-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D0fmmt0Ex+5yEZ2X1T6aZimqpQd5mQIayMDRuLHwQOFhNaAuUdPQoIfTesi3SOS3 1Zby08ttJ3sfcU4XzYncyg== 0000899243-02-002152.txt : 20020806 0000899243-02-002152.hdr.sgml : 20020806 20020805172018 ACCESSION NUMBER: 0000899243-02-002152 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 20020719 ITEM INFORMATION: Changes in control of registrant ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASTLE DENTAL CENTERS INC CENTRAL INDEX KEY: 0001018152 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 760486898 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13263 FILM NUMBER: 02719900 BUSINESS ADDRESS: STREET 1: 1360 POST OAK BLVD STREET 2: STE 1300 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7134798000 8-K 1 d8k.txt FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 July 19, 2002 Date of Report (Date of earliest event reported) Castle Dental Centers, Inc. (Exact name of registrant as specified in its charter) Delaware 001-13263 76-0486898 (State or other jurisdiction (Commission File Number) (I.R.S. Employer of incorporation) Identification No.) 3701 Kirby Drive, Suite 550 Houston, Texas 77098 (Address of principal executive offices, including zip code) (713) 490-8400 (Registrant's telephone number, including area code) Not Applicable (Former name and former address, if changed since last report) Item 1. Changes in Control of Registrant. Since June 2000, the Company has been in default under: .. its bank credit agreement (the "Old Credit Agreement") with its senior secured lenders (the "Senior Secured Lenders"); .. its senior subordinated notes and subordinated convertible notes (the "Senior Subordinated Notes") issued to Heller Financial, Inc. ("Heller") and Midwest Mezzanine Fund II, L.P. ("Midwest," and, collectively with Heller, the "Senior Subordinated Lenders"); and .. its subordinated notes and other subordinated indebtedness issued to various sellers of dental practices to the Company (collectively, the "Old Notes"). On July 19, 2002, the Company entered into a restructuring (the "Restructuring") with its Senior Secured Lenders and its Senior Subordinated Lenders regarding the debt outstanding under the Old Credit Agreement, the Senior Subordinated Notes and the Old Notes. Pursuant to the Restructuring, the Company has: .. exchanged 32,002 shares of Convertible Preferred Stock, Series A-1, par value $.001 per share ("Series A-1 Stock"), for $3,624,771 in aggregate principal and interest of its Old Notes; .. exchanged 179,280 shares of Series A-1 Stock for $17,928,000 in aggregate principal and interest of the Senior Subordinated Notes; .. amended and restated the Old Credit Agreement; .. issued warrants to purchase 60,859 shares of Convertible Preferred Stock, Series A-2, par value $.001 per share ("Series A-2 Stock"), to the Senior Secured Lenders; .. borrowed $1,700,000 from the Senior Subordinated Lenders and James M. Usdan (collectively with the Senior Subordinated Lenders, the "New Money Lenders"); .. issued convertible notes with an aggregate principal amount of $1,700,000 evidencing the amount borrowed from the New Money Lenders which notes are initially convertible into 3,105,618 shares of the Company's common stock, par value $.001 per share ("Common Stock"); and .. issued warrants to purchase 17,974,062 shares of Common Stock to the New Money Lenders. Heller exchanged $11,952,000 in aggregate principal and interest of Senior Subordinated Notes for 119,520 shares of Series A-1 Stock. In its capacity as Senior Secured Lender, Heller was issued warrants to purchase 10,984 shares of Series A-2 Stock in exchange for entering into the amendment and restatement of the Old Credit Agreement. In addition, Heller loaned $500,000 to the Company in exchange for a $500,000 note initially convertible into 913,417 shares of Common Stock and warrants to purchase 5,286,489 shares of Common Stock. Heller financed this loan with its working capital. Midwest exchanged $5,976,000 in aggregate principal and interest of Senior Subordinated Notes for 59,760 shares of Series A-1 Stock. Midwest also loaned $500,000 to the 2 Company in exchange for a $500,000 note initially convertible into 913,417 shares of Common Stock and warrants to purchase 5,286,489 shares of Common Stock. Midwest financed this loan with its working capital. James M. Usdan, the Company's Chief Executive Officer, loaned $700,000 to the Company in exchange for a $700,000 note initially convertible into 1,278,784 shares of Common Stock and a warrant to purchase 7,401,084 shares of Common Stock. Mr. Usdan financed this loan with personal funds. Each share of Series A-1 Stock and Series A-2 Stock is currently convertible into 182.7 shares of Common Stock and, once issued, votes on an "as converted" basis on all matters submitted to the holders of Common Stock of the Company. Holders of Series A-1 Stock, voting separately as a class, are entitled to elect a majority of the directors of the Company. Heller's 119,520 shares of Series A-1 Stock currently represent approximately 48.5% of the Company's outstanding voting stock and Midwest's 59,760 shares of Series A-1 Stock currently represent approximately 24.3% of the Company's outstanding voting stock. If Heller's convertible note were converted into Common Stock, its warrant to purchase Common Stock were exercised in full, and its warrant to purchase Series A-2 Stock were exercised in full, Heller would be able to cast 30,040,825 votes on all matters submitted to stockholders for a vote. If Midwest's convertible note were converted into Common Stock and its warrant to purchase Common Stock were exercised in full, Midwest would be able to cast 17,117,068 votes on all matters submitted to stockholders for a vote. The 6,417,206 shares of Common Stock and 211,282 shares of Series A Stock currently outstanding have the aggregate ability to cast 45,014,928 votes on all matters submitted to stockholders for a vote. In connection with the Restructuring, the Company and the New Money Lenders entered into an Investor Agreement (the "Investor Agreement") which provides that the Company's Board of Directors will consist of five persons and that Heller is entitled to designate two directors, Midwest is entitled to designate one director, and the Chief Executive Officer of the Company will serve as a director. Pursuant to the Investor Agreement, Heller has designated Ira Glazer and Midwest has designated Paul Kreie to serve on the Company's Board of Directors. In addition, Mr. Usdan, the Company's Chief Executive Officer and a current director, and Edward Kuntz have been designated to serve on the Company's Board of Directors pursuant to the Investor Agreement. Heller will designate a fifth director to serve on the Company's Board of Directors by October 2, 2002. Robert J. Cresci, G. Kent Kahle and Emmett E. Moore have resigned as directors of the Company effective on the tenth day following the mailing of an information statement ("Information Statement") required by Section 14(f) of the Securities Exchange Act of 1934 to the stockholders of the Company. The Board of Directors has appointed the designees described above to the Board of Directors of the Company to fill the positions vacated by the three resigning directors effective on the tenth day following the mailing of the Information Statement to the stockholders of the Company. Item 2. Acquisition or Disposition of Assets. Not applicable to this filing. 3 Item 3. Bankruptcy or Receivership. Not applicable to this filing. Item 4. Changes in Registrant's Certifying Accountants. Not applicable to this filing. Item 5. Other Events. Not applicable to this filing. Item 6. Resignation of Registrant's Directors. Not applicable to this filing. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Business Acquired. Not applicable to this filing. (b) Pro Forma Financial Information. Not applicable to this filing. (c) Exhibits. 3.1 Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of Castle Dental Centers, Inc. 3.2 Amended and Restated Bylaws 10.1 Second Amended and Restated Credit Agreement among Castle Dental Centers, Inc., Bank of America, N.A. and the Lenders dated as of July 19, 2002 10.2 Form of Warrant Agreement among the Company and the Lenders 10.3 Senior Subordinated Note and Warrant Purchase Agreement dated as of July 19, 2002, among Castle Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and James M. Usdan 10.4 Form of Warrant Agreement among the Company and the New Money Lenders 4 10.5 Form of Convertible Note among the Company and the New Money Lenders 10.6 Subordination and Intercreditor Agreement dated July 19, 2002, by and among Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., James M. Usdan, Castle Dental Centers, Inc., Castle Dental Centers of California, L.L.C., Castle Dental Centers of Florida, Inc., Castle Dental Centers of Tennessee, Inc., Castle Dental Centers of Texas, Inc., Dentcor, Inc., CDC of California, Inc., Castle Texas Holdings, Inc. and Academy for Dental Assistants, Inc. 10.7 Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement dated as of July 19, 2002 among Castle Dental Centers, Inc., Heller Financial, Inc. and Midwest Mezzanine Fund II, L.P. 10.8 Stockholders Agreement by and among Castle Dental Centers, Inc., Bank of America Strategic Solutions, Inc., FSC Corp., Amsouth Bank, Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and James M. Usdan 10.9 Investors Agreement, dated as of July 19, 2002, by and among Castle Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and James M. Usdan 10.10 Registration Rights Agreement dated July 19, 2002 10.11 Form of Exchange Agreement with Holders of Seller Notes 10.12 Forbearance Agreement dated as of July 17, 2002, by and between Leon D. Roisman, D.M.D, Leon D. Roisman, D.M.D, Inc., Roisman Acquisition Company, CDC of California, Inc. and Castle Dental Centers of California, L.L.C. 10.13 Settlement Agreement between Jack H. Castle, D.D.S. and the Estate of Jack H. Castle, D.D.S., Castle Dental Centers, Inc., Castle Dental Centers of Texas, Inc., Castle Dental Associates of Texas, P.C., Castle Interests, Ltd., and Loretta M. Castle 10.14 Severance Agreement between Jack H. Castle, Jr., the Company, Goforth, Inc. and Castle 1995 Gift Trust 10.15 Castle Dental Centers 2002 Stock Option Plan 10.16 Employment Agreement by and between James M. Usdan and the Company 99.1 Copy of Castle Dental Centers, Inc.'s Press Release dated July 23, 2002 5 Item 8. Change in Fiscal Year. Not applicable to this filing. Item 9. Regulation FD Disclosure. Not applicable to this filing. 6 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CASTLE DENTAL CENTERS, INC. By: /s John M. Slack --------------------------------- Dated: August 5, 2002 John M. Slack Senior Vice President and Chief Administrative Officer 7 EXHIBIT INDEX Exhibits 3.1 Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of Castle Dental Centers, Inc. 3.2 Amended and Restated Bylaws 10.1 Second Amended and Restated Credit Agreement among Castle Dental Centers, Inc., Bank of America, N.A. and the Lenders dated as of July 19, 2002 10.2 Form of Warrant Agreement among the Company and the Lenders 10.3 Senior Subordinated Note and Warrant Purchase Agreement dated as of July 19, 2002, among Castle Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and James M. Usdan 10.4 Form of Warrant Agreement among the Company and the New Money Lenders 10.5 Form of Convertible Note among the Company and the New Money Lenders 10.6 Subordination and Intercreditor Agreement dated July 19, 2002, by and among Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., James M. Usdan, Castle Dental Centers, Inc., Castle Dental Centers of California, L.L.C., Castle Dental Centers of Florida, Inc., Castle Dental Centers of Tennessee, Inc., Castle Dental Centers of Texas, Inc., Dentcor, Inc., CDC of California, Inc., Castle Texas Holdings, Inc. and Academy for Dental Assistants, Inc. 10.7 Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement dated as of July 19, 2002 among Castle Dental Centers, Inc., Heller Financial, Inc. and Midwest Mezzanine Fund II, L.P. 10.8 Stockholders Agreement by and among Castle Dental Centers, Inc., Bank of America Strategic Solutions, Inc., FSC Corp., Amsouth Bank, Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and James M. Usdan 10.9 Investors Agreement, dated as of July 19, 2002, by and among Castle Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and James M. Usdany and among Castle Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and James M. Usdan 10.10 Registration Rights Agreement dated July 19, 2002 10.11 Form of Exchange Agreement with Holders of Seller Notes 8 10.12 Forbearance Agreement dated as of July 17, 2002, by and between Leon D. Roisman, D.M.D, Leon D. Roisman, D.M.D, Inc., Roisman Acquisition Company, CDC of California, Inc. and Castle Dental Centers of California, L.L.C. 10.13 Settlement Agreement between Jack H. Castle, D.D.S. and the Estate of Jack H. Castle, D.D.S., Castle Dental Centers, Inc., Castle Dental Centers of Texas, Inc., Castle Dental Associates of Texas, P.C., Castle Interests, Ltd., and Loretta M. Castle 10.14 Severance Agreement between Jack H. Castle, Jr., the Company, Goforth, Inc. and Castle 1995 Gift Trust 10.15 Castle Dental Centers 2002 Stock Option Plan 10.16 Employment Agreement by and between James M. Usdan and the Company 99.1 Copy of Castle Dental Centers, Inc.'s Press Release dated July 23, 2002 9 EX-3.1 3 dex31.txt CERTIFICATE OF DESIGNATIONS Exhibit 3.1 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A-1 CONVERTIBLE PREFERRED STOCK AND SERIES A-2 CONVERTIBLE PREFERRED STOCK OF CASTLE DENTAL CENTERS, INC. Castle Dental Centers, Inc. (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to authority conferred upon the Board of Directors of the Company by the Amended and Restated Certificate of Incorporation of the Company, and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company at a meeting duly held, adopted resolutions (i) authorizing two (2) series of the Company's previously authorized preferred stock, par value $.001 per share, and (ii) providing for the designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of Two Hundred Fourteen Thousand (214,000) shares of Series A-1 Convertible Preferred Stock of the Company and Sixty-Two Thousand (62,000) shares of Series A-2 Convertible Preferred Stock of the Company, as follows: RESOLVED, that the Company is authorized to issue 214,000 shares of Series A-1 Convertible Preferred Stock, par value $.001 per share (the "Series A-1 Preferred Shares"), and 62,000 shares of Series A-2 Convertible Preferred Stock, par value $.001 per share (the "Series A-2 Preferred Shares" and, together with the Series A-1 Preferred Shares, the "Preferred Shares"), which shall have the following powers, designations, preferences and other special rights: (1) Dividends. Except as provided in Section 8, the Preferred Shares shall not bear any dividends. (2) Conversion of Preferred Shares. The Preferred Shares shall be convertible into shares of the Company's common stock, par value $.001 per share (the "Common Stock"), on the terms and conditions set forth in this Section 2. (a) Certain Defined Terms. For purposes of this Certificate of Designations, the following terms shall have the following meanings: (i) "Business Day" means any day other than Saturday, Sunday or other day on which commercial banks in the city of New York are authorized or required by law to remain closed. (ii) "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of corporate stock, and (ii) with respect to any other Person, any and all partnership, limited partnership, limited liability company or other equity interest of such Person, whether outstanding on the Issuance Date or issued after the Issuance Date, and any and all rights or warrants exercisable or exchangeable for or convertible into such Capital Stock. (iii) "Closing Bid Price" means, for any security as of any date, the last closing bid price for such security on the Principal Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price, then the last bid price of such security prior to 4:00 p.m. New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg, or, if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price of such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value (the "Fair Market Value") as mutually determined by the Company and a Majority Interest. If the Company and a Majority Interest are unable to agree upon the Fair Market Value, then such dispute shall be resolved pursuant to Section 2(d)(iii) below. All such determinations to be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. (iv) "Conversion Amount" means, with respect to each Preferred Share, $100 (as adjusted for stock splits, stock dividends, stock combinations or other similar events with respect to the Preferred Shares). (v) "Conversion Price" means initially .547395001, as such price may be subsequently adjusted as provided herein. (vi) "Exchange Agreement" means that certain Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement, dated as of July 19, 2002, between the Company and certain of the initial holders of the Series A-1 Preferred Shares, as such agreement may be amended from time to time as provided in such agreement. 2 (vii) "Issuance Date" means the date of issuance of the Series A-1 Preferred Shares pursuant to the Exchange Agreement. (viii) "Liquidation" means any voluntary or involuntary liquidation, dissolution or winding up of the Company. (ix) "Majority Interest" means a Series A-1 Majority Interest, voting separately as a single class, and a Series A-2 Majority Interest, voting separately as a single class. (x) "Note Holders" means, collectively, Heller Financial, Inc., Midwest Mezzanine Fund II, L.P. and James M. Usdan. (xi) "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (xii) "Principal Market" means the principal securities exchange or trading market for the Common Stock. (xiii) "Senior Bank Warrants" means those certain warrants to purchase Series A-2 Preferred Shares issued to the Senior Lenders, and any warrants issued upon the partial exercise, assignment, transfer, sale exchange or replacement of such warrants. (xiv) "Senior Lenders" means Banc of America Strategic Solutions, Inc., a Delaware corporation, FSC Corp., a Massachusetts corporation, Amsouth Bank, a national banking association, and Heller Financial Inc., a Delaware corporation. (xv) "Senior Loan Agreement" means that certain Second Amended and Restated Credit Agreement, dated as of July 19, 2002, between Company and the Senior Lenders. (xvi) "Senior Securities" means all equity securities (including any rights or options exercisable or convertible for such equity securities) of the Company with which the Preferred Shares rank junior, whether with respect to dividends or upon Liquidation or otherwise. (xvii) "Series A-1 Majority Interest" means the Persons holding at least seventy-five percent (75%) of the Series A-1 Preferred Shares then outstanding. (xviii) "Series A-2 Majority Interest" means the Persons holding at least sixty-six and two-thirds percent (66-2/3%) of the sum of (i) Series A-2 Preferred Shares then outstanding, plus (ii) the Senior Bank Warrants then outstanding, being treated for purposes of this definition on an as-exercised basis. 3 (b) Holder's Conversion Right; Mandatory Conversion. At any time or times on or after the Issuance Date, any holder of Preferred Shares shall, at the option of such holder, be entitled to convert any whole or fractional number of Preferred Shares into fully paid and nonassessable shares of Common Stock in accordance with Section 2(d), at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock upon any conversion. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one Preferred Share by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of a fraction of a share of Common Stock. If, after the aforementioned aggregation, the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share. (c) Conversion Rate. The number of shares of Common Stock issuable upon conversion of each Preferred Share pursuant to Section 2(b) shall be determined according to the following formula (the "Conversion Rate"): Conversion Amount ----------------- Conversion Price (d) Mechanics of Conversion. The conversion of Preferred Shares shall be conducted in the following manner: (i) Holder's Delivery Requirements. To convert Preferred Shares into shares of Common Stock on any date (the "Conversion Date"), the holder thereof shall (A) transmit, by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m. New York Time on such date, a copy of an executed conversion notice in the form attached hereto as Exhibit I (the "Conversion Notice") to the Company and (B) if all the Preferred Shares then represented by the certificate are being converted, surrender to a common carrier for delivery to the Company as soon as practicable following such date the original certificates representing the Preferred Shares being converted (or an indemnification undertaking with respect to such shares in the case of their loss, theft or destruction) (the "Preferred Stock Certificates"). (ii) Company's Response. Upon receipt by the Company of a copy of a Conversion Notice, the Company (I) shall promptly and in no event later than two (2) Business Days after receipt deliver, via facsimile, a confirmation of receipt of such Conversion Notice to such holder and the Company's designated transfer agent (the "Transfer Agent"), which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein, and (II) on or before the third (3rd) Business Day following the date of receipt by the Company of such Conversion Notice (the "Share Delivery Date") (A) provided that the Transfer Agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and provided that the holder is eligible to receive shares through DTC, upon the request of the holder, credit the number of shares of Common Stock to which such holder is entitled to such holder's balance 4 account with DTC through its Deposit Withdrawal Agent Commission system or (B) issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of such holder, for the number of shares of Common Stock to which such holder is entitled. If a certificate is delivered to the Company by a holder and the number of Preferred Shares represented by the Preferred Stock Certificate(s) submitted for conversion is greater than the number of Preferred Shares that have been converted, then the Company shall, as soon as practicable and in no event later than three (3) Business Days after receipt of the Preferred Stock Certificate(s) (the "Preferred Stock Delivery Date") and at its own expense, issue and deliver to the holder a new Preferred Stock Certificate representing the number of Series A-1 Preferred Shares or Series A-2 Preferred Shares, as the case may be, not converted. (iii) Dispute Resolution. In the case of a dispute as to the determination of the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed arithmetic calculations to the holder via facsimile within two (2) Business Days of receipt of such holder's Conversion Notice or other date of determination. If such holder and the Company are unable to agree upon the determination of the arithmetic calculation of the Conversion Rate within one (1) Business Day of such disputed arithmetic calculation being transmitted to the holder, then the Company shall within one (1) Business Day submit via facsimile the disputed arithmetic calculation of the Conversion Rate to the Company's independent, outside accountant. Furthermore, in the event a Majority Interest, on the one hand, and the Company, on the other hand, are unable to agree on the Fair Market Value in accordance with the definition of Closing Bid Price, then the Company shall submit as soon as reasonably practicable after it becomes apparent that the Company and such holders do not agree as to the Fair Market Value, the disputed determination of the Fair Market Value to an independent, reputable investment bank selected by the Company and approved by a Majority Interest. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holders of the Preferred Shares of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon the Company and the holders of the Preferred Shares then outstanding. Within one (1) Business Day of the accountant's determination of the calculation of the Conversion Rate, the Company shall deliver to the holder of Preferred Shares the balance of Common Stock that such holder is entitled to as provided herein (such date also deemed to be a Share Delivery Date) and any failure to do so will subject the Company to the provisions of subsection (v) below. 5 (iv) Record Holder. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of Preferred Shares shall be treated for all purposes as the legal and record holder or holders of such shares of Common Stock on the Conversion Date. (v) Company's Failure to Timely Convert. (A) Cash Damages. If within three (3) Business Days after the Company's receipt of a Conversion Notice the Company shall fail (i) to issue and deliver a certificate to a holder or, at the holder's election, credit such holder's balance account with DTC for the number of shares of Common Stock to which such holder is entitled upon such holder's conversion of Preferred Shares or (ii) to issue a new Preferred Stock Certificate representing the number of Series A-1 Preferred Shares or Series A-2 Preferred Shares, as the case may be, to which such holder is entitled pursuant to Section 2(d)(ii), then, in addition to all other available remedies which such holder may pursue hereunder and under any other agreement between the Company and such holder (including, but not limited to, indemnification thereunder) or otherwise, the Company shall pay additional damages to such holder for each day after the Share Delivery Date such conversion is not timely effected and/or each day after the Preferred Stock Delivery Date such Preferred Stock Certificate is not delivered in an amount equal to 0.5% of the sum of (a) the product of (I) the number of shares of Common Stock not issued to the holder on or prior to the Share Delivery Date and to which such holder is entitled and (II) the Closing Bid Price of the Common Stock on the Share Delivery Date, and (b) in the event the Company has failed to deliver a Preferred Stock Certificate to the holder on or prior to the Preferred Stock Delivery Date, the product of (y) the number of shares of Common Stock issuable upon conversion (without regard to any limitations on conversions herein or elsewhere, including, but not limited to, any limitations as a result of the actual number of shares of Common Stock authorized for issuance by the Company) of the Preferred Shares represented by such Preferred Stock Certificate, as of the Preferred Stock Delivery Date, and (z) the Closing Bid Price of the Common Stock on the Preferred Stock Delivery Date. If the Company fails to pay the additional damages set forth in this Section 2(d)(v) within five (5) Business Days of the date incurred, then the holder entitled to such payments shall have the right at any time, so long as the Company continues to fail to make such payments, to require the Company, upon written notice, to immediately issue, in lieu of such cash damages, the number of shares of Common Stock equal to the quotient of (X) the aggregate amount of the damages payments described herein divided by (Y) the Conversion Price in effect on such Conversion Date as specified by the holder in the Conversion Notice. (B) Void Conversion Notice; Adjustment to Conversion Price. If for any reason a holder has not received all of the shares of Common Stock to which it is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of Preferred Shares, then the holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any Preferred Shares that were to be converted pursuant to such holder's Conversion Notice; provided that the voiding of a holder's Conversion Notice shall not affect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to Section 2(d)(v)(A) or otherwise. 6 (vi) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of Preferred Shares in accordance with the terms hereof, the holder thereof shall not be required to physically surrender the certificate representing the Preferred Shares to the Company unless the full number of Preferred Shares represented by the certificate are being converted. The holder and the Company shall maintain records showing the number of Preferred Shares so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the holder and the Company, so as to account for the number of Series A-1 Preferred Shares or Series A-2 Preferred Shares, as the case may be, that are represented by a certificate representing such Preferred Shares where conversions have occurred without the physical surrender of the certificate. Notwithstanding the foregoing, if Preferred Shares represented by a certificate are converted as aforesaid, the holder may not transfer the certificate representing the Preferred Shares unless the holder first physically surrenders the certificate representing the Preferred Shares to the Company, whereupon the Company will forthwith issue and deliver upon the order of the holder a new certificate of like tenor, registered as the holder may request, representing in the aggregate the remaining number of Series A-1 Preferred Shares or Series A-2 Preferred Shares, as the case may be, represented by such certificate. Each certificate for Preferred Shares shall bear the following legend: ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF THE PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 2(d)(vi) THEREOF. THE NUMBER OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION 2(d)(vi) OF THE CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS. (e) Taxes. The Company shall pay any and all taxes that may be payable with respect to the issuance and delivery of Common Stock upon the conversion of Preferred Shares. (f) Adjustments to Conversion Price. The Conversion Price will be subject to adjustment from time to time as provided in this Section 2(f). (i) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by combination, 7 reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased. (ii) Other Events. If any event occurs of the type contemplated by the provisions of this Section 2(f) but not expressly provided for by such provisions, then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the Preferred Shares. (iii) Notices. (A) Immediately upon any adjustment of the Conversion Price, the Company will give written notice thereof to the holders of the Preferred Shares of such adjustment and a certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who shall be appointed at the Company's expense and who may be the independent public accountants regularly employed by the Company) setting forth the number of shares of Common Stock and the Conversion Price of such shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. (B) The Company will give written notice to each holder of Preferred Shares at least twenty (20) Business Days prior to the date on which the Company closes its books or takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to holders of Common Stock or (III) for determining rights to vote with respect to any Organic Change (as defined in Section 3(a)) or Liquidation, provided that such information shall have been made known to the public prior to or in conjunction with such notice being provided to such holder. (C) The Company will also give written notice to each holder of Preferred Shares at least twenty (20) days prior to the date on which any Organic Change or Liquidation will take place, provided that such information shall have been made known to the public prior to or in conjunction with such notice being provided to such holder. (3) Other Rights of Holders. (a) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person, conveyance to another Person of the property of the Company as an entirety or substantially as an entirety or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent Liquidation) Capital Stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change." Prior to the consummation of, and as a condition to, any (i) sale or other conveyance of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change, the Company, or such other successor or purchasing Person, as the case may be, shall make lawful and adequate provision whereby the 8 holders of Preferred Shares shall have the right thereafter to receive on complete conversion of the Preferred Shares the kind and amount of securities and property receivable upon such Organic Change by a holder of the number of securities issuable upon the complete conversion of such Preferred Stock immediately prior to such Organic Change. The above provisions of this Section 3(a) shall similarly apply to successive Organic Changes. (b) Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the holders of Preferred Shares will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of such holder's Preferred Shares (without taking into account any limitations or restrictions on the convertibility of the Preferred Shares, including, but not limited to, any limitations as a result of the actual number of shares of Common Stock authorized for issuance by the Company) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. For purposes of this Section 3(b), (i) "Convertible Securities" means any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock, and (ii) "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. (4) Reservation of Shares. (a) Valid Issuance. The Company agrees that all shares of Common Stock issued upon the conversion of Preferred Shares will, upon issuance, be validly issued, fully paid and nonassessable, not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (b) Reservation. The Company shall, so long as any of the Preferred Shares are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Preferred Shares then outstanding (the "Required Reserve Amount"). (c) Insufficient Authorized Shares. If at any time while any of the Preferred Shares remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Preferred Shares at least a number of shares of Common Stock equal to the Required Reserve Amount (an "Authorized Share Failure"), then the Company shall immediately take all action necessary to cause the number of the Company's authorized shares of Common Stock to be sufficient to allow the Company to reserve the Required Reserve Amount for the Preferred Shares then outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share 9 Failure, but in no event later than 75 days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the authorization of either an increase in the number of authorized shares of Common Stock or a reverse stock split with respect to the Common Stock. In addition, if at any time while the Senior Bank Warrants are outstanding, the exercise price of such warrants is less than the aggregate par value of the number of shares of Common Stock issuable upon conversion of the Series A-2 Preferred Shares issuable upon exercise of such warrants (a "Par Value Failure"), the Company shall immediately take all action necessary to reduce the par value of the shares of Common Stock to the extent necessary to remedy such Par Value Failure. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of a Par Value Failure, but in no event later than 75 days after the occurrence of such Par Value Failure, the Company shall hold a meeting of its stockholders for the authorization of a reduction in the par value of the Common Stock. In connection with such meeting or meetings, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders' approval of such increase in authorized shares of Common Stock, reverse stock split or change in par value, as appropriate, and to cause its board of directors to recommend to the stockholders that they approve such proposal. (5) Voting Rights. (a) Generally. Except as otherwise required by applicable law or as otherwise provided herein, each holder of Preferred Shares shall be entitled to vote together with the Common Stock and all other series and classes of stock permitted to vote with the Common Stock on all matters submitted to a vote of the stockholders of the Corporation (including election of directors), and to have the number of votes per Preferred Share equal to the number of shares of Common Stock into which such Preferred Share is then convertible pursuant to the provisions hereof (without regard to any limitations on conversions herein or elsewhere, including, but not limited to, any limitations as a result of the actual number of shares of Common Stock authorized for issuance by the Company). Each holder of Preferred Shares shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. (b) Directors. The holders of Series A-1 Preferred Shares shall have, in addition to the other voting rights set forth herein, the exclusive right, voting separately as a single class, to elect a number of directors equal to a majority of the number of members of the Company's Board of Directors. The foregoing right of holders of Series A-1 Preferred Shares may be exercised at any annual meeting of stockholders or at a special meeting of holders of Series A-1 Preferred Shares held for such purpose or at any adjournment thereof, or by the written consent, delivered to the Secretary of the Company, of the holders of the minimum number of shares required to take such action. Each director elected by the holders of Series A-1 Preferred Shares as provided herein shall, unless his or her term shall expire earlier in accordance with the provisions contained herein, hold office until the annual meeting of stockholders at which directors of the class stand for election or until his or her successor, if any, is elected and qualified. Any director elected by the holders of shares of Series A-1 Preferred Shares voting separately as a single class may be removed from office with or without cause by the vote or written consent of a Series A-1 Majority Interest at the time of removal. If any director elected 10 by the holders of the Series A-1 Preferred Shares shall cease to serve as a director before his or her term shall expire (for whatever reason), the holders of the Series A-1 Preferred Shares then outstanding and entitled to vote for such director may, by written consent, or at a special meeting of such holders, elect a successor to hold office for the unexpired term of the director whose place shall be vacant. (6) Liquidation, Dissolution, Winding-Up. In the event of Liquidation, the holders of the Preferred Shares shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders (the "Liquidation Funds"), before any amount shall be paid to the holders of any of the Capital Stock of the Company of any class junior in rank to the Preferred Shares in respect of the preferences as to the distributions and payments on Liquidation, an amount per Series A-1 Preferred Share equal to $100.00 (as adjusted for stock splits, stock dividends, stock combinations, or other similar events with respect to the Series A-1 Preferred Shares) plus declared but unpaid dividends (the "Series A-1 Liquidation Preference") and an amount per Series A-2 Preferred Share equal to $47.341 (as adjusted for stock splits, stock dividends, stock combinations or other similar events with respect to the Series A-2 Preferred Shares) plus declared but unpaid dividends (the "Series A-2 Liquidation Preference" and, together with the Series A-1 Liquidation Preference, the "Liquidation Preference"); provided that, if the Liquidation Funds are insufficient to pay the full amount due to the holders of Preferred Shares and holders of shares of other classes or series of preferred stock of the Company that are of equal rank with the Preferred Shares as to payments of Liquidation Funds (the "Pari Passu Shares"), then each holder of Preferred Shares and Pari Passu Shares shall receive a percentage of the Liquidation Funds equal to the full amount of Liquidation Funds payable to such holder as a liquidation preference, in accordance with their respective Certificate of Designations, Preferences and Rights, as a percentage of the full amount of Liquidation Funds payable to all holders of Preferred Shares and Pari Passu Shares. For purposes hereof, a Change of Control (as defined below) shall not be deemed to be a Liquidation. For purposes of this Section 6, "Change of Control" means at any time Heller Financial, Inc., a Delaware corporation, and Midwest Mezzanine Fund II, L.P., a Delaware limited partnership, together, cease to have the right to appoint a majority of the members of the Board of Directors of the Company. In addition to the foregoing, a holder of Preferred Shares shall be entitled to all amounts previously accrued with respect to amounts owed hereunder. Notwithstanding the foregoing, a holder of Preferred Shares may convert its Preferred Shares into Common Stock pursuant to Section 2 prior to a Liquidation. (7) Preferred Rank. All shares of Common Stock and all other series of preferred stock (other than Senior Securities and Pari Passu Shares) shall be of junior rank to all Preferred Shares with respect to the preferences as to distributions and payments upon Liquidation. The rights of the shares of Common Stock and all other series of preferred stock (other than Senior Securities and Pari Passu Shares) shall be subject to the preferences and relative rights of the Preferred Shares. (8) Participation. The holders of the Preferred Shares shall, as holders of Preferred Shares, be entitled to such dividends paid and distributions made to the holders of Common Stock to the same extent as if such holders of Preferred Shares had converted the Preferred Shares into Common Stock (without regard to any limitations on conversion herein or 11 elsewhere, including, but not limited to, any limitations as a result of the actual number of shares of Common Stock authorized for issuance by the Company) and had held such shares of Common Stock on the record date for such dividends and distributions. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock. (9) Restriction on Cash Dividends. Until all of the Preferred Shares have been converted or redeemed as provided herein, the Company shall not, directly or indirectly, redeem, or declare or pay any dividend or distribution on, its Capital Stock without the prior express written consent of a Majority Interest. (10) Vote to Change the Terms of Preferred Shares. (a) The affirmative vote, at a meeting duly called for such purpose or the written consent without a meeting, of a Series A-1 Majority Interest, voting separately as a single class, shall be required for (A) any change to this Certificate of Designations or the Company's Certificate of Incorporation which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series A-1 Preferred Shares and (B) the issuance of Preferred Shares, other than pursuant to the Exchange Agreement or the Senior Bank Warrants. (b) The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting, of a Series A-2 Majority Interest, voting separately as a single class, shall be required for (A) any change to this Certificate of Designations or the Company's Certificate of Incorporation which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series A-2 Preferred Shares and (B) the issuance of Preferred Shares, other than pursuant to the Exchange Agreement or the Senior Bank Warrants. (c) Notwithstanding the foregoing, the Company will not, by amendment of its Certificate of Incorporation or by-laws, by filing any resolution of the Board of Directors of the Company with the Secretary of State of Delaware or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Certificate of Designations and in the taking of all such action as may reasonably be requested by the holders of the Preferred Shares in order to protect the conversion privilege of the holders of the Preferred Shares, consistent with the tenor and purpose of this Certificate of Designations. (11) Lost or Stolen Certificates. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the Preferred Shares, and, in the case of loss, theft or destruction, of an indemnification undertaking by the holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new preferred stock certificate(s) of like tenor and date; provided, however, the Company shall not be obligated to re-issue preferred 12 stock certificates if the holder contemporaneously requests the Company to convert such Preferred Shares into Common Stock. (12) Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designations shall be cumulative and in addition to all other remedies available under this Certificate of Designations, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designations. The Company covenants to each holder of Preferred Shares that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of the Preferred Shares and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holders of the Preferred Shares shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. (13) Specific Shall Not Limit General; Construction. No specific provision contained in this Certificate of Designations shall limit or modify any more general provision contained herein. This Certificate of Designations shall be deemed to be jointly drafted by the Company and all of the holders of the Preferred Shares and shall not be construed against any person as the drafter hereof. (14) Failure or Indulgence Not Waiver. No failure or delay on the part of a holder of Preferred Shares in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. (15) Notice. Whenever notice is required to be given under this Certificate of Designations, unless otherwise provided herein, such notice shall be given in accordance with Section 8.02 of the Exchange Agreement with respect to the holders of Series A-1 Preferred Shares and Section 12.02 of the Senior Loan Agreement with respect to the holders of Series A-2 Preferred Shares. 13 IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by Joseph P. Keane, its Chief Financial Officer, as of the 19th day of July, 2002. CASTLE DENTAL CENTERS, INC. By: ------------------------------------------------- Joseph P. Keane, Chief Financial Officer 14 EXHIBIT I ISSUER CONVERSION NOTICE Reference is made to the Certificate of Designations, Preferences and Rights for the Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of Castle Dental Centers, Inc. (the "Certificate of Designations"). In accordance with and pursuant to the Certificate of Designations, the undersigned hereby elects to convert the number of shares of Series A-1 Convertible Preferred Stock, par value $.001 per share (the "Series A-1 Preferred Shares") or Series A-2 Convertible Preferred Stock, par value $.001 per share (the "Series A-2 Preferred Shares" and, together with the Series A-1 Preferred Shares, the "Preferred Shares"), of Castle Dental Centers, Inc., a Delaware corporation (the "Company"), indicated below into shares of Common Stock, par value $.001 per share (the "Common Stock"), of the Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as of the date specified below. Date of Conversion: ---------------------------------------------------- Number and Series of Preferred Shares to be converted: ---------------- Stock certificate no(s). of Preferred Shares to be converted: --------- Please confirm the following information: Conversion Price: ------------------------------------------------------ Number of shares of Common Stock to be issued: ------------------------ Please issue the Common Stock into which the Preferred Shares are being converted in the following name and to the following address: Issue to: -------------------------------------------------------------- -------------------------------------------------------------- Facsimile Number: ------------------------------------------------------ Authorization: --------------------------------------------------------- By: ----------------------------------------- Title: -------------------------------------- Dated: ----------------------------------------------------------------- Account Number (if electronic book entry transfer): ------------------- Transaction Code Number (if electronic book entry transfer): ---------- 15 ACKNOWLEDGMENT The Company hereby acknowledges this Conversion Notice and hereby directs [TRANSFER AGENT] to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated ___________ ___, 20__ from the Company and acknowledged and agreed to by [TRANSFER AGENT]. CASTLE DENTAL CENTERS, INC. By: ------------------------------------------------- Name: Its: 16 EX-3.2 4 dex32.txt AMENDED AND RESTATED BYLAWS Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF CASTLE DENTAL CENTERS, INC. A DELAWARE CORPORATION ADOPTED JULY 17, 2002 Article 1 OFFICES SECTION 1.1. REGISTERED OFFICE. The registered office of the Corporation which is required by the State of Delaware to be maintained in the State of Delaware shall be the registered office named in the charter documents of the Corporation, or such other office as may be designated from time to time by the Board of Directors in the manner provided by law. SECTION 1.2. OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. Article 2 STOCKHOLDERS SECTION 2.1. PLACE OF MEETINGS. All meetings of the stockholders shall be held at the principal office of the Corporation, or at such other place within or without the State of Delaware as shall be specified or fixed in the notices or waivers of notice thereof. SECTION 2.2. QUORUM; ADJOURNMENT OF MEETINGS. Unless otherwise required by law or provided in the charter documents of the Corporation or these Bylaws, (i) the holders of issued and outstanding shares representing a majority of the votes entitled to be cast at any such meeting of stockholders, present in person or represented by proxy, shall constitute a quorum at such meeting of stockholders for the transaction of business, (ii) in any matter (other than election of directors), the affirmative vote of the holders of shares representing a majority of the votes entitled to be cast so present or represented at any meeting of stockholders at which a quorum is present shall constitute the act of the stockholders, and (iii) where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, subject to the provisions of clauses (ii) and (iii) above. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Notwithstanding the other provisions of the charter documents of the Corporation or these Bylaws, the chairman of the meeting or the holders of issued and outstanding shares representing a majority of the votes entitled to be cast, present in person or represented by proxy, at any meeting of stockholders, whether or not a quorum is present, shall have the power to adjourn such meeting from time to time, without any notice other than announcement at the meeting of the time and place of the holding of the adjourned meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at such meeting. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.3. ANNUAL MEETINGS. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place (within or without the State of Delaware), on such date, and at such time as the Board of Directors shall fix and set forth in the notice of the meeting, which date shall be within thirteen (13) months subsequent to the last annual meeting of stockholders. SECTION 2.4. SPECIAL MEETINGS. Unless otherwise provided in the charter documents of the Corporation, special meetings of the stockholders for any purpose or purposes may be called at any time by the President, by a majority of the Board of Directors, by a majority of the executive committee (if any), or by holders of issued and outstanding shares representing 20% of the votes entitled to be cast at a meeting of stockholders, at such time and at such place as may be stated in the notice of the meeting. Business transacted at a special meeting shall be confined to the purpose(s) stated in the notice of such meeting. SECTION 2.5. RECORD DATE. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, 2 conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors of the Corporation may fix a date as the record date for any such determination of stockholders, which record date shall not precede the date on which the resolutions fixing the record date are adopted and which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting of stockholders, nor more than sixty (60) days prior to any other action to which such record date relates. If the Board of Directors does not fix a record date for any meeting of the stockholders, the record date for determining stockholders entitled to notice of or to vote at such meeting shall be at the close of business on the day next preceding the day on which notice is given, or, if in accordance with Article 7, Section 7.3 of these Bylaws notice is waived, at the close of business on the day next preceding the day on which the meeting is held. The record date for determining stockholders for any other purpose (other than the consenting to corporate action in writing without a meeting) shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. For the purpose of determining the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If the Board of Directors does not fix the record date, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation at its registered office in the state of incorporation of the Corporation or at its principal place of business. If the Board of Directors does not fix the record date, and prior action by the Board of Directors is necessary, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. SECTION 2.6. NOTICE OF MEETINGS. Written notice of the place, date and hour of all meetings, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by or at the direction of the President, the Secretary or the other person(s) calling the meeting to each stockholder entitled to vote thereat not less than ten (10) nor more than sixty (60) days before the date of the meeting. Such notice may be delivered either personally or by mail. If mailed, 3 notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. SECTION 2.7. STOCKHOLDER LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in the name of such stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The stockholder list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.8. PROXIES. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of stockholders shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time determine by resolution, before or at the time of the meeting. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting, who shall decide all questions touching upon the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions. No proxy shall be valid after three (3) years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power. Should a proxy designate two or more persons to act as proxies, unless such instrument shall provide the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of such portion of the shares as is equal to the reciprocal of the fraction equal to the number of proxies representing such shares divided by the total number of shares represented by such proxies. 4 SECTION 2.9. VOTING; ELECTION; INSPECTORS. Unless otherwise required by law or provided in the charter documents of the Corporation, each stockholder shall on each matter submitted to a vote at a meeting of stockholders have one vote for each share of the stock entitled to vote which is registered in his name on the record date for the meeting. For the purposes hereof, each election to fill a directorship shall constitute a separate matter. Shares registered in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaws (or comparable body) of such corporation may determine. Shares registered in the name of a deceased person may be voted by the executor or administrator of such person's estate, either in person or by proxy. All voting, except as required by the charter documents of the Corporation or where otherwise required by law, may be by a voice vote; provided, however, upon request of the chairman of the meeting or upon demand therefor by persons holding issued and outstanding shares representing a majority of the votes entitled to be cast, present in person or by proxy, at any meeting of stockholders a stock vote shall be taken. Every stock vote shall be taken by written ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections of directors shall be by written ballots, unless otherwise provided in the charter documents of the Corporation. At any meeting at which a vote is taken by written ballots, the chairman of the meeting may appoint one or more inspectors, each of whom shall subscribe an oath or affirmation to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of such inspector's ability. Such inspector shall receive the written ballots, count the votes, and make and sign a certificate of the result thereof. The chairman of the meeting may appoint any person to serve as inspector, except no candidate for the office of director shall be appointed as an inspector. Unless otherwise provided in the charter documents of the Corporation, cumulative voting for the election of directors shall be prohibited. SECTION 2.10. CONDUCT OF MEETINGS. The meetings of the stockholders shall be presided over by the President, or, if the President is not present, by a chairman elected at the meeting. The Secretary of the Corporation, if present, shall act as secretary of such meetings, or, if the Secretary is not present, an Assistant Secretary shall so act; if neither the Secretary or an Assistant Secretary is present, then a secretary shall be appointed by the chairman of the meeting. 5 The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to the chairman in order. SECTION 2.11. TREASURY STOCK. The Corporation shall not vote, directly or indirectly, shares of its own stock owned by it and such shares shall not be counted for quorum purposes. Nothing in this Section 2.11 shall be construed as limiting the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. SECTION 2.12. ACTION WITHOUT MEETING. Unless otherwise provided in the charter documents of the Corporation, any action permitted or required by law, the charter documents of the Corporation or these Bylaws to be taken at a meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares representing not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the state of incorporation, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered in the manner required by this Section to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in the state of incorporation, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of corporation action without a meeting by less than a unanimous written consent shall be given by the Secretary to those stockholders who have not consented in writing. SECTION 2.13. CHAIRMAN OF STOCKHOLDER MEETINGS. Each annual and special meeting of Stockholders held in person shall be presided over by a chairman, who shall have the exclusive authority to, among other things, determine (a) whether business and nominations have been properly brought before such meetings, and (b) the order in which business and nominations properly brought 6 before such meeting shall be considered. The chairman of each annual and special meeting shall be the Chairman of the Board of Directors, or such person as shall be appointed by the resolution approved by the majority of the Board of Directors. SECTION 2.14. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (a) ANNUAL MEETINGS OF STOCKHOLDERS. (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the Stockholders may be made at an annual meeting of Stockholders (A) pursuant to the Corporation's notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any Stockholder who was a Stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. (ii) For nominations or other business to be properly brought before an annual meeting by a Stockholder pursuant to section 2.14(a)(i) of this ARTICLE 2, the Stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for Stockholder action. To be timely, a Stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first(1st) anniversary of the preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the Stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a Stockholders' notice as described above. Such Stockholder's notice shall set forth: (A) as to each person whom the Stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); 7 (B) as to any other business that the Stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such Stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the Stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such Stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such Stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of Section 2.14(a)(ii) of this ARTICLE 2 to the contrary, in the event that the number of Directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for Director or specifying the size of the increased Board of Directors at least seventy (70) days prior to the first (1st) anniversary of the preceding year's annual meeting, a Stockholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. (b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of Stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of Stockholders at which Directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that Directors shall be elected at such meeting, by any Stockholder who is a Stockholder of record at the time of giving of notice provided for in this Section 2.14, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.14. In the event the Corporation calls a special meeting of Stockholders for the purpose of electing one or more Directors to the Board of Directors, any such Stockholder may nominate a person or persons (as the case may be), for election to such positions(s) as specified in the Corporation's notice of meeting, if the Stockholder's notice required by Section 2.14(a)(ii) of this ARTICLE 2 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the ninetieth (90th) day prior to such special meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the 8 Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a Stockholder's notice as described above. (c) GENERAL. (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.14 shall be eligible to serve as Directors and only such business shall be conducted at a meeting of Stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.14. Except as otherwise provided by applicable law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 2.14 and, if any proposed nomination or business is not in compliance with this Section 2.14, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 2.14, "Public Announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associate Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 2.14, a Stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.14. Nothing in this Section 2.14 shall be deemed to affect any rights (A) of Stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act; or (B) of the holders of any series of Common Stock or Preferred Stock or any outstanding Voting Indebtedness to elect Directors under specified circumstances. Notwithstanding any other provisions of the Certificate of Incorporation of the Corporation, and notwithstanding that a lesser percentage may be permitted from time to time by applicable law, no provision of this Section 2.14 of ARTICLE 2 may be altered, amended or repealed in any respect, nor may any provision inconsistent therewith be adopted, unless such alteration, amendment, repeal or adoption is approved by the affirmative vote of the holders of at least 80 percent of the combined voting power of the then outstanding shares of the Corporation's stock entitled to vote generally at elections of Directors voting together as a single class, and at least 80 percent of each class, series and issuance of combined voting power 9 of the then outstanding shares of the Corporation's stock entitled to vote generally at elections of Directors voting separately as a class, series and issuance. Article 3 BOARD OF DIRECTORS SECTION 3.1. POWER; NUMBER; TERM OF OFFICE. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, and, subject to the restrictions imposed by law or the charter documents of the Corporation, the Board of Directors may exercise all the powers of the Corporation. The number of directors which shall constitute the whole Board of Directors shall be five. Each director shall hold office for the term for which such director is elected, and until such director's successor shall have been elected and qualified or until such director's earlier death, resignation or removal. Unless otherwise provided in the charter documents of the Corporation, directors need not be stockholders nor residents of the State of Delaware. SECTION 3.2. QUORUM; VOTING. Unless otherwise provided in the charter documents of the Corporation, a majority of the number of directors fixed in accordance with Section 3.1 shall constitute a quorum for the transaction of business of the Board of Directors and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors; provided, however, that in no event shall the Board of Directors act (other than by a duly constituted committee) by the vote of fewer than three directors. SECTION 3.3. PLACE OF MEETINGS; ORDER OF BUSINESS. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by law, in such place or places, within or without the state of incorporation of the Corporation, as the Board of Directors may from time to time determine. At all meetings of the Board of Directors business shall be transacted in such order as shall from time to time be determined by the President or by the Board of Directors. SECTION 3.4. FIRST MEETING. Each newly elected Board of Directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of the stockholders. Notice of such meeting shall not be required. At the first meeting of the Board of Directors in each year at which a quorum shall be present, held after the annual meeting of stockholders, the Board of Directors shall elect the officers of the Corporation. 10 SECTION 3.5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by the President, or in the President's absence, by another officer of the Corporation. Notice of such regular meetings shall not be required. SECTION 3.6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President, or, on the written request of any director, by the Secretary, in each case on at least twenty-four (24) hours' personal, written, telegraphic or cable notice to each director. Such notice, or any waiver thereof pursuant to Article 7, Section 7.3 hereof, need not state the purpose or purposes of such meeting, except as may otherwise be required by law or provided for in the charter documents of the Corporation or these Bylaws. Meetings may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in writing. SECTION 3.7. REMOVAL. Unless otherwise provided in the charter documents of the Corporation, any director or the entire Board of Directors may be removed, with or without cause, by the holders of shares representing a majority of the votes then entitled to be cast at an election of directors. SECTION 3.8. VACANCIES; INCREASES IN THE NUMBER OF DIRECTORS. Unless otherwise provided in the charter documents of the Corporation, vacancies existing on the Board of Directors for any reason and newly created directorships resulting from any increase in the authorized number of directors may be filled by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director; and any director so chosen shall hold office until the next annual election and until such director's successor shall have been elected and qualified, or until such director's earlier death, resignation or removal. SECTION 3.9. COMPENSATION. Directors and members of standing committees may receive such compensation as the Board of Directors from time to time shall determine to be appropriate, and shall be reimbursed for all reasonable expenses incurred in attending and returning from meetings of the Board of Directors. SECTION 3.10. ACTION WITHOUT A MEETING; TELEPHONE CONFERENCE MEETING. Unless otherwise restricted by the charter documents of the Corporation, any action required or permitted to be taken at any meeting of the Board of Directors or any committee designated by the Board of Directors may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such consent shall 11 have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State of the state of incorporation of the Corporation. Unless otherwise restricted by the charter documents of the Corporation, subject to the requirement for notice of meetings, members of the Board of Directors, or members of any committee designated by the Board of Directors, may participate in a meeting of such Board of Directors or committee, as the case may be, by means of a conference telephone connection or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. SECTION 3.11. APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS BY STOCKHOLDERS. The Board of Directors in its discretion may submit any act or contract for approval or ratification at any annual meeting of the stockholders, or at any special meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or be ratified by the vote of the stockholders holding issued and outstanding shares of the Corporation representing a majority of the votes entitled to be cast and present in person or by proxy at such meeting (provided that a quorum is present) shall be as valid and as binding upon the Corporation and upon all the stockholders as if it has been approved or ratified by every stockholder of the Corporation. In addition, any such act or contract may be approved or ratified by the written consent of stockholders holding issued and outstanding shares of the Corporation representing a majority of the votes entitled to be cast, and such consent shall be as valid and binding upon the Corporation and upon all the stockholders as if it had been approved or ratified by every stockholder of the Corporation. Article 4 COMMITTEES SECTION 4.1. DESIGNATION; POWERS. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, including, if they shall so determine, an executive committee, with each such committee to consist of one or more of the directors of the Corporation. Any such designated committee shall have and may exercise such of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as may be provided in such resolution, except that no such committee shall have the power or authority of the Board of Directors in reference to amending the charter documents of the Corporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, 12 recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution of the Corporation, or amending, altering or repealing these Bylaws or adopting new bylaws for the Corporation. Any such designated committee may authorize the seal of the Corporation to be affixed to all papers which may require it. In addition to the above, such committee or committees shall have such other powers and limitations of authority as may be determined from time to time by the Board of Directors. SECTION 4.2. PROCEDURE; MEETINGS; QUORUM. Any committee designated pursuant to this Article 4 shall keep regular minutes of its actions and proceedings in a book provided for that purpose and report the same to the Board of Directors at its meeting next succeeding such action, shall fix its own rules or procedures, and shall meet at such times and at such place or places as may be provided by such rules, or by such committee or the Board of Directors. Should a committee fail to fix its own rules, the provisions of these Bylaws, pertaining to the calling of meetings and conduct of business by the Board of Directors, shall apply as nearly as may be possible. At every meeting of any such committee, the presence of a majority of all the members thereof shall constitute a quorum, except as provided in Section 4.3 of this Article 4, and the affirmative vote of a majority of the members present shall be necessary for the adoption by it of any resolution. SECTION 4.3. SUBSTITUTION AND REMOVAL OF MEMBERS; VACANCIES. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The Board of Directors shall have the power at any time to remove any member(s) of a committee and to appoint other directors in lieu of the person(s) so removed and shall also have the power to fill vacancies in a committee. Article 5 OFFICERS SECTION 5.1. NUMBER, TITLES AND TERM OF OFFICE. The officers of the Corporation shall be a President, Treasurer, a Secretary, and such other officers as the Board of Directors may from time to time elect or appoint (including, but not limited to, a Chairman of the Board, and or more Vice Presidents (any one or more of whom may be designated Executive Vice President or Senior Vice President), one or more Assistant Secretaries and one or more Assistant Treasurers). Each officer shall hold office until such officer's successor shall be duly elected and shall qualify or until such officer's death or until such officer shall resign or shall have been removed. Any number of offices may be held by the same person, unless the 13 Certificate of Incorporation of the Corporation provides otherwise. Except for the Chairman of the Board, no officer need be a director. SECTION 5.2. POWERS AND DUTIES OF THE PRESIDENT. The President shall be the chief executive officer of the Corporation. Subject to the control of the Board of Directors and the Executive Committee (if any), the President shall have general executive charge, management and control of the properties, business and operations of the Corporation with all such powers as may be reasonably incident to such responsibilities; may agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation and may sign all certificates for shares of capital stock of the Corporation; and shall have such other powers and duties as designated in accordance with these Bylaws and as from time to time may be assigned to the President by the Board of Directors. The President shall preside at all meetings of the stockholders and of the Board of Directors. SECTION 5.3. VICE PRESIDENTS. Each Vice President shall at all times possess power to sign all certificates, contracts and other instruments of the Corporation, except as otherwise limited in writing by the Chairman of the Board or the President of the Corporation. Each Vice President shall have such other powers and duties as from time to time may be assigned to such Vice President by the Board of Directors, the Chairman of the Board or the President. SECTION 5.4. SECRETARY. The Secretary shall keep the minutes of all meetings of the Board of Directors, committees of the Board of Directors and the stockholders, in books provided for that purpose; shall attend to the giving and serving of all notices; may in the name of the Corporation affix the seal of the Corporation to all contracts and attest the affixation of the seal of the Corporation thereto; may sign with the other appointed officers all certificates for shares of capital stock of the Corporation; shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection of any director upon application at the office of the Corporation during business hours; shall have such other powers and duties as designated in these Bylaws and as from time to time may be assigned to the Secretary by the Board of Directors, the Chairman of the Board or the President; and shall in general perform all acts incident to the office of Secretary, subject to the control of the Board of Directors, the Chairman of the Board or the President. SECTION 5.5. ASSISTANT SECRETARIES. Each Assistant Secretary shall have the usual powers and duties pertaining to such offices, together with such other powers and duties as designated in these Bylaws and as from time to time may be assigned to an Assistant Secretary by the Board of Directors, the President, 14 or the Secretary. The Assistant Secretaries shall exercise the powers of the Secretary during that officer's absence or inability or refusal to act. SECTION 5.6. TREASURER. The Treasurer shall have responsibility for the custody and control of all the funds and securities of the Corporation, and shall have such other powers and duties as designated in these Bylaws and as from time to time may be assigned to the Treasurer by the Board of Directors or the President. The Treasurer shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors or the President; and the Treasurer shall, if required by the Board of Directors, give such bond for the faithful discharge of the Treasurer's duties in such form as the Board of Directors may require. SECTION 5.7. ASSISTANT TREASURERS. Each Assistant Treasurer shall have the usual powers and duties pertaining to such office, together with such other powers and duties as designated in these Bylaws and as from time to time may be assigned to each Assistant Treasurer by the Board of Directors, the President, or the Treasurer. The Assistant Treasurers shall exercise the powers of the Treasurer during that officer's absence or inability or refusal to act. SECTION 5.8. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the President, together with the Secretary or any Assistant Secretary shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of security holders of or with respect to any action of security holders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. SECTION 5.9. DELEGATION. For any reason that the Board of Directors may deem sufficient, the Board of Directors may, except where otherwise provided by statute, delegate the powers or duties of any officer to any other person, and may authorize any officer to delegate specified duties of such office to any other person. Any such delegation or authorization by the Board shall be effected from time to time by resolution of the Board of Directors. Article 6 CAPITAL STOCK SECTION 6.1. CERTIFICATES OF STOCK. The certificates for shares of the capital stock of the Corporation shall be in such form, not inconsistent with that required by law and the charter documents of the Corporation, as shall be approved by the Board of Directors. Every holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation representing the number of 15 shares (and, if the stock of the Corporation shall be divided into classes or series, certifying the class and series of such shares) owned by such stockholder which are registered in certified form; provided, however, that any of or all the signatures on the certificate may be facsimile. The stock record books and the blank stock certificate books shall be kept by the Secretary or at the office of such transfer agent or transfer agents as the Board of Directors may from time to time determine. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature or signatures shall have been placed upon any such certificate or certificates shall have ceased to be such officer, transfer agent or registrar before such certificate is issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The stock certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and number of shares. SECTION 6.2. TRANSFER OF SHARES. The shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives upon surrender and cancellation of certificates for a like number of shares. Upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 6.3. OWNERSHIP OF SHARES. The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock of the Corporation as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. SECTION 6.4. REGULATIONS REGARDING CERTIFICATES. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of capital stock of the Corporation. SECTION 6.5. LOST OR DESTROYED CERTIFICATES. The Board of Directors may determine the conditions upon which the Corporation may issue a new certificate of stock in place of a certificate theretofore issued by it which is alleged to have been lost, stolen or destroyed and may require the owner of such certificate or such owner's legal representative to give bond, with surety sufficient to indemnify the Corporation and each transfer agent and registrar against any and all losses or claims which may arise by reason of the alleged loss, theft or 16 destruction of any such certificate or the issuance of such new certificate in the place of the one so lost, stolen or destroyed. Article 7 MISCELLANEOUS PROVISIONS SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of January of each year. SECTION 7.2. CORPORATE SEAL. The corporate seal shall be circular in form and shall have inscribed thereon the name of the Corporation and the state of its incorporation, which seal shall be in the charge of the Secretary and shall be affixed to certificates of stock, debentures, bonds, and other documents, in accordance with the direction of the Board of Directors or a committee thereof, and as may be required by law; however, the Secretary may, if the Secretary deems it expedient, have a facsimile of the corporate seal inscribed on any such certificates of stock, debentures, bonds, contract or other documents. Duplicates of the seal may be kept for use by any Assistant Secretary. SECTION 7.3. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required to be given by law, the charter documents of the Corporation or under the provisions of these Bylaws, said notice shall be deemed to be sufficient if given (i) by telegraphic, cable or wireless transmission (including by telecopy or facsimile transmission) or (ii) by deposit of the same in a post office box or by delivery to an overnight courier service company in a sealed prepaid wrapper addressed to the person entitled thereto at such person's post office address, as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such transmission or mailing or delivery to courier, as the case may be. Whenever notice is required to be given by law, the charter documents of the Corporation or under any of the provisions of these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person, including without limitation a director, at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the charter documents of the Corporation or these Bylaws. SECTION 7.4. FACSIMILE SIGNATURES. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in these Bylaws, 17 facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors. SECTION 7.5. RELIANCE UPON BOOKS, REPORTS AND RECORDS. A member of the Board of Directors, or a member of any committee designated by the Board of Directors, shall, in the performance of such person's duties, be protected to the fullest extent permitted by law in relying upon the records of the Corporation and upon information, opinion, reports or statements presented to the Corporation. SECTION 7.6. APPLICATION OF BYLAWS. In the event that any provisions of these Bylaws is or may be in conflict with any law of the United States, of the State of Delaware, or of any other governmental body or power having jurisdiction over this Corporation, or over the subject matter to which such provision of these Bylaws applies, or may apply, such provision of these Bylaws shall be inoperative to the extent only that the operation thereof unavoidably conflicts with such law, and shall in all other respects be in full force and effect. SECTION 7.7. INDEMNIFICATION. The Corporation shall indemnify its officers and directors to the full extent permitted by the Delaware General Corporation Law. Article 8 AMENDMENTS SECTION 8.1. AMENDMENTS. The Board of Directors shall have the power to adopt, amend and repeal from time to time Bylaws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to amend or repeal such Bylaws as adopted or amended by the Board of Directors. 18 EX-10.1 5 dex101.txt SECOND AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10.1 SECOND AMENDED AND RESTATED CREDIT AGREEMENT Among CASTLE DENTAL CENTERS, INC. as Borrower, BANK OF AMERICA, N.A., as Agent, and THE LENDERS SIGNATORY HERETO Dated as of July 19, 2002 $47,428,478.76 Term Loan TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Accounting Matters ............................. 2 Section 1.01 Terms Defined Above .................................... 2 Section 1.02 Certain Defined Terms .................................. 2 Section 1.03 Accounting Terms and Determinations .................... 15 ARTICLE II Loans ......................................................... 15 Section 2.01 Restructure, Modification and Continuation of Prior Debt ........................................... 15 Section 2.02 Fees ................................................... 15 Section 2.03 Notes .................................................. 16 ARTICLE III Payments of Principal and Interest ........................... 16 Section 3.01 Optional Prepayments of Loans .......................... 16 Section 3.02 Scheduled Principal Payments; Mandatory Prepayments of Loans. ............................................ 17 Section 3.03 Interest. .............................................. 18 ARTICLE IV Payments; Pro Rata Treatment; Computations; Etc. .............. 19 Section 4.01 Payments ............................................... 19 Section 4.02 Pro Rata Treatment ..................................... 19 Section 4.03 Computations ........................................... 19 Section 4.04 Non-receipt of Funds by the Agent ...................... 20 Section 4.05 Set-off, Sharing of Payments, Etc. ..................... 20 Section 4.06 Taxes. ................................................. 21 ARTICLE V Capital Adequacy ............................................... 23 Section 5.01 Capital Adequacy; Additional Costs. .................... 23 ARTICLE VI Conditions Precedent .......................................... 24 Section 6.01 Conditions to Restructure .............................. 24 Section 6.02 Conditions Precedent for the Benefit of Lenders ........ 28 ARTICLE VII Representations and Warranties ............................... 28 Section 7.01 Corporate Existence .................................... 28 Section 7.02 Financial Condition .................................... 28 Section 7.03 Litigation ............................................. 29 Section 7.04 No Breach .............................................. 29 Section 7.05 Authority .............................................. 29 Section 7.06 Approvals .............................................. 29 Section 7.07 Use of Loans ........................................... 29 Section 7.08 ERISA. ................................................. 29 Section 7.09 Taxes .................................................. 30 Section 7.10 Titles, etc. ........................................... 30 Section 7.11 No Material Misstatements .............................. 31 Section 7.12 Investment Company Act ................................. 31 Section 7.13 Public Utility Holding Company Act ..................... 31
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Section 7.14 Subsidiaries ........................................... 31 Section 7.15 Location of Business and Offices ....................... 31 Section 7.16 Defaults ............................................... 31 Section 7.17 Environmental Matters .................................. 32 Section 7.18 Compliance with the Law ................................ 32 Section 7.19 Insurance .............................................. 32 Section 7.20 Management Services Agreements and Accounts Receivable Purchase Agreements .................................. 32 Section 7.21 Restriction on Liens ................................... 33 Section 7.22 Material Agreements .................................... 33 Section 7.23 Hedging Agreements ..................................... 33 Section 7.24 Security Instruments. .................................. 33 Section 7.25 Labor Relations ........................................ 33 ARTICLE VIII Affirmative Covenants ....................................... 34 Section 8.01 Reporting Requirements ................................. 34 Section 8.02 Litigation ............................................. 37 Section 8.03 Maintenance, Etc. ...................................... 37 Section 8.04 Environmental Matters .................................. 38 Section 8.05 Further Assurances ..................................... 38 Section 8.06 Performance of Obligations ............................. 39 Section 8.07 ERISA Information and Compliance ....................... 39 Section 8.08 Management Services Agreements and Accounts Receivable Purchase Agreements .................................. 40 Section 8.09 Inspection of Property and Books and Records ........... 40 Section 8.10 Best Efforts to Prepay ................................. 40 Section 8.11 Authorized Shares. ..................................... 40 ARTICLE IX Negative Covenants ............................................ 41 Section 9.01 Debt ................................................... 41 Section 9.02 Liens .................................................. 41 Section 9.03 Investments, Loans and Advances ........................ 42 Section 9.04 Dividends, Distributions and Redemptions ............... 43 Section 9.05 Sales and Leasebacks ................................... 43 Section 9.06 Nature of Business ..................................... 43 Section 9.07 Mergers, Etc ........................................... 43 Section 9.08 ERISA Compliance ....................................... 43 Section 9.09 Asset Dispositions ..................................... 44 Section 9.10 Ratio of Total Funded Debt to EBITDA ................... 45 Section 9.11 Capital Expenditures ................................... 46 Section 9.12 Minimum EBITDA ......................................... 46 Section 9.13 Debt Service Coverage Ratio ............................ 47 Section 9.14 Environmental Matters .................................. 48 Section 9.15 Transactions with Affiliates ........................... 48 Section 9.16 Subsidiaries ........................................... 48 Section 9.17 Negative Pledge Agreements ............................. 49 Section 9.18 Other Agreements ....................................... 49
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Section 9.19 Limitation on Certain Payments and Modifications of Indebtedness; Cash Management. ....................... 49 Section 9.20 Accounting Changes ..................................... 49 ARTICLE X Events of Default; Remedies .................................... 49 Section 10.01 Events of Default ...................................... 49 Section 10.02 Remedies. .............................................. 52 ARTICLE XI The Agent ..................................................... 52 Section 11.01 Appointment, Powers and Immunities ..................... 52 Section 11.02 Reliance by Agent ...................................... 53 Section 11.03 Defaults ............................................... 53 Section 11.04 Rights as a Lender ..................................... 53 Section 11.05 Indemnification ........................................ 53 Section 11.06 Non-Reliance on Agent and other Lenders ................ 54 Section 11.07 Action by Agent ........................................ 54 Section 11.08 Resignation or Removal of Agent ........................ 55 ARTICLE XII Miscellaneous ................................................ 55 Section 12.01 Waiver ................................................. 55 Section 12.02 Notices ................................................ 55 Section 12.03 Payment of Expenses, Indemnities, etc. ................. 55 Section 12.04 Amendments, Etc ........................................ 58 Section 12.05 Successors and Assigns ................................. 58 Section 12.06 Assignments and Participations. ........................ 58 Section 12.07 Invalidity ............................................. 59 Section 12.08 Counterparts ........................................... 59 Section 12.09 References ............................................. 59 Section 12.10 Survival ............................................... 60 Section 12.11 Captions ............................................... 60 Section 12.12 No Oral Agreements ..................................... 60 Section 12.13 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. .......................................... 60 Section 12.14 Interest ............................................... 61 Section 12.15 Confidentiality ........................................ 62 Section 12.16 Effectiveness .......................................... 62 Section 12.17 Binding Arbitration. ................................... 63 Section 12.18 Exculpation Provisions ................................. 64 Section 12.19 Reaffirmation of Guaranty Agreement and Security Agreement ............................................ 64 Section 12.20 RELEASE AND COVENANT NOT TO SUE. ....................... 65 Section 12.21 Tolling of Statute of Limitations ...................... 66
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ANNEXES, EXHIBITS AND SCHEDULES Annex I - List of Maximum Credit Amounts Exhibit A - Form of Note Exhibit B - Form of Compliance Certificate Exhibit C - List of Security Instruments Exhibit D - Form of Subordination and Intercreditor Agreement Exhibit E - Form of Assignment and Acceptance Exhibit F - Form of Excess Cash Flow Certificate Exhibit G - Form of Cash Flow Differential Certificate Exhibit H - Form of Warrant Exhibit I - Form of Roisman Forbearance Agreement Exhibit J - Form of Castle Settlement Agreement Exhibit K - Form of Castle Severance Agreement Schedule 1.1 - Acquired Entities and Existing PC's Schedule 2.02(c) - Financing Fee Discount Schedule 6.01(g) - Additional Collateral Schedule 6.01(q) - Terms for Conversion of Subordinated Debt into Equity Schedule 7.02 - Liabilities Schedule 7.03 - Certain Litigation Schedule 7.14 - Subsidiaries Schedule 7.19 - Insurance Schedule 7.20 - Management Services Agreements and Accounts Receivable Purchase Agreements Schedule 7.22 - Material Agreements Schedule 7.23 - Hedging Agreements Schedule 8.01(e) - Reporting Regions Schedule 8.05(b) - Unperfected Assets Schedule 9.01 - Debt Schedule 9.02 - Liens Schedule 9.03 - Investments, Loans and Advances
IV SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of July 19, 2002 (the "Effective Date"), is among CASTLE DENTAL CENTERS, INC., a corporation formed under the laws of the State of Delaware (the "Borrower"); each of the lenders that is a signatory hereto or which becomes a signatory hereto as provided in Section 12.06 (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); and BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), a national banking association (in its individual capacity, "Bank of America"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S A. The Borrower, the Agent and the Lenders are parties to that certain Amended and Restated Credit Agreement dated as of December 18, 1998, which amended and restated the Prior Agreement (as defined in Section 1.02), said Amended and Restated Credit Agreement being amended by First Amendment to Amended and Restated Credit Agreement dated as of July 20, 1999, by Second Amendment to Amended and Restated Credit Agreement dated as of September 30, 1999, by Third Amendment to Amended and Restated Credit Agreement dated as of January 31, 2000 and by Fourth Amendment to Amended and Restated Credit Agreement dated as of December 31, 1999 (such Amended and Restated Credit Agreement as amended, the "Existing Agreement"), pursuant to which the Lenders agreed to make loans to and extensions of credit on behalf of the Borrower. B. The indebtedness arising under the Existing Agreement is evidenced by those certain promissory notes, one dated July 20, 1999 in the amount of $22,500,000 payable to Bank of America, one dated July 20, 1999 in the amount of $15,000,000 payable to BankBoston, N.A., one in the amount of $10,000,000 dated March 31, 1999 payable to Heller Financial, Inc., and one dated December 18, 1998 in the amount of $7,500,000 payable to AmSouth Bank (individually, an "Existing Note" and collectively, the "Existing Notes"), such indebtedness being (i) secured by liens and security interests granted in favor of Agent (for the ratable benefit of the Lenders) pursuant to certain Security Instruments more fully described in the Existing Agreement executed by Borrower and certain of its Subsidiaries and (ii) guaranteed by certain Subsidiaries of Borrower pursuant to certain guaranty agreements each executed by such Subsidiaries as of December 18, 1998 (collectively, the "Guaranty Agreements") in favor of Agent and the Lenders. C. Borrower hereby acknowledges that as of December 18, 2000 (being the Revolving Credit Termination Date as defined in the Existing Agreement), the aggregate outstanding principal amount of the Existing Notes was converted into term loans payable in eight consecutive quarterly installments, each equal to 1/20th of the outstanding principal amount of the Existing Notes as of such date, with final payment of the remaining principal balance on the Existing Notes due on November 7, 2002. D. The Borrower hereby further acknowledges that certain Defaults and Events of Default under the Existing Agreement have occurred and are continuing, including, without limitation, Borrower's failure to make scheduled principal payments due on the Existing Notes in the aggregate amount of $13,569,000. E. In consideration of, among other things, the Borrower (i) arranging for the conversion of certain existing subordinate indebtedness into equity (ii) obtaining new subordinated loans of $1,700,000 and (iii) paying certain fees and expenses required under this Agreement, the Lenders are willing to restructure, modify and continue, but not extinguish, the indebtedness outstanding under the Existing Agreement pursuant to the terms and conditions set forth herein and in the documents delivered pursuant hereto. F. The parties hereto desire to amend the Existing Agreement as hereinafter provided and have agreed, for purposes of clarity and ease of administration, to amend the Existing Agreement and then restate the Existing Agreement in its entirety by means of this Agreement. G. In consideration of the mutual covenants and agreements and provisions and covenants contained herein, the Borrower, the Lenders and the Agent hereby agree to amend and restate the Existing Credit Agreement in its entirety as follows: ARTICLE I Definitions and Accounting Matters Section 1.01 Terms Defined Above. As used in this Agreement, the terms "Agent," "Borrower," "Lender," "Lenders" and "Bank of America" shall have the meanings indicated above. Section 1.02 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Article I or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Academy" shall mean Academy for Dental Assistants, Inc., a Florida corporation and a Wholly-Owned Subsidiary of Borrower. "Accounts Receivable Purchase Agreements" shall mean the Accounts Receivable Purchase Agreements either previously or hereafter entered into between an Acquired Entity, as seller, and Borrower or any Subsidiary, as buyer, in form and substance satisfactory to Agent. "Acquired Entity" shall mean the entities identified on Schedule 1.1 hereto and all entities (of whatever form) whose assets are acquired by the Borrower or any Subsidiary with the approval of Majority Lenders, and all new professional corporations, professional associations or other Persons which become a party to future Management Services Agreements and Accounts Receivable Purchase Agreements with Borrower or any Subsidiary permitted hereunder. "Additional Collateral" shall have the meaning set forth in Section 6.01(g). "Administrative Fee" shall have the meaning set forth in Section 2.02(a). 2 "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 10% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. "Agreement" shall mean this Second Amended and Restated Credit Agreement, as the same may from time to time be amended or supplemented. "Aggregate Maximum Credit Amounts" at any time shall equal the sum of the Maximum Credit Amounts of the Lenders ($47,428,478.76), as the same may be reduced pursuant to this Agreement. "Annual Cash Flow Payment" shall have the meaning set forth in Section 3.02(b)(ii). "Applicable Lending Office" shall mean, for each Lender, the lending office of such Lender (or an Affiliate of such Lender) designated on the signature pages hereof or such other offices of such Lender (or of an Affiliate of such Lender) as such Lender may from time to time specify to the Agent and the Borrower as the office by which its Loans are to be made and maintained. "Assignment" shall mean an Assignment and Acceptance in substantially the form of Exhibit E. "Bank Products" means any one or more of the following types of services or facilities extended to the Borrower or any Subsidiary by the Agent or any Affiliate of the Agent in reliance on the Agent's agreement to indemnify such Affiliate: (a) credit cards; (b) cash management or related services including the automated clearinghouse transfer of funds for the account of the Borrower or any Subsidiary pursuant to agreement or overdrafts; (c) Hedging Agreements; and (d) foreign exchange contracts. "Base Rate" shall mean, with respect to any Loan hereunder, for any day, the Prime Rate for such day plus 2%. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate. "Business Day" shall mean any day excluding Saturday, Sunday and any other day on which commercial banks are authorized or required to close in Houston, Texas. "Capital Expenditures" shall mean, for any period and with respect to any Person, the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a 3 liability and including that portion of capital leases that is capitalized on the balance sheet of such Person including in connection with a sale-leaseback transaction) by such Person and its Subsidiaries for the acquisition or leasing of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which are required to be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "Capitalization" shall mean shareholder's equity plus Total Funded Debt. "Capital Stock" shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock, membership interest, partnership interest or other equity participation in or of a Person and any and all warrants or options to purchase any of the foregoing. "Cash Flow Differential Certificate" shall have the meaning set forth in Section 8.01(g). "Cash Floor Limit" shall have the meaning set forth in Section 3.02(b)(ii). "Cash on Hand" shall mean, at any time, (i) all cash and cash equivalents as reflected on a consolidated balance sheet of the Borrower and its Subsidiaries and (ii) all investments by the Borrower and its Subsidiaries of the types permitted by Section 9.03(c), (d), (e) and (f). "Castle Florida" shall mean Castle Dental Centers of Florida, Inc., a Florida corporation and a Wholly-Owned Subsidiary of the Borrower. "Castle Tennessee" shall mean Castle Dental Centers of Tennessee, Inc., a Tennessee corporation and a Wholly-Owned Subsidiary of the Borrower. "Castle Texas" shall mean Castle Dental Centers of Texas, Inc., a Texas corporation and a Wholly-Owned Subsidiary of the Borrower. "Castle Texas Holdings" shall mean Castle Texas Holdings, Inc., a Delaware corporation and a Wholly-Owned Subsidiary of Borrower. "Castle West" shall mean Castle Dental Centers of California, L.L.C., a Delaware limited liability company and Wholly-Owned Subsidiary of the Borrower. "CDC California" shall mean CDC of California, Inc., a Delaware corporation and a Wholly-Owned Subsidiary of the Borrower. "Certificate of Designations" shall mean that certain Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock adopted by the Board of Directors of the Borrower on July 18, 2002 and filed with the Secretary of State of Delaware on July 19, 2002 (as amended or restated from time to time). "Change of Control" shall mean at any time, as a result of one or more transactions after the date of this Agreement, any Person or "group" of Persons acting in concert (other than the 4 Subordinated Lenders) shall have "beneficial ownership" of more than 51% of the outstanding voting securities of the Borrower (within the meaning of Section 13(d) or 14 (d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder), provided that the relationships among the respective shareholders of the Borrower on the date of this Agreement shall not be deemed to constitute all or any combination of them as a "group". "Closing Date" shall mean July 19, 2002, provided that all conditions precedent set forth in Article VI have been satisfied or waived by the Majority Lenders by such date. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and any successor statute. "Collateral" shall have the meaning set forth in Section 6.01(g). "Common Stock" the common stock, $.001 par value, of the Borrower. "Consolidated Net Income" shall mean with respect to the Borrower and its Consolidated Subsidiaries, for any period, the aggregate of the net income (or loss) of the Borrower and its Consolidated Subsidiaries after allowances for taxes for such period, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein) the following: (i) the net income of any Person in which the Borrower or any Consolidated Subsidiary has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of the Borrower and its Consolidated Subsidiaries in accordance with GAAP), except to the extent of the amount of dividends or distributions actually paid in such period by such other Person to the Borrower or to a Consolidated Subsidiary, as the case may be; (ii) the net income (but not loss) of any Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions or transfers or loans by that Consolidated Subsidiary is not at the time permitted by operation of the terms of its charter or any agreement, instrument or Governmental Requirement applicable to such Consolidated Subsidiary, or is otherwise restricted or prohibited in each case determined in accordance with GAAP; (iii) the net income (or loss) of any Person acquired in a pooling-of-interests transaction for any period prior to the date of such transaction; (iv) any nonrecurring gains or losses acceptable to the Majority Lenders and any extraordinary gains or losses, including gains or losses attributable to Property sales not in the ordinary course of business; and (v) the cumulative effect of a change in accounting principles and any gains or losses attributable to writeups or write downs of assets. "Consolidated Subsidiaries" shall mean each Subsidiary of the Borrower (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of the Borrower in accordance with GAAP. "Consolidated Working Capital" shall mean with respect to Borrower and its Consolidated Subsidiaries, the Current Assets of Borrower and its Consolidated Subsidiaries minus the Current Liabilities of Borrower and its Consolidated Subsidiaries all determined on a consolidated basis. 5 "Current Assets" shall mean, with respect to any Person, all assets of such Person which, in accordance with GAAP, are required to be classified as current assets on a balance sheet of such Person. "Current Liabilities" shall mean, with respect to any Person, all liabilities which, in accordance with GAAP, are required to be classified as current liabilities on a balance sheet of such Person. "Debt" shall mean, for any Person the sum of the following (without duplication): (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or other similar instruments (including principal, interest, fees and charges); (ii) all obligations of such Person (whether contingent or otherwise) in respect of bankers' acceptances, letters of credit, surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the deferred purchase price of Property or services (other than for borrowed money); (iv) all obligations under leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable (whether contingent or otherwise); (v) all obligations under leases which require such Person or its Affiliate to make payments over the term of such lease, including payments at termination, which are substantially equal to at least eighty percent (80%) of the purchase price of the Property subject to such lease plus interest as an imputed rate of interest; (vi) all Debt (as described in the other clauses of this definition) and other obligations of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person; (vii) all Debt (as described in the other clauses of this definition) and other obligations of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the debtor or obligations of others; (viii) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others or to purchase the Debt (as described in the other clauses of this definition) or Property of others; (ix) obligations to deliver goods or services in consideration of advance payments; and (x) all obligations of such Person under Hedging Agreements. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would become an Event of Default. "Deferred Interest" shall have the meaning set forth in Section 3.03(c). "Deferred Interest Rate" shall have the meaning set forth in Section 3.03(c). "Dentcor" shall mean Dentcor, Inc., a Florida corporation and a Wholly-Owned Subsidiary of Borrower. "Dollars" and "$" shall mean lawful money of the United States of America. "EBIT" shall mean, for any period, the sum of Consolidated Net Income for such period plus the following expenses or charges to the extent deducted from Consolidated Net Income in such period: interest and taxes. 6 "EBITDA" shall mean, for any period, the sum of Consolidated Net Income for such period plus the following expenses or charges to the extent deducted from Consolidated Net Income in such period: interest, taxes, depreciation and amortization. "Eligible Assignee" shall have the meaning set forth in Section 12.06(b). "Environmental Laws" shall mean any and all Governmental Requirements pertaining to health or the environment in effect in any and all jurisdictions in which the Borrower or any Subsidiary is conducting or at any time has conducted business, or where any Property of the Borrower or any Subsidiary is located, including without limitation, the Oil Pollution Act of 1990 ("OPA"), as amended, the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection laws. The term "oil" shall have the meaning specified in OPA, the terms "hazardous substance" and "release" (or "threatened release") have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and (ii) to the extent the laws of the state in which any Property of the Borrower or any Subsidiary is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower or any Subsidiary would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA or Subsections (b), (c), (m) or (o) of Section 414 of the Code. "ERISA Event" shall mean (i) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal of the Borrower, any Subsidiary or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv) the institution of proceedings to terminate a Plan by the PBGC or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Event of Default" shall have the meaning assigned such term in Section 10.01. 7 "Event of Loss" means, with respect to any capital asset of the Borrower or any of its Subsidiaries, any of the following: (a) any loss, destruction or damage of such property, or (b) any actual condemnation, seizure or taking, by exercise of the power of eminent domain or otherwise, of such property, or confiscation of such property or the requisition of the use of such property by any Governmental Authority. "Excepted Liens" shall mean: (i) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained; (ii) Liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction or other like Liens arising by operation of law in the ordinary course of business or statutory landlord's liens, each of which is in respect of obligations that have not been outstanding more than 90 days or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been maintained in accordance with GAAP; (iv) any Liens reserved in leases for rent and for compliance with the terms of leases in the case of leasehold estates, to the extent that any such Lien referred to in this clause does not materially impair the use of the Property covered by such Lien for the purposes for which such Property is held by the Borrower or any Subsidiary or materially impair the value of such Property subject thereto; (v) encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of Property or services), easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any rights of way or other Property of the Borrower or any Subsidiary for the purpose of roads, pipelines, transmission lines, transportation lines, distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment, and defects, irregularities, zoning restrictions and deficiencies in title of any rights of way or other Property which in the aggregate do not materially impair the use of such rights of way or other Property for the purposes of which such rights of way and other Property are held by the Borrower or any Subsidiary or materially impair the value of such Property subject thereto; (vi) deposits of cash or securities to secure the performance of bids, trade contracts, leases, statutory obligations and other obligations of a like nature incurred in the ordinary course of business; and (vii) Liens permitted by the Security Instruments. "Excess Cash Flow" means, for each 12 month period ending March 31, (i) EBITDA for such period, less (ii) the sum of, without duplication, (A) Capital Expenditures during such period by the Borrower and its Subsidiaries (net of any proceeds relating to any financing with respect to such Capital Expenditures), plus (B) cash tax payments on or measured by income or capital (or changes therein) of the Borrower and its Subsidiaries during such period, plus (C) cash interest for such period, plus (D) scheduled principal payments on account of any Debt during such period, plus (E) any net increase in Consolidated Working Capital (excluding cash) from the prior 12 month period ending March 31, plus (iii) any net decrease in Consolidated Working Capital (excluding cash) from the prior 12 month period ending March 31. "Excess Cash Flow Certificate" shall have the meaning set forth in Section 8.01(g). 8 "Excess Cash Flow Percentage" means 55%. "Existing PCs" means the affiliated dental practices identified on Schedule 7.14 hereto. "Federal Funds Rate" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight federal funds transactions with a member of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the date for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to the Agent on such day on such transactions as determined by the Agent. "Final Maturity Date" shall mean the earlier to occur of (i) July 19, 2005 and (ii) the date that the Notes are accelerated pursuant to Section 10.02. "Financial Statements" shall mean the financial statement or statements of the Borrower and its Consolidated Subsidiaries described or referred to in Section 7.02. "Financing Fee" shall have the meaning as set forth in Section 2.02(c). "Forbearance Agreement" shall have the meaning as set forth in Section 6.01(r). "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority" shall include the country, the state, county, city and political subdivisions in which any Person or such Person's Property is located or which exercises valid jurisdiction over any such Person or such Person's Property, and any court, agency, department, commission, board, bureau or instrumentality of any of them including monetary authorities which exercises valid jurisdiction over any such Person or such Person's Property. Unless otherwise specified, all references to Governmental Authority herein shall mean a Governmental Authority having jurisdiction over, where applicable, the Borrower, its Subsidiaries or any of their Property or the Agent or any Lender or any Applicable Lending Office. "Governmental Requirement" shall mean any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement (whether or not having the force of law), including, without limitation, Environmental Laws, energy regulations and occupational, safety and health standards or controls, of any Governmental Authority. "Guarantors" shall mean each Subsidiary which may execute a Guaranty Agreement pursuant to Section 9.16. 9 "Guaranty Agreement" shall mean an agreement executed by one or more Guarantors in form and substance satisfactory to the Agent guarantying, unconditionally, payment of the Indebtedness, as the same may be amended, modified or supplemented from time to time. "Hedging Agreements" shall mean any interest rate swap, cap, floor, collar, forward agreement or other protection agreements or any option with respect to any such transaction. "Highest Lawful Rate" shall mean, with respect to each Lender, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Notes or on other Indebtedness under laws applicable to such Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. "Indebtedness" shall mean any and all amounts owing or to be owing by the Borrower or any Subsidiary to the Agent, any of the Lenders or any Affiliate of a Lender in connection with any Bank Products or the Loan Documents, now or hereafter entered into between the Borrower and the Lenders or any Affiliate of a Lender, and all renewals, extensions and/or rearrangements of any of the above. "Indemnified Parties" shall have the meaning assigned such term in Section 12.03(a)(ii). "Indemnity Matters" shall mean any and all actions, suits, proceedings (including any investigations, litigation or inquiries), claims, demands and causes of action made or threatened against a Person and, in connection therewith, all losses, liabilities, damages (including, without limitation, consequential damages) or reasonable costs and expenses of any kind or nature whatsoever incurred by such Person whether caused by the sole or concurrent negligence of such Person seeking indemnification. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing. "Loans" shall mean the Prior Debt of all the Lenders as restructured, modified and continued hereunder, and a "Loan" shall mean such Prior Debt of a single Lender. "Loan Documents" shall mean this Agreement, the Notes, the Security Instruments and the Warrants. 10 "Majority Lenders" shall mean Lenders holding at least sixty-six and two-thirds percent (66-2/3%) of the outstanding aggregate principal amount of the Loans (without regard to any sale by a Lender of a participation in any Loan under Section 12.06(c)). "Management Services Agreements" shall mean Management Services Agreements (i) previously entered into between an Acquired Entity and Borrower or any Subsidiary and (ii) such agreements which are hereafter entered into between any Acquired Entity and Borrower or any Subsidiary which are in form and substance reasonably satisfactory to Lenders. "Material Adverse Effect" shall mean any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations or affairs of the Borrower and its Subsidiaries taken as a whole different from those reflected in the Financial Statements or from the facts represented or warranted in any Loan Document, or (ii) the ability of the Borrower and its Subsidiaries taken as a whole to carry out their business as at the Closing Date or as proposed as of the Closing Date to be conducted or meet their obligations under the Loan Documents on a timely basis, or (iii) the rights and remedies of the Agent or Lenders under the Loan Documents taken as a whole. "Maximum Credit Amount" shall mean, as to each Lender, the amount set forth opposite such Lender's name on Annex I under the caption "Maximum Credit Amounts" (as the same may be reduced pursuant to this Agreement pro rata to each Lender based on its Percentage Share), as modified from time to time to reflect any assignments permitted by Section 12.06(b). "Monthly Date" shall mean the first day of each calendar month in each calendar year; provided if any such date is not a Business Day such Monthly Date shall be the next succeeding Business Day. "Multiemployer Plan" shall mean a Plan defined as such in Section 3(37) or 4001(a)(3) of ERISA. "Net Proceeds" shall mean, in respect of any disposition or Event of Loss, the proceeds in cash received by the Borrower or any of its Subsidiaries with respect to or on account of such disposition or Event of Loss, net of: (a) in the case of a disposition, the reasonable direct costs (including, without limitation, broker's fees and commissions) of such disposition then payable by the recipient of such proceeds or, in the case of an Event of Loss, the reasonable direct costs of collecting insurance or other proceeds, in each case excluding amounts payable to the Borrower or any Affiliate of the Borrower, (b) sales, use and other taxes paid or payable by such recipient as a result thereof, (c) amounts required to be applied to repay principal, interest and prepayment premiums and penalties on Debt secured by an Excepted Lien on the properties subject to such disposition, and (d) reasonable amounts required to be paid to non-Affiliates in order to obtain required consents to such disposition. "Notes" shall mean the Notes provided for by Section 2.03, together with any and all renewals, extensions for any period, increases, rearrangements, substitutions or modifications thereof. "Other Taxes" shall have the meaning assigned such term in Section 4.06(b). 11 "Payment Default" means the Borrower's default in the payment or prepayment when due of any principal of or interest on any Loan, or any fees or other amount payable by it hereunder; provided, however, if such default is a default only on a payment of fees or expenses (other than fees under Section 2.02), no Payment Default shall occur unless such default continues unremedied for a period of 30 days. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions. "Percentage Share" shall mean the percentage of the Aggregate Maximum Credit Amounts of a Lender under this Agreement as indicated on Annex I hereto, as modified from time to time to reflect any assignments permitted by Section 12.06(b). "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government or any agency, instrumentality or political subdivision thereof, or any other form of entity. "Plan" shall mean any employee pension benefit plan, as defined in Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or (ii) was at any time during the preceding six calendar years sponsored, maintained or contributed to, by the Borrower, any Subsidiary or an ERISA Affiliate. "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount payable by the Borrower under this Agreement or any other Loan Document, a rate per annum accruing during the period commencing on the date of occurrence of an Event of Default and ending when such Event of Default and all other Events of Default are cured or waived, equal to 3% per annum above the Base Rate as in effect from time to time, but in no event shall such rate exceed the Highest Lawful Rate. "Prime Rate" shall mean the rate of interest from time to time announced publicly by the Agent at the Principal Office as its prime commercial lending rate. Such rate is set by the Agent as a general reference rate of interest, taking into account such factors as the Agent may deem appropriate, it being understood that many of the Agent's commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate actually charged to any customer and that the Agent may make various commercial or other loans at rates of interest having no relationship to such rate. "Principal Office" shall mean the principal office of the Agent, presently located at 901 Main Street, Dallas, Dallas County, Texas 75202. "Prior Credit Agreement" shall mean that certain Credit Agreement dated as of November 7, 1997 among the Borrower, the Agent, and the lenders party thereto, as amended and supplemented prior to the Existing Agreement. "Prior Debt" shall mean the outstanding Debt under the Prior Credit Agreement and the Existing Agreement. 12 "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Quarterly Dates" shall mean the fifteenth day of each March, June, September, and December, in each year, the first of which shall be September 15, 2002; provided, however, that if any such day is not a Business Day, such Quarterly Date shall be the next succeeding Business Day. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Regulatory Change" shall mean, with respect to any Lender, any change after the Closing Date in any Governmental Requirement (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of lenders (including such Lender or its Applicable Lending Office) of or under any Governmental Requirement (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "Reporting Region" shall have the meaning as set forth in Section 8.01(e). "Required Payment" shall have the meaning assigned such term in Section 4.04. "Responsible Officer" shall mean, as to any Person, the Chief Executive Officer, the President or any Vice President of such Person and, with respect to financial matters, the term "Responsible Officer" shall include the Chief Financial Officer of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Borrower. "Restricted Payments" shall have the meaning set forth in Section 9.04. "Restructuring Fee" shall have the meaning ascribed to such term in Section 2.02(b). "Restructured Amount" shall have the meaning ascribed to such term in Section 2.01. "Roisman" shall collectively refer to Leon D. Roisman, D.M.D., Leon D. Roisman, D.M.D., Inc. and Roisman Acquisition Company. "Sale Date" shall mean the first date on which all of the original Lenders signing this Agreement (other than Heller Financial, Inc.) shall have assigned, or granted a participation, in all of their rights and obligations under this Agreement and the Warrants issued to them. "SEC" shall mean the Securities and Exchange Commission or any successor Governmental Authority. "Security Instruments" shall mean the agreements or instruments described or referred to in Exhibit C, and any and all other agreements or instruments now or hereafter executed and delivered by the Borrower or any other Person (other than participation or similar agreements 13 between any Lender and any other lender or creditor with respect to any Indebtedness pursuant to this Agreement) in connection with, or as security for the payment or performance of the Notes or this Agreement, as such agreements may be amended, supplemented or restated from time to time. "Senior Funded Debt" shall mean, at any date and with respect to the Borrower and its Subsidiaries, all Debt for borrowed money (excluding Debt expressly subordinated to the Indebtedness in form and substance satisfactory to the Lenders), any capital lease obligations and any guaranty with respect to Senior Funded Debt of another Person. "Series A-2 Preferred Stock" shall mean the Borrower's Series A-2 Convertible Preferred Stock, par value $.001 per share, having the designations, preferences and rights described in the Certificate of Designations. "Special Entity" shall mean any joint venture, limited liability company or partnership, general or limited partnership or any other type of partnership or company other than a corporation in which the Borrower or one or more of its other Subsidiaries is a member, owner, partner or joint venturer and owns, directly or indirectly, at least a majority of the equity of such entity or controls such entity, but excluding any tax partnerships that are not classified as partnerships under state law. For purposes of this definition, any Person which owns directly or indirectly an equity investment in another Person which allows the first Person to manage or elect managers who manage the normal activities of such second Person will be deemed to "control" such second Person (e.g., a sole general partner controls a limited partnership). "Stockholders Agreement" shall mean that certain Stockholders Agreement executed by and among the Borrower, each Lender and the Subordinate Lenders dated as of July 19, 2002. "Subordinated Debt" shall mean Debt of the Borrower or any Subsidiary described on Schedule 9.01 that is subordinated to the Indebtedness pursuant to a subordination agreement in the form of Exhibit D. "Subordinate Lenders" shall have the meaning set forth in Section 6.01(p). "Subordination Agreement" shall have the meaning set forth in Section 6.01(p). "Subsidiary" shall mean (i) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Borrower or one or more of its Subsidiaries or by the Borrower and one or more of its Subsidiaries and (ii) any Special Entity. Unless otherwise indicated herein, each reference to the term "Subsidiary" shall mean a Subsidiary of the Borrower. "Taxes" shall have the meaning assigned such term in Section 4.06(a). "Total Funded Debt" shall mean Senior Funded Debt plus all debt expressly subordinated to the Indebtedness. 14 "Unperfected Assets" shall have the meaning set forth in Section 8.05(b). "Warrants" shall have the meaning set forth in Section 6.01(n)(i). "Wholly-Owned Subsidiary" shall mean, as to the Borrower, any Subsidiary of which all of the outstanding shares of capital stock or other equity interests, on a fully-diluted basis, are owned by the Borrower or one or more of the Wholly-Owned Subsidiaries or by the Borrower and one or more of the Wholly-Owned Subsidiaries. Section 1.03 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Agent or the Lenders hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the audited financial statements of the Borrower referred to in Section 7.02 (except for changes concurred with by the Borrower's independent public accountants). ARTICLE II Loans Section 2.01 Restructure, Modification and Continuation of Prior Debt. The aggregate unpaid principal balance of the Prior Debt as of the Effective Date is $45,230,000. As of the Effective Date, accrued and unpaid interest on the Prior Debt equals $2,162,838.13, of which $1,860,465.05 is accrued interest in excess of the pre-default rate (the "Default Interest"), the amount of unpaid obligations with respect to the Hedging Agreements is $347,678.89 (the "Hedge Obligations") and the aggregate amount all other obligations owing to the Agent and Lenders with respect to the Prior Debt is $1,490,334.82 (the "Other Obligations"). On or prior to the Effective Date, Borrower shall pay to Agent and Lenders (i) all accrued and unpaid interest owing on the Prior Debt, other than the Default Interest, in the amount of $302,373.08 plus (ii) the sum of $1,500,000 (inclusive of a $500,000 expense reimbursement previously paid to the Agent) which shall be applied to the repayment in part of the Other Obligations. Subject to the terms and conditions of this Agreement, the Lenders hereby agree to restructure, modify and continue the principal balance of the Prior Debt, the Default Interest, the Hedge Obligations and any remaining Other Obligations as single tranche term Loans in the original aggregate principal amount of $47,428,478.76 (the "Restructured Amount"), which Loans shall be repayable in accordance with the terms of this Agreement and the Notes. Section 2.02 Fees. (a) Administrative Fee. Until the Loans are repaid in full, the Borrower shall pay an annual administrative fee to the Agent for the Agent's own account in the amount of $25,000 ("Administrative Fee") with the first payment of such fee due on the Closing Date and a like amount to be due and payable on each anniversary of the Closing Date. (b) Restructuring Fee. Effective as of the Closing Date, the Agent and Lenders hereby waive all defaults and events of default which have occurred and are continuing under the Existing Agreement. In partial consideration of the waiver of such defaults and events of defaults and in order to induce the Lenders to agree to the restructuring, modification and 15 continuation of the Prior Debt as contemplated hereby, the Borrower shall pay to the Agent for the account of the Lenders a restructuring fee in the amount of $474,284.79, being 1% of the Restructured Amount (the "Restructuring Fee"), which Restructuring Fee shall be payable in four equal quarterly installments of $118,571.20 each plus accrued interest thereon at the Base Rate or Post-Default Rate (as applicable), with the first such installment plus interest at the Base Rate being due on September 19, 2002, and the second, third and fourth installments being due on December 19, 2002, March 19, 2003, and June 19, 2003 respectively. The Restructuring Fee shall be fully earned by the Lenders as of the Closing Date. (c) Financing Fee. In partial consideration of the waiver of defaults under the Existing Agreement granted under Section 2.02(b) above and in order to induce Lenders to agree to the restructuring, modification and continuation of the Prior Debt as contemplated hereby, the Borrower shall pay to the Agent for the account of each Lender a Financing Fee in the amount of $1,897,139.15 being 4% of the Restructured Amount (the "Financing Fee"), which Financing Fee shall be payable in full without interest on the Final Maturity Date. The Financing Fee shall be fully earned by the Lenders as of the Closing Date. The Financing Fee shall be discounted as provided in Schedule 2.02(c) to this Agreement if the aggregate principal amount of the Loans is reduced to the amounts, and by the dates, specified therein. Section 2.03 Notes. The Loan of each Lender shall be evidenced by a single replacement promissory note of the Borrower in substantially the form of Exhibit A, dated (i) the Closing Date or (ii) the effective date of an Assignment pursuant to Section 12.06(b), payable to the order of such Lender in a principal amount equal to its Maximum Credit Amount as originally in effect and otherwise duly completed and such substitute Notes as required by Section 12.06(b). The date and amount of each Lender's Loan and all payments made on account of the principal thereof, shall be recorded by such Lender on its books, and, prior to any transfer, may be endorsed by such Lender on the schedule attached to such Notes or any continuation thereof or on any separate record maintained by such Lender. Failure to make any such notation or to attach a schedule shall not affect any Lender's or the Borrower's rights or obligations in respect of such Loan or affect the validity of such transfer by any Lender of its Note. ARTICLE III Payments of Principal and Interest Section 3.01 Optional Prepayments of Loans. 1. The Borrower may prepay the Loans in whole or in part upon not less than one (1) Business Day's prior notice to the Agent (which shall promptly notify the Lenders), which notice shall specify the prepayment date (which shall be a Business Day) and the amount of the prepayment (which shall be at least $10,000 or the remaining aggregate principal balance outstanding on the Notes) and shall be irrevocable and effective only upon receipt by the Agent. As a condition to any optional prepayment, interest on the principal prepaid, accrued to the prepayment date, shall be paid on the prepayment date. (b) Notwithstanding the foregoing, if the Borrower should voluntarily prepay the Loans in their entirety, Borrower shall pay to the Agent, for the benefit of the Lenders the then unpaid amount of the Restructuring Fee plus accrued and unpaid interest thereon and the Financing Fee as discounted in accordance with Schedule 2.02(c). 16 Section 3.02 Scheduled Principal Payments; Mandatory Prepayments of Loans. (a) Scheduled Principal Payments. The Notes shall be payable in quarterly principal installments on the dates and in the amounts set forth below: 2003 2004 2005 ---- ---- ---- March 31 $ 500,000 $1,000,000 $1,625,000 June 30 $ 500,000 $1,000,000 September 30 $ 500,000 $1,000,000 December 31 $ 500,000 $1,000,000 The final payment of the remaining principal balance of the Notes and any other amounts owing on the Loans and not previously paid shall be due on the Final Maturity Date. (b) Mandatory Prepayments. (i) Upon receipt by the Borrower or any of its Subsidiaries, the Borrower shall prepay the Loans in an amount equal to 50% of the cash proceeds (net of underwriting discounts and commissions or underwriting or placement fees, investment banking fees, legal fees, accounting fees, and other customary fees, commissions, expenses and costs associated therewith and net of taxes paid or payable as a result thereof) of any sale of equity securities by the Borrower or any of its Subsidiaries; provided, however, that no such prepayment shall be required with respect to any equity securities issued by any Subsidiary of the Borrower to the Borrower or another Subsidiary of the Borrower. (ii) Commencing with the 12 month period ended March 31, 2003, the Borrower shall prepay the Loans in an amount equal to the Excess Cash Flow Percentage of the Excess Cash Flow (the "Annual Cash Flow Payment") as follows: (A) On or prior to April 30 of each year, the Borrower shall pay the Annual Cash Flow Payment in full, except that if, after giving effect to such payment, Borrower's Cash on Hand on the date of such payment would be less than $3,000,000 (such amount being referred to herein as the "Cash Floor Limit"), the Borrower may defer payment of such portion of the Annual Cash Flow Payment as is necessary to maintain the Cash Floor Limit as provided below; and (B) For so long as any portion of the Annual Cash Flow Payment remains unpaid as provided above, then on the last Business Day of each successive month the Borrower shall pay the deferred portion (if any) of the Annual Cash Flow Payment in full, except that if, after giving effect to such payment, Borrower's Cash on Hand on the date of such payment would be less than the Cash Floor Limit, then the Borrower may further defer to the next month payment of such portion of the Annual Cash Flow Payment as is necessary to maintain the Cash Floor Limit. 17 (iii) Upon any (A) Event of Loss resulting in Net Proceeds of $25,000 or more with respect to which Borrower (or its Subsidiaries) have determined not to repair or replace the Property which is the subject of the Event of Loss, or (B) sale or series of related sales of assets by the Borrower or any of its Subsidiaries undertaken pursuant to Section 9.09(b) or as otherwise permitted by a waiver by the Lenders to this Agreement, the Borrower shall prepay the Loans in an amount equal to 100% of the Net Proceeds of (y) each such Event of Loss, or (z) each such sale, in each case, if and to the extent that Net Proceeds received by the Borrower or its Subsidiaries from such sale or series of related sales of assets exceeds $100,000 in the aggregate for all such sales in any fiscal year. (iv) Prepayments of the Loans pursuant to this Section 3.02(b) shall be applied to the principal amounts outstanding on the Loans in inverse order of maturity. Section 3.03 Interest. (a) Interest Rates. The Borrower will pay to the Agent, for the account of each Lender, interest on the unpaid principal amount of each Loan for the period commencing on the Closing Date, but excluding the date such Loan shall be paid in full, at a rate per annum equal to the Base Rate (as in effect from time to time), but in no event to exceed the Highest Lawful Rate. (b) Post-Default Rate. Notwithstanding the foregoing, the Borrower will pay to the Agent, for the account of each Lender, interest at the Post-Default Rate on any principal of any Loan, and (to the fullest extent permitted by law) on any other amount payable by the Borrower hereunder, under any Loan Document or under any Note held by such Lender to or for account of such Lender, for the period commencing on the date of an Event of Default and ending when such Event of Default and all other Events of Default are cured or waived. (c) Deferred Interest Rate. In addition to the Base Rate and (if applicable) the Post-Default Rate and subject at all times to Section 12.14 hereof , the outstanding principal balance of each Loan shall accrue additional interest from the Closing Date until paid at the rate of 4 1/2% per annum ("Deferred Interest Rate"). All accrued interest at the Deferred Interest Rate ("Deferred Interest") shall be immediately due and payable only upon the occurrence of a Payment Default and shall continue to accrue and will be payable as it accrues for all periods following any Payment Default until paid in full. If a Payment Default has not occurred prior to July 19, 2005, and the Indebtedness is paid in full on or prior to July 19, 2005, then (i) no Deferred Interest shall ever become due or payable and (ii) all accrued and unpaid Deferred Interest shall be deemed extinguished and forgiven. If the Loans are accelerated in accordance with Section 10.02(a), but no Payment Default has occurred concurrently therewith or prior thereto, so long as Borrower continues to make the regularly scheduled payments required under this Agreement with respect to the Loans as though no such acceleration had occurred, then Deferred Interest shall not become due and payable. Notwithstanding any provision herein to the contrary, the total amounts due to all Lenders for Deferred Interest shall not exceed $4,500,000. (d) Due Dates. Accrued interest on the Loans at the Base Rate shall be payable monthly in arrears commencing on August 1, 2002, and on each Monthly Date 18 thereafter. All interest hereunder at the Post-Default Rate shall be payable from time to time on demand. Deferred Interest shall be payable as provided in Section 3.03(c). (e) Determination of Rates. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall notify the Lenders to which such interest is payable and the Borrower thereof. Each determination by the Agent of an interest rate or fee hereunder shall, except in cases of manifest error, be final, conclusive and binding on the parties. Anything herein to the contrary notwithstanding, the obligations of the Borrower to any Lender hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder to the extent (but only to the extent) that contracting for, charging, reserving, collecting or receiving such payment by such Lender would be contrary to the provisions of any law applicable to such Lender limiting the Highest Lawful Rate of interest that may be contracted for, charged, reserved, collected or received by such Lender, and in such event the Borrower shall pay such Lender interest at the Highest Lawful Rate. ARTICLE IV Payments; Pro Rata Treatment; Computations; Etc. Section 4.01 Payments. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrower under this Agreement, the Notes shall be made in Dollars, in immediately available funds, to the Agent at such account as the Agent shall specify by notice to the Borrower from time to time, not later than 11:00 a.m. Dallas time on the date on which such payments shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Such payments shall be made without (to the fullest extent permitted by applicable law) defense, set-off or counterclaim. Each payment received by the Agent under this Agreement or any Note for account of a Lender shall be paid promptly to such Lender in immediately available funds. If the due date of any payment under this Agreement or any Note would otherwise fall on a day which is not a Business Day such date shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. Section 4.02 Pro Rata Treatment. Except to the extent otherwise provided herein each Lender agrees that: (i) each payment of the Restructuring Fee, the Financing Fee or other fees under Section 2.02 shall be made for account of the Lenders pro rata in accordance with their Percentage Share; (ii) each payment of principal of Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amount of the Loans held by the Lenders; and (iii) each payment of interest on Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the amounts of interest due and payable to the respective Lenders. Section 4.03 Computations. All computations of interest for the Loans and fees hereunder shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. Each determination of an interest rate by the Agent shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. 19 Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent shall have been notified by a Lender or the Borrower prior to the date on which such notifying party is scheduled to make payment to the Agent (in the case of a Lender) of the proceeds of a Loan or (in the case of the Borrower) a payment to the Agent for account of one or more of the Lenders hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that it does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date and, if such Lender or the Borrower (as the case may be) has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until, but excluding, the date the Agent recovers such amount at a rate per annum which, for any Lender as recipient, will be equal to the Federal Funds Rate, and for the Borrower as recipient, will be equal to the Base Rate. Section 4.05 Set-off, Sharing of Payments, Etc. (a) Upon the occurrence and during the continuance of an Event of Default, the Borrower agrees that, in addition to (and without limitation of) any right of set-off, bankers' lien or counterclaim a Lender may otherwise have, each Lender shall have the right and be entitled (after consultation with the Agent), at its option, to offset balances held by it or by any of its Affiliates for account of the Borrower or any Subsidiary at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender's Loans, or any other amount payable to such Lender hereunder, which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Agent thereof, provided that such Lender's failure to give such notice shall not affect the validity thereof. (b) If any Lender shall obtain payment of any principal of or interest on any Loan made by it to the Borrower under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise, and, as a result of such payment, such Lender shall have received a greater percentage of the principal or interest (or reimbursement) then due hereunder by the Borrower to such Lender than the percentage received by any other Lenders, it shall promptly (i) notify the Agent and each other Lender thereof and (ii) purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans made by such other Lenders (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses which may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal and/or interest on the Loans held by each of the Lenders. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Lender so purchasing a participation (or direct interest) in the Loans made by other Lenders (or in interest due thereon, as the case may be) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans in the 20 amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set-off to which this Section 4.05 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 4.05 to share the benefits of any recovery on such secured claim. Section 4.06 Taxes. (a) Payments Free and Clear. Any and all payments by the Borrower hereunder shall be made, in accordance with Section 4.01, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender, and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by (i) any jurisdiction (or political subdivision thereof) of which the Agent, or such Lender, as the case may be, is a citizen or resident or in which such Lender has an Applicable Lending Office, (ii) the jurisdiction (or any political subdivision thereof) in which the Agent, or such Lender is organized, or (iii) any jurisdiction (or political subdivision thereof) in which such Lender, or the Agent is presently doing business which taxes are imposed solely as a result of doing business in such jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders, or the Agent (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.06) such Lender, or the Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law and provide the relevant Lender with a receipt thereof. (b) Other Taxes. In addition, to the fullest extent permitted by applicable law, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, any Assignment or any Security Instrument (hereinafter referred to as "Other Taxes"). (c) Indemnification. To The Fullest Extent Permitted By Applicable Law, The Borrower Will INDEMNIFY Each Lender And The Agent For The Full Amount Of Taxes And Other Taxes (Including, But Not Limited To, Any Taxes or Other Taxes Imposed by any Governmental Authority on amounts payable under This Section 4.06) paid by such Lender or the Agent (on their behalf or on behalf of any Lender), as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted unless the payment of such Taxes was not correctly or legally asserted and such Lender's 21 Payment of such Taxes or Other Taxes was the result of its gross negligence or wilfull misconduct. Any Payment pursuant to such indemnification shall be made within thirty (30) Days after the date any Lender or the Agent, as the case may be, makes written demand therefor. If any lender or the Agent receives a refund or credit in respect of any taxes or Other Taxes for which such Lender or the Agent has received payment form the Borrower it shall promptly notify the Borrower of such refund or credit and shall, if no default has occurred and is continuing, within thirty (30) days after receipt of a request by the Borrower (or promptly upon receipt, if the Borrower has requested application for such refung or credit pursuant hereto), pay an amount equal to such refund or credit to the Borrower without interest (but with any interest so refunded or credited), provided that the Borrower, upon the request of such Lender or the Agent, agrees to return such refund or credit (plus penalties, interest or other charges) to such lender or the Agent in the event such Lender or the Agent is required to repay such refund or credit. (d) Lender Representations. (i) EachLender represents that it is either (1) a banking association or corporation organized under the laws of the United States of America or any state thereof or (2) entitled to complete exemption from United States withholding tax imposed on or with respect to any payments, including fees, to be made to it pursuant to this Agreement (A) under an applicable provision of a tax convention to which the United States of America is a party or (B) because it is acting through a branch, agency or office in the United States of America and any payment to be received by it hereunder is effectively connected with a trade or business in the United States of America. Each Lender that is not a banking association or corporation organized under the laws of the United States of America or any state thereof agrees to provide to the Borrower and the Agent on the Closing Date, or on the date of its delivery of the Assignment pursuant to which it becomes a Lender, and at such other times as required by United States law or as the Borrower or the Agent shall reasonably request, two accurate and complete original signed copies of U.S. Internal Revenue Service Form W-8ECI or W-8BEN or, in the case of a Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code, a form W-8BEN, or other equivalent successor form, as appropriate, certifying in each case that such Lender is entitled to receive payments under this Agreement and the Note payable to it, without deduction or withholding of any U.S. federal income taxes and (ii) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower and the Agent. In addition, each Lender agrees that if it previously filed a Form W-8ECI or W-8BEN, it will deliver to the Borrower and the Agent a new Form W-8ECI or W-8BEN, as applicable, prior to the first payment date occurring in each of its subsequent taxable years. Each Lender which delivers to the Borrower and the Agent a Form W-8ECI or W-8BEN, or other equivalent successor form, as appropriate, further undertakes to deliver to the Borrower and the Agent two further copies of such form, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a 22 change in the most recent form previously delivered by it to the Borrower and the Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower and the Agent certifying in the case of a Form W-8ECI or W-8BEN that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any U.S. federal income taxes. If a Lender determines, as a result of any change in either (i) a Governmental Requirement or (ii) its circumstances, that it is unable to submit any form or certificate that it is obligated to submit pursuant to this Section 4.06, or that it is required to withdraw or cancel any such form or certificate previously submitted, it shall promptly notify the Borrower and the Agent of such fact. If a Lender is organized under the laws of a jurisdiction outside the United States of America, unless the Borrower and the Agent have received a Form W-8ECI or W-8BEN satisfactory to them indicating that all payments to be made to such Lender hereunder are not subject to United States withholding tax, the Borrower shall withhold taxes from such payments at the applicable statutory rate. Each Lender agrees to indemnify and hold harmless the Borrower or Agent, as applicable, from any United States taxes, penalties, interest and other expenses, costs and losses incurred or payable by (i) the Agent as a result of such Lender's failure to submit any form or certificate that it is required to provide pursuant to this Section 4.06 or (ii) the Borrower or the Agent as a result of their reliance on any such form or certificate which such Lender has provided to them pursuant to this Section 4.06. (ii) For any period with respect to which a Lender has failed to provide the Borrower with the form required pursuant to this Section 4.06, if any, (other than if such failure is due to a change in a Governmental Requirement occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 4.06 with respect to Taxes imposed by the United States which Taxes would not have been imposed but for such failure to provide such forms; provided, however, that if a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such taxes. (iii) Any Lender claiming any additional amounts payable pursuant to this Section 4.06 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or the Agent or to change the jurisdiction of its Applicable Lending Office or to contest any tax imposed if the making of such a filing or change or contesting such tax would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender. ARTICLE V Capital Adequacy Section 5.01 Capital Adequacy; Additional Costs. (a) Capital Adequacy. The Borrower shall pay directly to any Lender pursuant to the procedure set forth in Section 5.01(b) such amounts as such Lender may 23 reasonably determine to be necessary to compensate such Lender or its parent or holding company for any costs which it determines are attributable to the maintenance by such Lender or its parent or holding company (or any Applicable Lending Office), pursuant to any Governmental Requirement following any Regulatory Change, of capital in respect of its Note or its Loan, such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender or its parent or holding company (or any Applicable Lending Office) to a level below that which such Lender or its parent or holding company (or any Applicable Lending Office) could have achieved but for such Governmental Requirement. Such Lender will notify the Borrower that it is entitled to compensation pursuant to this Section 5.01(a) as promptly as practicable after it determines to request such compensation. (b) Compensation Procedure. Any Lender notifying the Borrower of the incurrence of additional costs under this Section 5.01 shall in such notice to the Borrower and the Agent set forth in reasonable detail the basis and amount of its request for compensation. Determinations and allocations by each Lender for purposes of this Section 5.01 of the effect of any Regulatory Changes or of the effect of capital maintained, on its costs or rate of return of maintaining its Loan or on amounts receivable by it in respect of its Loan, and of the amounts required to compensate such Lender under this Section 5.01, shall be conclusive and binding for all purposes, provided that such determinations and allocations are made on a reasonable basis. Any request for additional compensation under this Section 5.01 shall be paid by the Borrower within thirty (30) days of the receipt by the Borrower of the notice described in this Section 5.01(b). ARTICLE VI Conditions Precedent Section 6.01 Conditions to Restructure. Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of the Agent and the Lenders prior to the Closing Date under the Existing Agreement, the Lenders shall not be required to restructure, modify and continue the Prior Debt as Loans under this Agreement unless and until each of the following conditions has been satisfied or waived and, in the case of documents to be delivered, the Agent has received all of the following, in form and substance reasonably satisfactory to the Agent and each Lender, with sufficient copies for each Lender: (a) This Agreement and the Loan Documents contemplated hereby have been executed by each party thereto. (b) A certificate of the Secretary or an Assistant Secretary of the Borrower setting forth (i) resolutions of its board of directors with respect to the authorization of the Borrower to execute and deliver the Loan Documents to which it is a party and to enter into the transactions contemplated in those documents, (ii) the officers of the Borrower (y) who are authorized to sign the Loan Documents to which Borrower is a party and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the transactions contemplated hereby, (iii) specimen 24 signatures of the authorized officers, and (iv) the articles or certificate of incorporation and bylaws of the Borrower, certified as being true and complete. The Agent and the Lenders may conclusively rely on such certificate until the Agent receives notice in writing from the Borrower to the contrary. (c) A certificate of the Secretary or an Assistant Secretary of each Guarantor setting forth (i) resolutions of its board of directors with respect to the authorization of such Guarantor to execute and deliver the Loan Documents to which it is a party and to enter into the transactions contemplated in those documents, (ii) the officers of such Guarantor (y) who are authorized to sign the Loan Documents to which such Guarantor is a party and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the transactions contemplated hereby, (iii) specimen signatures of the authorized officers, and (iv) the articles or certificate of incorporation and bylaws of such Guarantor, certified as being true and complete. The Agent and the Lenders may conclusively rely on such certificate until they receive notice in writing from such Guarantor to the contrary. (d) Certificates of the appropriate state agencies with respect to the organizational existence, qualification and good standing of the Borrower and Subsidiaries. (e) A compliance certificate which shall be substantially in the form of Exhibit B, duly and properly executed by a Responsible Officer and dated as of the Closing Date. (f) The Notes, duly completed and executed. (g) The Security Instruments as necessary to preserve in favor of the Agent a legal, valid and enforceable first (except for Excepted Liens entitled to priority under applicable law) security interest in and lien upon the collateral described in the existing Security Instruments and the additional collateral described in Schedule 6.01(g) ("Additional Collateral"), such collateral described in the existing Security Instruments and the Additional Collateral being collectively referred to as "Collateral"), together with: (i) written advice relating to such Lien and judgment searches as the Agent shall have reasonably requested with respect to any of the Collateral, and such termination statements or other documents, including payoff letters, as may be necessary to release any Lien in favor of any Person not otherwise permitted by Section 9.02; (ii) evidence that all other actions necessary or, in the reasonable opinion of the Agent, desirable to perfect and protect the first priority security interest created by the Security Instruments have been taken; and (iii) evidence that the Agent is named as loss payee under all policies of casualty insurance, and as additional insured under all policies of liability insurance (excluding directors and officers insurance and malpractice insurance), required by the Security Instruments and hereunder. 25 (h) An opinion of Haynes and Boone, L.L.P., counsel to the Borrower, in form and substance satisfactory to the Agent, as to such matters incident to the transactions herein contemplated as the Agent may reasonably request. (i) A certificate of insurance coverage of the Borrower evidencing that the Borrower is carrying insurance in accordance with Section 7.19. (j) Payment by the Borrower (out of its Cash on Hand) of the following interest, fees, costs and expenses to the extent then due and payable on the Closing Date: (i) $1,500,000 (inclusive of a $500,000 expense reimbursement payment previously paid to the Agent) to be applied first to unpaid professional fees and expenses, including reasonable attorneys' fees and expenses incurred by the Agent and Lenders in connection with the transactions contemplated hereby, and second to principal due on the Prior Debt prior to the Closing Date; (ii) the first Administrative Fee due to Agent in the amount of $25,000; and (iii) all accrued and unpaid interest due on the Prior Debt as of the Closing Date other than the Default Interest. (k) A certificate signed by a Responsible Officer of the Borrower, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article VII are true and correct on and as of such date, as though made on and as of such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and (ii) no Default or Event of Default exists under this Agreement. (l) A copy of the Financial Statements and detailed projections of the Borrower and its Subsidiaries for the period ending December 31, 2005; (m) Such other documents as the Agent or any Lender or special counsel to the Agent may reasonably request. (n) The following actions and documentation shall have been completed: (i) Borrower shall have issued to each Lender or its designee a Warrant in the form attached as Exhibit H hereto (each, a "Warrant," and collectively, the "Warrants"), providing the Lenders or their designees with warrants to purchase an aggregate of 60,859 shares of Series A-2 Preferred Stock on such terms as are specified therein; 26 (ii) Borrower, each Lender and the Subordinate Lenders shall have entered into the Stockholders Agreement and a Registration Rights Agreement, each on such terms and conditions satisfactory to Lenders; (iii) Borrower shall have filed with the Secretary of State of Delaware the Certificate of Designations, which will contain terms and conditions satisfactory to Lenders; (iv) Borrower shall have obtained from its stockholders having the voting power to amend the Borrower's Certificate of Incorporation and, if necessary, Bylaws, a voting agreement to accomplish the actions set forth in Section 8.11(a); and Borrower shall have taken all appropriate corporate action necessary to authorize each of the documents and instruments referenced in this Section 6.01(n). (o) The Borrower and its Subsidiaries shall have established lock box accounts with the Agent providing for the deposit of all collections of receivables; (p) Borrower shall have obtained from Heller Financial, Inc., Midwest Mezzanine Fund II, L.P. and James Usdan ("Subordinate Lenders") $1,700,000 of unsecured subordinated loans on terms and conditions acceptable to Agent, and the Agent, the Subordinate Lenders, the Borrower and the Guarantors shall have entered into a subordination agreement in the form attached as Exhibit D hereto (the "Subordination Agreement"); (q) The current holders of all Subordinated Debt existing prior to the Closing Date, shall have as of the Closing Date, converted all such existing Subordinated Debt into equity of the Borrower in accordance with the terms set forth in Schedule 6.01(q) hereto and otherwise on terms and conditions satisfactory to Agent and the Lenders; (r) Borrower, CDC California and Castle West, and Roisman shall have entered into a Forbearance Agreement in the form attached as Exhibit I hereto (the "Forbearance Agreement") providing Roisman with a series of monthly payments in exchange for Roisman's agreement to forbear from exercising any rights, remedies and recourse against CDC California and Castle West in connection with that certain judgment against CDC California and Castle West. (s) Borrower, Castle Texas and Castle Dental Associates of Texas, P.C., and Jack H. Castle, D.D.S. and the Estate of Jack H. Castle, D.D.S. (collectively, "Estate of Castle") shall have entered into a Settlement Agreement in the form attached as Exhibit J hereto providing for the Estate of Castle to release all claims against Borrower, Castle Texas, Castle Dental Associates of Texas, P.C. and Lenders under that certain deferred compensation agreement dated December 18, 1995. (t) Borrower, Jack H. Castle, Jr. ("Castle, Jr.") and Goforth, Inc. ("Goforth") shall have entered into the Severance Agreement in the form attached as Exhibit K hereto providing for (i) a severance package to Castle, Jr. and (ii) the payment of back rent, current rent and other amounts owing to Goforth under a certain lease agreement in exchange for (1) Castle, 27 Jr. terminating any employment or other relations with Borrower or any Subsidiary of Borrower and (2) Goforth releasing claims arising out of such lease agreement. Section 6.02 Conditions Precedent for the Benefit of Lenders. All conditions precedent to the obligations of the Lenders to restructure, modify and/or continue the Prior Debt are imposed hereby solely for the benefit of the Lenders, and no other Person may require satisfaction of any such condition precedent or be entitled to assume that the Lenders will refuse to restructure, modify and/or continue any Loan in the absence of strict compliance with such conditions precedent. ARTICLE VII Representations and Warranties The Borrower represents and warrants to the Agent and the Lenders as follows: Section 7.01 Corporate Existence. Each of the Borrower and each Subsidiary: (i) is a corporation or limited liability company duly organized, legally existing and in good standing under the laws of the jurisdiction of its organization; (ii) has all requisite corporate or limited liability company power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect. Section 7.02 Financial Condition. The audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at December 31, 2001 and the related consolidated statement of income, stockholders' equity and cash flow of the Borrower and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Price Waterhouse Coopers, L.L.P. heretofore furnished to the Agent and the unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at May 31, 2002 and their related consolidated statements of income and cash flow of the Borrower and its Consolidated Subsidiaries for the 5 month period ended on such date heretofore furnished to the Agent, are complete and correct and fairly present the consolidated financial condition of the Borrower and its Consolidated Subsidiaries as at said dates and the results of its operations for the fiscal year and the 5 month period on said dates, all in accordance with GAAP, as applied on a consistent basis (subject, in the case of the interim financial statements, to normal year-end adjustments). Neither the Borrower nor any Subsidiary has on the Closing Date any material Debt, contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the Financial Statements or in Schedule 7.02. Since May 31, 2002, there has been no change or event having a Material Adverse Effect. Since the latest date of the Financial Statements, neither the business nor the Properties of the Borrower or any Subsidiary have been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, permits or concessions by any Governmental Authority, riot, activities of armed forces or acts of God or of any public enemy. 28 Section 7.03 Litigation. There is no litigation, legal, administrative or arbitral proceeding, investigation or other action of any nature pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary which could reasonably be expected to have a Material Adverse Effect or purport to affect or pertain to this Agreement or any other Loan Document or any of the transactions contemplated hereby or thereby, except as disclosed in Schedule 7.03. Section 7.04 No Breach. After giving effect to Section 2.02(b), no Default or Event of Default exists or would result from the restructuring of the Prior Debt as contemplated thereby. Neither the execution and delivery of the Loan Documents, nor compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent which has not been obtained as of the Closing Date under, the respective charter or by-laws of the Borrower or any Subsidiary, or any Governmental Requirement or any material agreement or instrument to which the Borrower or any Subsidiary is a party or by which it is bound or to which it or its Properties are subject, or constitute a default under any such material agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Borrower or any Subsidiary pursuant to the terms of any such material agreement or instrument other than the Liens created by the Loan Documents. Section 7.05 Authority. The Borrower and each Subsidiary have all necessary corporate or limited liability company power and authority to execute, deliver and perform its obligations under the Loan Documents to which it is a party; and the execution, delivery and performance by the Borrower and each Subsidiary of the Loan Documents to which it is a party, have been duly authorized by all necessary action on its part; and the Loan Documents constitute the legal, valid and binding obligations of the Borrower and each Subsidiary, enforceable in accordance with their terms. Section 7.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority are necessary for the execution, delivery or performance by the Borrower or any Subsidiary of the Loan Documents to which it is a party or for the validity or enforceability thereof, except for the recording and filing of the Security Instruments as required by this Agreement. Section 7.07 Use of Loans. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying margin stock (within the meaning of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System) and no part of the proceeds of the Prior Debt has been used to buy or carry any margin stock. Section 7.08 ERISA. (a) The Borrower, each Subsidiary and each ERISA Affiliate have complied in all material respects with ERISA and, where applicable, the Code regarding each Plan. (b) Each Plan is, and has been, maintained in substantial compliance with ERISA and, where applicable, the Code. 29 (c) No act, omission or transaction has occurred which could result in imposition on the Borrower, any Subsidiary or any ERISA Affiliate (whether directly or indirectly) of (i) either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under section 409 of ERISA. (d) No liability to the PBGC (other than for the payment of current premiums which are not past due) by the Borrower, any Subsidiary or any ERISA Affiliate has been or is expected by the Borrower, any Subsidiary or any ERISA Affiliate to be incurred with respect to any Plan. No ERISA Event with respect to any Plan has occurred. (e) Full payment when due has been made of all amounts which the Borrower, any Subsidiary or any ERISA Affiliate is required under the terms of each Plan or applicable law to have paid as contributions to such Plan, and no accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan. (f) The actuarial present value of the benefit liabilities under each Plan which is subject to Title IV of ERISA does not, as of the end of the Borrower's most recently ended fiscal year, exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA. (g) None of the Borrower, any Subsidiary or any ERISA Affiliate sponsors, maintains, or contributes to an employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by the Borrower, a Subsidiary or any ERISA Affiliate in its sole discretion at any time without any material liability. (h) None of the Borrower, any Subsidiary or any ERISA Affiliate sponsors, maintains or contributes to, or has at any time in the preceding six calendar years, sponsored, maintained or contributed to, any Multiemployer Plan. (i) None of the Borrower, any Subsidiary or any ERISA Affiliate is required to provide security under section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the Plan. Section 7.09 Taxes. Each of the Borrower and its Subsidiaries has filed all United States Federal income tax returns and all other tax returns which are required to be filed by them and have paid all material taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Borrower, adequate. No tax lien has been filed and, to the knowledge of the Borrower, no claim is being asserted with respect to any such tax, fee or other charge. Section 7.10 Titles, etc. 30 (a) Each of the Borrower and its Subsidiaries has good and defensible title to its material (individually or in the aggregate) Properties, free and clear of all Liens, except Liens permitted by Section 9.02. (b) All leases and agreements necessary for the conduct of the business of the Borrower and its Subsidiaries are valid and subsisting, in full force and effect and there exists no default or event or circumstance which with the giving of notice or the passage of time or both would give rise to a default under any such lease or leases, which would affect in any material respect the conduct of the business of the Borrower and its Subsidiaries. (c) The licenses, rights, Properties and other assets presently owned, leased or licensed by the Borrower and its Subsidiaries, include all rights, Properties and other assets necessary to permit the Borrower and its Subsidiaries to conduct their business in all material respects in the same manner as its business has been conducted prior to the Closing Date. (d) All of the assets and Properties of the Borrower and its Subsidiaries which are reasonably necessary for the operation of its business are in good working condition and are maintained in accordance with prudent business standards. Section 7.11 No Material Misstatements. No written information, statement, exhibit, certificate, document or report furnished to the Agent and the Lenders (or any of them) by the Borrower or any Subsidiary in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading in the light of the circumstances in which made and with respect to the Borrower and its Subsidiaries taken as a whole. Section 7.12 Investment Company Act. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Section 7.13 Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.14 Subsidiaries. Except as set forth on Schedule 7.14, the Borrower has no Subsidiaries and has no equity investments in any other Person. Section 7.15 Location of Business and Offices. The Borrower's principal place of business and chief executive offices are located at the address stated on the signature page of this Agreement. The principal place of business and chief executive office of each Subsidiary are located at the addresses stated on Schedule 7.14. Section 7.16 Defaults. Neither the Borrower nor any Subsidiary is in default nor has any event or circumstance occurred which, but for the expiration of any applicable grace period or the giving of notice, or both, would constitute a default under any material agreement or 31 instrument to which the Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary is bound which default would have a Material Adverse Effect. Section 7.17 Environmental Matters. Except as would not have a Material Adverse Effect, neither any Property of the Borrower nor any Subsidiary nor the operations conducted thereon violate any law, order or requirement of any court or Governmental Authority or any Environmental Laws. Section 7.18 Compliance with the Law. Neither the Borrower nor any Subsidiary has violated any Governmental Requirement or failed to obtain any license, permit, franchise or other governmental authorization necessary for the ownership of any of its Properties or the conduct of its business, which violation or failure would have (in the event such violation or failure were asserted by any Person through appropriate action) a Material Adverse Effect. Section 7.19 Insurance. Schedule 7.19 attached hereto contains an accurate and complete description of all material policies of fire, liability, workmen's compensation and other forms of insurance owned or held by the Borrower and each Subsidiary. Except as disclosed in Schedule 7.19, all such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date of the closing have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such policies are sufficient for compliance with all requirements of law and of all agreements to which the Borrower or any Subsidiary is a party; are valid, outstanding and enforceable policies; provide adequate insurance coverage in at least such amounts and against at least such risks (but including in any event public liability) as are usually insured against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Borrower and each Subsidiary; will remain in full force and effect through the respective dates set forth in Schedule 7.19 without the payment of additional premiums; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. Schedule 7.19 identifies all material risks, if any, which the Borrower and its Subsidiaries and their respective Board of Directors or officers have designated as being self insured. Neither the Borrower nor any Subsidiary has been refused any insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary policy limits, by an insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last three years. In the event that a new Subsidiary is formed and an advance is requested under the Loans, and the Lenders approve such advance, Borrower will provide the Agent with a new, updated Schedule 7.19. Section 7.20 Management Services Agreements and Accounts Receivable Purchase Agreements. The Management Services Agreements and Account Receivable Purchase Agreements listed on Schedule 7.20 hereto are valid, binding and enforceable against the parties thereto. The Borrower has the right to grant, and has granted, an enforceable Lien on the Borrower's right to receive proceeds under the Management Services Agreements and the receivables purchased under the Accounts Receivable Purchase Agreements pursuant to the Security Instruments. The Borrower has obtained all consents from Governmental Authorities necessary to perform under the Management Services Agreements, the failure of which to obtain could have a Material Adverse Effect. Schedule 7.20 lists any security agreements which have 32 been executed by Existing PCs in favor of the Borrower or any Subsidiary and are currently in effect. Section 7.21 Restriction on Liens. Neither the Borrower nor any of its Subsidiaries is a party to any agreement or arrangement (other than this Agreement and the Security Instruments), or subject to any order, judgment, writ or decree, which either restricts or purports to restrict its ability to grant Liens to other Persons on or in respect of their respective assets or Properties, except for Property subject to Liens permitted under Section 9.02. Section 7.22 Material Agreements. Set forth on Schedule 7.22 hereto is a complete and correct list of all material credit agreements, indentures, purchase agreements, obligations in respect of letters of credit, guarantees, joint venture agreements, and other instruments in effect or to be in effect as of the Closing Date (other than Hedging Agreements) providing for, evidencing, securing or otherwise relating to any Debt of the Borrower or any of its Subsidiaries in excess of $250,000, and all obligations of the Borrower or any of its Subsidiaries to issuers of surety or appeal bonds issued for account of the Borrower or any such Subsidiary in excess of $250,000, and such list correctly sets forth the names of the debtor or lessee and creditor or lessor with respect to the Debt or lease obligations outstanding or to be outstanding and the Property subject to any Lien securing such Debt or lease obligation. Section 7.23 Hedging Agreements. Schedule 7.23 sets forth, as of the Closing Date, a true and complete list of all Hedging Agreements of the Borrower, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark to market value thereof, all credit support agreements relating thereto (including any margin required or supplied), and the counterparty to each such agreement. Section 7.24 Security Instruments. (a) The provisions of each of the Security Instruments (other than the Guaranties and similar non-Lien creating instruments) are effective to create in favor of the Agent for the benefit of the Lenders a legal, valid and enforceable security interest in all right, title, and interest of the Borrower and its Subsidiaries, as applicable, in the collateral described therein and to the extent permitted or provided for by applicable law; and the Agent for the benefit of the Lenders has a perfected first priority security interest or otherwise enforceable Lien in all right, title, and interest of the Borrower and its Subsidiaries, as applicable, in the Collateral, as provided for by applicable law and subject only to Excepted Liens or as otherwise specified in the Security Instruments. (b) All representations and warranties of the Borrower and its Subsidiaries contained in the Security Instruments are true and correct. Section 7.25 Labor Relations. There are no strikes, lockouts or other material labor disputes against the Borrower or any of its Subsidiaries or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Subsidiaries, and no significant unfair labor practice complaint is pending against the Borrower or any of its Subsidiaries or, to the Borrower's knowledge, threatened against any of them before any Governmental Authority. The Borrower is not a party to any collective bargaining agreements or contracts and no union 33 representation exists and, to the Borrower's knowledge, no union organizing activities are taking place. ARTICLE VIII Affirmative Covenants The Borrower covenants and agrees that until payment in full of the Loans, all interest thereon and all other amounts payable by the Borrower hereunder and unless prior written consent is obtained from the Majority Lenders: Section 8.01 Reporting Requirements. The Borrower shall deliver, or shall cause to be delivered, to the Agent with sufficient copies of each for the Lenders: (a) Annual Financial Statements. As soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, the audited consolidated and unaudited consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Borrower and its Consolidated Subsidiaries for such fiscal year, and the related consolidated and consolidating balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of such fiscal year, and setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, and accompanied by the related opinion of independent public accountants of recognized national standing acceptable to the Agent which opinion shall state that said financial statements fairly present in all material respects the consolidated and consolidating financial condition and results of operations of the Borrower and its Consolidated Subsidiaries as at the end of, and for, such fiscal year and that such financial statements have been prepared in accordance with GAAP, except for such changes in such principles with which the independent public accountants shall have concurred and such opinion shall not contain a "going concern" or like qualification or exception, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default. (b) Quarterly Financial Statements. As soon as available and in any event within 50 days after the end of each of the first three fiscal quarterly periods of each fiscal year of the Borrower, consolidated and consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Borrower and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present in all material respects the consolidated and consolidating financial condition and results of operations of the Borrower and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments). (c) Monthly Financial Statements. As soon as available and in any event within 30 days after the end of each calendar month, the Borrower-prepared consolidated and consolidating statements of income and cash flow of the Borrower and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to 34 the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Borrower and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year end audit adjustments). (d) Accounts Receivable. As soon as available and in any event within 30 days after the end of each calendar month, (i) a report in form reasonably satisfactory to the Agent reflecting the aging and collection of the receivables of the Borrower and its Subsidiaries and (ii) such other reports with respect to receivables as deemed reasonably necessary by the Agent. (e) Quarterly Regional Reports. As soon as available and in any event within 45 days after the end of each of quarterly period of each fiscal year of the Borrower, statements of EBIT and EBITDA for each Reporting Region for such period and for the period from the beginning of the fiscal year to the end of such period. As used herein the term "Reporting Region" shall mean the dental centers and other business operations for each of Houston, Austin, Dallas/Fort Worth, San Antonio, Tennessee, Florida and California, all as more fully set forth in Schedule 8.01(e). Such statements shall be accompanied by a certificate of a Responsible Officer as to the good faith preparation of such report. (f) Monthly Regional Statements. As soon as available and in any event within 30 days after the end of each calendar month of each fiscal year of the Borrower, statements of EBIT and EBITDA for each Reporting Region for such period and for the period from the beginning of the respective fiscal year to the end of such period. Such statements shall be accompanied by a certificate of a Responsible Officer as to the good faith preparation of such report. (g) Excess Cash Flow. As soon as available but no later than April 30 of each year, commencing April 30, 2003, a certificate substantially in the form of Exhibit F ("Excess Cash Flow Certificate") of a Responsible Officer of the Borrower setting forth in reasonable detail the Borrower's calculation of Excess Cash Flow and for each month after April 30 of each year for which an Annual Cash Flow Payment remains unpaid and is outstanding; and, on the last day of each month thereafter until the Annual Cash Flow Payment is made, a certificate substantially in the form of Exhibit G ("Cash Flow Differential Certificate") of a Responsible Officer of the Borrower setting forth in reasonable detail the Borrower's calculation of current Cash on Hand and the amount of the unpaid Annual Cash Flow Payment due for such month. (h) Cash Flow Forecast. Monthly, a rolling 13 week cash flow forecast. (i) Budget. As soon as available and in any event within thirty (30) days after the end of each fiscal year of the Borrower, a budget for the Borrower and its Consolidated Subsidiaries, as approved by the board of directors of the Borrower, for the following fiscal year setting forth in comparative form corresponding figures from the preceding fiscal year, in reasonable detail. 35 (j) Notice of Default, Etc. Promptly after the Borrower knows that any Default or any Material Adverse Effect has occurred, a notice of such Default or Material Adverse Effect, describing the same in reasonable detail and the action the Borrower proposes to take with respect thereto. (k) Other Accounting Reports. Promptly upon receipt thereof, (i) a copy of each other report or letter submitted to the Borrower or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower and its Subsidiaries, (ii) a copy of any response by the Borrower or any Subsidiary of the Borrower, or the Board of Directors of the Borrower or any Subsidiary of the Borrower, to such letter or report and (iii) any other reports which the Agent or Lenders may reasonably request. (l) SEC Filings, Etc. Promptly upon its becoming available (and no later than 10 Business Days after a filing by Borrower), each financial statement, report, notice or proxy statement sent by the Borrower to stockholders generally and each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Borrower with or received by the Borrower in connection therewith from any securities exchange or the SEC (including forms 10K, 10Q and 8K) or any successor agency. (m) Notices Under Other Loan Agreements. Promptly after the furnishing thereof, copies of any material statement, report or notice furnished to or any Person pursuant to the terms of any indenture, loan or credit or other similar agreement, other than this Agreement and not otherwise required to be furnished to the Agent pursuant to any other provision of this Section 8.01. (n) Annual Revenue Reports. As soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a report prepared by the Borrower for each dental center setting forth the revenues, expenses and contributions to profit of such dental center in form and substance acceptable to the Agent. (o) Quarterly Revenue Reports. As soon as available and in any event within 45 days after each of the first three fiscal quarterly periods of each fiscal year of the Borrower, a report by the Borrower for each dental center setting for the revenues, expenses and contributions to profit of such dental center generally in the form previously provided by the Borrower and otherwise in form and substance reasonably acceptable to the Agent. (p) Plan Report. From time to time such other information regarding the business, affairs or financial condition of the Borrower or any Subsidiary (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as the Agent may reasonably request. (q) Capital Expenditures Budget. Promptly upon becoming available and in any event within 30 days after the end of each fiscal year of the Borrower, a capital expenditure budget for the next fiscal year setting forth all proposed Capital Expenditures to be incurred during such fiscal year. 36 (r) Modifications of Management Services Agreements, etc. Promptly upon the execution thereof, executed copies of any modification or amendment of any Management Services Agreement or Accounts Receivable Purchase Agreement. The Borrower shall furnish to the Lenders, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate substantially in the form of Exhibit B hereto executed by a Responsible Officer (i) certifying as to the matters set forth therein and stating that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail), and (ii) setting forth in reasonable detail the computations necessary to determine the Borrower's Total Funded Debt, Senior Funded Debt, EBIT and EBITDA and whether the Borrower is in compliance with Sections 9.12, 9.13, 9.14 and 9.15 as of the end of the respective fiscal quarter or fiscal year. Upon Agent's request Borrower further agrees to conduct a quarterly conference call with representatives of the Lenders on or about the Quarterly Dates and to furnish to the Lenders at least 3 Business Days prior to such quarterly conference call a written report prepared by a Responsible Officer which report shall include a discussion of the current operating results, conditions of and prospects of the business of the Borrower and its Subsidiaries. Section 8.02 Litigation. The Borrower shall promptly give to the Agent notice of: (i) all legal or arbitral proceedings, and of all proceedings before any Governmental Authority affecting the Borrower, any Acquired Entity or any Subsidiary, except proceedings which, if adversely determined, would not have a Material Adverse Effect, and (ii) of any litigation or proceeding against or adversely affecting the Borrower, any Acquired Entity or any Subsidiary in which the amount involved is not covered in full by insurance (subject to normal and customary deductibles and for which the insurer has not assumed the defense), or in which injunctive or similar relief is sought. The Borrower will, and will cause each of its Subsidiaries to, promptly notify the Agent and each of the Lenders of any claim, judgment, Lien or other encumbrance affecting any Property of the Borrower, any Acquired Entity or any Subsidiary if the value of the claim, judgment, Lien, or other encumbrance affecting such Property shall exceed $250,000. Section 8.03 Maintenance, Etc. (a) Generally. The Borrower shall and shall cause each Subsidiary to: preserve and maintain its corporate or limited liability company existence and all of its material rights, privileges and franchises; in accordance with Section 8.09, keep books of record and account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities; comply with all Governmental Requirements if failure to comply with such requirements will have a Material Adverse Effect; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; in accordance with Section 8.09, upon reasonable notice, permit representatives of the Agent or any Lender, during normal business hours, to examine, copy and make extracts from its books and records, to inspect its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Agent (as the case may be); and keep, or cause to be kept, insured by financially sound and reputable insurers all Property of a character usually 37 insured by Persons engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such Persons and carry such other insurance as is usually carried by such Persons including, without limitation, environmental risk insurance to the extent reasonably available. (b) Proof of Insurance. Contemporaneously with the delivery of the financial statements required by Section 8.01(a) to be delivered for each year, the Borrower will furnish or cause to be furnished to the Agent a certificate of insurance coverage from the insurer in form and substance satisfactory to the Agent and, if requested, will furnish the Agent copies of the applicable policies. (c) Operation of Properties. The Borrower will and will cause each Subsidiary to operate its Properties or cause such Properties to be operated in a careful and efficient manner in accordance with the practices of the industry and in compliance with all applicable contracts and agreements and in compliance in all material respects with all Governmental Requirements. Section 8.04 Environmental Matters. (a) Establishment of Procedures. The Borrower will and will cause each Subsidiary to establish and implement such procedures as may be reasonably necessary to continuously determine and assure that (i) all Property of the Borrower and its Subsidiaries and the operations conducted thereon and other activities of the Borrower and its Subsidiaries are, in all material respects, in compliance with and do not violate the requirements of any Environmental Laws, and (ii) no oil, hazardous substances or solid wastes are disposed of or otherwise released on or to any Property owned by any such party except in compliance with Environmental Laws. (b) Notice of Action. The Borrower will promptly notify the Agent in writing of any threatened action, investigation or inquiry by any Governmental Authority of which the Borrower has knowledge in connection with any Environmental Laws, excluding routine testing and corrective action. Section 8.05 Further Assurances. (a) General. The Borrower will and will cause each Subsidiary to cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Security Instruments and this Agreement. The Borrower at its expense will and will cause each Subsidiary to promptly execute and deliver to the Agent upon request all such other documents, agreements and instruments to comply with or accomplish the covenants and agreements of the Borrower or any Subsidiary, as the case may be, in the Security Instruments and this Agreement, or to further evidence and more fully describe the collateral intended as security for the Notes, or to correct any omissions in the Security Instruments, or to state more fully the security obligations set out herein or in any of the Security Instruments, or to perfect, protect or preserve any Liens created pursuant to any of the Security Instruments, or to make any recordings, to file any notices or obtain any consents, all as may be necessary or appropriate in connection therewith. 38 (b) Certain Unperfected Interests. As of the Closing Date, Borrower and Lenders recognize that Borrower and its Subsidiaries may not have obtained complete legal title to certain of their assets or assets of their respective Existing PC's consistent with the Management Services Agreements and other contracts between Borrower and its Subsidiaries and their Existing PC's, including, without limitation, those certain assets set forth on Schedule 8.05(b) (herein referred to as the "Unperfected Assets"). Borrower will and will cause each Subsidiary to do all things reasonably necessary to perfect liens and security interests in favor of Agent on behalf of the Lenders or otherwise obtain legal title to all such Unperfected Assets within 30 days after the Closing Date; provided if Borrower reasonably determines that undertaking such actions will undermine or otherwise act to the detriment of the business relationship between Borrower and its Subsidiaries and their respective Existing PC's, Borrower will provide written notice to Agent setting forth a written explanation thereof in lieu of such perfection or obtaining legal title prior to the end of said 30-day period. If, after receipt of such written explanation, Agent requests the Borrower to nevertheless pursue such perfection and/or obtain legal title to the Unperfected Assets, Borrower shall or shall cause its Subsidiaries to immediately commence such pursuit of such perfection or legal control. Notwithstanding any provision herein to the contrary, Borrower shall and shall cause its Subsidiaries to use best efforts to cause each of the Existing PC's to grant Agent on behalf of Lenders a security interest in all of their respective assets, including, without limitation, the Unperfected Assets and any after-acquired property obtained by such Existing PC's. Section 8.06 Performance of Obligations. The Borrower will pay the Notes according to the reading, tenor and effect thereof; and the Borrower will and will cause each Subsidiary to do and perform every act and discharge all of the obligations to be performed and discharged by them under the Security Instruments and this Agreement, at the time or times and in the manner specified. In furtherance of the foregoing, Borrower will, and will cause each Subsidiary to, establish, maintain and comply at all times with the accounts receivable collection procedures and cash management systems as set forth in the Security Instruments and any agreements related thereto. Section 8.07 ERISA Information and Compliance. The Borrower will promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to promptly furnish to the Agent with sufficient copies to the Lenders (i) promptly after the filing thereof with the United States Secretary of Labor, the Internal Revenue Service or the PBGC, copies of each annual and other report with respect to each Plan or any trust created thereunder, (ii) immediately upon becoming aware of the occurrence of any ERISA Event or of any "prohibited transaction," as described in section 406 of ERISA or in section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by a Responsible Officer specifying the nature thereof, what action the Borrower, the Subsidiary or the ERISA Affiliate is taking or proposes to take with respect thereto, and, when known, any action taken or proposed by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto, and (iii) immediately upon receipt thereof, copies of any notice of the PBGC's intention to terminate or to have a trustee appointed to administer any Plan. With respect to each Plan (other than a Multiemployer Plan), the Borrower will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full and in a timely manner, without incurring any late payment or underpayment charge or penalty and without giving rise to any lien, all of the contribution and funding requirements of section 412 of the Code (determined without regard to subsections (d), (e), (f) 39 and (k) thereof) and of section 302 of ERISA (determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay, or cause to be paid, to the PBGC in a timely manner, without incurring any late payment or underpayment charge or penalty, all premiums required pursuant to sections 4006 and 4007 of ERISA. Section 8.08 Management Services Agreements and Accounts Receivable Purchase Agreements. The Borrower will and will cause each Subsidiary to do all things necessary to maintain and keep in full force and effect and to enforce compliance with the Management Services Agreements and the Accounts Receivable Purchase Agreements. In the event that a new Subsidiary is formed, any Management Services Agreements and Accounts Receivable Purchase Agreements binding such Subsidiary shall be included within the terms of this affirmative covenant. Section 8.09 Inspection of Property and Books and Records. The Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Borrower and such Subsidiary and consistent with Borrower's 10K and 10Q filings. The Borrower shall permit, and shall cause each Subsidiary to permit, non-legal representatives and independent consultants and contractors of the Agent and the Lenders to visit and inspect any of their respective properties and Collateral, to examine the Borrower's and each of its Subsidiaries' corporate, financial and operating records, and to make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the reasonable expense of the Borrower at such reasonable times during normal business hours and as often as may be reasonably required for the reasonable administration of this Agreement, upon three (3) Business Days' prior written notice to the Borrower. The Lenders will have the specific right to conduct the first such on site inspections of Borrower and its Subsidiaries within 60 days of the Closing Date and annually thereafter within 12 months of the first such site inspections. Section 8.10 Best Efforts to Prepay. Notwithstanding the Final Maturity Date, Borrower will use best efforts, commencing on January 1, 2005, to prepay the Loans in full. Section 8.11 Authorized Shares. (a) Within 75 days after the Closing Date, the Borrower shall amend its Certificate of Incorporation and, if necessary, its Bylaws, to (i) increase the authorized shares of preferred stock or cause a reverse stock split, in either case, so that 100% of the number of shares of Series A-2 Preferred Stock are authorized and reserved to provide for the exercise of the rights represented by the Warrants, (ii) increase the authorized shares of Common Stock or cause a reverse stock split, in either case, so that 100% of the number of shares of Common Stock are authorized and reserved to provide for the exercise of the rights then represented by the Preferred Stock and (iii) reduce the par value of the Common Stock so that such par value is below the price required by Section 153(a) of the Delaware General Corporation Law, or any successor statute, to provide for the exercise of the Warrants and subsequent conversion of the Series A-2 Preferred Stock. Without limiting the generality of the foregoing sentence, as soon as practicable after the Closing Date, but in no event later than 75 days after the Closing Date, the Borrower 40 shall hold a meeting of its stockholders for the authorization of either a reverse stock split or an increase in the number of authorized shares of Preferred Stock and Common Stock, and a decrease in the par value of the Common Stock to meet the requirements of clause (iii) above. (b) At all times subsequent to the 75/th/ day after the Closing Date and during the period within which the rights represented by the Warrants and the Series A-2 Preferred Stock may be exercised, (i) the Borrower will at all times have authorized and reserved at least (A) 100% of the number of shares of Series A-2 Preferred Stock needed to provide for the exercise of the rights then represented by the Warrants and (B) 100% of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by the Series A-2 Preferred Stock and (ii) the par value of said shares will at all times be less than or equal to the price required by Section 153(a) of the Delaware General Corporation Law, or any successor statute, to provide for the exercise of the Warrants and subsequent conversion of the Series A-2 Preferred Stock. ARTICLE IX Negative Covenants The Borrower covenants and agrees that until payment in full of the Loans, all interest thereon and all other amounts payable by the Borrower hereunder, without the prior written consent of the Majority Lenders: Section 9.01 Debt. Neither the Borrower nor any Subsidiary will incur, create, assume or permit to exist or otherwise become or remain directly or indirectly liable with respect to, any Debt, except: (a) the Notes or other Indebtedness or any guaranty of or suretyship arrangement for the Notes or other Indebtedness; (b) accounts payable (for the deferred purchase price of Property or services) from time to time incurred in the ordinary course of business which, if greater than 90 days past the invoice or billing date, are being contested in good faith by appropriate proceedings and reserves adequate under GAAP shall have been established therefor; (c) purchase money Debt and Debt under capital leases (as required to be reported on the financial statements of the Borrower pursuant to GAAP) not to exceed $2,000,000 in the aggregate; (d) Debt described on Schedule 9.01; (e) Subordinated Debt set forth in Schedule 9.01 or otherwise approved by the Majority Lenders; and (f) Inter-company Debt permitted under Section 9.03(g). Section 9.02 Liens. Neither the Borrower nor any Subsidiary will create, incur, assume or permit to exist any Lien on any of its Properties (now owned or hereafter acquired), except: 41 (a) Liens securing the payment of any Indebtedness. (b) Excepted Liens. (c) Liens disclosed on Schedule 9.02. (d) Liens securing capital leases allowed under Section 9.01(c), but only on the Property leased with such capital leases. (e) Liens originally created to secure purchase money Debt permitted under Section 9.01(c), which in each case shall not exceed 100% of the lesser of the total purchase price and the fair market value of the Property acquired as determined at the time of acquisition; provided, that, (i) the Property to be purchased with the proceeds of such Debt shall be purchased not more than sixty (60) days prior to the date of the creation of such Lien and (ii) such Lien encumbers only the Property so acquired. Section 9.03 Investments, Loans and Advances. Neither the Borrower nor any Subsidiary will make or permit to remain outstanding any loans or advances to or investments in any Person, or acquire, or make any commitment therefor, including the purchase or acquisition of any Capital Stock in, or any material portion of the assets of, any Person, or make or commit to make any advance or extension of credit or capital contribution to any Person including any Affiliate of Borrower, except that the foregoing restriction shall not apply to: (a) investments, loans or advances which are disclosed to the Agent in Schedule 9.03; (b) accounts receivable arising in the ordinary course of business; (c) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, in each case maturing within one year from the date of creation thereof; (d) commercial paper maturing within one year from the date of creation thereof rated in the highest grade by Standard & Poor's Corporation or Moody's Investors Service, Inc.; (e) deposits maturing within one year from the date of creation thereof with, including certificates of deposit issued by, any Lender or any office located in the United States of any other bank or trust company which is organized under the laws of the United States or any state thereof, has capital, surplus and undivided profits aggregating at least $100,000,000.00 (as of the date of such Lender's or bank or trust company's most recent financial reports) and has a short term deposit rating of no lower than A2 or P2, as such rating is set forth from time to time, by Standard & Poor's Corporation or Moody's Investors Service, Inc., respectively; (f) deposits in money market funds investing exclusively in investments described in Section 9.03(c), 9.03(d) or 9.03(e); 42 (g) loans or advances by any Subsidiary to the Borrower or a Wholly Owned Subsidiary of Borrower, or by the Borrower to any Wholly Owned Subsidiary; and (h) advances to employees in the ordinary course of business which shall not at any time exceed $250,000 in the aggregate. Section. 9.04 Dividends, Distributions and Redemptions. Neither the Borrower nor any Subsidiary will declare or pay any dividend, purchase, redeem or otherwise acquire for value any of their respective Capital Stock now or hereafter outstanding, return any capital to its stockholders or make any distribution of its assets to its stockholders ("Restricted Payments"); except that any Subsidiary of the Borrower may make Restricted Payments to the Borrower or a Wholly-Owned Subsidiary of Borrower. Section. 9.05 Sales and Leasebacks. Neither the Borrower nor any Subsidiary will enter into any arrangement, directly or indirectly, with any Person whereby the Borrower or any Subsidiary shall sell or transfer any of its Property, whether now owned or hereafter acquired, and whereby the Borrower or any Subsidiary shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Borrower or any Subsidiary intends to use for substantially the same purpose or purposes as the Property sold or transferred. Section. 9.06 Nature of Business. Neither the Borrower nor any Subsidiary will allow any material change to be made in the character of its business as conducted by any of them as of the Closing Date. Section. 9.07 Mergers, Etc. Neither the Borrower nor any Subsidiary will merge into or with or consolidate with any other Person, or sell, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its Property or assets to any other Person, or another Subsidiary except that any Subsidiary may merge into the Borrower or into any Wholly-Owned Subsidiary so long as the surviving entity is Borrower or a Wholly-Owned Subsidiary that is a Guarantor. Section. 9.08 ERISA Compliance. The Borrower will not at any time: (a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in, any transaction in connection with which the Borrower, any Subsidiary or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) Terminate, or permit any Subsidiary or ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could result in any liability to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC; (c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary or any ERISA Affiliate is required to pay as contributions thereto; 43 (d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of Section 302 of ERISA or section 412 of the Code, whether or not waived, with respect to any Plan; (e) Permit, or allow any Subsidiary or ERISA Affiliate to permit, the actuarial present value of the benefit liabilities under any Plan maintained by the Borrower, any Subsidiary or any ERISA Affiliate which is regulated under Title IV of ERISA to exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA; (f) Contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any Multiemployer Plan; (g) Acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Borrower, any Subsidiary or any ERISA Affiliate if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, (1) any Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA under which the actuarial present value of the benefit liabilities under such Plan exceeds the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities; (h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; (i) Contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by such entities in their sole discretion at any time without any material liability; or (j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that the Borrower, any Subsidiary or any ERISA Affiliate is required to provide security to such Plan under section 401(a)(29) of the Code. Section. 9.09 Asset Dispositions. Neither Borrower nor any Subsidiary will sell, transfer, lease, contribute or otherwise convey (including in connection with a sale and leaseback transaction), or grant options, warrants or other rights with respect to, all or any part of its assets (including a discount or sale of accounts receivable and Capital Stock of Subsidiaries) to any Person, other than: (a) sales or other dispositions of equipment which is worn-out, obsolete, or no longer needed in the ordinary course of business; 44 (b) dispositions of assets for cash in an amount not less than the fair market value thereof and which are not otherwise permitted hereunder if: (i) at the time of such disposition no Default or Event of Default exists or shall result from such disposition; and (ii) the aggregate value of all assets so sold by the Borrower and its Subsidiaries together with the sales or other dispositions permitted under Section 9.09(a) does not exceed $100,000 in any fiscal year and the net proceeds thereof are applied as a mandatory prepayment on the Loans as provided in Section 3.02(b)(iii); (c) transfers, advances, loans, extensions of credit, capital contributions and other investments permitted by Section 9.03; and (d) operating leases and subleases by Borrower and its Subsidiaries of assets in the ordinary course of business to unaffiliated third parties. Section 9.10 Ratio of Total Funded Debt to EBITDA. The Borrower will not permit its ratio of Total Funded Debt as of the end of any fiscal quarter to EBITDA for the four fiscal quarters ending on such date (except for the quarter ending September 30, 2002 which will be calculated on the basis of the prior three fiscal quarters ending on such date) to be greater than the applicable ratio as set forth in table (a) below prior to the Sale Date or table (b) below after the Sale Date: (a) Prior to the Sale Date. - -------------------------------------------------------------------------------- Ratio Quarter Ending ----- -------------- - -------------------------------------------------------------------------------- 11 to 1 September 30, 2002 - -------------------------------------------------------------------------------- 8 to 1 December 31, 2002 - -------------------------------------------------------------------------------- 7.2 to 1 March 31, 2003 - -------------------------------------------------------------------------------- 6.8 to 1 June 30, 2003 - -------------------------------------------------------------------------------- 6.5 to 1 September 30, 2003 - -------------------------------------------------------------------------------- 6.1 to 1 December 31, 2003 - -------------------------------------------------------------------------------- 5.8 to 1 March 31, 2004 - -------------------------------------------------------------------------------- 5.5 to 1 June 30, 2004 - -------------------------------------------------------------------------------- 5.2 to 1 September 30, 2004 - -------------------------------------------------------------------------------- 5 to 1 December 31, 2004 - -------------------------------------------------------------------------------- 4.8 to 1 March 31, 2005 - -------------------------------------------------------------------------------- 4.6 to 1 June 30, 2005 - -------------------------------------------------------------------------------- (b) After the Sale Date, 45 - -------------------------------------------------------------------------------- Ratio Quarter Ending - -------------------------------------------------------------------------------- 11.7 to 1 September 30, 2002 - -------------------------------------------------------------------------------- 8.5 to 1 December 31, 2002 - -------------------------------------------------------------------------------- 7.6 to 1 March 31, 2003 - -------------------------------------------------------------------------------- 7.2 to 1 June 30, 2003 - -------------------------------------------------------------------------------- 6.9 to 1 September 30, 2003 - -------------------------------------------------------------------------------- 6.5 to 1 December 31, 2003 - -------------------------------------------------------------------------------- 6.1 to 1 March 31, 2004 - -------------------------------------------------------------------------------- 5.8 to 1 June 30, 2004 - -------------------------------------------------------------------------------- 5.5 to 1 September 30, 2004 - -------------------------------------------------------------------------------- 5.3 to 1 December 31, 2004 - -------------------------------------------------------------------------------- 5.2 to 1 March 31, 2005 - -------------------------------------------------------------------------------- 4.9 to 1 June 30, 2005 - -------------------------------------------------------------------------------- Section 9.11 Capital Expenditures. The Borrower and its Subsidiaries will not make any Capital Expenditures if, after giving effect thereto, the aggregate of all such expenditures would exceed the applicable amount as set forth in table (a) below prior to the Sale Date or table (b) below after the Sale Date: (a) Prior to the Sale Date. - -------------------------------------------------------------------------------- Amount Period - -------------------------------------------------------------------------------- $1,700,000 Fiscal year ending December 31, 2002 - -------------------------------------------------------------------------------- $1,800,000 Fiscal year ending December 31, 2003 - -------------------------------------------------------------------------------- $1,800,000 Fiscal year ending December 31, 2004 - -------------------------------------------------------------------------------- $2,400,000 Fiscal year ending December 31, 2005 - -------------------------------------------------------------------------------- (b) After the Sale Date. - -------------------------------------------------------------------------------- Amount Period - -------------------------------------------------------------------------------- $1,700,000 Fiscal year ending December 31, 2002 - -------------------------------------------------------------------------------- $1,800,000 Fiscal year ending December 31, 2003 - -------------------------------------------------------------------------------- $1,800,000 Fiscal year ending December 31, 2004 - -------------------------------------------------------------------------------- $2,400,000 Fiscal year ending December 31, 2005 - -------------------------------------------------------------------------------- Section 9.12 Minimum EBITDA. The Borrower will not permit EBITDA, as of the end of any fiscal quarter, calculated on a rolling four quarter basis, ending closest to the date listed below (except for the quarter ending September 30, 2002 which will be calculated on the basis of the prior three fiscal quarters ending on such date), to be less than the applicable amount as set forth in table (a) below prior to the Sale Date or table (b) below after the Sale Date: 46 (a) Prior to the Sale Date. - -------------------------------------------------------------------------------- Amount Quarter Ending - -------------------------------------------------------------------------------- $4,500,000 September 30, 2002 - -------------------------------------------------------------------------------- $6,300,000 December 31, 2002 - -------------------------------------------------------------------------------- $7,000,000 March 31, 2003 - -------------------------------------------------------------------------------- $7,300,000 June 30, 2003 - -------------------------------------------------------------------------------- $7,600,000 September 30, 2003 - -------------------------------------------------------------------------------- $8,000,000 December 31, 2003 - -------------------------------------------------------------------------------- $8,200,000 March 31, 2004 - -------------------------------------------------------------------------------- $8,500,000 June 30, 2004 - -------------------------------------------------------------------------------- $8,800,000 September 30, 2004 - -------------------------------------------------------------------------------- $9,000,000 December 31, 2004 - -------------------------------------------------------------------------------- $9,300,000 March 31, 2005 - -------------------------------------------------------------------------------- $9,600,000 June 30, 2005 - -------------------------------------------------------------------------------- (b) After the Sale Date. - -------------------------------------------------------------------------------- Amount Quarter Ending - -------------------------------------------------------------------------------- $4,300,000 September 30, 2002 - -------------------------------------------------------------------------------- $5,900,000 December 31, 2002 - -------------------------------------------------------------------------------- $6,600,000 March 31, 2003 - -------------------------------------------------------------------------------- $6,900,000 June 30, 2003 - -------------------------------------------------------------------------------- $7,200,000 September 30, 2003 - -------------------------------------------------------------------------------- $7,500,000 December 31, 2003 - -------------------------------------------------------------------------------- $7,800,000 March 31, 2004 - -------------------------------------------------------------------------------- $8,000,000 June 30, 2004 - -------------------------------------------------------------------------------- $8,300,000 September 30, 2004 - -------------------------------------------------------------------------------- $8,500,000 December 31, 2004 - -------------------------------------------------------------------------------- $8,800,000 March 31, 2005 - -------------------------------------------------------------------------------- $9,000,000 June 30, 2005 - -------------------------------------------------------------------------------- Section 9.13 Debt Service Coverage Ratio. The Borrower will not permit its Debt Service Coverage Ratio as of the end of any fiscal quarter, calculated on a rolling four quarter basis (except for the quarter ending September 30, 2002 which will be calculated on the basis of the prior three fiscal quarters ending on such date), to be less than the ratio for the relevant periods set forth in table (a) below prior to the Sale Date or table (b) below after the Sale Date: (a) Prior to the Sale Date. - -------------------------------------------------------------------------------- Ratio Quarter Ending - -------------------------------------------------------------------------------- 1.05 to 1 September 30, 2002 - -------------------------------------------------------------------------------- 47 - -------------------------------------------------------------------------------- 1.1 to 1 December 31, 2002 through June 30, 2003 - -------------------------------------------------------------------------------- 1 to 1 September 30, 2003 through March 31, 2004 - -------------------------------------------------------------------------------- ..9 to 1 June 30, 2004 and September 30, 2004 - -------------------------------------------------------------------------------- ..85 to 1 December 31, 2004 - -------------------------------------------------------------------------------- ..8 to 1 March 31, 2005 - -------------------------------------------------------------------------------- ..95 to 1 June 30, 2005 - -------------------------------------------------------------------------------- (b) After the Sale Date. - -------------------------------------------------------------------------------- Ratio Quarter Ending - -------------------------------------------------------------------------------- 1 to 1 September 30, 2002 - -------------------------------------------------------------------------------- 1.05 to 1 December 31, 2002 and March 31, 2003 - -------------------------------------------------------------------------------- 1 to 1 June 30, 2003 and September 30, 2003 - -------------------------------------------------------------------------------- ..9 to 1 December 31, 2003 through June 30, 2004 - -------------------------------------------------------------------------------- ..8 to 1 September 30, 2004 and December 31, 2004 - -------------------------------------------------------------------------------- ..75 to 1 March 31, 2005 - -------------------------------------------------------------------------------- ..9 to 1 June 30, 2005 - -------------------------------------------------------------------------------- For purposes of this Section 9.13, "Debt Service Coverage Ratio" shall mean the ratio for the relevant period of (i) EBITDA less taxes payable in cash and less any non-financed Capital Expenditures to (ii) cash interest, plus principal payments scheduled during the period. Section 9.14 Environmental Matters. Neither the Borrower nor any Subsidiary will cause or permit any of its Property to be in violation of, or do anything or permit anything to be done which will subject any such Property to any remedial obligations under any Environmental Laws, assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to such Property where such violations or remedial obligations would have a Material Adverse Effect. Section 9.15 Transactions with Affiliates. Except pursuant to Management Services Agreements and the Accounts Receivable Purchase Agreements, neither the Borrower nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under this Agreement, are in the ordinary course of its business and are upon fair and reasonable terms no less favorable to it than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. Section 9.16 Subsidiaries. The Borrower shall not create any additional Subsidiaries or permit any Subsidiary to do so. In every such case, each new Subsidiary shall forthwith execute and deliver a Guaranty Agreement and Security Instruments in favor of the Agent. The Borrower shall not and shall not permit any Subsidiary to sell or to issue any stock of a Subsidiary or any interest in a Special Entity. The Borrower shall not permit any Subsidiary to issue any stock except to the Borrower or any Guarantors and except in compliance with Section 48 9.03 and all of the stock of such Subsidiary shall have been pledged to the Agent for the benefit of the Lenders in form satisfactory to the Agent. Section 9.17 Negative Pledge Agreements. Neither the Borrower nor any Subsidiary will create, incur, assume or suffer to exist any contract, agreement or understanding (other than this Agreement and the Security Instruments) which in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any of its Property or restricts any Subsidiary from paying dividends to the Borrower, or which requires the consent of or notice to other Persons in connection therewith. Section 9.18 Other Agreements. Neither the Borrower nor any Subsidiary shall make or permit any material amendment or modification of the Management Services Agreements or the Accounts Receivables Purchase Agreements, except for those modifications required to comply with Government Requirements. Section 9.19 Limitation on Certain Payments and Modifications of Indebtedness; Cash Management. (a) Neither the Borrower nor any Subsidiary shall (i) make any payment whether directly, indirectly, voluntarily, mandatorily or through any redemption or otherwise on account of the Subordinated Debt, (ii) make any voluntary or optional payment or prepayment on account of, or voluntary or optional redemption or acquisition for value of any portion of, any Debt other than the Indebtedness, (iii) otherwise agree to amend or modify the payment terms thereof or any provision other than the payment terms of any such Debt or of any agreement relating to any of the foregoing or (iv) make any payment of the Fozoonmehr Amount (as defined in the Forbearance Agreement) to Roisman. (b) Neither Borrower nor any Subsidiary shall make any usage of cash or changes in Consolidated Working Capital that is not in accordance with ordinary course of business practices for the reasonable and ordinary operation of Borrower's and such Subsidiary's business, nor shall make any prepayments or take any other action that would impair the ability of Borrower to make the Annual Cash Flow Payment required under Section 3.02(b)(ii) hereof. Section 9.20 Accounting Changes. Neither the Borrower nor any Subsidiary shall make any significant change in accounting treatment or reporting practices from those currently employed by the Borrower and its Subsidiaries, except as required by GAAP, or change the fiscal year of the Borrower or any of its Subsidiaries from the current fiscal year ending in December of each year. ARTICLE X Events of Default; Remedies Section 10.01 Events of Default. One or more of the following events shall constitute an "Event of Default": (a) the Borrower shall default in the payment or prepayment when due of any principal of or interest on any Loan, or any fees or other amount payable by it hereunder or under any Security Instrument; provided, however, if such default is a default on a payment of fees or 49 expenses (other than fees under Section 2.02), then no Event of Default shall occur unless such default shall continue unremedied for a period of 30 days; or (b) the Borrower or any Subsidiary shall default in the payment when due of any principal of or interest on any of its other Debt aggregating $250,000 or more, or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Debt shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Debt (or a trustee or agent on behalf of such holder or holders) to cause, such Debt to become due prior to its stated maturity; or (c) any representation, warranty or certification made or deemed made herein or in any Security Instrument by the Borrower or any Subsidiary, or any certificate furnished to any Lender pursuant to the provisions hereof or any Security Instrument, shall prove to have been materially false or misleading as of the time made or furnished in any material respect; or (d) the Borrower shall default in the performance of any of its obligations under Section 8.01 or Section 8.11, Article IX or any other Article of this Agreement other than under Article VIII (excluding Section 8.01 and Section 8.11); or the Borrower or any Subsidiary shall default in the performance of any of its obligations under Article VIII, the Stockholders Agreement, any Warrant or any Security Instrument (other than Section 8.01 or Section 8.11 or the payment of amounts due which shall be governed by Section 10.01(a)) and such default shall continue unremedied for a period of 30 days after the earlier to occur of (i) notice thereof to the Borrower or such Subsidiary by any Lender or (ii) the Borrower or such Subsidiary otherwise becoming aware of such default; or (e) the Borrower shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) the Borrower shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, liquidation or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) a proceeding or case shall be commenced, without the application or consent of the Borrower, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower of all or any substantial part of its assets, or (iii) similar relief in respect of the Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, 50 for a period of 60 days; or (iv) an order for relief against the Borrower shall be entered in an involuntary case under the Federal Bankruptcy Code; or (h) a judgment or judgments for the payment of money in excess of $250,000 in the aggregate shall be rendered by a court against the Borrower or any Subsidiary and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be (i) fully covered by insurance owned or held by the Borrower or such Subsidiary, as applicable, under a policy or policies which are in full force and effect, or (ii) procured, within 30 days from the date of entry thereof and the Borrower or such Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) a non-monetary judgment, order or decree is entered against the Borrower or any of its Subsidiaries which has, or would reasonably be expected to have, a Material Adverse Effect, and there shall be any period of 30 days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (j) the Security Instruments after delivery thereof shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding and enforceable in accordance with their terms, or cease to create a valid and perfected Lien of the priority required thereby on any of the collateral purported to be covered thereby, except to the extent permitted by the terms of this Agreement; or (k) the Borrower discontinues its usual business; or (l) any of the Guarantors takes, suffers or permits to exist any of the events or conditions referred to in paragraphs (e), (f), (g) or (h) hereof or if any provision of any guaranty agreement related thereto shall for any reason cease to be valid and binding on any Guarantor or if Guarantor shall so state in writing; or (m) the subordination provisions of the Subordinated Debt or the Subordination Agreement or any other instrument governing any other subordinated debt is for any reason revoked or invalidated, or otherwise cease to be in full force and effect or any Person who is a party thereto contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder, or the Indebtedness hereunder is for any reason subordinated or does not have the priority contemplated by this Agreement, the Subordination Agreement or the documents evidencing the Subordinated Debt; or (n) any Management Services Agreement or any Accounts Receivable Purchase Agreement terminates or a default by the Borrower occurs thereunder; or (o) any modification or amendment of any Management Services Agreement or any Accounts Receivable Purchase Agreement is made that could result in an adverse monetary impact to the Borrower without the prior written consent of the Agent; or (p) any default or event of default occurs under the Forbearance Agreement which permits Roisman to terminate the Forbearance Period (as defined therein); or 51 (q) a Change of Control occurs. Section 10.02 Remedies. (a) In the case of an Event of Default other than one referred to in clauses (e), (f) or (g) of Section 10.01 or in clause (l) to the extent it relates to clauses (e), (f) or (g), the Agent, upon request of the Majority Lenders, shall, by notice to the Borrower, declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Borrower hereunder and under the Notes to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other formalities of any kind, all of which are hereby expressly waived by the Borrower. (b) In the case of the occurrence of an Event of Default referred to in clauses (e), (f) or (g) of Section 10.01 or in clause (l) to the extent it relates to clauses (e), (f) or (g), the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Borrower hereunder and under the Notes shall become automatically immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other formalities of any kind, all of which are hereby expressly waived by the Borrower. (c) All proceeds received after maturity of the Notes, whether by acceleration or otherwise shall be applied first to reimbursement of expenses and indemnities provided for in this Agreement and the Security Instruments; second to accrued interest on the Notes; third to fees; fourth pro rata to principal outstanding on the Notes and other Indebtedness; and any excess shall be paid to the Borrower or as otherwise required by any Governmental Requirement. (d) The rights and remedies of Agent and Lenders provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE XI The Agent Section 11.01 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the Security Instruments with such powers as are specifically delegated to the Agent by the terms of this Agreement and the Security Instruments, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in Section 11.05 and the first sentence of Section 11.06 shall include reference to its Affiliates and its and its Affiliates' officers, directors, employees, attorneys, accountants, experts and agents): (i) shall have no duties or responsibilities except those expressly set forth in the Loan Documents, and shall not by reason of the Loan Documents be a trustee or fiduciary for any Lender; (ii) makes no representation or warranty to any Lender and shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, 52 this Agreement, or for the value, validity, effectiveness, genuineness, execution, effectiveness, legality, enforceability or sufficiency of this Agreement, any Note or any other document referred to or provided for herein or for any failure by the Borrower or any other Person (other than the Agent) to perform any of its obligations hereunder or thereunder or for the existence, value, perfection or priority of any collateral security or the financial or other condition of the Borrower, its Subsidiaries or any other obligor or guarantor; (iii) except pursuant to Section 11.07 shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (iv) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith including its own ordinary negligence, except for its own gross negligence or willful misconduct. The Agent may employ agents, accountants, attorneys and experts and shall not be responsible for the negligence or misconduct of any such agents, accountants, attorneys or experts selected by it in good faith or any action taken or omitted to be taken in good faith by it in accordance with the advice of such agents, accountants, attorneys or experts. The Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof permitted hereunder shall have been filed with the Agent. The Agent is authorized to release any collateral that is permitted to be sold or released pursuant to the terms of the Loan Documents. Section 11.02 Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telecopier, telegram or cable) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. Section 11.03 Defaults. The Agent shall not be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of or interest on Loans unless the Agent has received notice from a Lender or the Borrower specifying such Default and stating that such notice is a "Notice of Default"). In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Lenders. In the event of a payment Default, the Agent shall give each Lender prompt notice of each such payment Default. Section 11.04 Rights as a Lender. With respect to any Loan made by it, Bank of America (and any successor acting as Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. Bank of America (and any successor acting as Agent) and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Borrower (and any of its Affiliates) as if it were not acting as the Agent, and Bank of America and its Affiliates may accept fees and other consideration from the Borrower for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. Section 11.05 Indemnification. The Lenders agree to indemnify the Agent ratably in accordance with their Percentage Shares for the Indemnity Matters as described in 53 Section 12.03 to the extent not indemnified or reimbursed by the Borrower under Section 12.03, but without limiting the obligations of the Borrower under said Section 12.03 and for any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of: (i) this Agreement, the Security Instruments or any other documents contemplated by or referred to herein or the transactions contemplated hereby, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder or (ii) the enforcement of any of the terms of this Agreement, any Security Instrument or of any such other documents; whether or not any of the foregoing specified in this Section 11.05 arises from the sole or concurrent negligence of the Agent, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. Section 11.06 Non-Reliance on Agent and other Lenders. Each Lender acknowledges and agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and its decision to enter into this Agreement, and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrower of this Agreement, the Notes, the Security Instruments or any other document referred to or provided for herein or to inspect the properties or books of the Borrower. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder and copies of the documents required to be provided to the Agent under Article VI, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower (or any of its Affiliates) which may come into the possession of the Agent or any of its Affiliates. In this regard, each Lender acknowledges that Vinson & Elkins L.L.P. is acting in this transaction as special counsel to the Agent only, except to the extent otherwise expressly stated in any legal opinion or any Loan Document. Each Lender will consult with its own legal counsel to the extent that it deems necessary in connection with the Loan Documents and the matters contemplated therein. Section 11.07 Action by Agent. Except for action or other matters expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall (i) receive written instructions from the Majority Lenders (or all of the Lenders as expressly required by Section 12.04) specifying the action to be taken, and (ii) be indemnified to its satisfaction by the Lenders against any and all liability and expenses which may be incurred by it by reason of taking or continuing to take any such action. The instructions of the Majority Lenders (or all of the Lenders as expressly required by Section 12.04) and any action taken or failure to act pursuant thereto by the Agent shall be binding on all of the Lenders. If a Default has occurred and is continuing, the Agent shall take such action with respect to such Default as shall be directed by the Majority Lenders (or all of the Lenders as required by Section 12.04) in the written instructions (with indemnities) described in this Section 11.07, 54 provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Lenders. In no event, however, shall the Agent be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement and the Security Instruments or applicable law. Section 11.08 Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Borrower, and the Agent may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent. Upon the acceptance of such appointment hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article XI and Section 12.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. ARTICLE XII Miscellaneous Section 12.01 Waiver. No failure on the part of the Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Section 12.02 Notices. All notices and other communications provided for herein and in the other Loan Documents (including, without limitation, any modifications of, or waivers or consents under, this Agreement or the other Loan Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in writing and telexed, telecopied, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or in the Loan Documents; to each other party. Except as otherwise provided in this Agreement or in the other Loan Documents, all such communications shall be deemed to have been duly given when transmitted, if transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next succeeding Business Day) by telex or telecopier and evidence or confirmation of receipt is obtained, or personally delivered or, in the case of a mailed notice, three (3) Business Days after the date deposited in the mails, postage prepaid, in each case given or addressed as aforesaid. Section 12.03 Payment of Expenses, Indemnities, etc. (a) The Borrower agrees: 55 (i) whether or not the transactions hereby contemplated are consummated, to pay all reasonable expenses of the Agent in the administration (both before and after the execution hereof and including advice of counsel as to the rights and duties of the Agent and the Lenders with respect thereto) of, and in connection with the negotiation, syndication, investigation, preparation, execution and delivery of, recording or filing of, preservation of rights under, enforcement of, and refinancing, renegotiation or restructuring of, the Loan Documents and any amendment, waiver or consent relating thereto (including, without limitation, travel, photocopy, mailing, courier, telephone and other similar expenses of the Agent, the cost of environmental audits, surveys and appraisals at reasonable intervals, the reasonable fees and disbursements of counsel and other outside consultants for the Agent and, in the case of enforcement (including, without limitation, bankruptcy and workout matters), the reasonable fees and disbursements of counsel for the Agent and any of the Lenders); and promptly reimburse the Agent for all amounts expended, advanced or incurred by the Agent or the Lenders to satisfy any obligation of the Borrower under this Agreement or any Security Instrument, including without limitation, all costs and expenses of foreclosure; (ii) to indemnify the Agent and each Lender and each of their Affiliates and each of their officers, directors, employees, representatives, agents, attorneys, accountants and experts ("Indemnified Parties") from, hold each of them harmless against and promptly upon demand pay or reimburse each of them for, the Indemnity Matters which may be incurred by or asserted against or involve any of them (whether or not any of them is designated a party thereto) as a result of, arising out of or in any way related to (i) any actual or proposed use by the Borrower of the proceeds of any of the Prior Debt, (ii) the execution, delivery and performance of the Loan Documents, (iii) the operations of the business of the Borrower and its Subsidiaries, (iv) the failure of the Borrower or any Subsidiary to comply with the terms of any Security Instrument or this Agreement, or with any Governmental Requirement, (v) any inaccuracy of any representation or any breach of any warranty of the Borrower or any Guarantor set forth in any of the Loan Documents, (vi) any assertion that the Lenders were not entitled to receive the proceeds received pursuant to the Security Instruments or (vii) any other aspect of the Loan Documents, including, without limitation, the reasonable fees and disbursements of counsel and all other expenses incurred in connection with investigating, defending or preparing to defend any such action, suit, proceeding (including any investigations, litigation or inquiries) or claim and including all Indemnity Matters arising by reason of the ordinary negligence of any Indemnified Party, but excluding all Indemnity Matters arising solely by reason of claims between the Lenders or any Lender and the Agent or a Lender's shareholders against the Agent or Lender or by reason of the gross negligence or willful misconduct on the part of the Indemnified Party; and (iii) to indemnify and hold harmless from time to time the Indemnified Parties from and against any and all losses, claims, cost recovery actions, administrative orders or proceedings, damages and liabilities to which any such Person may become subject (i) under any Environmental Law applicable to the Borrower or any Subsidiary or any of their Properties, including without limitation, the treatment or disposal of hazardous substances on any of their Properties, (ii) as 56 a result of the breach or non-compliance by the Borrower or any Subsidiary with any Environmental Law applicable to the Borrower or any Subsidiary, (iii) due to past ownership by the Borrower or any Subsidiary of any of their Properties or past activity on any of their Properties which, though lawful and fully permissible at the time, could result in present liability, (iv) the presence, use, release, storage, treatment or disposal of hazardous substances on or at any of the Properties owned or operated by the Borrower or any Subsidiary, or (v) any other environmental, health or safety condition in connection with the Loan Documents; provided, however, no indemnity shall be afforded under this Section 12.03(a)(iii) in respect of any Property for any occurrence arising from the acts or omissions of the Agent or any Lender during the period after which such Person, its successors or assigns shall have obtained possession of such Property (whether by foreclosure or deed in lieu of foreclosure, as mortgagee-in-possession or otherwise). (b) No Indemnified Party may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld; provided, that the indemnitor may not reasonably withhold consent to any settlement that an Indemnified Party proposes, if the indemnitor does not have the financial ability to pay all its obligations outstanding and asserted against the indemnitor at that time, including the maximum potential claims against the Indemnified Party to be indemnified pursuant to this Section 12.03. (c) In the case of any indemnification hereunder, the Agent or Lender, as appropriate, shall give notice to the Borrower of any such claim or demand being made against the Indemnified Party and the Borrower shall have the non-exclusive right to join in the defense against any such claim or demand provided that if the Borrower provides a defense, the Indemnified Party shall bear its own cost of defense unless there is a conflict between the Borrower and such Indemnified Party. (d) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY. (e) The Borrower's obligations under this Section 12.03 shall survive any termination of this Agreement and the payment of the Notes and shall continue thereafter in full force and effect. (f) The Borrower shall pay any amounts due under this Section 12.03 within thirty (30) days of the receipt by the Borrower of notice of the amount due. 57 Section 12.04 Amendments, Etc. Any provision of this Agreement or any Security Instrument may be amended, modified or waived with the Borrower's and the Majority Lenders' prior written consent; provided that (i) no amendment, modification or waiver which extends the final maturity of the Loans, postpones the scheduled payment date of any amount owing under any Loan Document, increases the Aggregate Maximum Credit Amounts, forgives the principal amount of any Indebtedness outstanding under this Agreement, releases any guarantor of the Indebtedness or releases all or substantially all of the collateral, reduces the interest rate applicable to the Loans or the fees payable to the Lenders generally, affects Section 2.01, this Section 12.04 or Section 12.06(a) or modifies the definition of "Majority Lenders" shall be effective without consent of all Lenders; (ii) no amendment, modification or waiver which increases the Maximum Credit Amount of any Lender shall be effective without the consent of such Lender; (iii) no amendment, modification or waiver which modifies the rights, duties or obligations of the Agent shall be effective without the consent of the Agent, and (iv) no amendment, modification or waiver of the Subordination Agreement shall be effective without the consent of all Lenders. Section 12.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no third party shall be deemed a third party beneficiary hereof. Section 12.06 Assignments and Participations. (a) The Borrower may not assign its rights or obligations hereunder or under the Notes without the prior consent of all of the Lenders and the Agent. (b) Any Lender may assign only to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement; provided, however, that (i) any such assignment shall be in the amount of at least $1,000,000 or such lesser amount to which the Majority Lenders have consented and (ii) the assignee or assignor shall pay to the Agent a processing and recordation fee of $3,000 for each assignment. As used herein, the term "Eligible Assignee" shall mean (a) a Lender or Affiliate thereof, (b) a commercial bank, or other finance, insurance or other financial entity or fund which, with its Affiliates, has total assets (including assets under management or pledge) of not less than $50,000,000, or (c) such other Person to which the Majority Lenders have consented and, if no Event of Default has occurred and is continuing, the Borrower has consented, such consents not to be unreasonably withheld or delayed. Any such assignment will become effective upon the execution and delivery to the Agent of the Assignment and the consent of the Agent and the Borrower, if applicable. Promptly after receipt of an executed Assignment, the Agent shall send to the Borrower a copy of such executed Assignment. Upon receipt of such executed Assignment, the Borrower, will, at its own expense, execute and deliver new Notes to the assignor and/or assignee, as appropriate, in accordance with their respective interests as they appear. Upon the effectiveness of any assignment pursuant to this Section 12.06(b), the assignee will become a "Lender," if not already a "Lender," for all purposes of this Agreement and the Security Instruments. The assignor shall be relieved of its obligations hereunder to the extent of such assignment (and if the assigning Lender no longer holds any rights or obligations under this Agreement, such assigning Lender shall cease to be a "Lender" hereunder except that its rights under Sections 4.06, 5.01 and 12.03 shall not be affected). The Agent will prepare on the last Business Day of each month during 58 which an assignment has become effective pursuant to this Section 12.06(b), a new Annex I giving effect to all such assignments effected during such month, and will promptly provide the same to the Borrower and each of the Lenders. (c) Each Lender may transfer, grant or assign participations in all or any part of such Lender's interests hereunder pursuant to this Section 12.06(c) to any Person, provided that: (i) such Lender shall remain a "Lender" for all purposes of this Agreement and the transferee of such participation shall not constitute a "Lender" hereunder; and (ii) no participant under any such participation shall have rights to approve any amendment to or waiver of any of the Loan Documents except to the extent such amendment or waiver would (x) forgive any principal owing on any Indebtedness or extend the final maturity of the Loans, (y) reduce the interest rate (other than as a result of waiving the applicability of any post-default increases in interest rates) or fees applicable to any of the Loans in which such participant is participating, or postpone the payment of any thereof, or (z) release any guarantor of the Indebtedness or release all or substantially all of the collateral (except as provided in the Loan Documents) supporting any of the Loans in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the Security Instruments (the participant's rights against the granting Lender in respect of such participation to be those set forth in the agreement with such Lender creating such participation), and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation, provided that such participant shall be entitled to receive additional amounts under Article V on the same basis as if it were a Lender and be indemnified under Section 12.03 as if it were a Lender. In addition, each agreement creating any participation must include an agreement by the participant to be bound by the provisions of Section 12.15. (d) The Lenders may furnish any information concerning the Borrower in the possession of the Lenders from time to time to assignees and participants (including prospective assignees and participants); provided that, such Persons agree to be bound by the provisions of Section 12.15. (e) Notwithstanding anything in this Section 12.06 to the contrary, any Lender may assign and pledge its Notes to any Federal Reserve Bank. No such assignment and/or pledge shall release the assigning and/or pledging Lender from its obligations hereunder. Section 12.07 Invalidity. In the event that any one or more of the provisions contained in any of the Loan Documents shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Notes, this Agreement or any Security Instrument. Section 12.08 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. Section 12.09 References. The words "herein," "hereof," "hereunder" and other words of similar import when used in this Agreement refer to this Agreement as a whole, and not to any particular article, section or subsection. Any reference herein to a Section shall be deemed to refer to the applicable Section of this Agreement unless otherwise stated herein. Any reference 59 herein to an exhibit or schedule shall be deemed to refer to the applicable exhibit or schedule attached hereto unless otherwise stated herein. Section 12.10 Survival. The obligations of the parties under Section 4.06, Article V, and Sections 11.05 and 12.03 shall survive the repayment of the Loans and the termination of the Commitments. To the extent that any payments on the Indebtedness or proceeds of any collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Indebtedness so satisfied shall be revived and continue as if such payment or proceeds had not been received and the Agent's and the Lenders' Liens, security interests, rights, powers and remedies under this Agreement and each Security Instrument shall continue in full force and effect. In such event, each Security Instrument shall be automatically reinstated and the Borrower shall take such action as may be reasonably requested by the Agent and the Lenders to effect such reinstatement. Section 12.11 Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. Section 12.12 No Oral Agreements. The Loan Documents embody the entire agreement and understanding between the parties and supersede all other agreements and understandings between such parties relating to the subject matter hereof and thereof. The Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. Section 12.13 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. (a) This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of Texas except to the extent that United States federal law permits any Lender to charge interest at the rate allowed by the laws of the state where such Lender is located. Chapter 346 of the Texas Finance Code (which regulates certain revolving credit loan accounts and revolving tri-party accounts) shall not apply to this Agreement or the Notes. (b) Subject to Section 12.17, any legal action or proceeding with respect to the Loan Documents shall be brought in the courts of the State of Texas or of the United States of America for the Southern District of Texas, and, by execution and delivery of this Agreement, each of the Borrower, the Agent and the Lenders hereby accepts for itself and (to the extent permitted by law) in respect of its Property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each of the Borrower, the Agent and the Lenders hereby irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. 60 (c) Nothing herein shall affect the right of the Agent or any Lender or any holder of a Note to serve process in any other manner permitted by law. (d) The Borrower, the Agent and each Lender hereby (i) irrevocably and unconditionally waive, to the fullest extent permitted by law, trial by jury in any legal action or proceeding relating to this Agreement, any Security Instrument or any other Loan Document and with respect to any counterclaim asserted therein; (ii) irrevocably waive, to the maximum extent not prohibited by law, any right it may have to claim or recover in any such litigation or other legal proceeding any special, exemplary, punitive or consequential damages, or damages other than, or in addition to, actual damages; (iii) certify that no party hereto nor any representative or agent of counsel for any party hereto has represented, expressly or otherwise, or implied that such party would not, in the event of litigation, seek to enforce the foregoing waivers, and (iv) acknowledge that it has been induced to enter into this Agreement, the Security Instruments and the transactions contemplated hereby and thereby by, among other things, the mutual waivers and certifications contained in this Section 12.13. Section 12.14 Interest. It is the intention of the parties hereto that each Lender shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated hereby would be usurious as to any Lender under laws applicable to it (including the laws of the United States of America and the State of Texas or any other jurisdiction whose laws may be mandatorily applicable to such Lender notwithstanding the other provisions of this Agreement), then, in that event, notwithstanding anything to the contrary in any of the Loan Documents or any agreement entered into in connection with or as security for the Notes, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to any Lender that is contracted for, taken, reserved, charged or received by such Lender under any of the Loan Documents or agreements or otherwise in connection with the Notes shall under no circumstances exceed the Highest Lawful Rate, and any excess shall be canceled automatically and if theretofore paid shall be credited by such Lender on the principal amount of the Indebtedness (or, to the extent that the principal amount of the Indebtedness shall have been or would thereby be paid in full, refunded by such Lender to the Borrower); and (ii) in the event that the maturity of the Notes is accelerated by reason of an election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to any Lender may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically by such Lender as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by such Lender on the principal amount of the Indebtedness (or, to the extent that the principal amount of the Indebtedness shall have been or would thereby be paid in full, refunded by such Lender to the Borrower). All sums paid or agreed to be paid to any Lender for the use, forbearance or detention of sums due hereunder shall, to the extent permitted by law applicable to such Lender, be amortized, prorated, allocated and spread throughout the full term of the Loans evidenced by the Notes until payment in full so that the rate or amount of interest on account of any Loans hereunder does not exceed the maximum amount allowed by such applicable law. If at any time and from time to time (i) the amount of interest payable to any Lender on any date shall be computed at the Highest Lawful Rate applicable to such Lender pursuant to this Section 12.14 and (ii) in respect of any subsequent interest 61 computation period the amount of interest otherwise payable to such Lender would be less than the amount of interest payable to such Lender computed at the Highest Lawful Rate applicable to such Lender, then the amount of interest payable to such Lender in respect of such subsequent interest computation period shall continue to be computed at the Highest Lawful Rate applicable to such Lender until the total amount of interest payable to such Lender shall equal the total amount of interest which would have been payable to such Lender if the total amount of interest had been computed without giving effect to this Section 12.14. To the extent that Chapter 303 of the Texas Finance Code is relevant for the purpose of determining the Highest Lawful Rate, such Lender elects to determine the applicable rate ceiling under such Chapter by the indicated weekly rate ceiling from time to time in effect. Section 12.15 Confidentiality. In the event that the Borrower provides to the Agent or the Lenders written confidential information belonging to the Borrower, if the Borrower shall denominate such information in writing as "confidential", the Agent and the Lenders shall thereafter maintain such information in confidence in accordance with the standards of care and diligence that each utilizes in maintaining its own confidential information. This obligation of confidence shall not apply to such portions of the information which (i) are in the public domain, (ii) hereafter (but not until they) become part of the public domain without the Agent or the Lenders breaching their obligation of confidence to the Borrower, (iii) are previously known by the Agent or the Lenders from some source other than the Borrower, (iv) are hereafter developed by the Agent or the Lenders without using the Borrower's information, (v) are hereafter obtained by or available to the Agent or the Lenders from a third party who owes no obligation of confidence to the Borrower with respect to such information or through any other means other than through disclosure by the Borrower, (vi) are disclosed with the Borrower's consent, (vii) must be disclosed either pursuant to any Governmental Requirement or to Persons regulating the activities of the Agent or the Lenders, (viii) as may be required by law or regulation or order of any Governmental Authority in any judicial, arbitration or governmental proceeding, or (ix) are disclosed in connection with the enforcement or exercise of the Agent's or any Lender's rights and remedies under any Loan Document and not otherwise prohibited by law. Further, the Agent or a Lender may disclose any such information to any other Lender, any independent consultants, any independent certified public accountants, any legal counsel employed by such Person in connection with this Agreement, any Security Instrument or any other Loan Document, including without limitation, the enforcement or exercise of all rights and remedies thereunder, or any assignee or participant (including prospective assignees and participants) in the Loans; provided, however, that the Agent or the Lenders shall receive a confidentiality agreement from the Person (excluding legal counsel) to whom such information is disclosed such that said Person shall have the same obligation to maintain the confidentiality of such information as is imposed upon the Agent or the Lenders hereunder. Notwithstanding anything to the contrary provided herein, this obligation of confidence shall cease three (3) years from the date the information was furnished, unless the Borrower requests in writing at least thirty (30) days prior to the expiration of such three year period, to maintain the confidentiality of such information for an additional three year period. The Borrower waives any and all other rights it may have to confidentiality as against the Agent and the Lenders arising by contract, agreement, statute or law except as expressly stated in this Section 12.15. Section 12.16 Effectiveness. This Agreement shall be effective on the Closing Date. 62 Section 12.17 Binding Arbitration. (a) Any controversy or claim between or among the parties hereto, including but not limited to, those arising out of or relating to this Agreement, the Notes, the Security Instruments or any other Loan Document, including any claim or controversy of any kind based on or arising in tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, applicable state law), the Rules of Practice and Procedure for the Arbitration of Commercial Disputes or Judicial Arbitration and Mediation Services, Inc. ("J.A.M.S."), and the rules set forth in Section 12.17(b) below. In the event of any inconsistency, the rules set forth in Section 12.17(b) below shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to the Notes or any other Security Instrument may bring an action, including a summary or expedited proceeding, to compel arbitration or any controversy or claim to which either the Notes, this Agreement or any other Security Instrument applies in any court having jurisdiction over such action. (b) The arbitration shall be conducted in the City of Houston, Texas and administered by J.A.M.S. who will appoint an arbitrator. If J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within 90 days of the demand for arbitration, and the arbitrator shall, only upon a showing of cause, be permitted to extend the commencement of such hearings for an additional 60 days. (c) Nothing in this Agreement shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose or any waivers contained in this Agreement, the Notes, the Guaranty Agreement or the other Security Instruments; (ii) be a waiver by any Lender of the protection afforded to it by 12 U.S.C. ss.91 or any substantially equivalent state law; or (iii) limit the right of any Lender to (a) exercise self help remedies such as, but not limited to, setoff, (b) foreclose against any collateral, whether real or personal property, or (c) obtain from a court provisional or ancillary remedies such as, but not limited, injunctive relief, writ of possession or the appointment of a receiver. Any Lender may exercise such self help rights, foreclose upon collateral, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to the Notes, this Agreement or the other Security Instruments. Neither the exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in such action, to arbitrate the merits of the controversy or claim occasioning the resort to such remedies. (d) The provisions of this Section 12.17 shall survive any termination, amendment, or expiration of the Security Instruments. Each party agrees to keep all disputes and arbitration proceedings strictly confidential, except for disclosures of information required in the ordinary course of its business or by applicable law or regulation. (e) Nothing in this Agreement shall be deemed to limit the right of the Borrower to obtain injunctive relief against any Lender prior to or during the pendency of 63 any arbitration proceeding based on violations by any Lender of any Lender's agreements with the Borrower, so long as the injunctive relief is limited to restraining any Lender from exercising its rights and remedies until the arbitration proceeding (in process or initiated by the Borrower or any Lender in conjunction with the request for such injunctive relief) has been completed and arbitration award has been made. Section 12.18 Exculpation Provisions. Each of the parties hereto specifically agrees that it has a duty to read this Agreement, the Security Instruments and the other Loan Documents and agrees that it is charged with notice and knowledge of all of their terms; that it has in fact read this Agreement and is fully informed and has full notice and knowledge of the terms, conditions and effects of this Agreement; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement, the Security Instruments and the other Loan Documents; and has received the advice of its attorney in entering into this Agreement, the Security Instruments and the other Loan Documents; and that it recognizes that certain of the terms of this Agreement and the Security Instruments result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability. Each party hereto agrees and covenants that it will not contest the validity or enforceability of any exculpatory provision of this Agreement, the Security Instruments and the other Loan Documents on the basis that the party had no notice or knowledge of such provision or that the provision is not "conspicuous." Section 12.19 Reaffirmation of Guaranty Agreement and Security Agreement. Each Guarantor hereby consents to this Agreement and agrees that the execution and the performance of such Agreement shall not in any way affect, impair, discharge, relieve or release such Guarantor from its obligations under its respective Guaranty Agreement or under any Security Instrument executed by it. Each Guarantor reaffirms its respective Guaranty Agreement and any Security Instruments executed by it and agrees that: (i) such Guaranty Agreement and Security Instruments are in full force and effect to guarantee payment and performance of the "Liabilities" as defined therein; and (ii) its respective obligations under such agreements shall continue to be in full force and effect until its respective obligations thereunder or hereunder are fully paid and performed. In furtherance of the foregoing, each Guarantor affirms that each reference in its respective Guaranty Agreement to the "Credit Agreement", the "Loan Documents", the "Notes" and the "Security Instruments" are, respectively, references to this Agreement, Loan Documents, the Notes and Security Instruments as defined in this Agreement, together with all renewals, restatements, rearrangements, amendments, extensions, or supplements in whole or in part of any of the foregoing. In addition to the foregoing, each Guarantor affirms, acknowledges and agrees that (a) the "Liabilities" as defined and described in its respective Guaranty Agreement shall be deemed to cover and include not only those items set forth in the definition of Liabilities in its respective Guaranty Agreement, but also the Indebtedness and Loans as defined and described in this Agreement, together with all renewals, restatements, rearrangements, increases, extensions for any period, amendments or supplements in whole or in part of such Indebtedness or Loans; (b) each of the Lenders named in this Agreement, together with their respective successors and assigns, and the Agent shall be entitled to the benefits of such Guarantor's respective Guaranty Agreement and all obligations of such Guarantor thereunder; and (c) Bank of America, N.A., f/k/a NationsBank, N.A., is the successor in interest by reason of merger to NationsBank of Texas, N.A. 64 Section 12.20 RELEASE AND COVENANT NOT TO SUE. THE BORROWER (IN ITS OWN RIGHT AND ON BEHALF OF ITS DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS AND AGENTS) AND EACH GUARANTOR (IN ITS OWN RIGHT AND ON BEHALF OF THEIR RESPECTIVE DIRECTORS, OFFICERS, PARTNERS, MEMBERS, EMPLOYEES, ATTORNEYS AND AGENTS) (THE "RELEASING PARTIES") JOINTLY AND SEVERALLY RELEASE, ACQUIT, AND FOREVER DISCHARGE THE AGENT, EACH LENDER AND THEIR RESPECTIVE AFFILIATES AND EACH OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, INDEPENDENT CONTRACTORS, ATTORNEYS AND AGENTS (COLLECTIVELY, THE "RELEASED PARTIES"), TO THE FULLEST EXTENT PERMITTED BY APPLICABLE STATE AND FEDERAL LAW, FROM ANY AND ALL ACTS AND OMISSIONS OF THE RELEASED PARTIES, AND FROM ANY AND ALL CLAIMS, CAUSES OF ACTION, COUNTERCLAIMS, DEMANDS, CONTROVERSIES, COSTS, DEBTS, SUMS OF MONEY, ACCOUNTS, RECKONINGS, BONDS, BILLS, DAMAGES, OBLIGATIONS, LIABILITIES, OBJECTIONS, AND EXECUTIONS OF ANY NATURE, TYPE, OR DESCRIPTION WHICH THE RELEASING PARTIES MAY HAVE ON THE DATE HEREOF AGAINST THE RELEASED PARTIES, IN CONNECTION WITH OR RELATED TO THE PRIOR CREDIT AGREEMENT, THE LOAN DOCUMENTS AND THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE, GROSS NEGLIGENCE, USURY, FRAUD, DECEIT, MISREPRESENTATION, CONSPIRACY, UNCONSCIONABILITY, DURESS, ECONOMIC DURESS, DEFAMATION, CONTROL, INTERFERENCE WITH CONTRACTUAL AND BUSINESS RELATIONSHIPS, CONFLICTS OF INTEREST, MISUSE OF INSIDER INFORMATION, CONCEALMENT, DISCLOSURE, SECRECY, MISUSE OF COLLATERAL, WRONGFUL RELEASE OF COLLATERAL, FAILURE TO INSPECT, ENVIRONMENTAL DUE DILIGENCE, NEGLIGENT LOAN PROCESSING AND ADMINISTRATION, WRONGFUL SETOFF, VIOLATIONS OF STATUTES AND REGULATIONS OF GOVERNMENTAL ENTITIES, INSTRUMENTALITIES AND AGENCIES (BOTH CIVIL AND CRIMINAL), RACKETEERING ACTIVITIES, SECURITIES AND ANTITRUST LAWS VIOLATIONS, TYING ARRANGEMENTS, DECEPTIVE TRADE PRACTICES, BREACH OR ABUSE OF ANY ALLEGED FIDUCIARY DUTY, BREACH OF ANY ALLEGED SPECIAL RELATIONSHIP, COURSE OF CONDUCT OR DEALING, ALLEGED OBLIGATION OF FAIR DEALING, ALLEGED OBLIGATION OF GOOD FAITH, AND ALLEGED OBLIGATION OF GOOD FAITH AND FAIR DEALING, AT LAW OR IN EQUITY, IN CONTRACT, IN TORT, OR OTHERWISE, KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED (COLLECTIVELY, THE "RELEASED CLAIMS"). THE RELEASING PARTIES FURTHER JOINTLY AND SEVERALLY AGREE TO LIMIT ANY DAMAGES THEY MAY SEEK IN CONNECTION WITH ANY CLAIM OR CAUSE OF ACTION, IF ANY, TO EXCLUDE ALL PUNITIVE AND EXEMPLARY DAMAGES, DAMAGES ATTRIBUTABLE TO LOST PROFITS OR OPPORTUNITY, DAMAGES ATTRIBUTABLE TO MENTAL ANGUISH, AND DAMAGES ATTRIBUTABLE TO PAIN AND SUFFERING, AND THE RELEASING PARTIES DO HEREBY JOINTLY AND SEVERALLY WAIVE AND RELEASE ALL SUCH DAMAGES WITH RESPECT TO ANY AND ALL CLAIMS OR CAUSES OF ACTION WHICH MAY ARISE AT ANY TIME AGAINST ANY OF THE RELEASED PARTIES. THE RELEASING PARTIES REPRESENT AND WARRANT THAT NO FACTS EXIST WHICH COULD PRESENTLY SUPPORT THE ASSERTION OF ANY OF THE RELEASED CLAIMS 65 AGAINST THE RELEASED PARTIES. THE RELEASING PARTIES FURTHER COVENANT NOT TO SUE THE RELEASED PARTIES ON ACCOUNT OF ANY OF THE RELEASED CLAIMS, AND EXPRESSLY WAIVE ANY AND ALL DEFENSES THEY MAY HAVE IN CONNECTION WITH THEIR DEBTS AND OBLIGATIONS UNDER THE LOAN DOCUMENTS AND THIS AGREEMENT. THIS SECTION 12.20 IS IN ADDITION TO AND SHALL NOT IN ANY WAY LIMIT ANY OTHER RELEASE, COVENANT NOT TO SUE, OR WAIVER BY THE RELEASING PARTIES IN FAVOR OF THE RELEASED PARTIES. NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, THIS SECTION 12.20 SHALL REMAIN IN FULL FORCE AND EFFECT AND SHALL SURVIVE THE PAYMENT OF THE OBLIGATIONS AND TERMINATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. Section 12.21 Tolling of Statute of Limitations. In consideration of the waiver of defaults under the Existing Agreement and in order to induce the Lenders to agree to the restructuring, modification and continuation of the Prior Debt as contemplated hereby, Borrower agrees that all applicable statutes of limitations that have not expired as of the Closing Date shall be, and hereby are, tolled for the period commencing on the Closing Date and continuing for the duration of this Agreement to and including the Final Maturity Date and such periods thereafter as may apply to any terms or conditions of this Agreement that specifically survive the Final Maturity Date. [SIGNATURES BEGIN ON NEXT PAGE] 66 The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWER: CASTLE DENTAL CENTERS, INC. By: /s/ James M. Usdan ------------------------------------------ Name: James M. Usdan ---------------------------------------- Title: Chief Executive Officer and President --------------------------------------- Address for Notices: 3701 Kirby Drive Suite 550 Houston, Texas 77098 Telecopier No.: (713) 490-8420 Telephone No.: (713) 490-8603 Signature Page AGENT: BANK OF AMERICA, N.A. By: /s/ Mark Henze ------------------------------------- Name: Mark Henze ----------------------------------- Title: Senior Vice President ---------------------------------- Address for Notices: 901 Main Street, 11th Floor Dallas, Texas 75202-3714 Attention: Mark Henze Telecopier No.: (214) 209-3444 Telephone No.: (214) 209-2565 Signature Page LENDERS: BANC OF AMERICA STRATEGIC SOLUTIONS, INC. By: /s/ Mark Henze ------------------------------------- Name: Mark Henze ----------------------------------- Title: Senior Vice President ---------------------------------- Address for Notices: 901 Main Street, 11th Floor Dallas, Texas 75202-3714 Attention: Mark Henze Telecopier No.: (214) 209-3444 Telephone No.: (214) 209-2565 Signature Page FLEET NATIONAL BANK By: /s/ Kali Ramachandran ------------------------------------- Name: Kali Ramachandran ----------------------------------- Title: Vice President ---------------------------------- Address for Notices: 100 Federal Street Mail Stop: MADE10006A Boston, Massachusetts 02110 Attention: Kali Ramachandran Telecopier No.: 617-434-4775 Telephone No.: 617-434-5932 Signature Page AMSOUTH BANK By: /s/ Tim McCarthy ------------------------------------- Name: Tim McCarthy ----------------------------------- Title: Vice President ---------------------------------- Address for Notices: 315 Deaderick Street, 8th Floor Nashville, Tennessee 37021 Attention: Tim McCarthy Telecopier No.: (615) 736-6633 Telephone No.: (615) 748-2045 Signature Page HELLER FINANCIAL, INC. By: /s/ Michael S. Sznajder ------------------------------------- Name: Michael S. Sznajder ----------------------------------- Title: Senior Vice President ---------------------------------- Address for Notices: c/o Heller Healthcare Financial Services 500 West Monroe Street Chicago, Illinois 60661 Attention: Michael S. Sznajder Telecopier No.: (312) 441-7598 Telephone No.: (312) 441-7470 Signature Page The undersigned Guarantors join in this Agreement solely for the purpose of agreeing to Sections 12.19 and 12.20 hereof. CDC OF CALIFORNIA, INC., a Delaware corporation By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: Chief Executive Officer and President ---------------------------------- CASTLE DENTAL CENTERS OF CALIFORNIA, L.L.C., a California limited liability company By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: ---------------------------------- CASTLE TEXAS HOLDINGS, INC., a Delaware corporation By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: ---------------------------------- CASTLE DENTAL CENTERS OF TEXAS, INC., a Texas corporation By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: ---------------------------------- CASTLE DENTAL CENTERS OF TENNESSEE, INC., a Tennessee corporation By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: ---------------------------------- Signature Page CASTLE DENTAL CENTERS OF FLORIDA, INC., a Florida corporation By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: ---------------------------------- ACADEMY FOR DENTAL ASSISTANTS, INC., a Florida corporation By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: ---------------------------------- DENTCOR, INC., a Florida corporation By: /s/ James M. Usdan ------------------------------------- Name: James M. Usdan ----------------------------------- Title: ---------------------------------- Signature Page ANNEX I PERCENTAGE SHARES AND MAXIMUM CREDIT AMOUNTS
- ----------------------------------------------- --------------------- ------------------- Maximum Name of Lender Percentage Share Credit Amount - ----------------------------------------------- --------------------- ------------------- Banc of America Strategic Solutions, Inc. 41.3422634% $19,608,006.11 - ----------------------------------------------- --------------------- ------------------- Heller Financial, Inc. 18.04853466% $8,560,145.43 - ----------------------------------------------- --------------------- ------------------- Fleet National Bank 27.07280201% $12,840,218.15 - ----------------------------------------------- --------------------- ------------------- AmSouth Bank 13.53640099% $6,420,109.07 - ----------------------------------------------- --------------------- ------------------- TOTAL 100.00% $47,428,478.76 - ----------------------------------------------- --------------------- -------------------
Annex I-1 EXHIBIT A FORM OF NOTE $_____________________________ ___________________, 2002 FOR VALUE RECEIVED, CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of ______________________________ (the "Lender"), at the Principal Office of Bank of America, N.A., as Agent (the "Agent"), at 901 Main Street, 11th Floor, Dallas, Texas 75202-3714, the principal sum of _____________ Dollars ($____________), in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement (as hereinafter defined), together with interest thereon at the rate per annum provided in the Credit Agreement. All outstanding principal and accrued interest thereon is and shall be payable in accordance with the Credit Agreement. This Note is one of the Notes referred to in the Second Amended and Restated Credit Agreement dated as of ________________, 2002, among the Borrower, the Lenders which are or become parties thereto (including the Lender) and the Agent, and evidences the Loan of the Lender thereunder (such Second Amended and Restated Credit Agreement as the same may be amended or supplemented from time to time, the "Credit Agreement"). Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement. All amounts paid hereunder shall be applied first to all interest then accrued and unpaid hereunder, and the balance to principal. All past due principal and interest on this Note shall bear interest until paid at the applicable Post-Default Rate as specified in the Credit Agreement. This Note is issued pursuant to the Credit Agreement and is entitled to the benefits provided for in the Credit Agreement and the Security Instruments. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events, for prepayments of Loans upon the terms and conditions specified therein and other provisions relevant to this Note. This Note is given to restructure, modify and continue, but not extinguish, the indebtedness evidenced by the Existing Note executed by the Borrower and payable to the order of the Lender. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. CASTLE DENTAL CENTERS, INC. By: ------------------------------------- Name: Title: Exhibit A-1 EXHIBIT B FORM OF COMPLIANCE CERTIFICATE The undersigned hereby certifies that he is the ________________ of CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Borrower"), and that as such he is authorized to execute this certificate on behalf of the Borrower. With reference to the Second Amended and Restated Credit Agreement dated as of _________________, 2002 (together with all amendments or supplements thereto being the "Agreement") among the Borrower, each of the lenders that is a signatory thereto or which becomes a signatory thereto as provided in Section 12.06 (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"), and Bank of America, N.A., as Agent (in such capacity, the "Agent") for itself and each of the Lenders, the undersigned represents and warrants as follows (each capitalized term used herein having the same meaning given to it in the Agreement unless otherwise specified): (a) The Borrower has performed and complied with all agreements and conditions contained in Articles VIII and IX of the Agreement and in the Security Instruments to which it is a party required to be performed or complied with by it prior to or at the time of delivery hereof, except for the deviations, if any, described on a schedule to this certificate. (b) Neither the Borrower nor any Subsidiary has incurred any material liabilities, direct or contingent, since the date of the Financial Statements accompanying this certificate, except those allowed by the terms of the Agreement or consented to by the Agent in writing. (c) Since the date of the Financial Statements accompanying this certificate, no Material Adverse Effect has occurred. (d) There exists no Default or Event of Default under the Agreement. (f) The following computations reflect compliance with the following Sections of the Agreement: Section 9.10 Total Funded Debt to EBITDA Section 9.11 Capital Expenditures Section 9.12 Minimum EBITDA Section 9.13 Debt Service Coverage Ratio Exhibit B-1 EXECUTED AND DELIVERED this ____ day of ______________. CASTLE DENTAL CENTERS, INC. By: ------------------------------------ Name: Title: Exhibit B-2 EXHIBIT C LIST OF SECURITY INSTRUMENTS 1. Borrower: (a) Second Amended and Restated Security Agreement from Borrower (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 1(a); (c) Second Amended and Restated Security Agreement from Borrower (Stocks, Bonds and Other Securities); and (d) Financing Statements related to Document No. 1(c). 2. Castle Tennessee: (a) Second Amended and Restated Security Agreement from Castle Tennessee (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 2(a); (c) Amended and Restated Guaranty Agreement; and (d) Financing Statements in favor of Agent related to Management Services Agreement dated May 31, 1996 between Castle Tennessee and Castle Mid-South Dental Center, P.C. 3. Castle Florida: (a) Second Amended and Restated Security Agreement from Castle Florida (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 3(a); (c) Second Amended and Restated Security Agreement from Castle Florida (Stocks, Bonds and Other Securities); (d) Financing Statements related to Document No. 3(c); (e) Amended and Restated Guaranty Agreement; and (f) Financing Statements in favor of Agent related to Amended and Restated Management Services Agreement dated January 1, 2000 between Castle Florida and Castle 1st Dental Care, P.A. Exhibit C-1 4. CDC California: (a) Second Amended and Restated Security Agreement from CDC California (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 4(a); (c) Second Amended and Restated Security Agreement from CDC California (Stocks, Bonds and Other Securities); and (d) Financing Statements related to Document No. 4(c); and (e) Amended and Restated Guaranty Agreement. 5. Castle Texas: (a) Second Amended and Restated Security Agreement from Castle Texas (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 5(a); (c) Amended and Restated Guaranty Agreement; and (d) Financing Statements in favor of Agent related to Amended and Restated Management Services Agreement dated May 15, 2002 between Castle Texas (formerly Borrower under the original Management Services Agreement) and Castle Dental Associates of Texas, P.C. (f/k/a Jack H. Castle, D.D.S., P.C.). 6. Castle West: (a) Second Amended and Restated Security Agreement from Castle West (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 6(a); (c) Amended and Restated Guaranty Agreement; (d) Security Agreement between Schlang Dental Corporation, Elliot P. Schlang and Castle West arising under the Management Services Agreement dated February 27, 2001 between such persons; and (e) Financing Statements in favor of Agent related to Document No. 6(d). 7. Dentcor: Exhibit C-2 (a) Amended and Restated Security Agreement from Dentcor (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); and (b) Financing Statements related to Document No. 7(a); and (c) Guaranty Agreement. 8. Academy: (a) Amended and Restated Security Agreement from Academy (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 8(a); and (c) Guaranty Agreement. 9. Castle Texas Holdings: (a) Amended and Restated Security Agreement from Castle Texas Holdings (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments, General Intangibles, and Other Property); (b) Financing Statements related to Document No. 9(a); (c) Security Agreement from Castle Texas Holdings (Stocks, Bonds and Other Securities); and (d) Financing Statements related to Document No. 9(c); and (e) Guaranty Agreement. 10. Miscellaneous Security Instruments: (a) Subordination and Intercreditor Agreement between Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., James M. Usdan, Borrower, Castle West, Castle Florida, Castle Tennessee, Castle Texas, Dentcor, CDC California, Castle Texas Holdings, Academy and Agent. Exhibit C-3 EXHIBIT D FORM OF SUBORDINATION AND INTERCREDITOR AGREEMENT THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this "Agreement") is entered into as of July 19, 2002, by and among HELLER FINANCIAL, INC., a Delaware corporation ("Heller"), MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership ("Midwest"), JAMES M. USDAN, an individual ("Usdan"; Usdan, Heller and Midwest, are sometimes referred to individually as a "Junior Creditor" and collectively as the "Junior Creditors"), CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Company"), CASTLE DENTAL CENTERS OF CALIFORNIA, L.L.C., a Delaware limited liability company ("Castle West"), CASTLE DENTAL CENTERS OF FLORIDA, INC., a Florida corporation ("Castle Florida"), CASTLE DENTAL CENTERS OF TENNESSEE, INC., a Tennessee corporation ("Castle Tennessee"), CASTLE DENTAL CENTERS OF TEXAS, INC., a Texas corporation and successor by merger to Dental World, Inc., a Texas corporation, and Castle Dental Centers of Austin, Inc., a Texas corporation ("Castle Texas"), DENTCOR, INC., a Florida corporation ("Dentcor"), CDC OF CALIFORNIA, INC., a Delaware corporation ("CDC"), CASTLE TEXAS HOLDINGS, INC., a Delaware corporation ("Holdings"), and ACADEMY FOR DENTAL ASSISTANTS, INC., a Florida corporation ("Academy"), in favor of BANK OF AMERICA, N.A., a national banking association formerly known as NationsBank, N.A., as agent ("Agent") for all Lenders party to the Credit Agreement described below. R E C I T A L S A. The Company, Agent and Lenders have entered into the Credit Agreement, pursuant to which, among other things, Agent and the Lenders have agreed, subject to the terms and conditions set forth in the Credit Agreement, to restructure certain loans and other financial accommodations to the Company. B. The Company and the Junior Creditors have entered into the Note Purchase Agreement, pursuant to which, among other things, each Junior Creditor is extending credit to the Company as evidenced by the Junior Notes. C. As an inducement to and as one of the conditions precedent to the agreement of Lenders to consent to the transactions contemplated by the Note Purchase Agreement, Lenders have required the execution and delivery of this Agreement by the Junior Creditors, the Company and the Subsidiaries. NOW, THEREFORE, in order to induce Agent and Lenders to consent to the transactions contemplated by the Note Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used in this Agreement without definition shall have the meanings ascribed to such terms in the Credit Agreement. In addition, the following terms shall have the following meanings in this Agreement: Credit Agreement shall mean that certain Second Amended and Restated Credit Agreement of even date herewith by and among the Company, Agent and the financial institutions party thereto as Lenders, as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time as permitted hereunder. Enforcement Action means any action to enforce or attempt to enforce any right or remedy available to any of the Junior Creditors to collect the Junior Debt, including any action or proceeding (a) to accelerate the maturity of, or demand as immediately due and payable, all or any part of the Junior Debt, or (b) to commence, continue or participate in any judicial, arbitral or other proceeding, or any collection, foreclosure or enforcement action of any kind, against the Company or any Subsidiary or any of the Company's or any Subsidiary's assets seeking, directly or indirectly, to enforce any rights or remedies, or to enforce any of the obligations incurred by the Company or any Subsidiary, under or in connection with the Junior Debt. Junior Debt shall mean all of the obligations of the Company to the Junior Creditors evidenced by the Junior Notes and all other amounts now or hereafter owed by the Company to any Junior Creditor under any of the Junior Debt Documents. Junior Debt Documents shall mean the Junior Notes, the Note Purchase Agreement and any other loan document pertaining to Junior Debt; provided, however, the term "Junior Debt Documents" shall not include any "Warrants" (as such term is defined in the Note Purchase Agreement). Junior Notes shall mean, collectively: (i) that certain Convertible Promissory Note of even date herewith in the principal amount of $500,000.00 made by Company to the order of Heller, (ii) that certain Convertible Promissory Note of even date herewith in the principal amount of $500,000.00 made by Company to the order of Midwest and (iii) that certain Convertible Promissory Note of even date herewith in the principal amount of $700,000.00 made by Company to the order of Usdan, in each instance as the same may be amended, substituted, supplemented or otherwise modified from time to time as permitted hereunder. Loan Documents shall have the meaning specified in the Credit Agreement. Note Purchase Agreement shall mean that certain Senior Subordinated Note and Warrant Purchase Agreement of even date herewith by and among the Company and each of the Junior Creditors, as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time as permitted hereunder. Proceeding shall mean any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding D-2 up of a Person. Reorganization Subordinated Securities shall mean (a) any equity securities issued in substitution of all or any portion of the Junior Debt that are subordinated in right of payment to the Senior Debt (or any notes or other securities issued in substitution of all or any portion of the Senior Debt), and (b) any notes or other debt securities issued in substitution of all or any portion of the Junior Debt that are subordinated to the Senior Debt (or any notes or other securities issued in substitution of all or any portion of the Senior Debt) to the same extent that the Junior Debt is subordinated to the Senior Debt pursuant to the terms of this Agreement. Senior Creditor shall mean the Agent and any party to the Credit Agreement as a Lender. Senior Debt shall mean: (a) all principal, interest, fees, reimbursements, indemnifications and other amounts now or hereafter owed by the Company to Senior Creditors under the Credit Agreement and other Loan Documents and (b) any increases, extensions and rearrangements of the foregoing obligations under any amendments, supplements and other modifications of the documents and agreements creating the foregoing obligations to the extent permitted under Section 3 hereof; provided, however, that in no event shall the principal amount of the Senior Debt exceed the sum of the aggregate principal amount of Senior Debt outstanding on the date hereof plus $2,000,000, reduced by the amount of any repayments and prepayments thereof (it being understood that no amounts expended by any Senior Creditor to preserve the value of, or otherwise protect, the Collateral, shall be subject to, or included within, the foregoing limitations). Subsidiaries shall mean, collectively, Academy, Castle West, Castle Florida, Castle Tennessee, Castle Texas, Dentcor, CDC, Holdings and any other Person now or hereafter guaranteeing payment or performance of the Junior Debt. Each of the Subsidiaries may be referred to individually as a Subsidiary. 2. Subordination. 2.1 Subordination of Junior Debt to Senior Debt. The Company and each Subsidiary covenants and agrees, and each Junior Creditor by its acceptance of a Junior Note (whether upon original issue or upon transfer or assignment) likewise covenants and agrees, that unless and until the Senior Debt shall have been irrevocably paid in full, the payment and performance of the Junior Debt is hereby made expressly subordinate and junior in right of payment and performance to the prior payment and performance of all obligations and liabilities under the Senior Debt to the extent and in the manner set forth in this Section 2. Each holder of Senior Debt, whether now outstanding or hereafter created, incurred, assumed or guaranteed, and whether such holder holds any Senior Debt as of the date hereof or later becomes a holder by means of assignment or otherwise, shall be deemed to have acquired Senior Debt in reliance upon the provisions contained in this Agreement. D-3 2.2 Proceedings. In the event of any Proceeding involving the Company, (a) all Senior Debt first shall be paid in full before any payment of or with respect to the Junior Debt shall be made (other than a distribution of Reorganization Subordinated Securities); and (b) any payment or distribution, whether in cash, property or securities which, but for the terms hereof, otherwise would be payable or deliverable in respect of the Junior Debt (other than a distribution of Reorganization Subordinated Securities), shall be paid or delivered directly to Agent (to be held and/or applied by Agent in accordance with the terms of the Credit Agreement) until all Senior Debt is irrevocably paid in full, and each Junior Creditor irrevocably authorizes, empowers and directs all receivers, trustees, liquidators, custodians, conservators and others having authority in the premises to effect all such payments and distributions. In the event of any Proceeding involving any Subsidiary, (a) all payments or distributions in such Proceeding shall be applied to Senior Debt before any payment of or with respect to the Junior Debt shall be made (other than a distribution of Reorganization Subordinated Securities); and (b) any payment or distribution, whether in cash, property or securities which, but for the terms hereof, otherwise would be payable or deliverable in respect of the Junior Debt (other than a distribution of Reorganization Subordinated Securities) in such Proceeding, shall be paid or delivered directly to Agent (to be held and/or applied by Agent in accordance with the terms of the Credit Agreement) until all Senior Debt is irrevocably paid in full, and each Junior Creditor irrevocably authorizes, empowers and directs all receivers, trustees, liquidators, custodians, conservators and others having authority in the premises to effect all such payments and distributions. 2.3 Limitation on Payments. (a) Neither the Company nor any Subsidiary may make, and no Junior Creditor may receive, any payment or prepayment of any sum with respect to the Junior Debt (other than reimbursement of actual and reasonable out-of-pocket costs and expenses not to exceed, with respect to periods prior to the Closing Date, $50,000) until all of the Senior Debt shall have been irrevocably paid in full. (b) The provisions of this subsection 2.3 shall not apply to any payment with respect to which subsection 2.2 would be applicable. 2.4 Subordination of Liens and Guarantees. The Junior Creditors will not create, assume, or suffer to exist any lien, security interest, guaranty, or assignment of collateral securing or guaranteeing the repayment of the Junior Debt. Any judgment lien, and any other lien, security interest, guaranty or assignment existing in violation of the foregoing shall be fully subordinate to any lien, security interest, guaranty or assignment in favor of the Senior Creditors which secures any of the Senior Debt, and the Junior Creditors, the Company and the Subsidiaries shall immediately take any and all steps necessary to effect the release of any such lien, security interest, assignment or collateral or the termination of any such guaranty. 2.5 Restriction on Action by the Junior Creditors. D-4 (a) Until the Senior Debt is paid in full, no Junior Creditor shall, without the prior written consent of the Senior Lenders, take any Enforcement Action with respect to the Junior Debt, except as permitted in the following sentence. Upon the earlier to occur of: (i) acceleration of the Senior Debt; or (ii) commencement of a Proceeding with respect to the Company; the Junior Creditors may accelerate the Junior Debt or take any other Enforcement Action; provided, however, that if following the acceleration of the Senior Debt, such acceleration is rescinded, then all Enforcement Actions taken by the Junior Creditors shall likewise be rescinded if such Enforcement Action is based solely on such acceleration. (b) Until the Senior Debt is irrevocably paid in full and notwithstanding anything contained in the Junior Debt Documents, the Credit Agreement or any of the other Loan Documents to the contrary, no Junior Creditor shall, without the prior written consent of Agent (which consent may be withheld in the Agent's sole discretion), agree to any amendment, modification or supplement to the Junior Debt Documents, or make any increases, extensions, rearrangements, amendments, supplements, or other modifications to the Junior Debt, the effect of which is to (i) increase the maximum principal amount of the Junior Debt or rate of interest on any of the Junior Debt, (ii) accelerate or shorten the dates upon which payments of principal or interest on the Junior Debt are due, (iii) change in a manner adverse to Company or any Subsidiary, or add, any event of default or any covenant with respect to the Junior Debt, (iv) change any put, redemption or prepayment provisions of the Junior Debt, or (v) alter the subordination provisions with respect to the Junior Debt, including, without limitation, subordinating the Junior Debt to any other debt. (c) Notwithstanding anything herein to the contrary, (i) the Junior Creditors may file proofs of claim against the Company in any Proceeding involving the Company, (ii) the Junior Creditors may at any time and from time to time convert all or any portion of the Junior Notes into common stock of the Company in accordance with the terms thereof and (iii) the Junior Creditors may accrue interest at the default rate specified in the Note Purchase Agreement, or otherwise give notices or file suits, actions or proceedings, and the Company may agree to tolling agreements, to prevent the running of the relevant statute of limitations, but no Junior Creditor may receive any property or payment on account of any such suit, action or proceeding until the Senior Debt has been irrevocably paid in full. 2.6 Incorrect Payments. If any payment or distribution on account of the Junior Debt not permitted to be made by the Company or any Subsidiary or received by a Junior Creditor under this Agreement is received by such Junior Creditor before all outstanding Senior Debt has been irrevocably paid in full, such payment or distribution shall not be commingled with any asset of such Junior Creditor, shall be held in trust by such Junior Creditor for the D-5 benefit of Lenders and shall be immediately paid over to Agent, or its designated representative, in the form received (together with any necessary endorsements) for application (in accordance with the Credit Agreement) to the Senior Debt until all outstanding Senior Debt has been irrevocably paid in full. 2.7 Sale, Transfer, etc. No Junior Creditor shall sell, assign or otherwise transfer all or any portion of the Junior Debt or any Junior Debt Document unless prior to the consummation of any such action, the transferee thereof shall execute and deliver to Agent an agreement substantially identical to this Agreement, providing for the continued subordination and forbearance of the Junior Debt to the Senior Debt as provided herein and for the continued effectiveness of all of the rights of the Senior Creditors arising under this Agreement. Any failure to execute or deliver any such agreement shall make any attempted sale, assignment or other transfer of any portion of the Junior Debt or any Junior Debt Document void ab initio. The subordination effected hereby shall survive any sale, assignment, pledge, disposition or other transfer of all or any portion of the Junior Debt, and the terms of this Agreement shall be binding upon the successors and assigns of such Junior Creditor, as provided in Section 10 below. 2.8 Legends. The Junior Creditors shall cause all Junior Debt to be evidenced by a note, debenture, instrument, or other writing evidencing the Junior Debt and will inscribe a statement or legend thereon to the effect that such note, debenture, instrument, or other writing is subordinated to the Senior Debt in favor of the Senior Creditors in the manner and to the extent set forth in this Agreement. 3. Modifications to Senior Debt. This is an irrevocable agreement of subordination and the Senior Creditors may, without notice to any of the parties hereto and without impairing or releasing the obligations of the Company, any Subsidiary and the Junior Creditors hereunder, (a) create Senior Debt by extending credit under the Credit Agreement; (b) change the terms of or increase the amount of the Senior Debt by increasing, extending, rearranging, amending, supplementing, or otherwise modifying any of the Loan Documents or other instruments or agreements creating Senior Debt; (c) sell, exchange, release, or otherwise deal with any collateral securing any Senior Debt; (d) release anyone, including the Company, any Subsidiary or any guarantor, liable in any manner for the payment or collection of any Senior Debt; (e) exercise or refrain from exercising any rights against the Company or any Subsidiary or any other Person; and (f) apply any sums received by any of the Senior Creditors, from whatever source, to the payment of the Senior Debt; provided, however, that neither Agent nor any of the Lenders shall (a) increase the Senior Debt to an amount greater than the sum of the aggregate principal amount of Senior Debt outstanding on the date hereof plus $2,000,000, reduced by the amount of any repayments and prepayments thereof (it being understood that no amounts expended by any Senior Creditor to preserve the value of, or otherwise protect, the Collateral, shall be subject to, or included within, the foregoing limitations), (b) increase the interest rate with respect to the Senior Debt by more than three hundred (300) basis points from any interest rate specified in the Credit Agreement as in effect on the date hereof, or (c) extend the final maturity of the Senior Debt to a date later than June 30, 2007. 4. Continued Effectiveness of this Agreement. The terms of this Agreement, the subordination effected hereby, and the rights and the obligations of the Junior Creditors, the D-6 Company, the Subsidiaries, Agent and Lenders arising hereunder shall not be affected, modified or impaired in any manner or to any extent by: (a) any amendment or modification of or supplement to the Credit Agreement, any of the other Loan Documents or any of the Junior Debt Documents, in each instance, to the extent permitted herein; (b) the validity or enforceability of any of such documents; or (c) any exercise or non-exercise of any right, power or remedy under or in respect of the Senior Debt or the Junior Debt or any of the instruments or documents referred to in clause (a) above. The Junior Creditors and each other holder of Junior Debt hereby acknowledge that the provisions of this Agreement are intended to be enforceable at all times, whether before the commencement of, after the commencement of, in connection with or premised on the occurrence of a Proceeding. 5. Cumulative Rights, No Waivers. Each and every right, remedy and power granted to Agent or Lenders hereunder shall be cumulative and in addition to any other right, remedy or power specifically granted herein, in the Credit Agreement or the other Loan Documents or now or hereafter existing in equity, at law, by virtue of statute or otherwise, and may be exercised by Agent or Lenders, from time to time, concurrently or independently and as often and in such order as Agent or Lenders may deem expedient. Any failure or delay on the part of Agent or Lenders in exercising any such right, remedy or power, or abandonment or discontinuance of steps to enforce the same, shall not operate as a waiver thereof or affect the rights of Agent or Lenders thereafter to exercise the same, and any single or partial exercise of any such right, remedy or power shall not preclude any other or further exercise thereof or the exercise of any other right, remedy or power, and no such failure, delay, abandonment or single or partial exercise of the rights of Agent or Lenders hereunder shall be deemed to establish a custom or course of dealing or performance among the parties hereto. 6. Modification. Any amendment, modification or waiver of any provision of this Agreement shall not be effective in any event unless the same is in writing and signed by Agent, Company, the Subsidiaries and each Junior Creditor and then such amendment, modification or waiver shall be effective only in the specific instance and for the specific purpose given. 7. Additional Documents and Actions. The Company, each Subsidiary and the Junior Creditors at any time, and from time to time, after the execution and delivery of this Agreement, will execute and deliver such further documents as Agent reasonably may request that may be necessary in order to confirm the subordination effected herein. 8. Notices. Unless otherwise specifically provided herein, any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier service or certified or registered United States mail and shall be deemed to have been given (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a Business Day before 1:00 p.m. (Central time) or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, two (2) Business Days after delivery to such courier properly addressed; or (d) if by United States mail, four (4) Business Days after deposit in the United States mail, postage prepaid and properly addressed. Notices shall be addressed as follows: D-7 (a) If to Agent: Bank of America, N.A. 901 Main Street, 11th Floor Dallas, Texas 75202-3714 Attention: Mark Henze Telecopy: 214.209.3444 (b) If to Heller: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 500 West Monroe Street Chicago, Illinois 60661 Attention: Michael Sznajder Telecopy: 312.441.7598 With a copy to: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 2 Wisconsin Circle, 4th Floor Chevy Chase, Maryland 20815 Attention: Katherine R. Lofft, Esq. Telecopy: 301.664.9866 (c) If to Midwest: Midwest Mezzanine Fund II, L.P. 208 South LaSalle Street, 10th floor Chicago, Illinois 60604-1003 Attention: J. Allan Kayler Telecopy: 312.553.6647 and Foley & Lardner Three First National Plaza, Suite 4100 Chicago, Illinois 60602 Attention: Van E. Holkeboer, Esq. Telecopy: 312.558.3310 (d) If to Usdan: James M. Usdan D-8 c/o Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Attention: James Usdan Telecopy: 713.490.8420 and Porter & Hedges, LLP 700 Louisiana, 35th floor Houston, Texas 77002 Attention: Robert G. Reedy, Esq. Telecopy: 713.226.0274 (e) If to the Company or any Subsidiary: c/o Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Attention: James Usdan Telecopy: 713.490.8420 or in any case, to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 8. A notice not given as provided above shall, if it is in writing, be deemed given if and when actually received by the party to whom given. 9. Severability. In the event that any provision of this Agreement is deemed to be invalid, illegal or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court or governmental authority, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and the affected provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Agreement. 10. Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their successors and assigns. 11. Counterparts. This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall be one and the same instrument. 12. Defines Rights of Creditors. The provisions of this Agreement are solely for the purpose of defining the relative rights of the Junior Creditors, Agent and Lenders and shall not be deemed to create any rights or priorities in favor of any other Person, including, without limitation, the Company or the Subsidiaries. D-9 13. Subrogation. Subject to the irrevocable payment in full of all Senior Debt, in the event and to the extent cash, property or securities otherwise payable or deliverable to the holders of the Junior Debt shall have been applied pursuant to this Agreement to the payment of Senior Debt, then and in each such event, the holders of the Junior Debt shall be subrogated to the rights of each holder of Senior Debt to receive any further payment or distribution in respect of or applicable to the Senior Debt; and, for the purposes of such subrogation, no payment or distribution to the holders of Senior Debt of any cash, property or securities to which any holder of Junior Debt would be entitled except for the provisions of this Agreement shall, and no payment over pursuant to the provisions of this Agreement to the holders of Senior Debt by the holders of the Junior Debt shall, as between Company and the Subsidiaries, their creditors other than the holders of the Senior Debt and the holders of Junior Debt, be deemed to be a payment by the Company or the Subsidiaries to or on account of Senior Debt. 14. Headings. The paragraph headings used in this Agreement are for convenience only and shall not affect the interpretation of any of the provisions hereof. 15. Termination. Except for Sections 17, 18 and 19 hereof, this Agreement shall terminate upon the irrevocable payment in full of all of the Senior Debt. 16. Applicable Law. This Agreement shall be governed by and shall be construed and enforced in accordance with the internal laws of the State of Texas, without regard to conflicts of law principles. 17. WAIVER OF JURY TRIAL. THE JUNIOR CREDITORS, THE COMPANY, THE SUBSIDARIES AND AGENT EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE JUNIOR DEBT DOCUMENTS. THE JUNIOR CREDITORS, THE COMPANY, THE SUBSIDIARIES AND AGENT ACKNOWLEDGE THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF THE JUNIOR CREDITORS, THE COMPANY, THE SUBSIDIARIES AND AGENT WARRANTS AND REPRESENTS THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. 18. Enforcement. The Senior Creditors are hereby authorized to setoff and apply any obligations owed by the Senior Creditors to the Company or a Subsidiary against any obligations of the Company or a Subsidiary under this Agreement. The provisions of this paragraph shall survive termination of this Agreement. 19. Reinstatement. The obligations of Junior Creditors under this Agreement shall continue to be effective, or be reinstated after irrevocable payment in full of the Senior Debt, as the case may be, if at any time any payment (an "Invalidated Senior Payment") in respect of D-10 the Senior Debt is rescinded or otherwise restored or returned by a Senior Creditor to the Company or any Subsidiary by reason of any Proceedings, all as though such Invalidated Senior Payment had not been made. To the extent the Junior Creditors have received any payments with respect to the Junior Debt on or subsequent to the date of the receipt by the Senior Creditors of such Invalidated Senior Payment and such payments received by the Junior Creditors have not been rescinded or otherwise restored or returned by the Senior Creditors to the Company or any Subsidiary or paid over to the Senior Creditors, the Junior Creditors hereby agree to pay over to the Senior Creditors the amount of such payments so received by the Junior Creditors on or subsequent to such date to the extent necessary to restore to the Senior Creditors the amount of the Invalidated Senior Payment. 20. Termination of Prior Subordination Agreement. The parties hereto acknowledge and agree that, upon the execution, delivery and effectiveness of this Agreement, that certain Subordination and Intercreditor Agreement dated as of January 31, 2000 by and among the Company, Agent, Heller, Midwest and the Persons party thereto as "Guarantors" is terminated and shall be of no further force or effect. THIS WRITTEN AGREEMENT AND THE RELATED LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. - Remainder of Page Intentionally Left Blank - [Signature Page Follows] IN WITNESS WHEREOF, each Junior Creditor, the Company and the Subsidiaries have caused this Agreement to be executed in favor of the Agent for all the Lenders as of the date first above written.
COMPANY: AGENT: - ------- ----- CASTLE DENTAL CENTERS, INC., BANK OF AMERICA, N.A., a Delaware corporation a national banking association By: _______________________________ By: _______________________________ Name: _______________________________ Name: _______________________________ Title: _______________________________ Title: _______________________________ SUBSIDIARIES: JUNIOR CREDITORS: Academy for Dental Assistants, Inc., MIDWEST MEZZANINE FUND II, L.P., a Florida corporation; a Delaware limited partnership Castle Dental Centers Of California, L.L.C., a Delaware limited liability By: ABN AMRO Mezzanine Management II, company; L.P., its general partner Castle Texas Holdings, Inc., a Delaware corporation; By: ABN AMRO Mezzanine Management II, Castle Dental Centers Of Texas, Inc., Inc., its general partner a Texas corporation and successor by merger to Dental World, Inc., a Texas By: _______________________________ corporation, and Castle Dental centers Name: J. Allan Kayler of Austin, Inc., a Texas corporation; Title: Senior Vice President CDC Of California, Inc., corporation; and a Delaware corporation; Castle Dental Centers Of Florida, Inc., HELLER FINANCIAL, INC., a Florida corporation; a Delaware corporation Castle Dental Centers Of Tennessee, Inc., a Tennessee corporation; and Dentcor, Inc., By: _______________________________ a Florida corporation Name: _______________________________ Title: _______________________________ By: ____________________________________ Name: __________________________________ Title: _________________________________ JAMES M. USDAN, an individual By: _______________________________ Name: James M. Usdan
D-11 EX-10.2 6 dex102.txt FORM OF WARRANT AGREEMENT Exhibit 10.2 FORM OF WARRANT NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAS BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, NOR THE SECURITIES LAWS OF ANY STATE. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE ISSUER OF THIS WARRANT OF AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER, OR (3) THE SUBMISSION TO THE ISSUER OF THIS WARRANT OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE, HYPOTHECATION OR TRANSFER WILL NOT BE IN VIOLATION OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR OTHER APPLICABLE SECURITIES LAWS OF ANY STATE, OR ANY RULES OR REGULATIONS PROMULGATED THEREUNDER. CASTLE DENTAL CENTERS, INC. WARRANT TO PURCHASE SERIES A-2 PREFERRED STOCK Warrant No.: Number of Shares: ____ Date of Issuance: July 19, 2002 Castle Dental Centers, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, ____________________, the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. New York Time on the Expiration Date (as defined herein), ________________ (_______) fully paid and nonassessable shares of the Company's Series A-2 Convertible Preferred Stock (the "Preferred Stock"), $.001 par value per share (the "Warrant Shares"), at the purchase price per share equal to the Warrant Exercise Price (as defined herein). Section 1. Definitions. The following words and terms as used in this Warrant shall have the following meanings: (a) "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual or any trust whose principal beneficiary is such individual or one (1) or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. (b) "Business Day" means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed. (c) "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of corporate stock, and (ii) with respect to any other Person, any and all partnership, limited partnership, limited liability company or other equity interest of such Person, whether outstanding on the date of the Warrant or issued after the date of the Warrant, and any and all rights (other than any evidence of indebtedness) or warrants exercisable or exchangeable for or convertible into such capital stock. (d) "Closing Bid Price" means, for any security as of any date, the last closing bid price for such security on the Principal Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price, then the last bid price of such security at 4:00 p.m. New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg, or, if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value (the "Fair Market Value") as mutually determined by the Company and a Majority Interest. If the Company and a Majority Interest are unable to agree upon the Fair Market Value, then such dispute shall be resolved pursuant to Section 2(a) below. All such determinations to be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. (e) "Common Stock" means the common stock, $.001 par value per share, of the Company. (f) "Convertible Securities" means any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock. (g) "Expiration Date" means July 18, 2012 or, if such date does not fall on a Business Day or on a day on which trading takes place on the Principal Market, then the next Business Day. (h) "Majority Interest" means the Persons holding at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding Preferred Warrants. (i) "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. (j) "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (k) "Preferred Warrants" means all warrants, including this Warrant, issued to the lenders as a condition to closing of that certain Second Amended and Restated Credit Agreement dated as of July 19, 2002, among the Company and the Persons referred to therein. (l) "Principal Market" means the principal securities exchange or trading market for the Preferred Stock. (m) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (n) "Securities Act" means the Securities Act of 1933, as amended. (o) "Warrant" means this Warrant and all warrants issued upon the partial exercise, assignment, transfer, sale, exchange or replacement thereof. (p) "Warrant Exercise Price" shall be equal to $.001, subject to adjustment as hereinafter provided. Section 2. Exercise of Warrant. (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, in whole or in part, at any time on any Business Day on or after the opening of business on the date hereof and prior to 11:59 P.M. New York Time on the Expiration Date by (i) delivery of a written notice, in the form of the subscription form attached as Exhibit A hereto (the "Exercise Notice"), of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) (A) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the "Aggregate Exercise Price") or (B) by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section 2(e), and (iii) if this Warrant is being exercised with respect to all of the Warrant Shares for which it can then be exercised, the surrender to a common carrier for overnight delivery to the Company as soon as practicable following such date, this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction). In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), the Company shall on the third (3rd) Business Day (the "Warrant Share Delivery Date") following the date of its receipt of the Exercise Notice, the Aggregate Exercise Price (or notice of Cashless Exercise) and this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) (the "Exercise Delivery Documents") (A) provided that the transfer agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and provided that the holder is eligible to receive shares through DTC, upon the request of the holder of this Warrant, credit the number of shares of Preferred Stock to which the holder is entitled to the holder's balance account with DTC through its Deposit Withdrawal Agent Commission system or (B) issue and deliver to the address specified in the Exercise Notice, a certificate, registered in the name of the holder, for the number of shares of Preferred Stock to which the holder is entitled. Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in clause (ii)(A) above or notification to the Company of a Cashless Exercise referred to in Section 2(e), the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of this Warrant as required by clause (iii) above or the certificates evidencing such Warrant Shares. In the case of a dispute as to the determination of the arithmetic calculation of the Warrant Exercise Price and the arithmetic calculation of the number of Warrant Shares, the Company shall instruct the Transfer Agent to issue to the holder the number of shares of Preferred Stock that is not disputed and shall transmit an explanation of the disputed arithmetic calculations to the holder via facsimile within two (2) Business Days of receipt of such holder's Exercise Notice or other date of determination. If such holder and the Company are unable to agree upon the determination of the arithmetic calculation of the Warrant Exercise Price and the arithmetic calculation of the number of Warrant Shares within two (2) Business Day of such disputed arithmetic calculation being transmitted to the holder, then the Company shall within one (1) Business Day submit via facsimile the disputed arithmetic calculations to the Company's independent, outside accountant. Furthermore, in the event a Majority Interest, on the one hand, and the Company, on the other hand, are unable to agree on the Fair Market Value in accordance with the definition of Closing Bid Price, then the Company shall submit as soon as reasonably practicable after it becomes apparent that the parties do not agree as to the Fair Market Value, the disputed determination of the Fair Market Value to an independent, reputable investment bank selected by the Company and approved by a Majority Interest. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holders of the Preferred Warrants of the results no later than two Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties. Within one (1) Business Day of the accountant's determination of the calculation of arithmetic calculation of the Warrant Exercise Price and the arithmetic calculation of the number of Warrant Shares, the Company shall deliver to the holder the balance of Preferred Stock that such holder is entitled to as provided herein (such date also deemed to be a Warrant Share Delivery Date) and any failure to do so will subject the Company to the provisions of this Section 2(a). (b) Notwithstanding anything to the contrary set forth herein, upon exercise of any portion of this Warrant in accordance with the terms hereof, the holder of this Warrant shall not be required to physically surrender this Warrant to the Company unless the full amount of Warrant Shares then represented by the Warrant have been exercised. The Company shall maintain records showing the Warrant Shares so exercised and the dates of such exercise or shall use such other method, reasonably satisfactory to the holder, so as to account for the number of Warrant Shares that are represented by the Warrant where the exercise of the Warrant has occurred without the physical surrender of this Warrant. Notwithstanding the foregoing, if any portion of this Warrant is converted as aforesaid, thereafter, the holder may not transfer this Warrant unless the holder first physically surrenders this Warrant to the Company, whereupon the Company will forthwith issue and deliver to the holder a new Warrant of like tenor, registered as the holder may request, representing in the aggregate the remaining Warrant Shares represented by this Warrant. The holder and any assignee, by acceptance of this Warrant or such new Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following exercise of any portion of this Warrant, the number of Warrant Shares represented by this Warrant may be less than the number of Warrant Shares set forth on the face hereof. If a Warrant is delivered to the Company by a holder and the number of Warrant Shares represented by the Warrant submitted for exercise is greater than the number of Warrant Shares that have been exercised, then the Company shall, as soon as practicable and in no event later than three (3) Business Days after receipt of the Warrant (the "Warrant Delivery Date") and at its own expense, issue and deliver to the holder a new Warrant representing the number of Warrant Shares not converted. (c) No fractional shares of Preferred Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Preferred Stock issued upon exercise of this Warrant shall be rounded up to the nearest whole number. (d) If the Company shall fail for any reason or for no reason to issue and deliver to the holder within three (3) Business Days of receipt of the Exercise Delivery Documents a certificate for the number of shares of Preferred Stock to which the holder is entitled or to credit, at the holder's request, the holder's balance account with DTC for such number of shares of Preferred Stock to which the holder is entitled upon the holder's exercise of this Warrant or to issue a new Warrant for the number of shares of Preferred Stock to which such holder is entitled pursuant to Section 2(b) hereof, then the Company shall, in addition to any other remedies under this Warrant or otherwise available to such holder, pay as additional damages in cash to such holder on each day after the Warrant Share Delivery Date that such exercise is not timely effected and/or each day after the Warrant Delivery Date that such Warrant is not delivered, as the case may be, in an amount equal to 0.5% of the sum of (i) the product of (A) the number of shares of Preferred Stock not issued to the holder on or prior to the Warrant Share Delivery Date and (B) the Closing Bid Price of the Preferred Stock on the Warrant Share Delivery Date, in the case of the failure to deliver Preferred Stock, and (ii) if the Company has failed to deliver a Warrant to the holder on or prior to the Warrant Delivery Date, the product of (x) the number of shares of Preferred Stock issuable upon exercise of the Warrant (without regard to any limitations on conversions herein or elsewhere, including, but not limited to, any limitations as a result of the actual number of shares of Preferred Stock authorized for issuance by the Company) as of the Warrant Delivery Date, and (y) the Closing Bid Price of the Preferred Stock on the Warrant Delivery Date, in the case of the failure to deliver a Warrant. If for any reason the holder has not received all of the shares of Preferred Stock to which it is entitled to prior to the tenth (10th) Business Day after the expiration of the Warrant Share Delivery Date, then the holder, upon written notice to the Company, may void its Exercise Notice with respect to, and retain or have returned or restored as of the date of the Exercise Notice, as the case may be, any Warrant Shares pursuant to such holder's Exercise Notice; provided that the voiding of a holder's Exercise Notice shall not effect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 2(d). (e) Notwithstanding anything contained herein to the contrary, the holder of this Warrant may, at its election exercised in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the "Net Number" of shares of Preferred Stock determined according to the following formula (a "Cashless Exercise"): Net Number = (A X B) - (A X C) / B For purposes of the foregoing formula: A= the total number of shares with respect to which this Warrant is then being exercised. B= the Closing Bid Price of the Preferred Stock on the trading day immediately preceding the date of the Exercise Notice. C= the Warrant Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise. Section 3. Covenants as to Preferred Stock. The Company hereby covenants and agrees as follows: (a) This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued, not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (b) All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable, and not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (c) During the period within which the rights represented by this Warrant may be exercised, (i) the Company will at all times have authorized and reserved at least (A) 100% of the number of shares of Preferred Stock needed to provide for the exercise of the rights then represented by this Warrant and (B) 100% of the number of shares of Common Stock needed to provide for the conversion of such shares of Preferred Stock (and if there is ever an insufficient amount of shares of Preferred Stock or Common Stock to provide for the exercise of the rights represented by this Warrant, such event shall be an "Authorized Share Failure"), the Company shall immediately take all action necessary to increase the Company's authorized shares of Preferred Stock or Common Stock to an amount sufficient to accomplish the holder's right of exercise hereunder) and, (ii) the Company will at all times ensure that the Warrant Exercise Price of this Warrant is less than the aggregate par value of the greater of (x) the par value of the Preferred Stock issuable upon exercise of this Warrant and (y) the par value of the number of shares of Common Stock issuable upon conversion of the Preferred Stock issuable upon exercise of this Warrant (and if there is ever a time when such Warrant Exercise Price is less that such amount, such event shall be a "Par Value Failure"). Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than 75 days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the authorization of either an increase in the number of authorized shares of Preferred Stock or Common Stock, as applicable, or a reverse stock split with respect to such shares. In addition, without limiting the generality of the foregoing, as soon as practicable after the date of the occurrence of a Par Value Failure, but in no event later than 75 days after the occurrence of such Par Value Failure, the Company shall hold a meeting of its stockholders for the authorization of a reduction in the par value of the Common Stock or Preferred Stock, as appropriate. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders' approval of such increase in authorized shares of Preferred Stock or Common Stock, reverse stock split or reduction in par value, as applicable, and to cause its board of directors to recommend to the stockholders that they approve such proposal. (d) The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Preferred Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect (except as otherwise provided in Section 3(c) above, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Preferred Stock upon the exercise of this Warrant. Section 4. Taxes. The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant. Section 5. Warrant Holder Not Deemed a Stockholder; Notice of Corporate Action. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he, she, or it is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders. Furthermore, so long as this Warrant has not been exercised in full: (A) Immediately upon any adjustment of the Exercise Price or the number of shares of Preferred Stock issuable upon exercise of this Warrant, the Company will give written notice thereof to the holder of such adjustment and a certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who shall be appointed at the Company's expense and who may be the independent public accountants regularly employed by the Company) setting forth the number of shares of Preferred Stock and the Exercise Price of such shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. (B) The Company will give written notice to the holder at least twenty (20) Business Days prior to the date on which the Company closes its books or takes a record (I) with respect to any dividend or distribution upon the Preferred Stock or the Common Stock, (II) with respect to any pro rata subscription offer to holders of Preferred Stock or the Common Stock or (III) for determining rights to vote with respect to any Organic Change (as defined in Section 9(b)), dissolution or liquidation, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder. (C) The Company will also give written notice to holder at least twenty (20) Business Days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder. Section 6. Representations of Holder. The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an "accredited investor" as such term is defined in Rule 501(a)(3) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an "Accredited Investor"). Section 7. Ownership and Transfer. (a) Warrant Register. The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. (b) Transferability and Negotiability of Warrant. Title to this Warrant may be transferred by endorsement (by the holder hereof executing the Assignment Form attached hereto as Exhibit B) and delivery in the same manner as negotiable instruments transferable by endorsement and delivery. (c) Exchange of Warrant Upon a Transfer. This Warrant shall be transferable by the holder hereof to (i) any Person subject only to the restrictions set forth in the legend on the first page of this Warrant or (ii) any of its Affiliates. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions hereof with respect to compliance with the Securities Act, the Company at its expense shall issue to or on the order of such holder a new warrant or warrants of like tenor, in the name of such holder or as such holders (on payment by the holder of any applicable transfer taxes) may direct, exercisable for the number of shares of Preferred Stock issuable upon the exercise hereof. Section 8. Adjustment of Warrant Exercise Price and Number of Shares. The Warrant Exercise Price and the number of shares of Preferred Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows: (a) Adjustment of Warrant Exercise Price upon Subdivision or Combination of Preferred Stock. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Preferred Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Preferred Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) its outstanding shares of Preferred Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Preferred Stock obtainable upon exercise of this Warrant will be proportionately decreased. The increases and reductions provided for in this Section 8(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrant nor the price payable for such percentage upon such exercise will be affected by any event described in this Section 8(a). Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Conversion of Preferred Stock. Should all of the Preferred Stock be, or if outstanding would be, at any time prior to the expiration of this Warrant or any portion thereof, converted into shares of Common Stock in accordance with the conversion terms of such Preferred Stock, then this Warrant shall become immediately exercisable for that number of shares of Common Stock equal to the number of shares of the Common Stock that would have been received if this Warrant had been exercised in full and the Preferred Stock received thereupon had been simultaneously converted immediately prior to such event, and the Warrant Exercise Price shall immediately be adjusted to equal the quotient obtained by dividing (x) the aggregate Warrant Exercise Price of the maximum number of shares of Preferred Stock for which this Warrant was exercisable immediately prior to such conversion, by (y) the number of shares of Common Stock for which this Warrant is exercisable immediately after such conversion. (c) Distribution of Securities. If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of any or all of the Company's Securities, such number of securities will be distributed to the holder of this Warrant or its assignee upon exercise of its rights hereunder as such Warrant holder or assignee would have been entitled to if this Warrant had been exercised prior to such distribution, giving effect to all adjustments called for by this Section 8. The provisions with respect to adjustment of the Preferred Stock provided in this Section 8 will also apply to the Securities of the Company and securities of any subsidiary to which the Warrant holder or its assignee is entitled under this Section 8 (c). (d) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions, then the Company's Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Preferred Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Preferred Warrants. Section 9. Purchase Rights; Reorganization, Reclassification, Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Preferred Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Preferred Stock are to be determined for the grant, issue or sale of such Purchase Rights. (b) Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person, conveyance to another Person of the property of the Company as an entirety or substantially as an entirety or other transaction which is effected in such a way that holders of Preferred Stock are entitled to receive (either directly or upon subsequent liquidation) Capital Stock, securities or assets with respect to or in exchange for Preferred Stock is referred to herein as an "Organic Change." Prior to the consummation of, and as a condition to, any (i) sale or other conveyance of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change, the Company, or such other successor or purchasing Person, as the case may be, shall make lawful and adequate provision whereby the holder of this Warrant shall have the right thereafter to receive on exercise of such Warrant the kind and amount of securities and property receivable upon such Organic Change by a holder of the number of securities issuable upon exercise of such Warrant immediately prior to such Organic Change. The above provisions of this Section 9(b) shall similarly apply to successive Organic Changes. Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt of an indemnification undertaking (or in the case of a mutilated Warrant, the Warrant), issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed. Section 11. Notices. Service of all notices under this Warrant shall be sufficient and considered given if in writing and delivered personally or sent by certified United States mail, return receipt requested, with postage paid thereon, to the following address: To holder: ____________________________ ____________________________ ____________________________ Attn: ______________________ To Company: Castle Dental Centers, Inc. ____________________________ ____________________________ Attn: ______________________ Notice delivered by certified United States mail is considered given on the date shown on the return receipt. Either party may, by notice given at any time or from time to time, require subsequent notices to be given to another individual person, whether a partner, an officer, or a representative, or to a different address, or both. Notices given before actual receipt of notice of such change shall not be invalidated by the change. Section 12. Registration Rights. If the holder hereof is a party to, or an assignee of rights under, that certain Registration Rights Agreement, dated as of July 19, 2002, by and among the Company and the Persons who are signatories thereto, such holder shall be entitled to include with such holder's registrable securities any shares of Preferred Stock or other securities received upon exercise of this Warrant, all on the terms and conditions as set forth in the Registration Rights Agreement. Section 13. Amendments. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the Company and a Majority Interest; provided, however, that no amendment, modification or waiver can be effected if, by its terms, such amendment, modification or waiver adversely affects one holder without having the same adverse effect on all other holders without the prior written consent of the adversely affected holder. Section 14. Date. The date of this Warrant is July 19, 2002 (the "Warrant Date"). This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. Section 15. Descriptive Headings; Governing Law. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by Joseph P. Keane, its Chief Financial Officer, as of the 19th day of July, 2002. CASTLE DENTAL CENTERS, INC. By: ---------------------------------------- Joseph P. Keane, Chief Financial Officer EXHIBIT A TO WARRANT SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT CASTLE DENTAL CENTERS, INC. The undersigned holder hereby exercises the right to purchase _________________ of the shares of Preferred Stock ("Warrant Shares") of Castle Dental Centers, Inc., a Delaware corporation (the "Company"), evidenced by the attached Warrant (the "Warrant"). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant. 1. Form of Warrant Exercise Price. The Holder intends that payment of the Warrant Exercise Price shall be made as: __________ "Cash Exercise" with respect to _________________ Warrant Shares; and/or __________ "Cashless Exercise" with respect to _________________ Warrant Shares (to the extent permitted by the terms of the Warrant). 2. Payment of Warrant Exercise Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance with the terms of the Warrant. 3. Delivery of Warrant Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant. Date: _______________ __, ______ Name of Registered Holder By: --------------------------------- Name: --------------------------------- Title: --------------------------------- ACKNOWLEDGMENT The Company hereby acknowledges this Subscription Form and hereby directs [TRANSFER AGENT] to issue the above indicated number of shares of Preferred Stock in accordance with the Transfer Agent Instructions dated ________________, 20__ from the Company and acknowledged and agreed to by [TRANSFER AGENT]. Castle Dental Centers, Inc. By: --------------------------------- Name: --------------------------------- Title: --------------------------------- EXHIBIT B TO WARRANT ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Preferred Stock set forth below: Name and Address of Assignee No. of Shares of Preferred Stock and does hereby irrevocably constitute and appoint _______________________ attorney-in-fact to register such transfer onto the books of Castle Dental Centers, Inc. maintained for the purpose, with full power of substitution in the premises. Date: Print Name: ------------------------------ Signature: ------------------------------- Witness: --------------------------------- EX-10.3 7 dex103.txt SENIOR SUBORDINATED NOTE Exhibit 10.3 ================================================================================ SENIOR SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT DATED AS OF JULY 19, 2002 AMONG CASTLE DENTAL CENTERS, INC., HELLER FINANCIAL, INC., MIDWEST MEZZANINE FUND II, L.P. AND JAMES M. USDAN ================================================================================ EXHIBITS AND SCHEDULES Exhibit A Form of Notes Exhibit B Form of Warrants Exhibit C Form of Compliance Certificate Schedule 7.02 Liabilities Schedule 7.03 Litigation Schedule 7.14 Subsidiaries Schedule 7.19 Insurance Schedule 7.21 Material Agreements Schedule 7.22 Hedging Agreements Schedule 7.23 Capitalization Schedule 8.01(e) Reporting Regions Schedule 9.01 Debt Schedule 9.02 Liens Schedule 9.03 Investments, Loans and Advances i THIS SENIOR SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT, dated as of July 19, 2002, is by and among CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Company"), HELLER FINANCIAL, INC., a Delaware corporation ("Heller"), MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership ("Midwest") and JAMES M. USDAN, an individual ("Usdan"; Heller, Midwest and Usdan are sometimes referred to individually as a "Holder" and collectively, as the "Holders"). R E C I T A L S WHEREAS, the Company desires to sell to Holders and Holders desire to purchase from the Company (i) certain senior subordinated convertible promissory notes in the aggregate principal amount of $1,700,000, which initially may be converted into 3,105,618 shares of Common Stock of the Company and (ii) warrants to acquire 17,974,062 shares of Common Stock of the Company, upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING MATTERS Section 1.01 Terms Defined Above. As used in this Agreement, the terms "Company", "Heller", "Midwest", "Usdan" and "Holder" shall have the meanings indicated above. Section 1.02 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Article I or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one (1) or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, 1 "controlled by" and "under common control with") such corporation or other Person. "Agreement" shall mean this Agreement, as the same may from time to time be amended, restated, supplemented or otherwise modified from time to time. "Annual Meeting" shall have the meaning assigned to such term in Section 8.08. "Authorized Share Amendment" shall have the meaning assigned to such term in Section 7.06. "Business Day" shall mean any day other than a day on which commercial banks are authorized or required to close in Chicago, Illinois. "California LLC" shall mean Castle Dental Centers of California, L.L.C., a Delaware limited liability company. "Capital Expenditures" shall mean, for any period and with respect to any Person, the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of capital leases that is capitalized on the balance sheet of such Person including in connection with a sale-leaseback transaction) by such Person and its Subsidiaries for the acquisition or leasing of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which are required to be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "Castle PC" shall mean Castle Dental Associates of Texas, P.C., a Texas professional corporation formerly known as Jack H. Castle D.D.S., P.C. "Castle Texas" shall mean Castle Dental Centers of Texas, Inc., a Texas corporation. "CDC California" shall mean CDC of California, Inc., a Delaware corporation. "Change of Control" shall mean at any time, Heller and Midwest, together, cease to have the right to appoint to the Board of Directors of the Company a majority of the members of the Board of Directors of the Company. "Closing Date" shall mean July 19, 2002. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and any successor statute. "Common Stock" shall mean the common stock, $.001 par value, of the Company. 2 "Consolidated Net Income" shall mean with respect to the Company and its Consolidated Subsidiaries, for any period, the aggregate of the net income (or loss) of the Company and its Consolidated Subsidiaries after allowances for taxes for such period, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein) the following: (i) the net income of any Person in which the Company or any Consolidated Subsidiary has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of the Company and its Consolidated Subsidiaries in accordance with GAAP), except to the extent of the amount of dividends or distributions actually paid in such period by such other Person to the Company or to a Consolidated Subsidiary, as the case may be; (ii) the net income (but not loss) of any Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions or transfers or loans by that Consolidated Subsidiary is not at the time permitted by operation of the terms of its charter or any agreement, instrument or Governmental Requirement applicable to such Consolidated Subsidiary, or is otherwise restricted or prohibited in each case determined in accordance with GAAP; (iii) the net income (or loss) of any Person acquired in a pooling-of-interests transaction for any period prior to the date of such transaction; (iv) any nonrecurring gains or losses acceptable to Holders and any extraordinary gains or losses, including gains or losses attributable to Property sales not in the ordinary course of business; and (v) the cumulative effect of a change in accounting principles and any gains or losses attributable to writeups or write downs of assets. "Consolidated Subsidiaries" shall mean each Subsidiary of the Company (whether now existing or hereafter created or acquired), the financial statements of which shall be (or should have been) consolidated with the financial statements of the Company in accordance with GAAP. "Corpus Transactions" shall mean, collectively: (i) the execution and delivery of that certain Severance Agreement dated as of June 12, 2002 by and among the Company, Jack Castle, Goforth, Inc., a Texas corporation, and Castle 1995 Gift Trust f/b/o Jack H. Castle, Jr., (ii) the execution and delivery of that certain Settlement Agreement dated as of June 12, 2002 by and among the Company, Jack H. Castle, D.D.S. and the Estate of Jack H. Castle, D.D.S., Castle Texas, Castle PC, Castle Interests Ltd. and Loretta M. Castle, an individual, and (iii) the sale by the Company of two (2) locations in Corpus Christi, Texas and one (1) location in Beaumont, Texas pursuant to that certain Asset Purchase Agreement dated as of June 12, 2002 by and among Dentists Choice 1 L.P., a Texas limited partnership, Jack Castle, Texas Dental Associates, P.A., a Texas professional association, Castle Texas and Castle PC. "Debt" shall mean, for any Person the sum of the following (without duplication): (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or other similar instruments (including principal, interest, fees and charges); (ii) all obligations of such Person (whether contingent or otherwise) in respect of bankers' acceptances, letters of credit, surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the deferred purchase price of Property or services (other than for borrowed money); (iv) all 3 obligations under leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable (whether contingent or otherwise); (v) all obligations under leases which require such Person or its Affiliate to make payments over the term of such lease, including payments at termination, which are substantially equal to at least eighty percent (80%) of the purchase price of the Property subject to such lease plus interest as an imputed rate of interest; (vi) all Debt (as described in the other clauses of this definition) and other obligations of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person; (vii) all Debt (as described in the other clauses of this definition) and other obligations of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the debtor or obligations of others; (viii) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others or to purchase the Debt or Property of others; (ix) obligations to deliver goods or services in consideration of advance payments; and (x) all obligations of such Person under Hedging Agreements. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would become an Event of Default. "Dollars" and "$" shall mean lawful money of the United States of America. "EBITDA" shall mean, for any period, the sum of Consolidated Net Income for such period plus each of the following expenses or charges to the extent deducted from Consolidated Net Income in such period: interest, taxes, depreciation, depletion and amortization. "Environmental Laws" shall mean any and all Governmental Requirements pertaining to health or the environment in effect in any and all jurisdictions in which the Company or any Subsidiary is conducting or at any time has conducted business, or where any Property of the Company or any Subsidiary is located, including without limitation, the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection laws. The term "oil" shall have the meaning specified in OPA, the terms "hazardous substance" and "release" (or "threatened release") have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and (ii) to the extent the laws of the state in which any Property of the Company or any Subsidiary is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either 4 OPA, CERCLA or RCRA, such broader meaning shall apply. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Company or any Subsidiary would be deemed to be a "single employer" within the meaning of section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code. "ERISA Event" shall mean (i) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal of the Company, any Subsidiary or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv) the institution of proceedings to terminate a Plan by the PBGC or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Event of Default" shall have the meaning assigned such term in Section 10.01. "Excepted Liens" shall mean: (i) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained; (ii) Liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction or other like Liens arising by operation of law in the ordinary course of business or statutory landlord's liens, each of which is in respect of obligations that have not been outstanding more than ninety (90) days or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been maintained in accordance with GAAP; (iv) any Liens reserved in leases for rent and for compliance with the terms of leases in the case of leasehold estates, to the extent that any such Lien referred to in this clause does not materially impair the use of the Property covered by such Lien for the purposes for which such Property is held by the Company or any Subsidiary or materially impair the value of such Property subject thereto; (v) encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of Property or services), easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any rights of way or other Property of the Company or any Subsidiary for the purpose of roads, pipelines, transmission lines, transportation lines, distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment, and defects, irregularities, zoning restrictions and deficiencies in title of any rights of 5 way or other Property which in the aggregate do not materially impair the use of such rights of way or other Property for the purposes of which such rights of way and other Property are held by the Company or any Subsidiary or materially impair the value of such Property subject thereto; (vi) deposits of cash or securities to secure the performance of bids, trade contracts, leases, statutory obligations and other obligations of a like nature incurred in the ordinary course of business; and (vii) Liens permitted by the Senior Credit Documents. "Existing Seller Notes" shall mean, collectively, each of those certain subordinated promissory notes issued by the Company prior to the Closing Date to Lester B. Greenberg, D.D.S.; John G. Goodman, D.D.S.; Alexander Soleimani, D.M.D.; Elliot Schlang, D.D.S.; Martin Schechter, D.D.S.; Jeffrey D. Schechter, D.D.S.; Dental Advisory Group, LLC; DCA Limited Partnership, L.L.P.; and Dental Administrators of Texas Limited Partnership, L.L.P., in an aggregate amount outstanding of $3,650,000 (including principal and interest that has accrued thereunder, but excluding default interest). "Financial Statements" shall mean the financial statement or statements of the Company and its Consolidated Subsidiaries described or referred to in Section 7.02. "Florida Transaction" shall mean the sale of substantially all of the property, assets and business relating to the Company's dental centers located in Sarasota and Venice, Florida pursuant to that certain Asset Purchase Agreement dated as of June 14, 2002, by and among Woolf Dentistry, P.A., a Florida professional association, Castle Dental Centers of Florida, Inc., a Florida corporation, and Castle 1st Dental Care, P.A., a Florida professional association, in exchange for a release of that certain nine percent (9%) Subordinated Note issued by the Company to Woolf Dentistry, P.A. on July 9, 1998, in the original principal amount of $370,000. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority" shall include the country, the state, county, city and political subdivisions in which any Person or such Person's Property is located or which exercises valid jurisdiction over any such Person or such Person's Property, and any court, agency, department, commission, board, bureau or instrumentality of any of them including monetary authorities which exercises valid jurisdiction over any such Person or such Person's Property. Unless otherwise specified, all references to Governmental Authority herein shall mean a Governmental Authority having jurisdiction over, where applicable, the Company, its Subsidiaries or any of their Property or any Holder. "Governmental Requirement" shall mean any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement (whether or not having the force of law), including, without limitation, Environmental Laws, energy regulations and occupational, safety and health standards or controls, of any Governmental Authority. 6 "Hedging Agreements" shall mean any interest rate swap, cap, floor, collar, forward agreement or other protection agreements or any option with respect to any such transaction. "Heller/Midwest Debt Exchange" shall mean the exchange by Heller and Midwest of all liabilities and obligations owed to them by the Company pursuant to that certain Senior Subordinated Note Purchase Agreement dated as of January 31, 2000 by and among Heller, Midwest and the Company for 119,520 and 59,760 shares of Series A Preferred Stock, respectively. "Highest Lawful Rate" shall mean the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Notes or on other Indebtedness under laws applicable to Holders which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. "Indebtedness" shall mean any and all amounts owing or to be owing by the Company or any Subsidiary to Holders in connection with the Subordinated Note and Warrant Documents, now or hereafter entered into between or among the Company, any of its Subsidiaries and any Holder, and all renewals, extensions and/or rearrangements of any of the above. "Indemnified Parties" shall have the meaning assigned such term in Section 12.03(a)(ii). "Indemnity Matters" shall mean any and all actions, suits, proceedings (including any investigations, litigation or inquiries), claims, demands and causes of action made or threatened against a Person and, in connection therewith, all losses, liabilities, damages (including, without limitation, consequential damages) or reasonable costs and expenses of any kind or nature whatsoever incurred by such Person whether caused by the sole or concurrent negligence of such Person seeking indemnification. "Investors Agreement" shall mean that certain Investors Agreement of even date herewith by and among the Company, Heller and Midwest. "Jack Castle" shall mean Jack H. Castle, Jr., an individual "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and 7 encumbrances affecting Property. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing. "Majority Lenders" shall mean the "Majority Lenders" as defined in the Senior Credit Agreement. "Material Adverse Effect" shall mean any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations or affairs of the Company and its Subsidiaries taken as a whole different from those reflected in the Financial Statements or from the facts represented or warranted in any Subordinated Note and Warrant Document, or (ii) the ability of the Company and its Subsidiaries taken as a whole to carry out their business as at the Closing Date or as proposed as of the Closing Date to be conducted or meet their obligations under the Subordinated Note and Warrant Documents or the Restructuring Documents on a timely basis. "Multiemployer Plan" shall mean a Plan defined as such in Section 3(37) or 4001(a)(3) of ERISA. "Notes" shall have the meaning assigned such term in Section 2.01(a). "Other Taxes" shall have the meaning assigned such term in Section 4.03(b). "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization, Governmental Authority or any other form of entity. "Plan" shall mean any employee pension benefit plan, as defined in Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or contributed to by the Company, any Subsidiary or an ERISA Affiliate or (ii) was at any time during the preceding six calendar years sponsored, maintained or contributed to, by the Company, any Subsidiary or an ERISA Affiliate. "Post-Default Rate" shall mean, in respect of any principal of any Note or any other amount payable by the Company under this Agreement or any other Subordinated Note Document, a rate per annum during the period commencing on the date of occurrence of an Event of Default until such amount is paid in full or all Events of Default are cured or waived equal to eighteen percent (18%) per annum. 8 "Prior Registration Rights Agreement" shall mean that certain Registration Rights Agreement dated as of January 31, 2000, by and among the Company, Heller and Midwest. "Prior Stockholders Agreement" shall mean that certain Stockholders Agreement dated as of January 31, 2000, by and among the Company, Jack Castle, Heller, Midwest, Delaware State Employees' Retirement Fund, Declaration of Trust For Defined Benefit Plan of ICI American Holdings Inc., Declaration of Trust for Defined Benefit Plan of Zeneca Holdings Inc., Jack H. Castle, Jr., as Trustee of the Castle 1995 Gift Trust F/B/O Jack H. Castle, Jr., Castle Interests, Ltd., Jack H. Castle, D.D.S., Loretta M. Castle, and Gulfstar Investments, Ltd. "Prior Subordination Agreement" shall mean that certain Subordination and Intercreditor Agreement dated as of January 31, 2000 by and among Heller, Midwest, the Company, Castle Dental Centers of California, L.L.C., a Delaware limited liability company, Dental World, Inc., a Texas corporation, Castle Dental Centers of Austin, Inc., Castle dental Centers of Florida, Inc., a Florida corporation, Castle Dental Centers of Tennessee, Inc., a Tennessee corporation, Castle Dental Centers of Texas, Inc., a Texas corporation, Dentcor, Inc., a Florida corporation, CDC of California, Inc., a Delaware corporation, Castle Texas Holdings, Inc., a Delaware corporation, Academy for Dental Assistants, Inc., a Florida corporation, and Bank of America, N.A., a national banking association formerly known as NationsBank, N.A. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Proposal" shall have the meaning assigned to such term in Section 8.08 "Quarterly Date" shall mean the fifteenth (15th) day of each January, April, July and October, commencing October 15, 2002; provided, however, that if any such day is not a Business Day, such Quarterly Date shall be the next succeeding Business Day. "Registration Rights Agreement" shall mean that certain Registration Rights Agreement, dated as of even date herewith, by and among the Company and the stockholders party thereto. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Regulatory Change" shall mean any change after the Closing Date in any Governmental Requirement (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of lenders of or under any Governmental Requirement (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. 9 "Reporting Region" shall mean the dental centers and other business operations for each of Houston, Austin, Dallas/Fort Worth, San Antonio, Tennessee, Florida and California, all as more fully set forth in Schedule 8.01(e). "Responsible Officer" shall mean, as to any Person, the Chief Executive Officer, the President or any Vice President of such Person and, with respect to financial matters, the term "Responsible Officer" shall include the Chief Financial Officer of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Company. "Restructuring Transactions" shall mean, collectively, the Heller/Midwest Debt Exchange, the Roisman Settlement, the Seller Debt Exchange, the San Antonio Transaction, the Florida Transaction, the Corpus Transactions and the amendment of the Certificate of Incorporation of the Company to create the Series A Preferred Stock. "Restructuring Documents" shall mean the Senior Credit Documents and each other document executed or delivered in connection with any of the Restructuring Transactions, in each instance as in effect on the date hereof and as the same may be amended, modified or supplemented from time to time as permitted herein. "Roisman" shall mean, collectively, Leon D. Roisman, D.M.D., Leon D. Roisman, D.M.D., Inc., a California corporation and Roisman Acquisition Company, a California corporation. "Roisman Judgment" shall mean that certain judgment rendered against CDC California, and California LLC, in favor of Roisman in Los Angeles County, California Superior Court Case No. BS058068 on October 23, 2000, in the initial amount of $1,108,210.62 plus interest at ten percent (10%) per annum from the date of such judgment. "Roisman Settlement" shall mean the execution and delivery of that certain Forbearance Agreement dated as of July 3, 2002 by and among CDC California, California LLC and Roisman with respect to the Roisman Judgment. "San Antonio Transaction" means the issuance of Series A Preferred Stock pursuant to the Settlement Agreement among the Company, Castle Texas, Castle PC, Barry E. Solomon, Marc A. Solomon, Hebron D. Cutrer, Stan E. Faye, Robert B.Grau, Dental Centers of America, Inc., Dental Administrators, Inc., Senior Agent, Senior Lenders, General Electric Capital Corporation, a Delaware corporation, Heller and Midwest. "SEC" shall mean the Securities and Exchange Commission or any successor Governmental Authority. "Seller Debt Exchange" shall mean the exchange by the holders of Existing Seller Notes 10 of all liabilities and obligations owed to them by the Company pursuant to the Seller Notes and all documents related thereto for an aggregate 32,002 shares of Series A Preferred Stock. "Senior Agent" shall mean Bank of America, N.A., a national banking association formerly known as NationsBank of Texas, N.A. (together with any duly appointed successor) for the Senior Lenders. "Senior Credit Agreement" shall mean that certain Second Amended and Restated Credit Agreement dated as of even date herewith, by and among the Company, the Senior Agent and the Senior Lenders, as the same may hereafter be amended, restated, supplemented or otherwise modified and in effect from time to time as permitted herein and in the Subordination Agreement. "Senior Credit Documents" shall mean the Senior Credit Agreement and the "Loan Documents" (as defined in the Senior Credit Agreement) in each instance as in effect on the date hereof and as the same may be amended, modified or supplemented from time to time as permitted herein. "Senior Indebtedness" shall mean "Senior Debt" as such term is defined in the Subordination Agreement. "Senior Funded Debt" shall mean, at any date and with respect to the Company and its Subsidiaries, all Debt for borrowed money (excluding the Indebtedness and other Debt expressly subordinated to the Indebtedness in form and substance satisfactory to the Holders), any capital lease obligations and any guaranty with respect to Senior Funded Debt of another Person. "Senior Lenders" shall mean each Person that is or shall become a lender under the Senior Credit Agreement for so long as such Person shall be a party to that Agreement. "Series A Preferred Stock" shall mean the Series A-1 Convertible Preferred Stock, $.001 par value per share, of the Company. "Special Entity" shall mean any joint venture, limited liability company or partnership, general or limited partnership or any other type of partnership or company other than a corporation in which the Company or one or more of its other Subsidiaries is a member, owner, partner or joint venturer and owns, directly or indirectly, at least a majority of the equity of such entity or controls such entity, but excluding any tax partnerships that are not classified as partnerships under state law. For purposes of this definition, any Person which owns directly or indirectly an equity investment in another Person which allows the first Person to manage or elect managers who manage the normal activities of such second Person will be deemed to "control" such second Person (e.g. a sole general partner controls a limited partnership). "Stockholders Agreement" shall mean that certain Stockholders Agreement, dated as of 11 even date herewith, by and among the Company and the stockholders party thereto. "Subordinated Note and Warrant Documents" shall mean this Agreement, the Notes, the Warrants, the Stockholders Agreement, the Registration Rights Agreement and any other stockholder, registration or intercreditor agreement between or among the holders of such stock, notes, warrants, debentures or other instruments. "Subordination Agreement" shall mean that certain Subordination and Intercreditor Agreement of even date herewith among the Company, Holders, Subsidiaries and the Senior Agent, as such Agreement may be amended from time to time as provided therein. "Subsidiary" shall mean (i) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Company or one (1) or more of its Subsidiaries or by the Company and one (1) or more of its Subsidiaries and (ii) any Special Entity. Unless otherwise indicated herein, each reference to the term "Subsidiary" shall mean a Subsidiary of the Company. "Taxes" shall have the meaning assigned such term in Section 4.03(a). "Wholly-Owned Subsidiary" shall mean, as to the Company, any Subsidiary of which all of the outstanding shares of capital stock or other equity interests, on a fully-diluted basis, are owned by the Company or one or more of the Wholly-Owned Subsidiaries or by the Company and one or more of the Wholly-Owned Subsidiaries. Section 1.03 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to Holders hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the audited financial statements of the Company referred to in Section 7.02 (except for changes concurred with by the Company's independent public accountants). ARTICLE II PURCHASE AND SALE OF NOTES AND WARRANTS Section 2.01 Purchase and Sale of Notes and Warrants. (a) Subject to the terms and conditions herein set forth, the Company agrees that it will issue and sell to each of Heller, Midwest and Usdan 12 and each of Heller, Midwest and Usdan agrees that it will acquire from the Company, on the Closing Date, for the purchase price of $500,000, $500,000 and $700,000, respectively, the Company's fifteen percent (15%) senior subordinated convertible promissory notes in original principal amounts of $500,000, $500,000 and $700,000 each, respectively, in substantially the form attached hereto as Exhibit A (together with any and all renewals, extensions for any period, increases, rearrangements, substitutions or modifications thereof, the "Notes"), which Notes shall initially be convertible into 913,417, 913,417 and 1,278,784 shares of Common Stock of the Company, respectively, constituting an aggregate of three and three tenths percent (3.30%) of the fully diluted Common Stock of the Company as of the date hereof. The holders of Notes will be entitled to the benefits of the Stockholders Agreement and the Registration Rights Agreement. (b) Subject to the terms and conditions herein set forth, the Company agrees that it will issue and sell to each of Heller, Midwest and Usdan, and each of Heller, Midwest and Usdan agrees that it will acquire from the Company, on the Closing Date, for the purchase price of $0, $0 and $0, respectively, warrants of the Company representing the right to acquire 5,286,489, 5,286,489 and 7,401,084 shares of Common Stock of the Company each, respectively, constituting an aggregate of nineteen and four tenths of one percent (19.4%) of the fully diluted Common Stock of the Company as of the date hereof, in substantially the form attached hereto as Exhibit B (together with any and all renewals, extensions for any period, increases, rearrangements, substitutions or modifications thereof, the "Warrants"). The holders of Warrants will be entitled to the benefits of the Stockholders Agreement and the Registration Rights Agreement. (c) The Company and each Holder acknowledge that the purchase prices set forth above for each of the Notes and Warrants represent their relative fair market values and agree to be bound by this allocation for all tax purposes pursuant to Treasury Regulation Section 1.1273-2(h). ARTICLE III PAYMENTS OF PRINCIPAL AND INTEREST Section 3.01 Payment of Notes. The aggregate outstanding principal balance of the Notes and all accrued and unpaid interest thereon shall be payable on June 30, 2007. Section 3.02 Interest. (a) Interest Rates. Interest on the unpaid principal amount of the Notes for the period commencing on the Closing Date to, but excluding, the date such Notes shall be paid in full, shall accrue at the rate per annum equal to fifteen percent (15%), except as provided in Section 5.01. (b) Post-Default Rate. Interest at the applicable Post-Default Rate shall accrue on 13 any principal of any Note, and (to the fullest extent permitted by law) on any other amount payable by the Company hereunder or under any Subordinated Note Document, for the period commencing on the date of an Event of Default until the same is paid in full or all Events of Default are cured or waived. (c) Due Dates. Interest on the unpaid principal amount of the Notes at the rate of fifteen percent (15%) per annum from the Closing Date or the immediately preceding Quarterly Date, as applicable, shall be capitalized, be compounded and added to the then unpaid principal amount of the Notes as of each Quarterly Date. As used herein and in the other Subordinated Note and Warrant Documents, the phrase "unpaid principal amount of the Notes" and other similar phrases shall mean the original aggregate principal amount of $1,700,000, as reduced by payments of principal and increased by capitalized interest as provided herein. Section 3.03 Prepayments. (a) Voluntary Prepayments. The Company shall not be permitted to voluntarily prepay the Notes. (b) Mandatory Prepayments. Concurrently with the consummation of a Change in Control, Company shall pay the outstanding principal of the Notes (together with accrued interest and, if applicable, the prepayment fee described below). (c) Pro Rata Payments and Treatment; Notice to Holders. (i) All interest payments and payments of principal shall be made and applied pro rata on all outstanding Notes in accordance with the respective unpaid principal amounts thereof. (ii) If any Holder (a "Benefited Holder") shall at any time receive any payment under such Benefited Holder's Note or Notes, (whether from the Company, any of its Subsidiaries, affiliates or otherwise and whether by set-off, exercise of subrogation rights or otherwise) in a greater proportion than its ratable share as set forth in clause (i) above, then such Benefited Holder shall deliver such excess payment ratably to the other Holders and thereafter shall be deemed to have purchased for cash from such other Holders such participations in the other Holders' Notes as shall be necessary to cause the Benefited Holder to share the excess ratably with the other Holders; provided, however, if all or any portion of such excess payment is thereafter recovered from the Benefited Holder, such purchase shall be rescinded, and the excess payment shall be returned to the Benefited Holder to the extent of such recovery, but without interest. The Company agrees that each Holder so purchasing a participation in another Holder's Note may exercise all rights of payment (including, without limitation, rights of set-off, and subrogation) with respect to such participation so purchased as if such Holder was the direct creditor of the Company in the amount of such participation. 14 (iii) Each Holder agrees to give prior notice as soon as reasonably practicable of its intention to: (A) receive a Mandatory Prepayment or (B) issue a notice accelerating its Note under Section 10.2(a). ARTICLE IV PAYMENTS; COMPUTATIONS; ETC. Section 4.01 Payments. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Company under this Agreement and the Notes shall be made in Dollars, in immediately available funds, to each Holder at such account as such Holder shall specify by notice to the Company from time to time, not later than 11:00 a.m. Chicago time on the date on which such payments shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Such payments shall be made without (to the fullest extent permitted by applicable law) defense, set-off or counterclaim. If the due date of any payment under this Agreement or any Note would otherwise fall on a day which is not a Business Day such date shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. Section 4.02 Computations. Interest shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which such interest is payable, unless such calculation would exceed the Highest Lawful Rate, in which case interest shall be calculated on the per annum basis of a year of 365 or 366 days, as the case may be. Section 4.03 Taxes. (a) Payments Free and Clear. Any and all payments by the Company hereunder shall be made, in accordance with Section 4.01, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of any Holder, taxes imposed on its income, and franchise or similar taxes imposed on it, by (i) any jurisdiction (or political subdivision thereof) of which such Holder is a citizen or resident, (ii) the jurisdiction (or any political subdivision thereof) in which such Holder is organized, or (iii) any jurisdiction (or political subdivision thereof) in which such Holder is presently doing business which taxes are imposed solely as a result of doing business in such jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Holder (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable 15 under this Section 4.03) such Holder shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions and (iii) the Company shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law and provide such Holder with a receipt thereof. (b) Other Taxes. In addition, to the fullest extent permitted by applicable law, the Company agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, any assignment of the Notes, the Warrants, Common Stock issued upon conversion of all or any portion of the Notes or exercise of all or any portion of the Warrants (hereinafter referred to as "Other Taxes"). (c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY WILL INDEMNIFY EACH HOLDER FOR THE FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY TAXES OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE UNDER THIS SECTION 4.03) PAID BY SUCH HOLDER AND ANY LIABILITY (INCLUDING PENALTIES, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED UNLESS THE PAYMENT OF SUCH TAXES WAS NOT CORRECTLY OR LEGALLY ASSERTED AND SUCH HOLDER'S PAYMENT OF SUCH TAXES OR OTHER TAXES WAS THE RESULT OF ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY PAYMENT PURSUANT TO SUCH INDEMNIFICATION SHALL BE MADE WITHIN THIRTY (30) DAYS AFTER THE DATE A HOLDER MAKES WRITTEN DEMAND THEREFOR. IF A HOLDER RECEIVES A REFUND OR CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH HOLDER HAS RECEIVED PAYMENT FROM THE COMPANY IT SHALL PROMPTLY NOTIFY THE COMPANY OF SUCH REFUND OR CREDIT AND SHALL, IF NO DEFAULT HAS OCCURRED AND IS CONTINUING, WITHIN THIRTY (30) DAYS AFTER RECEIPT OF A REQUEST BY THE COMPANY (OR PROMPTLY UPON RECEIPT, IF THE COMPANY HAS REQUESTED APPLICATION FOR SUCH REFUND OR CREDIT PURSUANT HERETO), PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE COMPANY WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR CREDITED), PROVIDED THAT THE COMPANY, UPON THE REQUEST OF A HOLDER, AGREES TO RETURN SUCH REFUND OR CREDIT (PLUS PENALTIES, INTEREST OR OTHER CHARGES) TO SUCH HOLDER IN THE EVENT SUCH HOLDER IS REQUIRED TO REPAY SUCH REFUND OR CREDIT. 16 ARTICLE V CAPITAL ADEQUACY Section 5.01 Capital Adequacy. (a) Capital Adequacy. The Company shall pay directly to each affected Holder from time to time on request such amounts as such Holder may reasonably determine to be necessary to compensate itself or its parent or holding company for any costs which it determines are attributable to the maintenance by such Holder or its parent or holding company, pursuant to any Governmental Requirement following any Regulatory Change, of capital in respect of the Notes, such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Holder or its parent or holding company to a level below that which such Holder or its parent or holding company could have achieved but for such Governmental Requirement. Each affected Holder will notify the Company that it is entitled to compensation pursuant to this Section 5.01(a) as promptly as practicable after it determines to request such compensation. (b) Compensation Procedure. Upon notifying the Company of the incurrence of additional costs under this Section 5.01, the affected Holder shall in such notice to the Company set forth in reasonable detail the basis and amount of its request for compensation. Determinations and allocations by such Holder for purposes of this Section 5.01 of the amounts required to compensate such Holder under this Section 5.01, shall be conclusive and binding for all purposes, provided that such determinations and allocations are made on a reasonable basis. Any request for additional compensation under this Section 5.01 shall be paid by the Company within thirty (30) days of the receipt by the Company of the notice described in this Section 5.01(b). ARTICLE VI CONDITIONS PRECEDENT Section 6.01 Conditions to Purchase. The obligation of Holders to purchase the Notes and Warrants is subject to the receipt by Holders of all of the following documents and satisfaction of the other conditions provided in this Section 6.01, each of which shall be reasonably satisfactory to Holders in form and substance: (a) A certificate of the Secretary or an Assistant Secretary of the Company setting forth (i) resolutions of its board of directors with respect to the authorization of the Company to execute and deliver the Subordinated Note and Warrant Documents and the Restructuring 17 Documents to which it is a party and to enter into the transactions contemplated in those documents, (ii) the officers of the Company (y) who are authorized to sign the Subordinated Note and Warrant Documents and the Restructuring Documents to which Company is a party and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the transactions contemplated hereby, (iii) specimen signatures of the authorized officers, and (iv) the articles or certificate of incorporation and bylaws of the Company, certified as being true and complete. Holders may conclusively rely on such certificate until it receives notice in writing from the Company to the contrary. (b) A certificate of the Secretary or an Assistant Secretary of each Subsidiary setting forth (i) resolutions of its board of directors with respect to the authorization of such Subsidiary to execute and deliver the Subordinated Note and Warrant Documents and the Restructuring Documents to which it is a party and to enter into the transactions contemplated in those documents, (ii) the officers of such Subsidiary (y) who are authorized to sign the Subordinated Note and Warrant Documents and the Restructuring Documents to which such Subsidiary is a party and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the transactions contemplated hereby, (iii) specimen signatures of the authorized officers, and (iv) the articles or certificate of incorporation and bylaws of such Subsidiary, certified as being true and complete. Holders may conclusively rely on such certificate until they receive notice in writing from such Subsidiary to the contrary. (c) Certificates of the appropriate state agencies with respect to the existence, qualification and good standing of the Company and its Subsidiaries. (d) A compliance certificate which shall be substantially in the form of Exhibit C hereto, duly and properly executed by a Responsible Officer and dated as of the Closing Date. (e) The Notes and the Warrants, duly completed, executed and delivered to each Holder, as applicable. (f) Opinions of Haynes and Boone, LLP, counsel to the Company and Subsidiaries, in form and substance satisfactory to Holders, as to such matters incident to the transactions herein contemplated as Holders may reasonably request. (g) A certificate of insurance coverage of the Company evidencing that the Company is carrying insurance in accordance with Section 7.19. (h) Unaudited pro forma projected consolidated balance sheet of the Company and its Consolidated Subsidiaries at the Closing Date (which pro forma shall be based on the 18 consolidated balance sheet of the Company and its Consolidated Subsidiaries as of March 31, 2002). (i) Certified copies of the Senior Credit Documents, the promissory notes evidencing the Debt described on Schedule 9.01 and the Subordination Agreement. (j) Stockholders Agreement, Investors Agreement and Registration Rights Agreement duly completed, executed and delivered to Holders. (k) payment of all legal fees and other reasonable expenses incurred by Heller and Midwest incurred in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated hereby. (l) consummation of the Restructuring Transactions on terms and conditions and pursuant to the Restructuring Documents acceptable in form and substance to the Holders. (m) termination of the Prior Subordination Agreement, the Prior Registration Rights Agreement and the Prior Stockholders Agreement. (n) with respect to Midwest, duly executed and completed (i) SBA Form 480 (Size Status Declaration) and SBA Form 652 (Assurance of Compliance), (ii) SBA Form 1031 (Portfolio Finance Report), Part A and B, and (iii) letter regarding SBA matters in form and substance acceptable to Midwest. (o) such other documents as Holders or special counsel to Holders may reasonably request. ARTICLE VII REPRESENTATIONS AND WARRANTIES The Company represents and warrants to each Holder: Section 7.01 Corporate Existence. Each of the Company and each Subsidiary: (i) is a corporation or limited liability company duly organized, legally existing and in good standing under the laws of the jurisdiction of its incorporation or formation; (ii) has all requisite corporate or limited liability company power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect. 19 Section 7.02 Financial Condition. The audited consolidated balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 2001 and the related consolidated statement of income, stockholders' equity and cash flow of the Company and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Pricewaterhouse Coopers L.L.P. heretofore furnished to Holders and the unaudited consolidated balance sheet of the Company and its Consolidated Subsidiaries as at May 31, 2002 and their related consolidated statements of income, stockholders' equity and cash flow of the Company and its Consolidated Subsidiaries for the five (5) month period ended on such date heretofore furnished to Holders, are complete and correct and fairly present the consolidated financial condition of the Company and its Consolidated Subsidiaries as at said dates and the results of its operations for the fiscal year and the five (5) month period on said dates, all in accordance with GAAP, as applied on a consistent basis (subject, in the case of the interim financial statements, to normal year-end adjustments). Neither the Company nor any Subsidiary has on the Closing Date any material Debt, contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the Financial Statements or in Schedule 7.02. Since December 31, 2001, there has been no change or event having a Material Adverse Effect. Since the date of the Financial Statements, neither the business nor the Properties of the Company or any Subsidiary have been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, permits or concessions by any Governmental Authority, riot, activities of armed forces or acts of God or of any public enemy. The unaudited pro forma projected consolidated balance sheet of the Company and its Consolidated Subsidiaries at the Closing Date (which proforma shall be based on the consolidated balance sheet of the Company and its Consolidated Subsidiaries as of March 31, 2002, adjusted to reflect the transactions contemplated herein), and the unaudited pro forma projected consolidated statement of income of the Company and its Consolidated Subsidiaries as of the Closing Date, heretofore furnished to Holders, represent Company's best estimate of the pro forma projected consolidated financial condition of the Company and its Consolidated Subsidiaries as at the Closing Date after giving effect to the transactions contemplated herein provided projections as to future performance should not be construed as a guarantee of future performance. Section 7.03 Litigation. Except as set forth on Schedule 7.03, at the Closing Date there is no litigation, legal, administrative or arbitral proceeding, investigation or other action of any nature pending or, to the knowledge of the Company threatened against or affecting the Company or any Subsidiary which could reasonably be expected to have a Material Adverse Effect. Section 7.04 No Breach. Neither the execution and delivery of the Subordinated Note and Warrant Documents or the Restructuring Documents, nor compliance with the terms and provisions hereof or thereof will conflict with or result in a breach of, or require any consent which has not been obtained as of the Closing Date under, the respective charter or by-laws of 20 the Company or any Subsidiary, or any Governmental Requirement or any material agreement or instrument to which the Company or any Subsidiary is a party or by which it is bound or to which it or its Properties are subject, or constitute a default under any such material agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Company or any Subsidiary pursuant to the terms of any such material agreement or instrument other than the Liens created by the Senior Credit Documents. Section 7.05 Authority. The Company and each Subsidiary have all necessary corporate power and authority to execute, deliver and perform its respective obligations under the Subordinated Note and Warrant Documents and the Restructuring Documents to which it is a party. The execution, delivery and performance by the Company and each Subsidiary of the Subordinated Note and Warrant Documents and the Restructuring Documents to which it is a party, have been duly authorized by all necessary corporate action on its part. The Subordinated Note and Warrant Documents and the Restructuring Documents constitute the legal, valid and binding obligations of the Company and each Subsidiary, enforceable in accordance with their terms. Section 7.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority are necessary for the execution, delivery or performance by the Company or any Subsidiary of the Subordinated Note and Warrant Documents or the Restructuring Documents to which it is a party or for the validity or enforceability thereof, other than the filing with the Secretary of State of Delaware of a certificate of amendment to the certificate of incorporation of the Company which either increases the number of authorized shares of the Common Stock of the Company or effects a reverse stock split (the "Authorized Share Amendment"), which will be filed when it is approved at the next meeting of the stockholders of the Company. Section 7.07 Use of Note and Warrant Proceeds. The proceeds of the sale of the Notes and Warrants hereunder shall be used to provide financing for (i) payment of costs and expenses payable to Senior Agent and the Senior Lenders pursuant to the Senior Credit Agreement and (ii) payment of other costs and expenses incurred by the Company incurred with respect to the Restructuring Transactions. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying margin stock (within the meaning of Regulation T, U or X of the Board of Governors of the Federal Reserve System) and no part of the proceeds of the Notes will be used to buy or carry any margin stock. Section 7.08 ERISA. (a) The Company, each Subsidiary and each ERISA Affiliate have complied in all material respects with ERISA and, where applicable, the Code regarding each Plan. (b) Each Plan is, and has been, maintained in substantial compliance with ERISA 21 and, where applicable, the Code. (c) No act, omission or transaction has occurred which could result in imposition on the Company, any Subsidiary or any ERISA Affiliate (whether directly or indirectly) of (i) either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under section 409 of ERISA. (d) No liability to the PBGC (other than for the payment of current premiums which are not past due) by the Company, any Subsidiary or any ERISA Affiliate has been or is expected by the Company, any Subsidiary or any ERISA Affiliate to be incurred with respect to any Plan. No ERISA Event with respect to any Plan has occurred. (e) Full payment when due has been made of all amounts which the Company, any Subsidiary or any ERISA Affiliate is required under the terms of each Plan or applicable law to have paid as contributions to such Plan, and no accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan. (f) The actuarial present value of the benefit liabilities under each Plan which is subject to Title IV of ERISA does not, as of the end of the Company's most recently ended fiscal year, exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA. (g) None of the Company, any Subsidiary or any ERISA Affiliate sponsors, maintains, or contributes to an employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by the Company, a Subsidiary or any ERISA Affiliate in its sole discretion at any time without any material liability. (h) None of the Company, any Subsidiary or any ERISA Affiliate sponsors, maintains or contributes to, or has at any time in the preceding six calendar years, sponsored, maintained or contributed to, any Multiemployer Plan. (i) None of the Company, any Subsidiary or any ERISA Affiliate is required to provide security under section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the Plan. Section 7.09 Taxes. Each of the Company and its Subsidiaries has filed all United States Federal income tax returns and all other tax returns which are required to be filed by them and have paid all material taxes due pursuant to such returns or pursuant to any assessment 22 received by the Company or any Subsidiary. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. No tax lien has been filed and, to the knowledge of the Company, no claim is being asserted with respect to any such tax, fee or other charge. Section 7.10 Titles, etc. (a) Each of the Company and its Subsidiaries has good and defensible title to its material (individually or in the aggregate) Properties, free and clear of all Liens, except Liens permitted by Section 9.02. (b) All leases and agreements necessary for the conduct of the business of the Company and its Subsidiaries are valid and subsisting, in full force and effect and there exists no default or event or circumstance which with the giving of notice or the passage of time or both would give rise to a default under any such lease or leases, which would affect in any material respect the conduct of the business of the Company and its Subsidiaries. (c) The licenses, rights, Properties and other assets presently owned, leased or licensed by the Company and its Subsidiaries, include all rights, Properties and other assets necessary to permit the Company and its Subsidiaries to conduct their business in all material respects in the same manner as its business has been conducted prior to the Closing Date. (d) All of the assets and Properties of the Company and its Subsidiaries which are reasonably necessary for the operation of its business are in good working condition and are maintained in accordance with prudent business standards. Section 7.11 No Material Misstatements. No written information, statement, exhibit, certificate, document or report furnished to Holders by the Company or any Subsidiary in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading in the light of the circumstances in which made and with respect to the Company and its Subsidiaries taken as a whole. Section 7.12 Investment Company Act. Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Section 7.13 Public Utility Holding Company Act. Neither the Company nor any Subsidiary is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 23 Section 7.14 Subsidiaries. Except as set forth on Schedule 7.14, the Company has no Subsidiaries. In the event that a new Subsidiary is formed or acquired, Company will provide Holders with a new, updated Schedule 7.14. Section 7.15 Location of Business and Offices. The Company's principal place of business and chief executive offices are located at the address stated on the signature page of this Agreement. The principal place of business and chief executive office of each Subsidiary are located at the addresses stated on Schedule 7.14. Section 7.16 Defaults. Neither the Company nor any Subsidiary is in default nor has any event or circumstance occurred which, but for the expiration of any applicable grace period or the giving of notice, or both, would constitute a default under any agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound which default would have a Material Adverse Effect. No Default hereunder or under the Senior Credit Documents has occurred and is continuing. Section 7.17 Environmental Matters. Except as would not have a Material Adverse Effect, neither any Property of the Company nor any Subsidiary nor the operations conducted thereon violate any law, order or requirement of any court or Governmental Authority or any Environmental Laws. Section 7.18 Compliance with the Law. Neither the Company nor any Subsidiary has violated any Governmental Requirement or failed to obtain any license, permit, franchise or other governmental authorization necessary for the ownership of any of its Properties or the conduct of its business, which violation or failure would have (in the event such violation or failure were asserted by any Person through appropriate action) a Material Adverse Effect. Section 7.19 Insurance. Schedule 7.19 attached hereto contains an accurate and complete description of all material policies of fire, liability, workmen's compensation and other forms of insurance owned or held by the Company and each Subsidiary. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date of the closing have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such policies are sufficient for compliance with all requirements of law and of all agreements to which the Company or any Subsidiary is a party; are valid, outstanding and enforceable policies; provide adequate insurance coverage in at least such amounts and against at least such risks (but including in any event public liability) as are usually insured against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Company and each Subsidiary; will remain in full force and effect through the respective dates set forth in Schedule 7.19 without the payment of additional premiums; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. Schedule 7.19 identifies all material risks, if any, which the Company and its Subsidiaries and their respective Board of Directors or officers have designated as being self insured. Neither the Company nor any Subsidiary has been refused 24 any insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary policy limits, by an insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last three (3) years. In the event that a new Subsidiary is formed or acquired, Company will provide Holders with a new, updated Schedule 7.19. Section 7.20 Restriction on Liens. Neither the Company nor any of its Subsidiaries is a party to any agreement or arrangement (other than the Senior Credit Agreement and the Senior Credit Documents), or subject to any order, judgment, writ or decree, which either restricts or purports to restrict its ability to grant Liens to other Persons on or in respect of their respective assets or Properties, except for Property subject to Liens permitted under Section 9.02. Section 7.21 Material Agreements. Set forth on Schedule 7.21 hereto is a complete and correct list of all material credit agreements, indentures, purchase agreements, obligations in respect of letters of credit, guarantees, joint venture agreements, and other instruments in effect or to be in effect as of the Closing Date (other than Hedging Agreements) providing for, evidencing, securing or otherwise relating to any Debt of the Company or any of its Subsidiaries in excess of $250,000, and all obligations of the Company or any of its Subsidiaries to issuers of surety or appeal bonds issued for account of the Company or any such Subsidiary in excess of $250,000, and such list correctly sets forth the names of the debtor or lessee and creditor or lessor with respect to the Debt or lease obligations outstanding or to be outstanding and the Property subject to any Lien securing such Debt or lease obligation. In the event that a new Subsidiary is formed or acquired, Company will provide each Holder with a new, updated Schedule 7.21. Section 7.22 Hedging Agreements. Schedule 7.22 sets forth, as of the Closing Date, a true and complete list of all Hedging Agreements of the Company, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark to market value thereof, all credit support agreements relating thereto (including any margin required or supplied), and the counterparty to each such agreement. Section 7.23 Capitalization. The authorized capital stock and other equity securities of each of the Company and each of its Subsidiaries is as set forth on Schedule 7.23. All issued and outstanding shares of capital stock and other equity securities of each of the Company and each of its Subsidiaries are duly authorized and validly issued, fully paid, non-assessable, free and clear of all Liens other than those in favor of Senior Agent, and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. No shares of the capital stock of Company or any of its Subsidiaries, other than those described above, are issued and outstanding. Except as set forth on Schedule 7.23, all of the issued and outstanding capital stock and other equity securities of Subsidiaries of the Company are owned by the Company. Following the filing of the Authorized Share Amendment, the Common Stock issuable upon conversion of the Notes and the Common Stock issuable upon exercise of the Warrants will, when issued, be duly authorized, validly issued, fully paid and non-assessable. 25 Except as provided in the Stockholders Agreement and as set forth on Schedule 7.23, there are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from Company or any of its Subsidiaries, of any shares of capital stock or other securities of any such entity. Section 7.24 Restructuring Documents. Each of the representations and warranties of the Company and each of its Subsidiaries contained in each of the Restructuring Documents is true, correct and complete and is hereby incorporated herein by this reference thereto. ARTICLE VIII AFFIRMATIVE COVENANTS The Company covenants and agrees that, so long as any of the Notes are outstanding and, with respect to Sections 8.01(a), 8.01(b), 8.01(c), 8.01(d) and 8.03, so long as any of the Warrants or Common Stock issued upon conversion of all or any portion of the Notes or exercise of all or any portion of the Warrants are outstanding and held by a Holder or an Affiliate thereof (including, for such purpose, partners of any Holder which is a partnership): Section 8.01 Reporting Requirements. The Company shall deliver, or shall cause to be delivered, to each Holder: (a) Annual Financial Statements. As soon as available and in any event within one hundred five (105) days after the end of each fiscal year of the Company, the audited consolidated and unaudited consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Company and its Consolidated Subsidiaries for such fiscal year, and the related consolidated and consolidating balance sheets of the Company and its Consolidated Subsidiaries as at the end of such fiscal year, and setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, and accompanied by the related opinion of independent public accountants of recognized national standing acceptable to the Holders which opinion shall state that said financial statements fairly present in all material respects the consolidated and consolidating financial condition and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year and that such financial statements have been prepared in accordance with GAAP, except for such changes in such principles with which the independent public accountants shall have concurred and such opinion shall not contain a "going concern" or like qualification or exception, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default. (b) Quarterly Financial Statements. As soon as available and in any event within fifty (50) days after the end of each of the first three (3) fiscal quarterly periods of each fiscal year of the Company, consolidated and consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Company and its Consolidated Subsidiaries for 26 such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present in all material respects the consolidated and consolidating financial condition and results of operations of the Company and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments). (c) Monthly Financial Statements. As soon as available and in any event within thirty (30) days after the end of each calendar month, the Company-prepared consolidated and consolidating statements of income and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Borrower and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year end audit adjustments). (d) Accounts Receivable. As soon as available and in any event within thirty (30) days after the end of each calendar month, (i) a report in form reasonably satisfactory to the Holders reflecting the aging and collection of the receivables of the Company and its Subsidiaries and (ii) such other reports with respect to receivables as deemed reasonably necessary by the Holders. (e) Quarterly Regional Reports. As soon as available and in any event within forty five (45) days after the end of each of quarterly period of each fiscal year of the Company, statements of EBITDA for each Reporting Region for such period and for the period from the beginning of the fiscal year to the end of such period. Such statements shall be accompanied by a certificate of a Responsible Officer as to the good faith preparation of such report. (f) Monthly Regional Statements. As soon as available and in any event within thirty (30) days after the end of each calendar month of each fiscal year of the Company, statements of EBITDA for each Reporting Region for such period and for the period from the beginning of the respective fiscal year to the end of such period. Such statements shall be accompanied by a certificate of a Responsible Officer as to the good faith preparation of such report. (g) Excess Cash Flow. As soon as available but no later than thirty (30) days after April 30 of each year commencing April 30, 2003, a copy of the "Excess Cash Flow Certificate" (as such term is defined in the Senior Credit Agreement) of a Responsible Officer of the Company setting forth in reasonable detail the Company's calculation of "Excess Cash Flow" (as such term is defined in the Senior Credit Agreement) and for each month after April 30 of each 27 year for which an "Annual Cash Flow Payment" (as such term is defined in the Senior Credit Agreement) remains unpaid and is outstanding, and, on the last day of each month thereafter until such Annual Cash Flow Payment is received by the Senior Agent in accordance with the terms of the Senior Credit Agreement, a "Cash Flow Differential Certificate" (as such term is defined in the Senior Credit Agreement) of a Responsible Officer of the Company setting forth in reasonable detail the Company's calculation of current "Cash on Hand" (as such term is defined in the Senior Credit Agreement) and the amount of the unpaid Annual Cash Flow Payment (as such term is defined in the Senior Credit Agreement) due for such month. (h) Cash Flow Forecast. Monthly, a rolling thirteen (13) week cash flow forecast. (i) Budget. As soon as available and in any event within thirty (30) days after the end of each fiscal year of the Company, a budget for the Company and its Consolidated Subsidiaries, as approved by the board of directors of the Company, for the following fiscal year setting forth in comparative form corresponding figures from the preceding fiscal year, in reasonable detail. (j) Notice of Default, Etc. Promptly after the Company knows that any Default or any Material Adverse Effect has occurred, a notice of such Default or Material Adverse Effect, describing the same in reasonable detail and the action the Company proposes to take with respect thereto. (k) Other Accounting Reports. Promptly upon receipt thereof, (i) a copy of each other report or letter submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company and its Subsidiaries, (ii) a copy of any response by the Company or any Subsidiary of the Company, or the Board of Directors of the Company or any Subsidiary of the Company, to such letter or report and (iii) any reports which the Holders, Senior Agent or Senior Lenders may reasonably request. (l) SEC Filings, Etc. Promptly upon its becoming available (and no later than 10 Business Days after a filing by the Company), each financial statement, report, notice or proxy statement sent by the Company to stockholders generally and each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company with or received by the Company in connection therewith from any securities exchange or the SEC (including forms 10K, 10Q and 8K) or any successor agency. (m) Notices Under Other Loan Agreements. Promptly after the furnishing thereof, copies of any material statement, report or notice furnished to or any Person pursuant to the terms of any indenture, loan or credit or other similar agreement, other than this Agreement and not otherwise required to be furnished to the Holders pursuant to any other provision of this Section 8.01. 28 (n) Annual Revenue Reports. As soon as available and in any event within ninety (90) days after the end of each fiscal year of the Company, a report prepared by the Company for each dental center setting forth the revenues, expenses and contributions to profit of such dental center in form and substance acceptable to the Holders. (o) Quarterly Revenue Reports. As soon as available and in any event within forty five (45) days after each of the first three (3) fiscal quarterly periods of each fiscal year of the Company, a report by the Company for each dental center generally in the form previously provided by the Company and otherwise in form and substance reasonably acceptable to the Holders. (p) Plan Report. From time to time such other information regarding the business, affairs or financial condition of the Company or any Subsidiary (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as the Holders may reasonably request. (q) Capital Expenditures Budget. Promptly upon becoming available and in any event within thirty (30) days after the end of each fiscal year of the Company, a capital expenditure budget for the next (or present, as applicable) fiscal year setting forth all proposed Capital Expenditures to be incurred during such fiscal year. (r) Modifications of Management Services Agreements, etc. Promptly upon the execution thereof, executed copies of any modification or amendment of any "Management Services Agreement" or "Accounts Receivable Purchase Agreement" (as such terms are defined in the Senior Credit Agreement). (s) Further Certification. The Company shall furnish to each Holder, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate substantially in the form of Exhibit C hereto executed by a Responsible Officer (i) certifying as to the matters set forth therein and stating that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail), and (ii) setting forth in reasonable detail the computations necessary to determine the Company's Total Funded Debt, Senior Funded Debt and EBITDA and whether the Company is in compliance with Sections 9.11, 9.14, 9.15 and 9.16 as of the end of the respective fiscal quarter or fiscal year. Section 8.02 Litigation. The Company shall promptly give to each Holder notice of: (i) all legal or arbitral proceedings, and of all proceedings before any Governmental Authority affecting the Company or any Subsidiary, except proceedings which, if adversely determined, would not have a Material Adverse Effect, and (ii) of any litigation or proceeding against or adversely affecting the Company or any Subsidiary in which the amount involved is not covered in full by insurance (subject to normal and customary deductibles and for which the insurer has not assumed the defense), or in which injunctive or similar relief is sought. The Company will, and will cause each of its Subsidiaries to, promptly notify each Holder of any claim, judgment, Lien or other encumbrance affecting any Property of the Company or any Subsidiary if the value 29 of the claim, judgment, Lien, or other encumbrance affecting such Property shall exceed $250,000. Section 8.03 Maintenance, Etc. (a) Generally. The Company shall and shall cause each Subsidiary to: preserve and maintain its corporate existence and all of its material rights, privileges and franchises; keep books of record and account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities; comply with all Governmental Requirements if failure to comply with such requirements, individually or in the aggregate, will have a Material Adverse Effect; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; upon reasonable notice, permit representatives of each Holder, during normal business hours, to examine, copy and make extracts from its books and records, to inspect its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Holder; and keep, or cause to be kept, insured by financially sound and reputable insurers all Property of a character usually insured by Persons engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such Persons and carry such other insurance as is usually carried by such Persons including, without limitation, environmental risk insurance to the extent reasonably available. (b) Proof of Insurance. Contemporaneously with the delivery of the financial statements required by Section 8.01(a) to be delivered for each year, the Company will furnish or cause to be furnished to each Holder a certificate of insurance coverage from the insurer in form and substance satisfactory to Holders and, if requested, will furnish Holders copies of the applicable policies. (c) Operation of Properties. The Company will and will cause each Subsidiary to operate its Properties or cause such Properties to be operated in a careful and efficient manner in accordance with the practices of the industry and in compliance with all applicable contracts and agreements and in compliance in all material respects with all Governmental Requirements. Section 8.04 Environmental Matters. (a) Establishment of Procedures. The Company will and will cause each Subsidiary to establish and implement such procedures as may be reasonably necessary to continuously determine and assure that (i) all Property of the Company and its Subsidiaries and the operations conducted thereon and other activities of the Company and its Subsidiaries are, in all material respects, in compliance with and do not violate the requirements of any Environmental Laws, and (ii) no oil, hazardous substances or solid wastes are disposed of or otherwise released on or 30 to any Property owned by any such party except in compliance with Environmental Laws. (b) Notice of Action. The Company will promptly notify each Holder in writing of any threatened action, investigation or inquiry by any Governmental Authority of which the Company has knowledge in connection with any Environmental Laws, excluding routine testing and corrective action. Section 8.05 Further Assurances. The Company will and will cause each Subsidiary to cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of this Agreement. The Company at its expense will and will cause each Subsidiary to promptly execute and deliver to each Holder upon request all such other documents, agreements and instruments to comply with or accomplish the covenants and agreements of the Company or any Subsidiary, as the case may be, in any of the Subordinated Note and Warrant Documents, or to correct any omissions in any of the Subordinated Note and Warrant Documents, or to state more fully the security obligations set out herein or in any of the other Subordinated Note and Warrant Documents, or to make any recordings, to file any notices or obtain any consents, all as may be necessary or appropriate in connection therewith. Section 8.06 Performance of Obligations. The Company will pay the Notes according to the reading, tenor and effect thereof; and the Company will and will cause each Subsidiary to do and perform every act and discharge all of the obligations to be performed and discharged by them under this Agreement, at the time or times and in the manner specified. Section 8.07 ERISA Information and Compliance. The Company will promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to promptly furnish to each Holder (i) promptly after the filing thereof with the United States Secretary of Labor, the Internal Revenue Service or the PBGC, copies of each annual and other report with respect to each Plan or any trust created thereunder, (ii) immediately upon becoming aware of the occurrence of any ERISA Event or of any "prohibited transaction," as described in section 406 of ERISA or in section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by a Responsible Officer specifying the nature thereof, what action the Company, the Subsidiary or the ERISA Affiliate is taking or proposes to take with respect thereto, and, when known, any action taken or proposed by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto, and (iii) immediately upon receipt thereof, copies of any notice of the PBGC's intention to terminate or to have a trustee appointed to administer any Plan. With respect to each Plan (other than a Multiemployer Plan), the Company will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full and in a timely manner, without incurring any late payment or underpayment charge or penalty and without giving rise to any lien, all of the contribution and funding requirements of section 412 of the Code (determined without regard to subsections (d), (e), (f) and (k) thereof) and of section 302 of ERISA (determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay, or cause to be paid, to the PBGC in a timely manner, without incurring any late payment or underpayment charge or penalty, all premiums required pursuant to sections 4006 and 4007 of ERISA. 31 Section 8.08 Authorized Share Amendment; Issuance. The Company will place on the agenda for its next annual meeting of stockholders, which will take place on or before the 75th day following the Closing Date (the "Annual Meeting"), proposals (the "Proposals") to: (a) approve the Authorized Share Amendment, which shall be sufficient for the Company to issue duly authorized shares of Common Stock to each Person holding securities of the Company that are convertible into or exercisable for shares of Common Stock upon such conversion or exercise, including without limitation the Notes and Warrants, (b) amend its certificate of incorporation to delete Article IX thereof, which prohibits the taking of any action requiring a vote of the stockholders of the Company by written consent in lieu of a meeting of the stockholders, and (c) delete Section 2.14 of the Company's Bylaws. At the Annual Meeting, the Company will recommend to its stockholders that they vote in favor of, and to solicit proxies for the purpose of voting in favor of, the Proposals. Upon approval of the Proposals, the Company will authorize and reserve a sufficient number of shares of Common Stock with respect to the conversion of the Notes and the exercise of the Warrants. Section 8.09 Corresponding Amendment. Company agrees that, in the event any change or amendment is made to the Senior Credit Documents in consideration of a waiver of an actual or contemplated default or event of default thereunder, a corresponding change or amendment shall automatically and simultaneously be deemed to have been made to this Agreement without further action; provided Company agrees to execute such documents as any Holder may reasonably request to further memorialize such change or amendments. ARTICLE IX NEGATIVE COVENANTS The Company covenants and agrees that, so long as any of the Notes are outstanding, the Company shall perform and comply with, and shall cause each of its Subsidiaries to perform and comply with, all covenants in this Article IX applicable to such Person; provided, however, Section 9.18, the proviso to Section 9.23 and Section 9.25 shall survive repayment of the Notes and the Company shall perform and comply with such proviso so long as any of the Holders hold a Warrant or Common Stock issued upon conversion of all or any part of any Note or exercise of all or any part of any Warrant: Section 9.01 Debt. Neither the Company nor any Subsidiary will incur, create, assume or permit to exist any Debt, except: (a) the Notes, the Indebtedness or any guaranty of or suretyship arrangement for the Notes or the Indebtedness; (b) accounts payable (for the deferred purchase price of Property. or services) 32 from time to time incurred in the ordinary course of business which, if greater than ninety (90) days past the invoice or billing date, are being contested in good faith by appropriate proceedings and reserves adequate under GAAP shall have been established therefor; (c) Debt under capital leases (as required to be reported on the financial statements of the Company pursuant to GAAP) and purchase money Debt incurred after the Closing Date, in a combined amount not to exceed $500,000 per year or $2,000,000 in the aggregate outstanding at any one time; (d) Debt of the Company under Hedging Agreements with a Senior Lender or otherwise approved by Holders; (e) Debt in existence on the date hereof and described on Schedule 9.01; and (f) Senior Indebtedness. Section 9.02 Liens. Neither the Company nor any Subsidiary will create, incur, assume or permit to exist any Lien on any of its Properties (now owned or hereafter acquired), except: (a) Liens securing the payment of any Senior Indebtedness; (b) Excepted Liens; (c) Liens disclosed on Schedule 9.02. (d) Liens securing capital leases and purchase money Debt allowed under Section 9.01(c), but only on the Property leased with such capital leases or financed with such purchase money Debt. (e) Liens originally created to secure purchase money Debt permitted under Section 9.01(e), which in each case shall not exceed one hundred percent (100%) of the lesser of the total purchase price and the fair market value of the Property acquired as determined at the time of acquisition; provided, that, (i) the Property to be purchased with the proceeds of such Debt shall be purchased not more than sixty (60) days prior to the date of the creation of such Lien and (ii) such Lien encumbers only the Property so acquired. Section 9.03 Investments, Loans and Advances. Neither the Company nor any Subsidiary will make or permit to remain outstanding any loans or advances to or investments in any Person, except that the foregoing restriction shall not apply to: (a) investments, loans or advances reflected in the Financial Statements or which are disclosed in Schedule 9.03; 33 (b) accounts receivable arising in the ordinary course of business; (c) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, in each case maturing within one year from the date of creation thereof; (d) commercial paper maturing within one (1) year from the date of creation thereof rated in the highest grade by Standard & Poor's Corporation or Moody's Investors Service, Inc.; (e) deposits maturing within one (1) year from the date of creation thereof with, including certificates of deposit issued by, any Senior Lender or any office located in the United States of any other bank or trust company which is organized under the laws of the United States or any state thereof, has capital, surplus and undivided profits aggregating at least $100,000,000.00 (as of the date of such Senior Lender's or bank or trust company's most recent financial reports) and has a short term deposit rating of no lower than A2 or P2, as such rating is set forth from time to time, by Standard & Poor's Corporation or Moody's Investors Service, Inc., respectively; or (f) deposits in money market funds investing exclusively in investments described in Section 9.03(c), 9.03(d) or 9.03(e). Section 9.04 Dividends, Distributions and Redemptions. The Company will not declare or pay any dividend, purchase, redeem or otherwise acquire for value any of its stock, or options or warrants to acquire such stock, now or hereafter outstanding, return any capital to its stockholders or make any distribution of its assets to its stockholders, other than pursuant to cashless exercise provisions of such securities; provided, however, as long as no Defaults or Events of Default have occurred and are continuing and in the event no Default or Event of Default would arise therefrom, the Company may redeem for cash any equity securities required to be repurchased by the Company upon the termination of employment of Usdan in accordance with the terms of that certain Employment Agreement dated as of even date herewith by and between the Company and Usdan. Section 9.05 Sales and Leasebacks. Neither the Company nor any Subsidiary will enter into any arrangement, directly or indirectly, with any Person whereby the Company or any Subsidiary shall sell or transfer any of its Property, whether now owned or hereafter acquired, and whereby the Company or any Subsidiary shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Company or any Subsidiary intends to use for substantially the same purpose or purposes as the Property sold or transferred; provided, however, so long as the Senior Credit Agreement is in effect, this provision shall not prohibit any such transaction to the extent approved by the Majority Lenders and provided no Default or 34 Event of Default exists. Section 9.06 Nature of Business. Neither the Company nor any Subsidiary will allow any material change to be made in the character of its business. Section 9.07 Mergers, Etc. Neither the Company nor any Subsidiary will merge into or with or consolidate with any other Person, or sell, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its Property or assets to any other Person, another Subsidiary, except that any Subsidiary may merge into the Company or into any Wholly-Owned Subsidiary. Section 9.08 Proceeds of Notes. The Company will not permit the proceeds of the Notes to be used for any purpose other than those permitted by Section 7.07. Neither the Company nor any Person acting on behalf of the Company has taken or will take any action which might cause any of the Subordinated Note and Warrant Documents or the Restructuring Documents to violate Regulation T, U or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Section 9.09 ERISA Compliance. The Company will not at any time: (a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in, any transaction in connection with which the Company, any Subsidiary or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) Terminate, or permit any Subsidiary or ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could result in any material liability to the Company, any Subsidiary or any ERISA Affiliate to the PBGC; (c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, the Company, a Subsidiary or any ERISA Affiliate is required to pay as contributions thereto; (d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of Section 302 of ERISA or section 412 of the Code, whether or not waived, with respect to any Plan; (e) Permit, or allow any Subsidiary or ERISA Affiliate to permit, the actuarial present value of the benefit liabilities under any Plan maintained by the Company, any Subsidiary or any ERISA Affiliate which is regulated under Title IV of ERISA to exceed the current value of the 35 assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA; (f) Contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any Multiemployer Plan; (g) Acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Company, any Subsidiary or any ERISA Affiliate if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, (1) any Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA under which the actuarial present value of the benefit liabilities under such Plan exceeds the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities; (h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; (i) Contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by such entities in their sole discretion at any time without any material liability; or (j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that the Company, any Subsidiary or any ERISA Affiliate is required to provide security to such Plan under section 401(a)(29) of the Code. Section 9.10 Sale or Discount of Receivables. Neither the Company nor any Subsidiary will discount or sell (with or without recourse) any of its notes receivable or accounts receivable; provided, however, so long as the Senior Credit Agreement is in effect, this provision shall not prohibit any such transaction to the extent approved by the Majority Lenders and provided no Default or Event of Default exists. Section 9.11 Minimum EBITDA. The Company will not permit its EBITDA as of the end of any fiscal quarter, calculated on a rolling four (4) quarter basis (except for the quarter ending September 30, 2002, which shall be calculated on the basis of the three (3) prior fiscal quarters ending on such date), to be less than the amount for the relevant periods set forth below. Fiscal Quarter Ending Minimum EBITDA --------------------- -------------- 36 September 30, 2002 $ 3,870,000 December 31, 2002 $ 5,310,000 March 31, 2003 $ 5,940,000 June 30, 2003 $ 6,210,000 September 30, 2003 $ 6,480,000 December 31, 2003 $ 6,750,000 March 31, 2004 $ 7,110,000 June 30, 2004 $ 7,380,000 September 30, 2004 $ 7,470,000 December 31, 2004 $ 7,650,000 March 31, 2005 $ 7,920,000 June 30, 2005 and $ 8,100,000 each fiscal quarter ending thereafter Section 9.12 Reserved. Section 9.13 Reserved. Section 9.14 Debt Service Coverage Ratio. The Company will not permit its Debt Service Coverage Ratio as of the end of any fiscal quarter, calculated on a rolling four (4) quarter basis (except for the quarter ending September 30, 2002, which shall be calculated on the basis of the three (3) prior fiscal quarters ending on such date), to be less than the ratio for the relevant periods set forth below. Fiscal Quarter Ending Ratio --------------------- ----- September 30, 2002 0.90 December 31, 2002 0.95 March 31, 2003 0.95 June 30, 2003 0.90 September 30, 2003 0.90 December 31, 2003 0.81 March 31, 2004 0.81 June 30, 2004 0.81 September 30, 2004 0.72 37 December 31, 2004 0.72 March 31, 2005 0.68 June 30, 2005 0.81 September 30, 2005 0.90 and each fiscal quarter ending thereafter For purposes of this Section 9.14, "Debt Service Coverage Ratio" shall mean the ratio for the relevant period of (i) EBITDA less taxes payable in cash less any unfinanced Capital Expenditures to (ii) cash interest plus principal payments scheduled during the period. Section 9.15 Reserved. Section 9.16 Capital Expenditures. The Company will not make any Capital Expenditures if, after giving effect thereto, the aggregate of all such expenditures would, in the case of the twelve (12) month periods ending on the last day of any fiscal quarter, exceed $2,500,000. Section 9.17 Environmental Matters. Neither the Company nor any Subsidiary will cause or permit any of its Property to be in violation of, or do anything or permit anything to be done which will subject any such Property to any remedial obligations under any Environmental Laws, assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to such Property where such violations or remedial obligations would have a Material Adverse Effect. Section 9.18 Transactions with Affiliates. Neither the Company nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under this Agreement, are in the ordinary course of its business and are upon fair and reasonable terms no less favorable to it than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. Section 9.19 Subsidiaries. The Company shall not and shall not permit any Subsidiary to sell or to issue any stock of a Subsidiary or any interest in a Special Entity. The Company shall not permit any Subsidiary to issue any stock except to the Company or any other Subsidiary. Section 9.20 Negative Pledge Agreements. Neither the Company nor any Subsidiary will create, incur, assume or suffer to exist any contract, agreement or understanding (other than the Senior Credit Documents and the Subordinated Note and Warrant Documents) which in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any of its Property or restricts any Subsidiary from paying dividends to the Company, or which requires 38 the consent of or notice to other Persons in connection therewith. Section 9.21 Other Agreements. The Company will not and will not permit any of its Subsidiaries directly or indirectly to change or amend the terms of any of the Senior Credit Documents if the effect of such amendment is in violation of the terms of the Subordination Agreement. Section 9.22 Amendment of Castle West LLC Agreement. Neither the Company nor any Subsidiary shall make or permit any material amendment or modification of the Limited Liability Company Agreement of Castle Dental Centers of California, L.L.C., a Delaware limited liability company, without the prior written consent of Holders. Section 9.23 Restriction on Fundamental Changes. The Company will not and will not permit any of its Subsidiaries directly or indirectly to amend, modify or waive any term or provision of its organizational documents, including without limitation its articles of incorporation, certificates of designations pertaining to preferred stock, by-laws, partnership agreement or members' agreement; provided, however, after repayment in full of the Notes, the Company shall not amend, modify or waive any term or provision of its organizational documents pertaining to Common Stock, or the rights of any holder thereof, as in effect on the Closing Date, in a manner which is adverse to any Holder that holds a Warrant or Common Stock issued upon conversion of any Note or exercise of any Warrant. Section 9.24 Disposal of Assets or Subsidiary Stock. The Company will not and will not permit any of its Subsidiaries directly or indirectly to convey, sell, lease, sublease, transfer or otherwise dispose of, or grant any Person an option to acquire, in one (1) transaction or a series of transactions, any of its property, business or assets, or the capital stock of or other equity interests in any of its Subsidiaries, whether now owned or hereafter acquired, except for (a) bona fide sales of inventory to customers for fair value in the ordinary course of business and dispositions of obsolete equipment not used or useful in the business and (b) asset dispositions if all of the following conditions are met: (i) the market value of assets sold or otherwise disposed of in any fiscal year of the Company does not exceed $1,000,000; (ii) the consideration received is at least equal to the fair market value of such assets; and (iii) no Default or Event of Default then exists or shall result from such asset disposition. Section 9.25 Non-Disclosure. The Company will not and will not permit any of its Affiliates to, in the future, issue any press release or other public disclosure using the name of Heller, Midwest or any of their respective Affiliates or referring to this Agreement or referring to the other Subordinated Note and Warrant Documents without at least two (2) Business Days prior written notice to Heller or Midwest, as applicable, and without the prior written consent of Heller or Midwest, as applicable, unless (and only to the extent that) the Company or such affiliate of the Company is required to so disclose under law and then, in any event, the Company or such Affiliate will consult with Heller or Midwest, as applicable, before issuing such press release or other public disclosure. The Company consents to the publication by Heller 39 and/or Midwest of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement, the other Subordinated Note and Warrant Documents and/or the Restructuring Documents. ARTICLE X EVENTS OF DEFAULT; REMEDIES Section 10.01 Events of Default. One (1) or more of the following events shall constitute an "Event of Default": (a) the Company shall default in the payment or prepayment when due of any principal of any Note, or any fees or other amount payable by it hereunder; provided, however, if such default is a default in the payment of fees, such default shall continue unremedied for a period of thirty (30) days; or (b) the Company or any Subsidiary shall default in the payment when due of any principal of or interest on any of its other Debt (other than Senior Debt) aggregating $250,000 or more, or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Debt shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Debt (or a trustee or an agent on behalf of such holder or holders) to cause, such Debt to become due prior to its stated maturity; or (c) any representation, warranty or certification made or deemed made herein or in any of the other Subordinated Note and Warrant Documents or any of the Restructuring Documents by the Company or any Subsidiary, or any certificate furnished to any Holder pursuant to the provisions hereof or the other Subordinated Note and Warrant Documents or of the Restructuring Documents, shall prove to have been materially false or misleading as of the time made or furnished in any material respect; or (d) (i) the Company shall default in the performance of any of its obligations under Article IX, any other Article of this Agreement other than under Article VIII or Section 8.08 (other than the payment of amounts due, which shall be governed by Section 10.01(a)); or (ii) the Company shall default in the performance of any of its obligations under Article VIII (other than Section 8.08 ) and such default shall continue unremedied for a period of thirty (30) days after the earlier to occur of (x) notice thereof to the Company by any Holder or (y) the Company otherwise becoming aware of such default; or (e) the Company shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or 40 (f) the Company shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, liquidation or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) a proceeding or case shall be commenced, without the application or consent of the Company, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Company of all or any substantial part of its assets, or (iii) similar relief in respect of the Company under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of sixty (60) days; or (iv) an order for relief against the Company shall be entered in an involuntary case under the Federal Bankruptcy Code; or (h) a judgment or judgments for the payment of money in excess of $250,000 in the aggregate shall be rendered by a court against the Company or any Subsidiary and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be (i) fully covered by insurance owned or held by the Company or such Subsidiary, as applicable, under a policy or policies which are in full force and effect, or (ii) procured, within thirty (30) days from the date of entry thereof and the Company or such Subsidiary shall not, within said period of thirty (30) days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) the Company discontinues its usual business; or (j) any Subsidiary takes, suffers or permits to exist any of the events or conditions referred to in paragraphs (e), (f), (g) or (h) hereof; or (k) a Change of Control occurs; or (l) the Company or any of its Subsidiaries shall default in their performance of any obligations in any documents executed or delivered in connection with the Restructuring Transactions and any applicable cure period provided for in such document has passed; or (m) the Company shall default in the payment or performance of any obligations in 41 the Senior Credit Documents after any applicable cure period provided for in such document and as a result any Senior Lender causes the Senior Indebtedness to be accelerated or the Company shall default in the repayment of such Senior Indebtedness at final maturity. Section 10.02 Remedies. (a) In the case of an Event of Default other than one referred to in clauses (e), (f) or (g) of Section 10.01 or in clauses (j) to the extent it relates to clauses (e), (f) or (g), each Holder may, by notice to the Company, declare the principal amount then outstanding of, and the accrued interest on, the Notes held by it and all other amounts payable to it by the Company hereunder and under the Notes to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other formalities of any kind, all of which are hereby expressly waived by the Company. (b) In the case of the occurrence of an Event of Default referred to in clauses (e), (f) or (g) of Section 10.01 or in clauses (k) and (l) to the extent they relate to clauses (e), (f) or (g), the principal amount then outstanding of, and the accrued interest on, the Notes and all other amounts payable by the Company hereunder and under the Notes shall become automatically immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other formalities of any kind, all of which are hereby expressly waived by the Company. (c) All proceeds received after maturity of the Notes, whether by acceleration or otherwise shall be applied first to reimbursement of expenses and indemnities provided for in this Agreement; second to accrued interest on the Notes; third to fees; fourth pro rata to principal outstanding on the Notes and other Indebtedness; and any excess shall be paid to the Company or as otherwise required by any Governmental Requirement. (d) Upon the occurrence and during the continuance of any one (1) or more Events of Default, any Holder may proceed to protect and enforce its rights hereunder by suit in equity, action at law or by other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreements, the Notes, the other Subordinated Note and Warrant Documents or the Restructuring Documents or in aid of the exercise of any power granted in this Agreement or the Notes, or may proceed to enforce the payment of the Notes, or to enforce any other of its legal or equitable rights. ARTICLE XI HOLDER REPRESENTATIONS AND WARRANTIES Section 11.01 Accredited Investor. Each Holder represents, as to itself, that it is an 42 "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. ARTICLE XII MISCELLANEOUS Section 12.01 Waiver. No failure on the part of a Holder to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any of the Subordinated Note and Warrant Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any of the Subordinated Note and Warrant Documents preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Section 12.02 Notices. All notices and other communications provided for herein and in the other Subordinated Note and Warrant Documents (including, without limitation, any modifications of, or waivers or consents under, this Agreement or the other Subordinated Note and Warrant Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in writing and telexed, telecopied, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or in the Subordinated Note and Warrant Documents; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement or in the other Subordinated Note and Warrant Documents, all such communications shall be deemed to have been duly given when transmitted, if transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next succeeding Business Day) by telex or telecopier and evidence or confirmation of receipt is obtained, or personally delivered or, in the case of a mailed notice, three (3) Business Days after the date deposited in the mails, postage prepaid, in each case given or addressed as aforesaid. Section 12.03 Payment of Expenses, Indemnities, etc. (a) The Company agrees: (i) whether or not the transactions hereby contemplated are consummated, to pay all reasonable expenses of Holders in the administration (both before and after the execution hereof and including advice of counsel as to the rights and duties of a Holder with respect thereto) of, and in connection with the negotiation, syndication, investigation, preparation, execution and delivery of, recording or filing of, preservation of rights under, enforcement of, and refinancing, renegotiation or restructuring of, the Subordinated Note and Warrant Documents and any amendment, waiver or consent relating thereto (including, without limitation, travel, photocopy, mailing, courier, telephone and other similar expenses of Holders, the cost of environmental audits, 43 surveys and appraisals at reasonable intervals, the reasonable fees and disbursements of counsel and other outside consultants for Holders and, in the case of enforcement (including, without limitation, bankruptcy and workout matters), the reasonable fees and disbursements of counsel for Holders; and promptly reimburse a Holder for all amounts expended, advanced or incurred by such Holder to satisfy any obligation of the Company under this Agreement; (ii) TO INDEMNIFY EACH HOLDER AND EACH OF ITS AFFILIATES AND EACH OF ITS OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY OF THE NOTES, (II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE SUBORDINATED NOTE AND WARRANT DOCUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES, (IV) THE FAILURE OF THE COMPANY OR ANY SUBSIDIARY TO COMPLY WITH THE TERMS OF THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (V) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF THE COMPANY OR ANY SUBSIDIARY SET FORTH IN ANY OF THE SUBORDINATED NOTE AND WARRANT DOCUMENTS OR (VI) ANY OTHER ASPECT OF THE SUBORDINATED NOTE AND WARRANT DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY; AND (III) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO THE COMPANY OR ANY SUBSIDIARY OR ANY OF THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR PROPERTIES, (II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY THE COMPANY OR ANY SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE COMPANY OR ANY SUBSIDIARY, (III) DUE TO PAST OWNERSHIP BY THE COMPANY OR ANY SUBSIDIARY OF ANY OF THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH, THOUGH 44 LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE COMPANY OR ANY SUBSIDIARY, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE SUBORDINATED NOTE AND WARRANT DOCUMENTS. (b) No Indemnified Party may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld. (c) In the case of any indemnification hereunder, the Indemnified Party shall give notice to the Company of any such claim or demand being made against the Indemnified Party and the Company shall have the non-exclusive right to join in the defense against any such claim or demand provided that if the Company provides a defense, the Indemnified Party shall bear its own cost of defense unless there is a conflict between the Company and such Indemnified Party. (d) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY. (e) The Company's obligations under this Section 12.03 shall survive any termination of this Agreement, conversion and payment of the Notes and shall continue thereafter in full force and effect. (f) The Company shall pay any amounts due under this Section 12.03 within thirty (30) days of the receipt by the Company of notice of the amount due. Section 12.04 Amendments, Etc. Any provision of this Agreement may be amended, modified or waived with the prior written consent of the Company and the holders of fifty one percent (51%) of the then-outstanding principal balance of the Notes; provided, however, that no amendment, modification or waiver can be effected if, by its terms, such amendment, modification or waiver adversely affects one (1) Holder without having the same adverse effect on all other Holders without the prior written consent of the adversely affected Holder. Section 12.05 Successors and Assigns. This Agreement shall be binding upon and inure 45 to the benefit of the parties hereto and their respective successors and permitted assigns. Section 12.06 Assignments. (a) The Company may not assign its rights or obligations hereunder or under the Notes or the Warrants without the prior consent of Holders. (b) Subject to applicable securities laws and to the terms and conditions of the Stockholders Agreement, Holders (and its permitted assigns) may assign to one (1) or more assignees all or a portion of its rights and obligations under this Agreement and the other Subordinated Note and Warrant Documents to any Person, and any such assignee may further assign such rights and obligations to any Person. Any such assignment will become effective upon the execution and delivery to the assigning Holder of the assignment. Upon the assigning Holder's request, the Company, will, at its own expense, execute and deliver new Notes and Warrants, as applicable, to the assignor and/or assignee, as appropriate, in accordance with their respective interests as they appear. Upon the effectiveness of any assignment pursuant to this Section 12.06(b), all references to "Holders" or a "Holder" in this Agreement, the Notes, the Warrants and the other Subordinated Note and Warrant Documents shall mean and include each such assignee, each such assignee shall be deemed a party to this Agreement and bound by all the agreements and covenants of Holders (other than the covenant to purchase a Note or a Warrant) contained herein and all actions which are to be taken, and all consents or waivers to be granted or consents, amendments, waivers and other writings required to be signed by Holders or a party (other than the Company) to this Agreement thereafter shall be, in each case, effective only if taken or executed or delivered by Holders and all such assignees. (c) A Holder may furnish any information concerning the Company in its possession from time to time to assignees (including prospective assignees); provided that, such Persons agree to be bound by the provisions of Section 12.15. (d) Notwithstanding any other provisions of this Section 12.06, no transfer or assignment of the interests or obligations of a Holder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Company to file a registration statement with the SEC or to qualify the Notes under the "Blue Sky" laws of any state. Section 12.07 Invalidity. In the event that any one (1) or more of the provisions contained in any of the Subordinated Note and Warrant Documents shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Notes or this Agreement. Section 12.08 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one (1) and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 46 Section 12.09 References. The words "herein," "hereof," "hereunder" and other words of similar import when used in this Agreement refer to this Agreement as a whole, and not to any particular article, section or subsection. Any reference herein to a Section shall be deemed to refer to the applicable Section of this Agreement unless otherwise stated herein. Any reference herein to an exhibit or schedule shall be deemed to refer to the applicable exhibit or schedule attached hereto unless otherwise stated herein. Section 12.10 Survival. The obligations of the parties, other than under, but subject to the introductory statement to, Article VIII and Article IX, shall survive the repayment and conversion of the Notes. To the extent that any payments on the Indebtedness are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Indebtedness so satisfied shall be revived and continue as if such payment or proceeds had not been received and Holders' rights, powers and remedies under this Agreement shall continue in full force and effect. Section 12.11 Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. Section 12.12 NO ORAL AGREEMENTS. THE SUBORDINATED NOTE AND WARRANT DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THE SUBORDINATED NOTE AND WARRANT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. (b) SUBJECT TO SECTION 12.17, ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE SUBORDINATED NOTE AND WARRANT DOCUMENTS SHALL BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE AOMPANY AND EACH HOLDER HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH OF THE COMPANY AND EACH HOLDER HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT 47 LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. (c) NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY HOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. (d) THE COMPANY AND EACH HOLDER HEREBY (I) IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (IV) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 12.13. Section 12.14 Interest. It is the intention of the parties hereto that Holders shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated hereby would be usurious as to Holders under laws applicable to it (including the laws of the United States of America and the State of Illinois or any other jurisdiction whose laws may be mandatorily applicable to Holders notwithstanding the other provisions of this Agreement), then, in that event, notwithstanding anything to the contrary in any of the Subordinated Note and Warrant Documents or any agreement entered into in connection with or as security for the Notes, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to Holders that is contracted for, taken, reserved, charged or received by Holders under any of the Subordinated Note and Warrant Documents or agreements or otherwise in connection with the Notes shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be canceled automatically and if theretofore paid shall be credited by Holders on the principal amount of the Indebtedness (or, to the extent that the principal amount of the Indebtedness shall have been or would thereby be paid in full, refunded by Holders to the Company); and (ii) in the event that the maturity of the Notes is accelerated by reason of an election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to Holders may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically by Holders as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by Holders on the principal amount of the Indebtedness (or, to the extent that the principal amount of the 48 Indebtedness shall have been or would thereby be paid in full, refunded by Holders to the Company). All sums paid or agreed to be paid to Holders for the use, forbearance or detention of sums due hereunder shall, to the extent permitted by law applicable to Holders, be amortized, prorated, allocated and spread throughout the full term of the Notes until payment in full so that the rate or amount of interest on account of any Notes hereunder does not exceed the maximum amount allowed by such applicable law. If at any time and from time to time (i) the amount of interest payable to Holders on any date shall be computed at the Highest Lawful Rate applicable to Holders pursuant to this Section 12.14 and (ii) in respect of any subsequent interest computation period the amount of interest otherwise payable to Holders would be less than the amount of interest payable to Holders computed at the Highest Lawful Rate applicable to Holders, then the amount of interest payable to Holders in respect of such subsequent interest computation period shall continue to be computed at the Highest Lawful Rate applicable to Holders until the total amount of interest payable to Holders shall equal the total amount of interest which would have been payable to Holders if the total amount of interest had been computed without giving effect to this Section 12.14. Section 12.15 Confidentiality. In the event that the Company provides to a Holder written confidential information belonging to the Company, if the Company shall denominate such information in writing as "confidential", such Holder shall thereafter maintain such information in confidence in accordance with the standards of care and diligence that each utilizes in maintaining its own confidential information. This obligation of confidence shall not apply to such portions of the information which (i) are in the public domain, (ii) hereafter become part of the public domain without a Holder breaching its obligation of confidence to the Company, (iii) are previously known by a Holder from some source other than the Company, (iv) are hereafter developed by a Holder without using the Company's information, (v) are hereafter obtained by or available to a Holder from a third party who owes no obligation of confidence to the Company with respect to such information or through any other means other than through disclosure by the Company, (vi) are disclosed with the Company's consent, (vii) must be disclosed either pursuant to any Governmental Requirement or to Persons regulating the activities of a Holder, or (viii) as may be required by law or regulation or order of any Governmental Authority in any judicial, arbitration or governmental proceeding. Further, a Holder may disclose any such information to any independent consultants, any independent certified public accountants, any legal counsel employed by such Person in connection with this Agreement, including without limitation, the enforcement or exercise of all rights and remedies thereunder, or any assignee (including prospective assignees) in the Notes; provided, however, that such Holder shall receive a confidentiality agreement from the Person to whom such information is disclosed such that said Person shall have the same obligation to maintain the confidentiality of such information as is imposed upon such Holder hereunder. Notwithstanding anything to the contrary provided herein, this obligation of confidence shall cease three (3) years from the date the information was furnished, unless the Company requests in writing at least thirty (30) days prior to the expiration of such three year period, to maintain the confidentiality of such information for an additional three year period. The Company waives any and all other rights it may have to confidentiality as against a Holder arising by contract, agreement, statute or 49 law except as expressly stated in this Section 12.15. Section 12.16 Effectiveness. This Agreement shall be effective on the Closing Date. Section 12.17 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT; THAT IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS." Section 12.18 Subordination. Each of the Company, the Subsidiaries and Holders, by their acceptance of this Agreement, agree that all of the Indebtedness, all payments in respect thereof (prior to the payment in full of the Senior Indebtedness) and any renewals, refinancings or extensions thereof shall be subordinate and junior in right to all Senior Indebtedness as set forth and subject to the terms of the Subordination Agreement. - Remainder of Page Intentionally Left Blank - [Signature Page Follows] 50 The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. COMPANY: CASTLE DENTAL CENTERS, INC., a Delaware corporation By: /s/ JP Keane --------------------------------- Name: JP Keane --------------------------------- Title: Chief Financial Officer --------------------------------- Address for Notices: 3701 Kirby Drive Suite 550 Houston, Texas 77098 Telecopier No.: 713.490.8420 Telephone No.: 713.490.8400 Attention: James Usdan Note and Warrant Purchase Agreement The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. HELLER: HELLER FINANCIAL, INC., a Delaware corporation By: /s/ Michael S. Sznajder --------------------------------- Name: Michael S. Sznjder --------------------------------- Title: Senior Vice President --------------------------------- Address for Notices: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 500 West Monroe Street Chicago, Illinois 60661 ATTN: Michael Sznajder Telecopy: 312.441.7598 With a copy to: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 2 Wisconsin Circle, 4th Floor Chevy Chase, Maryland 20815 ATTN: Katherine R. Lofft, Esq. Telecopy: 301.664.9866 Note and Warrant Purchase Agreement The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. MIDWEST: MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership By: ABN AMRO Mezzanine Management II, L.P., its general partner By: ABN AMRO Mezzanine Management II, Inc., its general partner By: Paul Kreie ----------------------- Name: Paul Kreie Title: Vice President Address for Notices: Midwest Mezzanine Fund II, L.P. 208 South LaSalle Street, 10th floor Chicago, Illinois 60604-1003 ATTN: J. Allan Kayler Telecopy: 312.553.6647 Note and Warrant Purchase Agreement The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. USDAN: JAMES M. USDAN, an individual By: /s/ James M. Usdan ---------------------------------- Name: James M. Usdan Address for Notices: c/o Castle Dental Centers, Inc. 3701 Kirby Drive Suite 550 Houston, Texas 77098 Telecopier No.: 713.490.8420 Telephone No.: 713.490.8400 Attention: James Usdan Note and Warrant Purchase Agreement EXHIBIT A to Note and Warrant Purchase Agreement Form of Note Note and Warrant Purchase Agreement EXHIBIT B TO Note and Warrant Purchase Agreement Form Of Warrant Note and Warrant Purchase Agreement EXHIBIT C to Note and Warrant Purchase Agreement Form of Compliance Certificate COMPLIANCE CERTIFICATE The undersigned hereby certifies, as of this ____ day of ____________, 20__, that s/he is the ________________ of CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Company"), and that as such s/he is authorized to execute this certificate on behalf of the Company. With reference to the Senior Subordinated Note and Warrant Purchase Agreement dated as of July 19, 2002 (together with all amendments, restatements, supplements or other modifications from time to time thereto, the "Purchase Agreement") by and among the Company, Midwest Mezzanine Fund II, L.P., a Delaware limited partnership ("Midwest"), Heller Financial, Inc., a Delaware corporation ("Heller"), James M. Usdan, an individual ("Usdan"; Usdan, Heller and Midwest are sometimes referred to each as a "Holder" and collectively as the "Holders"), the undersigned represents and warrants as follows (each capitalized term used herein having the same meaning given to it in the Purchase Agreement unless otherwise specified): (a) The representations and warranties of the Company contained in Article VII of the Purchase Agreement and in the Subordinated Note and Warrant Documents and otherwise made in writing by or on behalf of the Company pursuant to the Purchase Agreement and in the Subordinated Note and Warrant Documents were true and correct when made, and are repeated at and as of the time of delivery hereof and are true and correct at and as of the time of delivery hereof, except as such representations and warranties are modified to give effect to the transactions expressly permitted by the Purchase Agreement. (b) Neither the Company nor any Subsidiary has incurred any material liabilities, direct or contingent, since the date of the Financial Statements accompanying this certificate, except those allowed by the terms of the Agreement or consented to by the Agent in writing. (c) Since the date of the Financial Statements accompanying this certificate, no Material Adverse Effect has occurred. (d) There exists no Default or Event of Default under the Purchase Agreement or any event or circumstance which constitutes, or with notice or lapse of time (or both) would constitute, an event of default under any loan or credit agreement, indenture, deed of trust, security agreement or other agreement or instrument evidencing or pertaining to any Debt of the Company or any Subsidiary, or under any material agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound. Note and Warrant Purchase Agreement (e) The Company has performed and complied with all agreements and conditions contained in the Purchase Agreement and in the Subordinated Note and Warrant Documents required to be performed or complied with by it prior to or at the time of delivery hereof. (f) The following computations reflect compliance with the following Sections of the Purchase Agreement: Section 9.11 Minimum EBITDA Section 9.14 Debt Service Coverage Ratio Section 9.16 Capital Expenditures EXECUTED AND DELIVERED as of the day first written above. CASTLE DENTAL CENTERS, INC., a Delaware corporation By: --------------------------------- Name: --------------------------------- Title: --------------------------------- Note and Warrant Purchase Agreement EX-10.4 8 dex104.txt FORM OF WARRANT AGREEMENT Exhibit 10.4 NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAS BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, NOR THE SECURITIES LAWS OF ANY STATE. NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE ISSUER OF THIS WARRANT OF AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER, OR (3) THE SUBMISSION TO THE ISSUER OF THIS WARRANT OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE, HYPOTHECATION OR TRANSFER WILL NOT BE IN VIOLATION OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR OTHER APPLICABLE SECURITIES LAWS OF ANY STATE, OR ANY RULES OR REGULATIONS PROMULGATED THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A STOCKHOLDERS AGREEMENT, DATED AS OF JULY 19, 2002. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE. CASTLE DENTAL CENTERS, INC. WARRANT TO PURCHASE COMMON STOCK Warrant No.:__________________ Number of Shares: ____ Date of Issuance: July 19, 2002 Castle Dental Centers, Inc., a Delaware corporation (the "Company"), hereby certifies that, for Ten United States Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ____________________, the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. New York Time on the Expiration Date (as defined herein) ________________ (_______) fully paid nonassessable shares of the Company's common stock (the "Common Stock"), $.001 par value per share (the "Warrant Shares") at the purchase price per share provided in Section 1(b) below. Section 1. (a) Purchase Agreement. This Warrant is one of the warrants (the "Share Warrants") issued pursuant to Section 2.01(b) of that certain Senior Subordinated Note and Warrant Purchase Agreement dated as of July 19, 2002, among the Company and the Persons (as defined below) referred to therein (as such agreement may be amended from time to time as provided in such agreement, the "Purchase Agreement"). (b) Definitions. The following words and terms as used in this Warrant shall have the following meanings: (i) "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual or any trust whose principal beneficiary is such individual or one (1) or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. (ii) "Business Day" means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed. (iii) "Capital Stock" or "capital stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of corporate stock, and (ii) with respect to any other Person, any and all partnership, limited partnership, limited liability company or other equity interest of such Person, whether outstanding on the date of the Warrant or issued after the date of the Warrant, and any and all rights or warrants exercisable or exchangeable for or convertible into such capital stock. (iv) "Closing Bid Price" means, for any security as of any date, the last closing bid price for such security on the Principal Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price, then the last bid price of such security at 4:00 p.m. New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg, or, if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date -2- on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value (the "Fair Market Value") as mutually determined by the Company and the holders of the Share Warrants representing a majority of the shares of Common Stock issuable upon exercise of the Share Warrants then outstanding. If the Company and the holders of the majority of the shares of Common Stock issuable upon exercise of the Share Warrants then outstanding are unable to agree upon the Fair Market Value, then such dispute shall be resolved pursuant to Section 2(a) below. All such determinations to be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. (v) "Convertible Securities" means any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock. (vi) "Expiration Date" means July 18, 2012 or, if such date does not fall on a Business Day or on a day on which trading takes place on the Principal Market, then the next date Business Day. (vii) "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. (viii) "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (ix) "Principal Market" means the principal securities exchange or trading market for the Common Stock. (x) "Securities Act" means the Securities Act of 1933, as amended. (xi) "Stockholders Agreement" means that certain Stockholders Agreement, dated as of July 19, 2002, among the Company and each of the stockholders a party thereto. (xii) "Warrant" means this Warrant and all warrants issued upon partial exercise, assignment, transfer, sale, exchange or replacement thereof. (xiii) "Warrant Date" has the meaning ascribed to it in Section 13. (xiv) "Warrant Exercise Price" shall be equal to $.001, subject to adjustment as hereinafter provided. Section 2. Exercise of Warrant. (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, in whole or in part, at any time on any Business Day on or after the opening of business on the date hereof and prior to 11:59 P.M. New York Time on the Expiration Date by (i) delivery of a written notice, in the -3- form of the subscription form attached as Exhibit A hereto (the "Exercise Notice"), of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) (A) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the "Aggregate Exercise Price") or (B) by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section 2(e), and (iii) if this Warrant is being exercised with respect to all of the Warrant Shares for which it can then be exercised, the surrender to a common carrier for overnight delivery to the Company as soon as practicable following such date, this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction). In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), the Company shall on the second (2nd) Business Day (the "Warrant Share Delivery Date") following the date of its receipt of the Exercise Notice, the Aggregate Exercise Price (or notice of Cashless Exercise) and this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) (the "Exercise Delivery Documents") (A), provided that the transfer agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and provided that the holder is eligible to receive shares through DTC, upon the request of the holder of this Warrant, credit the number of shares of Common Stock to which the holder is entitled to the holder's balance account with DTC through its Deposit Withdrawal Agent Commission system or (B) issue and deliver to the address specified in the Exercise Notice, a certificate, registered in the name of the holder, for the number of shares of Common Stock to which the holder is entitled. Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in clause (ii)(A) above or notification to the Company of a Cashless Exercise referred to in Section 2(e), the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of this Warrant as required by clause (iii) above or the certificates evidencing such Warrant Shares. In the case of a dispute as to the determination of the arithmetic calculation of the Warrant Exercise Price and the arithmetic calculation of the number of Warrant Shares, the Company shall instruct the Transfer Agent to issue to the holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed arithmetic calculations to the holder via facsimile within one (1) Business Day of receipt of such holder's Exercise Notice or other date of determination. If such holder and the Company are unable to agree upon the determination of the arithmetic calculation of the Warrant Exercise Price and the arithmetic calculation of the number of Warrant Shares within two (2) Business Days of such disputed arithmetic calculation being transmitted to the holder, then the Company shall within one (1) Business Day submit via facsimile the disputed arithmetic calculations to the Company's independent, outside accountant. Furthermore, in the event the holders of a majority of the Share Warrants then outstanding, on the one hand, and the Company, on the other hand, are unable to agree on the Fair Market Value in accordance with the definition of Closing Bid Price, then the Company shall submit as soon as reasonably practicable after it becomes apparent that the parties do not agree as to the Fair Market Value, the disputed determination of the Fair Market Value to an independent, reputable investment bank selected by the Company and approved by the holders of a majority of the Share Warrants then outstanding. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holders of the Share Warrants of the results no later than two (2) Business Days from the time it -4- receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties. Within one (1) Business Day of the accountant's determination of the calculation of arithmetic calculation of the Warrant Exercise Price and the arithmetic calculation of the number of Warrant Shares, the Company shall deliver to the holder the balance of Common Stock that such holder is entitled to as provided herein (such date also deemed to be a Warrant Share Delivery Date) and any failure to do so will subject the Company to the provisions of this Section 2(a). (b) Notwithstanding anything to the contrary set forth herein, upon exercise of any portion of this Warrant in accordance with the terms hereof, the holder shall not be required to physically surrender this Warrant to the Company unless the full amount of Warrant Shares then represented by the Warrant have been exercised. The Company shall maintain records showing the Warrant Shares so exercised and the dates of such exercise or shall use such other method, reasonably satisfactory to the holder, so as to account for the number of Warrant Shares that are represented by the Warrant where the exercise of the Warrant has occurred without the physical surrender of this Warrant. Notwithstanding the foregoing, if any portion of this Warrant is converted as aforesaid, thereafter, the holder may not transfer this Warrant unless the holder first physically surrenders this Warrant to the Company, whereupon the Company will forthwith issue and deliver to the holder a new Warrant of like tenor, registered as the holder may request, representing in the aggregate the remaining Warrant Shares represented by this Warrant. The holder, by acceptance of this Warrant or such new Warrant, acknowledges and agrees that, by reason of the provisions of this paragraph, following exercise of any portion of this Warrant, the number of Warrant Shares represented by this Warrant may be less than the number of Warrant Shares set forth on the face hereof. If a Warrant is delivered to the Company by a holder and the number of Warrant Shares represented by the Warrant submitted for exercise is greater than the number of Warrant Shares that have been exercised, then the Company shall, as soon as practicable and in no event later than three (3) Business Days after receipt of the Warrant (the "Warrant Delivery Date") and at its own expense, issue and deliver to the holder a new Warrant representing the number of Warrant Shares not converted. (c) In the event the Company receives an Exercise Notice from more than one holder of a Share Warrant and the Company can, after fully complying with Section 3(c), issue some, but not all, of such Common Stock issuable upon exercise of such notices, the Company shall issue to each holder of such Share Warrants a pro rata amount of such holder's Warrant Shares submitted for exercise based on the amount of the Warrant Shares being exercised by such holder relative to the aggregate amount of Warrant Shares being exercised. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock issued upon exercise of this Warrant shall be rounded up or down to the nearest whole number. (d) If the Company shall fail for any reason or for no reason to issue and deliver to the holder within three (3) Business Days of receipt of the Exercise Delivery Documents a certificate for the number of shares of Common Stock to which the holder is entitled or to credit, at the holder's request, the holder's balance account with DTC for such number of shares of Common Stock to which the holder is entitled upon the holder's exercise of this Warrant or to issue a new Warrant for the number of shares of Common Stock to which such holder is entitled pursuant to Section 2(b) hereof, then the Company shall, in addition to any -5- other remedies under this Warrant or the Purchase Agreement or otherwise available to such holder (including any indemnification under the Purchase Agreement), pay as additional damages in cash to such holder on each day after the Warrant Share Delivery Date that such exercise is not timely effected and/or each day after the Warrant Delivery Date that such Warrant is not delivered, as the case may be, in an amount equal to 0.5% of the sum of (i) the product of (A) the number of shares of Common Stock not issued to the holder on or prior to the Warrant Share Delivery Date and (B) the Closing Bid Price of the Common Stock on the Warrant Share Delivery Date, in the case of the failure to deliver Common Stock, and (ii) if the Company has failed to deliver a Warrant to the holder on or prior to the Warrant Delivery Date, the product of (x) the number of shares of Common Stock issuable upon exercise of the Warrant (without regard to any limitations on conversions herein or elsewhere, including, but not limited to, any limitations as a result of the actual number of shares of Common Stock authorized for issuance by the Company) as of the Warrant Delivery Date, and (y) the Closing Bid Price of the Common Stock on the Warrant Delivery Date, in the case of the failure to deliver a Warrant. If for any reason the holder has not received all of the shares of Common Stock to which it is entitled to prior to the tenth (10th) Business Day after the expiration of the Warrant Share Delivery Date, then the holder, upon written notice to the Company, may void its Exercise Notice with respect to, and retain or have returned or restored as of the date of the Exercise Notice, as the case may be, any Warrant Shares pursuant to such holder's Exercise Notice; provided that the voiding of a holder's Exercise Notice shall not effect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 2(d). (e) Notwithstanding anything contained herein to the contrary, the holder of this Warrant may, at its election exercised in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the "Net Number" of shares of Common Stock determined according to the following formula (a "Cashless Exercise"): Net Number = (A X B) - (A X C) / B For purposes of the foregoing formula: A= the total number of shares with respect to which this Warrant is then being exercised. B= the Closing Bid Price of the Common Stock on the trading day immediately preceding the date of the Exercise Notice. C= the Warrant Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise. Section 3. Covenants as to Common Stock. The Company hereby covenants and -6- agrees as follows: (a) This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued, not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (b) All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable, and not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (c) During the period within which the rights represented by this Warrant may be exercised, (i) the Company will at all times have authorized and reserved at least 100% of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant (and if there is ever an insufficient amount of shares of Common Stock to provide for the exercise of the rights represented by this Warrant (an "Authorized Share Failure"), the Company shall immediately take all action necessary to cause the number of Company's authorized shares of Common Stock to be sufficient to accomplish the holder's right of exercise hereunder) and, (ii) the Company will ensure that the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than 75 days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the authorization of either an increase in the number of authorized shares of Common Stock or a reverse stock split with respect to the Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders' approval of such increase in authorized shares of Common Stock or reverse stock split and to cause its board of directors to recommend to the stockholders that they approve such proposal. In addition, as soon as practicable after the date the par value is greater than the Warrant Exercise Price as a result of an adjustment provided for herein, but in no event later than 75 days after the effective date of such adjustment, the Company shall hold a meeting of its stockholders for the authorization of an decrease in the par value of Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders' approval of such decrease and to cause its board of directors to recommend to the stockholders that they approve such proposal. (d) The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the -7- Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect (except as otherwise provided in Section 3(c) above, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. Section 4. Taxes. The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant. Section 5. Warrant Holder Not Deemed a Stockholder; Notice of Corporate Action. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he, she, or it is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders. Furthermore, so long as this Warrant has not been exercised in full: (a) Immediately upon any adjustment of the Exercise Price or the number of shares of Common Stock issuable upon exercise of this Warrant, the Company will give written notice thereof to the holder of such adjustment and a certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who shall be appointed at the Company's expense and who may be the independent public accountants regularly employed by the Company) setting forth the number of shares of Common Stock and the Exercise Price of such shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. (b) The Company will give written notice to the holder at least twenty (20) Business Days prior to the date on which the Company closes its books or takes a record (i) with respect to any dividend or distribution upon the Common Stock, (ii) with respect to any pro rata subscription offer to holders of Common Stock or (iii) for determining rights to vote with respect to any Organic Change (as defined in Section 9 (b)), dissolution or liquidation, provided that such information shall have been made known to the public prior to or in conjunction with such notice being provided to such holder. (c) The Company will also give written notice to holder at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place, -8- provided that such information shall have been made known to the public prior to or in conjunction with such notice being provided to such holder. Section 6. Representations of Holder. The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an "accredited investor" as such term is defined in Rule 501(a)(3) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an "Accredited Investor"). Section 7. Ownership and Transfer. (a) Warrant Register. The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. (b) Transferability and Negotiability of Warrant. Title to this Warrant may be transferred by endorsement (by the holder hereof executing the Assignment Form attached hereto as Exhibit B) and delivery in the same manner as negotiable instruments transferable by endorsement and delivery. (c) Exchange of Warrant Upon a Transfer. This Warrant shall be transferable by the holder hereof to any of its Affiliates or any other Person subject only to the restrictions set forth in the legend on the first page of this Warrant and the restrictions set forth in the Stockholders Agreement. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions hereof with respect to compliance with the Securities Act, the Company at its expense shall issue to or on the order of such holder a new warrant or warrants of like tenor, in the name of such holder or as such holders (on payment by the holder of any applicable transfer taxes) may direct, exercisable for the number of shares of Common Stock issuable upon the exercise hereof. Section 8. Adjustment of Warrant Exercise Price and Number of Shares. The Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows: (a) Adjustment of Warrant Exercise Price upon Subdivision or Combination -9- of Common Stock. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. If the Company at any time after the date of issuance of this Warrant reduces the par value per share of the Common Stock to an amount less than the Warrant Exercise Price in effect immediately prior to such reduction, the Warrant Exercise Price shall be reduced to the par value per share of the Common Stock. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision, combination or reduction becomes effective. (b) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions, then the Company's Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Share Warrants. (c) Distribution of Securities. If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of any or all of the Company's securities, such number of securities will be distributed to the holder of this Warrant or its assignee upon exercise of its rights hereunder as such Warrant holder or assignee would have been entitled to if this Warrant had been exercised prior to such distribution, giving effect to all adjustments called for by this Section 8. The provisions with respect to adjustment of the Common Stock provided in this Section 8 will also apply to the securities of the Company and securities of any subsidiary to which the Warrant holder or its assignee is entitled under this Section 8 (c). Section 9. Purchase Rights; Reorganization, Reclassification, Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. (b) Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person, conveyance to -10- another Person of the property of the Company as an entirety or substantially as an entirety or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) Capital Stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change." Prior to the consummation of, and as a condition to, any (i) sale or other conveyance of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change, the Company, or such other successor or purchasing Person, as the case may be, shall make lawful and adequate provision whereby the holder of this Warrant shall have the right thereafter to receive on exercise of such Warrant the kind and amount of securities and property receivable upon such Organic Change by a holder of the number of securities issuable upon exercise of such Warrant immediately prior to such Organic Change. The above provisions of this Section 9(b) shall similarly apply to successive Organic Changes. Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt of an indemnification undertaking (or in the case of a mutilated Warrant, the Warrant), issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed. Section 11. Notice. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in accordance with the notice provisions in the Purchase Agreement. Any party may by notice given in accordance with this Section 11 designate an address or Person for receipt of notices hereunder. Section 12. Registration Rights. If the holder hereof is a party to, or an assignee of rights under, that certain Registration Rights Agreement, dated as of July 19, 2002, by and among the Company and the Persons who are signatories thereto, such holder shall be entitled to include with such holder's registrable securities any shares of Common Stock or other securities received upon exercise of this Warrant, all on the terms and conditions as set forth in such Registration Rights Agreement. Section 13. Amendments. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the Company and the holders of the Share Warrants representing a majority of the shares of Common Stock issuable upon exercise of the Share Warrants then outstanding; provided, however, that no amendment, modification or waiver can be effected if, by its terms, such amendment, modification or waiver adversely affects one (1) holder without having the same adverse effect on all other holders without the prior written consent of the adversely affected holder. Section 14. Date. The date of this Warrant is July 19, 2002 (the "Warrant Date"). This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. Section 15. Descriptive Headings; Governing Law. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporate laws of the State of Delaware shall govern all -11- issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Illinois. -12- IN WITNESS WHEREOF, the Company has executed this Warrant as of the 19th day of July, 2002. CASTLE DENTAL CENTERS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ EXHIBIT A TO WARRANT SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT CASTLE DENTAL CENTERS, INC. The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock ("Warrant Shares") of Castle Dental Centers, Inc., a ___________ corporation (the "Company"), evidenced by the attached Warrant (the "Warrant"). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant. 1. Form of Warrant Exercise Price. The Holder intends that payment of the Warrant Exercise Price shall be made as: ____________ "Cash Exercise" with respect to _________________ Warrant Shares; and/or ____________ "Cashless Exercise" with respect to _________________ Warrant Shares (to the extent permitted by the terms of the Warrant). 2. Payment of Warrant Exercise Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance with the terms of the Warrant. 3. Delivery of Warrant Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant. Date: _______________ __, ______ Name of Registered Holder By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- ACKNOWLEDGMENT The Company hereby acknowledges this Subscription Form and hereby directs [TRANSFER AGENT] to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated ________________, 200_ from the Company and acknowledged and agreed to by [TRANSFER AGENT]. Castle Dental Centers, Inc. By: ------------------------------------ Name: ---------------------------------- Title: -------------------------------- EXHIBIT B TO WARRANT ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Name and Address of Assignee No. of Shares of Preferred Stock and does hereby irrevocably constitute and appoint _______________________ attorney-in-fact to register such transfer onto the books of Castle Dental Centers, Inc. maintained for the purpose, with full power of substitution in the premises. Date: Print Name: -------------------------- Signature: -------------------------- Witness: -------------------------- EX-10.5 9 dex105.txt FORM OF CONVERTIBLE NOTE Exhibit 10.5 CONVERTIBLE SUBORDINATED NOTE NEITHER THIS NOTE NOR THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAS BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, NOR THE SECURITIES LAWS OF ANY STATE. NEITHER THIS NOTE NOR THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON (1) SUCH REGISTRATION, OR (2) DELIVERY TO THE ISSUER OF THIS NOTE OF AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER, OR (3) THE SUBMISSION TO THE ISSUER OF THIS NOTE OF OTHER EVIDENCE, REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE, PLEDGE, HYPOTHECATION OR TRANSFER WILL NOT BE IN VIOLATION OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR OTHER APPLICABLE SECURITIES LAWS OF ANY STATE, OR ANY RULES OR REGULATIONS PROMULGATED THEREUNDER. THE PAYMENT OF THE PRINCIPAL OF, AND INTEREST ON, AND ALL OTHER AMOUNTS OWING IN RESPECT OF THE INDEBTEDNESS EVIDENCED BY, THIS NOTE, IS AND SHALL BE EXPRESSLY SUBORDINATED, TO THE EXTENT AND IN THE MANNER SET FORTH HEREIN AND IN THAT CERTAIN SUBORDINATION AND INTERCREDITOR AGREEMENT DATED AS OF JULY 19, 2002, OR ANY OTHER SUBORDINATION AGREEMENT NOW OR HEREAFTER EXECUTED, BY THE ISSUER OF THE NOTE AND THE HOLDER IN FAVOR OF BANK OF AMERICA, N.A., A NATIONAL BANKING ASSOCIATION, ITS SUCCESSORS OR ASSIGNS, AS AGENT FOR THE HOLDERS OF SENIOR DEBT AND THE OTHER PARTIES SIGNATORY THERETO (THE "SUBORDINATION AGREEMENT"). A COPY OF THE SUBORDINATION AGREEMENT IS ON FILE AT THE MAIN HOUSTON OFFICE OF THE ISSUER AND IS AVAILABLE FOR INSPECTION AT SUCH OFFICE. [HELLER AND MIDWEST ONLY - THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CERTAIN VOTING AGREEMENTS ALL AS SET FORTH IN A CERTAIN INVESTORS AGREEMENT OF CASTLE DENTAL CENTERS, INC., DATED AS OF JULY 19, 2002, A COPY OF WHICH WILL BE MAILED TO THE HOLDER WITHOUT CHARGE WITHIN FIVE DAYS OF A WRITTEN REQUEST THEREFOR.] THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A STOCKHOLDERS AGREEMENT, DATED AS OF JULY 19, 2002. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE. $_______________________ July, 19, 2002 Chicago, Illinois FOR VALUE RECEIVED, CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Company"), hereby promises to pay to the order of __________________________, a[n] ___________________ or [its/his] registered assigns ("Holder") the principal amount of__________________________________ AND __/00 DOLLARS ($______________), on July __, 2007 (the "Maturity Date"). The Company further promises to pay interest on the outstanding unpaid principal amount hereof, as provided in the Purchase Agreement (as defined below), from the date hereof until payment in full hereof at the applicable rate specified in subsection 3.02(a) of the Purchase Agreement; provided, however, that if Holder so elects, following the occurrence and during the continuance of an Event of Default, the Company promises to pay to Holder interest on the unpaid principal amount hereof at the applicable rate specified in subsection 3.02(b) of the Purchase Agreement. Interest shall be payable in accordance with the provisions specified in subsection 3.02(c) of the Purchase Agreement. This Convertible Subordinated Note (hereinafter referred to as the "Note") is one of the notes (collectively, together with all notes issued in connection with the Purchase Agreement (as defined below), the "Notes") being issued by the Company pursuant to the terms of the Senior Subordinated Note and Warrant Purchase Agreement, dated as of July 19, 2002 (the "Purchase Agreement"), executed by and among the Company, the Holder and the other parties thereto. All terms which are capitalized and used herein (which are not otherwise specifically defined herein) and which are defined in the Purchase Agreement shall have the meanings set forth in the Purchase Agreement. 1. Payments of Principal and Interest. The principal amount hereof and all accrued and unpaid interest hereon, to the extent that it has not been converted into shares of Common Stock pursuant to Section 2 hereof, shall be payable in full on the Maturity Date. All payments of principal and interest on this Note shall be made in lawful money of the United States of America by wire transfer of immediately available funds to such account as the Holder may from time to time designate by written notice in accordance with the provisions of this Note. If a payment hereunder becomes due and payable on a day that is not a Business Day, the payment may be made on the next succeeding Business Day, and such extension of time shall be included in the computation of the amount of interest due on such succeeding Business Day. Checks, drafts or similar items of payment received by Holder shall not constitute payment, but credit therefor shall, solely for the purpose of computing interest earned by Holder, be given in accordance with the Purchase Agreement. In no contingency or event whatsoever shall interest charged hereunder, however such interest may be characterized or computed, exceed the highest rate permissible under any law which a court of competent jurisdiction determines is applicable hereto. In the event that such a court determines that Holder has received interest hereunder in excess of the highest rate applicable hereto, such excess shall be applied in accordance with the terms of the Purchase Agreement. 2. Conversion of Notes. This Note shall be convertible into shares of the Company's common stock, $.001 par value per share (the "Common Stock"), on the terms and conditions set forth in this Section 2. (a) Holder's Conversion Right; Mandatory Conversion. Subject to the provisions of Section 2(c), at any time or times on or after the Issuance Date, the Holder may convert, all or any part of the outstanding and unpaid principal of and interest on this Note (the amount being converted, the "Conversion Amount") into fully paid and nonassessable shares of Common Stock in accordance with Section 2(d), at the Conversion Rate (as defined below). (b) Conversion Rate. The number of shares of Common Stock issuable upon any conversion of all or any part of this Note pursuant to Section 2(a) shall be determined according to the following formula (the "Conversion Rate"): Conversion Amount Conversion Price (c) Regulatory Problem. In the event the Holder determines that it has a Regulatory Problem (as defined below), the Holder shall have the right to transfer this Note without regard to any restriction on transfer set forth in this Note or the Purchase Agreement (other than applicable securities laws restrictions) and the Company agrees to take all such actions as are reasonably requested by the Holder in order to (i) effectuate and facilitate any transfer by the Holder of this Note to any Person designated by Holder (subject to compliance with applicable federal and state securities laws) or (ii) to permit the Holder (or any Affiliate thereof) to exchange all or any portion of the Common Stock then held by, or issuable to, it on a "share-for-share" basis for shares of a class of non-voting stock of the Company, which non-voting stock shall be identical in all respects to such Common Stock, except such stock shall be non-voting and shall be convertible into Common Stock on such terms as are requested by such Holder in light of regulatory considerations then prevailing. The Company agrees to enter into such additional agreements, adopt such amendments hereto and to the Certificate of Incorporation of the Company and to take such additional actions as are reasonably requested by the Holder in order to effectuate the intent of the foregoing. For purposes hereof, a "Regulatory Problem" means any set of facts or circumstances wherein the Holder reasonably believes it is not entitled to hold, or exercise any significant right with respect to, the Common Stock. For purposes of this Note, the term Common Stock shall be deem to include any non-voting common stock to be issued pursuant to this Section 2(c). (d) Mechanics of Conversion. Any conversion of all or any portion of this Note shall be conducted in the following manner: (i) Holder's Delivery Requirements. To convert this Note into shares of Common Stock on any date set forth in the Conversion Notice (as hereinafter defined) by the Holder (the "Conversion Date"), the Holder hereof shall (A) deliver, by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m. New York time on such date, a fully executed notice of conversion in the form attached hereto as Exhibit A (the "Conversion Notice") to the Company with a copy thereof to the Company's designated transfer agent (the "Transfer Agent") and (B) if all of the shares of Common Stock then represented by this Note are being converted, surrender to a common carrier for delivery to the Company as soon as practicable following such date the original Note (or an indemnification undertaking with respect to such Note in the case of its loss, theft or destruction). (ii) Company's Response. Upon receipt by the Company of a Conversion Notice, the Company shall (A) promptly, and in no event later than two (2) Business Days after receipt, send, via facsimile, a confirmation of receipt of such Conversion Notice to such Holder and the Transfer Agent, which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein, and (B) on or before the third Business Day following the date of receipt by the Company of such Conversion Notice (the "Share Delivery Date"): (i) issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder, for the number of shares of Common Stock to which the Holder is entitled, or (ii) provided the Transfer Agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and provided that the Holder is eligible to receive shares through DTC, upon the request of the Holder, credit the aggregate number of shares of Common Stock to which the Holder is entitled upon such conversion to the Holder's balance account with DTC through its Deposit Withdrawal Agent Commission system. If the Note is delivered to the Company by the Holder and less than the entire outstanding principal of and accrued interest on, this Note is submitted for conversion, the Company shall, as soon as practicable and in no event later than three (3) Business Days after receipt of the Note (the "Note Delivery Date") and at its own expense, issue and deliver to the Holder a new Note for the amount not converted. (iii) Dispute Resolution. In the case of a dispute as to the determination of the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the Holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed arithmetic calculations to the Holder via facsimile within two (2) Business Days of receipt of such Holder's Conversion Notice or other date of determination. If such Holder and the Company are unable to agree upon the determination of the arithmetic calculation of the Conversion Rate within one (1) Business Day of such disputed arithmetic calculation being transmitted to the Holder, then the Company shall within one (1) Business Day submit via facsimile the disputed arithmetic calculation of the Conversion Rate to the Company's independent, outside accountant. Furthermore, in the event the holders of Notes holding a majority of the then outstanding principal amount of all the Notes, on the one hand, and the Company, on the other hand, are unable to agree on the Fair Market Value in accordance with the definition of Closing Bid Price, then the Company shall submit as soon as reasonably practicable after it becomes apparent that such holders and the Company do not agree as to the Fair Market Value, the disputed determination of the Fair Market Value to an independent, reputable investment bank selected by the Company and approved by the holders holding a majority of the then outstanding principal amount of all the Notes. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and all the holders of the Notes of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon the Company and all the holders of the Notes. Within one (1) Business Day of the accountant's determination of the calculation of the Conversion Rate, the Company shall deliver to the Holder the balance of Common Stock that such Holder is entitled to as provided herein (such date also deemed to be a Share Delivery Date) and any failure to do so will subject the Company to the provisions of subsection (v) below. (iv) Record Holder. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date. (v) Company's Failure to Timely Convert. (A) Cash Damages. If within three (3) Business Days after the Company's receipt of the Conversion Notice (i) the Company shall fail to issue and deliver a certificate to the Holder or, at the Holder's election, credit the Holder's balance account with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder's conversion of this Note or (ii) the Company shall fail to issue a new Note representing the principal amount to which such Holder is entitled, if any, pursuant to Section 2(d)(ii), in addition to all other available remedies which such Holder may pursue hereunder and under the Purchase Agreement (including, but not limited to, indemnification thereunder), the Company shall pay additional damages to such Holder for each date after the Share Delivery Date such conversion is not timely effected and/or each date after the Note Delivery Date such new Note is not delivered in an amount equal to 0.5% of the sum of (a) the product of (I) the number of shares of Common Stock not issued to the Holder on or prior to the Share Delivery Date and to which such Holder is entitled and (II) the Closing Bid Price of the Common Stock on the Share Delivery Date, and (b) in the event the Company has failed to deliver a new Note to the Holder on or prior to the Note Delivery Date, the product of (y) the number of shares of Common Stock issuable (without regard to any limitations on conversions herein or elsewhere, including, but not limited to, any limitations as a result of the actual number of shares of Common Stock authorized for issuance by the Company) upon conversion of the principal amount represented by the new Note, as of the Note Delivery Date and (z) the Closing Bid Price of the Common Stock on the Note Delivery Date. If the Company fails to pay the additional damages set forth in this Section 2(d)(v) within five (5) Business Days of the date incurred, then the Holder entitled to such payments shall have the right at any time, so long as the Company continues to fail to make such payments, to require the Company, upon written notice, to immediately issue, in lieu of such cash damages, the number of shares of Common Stock equal to the quotient of (X) the aggregate amount of the damages payments described herein divided by (Y) the Conversion Price in effect on such Conversion Date as specified by the Holder in the Conversion Notice. (B) Void Conversion Notice. If for any reason the Holder has not received all of the shares of Common Stock to which it is entitled to prior to the tenth (10th) Business Day after the expiration of the Share Delivery Date with respect to a conversion of this Note, then the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or have returned or restored as of the Conversion Date, as the case may be, any principal amount and accrued and unpaid interest on this Note that has not been converted pursuant to such Holder's Conversion Notice; provided that the voiding of a Holder's Conversion Notice shall not effect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to Section 2(d)(v)(A) or otherwise. (vi) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms hereof, the Holder thereof shall not be required to physically surrender this Note to the Company unless the full Conversion Amount then outstanding is being converted. The Company shall maintain records showing the Conversion Amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder, so as to account for the dollars of principal and interest that are represented by the Note where conversions have occurred without the physical surrender of this Note. Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, thereafter, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Company, whereupon the Company will forthwith issue and deliver to the Holder a new Note of like tenor, registered as the Holder may request, representing in the aggregate the remaining principal amount represented by this Note. The Holder, by acceptance of this Note or such new Note, acknowledges and agrees that, by reason of the provisions of this paragraph, following conversion of any portion of this Note, the principal amount represented by this Note may be less than the principal amount set forth on the face hereof. (vii) Fractional Shares. No fractional shares of Common Stock or scrip shall be issued to any Holder in connection with the conversion of this Note. Instead of any fractional shares of Common Stock that would otherwise be issuable to such Holder, the Company will pay to such Holder a cash adjustment in respect of such fractional interest in an amount equal to that fractional interest of the Closing Bid Price on the Conversion Date. (viii) Pro Rata Conversion. In the event the Company receives a Conversion Notice from more than one holder of the Notes for the same Conversion Date and the Company, after fully complying with Section 3(b) below, can convert some, but not all, of such Notes, the Company shall convert from each holder of such Notes electing to have Notes converted at such time a pro rata amount of such holder's Note submitted for conversion based on the amount of the Note submitted for conversion on such date by such holder relative to the aggregate amount of all amounts of all the Notes submitted for conversion on such date. (e) Taxes. The Company shall pay any and all taxes that may be payable with respect to the issuance and delivery of Common Stock upon the conversion of the Notes. (f) Certain Adjustments. In addition to any other adjustments provided herein, this Note and the number of shares of Common Stock to which this Note is convertible into will be subject to adjustment from time to time as provided in this Section 2(f). (i) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased. (ii) Other Events. If any event occurs of the type contemplated by the provisions of this Section 2(f) but not expressly provided for by such provisions, then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the Holder. (g) Other Rights of Holder. (i) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person, conveyance to another Person of the property of the Company as an entirety or substantially as an entirety or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) Capital Stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change." Prior to the consummation of, and as a condition to, any (i) sale or other conveyance of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change, the Company, or such other successor or purchasing Person, as the case may be, shall make lawful and adequate provision whereby the holder of this Note shall have the right thereafter to receive on conversion of such Note the kind and amount of securities and property receivable upon such Organic Change by a holder of the number of securities issuable upon conversion of such Note immediately prior to such Organic Change. The above provisions of this Section 2(g)(i) shall similarly apply to successive Organic Changes. (ii) Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without taking into account any limitations or restrictions on the convertibility of the Note, including, but not limited to, any limitations as a result of the actual number of shares of Common Stock authorized for issuance by the Company) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. For purposes of this Section 2(g)(ii), (i) "Convertible Securities" means any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock, and (ii) "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. (iii) Distribution of Securities. If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of any or all of the Company's securities, such number of securities will be distributed to the holder of this Note or its assignee upon conversion of its rights hereunder as such Note holder or assignee would have been entitled to if this Note had been converted prior to such distribution, giving effect to all adjustments called for by this Note. The provisions with respect to adjustment of the Common Stock provided in this Note will also apply to the securities of the Company and securities of any subsidiary to which the Note holder or its assignee is entitled under this Section 2(g)(iii). 3. Reservation of Shares. The Company covenants and agrees as follows: (a) All shares of Common Stock that are issued upon the conversion of this Note will, upon issuance, be validly issued, fully paid and nonassessable, not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (b) The Company will at all times have authorized and reserved, and keep available free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Note and if there is ever an insufficient amount of shares of Common Stock to provide for the exercise of the rights represented by this Note (an "Authorized Share Failure"), the Company shall immediately take all action necessary to cause the number of the Company's authorized shares of Common Stock to be sufficient to accomplish the Holder's right of conversion hereunder. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than 75 days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the authorization of either an increase in the number of authorized shares of Common Stock or a reverse stock split with respect to the Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders' approval of such increase in authorized shares of Common Stock or reverse stock split and to cause its board of directors to recommend to the stockholders that they approve such proposal. (c) The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Note and in the taking of all such action as may reasonably be requested by the holder of this Note in order to protect the exercise privilege of the holder of this Note against dilution or other impairment, consistent with the tenor and purpose of this Note. 4. Voting Rights. Prior to conversion of all or any portion of this Note, the Holder shall have no voting rights, except as required by law, including but not limited to the General Corporation Law of the State of Delaware, and as expressly provided in this Note. 5. Note Holder Not Deemed a Stockholder; Notice of Corporate Action. Except as otherwise specifically provided herein, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Note be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Common Stock which he, she, or it is then entitled to receive upon the due exercise of this Note. In addition, nothing contained in this Note shall be construed as imposing any liabilities on such holder to purchase any securities (upon conversion of this Note or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 5, the Company will provide the Holder with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders. Furthermore, so long as this Note has not been converted or redeemed in full: (A) Immediately upon any adjustment of the Conversion Price, the Company will give written notice thereof to the Holder of such adjustment and a certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who shall be appointed at the Company's expense and who may be the independent public accountants regularly employed by the Company) setting forth the number of shares of Common Stock and the Conversion Price after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. (B) The Company will give written notice to the Holder at least twenty (20) Business Days prior to the date on which the Company closes its books or takes a record (i) with respect to any dividend or distribution upon the Common Stock, (ii) with respect to any pro rata subscription offer to holders of Common Stock or (iii) for determining rights to vote with respect to any Organic Change (as defined in Section 2(g)(i)), dissolution or liquidation, provided that such information shall have been made known to the public prior to or in conjunction with such notice being provided to such holder. (C) The Company will also give written notice to Holder at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that such information shall have been made known to the public prior to or in conjunction with such notice being provided to such holder. 6. (a) Transferability and Negotiability of Note. Title to this Note may be transferred by endorsement (by the holder hereof executing the Assignment Form attached hereto as Exhibit B) and delivery in the --------- same manner as negotiable instruments transferable by endorsement and delivery. (b) Exchange of Note Upon a Transfer. This Note shall be transferable by the holder hereof to any of its Affiliates or any other Person subject only to the restrictions set forth in the legend on the first page of this Note and the restrictions set forth in the Stockholders Agreement [and the Investors Agreement]. On surrender of this Note for exchange, properly endorsed on the Assignment Form and subject to the provisions hereof with respect to compliance with the Securities Act, the Company at its expense shall issue to or on the order of such holder a new note of like tenor representing the remaining amount (principal and interest) of this Note which has not been so transferred and assigned. 7. Reissuance of Notes. Subject to Section 2(d)(vi), in the event of a conversion or redemption pursuant to this Note of less than all of the Conversion Amount represented by this Note, the Company shall promptly cause to be issued and delivered to the Holder, upon tender by the Holder of the Note converted or redeemed, a new note of like tenor representing the remaining amount (principal and interest) of this Note which has not been so converted or redeemed. 8. Definitions. As used herein, unless the context otherwise requires, the following terms have the following meanings: "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one (1) or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. "Business Day" means any day other than Saturday, Sunday or other day on which commercial banks in the city of New York are authorized or required by law to remain closed. "Capital Stock" or "capital stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of corporate stock, and (ii) with respect to any other Person, any and all partnership, limited partnership, limited liability company or other equity interest of such Person, whether outstanding on the date of the Note or issued after the date of the Note, and any and all rights or warrants exercisable or exchangeable for or convertible into such capital stock. "Closing Bid Price" means, for any security as of any date, the last closing bid price for such security on the Principal Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price, then the last bid price of such security prior to 4:00 p.m. New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg, or, if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price of such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value (the "Fair Market Value") as mutually determined by the Company, on the one hand, and the holders of a majority of the then outstanding principal amount of the Notes. If the Company and such holders are unable to agree upon the Fair Market Value, then such dispute shall be resolved pursuant to Section 2(d)(iii) above. All such determinations to be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. "Conversion Price" means initially [.53566616], as such price may be subsequently adjusted as provided herein. ["Investors Agreement" means that certain Investors Agreement, dated as of July 19, 2002, by and among the Company, Holder and certain other parties thereto. Heller and Midwest only] "Issuance Date" means the date of original issuance date of the Note. "Person" means any individual, limited liability company, partnership, joint venture, association, joint-stock company, corporation, trust, unincorporated organization, estate and other entity or government or any department or agency thereof. "Principal Market" means the principal securities exchange or trading market for the Common Stock. "Securities Act" means the Securities Act of 1933, as amended. "Stockholders Agreement" means that certain Stockholders Agreement, dated as of July 19, 2002, among the Company and each of the stockholders and warrant holders a party thereto. 9. Lost or Stolen Notes. Promptly upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Note, and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder to the Company in a form reasonably acceptable to the Company and, in the case of mutilation, upon surrender and cancellation of the Notes, the Company shall execute and deliver new notes of like tenor and date; provided, however, the Company shall not be obligated to re-issue notes if the Holder contemporaneously requests the Company to convert such remaining principal amount into Common Stock. 10. Payment of Collection, Enforcement and Other Costs. If any suit or action is instituted or attorneys are employed to collect or enforce this Note or any part thereof, the Company hereby promises and agrees to pay all costs of collection, including attorneys' fees and court costs. 11. Cancellation. After all principal and accrued interest at any time owed on this Note has been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued. 12. Waiver of Notice. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Purchase Agreement. 13. Governing Law. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement, interpretation and performance of this Note shall be governed by the laws of the State of Illinois, without giving effect to provisions thereof regarding conflict of laws. 14. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Note. The Company covenants to each Holder of Notes that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of the Notes and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holders of the Notes shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. 15. Specific Shall Not Limit General; Construction. No specific provision contained in this Note shall limit or modify any more general provision contained herein. This Note shall be deemed to be jointly drafted by the Company and all holders and shall not be construed against any person as the drafter hereof. 16. Failure or Indulgence Not Waiver. No failure or delay on the part of this Note in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. 17. Amendments. Any provision of this Note may be amended, modified or waived with the prior written consent of the Company and the holders of fifty one percent (51%) of the then-outstanding principal balance of the Notes; provided, however, no amendment, modification or waiver can be effected if, by its terms, such amendment, modification or waiver adversely affects one (1) Holder without having the same adverse effect on all other Holders without the prior written consent of such adversely affected Holder. 18. Notices. Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with the notice provisions in the Purchase Agreement. Any party may by notice given in accordance with this Section 18 designate another address or person for receipt of notices hereunder. 19. Registration Rights. If the holder hereof is a party to, or an assignee of rights under, that certain Registration Rights Agreement, dated as of July 19, 2002, by and among the Company and the Persons who are signatories thereto, such holder shall be entitled to include with such holder's registrable securities any shares of Common Stock or other securities received upon conversion of this Note, all on the terms and conditions as set forth in such Registration Rights Agreement. - Remainder of Page Intentionally Left Blank - [Signature Page Follows] IN WITNESS WHEREOF, the Company has executed this Note as of the day and year first written above. CASTLE DENTAL CENTERS, INC., a Delaware corporation By: ------------------------------- Name: ------------------------------- Title: ------------------------------- Note - ___________________________ EXHIBIT A CASTLE DENTAL CENTERS, INC. CONVERSION NOTICE Reference is made to the Note issued by Castle Dental Centers, Inc. (the "Company"). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note, indicated below into shares of Common Stock, par value $.001 per share (the "Common Stock"), of the Company as of the date specified below. Date of Conversion: Aggregate Conversion Amount to be converted: Note no(s). of Note to be converted: Please confirm the following information: Conversion Price: Number of shares of Common Stock to be issued: Please issue the Common Stock into which the Note is being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: Facsimile Number: Authorization: By: Title: Dated: Account Number: (if electronic book-entry transfer): Transaction Code Number (if electronic book-entry transfer): Note - ___________________________ EXHIBIT B TO NOTE ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Note hereby sells, assigns and transfers unto the assignee named below all of the rights of the undersigned under this Note, with respect to the principal amount set forth below: Name and Address of Assignee Principal Amount and does hereby irrevocably constitute and appoint _______________________ attorney-in-fact to register such transfer onto the books of Castle Dental Centers, Inc. maintained for the purpose, with full power of substitution in the premises. Date: Print Name: ------------------------- Signature: ------------------------- Witness: ------------------------- Note - ___________________________ EX-10.6 10 dex106.txt SUBORDINATION AND INTERCREDITOR AGREEMENT Exhibit 10.6 SUBORDINATION AND INTERCREDITOR AGREEMENT THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this "Agreement") is entered into as of July 19, 2002, by and among HELLER FINANCIAL, INC., a Delaware corporation ("Heller"), MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership ("Midwest"), JAMES M. USDAN, an individual ("Usdan"; Usdan, Heller and Midwest, are sometimes referred to individually as a "Junior Creditor" and collectively as the "Junior Creditors"), CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Company"), CASTLE DENTAL CENTERS OF CALIFORNIA, L.L.C., a Delaware limited liability company ("Castle West"), CASTLE DENTAL CENTERS OF FLORIDA, INC., a Florida corporation ("Castle Florida"), CASTLE DENTAL CENTERS OF TENNESSEE, INC., a Tennessee corporation ("Castle Tennessee"), CASTLE DENTAL CENTERS OF TEXAS, INC., a Texas corporation and successor by merger to Dental World, Inc., a Texas corporation, and Castle Dental Centers of Austin, Inc., a Texas corporation ("Castle Texas"), DENTCOR, INC., a Florida corporation ("Dentcor"), CDC OF CALIFORNIA, INC., a Delaware corporation ("CDC"), CASTLE TEXAS HOLDINGS, INC., a Delaware corporation ("Holdings"), and ACADEMY FOR DENTAL ASSISTANTS, INC., a Florida corporation ("Academy"), in favor of BANK OF AMERICA, N.A., a national banking association formerly known as NationsBank, N.A., as agent ("Agent") for all Lenders party to the Credit Agreement described below. R E C I T A L S A. The Company, Agent and Lenders have entered into the Credit Agreement, pursuant to which, among other things, Agent and the Lenders have agreed, subject to the terms and conditions set forth in the Credit Agreement, to restructure certain loans and other financial accommodations to the Company. B. The Company and the Junior Creditors have entered into the Note Purchase Agreement, pursuant to which, among other things, each Junior Creditor is extending credit to the Company as evidenced by the Junior Notes. C. As an inducement to and as one of the conditions precedent to the agreement of Lenders to consent to the transactions contemplated by the Note Purchase Agreement, Lenders have required the execution and delivery of this Agreement by the Junior Creditors, the Company and the Subsidiaries. NOW, THEREFORE, in order to induce Agent and Lenders to consent to the transactions contemplated by the Note Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used in this Agreement without definition shall have the meanings ascribed to such terms in the Credit Agreement. In addition, the following terms shall have the following meanings in this Agreement: Credit Agreement shall mean that certain Second Amended and Restated Credit Agreement of even date herewith by and among the Company, Agent and the financial institutions party thereto as Lenders, as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time as permitted hereunder. Enforcement Action means any action to enforce or attempt to enforce any right or remedy available to any of the Junior Creditors to collect the Junior Debt, including any action or proceeding (a) to accelerate the maturity of, or demand as immediately due and payable, all or any part of the Junior Debt, or (b) to commence, continue or participate in any judicial, arbitral or other proceeding, or any collection, foreclosure or enforcement action of any kind, against the Company or any Subsidiary or any of the Company's or any Subsidiary's assets seeking, directly or indirectly, to enforce any rights or remedies, or to enforce any of the obligations incurred by the Company or any Subsidiary, under or in connection with the Junior Debt. Junior Debt shall mean all of the obligations of the Company to the Junior Creditors evidenced by the Junior Notes and all other amounts now or hereafter owed by the Company to any Junior Creditor under any of the Junior Debt Documents. Junior Debt Documents shall mean the Junior Notes, the Note Purchase Agreement and any other loan document pertaining to Junior Debt; provided, however, the term "Junior Debt Documents" shall not include any "Warrants" (as such term is defined in the Note Purchase Agreement). Junior Notes shall mean, collectively: (i) that certain Convertible Promissory Note of even date herewith in the principal amount of $500,000.00 made by Company to the order of Heller, (ii) that certain Convertible Promissory Note of even date herewith in the principal amount of $500,000.00 made by Company to the order of Midwest and (iii) that certain Convertible Promissory Note of even date herewith in the principal amount of $700,000.00 made by Company to the order of Usdan, in each instance as the same may be amended, substituted, supplemented or otherwise modified from time to time as permitted hereunder. Loan Documents shall have the meaning specified in the Credit Agreement. Note Purchase Agreement shall mean that certain Senior Subordinated Note and Warrant Purchase Agreement of even date herewith by and among the Company and each of the Junior Creditors, as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time as permitted hereunder. Proceeding shall mean any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding up of a Person. Reorganization Subordinated Securities shall mean (a) any equity securities issued in 2 substitution of all or any portion of the Junior Debt that are subordinated in right of payment to the Senior Debt (or any notes or other securities issued in substitution of all or any portion of the Senior Debt), and (b) any notes or other debt securities issued in substitution of all or any portion of the Junior Debt that are subordinated to the Senior Debt (or any notes or other securities issued in substitution of all or any portion of the Senior Debt) to the same extent that the Junior Debt is subordinated to the Senior Debt pursuant to the terms of this Agreement. Senior Creditor shall mean the Agent and any party to the Credit Agreement as a Lender. Senior Debt shall mean: (a) all principal, interest, fees, reimbursements, indemnifications and other amounts now or hereafter owed by the Company to Senior Creditors under the Credit Agreement and other Loan Documents and (b) any increases, extensions and rearrangements of the foregoing obligations under any amendments, supplements and other modifications of the documents and agreements creating the foregoing obligations to the extent permitted under Section 3 hereof; provided, however, that in no event shall the principal amount of the Senior Debt exceed the sum of the aggregate principal amount of Senior Debt outstanding on the date hereof plus $2,000,000, reduced by the amount of any repayments and prepayments thereof (it being understood that no amounts expended by any Senior Creditor to preserve the value of, or otherwise protect, the Collateral, shall be subject to, or included within, the foregoing limitations). Subsidiaries shall mean, collectively, Academy, Castle West, Castle Florida, Castle Tennessee, Castle Texas, Dentcor, CDC, Holdings and any other Person now or hereafter guaranteeing payment or performance of the Junior Debt. Each of the Subsidiaries may be referred to individually as a Subsidiary. 2. Subordination. 2.1 Subordination of Junior Debt to Senior Debt. The Company and each Subsidiary covenants and agrees, and each Junior Creditor by its acceptance of a Junior Note (whether upon original issue or upon transfer or assignment) likewise covenants and agrees, that unless and until the Senior Debt shall have been irrevocably paid in full, the payment and performance of the Junior Debt is hereby made expressly subordinate and junior in right of payment and performance to the prior payment and performance of all obligations and liabilities under the Senior Debt to the extent and in the manner set forth in this Section 2. Each holder of Senior Debt, whether now outstanding or hereafter created, incurred, assumed or guaranteed, and whether such holder holds any Senior Debt as of the date hereof or later becomes a holder by means of assignment or otherwise, shall be deemed to have acquired Senior Debt in reliance upon the provisions contained in this Agreement. 2.2 Proceedings. In the event of any Proceeding involving the Company, (a) all Senior Debt first shall be paid in full before any payment of or with respect to the Junior Debt shall be made (other than a distribution of Reorganization Subordinated Securities); and (b) any payment or distribution, whether in cash, property or securities which, but for 3 the terms hereof, otherwise would be payable or deliverable in respect of the Junior Debt (other than a distribution of Reorganization Subordinated Securities), shall be paid or delivered directly to Agent (to be held and/or applied by Agent in accordance with the terms of the Credit Agreement) until all Senior Debt is irrevocably paid in full, and each Junior Creditor irrevocably authorizes, empowers and directs all receivers, trustees, liquidators, custodians, conservators and others having authority in the premises to effect all such payments and distributions. In the event of any Proceeding involving any Subsidiary, (a) all payments or distributions in such Proceeding shall be applied to Senior Debt before any payment of or with respect to the Junior Debt shall be made (other than a distribution of Reorganization Subordinated Securities); and (b) any payment or distribution, whether in cash, property or securities which, but for the terms hereof, otherwise would be payable or deliverable in respect of the Junior Debt (other than a distribution of Reorganization Subordinated Securities) in such Proceeding, shall be paid or delivered directly to Agent (to be held and/or applied by Agent in accordance with the terms of the Credit Agreement) until all Senior Debt is irrevocably paid in full, and each Junior Creditor irrevocably authorizes, empowers and directs all receivers, trustees, liquidators, custodians, conservators and others having authority in the premises to effect all such payments and distributions. 2.3 Limitation on Payments. (a) Neither the Company nor any Subsidiary may make, and no Junior Creditor may receive, any payment or prepayment of any sum with respect to the Junior Debt (other than reimbursement of actual and reasonable out-of-pocket costs and expenses not to exceed, with respect to periods prior to the Closing Date, $50,000) until all of the Senior Debt shall have been irrevocably paid in full. (b) The provisions of this subsection 2.3 shall not apply to any payment with respect to which subsection 2.2 would be applicable. 2.4 Subordination of Liens and Guarantees. The Junior Creditors will not create, assume, or suffer to exist any lien, security interest, guaranty, or assignment of collateral securing or guaranteeing the repayment of the Junior Debt. Any judgment lien, and any other lien, security interest, guaranty or assignment existing in violation of the foregoing shall be fully subordinate to any lien, security interest, guaranty or assignment in favor of the Senior Creditors which secures any of the Senior Debt, and the Junior Creditors, the Company and the Subsidiaries shall immediately take any and all steps necessary to effect the release of any such lien, security interest, assignment or collateral or the termination of any such guaranty. 2.5 Restriction on Action by the Junior Creditors. (a) Until the Senior Debt is paid in full, no Junior Creditor shall, without the prior written consent of the Senior Lenders, take any Enforcement Action with respect to the Junior Debt, except as permitted in the following sentence. Upon the earlier to occur of: 4 (i) acceleration of the Senior Debt; or (ii) commencement of a Proceeding with respect to the Company; the Junior Creditors may accelerate the Junior Debt or take any other Enforcement Action; provided, however, that if following the acceleration of the Senior Debt, such acceleration is rescinded, then all Enforcement Actions taken by the Junior Creditors shall likewise be rescinded if such Enforcement Action is based solely on such acceleration. (b) Until the Senior Debt is irrevocably paid in full and notwithstanding anything contained in the Junior Debt Documents, the Credit Agreement or any of the other Loan Documents to the contrary, no Junior Creditor shall, without the prior written consent of Agent (which consent may be withheld in the Agent's sole discretion), agree to any amendment, modification or supplement to the Junior Debt Documents, or make any increases, extensions, rearrangements, amendments, supplements, or other modifications to the Junior Debt, the effect of which is to (i) increase the maximum principal amount of the Junior Debt or rate of interest on any of the Junior Debt, (ii) accelerate or shorten the dates upon which payments of principal or interest on the Junior Debt are due, (iii) change in a manner adverse to Company or any Subsidiary, or add, any event of default or any covenant with respect to the Junior Debt, (iv) change any put, redemption or prepayment provisions of the Junior Debt, or (v) alter the subordination provisions with respect to the Junior Debt, including, without limitation, subordinating the Junior Debt to any other debt. (c) Notwithstanding anything herein to the contrary, (i) the Junior Creditors may file proofs of claim against the Company in any Proceeding involving the Company, (ii) the Junior Creditors may at any time and from time to time convert all or any portion of the Junior Notes into common stock of the Company in accordance with the terms thereof and (iii) the Junior Creditors may accrue interest at the default rate specified in the Note Purchase Agreement, or otherwise give notices or file suits, actions or proceedings, and the Company may agree to tolling agreements, to prevent the running of the relevant statute of limitations, but no Junior Creditor may receive any property or payment on account of any such suit, action or proceeding until the Senior Debt has been irrevocably paid in full. 2.6 Incorrect Payments. If any payment or distribution on account of the Junior Debt not permitted to be made by the Company or any Subsidiary or received by a Junior Creditor under this Agreement is received by such Junior Creditor before all outstanding Senior Debt has been irrevocably paid in full, such payment or distribution shall not be commingled with any asset of such Junior Creditor, shall be held in trust by such Junior Creditor for the benefit of Lenders and shall be immediately paid over to Agent, or its designated representative, in the form received (together with any necessary endorsements) for application (in accordance with the Credit Agreement) to the Senior Debt until all outstanding Senior Debt has been irrevocably paid in full. 2.7 Sale, Transfer, etc. No Junior Creditor shall sell, assign or otherwise transfer all 5 or any portion of the Junior Debt or any Junior Debt Document unless prior to the consummation of any such action, the transferee thereof shall execute and deliver to Agent an agreement substantially identical to this Agreement, providing for the continued subordination and forbearance of the Junior Debt to the Senior Debt as provided herein and for the continued effectiveness of all of the rights of the Senior Creditors arising under this Agreement. Any failure to execute or deliver any such agreement shall make any attempted sale, assignment or other transfer of any portion of the Junior Debt or any Junior Debt Document void ab initio. The subordination effected hereby shall survive any sale, assignment, pledge, disposition or other transfer of all or any portion of the Junior Debt, and the terms of this Agreement shall be binding upon the successors and assigns of such Junior Creditor, as provided in Section 10 below. 2.8 Legends. The Junior Creditors shall cause all Junior Debt to be evidenced by a note, debenture, instrument, or other writing evidencing the Junior Debt and will inscribe a statement or legend thereon to the effect that such note, debenture, instrument, or other writing is subordinated to the Senior Debt in favor of the Senior Creditors in the manner and to the extent set forth in this Agreement. 3. Modifications to Senior Debt. This is an irrevocable agreement of subordination and the Senior Creditors may, without notice to any of the parties hereto and without impairing or releasing the obligations of the Company, any Subsidiary and the Junior Creditors hereunder, (a) create Senior Debt by extending credit under the Credit Agreement; (b) change the terms of or increase the amount of the Senior Debt by increasing, extending, rearranging, amending, supplementing, or otherwise modifying any of the Loan Documents or other instruments or agreements creating Senior Debt; (c) sell, exchange, release, or otherwise deal with any collateral securing any Senior Debt; (d) release anyone, including the Company, any Subsidiary or any guarantor, liable in any manner for the payment or collection of any Senior Debt; (e) exercise or refrain from exercising any rights against the Company or any Subsidiary or any other Person; and (f) apply any sums received by any of the Senior Creditors, from whatever source, to the payment of the Senior Debt; provided, however, that neither Agent nor any of the Lenders shall (a) increase the Senior Debt to an amount greater than the sum of the aggregate principal amount of Senior Debt outstanding on the date hereof plus $2,000,000, reduced by the amount of any repayments and prepayments thereof (it being understood that no amounts expended by any Senior Creditor to preserve the value of, or otherwise protect, the Collateral, shall be subject to, or included within, the foregoing limitations), (b) increase the interest rate with respect to the Senior Debt by more than three hundred (300) basis points from any interest rate specified in the Credit Agreement as in effect on the date hereof, or (c) extend the final maturity of the Senior Debt to a date later than June 30, 2007. 4. Continued Effectiveness of this Agreement. The terms of this Agreement, the subordination effected hereby, and the rights and the obligations of the Junior Creditors, the Company, the Subsidiaries, Agent and Lenders arising hereunder shall not be affected, modified or impaired in any manner or to any extent by: (a) any amendment or modification of or supplement to the Credit Agreement, any of the other Loan Documents or any of the Junior Debt Documents, in each instance, to the extent permitted herein; (b) the validity or enforceability of any of such documents; or (c) any exercise or non-exercise of any right, power or remedy under or in respect of the Senior Debt or the Junior Debt or any of the instruments or documents referred to in clause (a) above. The Junior Creditors and each other holder of Junior Debt hereby 6 acknowledge that the provisions of this Agreement are intended to be enforceable at all times, whether before the commencement of, after the commencement of, in connection with or premised on the occurrence of a Proceeding. 5. Cumulative Rights, No Waivers. Each and every right, remedy and power granted to Agent or Lenders hereunder shall be cumulative and in addition to any other right, remedy or power specifically granted herein, in the Credit Agreement or the other Loan Documents or now or hereafter existing in equity, at law, by virtue of statute or otherwise, and may be exercised by Agent or Lenders, from time to time, concurrently or independently and as often and in such order as Agent or Lenders may deem expedient. Any failure or delay on the part of Agent or Lenders in exercising any such right, remedy or power, or abandonment or discontinuance of steps to enforce the same, shall not operate as a waiver thereof or affect the rights of Agent or Lenders thereafter to exercise the same, and any single or partial exercise of any such right, remedy or power shall not preclude any other or further exercise thereof or the exercise of any other right, remedy or power, and no such failure, delay, abandonment or single or partial exercise of the rights of Agent or Lenders hereunder shall be deemed to establish a custom or course of dealing or performance among the parties hereto. 6. Modification. Any amendment, modification or waiver of any provision of this Agreement shall not be effective in any event unless the same is in writing and signed by Agent, Company, the Subsidiaries and each Junior Creditor and then such amendment, modification or waiver shall be effective only in the specific instance and for the specific purpose given. 7. Additional Documents and Actions. The Company, each Subsidiary and the Junior Creditors at any time, and from time to time, after the execution and delivery of this Agreement, will execute and deliver such further documents as Agent reasonably may request that may be necessary in order to confirm the subordination effected herein. 8. Notices. Unless otherwise specifically provided herein, any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier service or certified or registered United States mail and shall be deemed to have been given (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a Business Day before 1:00 p.m. (Central time) or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, two (2) Business Days after delivery to such courier properly addressed; or (d) if by United States mail, four (4) Business Days after deposit in the United States mail, postage prepaid and properly addressed. Notices shall be addressed as follows: (a) If to Agent: Bank of America, N.A. 901 Main Street, 11th Floor Dallas, Texas 75202-3714 Attention: Mark Henze Telecopy: 214.209.3444 7 (b) If to Heller: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 500 West Monroe Street Chicago, Illinois 60661 Attention: Michael Sznajder Telecopy: 312.441.7598 With a copy to: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 2 Wisconsin Circle, 4th Floor Chevy Chase, Maryland 20815 Attention: Katherine R. Lofft, Esq. Telecopy: 301.664.9866 (c) If to Midwest: Midwest Mezzanine Fund II, L.P. 208 South LaSalle Street, 10th floor Chicago, Illinois 60604-1003 Attention: J. Allan Kayler Telecopy: 312.553.6647 and Foley & Lardner Three First National Plaza, Suite 4100 Chicago, Illinois 60602 Attention: Van E. Holkeboer, Esq. Telecopy: 312.558.3310 (d) If to Usdan: James M. Usdan c/o Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Attention: James Usdan Telecopy: 713.490.8420 and 8 Porter & Hedges, LLP 700 Louisiana, 35th floor Houston, Texas 77002 Attention: Robert G. Reedy, Esq. Telecopy: 713.226.0274 (e) If to the Company or any Subsidiary: c/o Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Attention: James Usdan Telecopy: 713.490.8420 or in any case, to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 8. A notice not given as provided above shall, if it is in writing, be deemed given if and when actually received by the party to whom given. 9. Severability. In the event that any provision of this Agreement is deemed to be invalid, illegal or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court or governmental authority, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and the affected provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Agreement. 10. Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their successors and assigns. 11. Counterparts. This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall be one and the same instrument. 12. Defines Rights of Creditors. The provisions of this Agreement are solely for the purpose of defining the relative rights of the Junior Creditors, Agent and Lenders and shall not be deemed to create any rights or priorities in favor of any other Person, including, without limitation, the Company or the Subsidiaries. 13. Subrogation. Subject to the irrevocable payment in full of all Senior Debt, in the event and to the extent cash, property or securities otherwise payable or deliverable to the holders of the Junior Debt shall have been applied pursuant to this Agreement to the payment of Senior Debt, then and in each such event, the holders of the Junior Debt shall be subrogated to the rights of each holder of Senior Debt to receive any further payment or distribution in respect of or applicable to the Senior Debt; and, for the purposes of such subrogation, no payment or distribution to the holders of Senior Debt of any cash, property or securities to which any holder of Junior Debt would be entitled except for the provisions of this Agreement shall, and no payment over pursuant to the provisions of this Agreement to the holders of Senior Debt by the holders of the Junior Debt shall, as between Company and the Subsidiaries, their creditors other 9 than the holders of the Senior Debt and the holders of Junior Debt, be deemed to be a payment by the Company or the Subsidiaries to or on account of Senior Debt. 14. Headings. The paragraph headings used in this Agreement are for convenience only and shall not affect the interpretation of any of the provisions hereof. 15. Termination. Except for Sections 17, 18 and 19 hereof, this Agreement shall terminate upon the irrevocable payment in full of all of the Senior Debt. 16. Applicable Law. This Agreement shall be governed by and shall be construed and enforced in accordance with the internal laws of the State of Texas, without regard to conflicts of law principles. 17. WAIVER OF JURY TRIAL. THE JUNIOR CREDITORS, THE COMPANY, THE SUBSIDARIES AND AGENT EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE JUNIOR DEBT DOCUMENTS. THE JUNIOR CREDITORS, THE COMPANY, THE SUBSIDIARIES AND AGENT ACKNOWLEDGE THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF THE JUNIOR CREDITORS, THE COMPANY, THE SUBSIDIARIES AND AGENT WARRANTS AND REPRESENTS THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS. 18. Enforcement. The Senior Creditors are hereby authorized to setoff and apply any obligations owed by the Senior Creditors to the Company or a Subsidiary against any obligations of the Company or a Subsidiary under this Agreement. The provisions of this paragraph shall survive termination of this Agreement. 19. Reinstatement. The obligations of Junior Creditors under this Agreement shall continue to be effective, or be reinstated after irrevocable payment in full of the Senior Debt, as the case may be, if at any time any payment (an "Invalidated Senior Payment") in respect of the Senior Debt is rescinded or otherwise restored or returned by a Senior Creditor to the Company or any Subsidiary by reason of any Proceedings, all as though such Invalidated Senior Payment had not been made. To the extent the Junior Creditors have received any payments with respect to the Junior Debt on or subsequent to the date of the receipt by the Senior Creditors of such Invalidated Senior Payment and such payments received by the Junior Creditors have not been rescinded or otherwise restored or returned by the Senior Creditors to the Company or any Subsidiary or paid over to the Senior Creditors, the Junior Creditors hereby agree to pay over to the Senior Creditors the amount of such payments so received by the Junior Creditors on or subsequent to such date to the extent necessary to restore to the Senior Creditors the amount of the Invalidated Senior Payment. 10 20. Termination of Prior Subordination Agreement. The parties hereto acknowledge and agree that, upon the execution, delivery and effectiveness of this Agreement, that certain Subordination and Intercreditor Agreement dated as of January 31, 2000 by and among the Company, Agent, Heller, Midwest and the Persons party thereto as "Guarantors" is terminated and shall be of no further force or effect. THIS WRITTEN AGREEMENT AND THE RELATED LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. - Remainder of Page Intentionally Left Blank - [Signature Page Follows] 11 IN WITNESS WHEREOF, each Junior Creditor, the Company and the Subsidiaries have caused this Agreement to be executed in favor of the Agent for all the Lenders as of the date first above written. COMPANY: AGENT: - ------- ----- CASTLE DENTAL CENTERS, INC., BANK OF AMERICA, N.A., a Delaware corporation a national banking association /s/ John M. Slack /s/ Mark Henze By: _____________________________ By: _____________________________ John M. Slack Mark Henze Name: _____________________________ Name: _____________________________ Senior Vice President Senior Vice President Title: _____________________________ Title: _____________________________ SUBSIDIARIES: JUNIOR CREDITORS: Academy for Dental Assistants, Inc., a MIDWEST MEZZANINE FUND II, L.P., Florida corporation; a Delaware limited partnership Castle Dental Centers Of California, L.L.C., a Delawarelimited liability company; By: ABN AMRO Mezzanine Management Castle Texas Holdings, Inc., a Management II, L.P., its general Delaware corporation; partner Castle Dental Centers Of Texas, Inc., a Texas corporation and successor by merger to Dental World, Inc., a Texas corporation, and Castle Dental centers By: ABN AMRO Mezzanine Management II, of Austin, Inc., a Texas corporation; Inc., its general partner CDC Of California, Inc., a Delaware /s/ Paul Kreie corporation; By: _______________________________ Castle Dental Centers Of Florida, Name: Paul Kreie Inc., a Florida corporation; Title: Vice President Castle Dental Centers Of Tennessee, Inc., a Tennessee corporation; and Dentcor, Inc., a Florida corporation HELLER FINANCIAL, INC., a Delaware /s/ John M. Slack corporation By: _____________________________ John M. Slack Name: _____________________________ Senior Vice President Title: _____________________________ /s/ Michael Sznajder By: _____________________________ Michael Sznajder Name: _____________________________ Senior Vice President Title: _____________________________ JAMES M. USDAN, an individual /s/ James M. Usdan By: _____________________________ Name: James M. Usdan 12 EX-10.7 11 dex107.txt SENIOR SUBORDINATED NOTE Exhibit 10.7 ================================================================================ SENIOR SUBORDINATED NOTE AND SUBORDINATED CONVERTIBLE NOTE EXCHANGE AGREEMENT DATED AS OF JULY 19, 2002 AMONG CASTLE DENTAL CENTERS, INC., HELLER FINANCIAL, INC., AND MIDWEST MEZZANINE FUND II, L.P. ================================================================================ TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS AND ACCOUNTING MATTERS........................ 1 Section 1.01 Certain Defined Terms..................... 1 Section 1.02 Accounting Terms and Determinations....... 9 ARTICLE II TENDER AND EXCHANGE OF SENIOR NOTES...................... 9 Section 2.01 Tender and Exchange of Senior Notes....... 9 Section 2.02 Release................................... 9 ARTICLE III CONDITIONS PRECEDENT.................................... 10 Section 3.01 Conditions to Purchase.................... 10 ARTICLE IV REPRESENTATIONS AND WARRANTIES........................... 11 Section 4.01 Corporate Existence....................... 12 Section 4.02 No Breach................................. 12 Section 4.03 Authority................................. 12 Section 4.04 Approvals................................. 12 Section 4.05 No Material Misstatements................. 13 Section 4.06 Capitalization............................ 13 Section 4.07 Offering.................................. 14 Section 4.08 Registration Rights....................... 14 Section 4.09 Restructuring Documents................... 14 ARTICLE V AFFIRMATIVE COVENANTS..................................... 14 Section 5.01 Reporting Requirements.................... 14 Section 5.02 Litigation................................ 16 Section 5.03 Other Covenants........................... 16 ARTICLE VI NEGATIVE COVENANTS....................................... 17 Section 6.01 Non-Disclosure............................ 17 ARTICLE VII HOLDER REPRESENTATIONS AND WARRANTIES................... 17 Section 7.01 Investment Representations................ 17 ARTICLE VIII MISCELLANEOUS.......................................... 18 Section 8.01 Waiver.................................... 18 Section 8.02 Notices................................... 18 Section 8.03 Payment of Expenses, Indemnities, etc..... 18 Section 8.04 Amendments, Etc........................... 20 Section 8.05 Successors and Assigns.................... 20 Section 8.06 Assignments............................... 20 Section 8.07 Invalidity................................ 21 Section 8.08 Counterparts.............................. 21 Section 8.09 References................................ 21 Section 8.10 Captions.................................. 21 Section 8.11 No Oral Agreements........................ 21 Section 8.12 Governing Law; Submission to Jurisdiction. 22 Section 8.13 Confidentiality........................... 22 Section 8.14 Effectiveness............................. 23 Section 8.15 Exculpation Provisions.................... 23
i EXHIBITS AND SCHEDULES Exhibit A Form of Certificate of Designations Exhibit B Form of Investors Agreement Exhibit C Form of Registration Rights Agreement Exhibit D Form of Release Exhibit E Form of Stockholders Agreement Exhibit F Form of Amended and Restated Bylaws Exhibit G Form of Compliance Certificate Schedule 4.06 Capitalization ii THIS SENIOR SUBORDINATED NOTE AND SUBORDINATED CONVERTIBLE NOTE EXCHANGE AGREEMENT, dated as of July 19, 2002, is by and among CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Company"), HELLER FINANCIAL, INC., a Delaware corporation ("Heller"), and MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership ("Midwest"; Heller and Midwest are sometimes referred to individually as a "Holder" and collectively, as the "Holders"). R E C I T A L S WHEREAS, $17,928,000 in aggregate principal and interest (including default interest) as of the date hereof (the "Indebtedness") is outstanding under the Senior Subordinated Notes and Subordinated Convertible Notes (collectively, the "Senior Notes") issued to the Holders pursuant to the Senior Subordinated Note Purchase Agreement between the Company and the Holders dated January 31, 2000; WHEREAS, Heller is the holder of Senior Notes representing $11,952,000 of the Indebtedness and desires to exchange the Indebtedness held by Heller for shares of Series A-1 Preferred Stock; WHEREAS, Midwest is the holder of Senior Notes representing $5,976,000 of the Indebtedness and desires to exchange the Indebtedness held by Midwest for shares of Series A-1 Preferred Stock; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING MATTERS Section 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Article I or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one (1) or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the 1 partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. "Agreement" shall mean this Agreement, as the same may from time to time be amended, restated, supplemented or otherwise modified from time to time. "Authorized Share Amendment" shall have the meaning assigned such term in Section 4.02. "Business Day" shall mean any day other than a day on which commercial banks are authorized or required to close in Chicago, Illinois. "Certificate of Designations" means the Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of the Company, in the form attached hereto as Exhibit A. "Closing Date" shall mean July 19, 2002. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and any successor statute. "Common Stock" shall mean the common stock, $.001 par value, of the Company. "Company" has the meaning set forth in the preamble of this Agreement. "Consolidated Subsidiaries" shall mean each Subsidiary of the Company (whether now existing or hereafter created or acquired), the financial statements of which shall be (or should have been) consolidated with the financial statements of the Company in accordance with GAAP. "Corpus Transactions" shall mean, collectively: (a) the Severance Agreement between the Company, Jack H. Castle, Jr. ("Castle"), Goforth, Inc., a Texas corporation ("Goforth"), and Castle 1995 Gift Trust F/b/o Jack H. Castle, Jr. (the "Trust"); (b) the Settlement Agreement between the Company, Jack H. Castle, D.D.S. and the Estate of Jack H. Castle, D.D.S. (collectively, the "Seller"), Castle Dental Centers of Texas, Inc., a Texas corporation ("Castle Texas"), Castle Dental Associates of Texas, P.C. (formerly Jack H. Castle, D.D.S., P.C.), a Texas professional corporation (the "PC"), Castle Interests, Ltd. ("Castle Interests"), and Loretta M. Castle ("Mrs. Castle"); and (c) the sale by the Company of two (2) locations in Corpus Christi, Texas and one (1) location in Beaumont Texas pursuant to the Asset Purchase Agreement ("Asset Purchase Agreement") among Dentists Choice 1 L.P., a Texas limited partnership ("Purchaser"), Castle, Texas Dental Associates, P.A., a Texas professional association ("Purchaser PC"), Castle Texas, and the PC. 2 "Environmental Laws" shall mean any and all Governmental Requirements pertaining to health or the environment in effect in any and all jurisdictions in which the Company or any Subsidiary is conducting or at any time has conducted business, or where any Property of the Company or any Subsidiary is located, including without limitation, the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection laws. The term "oil" shall have the meaning specified in OPA, the terms "hazardous substance" and "release" (or "threatened release") have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and (ii) to the extent the laws of the state in which any Property of the Company or any Subsidiary is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Company or any Subsidiary would be deemed to be a "single employer" within the meaning of section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code. "Exchange" shall have the meaning assigned such term in Section 2.01. "Exchange Agreement Documents" shall mean this Agreement, the Stockholders Agreement, the Registration Rights Agreement, the Investors Agreement, the Certificate of Designations, and any agreement, certificate or instrument delivered pursuant to or entered into in connection with any such agreement or instrument. "Existing Seller Notes" shall mean, collectively, each of those certain subordinated promissory notes issued by the Company prior to the Closing Date to: Lester B. Greenberg, D.D.S.; John G. Goodman, D.D.S.; Alexander Soleimani, D.M.D.; Elliot Schlang, D.D.S.; Martin Schechter, D.D.S.; Jeffrey D. Schechter, D.D.S.; Dental Advisory Group, LLC; DCA Limited Partnership, L.L.P.; and Dental Administrators of Texas Limited Partnership, L.L.P., in an aggregate amount outstanding of $3,650,000 at June 30, 2002 (including principal and interest that has accrued thereunder, but excluding default interest). 3 "Florida Transaction" shall mean the sale of substantially all of the property, assets and business relating to the Company's dental centers located in Sarasota and Venice, Florida pursuant to the Asset Purchase Agreement dated as of June 14, 2002, by and among Woolf Dentistry, P.A., a Florida professional association, Castle Dental Centers of Florida, Inc., a Florida corporation, and Castle 1st Dental Care, P.A., a Florida professional association, in exchange for a release of the 9% Subordinated Note of the Company issued to Woolf Dentistry, P.A. on July 9, 1998, in the original principal amount of $370,000. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority" shall include the country, the state, county, city and political subdivisions in which any Person or such Person's Property is located or which exercises valid jurisdiction over any such Person or such Person's Property, and any court, agency, department, commission, board, bureau or instrumentality of any of them including monetary authorities which exercises valid jurisdiction over any such Person or such Person's Property. Unless otherwise specified, all references to Governmental Authority herein shall mean a Governmental Authority having jurisdiction over, where applicable, the Company, its Subsidiaries or any of their Property or any Holder. "Governmental Requirement" shall mean any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement (whether or not having the force of law), including, without limitation, Environmental Laws, energy regulations and occupational, safety and health standards or controls, of any Governmental Authority. "Heller" has the meaning set forth in the preamble of this Agreement. "Holder" has the meaning set forth in the preamble of this Agreement. "Indebtedness" has the meaning set forth in the recitals of this Agreement. "Indemnified Parties" shall have the meaning assigned such term in Section 8.03(a)(ii). "Indemnity Matters" shall mean any and all actions, suits, proceedings (including any investigations, litigation or inquiries), claims, demands and causes of action made or threatened against a Person and, in connection therewith, all losses, liabilities, damages (including, without limitation, consequential damages) or reasonable costs and expenses of any kind or nature whatsoever incurred by such Person whether caused by the sole or concurrent negligence of such Person seeking indemnification. "Information Statement" shall have the meaning assigned such term in Section 5.04. 4 "Information Statement Period" shall have the meaning assigned such term in Section 5.04. "Investors Agreement" shall mean that certain Investors Agreement, dated as of even date herewith, by and among the Company, Heller and Midwest, in the form attached hereto as Exhibit B. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing. "Material Adverse Effect" shall mean any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations or affairs of the Company and its Subsidiaries taken as a whole different from those reflected in the financial statements of the Company and its Consolidated Subsidiaries contained in the Company Documents or from the facts represented or warranted in any of the Exchange Agreement Documents or Subordinated Note and Warrant Documents, or (ii) the ability of the Company and its Subsidiaries taken as a whole to carry out their business as at the Closing Date or as proposed as of the Closing Date to be conducted or meet their obligations under the Exchange Agreement Documents or the Restructuring Documents on a timely basis. "Midwest" has the meaning set forth in the preamble of this Agreement. "Multiemployer Plan" shall mean a Plan defined as such in Section 3(37) or 4001(a)(3) of ERISA. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization, Governmental Authority or any other form of entity. "Plan" shall mean any employee pension benefit plan, as defined in Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or contributed to by the Company, any Subsidiary or an ERISA Affiliate or (ii) was at any time during the preceding six calendar years sponsored, maintained or contributed to, by the Company, any Subsidiary or an ERISA Affiliate. 5 "Prior Registration Rights Agreement" shall mean that certain Registration Rights Agreement, dated as of January 31, 2000, by and among the Company, Heller Financial, Inc., and Midwest Mezzanine Fund II, L.P "Prior Stockholders Agreement" shall mean that certain Stockholders Agreement, dated as of January 31, 2000, by and among the Company, Jack H. Castle, Jr., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., Delaware State Employees' Retirement Fund, Declaration of Trust For Defined Benefit Plan of ICI American Holdings Inc., Declaration of Trust for Defined Benefit Plan of Zeneca Holdings Inc., Jack H. Castle, Jr., as Trustee of the Castle 1995 Gift Trust F/B/O Jack H. Castle, Jr., Castle Interests, Ltd., Jack H. Castle, D.D.S., Loretta M. Castle, and Gulfstar Investments, Ltd. "Prior Subordination Agreement" shall mean that certain Subordination and Intercreditor Agreement, dated as of January 31, 2000, by and among Heller, Midwest, the Company, Castle Dental Centers of California, L.L.C., a Delaware limited liability company, Dental World, Inc., a Texas corporation, Castle Dental Centers of Austin, Inc., Castle dental Centers of Florida, Inc., a Florida corporation, Castle Dental Centers of Tennessee, Inc., a Tennessee corporation, Castle Dental Centers of Texas, Inc., a Texas corporation, Dentcor, Inc., a Florida corporation, CDC of California, Inc., a Delaware corporation, Castle Texas Holdings, Inc., a Delaware corporation, Academy for Dental Assistants, Inc., a Florida corporation, and Bank of America, N.A., a national banking association formerly known as NationsBank, N.A. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Registration Rights Agreement" shall mean that certain Registration Rights Agreement, dated as of even date herewith, by and among the Company, James M. Usdan, Heller, Midwest and the Senior Lenders and certain other stockholders of the Company, in the form attached hereto as Exhibit C. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Release" shall mean a letter agreement, in the form attached hereto as Exhibit D, dated as of the Closing Date and executed by the Company and each of its Subsidiaries in favor of Heller and Midwest. "Responsible Officer" shall mean, as to any Person, the Chief Executive Officer, the President or any Vice President of such Person and, with respect to financial matters, the term "Responsible Officer" shall include the Chief Financial Officer of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Company. 6 "Restructuring Transactions" shall mean, collectively, the transactions contemplated by the Exchange Agreement Documents, the Senior Credit Documents and the Subordinated Note and Warrant Documents, the Roisman Settlement, the Seller Debt Exchange, the Corpus Transactions, the San Antonio Transaction and the Florida Transaction. "Restructuring Documents" shall mean the Senior Credit Documents, the Subordinated Note and Warrant Documents, the Exchange Agreement Documents and each other document executed or delivered in connection with any of the Restructuring Transactions. "Roisman" shall mean, collectively, Leon D. Roisman, D.M.D., Leon D. Roisman, D.M.D., Inc., a California corporation and Roisman Acquisition Company, a California corporation. "Roisman Judgment" shall mean that certain judgment in favor of Roisman rendered against CDC of California, Inc. and Castle Dental Centers of California, L.L.C., in LACSC Case # BS058068 dated as of October 23, 2000, in the initial amount of $1,108,210.62 plus interest at 10% (ten percent) per annum from the date of the judgment. "Roisman Settlement" shall mean the execution and delivery of that certain Forbearance Agreement dated as of July 3, 2002 by and among, CDC of California, Inc., a Delaware corporation, Castle Dental Centers of California, LLC, a Delaware limited liability company, and Roisman, with respect to the Roisman Judgment. "San Antonio Transaction" means the issuance of Series A-1 Preferred Stock pursuant to the Settlement Agreement among the Company, Castle Texas, Castle PC, Barry E. Solomon, Marc A. Solomon, Hebron D. Cutrer, Stan E. Faye, Robert B. Grau, Dental Centers of America, Inc., Dental Administrators, Inc., the Senior Agent, the Senior Lenders and the Holders. "SEC" shall mean the Securities and Exchange Commission or any successor Governmental Authority. "Seller Debt Exchange" shall mean the exchange by the holders of Existing Seller Notes of all liabilities and obligations owed to them by the Company pursuant to the Existing Seller Notes and all documents related thereto for an aggregate of 32,002 shares of Series A-1 Preferred Stock pursuant to the Seller Note Exchange Agreement. "Seller Note Exchange Agreement" means, collectively, those certain Exchange Agreements, each dated July 19, 2002, between the Company and each of the holders of the Existing Seller Notes. "Senior Agent" shall mean Bank of America, N.A., a national banking association formerly known as NationsBank of Texas, N.A. (together with any duly appointed successor) for the Senior Lenders. 7 "Senior Credit Agreement" shall mean that certain Second Amended and Restated Credit Agreement, dated as of even date herewith, between the Company, the Senior Agent and the Senior Lenders. "Senior Credit Documents" shall mean the Senior Credit Agreement and the "Loan Documents" (as defined in the Senior Credit Agreement). "Senior Lenders" shall mean each Person that is or shall become a lender under the Senior Credit Agreement for so long as such Person shall be a party to that Agreement. "Senior Notes" has the meaning set forth in the recitals to this Agreement. "Senior Subordinated Note and Warrant Purchase Agreement" means the Senior Subordinated Note and Warrant Purchase Agreement, dated as of the date of this Agreement, by and among the Company, Heller, Midwest and James M. Usdan. "Series A-1 Preferred Stock" shall mean the Company's Convertible Preferred Stock, Series A-1, par value $.001 per share, of the Company. "Special Entity" shall mean any joint venture, limited liability company or partnership, general or limited partnership or any other type of partnership or company other than a corporation in which the Company or one or more of its other Subsidiaries is a member, owner, partner or joint venturer and owns, directly or indirectly, at least a majority of the equity of such entity or controls such entity, but excluding any tax partnerships that are not classified as partnerships under state law. For purposes of this definition, any Person which owns directly or indirectly an equity investment in another Person which allows the first Person to manage or elect managers who manage the normal activities of such second Person will be deemed to "control" such second Person (e.g. a sole general partner controls a limited partnership). "Stockholders Agreement" shall mean that certain Stockholders Agreement, dated as of even date herewith, by and among the Company, the Senior Lenders, James M. Usdan, Heller and Midwest, in the form attached hereto as Exhibit E. "Subordinated Note and Warrant Documents" shall mean the Senior Subordinated Note and Warrant Purchase Agreement, the senior subordinated convertible promissory notes and the warrants to be issued pursuant thereto, the Stockholders Agreement, the Registration Rights Agreement and any other agreements, certificates or instruments executed or delivered pursuant to or entered into in connection with any of the foregoing. "Subsidiary" shall mean (i) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the 8 Company or one (1) or more of its Subsidiaries or by the Company and one (1) or more of its Subsidiaries and (ii) any Special Entity. Unless otherwise indicated herein, each reference to the term "Subsidiary" shall mean a Subsidiary of the Company. Section 1.02 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to Holders hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the audited financial statements of the Company contained in the Company Documents (except for changes concurred with by the Company's independent public accountants). ARTICLE II TENDER AND EXCHANGE OF SENIOR NOTES Section 2.01 Tender and Exchange of Senior Notes. Upon the terms and subject to the conditions specified in this Agreement, each Holder hereby agrees to sell, transfer and assign to the Company, and the Company agrees to purchase from each such Holder, on the Closing Date, all of, and not a partial interest in, such Holder's Indebtedness represented by the Senior Notes held by such Holder in exchange for shares of Series A-1 Preferred Stock, with 119,520 shares to be issued to Heller and 59,760 shares to be issued to Midwest (collectively, the "Exchange"). No additional payment will be made for default interest or interest accrued after June 30, 2002 on the Senior Notes, which is hereby irrevocably waived. On the Closing Date, the Company will deliver to the each Holder certificates issued in such Holder's name representing the number of shares of Series A-1 Preferred Stock for which such Holder's Indebtedness is being exchanged against delivery of the original executed copies of the Senior Notes representing the Indebtedness. Section 2.02 Release. (a) Effective upon the consummation of the Exchange, each Holder, on behalf of itself, its Affiliates, its successors and assigns, irrevocably and unconditionally releases, relinquishes, waives, and forever discharges the Company and each of the Senior Lenders, and each of their respective subsidiaries, Affiliates, and present and former agents, employees, officers, directors, attorneys, advisors, stockholders, plan fiduciaries, successors and assigns (the "Released Parties") forever, from and against any and all claims, debts, obligations, demands, actions, suits, causes of action, costs, fees, and all liability whatsoever, whether known or unknown, fixed or contingent, in contract or in tort, or based on any statute or other law, state or federal (collectively "Claims"), which the Exchanging Holder has, had, or may have in the future against the Released Parties, relating to or arising out of the Senior Notes, the previous failure to pay interest and principal thereon, and the issuance thereof. 9 (b) Each Holder hereby declares and agrees that, on the Closing Date following the consummation of the Exchange, the Senior Notes will be deemed paid in full and in all respects terminated and of no further force or effect. (c) Each Holder hereby agrees not to bring any claim of any kind against any Released Party concerning any matter released by this Section 2.02. Each Holder agrees that this Agreement constitutes a bar to any such future claim. ARTICLE III CONDITIONS PRECEDENT Section 3.01 Conditions to Purchase. The obligation of Holders to exchange their Senior Notes for Series A-1 Preferred Stock pursuant to this Agreement is subject to the receipt by Holders of all of the following documents and satisfaction of the other conditions provided in this Section 3.01, each of which shall be reasonably satisfactory to Holders in form and substance: (a) A certificate of the Secretary or an Assistant Secretary of the Company, dated the Closing Date, setting forth (i) resolutions of its board of directors with respect to the authorization of the Company to execute and deliver certificates representing the Series A-1 Preferred Stock, the Exchange Agreement Documents and the Restructuring Documents to which it is a party and to enter into the transactions contemplated in those documents (including, without limitation, the filing of the Certificate of Designations and the issuance of the Series A-1 Preferred Stock in connection with the Exchange), (ii) the officers of the Company who are authorized to sign the Exchange Agreement Documents and the Restructuring Documents to which Company is a party and, (iii) specimen signatures of the authorized officers, (iv) the certificate of incorporation of the Company (which shall include the Certificate of Designations) and the bylaws of the Company (which shall be the Amended and Restated Bylaws in the form attached hereto as Exhibit F), certified as being the true and complete certificate of incorporation and bylaws of the Company, respectively, and (v) the members of the board of directors of the Subsidiaries of the Company which shall be James M. Usdan, Paul Kreie, Ira Glazer and Eddie Kunz. (b) Certificates of the appropriate state agencies with respect to the existence, qualification and good standing of the Company and its Subsidiaries. (c) Certificates representing the Series A-1 Preferred Stock, duly completed, executed and delivered to each Holder, as applicable. (d) A compliance certificate which shall be substantially in the form attached hereto as Exhibit G, duly and properly executed by a Responsible Officer and dated as of the Closing Date. 10 (e) Opinions of Haynes and Boone, LLP, counsel to the Company, in form and substance satisfactory to Holders, as to such matters incident to the transactions herein contemplated as Holders may reasonably request. (g) Unaudited pro forma projected consolidated balance sheet of the Company and its Consolidated Subsidiaries at the Closing Date (which pro forma shall be based on the consolidated balance sheet of the Company and its Consolidated Subsidiaries as of March 31, 2002). (h) Certified copies of the Senior Debt Documents. (i) The Stockholders Agreement, the Registration Rights Agreement and the Investors Agreement duly completed, executed by the Company and the other signatories thereto and delivered to Holders. (j) The Release, duly executed by the Company and each of its Subsidiaries. (k) Consummation of the Restructuring Transactions, including without limitation, the exchange of each of the Existing Seller Notes for an aggregate of 32,002 shares of Series A-1 Preferred Stock, on terms and conditions, and pursuant to the Restructuring Documents, acceptable in form and substance to the Holders. (l) Termination of the Prior Subordination Agreement, the Prior Registration Rights Agreement and the Prior Stockholders Agreement. (m) With respect to Midwest, duly executed and completed (i) SBA Form 480 (Size Status Declaration) and SBA Form 652 (Assurance of Compliance), (ii) SBA Form 1031 (Portfolio Finance Report), Part A and B, and (iii) letter regarding SBA matters in form and substance acceptable to Midwest. (n) Certified copies of the Employment Agreements between the Company and each of James M. Usdan, Joseph P. Keane and John M. Slack. (o) Payment of all legal fees and other reasonable expensed incurred by Heller and Midwest in connection with the preparation, execution and delivery of this Agreement and the other Exchange Agreement Documents and the transaction contemplated hereby. (o) such other documents as Holders or special counsel to Holders may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Company represents and warrants to each Holder: 11 Section 4.01 Corporate Existence. Each of the Company and each Subsidiary: (i) is a corporation or limited liability company duly organized, legally existing and in good standing under the laws of the jurisdiction of its incorporation or formation; (ii) has all requisite corporate or limited liability company power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect. Section 4.02 No Breach. Neither the execution and delivery of the Exchange Agreement Documents or the Restructuring Documents, nor compliance with the terms and provisions hereof or thereof (including, without limitation, the filing of the Certificate of Designations and the issuance of the Series A-1 Preferred Stock pursuant to the Exchange, and, subject to the filing with the Delaware Secretary of State of a certificate of amendment to the Company's certificate of incorporation increasing the number of authorized shares of the Company's common stock or effecting a reverse stock split with respect to the Company's common stock (the "Authorized Share Amendment"), the issuance of the Common Stock upon the conversion of the Series A-1 Preferred Stock) will conflict with or result in a breach of, or require any consent which has not been obtained as of the Closing Date under, the respective charter or by-laws of the Company or any Subsidiary, or any Governmental Requirement or any material agreement or instrument to which the Company or any Subsidiary is a party or by which it is bound or to which it or its Properties are subject, or constitute a default under any such material agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Company or any Subsidiary pursuant to the terms of any such material agreement or instrument other than the Liens created by the Senior Credit Documents. Section 4.03 Authority. The Company and each Subsidiary have all necessary corporate power and authority to execute, deliver and perform its respective obligations under the Exchange Agreement Documents and the Restructuring Documents to which it is a party (including, without limitation, the filing of the Certificate of Designations and the issuance of the Series A-1 Preferred Stock pursuant to the Exchange and Common Stock upon conversion of the Series A-1 Preferred Stock). The execution, delivery and performance by the Company and each Subsidiary of the Exchange Agreement Documents and the Restructuring Documents to which it is a party, have been duly authorized by all necessary corporate action on its part. The Exchange Agreement Documents and the Restructuring Documents constitute the legal, valid and binding obligations of the Company and each Subsidiary, enforceable in accordance with their terms. Section 4.04 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority are necessary for the execution, delivery or performance by the Company or any Subsidiary of the Exchange Agreement Documents or the Restructuring Documents to which it is a party (including, without limitation, the filing of the Certificate of Designations and the issuance of the Series A-1 Preferred Stock pursuant to the Exchange and the issuance of the Common Stock upon the conversion of the Series A-1 12 Preferred Stock) or for the validity or enforceability thereof, other than the filing of the Authorized Share Amendment, which will not be filed until it is approved at the Company's next meeting of stockholders, which meeting shall take place no later than 75 days following the date of this Agreement. Section 4.05 No Material Misstatements. No written information, statement, exhibit, certificate, document or report furnished to Holders by the Company or any Subsidiary in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading in the light of the circumstances in which made and with respect to the Company and its Subsidiaries taken as a whole. The information contained in the following documents (the "Company Documents") was true and correct in all material respects as of the respective filing date of the applicable Company Document: (a) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001; (b) the Company's Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31, 2002; and (c) all other documents, if any, filed by the Company with the Commission since June 30, 2001 pursuant to Section 13, 14 or 15 of the Exchange Act. As of their respective filing dates, the Company Documents (i) complied in all material respects with the requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and (ii) did not contain any untrue statement of material fact or omit a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company has timely filed with the SEC all documents required to be filed by the Company under the Exchange Act. Section 4.06 Capitalization. The authorized capital stock and other equity securities of each of the Company and each of its Subsidiaries is as set forth on Schedule 4.06. All issued and outstanding shares of capital stock and other equity securities of each of the Company and each of its Subsidiaries are duly authorized and validly issued, fully paid, non-assessable, free and clear of all Liens other than those in favor of Senior Agent, and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. No shares of the capital stock of Company or any of its Subsidiaries, other than those described above, are issued and outstanding. Except as set forth on Schedule 4.06, all of the issued and outstanding capital stock and other equity securities of Subsidiaries of the Company are owned by the Company. Upon issuance, the Series A-1 Preferred Stock will be duly authorized and validly issued, fully paid, non-assessable, free and clear of all Liens. Following the filing of the Authorized Share Amendment, the Common Stock issuable upon conversion of the Series A-1 Preferred Stock will, when issued, be duly authorized, validly issued, fully paid and non-assessable. Except as provided in the Stockholders Agreement and as set forth on Schedule 4.06, 13 there are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from the Company or any of its Subsidiaries, of any shares of capital stock or other securities of any such entity. Section 4.07 Offering. Subject in part to the truth and accuracy of the representations of the Holders set forth in this Agreement, the offer, sale and issuance of the Series A-1 Preferred Stock, and the shares of Common Stock issuable upon conversion of the Series A-1 Preferred Stock as contemplated by this Agreement, are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities laws. Section 4.08 Registration Rights. Except as set forth on Schedule 4.08 and as provided for in the Registration Rights Agreement, as of the Closing Date, the Company is not under any obligation to register under the Securities Act any of its currently outstanding securities or any of its securities which may hereinafter be issued. Section 4.09 Restructuring Documents. Each of the representations and warranties of the Company and each of its Subsidiaries contained in each of the Restructuring Documents, including, without limitation, the Senior Subordinated Note and Warrant Purchase Agreement, is true, correct and complete and is hereby incorporated herein by this reference thereto. For purposes hereof, if a representation contained in a Restructuring Document is qualified by the term "Material Adverse Effect", then, in making the representation in this Section 4.09 the term "Material Adverse Effect" will mean a "Material Adverse Effect" as defined herein. ARTICLE V AFFIRMATIVE COVENANTS The Company covenants and agrees that, so long as any of the Holders or an Affiliate thereof (including, for such purpose, partners of any Holder which is a partnership) hold SeriesA-1 Preferred Stock or Common Stock issued upon conversion of all or any portion of the Series A-1 Preferred Stock: Section 5.01 Reporting Requirements. The Company shall deliver, or shall cause to be delivered, to each Holder: (a) Annual Financial Statements. As soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, the audited consolidated and unaudited consolidating statements of operations, changes in stockholders' equity, changes in financial position and cash flow of the Company and its Consolidated Subsidiaries for such fiscal year, and the related consolidated and consolidating balance sheets of the Company and its Consolidated Subsidiaries as at the end of such fiscal year, and setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, and accompanied by the related opinion of independent public accountants of recognized national 14 standing acceptable to Holders which opinion shall state that said financial statements fairly present the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year and that such financial statements have been prepared in accordance with GAAP, except for such changes in such principles with which the independent public accountants shall have concurred and such opinion shall not contain a "going concern" or like qualification or exception, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any default. (b) Quarterly Financial Statements. As soon as available and in any event within forty five (45) days after the end of each of the first three (3) fiscal quarterly periods of each fiscal year of the Company, consolidated and consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Company and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments). (c) Monthly Financial Statements. As soon as available and in any event within thirty (30) days after the end of each of the first eleven (11) months of each fiscal year of the Company, consolidated and consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Company and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments). (d) Budget. As soon as available and in any event within thirty (30) days after the end of each fiscal year of the Company, a budget for the Company and its Consolidated Subsidiaries, as approved by the Board of Directors of the Company, for the following fiscal year setting forth in comparative form corresponding figures from the preceding fiscal year, in reasonable detail and certified as to its good-faith preparation by a Responsible Officer. (e) Other Accounting Reports. Promptly upon receipt thereof, a copy of each other report or letter submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company 15 or any of its Subsidiaries, and a copy of any response by the Company or any Subsidiary of the Company, or the Board of Directors of the Company or any Subsidiary of the Company, to such letter or report. (f) SEC Filings, Etc. Promptly upon its becoming available, each financial statement, report, notice or proxy statement sent by the Company to stockholders generally and each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company with or received by the Company in connection therewith from any securities exchange or the SEC or any successor agency. (g) Annual Revenue Reports. As soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, a report prepared by the Company for each dental center setting forth the revenues, expenses and contributions to profit of such dental center, in form and substance acceptable to Holders. (h) Quarterly Revenue Reports. As soon as available and in any event within forty five (45) days after the end of each of the first three (3) fiscal quarterly periods of each fiscal year of the Company, a report by the Company for each dental center setting forth the revenues, expenses and contributions to profit of such dental center, in form and substance acceptable to Holders. (i) Other Information. From time to time, such other information regarding the business, affairs or financial condition of the Company or any Subsidiary (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA), as any Holder may reasonably request. Section 5.02 Litigation. The Company shall promptly give to each Holder notice of: (i) all legal or arbitral proceedings, and of all proceedings before any Governmental Authority affecting the Company or any Subsidiary, except proceedings which, if adversely determined, would not have a Material Adverse Effect, and (ii) of any litigation or proceeding against or adversely affecting the Company or any Subsidiary in which the amount involved is not covered in full by insurance (subject to normal and customary deductibles and for which the insurer has not assumed the defense), or in which injunctive or similar relief is sought. The Company will, and will cause each of its Subsidiaries to, promptly notify each Holder of any claim, judgment, Lien or other encumbrance affecting any Property of the Company or any Subsidiary if the value of the claim, judgment, Lien, or other encumbrance affecting such Property shall exceed $250,000. Section 5.03 Other Covenants. The Company shall comply with all covenants contained in Sections 8.03, 8.04, and 8.07 of the Senior Subordinated Note and Warrant Purchase Agreement. 16 Section 5.04 Schedule 14f-1. The Company has duly appointed Paul Kreie, Ira Glazer and Eddie Kuntz to the Company's Board of Directors subject to the expiration of the ten-day period (the "Information Statement Period") following the later of (a) the filing of an Information Statement on Schedule 14f-1 (the "Information Statement") with the SEC disclosing the appointment of new directors to the Company's Board of Directors, and (b) the mailing of the Information Statement to the stockholders of the Company. Immediately following the Information Statement Period, the Company's Board of Directors shall consist solely of James M. Usdan, Paul Kreie, Ira Glazer and Eddi Kunz. On the Closing Date, the Board of Directors of each Subsidiary of the Company shall consist solely of James M. Usdan, Paul Kreie, Ira Glazer and Eddi Kunz. The Company shall file the Information Statement with the SEC and mail the Information Statement to stockholders of the Company by _______________. The Company's Board of Directors will not take any action at a meeting of the Board of Directors or pursuant to a written consent, prior to the expiration of the Information Statement Period. ARTICLE VI NEGATIVE COVENANTS The Company covenants and agrees that, so long as any of the Holders or an Affiliate thereof (including, for such purpose, partners of any Holder which is a partnership) hold Series A-1 Preferred Stock or Common Stock issued upon conversion of all or any part of the Series A-1 Preferred Stock: Section 6.01 Non-Disclosure. The Company will not and will not permit any of its Affiliates to, in the future, issue any press release or other public disclosure using the name of Heller, Midwest or any of their respective Affiliates or referring to this Agreement or referring to the other Exchange Agreement Documents without at least two (2) Business Days prior written notice to Heller or Midwest, as applicable, and without the prior written consent of Heller or Midwest, as applicable, unless (and only to the extent that) the Company or such Affiliate of the Company is required to so disclose under law and then, in any event, the Company or such Affiliate will consult with Heller or Midwest, as applicable, before issuing such press release or other public disclosure. The Company consents to the publication by Heller and/or Midwest of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement, the other Exchange Agreement Documents and/or the Restructuring Documents. ARTICLE VII HOLDER REPRESENTATIONS AND WARRANTIES Section 7.01 Investment Representations. Each Holder represents and warrants to the Company that it is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. 17 ARTICLE VIII MISCELLANEOUS Section 8.01 Waiver. No failure on the part of a Holder to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any of the Exchange Agreement Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any of the Exchange Agreement Documents preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Section 8.02 Notices. All notices and other communications provided for herein and in the other Exchange Agreement Documents (including, without limitation, any modifications of, or waivers or consents under, this Agreement or the other Exchange Agreement Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in writing and telexed, telecopied, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or in the Exchange Agreement Documents; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement or in the other Exchange Agreement Documents, all such communications shall be deemed to have been duly given when transmitted, if transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next succeeding Business Day) by telex or telecopier and evidence or confirmation of receipt is obtained, or personally delivered or, in the case of a mailed notice, three (3) Business Days after the date deposited in the mails, postage prepaid, in each case given or addressed as aforesaid. Section 8.03 Payment of Expenses, Indemnities, etc. (a) The Company agrees: (i) whether or not the transactions hereby contemplated are consummated, to pay all reasonable expenses of Holders in the administration (both before and after the execution hereof and including advice of counsel as to the rights and duties of a Holder with respect thereto) of, and in connection with the negotiation, investigation, preparation, execution and delivery of, preservation of rights under, enforcement of, and renegotiation or restructuring of, the Exchange Agreement Documents and any amendment, waiver or consent relating thereto (including, without limitation, travel, photocopy, mailing, courier, telephone and other similar expenses of Holders, the cost of environmental audits, surveys and appraisals at reasonable intervals, the reasonable fees and disbursements of counsel and other outside consultants for Holders and, in the case of enforcement (including, without limitation, bankruptcy and workout matters); and promptly reimburse a Holder for all amounts expended, advanced or incurred by such Holder to satisfy any obligation of the Company under this Agreement; 18 (ii) to indemnify each holder and each of its Affiliates and each of its officers, directors, employees, representatives, agents, attorneys, accountants and experts ("Indemnified Parties") from, hold each of them harmless against and promptly upon demand pay or reimburse each of them for, the Indemnity Matters which may be incurred by or asserted against or involve any of them (whether or not any of them is designated a party thereto) as a result of, arising out of or in any way related to (i) the execution, delivery and performance of the Exchange Agreement Documents, (ii) the operations of the business of the Company and its Subsidiaries, (iii) the failure of the Company or any Subsidiary to comply with the terms of this Agreement, or with any Governmental Requirement, (iv) any inaccuracy of any representation or any breach of any warranty of the Company set forth in this Agreement or any of the Exchange Agreement Documents, or (v) any other aspect of the this Agreement or any of the Exchange Agreement Documents, including, without limitation, the reasonable fees and disbursements of counsel and all other expenses incurred in connection with investigating, defending or preparing to defend any such action, suit, proceeding (including any investigations, litigation or inquiries) or claim and including all Indemnity Matters arising by reason of the ordinary negligence of any Indemnified Party, but excluding all Indemnity Matters arising solely by reason of the gross negligence or willful misconduct on the part of the Indemnified Party; and (iii) to indemnify and hold harmless from time to time the Indemnified Parties from and against any and all losses, claims, cost recovery actions, administrative orders or proceedings, damages and liabilities to which any such Person may become subject (i) under any Environmental Law applicable to the Company or any Subsidiary or any of their Properties, including without limitation, the treatment or disposal of hazardous substances on any of their Properties, (ii) as a result of the breach or non-compliance by the Company or any Subsidiary with any Environmental Law applicable to the Company or any Subsidiary, (iii) due to past ownership by the Company or any Subsidiary of any of their Properties or past activity on any of their Properties which, though lawful and fully permissible at the time, could result in present liability, (iv) the presence, use, release, storage, treatment or disposal of hazardous substances on or at any of the Properties owned or operated by the Company or any Subsidiary, or (v) any other environmental, health or safety condition in connection with the Exchange Agreement Documents. (b) No Indemnified Party may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld. (c) In the case of any indemnification hereunder, the Indemnified Party shall give notice to the Company of any such claim or demand being made against the Indemnified Party and the Company shall have the non-exclusive right to join in the defense against any such claim or demand provided that if the Company provides a defense, the Indemnified Party shall bear its own cost of defense unless there is a conflict between the Company and such Indemnified Party. 19 (d) The foregoing indemnities shall extend to the Indemnified Parties notwithstanding the sole or concurrent negligence of every kind or character whatsoever, whether active or passive, whether an affirmative act or an omission, including without limitation, all types of negligent conduct identified in the restatement (second) of torts of one or more of the Indemnified Parties or by reason of strict liability imposed without fault on any one or more of the Indemnified Parties. to the extent that an Indemnified Party is found to have committed an act of gross negligence or willful misconduct, this contractual obligation of indemnification shall continue but shall only extend to the portion of the claim that is deemed to have occurred by reason of events other than the gross negligence or willful misconduct of the Indemnified Party. (e) The Company's obligations under this Section 8.03 shall survive any termination of this Agreement, and shall continue thereafter in full force and effect. (f) The Company shall pay any amounts due under this Section 8.03 within thirty (30) days of the receipt by the Company of notice of the amount due. Section 8.04 Amendments, Etc. Any provision of this Agreement may be amended, modified or waived with the prior written consent of the Company and the holders of sixty-six and two-thirds percent (66 2/3%) of voting power represented by the Series A-1 Preferred Stock and Common Stock issued upon conversion of all or any portion of the Series A-1 Preferred Stock held by the Holders at the time of any such amendment, modification or waiver; provided, however, no amendment, modification or waiver can be effected without the prior written consent of all Holders if, by its terms, such amendment, modification or waiver adversely affects one (1) Holder without having the same adverse effect on all other Holders. Section 8.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Section 8.06 Assignments. (a) The Company may not assign its rights or obligations hereunder without the prior consent of Holders. (b) Prior to the Closing Date, each Holder covenants not to transfer, pledge, hypothecate, assign or grant an option to otherwise acquire any interest in the Senior Notes unless the transferee of such Senior Notes agrees, in writing, to be bound by the terms of this Agreement. Subject to the preceding sentence, applicable securities laws and to the terms and conditions of the Stockholders Agreement, Holders (and its permitted assigns) may assign to one (1) or more assignees all or a portion of its rights and obligations under this Agreement and the other Exchange Agreement Documents to any Person, and any such assignee may further assign such rights and obligations to any Person. Any such assignment will become effective upon the execution and delivery to the assigning Holder of the assignment. Upon the assigning Holder's request, the Company, will, at its own expense, execute and deliver new certificates representing Series A-1 Preferred Stock and/or Common Stock, as applicable, to the assignor and/or assignee, 20 as appropriate, in accordance with their respective interests as they appear. Upon the effectiveness of any assignment pursuant to this Section 8.06(b), all references to "Holders" or a "Holder" in this Agreement, and the other Exchange Agreement Documents shall mean and include each such assignee, each such assignee shall be deemed a party to this Agreement and bound by all the agreements and covenants of Holders contained herein and all actions which are to be taken, and all consents or waivers to be granted or consents, amendments, waivers and other writings required to be signed by Holders or a party (other than the Company) to this Agreement thereafter shall be, in each case, effective only if taken or executed or delivered by Holders and all such assignees. (c) A Holder may furnish any information concerning the Company in its possession from time to time to assignees (including prospective assignees); provided that, such Persons agree to be bound by the provisions of Section 8.13. (d) Notwithstanding any other provisions of this Section 8.06, no transfer or assignment of the interests or obligations of a Holder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Company to file a registration statement with the SEC or to qualify the Series A-1 Preferred Stock or Common Stock issued or issuable upon conversion of all or any portion of the Series A-1 Preferred Stock under the "Blue Sky" laws of any state. Section 8.07 Invalidity. In the event that any one (1) or more of the provisions contained in any of the Exchange Agreement Documents shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. Section 8.08 Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. Section 8.09 References. The words "herein," "hereof," "hereunder" and other words of similar import when used in this Agreement refer to this Agreement as a whole, and not to any particular article, section or subsection. Any reference herein to a Section shall be deemed to refer to the applicable Section of this Agreement unless otherwise stated herein. Any reference herein to an exhibit or schedule shall be deemed to refer to the applicable exhibit or schedule attached hereto unless otherwise stated herein. Section 8.10 Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. Section 8.11 No Oral Agreements. The Exchange Agreement Documents embody the entire agreement and understanding between the parties and supersede all other agreements and understandings between such parties relating to the subject matter hereof and thereof. The 21 Exchange Agreement Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. Section 8.12 Governing Law; Submission to Jurisdiction. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois. (b) Subject to Section 8.15, Any legal action or proceeding with respect to the Exchange Agreement Documents shall be brought in the courts of the State of Illinois or of the United States of America for the Northern District of Illinois, and, by execution and delivery of this Agreement, each of the Company and each holder hereby accepts for itself and (to the extent permitted by law) in respect of its Property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each of the Company and each holder hereby irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (c) Nothing herein shall affect the right of any holder to serve process in any other manner permitted by law. (d) The Company and each holder hereby (i) irrevocably and unconditionally waive, to the fullest extent permitted by law, trial by jury in any legal action or proceeding relating to this Agreement and for any counterclaim therein; (ii) irrevocably waive, to the maximum extent not prohibited by law, any right it may have to claim or recover in any such litigation any special, exemplary, punitive or consequential damages, or damages other than, or in addition to, actual damages; (iii) certify that no party hereto nor any representative or agent of counsel for any party hereto has represented, expressly or otherwise, or implied that such party would not, in the event of litigation, seek to enforce the foregoing waivers, and (iv) acknowledge that it has been induced to enter into this Agreement, and the transactions contemplated hereby, among other things, the mutual waivers and certifications contained in this Section 8.12. Section 8.13 Confidentiality. In the event that the Company provides to a Holder written confidential information belonging to the Company, if the Company shall denominate such information in writing as "confidential", such Holder shall thereafter maintain such information in confidence in accordance with the standards of care and diligence that each utilizes in maintaining its own confidential information. This obligation of confidence shall not apply to such portions of the information which (i) are in the public domain, (ii) hereafter become part of the public domain without a Holder breaching its obligation of confidence to the Company, (iii) are previously known by a Holder from some source other than the Company, (iv) are hereafter developed by a Holder without using the Company's information, (v) are hereafter obtained by or available to a Holder from a third party who owes no obligation of confidence to the Company with respect to such information or through any other means other 22 than through disclosure by the Company, (vi) are disclosed with the Company's consent, (vii) must be disclosed either pursuant to any Governmental Requirement or to Persons regulating the activities of a Holder, or (viii) as may be required by law or regulation or order of any Governmental Authority in any judicial, arbitration or governmental proceeding. Further, a Holder may disclose any such information to any independent consultants, any independent certified public accountants, any legal counsel employed by such Person in connection with this Agreement, including without limitation, the enforcement or exercise of all rights and remedies thereunder, or any assignee (including prospective assignees) in the Series A-1 Preferred Stock; provided, however, that such Holder shall receive a confidentiality agreement from the Person to whom such information is disclosed such that said Person shall have the same obligation to maintain the confidentiality of such information as is imposed upon such Holder hereunder. Notwithstanding anything to the contrary provided herein, this obligation of confidence shall cease three (3) years from the date the information was furnished, unless the Company requests in writing at least thirty (30) days prior to the expiration of such three year period, to maintain the confidentiality of such information for an additional three year period. The Company waives any and all other rights it may have to confidentiality as against a Holder arising by contract, agreement, statute or law except as expressly stated in this Section 8.13. Section 8.14 Effectiveness. This Agreement shall be effective on the Closing Date. Section 8.15 Exculpation Provisions. Each of the parties hereto specifically agrees that it has a duty to read this Agreement and agrees that it is charged with notice and knowledge of the terms of this Agreement; that it has in fact read this Agreement and is fully informed and has full notice and knowledge of the terms, conditions and effects of this Agreement; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement; and has received the advice of its attorney in entering into this Agreement; and that it recognizes that certain of the terms of this Agreement result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability. Each party hereto agrees and covenants that it will not contest the validity or enforceability of any exculpatory provision of this Agreement on the basis that the party had no notice or knowledge of such provision or that the provision is not "conspicuous." - Remainder of Page Intentionally Left Blank - [Signature Page Follows] 23 The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. COMPANY: CASTLE DENTAL CENTERS, INC., a Delaware corporation By: ______________________________ Name: ______________________________ Title: ______________________________ Address for Notices: 3701 Kirby Drive Suite 550 Houston, Texas 77098 Telecopier No.: 713.490.8420 Telephone No.: 713.490.8400 Attention: James Usdan 24 The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. HELLER: HELLER FINANCIAL, INC., a Delaware corporation By: ______________________________ Name: ______________________________ Title: ______________________________ Address for Notices: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 500 West Monroe Street Chicago, Illinois 60661 ATTN: Michael Sznajder Telecopy: 312.441.7598 With a copy to: HELLER FINANCIAL, INC. c/o Heller Healthcare Financial Services 2 Wisconsin Circle, 4th Floor Chevy Chase, Maryland 20815 ATTN: Katherine R. Lofft, Esq. Telecopy: 301.664.9866 Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 25 The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. MIDWEST: MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership By: ABN AMRO Mezzanine Management II, L.P., its general partner By: ABN AMRO Mezzanine Management II, Inc., its general partner By: _________________________ Name: Paul Kreie Title: _________________________ Address for Notices: Midwest Mezzanine Fund II, L.P. 208 South LaSalle Street, 10th floor Chicago, Illinois 60604-1003 ATTN: J. Allan Kayler Telecopy: 312.553.6647 Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 26 EXHIBIT A to Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement Form of Certificate of Designations Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 27 EXHIBIT B to Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement Form of Investors Agreement Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 28 EXHIBIT C to Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement Form of Registration Rights Agreement Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 29 EXHIBIT D to Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement Form of Release Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 30 EXHIBIT E to Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement Form of Stockholders Agreement Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 31 EXHIBIT F to Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement Form of Amended and Restated Bylaws Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 32 EXHIBIT G to Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement Form of Compliance Certificate Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement 33 EX-10.8 12 dex108.txt STOCKHOLDERS AGREEMENT Exhibit 10.8 - -------------------------------------------------------------------------------- Stockholders Agreement - -------------------------------------------------------------------------------- by and among CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Company"), and Bank of America Strategic Solutions, Inc., a Delaware corporation ("B of A"), FSC Corp., a Massachusetts corporation ("Fleet"), Amsouth Bank, a national banking association ("Amsouth"), Heller Financial, Inc., a Delaware corporation ("Heller"), Midwest Mezzanine Fund II, L.P., a Delaware limited partnership ("Midwest"), and James M. Usdan July 19, 2002 TABLE OF CONTENTS ARTICLE I. CERTAIN DEFINITIONS......................................................... 2 Section 1.01 Defined Terms...................................................... 2 ARTICLE II. TRANSFERS OF RESTRICTED SECURITIES ........................................ 9 Section 2.01 Restrictions Generally; Securities Act............................. 9 Section 2.02 Legend............................................................. 9 Section 2.03 Tag-Along Rights................................................... 10 Section 2.04 Notice of Open Market Sales........................................ 12 Section 2.05 Right of First Refusal............................................. 12 ARTICLE III. COMPANY OBLIGATIONS....................................................... 13 Section 3.01 Regulatory Problem................................................. 13 ARTICLE IV. OTHER AGREEMENTS........................................................... 14 Section 4.01 Agreement Regarding Conversion..................................... 14 Section 4.02 Annual Meeting..................................................... 14 Section 4.03 Issuance of Senior Securities...................................... 15 ARTICLE V. MISCELLANEOUS............................................................... 15 Section 5.01 Governing Law; Submission to Jurisdiction.......................... 15 Section 5.02 Entire Agreement; Amendments....................................... 16 Section 5.03 Term............................................................... 16 Section 5.04 Inspection......................................................... 16 Section 5.05 Recapitalization, Exchanges, Etc., Affecting Restricted Securities. 16 Section 5.06 Waiver............................................................. 17 Section 5.07 Successors and Assigns............................................. 17 Section 5.08 Remedies........................................................... 17 Section 5.09 Invalid Provisions................................................. 17 Section 5.10 Headings........................................................... 17 Section 5.11 Further Assurances................................................. 18 Section 5.12 Gender............................................................. 18 Section 5.13 Counterparts....................................................... 18 Section 5.14 Notices............................................................ 18
STOCKHOLDERS AGREEMENT Stockholders Agreement (this "Agreement") dated as of July 19, 2002, by and among Castle Dental Centers, Inc., a Delaware corporation (the "Company"), and (a) Banc of America Strategic Solutions, Inc., a Delaware corporation ("B of A"), FSC Corp., a Massachusetts corporation ("Fleet"), Amsouth Bank, a national banking association ("Amsouth") and Heller Financial, Inc., a Delaware corporation ("Heller"), as initial holders of the Bank Warrants (as defined below), (b) Heller and Midwest Mezzanine Fund II, L.P., a Delaware limited partnership ("Midwest"), as initial holders of Series A-1 Stock (as defined below), and (c) Heller, Midwest and James M. Usdan ("Usdan"), as initial holders of the New Money Warrants and Convertible Notes (each as defined below). Capitalized terms used and not otherwise defined herein have the respective meanings ascribed thereto in Article I. RECITALS WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Company and the Preferred Stockholders will enter into a Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement (the "Exchange Agreement"); and WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Company will issue a Bank Warrant to each of B of A, Fleet, Amsouth and Heller; and WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Company and the New Money Stockholders will enter into a Note and Warrant Purchase Agreement (the "Note Purchase Agreement"); and WHEREAS, pursuant to the Exchange Agreement, the Preferred Stockholders will be issued the Series A-1 Stock; and WHEREAS, pursuant to the Note Purchase Agreement, the New Money Stockholders will be issued the New Money Warrants and the Convertible Notes; and WHEREAS, each of the Bank Stockholders, the Preferred Stockholders, the New Money Stockholders, the Management Stockholders (as hereinafter defined) and the Company desire to enter into this Agreement to regulate certain aspects of their relationship and to provide for, among other things, restrictions on the transfer or other disposition of securities of the Company. 1 NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I. CERTAIN DEFINITIONS Section 1.01 Defined Terms. (a) The following capitalized terms, when used in this Agreement, have the respective meanings set forth below: "2002 Options" means options to purchase up to 15,287,218 shares of Common Stock issued to officers, directors, employees or consultants of the Company or its Subsidiaries pursuant to the Company's 2002 Stock Option Plan. "2002 Stock Option Plan" means the Castle Dental Centers, Inc. 2002 Stock Option Plan dated July 19, 2002. "Affiliate" of any Person means (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one (1) or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. "Agreement" shall have the meaning set forth in the preamble. "Amsouth" shall have the meaning set forth in the preamble. "Annual Meeting" shall have the meaning set forth in Section 4.02. "B of A" shall have the meaning set forth in the preamble. "Bank Stockholders" means B of A, Fleet, Amsouth and Heller in their capacity as the initial holders of the Bank Warrants, any Permitted Transferee, any Person to whom any of the foregoing shall Transfer any Restricted Securities 2 pursuant to Section 2.03 or Section 3.01 of this Agreement, and any Person to whom B of A, Fleet, Amsouth, Heller and their Permitted Transferees shall Transfer any Restricted Securities in compliance with Section 2.01(b) (other than pursuant to an Open Market Sale or an effective registration statement under the Securities Act); provided, however, in each case, such transferee has agreed to be bound by the terms of this Agreement by executing a Joinder Agreement. Heller shall not be considered a Bank Stockholder with respect to the Series A-1 Stock, New Money Warrants or Convertible Notes issued to it, or any shares of Common Stock issued or issuable upon conversion or exercise of any of the Series A-1 Stock, New Money Warrants or Convertible Notes issued to it. "Bank Warrants" means the warrants to purchase Series A-2 Stock issued to the Bank Stockholders contemporaneously with the execution and delivery of this Agreement and any warrants issued upon the partial exercise, Transfer, exchange or replacement of such warrants. "Business Day" means any day other than a Saturday, Sunday or a day on which commercial banks in the City of New York, New York are authorized or required by law or executive order to remain closed. "Buyer" means any Person to whom Restricted Securities are to be Transferred Subject to the Tag-Along Rights set forth in Section 2.03. "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" means the common stock of the Company, par value $.001 per share, any securities into which such Common Stock shall have been changed or any securities resulting from any reclassification or recapitalization of such Common Stock and all other securities of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, after payment on any securities entitled to a preference on dividends or other distributions upon any dissolution, liquidation or winding up, either to all or to a share of the balance of payments upon such dissolution, liquidation or winding up. "Common Stock Equivalents" means the number of shares of Common Stock owned by a Stockholder directly or which are issued or issuable to such Stockholder upon (a) conversion of the Series A-1 Stock, (b) conversion of the Convertible Notes, (c) exercise of the New Money Warrants, and/or (d) conversion of the Series A-2 Stock issued or issuable upon exercise of the Bank Warrants. "Company" shall have the meaning set forth in the preamble. 3 "Convertible Notes" means the notes dated the date hereof in the aggregate principal amount of $1,700,000 initially convertible into approximately 3,105,618 shares of Common Stock, issued to the New Money Stockholders pursuant to the Note Purchase Agreement, and any notes issued upon the partial conversion, assignment, transfer, sale, exchange or replacement of such notes. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Exchange Agreement" shall have the meaning set forth in the recitals. "Fleet" shall have the meaning set forth in the preamble. "GAAP" means generally accepted accounting principles, consistently applied. "Heller" shall have the meaning set forth in the preamble. "Heller Designee" shall have the meaning set forth in Section 4.01. "Investor Rights Agreement" means that certain Investor Rights Agreement dated as of July 19, 2002, among the Company, Heller and Midwest. "Investor Stockholders" means, so long as any such Person shall hold Restricted Securities, the Bank Stockholders, the Preferred Stockholders, and the New Money Stockholders. Usdan shall be considered an Investor Stockholder with respect to all shares of Common Stock issued or issuable upon exercise or conversion of New Money Warrants or Convertible Notes issued to him. "Lien" means any lien, claim, charge, encumbrance, security interest or other adverse claim of any kind, other than any restrictions imposed under this Agreement or under federal or state securities laws. "Liquidation" means the voluntary or involuntary liquidation, dissolution or winding up of the Company. "Management Stockholder" means Usdan, a Permitted Transferee of Usdan and any Person (other than an Investor Stockholder) to whom Usdan shall Transfer any Restricted Securities pursuant to Section 2.03 of this Agreement; provided, however, in each case, such transferee has agreed to be bound by the terms of this Agreement by executing a Joinder Agreement. Usdan shall not be considered a Management Stockholder with respect to the New Money Warrants and Convertible Notes issued to him, or any shares of Common Stock issued or issuable upon 4 conversion exercise of any of the New Money Warrants or Convertible Notes issued to him. "Midwest" shall have the meaning set forth in the preamble. "New Money Stockholders" means Heller, Midwest and Usdan in their capacity as the initial holders of the New Money Warrants and Convertible Notes, any Permitted Transferee, and any Person to whom any of the foregoing shall Transfer any Restricted Securities pursuant to Section 2.03 or Section 3.01 of this Agreement; provided, however, in each case, such transferee has agreed to be bound by the terms of this Agreement by executing a Joinder Agreement. Heller shall not be considered a New Money Stockholder with respect to the Series A-1 Stock, Series A-2 Stock issued or issuable upon exercise of Bank Warrants, or Bank Warrants issued to it, or any shares of Common Stock issued or issuable upon conversion of any of the Series A-1 Stock or Series A-2 Stock issued to it. Midwest shall not be considered a New Money Stockholder with respect to the Series A-1 Stock issued to it, or any shares of Common Stock issued or issuable upon conversion of any of the Series A-1 Stock issued to it. "New Money Warrants" means the warrants to purchase Common Stock of the Company issued to the New Money Stockholders pursuant to the Note Purchase Agreement, and any warrants issued upon the partial exercise, assignment, transfer, sale, exchange or replacement of such warrants. "New Securities" means (i) any capital stock of the Company or any other securities or other obligations of the Company, including any equity or profit participation rights, whether now authorized or not, (ii) any rights, options, or warrants to purchase any such capital stock or rights, or to purchase any securities of any type whatsoever that are, or may become, convertible into any such capital stock, and (iii) any securities of any type whatsoever that are, or may become convertible into any such capital stock; provided, however, the "New Securities" will not include (A) securities offered to the public pursuant to a registration statement under the Securities Act, (B) options or securities issued or issuable to, or securities issued upon exercise of options issued to, officers, directors, consultants or employees of the Company (or its Subsidiaries) pursuant to stock option plans or agreements approved by the Board of Directors of the Company, (C) securities issued upon conversion of the Series A-1 Stock or Series A-2 Stock, (D) securities issued pursuant to the Bank Warrants, the New Money Warrants or the Convertible Notes, (E) Common Stock issued upon exercise of options outstanding on the date hereof, and (F) up to 150,000 shares of Common Stock issued to the directors of the Company on the date hereof. "Note Purchase Agreement" shall have the meaning set forth in the recitals. 5 "Offeree" shall have the meaning set forth in Section 2.03(a). "Open Market Sale" means a sale of shares of Common Stock pursuant to a "brokers' transaction" within the meaning of Section 4(4) of the Securities Act or in a transaction directly with a "market maker", as that term is defined in Section 3(a) (38) of the Exchange Act. "Open Market Sales Threshold" means, as of any particular date, a number of shares of Restricted Securities which represent a number of Common Stock Equivalents equal to the lesser of (i) 1% of the total number of shares of Common Stock then outstanding, without giving effect to the conversion, exchange or exercise of any securities, and (ii) 50% of the average weekly trading volume of the Company's Common Stock for the four consecutive calendar weeks immediately prior to the week in which such date occurs. "Permitted Transfer" means the Transfer of Restricted Securities (i) to a Permitted Transferee, (ii) pursuant to a public offering pursuant to a registration statement which shall have become effective under the Securities Act, (iii) pursuant to Section 2.03 of this Agreement, (iv) pursuant to an Open Market Sale, (v) pursuant to Section 3.01 of this Agreement, (vi) to Heller Holders or Midwest Holders pursuant to the Investor Rights Agreement, (vii) by a Preferred Stockholder to any person for an aggregate price per Common Stock Equivalent equal to or less than the aggregate liquidation preference of such securities divided by the number of shares of Common Stock issuable upon conversion of the Series A-1 Stock to be Transferred (or the aggregate liquidation preference of the Series A-1 Stock that was converted into the shares of Common Stock to be Transferred divided by the number of shares of Common Stock issued upon such conversion), not in violation of Section 2.03, or (viii) by Usdan pursuant to the terms of the Employment Agreement dated July 19, 2002 between Usdan and the Company. "Permitted Transferee" means, (a) for a Stockholder who is an individual: (i) the spouse or lineal descendants of any Stockholder, (ii) any trust for the benefit of such Stockholder or the benefit of the spouse or lineal descendants of such Stockholder, any corporation or partnership in which such Stockholder, the spouse and the lineal descendants of such Stockholder are the direct and beneficial owners of all of the equity interests (provided such Stockholder, spouse and lineal descendants agree in writing to remain the direct and beneficial owners of all of the equity interests thereof), or (iii) the personal representative of such Stockholder upon such Stockholder's death for purposes of administration of such Stockholder's estate or upon such Stockholder's incompetency for purposes of the protection and management of the assets of such Stockholder; and (b) with respect to a Stockholder that is a corporation, partnership, trust, limited liability company, or other entity, any Affiliate or partner of such Stockholder; provided, however, in each case, that 6 such transferee must agree to be bound by the terms of this Agreement by executing a Joinder Agreement. "Person" means an individual, partnership, corporation, limited liability company, trust, unincorporated organization, joint venture, government (or agency or political subdivision thereof) or any other entity of any kind. "Preferred Stockholders" means Heller and Midwest in their capacity as the initial holders of the Series A-1 Stock, any Permitted Transferee, and any Person to whom any of the foregoing shall Transfer any Restricted Securities pursuant to Section 2.03 or Section 3.01 of this Agreement or clause (vii) of the definition of Permitted Transfer; provided, however, in each case, such transferee has agreed to be bound by the terms of this Agreement by executing a Joinder Agreement. Heller shall not be considered a Preferred Stockholder with respect to the New Money Warrants, Convertible Notes, Bank Warrants, or Series A-2 Stock issued or issuable upon exercise of Bank Warrants issued to it, or any shares of Common Stock issued or issuable upon conversion or exercise of any of the New Money Warrants, Convertible Notes, or Series A-2 Stock issued to it. Midwest shall not be considered a Preferred Stockholder with respect to the New Money Warrants or Convertible Notes issued to it, or any shares of Common Stock issued or issuable upon conversion or exercise of any of the New Money Warrants or Convertible Notes issued to it. "Proposals" shall have the meaning set forth in Section 4.02. "Regulatory Problem" means any set of facts or circumstances wherein any Investor Stockholder reasonably believes it is not entitled to hold, or exercise any significant right with respect to, the Series A-1 Stock, Series A-2 Stock, or Common Stock. "Restricted Securities" means the Series A-1 Stock, the Series A-2 Stock, the Bank Warrants, the New Money Warrants, the Convertible Notes, the Stock Options, the Common Stock or Series A-2 Stock issued or issuable upon conversion or exercise of any of the foregoing, and any securities issued with respect thereto as a result of any stock dividend, stock split, reclassification, recapitalization, reorganization, merger, consolidation or similar event or upon the conversion, exchange or exercise thereof. As to any particular Restricted Securities, once issued, such securities shall cease to be Restricted Securities when such securities are Transferred (i) pursuant to a public offering pursuant to a registration statement which shall have become effective under the Securities Act, or (ii) pursuant to an Open Market Sale. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 7 "Senior Securities" means all equity securities (including any rights or options exercisable or convertible for such equity securities) of the Company with which the Series A-1 Stock and Series A-2 Stock rank junior, whether with respect to dividends or upon Liquidation or otherwise. "Series A-1 Stock" means the Convertible Preferred Stock, Series A-1, of the Company issued to the Preferred Stockholders pursuant to the Exchange Agreement. "Series A-2 Stock" means the Convertible Preferred Stock, Series A-2, of the Company issued or issuable upon exercise of the Bank Warrants. "Stock Options" means incentive stock options or nonqualified stock options issued by the Company. "Stockholder" means the Bank Stockholders, the Preferred Stockholders, the New Money Stockholders, and the Management Stockholders. "Subsidiary" means any corporation, association or other business entity of which securities or other ownership interests representing more than fifty percent (50%) of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the Company or one or more Subsidiaries of the Company or by the Company and one or more Subsidiaries of the Company. "Tag-Along Notice" shall have the meaning set forth in Section 2.03(a). "Tag-Along Offer" shall have the meaning set forth in Section 2.03(a). "Tag-Along Right" shall have the meaning set forth in Section 2.03(b). "Transfer," including the correlative term "Transferred" and any noun or verb tense of such word, means, directly or indirectly, any sale, transfer, assignment, hypothecation, pledge or other disposition of any Restricted Securities or any interests therein. "Transferor" means a Stockholder proposing to Transfer Restricted Securities subject to the Tag-Along rights set forth in Section 2.03. "Transferor Shares" means the Restricted Securities proposed to be Transferred by Transferor subject to the Tag-Along rights set forth in Section 2.03. "Usdan" shall have the meaning set forth in the preamble. 8 (b) Unless otherwise provided herein, all accounting terms used in this Agreement shall be interpreted in accordance with U.S. GAAP as in effect from time to time. ARTICLE II. TRANSFERS OF RESTRICTED SECURITIES Section 2.01 Restrictions Generally; Securities Act. (a) Each Stockholder, other than the Bank Stockholders, agrees that it will not, directly or indirectly, Transfer any Restricted Securities unless such Transfer is a Permitted Transfer. Any attempt to Transfer any Restricted Securities, other than pursuant to a Permitted Transfer, shall be null and void and neither the issuer of such securities nor any transfer agent of such securities shall give any effect to such attempted Transfer in its stock records. (b) Each Stockholder agrees that, in addition to the other requirements herein relating to a Transfer, it will not Transfer any Restricted Securities except pursuant to an effective registration statement under the Securities Act, or upon receipt by the Company of an opinion of counsel to the Stockholder, reasonably satisfactory to the Company, or counsel to the Company, or other evidence, reasonably acceptable to the Company, to the effect that any such Transfer will not be in violation of the Securities Act or other applicable securities laws of any state, or any rules or regulations promulgated thereunder. Section 2.02 Legend. (a) Each certificate representing Restricted Securities shall be endorsed with the following legends and such other legends as may be required by applicable state securities laws: THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND ANY INTEREST THEREIN MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACTS. 9 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A STOCKHOLDERS AGREEMENT, DATED AS OF JULY 19, 2002. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE. (b) The legend regarding the status of the Restricted Securities under the Securities Act set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Restricted Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) a registration statement with respect to such Restricted Securities shall have become effective under the Securities Act, and such Restricted Securities shall have been disposed of in accordance with such registration statement, (ii) in connection with a Transfer permitted under or made in compliance with this Agreement, such holder provides the Company, at the Company's expense, with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Restricted Securities may be made without registration under the Securities Act, or (iii) the Restricted Securities can be sold pursuant to Rule 144 under the Securities Act without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold. (c) The legend regarding the applicability of this Agreement to the Restricted Securities set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Restricted Securities upon which it is stamped, if the Restricted Securities have been Transferred pursuant to a Permitted Transfer (other than a Permitted Transfer to a Permitted Transferee, pursuant to the Investor Rights Agreement or pursuant to Section 2.03). Section 2.03 Tag-Along Rights. (a) If (x) any Management Stockholder or New Money Stockholder proposes to Transfer any Restricted Securities to any Person, or (y) any Preferred Stockholder proposes to Transfer any Restricted Securities to any Person for an aggregate price per Common Stock Equivalent in excess of the aggregate liquidation preference of such securities divided by the number of shares of Common Stock issuable upon conversion of the Series A-1 Stock to be Transferred (or the aggregate liquidation preference of the Series A-1 Stock that was converted into the shares of Common Stock to be Transferred divided by the number of shares of Common Stock issued upon such conversion), in each case other than (i) to a Permitted Transferee, (ii) pursuant to an Open Market Sale, (iii) to Heller or Midwest pursuant to the Investor Rights Agreement, or (iv) pursuant to a public offering pursuant to a registration statement which shall have become effective under the Securities Act, then, as a condition to such Transfer, the Transferor shall cause the Buyer to include an offer (the "Tag-Along Offer") to each of the Investor Stockholders 10 (collectively, the "Offerees"), to purchase from each Offeree, at the option of each Offeree, up to a number of shares of Restricted Securities determined in accordance with Section 2.03(b), on the same terms and conditions as are applicable to the Transferor Shares. The Transferor shall provide a written notice (the "Tag-Along Notice") of the Tag-Along Offer to each Offeree, which may accept the Tag-Along Offer by providing a written notice of acceptance of the Tag-Along Offer to the Transferor within 15-days of delivery of the Tag-Along Notice. (b) Each Offeree shall have the right (a "Tag-Along Right") to sell pursuant to the Tag-Along Offer up to a number of shares of Common Stock Equivalents equal to: (i) the number of shares of Common Stock Equivalents that the Buyer is willing to purchase from the Transferor and the Offerees, in the aggregate, multiplied by (ii) a fraction, the numerator of which is the number of shares of Common Stock Equivalents owned by such Offeree and the denominator of which is the number of shares of Common Stock Equivalents owned by the Transferor and all of the Offerees exercising their respective Tag-Along Rights; provided, however, that, if all Common Stock Equivalents beneficially owned by all Offerees are permitted to be sold to the Buyer, the Transferor shall be entitled to sell the number of shares set forth in the Tag-Along Offer which any Offeree has chosen not to sell without providing additional notice to the Offerees. (c) Upon exercise of a Tag-Along Right, at the closing of the proposed Transfer (which date, place and time shall be designated by the Transferor and provided to the Offerees in writing at least five Business Days prior thereto), each Offeree shall deliver to the Buyer a certificate or certificates representing (x) the shares of Common Stock to be sold or otherwise disposed of pursuant to the Tag-Along Offer by such Offeree or (y), at the election of the Offeree, Restricted Securities representing the number of shares of Common Stock Equivalents to be sold or otherwise disposed of pursuant to the Tag-Along Offer by such Offeree (plus an amount of cash or, if such Restricted Securities have a cashless exercise option, additional Restricted Securities necessary to pay the exercise price, if any, on any Restricted Securities so delivered (other than Common Stock) which is required to be paid under the terms of such Restricted Securities in order to acquire the number of shares of Common Stock to be sold or otherwise disposed of pursuant to the Tag-Along Offer by such Offeree), in either case free and clear of all Liens, against delivery of the purchase price therefor; provided that neither the Transferor nor any Offeree shall sell any Restricted Securities to any Buyer if such Buyer does not purchase, simultaneously and pursuant to the same terms, all of the Restricted Securities which the Offerees are entitled to sell to such Buyer pursuant to Section 2.03(b). In the event that, following delivery of a Tag-Along Notice, the 15-day period set forth in Section 2.03(a) shall have expired and the Transferor shall not have received a written notice from any Offeree pursuant to Section 2.03(a), the 11 Transferor shall have the right, during the remainder of the 120-day period following the expiration of such 15-day period, to sell the Transferor Shares to the proposed Buyer, at a price not less than the price specified in the Tag-Along Offer and on terms no more favorable to such proposed Buyer than the terms of the Tag-Along Offer. (d) Promptly after the consummation of the sale or other disposition of the Transferor Shares and shares of Common Stock Equivalents of the Offerees to the Buyer pursuant to the Tag-Along Offer, the Transferor shall notify the Offerees thereof, and the Buyer shall pay to the Transferor and each of the Offerees their respective portions of the sales price of the shares of Common Stock Equivalents sold or otherwise disposed of pursuant thereto, and shall furnish such other evidence of the completion of such sale or other disposition and the terms thereof as may be reasonably requested by the Offerees. Section 2.04 Notice of Open Market Sales. In any 90-day period, a Management Stockholder may not sell a number of shares of Restricted Securities in excess of the Open Market Sales Threshold then in effect unless and until all of the following criteria shall have been met: (a) all of the Restricted Securities then held by the Investor Stockholders either are (i) then registered for resale under the Securities Act on a Form S-3 (or any successor or similar short-form registration statement) that remains effective as of the date of such sale and during the ten Business Days prior thereto, or (ii) freely transferable in Open Market Sales, other than restrictions with respect to the number of securities that can be sold pursuant to Rule 144; and (b) no less than two Business Days prior to the placing with a broker of an order to execute such sale or the execution directly with a market maker of such sale, such Management Stockholder shall have filed with the Commission a notice of proposed sale on Form 144 with respect to such sale and shall have delivered a copy thereof to each of the Investor Stockholders. Section 2.05 Right of First Refusal. (a) Each of the Investor Stockholders shall have the right of first refusal to purchase its proportionate number, or any lesser number, of any New Securities which the Company may, from time to time, propose to sell and issue. For purposes of this Section 2.05, each such Investor Stockholder's "proportionate number" means the product obtained by multiplying the number of New Securities proposed to be sold and issued by a fraction, the numerator of which will be the number of shares of Common Stock Equivalents owned (or deemed owned) by such stockholder and the denominator of which will be the total number of shares of Common Stock Equivalents owned (or deemed owned) by all Investor Stockholders. (b) In the event the Company proposes to undertake an issuance of New Securities, it will give each of the Investor Stockholders written notice of its 12 intention to do so, describing the New Securities and the price and terms upon which the Company proposes to issue the same, and setting forth the number of shares which such Investor Stockholder is entitled to purchase and the aggregate purchase price therefor. Each such Investor Stockholder will have 15 days from the date of receipt of any notice to agree to purchase up to its proportionate number of such New Securities, for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event any Investor Stockholder fails to exercise such right of first refusal within said 15-day period, the Company will have 90 days thereafter to sell or enter into a binding and unconditional agreement (pursuant to which the sale of New Securities covered thereby will be, and is, consummated within 90 days from the date of said agreement) to sell the New Securities as to which such Stockholder's rights were not exercised, at a price and upon such other terms no more favorable to the purchasers thereof than those specified in the Company's notice. In the event the Company has not sold such New Securities within said 90-day period (or sold and issued New Securities in accordance with the foregoing within 90 days from the date of said agreement), the Company will not thereafter issue or sell any New Securities without first offering such New Securities to the Investor Stockholders, in the manner provided above. ARTICLE III. COMPANY OBLIGATIONS 13 Section 3.01 Regulatory Problem. In the event an Investor Stockholder determines that it has a Regulatory Problem, such Investor Stockholder shall have the right to transfer its entire interest in the Company without regard to any restriction on transfer set forth in this Agreement (other than federal and state securities laws restrictions), and the Company agrees to take all such actions as are reasonably requested by such Investor Stockholder in order to (i) effectuate and facilitate any transfer by such Investor Stockholder of its interests to any person designated by such Investor Stockholder (subject to compliance with applicable federal and state securities laws) or (ii) permit such Investor Stockholder (or any Affiliate thereof) to exchange all or any portion of the Series A-1 Stock, Series A-2 Stock, or Common Stock then held by, or issuable to, it on a "share-for-share" basis for interests of a class of non-voting preferred stock or common stock of the Company, which non-voting preferred stock or common stock shall be identical in all respects to such Series A-1 Stock, Series A-2 Stock, or Common Stock, as the case may be, except such stock shall be non-voting preferred stock or common stock and shall be convertible into voting common stock on such terms as are requested by such Investor Stockholder in light of regulatory considerations then prevailing. The Company and each Stockholder agree to enter into such additional agreements, adopt such amendments hereto and to the certificate of incorporation of the Company and to take such additional actions as are reasonably requested by such Investor Stockholder in order to effectuate the intent of the foregoing. ARTICLE IV. OTHER AGREEMENTS Section 4.01 Agreement Regarding Conversion. Each of the Stockholders hereby agrees that until the 76th day after the date of this Agreement not to convert any shares of Series A-1 Stock or Series A-2 Stock or Convertible Notes into Common Stock or exercise New Money Warrants. 14 Section 4.02 Annual Meeting. The Company agrees to place on the agenda for its next annual meeting of stockholders or a special meeting of the stockholders, which will take place on or before the 75th day following the date of this Agreement (the "Annual Meeting"), (a) a proposal to amend its certificate of incorporation to increase the number of authorized shares of Common Stock or cause a reverse stock split, in either case, sufficient to cause the Company to have a number of shares of Common Stock authorized for issuance that is sufficient for the Company to issue duly authorized shares of Common Stock to each Person holding securities of the Company that are convertible into or exercisable for shares of Common Stock upon such conversion or exercise, (b) a proposal to amend its certificate of incorporation to delete Article IX thereof which prohibits the taking of any action requiring a vote of the stockholders of the Company by written consent in lieu of a meeting of the stockholders, (c) a proposal to reduce the par value of the Common Stock such that the par value is at or below the price required by Section 153(a) of the Delaware General Corporation Law, or any successor statute, to enable the full exercise of the Bank Warrants and the subsequent full conversion of the Series A-2 Stock, and (d) a proposal (together with the previous proposals, the "Proposals") to amend the bylaws of the Company to delete Section 2.14 thereof. If the Proposals are approved by the Company's stockholders, the Company shall file appropriate amendments to its certificate of incorporation to effect the actions set forth in the Proposals within one Business Day following such stockholder approval. In addition, the Company shall take all actions necessary to effect the Proposals. Furthermore, the Company agrees to recommend to its stockholders that they vote in favor of, and to solicit proxies for the purpose of voting in favor of, the Proposals at the Annual Meeting. In furtherance of the foregoing, each of the Stockholders agrees to take all actions within their respective power required to approve the Proposals, including without limitation, the voting of all capital stock of the Company held by the Stockholders in favor of the Proposals; provided that the foregoing shall not require any Stockholder to convert securities into voting securities of the Company or exercise any warrant or other right to purchase voting securities of the Company. Section 4.03 Approval of Issuances. So long as any of the Bank Warrants or the Series A-2 Stock issuable upon the exercise of the Bank Warrants are outstanding and held by the Bank Stockholders, the Company shall not, without first obtaining (by written consent or at a special meeting of such holders) the approval of at least sixty six and two-thirds percent (66 2/3%) of the Common Stock Equivalents represented by the then outstanding Bank Warrants and shares of Series A-2 Preferred Stock held by the Bank Stockholders, (i) issue Senior Securities in exchange for any consideration other than cash; or (ii) issue options or securities issued or issuable to, or securities issued upon exercise of options issued to, any officer, director, consultant or employee of the Company or any of its Subsidiaries other than the 2002 Options and Common Stock issued upon exercise of the 2002 Options. 15 ARTICLE V. MISCELLANEOUS Section 5.01 Governing Law; Submission to Jurisdiction. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. (b) Any legal action or proceeding with respect to this Agreement shall be brought in the courts of the State of Delaware or of the United States of America for the district of Delaware, and, by execution and delivery of this Agreement, each of the Company and each Stockholder hereby accepts for itself and (to the extent permitted by law) in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Company and each Stockholder hereby irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (c) Nothing herein shall affect the right of any holder to serve process in any other manner permitted by law. (d) The Company and each Stockholder hereby (i) irrevocably and unconditionally waive, to the fullest extent permitted by law, trial by jury in any legal action or proceeding relating to this Agreement and for any counterclaim therein; (ii) irrevocably waive, to the maximum extent not prohibited by law, any right it may have to claim or recover in any such litigation any special, exemplary, punitive or consequential damages, or damages other than, or in addition to, actual damages; (iii) certify that no party hereto nor any representative or agent of counsel for any party hereto has represented, expressly or otherwise, or implied that such party would not, in the event of litigation, seek to enforce the foregoing waivers, and (iv) acknowledge that it has been induced to enter into this Agreement and the transactions contemplated hereby among other things, the mutual waivers and certifications contained in this Section 5.01. 16 Section 5.02 Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all previous oral or written communications, representations or agreements. The provisions of this Agreement may be amended, modified, supplemented or waived only by a written instrument duly executed by the Company and (i) Bank Stockholders holding sixty-six and two-thirds percent (66 2/3%) of the Common Stock Equivalents then held by Bank Stockholders subject to this Agreement, (ii) New Money Stockholders holding a majority of the Common Stock Equivalents then held by New Money Stockholders subject to this Agreement, and (iii) Preferred Stockholders holding a majority of the Common Stock Equivalents then held by Preferred Stockholders subject to this Agreement; provided, however, no amendment, modification, supplement or waiver can be effected if, by its terms, such amendment, modification, supplement or waiver adversely affects one Bank Stockholder, New Money Stockholder or Preferred Stockholder without having the same adverse effect on all Bank Stockholders, New Money Stockholders or Preferred Stockholders, as the case may be, without the prior written consent of such adversely affected Bank Stockholder, New Money Stockholder or Preferred Stockholder. Section 5.03 Term. This Agreement will terminate at such time as the Restricted Securities owned by the Investor Stockholders, in the aggregate, represent less than 25% of the Company's outstanding shares of Common Stock on a fully diluted basis. Section 5.04 Inspection. For so long as this Agreement shall remain in effect, this Agreement shall be made available for inspection by any Stockholder at the principal executive offices of the Company. Section 5.05 Recapitalization, Exchanges, Etc., Affecting Restricted Securities. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to the Restricted Securities, to any and all shares of the Company's capital stock or any successor or assign of the Company (whether by merger, consolidation, sale of assets, or otherwise, including shares issued by a parent corporation in connection with a triangular merger) which may be issued in respect of, in exchange for, or in substitution of, Restricted Securities and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, reclassifications and the like occurring after the date hereof. Section 5.06 Waiver. No waiver by any party of any term or condition of this Agreement, in one or more instances, shall be valid unless in writing, and no such waiver shall be deemed to be construed as a waiver of any subsequent breach or default of the same or similar nature. 17 Section 5.07 Successors and Assigns. Except as otherwise expressly provided herein, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns, as the case may be; provided, however, that nothing contained herein shall be construed as granting any Stockholder the right to transfer any of its Restricted Securities except in accordance with this Agreement. Section 5.08 Remedies. In the event of a breach by any party to this Agreement of its obligations under this Agreement, the loss of any right as provided in this Agreement as a result of such breach shall not be the sole and exclusive remedy of any party injured by such breach. Any such injured party will be entitled to specific performance of its rights under this Agreement, in addition to being entitled to exercise all rights granted by law, including recovery of damages. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Section 5.09 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (i) such provision will be fully severable, (ii) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and (iv) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. Section 5.10 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. Section 5.11 Further Assurances. Each party hereto shall cooperate and shall take such further action and shall execute and deliver such further documents as may be reasonably requested by any other party in order to carry out the provisions and purposes of this Agreement. 18 Section 5.12 Gender. Whenever the pronouns "he" or "his" are used herein they shall also be deemed to mean "she" or "hers" or "it" or "its" whenever applicable words in the singular shall be read and construed as though in the plural and words in the plural shall be construed as though in the singular in all cases where they would so apply. Section 5.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Section 5.14 Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telecopy, courier or U.S. Mail or in writing and telexed, telecopied, mailed or delivered to the intended recipient at the address specified below; or, as to any party, at such other address as shall be designated by such party in a notice to each other party: If to the Company: Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Attention: James M. Usdan Telecopy: (713) 490-8601 If to Heller Financial, Inc. Heller Financial, Inc. 500 West Monroe Chicago, Illinois 60661 Attention: Michael Sznajder Telecopy: (312) 441-7598 If to Midwest Mezzanine Fund II, L.P. Midwest Mezzanine Fund II, L.P. 208 South LaSalle, Tenth Floor Chicago, Illinois Attention: Paul Kreie Telecopy: (312) 553-6647 19 If to Banc of America Strategic Solutions, Inc. Banc of America Strategic Solutions, Inc. 901 Main St., 11th Floor TX1-492-11-05 Dallas, Texas 75202-3714 Attention: Mark Henze Telecopy: 214-209-3444 If to FSC Corp. FSC Corp. c/o Banc Boston Capital Inc. 175 Federal Street, 10th Floor Boston, MA 02110 Attention: John J. Quintal Telecopy: (617) 434-7891 If to Amsouth Bank Amsouth Bank 315 Deaderick Street, 8th Floor Nashville, TN 37021 Attention: Tim McCarthy Telecopy: (615) 736-6633 If to James M. Usdan James M. Usdan 3701 Kirby Dr., Suite 550 Houston, Texas 77098 Telecopy: (713) 490-8420 Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted, if transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next succeeding Business Day) by telex or telecopier and evidence or confirmation of receipt is obtained, or personally delivered or, in the case of a mailed notice, three (3) Business Days after the date deposited in the mails, postage prepaid, in each case given or addressed as aforesaid. [Signature Page Follows] 20 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Stockholders Agreement as of the date first above written. COMPANY Castle Dental Centers, Inc. By: /s/ J.P. Keane ----------------------------------- Name: J.P. Keane --------------------------------- Title: Chief Financial Officer -------------------------------- STOCKHOLDERS: Heller Financial, Inc. By: /s/ Michael Sznajder ----------------------------------- Name: Michael Sznajder --------------------------------- Title: Senior Vice President -------------------------------- Midwest Mezzanine Fund II, L.P. By: ABN AMRO Mezzanine Management II, L.P., its general partner By: ABN AMRO Mezzanine Management II, Inc., its general partner By: /s/ Paul Kreie ----------------------------------- Name: Paul Kreie --------------------------------- Title: Vice President -------------------------------- Banc of America Strategic Solutions, Inc. By: /s/ Mark Henze ----------------------------------- Name: Mark Henze --------------------------------- Title: Senior Vice President -------------------------------- FSC Corp. By: /s/ John J. Quintal ----------------------------------- Name: John J. Quintal --------------------------------- Title: Vice President -------------------------------- Amsouth Bank By: /s/ Tim McCarthy ----------------------------------- Name: Tim McCarthy --------------------------------- Title: Vice President -------------------------------- /s/ James M. Usdan -------------------------------------- James M. Usdan Exhibit A Form of Joinder Agreement Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Gentlemen: In consideration of the transfer to the undersigned of ________ shares of Common Stock, par value $.001 per share, [Describe any other security being transferred] of Castle Dental Centers, Inc., a Delaware corporation (the "Company"), the undersigned represents that it is a Permitted Transferee of [Insert name of transferor] and agrees that, as of the date written below, [he] [she] [it] shall become a party to, and a Permitted Transferee as defined in, that certain Stockholders Agreement dated as of July 19, 2002, as such agreement may have been amended from time to time (the "Agreement"), among the Company and the persons named therein, and as a Permitted Transferee shall be fully bound by, and subject to, all of the covenants, terms and conditions of the Agreement that were applicable to the undersigned's transferor, as though an original party thereto and shall be deemed a [Bank] [Preferred] [New Money] [Management] Stockholder for purposes thereof. Executed as of the _________ day of __________________________________. TRANSFEREE: Address: ------------------------------ ACKNOWLEDGED AND ACCEPTED: CASTLE DENTAL CENTERS, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- EX-10.9 13 dex109.txt INVESTORS AGREEMENT Exhibit 10.9 INVESTORS AGREEMENT This INVESTORS AGREEMENT (this "Agreement"), dated as of July 19, 2002, is by and among CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "Corporation"), HELLER FINANCIAL, INC., a Delaware corporation ("Heller"), MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership ("Midwest") and, solely for purposes of Section 5(a) hereof, James M. Usdan ("Usdan"). RECITALS A. Pursuant to the terms of that certain Senior Subordinated Note and Subordinated Convertible Note Exchange Agreement, dated July 19, 2002 among the Corporation, Heller and Midwest (the "Exchange Agreement"), the Corporation (i) issued to Heller 119,520 shares of Series A-1 Convertible Preferred Stock of the Corporation, par value $.001 per share (the "Series A-1 Preferred Stock"), and (ii) issued to Midwest 59,760 shares of Series A-1 Preferred Stock. B. Pursuant to the terms of that certain Senior Subordinated Note and Warrant Purchase Agreement dated July 19, 2002 among the Corporation, Heller, Midwest and Usdan (the "Note Purchase Agreement"), the Corporation, among other things, issued to each of Heller and Midwest senior subordinated convertible promissory notes of the Corporation (collectively, the "New Money Notes") which may be converted in the aggregate into 1,826,834 shares of the fully-diluted common stock of the Corporation, par value $.001 per share (the "Common Stock"). C. The parties hereto desire to enter into this Agreement to provide for, among other things, (i) a right of first refusal between Heller and Midwest with respect to transfers of the Series A-1 Preferred Stock and the New Money Notes, (ii) special voting rights with respect to the designation and election of directors of the Corporation and its Subsidiaries and (iii) certain covenants to be complied with by the Corporation. AGREEMENT NOW, THEREFORE, in consideration of the recitals and the mutual agreements herein set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. In addition to capitalized terms defined elsewhere in this Agreement, the following capitalized terms shall have the following respective meanings when used in this Agreement: "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual or any trust whose principal beneficiary is such individual or one (1) or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. "Board Options" means options to purchase up to 1,389,747 Common Shares issued to non-employee directors of the Corporation pursuant to the Corporation's 2002 Stock Option Plan. "Business Day" means any day other than a day on which commercial banks are authorized or required to close in Chicago, Illinois. "Common Shares" means the shares of Common Stock. "Debt" means for any Person the sum of the following (without duplication): (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or other similar instruments (including principal, interest, fees and charges); (ii) all obligations of such Person (whether contingent or otherwise) in respect of bankers' acceptances, letters of credit, surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the deferred purchase price of property or services (other than for borrowed money); (iv) all obligations under leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable (whether contingent or otherwise); (v) all obligations under leases which require such Person or its Affiliate to make payments over the term of such lease, including payments at termination, which are substantially equal to at least eighty percent (80%) of the purchase price of the property subject to such lease plus interest as an imputed rate of interest; (vi) all Debt (as described in the other clauses of this definition) and other obligations of others secured by a lien, claim or other encumbrance on any asset of such Person, whether or not such Debt is assumed by such Person; (vii) all Debt (as described in the other clauses of this definition) and other obligations of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the debtor or obligations of others; (viii) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others or to purchase the Debt or property of others; (ix) obligations to deliver goods or services in consideration of advance payments; and (x) all obligations of such Person under Hedging Agreements. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time. "Hedging Agreements" means any interest rate swap, cap, floor, collar, forward agreement or other protection agreements or any option with respect to any such transaction. "Heller Holders" means Heller and its successors and assigns, together with any transferee(s) of the Securities initially held by Heller. "Holders" means collectively the Heller Holders and the Midwest Holders. 2 "Indebtedness" means any and all amounts owing or to be owing by the Corporation or any of its Subsidiaries to Note Holders in connection with the Subordinated Note and Warrant Documents, now or hereafter entered into between or among the Corporation or any of its Subsidiaries and any Note Holder, and all renewals, extensions and/or rearrangements of any of the above. "Management Options" means option to purchase up to 13,897,471 shares of the Corporation's Common Stock issued to officers, employees or consultants of the Corporation or its Subsidiaries pursuant to the Corporation's 2002 Stock Option Plan. "Midwest" means Midwest and its successors and assigns, together with any transferee(s) of the Securities initially held by Midwest. "Note Holders" means, collectively, Heller, Midwest and Usdan. "Notes" means the New Money Notes issued to Heller and Midwest pursuant to the Note Purchase Agreement, and any note or notes issued in exchange for such notes. "Person" means any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency, instrumentality or political subdivision thereof, or any other form of entity. "Preferred Shares" means the Series A-1 Preferred Shares and the Series A-2 Preferred Shares. "Registration Rights Agreement" means that certain Registration Rights Agreement dated July 19, 2002 by and among the Corporation, the Senior Lenders, Heller, Midwest, Usdan and certain other stockholders party thereto. "Securities" means collectively the Series A-1 Preferred Shares and the Notes. "Senior Bank Warrants" means those certain warrants to purchase Series A-2 Preferred Shares issued to the Senior Lenders pursuant to the Senior Loan Agreement. "Senior Indebtedness" means "Senior Debt" as such term is defined in the Subordination Agreement. "Senior Lenders" means Banc of America Strategic Solutions, Inc., a Delaware corporation, Fleet National Bank, a national banking association, Amsouth Bank, a national banking association, and Heller. "Senior Loan Agreement" means that certain Second Amended and Restated Credit Agreement dated as of July 19, 2002 between the Corporation and the Senior Lenders. "Series A-1 Preferred Shares" means the shares of Series A-1 Preferred Stock and any shares issued in exchange for such shares (other than Common Shares). 3 "Series A-2 Preferred Shares" means the shares of Series A-2 Convertible Preferred Stock of the Corporation, par value $.001 per share, and any shares issued in exchange for such shares (other than Common Shares). "Stockholders Agreement" means that certain Stockholders Agreement dated July 19, 2002 among the Corporation, Heller, Midwest and certain other holders of the Corporation's capital stock and other securities. "Sub-Debt Warrants" means those certain warrants to purchase Common Shares issued pursuant to the Note Purchase Agreement. "Subordinated Note and Warrant Documents" means collectively the Note Purchase Agreement, the Notes, the Sub-Debt Warrants, the Subordinated Guaranty Agreement entered into pursuant to the Note Purchase Agreement, the Stockholders Agreement, the Registration Rights Agreement and any other agreements, certificates or instruments executed or delivered pursuant to or entered into in connection with any of the foregoing. "Subordination Agreement" means that certain Subordination and Intercreditor Agreement dated as of the date hereof among the Corporation, certain guarantors named therein, Heller, Midwest, and Bank of America, N.A., a national banking association (together with any duly appointed successor), as agent for the Senior Lenders. "Subsidiary" means any corporation, association or other business entity of which securities or other ownership interests representing more than fifty percent (50%) of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the Corporation or one or more Subsidiaries of the Corporation or by the Corporation and one or more Subsidiaries of the Corporation. "Transfer" means any sale, gift, bequest, assignment, distribution, conveyance, pledge, hypothecation, encumbrance or other transfer or disposition, whether voluntary or involuntary by operation of law or otherwise, and whether inter vivos or testamentary. Section 2. Right of First Refusal. (a) Except for dispositions permitted by Section 3, if a Holder desires to Transfer any Securities (collectively, the "Offered Securities") to a third party, such Holder (the "Selling Holder") will, prior to making or offering to make any such Transfer or accepting any such offer, give written notice (the "Offer Notice") to the other Holders (the "Non-Selling Holders") and to Usdan stating (i) the name of the proposed transferee of the Offered Securities (the "Proposed Transferee"), (ii) the number and type of Offered Securities, (iii) the purchase price therefor, and (iv) other material terms and conditions upon which the Selling Holder proposes to sell such Offered Securities to such proposed transferee and making an offer to sell such Offered Securities (the "Offer") to each of the Non-Selling Holders pursuant to the terms and conditions of this Section, at the price and on the other terms described in the Offer Notice. The date upon which the Offer Notice is given to the Non-Selling Holders is called the "Offer Notice Date." The Offer shall remain open and irrevocable for the period of ten (10) Business Days following the Offer Notice Date. 4 (b) Each Non-Selling Holder may accept the offer to purchase all the Offered Securities by giving written notice thereof (each, a "Holder's Acceptance Notice") to the Selling Holder within 10 Business Days following the Offer Notice Date, such notice to set forth the maximum number of Offered Securities such Non-Selling Holder is willing to purchase. In the event that the Holder's Acceptance Notice(s) reflect a willingness on the part of Non-Selling Holders to purchase, in the aggregate, more than the number of Offered Securities available, the Non-Selling Holders shall be entitled to purchase such Offered Securities pro rata among themselves on the basis of the number of Common Shares into which the Series A Preferred Shares and the Notes held by each such Non-Selling Holder are then convertible. (c) In the event after compliance with Section 2(b) above, the Offer has been accepted in its entirety by the Non-Selling Holders, the Selling Holder shall sell the Offered Securities to the Non-Selling Holders, and the Non-Selling Holders shall purchase the Offered Securities, on the terms and conditions set forth in the Offer Notice and the closing shall take place 25 Business Days after the Offer Notice Date, unless a later date is agreed to by parties to such transaction. (d) In the event after compliance with Section 2(b) above, the Offer has not been accepted in its entirety by the Non-Selling Holders, the Selling Holder may, within 25 Business Days thereafter, sell the Offered Securities to the Proposed Transferee on the terms set forth in the Offer Notice. The Proposed Transferee, as a condition to such Transfer, shall agree in writing to be bound by the terms of this Agreement to the same extent as the Selling Holder. If such sale has not been completed within such 25-Business Day period, such sale may not be carried out without complying again with the provisions of this Section. Any Transfer in violation of this Section 2 shall be void and ineffective. Section 3. Permitted Transfers. Notwithstanding anything herein to the contrary, a Holder may Transfer its Securities free of the restrictions contained in Section 2 to the partners, members or Affiliates of such Holder, provided that such transferee is not engaged in the business of providing dental services in the United States and provided further that any such transferee first agrees in a writing to be bound by the terms of this Agreement to the same extent as such transferring Holder. Section 4. Voting Agreement; Initial Designation of Directors. (a) Each of the Holders acknowledges and agrees to take all action within their respective power, including, but not limited to, the voting of capital stock of the Corporation, required to (i) cause the Board of Directors of the Corporation to at all times consist of up to five (5) members, (ii) cause the Board of Directors as soon as possible following the execution of this Agreement to initially consist of James M. Usdan, Eddie Kunz, Paul Kreie, as the Midwest Designee (as defined below) and Ira Glazer, as one of the Heller Designees (as defined below), and (iii) thereafter cause to be elected to the Board of Directors the Chief Executive Officer of the Corporation. (b) Each of the Holders acknowledges and agrees that the holders of the Series A-1 Preferred Shares have the exclusive right, pursuant to the terms of the Certificate of Incorporation of the Corporation, voting separately as a single class, to elect a majority of the number of the members of the Corporation's Board of Directors. Each of the Holders agrees 5 that, (i) Holders holding a majority of the Series A-1 Preferred Shares originally acquired by Heller pursuant to the Exchange Agreement shall have the right to designate, at any time and from time to time, two members of the Corporation's Board of Directors (the "Heller Designees"), and (ii) Holders holding a majority of the Series A-1 Preferred Shares originally acquired by Midwest pursuant to the Exchange Agreement shall have the right to designate, at any time and from time to time, one member of the Corporation's Board of Directors (the "Midwest Designee"). Each of the Holders agrees to take all actions necessary at any time and from time to time including, but not limited to, the voting of its shares of stock of the Corporation, the execution of written consents, the calling of special meetings, the removal of directors, the filling of vacancies in directorships, the waiving of notice, the attending of meetings and the amendment of the Corporation's by-laws, so as to cause the Corporation's Board of Directors to include the designees of Heller and Midwest. Concurrently with the consummation of the transactions contemplated by the Exchange Agreement, Midwest hereby designates Paul Kreie as the initial Midwest Designee, and Heller hereby designates Ira Glazer as one of its initial Heller Designees. The Corporation acknowledges that as of the date hereof, there is one vacancy on the Corporation's Board of Directors, which is a vacancy of a Series A-1 Director (as defined in the Certificate of Designation of the Series A Preferred Shares). Heller shall use its reasonable efforts to designate an additional Heller Designee that is reasonably acceptable to Midwest and Usdan within 75 days of the date hereof. Section 5. Covenants of the Corporation. (a) So long as any Series A-1 Preferred Shares are outstanding, the Corporation shall not, without first obtaining the written consent of (1) Holders holding a majority of the Series A-1 Preferred Shares originally acquired by Heller pursuant to the Exchange Agreement, (2) Holders holding a majority of the Series A-1 Preferred Shares originally acquired by Midwest pursuant to the Exchange Agreement and (3) Usdan, so long as he holds at least seventy-five percent (75%) of the principal amount of the Note originally acquired by him pursuant to the Note Purchase Agreement: (i) authorize or issue, or enter into any agreement providing for the issuance (contingent or otherwise) of, (A) any equity securities of the Corporation or any securities convertible into or exchangeable for equity securities of the Corporation or permit any Subsidiary to authorize or issue, or enter into any agreement providing for the issuance (contingent or otherwise) of, any equity securities of such Subsidiary or any securities convertible into or exercisable for equity securities of such Subsidiary, any notes or debt securities containing equity features, including, but not limited to, any notes or debt securities convertible into or exchangeable for equity securities, issued in connection with the issuance of equity securities or containing profit participation features, or (B) any capital appreciation or profit participation rights, except, in each case, (w) for the Preferred Shares, Senior Bank Warrants, the Management Options, the Board Options, the Sub-Debt Warrants, the Notes and the capital stock issuable upon conversion, exercise or exchange of any of the foregoing, (x) for profit participation rights issued in the ordinary course of business consistent with past practice, (y) for up to 150,000 Common Shares issued to directors of the Corporation in office on the date of this Agreement, and (z) pursuant to customary management compensation arrangements approved by the Compensation Committee; 6 (ii) directly or indirectly repurchase, redeem or retire any shares of capital stock of the Corporation (or any capital stock of a Subsidiary) other than pursuant to (x) the Employment Agreement between the Corporation and Usdan, dated as of the date hereof, (y) contractual rights to repurchase Common Shares held by employees, directors or consultants of the Corporation upon termination of their employment or services or (z) cashless exercise provisions; (iii) merge or consolidate with any Person or permit any Subsidiary to merge or consolidate with any Person (other than a merger of a wholly-owned Subsidiary into the Corporation or another wholly-owned Subsidiary); (iv) sell, lease or otherwise dispose of all or substantially all (or a substantial portion) of the Corporation's (or its Subsidiaries') assets or sell or otherwise dispose of, or permit any Subsidiary to issue, sell or otherwise dispose of, any shares of the capital stock of any Subsidiary; (v) liquidate, dissolve or effect a recapitalization or reorganization (or permit a Subsidiary to liquidate, dissolve or effect a recapitalization or reorganization unless the assets of such Subsidiary are transferred to the Corporation or another Subsidiary); (vi) acquire another company or business (or permit a Subsidiary to acquire another company or business); (vii) directly or indirectly, declare or pay, any dividends, or make any distributions on any of the Corporation's capital stock; (viii) establish, acquire or permit to exist any Subsidiary other than Subsidiaries existing on the date hereof and other wholly-owned Subsidiaries; (ix) increase or decrease the size of the Corporation's or any Subsidiary's board of directors to a number greater than or less than five (5) members; (x) change the Corporation's primary business or enter into or permit a Subsidiary of the Corporation to enter into, the ownership, management or operation of any business other than the business conducted by the Corporation on the date hereof; (xi) amend the Certificate of Incorporation (including, but not limited to, filing or amending any certificate of designations) or by-laws of the Corporation (or any Subsidiary); (xii) enter into, or permit any Subsidiary to enter into, any transaction with any of its or any Subsidiary's Affiliates, except in the ordinary course of business and upon fair and reasonable terms no less favorable to the Corporation or any Subsidiary than would be obtained by the Corporation or any Subsidiary in a comparable arm's length transaction with a Person who is not the Corporation's or any Subsidiary's Affiliate; provided, however, nothing in this clause (xii) shall be deemed to prohibit payments to officers, directors and other agents of the Corporation or any Subsidiary pursuant to employment arrangements on customary terms or indemnities contained in the 7 Corporation's or any Subsidiary's certificate of incorporation, by-laws or any indemnity agreement to which the Corporation or any Subsidiary is a party; or (xiii) incur, create, assume or permit to exist any Debt, except: (A) the Notes, the Indebtedness or any guaranty of or suretyship arrangement for the Notes or the Indebtedness; (B) material accounts payable (for the deferred purchase price of property or services) from time to time incurred in the ordinary course of business which, if greater than one hundred twenty (120) days past the invoice or billing date, are being contested in good faith by appropriate proceedings and reserves adequate under GAAP shall have been established therefor; (C) debt under capital leases (as required to be reported on the financial statements of the Corporation pursuant to GAAP) and purchase money Debt incurred after July 19, 2002, in a combined amount not to exceed $500,000 per year or $2,000,000 in the aggregate outstanding at any one time; (D) debt of the Corporation under Hedging Agreements with a lender under the Senior Loan Agreement or otherwise approved by the Note Holders; (E) debt in existence on July 19, 2002 and described in the Note Purchase Agreement; and (F) Senior Indebtedness. (b) The Corporation shall not take any of the following actions without the affirmative vote of at least three directors of the Corporation: (i) make capital expenditures or permit a Subsidiary to make capital expenditures in excess of the annual budgeted amount approved by the Board of Directors; (ii) make, or permit any Subsidiary to make, any loans or advances to, or guarantees for the benefit of, any Person, other than loans to employees of the Corporation and its affiliated practices not to exceed $25,000 at any one time per individual and $200,000 at any one time in the aggregate; (iii) make or permit to exist, or permit any Subsidiary to make or permit to exist, any investment other than: (A) investments existing on the date hereof, (B) investments in short-term obligations issued by, or guaranteed by, the United States government, (C) investments in negotiable certificates of deposit, bankers' acceptances or money market securities issued by any bank or branch of a bank having capital and surplus of at least $300,000,000 in the aggregate at all times, and (D) investments in commercial paper rated P1 or A1 by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively; 8 (iv) approve any budget of the Corporation, or any material amendment or modification thereto; (v) make, or permit any Subsidiary to make, any material changes in accounting methods, practices or principles, except in accordance with GAAP; and (vi) sell shares of capital stock of the Corporation or any Subsidiary of the Corporation to the public or register such a sale, whether for the Corporation's own account or the account of another, pursuant to a registration statement under the Securities Act, except for registrations and sales made pursuant to demand registrations requested pursuant to the Registration Rights Agreement. (c) The Board of Directors shall have a compensation committee (the "Compensation Committee"), which shall perform such functions as are customarily performed by compensation committees, specifically: (i) hiring and firing of members of management or other significant senior executives and setting or changing their compensation; and (ii) adoption and administration of any employee compensation or benefit plan by the Corporation or its Subsidiaries, including bonus plans, profit sharing arrangements and incentive compensation programs (other than those plans adopted prior to the date hereof). The Compensation Committee and any other committee established or empowered by the Board of Directors shall consist of no more than three (3) members, one of whom shall be a Heller Designee and one of whom shall be a Midwest Designee. (d) The Corporation shall cause the board of directors of each Subsidiary to at all times be composed of the same members as the Corporation's Board of Directors. (e) Not more than 20 Business Days after the date hereof, the Corporation shall provide evidence reasonably satisfactory to the Heller Designees and the Midwest Designee that the Corporation has obtained directors' and officers' liability insurance in an amount reasonably acceptable to the Heller Designees and the Midwest Designee (the "D&O Insurance"). The Corporation shall maintain the D&O Insurance, in amounts reasonably acceptable to the then-current Heller Designees and the Midwest Designee, at all times that the holders of the Series A-1 Preferred Shares have the right to designate members to the Corporation's Board of Directors. Not more than 20 Business Days after the date hereof, the Corporation shall have entered into indemnification agreements with the Heller Designees and the Midwest Designee, in form and substance reasonably acceptable to each such Designee, pursuant to which the Corporation shall agree to indemnify each such Designee to the fullest extent permitted by law in connection with such Designees' service on the Corporation's Board of Directors. The Corporation further agrees to enter into substantially similar indemnification agreements with the successors to the Heller Designees and the Midwest Designee. Section 6. Term. This Agreement shall terminate and be of no further force and effect at such time as (a) the Notes have been paid in full or are otherwise no longer outstanding and (b) there are no Series A-1 Preferred Shares outstanding. Section 7. Legend. The Corporation will cause the Notes and each certificate representing Series A-1 Preferred Shares governed by this Agreement to be stamped or otherwise 9 imprinted, throughout the term of this Agreement, with a legend in substantially the following form: The securities represented by this certificate are subject to certain restrictions on transfer and certain voting agreements all as set forth in a certain Investors Agreement of Castle Dental Centers, Inc., dated as of July 19, 2002, a copy of which will be mailed to the holder without charge within five days of a written request therefor." Section 8. Notices to the Corporation and the Holders. Any notices desired, required or permitted to be given hereunder shall be delivered personally or mailed, certified or registered mail, return receipt requested, postage prepaid or delivered by commercial overnight courier service, charges prepaid to the following addresses, or such other addresses as shall be given by notice delivered hereunder, and shall be deemed to have been given upon delivery, if delivered personally, three Business Days after mailing, if mailed, or one Business Day after delivery to the overnight courier service, if delivered by overnight courier service: If to the Corporation to: Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Attention: James M. Usdan If to Heller to: Heller Financial, Inc. c/o Heller Healthcare Financial Services 500 West Monroe Street Chicago, Illinois 60661 Attention: Michael Sznajder If to Midwest to: Midwest Mezzanine Fund II, L.P. 208 South LaSalle Street 10th Floor Chicago, Illinois 60604 Attention: J. Allan Kayler Any party may change the address to which notices to it are to be sent by giving written notice given pursuant to this Section to the other parties hereto. 10 Section 9. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Corporation shall bind and inure to the benefit of its respective successors and permitted assigns hereunder. Section 10. Governing Law. This Agreement shall be deemed to be a contract made under the laws of the State of Illinois and for all purposes shall be construed in accordance with the internal laws of said State. Section 11. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 12. Amendment; Waiver. This Agreement cannot be amended without the prior written consent of the Holders and the Corporation. No provision of this Agreement may be waived except by an instrument in writing signed by the party to be bound. No failure or delay by any party in exercising any right or remedy hereunder shall operate as a waiver thereof, and a waiver of a particular right or remedy on one occasion shall not be deemed a waiver of any other right or remedy or a waiver of the same right or remedy on any subsequent occasion. [REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGE FOLLOWS.] 11 IN WITNESS WHEREOF, the parties hereto have caused this Investors Agreement to be duly executed as of the day and year first above written. CASTLE DENTAL CENTERS, INC. By: /s/ J.P. Keane ------------------------------------------ Its: Chief Financial Officer ------------------------------------------ HELLER FINANCIAL, INC. By: /s/ Michael Snajder ------------------------------------------ Its: Senior Vice President ------------------------------------------ MIDWEST MEZZANINE FUND II, L.P. By: ABN AMRO Mezzanine Management II, L.P., its General Partner By: ABN AMRO Mezzanine Management II, Inc., its General Partner By: /s/ Paul Kreie ------------------------------------------ Its: Vice President ------------------------------------------ Solely for purposes of Section 5(a) hereof: /s/ James M. Usdan ----------------------------------------------- James M. Usdan 12 EX-10.10 14 dex1010.txt REGISTRATION RIGHTS AGREEMENT Exhibit 10.10 - -------------------------------------------------------------------------------- Registration Rights Agreement - -------------------------------------------------------------------------------- by and among CASTLE DENTAL CENTERS, INC. a Delaware corporation (the "Company") and Those persons listed on Exhibit A ("Stockholders") July 19, 2002 TABLE OF CONTENTS ARTICLE I. DEFINED TERMS......................................................1 Section 1.1 Defined Terms............................................1 Section 1.2 Construction.............................................3 Section 1.3 References...............................................3 ARTICLE II. DEMAND REGISTRATION...............................................4 Section 2.1. Request..................................................4 Section 2.2. Registration Statement Form..............................4 Section 2.3. Expenses.................................................4 Section 2.4. Effective Registration Statement.........................4 Section 2.5. Selection of Underwriters................................5 Section 2.6. Priority in Requested Registrations......................5 Section 2.7. S-3 Registration.........................................5 ARTICLE III. "PIGGY BACK" REGISTRATION........................................6 Section 3.1. Right to Include Registrable Securities..................6 Section 3.2. Priority in Piggy-Back Registrations.....................7 ARTICLE IV. REGISTRATION PROCEDURES...........................................8 Section 4.1. Preparation of Filings...................................8 (a) Registration Statement...................................8 (b) Amendments...............................................8 (c) Copies of Documents......................................8 (d) Blue-Sky.................................................9 (e) Other Approvals..........................................9 (f) Opinions; Comfort Letters................................9 (g) Notice of Events........................................10 (h) Earnings Statement......................................10 (i) Listing.................................................10 (j) Transfer Agent..........................................11 (k) Access..................................................11 Section 4.2. Data from Holders of Registerable Securities............11 Section 4.3. Discontinuance of Use of Prospectus.....................11 Section 4.4. References to Holders in Registration Statements........11 Section 4.5. Underwritten Offerings..................................12 Section 4.6. Holdback Agreements.....................................12 Section 4.7. Preparation; Reasonable Investigation...................12 ARTICLE V. INDEMNIFICATION...................................................13 Section 5.1. Indemnification by the Company..........................13 Section 5.2. Indemnification by the Sellers..........................14 Section 5.3. Notices of Claims, etc..................................14 Section 5.4. Other Indemnification...................................15 Section 5.5. Indemnification Payments................................15 Section 5.6. Contributions...........................................15 ARTICLE VI. RULE 144.........................................................16 Section 6.1. Rule 144................................................16 -i- ARTICLE VII. MISCELLANEOUS...................................................16 Section 7.1. Remedies................................................16 Section 7.2. No Inconsistent Agreements..............................16 Section 7.3. Adjustments Affecting Registrable Securities............17 Section 7.4. Assignment..............................................17 Section 7.5. Descriptive Headings....................................17 Section 7.6. Governing Law...........................................17 Section 7.7. Counterparts............................................17 Section 7.8. Entire Agreement........................................17 Section 7.9. Severability............................................17 Section 7.10. Amendments and Waivers..................................17 Section 7.11. Nominees for Beneficial Owners..........................18 Section 7.12. Notices.................................................18 Section 7.13. Other Registration Rights Agreements....................18 ii REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement ("Agreement") is entered into as of this 19th day of July 2002, by and between Castle Dental Centers, Inc., a Delaware corporation (the "Company"), those persons listed on Exhibit A (individually, a "Stockholder" and collectively, the "Stockholders") and evidences that for good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties hereto agree as follows: ARTICLE I. DEFINED TERMS Section 1.1 Defined Terms. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: Agreement: As defined in the introductory paragraph of this Agreement. Bank Warrants: The warrants to purchase Series A-2 Stock issued to Banc of America Strategic Solutions, Inc., a Delaware corporation, FSC Corp., a Massachusetts corporation, Amsouth Bank, a national banking association, and Heller Financial, Inc., a Delaware corporation, contemporaneously with the execution of this Agreement, and any warrants issued upon the partial exercise, assignment, transfer, sale, exchange or replacement of such warrants. Common Stock: The common stock, par value $0.001, of the Company. Company: As defined in the introductory paragraph of this Agreement. Demand Right Holders: Persons with "demand" registration rights pursuant to a contractual commitment of the Company that have exercised such rights. Exchange Act: The Securities Exchange Act of 1934, as amended and the rules and regulations of the SEC from time to time in effect thereunder, and shall include any replacement statute and rules and regulations thereunder. Initiating Holders: Any holder or holders of at least 20% of the Registrable Securities (other than Registrable Securities issued or issuable upon conversion of Piggyback Stock) by number of shares at the time outstanding or issuable upon exercise or conversion of the Series A-1 Stock (other than Piggyback Stock), Series A-2 Stock, the Bank Warrants, the New Money Notes and/or the New Money Warrants, and initiating a request pursuant to Section 2.1 or Section 2.7 for the registration of all or part of such holder's or holders' Registrable Securities. Holders of Piggyback Stock or Registrable Securities issued or issuable upon conversion of Piggyback Stock are specifically excluded from the definition of Initiating Holder and Registrable Securities issued or issuable upon conversion of Piggyback Stock shall be excluded from calculations used in the definition of Initiating Holder. Inspectors: As defined in Section 4.1(k) of this Agreement. 1 New Money Notes: The convertible notes issued pursuant to the Note and Warrant Purchase Agreement between the Company and Heller Financial, Inc., a Delaware corporation, Midwest Mezzanine Fund II, L.P., a Delaware limited partnership, and James M. Usdan, entered into contemporaneously with the execution of this Agreement, and any notes issued upon the partial conversion, assignment, transfer, sale, exchange or replacement of such notes. New Money Warrants: The warrants to purchase Common Stock issued pursuant to the Note and Warrant Purchase Agreement between the Company and Heller Financial, Inc., a Delaware corporation, Midwest Mezzanine Fund II, L.P., a Delaware limited partnership, and James M. Usdan, entered into contemporaneously with the execution of this Agreement, and any warrants issued upon the partial exercise, assignment, transfer, sale, exchange or replacement of such warrants.. Person: Any individual, corporation, limited liability company, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government or any agency, instrumentality or political subdivision thereof, or any other form of entity. Piggyback Stock: The Series A-1 Stock issued in exchange for the Company's subordinated notes and other subordinated indebtedness issued to various sellers of dental practices to the Company in connection with the exchange offer described in the Company's Confidential Offering Memorandum dated July 5, 2002. Records: As defined in Section 4.1(k) of this Agreement. Registrable Securities: (a) Any shares of Common Stock issued or issuable upon conversion of the Series A-1 Stock or Piggyback Stock, (b) any shares of Common Stock issued or issuable upon conversion of the New Money Notes, (c) any shares of Common Stock issued or issuable upon exercise of the New Money Warrants, (d) any shares of Common Stock issued or issuable upon conversion of the Series A-2 Stock issued or issuable upon exercise of the Bank Warrants, and (e) any securities issued or issuable with respect to the Common Stock referred to in subdivisions (a), (b), (c), and (d) above by way of stock dividend or stock split, or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, or otherwise. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) such securities have been sold to the public pursuant to Rule 144 (or any similar provision then in force promulgated under the Securities Act), (c) such securities shall have been otherwise transferred, new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company, and subsequent disposition of such securities shall not require registration or qualification of such securities under the Securities Act or any similar state law then in force, or (d) such securities shall have ceased to be outstanding. 2 Registration Expenses: All expenses incident to the Company's performance of or compliance with Article II or III, including, without limitation, all registration, filing, listing, and NASD fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating, printing and engraving expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the fees and disbursements of a single counsel retained by the holder or holders of more than 51% of the Registrable Securities being registered, premiums and other costs of policies of insurance against liabilities arising out of the public offering of the Registrable Securities being registered and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any. SEC: The U.S. Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. Securities Act: The Securities Act of 1933, as amended, and the rules and regulations of the SEC from time to time in effect thereunder, and shall include any replacement statute and rules and regulations thereunder. Series A-1 Stock: The Convertible Preferred Stock, Series A-1, of the Company issued pursuant to the Restructuring Agreement between the Company and Heller Financial, Inc., a Delaware corporation, and Midwest Mezzanine Fund II, L.P., a Delaware limited partnership, entered into contemporaneously with the execution of this Agreement. Series A-2 Stock: The Convertible Preferred Stock, Series A-2, of the Company issuable upon exercise of the Bank Warrants. Stockholder: As defined in the introductory paragraph of this Agreement. Section 1.2 Construction. Whenever the context requires, the gender of all words used herein shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. Section 1.3 References. Unless otherwise specified, references in this Agreement to "Sections", "Subsections" or "Articles" refer to the sections, subsections or articles in this Agreement. 3 ARTICLE II. DEMAND REGISTRATION Section 2.1. Request. Upon the written request of one or more Initiating Holders, requesting that the Company effect the registration under the Securities Act of all or part of such Initiating Holders' Registrable Securities and specifying the intended method of disposition thereof, the Company will promptly give written notice of such requested registration to all registered holders of Registrable Securities, and thereupon the Company will use its best efforts to effect as expeditiously as possible the registration under the Securities Act of the following: (a) the Registrable Securities which the Company has been so requested to be registered by such Initiating Holders for disposition in accordance with the intended method of disposition stated in such request; (b) all other Registrable Securities the holders of which shall have made a written request to the Company for registration thereof within 30 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Securities); and (c) all shares of Common Stock which the Company may elect to register in connection with the offering of Registrable Securities pursuant to this Article II; all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities and the additional shares of Common Stock, if any, so to be registered; provided, that, the provisions of this Article II shall not require the Company to effect more than four registrations of Registrable Securities. Section 2.2. Registration Statement Form. Registrations under this Article II shall be on an appropriate registration form of the SEC (i) as shall be selected by the Company and shall be reasonably acceptable to the holders of more than fifty percent (by number of shares) of the Registrable Securities so to be registered and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in their request for such registration. The Company agrees to include in any such registration statement all information which holders of Registrable Securities being registered shall reasonably request. Section 2.3. Expenses. The Company will pay all Registration Expenses in connection with any registrations requested pursuant to this Article II. Section 2.4. Effective Registration Statement. A registration requested pursuant to this Article II shall not be deemed to have been effected for purposes of Section 2.1 hereof (i) unless a registration statement with respect thereto has become effective; provided, that a registration which does not become effective after the Company has filed a registration statement with respect thereto solely by reason of the refusal to proceed of 4 the Initiating Holders (other than a refusal to proceed based upon the advice of counsel relating to a matter with respect to the Company) shall be deemed to have been effected by the Company at the request of such Initiating Holders unless the Initiating Holders shall have elected to pay all Registration Expenses in connection with such registration, (ii) if, after it has become effective, such registration is withdrawn by the Company (other than at the request of a majority of the Initiating Holders) or interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason prior to the expiration of a 180 day period following such registration statement effectiveness, or (iii) if the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied, other than due solely to some act or omission by such Initiating Holders. Section 2.5. Selection of Underwriters. If a requested registration pursuant to this Article II involves an underwritten offering, the underwriter or underwriters thereof shall be selected by the consent of holders of a majority (by number of shares) of Registrable Securities and shall be reasonably acceptable to the Company. Section 2.6. Priority in Requested Registrations. If a requested registration pursuant to this Article II involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Securities) exceeds the number which can be sold in such offering within a price range reasonably acceptable to the Company and to the holders of a majority (by number of shares) of the Registrable Securities requested to be included in such registration, the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, (i) first, the securities which have been requested to be included in such registration by the holders of Registrable Securities (other than holders of Registrable Securities issued or issuable upon conversion of Piggyback Stock) pursuant to this Agreement (pro rata based on the amount of securities sought to be registered by such Persons), (ii) second, provided that no securities sought to be included by the holders of Registrable Securities have been excluded from such registration, the securities of other Persons (including holders of Registrable Securities issued or issuable upon conversion of Piggyback Stock) entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata based on the amount of securities sought to be registered by such Persons) and (iii) third, securities the Company proposes to register. Section 2.7. S-3 Registrations. Upon the written request of one or more Initiating Holders, requesting that the Company effect the registration under the Securities Act of all or part of such Initiating Holders' Registrable Securities on Form S-3 and specifying the intended method of disposition thereof, the Company will promptly give written notice of such requested registration to all registered holders of Registrable Securities, and thereupon the Company will, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of the following: 5 (a) the Registrable Securities which the Company has been so requested to be registered by such Initiating Holders for disposition in accordance with the intended method of disposition stated in such request; and (b) all other Registrable Securities the holders of which shall have made a written request to the Company for registration thereof on Form S-3 within 30 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Securities); all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities and the additional shares of Common Stock, if any, so to be registered; provided, that, the provisions of this Article II shall not require the Company to effect a registration on Form S-3 if (i) Form S-3 is not available for such offering by the Initiating Holders, or (ii) the Initiating Holders, together with all other holders of Registrable Securities that have elected to register such Registrable Securities, propose to sell Registrable Securities at an aggregate price to the public of less than $1,000,000. Notwithstanding Section 2.1, the holders of Registrable Securities are permitted to make an unlimited number of requests for S-3 registrations pursuant to this Section 2.7. ARTICLE III. "PIGGY BACK" REGISTRATION Section 3.1. Right to Include Registrable Securities. If the Company at any time proposes to file a registration statement under the Securities Act covering any of its securities (other than (i) a registration statement on Form S-4 or S-8 (or any substitute or successor form that may be adopted by the SEC), (ii) a registration statement filed in connection with an exchange offer or offering of securities solely to the Company's existing security holders, or (iii) pursuant to Article II), whether or not for sale for its own account, it will each such time give prompt written notice to all holders of Registrable Securities of its intention to do so and of such holders' rights under this Article III. Upon the written request of any such holder made within 30 days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company will, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holders thereof, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which the Company proposes to register; provided, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the 6 Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Article II and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Article III shall relieve the Company of its obligation to effect any registration upon request under Article II. The Company will pay all Registration Expenses incurred by holders by Registrable Securities in connection with each registration of Registrable Securities requested pursuant to this Article III. Section 3.2. Priority in Piggy-Back Registrations. If (i) a registration pursuant to this Article III involves an underwritten offering of the securities being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and (ii) the managing underwriter of such underwritten offering shall inform the Company and holders of the Registrable Securities requesting such registration by letter of its belief that the distribution of all or a specified number of such Registrable Securities concurrently with the securities being distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such writing to state the basis of such belief and the approximate number of such Registrable Securities which may be distributed without such effect), then the Company will be required to include in such registration only the amount of securities which it is so advised should be included in such registration. In such event: (x) in cases initially involving the registration for sale of securities for the Company's own account, securities shall be registered in such offering in the following order of priority: (i) first, the securities which the Company proposes to register, (ii) second, Registrable Securities other than Registrable Securities issued or issuable upon conversion of Piggyback Stock (pro rata on the amount of securities sought to be registered by such Persons), and (iii) third, the securities which have been requested to be included in such registration by Persons (including holders of Registrable Securities issued or issuable upon conversion of Piggyback Stock) entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata on the amount of securities sought to be registered by such Persons); and (y) in cases not initially involving the registration for sale of securities for the Company's own account, securities shall be registered in such offering in the following order of priority: (i) first, the securities of any Person whose exercise of a "demand" registration right pursuant to a contractual commitment of the Company is the basis for the registration, (ii) second, Registrable Securities other than Registrable Securities issued or issuable upon conversion of Piggyback Stock (pro rata on the amount of securities sought to be registered by such Persons), (iii) third, the securities which have been requested to be included in such registration by Persons (including holders of Registrable Securities issued or issuable upon conversion of Piggyback Stock) entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata on the amount of securities sought to be registered by such Persons), and (iv) fourth, the securities which the Company proposes to register. 7 ARTICLE IV. REGISTRATION PROCEDURES Section 4.1. Preparation of Filings. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Articles II or III, the following shall apply: (a) Registration Statement. The Company shall promptly prepare and file (in the case of a registration pursuant to Article II, such filing to be made within 90 days after the initial request of one or more Initiating Holders of Registrable Securities or in any event as soon after such request as possible) with the SEC the requisite registration statement to effect such registration (including such audited financial statements as may be required by the Securities Act or the rules and regulations promulgated thereunder) and thereafter use its best efforts to cause such registration statement to become effective as soon as possible and remain effective thereafter; provided, however, that the Company may withdraw any registration of its securities which are not Registrable Securities (and, under the circumstances specified in Section 3.2, its securities which are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; provided further, that before filing such registration statement or any amendments thereto, the Company will furnish to the holders of Registrable Securities that are to be included in such registration and their counsel copies of all such documents proposed to be filed, which documents will be subject to the review and reasonable approval of such holders and their counsel. (b) Amendments. The Company shall prepare and file with the SEC such amendments, post effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the following time periods: (i) in the case of a S-3 registration pursuant to Section 2.7, 180 days or such shorter period as all Registrable Securities have been sold in accordance with the intended methods of disposition specified by the holders thereof; (ii) in the case of a registration under Article II other than a S-3 registration pursuant to Section 2.7, 90 days or such shorter period as all Registrable Securities have been sold in accordance with the intended methods of disposition specified by the holders thereof; and (iii) in the case of a registration under Article III, such period of time as the Company determines. (c) Copies of Documents. The Company shall furnish to each seller of Registrable Securities covered by such registration statement and each underwriter, if any, of the securities being sold by such seller such number of conformed copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits to such Registration Statement), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and 8 any other prospectus filed pursuant to Rule 424 under the Securities Act and such other documents, as such seller and underwriter, if any, may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such seller (it being understood that the Company consents to the use of the prospectus and any amendments or supplement thereto by each holder of Registrable Securities covered by the Registration Statement and the underwriter or underwriters, if any, in connection with the offering and sale of Registrable Securities covered by the prospectus or any amendment or supplement thereto). (d) Blue-Sky. The Company will use its best efforts to register or qualify all Registrable Securities under the securities laws or blue sky laws of the jurisdictions as any seller thereof and any underwriter of the securities being sold by such seller shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller and underwriter to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subsection (d) be obligated to be so qualified, or to consent to general service of process in any such jurisdiction. (e) Other Approvals. The Company will use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the intended disposition of such Registrable Securities. (f) Opinions; Comfort Letters. The Company shall furnish to each seller of Registrable Securities a signed counterpart, addressed to such seller, (and the underwriters, if any) of: (i) an opinion of counsel for the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), reasonably satisfactory in form and substance to such seller, and (ii) a "comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, 9 covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, and, in the case of the legal opinion, such other legal matters, as such seller (or the underwriters, if any) may reasonably request. (g) Notice of Events. The Company will notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon the Company's discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to such seller and each underwriter, if any, a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. (h) Earnings Statement. The Company will otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act, and will furnish to each such seller at least five business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder. (i) Listing. The Company will cause all Registrable Securities covered by the registration statement to be listed on each securities exchange or traded or quoted on each market on which the same class of securities issued by the Company are then listed, traded or quoted. 10 (j) Transfer Agent. The Company will provide a transfer agent, registrar and a CUSIP number for all Registrable Securities no later than the effective date of such Registration Statement. (k) Access. The Company will make available for inspection by any holder of Registrable Securities included in such registration statement, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration statement. Section 4.2. Data from Holders of Registrable Securities. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Section 4.3. Discontinuance of Use of Prospectus. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any written notice from the Company of the occurrence of any event of the kind described in Section 4.1(g), such holder will forthwith discontinue such holder's offer of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 4.1(g) and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 4.1(b) shall be extended by the length of the period from and including the date when each seller of any Registrable Securities covered by such registration statement shall have received such notice to the date on which each such seller has received the copies of the supplemented or amended prospectus contemplated by Section 4.1(g). Section 4.4. References to Holders in Registration Statements. If any registration or comparable statement refers to any holder of Registrable Securities by name or otherwise as the holder of any securities of the Company then such holder shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to such holder, to the effect that the holding by such holder of such securities is not to be construed as a recommendation by such holder of the investment quality of the Company's securities covered thereby and that such holding does not imply that such holder will assist in meeting any future financial requirements of the Company, or (ii) in the event that such reference to such holder by name or otherwise is not required by the 11 Securities Act or any similar federal statute then in force, the deletion of the reference to such holder. Section 4.5. Underwritten Offerings. If requested by the underwriters for any underwritten offering by holders of Registrable Securities pursuant to a registration requested under Article II, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in form and substance to the Company, each such holder and the underwriters, and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in Section 5.1. The holders of the Registrable Securities will cooperate with the Company in the negotiation of the underwriting agreement and will give consideration to the reasonable suggestions of the Company regarding the form thereof; provided, that nothing herein contained shall diminish the foregoing obligations of the Company. The holders of Registrable Securities to be distributed by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. Section 4.6. Holdback Agreements. The Company agrees if so required by a managing underwriter of an offering of Registrable Securities, not to effect any public sale or distribution of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the seven days prior to and the 90 days after any underwritten registration pursuant to Articles II or III has become effective, except as part of such underwritten registration and except pursuant to registrations on Form S-8, or any successor or similar forms thereto. Section 4.7. Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 12 ARTICLE V. INDEMNIFICATION Section 5.1. Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does, indemnify and hold harmless (i) in the case of any registration statement filed pursuant to Articles II and III, the holder of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such holder or any such underwriter within the meaning of the Securities Act, and (ii) in the case of any registration statement of the Company, any holder of Registrable Securities that is selling Registrable Securities pursuant to such Registration Statement, its directors and officers and each other Person, if any, who controls such holder of Registrable Securities within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director or officer or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such holder and each such director, officer, underwriter and controlling person for any legal or any other expenses and costs reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense or cost arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such holder expressly for use in the preparation thereof and, provided further that the Company shall not be liable to any Person who participates as an underwriter, in the offering or sale of Registrable Securities or to any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the Securities Act to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such holder. 13 Section 5.2. Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Article II or III, that the Company shall have received an undertaking satisfactory to it from each prospective seller of Registrable Securities, severally but not jointly, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 5.1) the Company, each director of the Company, each officer of the Company and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, that such sellers' liability under such indemnification shall be limited to the net sales proceeds actually received by such seller from the sale of the Company's securities pursuant to such Registration Statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. Section 5.3. Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Sections 5.1 or 5.2, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Sections 5.1 or 5.2, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any 14 settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. Section 5.4. Other Indemnification. Indemnification similar to that specified in Sections 5.1 and 5.2 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority, other than the Securities Act. Section 5.5. Indemnification Payments. The indemnification required by this Article V shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. Section 5.6. Contributions. If the indemnification provided for in Sections 5.1 and 5.2 of this Agreement is unavailable or insufficient to hold harmless an indemnified party under such Sections, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in Section 5.1 or Section 5.2 of this Agreement in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand, and the indemnified party on the other, in connection with statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations, including, without limitation, the relative benefits received by each party from the offering of the securities covered by such registration statement, the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted and the opportunity to correct and prevent any statement or omission. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 5.6 were to be determined by pro rata or per capita allocation (even if the underwriters, if any, were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this Section 5.6. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this Section 5.6 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided in Section 5.3 of this Agreement if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) which is the subject of this Section 5.6. Promptly after receipt by an indemnified party under this Section 5.6 of notice of the commencement of any action against such party in respect of which a claim for contribution may be made against an indemnifying party under this Section 5.6, such indemnified party shall notify the indemnifying party in writing of the commencement thereof if the notice specified in 15 Section 5.3 of this Agreement has not been given with respect to such action; provided, that the omission to so notify the indemnifying party shall not relieve the indemnifying party from any liability which it may otherwise have to any indemnified party under this Section 5.6, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. The Company and each holder of Registrable Securities agrees with each other and the underwriters of the Registrable Securities, if requested by such underwriters, that (i) the underwriters' portion of such contribution shall not exceed the underwriting discount and (ii) that the amount of such contribution shall not exceed an amount equal to the net proceeds actually received by such indemnifying party from the sale of Registrable Securities in the offering to which the losses, claims, damages, liabilities or expenses of the indemnified parties relate. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE VI. RULE 144 Section 6.1. Rule 144. The Company shall timely file the reports required to be filed by it under the Securities Act and the Exchange Act (including but not limited to the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted by the SEC under the Securities Act) and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, will, upon the request of any holder of Registrable Securities, make publicly available other information) and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. ARTICLE VII. MISCELLANEOUS Section 7.1. Remedies. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of such a breach and hereby agrees to waive the defense in any action for specific performance of such an obligation that a remedy at law would be adequate. Section 7.2. No Inconsistent Agreements. Without the written consent of the holders of a majority of the then outstanding Registrable Securities, the Company will not on or after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the holders of Registrable Securities hereunder do not in any way conflict with 16 and are not inconsistent with the rights granted to the holders of the Company's securities under any agreements previously entered into by the Company. Section 7.3. Adjustments Affecting Registrable Securities. The Company will not take any action, or permit any change to occur, with respect to the Registrable Securities which would adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement. Section 7.4. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities. Section 7.5. Descriptive Headings. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. Section 7.6. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS OF LAWS. Section 7.7. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. Section 7.8. Entire Agreement. This Agreement embodies the entire agreement and understanding between the Company and each other party hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. Section 7.9. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. Section 7.10. Amendments and Waivers. This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of 51% or more of the shares of Registrable Securities; provided, however, no amendment, modification or waiver can be effected if, by its terms, such amendment, modification or 17 waiver adversely affects one holder without having the same adverse effect on all other holders without the prior written consent of the adversely affected holder. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 7.10, whether or not such Registrable Securities shall have been marked to indicate such consent. Section 7.11. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. Section 7.12. Notices. Except as otherwise provided in this Agreement, all communications provided for hereunder shall be in writing and sent by first-class mail, postage prepaid, and (a) if addressed to a party to this Agreement other than the Company, addressed to the address of such party listed in Exhibit A or at such other address as such party shall have furnished to the Company in writing, or (b) if addressed to any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company, or (c) if addressed to the Company 3701 Kirby Drive, Suite 550, Houston, Texas 77098 to the attention of its Chief Financial Officer or at such other address, or to the attention of such other officer, as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. Section 7.13. Other Registration Rights Agreements. Without the approval of the holders of a majority of the Registrable Securities, the Company will neither enter into any new registration rights agreements that conflict with the terms of this Agreement nor permit the exercise of any other registration rights in a manner that conflicts with the terms of the registration rights granted under this Agreement. 18 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. COMPANY Castle Dental Centers, Inc. By: /s/ J.P. Keane ----------------------------------- Name: J.P. Keane --------------------------------- Title: Chief Financial Officer -------------------------------- STOCKHOLDERS: Heller Financial, Inc. By: /s/ Michael Snajder ----------------------------------- Name: Michael Snajder --------------------------------- Title: Senior Vice President -------------------------------- Midwest Mezzanine Fund II, L.P. By: ABN AMRO Mezzanine Management II, L.P., its general partner By: ABN AMRO Mezzanine Management II, Inc., its general partner By: /s/ Paul Kreie ----------------------------------- Name: Paul Kreie --------------------------------- Title: Vice President -------------------------------- Banc of America Strategic Solutions, Inc. By: /s/ Mark Henze ----------------------------------- Name: Mark Henze --------------------------------- Title: Senior Vice President -------------------------------- FSC Corp. By: /s/ John J. Quintal ----------------------------------- Name: John J. Quintal --------------------------------- Title: Vice President -------------------------------- Amsouth Bank By: /s/ Tim McCarthy ----------------------------------- Name: Tim McCarthy --------------------------------- Title: Vice President -------------------------------- /s/ James M. Usdan -------------------------------------- James M. Usdan PIGGYBACK STOCKHOLDERS By: James M. Usdan ----------------------------------- James M. Usdan, Attorney-in-Fact for each of the Piggyback Stockholders listed below Exhibit A to Registration Rights Agreement dated July 19, 2002 Name and address of stockholder: Name: Heller Financial, Inc. Address for notice: Heller Financial, Inc. 500 West Monroe Chicago, Illinois 60661 Attention: Michael Sznajder Telecopy: (312) 441-7598 Number of shares of Series A-1 Stock owned: 119,520 Principal amount of New Money Notes owned: $500,000 Number of New Money Warrants owned: 5,286,489 Number of Bank Warrants owned: 10,984 Name and address of stockholder: Name: Midwest Mezzanine Fund II, L.P. Address for notice: Midwest Mezzanine Fund II, L.P. 208 South LaSalle, Tenth Floor Chicago, Illinois Attention: Paul Kreie Telecopy: (312) 553-6647 Number of shares of Series A-1 Stock owned: 59,760 Principal amount of New Money Notes owned: $500,000 Number of New Money Warrants owned: 5,286,489 Name and address of stockholder: Exhibit A - Page 1 of 1 Name: Banc of America Strategic Solutions, Inc. Address for notice: Banc of America Strategic Solutions, Inc. 901 Main St., 11th Floor TX1-492-11-05 Dallas, Texas 75202-3714 Attention: Mark Henze Telecopy: 214-209-3444 Number of Bank Warrants owned: 25,161 Name and address of stockholder: Name: FSC Corp. Address for notice: FSC Corp. c/o Banc Boston Capital Ins. 175 Federal Street, 10th Floor Boston, MA 02110 Attention: John J. Quintal Telecopy: (617) 434-7891 Number of Bank Warrants owned: 16,476 Name and address of stockholder: Name: Amsouth Bank Address for notice: Amsouth Bank 315 Deaderick Street, 8th Floor Nashville, TN 37021 Attention: Tim McCarthy Telecopy: (615) 736-6633 Number of Bank Warrants owned: 8,238 Exhibit A - Page 1 of 1 Name and address of stockholder: Name: James M. Usdan Address for notice: James M. Usdan 3701 Kirby Dr., Suite 550 Houston, Texas 77098 Telecopy: (713) 490-8420 Number of New Money Warrants owned: 7,401,084 Principal amount of New Money Notes owned: $700,000 Name and address of stockholder: Name: Address for notice: Number of shares of Piggyback Stock owned: 32,002 Exhibit A - Page 1 of 1 EX-10.11 15 dex1011.txt FORM OF EXCHANGE AGREEMENT Exhibit 10.11 EXCHANGE AGREEMENT This exchange agreement (the "Agreement") is entered into as of the date set forth below between Castle Dental Centers, Inc., a Delaware corporation (the "Company"), and the undersigned (the "Exchanging Holder"). The Exchanging Holder and all other holders of Subordinated Debt (as defined below) who have executed an agreement similar to this Agreement are referred to herein as the "Exchanging Holders". The Exchanging Holders are holders of subordinated notes and/or other subordinated indebtedness issued to various sellers of dental practices to the Company (collectively, the "Subordinated Debt"). Capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings ascribed to them in the Company's Confidential Offering Memorandum dated July 5, 2002, as amended to date (the "Memorandum"). WHEREAS, the aggregate principal plus accrued and unpaid interest (excluding default interest) (the "Indebtedness") outstanding under the Exchanging Holder's Subordinated Debt (the "Old Note") through June 30, 2002 is set forth next to the Exchanging Holder's name on the signature page of this Agreement; WHEREAS, the Exchanging Holder desires to exchange the Indebtedness for shares of the Company's Convertible Preferred Stock, Series A-1, par value $0.001 per share (the "Series A Stock"), upon the terms described in the Memorandum; NOW THEREFORE, this Agreement witnesseth that, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Exchanging Holder agree as follows; Section 1. Tender and Exchange. Upon the terms and subject to the conditions of the exchange offer specified in the Memorandum, the Exchanging Holder hereby tenders to the Company all of, and not a partial interest in, the principal amount, together with any accrued and unpaid interest (including any default interest) thereon, of the Old Note. On the Effective Date (defined below), the Company will exchange the Indebtedness represented by the Old Note tendered herewith for a number of shares of Series A Stock determined by dividing the Indebtedness by $100, and rounding up to the nearest whole share of Series A Stock (the "Exchange"). No fractional shares of Series A Stock will be issued for such Old Note. No additional payment will be made for default interest or interest accrued after June 30, 2002 on the Old Note, which is hereby irrevocably waived. Subject to the Exchange, and effective on the Effective Date, the Exchanging Holder hereby tenders, exchanges, assigns, and transfers to, or upon the order of, the Company all right, title, and interest in and to the Old Note and the Indebtedness represented thereby. The Exchanging Holder irrevocably constitutes and appoints James M. Usdan as its attorney-in-fact and agent, with the power of substitution, for the Exchanging Holder in any and all capacities, to transfer the Old Note to the Company as set forth in this Section 1, granting to said attorney-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Exchanging Holder might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, or its substitute, may lawfully do or cause to be done by virtue of this power of attorney. Promptly following the Effective Date and the Company's acceptance of the tender of the Exchanging Holder's Indebtedness represented by the Old Note, the Company will cause to be delivered to the Exchanging Holder certificates issued in the Exchanging Holder's name representing the number of shares of Series A Stock for which such Exchanging Holder's Indebtedness has been exchanged at the address set forth below the Exchanging Holder's name on the signature page of this Agreement. The Exchanging Holder is delivering herewith the original executed copy of the Old Note representing the Indebtedness tendered hereby. In the event the exchange offer is terminated for any reason or the Company rejects the tendered Indebtedness because of a defect in the tender, the Company will promptly return the Old Note to the Exchanging Holder at the address set forth below the Exchanging Holder's name on the signature page of this Agreement. Section 2. Conditions and Effective Date. The Exchange is conditioned upon: (a) 100% of the principal plus accrued and unpaid interest outstanding under the Subordinated Debt being tendered by holders of Subordinated Debt and the execution of an exchange agreement substantially similar to this Agreement by each holder of Subordinated Debt; (b) the Company having entered into the Restructured Credit Agreement; (c) the Senior Subordinated Notes issued pursuant to the Senior Subordinated Note Purchase Agreement dated January 31, 2000 having been exchanged for Series A Stock; (d) the Company having entered into the Forbearance Agreement with Dr. Roisman; (e) the Company having entered into the Settlement Agreements with Jack H. Castle, Jr.; (f) the funding of the $1,700,000 loan to the Company from the New Money Lenders having occurred; and (g) the other customary conditions described under "The Exchange Offer--Conditions to Consummation of the Exchange Offer" in the Memorandum. All of the conditions to Exchange, other than those described under subsections (b) and (c) of this Section 2, may be waived by the Company, in its sole discretion, at any time. Assuming all of the preceding conditions to the Exchange have been satisfied or, if 2 waivable, waived by the Company, the "Effective Date" of the Exchange will occur on the date the Company accepts the tendered Subordinated Debt (which in no event will occur later than the date the Company enters into the Restructured Credit Agreement). Section 3. Release. (a) The Exchanging Holder, on behalf of itself, its affiliates, its successors and assigns, irrevocably and unconditionally releases, relinquishes, waives, and forever discharges the Company, Heller Financial, Inc., Midwest Mezzanine Fund II, L.P. and each of the lenders under the Amended and Restated Credit Agreement dated as of December 18, 1998, as amended, among the Company and Bank of America, N.A., and the other lenders thereto, and each of their respective parents, divisions, subsidiaries, affiliates, and related companies, and their present and former agents, employees, officers, directors, attorneys, advisors, fairness opinion givers, stockholders, plan fiduciaries, successors and assigns (the "Released Parties") forever, from and against any and all claims, debts, obligations, demands, actions, suits, causes of action, costs, fees, and all liability whatsoever, whether known or unknown, fixed or contingent, in contract or in tort, or based on any statute or other law, state or federal (collectively "Claims") which the Exchanging Holder has, had, or may have in the future against the Released Parties, relating to or arising out of or by virtue of the Old Note, the previous failure to pay interest and principal thereon, and the transactions giving rise to the issuance thereof. (b) The Exchanging Holder hereby declares and agrees that, on the Effective Date following the Exchange, the Old Note will be deemed paid in full and in all respects terminated and of no further force or effect. (c) The Exchanging Holder hereby agrees not to bring any claim of any kind against any Released Party concerning any matter released by this Section 3. The Exchanging Holder agrees that this Agreement constitutes a bar to any such future claim. (d) In confirmation of the foregoing, the Exchanging Holder shall, upon the reasonable request of a Released Party, but at no out-of-pocket cost to the Exchanging Holder, execute and deliver such specific or further releases, terminations or other similar instruments in order to more effectively evidence the releases, terminations and other actions made or intended to be made by this Section 3. Section 4. Transfer of Notes. Prior to the termination of the exchange offer by the Company as a result of one or more of the conditions specified in Section 2 not being met or waived by the Company, the Exchanging Holder covenants not to transfer, pledge, hypothecate, assign, or grant an option to otherwise acquire any interest in the Old Note unless the transferee of such Old Note agrees, in writing, to be bound by the terms of this Agreement. Section 5. Registration Rights Agreement. The Exchanging Holder irrevocably constitutes and appoints James M. Usdan as its attorney-in-fact and agent, 3 with the power of substitution, for the Exchanging Holder in any and all capacities, to execute the Registration Rights Agreement between the Company and certain parties listed therein to be entered into in connection with this Agreement by and on behalf of the Exchanging Holder, granting to said attorney-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Exchanging Holder might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, or its substitute, may lawfully do or cause to be done by virtue of this power of attorney. Section 6. Agreement Regarding Conversion. The Exchanging Holder hereby agrees not to convert the shares of Series A Stock issuable to it hereunder into Common Stock until the Company's certificate of incorporation has been amended, until a reverse stock split has been completed, or until another transaction has been completed which, in each case, results in the Company having sufficient authorized shares of Common Stock to permit issuance of authorized shares of Common Stock upon conversion of all of the shares of Series A Stock issued in connection with the Restructuring. Section 7. Headings. The headings of the Sections of this Agreement have been inserted for convenience of reference only, and are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. Section 8. Governing Laws. The laws of the State of Texas shall govern this Agreement. Section 9. Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. Section 10. Investment Representations. The Exchanging Holder represents and warrants to the Company that: (a) It is acquiring the Series A Stock and the Common Stock issuable upon conversion thereof (collectively, the "Offered Securities") for its own account and that it is an accredited investor. (b) It acknowledges that the Offered Securities have not been registered under the Securities Act of 1933 and therefore are not freely tradable. (c) It understands and agrees: (A) that the Company is not offering the Offered Securities in a public offering within the meaning of the Securities Act 1933; and (B) that if it decides to resell, pledge or otherwise transfer the Offered Securities, the Offered Securities may be subject to transfer restrictions which limit who may purchase the securities and impose notification requirements. 4 (d) It understands that a legend will be placed on the certificates for the Offered Securities describing the transfer restrictions applicable to the Offered Securities. (e) It has (A) by reason of its business or financial experience, the capacity to protect its own interests in connection with the transactions contemplated by the Memorandum and this Agreement, (B) in consultation with its accountants, attorneys and financial advisors, such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its prospective investment in the Offered Securities; and (C) adequate means of providing for its current financial needs and contingencies, is able to bear the substantial economic risks of an investment in the Offered Securities, has no need for liquidity in such investment, and is able to withstand a complete loss of such investment. (f) It has received a copy of the Memorandum and acknowledges that it has had access to such financial and other information, and has been afforded the opportunity to ask the Company questions and receive answers thereto, as it deemed necessary in connection with its decision to acquire the Offered Securities. (g) It has read our Annual Report on Form 10-K for the year ended December 31, 2001, and all other materials described in "Where You Can Find More Information" in the Memorandum. (h) It understands that the Company and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that if any of the acknowledgments, representations and agreements deemed to have been made by its acquisition of the Offered Securities are no longer accurate, it will promptly notify the Company. (i) It is not acquiring the Offered Securities with a view to any distribution of the Offered Securities in a transaction that would violate the Securities Act of 1933 or the securities laws of any state of the United States or any other applicable jurisdiction. Section 11. Exchanging Holder Representations. The Exchanging Holder represents that the Exchanging Holder has full power and authority to tender, exchange, assign, and transfer the Old Note and otherwise carry out the transactions contemplated thereby, and that upon the Effective Date, the Company will acquire good title to the Old Note, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, right, or option. The Exchanging Holder acknowledges that the Exchanging Holder understands that, under certain circumstances and subject to the conditions set forth in Section 2, the Company will not accept for Exchange any of the Subordinated Debt. Section 12. Irrevocable. This Agreement shall be irrevocable and survive the death, incapacity, liquidation, bankruptcy, winding up, dissolution or similar event of the Exchanging Holder, and shall be binding upon the Exchanging Holder's heirs, personal 5 representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives. Section 13. Additional Agreements. The Exchanging Holder agrees to execute such other agreements or amendments reasonably requested by the Company in order to carry out the purpose and effect of this Agreement. [Signature Page Follows] 6 Tendered this ___ day of July, 2002. EXCHANGING HOLDER - ----------------------------------- Old Note Name: Principal Amount: ------------------------------ -------------------- Indebtedness: ------------------------- Address: --------------------------- - ----------------------------------- - ----------------------------------- The Tender of the Exchanging Holder's Old Note is Accepted and Agreed To as of the ___ day of July, 2002 Castle Dental Centers, Inc. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 7 EX-10.12 16 dex1012.txt FORBEARANCE AGREEMENT Exhibit 10.12 FORBEARANCE AGREEMENT This Forbearance Agreement (the "Agreement") is dated as of July 17, 2002, by and between Leon D. Roisman, D.M.D, Leon D. Roisman, D.M.D, Inc., a California corporation, and Roisman Acquisition Company, a California corporation (collectively "Roisman"); and CDC of California, Inc, a Delaware corporation (the "Corporation"), and Castle Dental Centers of California, L.L.C., a Delaware limited liability company (the "LLC", and sometimes together with the Corporation collectively referred to as "Castle"). RECITALS WHEREAS Roisman holds a judgment against Castle in LACSC Case # BS058068 dated as of October 23, 2000, in the initial amount of $1,108,210.62 plus interest at 10% (ten percent) per annum from the date of the judgment (approximately $1,294,114.45 as of June 24, 2002); which amounts are currently due and owing by Castle to Roisman (the amount of such judgment plus interest thereon outstanding at any time is hereinafter defined as the "Claim" or the "Roisman Claim"); and WHEREAS Roisman asserts that he holds a valid and perfected Judgment Lien against certain assets of the Corporation and the LLC, which Judgment Lien secures the Claim; and WHEREAS the Bank Group, as defined in Paragraph 11 below, asserts that it holds valid and perfected liens against certain assets of the Corporation and the LLC, which liens secure the claims of the Bank Group against the Corporation, the LLC and certain affiliated entities (the "Bank Group Claims"); and WHEREAS litigation is ongoing by Roisman against Castle to collect the Claim and/or enforce the Judgment Lien asserted by Roisman against certain assets of the Corporation and the LLC; and WHEREAS the parties hereto have negotiated the terms of an agreement under which Roisman will forbear from further efforts to collect, realize and enforce his Claim and the asserted Judgment Lien. NOW therefore, the parties hereto, having exchanged good, valuable and adequate consideration, the sufficiency of which is acknowledged, agree as follows: AGREEMENTS 1. ROISMAN FORBEARANCE. Roisman shall forbear from pursuing and exercising any of his rights remedies and recourse against the Corporation and the LLC or their respective assets or affiliates, whether such rights and remedies exist at law or in equity, so long as there is no uncured breach by Castle of its undertakings to Roisman under this Agreement or this Agreement otherwise provides. The period of such forbearance by Roisman shall be defined as the "Forbearance Period". 2. PAYMENTS. In exchange for the forbearance by Roisman as described in Paragraph 1 above, Castle shall make payments to Roisman as set forth in this Paragraph 2 and otherwise perform certain undertakings as set forth herein. a. As a condition to the effectiveness of this Agreement (as described in Paragraph 11), Castle shall pay Roisman, by wire transfer to an account specified in writing by Roisman, $100,000.00, to be applied first to outstanding and unpaid interest on the Claim and then to principal on the Claim. b. Thirty (30) days after the payment described in Paragraph 2 a. above (or if any such date is not a business day, on the first business day thereafter), Castle shall commence making consecutive monthly payments to Roisman, by wire transfer to an account specified in writing by Roisman, in the amount of $30,000.00 per month for twenty-three months on the same date of -2- each such month as the first payment to be made under this paragraph. Each such payment shall be applied first to outstanding and unpaid interest and then to principal on the Claim. c. Thereafter, Castle shall pay consecutive monthly payments to Roisman, by wire transfer to an account specified in writing by Roisman, in the amount of $25,000 per month (or such lesser amounts for the last payment as may be necessary to pay the Claim in full) on the same date of each such month as the payments to be made under paragraph 2(b) until such time as the Claim is paid in full. Each such payment shall be applied first to outstanding and unpaid interest and then to principal on the Claim. d. Castle may, at any time, in lieu of making periodic payments, pay Roisman the full amount of the Claim, without penalty. e. Providing that no case under Title 11 of the United States Code has been commenced by or against Castle, and that no common law assignment for the benefit of creditors has been made by Castle, one hundred days following full payment of the Claim, Roisman shall execute a full and complete release in favor of Castle in respect of the Claim and such release of liens and other documents as shall be required by Castle to effect a release of the Judgment Lien. 3. TOLLING OF STATUTES OF LIMITATION. Castle, Roisman and the Bank Group, as defined in Paragraph 11 below, agree to the tolling of any unexpired statute of limitations period with respect to the Claim (including, but not limited to, the statute of limitations period in which Roisman could seek to avoid the alleged lien of the Bank Group against any or all of the assets of Castle) and any rights or claims held by such party with respect thereto for a period of 60 (Sixty) days after the Forbearance Period terminates, if such period terminates other than through the full and final payment of the Claim by Castle. 4. OTHER AGREEMENTS. The parties hereto further agree as follows: -3- a. During the pendency of this Agreement, there shall not be any new pledge or other encumbrance of the stock of the Corporation or of the equity interest in the LLC. b. During the pendency of this Agreement, the Corporation shall be maintained in good standing and Castle shall operate in the ordinary course of business. c. During the pendency of this Agreement, Castle shall deliver to Roisman the financial statements that are required to be provided to the Bank Group pursuant to the restructured Credit Agreement (as defined in Paragraph 11 below) at the same time as such information is provided to the Bank Group. d. Any amount owing on the Claim shall be fully paid from the proceeds of the sale of either the Corporation or the LLC, or their respective assets, provided that Roisman is determined to have a valid non-voidable security interest in and to any of such assets sold and the proceeds thereof, and that the priority of Roisman's security interest entitles him to receive such proceeds; provided further that the transactions contemplated by the Fozoonmehr Agreement (as defined below) shall not be deemed to be such a sale. Castle shall give Roisman twenty (20) days notice of any scheduled closing of such a sale. Upon the closing of such sale, the "Forbearance Period" shall terminate. Nothing in this Paragraph is intended to nor shall be deemed to release Roisman's Judgement Lien on any of the assets of the Corporation or the LLC, or as a consent to the sale of any or all of such assets (other than a sale whereby the Roisman Judgement Lien is fully paid off to Roisman), even if such Judgement Lien is junior to the lien of a creditor whose claim is larger than the projected purchase price of any sale of any or all of such assets. -4- e. Castle shall provide twenty (20) days notice of any transfer of a Castle asset valued at $100,000 or more, but such notice obligation shall exclude assets transferred in the ordinary course of business or as ordinary course payment on debts to Castle lenders existing at the time of execution of this Agreement. f. There shall be a five (5) day cure period after written notice by Roisman to Castle of a default under this Agreement. If the default remains uncured or is not waived by Roisman, the Forbearance Period shall automatically terminate. g. It will be an event of default under this Agreement if there is an event of default under any separate forbearance agreement that may be entered into by and among Castle, Castle affiliate(s), and the Bank Group on or after the date hereof ("Bank Group Forbearance Agreement"). Castle shall give Roisman immediate written notice of any event of default under the Bank Group Forbearance Agreement. Moreover, it shall be an event of default under this Agreement if the Bank Group commences any action to enforce its remedies against the assets of Castle on account of its alleged lien against Castle, the Corporation, or the LLC. h. It shall be an event of default if from and after the date of this Agreement, any liens junior to that of Roisman attach to any of the assets of Castle, the Corporation, or the LLC; provided, however, that notwithstanding anything to the contrary contained herein, the existence of any liens on or security interests in any of the current or hereafter acquired assets of Castle, the Corporation or the LLC to secure any claims and indebtedness of Castle to the Bank Group, under the Credit Agreement, as defined in Paragraph 11 below, or to any successors or assigns of the Bank Group with respect to the Credit Agreement and its related documents, shall not constitute an event of default under this Agreement. Nothing in this -5- Paragraph or in this Agreement is intended to nor shall be deemed to change the status quo between Roisman and the Bank Group in respect of the relative priorities of their liens on any of the assets of the Corporation or the LLC. i. Shahram Fozoonmehr, D.D.S., Inc. and Shahram Fozoonmehr, D.D.S. (collectively, "Fozoonmehr"), and the Corporation have entered into a Memorandum of Understanding dated May 30, 2002 (the "Fozoonmehr Agreement"). The Fozoonmehr Agreement requires Fozoonmehr to: (x) pay the Corporation $500,000 by October 1, 2002 or (y), if such payments are not paid in full by such date, enter into a stipulated judgement requiring Fozoonmehr to pay the unpaid amounts to the Corporation and surrender to the Corporation possession, right, title and interest to the professional and nonprofessional assets of the dental practice located at 16607 Hawthorne Blvd., Lawndale, California 90260 (the "Hawthorne Practice"). $50,000 of the amount owing under the Fozoonmehr Agreement has previously been paid to Roisman and shall be credited against amounts otherwise owed hereunder by Castle and shall be applied first to outstanding and unpaid interest and then to principal due on the Claim. Castle and each member of the Bank Group hereby agree not to challenge in any manner Roisman's right to retain such $50,000 payment. Castle, the Bank Group and Roisman hereby agree that any further proceeds of the Fozoonmehr Agreement, including the Hawthorne Practice (collectively, the "Fozoonmehr Proceeds"), shall be paid and delivered one-half to Roisman and one-half to the Bank Group, subject to the prior payment of legal fees of no more than $50,000 to Castle's attorneys, Miller & Holguin, who claim a security interest in the Fozoonmehr Proceeds. In the event that Miller & Holguin's fees secured by the -6- Fozoonmehr Proceeds exceed $50,000, Castle shall pay and be solely responsible for payment of such excess and shall indemnify and hold harmless Roisman and the Bank Group from any claim regarding such excess. The value of the Hawthorne Practice shall be as set forth in the Fozoonmehr Agreement. Prepayments of the Claim under this Paragraph 4 shall not affect the payment schedule set forth in Paragraph 2 until the Claim has been paid in full. In no event shall the forbearance agreed to in Paragraph 1 prohibit Roisman from taking the actions necessary to pursue the Fozoonmehr Proceeds in accordance with this Paragraph 4(i). 5. TERMINATION OF AGREEMENT. This Agreement shall terminate at the time of full payment of the Roisman Claim or at the earlier termination of the Forbearance Period as set forth herein. 6. RESERVATION OF RIGHTS; TOLLING. Roisman and the Bank Group hereby acknowledge and agree that (i) the Bank Group and Roisman and any of their respective successors and assigns with respect to the Credit Agreement, reserve all of their respective rights, remedies, claims, causes of action and defenses in respect to the Roisman Claim or the Bank Group Claim or otherwise, (ii) nothing herein shall in any way waive, limit or modify such respective rights, remedies, claims, causes of action and defenses with respect to the Roisman Claim or the Bank Group Claims or otherwise, and (iii) any applicable statutes of limitations and periods of laches, waiver or estoppel relating to such respective rights, remedies, claims, causes of action or defenses with respect to the Roisman Claim, the Bank Group Claim or otherwise are hereby tolled from the date hereof through and including the date of termination of the Forbearance Period. Castle shall notify Roisman and the Bank Group in writing of any breach of or default under this Agreement or any termination of the Forbearance Period. -7- 7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the rules of conflict of laws of the State of California or any other jurisdiction. 8. EXPENSES. All costs and expenses incurred in connection with this Agreement shall be borne by and paid by the party incurring such costs and expenses. 9. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of the parties hereto. 10. COUNTERPARTS AND EFFECTIVENESS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which shall constitute the same agreement. This Agreement shall be effective after each party signs this Agreement and the condition precedent set forth in Paragraph 11 hereto has been timely satisfied. 11. CONDITION TO EFFECTIVENESS OF AGREEMENT. Contemporaneously with the restructuring of the Credit Agreement, as defined below: (a) the Bank Group shall execute and deliver to Roisman and Castle an instrument evidencing the consent of the Bank Group to Castle entering into this Agreement and performing its undertakings hereunder and the Bank Group agreeing to the Tolling Provisions contained in Paragraphs 3 and 6 of this Agreement and (b) Castle shall make the initial $100,000 payment to Roisman required by Paragraph 2(a) above. For the purposes of this Agreement, the "Bank Group" shall mean: Bank of America, N. A., as Agent for the Bank Group, Banc of America Strategic Solutions, Inc., Fleet National Bank, Amsouth Bank and Heller Financial, Inc. as lenders under that certain Amended and Restated Credit Agreement dated December 18, 1998 as amended on July 20, 1999, September 30, 1999, October 31, 1999 and January 31, 2000 (the "Credit Agreement"). Notwithstanding anything to the contrary herein, this Agreement shall be void and of no effect if the restructuring of the -8- Credit Agreement has not been fully executed and effective, the initial $100,000 payment has not been paid, and this Agreement has not otherwise become effective, on or before July 31, 2002. 12. SUCCESSORS AND ASSIGNS. This Agreement is binding on the parties hereto and their respective successors and assigns. 13. NOTICES. All notices, claims, demands and other communications hereunder shall be in writing and shall be deemed given upon (a) confirmation of receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand, or (c) the expiration of five (5) business days after the day when mailed by registered or certified mail (postage prepaid, return receipt requested), addressed to the respective parties at the following addresses (or such other address for a party as shall be specified by like notice): (a) If to Castle, to: CDC of California, Inc. Castle Dental Center of California, LLC 3701 Kirby Drive, Suite 550 Houston, Texas 77098 Attn: Chief Financial Officer Telecopy: (713) 490-8415 with copies to: Haynes and Boone, LLP 1000 Louisiana, Suite 4300 Houston, Texas 77002-5012 Telecopy: (713) 236-5405 Attention: Lenard M. Parkins (b) If to Roisman: Leon D. Roisman 310 S. Lake Avenue Pasadena, CA 91101 Telecopy: (626) 432-4270 -9- with copies to: Kirkland & Ellis 777 South Figueroa Street Los Angeles, CA 90017 Telecopy: (213) 680-8500 Attention: Bennett L. Spiegel 14. AUTHORITY. Each party hereby represents to each of the other parties that: (a) such party has all necessary power and authority to execute, deliver and perform its respective obligations under this Agreement; (b) the execution, delivery and performance by such party of its obligations under this Agreement have been duly authorized by all necessary corporate action on its part; (c) the person executing this Agreement on such party's behalf is duly authorized to do so; and (d) this Agreement constitutes the legal, valid and binding obligation of such party enforceable in accordance with its terms. -10- Signed and executed by the parties hereto as of the date first set forth above. Leon D. Roisman, D.M.D. CDC of California, Inc. /s/ Leon D. Roisman, D.M.D. By: /s/ John M. Slack - ------------------------------- ---------------------------------------- Its: Vice President ------------------------------------- Leon D Roisman, D.M.D., Inc. Castle Dental Centers of California, L.L.C. By: /s/ Leon D. Roisman, D.M.D. By: /s/ John M. Slack ---------------------------- ------------------------------------- Its: Chief Executive Officer Its: Vice President ---------------------------- ------------------------------------- Roisman Acquisition Company By: /s/ Leon D. Roisman, D.M.D. ---------------------------- Its: Chief Executive Officer --------------------------- -11- EX-10.13 17 dex1013.txt SETTLEMENT AGREEMENT Exhibit10.13 SETTLEMENT AGREEMENT THIS AGREEMENT dated as of the 12th day of June, 2002, is between Jack H. Castle, D.D.S., an individual who resided in Harris County, Texas, and the Estate of Jack H. Castle, D.D.S. (collectively, the "Seller"), Castle Dental Centers, Inc., a Delaware corporation ("Castle Dental"), Castle Dental Centers of Texas, Inc., a Texas corporation ("Castle Texas"), and Castle Dental Associates of Texas, P.C. (formerly Jack H. Castle, D.D.S., P.C.), a Texas professional corporation (the "Company"), Castle Interests, Ltd. ("Castle Interests") and Loretta M. Castle ("Mrs. Castle"). The Seller, Castle Interests, Mrs. Castle, Castle Dental, Castle Texas and the Company hereby agree as follows: 1. Effectiveness of Agreement. All of the parties' obligations under this Agreement shall be subject to and dependent upon the approval of this Agreement by Castle Dental's board of directors and by Castle Dental's senior lenders (the "Senior Lenders"). Consequently, unless and until Castle Dental notifies Seller in writing that it has received the approval of its board of directors and the Senior Lenders (the "Effective Date"), this Agreement will not be binding on any of the parties hereto. Castle Dental hereby agrees to submit this Agreement to its board of directors and to the Senior Lenders for approval forthwith upon its execution and to diligently seek such approvals. If the Effective Date does not occur on or before June 30, 2002, any of the parties hereto may terminate this Agreement by delivery of written notice to the other parties and thereafter this Agreement will be void and of no further force and effect. 2. Representations and Warranties of the Seller. The Seller represents and warrants to and agrees with Castle Dental that: (a) Authority of the Seller. This Agreement, upon execution and delivery in accordance with its terms, will represent the valid, binding and enforceable obligation of the Seller in accordance with its terms. (b) No Conflict. The consummation of the transactions contemplated by this Agreement will not result in the breach of or constitute a default under any agreement, instrument, law or court decree to which the Seller is a party or by which the Seller is bound. 3. Covenants and Agreements. (a) Trademarks/ Service Marks/ Tradenames. Seller acknowledges that Castle Dental owns all rights in and to the trademarks, service marks, and 1 trade names "Castle Dental Centers", "The Castle" and "Jack H. Castle, D.D.S., P.C." and all logos heretofore used in connection with those marks and names. Seller agrees not to (a) challenge the validity of Castle Dental's exclusive rights in such names and marks at any time or in any context or forum or (b) use such marks in a manner that infringes upon such marks. Seller covenants and agrees that any and all advertising using the term "Castle" prior to the date of this Agreement was pursuant to a license from Castle Dental and that all such prior use inured to the benefit of Castle Dental. (b) Settlement. The parties have agreed to settle finally and forever any and all claims between them of any nature whatsoever from any and all liability or damages of any kind, known or unknown, in contract or in tort. Seller, Castle Dental and Castle Texas agree that (x) each of the Continuing Agreements (as defined below) remains in full force and effect, (y) none of them is aware of the breach by any party of any of the parties' obligations under the Continuing Agreements and (z) that the provisions of this Agreement and the circumstances surrounding the termination of Seller's service on the board of directors of Castle Dental do not constitute a breach of the terms of any of the Continuing Agreements or of any other obligation, contract, agreement or understanding between the Company, Castle Dental, Castle Texas and Seller. Seller acknowledges that he has been provided drafts of the term sheets detailing the terms of the proposed restructuring of Castle Dental's senior secured debt and subordinated debt (the "Restructuring") and he understands that his and his affiliates' common stock in Castle Dental will be subject to severe, immediate and irreversible dilution upon the consummation of the transactions contemplated by the Restructuring, with all currently outstanding common stock of Castle Dental to represent less than 7.5% of the fully diluted common equity of Castle Dental following the Restructuring. (c) Agreement not to Sue. Except only to enforce the terms of this Agreement, each party agrees not to bring any claim of any kind against the other party to this Agreement concerning any matter released by this Agreement. Each party further agrees that this Agreement constitutes a bar to any such future claim. (d) Continuing Agreements. The following agreements shall remain in full force and effect following the Effective Date: (1) the Indemnity Agreement dated as of December 18, 1995, between Seller and Castle Dental (the "Indemnity Agreement"); (2) the Amended and Restated Registration Rights Agreement dated as of June 16, 1997, by and among Castle Dental, Delaware State Employees' Retirement Fund, Declaration of Trust For Defined Benefit Plan of ICI American Holdings Inc., Declaration of Trust for Defined Benefit Plan of Zeneca Holdings Inc., Jack H. Castle, Jr., as Trustee of the Castle 1995 2 Gift Trust F/B/O Jack H. Castle, Jr., Castle Interests, Ltd., Lisa G. Castle Donnell, as Trustee of the Castle 1995 Gift Trust F/B/O Lisa G. Castle Donnell, Seller, Loretta M. Castle, and Gulfstar Investments, Ltd. (the "Registration Rights Agreement"); and (3) the Stockholders Agreement dated as of January 31, 2000, by and among Castle Dental, Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., Delaware State Employees' Retirement Fund, Declaration of Trust For Defined Benefit Plan of ICI American Holdings Inc., Declaration of Trust for Defined Benefit Plan of Zeneca Holdings Inc., Jack H. Castle, Jr., Jack H. Castle, Jr., as Trustee of the Castle 1995 Gift Trust F/B/O Jack H. Castle, Jr., Castle Interests, Ltd., Seller, Loretta M. Castle, and Gulfstar Investments, Ltd. (the "Stockholders Agreement" and, together with the Indemnity Agreement and the Registration Rights Agreement, the "Continuing Agreements"). Mrs. Castle, on her own behalf, Castle Interests, on its own behalf, and Seller, on his own behalf and on behalf of his heirs, assigns and affiliates, hereby consents to Castle Dental, upon the consummation of the Restructuring: (a) entering into a registration rights agreement with the persons receiving equity interests in Castle Dental in connection with the Restructuring, which registration rights are superior to and in conflict with those granted to Mrs. Castle, Castle Interests and Seller and his heirs, assigns and affiliates pursuant to the Registration Rights Agreement, (b) amending the Registration Rights Agreement to eliminate the demand registration rights provided for therein and (c) terminating the Stockholders Agreement. (e) Confidentiality. The parties agree the terms and conditions of this Agreement shall be confidential, and that no party shall disclose any part of this Agreement except (i) as required by subpoena or otherwise by law or (ii) to either party's accountants, tax preparers, legal counsel or financial advisors. (f) Release. In consideration of the terms and provisions of this Agreement, except only to enforce his rights under this Agreement, the Asset Purchase Agreement (as defined below) and the Continuing Agreements, Seller on behalf of himself, his affiliates, his heirs, executors, successors and assigns, forever releases the Company, Castle Dental, Castle Texas, the lenders under that certain Amended and Restated Credit Agreement dated as of December 18, 1998, as amended (the "Credit Agreement"), by and among Castle Dental, Bank of America, N.A., as agent ("Agent") and the lenders who are parties thereto, and Heller Financial, Inc. and Midwest Mezzanine Fund II, L.P. and each of their respective parents, divisions, subsidiaries, affiliates, and related companies, and their present and former agents, employees, officers, directors, attorneys, advisors, fairness opinion givers, stockholders, plan fiduciaries, successors and assigns (collectively, the "Company Releasees"), from any and all claims, debts, obligations, demands, actions, causes of action, costs, fees, and all liability whatsoever, whether known or unknown, fixed or contingent, in 3 contract or in tort, or based on any statute or other law, state or federal (collectively, "Claims"), which Seller has, had, or may have in the future against the Company Releasees relating to or arising out of (1) Seller's employment by or services as an officer or director of the Company, Castle Dental or any subsidiary of Castle Dental whether arising on or prior to the date of this Agreement under the common law or federal or state statutory law, whether known or unknown, including, but not limited to, any law which prohibits discrimination on the basis of sex, race, age, national origin, veteran status, or any other form of discrimination and (2) any Claim in any way related to Seller's employment with, or service as a director of, the Company, Castle Dental or Castle Texas or the circumstances in which that service ended. In addition, except only to enforce his rights under this Agreement, effective upon the tender on or prior to August 31, 2002, by Castle Texas and the Company of the Assets (as defined in the Asset Purchase Agreement of even date herewith between Dentists Choice 1 L.P., Jack H. Castle, Jr., Texas Dental Associates, P.A., Castle Texas and the Company (the "Asset Purchase Agreement")) in accordance with the provisions of the Asset Purchase Agreement, Seller on behalf of himself, his affiliates, his heirs, executors, successors and assigns, shall and hereby does forever release the Company Releasees from any and all Claims which Seller has, had, or may have in the future against the Company Releasees relating to or arising out of (1) the Deferred Compensation Agreement between Seller and Castle Dental dated December 18, 1995, (2) implementation of any of the transactions, agreements, or stock and/or debt issuances contemplated by the proposed Restructuring, as it may be amended from time to time, including claims for breach of fiduciary duty, including the duties of loyalty and care, or claims for breach of any other duty or obligation of any of the Company Releasees owed or allegedly owed to Seller, his affiliates, any other equity or debt holders in Castle Dental or any other constituency or stakeholder group of Castle Dental or (3) any other act or omission by any Company Releasee other than those expressly excepted herein which occurred on or prior to the effective date of this release. In consideration of the terms and provisions of this Agreement, except only to enforce its rights under this Agreement, the Asset Purchase Agreement and the Continuing Agreements, Castle Dental, Castle Texas and the Company forever release Seller from any claims, debts, obligations, and causes of action of any kind arising on or prior to the date of this Agreement relating to Seller's employment with, or service as a director of, the Company, Castle Dental or Castle Texas, under the common law or federal or state statutory law, whether known or unknown. (g) Insurance. Castle Dental hereby agrees that in the event the Company is voluntarily dissolved or otherwise voluntarily ceases to exist, that Castle Dental shall, prior to such event, purchase a "tail" malpractice insurance policy for the benefit of Seller insuring all actions or omissions that may have occurred prior to such event. In addition, for a period of three years following the 4 Closing Date, Castle Dental shall take such actions as are necessary to have Seller named as an additional insured on the Company's malpractice insurance policies. 4. Indemnification. (a) Indemnification of the Seller. Castle Dental, Castle Texas and the Company, from and after the Closing Date, jointly and severally, shall indemnify and hold Seller and his affiliates (the "Seller Indemnitees") harmless from and against any and all damages (including exemplary damages and penalties, losses, deficiencies, costs, expenses, obligations, fines, expenditures, claims and liabilities, including reasonable counsel fees and reasonable expenses of investigation, defending and prosecuting litigation (collectively, the "Damages"), suffered by any Seller Indemnitee as a result of, caused by, arising out of, or in any way relating to (a) any misrepresentation, breach of warranty, or nonfulfillment of any agreement or covenant on the part of Castle Dental, Castle Texas or the Company under this Agreement, (b) any liability or obligation (other than those for which the Company is being indemnified by Seller and the Shareholder hereunder) which pertains to the ownership, operation or conduct of the business of the Company arising from any acts, omissions, events, conditions or circumstances occurring prior to, on or after the Closing Date. The obligations of Castle Dental, Castle Texas and the Company hereunder are in addition to, and not in lieu of, any other indemnifications such persons may have to Seller Indemnitees. (b) Indemnification of Castle Dental, Castle Texas and the Company. Seller shall indemnify and hold Castle Dental, Castle Texas, the Company and their respective officers, directors, agents, employees, shareholders and affiliates (the "Company Indemnitees") harmless from and against any and all Damages suffered by any Company Indemnitee as a result of, caused by, arising out of, or in any way relating to any misrepresentation, breach of warranty, or nonfulfillment of any agreement or covenant on the part of the Seller under this Agreement. (c) Demands. Each indemnified party hereunder agrees that promptly upon its discovery of facts giving rise to a claim for indemnity under the provisions of this Agreement, including receipt by it of notice of any demand, assertion, claim, action or proceeding, judicial or otherwise, by any third party (such third party actions being collectively referred to herein as the "Claim"), with respect to any matter as to which it claims to be entitled to indemnity under the provisions of this Agreement, it will give prompt notice thereof in writing to the indemnifying party, together with a statement of such information respecting any of the foregoing as it shall have. Such notice shall 5 include a formal demand for indemnification under this Agreement. The right to indemnification hereunder shall not be affected by any failure to give the indemnifying party such notice or delay in giving the indemnifying party such notice unless, and then only to the extent that, the rights and remedies of the indemnifying party shall have been actually prejudiced as a result of the failure to give, or delay in giving, such notice. (d) Right to Contest and Defend. The indemnifying party shall be entitled at its cost and expense to contest and defend by all appropriate legal proceedings any Claim with respect to which it is called upon to indemnify the indemnified party under the provisions of this Agreement; provided, that notice of the intention so to contest shall be delivered by the indemnifying party to the indemnified party within 20 days from the date of receipt by the indemnifying party of notice by the indemnified party of the assertion of the Claim. Such contest shall be conducted by reputable counsel employed by the indemnifying party, but the indemnified party shall have the right but not the obligation to participate in such proceedings and to be represented by counsel of its own choosing at its sole cost and expense. The indemnifying party shall have full authority to control such litigation; provided, however, that the indemnifying party will not have the authority to subject the indemnified party to any obligation whatsoever, other than the performance of purely ministerial tasks or obligations not involving material expense. If the indemnifying party does not elect to contest any such Claim, the indemnifying party shall be bound by the result obtained with respect thereto by the indemnified party. At any time after the commencement of the defense of any Claim, the indemnifying party may request the indemnified party to agree in writing to the abandonment of such contest or to the payment or compromise by the indemnified party of the asserted Claim, whereupon such action shall be taken unless the indemnified party determines that the contest should be continued, and so notifies the indemnifying party in writing within 15 days of such request from the indemnifying party. If the indemnified party determines that the contest should be continued, the indemnifying party shall be liable hereunder only to the extent of the amount that the other party to the contested Claim had agreed unconditionally to accept in payment or compromise (with such payment to consist of the entire remedy against the indemnified party) as of the time the indemnifying party made its request therefor to the indemnified party. (e) Cooperation. If requested by the indemnifying party, the indemnified party agrees to cooperate with any reasonable requests by the indemnifying party and its counsel in contesting any Claim that the indemnifying party elects to contest or, if appropriate, in making any counterclaim against the person asserting the Claim, or any cross-complaint against any person, and the indemnifying party will reimburse the indemnified 6 party for any expenses incurred by it in, and indemnify the indemnified party for any Damages incurred as a result of, so cooperating. At no cost or expense to the indemnified party, the indemnifying party shall cooperate with the indemnified party and its counsel in contesting any Claim. (f) Right to Participate. To the extent permitted by law and unless counsel to the indemnified party advises otherwise, the indemnified party agrees to afford the indemnifying party and its counsel the opportunity to be present at, and to participate in, conferences with all persons, including governmental authorities, asserting any Claim against the indemnified party or conferences with representatives of or counsel for such persons. (g) Payment of Damages. The indemnifying party shall pay to the indemnified party in immediately available funds any amounts to which the indemnified party may become entitled by reason of the provisions of this Agreement, such payment to be made within five days after any such amounts are finally determined either by mutual agreement of the parties hereto or pursuant to the final unappealable judgment of a court of competent jurisdiction. 5. Miscellaneous. (a) No modification to any provisions contained in this Agreement shall be binding upon any party unless made in writing and signed by both parties. (b) If any provision of this Agreement is held to be unenforceable for any reason, the remaining parts of the Agreement shall remain in full force and effect. (c) Each party represents he or it has not assigned any portion of the claims released under this Agreement to any third party. (d) This Agreement shall be construed in accordance with Texas law. (e) Except as expressly set forth in this Agreement, this Agreement constitutes a single, integrated written contract expressing the entire agreement of the parties to this Agreement. Any other agreements, discussions, promises, and representations (other than the Continuing Agreements) have been and are integrated into and superseded by this Agreement. (f) Each party has fully considered this Agreement. Each recognizes that no facts can ever be known with certainty and that no representations or 7 warranties other than as set forth in this Agreement have been made to induce this Agreement. (g) With respect to Seller, this Agreement shall also bind and inure to the benefit of his heirs and assigns. With respect to the Company, Castle Dental and Castle Texas, this Agreement shall also bind and inure to the benefit of any affiliated entities, successor-in-interests, or assigns. The Company and Seller each specifically acknowledges and agrees that the rights and benefits of Castle Dental and Castle Texas under this Agreement may be assigned by Castle Dental and/or Castle Texas to Agent, as collateral security for certain obligations and indebtedness of Castle Dental and/or Castle Texas arising under the Credit Agreement, and the "Security Instruments" as defined therein. (h) In the event that any party should bring any action to enforce any term of this Agreement, the party who does not prevail in any such action shall pay all the reasonable attorneys' fees and costs incurred by all other parties because of the action. (i) The parties agree that the terms of this Agreement are the result of negotiations between the parties, and constitute a final accord and satisfaction concerning all disputes both between Seller and the Company, Castle Dental and Castle Texas. (j) Seller expressly warrants and represents and does hereby state and represent that no promise or agreement which is not herein expressed has been made to him in executing this Agreement, and that Seller is not relying upon any statement or representation of any agent of the parties being released hereby. Seller is relying on his own judgment and acknowledges that he has been represented by competent legal counsel in this matter. The aforesaid legal counsel has read and explained to Seller the entire contents of this Agreement, as well as the legal consequences of the releases contained herein. (k) Except as expressly stated herein, no party to this Agreement admits the existence of any liability or wrongdoing, and all such liability is expressly denied. (l) The parties each agree that neither shall disparage the other to any third party at any time. (m) No failure by any party hereto at any time to give notice of any breach by another party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 8 9 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written. CASTLE DENTAL ASSOCIATES OF TEXAS, P.C. By: /s/ Mashalah Ameri ------------------------------ Mashalah Ameri, D.D.S., President JACK H. CASTLE, D.D.S., AND THE ESTATE OF JACK H. CASTLE, D.D.S. By: /s/ Loretta M. Castle ---------------------------------- Loretta M. Castle, in her capacity as Executrix of the Estate of Jack H. Castle, D.D.S. /s/ Loretta M. Castle ---------------------------- Loretta M. Castle, Individually CASTLE INTERESTS, LTD. By: /s/ Jack H. Castle, Jr. --------------------------------- Jack H. Castle, Jr., General Partner By: /s/ Loretta M. Castle ------------------------------- Loretta M. Castle, General Partner By: /s/ Loretta M. Castle ------------------------------- Loretta M. Castle, in her capacity as Executrix of the Estate of Jack H. Castle, D.D.S., General Partner CASTLE DENTAL CENTERS OF TEXAS, INC. By: /s/ James M. Usdan ------------------------------- James M. Usdan, President and Chief Executive Officer CASTLE DENTAL CENTERS, INC. 10 By: /s/ James M. Usdan ---------------------------------- James M. Usdan, President and Chief Executive Officer 11 EX-10.14 18 dex1014.txt SEVERANCE AGREEMENT Exhibit 10.14 SEVERANCE AGREEMENT 1. The parties to this Severance Agreement ("Agreement") are: (a) Jack H. Castle, Jr., an individual residing in Harris County, Texas ("Castle"); (b) Castle Dental Centers, Inc., a Delaware corporation ("Company"); (c) Goforth, Inc., a Texas corporation ("Goforth"), and Castle 1995 Gift Trust F/b/o Jack H. Castle, Jr. (the "Trust"). 2. The Company employed Castle as its Chairman of the Board until June 30, 2001. Castle also served as director of all of the Company's wholly owned subsidiaries. Prior to February 15, 2001, Castle served as Chief Executive Officer of the Company and Chief Executive Officer and President of its wholly owned subsidiaries. All references in this Agreement to the Company shall be deemed to include, unless the context otherwise requires, all of the subsidiaries of the Company. On April 8, 2002, Castle resigned from all of his positions as officer and/or director of the Company and each of its subsidiaries. 3. The parties have agreed to settle finally and forever any and all claims between them of any nature whatsoever from any and all liability or damages of any kind, known or unknown, in contract or in tort, including without limitation: (a) Castle's employment by the Company, including, but not limited to, any event occurring during the time the Company employed Castle and the circumstances in which that employment ended, (b) any existing obligation, contract, agreement or understanding between Castle and the Company other than pursuant to the Continuing Agreements (as defined below), (c) any existing obligation, contract, agreement or understanding between any entity controlled by Castle ("Affiliate") and the Company or any subsidiary of the Company, (d) the proposed restructuring of the Company's outstanding indebtedness (the "Restructuring"), and (e) any action by the Company or its agents, employees, officers and directors, unless otherwise expressly excepted herein. Castle and the Company agree that (x) each of the Continuing Agreements remains in full force and effect, (y) neither of them is aware of the breach by any party of any of the parties' obligations under the Continuing Agreements and (z) that the provisions of this Agreement and the circumstances surrounding the termination of Castle's employment do not constitute a breach of the terms of any of the Continuing Agreements or of any other obligation, contract, agreement or understanding between (A) the Company and Castle or (B), other than the Goforth Agreements (as defined below), any Affiliate and the Company. Castle acknowledges that he has been provided drafts of the term sheets detailing the terms of the Restructuring of the Company's senior secured debt and subordinated debt and he understands that his and his Affiliates' common stock in the Company will be subject to severe, immediate and irreversible dilution upon the consummation of the transactions contemplated by the Restructuring, with all currently outstanding common stock of the Company to represent less than 7.5% of the fully diluted common equity of the Company following the Restructuring. 1 4. The parties agree that Castle has received all sums owing to him by the Company for salary and benefits through the termination of his employment as chairman of the board of the Company on June 30, 2001. From July 1, 2001 through February 2002, the Company has previously paid Castle Severance Payments (as defined below) of $170,806.77 (in increments of $21,147.50 per month), with the last check having been dated March 8, 2002, and has reimbursed him for certain expenses. 5. In consideration for the terms of this Agreement, the Company shall: (a) from July 1, 2001 through June 30, 2002 (the "Payment Period"), bring current suspended payments (beginning with the payment due March 22) no later than five business days following the Effective Date (as defined below) and thereafter continue to pay to Castle as severance payments (the "Severance Payments") $21,147.50 per month, less normal tax and other withholdings, payable (following the Effective Date (as defined below)) in accordance with the Company's usual payment procedures (with full credit against this obligation for the Severance Payments previously paid as described in paragraph 4 above); (b) following the Effective Date during the Payment Period (x) pay the party entitled thereto the amount of his COBRA payments necessary to keep his existing health insurance with the Company in place and (y) no later than five business days following the Effective Date bring current and thereafter continue to pay the rent and other amounts owing to Goforth on the West Loop Lease (as defined below) (which includes a property tax shortfall for 2001, of $3,467.10, and for the first three months of 2002, of $866.79, plus full lease payment and full property tax beginning April 2002, of $16,017.67 per month), (c) forgive as of the Effective Date the advances from the Company to Castle in the amount of $45,000; (d) allow Castle to keep, and, upon the Effective Date, does hereby transfer to him, the Company computer and related equipment that he has in his home; (e) upon the Effective Date, pay, in settlement of all claims for reimbursement of expenses incurred on the Company's behalf, the amount of $5,619.31 directly to American Express, and the sum of $2,962.69 directly to Castle as reimbursement for previously submitted expenses; and (f) subject to the prior approval of Bank of America, N.A., as agent for the Company's senior lenders (the "Senior Lenders"), and no later than the 30th day following the closing of the proposed restructuring of the Company's debt with the Senior Lenders, sell to Castle certain of the assets related to the Company's two Corpus Christi, Texas offices and one Beaumont, Texas office (the "Corpus/Beaumont Assets") in accordance with the terms of an Asset Purchase Agreement substantially in the Form of Exhibit A hereto ("Asset Purchase Agreement"). Upon the Effective Date, the Company shall assign all of its rights in and to the split dollar life insurance policy on Castle to the Castle Family Trust of 1998, who will thereafter be responsible for payment of all premiums with respect to such policy. Upon the closing (the "Corpus/Beaumont Closing") of the sale of the Corpus/Beaumont Assets, the Company will make one additional severance payment to an entity designated by Castle in the amount of $24,000; provided, however, that if Castle does not obtain a complete and full release of the Company from all indebtedness to Compass Bank Houston arising out of the purchase of Castle's Jeep Wrangler, at the Corpus/Beaumont Closing the Company may elect to pay the outstanding balance on such debt and reduce the final severance payment to Castle's designated entity accordingly. The Company will continue to carry Castle as an employee for health insurance purposes through June 2 30, 2002. Beginning July 1, 2002, Castle will become eligible for COBRA coverage and will be responsible for paying the costs of COBRA coverage for his family and for his ex-wife following such date, which coverage will continue through the statutory time limit allowed. 6. All of the parties' obligations under this Agreement shall be subject to and dependent upon (a) the approval of this Agreement by the Senior Lenders and (b) the approval of this Agreement by the Company's board of directors. Consequently, unless and until the Company notifies Castle in writing that it has received the approval of the Company's board of directors and the Senior Lenders (the "Effective Date"), this Agreement will not be binding on any of the parties hereto. The Company hereby agrees to submit this Agreement to its board of directors and to the Senior Lenders for approval forthwith upon its execution and to diligently seek such approvals. If the Effective Date does not occur on or before June 30, 2002, any of the parties hereto may terminate this Agreement by delivery of written notice to the other parties and thereafter this Agreement will be void and of no further force and effect. 7. Confidentiality. 7.1. Castle agrees and acknowledges that in the course of serving as Chairman of the Board, Chief Executive Officer and a director of the Company, the Company has given him confidential information about the professional, business and financial affairs of the Company, the Company's strategy and procedures and the Company's PCs. As used in this Agreement, the term "PCs" refers to any entity to which the Company provides management services. Castle recognizes that in order to guard the legitimate interests of the Company it is necessary for the Company to protect all such confidential information, good will and reputation. 7.2 In the course of his service to the Company, the Company gave confidential information, including, but not limited to: forecasts, budgets, pricing information, Company developed methods of operation, and risk management strategies and procedures, specialized know-how developed by the Company, business documents or information, marketing data, trade secrets, personnel rosters, including the identity, qualifications and/or salary scale of any consultant or other Company or PC employee, and other information generated by the Company or arising in connection with the Company's business the disclosure of which would give an advantage to the Company's competitors. Such information shall hereinafter be called "Proprietary Information" and shall include any and all items enumerated in the preceding sentence which come within the scope of the business activities of the Company as to which Castle has had access in the past, whether or not conceived or developed by others or by Castle alone or with others during the period of his tenure on the board of directors of the Company. "Proprietary Information" shall not include (a) any information which is in or comes into the public domain, provided such information is not in the public domain as a consequence of disclosure by Castle, (b) any information provided to Castle to others without the breach by the disclosing party of any obligation of confidentiality to the Company, (c) any information developed by Castle following the date of this Agreement without the use of other Proprietary 3 Information, (d) any information not considered confidential information by similar enterprises operating in the dental management industry, and (e) any information that can reasonably be said to have resulted from general business and professional experience gained by Castle during his career. 7.3 Castle agrees and acknowledges that Proprietary Information belongs solely to the Company and is of critical importance to the Company and that a use or disclosure of the Proprietary Information in violation of this Paragraph 7 may seriously and irreparably impair and damage the Company's businesses. Castle therefore agrees at all times hereafter (a) to keep all Proprietary Information confidential for the sole benefit of the Company and (b) not to use the Proprietary Information for the benefit of Castle or any other person or entity. 7.4 Castle shall not disclose, directly or indirectly (except as required by law), any Proprietary Information to any person other than (a) the Company, (b) such other persons to whom Castle has been instructed to make disclosure by the board of directors of the Company, or (c) Castle's counsel so long as such counsel agrees to keep all Proprietary Information confidential. 7.5 Notwithstanding anything provided in Paragraphs 7.3 and 7.4, following Castle's acquisition of the Corpus/Beaumont Assets, Castle may use the Proprietary Information in connection with his operation of the Corpus/Beaumont Assets and within the Corpus Christi, Texas and Beaumont, Texas standard metropolitan area as long as he takes reasonable precautions to preserve the confidential nature of such Proprietary Information. 8. Non-Competition and Non-Solicitation. 8.1 Castle acknowledges and agrees that (a) in order for the Company to further ensure that the Proprietary Information will be used solely for the benefit of the Company and not for the benefit of Castle or any other person or entity and (b) in consideration of (i) the payments to be made to him pursuant to Paragraph 5 above, (ii) the forgiveness of indebtedness referred to in Paragraph 5 above, and (iii) being permitted to acquire the Corpus/Beaumont Assets, Castle has agreed not to compete with the Company to the extent provided in this Paragraph. Castle covenants and agrees that during the Restricted Covenant Period (as defined below) and only within the Restricted Area (as defined below), Castle shall not, whether for his own account or for any other person or organization other than the Company, (a) manage, operate, control, assist (directly or indirectly), or participate in the management, operation or control of, (b) serve as a director, officer, partner, manager, employee or consultant of, or own more than five percent of the outstanding voting securities of, or (c) lease property to, in each case, any enterprise which, within the Restricted Area (as that term is defined below), is then carrying on the businesses of general dentistry or any specialty thereof (including orthodontics, pedodontics, periodontics, endodontics, oral surgery and implantology) or providing management services to dentists or the entities owned by them. Castle further agrees that, during the Restrictive Covenant Period and within the Restricted Area, he shall not knowingly solicit, divert, attempt to solicit or 4 divert, or conduct or carry on any business with any of the PCs without in each case obtaining the prior written consent of the Company. This provision is in no way meant to prohibit or impede Castle's efforts to make preparations to compete before the Restrictive Covenant Period has ended within the Restricted Area. 8.2 Castle further agrees that during the period commencing on the date hereof and continuing for three years from the date of this Agreement, he will not directly or through the use of any agent, intermediary or "headhunter," (a) solicit the employment or engagement as a consultant of any person who is an employee of or a consultant to the Company or a PC at the time of any such solicitation or (b) initiate contact with any such person concerning the business of the Company or a PC (other than is necessary in connection with the operation of the Corpus/Beaumont Assets), unless in each case Castle obtains the prior written consent of the Company. This provision is in no way meant to prohibit Castle from employing any such employee or consultant at any time so long as such person was not solicited away from Castle Dental or a PC but instead decided to seek employment from Castle on his or her own. The Company hereby consents to the solicitation and hiring of the employees and dentists employed by the Company or the PC in the Corpus Christi and Beaumont offices in accordance with the terms of the Asset Purchase Agreement. 8.3 For the purposes of Paragraph 8.1, the term "Restricted Covenant Period" shall mean the period commencing on the date hereof and terminating on July 31, 2002, unless the Corpus/Beaumont Closing occurs on or prior to such date, in which case the Restricted Covenant Period shall terminate on September 30, 2002. For the purposes of this Paragraph 8, the term "Restricted Area" shall mean the standard metropolitan area of each city (other than Corpus Christi, Texas and Beaumont, Texas) in which the Company manages a dental center. 9. The parties agree the terms and conditions of this Agreement shall be confidential, and that no party shall disclose any part of this Agreement to any person, except (i) as required by subpoena or otherwise by law; or (ii) to an accountant or tax preparer, or (iii) to legal counsel or financial advisors, or (iv) to the lenders under the Amended and Restated Credit Agreement, dated as of December 18, 1998, as amended, among the Company and Bank of America, N.A., and the other lenders thereto, (the "Credit Agreement") or (v) the purchasers of notes under the Senior Subordinated Note Purchase Agreement, dated January 1, 2000, as amended, among the Company, Heller Financial, Inc. and Midwest Mezzanine Fund II, L.P., or (vi) the legal and financial advisors of such lenders and purchasers of notes. 10. Releases. 9.1 Except only to enforce his rights under this Agreement, the Asset Purchase Agreement and the ancillary agreements contemplated hereby and thereby, Castle on behalf of himself, his Affiliates, his heirs, executors, successors and assigns, irrevocably and unconditionally releases, waives, and forever discharges the Company, each of the lenders under the Credit Agreement, Heller Financial, Inc. and Midwest Mezzanine Fund II, L.P. and each of their respective parents, divisions, subsidiaries, 5 affiliates, and related companies, and their present and former agents, employees, officers, directors, attorneys, advisors, fairness opinion givers, stockholders, plan fiduciaries, successors and assigns (collectively, the "Company Releasees"), from any and all claims, debts, obligations, demands, actions, causes of action, costs, fees, and all liability whatsoever, whether known or unknown, fixed or contingent, in contract or in tort, or based on any statute or other law, state or federal (collectively, "Claims"), which Castle has, had, or may have in the future against the Company Releasees, relating to or arising out of Castle's employment by or services as an officer, director or employee of the Company or any of its subsidiaries, status as a shareholder of the Company, or separation from employment with the Company. In addition, except only to enforce his rights under this Agreement, effective upon the tender on or prior to August 31, 2002, of the Corpus/Beaumont Assets in accordance with the provisions of the Asset Purchase Agreement, Goforth, on its own behalf, the Trust, on its own behalf, and Castle on behalf of himself, his Affiliates, his heirs, executors, successors and assigns, shall and hereby does forever release the Company Releasees from any and all Claims which Goforth, the Trust, Castle and/or any Castle Affiliates has, had, or may have in the future against the Company Releasees relating to or arising out of (a) the Lease dated January 1, 1996, between Goforth and Family Dental Services of Texas, Inc. (the "West Loop Lease") concerning the property located at 2101 West Loop South, (b) the letter agreement dated January 1996 among Goforth, Family Dental Services of Texas, Inc. and the Company (together with the West Loop Lease, the "Goforth Agreements"), (c) any other existing obligation, contract, agreement or understanding between Castle and/or his Affiliates and any of the Company Releasees (other than pursuant to the Continuing Agreements), (d) implementation of any of the transactions, agreements, or stock and/or debt issuances contemplated by the proposed Restructuring, as it may be amended from time to time, including claims for breach of fiduciary duty, including the duties of loyalty and care, or claims for breach of any other duty or obligation of any of the Company Releasees owed or allegedly owed to Castle, his Affiliates, any other equity or debt holders in the Company or any other constituency or stakeholder group of the Company, and (e) any other act or omission by any Company Releasee other than those expressly excepted herein which occurred on or prior to the effective date of this release. Castle's release includes, without limitation, claims at law or equity or sounding in contract (express or implied) or tort, claims arising under any federal, state, or local laws, of any jurisdiction, that prohibit age, sex, race, national origin, color, disability, religion, veteran or any other form of discrimination, harassment, or retaliation (including, without limitation, the Age Discrimination in Employment Act, the Americans with Disabilities Act, Title VII of the 1964 Civil Rights Act, the Civil Rights Act of 1991, the Rehabilitation Act, the Family and Medical Leave Act, or any other federal, state, or local laws of any jurisdiction), claims arising under the Employee Retirement Income Security Act, or any other statutory or common law claims related to Castle's employment with the Company, the continuation of Castle's employment with the Company, or the termination of Castle's employment with the Company. Except only to enforce its rights under this Agreement, the Continuing Agreements, the Asset Purchase Agreement, and any ancillary agreements contemplated hereby and thereby, the Company on behalf of itself, its subsidiaries and their respective successors and assigns, irrevocably and unconditionally releases, waives, and forever discharges 6 Castle, and all of his affiliates, his present and former agents, attorneys, successors and assigns (collectively, the "Castle Releasees"), from any and all Claims which the Company has, had, or may have in the future against the Castle Releasees relating to or arising out of Castle's employment by or services as an officer, director or employee of the Company or any of its subsidiaries, status as a shareholder of the Company, or separation from employment with the Company. 9.2 Castle understands it is his choice whether or not to enter into this Agreement and that his decision to do so is voluntary and is made knowingly. 9.3. Castle expressly warrants and represents and does hereby state and represent that no promise or agreement which is not herein expressed has been made to him in executing this release, and that Castle is not relying upon any statement or representation of any agent of the parties being released hereby. Castle is relying on his own judgment and acknowledges that he has been represented by competent legal counsel in this matter. The aforesaid legal counsel has read and explained to Castle the entire contents of this Agreement, as well as the legal consequences of this release. 11. Except only to enforce the terms of this Agreement, each party agrees not to bring any claim of any kind against the other party to this Agreement concerning any matter released by this Agreement. Each party further agrees that this Agreement constitutes a bar to any such future claim. 12. No modification to any provisions contained in this Agreement shall be binding upon any party unless made in writing and signed by both parties. 13. If any provision of this Agreement is held to be unenforceable for any reason, the remaining parts of the Agreement shall remain in full force and effect. 14. Each party represents he or it has not assigned any portion of the claims released under this Agreement to any third party. 15. This Agreement shall be construed in accordance with Texas law. 16. Except as expressly set forth in this Agreement, this Agreement constitutes a single, integrated written contract expressing the entire agreement of the parties to this Agreement. Any other agreements, discussions, promises, and representations (other than the Continuing Agreements and the Asset Purchase Agreement) have been and are integrated into and superseded by this Agreement. 17. Each party has fully considered this Agreement. Each recognizes that no facts can ever be known with certainty and that no representations or warranties other than as set forth in this Agreement have been made to induce this Agreement. 18. With respect to Castle, this Agreement shall also bind and inure to the benefit of his respective heirs and assigns. With respect to the Company, this Agreement shall also bind and inure to the benefit of any affiliated entities, successor- 7 in-interests, or assigns. Castle specifically acknowledges that the rights and benefits of the Company under this Agreement may be assigned by the Company to Bank of America, N.A., as agent ("Agent") as collateral security for certain obligations and indebtedness of the Company arising under the Credit Agreement, and the "Security Instruments" as defined therein. 19. In the event that either party should bring any action to enforce any term of this Agreement, the party who does not prevail in any such action shall pay all the reasonable attorneys' fees and costs incurred by all other parties because of the action. 20. The parties agree that the terms of this Agreement are the result of negotiations between the parties, and constitute a final accord and satisfaction concerning all disputes both between Castle and the Company. 21. No party to this Agreement admits the existence of any liability or wrongdoing, and all such liability is expressly denied. 22. The parties each agree that neither shall disparage the other to any third party at any time. 23. The Company agrees that during the period commencing on the date of the Corpus/Beaumont Closing and continuing for three years from such date, it will not directly or through the use of any agent, intermediary or "headhunter," solicit the employment or engagement as a consultant of any person who is an employee of or a consultant to the companies that acquire the Corpus/Beaumont Assets (the "Castle Entities") at the time of any such solicitation who performs services for the Castle Entities in Corpus Christi, Texas or Beaumont, Texas, unless in each case the Company obtains the prior written consent of Castle. This provision is in no way meant to prohibit the Company from employing any such employee or consultant at any time so long as such person was not solicited away from the Castle Entities but instead decided to seek employment from the Company on his or her own. 24. If Castle commits a breach, or clearly indicates that a breach is imminent, of any of the provisions of Paragraphs 7 or 8, the Company shall have the right and remedy to obtain suitable restraining orders as allowed by law and to have the provisions of Paragraphs 7 or 8 of this Agreement specifically enforced by any court having jurisdiction, it being acknowledged and agreed that any such breach or potentially imminent breach will cause immediate irreparable injury and continuing damage to the Company and its affiliates, the exact amount of which would be difficult to ascertain. In addition, if Castle commits a breach of Paragraph 7 that would reasonably be expected to materially damage the Company or commits a breach of Paragraph 8, the Company shall have the right and remedy to: (a) terminate its obligation to continue making the payments otherwise due to Castle pursuant to Paragraph 5, and (b) terminate the Service Mark License Agreement contemplated by the Asset Purchase Agreement. Further, Castle acknowledges and agrees that money damages will not provide an adequate remedy, and that the Company shall be entitled to injunctive relief restraining any violation of Paragraphs 7 and 8. The rights and 8 remedies enumerated above shall be independent, and in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. 25. It is expressly understood and agreed that the covenants of Castle contained herein are supported by independent valuable consideration, including without limitation the Company's obligations under Paragraph 5, and that Castle and the Company consider the restrictions contained in Paragraphs 7 and 8 above to be reasonable and necessary for the purposes of preserving and protecting the business of the Company, including the goodwill of the Company, and other legitimate business interests of the Company. Nevertheless, if any of the aforesaid restrictions are found by a court having jurisdiction to be unreasonable, or overly broad as to the scope of activity to be restrained, geographic area or time, or otherwise unenforceable, the parties intend for the restrictions therein set forth to be modified by such court in the minimal amount necessary so as to be reasonable and enforceable and, as so modified by the court, to be fully enforced. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application. 26. Castle acknowledges that the Company owns all rights in and to the trademarks, service marks, and trade names "Castle Dental Centers", "The Castle" and "Jack H. Castle, D.D.S., P.C." and all logos heretofore used in connection with those marks and names. Castle agrees not to (a) challenge the validity of the Company's exclusive rights in such names and marks at any time or in any context or forum or (b) use such marks in a manner that infringes upon such marks. Castle covenants and agrees that, from and after the Effective Date until July 31, 2002, unless the Corpus/Beaumont Closing occurs on or prior to such date, in which case this covenant will continue until September 30, 2002, he will not advertise using the term "Castle" in connection with any products or services sold, offered for sale, or distributed by or for any individual or entity that carries on the practice of general dentistry or any specialty thereof or provides management services to dentists or entities owned by them except as permitted under the Service Mark License Agreement to be executed in connection with the sale of the Corpus/Beaumont Assets. Castle further covenants and agrees that any advertising using the term "Castle" prior to the date of this Agreement was pursuant to a license from the Company and that all such prior use inured to the benefit of the Company. 27. No failure by any party hereto at any time to give notice of any breach by another party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 28. The following agreements shall remain in full force and effect following the Effective Date: (1) the Indemnity Agreement dated as of December 18, 1995, 9 between Castle and the Company (the "Indemnity Agreement"); (2) the Amended and Restated Registration Rights Agreement dated as of June 16, 1997, by and among the Company, Delaware State Employees' Retirement Fund, Declaration of Trust For Defined Benefit Plan of ICI American Holdings Inc., Declaration of Trust for Defined Benefit Plan of Zeneca Holdings Inc., Jack H. Castle, Jr., as Trustee of the Castle 1995 Gift Trust F/B/O Jack H. Castle, Jr., Castle Interests, Ltd., Lisa G. Castle Donnell, as Trustee of the Castle 1995 Gift Trust F/B/O Lisa G. Castle Donnell, Jack H. Castle, D.D.S., Loretta M. Castle, and Gulfstar Investments, Ltd. (the "Registration Rights Agreement"); and (3) the Stockholders Agreement dated as of January 31, 2000, by and among the Company, Castle, Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., Delaware State Employees' Retirement Fund, Declaration of Trust For Defined Benefit Plan of ICI American Holdings Inc., Declaration of Trust for Defined Benefit Plan of Zeneca Holdings Inc., Jack H. Castle, Jr., as Trustee of the Castle 1995 Gift Trust F/B/O Jack H. Castle, Jr., Castle Interests, Ltd., Jack H. Castle, D.D.S., Loretta M. Castle, and Gulfstar Investments, Ltd. (the "Stockholders Agreement" and, together with the Indemnity Agreement and the Registration Rights Agreement, the "Continuing Agreements"). The Trust, on its own behalf, and Castle, on his own behalf and on behalf of his heirs, assigns and Affiliates, hereby consents to the Company, upon the consummation of the Restructuring: (a) entering into a registration rights agreement with the persons receiving equity interests in the Company in connection with the Restructuring, which registration rights are superior to and in conflict with those granted to the Trust, Castle, his heirs, assigns and Affiliates pursuant to the Registration Rights Agreement, (b) amending the Registration Rights Agreement to eliminate the demand registration rights provided for therein and (c) terminating the Stockholders Agreement. 29. Any controversy, dispute or claim arising out of, in connection with, or in relation to, the interpretation, performance or breach of paragraph 8.2 or paragraph 23 hereof (and only such paragraphs) which cannot first be settled through ordinary negotiation between the Parties shall be submitted to binding and final arbitration conducted in Harris County, Texas by and in accordance with the then existing Rules for Commercial Arbitration of the American Arbitration Association or any successor organization; provided that: (1) each Party will be limited to asking questions at one deposition and will be limited to two hours of testimony at the arbitration; (2) if the complaining Party substantially prevails, it will receive six months salary of the employee involved; (3) if the responding Party substantially prevails, it will receive three months salary of the employee involved; (4) the Parties and the arbitrator shall seek the most expedited hearing possible. The applicable individual salary shall be the employee's base salary at the time of the claimed violation of this Agreement, excluding any bonuses and fringe benefits payable to that employee. Any such arbitration shall be to a one-member panel selected by mutual agreement from among the following: Michael Wilk, Judge Dan Downey, Gary McGowan, Alan Levin, Alvin Zimmerman and Mickey Mills. The award rendered by the arbitrator may be confirmed, entered and enforced as a judgment in any court of competent jurisdiction; however, the Parties otherwise waive any rights to appeal the award except with regard to fraud by the panel. Any such action must be brought within 90 days of the hiring of the affected employee. The arbitrator shall award the Party which 10 substantially prevails in any arbitration proceeding recovery of that Party's reasonable attorneys' fees, the arbitrator's fees and all costs reasonably incurred in connection with the arbitration from the Party who does not substantially prevail. 11 Dated: June __, 2002 CASTLE DENTAL CENTERS, INC. By: /s/ James M. Usdan ---------------------------- Its: President and Chief Executive Officer ---------------------------- Name: James M. Usdan --------------------------- /s/ Jack H. Castle, Jr. Dated: June __, 2002 --------------------------- Jack H. Castle, Jr. Dated: June __, 2002 GOFORTH, INC. By: /s/ Jack H. Castle, Jr. ----------------------------- Jack H. Castle, Jr., President Dated: June __, 2002 CASTLE 1995 GIFT TRUST F/B/O JACK H. CASTLE, JR. By: /s/ Jack H. Castle, Jr. ----------------------------- Jack H. Castle, Jr., Trustee 12 EX-10.15 19 dex1015.txt 2002 STOCK OPTION PLAN Exhibit 10.15 - -------------------------------------------------------------------------------- 2002 Stock Option Plan - -------------------------------------------------------------------------------- CASTLE DENTAL CENTERS, INC. July 19, 2002 TABLE OF CONTENTS ARTICLE I. GENERAL...........................................................................1 Section 1.1 Purpose.......................................................................1 Section 1.2 Administration................................................................1 Section 1.3 Eligibility for Participation.................................................2 Section 1.4 Types of Options Under Plan...................................................2 Section 1.5 Aggregate Limitation on Options...............................................3 Section 1.6 Effective Date and Term of Plan...............................................3 ARTICLE II. STOCK OPTIONS....................................................................3 Section 2.1 Grant of Stock Options........................................................3 Section 2.2 Stock Option Agreements.......................................................3 Section 2.3 Stock Option Price............................................................3 Section 2.4 Term and Exercise.............................................................4 Section 2.5 Manner of Payment.............................................................4 Section 2.6 Issuance of Certificates......................................................4 Section 2.7 Death, Retirement and Termination of Employment of Optionee...................4 ARTICLE III. INCENTIVE STOCK OPTIONS.........................................................5 Section 3.1 Grant of Incentive Stock Options..............................................5 Section 3.2 Incentive Stock Option Agreements.............................................5 Section 3.3 Incentive Stock Option Price..................................................5 Section 3.4 Term and Exercise.............................................................5 Section 3.5 Maximum Amount of Incentive Stock Option Grant................................5 Section 3.6 Applicability of Stock Options Sections.......................................6 Section 3.7 Code Requirements.............................................................6 ARTICLE IV. MISCELLANEOUS....................................................................6 Section 4.1 General Restriction...........................................................6 Section 4.2 Non-Assignability.............................................................6 Section 4.3 Withholding Taxes.............................................................7 Section 4.4 Right to Terminate Employment.................................................7 Section 4.5 Non-Uniform Determinations....................................................7 Section 4.6 Rights as a Stockholder.......................................................7 Section 4.7 Definitions...................................................................8 Section 4.8 Leaves of Absence.............................................................8 Section 4.9 Newly Eligible Employees......................................................8 Section 4.10 Adjustments..................................................................8 Section 4.11 Changes in the Company's Capital Structure...................................9 Section 4.12 Amendment of the Plan.......................................................10
i CASTLE DENTAL CENTERS, INC. 2002 STOCK OPTION PLAN ARTICLE I. GENERAL Section 1.1 Purpose. The purposes of this Stock Option Plan (the "Plan") are to: (1) associate the interests of the management of Castle Dental Centers, Inc. and its subsidiaries and affiliates (collectively referred to as the "Company") closely with the stockholders to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders; (2) provide management with a proprietary ownership interest in the Company commensurate with Company performance, as reflected in increased stockholder value; (3) maintain competitive compensation levels thereby attracting and retaining highly competent and talented directors, employees and consultants; and (4) provide an incentive to management for continuous employment with the Company. Certain capitalized terms are defined in Section 4.7. Section 1.2 Administration. (a) The administration of the Plan with respect to all or any number or type of awards shall be undertaken by one or more of the following as designated from time to time by the Board of Directors of the Company: (i) the Board of Directors; (ii) any duly constituted committee of the Board of Directors; or (iii) any duly authorized officer or officers of the Company. Such administrating party shall be referred to herein as the "Plan Administrator". The Board of Directors may place any conditions it deems appropriate on the discretion of the Plan Administrator. (b) Subject to any limitations imposed by the Board of Directors, the Plan Administrator shall have the authority, in its sole discretion and from time to time to: (i) designate the officers and key employees and consultants of the Company and its Subsidiaries eligible to participate in the Plan; (ii) grant Options provided in the Plan in such form and amount as the Plan Administrator shall determine; (iii) impose such limitations, restrictions and conditions, not inconsistent with this Plan, upon any such Option as the Plan Administrator shall deem appropriate; and 1 (iv) interpret the Plan and any agreement, instrument or other document executed in connection with the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Plan Administrator on all matters relating to the Plan shall be in its sole discretion and shall be final, conclusive and binding upon all persons, including the Company, any participant, any stockholder of the Company, any employee and any consultant. No member of any committee acting as Plan Administrator shall be liable for any action taken or decision made relating to the Plan or any Option thereunder. Section 1.3 Eligibility for Participation. Participants in the Plan shall be selected by the Plan Administrator from the directors, executive officers and other employees and consultants of the Company, executive officers and employees of any Subsidiary of the Company and executive officers and key employees of any consultant to, administrator for or manager of the Company who have the capability of making a substantial contribution to the success of the Company. In making this selection and in determining the form and amount of Options, the Plan Administrator shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company and past and potential contributions to the Company's profitability and growth. For the purposes of this Plan, the term "Subsidiary" means any corporation or other entity of which at least 50% of the voting securities are owned by the Company directly or through one or more other corporations, each of which is also a Subsidiary. With respect to non-corporate entities, Subsidiary shall mean an entity managed or controlled by the Company or any Subsidiary and with respect to which the Company or any Subsidiary is allocated more than half of the profits and losses thereof. Section 1.4 Types of Options Under Plan. Options under the Plan may be in the form of any one or more of the following: (i) Stock Options, as described in Article II; and/or (ii) Incentive Stock Options, as described in Article III. Options under the Plan shall be evidenced by an option agreement between the Company and the recipient of the Option, in form and substance satisfactory to the Plan Administrator, and not inconsistent with this Plan ("Option Agreement"). Option Agreements may provide such vesting schedules for Stock Options and Incentive Stock Options, and such other terms, conditions and provisions as are not inconsistent with the terms of this Plan. Subject to the express provisions of the Plan, and within the limitations of the Plan, the Plan Administrator may modify, extend or renew outstanding Option Agreements, or accept the surrender of outstanding Options and authorize the granting of new Options in substitution therefor. However, except as provided in this Plan, no modification of an Option shall materially impair the rights of the holder thereof without his consent. 2 Section 1.5 Aggregate Limitation on Options. (a) Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of common stock, $.001 par value, of the Company ("Common Stock"). The maximum number of shares of Common Stock which may be issued pursuant to Options issued under the Plan shall be 15,287,218 which may be increased by the Board of Directors pursuant to Section 4.12. (b) For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan at any time, all the shares issued (including the shares, if any, withheld for tax withholding requirements) under the Plan shall be counted when issued upon exercise of a Stock Option or Incentive Stock Option. (c) Shares tendered by a participant as payment for shares issued upon exercise of a Stock Option or Incentive Stock Option shall be available for issuance under the Plan. Any shares of Common Stock subject to a Stock Option or Incentive Stock Option which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan. Section 1.6 Effective Date and Term of Plan. (a) The Plan shall become effective on the date adopted by the Board of Directors, subject to approval by the holders of a majority of the shares of Common Stock at a meeting or by written consent. (b) The Plan and all Options issued under the Plan shall remain in effect until such Options have been satisfied or terminated in accordance with the Plan and the terms of such Options. ARTICLE II. STOCK OPTIONS Section 2.1 Grant of Stock Options. The Plan Administrator may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Plan Administrator may prescribe, grant to any participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock ("Stock Options") allotted by the Plan Administrator. The date a Stock Option is granted shall mean the date selected by the Plan Administrator as of which the Plan Administrator allots a specific number of shares to a participant pursuant to the Plan. Section 2.2 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Option Agreement, executed by the Company and the holder of a Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Plan Administrator may from time to time determine. Section 2.3 Stock Option Price. The option price per share of Common Stock which must be paid by the Optionee upon the exercise of a Stock Option shall be 100% of the fair 3 market value of a share of Common Stock on the date the Stock Option is granted to the Optionee, unless a higher or lower price is otherwise determined by the Plan Administrator. Section 2.4 Term and Exercise. Stock Options granted under the Plan shall not be exercisable prior to six months from the date of their grant, unless a shorter period is provided by the Plan Administrator or by another section of this Plan, and may be subject to such conditions and restrictions on exercise as the Plan Administrator shall determine. A Stock Option shall be subject to such vesting schedule and term ("Option Term") as the Plan Administrator may provide in an Option Agreement. No Stock Option shall be exercisable after the expiration of its Option Term. Unless otherwise provided in an Option Agreement, each Option shall have an Option Term of ten years, subject to earlier termination as provided herein. Section 2.5 Manner of Payment. Each Option Agreement providing for Stock Options shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the option price for such shares with cash or, if authorized by the Plan Administrator, Common Stock. The Plan Administrator may permit an Optionee to elect to pay the option price upon exercise of a Stock Option through a cashless exercise procedure approved by the Plan Administrator by irrevocably authorizing a broker to sell shares of Common Stock (or a sufficient portion of the shares) acquired upon exercise of the Stock Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire option price and any tax withholding resulting from such exercise. Section 2.6 Issuance of Certificates. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a stockholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a stockholder. Section 2.7 Death, Retirement and Termination of Employment of Optionee. Unless otherwise provided in an Option Agreement or otherwise agreed to by the Plan Administrator: (a) Upon the death of the Optionee, any rights to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) one year. The provisions of this section shall apply notwithstanding the fact that the Optionee's employment may have terminated prior to death, but only to the extent of any rights exercisable on the date of death. (b) Upon termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Plan Administrator), the Optionee may exercise any Stock Options, provided such option exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) 180 days (in the case of permanent disability) or 90 days (in the case of retirement). 4 (c) Except as provided in Subsections (a) and (b) of this Section 2.7 or in an Option Agreement, all Stock Options shall terminate immediately upon the termination of the Optionee's employment. ARTICLE III. INCENTIVE STOCK OPTIONS Section 3.1 Grant of Incentive Stock Options. The Plan Administrator may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Plan Administrator may prescribe, grant to any officer or key employee who is a participant in the Plan one or more "incentive stock options" (intended to qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended) ("Incentive Stock Options") to purchase for cash or shares the number of shares of Common Stock allotted by the Plan Administrator. No Incentive Stock Options shall be made under the Plan after the tenth anniversary of the effective date of the Plan. The date an Incentive Stock Option is granted shall mean the date selected by the Plan Administrator as of which the Plan Administrator allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of 10% or more of the total combined voting power of the Company and its subsidiaries. Section 3.2 Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Option Agreement, executed by the Company and the holder of an Incentive Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby, and in such form as the Plan Administrator may from time to time determine. Section 3.3 Incentive Stock Option Price. The option price per share of Common Stock which must be paid by the Optionee upon the exercise of an Incentive Stock Option shall be 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted to the Optionee. Section 3.4 Term and Exercise. Incentive Stock Options granted under the Plan shall not be exercisable prior to six months from the date of their grant, unless a shorter period is provided by the Plan Administrator or by another section of this Plan, and may be subject to such conditions and restrictions on exercise as the Plan Administrator shall determine. Each Incentive Stock Option may be exercised during a period determined by the Plan Administrator, not to exceed ten years from the date of grant thereof (the "Option Term") and may be subject to such vesting scheduling as the Plan Administrator may provide in an Option Agreement. No Incentive Stock Option shall be exercisable after the expiration of its Option Term. Section 3.5 Maximum Amount of Incentive Stock Option Grant. The aggregate fair market value (determined on the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options first become exercisable by an Optionee during any calendar year (under all plans of the Optionee's employer corporations and their parent and subsidiary corporations) shall not exceed $100,000. 5 Section 3.6 Applicability of Stock Options Sections. Sections 2.5, Manner of Payment; and 2.6, Issuance of Certificates; and 2.7 Death, Retirement and Termination of Employment; applicable to Stock Options, shall apply equally to Incentive Stock Options. Said sections are incorporated by reference in this Article III as though fully set forth herein. Section 3.7 Code Requirements. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Code Section 422. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any Incentive Stock Option under Code Section 422, unless the participant has first requested the change that will result in such disqualification. ARTICLE IV. MISCELLANEOUS Section 4.1 General Restriction. Each Option granted under the Plan shall be subject to the requirement that, if at any time the Plan Administrator shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an Option with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issue or purchase of shares of Common Stock thereunder, such Option may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Plan Administrator. Section 4.2 Non-Assignability. (a) No Option granted under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order (as defined by Code Section 141(p)): provided, however, only with respect to Stock Options other than Incentive Stock Options, the Plan Administrator may, in its discretion, authorize all or a portion of the Stock Options (other than Incentive Stock Options) to be granted on terms which permit transfer by the Optionee to a trust or trusts for the exclusive benefit of the Optionee's children, stepchildren, grandchildren, parents, stepparents, grandparents, or spouse, including adoptive relationships (collectively "Immediate Family"), provided that (A) such trust or trusts must be controlled by the Optionee, (B) there may be no consideration for any such transfer, (C) the Option Agreement pursuant to which Stock Options are granted must be approved by the Plan Administrator, and must expressly provide for transferability in a manner consistent with this Section 4.2, and (D) subsequent transfers of transferred Stock Options shall be prohibited except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order. Following any permitted transfer, any Stock Option will continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that the term Optionee shall be deemed to refer to the transferee. The termination of employment and other events described in Section 2.7 6 and in the Option Agreement shall continue to be applied with respect to the original Optionee, and the Stock Option shall be exercisable by the transferee only to the extent, and for the periods, specified Section 2.7 and in the Option Agreement. During the life of the recipient, such Option shall be exercisable only by such person or by such person's guardian or legal representative. (b) Except as may otherwise be permitted under the Code, in the event of a permitted transfer of a Stock Option (other than an Incentive Stock Option) hereunder, the original Optionee shall remain subject to withholding taxes upon exercise. In addition, the Company shall have no obligation to provide any notices to a transferee, including, for example, of the termination of an Option Agreement following the original Optionee's termination of employment. Section 4.3 Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may issue, transfer or vest only such net of the number of shares of the Company sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. Section 4.4 Right to Terminate Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. Section 4.5 Non-Uniform Determinations. The Plan Administrator's determinations under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such Options, the terms and provisions of such Options and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. Section 4.6 Rights as a Stockholder. The recipient of any Option under the Plan shall have no rights as a stockholder with respect thereto unless and until certificates for shares of Common Stock are issued to him. 7 Section 4.7 Definitions. In this Plan the following definitions shall apply: (a) "fair market value" as of any date and in respect of any share of Common Stock means the average of the closing bid and offer price on such date or on the next business day, if such date is not a business day, of a share of Common Stock on the OTC Bulletin Board or other public securities market on which the Common Stock trades. If the Plan Administrator determines that the average of the closing bid and offer price on the OTC Bulletin Board or other public securities market on which the Common Stock trades does not properly reflect the fair market value of a share of Common Stock, the fair market value of shares of Common Stock shall be as determined by the Plan Administrator in such manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. (b) "Option" means a Stock Option or Incentive Stock Option. (c) "option price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. Section 4.8 Leaves of Absence. The Plan Administrator shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Option. Without limiting the generality of the foregoing, the Plan Administrator shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on Options under the Plan theretofore made to any recipient who takes such leave of absence. Section 4.9 Newly Eligible Employees. The Plan Administrator shall be entitled to make such rules, regulations, determinations and grants of Options as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof. Section 4.10 Adjustments. In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Plan Administrator may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, and any and all other matters deemed appropriate by the Plan Administrator. 8 Section 4.11 Changes in the Company's Capital Structure. (a) The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) If, while there are outstanding Options, the Company shall effect a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefore in money, services or property, then, subject to the provisions, if any, in the Option Agreement (i) in the event of an increase in the number of such shares outstanding, the number of shares of Common Stock then subject to Options hereunder shall be proportionately increased; and (ii) in the event of a decrease in the number of such shares outstanding the number of shares then subject to Option hereunder shall be proportionately decreased. (c) After a merger of one or more corporations into the Company, or after a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, each holder of an outstanding Option shall, at no additional cost, be entitled upon exercise of such Option to receive (subject to any required action by stockholders) in lieu of the number of shares as to which such Option shall then be so exercisable, the number and class of shares of stock, other securities or consideration to which such holder would have been entitled to receive pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of the Company equal to the number of shares as to which such Option had been exercisable. (d) If the Company is about to be merged into or consolidated with another corporation or other entity under circumstances where the Company is not the surviving corporation, or if the Company is about to sell or otherwise dispose of substantially all of its assets to another corporation or other entity while unexercised Options remain outstanding, then the Plan Administrator may direct that any of the following shall occur: (i) If the successor entity is willing to assume the obligation to deliver shares of stock or other securities after the effective date of the merger, consolidation or sale of assets, as the case may be, each holder of an outstanding Option shall be entitled to receive, upon the exercise of such Option and payment of the option price, in lieu of shares of Common Stock, such shares of stock or other securities as the holder of such Option would have been entitled to receive had such Option been exercised immediately prior to the consummation of such merger, consolidation or sale, and the terms of such Option shall apply as nearly as practicable to the shares of stock or other securities purchasable upon exercise of the Option following such merger, consolidation or sale of assets; 9 (ii) The Plan Administrator may waive any limitations set forth in or imposed pursuant to this Plan or any Option Agreement with respect to such Option such that such Option shall become exercisable prior to the record or effective date of such merger, consolidation or sale of assets; and/or (iii) The Plan Administrator may cancel all outstanding Options as of the effective date of any such merger, consolidation or sale of assets provided that prior notice of such cancellation shall be given to each holder of an Option at least 30 days prior to the effective date of such merger, consolidation or sale of assets, and each holder of an Option shall have the right to exercise such Option in full immediately prior to, and contingent upon, the effective date of such merger, consolidation or sale of assets. (e) Except as herein provided, the issuance by the Company of Common Stock or any other shares of capital stock or securities convertible into shares of capital stock, for cash, property, labor done or other consideration, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. Section 4.12 Amendment of the Plan. The Board of Directors may, without further approval by the stockholders and without receiving further consideration from the participant, amend this Plan or condition or modify Options under this Plan, including increases to the number of shares which may be covered by Options under this Plan. This is the Stock Incentive Plan adopted by the Company on July 19, 2002. CASTLE DENTAL CENTERS, INC. By: /s/ John M. Slack -------------------------------- Name: John M. Slack ------------------------------ Title: Senior Vice President ----------------------------- 10 EX-10.16 20 dex1016.txt EMPLOYMENT AGREEMENT - JAMES M. USDAN Exhibit 10.16 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into on July 19, 2002 (the "Effective Date"), by and between James M. Usdan (the "Executive") and Castle Dental Centers, Inc., a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, The Company wishes to employ the Executive as President and Chief Executive Officer, and the Executive wishes to be so employed by the Company, all upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the promises and mutual covenants and obligations herein set forth and for other good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows, intending to be legally bound: 1. EMPLOYMENT AND TERM. The Company hereby employs the Executive to serve as President and Chief Executive Officer. The term of this Agreement shall begin on the Effective Date and shall terminate thirty-six (36) months from the Effective Date, unless earlier terminated by either party hereto in accordance with the provisions of Section 5 hereof. After the expiration of the initial 36-month term of this Agreement, the Executive's period of employment under this Agreement shall be automatically renewed for successive one-year terms on each anniversary of the Effective Date, unless written notice of non-renewal is delivered by one party to the other at least 120 days before the end of any such one-year renewal term. During the term of this Agreement, the terms of employment shall be as set forth herein unless modified by the Executive and the Company in accordance with the provisions of Section 10 hereof. The Executive hereby agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter set forth. 2. POSITION AND RESPONSIBILITIES. The Executive shall report to, and be subject to the general direction and control of, the Board of Directors of the Company. The Executive will be elected as a member of the Board of Directors of the Company during the term of this Agreement so long as he is the Chief Executive Officer of the Company, and the Executive shall also have the right to participate in the nomination of the member of the Board of Directors not designated by the holders of Series A-1 Convertible Preferred Stock of the Company. The Executive shall have other obligations, duties, authority and power to do all acts and things as are customarily done by a person holding the same or equivalent position or performing duties similar to those to be performed by executives in corporations of similar size to the Company and shall perform such managerial duties and responsibilities for the Company which are not inconsistent with the Executive's position as may reasonably be assigned to him by the Board of Directors of the Company. Unless otherwise agreed to by the Executive, the Executive shall be based at the Company's offices located in the greater metropolitan area of Houston, Texas. 3. EXTENT OF SERVICE. The Executive shall devote his full business time and attention to the business of the Company. During the term of this Agreement, however, it shall not be a violation of this Agreement for the Executive to (a) serve on any corporate board or committee thereof with the approval of the Board of Directors, (b) serve on the board of directors of MetroOne Telecommunications, (c) serve on any academic, university, civic or charitable board of directors, (d) deliver lectures or make teaching or speaking engagements, (e) testify as a witness in litigation involving a former employer, or (f) manage personal investments, so long as such activities do not, taken together, materially interfere with the performance of the Executive's responsibilities under this Agreement. 4. COMPENSATION. (a) Salary. In consideration of the services to be rendered by the Executive to the Company, the Company will pay the Executive a salary ("Salary") of $30,208 per month during the term of this Agreement. Such Salary will be payable in accordance with the Company's customary payroll practices and shall be subject to all applicable federal and state withholding, payroll and other taxes. If the Company achieves the targets set forth in the 2002 Bank Plan attached hereto as Exhibit A (the "Bank Plan"), the Executive's annual Salary for 2003 will automatically be increased by the greater of $12,500 or an amount determined by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"). In addition, the amount of the Executive's Salary may be increased from time to time during the term of this Agreement, by, and at the sole discretion of, the Compensation Committee, which shall review the Executive's Salary no less regularly than annually. (b) Bonus. The Executive shall be eligible for an annual bonus of up to 100% of Executive's annual Salary. A guaranteed bonus of $66,667 will be paid to the Executive in 2002, with one-half ($33,333.50) payable at the end of the pay period during which the restructuring of the Company's senior credit agreement is completed (contemplated to take place in July 2002) and one-half ($33,333.50) payable at the end of the pay period during which the 2002 annual audit is completed and delivered to the Company. The remaining $295,833 of available bonus potential for 2002 will be discretionary and based on the criteria approved by the Compensation Committee, which criteria shall be determined within 30 days of such committee's formation; provided, however, that if the Compensation Committee fails to determine such criteria within such 30-day period, the Executive shall be entitled to a bonus in the amount of $205,208 if the Company achieves the targets set forth in the Bank Plan. Except for the guaranteed bonus of $66,667 in 2002 and as set forth in the preceding sentence, any bonus paid to the Executive shall be based on performance and shall be payable at the sole discretion of the Compensation Committee. (c) Expenses. During the term of this Agreement, the Company shall pay or reimburse the Executive for all reasonable out-of-pocket expenses for travel, meals, hotel accommodations, entertainment and the like incurred by him in connection with the business of the Company upon submission by him of an appropriate statement documenting such expenses as required by the Internal Revenue Code of 1986, as amended (the "Code"). -2- (d) Relocation Expenses. In connection with the Executive's relocation to Houston, Texas, the Company agrees to reimburse the Executive for (i) all reasonable costs incurred by the Executive in moving his personal belongings to Houston, (ii) a reasonable number of "house hunting" trips for the Executive and his wife, (iii) a reasonable broker's fee for selling the Executive's home in Austin, Texas, (iv) the points, if any, on a mortgage for a new home in Houston and (v) the lost deposit of $8,000 on the vacation that the Executive cancelled at the Company's request. In addition, if the Executive suffers a capital loss on the sale of his current home in Austin (which was purchased for $790,000), the Company, upon request, will loan the Executive up to the amount of the capital loss at a market rate of interest. Any such loan will be repaid to the Company by the Executive ratably over five years. Also, if necessary, the Company will pay for temporary housing and related expenses pending the Executive's relocation to Houston through December 31, 2002, unless such date is extended by the Compensation Committee in its sole discretion. All relocation expenses will be "grossed up" by the Company to compensate the Executive for the payment of any federal income taxes on such expenses. (e) Vacation. The Executive shall be entitled to 25 days of paid vacation for each calendar year during the term of this Agreement, earned on an accrual basis. Vacation shall start to accrue on the first day of each calendar year. The Company shall pay the Executive for any accrued but unused portion of vacation and any such unused portion of vacation shall not be carried forward to the next year. (f) Benefits. During the term of this Agreement, the Executive shall be entitled to participate in and to receive all rights and benefits under any bonus, stock option, equity incentive, pension, retirement, life, disability, medical and dental, health and accident and profit sharing or deferred compensation plans and such other plan or plans as may be implemented by the Company during the term of this Agreement. The Company shall provide the Executive with life insurance in an amount equal to the greater of (i) fifty percent (50%) of the Executive's annual Salary and (ii) the amount to which the Executive is entitled pursuant to the Company policy, if any, for its executive employees. The Executive shall also be entitled to participate in and to receive all rights and benefits under any plan or program adopted by the Company for any other or group of other executive employees of the Company, including without limitation, the rights and benefits under the directors' and officers' liability insurance currently in place under the Company's insurance program for the directors and officers of the Company, and any indemnification agreements entered into by the Company with its officers and directors providing them with indemnification from the Company for claims arising out of their service as officers and directors of the Company. (g) Stock Options. The Company shall promptly grant to the Executive options to purchase approximately 4,600,000 shares of common stock of the Company at fair market value on the date hereof pursuant to the terms of the Company's 2002 Stock Option Plan and a stock option agreement to be entered into in connection therewith by the Executive (the "Executive's Option Agreement"). Such options shall vest as follows: 20% on the date of grant, -3- and 20% on each anniversary of the date of grant, until fully vested, unless otherwise provided in the Executive's Option Agreement. 5. TERMINATION. (a) Termination by Company; Discharge for Cause. The Company shall be entitled to terminate this Agreement and the Executive's employment with the Company at any time and for whatever reason, or at any time for "Cause" (as defined below), by written notice to the Executive. Termination of the Executive's employment by the Company shall constitute a termination for "Cause" if such termination is for one or more of the following reasons: (i) the willful failure or refusal of the Executive to render services to the Company in accordance with his obligations under this Agreement, including, without limitation, the failure or refusal of the Executive to comply with the work rules, policies, procedures, and directives as established by the Board of Directors and consistent with this Agreement if such failure or refusal continues for a period of not less than 30 days after written notice outlining the situation is given by the Company to the Executive; (ii) a determination by the Board of Directors, made after reasonable inquiry (including an opportunity for the Executive to be heard), that the Executive has committed an act of fraud or embezzlement; (iii) a determination by the Board of Directors, made after reasonable inquiry (including an opportunity for the Executive to be heard), that the Executive has committed any other action with the intent to injure the Company; (iv) the Executive having been convicted of a felony or a crime involving moral turpitude; (v) a determination by the Board of Directors, made after reasonable inquiry (including an opportunity for the Executive to be heard), that the Executive has misappropriated the property of the Company; (vi) a determination by the Board of Directors, made after reasonably inquiry (including an opportunity for the Executive to be heard), that the Executive has engaged in personal misconduct which has materially injured the Company, including, without limitation, engaging in harassment or discrimination in violation of the Company's policies; or (vii) the Executive having willfully violated any law or regulation relating to the business of the Company which results in material injury to the Company. In the event of the Executive's termination by the Company for Cause hereunder, the Executive shall be entitled to no severance or other termination benefits except for any unpaid Salary accrued through the date of termination. A termination of this Agreement by the Company without Cause pursuant to this Section 5(a) shall entitle the Executive to the Severance Payment and other benefits specified in Section 5(f) hereof. In addition, the parties acknowledge and agree that any election by the Company not to extend the term of this Agreement pursuant to Section 1 shall not constitute a termination of this Agreement or of the Executive's employment by the Company. (b) Death. If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Executive or his estate except that the Company shall pay to the Executive's estate that portion of his Salary and benefits accrued through the date of death. All such payments to the Executive's estate shall be made in the same manner and at the same time as the Executive's Salary. -4- (c) Disability. If during the term of this Agreement, the Executive shall be prevented from performing his duties hereunder for either (i) a period of 90 days or (ii) 150 days in any 12-month period by reason of disability, then the Company, on 30 days prior written notice to the Executive, may terminate this Agreement. For purposes of this Agreement, the Executive shall be deemed to have become disabled when the Board of Directors of the Company, upon verification by a physician designated by the Company, shall have determined that the Executive has become physically or mentally unable (excluding infrequent and temporary absences due to ordinary illness) to perform the essential functions of his duties under this Agreement with or without reasonable accommodation. In the event of a termination pursuant to this paragraph (c), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Executive or his estate in the event of his subsequent death, that portion of the Executive's Salary and benefits accrued through the date of such termination. All such payments to the Executive or his estate shall be made in the same manner and at the same time as his Salary and would have been paid to him had he not become disabled. (d) Termination for Good Reason. The Executive shall be entitled to terminate this Agreement and his employment with the Company at any time upon 30 days written notice to the Company for "Good Reason" (as defined below); provided, however, that if the Company eliminates the reason for such termination to the reasonable satisfaction of the Executive within such 30-day period, the Executive shall not be entitled to terminate this Agreement and his employment with the Company pursuant to this subsection (d). The Executive's termination of employment shall be for "Good Reason" if such termination is a result of any of the following events: (i) the Executive is assigned any responsibilities or duties materially inconsistent with his position, duties, responsibilities and status with the Company as in effect at the date of this Agreement or as may be assigned to the Executive pursuant to Section 2 hereof; (ii) the Salary payable to the Executive pursuant to Section 4(a) hereof in any year is reduced by an amount in excess of fifteen percent (15%) of the previous year's Salary, unless the Executive has otherwise agreed to such reduction; (iii) there is (1) a failure by the Company or any successor to the Company or its assets to continue to provide to the Executive any material benefit, bonus, profit sharing, incentive, remuneration or compensation plan, stock ownership or purchase plan, stock option plan, life insurance, disability plan, pension plan or retirement plan in which the Executive was entitled to participate in as at the date of this Agreement or subsequent thereto, and the Company fails to provide a substitute therefor which is substantially similar to the discontinued material benefit or plan, or (2) the taking by the Company of any action that materially and adversely affects the Executive's participation in or materially reduces his rights or benefits under or pursuant to any such plan, but excluding any such action that is required by law; -5- (iv) without Executive's consent, the Company requires the executive to relocate to any city or community other than one within a 50 mile radius of the greater metropolitan area of Houston, Texas, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations under this Agreement; (v) there is any material breach by the Company of any provision of this Agreement; or (vi) there is a Change of Control (as defined below) of the Company. For purposes hereof, the term "Change of Control" shall have the meaning specified in the Option Agreement entered into by the Company and the Executive as of the date hereof pursuant to the Company's 2002 Stock Option Plan. Upon the Executive's termination of this Agreement for Good Reason, the Executive shall be entitled to the payments and other benefits specified in Section 5(f) hereof. (e) Voluntary Termination. Notwithstanding anything to the contrary herein, the Executive shall be entitled to voluntarily terminate this Agreement and his employment with the Company at his pleasure upon 30 days written notice to such effect. In such event, the Executive shall not be entitled to any further compensation other than any unpaid Salary and benefits accrued through the last day worked. At the Company's option, the Company may pay to the Executive the salary and benefits that the Executive would have received during such 30 day period in lieu of requiring the Executive to remain in the employment of the Company for such 30 day period. (f) Termination Benefits Upon Involuntary Termination or Termination for Good Reason. In the event that the Company terminates this Agreement and the Executive's employment with the Company for any reason other than for Cause (as defined in Section 5(a) hereof), death, disability (as defined in Section 5(c) hereof), then the Company shall pay the Executive an amount (the "Severance Payment") equal to one year's Salary plus the amount of bonus received by the Executive related to the fiscal year immediately prior to the year in which such termination occurs, payable over a 6-month period after such termination in accordance with the Company's customary payroll practices. In the event that the Executive terminates this Agreement and his employment with the Company for Good Reason (as set forth in Section 5(d) hereof), then the Company shall pay the Executive an amount (the "Good Reason Severance Payment") equal to one year's Salary plus a portion of the bonus received by the Executive related to the fiscal year immediately prior to the year in which such termination occurs which is (1) proportionate to the number of days during such year that the Executive was employed by the Company and (2) in no event less than fifty percent (50%) of the preceding year's bonus, payable over a 6-month period after such termination in accordance with the Company's customary payroll practices. In addition, following any such termination, the Executive shall be entitled to the following benefits (collectively, the "Additional Benefits"); -6- (i) continued coverage, at the Company's cost, under the Company's group health plan for the applicable coverage period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") but only if Executive elects such COBRA continuation in accordance with the time limits and in the applicable COBRA regulations; and (ii) an amount equal to the sum of (A) any unreimbursed expenses incurred by the Executive in the performance of his duties hereunder through the date of termination, plus (B) any accrued and unused vacation time or other unpaid benefits as of the date of termination. The parties agree that, because there can be no exact measure of the damages which would occur to the Executive as a result of termination of employment, such payments contemplated in this Section 5(f) shall be deemed to constitute liquidated damages and not a penalty and the Company agrees that the Executive shall not be required to mitigate his damages. The Severance Payment or the Good Reason Severance Payment, as the case may be, and the Additional Benefits shall be paid in lieu of any amounts payable by reason of any severance package or agreement offered or in effect by the Company, and shall be paid only if the Executive executes a termination agreement releasing all legally waivable claims arising from the Executive's employment. (g) Survival. Notwithstanding the termination of this Agreement under this Section 5, all provisions of this Agreement hereof which by their terms are to be performed following the termination hereof shall survive such termination and be continuing obligations. 6. COVENANTS OF THE EXECUTIVE. (a) Confidential Information. The Executive shall not, without the prior written consent of the Company (except as may be required in connection with any judicial or administrative proceeding or inquiry), disclose to any person, other than an officer or director of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive officer of the Company, any confidential information obtained by him, before or after the date hereof, while in the employ of the Company with respect to its business or assets, including, but not limited to, confidential information relating to the technology, properties, accounts, books, records, suppliers, trade secrets and contracts of the Company (collectively, the "Confidential Information"); provided, however, that Confidential Information shall not include any information known or available to the public (other than as a result of unauthorized disclosure by the Executive). (b) Covenant Not to Compete. The Executive acknowledges that he has been and will continue to be provided with Confidential Information in the course of his employment with the Company. The Executive agrees that in order to protect the Company's Confidential Information, it is necessary to enter into the following restrictive covenant, which is ancillary to the enforceable promises between the Company and the Executive in Section 6(a) of this Agreement. The Executive covenants that the Executive shall, during the term of this Agreement -7- and for a period of one (1) year following the termination of the Executive's employment hereunder for whatever reason, observe the following separate and independent covenants: (i) Neither the Executive nor any Affiliate (as defined in subsection (c) below) will, without the prior written consent of the Company, within the Area (as defined in subsection (c) below), either directly or indirectly, (1) become financially interested in a Competing Enterprise (as defined in subsection (c) below) (other than as a holder of less than five percent (5%) of the outstanding voting securities of any entity whose voting securities are listed on a national securities exchange or quoted by the NASDAQ Stock Market, including the OTC Bulletin Board or any comparable system), or (2) engage in or be employed by any Competing Enterprise as a consultant, officer, director, or executive or managerial employee. (ii) Neither the Executive nor any Affiliate will, without the prior written consent of the Company, either directly or indirectly, on Executive's own behalf or in the service or on behalf of others, solicit, divert or appropriate, or attempt to solicit, divert, or appropriate, to any Competing Enterprise, any person or entity whose account with the Company was serviced by or under the Executive's direction or supervision during the term of this Agreement. (iii) Neither the Executive nor any Affiliate will, without the Company's prior written consent, either directly or indirectly, on the Executive's own behalf or in the service or on behalf of others, solicit, divert, or hire away, or attempt to solicit, divert, or hire away, to any Competing Enterprise, any person employed by the Company, any of its subsidiaries or any dental practices affiliated with the Company or any of its subsidiaries through a long-term services agreement (collectively, the "Affected Parties"), whether or not such employee is a full-time or a temporary employee of any such Affected Party and whether or not such employment is pursuant to written agreement and whether or not such employment is at will. (c) The following terms used in Section 6(b) shall have the definitions set forth below: "Affiliate" means any person or entity directly or indirectly controlling, controlled by, or under common control with the Executive. As used herein, the word "control" means the power to direct the management and affairs of a person. "Area" means (i) any "Metropolitan Statistical Area" or "Primary Metropolitan Statistical Area" (as each such term is defined by the Federal Office of Management and Budget) in which the Company owns a dental center or has a dental center under development and (ii) within 10 miles of any dental center owned or under development by the Company that is not located in a Metropolitan Statistical Area or a Primary Metropolitan Statistical Area. "Competing Enterprise" means any person or any business organization of whatever form, engaged directly or indirectly within the Area in the business of the Company or any of it subsidiaries or any other related business conducted by the Company or any of its subsidiaries as of the time of the termination of the Executive's employment by the Company. -8- (d) The parties hereto agree that the Executive's breach of any covenant contained in this Section 6 could result in substantial damage to the Company which would be impossible to ascertain. By reason of that fact, the Executive agrees that, in the event of such breach, the Company shall have the right to enforce such provisions by injunctive or other relief in equity. (e) The parties hereto agree that if at any time while the Executive is subject to the provisions of Section 6(b), the Company breaches its obligation, if any, to make any Severance Payment or Good Reason Severance Payment to the Executive, and such breach is not cured within 10 days after written notice to the Company from the Executive, then the Executive shall be released from his obligations under Section 6(b). 7. PUT OPTION. (a) The following terms used in this Section 7 and in Section 8 shall have the definitions set forth below: "Common Share Equivalents" means, at any given time, the sum of (i) the number of Common Shares outstanding, plus (ii) the number of Common Shares issuable upon the exercise of the Warrants at such time, plus (iii) the maximum number of Common Shares issuable upon the exercise or conversion of all other outstanding warrants, options and convertible securities of the Company from time to time, without regard to whether such exercise or conversion is then available. "Common Shares" means shares of common stock of the Company, par value $.001 per share. "Fair Market Value Per Common Share" as at any determination date shall mean: (i) with respect to securities that are publicly traded, the average of the daily closing prices of such security for twenty-one (21) consecutive trading days ending on such date, or if such date is not a trading day, on the trading day immediately before such date (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 21-day trading period). The closing price for each day shall be the last reported sale price or, in case no reported sale takes place on such day, the average of the last closing bid and asked prices, in either case on the Principal Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid or asked prices, then the last bid and asked price of such security prior to 4:00 p.m. New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg, or, if the foregoing do not apply, the last closing bid and asked prices of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price of such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, -9- the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc.; or (ii) with respect to securities that are not publicly traded, an amount determined by an Independent Appraiser equal to (i) the fair market value of the common equity of the Company and its subsidiaries divided by (ii) the Common Share Equivalents outstanding on such determination date. In determining the fair market value of the Company and its subsidiaries, the Independent Appraiser shall value the Company and such subsidiaries as a going concern assuming the exercise of the Warrants, and without taking into account any discount for minority interest, absence of voting rights or lack of liquidity. "Independent Appraiser" means a business appraiser or investment banker of recognized regional standing (i) with experience in valuing companies engaged in businesses similar to that of the Company, (ii) that has no affiliation with the Company, the Executive or any of their respective affiliates and (iii) that has been selected in accordance with Section 7(e). "Note" means the senior subordinated convertible promissory note of the Company in the original principal amount of $700,000 issued to the Executive pursuant to the terms of the Note Purchase Agreement. "Note Purchase Agreement" means that certain Senior Subordinated Note and Warrant Purchase Agreement dated July 19, 2002 among the Company, the Executive, Heller Financial, Inc. and Midwest Mezzanine Fund II, L.P. "Put/Call Shares" means the Common Shares issued upon the conversion of the Note and the exercise of the Warrants. "Warrants" means those certain warrants to purchase Common Shares issued to the Executive pursuant to the Note Purchase Agreement. (b) If the Executive's employment is terminated by the Company without Cause, or if the Executive terminates his employment with the Company for Good Reason, the Executive shall have the option to require the Company to (i) purchase the Note for an amount equal to the outstanding principal amount thereof and all accrued interest thereon through the date of such purchase (such amount, the "Note Put Price"), and (ii) redeem and purchase all of the Warrants and Put/Call Shares held by the Executive (the "Put Option"), pursuant to the terms of this Section 7. The purchase price for the Warrants and the Put/Call Shares to be acquired by the Company shall be equal to the product of (A) the Fair Market Value Per Common Share, calculated as of the date the Put Option Notice (as defined below) with respect to such Put Option was given, and (B) the number of Put/Call Shares for which the Put Option has been exercised (such amount, the "Warrant Put Price," and together with the Note Put Price, the "Put Price"). For purposes of this Section 7, the number of Put/Call Shares for which the Put Option has been exercised is the number of Put/Call Shares included in such Put Option plus (without duplication), the number of Common Shares then issuable if the Warrants included in the Put Option were exercised for Common Shares on the date for determining the Warrant Put Price. -10- (c) The Executive may exercise the Put Option by delivering a written notice to the Company to that effect at any time within 60 days after the Executive's termination of employment without Cause or for Good Reason, as the case may be (the "Put Option Notice"). The Company, in consultation with the Executive, shall set the date for the closing of such Put Option (the "Sale Date"), which shall not be more than 120 days after the date on which the Put Option Notice was given. The Put Price shall be due and payable in full on the Sale Date, and upon payment of the Put Price, the Executive shall transfer and deliver to the Company (i) the Note and (ii) the certificate or certificates representing the Warrants and the certificate of certificates representing the Put/Call Shares, as the case may be, in each case together with all necessary assignments and endorsements. (d) The Company and the Executive acknowledge and agree that in order for the Company to fulfill its obligation to purchase the Note, the Warrants and the Put/Call Shares pursuant to this Section 7, the Company may need to obtain approvals or consents required pursuant to any loan agreement or other instrument or agreement to which the Company is then a party, enter into new or additional financing arrangements, and eliminate any legal restriction or limitation on its ability to consummate the Put Option. If the Put Option is exercised, the Company agrees to use all commercially reasonable efforts (i) to obtain any such required approval or consent under any such loan agreement or other instrument or agreement, (ii) obtain all financing as may be necessary to provide funds to pay the Put Price, and (iii) eliminate any legal restriction or limitation on the Company's ability to repurchase the securities hereunder. If the Put Option is exercised and the Put Price is not paid in full on the Sale Date, then such Put Option may be terminated by the Executive and the securities that were the subject of such Put Option may be the subject of a subsequent Put Option. The Executive acknowledges and agrees that this is the sole remedy for the Company's failure to pay the Put Price in full on the Sale Date. (e) The Independent Appraiser determining Fair Market Value Per Common Share in connection with the exercise of a Put Option shall be selected within 5 days of the date of the Put Option Notice by mutual agreement of the Company and the Executive. The cost of any appraisal utilized in calculating the Warrant Put Price shall be borne by the Company. A copy of all appraisal reports issued by the Independent Appraiser shall be delivered to the Executive on or prior to the 90th day after the Put Option Notice was given. (f) The closing of the Put Option shall take place at the principal office of the Company or such other place as may be mutually agreed to by the Executive and the Company. The Put Price shall be paid by cashier's or certified check or by wire transfer at closing. 8. CALL OPTION. (a) Upon the termination of the Executive's employment with the Company for any reason, the Company shall have the right, but not the obligation, to (i) purchase the Note for an amount equal to the outstanding principal amount and all accrued interest thereon through the date of such purchase (the "Note Call Price"), and (ii) redeem and purchase all of the Warrants and Put/Call Shares held by the Executive (such right, the "Call Option"), pursuant to -11- the terms of this Section 8. The purchase price for the Warrants and the Put/Call Shares to be acquired by the Company shall be either (A) an amount equal to the product of (x) the Fair Market Value Per Common Share, calculated as of the date the Call Notice (as defined below) with respect to such Call Option was given, and (y) the number of Put/Call Shares for which the Call Option has been exercised, in the event the Executive's employment with the Company is terminated due to the Executive's death or disability, termination by the Company without Cause or termination by the Executive for Good Reason, or (B) an amount equal to the par value of the Common Shares multiplied by the number of Put/Call Shares for which the Call Option has been exercised, in the event the Executive's employment with the Company is terminated for Cause or the Executive voluntarily terminates his employment with the Company (in each case, the "Warrant Call Price," and collectively with the Note Call Price, the "Call Price"). For purposes of this Section 8, the number of Put/Call Shares for which the Call Option has been exercised is the number of Put/Call Shares included in such Call Option plus (without duplication), the number of Common Shares then issuable if the Warrants included in the Call Option were exercised for Common Shares on the date for determining the Warrant Call Price. (b) The Company may exercise the Call Option by delivering written notice to the Executive (the "Call Notice") stating that the Company is exercising its Call Option, the Call Price to be paid (including supporting information and schedules to verify such calculation), and the date and time for the closing of the Call Option, which shall not be more than 120 days after the date on which the Executive receives the Call Notice. The closing of the Call Option shall take place at the principal office of the Company or such other place as may be mutually agreed by the Executive and the Company. The Call Price shall be due and payable in full on the date of the closing of the Call Option, and upon payment of the Call Price, the Executive shall transfer and deliver to the Company (i) the Note and (ii) the certificate or certificates representing the Warrants and the certificate or certificates representing the Put/Call Shares, as the case may be, in each case together with all necessary assignments and endorsements. The Call Price shall be paid by cashier's or certified check or by wire transfer at closing. 9. CONSENT AND WAIVER BY THIRD PARTIES. The Executive hereby represents and warrants that he has obtained all necessary waivers and/or consents from third parties as to enable him to accept employment with the Company on the terms and conditions set forth herein and to execute and perform this Agreement without being in conflict with any other agreement, obligations or understanding with any such third party. 10. NOTICES. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be delivered personally or mailed, certified or registered mail, return receipt requested, postage prepaid or delivered by commercial overnight courier service, charges prepaid to the following addresses, or such other addresses as shall be given by notice delivered hereunder, and shall be deemed to have been given upon delivery, if delivered personally, three business days after mailing, if mailed, or one business day after delivery to the overnight courier service, if delivered by overnight courier service: -12- If to the Executive: James M. Usdan P.O. Box 540876 Houston, Texas 77254-0876 If to the Company: Castle Dental Centers, Inc. 3701 Kirby, Suite 550 Houston, Texas 77098 Attn: Chairman, Compensation Committee Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 11. REMEDIES. Nothing contained in this Agreement shall be construed as prohibiting any party from pursuing any other remedies available to it for any breach or threatened breach, including, without limitation, the recovery of money damages. These covenants and disclosures shall each be construed as independent of any other provisions in this Agreement, and the existence of any claim or cause of action by the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such covenants and agreements. 12. WAIVERS AND MODIFICATIONS. This Agreement may be modified, and the rights and remedies of any provision hereof may be waived, only in accordance with this Section 12. No modification or waiver by the Company shall be effective without the consent of at least a majority of the Compensation Committee of the Board of Directors then in office at the time of such modification or waiver. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement supersedes all prior agreements between the Executive and the Company and sets forth all the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 13. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Texas and shall be binding upon and enforceable against the Executive's heirs and legal representatives. 14. SEVERABILITY. In case of one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been a part of this Agreement. Notwithstanding the foregoing, however, if for any reason any provision containing restrictions set forth herein is held to cover an area or to be for a length of time which is unreasonable, or in any other way is construed to be too broad or to any extent invalid, any such provision shall not be determined to be null, void and of no effect, but to the -13- extent the same is or would be valid or enforceable under applicable law, any court of competent jurisdiction shall construe and interpret or reform this Agreement to provide for a restriction having the maximum enforceable area, time period and other provisions (not greater than those contained herein) as shall be valid and enforceable under applicable law. 15. ASSIGNMENT; REPRESENTATIONS. This Agreement shall be binding upon and inure to the benefit of the Company, its successors, legal representatives and assigns and upon the Executive, his heirs, executors, administrators, and representatives. Any reference to the Company herein shall mean the Company as well as any successors thereto. The Company represents that it has all corporate power and authority necessary to enter into this Agreement and perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by the Company. [Signature page follows] -14- IN WITNESS WHEREOF, each of the parties hereto has executed this Employment Agreement as of the date and year first above written. COMPANY: CASTLE DENTAL CENTERS, INC. By: /s/ John M. Slack --------------------------------- Name: John M. Slack -------------------------------- Title: Secretary ------------------------------ EXECUTIVE: By: /s/ James M. Usdan --------------------------------- James M. Usdan EX-99.1 21 dex991.txt PRESS RELEASE DATED JULY 22, 2002 EXHIBIT 99.1 NEWS RELEASE Castle Dental Centers, Inc. 3701 Kirby Drive, Suite 550 Houston, TX 77098 (713) 490-8400 (OTC Bulletin Board: CASL.OB) - ------------------------------------------------------------------------------- For information contact: Amanda Hansen Marion, Montgomery, Inc. 713.523.7900, 713.523.7930 (fax) James M. Usdan President, Chief Executive Officer 713.490.8603 Joseph P. Keane Chief Financial Officer 713.490.8602 CASTLE DENTAL COMPLETES FINANCIAL RESTRUCTURING Dental leader reaches major milestone, continues to focus on service levels and operational results HOUSTON, July 23, 2002 -- Castle Dental Centers, Inc. (OTC Bulletin Board: CASL.OB), a full service dental care provider, today announced that it has completed the restructuring of its senior secured and senior subordinated debt, totaling approximately $70 million. The debt restructuring included the conversion of approximately $21.7 million of subordinated debt to equity in the form of newly-issued convertible preferred stock. New financing of $1.7 million, in the form of subordinated convertible notes, was received from the present holders of the Company's senior subordinated notes, Heller Financial (a GE Capital Healthcare Financial Services company) and Midwest Mezzanine Funds, as well as from the Company's president and chief executive officer, James M. Usdan. As a result of the conversion of debt and the new financing, GE Capital Healthcare Financial Services and Midwest Mezzanine Funds now own the majority voting rights in Castle Dental. With the signing of these agreements, the Company is no longer in default of its senior credit facility nor any other debt agreements. "The completion of our debt restructuring is a major milestone in the turnaround that has been ongoing for over a year at Castle Dental," said James M. Usdan, president and chief executive officer. "It is a significant achievement and the first step to returning the Company to profitability. The signing of these agreements allows our team to build upon successes implementing operational policies and communication programs that positively impact our employees, patients and the communities that have supported Castle for 54 years." Castle Dental Centers, Inc. July 23, 2002 Page 2 of 2 The new loan agreement with the senior bank group provides for a three-year term in the principal amount of approximately $47.4 million, with principal payments totaling $2 million in 2003, $4 million in 2004 and with the balance due in July 2005. Interest will accrue and be payable monthly at prime plus two percent. The Company issued warrants to the senior bank group to acquire convertible preferred stock equal to 12% of its fully-diluted equity. The Company also agreed to pay fees and costs incurred by the senior bank group in connection with the restructuring. "We appreciate the support of GE Capital Healthcare Financial Services and Midwest Mezzanine Funds, our new majority owners, in reaching these agreements and look forward to working with them as we continue to focus on improving our service levels and operating results," added Usdan. Castle Dental has provided quality dental care for over 54 years. With over 80 centers nationwide, Castle Dental provides a full spectrum of dental services including general and cosmetic dentistry, orthodontics, pedodontics and oral surgery. The Castle Dental family, including over 200 dentists and specialists, is committed to the dental health of its neighbors, neighborhoods and communities. Information contained in this press release, other than historical information, may be considered forward-looking in nature and is subject to various risks, uncertainties and assumptions. Among the key factors that may have a direct bearing on the Company are fluctuations in the economy, the degree and nature of competitions and the demand for the Company's services, changes in laws and regulations affecting the Company's business, and numerous other factors discussed in Castle Dental's filings with the Securities and Exchange Commission. --end-- -----END PRIVACY-ENHANCED MESSAGE-----