-----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, CQVJMGdVqe6V9FrPfZ6GNG1kdW1zogexgLj7AByi8Im7jD1Q8XoPXxrtMhZbLpso 3fn7vzdP1WDC+Hz42TCh7w== 0000950134-97-002117.txt : 19970326 0000950134-97-002117.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950134-97-002117 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED DENTAL CARE INC /DE/ CENTRAL INDEX KEY: 0000948556 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 752309712 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26688 FILM NUMBER: 97561887 BUSINESS ADDRESS: STREET 1: 14755 PRESTON RD STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144587474 MAIL ADDRESS: STREET 1: 14755 PRESTON RD STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 10-K 1 FORM 10-K PERIOD END DECEMBER 31, 1996 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-26688 UNITED DENTAL CARE, INC. (Exact name of registrant as specified in its charter) Delaware 75-2309712 (State of incorporation) (I.R.S. Employer Identification No.) 13601 Preston Road, Suite 500 East Dallas, Texas 75240 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 458-7474 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of class: COMMON STOCK, $.10 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on The Nasdaq Stock Market on March 12, 1997, was approximately $155.2 million. (For the purposes of this computation, all directors, officers and 10% beneficial stockholders of the registrant are deemed to be affiliates.) As of March 12, 1997, 8,925,416 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report is incorporated by reference from registrant's definitive proxy statement for its Annual Meeting of Stockholders (to be filed with the Commission pursuant to Regulation 14A). 2 TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PART III The information required by Part III of this Report is incorporated by reference from the registrant's definitive proxy statement for its Annual Meeting of Stockholders (to be filed with the Commission pursuant to Regulation 14A). ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3 ITEM 1. BUSINESS GENERAL United Dental Care, Inc. ("UDC" or "the Company") is a managed dental benefits company that is licensed to operate prepaid dental plans in 28 states and, as of December 31, 1996, provided dental coverage to approximately 1,700,000 members. The Company offers a comprehensive range of dental plans capable of meeting the needs of employer groups of all sizes as well as individuals. UDC's dentist networks, as of December 31, 1996, consisted of approximately 4,000 general dentists as well as specialty dentists providing a broad range of dental services. The Company markets its services through multiple distribution channels, including independent brokers, third-party arrangements with HMOs and a direct sales force of over 120 persons. In 1996, the Company entered into agreements to acquire five managed dental benefits companies and one dental referral plan company, all six companies having approximately 500,000 members in the aggregate. As of December 31, 1996, all but two of the acquisitions had been closed, and one of those two was completed effective January 1, 1997. Managed dental benefits plans are usually offered as an alternative to traditional dental indemnity insurance, although the Company has the capability of offering dual choice plans that provide both prepaid and indemnity plans. Industry sources report that prepaid dental plans are typically priced 20% or more below comparable indemnity plans. Prepaid dental plans are offered by employers to employees, frequently on a voluntary participation basis with all or part of the premium being paid by the employee. At the time of enrollment, participating employees and dependents become members of the prepaid dental plan and, under most of the Company's plans, each member is entitled to select his or her own dentist from the dentist network. The Company pays the network dentist a fixed monthly amount, or capitation payment, for each member who selected that dentist, regardless of the services rendered in any particular month. In addition, the dentist is paid a separate fee, or copayment, by the member at the time of service for many of the dental services covered under the plan. Under the prepaid dental plans of the Company, virtually all covered dental services are provided through these capitation arrangements, in which the Company bears little financial risk for either utilization levels or cost of services. THE MANAGED DENTAL BENEFITS INDUSTRY Background According to the U.S. Office of National Health Statistics, total expenditures for dental care in the United States grew from approximately $14.4 billion in 1980 to approximately $43.2 billion in 1993. According to the American Dental Association, there were approximately 138,000 active licensed dentists engaged in private practice in the United States in 1991. The American Dental Association estimated that in 1993 approximately 68% of the nation's private dentists were in solo practice and approximately 20% were in two-person practices. Historically, payment for dental services has been on a fee-for-service basis. Under this system, the individual, or a dental indemnity insurance company, pays fees established by the dentist for the dental services provided by the dentist and the dentist has little incentive to control costs or minimize expenses. The charges for services generally vary widely among dentists. Since the individual pays all or a portion of the established fees, the individual is reluctant to incur the costs of preventive dental care. In addition, the individual has limited access to information regarding cost and quality for use as a basis for selecting a dentist. Dental Indemnity Insurance The number of individuals in the United States with dental benefits was estimated by the National Association of Dental Plans to be approximately 117 million in 1995, representing approximately 46% of the total United States population. Historically, dental coverage was not an employee benefit customarily provided by employers. The Company believes that dental benefits are a frequently requested employee benefit. In response to employee demand, employers have increasingly offered dental coverage to employees usually in the form of indemnity insurance. According to a 1993 survey performed by Foster Higgins, an employee benefits consulting firm, approximately 87% of employers with more than 200 employees, approximately 63% of employers with 50-199 employees and approximately 3 4 39% of employers with 10-49 employees offer dental coverage as an available employee benefit. Dental coverage is typically offered as a separate benefit from medical coverage with the employer frequently paying none, or only a portion, of the premium for the dental coverage. Dental indemnity insurance is similar to medical indemnity insurance in that the individual or the employer pays a premium for the dental insurance coverage and the insurance company pays or reimburses the dentist in whole or in part for the charges for dental services. While dental indemnity insurance companies have utilized mechanisms to control costs such as limiting charges to reasonable and customary charges for the community in which the services are rendered and utilizing preferred providers with whom discounted fee schedules are negotiated, such mechanisms do not transfer significant risk to the dentist or provide significant incentives to the dentist to control costs or reduce fees or to the individual to utilize preventative dental services. Managed Dental Benefits Increasing concern with the costs of health care, including dental care, has resulted in a greater willingness by employers and consumers to consider managed health care delivery systems. The Company believes that these alternate delivery systems are able to provide for services, or benefits, at a lower cost, or premium, than fee-for-service alternatives. Companies having the management expertise and industry knowledge required to establish and maintain a network of specialized providers such as dentists have developed specialized managed delivery systems to provide such health care services. HMOs, PPOs and other forms of managed health care plans for general medical services have not customarily devoted the resources to develop specialty managed delivery systems and frequently subcontract with companies providing single specialty managed delivery systems such as the Company's prepaid dental plans. According to the National Association of Dental Plans, prepaid dental plans have grown from approximately 10.4 million covered members in 1991 to an estimated 23.9 million in 1996, an annual compounded growth rate of approximately 18.1%. The Company believes the relatively high growth rate for prepaid dental plans is attributable to: (i) the greater acceptance and utilization of managed care alternatives by employers and employees to reduce costs; (ii) the significant price advantage relative to indemnity plans; (iii) the cost effectiveness to employers of prepaid plans as an employee benefit; and (iv) the growing acceptance of capitated dental plans by dentists, resulting in improved accessibility and convenience for members. The number of people with dental benefits was estimated by the National Association of Dental Plans to be approximately 117 million in 1995, of which approximately 16% were covered under prepaid dental plans representing approximately 9% of the total United States population. The Company believes there is significant growth opportunity for the managed dental benefits industry. A prepaid dental plan pays a fixed monthly capitation payment to the network dentist who provides dental services as needed at either no cost to the member or at reduced fees (copayments) paid by the member. Consequently, the risk of high utilization is shifted to the dentist, although, generally, the dentist receives copayments for many covered services that are often greater than the direct costs of the dentist, reducing financial risk. The capitation method rewards efficient providers who stress routine, preventive care and control their fixed expenses. In comparison, under the traditional fee-for-service payment system, the risk of utilization is borne by the insurer or the consumer, with little incentive to the dentist to be an efficient provider. The Company believes that the ability of a managed dental benefits plan to volume purchase, shift risk to providers and manage both the costs and utilization of dental care typically results in premiums 20% or more below premiums for a traditional indemnity plan. In addition, some prepaid dental plans provide for specialty care at fixed copayments by the member. Unlike medical care, the majority of dental care is provided by general dentists with some specialty care provided by endodontists (specialists in root canal therapy), orthodontists (specialists in tooth movement), oral surgeons (specialists in extractions), pedodontists (specialists in dentistry for children) and periodontists (specialists in gum-related treatment). Companies such as UDC that arrange for specialty care at fixed copayments are further able to manage the costs and utilization of dental services through specialty referral authorization programs and discounted fee arrangements with specialty dentists. Medium to large employers increasingly expect comprehensive dental care, including specialty care, from prepaid dental plans, at stipulated copayments comparable to the type of coverage provided by a general medical plan. 4 5 According to the National Association of Dental Plans, the number of dentists affiliated with prepaid dental plans was approximately 27,500 in 1995, or approximately 19% of all active dentists. The Company believes that significant growth of prepaid dental plans will continue as a result of: (i) growing acceptance and participation in such plans by dentists; (ii) greater acceptance of such plans by consumers who are becoming increasingly aware of the price advantages, improved service and convenience offered by such plans; and (iii) recognition by employers that such plans can be used to provide important employee benefits at little or no cost to the employer. Consequently, the Company believes prepaid dental plans will be increasingly used to replace more expensive forms of dental coverage and provide dental coverage to greater portions of the population that presently have no dental coverage. The Company believes that the managed dental benefits industry has the potential for significant growth and is highly fragmented. The National Association of Dental Plans estimated that, at the beginning of 1994, approximately 40% of its members operating prepaid dental plans were single-state companies. The Company believes that large, independent, managed dental benefits companies will have a greater opportunity to grow and expand because of growing interest in multi-state coverage by medium and large employers and increased use by medical HMOs that contract with large dental plans to provide dental coverage to the medical HMO members. The Company believes that large dental plans have the resources and systems required to satisfy the expectations of employers and the requirements of dentists and regulatory authorities while achieving financial economies of scale. The Company believes that the factors supporting the growth of large dental plans will give rise to consolidation opportunities. BUSINESS STRATEGY The Company's goal is to be the leading dental benefits company in the United States with the ability to offer prepaid dental plans to employers of all sizes. The Company intends to maintain and develop a leadership position within each of its existing key markets and to strategically enter new markets that afford significant growth opportunities. At present, the Company is licensed to operate prepaid dental plans in 28 states not including one additional state to be entered through a pending acquisition. The Company believes that, as a large, multi-state managed dental benefits company with significant management depth and financial resources, it will have a competitive advantage over smaller and single-market companies in gaining market share and participating in the consolidation of the managed dental benefits industry. In order to implement its strategy, the Company will: Offer a Full Range of Comprehensive Dental Benefits Plans. One of the keys to the Company's success has been its ability to offer a broad range of prepaid dental plans providing different levels of dental coverage, including specialty care. The variety of its prepaid dental plans has enabled the Company to attract both small, single-market employers and large, multi-state employers as well as individuals. In addition, the Company has developed prepaid dental plans that may be offered in substantially all states where it is licensed so that large, multi-state employers can provide the same dental coverage to all of their employees. Ensure Quality Dental Care Through Accessible Dentist Networks. The Company's strategy is to have one of the three largest dentist networks in its key markets, providing a full spectrum of dental care, including specialty care. The Company believes that having provider relations representatives located in each of its key markets enhances the quality of its dentist networks. The local knowledge and expertise provided through these local representatives enables the Company to develop highly accessible dentist networks convenient for members, which is an important factor to employers in selecting a prepaid dental plan. All local efforts are supported by the Company's corporate and regional dental directors. Utilize Multiple Distribution Channel Sales Efforts. The Company sells its prepaid dental plans to employers through: (i) its direct sales force of over 120 persons focusing on medium to large groups such as multi-state employers, large independent insurance brokers and trade or professional organizations; and (ii) a network of independent insurance brokers who market to smaller employers and individuals. In addition, the Company sells to third- party medical HMOs that offer its prepaid dental plans as an additional benefit to members of the medical HMOs. The Company believes that its multiple distribution channel approach is a competitive advantage that provides the flexibility to meet the needs of the full spectrum of customers. 5 6 Emphasize an Integrated Approach to Customer Service. The Company utilizes an integrated service approach involving local and regional specialized service representatives to optimize its operations and product strategy for each target market. Local offices are maintained in each of the Company's key markets with specialized sales and service representatives for employer groups and insurance brokers and with the local provider relations representatives for dentists. Customer service is performed by member service centers, accessed via an 800-telephone number, with the objective of providing consistent, responsive and efficient member service. Acquire Other Managed Dental Benefits Companies. The Company intends to continue acquisition efforts to enter target markets and to expand its market penetration in current markets. The acquisition of U.S. Dental Management, Inc. ("US Dental") in November 1995 resulted in approximately 163,000 additional members, and the acquisition of Associated Health Plans, Inc. ("AHP") in January 1996 resulted in approximately 220,000 additional members. In 1996, the Company entered into agreements to acquire five managed dental benefits companies and one dental referral plan having approximately 500,000 members in the aggregate. These acquisitions are as follows:
Effective Approximate States of Date of Acquired Company Membership Prepaid Operation Ownership - ------------------------------------------------- --------------------- ------------------ ------------- Independent Dental Plans, Inc ("Independent") . 10,000 (managed) Michigan 10/01/96 Association Dental Plan, Inc. ("Association") . 60,000 (referral) Not applicable 10/01/96 OraCare DPO, Inc. ("OraCare") . . . . . . . . . 150,000 (managed) New Jersey, Pennsylvania 11/01/96 Kansas City Dental Care, Inc. ("KCDC") . . . . 90,000 (managed) Kansas, Missouri 11/01/96 United Dental Care, Inc. ("United") . . . . . . 90,000 (managed) Oklahoma 01/01/97 International Dental Plans, Inc. ("IDP") . . . 100,000 (managed) Florida Pending
The Company currently has no agreement or understanding relating to any other acquisition. BENEFITS PLANS Managed Dental Plans The Company offers a full spectrum of managed dental plans ("Plans") through numerous state-level subsidiaries. The Plans range from lower coverage, higher co-payment plans with low premiums to higher coverage, low co-payment plans with higher premiums. Under each of the Company's Plans, a premium is paid to the Company for the type of coverage selected, making the employee and each participating dependent a member of the Plan. Premium payments are made by the employer or by the employee (usually by payroll deduction) with respect to employer offered Plans or by the member directly. Over half of the Company's revenues are derived from Plans in which the member pays the entire premium. The remainder of the Plans are paid either entirely by the employer or partially by the employer with the member contributing the balance of the premium. Typically, the premiums charged are fixed for a 12-month contract, except for certain multiple year contracts that are subject to limitations on premium increases. Recently, the increase in the dental component of the Consumer Price Index has averaged approximately 6% per year. The Company estimates that its increases in premiums have averaged less than 3.5% per year and that the premiums charged by the Company are typically 20% or more below premiums for comparable indemnity dental plans. Consequently, the Company believes that it is able to offer Plans that are not only less expensive than the indemnity competition, but also have had lower increases than most dental costs and indemnity premiums. Many of the Company's Plans permit each member to select his or her own individual general dentist from the Company's dentist network at the time of enrollment. The Company intends to incorporate this flexibility into all its Plans. Each month, the Company pays a fixed payment, or capitation, to the member's general dentist regardless of which services are rendered in the month. In return for the capitation payment and the specified copayments, the general dentist agrees to provide all covered services for the member. 6 7 Although the Plans vary, typically routine preventive and diagnostic care (exams, x-rays, sealants, teeth cleanings) is provided at no charge or at a small co-payment, while basic care (including fillings and extractions) and specialty care (root canal therapy and gum disease, or periodontal services) is provided at stipulated copayments. More involved major care (such as crowns and bridges) is also provided at copayments that are frequently lower than the member's cost of coinsurance under a comparable indemnity insurance plan. Under many of the prepaid dental plans offered by the Company, specialty dental care by specialty dentists is made available to members. Specialty dentists are generally reimbursed by the Company on a discounted, fee-for-service basis and are not reimbursed on a capitated basis. Accordingly, the Company retains the risk for the payment of specialty care benefits in such situations. In the event that the utilization of specialty care benefits increases under the outstanding plans of the Company, it could substantially adversely affect the profitability of the Company. The Company believes that a specialty care referral program with specialty dentists providing services at fixed copayments is necessary for the cost management of dental care services. Orthodontic care is also available under many of the Company's Plans. Dual Choice Plans The Company is able to offer employers Plans providing both managed dental benefits and traditional indemnity insurance coverage, commonly referred to as dual choice plans. Such Plans allow an employee to select the most suitable type of coverage at the beginning of the contract year by offering each employee the choice of a prepaid plan utilizing the Company's dentist network or traditional indemnity insurance coverage utilizing any dentist, but usually at higher premiums and with lower coverage than the prepaid plan alternative. A dual choice plan is particularly useful when some employees reside in areas where the Company's dentist network is less developed or in states where the Company is not yet licensed to offer managed dental benefits. The indemnity portion of the dual choice plans is made available either through United Dental Care Insurance Company ("UDCIC"), the Company's subsidiary that is licensed to offer dental indemnity insurance in all states where the Company operates a prepaid dental plan, or through contractual arrangements with third party insurers. An employee who selects the indemnity insurance option pays a portion of the charges for covered services (or coinsurance) after satisfying any deductible. Although coinsurance payments are typically higher than the copayments charged for the same services under the other Company Plans, the employee may select any dentist for dental services. In certain states, the Company has contracted with PPOs for discounted fees for services covered under the Company's indemnity insurance. Currently, the Company intends to offer its dual choice plans and its point of service plan as an enhancement to the marketing of its core business of prepaid dental benefits. As of December 31, 1996, the Company had approximately 80,000 individuals covered through its indemnity insurance subsidiary, excluding point-of-service members who are considered prepaid members. Third Party Plans The Company offers customized plans and services through contractual arrangements with medical HMOs, including contracts under which the Company acts as a dental benefits subcontractor to HMOs that have contracted with state agencies to provide Medicaid benefits or that provide Medicare benefits. Under these arrangements, the Company often provides only preventive and diagnostic dental benefits but may also provide more comprehensive coverages, in each case either on a "private-label" basis or directly through the Company's Plans. As of December 31, 1996, the Company had 27 such arrangements, which accounted for approximately 21.0% of its membership and approximately 4.0% of its 1996 revenues. The Company believes its size and geographic scope give it a competitive advantage in developing additional third party HMO relationships. Point of Service Plan The Company has developed a point of service plan ("POS") that provides members of the Company's prepaid dental plans the option of receiving dental services from dentists outside the Company's dentist network on an indemnity basis providing less coverage. The POS Plan allows the member to select the dentist of the member's choice each time services are obtained. Although the Company charges higher premiums under the POS Plan, the Company has somewhat greater risk exposure than under its managed dental benefit plans. As of December 31, 1996, the Company had less than 6,000 POS members. 7 8 Dental Referral Plan Through its acquisition of Association Dental Plan, Inc., the Company offers a referral plan. This plan is currently delivered through a network of approximately 9,400 providers in 36 states. The referral plan contracts with the dental providers to provide dental services to referral plan members at certain scheduled fee-for-service rates. No capitation payments are made to dentists. Members of the referral plan pay a fixed fee per month for the member's ability to access the Company's referral plan network. There are no claim forms or deductibles and no pre-authorization is required. The Company bears no financial risk or responsibility for dental services provided to members in conjunction with its referral product. Indemnity Plans The Company's present strategy regarding dental indemnity insurance is to only offer its indemnity plans in those situations where an employer with greater than 250 employees declines to use the Company's dual choice products. To the extent future groups select the UDCIC indemnity policy, UDCIC will become subject to additional underwriting risk. DENTIST NETWORKS The Company designs its Plans and capitation programs to create dentist networks of general and specialty dentists that the Company believes provide the quality of care and convenience needed to attract and retain members. The Company's strategy is to have one of the three largest dentist networks in each of its key markets. As of December 31, 1996, the Company had provider contracts with approximately 4,000 general dentists. The Company also had contracts with specialty dentists representing the specialities of endodontics, oral surgery, orthodontics, periodontics and pedodontics. Since specialty care is covered under many of the Company's Plans, the Company has a specialty care referral review program in order to manage the specialty care provided. The Company employs 46 provider relations representatives, located in local offices situated in its key markets, who recruit general and specialty dentists, determine their qualifications for participation in the Company's network, provide administrative training to the dentist's office staff and assist the dentists with respect to participation in the Company's network. Collectively, the dental directors are responsible for establishing and monitoring the Company's quality review efforts, including credentialing and re-credentialing for network participation, review of specialty referrals and utilization review. Typically, the Company seeks established, private-practice dentists who have capacity in their practice to see at least 200 of the Company's members as new patients. Most general dentists and specialty dentists with whom the Company contracts have small dental offices similar to those familiar to most consumers. Both the dentist and the facility are reviewed in the Company's credentialing process, which incudes verification of licensure and malpractice coverage, as well as review of any actions that may have been taken by state regulatory authorities. In addition to professional practice capabilities, the Company also reviews the service amenities of the office, including available parking, days and hours of operation, a patient recall system for routine, preventive check-ups and radiographic and sterilization equipment and procedures. Upon determining that a dentist meets the Company's requirements for participation in the Company's dental network, the Company offers the dentist a provider contract setting forth the capitation payments, copayments, limitations and exclusions and other terms and conditions applicable to the specific Plans in which such dentist will participate. Provider contracts are typically non-exclusive and permit the Company or the dentist to terminate the contract with 90 days prior written notice. The Company periodically reviews its general and specialty dentists for continued compliance with Company requirements for participation in the Company's dentist network. The Company believes that the advantages to a dentist who participates in a managed dental benefits plan include: (i) increasing the size of the dentist's practice as a result of selection of the dentist by plan members and referrals from plan members; (ii) increasing practice profitability through utilization of excess capacity to accept additional patients; (iii) generation of predictable incremental cash flow from regular capitation payments; (iv) retention of patients seeking managed dental plan participation; and (v) reduction of paper work and collection risks associated with conventional fee-for-service practices. 8 9 The general and specialty dentists are independent from the Company, providing service to members of the Company's Plans based upon dental practice standards in the community and their contractual arrangements with the Company. The Company requires that its network dentists maintain malpractice insurance and satisfy quality service standards. In connection with the OraCare acquisition, the Company acquired a dental management company that has entered into a management agreement with the OraCare dental professional association pursuant to which the management company will furnish the facilities and equipment and certain management services to the dental professional association. In combination, the dental management company and the dental professional association employed 111 employees at December 31, 1996, engaged in providing dental services to members of the general public and members of the Company's prepaid dental plans. The Company's business strategy is dependent to a large extent upon the Company's continued maintenance of a large network of quality general and specialty dentists in each of the Company's markets. Generally, the Company and network dentists enter into nonexclusive contracts that can be terminated by either party with limited notice (generally 90 days). Primarily for such reasons, the Company did not allocate for financial statement purposes any portion of the consideration paid in its acquisitions to the dentist networks of the acquired companies. The Company's business may be adversely affected if the Company is unable to establish and maintain contracts with an adequate number of dentists in any market. MARKETS AND OPERATIONS The Company currently is licensed to sell its prepaid dental plans in 28 states, and its indemnity plan in 27 states including an acquisition that was completed effective January 1, 1997, which added the state of Oklahoma where the Company is licensed to sell both prepaid and indemnity plans. As of December 31, 1996, approximately 76.5% of all UDC prepaid plan members were located in five states, Arizona, Texas, New Jersey, New Mexico and Missouri. The following table shows the approximate number of managed benefits members, indemnity members, referral plan members and total members of the Company as of December 31, 1996.
Managed Benefits Indemnity Total State Members Members Members ----------------------------------------- --------- ------ --------- Arizona . . . . . . . . . . . . . . . 518,276 19,574 537,850 Texas . . . . . . . . . . . . . . . . 284,762 6,122 290,884 New Jersey . . . . . . . . . . . . . 173,564 ---- 173,564 New Mexico . . . . . . . . . . . . . 115,456 2,789 118,245 Missouri . . . . . . . . . . . . . . 104,305 3,782 108,087 Colorado . . . . . . . . . . . . . . 96,313 10,103 106,416 Ohio . . . . . . . . . . . . . . . . 70,306 296 70,602 Utah . . . . . . . . . . . . . . . . 40,870 13,837 54,707 California . . . . . . . . . . . . . 41,429 11,208 52,637 Washington . . . . . . . . . . . . . 40,697 3,973 44,670 Other States . . . . . . . . . . . . 77,324 8,935 86,259 Referral members . . . . . . . . . . ---- ---- 85,370 --------- ------ --------- TOTALS 1,563,302 80,619 1,729,291 ========= ====== =========
The acquisition of US Dental added approximately 163,000 members located in four states where the Company already operated prepaid plans. The acquisition of AHP added approximately 220,000 members, all of whom were located in Arizona. The acquisition of Independent added approximately 10,000 members, all of whom were located in Michigan. The acquisition of Association added approximately 60,000 referral members spread across the United States. The acquisition of OraCare, effective November 1, 1996, added approximately 150,000 prepaid members in New Jersey and Pennsylvania. The KCDC acquisition, also effective November 1, 1996, added approximately 90,000 prepaid members in Kansas and Missouri. 9 10 The Company sells its Plans to small, single-market employers and large, multi-state employers, as well as to individuals. No single employer group accounted for more than 2% of the Company's revenues for the year ended December 31, 1996. The Company currently maintains its regional customer service centers in Phoenix, Arizona; San Diego, California; Denver, Colorado; and Dallas, Texas. In addition, the Company maintains 28 local offices with group sales and service representatives and provider relations representatives in its key markets having a significant concentration of members. SALES The Company sells its Plans primarily to employers through: (i) its direct sales force of over 120 persons focusing on medium to large groups such as multi-state employers, large independent insurance brokers and trade or professional organizations; and (ii) a network of independent insurance brokers who market to smaller employers and individuals. In addition, the Company sells to medical HMOs to offer the Company's Plans as an additional benefit to HMO members. The Company believes its multiple distribution channel approach is a competitive advantage that provides the flexibility to meet the needs of the full spectrum of customers. The Company has focused the efforts of its direct sales representatives on medium-to-large employers typically employing more than 250 employees and having no relationship with an insurance broker. If an employer utilizes an insurance broker, the Company generally sells through the broker to maintain its broker relationships. The Company's direct sales representatives are compensated by a combination of base salary and commissions based upon membership growth. The Company has implemented a direct sales effort in all of its major markets. The Company also sells its Plans through independent insurance brokers who typically have relationships with smaller employers. Approximately three-fourths of the Company's membership is the result of sales through brokers who receive commissions based on premiums received by the Company from such sales. The Company has actively pursued alliances with HMOs to offer its Plans to HMO members either on a private label basis or as a separate benefit and currently has 27 such agreements in place. The Company believes that, as HMOs seek to differentiate their services, many will consider contracting for dental benefit plans and that the Company has a competitive advantage in arranging alliances with HMOs as a result of the Company's experience, size and geographic scope. Sales to employers, regardless of distribution channel, involve selling both the employer and its employees. Typically, the employee has the opportunity to select the Company's Plans during an annual open enrollment period. Frequently, representatives of the Company have the opportunity to make presentations directly to the employees, while, in other cases, the employer distributes the Company's marketing materials that explain the features and benefits of the Company's Plan. The Company stresses: (i) the quality and size of its dentist networks; (ii) the comprehensiveness of its Plan, including specialty care coverage; (iii) its integrated customer service approach in responding to member inquiries or complaints, including requests to change general dentists; and (iv) the value of the Plan in relation to Plan premiums and copayments. CUSTOMER SERVICE The Company employs 126 group sales and service representatives, 46 provider relations representatives and 70 customer service representatives with primary responsibility to service the needs of its groups and brokers, general and specialty network dentists and members, respectively. The Company's group sales and service representatives and provider relations representatives are based at the local market level, while the Company's customer service representatives are located at four regional customer service centers in Arizona, California, Colorado and Texas. Inquiries or complaints from members are handled over the telephone via 800-telephone numbers by the regional customer service representatives who provide consistent, responsive and efficient member services. The Company believes this integrated approach enables it to respond quickly and personally to group, broker and dentist issues where direct interaction is critical. 10 11 MANAGEMENT INFORMATION SYSTEMS All administrative, accounting, finance and information services are provided from the Company's administrative offices in Dallas, Texas. The Company believes that, in the managed dental benefits industry, an advanced information system can be a significant competitive advantage. Accordingly, in 1995, the Company entered into a contract to acquire an advanced software program specifically designed for the managed dental benefits industry and, subsequently, has acquired the necessary hardware to fully utilize such software. The Company believes its new information system will significantly enhance the Company's capabilities to provide customer service, analyze provider utilization, create opportunities to take advantage of market conditions and support new product development. All of the Company's business is in the process of being converted to the new information system. The conversion of the internally developed systems formerly in use by International Dental Health, Inc. ("IDH") and AHP prior to their respective acquisitions by the Company has been substantially completed. The Company's internally developed system and the internally developed system used by US Dental at the time of the US Dental acquisition are in the process of being converted. Until the conversion is completed, the Company believes its system and the US Dental system are adequate for the Company's current needs. The Company expects that all of these systems will be fully converted to the new system by the end of 1997. The information systems of the recent and pending acquisitions will be converted to the new system as rapidly as possible, although the timing for the completed integration of such systems cannot currently be estimated. The Company has an administrative services agreement with R. E. Harrington, Inc. ("Harrington") pursuant to which Harrington provides indemnity claim administrative services to the Company. The Company pays Harrington 4.85% of all claims paid by Harrington, which percentage may be reduced if Harrington does not meet performance guarantees. The term of this agreement is from January 1, 1997 to December 31, 1999, but the Company may terminate the contract with 90-day advance written notice and the payment of a contractual penalty. IDH ACQUISITION The Company acquired IDH in September 1994 in furtherance of the Company's growth strategy. The IDH acquisition resulted in the addition of approximately 460,000 new members, prepaid dental plan licenses in 20 additional states and dental indemnity insurance licenses in all but two of the 24 states where the Company is currently licensed to offer its Plans. Since September 1994, the Company has consolidated the administrative functions of IDH into the centralized administrative operations of the Company in Dallas, Texas. The aggregate consideration of approximately $19.7 million relating to the IDH acquisition (consisting of approximately $14.3 million paid for IDH stock and approximately $5.4 million payable under the non-competition and consulting agreements with certain IDH stockholders) was allocated by the Company for financial statement purposes in the amounts of approximately $15.7 million to goodwill, approximately $0.3 million to the non-competition agreements, approximately $0.1 to the consulting agreements and approximately $3.6 million to tangible assets. Goodwill relates to items traditionally associated with going concern value such as the reputation of IDH in its markets, name recognition, the ability to maintain and further develop systems, and market position in geographic areas in which the Company previously did not have a market presence. The allocation of the consideration relating to the IDH acquisition for financial statement purposes by the Company was not based on a third party appraisal of the IDH assets. The Company relied on its own expertise and experience in the industry in making a valuation of the IDH assets for such allocation. Other than the amounts allocated to the non-competition and consulting agreements, the Company did not allocate any portion of such consideration to other intangibles such as the IDH dentist networks and subscriber contracts. The Company did not allocate any portion of the IDH consideration to the IDH dentist networks because the contracts between IDH and the dentists are non-exclusive and may be terminated with limited notice (generally 90 days). The Company believes that the expense attributable to recruiting new dentists does not constitute a material portion of the Company's expenses incurred with respect to its ongoing activities relating to credentialing dentists and maintaining its dental provider relationships. The Company did not allocate any portion of the IDH consideration to the IDH subscriber contracts because the IDH employer group agreements were generally for one year with a substantial percentage renewable in January. As such, at the time of the IDH acquisition, the remaining life of a 11 12 significant percentage of the IDH employer group agreements was less than six months. Individual subscribers may terminate participation in the plan periodically during the term of an employer group agreement or at any time if they cease to be employed by the employer having a group agreement. The Company estimates that terminations by members of the IDH plans in 1994 constituted approximately 31% of the total membership in the IDH plans during 1994. The Company considers that the significant growth in the total number of IDH subscribers was attributable primarily to ongoing sales and account maintenance efforts. The costs relating both to recruiting, credentialing and maintaining the dentist networks and to sales and account maintenance efforts are expensed by the Company as incurred. The amounts allocated as the values of the non-competition and consulting agreements were significantly below the contractual payments due under such agreements. Those amounts were based on an estimate by the Company of the value of the benefits expected under such agreements. With respect to the non-competition agreements, the Company did not consider it likely that significant revenues would have been lost if such IDH stockholders could have competed with the Company after the acquisition due to factors such as the age of the IDH stockholders, the substantial time necessary to develop and obtain regulatory licensure for a new company in the industry and the low probability that a significant number of employers or subscribers would contract with a new start-up competitor upon renewal. With respect to the consulting agreements, the allocation by the Company was based on its estimate of the value of the consulting services actually expected to be received under such agreements which consulting services have not been and are not expected to be significant. US DENTAL ACQUISITION The Company entered into a definitive agreement dated July 19, 1995, to purchase all of the outstanding capital stock of US Dental, a managed dental benefits company headquartered in Phoenix, Arizona. The US Dental acquisition closed on November 27, 1995. US Dental operated prepaid dental plans in Arizona, Colorado, Nebraska and New Mexico, and administered a prepaid dental plan owned by a third party in Nevada. The Company also had operations in each state where US Dental operated prepaid dental plans. US Dental had revenues of approximately $13.3 million and $13.0 million for the years ended December 31, 1995 and 1994, respectively. Revenue of $2.2 million was included in the UDC consolidated financial statements for its two months of ownership in 1995. The prepaid dental plans offered by US Dental are similar to the Company's Plans. The consideration given by the Company in connection with the US Dental acquisition was $12.6 million, which included the present value of amounts payable under consulting agreements and non-competition agreements entered into with each of the two former stockholders of US Dental. Each consulting agreement has a term of 50 months and provides for $522,264 in the aggregate to be paid in 48 equal monthly installments commencing the third month after the closing. Each non-competition agreement has a three year term and provides for $55,991 in the aggregate to be paid in 36 equal monthly installments commencing the month of closing. In addition, at closing, US Dental paid in full loans owed to the two former stockholders of US Dental in the aggregate principal amount of $200,000 and a bank loan in the principal amount of $50,000. Approximately $10.3 million of the purchase price was in the form of a promissory note due January 18, 1996. In allocating, for financial statement purposes, the consideration to be paid by it in connection with the US Dental acquisition, the Company applied the same principles that it applied in connection with the IDH acquisition. Approximately $11.7 million of such consideration was allocated to goodwill, approximately $0.2 million was allocated to the non-competition and consulting agreements and the balance of such consideration was allocated to tangible assets. No portion of such consideration was allocated to other intangibles such as the dentist networks and subscriber contracts for the same reasons applicable to the IDH acquisition. ASSOCIATED ACQUISITION The Company executed a definitive stock purchase agreement dated December 14, 1995, to acquire Associated Health Plans, Inc. ("AHP"), a managed dental benefits company, and Associated Companies, Inc. ("ACI"), the management company for AHP (collectively "Associated"). The acquisition became effective as of the close of business on January 31, 1996. 12 13 Associated, headquartered in Tucson, Arizona, operates managed dental benefit plans in Arizona, providing dental benefits to over 220,000 members. AHP had revenues of approximately $14.2 million and $12.6 million for the years ended December 31, 1995 and 1994, respectively. The consideration given by the Company in connection with the Associated acquisition was $15.0 million, which included the present value of amounts payable under non-competition agreements entered into with four former shareholders of Associated. The non-competition agreements totaled $600,000 and have a three year term payable in equal monthly installments commencing February 1996. In allocating, for financial statement purposes, the consideration to be paid by it in connection with the Associated acquisition, the Company will apply the same principles that it applied in connection with the IDH acquisition and the US Dental acquisition. Approximately $14.1 million of such consideration was allocated to goodwill, approximately $0.6 million was allocated to the non-competition agreements and the balance of such consideration was allocated to tangible assets. No portion of such consideration was allocated to other intangibles such as the dentist networks and subscriber contracts for the same reasons applicable to the IDH acquisition. ORACARE ACQUISITION On September 5, 1996, the Company entered into agreements to acquire OraCare DPO, Inc. ("OraCare"), a New Jersey prepaid dental plan having approximately 150,000 members, and to acquire a dental management company affiliated with OraCare. Approximately 75.6% of the OraCare's members were Medicaid members of medical HMOs that contracted with OraCare to provide the dental benefits under their plans. Members of one medical HMO represented approximately 34.4% of OraCare's total membership. In addition, as a part of the acquisition, the Company agreed to cause an affiliate to acquire a dental professional association owned by the majority stockholder of OraCare. The affiliated management company provides management services to both the prepaid dental plan and the dental professional association which, as of December 31, 1996, operated nine dental clinics servicing both members of the OraCare prepaid dental plan and other third-party prepaid and fee-for-service patients. In connection with the OraCare acquisition, the Company entered into employment agreements with two former OraCare stockholders as operating officers of the OraCare management company and two former stockholders as dental directors and dental providers of the dental professional association. The acquisition became effective November 1, 1996. The OraCare entities had combined revenues of $9.2 million and $7.6 million for the years ended December 31, 1995 and 1994, respectively, and $12.0 million for the nine months ended September 30, 1996. The consideration paid by the Company in connection with the OraCare acquisition was $30.5 million plus certain contingent payments up to a maximum aggregate amount of $6.0 million based on the financial performance of the Company in the states of New Jersey and Pennsylvania in 1997 and 1998. Approximately $31.2 million of the initial consideration in the OraCare acquisition was allocated to goodwill for financial statement purposes. Approximately $24.9 million of the purchase price was in the form of a promissory note due January 2, 1997. In response to certain regulations in New Jersey, the capital stock of the OraCare dental professional association was acquired by a licensed New Jersey dentist designated by the Company. The laws of New Jersey where the dental clinics are located prohibit dentists from sharing fees with non-dentists and prohibits non-dentist entities from practicing dentistry. Although the Company believes the operations of the dental management company are and will be in material compliance with existing applicable laws, the structure of the management relationship between the Company and the dentist has not been the subject of any state regulatory interpretations. The Company has not previously engaged in the dental practice management business. The OraCare dental management company entered into a management agreement pursuant to which it will furnish the facilities and equipment and certain management services to the OraCare dental professional association relating to the operation of its dental clinics. Through the terms of the management agreement, the Company has complete control over the dental professional association with the exception of the provision or direction of dental services. The management agreement entered into with the dental professional association substantially restricts the business activities of the dental professional association and the rights of its shareholder, a licensed New Jersey dentist who is an officer of the Company. The dental professional association has nominal capital and an insignificant amount of net assets. The Company is responsible for the selection of facility sites as 13 14 well as all equipment and the purchase or leasing of same. Fees outlined in the management agreement are structured to operate the dental professional association at a break even level. Additionally, the dentist has provided the Company, for nominal consideration, with an option to transfer, at the Company's discretion, the ownership of the dental professional association to another licensed dentist of the Company's choosing. Successor dentists will be required to provide a comparable option to the Company as a condition of the transfer of the ownership of the dental professional association to each successor dentist. The financial statements of the dental professional association are consolidated with the Company's because the Company (as opposed to any affiliate of the Company) has unilateral and perpetual control over the assets and operations of the dental professional association and because, notwithstanding the lack of direct ownership, consolidation is necessary to present fairly the financial position and results of operations of the Company due to the existence of a parent-subsidiary relationship by means other than direct ownership of the dental professional association's voting stock. The Company has perpetual control over the dental professional association because the Company does not intend to terminate its management agreement with the dental professional association and, upon termination of any such agreement by the dentist, the Company intends to exercise the stock transfer option described above. UICI ACQUISITION On September 10, 1996, the Company entered into definitive agreements to acquire the following companies, one of which is wholly owned by UICI, formerly known as United Insurance Companies, Inc., and one of which is majority owned by UICI: (i) United Dental Care, Inc. ("United") which, through an indemnity insurance subsidiary, operates a prepaid dental plan in Oklahoma having approximately 90,000 members; and (ii) International Dental Plan, Inc. ("IDP"), which operates a prepaid dental plan in Florida having approximately 100,000 members. On the same date, the Company agreed to acquire Association Dental Plan, Inc. ("Association"), a wholly owned subsidiary of UICI that operates a multi-state dental referral plan having approximately 60,000 members. United, IDP and Association had combined revenues of approximately $16.6 million for the year ended December 31, 1995 and $13.1 million for the nine months ended September 30, 1996. The acquisition of Association was completed effective October 1, 1996 , and the acquisition of United became effective January 1, 1997. At March 7, 1997, the acquisition of IDP was still pending Florida regulatory approval. The consideration paid by the Company in connection with the United acquisition was approximately $10.8 million. In connection with the United acquisition, the Company entered into four-year employment agreements with two employees of United. The consideration paid in the Association acquisition was $2.5 million. In addition, in connection with the Association acquisition, a note owed by Association to UICI having a balance of approximately $695,000 was repaid in full. Approximately $5.6 million of the initial consideration in the United acquisition and approximately $3.5 million of the initial consideration in the Association acquisition were allocated to goodwill for financial statement purposes. The IDP acquisition is subject to the receipt of Florida regulatory approval. The consideration to be paid by the Company in the IDP acquisition is $4.5 million. The Company presently anticipates that approximately $3.2 million of the consideration in the IDP acquisition will be allocated to goodwill for financial statement purposes. In the Association acquisition, the Company and two marketing entities affiliated with UICI having approximately 5,000 dedicated agents entered into a marketing agreement pursuant to which such agents will market the dental benefit products of the Company. KANSAS CITY DENTAL CARE ACQUISITION On September 11, 1996, the Company entered into an agreement to acquire Kansas City Dental Care, Inc. ("KCDC"), which operates prepaid dental plans in Missouri and Kansas having approximately 90,000 members in the aggregate. KCDC had revenues of approximately $8.4 million for the year ended December 31, 1995 and approximately $7.2 million for the nine months ended September 30, 1996. The consideration paid by 14 15 the Company in connection with the KCDC acquisition is $12.5 million plus a contingent payment up to a maximum of $2.0 million based on the financial performance of the Company in the states of Missouri and Kansas in the second year after completion of the acquisition. The acquisition became effective November 1, 1996. Approximately $12.7 million of the consideration paid in the KCDC acquisition was allocated to goodwill for financial statement purposes. In connection with the KCDC acquisition, the Company entered into three-year employment agreements with two management officers of KCDC, one of whom was a stockholder and officer of KCDC and the other of whom was the current chief executive officer (and stock option holder) of KCDC. The company previously operated prepaid dental plans in both states. INDEPENDENT DENTAL PLAN ACQUISITION On June 28, 1996, the Company entered into an agreement to acquire Independent Dental Plan, Inc. ("Independent"), which operates a prepaid dental plan in Michigan having approximately 10,000 members. Independent had revenues of approximately $1.7 million for the year ended December 31, 1995 and $1.3 million for the nine months ended September 30, 1996. The Independent acquisition was completed effective October 1, 1996. The consideration paid by the Company in connection with the Independent acquisition was approximately $1.3 million. The amount of $1.5 million was allocated to goodwill for financial statement purposes. In addition, in connection with the Independent acquisition, the Company entered into employment agreements with two of the operating officers of Independent. COMPETITION There are numerous competitors wherever the Company conducts business, creating a highly competitive marketplace. The Company's competitors include: (i) large insurance companies with the capability to offer both managed dental benefits and traditional dental indemnity insurance; (ii) HMOs that also offer dental benefits; (iii) self-funded employer programs; (iv) dental PPOs; (v) discounted, fee-for-service membership plans; and (vi) other local or regional companies offering prepaid dental plans. The Company believes that the competition from all of such sources will continue to increase in the future and that insurance companies and HMOs in particular will continue to seek to enter the managed dental benefits business and expand their dental care markets. Many of the Company's competitors are better known to the public and have substantially greater financial and other resources than those of the Company. The Company believes the key factors in selecting a particular managed dental benefits company include: (i) the comprehensiveness and range of prepaid plans offered; (ii) the quality, accessibility and convenience of dentist networks; (iii) the responsiveness of customer service; and (iv) the premium charged. In all of the Company's markets, other prepaid dental plans and insurance companies compete aggressively on all of these factors, particularly in situations where the selection is through a competitive bidding process. In recent years, the Company has seen increasing competition coming from all competitive sectors and the Company anticipates that this trend will continue. Certain markets also have intense price competition that could occur in all markets in the future. Price considerations have been a significant competitive factor in the past and the Company believes pricing will continue to be a significant competitive factor in the future, especially with respect to contracts awarded on the basis of competitive bidding. Larger, national indemnity insurance companies that offer both prepaid and indemnity dental coverage may have a competitive advantage over independent dental plans due to availability of multiple product lines, established business relationships, better name recognition and greater financial and information systems resources. The Company believes that it can effectively compete with insurance companies due to the specialized focus of its management team and resources directed towards developing competitive dental benefits plans at generally lower premiums. While some medical HMOs offer their own prepaid dental plans, others contract with independent managed dental plans for those services. The Company believes that it can compete with HMOs that offer dental benefits and pursue opportunities to form alliances with HMOs to offer dental benefits to HMO members. 15 16 GOVERNMENT REGULATION General State insurance laws and other governmental regulations establish various licensing, operational, financial and other requirements relating to the prepaid dental plan business. State insurance departments and other regulatory agencies are typically empowered to interpret such laws and promulgate regulations applicable to the prepaid dental plan business. The laws and regulations relating to the health care industry in general, and prepaid dental plans specifically, are rapidly developing and have been the subject of numerous past and present proposals which, if adopted, could adversely affect the Company's business. Such proposals have included proposals that would require the Company to admit "any willing provider" to its dental networks, create mandatory minimum capitation payments to dental providers and specify minimum loss ratios or mandate schedules of benefits. In addition, the Company's insurance company subsidiary is subject to numerous laws and regulations applicable to insurance companies generally. The Company is unable to predict the extent to which changes to existing laws and regulations will be adopted or the effect that any such changes may have on the Company's business. The Company's ability to conduct its business in additional states is subject to regulatory approvals required in connection with either acquisitions of existing prepaid dental plan businesses or the application of the Company to conduct its existing business in additional states. Approvals to acquire another licensed prepaid dental plan business often require six months or longer to obtain, while licenses and approvals necessary to commence operations of the Company's existing business in an additional state can require two years or longer to obtain. In addition, no assurance can be given that the Company's applications for any such licenses or approvals will be granted, in which case the Company's plans to expand in additional states would be adversely affected. In circumstances where the Company is unable to obtain licenses to conduct its business in a particular state or pending the grant of a license, the Company would be required to conduct business through contractual arrangements with a licensed insurance company or a licensed HMO, which arrangements are typically less advantageous to the Company than its independent offering of its prepaid dental plans. See "--Business Strategy." In addition to regulatory approvals for acquisitions and additional licenses, various regulatory approvals and filing requirements may apply to ongoing aspects of the Company's business such as approvals for benefits plans offered, premium rates and certain contractual relationships with HMOs and insurance companies. If the Company fails to maintain compliance with all material regulations, regulatory authorities are empowered to take certain actions against the Company such as license revocations that could adversely affect the Company's ability to conduct business. United Dental Care Insurance Company UDCIC is licensed to conduct business in 27 states. UDCIC is a traditional indemnity insurance carrier and therefore assumes underwriting risk. Currently, UDCIC provides the indemnity portion of some of the Company's dual choice and point of service plans. UDCIC has not issued any other form of insurance, and its maximum coverage under each dental insurance policy is generally $1,000. UDCIC is regulated by the Arizona Department of Insurance and the departments of insurance of the other states in which UDCIC is licensed to transact insurance business. The Company's ability to expand UDCIC's insurance operations into states in which UDCIC is not currently licensed is dependent, for the most part on prior regulatory approval, which must be sought from the department of insurance in each state in which the Company is applying. Such reviews may take from six months to two years or more. Insurance companies are heavily regulated and require significant cash deposits for capital and surplus. The regulations of the various state insurance departments include specific requirements with regard to such matters as minimum capital and surplus, permitted investments, advertising, policy forms and claims processing requirements. See "Item 3. Legal Proceedings." In December 1992, the National Association of Insurance Commissioners approved risk-based capital ("RBC") standards for life and/or health insurance companies, as well as a Model Act (the "RBC Model Act") to apply to such standards at the state level. The RBC Model Act requires an insurance company to submit an annual RBC report which compares its total adjusted capital with its risk-based capital as calculated by an RBC 16 17 formula which takes into account the risk characteristics of the company's investments and products. The RBC formula includes capital requirements for four categories or risk: asset risk, insurance risk, interest rate risk and business risk, with capital requirements increasing for higher levels of risk. There are four levels of progressively more intense regulatory action against insurance companies whose total adjusted capital does not meet the RBC standards, starting with the company being required to submit a plan to improve its capitalization and ending with the state insurance department placing the company under regulatory control. The State of Arizona adopted the RBC Model Act effective January 1, 1996. At December 31, 1996, UDCIC's total adjusted capital was $4.3 million, or 106%, of the "company action level" of the RBC standard of $4.0 million. If the capital and surplus of UDCIC do not exceed the "company action level" at December 31, 1997, UDCIC would be required to submit a business plan to the state regulators. The Company does not believe that compliance with the RBC standards will adversely affect the Company's business since the Company estimates that UDCIC will be able to satisfy such standards without the need for significant capital contributions by the Company. In addition, the Company does not consider that compliance with the RBC standards will adversely affect the ability of the Company to meet its anticipated operating cash requirements. Medicare/Medicaid Programs The Company contracts with certain medical HMOs that provide health services to members under the Medicare or Medicaid programs administered by certain state agencies. The Company provides the dental benefits coverage under such plans of the medical HMOs. The medical HMOs receive reimbursement under either the Medicare or Medicaid programs for the benefits provided. As a result, the availability of such reimbursement or decreases in the level of reimbursement or changes in regulatory requirements could have a significant impact on the decisions of the medical HMOs to continue to offer dental benefits. In addition, in the event that the contracts between such medical HMOs and the state agencies are terminated or not renewed, such termination or nonrenewal would also terminate the Company's contract with such medical HMO as a provider for dental benefits. EMPLOYEES At December 31, 1996, the Company employed approximately 507 employees, of which 126 were sales personnel, 70 were customer service personnel, 46 were provider relations personnel, 7 were dental directors, 147 were administrative personnel and 111 were part of the dental professional association and the dental management company in New Jersey. The Company has no collective bargaining agreements with any unions and believes that its overall relations with its employees are good. INSURANCE The Company carries general liability, comprehensive property damage, workers' compensation, professional liability and other insurance coverages that management considers adequate for the protection of the Company's assets and operations. There can be no assurance, however, that the coverage limits of such policies will be adequate. A successful claim against the Company in excess of its insurance coverage could have a material adverse effect on the Company. ITEM 2. PROPERTIES The Company leases 36,588 square feet of office space for its corporate offices in Dallas, Texas under a lease expiring March 31, 2002. In addition, the Company leases an aggregate of approximately 87,106 square feet of space for its other regional and local offices with lease terms expiring at various times through May 20, 2002. ITEM 3. LEGAL PROCEEDINGS On May 24, 1996, the Arizona Department of Insurance filed a Notice of Administrative Hearing against the Company alleging that the Company consummated its acquisition of AHP in January 1996 without complying with the requirements of the Arizona Insurance Holding Company Act (the "Act"). On January 31, 1997, the Company signed a consent order whereby the Company agreed to comply with the requirements of the Act and 17 18 pay a civil penalty of $10,000. The Arizona Department of Insurance is currently reviewing the Company's Form A filing regarding the acquisition of AHP. The Company is, and may be in the future, party to litigation arising in the course of its business. The Company carries insurance protecting it against liability arising out of the provision of dental care services by contracting dentists, who are not employees or agents of the Company. Claims against the Company arising out of the provision of dental care services by contracting dentists historically have been rare, but there can be no assurance that the Company will not become involved in such litigation or otherwise become subject to claims relating to its contracting dentists in the future. While the Company has no significant pending claims, there can be no assurance that the Company's insurance coverage will be adequate to cover all liabilities arising out of such claims or that any such claims will be covered by the Company's insurance. Any material claim which is not covered by insurance may have an adverse effect on the Company's business. Claims against the Company, regardless of their merit or outcome, may also have an adverse effect on the Company's reputation and business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of the security holders of the Company during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS On September 22, 1995, the common stock of the Company began trading on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "UDCI." The following table sets forth the range of quarterly high and low closing sale prices on the Nasdaq Stock Market for the periods indicated.
COMMON STOCK CLOSING PRICE -------------------------- TIME PERIOD HIGH LOW ------------------------------------------------- ---------- ---------- September 25 - September 30, 1995 . . . . . . . . $30.00 $27.75 October 1 - December 31, 1995 . . . . . . . . . . $41.25 $29.50 January 1 - March 31, 1996 . . . . . . . . . . . $43.75 $34.25 April 1 - June 30, 1996 . . . . . . . . . . . . . $44.25 $37.25 July 1 - September 30, 1996 . . . . . . . . . . . $45.75 $32.75 October-1 - December 31, 1996 . . . . . . . . . . $36.25 $25.00
The last reported sale price per share of common stock as reported by the Nasdaq National Market on March 12, 1997 was $28-5/8. As of the date of this report, the Company had 8,925,416 shares of common stock outstanding. As of March 12, 1997, the Company estimates that there were approximately 1,800 owners of the Company's common stock, including approximately 125 holders of record and approximately 1,675 persons or entities that hold common stock in nominee name. The Company has not paid or declared any cash dividends on its common stock since its inception. The Company currently intends to retain all future earnings for use in the expansion and operation of its business. In addition, future borrowings may limit the Company's ability to pay cash dividends. It is anticipated that the line of credit financing that may be used to finance any future acquisitions will contain a restriction on the payment of dividends. Any payments of cash dividends in the future will depend upon the financial condition, capital requirements and earnings of the Company, limitations on dividend payments by subsidiaries of the Company under applicable state laws and such other factors as the board of directors may deem relevant. 18 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The Company's selected financial data presented below for the years ended December 31, 1994, 1995 and 1996 and at December 31, 1995 and 1996, are derived from the audited consolidated financial statements of the Company. The selected financial data presented below for the Company for each of the years ended December 31, 1992 and 1993 and at December 31, 1992, 1993 and 1994 are derived from the audited consolidated financial statements of the Company not included herein. This data is not necessarily indicative of the Company's future performance. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the related Notes thereto included herein:
Year Ended December 31, --------------------------------------------------------------- 1992 1993 1994 (1) 1995 (2) 1996 (3) -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Managed benefits . . . . . . . . . . $ 13,854 $ 16,805 $ 31,683 $ 62,004 $ 96,786 Indemnity . . . . . . . . . . . . . . -- -- 5,514 16,622 15,143 Dental centers . . . . . . . . . . . -- -- -- -- 820 Interest . . . . . . . . . . . . . . 147 173 178 603 899 -------- -------- -------- -------- -------- Total revenues . . . . . . . . . 14,001 16,978 37,375 79,229 113,648 Dental services expense: Managed benefits . . . . . . . . . . 5,934 7,283 15,559 33,068 56,845 Indemnity . . . . . . . . . . . . . . -- -- 4,567 13,682 10,590 Dental centers. . . . . . . . . . . . -- -- -- -- 216 -------- -------- -------- -------- -------- Total dental services expense 5,934 7,283 20,126 46,750 67,651 Sales and marketing . . . . . . . . . . 2,445 3,025 5,756 9,637 12,587 General and administrative . . . . . . 3,101 3,632 7,062 14,785 18,612 Depreciation and amortization . . . . . 324 159 541 1,190 2,267 Acquisition-related expenses . . . . . -- -- 178 -- -- Interest expense . . . . . . . . . . . -- -- 360 1,005 536 -------- -------- -------- -------- -------- Total expenses 11,804 14,099 34,023 73,367 101,653 Income before provision for Federal income taxes, cumulative effect of a change in accounting principle and extraordinary charge . . . . . . . . 2,197 2,879 3,352 5,862 11,995 Provision for Federal income taxes . . 747 934 1,256 2,131 4,438 -------- -------- -------- -------- -------- Net income before cumulative effect of a change in accounting principle and extraordinary charge. . . . . . . . . 1,450 1,945 2,096 3,731 7,557 Cumulative effect of a change in accounting principle. . . . . . . . . -- 44 -- -- -- Extraordinary charge . . . . . . . . . -- -- -- 142 -- -------- -------- -------- -------- -------- Net income before preferred dividends . $1,450 $1,901 $2,096 $3,589 $7,557 ======== ======== ======== ======== ======== Net income per common share . . . . . . $0.30 $0.40 $0.44 $0.66 $1.00 Weighted average common shares outstanding . . . . . . . . . . . . 4,575 4,662 4,717 5,449 7,543 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital . . . . . . . . . . . $3,474 $3,907 $1,365 $30,892 $25,420 Total assets . . . . . . . . . . . . 5,485 7,283 31,404 86,588 165,672 Total debt including current portion -- -- 14,558 15,182 28,948 Stockholders' equity . . . . . . . . 4,795 6,730 8,974 61,600 125,495
- ------------------ (1) Results of operations for IDH after August 31, 1994 are included in historical results of operations for the Company on a consolidated basis for the years ended December 31, 1994, 1995 and 1996. See the Company's Consolidated Financial Statements and the Notes thereto. (2) Results of operations for US Dental after October 31, 1995 are included in historical results of operations for the Company on a consolidated basis for the years ended December 31, 1995 and 1996. See the Company's Consolidated Financial Statements and the Notes thereto. (3) Results of operations for AHP after January 31 1996, Independent and Association after September 30, 1996 and for KCDC and OraCare after October 31, 1996 are included in historical results of operations for the Company on a consolidated basis for the year ended December 31, 1996. See the Company's Consolidated Financial Statements and the Notes thereto. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This document includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this document, including, without limitation, statements under Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 1. "Business," regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed throughout this Form 10-K, including, without limitation, in conjunction with the forward-looking statements included herein. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are hereby expressly qualified in their entirety. OVERVIEW The Company's predecessor began operations in Texas in 1986, and subsequently initiated de novo operations in Ohio in 1990 and in Missouri and Kansas in 1993. The Company entered 15 new states with prepaid members (Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa, Minnesota, Nebraska, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming) by virtue of the IDH acquisition in 1994. Certain of these additional states have only limited number of prepaid members and are not considered by management to be prime markets for future expansion. Effective September 1, 1994, the Company completed the acquisition of all of the outstanding common stock of IDH for $14.3 million in cash and additional payments of $5.4 million (consulting and non-competition agreements) over the six year period beginning September 16, 1994. The cash portion of the purchase price was financed through bank borrowings of $11.0 million and $3.3 million of working capital. As a result of the IDH acquisition, the Company incurred interest expense and the Company's amortization expense significantly increased beginning in the third quarter of 1994. The Company repaid the entire outstanding balance of the bank borrowings with the proceeds of the September 21, 1995 initial public offering. Effective November 1, 1995, the Company completed the acquisition of all of the outstanding common stock of US Dental for $1.3 million in cash, deferred payments of $1.0 million (consulting and non-competition agreements) and a promissory note, maturing January 18, 1996, in the amount of $10.3 million (the "Promissory Note"). Effective February 1, 1996, the Company completed the acquisition of all of the outstanding common stock of AHP for $15.0 million, which includes the present value of amounts payable under 36-month non-competition agreements with four former stockholders of AHP. Effective October 1, 1996, the Company completed the acquisitions of all of the outstanding common stock of Independent for $1.3 million in cash and of Association for $3.2 million in cash. Effective November 1, 1996, the Company completed the acquisitions of all of the outstanding common stock of KCDC for $12.5 million in cash and of OraCare for $5.6 million in cash and a promissory note, maturing January 2, 1997, in the amount of $24.9 million (the "OraCare Promissory Note"). The OraCare Promissory Note was paid in full at maturity on January 2, 1997. The Company's revenues consist primarily of managed benefits premiums for the prepaid dental plans offered by the Company, such premiums representing 85.2% and 78.2% of total revenues for the years ended December 31, 1996 and 1995, respectively. A secondary source of revenue (representing 13.3% and 21.0% of total revenues for the years ended December 31, 1996 and 1995, respectively) is the indemnity premiums received 20 21 by a subsidiary of the Company in connection with dual choice plans and individual policies offered by the Company. Dual choice plans permit members to select between the Company's prepaid dental plans and traditional dental indemnity insurance. The dental indemnity insurance subsidiary was acquired effective September 1, 1994, so the Company had no revenue from this source prior to that date. The Company primarily seeks to generate its revenues through employer groups, specifically medium to large groups, although approximately 7.2% of the Company's prepaid members are individuals not associated with a group. The Company's premium revenues increased from $10.8 million for the year ended December 31, 1991 to $111.9 million for the year ended December 31, 1996, a compound annual growth rate of 59.6%. Such increase would have been approximately 21.3% assuming the acquisitions of IDH and US Dental had not occurred in 1994 and 1995, respectively, and the acquisitions of AHP, Independent, Association, OraCare and KCDC had not occurred in 1996. The increase is primarily related to the growth in the number of members, both from internal growth and from acquisitions, and secondarily due to premium rate increases. IDH had approximately 370,000 prepaid members and 90,000 indemnity members when it was acquired by the Company effective September 1, 1994. The Company had approximately 267,000 prepaid members at that date. Subsequent acquisitions added the following membership:
ACQUISITION MEMBERSHIP EFFECTIVE DATE -------------------------------------- ------------------- ---------------- US Dental . . . . . . . . . . . . . . 165,000 (prepaid) 11/01/95 AHP . . . . . . . . . . . . . . . . . 220,000 (prepaid) 02/01/96 Independent . . . . . . . . . . . . . 10,000 (prepaid) 10/01/96 Association . . . . . . . . . . . . . 60,000 (referral) 10/01/96 KCDC . . . . . . . . . . . . . . . . 90,000 (prepaid) 11/01/96 OraCare . . . . . . . . . . . . . . . 150,000 (prepaid) 11/01/96
The Company estimates that premium rate increases have generally averaged less than 3.5% per year during the five-year period ended December 31, 1996. 21 22 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages of revenues represented by certain items reflected in the Company's consolidated statements of operations.
YEAR ENDED DECEMBER 31, --------------------------------- 1994 1995 1996 ------- ------- ------- Revenues Managed benefits . . . . . . . . . . . . . . . 84.8% 78.2% 85.1% Indemnity . . . . . . . . . . . . . . . . . . . 14.7 21.0 13.3 Dental Centers . . . . . . . . . . . . . . . . -- -- 1.4 Less: intercompany . . . . . . . . . . . . -- -- (0.6) Interest . . . . . . . . . . . . . . . . . . . 0.5 0.8 0.8 ------- ------- ------- Total revenue . . . . . . . . . . . . . 100.0% 100.0% 100.0% ------- ------- ------- Expenses: Dental services: Managed benefits . . . . . . . . . . . . . . . . . 41.6% 41.7% 50.6% Less: intercompany . . . . . . . . . . . . . . -- -- (0.6) Indemnity . . . . . . . . . . . . . . . . . . . . . 12.2 17.3 9.3 Dental Centers . . . . . . . . . . . . . . . . . . -- -- 0.2 ------- ------- ------- Subtotal . . . . . . . . . . . . . . . . . 53.8 59.0 59.5 ------- ------- ------- Gross margin . . . . . . . . . . . . . . . . . . . 46.2 41.0 40.5 Sales and marketing expenses . . . . . . . . . . . 15.4 12.2 11.1 General and administrative expenses . . . . . . . . 18.9 18.7 16.4 Depreciation and amortization . . . . . . . . . . . 1.4 1.5 2.0 Acquisition-related expenses . . . . . . . . . . . 0.5 -- -- Interest expense . . . . . . . . . . . . . . . . . 1.0 1.2 0.5 ------- ------- ------- Total expenses . . . . . . . . . . . . . . 91.0 92.6 89.5 ------- ------- ------- Net income before provision for Federal income taxes and extraordinary charge. . . . . . . . . . . 9.0 7.4 10.5 Provision for Federal income taxes . . . . . . . . . . 3.4 2.7 3.9 ------- ------- ------- Net income before extraordinary charge . . . . . . . . 5.6 4.7 6.6 Extraordinary charge . . . . . . . . . . . . . . . . . -- 0.2 -- ------- ------- ------- Net Income . . . . . . . . . . . . . . . . . . . . . . 5.6% 4.5% 6.6% ======= ======= =======
YEARS ENDED DECEMBER 31, 1996 AND 1995 Revenues. Revenues increased by $34.4 million or 43.4%, to $113.6 million in 1996 from $79.2 million in 1995. Of this increase, $20.4 million, or 59.3% was attributable to the operations added through the acquisition of AHP, Association, Independent, KCDC and OraCare and $11.2 million was attributable to the ownership of US Dental for the entire twelve months in 1996 versus only two months in 1995. Revenues increased to $82.0 million in 1996 from $79.2 million in 1995 in markets where the Company had operations in both periods. This increase was primarily a result of an increase in the number of members and, to a lesser extent, to premium rate increases. During the year, members increased from 937,355 at December 31, 1995 to 1,729,291 at December 31, 1996. Dental Services. Dental services expenses increased $20.9 million, or 44.7% to $67.6 million in 1996 from $46.7 million in 1995. Total dental services as a percentage of revenues increased to 59.5% in 1996 from 59.0% in 1995 primarily due to the increase in the dental services expenses related to the managed benefits business. Dental service expenses for the Company's managed benefits business (before intercompany eliminations), which consist primarily of capitation to dentists, increased to 59.5% of managed benefits revenues in 1996 from 53.3% in 1995. This increase is attributable to the fact that the managed benefits plans offered by IDH, US Dental and AHP have historically paid dentists a higher percentage of premiums than the Company's pre-existing plans paid. Claims expense for the indemnity business was 70.0% of indemnity revenues. 22 23 Sales and Marketing. Sales and marketing expenses increased $3.0 million, or 31.3%, to $12.6 million in 1996 from $9.6 million in 1995. Sales and marketing expenses as a percentage of revenues declined to 11.1% in 1996 from 12.2% in 1995. This decrease was largely attributable to the change in product mix with a higher percentage of revenues generated by managed benefits products. Since the indemnity business generates a higher per-member-per-month revenue than generated by the managed benefits plans, and a portion of the sales and marketing costs, such as base salaries and printing costs, are fixed, the expenses as a percentage of revenues decline. In addition, the commissions paid on the indemnity business are lower as a percentage of revenues than those paid on the managed benefits plans. General and Administrative. General and administrative expenses increased $3.8 million, or 25.7%, to $18.6 million in 1996 from $14.8 million in 1995. The decline in general and administrative expenses as a percentage of revenues to 16.4% in 1996 from 18.7% in 1995 was primarily attributable to efficiencies achieved through the consolidation of executive staffs and accounting departments due to the Company's integration of its acquisitions. In addition, there was a decrease in premium taxes as a percentage of revenue because the Company now generates a greater percentage of its revenues in states that charge lower premium taxes. Depreciation and Amortization. Depreciation and amortization expenses increased $1.1 million, or 91.7% to $2.3 million in 1996 from $1.2 million in 1995. Most of this increase was the result of amortization of goodwill and the Agreements entered into in connection with the acquisitions of IDH, US Dental and AHP and the depreciation of the assets acquired. Interest. Interest expense decreased to $0.5 million in 1996 from $1.0 in 1995. The $0.5 million was entirely attributable to the imputed interest on the Agreements incurred to finance the IDH, US Dental and AHP acquisitions and the interest on the OraCare Promissory Note. The weighted average interest rates on the Agreements and the OraCare Promissory Note during 1996 were 7.9% and 4.8%, respectively. The weighted average interest rate on the Agreements includes the effects of the fees for the related letters of credit YEARS ENDED DECEMBER 31, 1995 AND 1994 Revenues. Revenues increased by $41.8 million, or 112.0%, to $79.2 million in 1995 from $37.4 million in 1994. Of this increase, $2.2 million, or 5.3% was attributable to the operations added through the acquisition of US Dental in November 1995. The remaining $39.6 million increase was a 105.9% increase in revenues to $77.0 million in 1995 from $37.4 million in 1994, in markets where the Company had operations in both periods. This increase was primarily a result of having IDH operations for the full year in 1995 compared to only four months in 1994 and the increase in the membership numbers. During 1995, members increased from 740,984 at December 31, 1994 to 937,355 at December 31, 1995. The increase in the comparable period in 1994 was from 214,455 to 740,984. Interest income increased $0.4 million, or 200.0% from $0.2 million to $0.6 million in 1995. This increase was due to the interest income derived from the cash proceeds of the initial public offering in September 1995. Dental Services. Dental services expenses increased $26.6 million, or 132.3 %, to $46.7 million in 1995 from $20.1 million in 1994. Total dental services as a percentage of revenue increased to 59.0% in 1995 from 53.8% in 1994, primarily due to the effect of a higher dental expense loss ratio in the indemnity insurance business that the Company acquired through IDH. Claims expense for the indemnity business was 82.4% of indemnity revenues in 1995 as compared to 82.8% in 1994. Dental service expenses for the Company's managed benefits plans ("Plans"), which consist primarily of capitation payments to general dentists, increased to 53.3% of managed benefits revenues in 1995, from 49.1% in 1994. This increase is attributable to the fact that the Plans offered by IDH have historically paid general dentists a higher percentage of premiums than the Company's pre-existing Plans. It is management's intention to increase premiums over the next several years, as market conditions permit, thereby increasing revenues. In most markets, amounts paid to general dentists will also be increased to maintain the Company's competitive position and to improve the economics for general dentists. The acquisition of Associated will result in an increase of approximately 5% in the percentage of dental services expenses for all of its managed dental benefits Plans relative to managed benefits revenues in 1996 over the percentage experienced in 1995. 23 24 Sales and Marketing. Sales and marketing expenses increased $3.8 million or 67.4%, to $9.6 million in 1995 from $5.8 million in 1994. Sales and marketing expenses as a percentage of revenue declined to 12.2% in 1995 from 15.4% in 1994. This decrease was largely attributable to the change in product mix from primarily Plans in 1994 to a combination of indemnity and Plans in 1995, resulting from the acquisition of IDH effective September 1, 1994. Since the indemnity business generates a higher per-member-per-month revenue than is generated by the Plans, and a portion of the sales and marketing costs, such as base salaries and printing costs, are fixed, the expenses as a percentage of revenues decline. In addition, the commissions paid on the indemnity business are lower as a percentage of revenues than those paid on the Plans. General and Administrative. General and administrative expenses increased $7.7 million, or 109.4% to $14.8 million in 1995 from $7.1 million in 1994. The decline in general and administrative expenses as a percentage of revenues to 18.7% in 1995 from 18.9% in 1994 was primarily attributable to efficiencies achieved through the consolidation of executive staffs and accounting departments due to the acquisition of IDH. In addition, there was a decrease in premium taxes as a percentage of revenue because the Company now generates a greater percentage of its revenues in states that have lower premium taxes. Depreciation and Amortization. Depreciation and amortization expenses increased $0.7 million, or 120.0%, to $1.2 million in 1995 from $0.5 million in 1994. Most of this increase was the result of amortization of goodwill and consulting and non-competition agreements (the "Agreements") attributable to the acquisitions of IDH and US Dental and the depreciation of the assets acquired. Interest. Interest expense increased to $1.0 million in 1995 from $0.4 in 1994. The $1.0 million was composed of the interest on the Bank Loan, the Promissory Note and the imputed interest on the consulting and non-competition agreements incurred to finance the IDH and US Dental acquisitions (the "Agreements"). The weighted average interest rates on the Bank Loan, the Promissory Note and the Agreements during 1995 were 9.5%, 4.4% and 8.6%, respectively. These weighted average interest rates include the effects of amortization of debt issuance costs and the fees for letters of credit related to the Agreements. Taxes. The average tax rate was 36.4% and 37.4% in 1995 and 1994, respectively. In 1995 and 1994, the average tax rate was higher than the statutory Federal tax rate of 34.0%, primarily as the result of the nondeductibility of the amortization of goodwill. The average rate decrease from 1994 to 1995 was primarily due to tax exempt interest income in 1995. Extraordinary Charge. Upon completion of the Company's initial public offering in September 1995, the Company used a portion of the offering's proceeds to repay its bank debt. This required the write off of the unamortized debt-financing expenses capitalized in connection with the bank financing incurred to finance the IDH acquisition and the financing obtained (but not used) for the US Dental acquisition. LIQUIDITY AND CAPITAL RESOURCES In September 1995, the Company completed an initial public offering of 2,375,000 shares of its common stock for $22.00 per share (the "Offering"), resulting in net proceeds of $48.0 million. The Company used approximately $9.9 million of such proceeds for the repayment of all outstanding bank indebtedness, which had been incurred in 1994 to finance the acquisition of IDH. In October 1996, the Company completed a public offering of 2,000,000 shares of its common stock for $30.00 per share (the "1996 Offering"), resulting in net proceeds of $56.2 million. The Company used a portion of the proceeds to complete the acquisitions of Independent, Association, OraCare and KCDC in 1996 and of United in 1997. The Company's historical operating cash requirements have been met through cash provided by operations. Net cash provided by operating activities was $1.3 million and $2.9 million for the years ended December 31, 1996 and 1995, respectively. The reduced amount of cash provided by operating activities in 1996 as compared to 1995 was a result of (i) a change to earlier capitation payments to certain network dentists that resulted in a one-time increase in cash outflow and (ii) a change to later collection of prepaid revenues from certain groups that resulted in a one-time decrease in cash inflows. Both changes were instituted to provide better 24 25 customer service and had no direct effect on operating earnings. The increase in premiums receivable of $4.9 million, the decrease in unearned premiums of $2.1 million and the decrease in accounts payable, accrued expenses and claims reserves of $2.2 million all reflect this one-time impact on cash from operating activities. Management believes that active management of receivables balances will result in a significant improvement in cash receipts during 1997. The Company's primary cash need is for debt service on the Agreements. The principal amount of the outstanding indebtedness of the Company at December 31, 1996 was $28.9 million, consisting of the OraCare Promissory Note of $24.9 million and the liability for the Agreements of $4.1 million. The Promissory Note was paid off on January 2, 1997. The IDH Agreements require payments of $0.1 million on January 1 and $0.8 million on September 16 each year. The US Dental Agreements require monthly payments totaling $0.3 million per year. The AHP agreements require monthly payments totaling $0.2 million per year. On November 14, 1996, the Company signed a revolving credit agreement providing a $35.0 million revolving credit facility with an unaffiliated bank. The purpose of the revolving credit facility is to provide (i) for funding future acquisitions of managed dental benefits companies, (ii) for the issuance of letters of credit, (iii) for capital expenditures and (iv) at the election of the company, a working capital line of credit in an amount up to $5.0 million out of the total amount available under the revolving credit facility. The revolving credit facility has a term of four years, expiring November 30, 2000. Outstanding indebtedness under the revolving line of credit will bear interest payable quarterly, at the Company's option, at: (i) up to 0.25% over the base rate of the lender or (ii) up to 1.85% over LIBOR, with the margin over the respective rates decreasing as the ratio of total funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") decreases. The Company pays an annual fee of up to 0.25% of the amount remaining available to be drawn under the credit facility and up to 0.85% of the amount available to be drawn under the letters of credit. The revolving credit facility is secured by the pledge of all the outstanding capital stock of the direct and indirect subsidiaries of the Company and a negative pledge on all other assets. The revolving credit facility contains numerous covenants including, among other things, that the Company cannot, except in certain permitted instances, (i) incur any additional indebtedness; (ii) grant liens on any of the assets of the Company or its subsidiaries; (iii) declare or pay any dividends; or (iv) merge or consolidate with any other entity. In addition, the Company is required to satisfy on an ongoing basis certain financial covenants. The Company's breach of any covenant would result in an event of default under the revolving credit facility. In 1994, the Company arranged for the issuance of two letters of credit in the aggregate amount of $4.8 million. The letters of credit secure the obligations of the Company under certain agreements executed in connection with the IDH acquisition. The letters of credit decline in amount annually and expire in September 1998. The Company pays an annual fee of up to 0.85% of the amount remaining to be drawn under the letters of credit. Under applicable insurance laws of most states in which the Company conducts business, the Company's subsidiary operating in the particular state is required to maintain a minimum level of net worth and reserves. In general, minimum capital requirements are more stringent for insurance companies, such as UDCIC. The Company may be required from time to time to invest funds in one or more of its subsidiaries to meet regulatory capital requirements. The implementation of risk-based capital regulations in states having jurisdiction over UDCIC may require that the Company increase its investment in UDCIC. However, the Company does not believe that compliance with such regulations will adversely affect the Company's ability to meet its operating cash requirements. The Company believes that UDCIC will be able to satisfy such regulations without the need for significant capital contributions by the Company. Applicable laws generally limit the ability of the Company's subsidiaries to pay dividends to the extent that required regulatory capital would be impaired. Capital expenditures were $4.5 million during the year ended December 31, 1996 and $2.2 million in the year ended December 31, 1995. Such expenditures in 1996 primarily consisted of the capitalized costs related to the new information system, expected to be completed in 1997. In June 1995, the Company entered into a contract to acquire a new information system to replace its existing system. The capital cost of the conversion of all current systems is expected to be approximately $6.6 million. This capital cost includes the capitalization of certain direct internal costs associated with the new system in addition to external costs such as consulting fees and hardware and software expenditures. 25 26 Management believes that cash flow generated by operations will be sufficient to fund the Company's normal working capital needs and capital expenditures (other than any acquisitions) for at least the next twelve months because the Company's operations are not capital intensive. Management believes that the Company's operations are not materially affected by inflation. The Company's principal costs, such as dental services expense and sales and marketing expenses are largely related to membership levels and are, therefore, variably related to premium revenues. Historically, the Company's rate of premium increases has been less than the rate of increase in dental costs in general. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data are set forth herein commencing on page F-1 of this Form 10-K. See Item 14 for the list of documents filed as a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required in response to Items 10, 11, 12 and 13 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, no later than 120 days after the end of the fiscal year covered by this report. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following are filed as a part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements Page --------------------------------- ---- Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
26 27 2. Financial Statement Schedules None. All other schedules have been omitted because the required information is either inapplicable, insignificant or included in the Consolidated Financial Statements and Notes thereto. 3. List of Exhibits 3.01 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.01 to the Company's Registration Statement on Form S-1, Registration Number 33-94356 (the "1995 Registration Statement") and incorporated herein by reference). 3.02 Amended and Restated Bylaws of the Company (filed as Exhibit 3.02 to the 1995 Registration Statement and incorporated herein by reference). 4.01 Specimen Common Stock Certificate (filed as Exhibit 4.01 to the 1995 Registration Statement and incorporated herein by reference). 10.01 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., The Adaven Group Limited Partnership and Robert J. Nettinga (filed as Exhibit 10.06 to the 1995 Registration Statement and incorporated herein by reference). 10.02 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and The Adaven Group Limited Partnership (filed as Exhibit 10.07 to the 1995 Registration Statement and incorporated herein by reference). 10.03 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., Omega Marine Development, Inc. and Paul C. Nettinga (filed as Exhibit 10.08 to the 1995 Registration Statement and incorporated herein by reference). 10.04 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and Omega Marine Development, Inc. (filed as Exhibit 10.09 to the 1995 Registration Statement and incorporated herein by reference). 10.05 Stockholders Agreement dated as of September 16, 1994 among United Dental Care, Inc., certain stockholders of United Dental Care, Inc. named therein and Robert J. Nettinga (filed as Exhibit 10.10 to the 1995 Registration Statement and incorporated herein by reference). 10.06 Irrevocable Letter of Credit dated September 16, 1994 in the amount of $4,023,500 in favor of The Adaven Group Limited Partnership (filed as Exhibit 10.11 to the 1995 Registration Statement and incorporated herein by reference). 10.07 Amended and Restated Application and Agreement for $4,023,500 Standby Letter of Credit in favor of The Adaven Group Limited Partnership dated September 16, 1994 by United Dental Care, Inc. to NationsBank of Texas, N.A. (filed as Exhibit 10.09 to the Company's Registration Statement on Form S-1, Registration Number 333-12425 (the "1996 Registration Statement") and incorporated herein by reference). 10.08 Administrative Services Agreement dated as of January 1, 1995 between United Dental Care, Inc. and R.E. Harrington, Inc., and Memorandum of Understanding in connection therewith dated as of January 1, 1995 (filed as Exhibit 10.28 to the 1995 Registration Statement and incorporated herein by reference). 10.09 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Dolores A. Kordek (filed as Exhibit 10.9 to the 1995 Form 10-Q and incorporated herein by reference). 10.10 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Christopher A. Jehle (filed as Exhibit 10.10 to the 1995 Form 10-Q and incorporated herein by reference). 10.11 Stock Purchase Agreement dated as of December 14, 1995 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 22, 1996, File No. 0-26688 (the "Form 8-K"), and incorporated herein by reference). 27 28 10.12 First Amendment to Stock Purchase Agreement dated as of January 17, 1996 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.2 to the Form 8-K and incorporated herein by reference). 10.13 Non-Competition Agreement, dated January 22, 1995, between United Dental Care, Inc. and R. Bruce Buchanan (filed as Exhibit 10.3 to the Form 8-K, and incorporated herein by reference). The three other Non-Competition Agreements between United Dental Care, Inc. and Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher, respectively, are identical in form except as to the parties thereto and are therefore omitted from this filing. 10.14 Post-Closing Escrow Agreement dated as of January 22, 1996, among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher and Lawyers Title of Arizona, Inc. (filed as Exhibit 10.4 to the Form 8-K, and incorporated herein by reference). 10.15 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, Gilbert G. Finger, Patricia L. Schubring, Edward K. Halstead, Birchtree Enterprises and Binkley & Stewart, P.C., as Sellers, and Independent Dental Plans, Inc. dated as of June 28, 1996 (filed as Exhibit 10.27 to the 1996 Registration Statement and incorporated herein by reference). 10.16 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of Association Dental Plan, Inc., a District of Columbia corporation (filed as Exhibit 10.28 to the 1996 Registration Statement and incorporated herein by reference). 10.17 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.30 to the 1996 Registration Statement and incorporated herein by reference). 10.18 Earnest Money Escrow Agreement among United Dental Care, Inc., UICI, and Texas Commerce Bank National Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.31 to the 1996 Registration Statement and incorporated herein by reference). 10.19 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and UICI, United Management & Consulting, Inc., United Management & Consulting Retirement Plan, and Marie C. Montgomery Revocable Trust U/T/A March 23, 1992, as Seller, dated as of September 10, 1996, for the purchase of 90% of the issued and outstanding shares of capital stock of United Dental Care, Inc., an Oklahoma corporation (filed as Exhibit 10.32 to the 1996 Registration Statement and incorporated herein by reference). 10.20 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and John E. Carlin, Ph.D., Frank J. Schloegel, III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28, 1996, The Frank J. Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel Charitable Remainder Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust UID September 5, 1996, as Sellers, and Kansas City Dental Care, Inc., dated as of September 11, 1996 (filed as Exhibit 10.34 to the 1996 Registration Statement and incorporated herein by reference). 10.21 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare Consultants, Inc., dated as of September 5, 1996 (filed as Exhibit 10.36 to the 1996 Registration Statement and incorporated herein by reference). 10.22 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., as Seller, and OraCare Dental Associates, P.A., dated as of September 5, 1996 (filed as Exhibit 10.38 to the 1996 Registration Statement and incorporated herein by reference). 28 29 10.23 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare DPO, Inc., dated as of September 5, 1996 (filed as Exhibit 10.39 to the 1996 Registration Statement and incorporated herein by reference). 10.24* Letter Agreement dated November 14, 1996 between United Dental Care, Inc. and Peter R. Barnett, D.M.D., regarding ownership of stock of OraCare Dental Associates, P.A. 10.25* Management Agreement dated November 14, 1996 between OraCare Consultants, Inc. and OraCare Dental Associates, P.A. 10.26* Revolving Credit Agreement, dated as of November 14, 1996, between United Dental Care, Inc., NationsBank of Texas, N.A., as Agent for the Lenders named therein, and the Lenders. 10.27* Warrant, dated February 26, 1996, held by Mark E. Pape to purchase Common Stock of the Company. 10.28 Employment Agreement dated as of May 13, 1996, between United Dental Care, Inc., and William H. Wilcox (filed as Exhibit 10.40 to the 1996 Registration Statement and incorporated herein by reference). 10.29 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc., and Mark E. Pape (filed as Exhibit 10.41 to the 1996 Registration Statement and incorporated herein by reference). 10.30 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc. and Peter R. Barnett, D.M.D. (filed as Exhibit 10.42 to the 1996 Registration Statement and incorporated herein by reference). 10.31 Master Software License and Services Agreement dated as of June 20, 1995 between Software Technologies Corporation and United Dental Care, Inc. (filed as Exhibit 10.29 to the 1995 Registration Statement and incorporated herein by reference). 10.32 United Dental Care, Inc. Amended and Restated 1989 Key Employee Stock Option Plan (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference). 10.33 United Dental Care, Inc. 1995 Stock Option Plan (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference). 10.34 United Dental Care, Inc. Executive Incentive Plans for 1996 for Mr. Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit 10.47 to the 1996 Registration Statement and incorporated herein by reference). 10.35* United Dental Care, Inc. Executive Incentive Plans for 1997 for Mr. Wilcox, Mr. Pape and Dr. Barnett. 11.1* Statement Regarding Computation of Per Share Earnings. 21.1* List of Subsidiaries of Registrant. 23.1* Consent of Price Waterhouse LLP. 27.1* Financial Data Schedule. ______________________ * Filed herewith. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of the period covered by this report. 29 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, March 21, 1997. UNITED DENTAL CARE, INC. ---------------------------------------- By: /s/ WILLIAM H. WILCOX -------------------------------------- William H. Wilcox, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM H. WILCOX President and Chief Executive Officer March 21, 1997 - ---------------------------------------------------- (Principal Executive Officer) --------------- William H. Wilcox /s/ MARK E. PAPE Senior Vice President and Chief March 21, 1997 - ---------------------------------------------------- Financial Officer --------------- Mark E. Pape (Principal Financial Officer) /s/ PETER R. BARNETT, DMD Senior Vice President, Chief Operations March 21, 1997 - ---------------------------------------------------- Officer -------------- Peter R. Barnett, DMD /s/ MICHAEL W. YOUNG Vice President, Finance March 21, 1997 - ---------------------------------------------------- (Principal Accounting Officer) -------------- Michael W. Young /s/ JACK R. ANDERSON Chairman of the March 21, 1997 - ---------------------------------------------------- Board of Directors -------------- Jack R. Anderson /s/ GEORGE E. BELLO Director March 21, 1997 - ---------------------------------------------------- -------------- George E. Bello /s/ JAMES E. BUNCHER Director March 21, 1997 - ---------------------------------------------------- -------------- James E. Buncher /s/ WILLIAM H. LONGFIELD Director March 21, 1997 - ------------------------------------------------------ -------------- William H. Longfield /s/ ROBERT J. NETTINGA Director March 21, 1997 - ------------------------------------------------------ -------------- Robert J. Nettinga /s/ JAMES KEN NEWMAN Director March 21, 1997 - ------------------------------------------------------ -------------- James Ken Newman /s/ DONALD E. STEEN Director March 21, 1997 - ------------------------------------------------------ -------------- Donald E. Steen
30 31 UNITED DENTAL CARE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
F-1 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of United Dental Care, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of United Dental Care, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Dallas, Texas February 6, 1997 F-2 33 UNITED DENTAL CARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1995 1996 --------- ---------- ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,940 $ 50,035 Premiums receivable, net of allowance for doubtful accounts of $307 and $1,809 at December 31, 1995 and 1996, respectively . . . . . . . . . . 4,757 11,016 Accrued interest and other current assets . . . . . . . . . . . . . . . . . . 522 832 Deferred taxes, current . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 957 --------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . 52,611 62,840 Regulatory deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,155 3,433 Furniture and equipment, net of accumulated depreciation of $1,289 and $3,304 at December 31, 1995 and 1996, respectively . . . . . . . . . . 2,855 7,056 Intangible assets, net of accumulated amortization of $669 and $2,224 at December 31, 1995 and 1996, respectively . . . . . . . . . . . . . . . . . 27,354 91,066 Pre-operational costs, net of accumulated amortization of $204 and $238 at December 31, 1995 and 1996, respectively . . . . . . . . . . . . . . . . . 40 127 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 856 Deferred taxes, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . 139 294 --------- ---------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,588 $ 165,672 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . $ 2,633 $ 5,805 Current portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,913 26,191 Claims reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,446 2,172 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,612 3,177 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 115 75 --------- ---------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . 21,719 37,420 Long-term debt - net of current portion . . . . . . . . . . . . . . . . . . . 3,269 2,757 --------- ---------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 24,988 40,177 --------- ---------- Stockholders' equity: Preferred stock, $.10 par value; 500,000 shares authorized; no shares outstanding -- -- Common stock, $.10 par value; 15,000,000 shares authorized; 6,898,416 shares issued and outstanding at December 31, 1995 and 8,908,416 at December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690 891 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 52,086 108,223 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,824 16,381 --------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 61,600 125,495 --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . $ 86,588 $ 165,672 ========= ==========
See accompanying notes. F-3 34 UNITED DENTAL CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 --------- --------- --------- Revenues: Dental services revenue . . . . . . . . . . . . . . . $ 37,197 $ 78,626 $ 112,749 Interest income . . . . . . . . . . . . . . . . . . . 178 603 899 --------- --------- --------- 37,375 79,229 113,648 Costs and expenses: Dental services expense . . . . . . . . . . . . . . . 20,126 46,750 67,651 Sales and marketing . . . . . . . . . . . . . . . . . 5,756 9,637 12,587 General and administrative . . . . . . . . . . . . . . 7,062 14,785 18,612 Depreciation and amortization . . . . . . . . . . . . 541 1,190 2,267 Acquisition-related expenses . . . . . . . . . . . . . 178 -- -- Interest expense . . . . . . . . . . . . . . . . . . . 360 1,005 536 --------- --------- --------- 34,023 73,367 101,653 Income before income taxes and extraordinary charge . . . 3,352 5,862 11,995 Provision for income taxes . . . . . . . . . . . . . . . 1,256 2,131 4,438 --------- --------- --------- Income before extraordinary charge . . . . . . . . . . . 2,096 3,731 7,557 Extraordinary charge, net of tax . . . . . . . . . . . . -- (142) -- --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . $ 2,096 $ 3,589 $ 7,557 ========= ========= ========= Per share amounts: Net income per common share before extraordinary charge . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.68 $ 1.00 Extraordinary charge, net of tax . . . . . . . . . . . -- (0.02) -- --------- --------- --------- Net income per common share . . . . . . . . . . . . . $ 0.44 $ 0.66 $ 1.00 ========= ========= =========
See accompanying notes. F-4 35 UNITED DENTAL CARE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
Preferred Stock Common Stock Additional --------------------- --------------------- Paid-in Retained Shares Amount Shares Amount Capital Earnings Total --------- --------- --------- -------- --------- -------- -------- Balance, December 31, 1993 . 1 ---- 4,086,414 $ 409 $ 3,182 $ 3,139 $ 6,730 Stock options exercised . ---- ---- 93,500 9 64 ---- 73 Tax effect of stock options exercised . . . . ---- ---- ---- ---- 75 ---- 75 Net income . . . . . . . . ---- ---- ---- ---- ---- 2,096 2,096 --------- --------- --------- -------- --------- -------- -------- Balance, December 31, 1994 1 ---- 4,179,914 418 3,321 5,235 8,974 Conversion of preferred to common stock . . . . 1 ---- 2 ---- ---- ---- ---- Stock options exercised . ---- ---- 343,500 34 431 ---- 465 Stock warrants issued . . ---- ---- ---- ---- 80 ---- 80 Tax effect of stock options exercised . . . . . . . ---- ---- ---- ---- 527 ---- 527 Shares issued in public ---- ---- 2,375,000 238 47,727 ---- 47,965 Net income . . . . . . . . ---- ---- ---- ---- ---- 3,589 3,589 --------- --------- --------- -------- --------- -------- -------- Balance, December 31, 1995 ---- ---- 6,898,416 690 52,086 8,824 61,600 Stock options exercised . ---- ---- 10,000 1 14 ---- 15 Tax effect of stock options exercised . . . . . . . ---- ---- ---- ---- 125 ---- 125 Shares issued in public ---- ---- 2,000,000 200 55,998 ---- 56,198 Net income . . . . . . . . ---- ---- ---- ---- ---- 7,557 7,557 --------- --------- --------- -------- --------- -------- -------- Balance, December 31, 1996 ---- ---- 8,908,416 $ 891 $ 108,223 $ 16,381 $125,495 ========= ========= ========= ======== ========= ======== ========
See accompanying notes. F-5 36 UNITED DENTAL CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1994 1995 1996 -------- -------- -------- Operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,096 $ 3,589 $ 7,557 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . 616 1,190 2,267 Changes in operating assets and liabilities, net of effects from purchase of acquisitions: Increase in premiums receivable . . . . . . . . . . . (399) (1,049) (4,887) Decrease (increase) in accrued interest and other current assets . . . . . . . . . . . . . . . . . . 60 134 (286) Decrease (increase) in deferred income taxes . . . . . 49 (27) 661 Decrease (increase) in other assets . . . . . . . . . 229 (222) 300 Increase (decrease) in accounts payable, accrued expenses and claims reserve . . . . . . . . . . . . 386 (277) (2,168) Increase (decrease) in unearned premiums . . . . . . . 180 (417) (2,148) -------- -------- -------- Net cash provided by operating activities . . . . . 3,217 2,921 1,296 Investing activities: Decrease (increase) in regulatory deposits . . . . . . . . . 33 (408) (38) Purchases of furniture and equipment . . . . . . . . . . . . (662) (2,176) (4,518) Maturities of temporary investments . . . . . . . . . . . . 1,295 ---- ---- Proceeds from sale of long-term investments . . . . . . . . 2,124 ---- ---- Investment in new markets . . . . . . . . . . . . . . . . . ---- (31) (206) Purchase of acquisitions (net of cash acquired) . . . . . . (9,043) 726 (37,560) -------- -------- -------- Net cash used in investing activities . . . . . . . (6,253) (1,889) (42,322) Financing activities: Proceeds from long-term debt . . . . . . . . . . . . . . . . 11,000 1,154 ---- Repayment of indebtedness . . . . . . . . . . . . . . . . . (1,734) (12,577) (12,092) Proceeds from public offering (net) . . . . . . . . . . . . ---- 47,965 56,198 Stock options exercised . . . . . . . . . . . . . . . . . . 121 465 15 Issuance of stock warrants . . . . . . . . . . . . . . . . . ---- 80 ---- -------- -------- -------- Net cash provided by financing activities . . . . . 9,387 37,087 44,121 -------- -------- -------- Net increase in cash and cash equivalents . . . . . . . . . . . 6,351 38,119 3,095 Cash and cash equivalents at beginning of period . . . . . . . 2,470 8,821 46,940 -------- -------- -------- Cash and cash equivalents at end of period . . . . . . . . . . $ 8,821 $ 46,940 $ 50,035 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 229 $ 989 $ 400 ======== ======== ======== Income Taxes . . . . . . . . . . . . . . . . . . . . . . $ 1,147 $ 1,385 $ 4,104 ======== ======== ========
See accompanying notes. F-6 37 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include the accounts of United Dental Care, Inc., and its subsidiaries (the "Company") for all periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company, through its subsidiaries, contracts with independent practitioners to provide dental services to members in the form of prepaid dental health contracts and/or indemnity dental insurance. The Company is currently licensed to market its prepaid dental plans in 28 states and its indemnity plan in 27 states. As of December 31, 1996, approximately 76.5% of all UDC prepaid plan members were located in five states, Arizona, Texas, New Jersey, New Mexico and Missouri. REVENUE AND EXPENSE RECOGNITION: Premium revenue is recorded in the month for which the member is entitled to service. Unearned premiums are reflected as current liabilities and consist of amounts billed in the current period for services to be rendered in a subsequent period. Included in unearned premiums are deposits which will be applied against future months' services. Under prepaid dental health contracts, the Company contracts with dentists for a set per-member, per-month capitation fee to provide dental care for its members. Specialty services not covered by capitation fees are recorded as incurred. INTANGIBLE ASSETS: Goodwill resulting from the Company's acquisitions (see Note 2) is being amortized on a straight-line basis over forty years. If facts and circumstances were to indicate the carrying amount of goodwill is impaired, the carrying amount would be reduced to an amount representing the undiscounted future cash flows to be generated by the operation. Also included in intangible assets are noncompetition and consulting agreements related to: (a) the IDH acquisition and valued at $400,000 at acquisition; (b) the US Dental acquisition and valued at $175,000 at acquisition; (c) the AHP acquisition and valued at $600,000 at acquisition; and (d) the OraCare acquisition and valued at $200,000 at acquisition, all of which are being amortized on a straight-line basis over the three to six year terms of such agreements. Accumulated amortization related to these agreements at December 31, 1995 and 1996 was $110,000 and $424,000, respectively. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("FAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which became effective for fiscal years beginning after December 15, 1995. FAS 121 establishes standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company adopted FAS 121 effective December 31, 1995. The financial statement impact of adopting FAS 121 was not material. PRE-OPERATIONAL COSTS: Organizational costs, costs associated with the establishment of the provider network, and pre-operational costs are capitalized and amortized over periods not exceeding 30 months. Pre-operational costs include office rent, salaries, site selection costs, licensing and legal fees, and other costs directly related to commencing business in a new market. FURNITURE AND EQUIPMENT: Furniture and equipment are recorded at cost. Depreciation is calculated using the straight-line method over a period of three to five years based on the estimated useful life of the related asset. CLAIMS RESERVE: The reserve for costs expected to be incurred for services approved during the year as well as costs incurred but not reported are actuarial estimates based on the Company's historical claims data. RECLASSIFICATIONS: Certain reclassifications have been made to the 1994 consolidated financial statements to conform to the classifications used for 1995 and 1996, respectively. F-7 38 CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, money market investment accounts held by brokers which are readily convertible to cash and certificates of deposit with original maturities of less than 90 days. INCOME TAXES: The Company accounts for income taxes as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("FAS 109"). FAS 109 prescribes an asset and liability method that requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement basis and the tax basis of assets and liabilities. See Note 7 for additional information. NET INCOME PER COMMON SHARE: Net income per common share is computed by dividing net income by the weighted average number of common shares and dilutive common stock equivalents outstanding during each period. Net income per common share has been restated to reflect a two-for-one stock dividend that was declared on July 17, 1995. The weighted average number of common shares and dilutive common stock equivalents used in the calculation of net earnings per common shares was 4,716,713; 5,448,892; and 7,542,997 for the years ended December 31, 1994, 1995 and 1996, respectively. Pursuant to the requirements of the Securities and Exchange Commission, common stock equivalent shares issued at prices below the original assumed public offering price of $18.00 per share during the twelve months immediately preceding the date of the initial filing of the Registration Statement related to the Company's initial public offering have been included in the calculation of common shares and common equivalent shares using the treasury stock method, as if they were outstanding for all periods presented. STOCK OPTIONS: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options (see Note 9). Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITIONS Effective September 1, 1994, the Company completed the acquisition of all of the outstanding common stock of International Dental Health, Inc. ("IDH") for $19.7 million, composed of $14.3 million in cash at the closing and additional payments of $5.4 million over the six year period beginning September 16, 1994. The cash portion of the purchase price was financed through bank borrowings of $11.0 million and internal funds of $3.3 million. The acquisition has been accounted for as a purchase and the net assets and results of operations of IDH and its subsidiaries have been included in the Company's consolidated financial statements beginning September 1, 1994. The purchase price has been allocated to assets and liabilities of IDH based on their estimated respective fair values. The purchase price exceeded the fair value of IDH's net assets by $16.1 million of which $15.7 is recorded as goodwill at the parent company level and $0.4 is recorded as the value of non-competition and consulting agreements. The Company has not allocated any portion of the purchase price to any other intangible assets considered to have nominal value such as the dentist networks and subscriber contracts. Assets acquired and liabilities assumed totaled $13.9 million and $9.6 million, respectively. F-8 39 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Effective November 1, 1995, the Company completed the acquisition of all of the outstanding common stock of U.S. Dental Management, Inc. ("US Dental") for $12.6 million, composed of $1.3 million in cash at the closing, principal payments totaling $1.0 million over the three year period beginning November 30, 1995 and an additional payment of $10.3 million in January 1996 from an amount held in escrow. The acquisition has been accounted for as a purchase and the net assets and results of operations of US Dental and its subsidiaries have been included in the Company's consolidated financial statements beginning November 1, 1995. The purchase price has been allocated to assets and liabilities of US Dental based on their estimated respective fair values. The purchase price exceeded the fair value of US Dental's net assets by $11.9 million of which $11.7 is recorded as goodwill and $0.2 is recorded as the value of non-competition and consulting agreements. The Company has not allocated any portion of the purchase price to any other intangible assets considered to have nominal value such as the dentist networks and subscriber contracts. Assets acquired and liabilities assumed totaled $4.3 million and $3.6 million, respectively. As of the purchase date, liabilities assumed included estimated amounts accrued of $238,000 for the termination or relocation of employees and other exit costs of the acquired company. As a result of new information gathered in 1996, the Company increased this liability and the corresponding cost of US Dental by $643,000. Effective February 1, 1996, the Company completed the acquisition of all of the outstanding common stock of both Associated Health Plans, Inc. ("AHP") and Associated Companies, Inc. ("ACI") for $15.0 million composed of $14.4 million in cash at closing, financed through internal funds, and additional monthly payments totaling $0.6 million for the three-year period beginning February 1996. The acquisition has been accounted for as a purchase and the net assets and results of operations of both have been included in the Company's consolidated financial statements beginning February 1, 1996. The purchase price has been allocated to assets and liabilities based on their estimated respective fair values. The purchase price exceeded the fair value of net assets by $14.7 million of which $14.1 million is recorded as goodwill and $0.6 million is recorded as the value of non-competition and consulting agreements. The Company has not allocated any portion of the purchase price to any other intangible assets considered to have nominal value such as the dentist networks and subscriber contracts. Assets acquired and liabilities assumed totaled $1.6 million and $1.3 million, respectively. As of the purchase date, liabilities assumed included an estimated amount accrued of $555,000 for the termination or relocation of employees and other exit costs of the acquired company. Effective October 1, 1996, the Company completed the acquisition of all of the outstanding common stock of Independent Dental Plans, Inc. ("Independent") for $1.3 million in cash at the closing, financed through internal funds. The acquisition has been accounted for as a purchase and the net assets and results of operations of Independent have been included in the Company's consolidated financial statements beginning October 1, 1996. The purchase price has been allocated to assets and liabilities of Independent based on their estimated respective fair values. The purchase price exceeded the fair value of Independent's net assets by $1.5 million of which $1.5 million is recorded as goodwill. The Company has not allocated any portion of the purchase price to any other intangible assets considered to have nominal value such as the dentist networks and subscriber contracts. Assets acquired and liabilities assumed totaled $0.5 million and $0.7 million, respectively. Effective October 1, 1996, the Company completed the acquisition of all of the outstanding common stock of Association Dental Plan, Inc. ("Association") for $3.2 million in cash at the closing, financed through internal funds. The acquisition has been accounted for as a purchase and net assets and results of operations of Association have been included in the Company's consolidated financial statements beginning October 1, 1996. F-9 40 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The purchase price has been allocated to assets and liabilities of Association based on their estimated respective fair values. The purchase price exceeded the fair value of Association's net assets by $3.5 million of which $3.5 million is recorded as goodwill. The Company has not allocated any portion of the purchase price to any other intangible assets considered to have nominal value such as the subscriber contracts. Assets acquired and liabilities assumed totaled $0.2 million and $0.5 million, respectively. As of the purchase date, liabilities assumed included an estimated amount accrued of $400,000 for the termination or relocation of employees and other exit costs of the acquired company. Effective November 1, 1996, the Company completed the acquisition of all of the outstanding common stock of Kansas City Dental Care, Inc. ("KCDC") for $12.5 million, composed of $12.5 million in cash at the closing, financed through internal funds, plus a contingent payment up to a maximum of $2.0 million based on the financial performance of the Company in the states of Missouri and Kansas in the second year after completion of the acquisition. The acquisition has been accounted for as a purchase and the net assets and results of operations of KCDC have been included in the Company's consolidated financial statements beginning November 1, 1996. The purchase price has been allocated to assets and liabilities of KCDC based on their estimated respective fair values. The purchase price exceeded the fair value of KCDC's net assets by $12.7 million, of which $12.7 million is recorded as goodwill at the parent company level. The Company has not allocated any portion of the purchase price to any other intangible assets considered to have nominal value such as the dentist networks and subscriber contracts. Assets acquired and liabilities assumed totaled $0.8 million and $1.0 million, respectively. As of the purchase date, liabilities assumed included an estimated amount accrued of $575,000 for the termination or relocation of employees and other exit costs of the acquired company. Effective November 1, 1996, the Company completed the acquisition of all of the outstanding common stock of OraCare DPO, Inc. and a dental management company affiliated with OraCare (collectively, "OraCare"). In addition, as a part of the acquisition, the Company agreed to cause an affiliate to acquire a dental professional association owned by the majority stockholder of OraCare DPO, Inc. These entities were acquired for $30.5 million, composed of $5.6 million in cash at the closing, financed through internal funds, and an additional payment of $24.9 million in January 1997 from an amount held in escrow, plus certain contingent payments up to a maximum aggregate amount of $6.0 million based on the financial performance of the Company in the states of New Jersey and Pennsylvania in 1997 and 1998. The acquisition has been accounted for as a purchase and the net assets and results of operations of OraCare and its subsidiaries have been included in the Company's consolidated financial statements beginning November 1, 1996. The purchase price has been allocated to assets and liabilities of OraCare based on their estimated respective fair values. The purchase price exceeded the fair value of OraCare's net assets by $31.4 million of which $31.2 million is recorded as goodwill and $0.2 million is recorded as the value of non-competition and consulting agreements. The Company has not allocated any portion of the purchase price to any other intangible assets considered to have nominal value such as the dentist networks and subscriber contracts. Assets acquired and liabilities assumed totaled $2.4 million and $3.3 million, respectively. As of the purchase date, liabilities assumed included an estimated amount accrued of $825,000 for the termination or relocation of employees and other exit costs of the acquired company. In response to certain regulations in New Jersey, the capital stock of the OraCare dental professional association was acquired by a company officer who is a licensed New Jersey dentist. Additionally, the dentist has provided the Company, for nominal consideration, with an option to transfer, at the Company's discretion, the ownership of the dental professional association to another licensed dentist of the Company's choosing. Successor dentists will be required to provide a comparable option to the Company as a condition of the transfer of the ownership of the dental professional association to each successor dentist. F-10 41 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The acquired OraCare dental management company entered into a management agreement pursuant to which it will furnish the facilities and equipment and certain management services to the OraCare dental professional association relating to the operation of the dental clinics. The Company believes that the management agreement conveys to the Company perpetual, unilateral control over the assets and operations of the affiliated dental professional association. Notwithstanding the lack of technical majority ownership of the stock of such entity, consolidation of the dental professional association is necessary to present fairly the financial position and results of operations of the Company because there exists a parent-subsidiary relationship by means other than record ownership of a majority of voting stock. Control by the Company is perpetual rather than temporary because of: (i) the length of the original term of the agreement, (ii) the continuing investment of capital by the Company, (iii) the employment of the majority of the non-physician personnel, and (iv) the nature of the services provided to the dental professional association by the Company. The Company's financial relationship with the dental professional association offers access to capital, management expertise, sophisticated information systems, and managed care contracts. Thus, a portion of the Company's revenue is derived from dental services provided by dentists through the dental professional association, which revenue has been assigned to the Company. The Company's profitability is improved by enhancing operating efficiency of the dental practices, expanding dental services provided, increasing market share and assisting affiliated dentists in managing the delivery of dental care. On September 10, 1996, the Company entered into a definitive agreement to acquire International Dental Plans, Inc. ("IDP"), which operates a prepaid dental plan in Florida, for $4.5 million pending approval by the Florida Department of Insurance. The following represents the unaudited pro forma results of operations as if the Company's acquisitions described above had occurred at the beginning of 1994 (dollars in thousands):
Unaudited -------------------------------------------- 1994 1995 1996 ----------- ----------- ------------ Revenues . . . . . . . . . . . . . . . . . . . . . . . . $113,506 $126,782 $140,761 Income before income taxes and extraordinary charge . . . 1,417 6,028 12,655 Net income (loss) applicable to common stock . . . . . . 112 2,808 8,051
The pro forma information is based on historical information adjusted to give effect to the amortization of goodwill and other intangibles as well as the increased interest expense due to the borrowings incurred to finance the IDH acquisition in 1994. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies. 3. REGULATORY DEPOSITS At December 31, 1996, regulatory deposits were recorded at cost and consisted of $1,508,000 in U.S. government obligations and $1,925,000 in certificates of deposit insured by the Federal Deposit Insurance Corporation. The Company has set aside certificates of deposit bearing interest at variable rates as required by various state statutes. The fair value of all financial instruments, determined by reference to market data, approximated their recorded value at each of the balance sheet dates shown. 4. ACQUISITION-RELATED EXPENSES Certain expenditures related to the acquisition of IDH discussed in Note 2 that have not been included in the cost of the acquisition are reported separately for comparability of expense categories to prior reported periods. These costs are primarily related to upgrades to UDC's facilities and computer systems necessitated by the acquisition. F-11 42 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 5. LONG-TERM DEBT On September 16, 1994, in conjunction with the acquisition of IDH (see Note 2), the Company borrowed $11.0 million from a commercial bank under a reducing revolver arrangement. The interest rate on the unpaid principal amount was, at the Company's option (i) 1.0% per annum over the lender's prime rate or (ii) 2.75% per annum over LIBOR. Interest payments were due quarterly. On December 15, 1994, the Company repaid $275,000, on February 17, 1995, the Company repaid $275,000, on March 15, 1995, the Company repaid $1.5 million of such indebtedness and on September 27, 1995, the Company repaid $9.9 million, the entire remaining balance. An additional portion of the IDH purchase price was deferred and is payable over the period ended January 1, 2000. The payments may be prepaid without penalty and are not contingent upon the future operations of the Company. The present value of the future payments (assuming no voluntary prepayments, discounted at 7.25%) is recorded as long- term debt. One of the former shareholders of IDH was subsequently appointed a director to the Company. On September 16, 1994, the Company made the first of the payments required under the agreements in a total amount of $755,000. The Company entered into a letter of credit facility relating to the deferral agreements that currently requires annual fees of up to 0.85% of the unpaid amounts under these agreements. A portion of the US Dental purchase price was financed by a promissory note in the amount of $10.3 million that was subsequently paid in full on January 18, 1996. In addition, a portion of the US Dental purchase price in the amount of $1.0 million was deferred and is payable over the period ended December 31, 1999. The payments may be prepaid without penalty and are not contingent upon the future operations of the Company. The present value of the future payments (assuming no voluntary prepayments, discounted at 7.50%) is recorded as long-term debt. On November 30, 1995, the Company made the first of the payments required under the agreements. A portion of the AHP purchase price in the amount of $0.6 million was deferred and payable in monthly installments over a three-year period. The payments may be prepaid without penalty and are not contingent upon the future operations of the Company. The interest rate on the deferred purchase price is 5.0% and the total amount of $0.6 million was recorded as long-term debt on the purchase date. On February 22, 1996, the Company made the first of the payments required under the agreements. On November 14, 1996, in conjunction with the acquisition of OraCare (see Note 2), the Company signed promissory notes in an aggregate amount of $24.9 million. The interest rate on the promissory notes was 4.84% per annum, payable at the notes' maturity on January 2, 1997. In addition, the Company acquired certain capital leases primarily for dental equipment used by the dental professional association. The following table summarizes the minimum required future principal reductions (dollars in thousands):
Deferred Deferred Deferred IDH US DENTAL AHP OraCare OraCare Purchase Purchase Purchase Promissory Capital Price Price Price Annual Note Leases Payments Payments Payments Total ---------- ------- -------- -------- -------- -------- 1997 . . . . . . . . . $ 24,864 $ 154 $ 724 $ 250 $ 199 $ 26,191 1998 . . . . . . . . . -- 89 790 263 209 1,351 1999 . . . . . . . . . -- 76 849 251 18 1,194 2000 . . . . . . . . . -- 52 142 -- -- 194 2001 . . . . . . . . . -- 18 -- -- -- 18 ---------- ------- -------- -------- -------- -------- TOTAL $ 24,864 $ 389 $ 2,505 $ 764 $ 426 $ 28,948 ========== ======= ======== ======== ======== ========
F-12 43 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED On November 14, 1996, the Company signed a revolving credit agreement providing a $35.0 million revolving credit facility with an unaffiliated bank. The purpose of the revolving credit facility is to provide (i) for funding future acquisitions of managed dental benefits companies, (ii) for the issuance of letters of credit, (iii) for capital expenditures and (iv) at the election of the Company, a working capital line of credit in an amount up to $5.0 million out of the total amount available under the revolving credit facility. The revolving credit facility has a term of four years, expiring November 30, 2000. Outstanding indebtedness under the revolving line of credit will bear interest payable quarterly, at the Company's option, at: (i) up to 0.25% over the base rate of the lender or (ii) up to 1.85% over LIBOR, with the margin over the respective rates decreasing as the ratio of total funded debt to earnings before interest, taxes, depreciation and interest decreases. The Company pays an annual fee of up to 0.25% of the amount remaining available to be drawn under the credit facility and up to 0.85 % of the amount available to be drawn under the letters of credit. The revolving credit facility is secured by the pledge of all the outstanding capital stock of the direct and indirect subsidiaries of the Company and a negative pledge on all other assets. The revolving credit facility contains numerous covenants including, among other things, that the Company cannot, except in certain permitted instances, (i) incur any additional indebtedness; (ii) grant liens on any of the assets of the Company or its subsidiaries; (iii) declare or pay any dividends; or (iv) merge or consolidate with any other entity. In addition, the Company is required to satisfy on an ongoing basis certain financial covenants. The Company's breach of any covenant would result in an event of default under the revolving credit facility. In 1994, the Company arranged for the issuance of two letters of credit in the aggregate amount of $4.8 million. The letters of credit secure the obligations of the Company under certain agreements executed in connection with the IDH acquisition. The letters of credit decline in amount annually and expire in September 1998. The Company pays an annual fee of up to 0.85% of the amount remaining to be drawn under the letters of credit. 6. COMMITMENTS The Company leases office space and certain equipment under operating leases. In 1996, the Company entered into a five-year lease for office space commencing in April 1997. Rental expense for 1994, 1995 and 1996 was $648,000, $1,351,000 and $1,243,000, respectively. Minimum obligations under the operating leases at December 31, 1996 are as follows (dollars in thousands):
YEAR ENDING DECEMBER 31: 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,751 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,580 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 173 ---------- $ 6,326 ==========
7. INCOME TAXES The provision (benefit) for income taxes allocated to continuing operations consisted of the following components (dollars in thousands):
1994 1995 1996 ------ ------ ------ Current . . . . . . . . . . . . . . . . . . . . . . . $1,253 $2,250 $3,744 Deferred (benefit). . . . . . . . . . . . . . . . . . 3 (119) 694 ------ ------ ------ Provision for Federal income taxes . . . . . . . . . $1,256 $2,131 $4,438 ====== ====== ======
F-13 44 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED In September 1995, the Company incurred an extraordinary charge due to the early retirement of debt in the amount of $142,000, net of a tax benefit in the amount of $73,000. The Company pays premium taxes in lieu of state income taxes in most states where it has operations. During 1995 and 1996, certain employees exercised 171,500 and 10,000 nonqualified stock options, respectively, resulting in tax savings of approximately $527,000 and $125,000, respectively, and a corresponding increase to capital. A reconciliation of the difference between the Federal income tax rate and the Company's effective tax rate is as follows:
1994 1995 1996 ---- ---- ---- Federal income tax rate . . . . . . . . . 34.0% 34.0% 34.0% Amortization of goodwill . . . . . . . . 1.1 2.0 3.0 Tax exempt interest income . . . . . . . -- (1.2) (1.4) Other . . . . . . . . . . . . . . . . . . 2.3 1.6 1.4 ---- ---- ---- Effective tax rate . . . . . . . . . 37.4% 36.4% 37.0% ==== ==== ====
Deferred tax assets (liabilities) were comprised of the following at December 31:
1995 1996 ------- -------- Premium reserve . . . . . . . . . . . . . . . . $ 69 $ 673 Prepaid assets . . . . . . . . . . . . . . . . 23 -- Depreciation . . . . . . . . . . . . . . . . . 256 303 Start Up Costs . . . . . . . . . . . . . . . . 38 24 Unearned Premium . . . . . . . . . . . . . . . 83 -- Consulting and non-competition agreements . . . 1,698 1,808 Miscellaneous accruals/reserves . . . . . . . . 49 942 ------- -------- Gross deferred tax asset . . . . . . . . . . 2,216 3,750 ------- -------- Consulting and non-competition agreements . . . (1,685) (2,499) ------- -------- Gross deferred tax liability . . . . . . . . (1,685) (2,499) ------- -------- Net deferred tax asset . . . . . . . . . . . . $ 531 $ 1,251 ======= ========
8. EXTRAORDINARY CHARGE In September 1995, the Company incurred an extraordinary charge due to the early retirement of debt in the amount of $142,000, consisting of bank fees of $195,000 and legal fees of $20,000 less a tax benefit of $73,000. 9. STOCKHOLDERS' EQUITY On September 21, 1995, the Company completed its initial public offering of common stock, issuing 2,375,000 shares at a price of $22.00 per share before expenses. After deduction of underwriting discounts and expenses of the offering, the aggregate net offering proceeds were $48.0 million. F-14 45 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED On October 28, 1996, the Company completed a public offering of common stock, issuing 2,000,000 shares at a price of $30.00 per share before expenses. After deduction of underwriting discounts and expenses of the offering, the aggregate net offering proceeds were $56.2 million. In January 1995, an executive officer of the Company purchased from the Company warrants to purchase 40,000 shares of common stock at $6.00 per share. The purchase price of the warrants was $2.00 each. The Company had an Incentive Stock Option Plan pursuant to which 200,000 shares of common stock were reserved. During 1994 and 1995, 60,000 and 80,000 stock options were exercised, respectively, at an exercise price of $1.25 per share. These options are considered noncompensatory. The board of directors has terminated the Incentive Stock Option Plan for the purposes of any additional grants thereunder. The Company also has a Key Employee Stock Option Plan pursuant to which 222,000 shares were reserved as of December 31, 1996. During 1995, 263,500 stock options were exercised at an average exercise price of $1.39 and, during 1996, 10,000 stock options were exercised at an exercise price of $1.50. At December 31, 1996, 7,500 of the 222,000 outstanding Key Employee Stock Option Plan options were exercisable at an exercise price of $5.50. These options are considered compensatory and have terms of five to ten years; the options are exercisable at various times during the terms of the options at exercise prices ranging from $4.00 to $6.25, which amounts, in management's estimation, were equal to or exceeded market value at the date of grant. The board of directors has terminated the Key Employee Stock Option Plan for the purposes of any additional grants thereunder. In 1995, the Company's board of directors adopted a new employee stock option plan (the "1995 Plan") that provides only for the grant of non-qualified stock options. The 1995 Plan originally provided that a total of 300,000 shares of common stock may be issued pursuant to the options granted under the 1995 Plan, and, in 1996, the stockholders approved an increase to 800,000 shares. In addition to discretionary grants of stock options to employees, the 1995 Plan provides for the automatic one-time grant of stock options for 16,000 shares of common stock to certain qualifying non-employee directors who were either serving on the board of directors of the Company when the 1995 Plan was adopted by the board of directors or subsequently elected to the board of directors (to the extent that options are available under the 1995 Plan). Such director options are exercisable in 25% increments beginning one year after the date of grant. At December 31, 1996, options for 395,000 shares had been granted under the 1995 Plan, 8,000 of which were exercisable at an option price of $7.00. These options are considered compensatory and have terms of ten years; the options are exercisable at various times during the terms of the options at exercise prices ranging from $33.75 to $39.50, which amounts were equal to or exceeded market value at the date of grant. Option grants to employees other than directors generally vest and are exercisable cumulatively in equal installments over a five year period commencing two years from the date of grant. F-15 46 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The combined historical activity in the Company's option plans since December 31, 1993 has been as follows:
1994 1995 1996 ------------------------ ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise (000) Price (000) Price (000) Price ------- --------- --------- --------- ----------- ----------- Outstanding at beginning of year 577.0 $1.78 635.5 $3.06 374.0 $6.01 Granted . . . . . . . 224.0 5.97 112.0 8.60 383.0 34.51 Exercised . . . . . . (93.5) 1.29 (343.5) 1.35 (10.0) 1.50 Forfeited . . . . . . (72.0) 4.21 (30.0) 6.25 (130.0) 11.60 ------- -------- -------- Outstanding at end of year . . . . . 635.5 3.05 374.0 6.01 617.0 22.60 ======= ======== ======== Exercisable at end of year . . . . . 320.0 1.29 -- -- 15.5 6.27 Weighted average fair value of options granted during year . . . $5.97 $8.60 $34.51
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ----------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Contractual Exercise Exercise Price Number Life Price Number Price --------- -------- ---------- -------- ------- -------- ($) (Years) ($) ($) 4.00 36,000 6.00 4.00 -- -- 5.50 30,000 4.84 5.50 7,500 5.50 6.00 156,000 5.02 6.00 -- -- 7.00 32,000 8.32 7.00 8,000 7.00 33.75 300,000 9.61 33.75 -- -- 35.50 16,000 9.16 35.50 -- -- 37.13 31,000 8.23 37.13 -- -- 39.50 16,000 9.31 39.50 -- -- ------- ------ 617,000 7.85 22.60 15,500 6.27 ======= ======
The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-16 47 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. The fair value for each option grant has been estimated at the date of grant using a Black-Scholes multiple option pricing model that treats each option vesting date as a separate option for purposes of the valuation. Thus, the assumptions concerning the risk-free interest rate may vary for each separate vesting date. The expected life of each separate vesting date is determined by estimating the time period between vesting and exercise, taking into account such factors as the age and financial resources of the individual being granted the option. The Company has not paid any dividends and does not anticipate paying dividends at any time during the life of options granted in 1995 and 1996. The assumed weighted average risk-free interest rate was 7.75% for options granted in 1995 and 6.07% for options granted in 1996. The assumed weighted average volatility was zero for options granted in 1995 (the Company was privately owned when the options were granted) and .35 for options granted in 1996. The assumed weighted average expected life was 4.1 years for options granted in 1995 and 5.6 years for options granted in 1996. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and, because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Forfeitures are recognized as they occur. The Company's pro forma information follows (in thousands except for earnings per share information):
1995 1996 --------- ---------- Net income: As reported . . . . . . . . . . . . . . $3,589 $7,557 Pro forma . . . . . . . . . . . . . . . $3,558 $6,971 Earnings per share: As reported . . . . . . . . . . . . . . $ 0.66 $ 1.00 Pro forma . . . . . . . . . . . . . . . $ 0.65 $ 0.94
10. STATUTORY NET WORTH COMPARED TO STOCKHOLDERS' EQUITY PER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Certain assets recognized under generally accepted accounting principles are considered nonadmissible under statutory accounting practices as filed and submitted in the annual reports to the states of domicile of the various subsidiaries required to submit such reports. These nonadmitted assets create differences between statutory net worth as reported on the annual filing and total stockholders' equity as recorded under generally accepted accounting principles. Statutory net worth of the Company's subsidiaries that are subject to state insurance regulations totaled approximately $18.0 million and $17.0 million at December 31, 1995 and 1996, respectively. Of these amounts, United Dental Care Insurance Company ("UDCIC") represents $6.3 million and $3.8 million at December 31, 1995 and 1996, respectively. UDCIC is subject to the Arizona insurance statutes and regulations and is required to maintain minimum capital and surplus of $500,000 and without the prior approval of the Arizona Department F-17 48 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED of Insurance may not pay a dividend greater than the lesser of 10% of capital and surplus as of the end of the prior year or net investment income for the prior year. UDCIC received approval from the Arizona Department of Insurance to pay a dividend of $2.5 million in 1996. Statutory net income of the Company's subsidiaries for 1995 and 1996 was $6.3 million and $8.9 million, respectively, and excludes a $3.9 million intercompany realized gain on the transfer of subsidiaries among affiliates in 1995. 11. SUPPLEMENTARY FINANCIAL INFORMATION SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 Quarters 1996 Quarters ------------------------------------ ------------------------------------ First Second Third Fourth First Second Third Fourth ------- ------- ------- ------- ------- ------- ------- ------- Revenues . . . . . . . . . . $18,871 $19,156 $19,340 $21,862 $24,794 $26,331 $26,713 $35,810 Net income: Before extraordinary charge 523 728 960 1,520 1,411 1,645 1,876 2,625 Extraordinary charge . . . -- -- (142) -- -- -- -- --- ------- ------- ------- ------- ------- ------- ------- ------- Net income . . . . . . . . $ 523 $ 728 $ 818 $ 1,520 $ 1,411 $ 1,645 $ 1,876 $ 2,625 ------- ------- ------- ------- ------- ------- ------- ------- Net income per share: Before extraordinary charge $ 0.11 $ 0.15 $ 0.19 $ 0.21 $ 0.19 $ 0.23 $ 0.26 $ 0.31 Extraordinary charge . . . -- -- (0.03) -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Net income per share . . . $0 .11 $ 0.15 $ 0.16 $ 0.21 $ 0.19 $ 0.23 $ 0.26 $ 0.31 ======= ======= ======= ======= ======= ======= ======= =======
12. SUBSEQUENT EVENTS On January 2, 1997, the Company paid off the $24.9 million Promissory Note made in connection with the purchase of all the outstanding capital stock of OraCare. On January 22, 1997, the Company completed the acquisition of United Dental Care, Inc., an Oklahoma corporation, for $7.6 million. F-18 49 EXHIBIT INDEX
NUMBER EXHIBIT 3.01 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.01 to the Company's Registration Statement on Form S-1, Registration Number 33-94356 (the "1995 Registration Statement") and incorporated herein by reference). 3.02 Amended and Restated Bylaws of the Company (filed as Exhibit 3.02 to the 1995 Registration Statement and incorporated herein by reference). 4.01 Specimen Common Stock Certificate (filed as Exhibit 4.01 to the 1995 Registration Statement and incorporated herein by reference). 10.01 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., The Adaven Group Limited Partnership and Robert J. Nettinga (filed as Exhibit 10.06 to the 1995 Registration Statement and incorporated herein by reference). 10.02 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and The Adaven Group Limited Partnership (filed as Exhibit 10.07 to the 1995 Registration Statement and incorporated herein by reference). 10.03 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., Omega Marine Development, Inc. and Paul C. Nettinga (filed as Exhibit 10.08 to the 1995 Registration Statement and incorporated herein by reference). 10.04 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and Omega Marine Development, Inc. (filed as Exhibit 10.09 to the 1995 Registration Statement and incorporated herein by reference). 10.05 Stockholders Agreement dated as of September 16, 1994 among United Dental Care, Inc., certain stockholders of United Dental Care, Inc. named therein and Robert J. Nettinga (filed as Exhibit 10.10 to the 1995 Registration Statement and incorporated herein by reference). 10.06 Irrevocable Letter of Credit dated September 16, 1994 in the amount of $4,023,500 in favor of The Adaven Group Limited Partnership (filed as Exhibit 10.11 to the 1995 Registration Statement and incorporated herein by reference). 10.07 Amended and Restated Application and Agreement for $4,023,500 Standby Letter of Credit in favor of The Adaven Group Limited Partnership dated September 16, 1994 by United Dental Care, Inc. to NationsBank of Texas, N.A. (filed as Exhibit 10.09 to the Company's Registration Statement on Form S-1, Registration Number 333-12425 (the "1996 Registration Statement") and incorporated herein by reference). 10.08 Administrative Services Agreement dated as of January 1, 1995 between United Dental Care, Inc. and R.E. Harrington, Inc., and Memorandum of Understanding in connection therewith dated as of January 1, 1995 (filed as Exhibit 10.28 to the 1995 Registration Statement and incorporated herein by reference). 10.09 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Dolores A. Kordek (filed as Exhibit 10.9 to the 1995 Form 10-Q and incorporated herein by reference). 10.10 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Christopher A. Jehle (filed as exhibit 10.10 to the 1995 Form 10-Q and incorporated herein by reference). 10.11 Stock Purchase Agreement dated as of December 14, 1995 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 22, 1996, File No. 0-26688 (the "Form 8-K"), and incorporated herein by reference). 10.12 First Amendment to Stock Purchase Agreement dated as of January 17, 1996 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.2 to the Form 8-K and incorporated herein by reference).
50 10.13 Non-Competition Agreement, dated January 22, 1995, between United Dental Care, Inc. and R. Bruce Buchanan (filed as Exhibit 10.3 to the Form 8-K, and incorporated herein by reference). The three other Non-Competition Agreements between United Dental Care, Inc. and Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher, respectively, are identical in form except as to the parties thereto and are therefore omitted from this filing. 10.14 Post-Closing Escrow Agreement dated as of January 22, 1996, among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher and Lawyers Title of Arizona, Inc. (filed as Exhibit 10.4 to the Form 8-K, and incorporated herein by reference). 10.15 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, Gilbert G. Finger, Patricia L. Schubring, Edward K. Halstead, Birchtree Enterprises and Binkley & Stewart, P.C., as Sellers, and Independent Dental Plans, Inc. dated as of June 28, 1996 (filed as Exhibit 10.27 to the 1996 Registration Statement and incorporated herein by reference). 10.16 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of Association Dental Plan, Inc., a District of Columbia corporation (filed as Exhibit 10.28 to the 1996 Registration Statement and incorporated herein by reference). 10.17 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.30 to the 1996 Registration Statement and incorporated herein by reference). 10.18 Earnest Money Escrow Agreement among United Dental Care, Inc., UICI, and Texas Commerce Bank National Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.31 to the 1996 Registration Statement and incorporated herein by reference). 10.19 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and UICI, United Management & Consulting, Inc., United Management & Consulting Retirement Plan, and Marie C. Montgomery Revocable Trust U/T/A March 23, 1992, as Seller, dated as of September 10, 1996, for the purchase of 90% of the issued and outstanding shares of capital stock of United Dental Care, Inc., an Oklahoma corporation (filed as Exhibit 10.32 to the 1996 Registration Statement and incorporated herein by reference). 10.20 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and John E. Carlin, Ph.D., Frank J. Schloegel, III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28, 1996, The Frank J. Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel Charitable Remainder Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust UID September 5, 1996, as Sellers, and Kansas City Dental Care, Inc., dated as of September 11, 1996 (filed as Exhibit 10.34 to the 1996 Registration Statement and incorporated herein by reference). 10.21 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare Consultants, Inc., dated as of September 5, 1996 (filed as Exhibit 10.36 to the 1996 Registration Statement and incorporated herein by reference). 10.22 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., as Seller, and OraCare Dental Associates, P.A., dated as of September 5, 1996 (filed as Exhibit 10.38 to the 1996 Registration Statement and incorporated herein by reference). 10.23 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare DPO, Inc., dated as of September 5, 1996 (filed as Exhibit 10.39 to the 1996 Registration Statement and incorporated herein by reference). 10.24* Letter Agreement dated November 14, 1996 between United Dental Care, Inc. and Peter R. Barnett, D.M.D., regarding ownership of stock of OraCare Dental Associates, P.A. 10.25* Management Agreement dated November 14, 1996 between OraCare Consultants, Inc. and OraCare Dental Associates, P.A. 10.26* Revolving Credit Agreement, dated as of November 14, 1996, between United Dental Care, Inc., NationsBank of Texas, N.A., as Agent for the Lenders named therein, and the Lenders.
51 10.27* Warrant, dated February 26, 1996, held by Mark E. Pape to purchase Common Stock of the Company. 10.28 Employment Agreement dated as of May 13, 1996, between United Dental Care, Inc., and William H. Wilcox (filed as Exhibit 10.40 to the 1996 Registration Statement and incorporated herein by reference). 10.29 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc., and Mark E. Pape (filed as Exhibit 10.41 to the 1996 Registration Statement and incorporated herein by reference). 10.30 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc. and Peter R. Barnett, D.M.D. (filed as Exhibit 10.42 to the 1996 Registration Statement and incorporated herein by reference). 10.31 Master Software License and Services Agreement dated as of June 20, 1995 between Software Technologies Corporation and United Dental Care, Inc. (filed as Exhibit 10.29 to the 1995 Registration Statement and incorporated herein by reference). 10.32 United Dental Care, Inc. Amended and Restated 1989 Key Employee Stock Option Plan (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference). 10.33 United Dental Care, Inc. 1995 Stock Option Plan (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference). 10.34 United Dental Care, Inc. Executive Incentive Plans for 1996 for Mr. Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit 10.47 to the 1996 Registration Statement and incorporated herein by reference). 10.35* United Dental Care, Inc. Executive Incentive Plans for 1997 for Mr. Wilcox, Mr. Pape and Dr. Barnett. 11.1* Statement Regarding Computation of Per Share Earnings. 21.1* List of Subsidiaries of Registrant. 23.1* Consent of Price Waterhouse LLP. 27.1* Financial Data Schedule.
- ------------------- * Filed herewith. EX-10.24 2 LETTER AGREEMENT PETER R. BARNETT 1 EXHIBIT 10.24 UNITED DENTAL CARE, INC. 14755 Preston Rd. Suite 300 Dallas, Texas 75240 November 14, 1996 Peter R. Barnett, D.M.D. 14755 Preston Rd. Suite 300 Dallas, Texas 75240 Dear Peter: This letter is intended to summarize the transactions between United Dental Care, Inc. ("UDC"), OraCare Dental Associates, P.A. ("OraCare PA"), and you. As provided in the Stock Purchase Agreement between UDC, Frank A. Pettisani, Sr., and OraCare PA, United Dental Care is required to designate an assignee of its rights to acquire the shares of OraCare PA, and such assignee must be a dentist duly licensed and in good standing in the State of New Jersey. You have agreed to become the designated assignee of UDC's rights under the Stock Purchase Agreement and to acquire the OraCare PA shares under the Agreement. UDC has agreed to loan to you the amount required to purchase the issued and outstanding shares of OraCare PA. The loan will be evidenced by a note payable to UDC in the amount of the purchase price. You will have no personal liability under the note. Instead, the note will be secured by a Pledge and Security Agreement executed by you and UDC, providing for a security interest in the shares of OraCare PA as the collateral for the note. Also you have agreed to sign an option agreement providing UDC, or its assignee, the right to purchase all of your shares of OraCare PA on the terms and conditions stated therein. It is also contemplated that OraCare PA will enter into a management agreement with OraCare Consultants, Inc. 2 Peter R. Barnett November 14, 1996 Page 2 - -------------------- If this letter accurately summarizes the transaction and the documents to be executed in connection thereunder, please so indicate by signing below. Sincerely, UNITED DENTAL CARE, INC. By: /s/ Mark E. Pape ----------------------------------- Its: Sr. Vice President ----------------------------------- Accepted and Agreed to: /s/ Peter R. Barnett - ----------------------------- Peter R. Barnett, D.M.D. EX-10.25 3 MANAGEMENT AGREEMENT 1 EXHIBIT 10.25 MANAGEMENT SERVICES AGREEMENT BY AND BETWEEN ORACARE CONSULTANTS, INC., A NEW JERSEY CORPORATION AND ORACARE DENTAL ASSOCIATES, P.A., A NEW JERSEY PROFESSIONAL ASSOCIATION ------------ EFFECTIVE AS OF NOVEMBER 14, 1996 2 TABLE OF CONTENTS
PAGE NO. ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Adjusted Gross Revenue. . . . . . . . . . . . . . . . 2 1.2 Adjustments. . . . . . . . . . . . . . . . . . . . . 2 1.3 Agreement. . . . . . . . . . . . . . . . . . . . . . 2 1.4 Ancillary Revenue. . . . . . . . . . . . . . . . . . 2 1.5 Association. . . . . . . . . . . . . . . . . . . . . 2 1.6 Association Account. . . . . . . . . . . . . . . . . 2 1.7 Association Expense. . . . . . . . . . . . . . . . . 2 1.8 Budget. . . . . . . . . . . . . . . . . . . . . . . . 2 1.9 Capitation Revenues. . . . . . . . . . . . . . . . . 2 1.10 Confidential Information. . . . . . . . . . . . . . . 3 1.11 Dental Director . . . . . . . . . . . . . . . . . . . 3 1.12 Dental Services. . . . . . . . . . . . . . . . . . . 3 1.13 Dentist. . . . . . . . . . . . . . . . . . . . . . . 3 1.14 GAAP. . . . . . . . . . . . . . . . . . . . . . . . . 3 1.15 Management Fee. . . . . . . . . . . . . . . . . . . . 4 1.16 Manager. . . . . . . . . . . . . . . . . . . . . . . 4 1.17 Manager Expense. . . . . . . . . . . . . . . . . . . 4 1.18 Office. . . . . . . . . . . . . . . . . . . . . . . . 4 1.19 Office Expense. . . . . . . . . . . . . . . . . . . . 4 1.20 Professional Services Revenues. . . . . . . . . . . . 5 1.21 Representatives. . . . . . . . . . . . . . . . . . . 5 1.22 State. . . . . . . . . . . . . . . . . . . . . . . . 5 1.23 Term. . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 2 APPOINTMENT AND AUTHORITY OF MANAGER . . . . . . . . . . . . 5 2.1 Appointment. . . . . . . . . . . . . . . . . . . . . 5 2.2 Authority. . . . . . . . . . . . . . . . . . . . . . 5 2.3 Patient Referrals. . . . . . . . . . . . . . . . . . 6 2.4 Internal Management of the Association. . . . . . . . 6 2.5 Practice of Dentistry. . . . . . . . . . . . . . . . 6 ARTICLE 3 COVENANTS AND RESPONSIBILITIES OF MANAGER . . . . . . . . . 6 3.1 Office and Equipment. . . . . . . . . . . . . . . . . 6 3.2 Dental Supplies. . . . . . . . . . . . . . . . . . . 7 3.3 Support Services. . . . . . . . . . . . . . . . . . . 7 3.4 Quality Assessment, Risk Management, and Utilization Management. . . . . . . . . . . . . . . . . . . . . . 7 3.5 Licenses and Permits. . . . . . . . . . . . . . . . . 7
(i) 3 3.6 Personnel. . . . . . . . . . . . . . . . . . . . . . 7 3.7 Contract Negotiations. . . . . . . . . . . . . . . . 8 3.8 Billing and Collection. . . . . . . . . . . . . . . . 8 3.9 The Association Account. . . . . . . . . . . . . . . 9 3.10 Fiscal Matters. . . . . . . . . . . . . . . . . . . . 10 (a) Annual Budget . . . . . . . . . . . . . . . . 10 (b) Accounting and Financial Records . . . . . . . 10 (c) Review of Expenditures . . . . . . . . . . . . 10 (d) Tax Matters . . . . . . . . . . . . . . . . . 11 (i) In General . . . . . . . . . . . . . . 11 (ii) Sales and Use Taxes . . . . . . . . . . 11 3.11 Reports and Records. . . . . . . . . . . . . . . . . 11 (a) Dental Records . . . . . . . . . . . . . . . . 11 (b) Other Reports and Records . . . . . . . . . . 11 3.12 Recruitment of the Association Personnel and Dentists. 11 3.13 Healthcare Reimbursement and Systems Programs. . . . 12 3.14 Corporate Dental Patient Accounts. . . . . . . . . . 12 3.15 Advertising. . . . . . . . . . . . . . . . . . . . . 12 3.16 Association Board of Directors Meetings. . . . . . . 12 3.17 Legal Matters. . . . . . . . . . . . . . . . . . . . 12 3.18 Credentialing. . . . . . . . . . . . . . . . . . . . 12 3.19 Confidential and Proprietary Information. . . . . . . 12 3.20 Manager's Insurance. . . . . . . . . . . . . . . . . 13 3.21 Reserved Duties of Manager. . . . . . . . . . . . . . 13 3.22 No Warranty. . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 4 COVENANTS AND RESPONSIBILITIES OF THE ASSOCIATION . . . . . 14 4.1 Organization and Operation. . . . . . . . . . . . . . 14 4.2 Association Personnel. . . . . . . . . . . . . . . . 14 (a) Dentist Personnel . . . . . . . . . . . . . . 14 (b) Non-Dentist Health Care Personnel . . . . . . 15 (c) Dentist Compensation . . . . . . . . . . . . . 15 4.3 Professional Standards. . . . . . . . . . . . . . . . 15 4.4 Dental Services. . . . . . . . . . . . . . . . . . . 15 4.5 Peer Review/Quality Assessment. . . . . . . . . . . . 16 4.6 Association's Insurance. . . . . . . . . . . . . . . 16 4.7 Indemnification. . . . . . . . . . . . . . . . . . . 17 4.8 Confidential and Proprietary Information. . . . . . . 17 4.9 Cost Effectiveness. . . . . . . . . . . . . . . . . . 17 4.10 Name, Trademark. . . . . . . . . . . . . . . . . . . 18 4.11 Availability. . . . . . . . . . . . . . . . . . . . . 18 4.12 Covenant Not to Solicit. . . . . . . . . . . . . . . 18 ARTICLE 5 FINANCIAL ARRANGEMENT . . . . . . . . . . . . . . . . . . . 18 5.1 Management Fee. . . . . . . . . . . . . . . . . . . . 18
(ii) 4 5.2 Reasonable Value. . . . . . . . . . . . . . . . . . . 19 5.3 Payment of Management Fee. . . . . . . . . . . . . . 19 5.4 Disputes Regarding Fees. . . . . . . . . . . . . . . 19 5.5 Accounts Receivable. . . . . . . . . . . . . . . . . 19 ARTICLE 6 TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . 20 6.1 Initial and Renewal Term. . . . . . . . . . . . . . . 20 6.2 Termination. . . . . . . . . . . . . . . . . . . . . 20 (a) Termination By Manager . . . . . . . . . . . . 20 (b) Termination By the Association . . . . . . . . 21 (c) Termination by Agreement . . . . . . . . . . . 21 (d) Legislative, Regulatory or Administrative Change 21 6.3 Effects of Termination. . . . . . . . . . . . . . . . 21 ARTICLE 7 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 22 7.1 Administrative Services Only. . . . . . . . . . . . . 22 7.2 Status of Contractor. . . . . . . . . . . . . . . . . 22 7.3 Notices. . . . . . . . . . . . . . . . . . . . . . . 22 7.4 Governing Law. . . . . . . . . . . . . . . . . . . . 23 7.5 Assignment. . . . . . . . . . . . . . . . . . . . . . 23 7.6 Dispute Resolution. . . . . . . . . . . . . . . . . . 23 7.7 Divisions and Headings. . . . . . . . . . . . . . . . 24 7.8 Amendments and Agreement Execution. . . . . . . . . . 24 7.9 Entire Agreement. . . . . . . . . . . . . . . . . . . 24 7.10 Severability. . . . . . . . . . . . . . . . . . . . . 24
(iii) 5 MANAGEMENT SERVICES AGREEMENT THIS MANAGEMENT SERVICES AGREEMENT ("Agreement") is made and entered into effective as of this 14th day of November, 1996, by and between OraCare Consultants, Inc., a New Jersey corporation ("Manager"), and OraCare Dental Associates, P.A., a New Jersey professional association ("Association"). RECITALS WHEREAS, the Association is a duly organized and validly existing New Jersey professional association, formed for and engaged in the conduct of a dental practice and the provision of dental services to the general public in New Jersey through individual dentists who are licensed to practice medicine in the State of New Jersey and who are employed or otherwise retained by the Association; WHEREAS, Manager is a duly formed and validly existing New Jersey corporation, which is in the business of managing the non-medical aspects of dental practices; WHEREAS, the Association desires to focus its energies, expertise and time on the practice of dentistry and on the delivery of dental services to patients, and to accomplish this goal it desires to delegate the increasingly more complex business functions of its dental practice to persons with business expertise; WHEREAS, the Association also is desirous of increasing the cost- effectiveness of the dental care it provides and desires to enlist the assistance of Manager in this regard; WHEREAS, the Association desires to engage Manager to provide such management, administrative and business services as are necessary and appropriate for the day-to-day administration of the non-medical aspects of the Association's dental practice, and Manager desires to provide such services all upon the terms and conditions hereinafter set forth; WHEREAS, the Association and Manager have determined a fair market value for the services to be rendered by Manager, and based on this fair market value, have developed a formula for compensation for Manager that will allow the parties to establish a relationship permitting each party to devote its skills and expertise to the appropriate responsibilities and functions; and WHEREAS, Manager is willing to commit significant resources to the Association based upon the representations and warranties of the Association that the current employee dentists of the Association will continue to practice medicine for the Association; NOW, THEREFORE, for and in consideration of the mutual terms, covenants and conditions hereinabove and hereinafter set forth, the parties agree as follows: MANAGEMENT SERVICES AGREEMENT - Page 1 6 ARTICLE 1 DEFINITIONS For the purposes of this Agreement, the following terms shall have the following meanings ascribed thereto unless otherwise clearly required by the context in which such term is used. 1.1 Adjusted Gross Revenue. The term "Adjusted Gross Revenue" shall mean the sum of all Professional Services Revenue and Ancillary Revenue. 1.2 Adjustments. The term "Adjustments" shall mean any adjustments on an accrual basis for uncollectible accounts, Medicare, Medicaid and other payor contractual adjustments, discounts, workers' compensation adjustments, professional courtesies, and other reductions in collectible revenue that result from activities that do not result in collectible charges. 1.3 Agreement. The term "Agreement" shall mean this Agreement by and between the Association and Manager and any amendments hereto as may be adopted as provided in this Agreement. 1.4 Ancillary Revenue. The term "Ancillary Revenue" shall mean all fees actually recorded each month by the Association (net of Adjustments) which are not Professional Services Revenues. 1.5 Association. The term "Association" shall mean OraCare Dental Associates, P.A., a New Jersey professional association. 1.6 Association Account. The term "Association Account" shall mean the bank account of the Association established as described in Sections 4.8 and 4.9. 1.7 Association Expense. The term "Association Expense" shall mean an expense incurred by the Manager or the Association and for which the Association and not the Manager, is financially liable. The Association Expense shall include such items as Dentist salaries and benefits (including professional dues, subscriptions, charitable donations, and continuing dental education expenses) and professional liability insurance for the Association, the Dentists and the Manager's employees rendering services pursuant to this Agreement. 1.8 Budget. The term "Budget" shall mean an operating budget and capital expenditure budget for each fiscal year as prepared by Manager and adopted by the Association. 1.9 Capitation Revenues. The term "Capitation Revenues" shall mean all collections from managed care organizations or third party payors where such payment is made periodically on a per member basis for the partial or total dental needs of a subscribing patient. Capitation Revenues shall include any co-payments and incentive bonuses or profits in shared risk pools MANAGEMENT SERVICES AGREEMENT - Page 2 7 received as a result of a capitation plan. Capitation Revenues shall be allocated between Professional Services Revenue and Ancillary Revenue by the Manager. 1.10 Confidential Information. The term "Confidential Information" shall mean any information of Manager or the Association, as appropriate (whether written or oral), including all notes, studies, patient lists, information, business or management methods, marketing data, fee schedules, or trade secrets of the Manager or of the Association, as applicable, whether or not such Confidential Information is disclosed or otherwise made available to one party by the other party pursuant to this Agreement. Confidential Information shall also include the terms and provisions of this Agreement and any transaction or document executed by the parties pursuant to this Agreement. Confidential Information does not include any information that the receiving party can establish (i) is or becomes generally available to and known by the public (other than as a result of an unpermitted disclosure directly or indirectly by the receiving party or its affiliates, advisors, or Representatives), (ii) is or becomes available to the receiving party on a non-confidential basis from a source other than the furnishing party or its affiliates, advisors, or Representatives, provided that such source is not and was not bound by a confidentiality agreement with or other obligation of secrecy to the furnishing party of which the receiving party has knowledge, or (iii) has already been or is hereafter independently acquired or developed by the receiving party without violating any confidentiality agreement with or other obligation of secrecy to the furnishing party. 1.11 Dental Director. The term "Dental Director" shall mean that director of the Association designated by the Association as the director responsible for the overall management of the Association, who shall be a dentist duly licensed and in good standing in the State of New Jersey. 1.12 Dental Services. The term "Dental Services" shall mean general and specialty dental care and services, and all related health care services provided by the Association through the Association's Dentists and other health care providers that are retained by or professionally affiliated with the Association. 1.13 Dentist. The term "Dentist" shall mean each individually licensed professional who is employed or otherwise retained by or associated with the Association, each of whom shall meet at all times the qualifications described in Section 4.2 and Section 4.3. 1.14 GAAP. The term "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity or other practices and procedures as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of the determination. For purposes of this Agreement, GAAP shall be applied on an accrual basis in a manner consistent with the historic practices of the person to which the term applies. MANAGEMENT SERVICES AGREEMENT - Page 3 8 1.15 Management Fee. The term "Management Fee" shall mean Manager's compensation established as described in Article 6 hereof. 1.16 Manager. The term "Manager" shall mean OraCare Consultants, Inc., a New Jersey corporation, or any entity that succeeds to the interests of OraCare Consultants, Inc. and to whom the obligations of Manager are assigned and transferred as permitted by this Agreement. 1.17 Manager Expense. The term "Manager Expense" shall mean an expense or cost incurred by the Manager and for which the Manager, and not the Association is financially liable. 1.18 Office. The term "Office" shall mean any office space, clinic, facility, including satellite facilities, that Manager shall own or lease or otherwise procure for the use of the Association. 1.19 Office Expense. The term "Office Expense" shall mean all operating and non-operating expenses incurred by the Manager or the Association in the provision of services to the Association, including, but not limited to, the following expenses: (a) Salaries and benefits and other direct costs of all employees of Manager at the Office and the salaries and benefits of the non-dentist employees of the Association but shall not include the salaries or benefits of the Dentists; (b) The direct cost of any employee or consultant that provides services at or in connection with the Office for improved clinic performance, such as management, billing and collections, and business office consultation; (c) In the event Manager assists the Association in the recruitment of additional dentist employees, Office Expense shall include reasonable recruitment costs and out-of-pocket expenses of Manager; (d) Comprehensive and general liability insurance covering the Office and employees of the Association and Manager at the Office; (e) The expense of using, leasing, purchasing or otherwise procuring the Office and related equipment, including depreciation but not including monies paid by third parties; (f) The cost of capital (whether as actual interest on indebtedness incurred on behalf of the Association or as reasonable imputed interest on capital advanced by Manager) to finance or refinance obligations of the Association, purchase medical or nonmedical equipment, or finance new ventures of the Association; (g) The reasonable travel expenses of Manager's New Jersey employees, or of the Dentists, associated with attending meetings, conferences, or seminars to benefit the Association; MANAGEMENT SERVICES AGREEMENT - Page 4 9 (h) The cost of supplies, inventory, and utilities; and (i) Office Expenses shall not include any State or federal income tax on income of Manger, or any other expense reasonably designated by Manager as a Manager Expense. 1.20 Professional Services Revenues. The term "Professional Services Revenues" shall mean the sum of (i) all professional fees actually recorded each month on an accrual basis under GAAP (net of Adjustments) as a result of professional dental services rendered by the Dentists, (ii) Capitation Revenues allocated by Manager to Professional Services Revenues, (iii) income produced from the services of physician assistants or extenders, and (iv) all revenue or contributions relating to research activities by dentists of the Association as part of their employment with Association. 1.21 Representatives. The term "Representatives" shall mean a party's officers, directors, employees, or other agents or representatives. 1.22 State. The term "State" shall mean the State of New Jersey. 1.23 Term. The term "Term" shall mean the initial and any renewal periods of duration of this Agreement as described in Section 5.1. ARTICLE 2 APPOINTMENT AND AUTHORITY OF MANAGER 2.1 Appointment. The Association hereby appoints Manager as its sole and exclusive agent for the management and administration of the business functions and business affairs of the Association, and Manager hereby accepts such appointment, subject at all times to the provisions of this Agreement. 2.2 Authority. Consistent with the provisions of this Agreement, Manager shall have the responsibility and commensurate authority to provide business, administrative and full management services for the Association, including, without limitation, provision of equipment, supplies, support services, non-dental personnel, office space, management, administration, financial record keeping and reporting and other business office services. Manager is hereby expressly authorized to provide such services in any reasonable manner Manager deems appropriate to meet the day-to-day requirements of the business functions of the Association. Manager is also expressly authorized to negotiate and execute on behalf of the Association contracts that do not relate to the provision of Dental Services. The Association shall give Manager thirty (30) days prior notice of the Association's intent to execute any agreement obligating the Association to perform Dental Services or otherwise creating a binding legal obligation on the Association. Unless an expense is expressly designated as a Manager Expense in this Agreement, all expenses incurred by Manager in providing services pursuant to this Agreement shall be Office Expenses. The parties acknowledge and agree that the Association, MANAGEMENT SERVICES AGREEMENT - Page 5 10 through its Dentists, shall be responsible for and shall have complete authority, responsibility, supervision, and control over the provision of all Dental Services and other professional health care services performed for patients, and that all diagnoses, treatments, procedures, and other professional health care services shall be provided and performed exclusively by or under the supervision of Dentists as such Dentists, in their sole discretion, deem appropriate. Manager shall have and exercise absolutely no control or supervision over the provision of Dental Services. 2.3 Patient Referrals. Manager and the Association agree that the benefits to the Association hereunder do not require, are not payment for, and are not in any way contingent upon the referral, admission, or any other arrangement for the provision of any item or service offered by Manager to patients of the Association in any facility or health care operation controlled, managed, or operated by Manager. 2.4 Internal Management of the Association. Matters involving the internal management, control, or finances of the Association, including specifically the allocation of professional income among the shareholder(s) and Dentist employees of the Association, tax planning, and investment planning, shall remain the responsibility of the Association and the shareholder(s) of the Association. 2.5 Practice of Dentistry. The parties acknowledge that Manager is not authorized or qualified to engage in any activity that may be construed or deemed to constitute the practice of dentistry. To the extent any act or service herein required by Manager should be construed by a court of competent jurisdiction to constitute the practice of dentistry, the requirement to perform that act or service by Manager shall be deemed waived and unenforceable. ARTICLE 3 COVENANTS AND RESPONSIBILITIES OF MANAGER During the Term of the Agreement, Manager shall provide all such management, administrative and business services as are necessary and appropriate for the day-to-day administration of the business aspects of the Association's operations, including without limitation those set forth in this Article 4 in accordance with the law and all rules, regulations and guidelines of applicable governmental agencies. 3.1 Office and Equipment. As necessary and appropriate, taking into consideration the professional concerns of the Association, Manager shall lease, acquire, or otherwise procure an Office in a location or locations reasonably acceptable to the Association, and shall permit the Association to use the Office and shall provide all non-dental equipment, fixtures, office supplies, furniture and furnishings deemed reasonably necessary by Manager for the operation of the Office and reasonably necessary for the provision of Dental Services. Manager shall also provide, finance, or cause to be provided or financed equipment related to the provision of Dental Services as required by the Association. Subject to economic feasibility, the Association shall have final authority in all dental equipment decisions, and Manager shall have no authority in regard to dental equipment issues. Manager may, however, advise the Association on the relationship MANAGEMENT SERVICES AGREEMENT - Page 6 11 between its dental equipment decisions and the overall administrative and financial operations of the practice. All dental and non-dental equipment acquired for the use of the Association shall be owned by Manager. Manager shall be responsible for the repair and maintenance of the Office, consistent with Manager's responsibilities under the terms of any lease or other use arrangement, and for the repair, maintenance, and replacement of all equipment other than such repairs, maintenance and replacement necessitated by the negligence or willful misconduct of the Association, its Dentists or other personnel employed by the Association, the repair or replacement of which shall be an Association Expense and not an Office Expense. 3.2 Dental Supplies. Manager shall order, procure, purchase and provide on behalf of and as agent for the Association all reasonable dental supplies unless otherwise prohibited by federal and/or State law. Furthermore, Manager shall ensure that the Office is at all times adequately stocked with the dental supplies that are necessary and appropriate for the operation of the Association and required for the provision of Dental Services. The ultimate oversight, supervision and ownership for all dental supplies is and shall remain the sole responsibility of the Association. As used in this provision the term "dental supplies" shall mean all drugs, pharmaceuticals, products, substances, items or devices whose purchase, possession, maintenance, administration, prescription or security requires the authorization or order of a licensed health care provider or requires a permit, registration, certification or other governmental authorization held by a licensed health care provider as specified under any federal and/or State law. 3.3 Support Services. Manager shall provide or arrange for all printing, stationery, forms, postage, duplication or photocopying services, and other support services as are reasonably necessary and appropriate for the operation of the Office and the provision of Dental Services therein. 3.4 Quality Assessment, Risk Management, and Utilization Management. Manager shall assist the Association in the establishment and implementation of procedures to ensure the consistency, quality, appropriateness and dental necessity of Dental Services provided by the Association, and shall provide administrative support for the Association's overall quality assessment, risk management, and utilization management programs. 3.5 Licenses and Permits. Manager shall, on behalf of and in the name of the Association, coordinate all development and planning processes, and apply for and use Manager's reasonable best efforts to obtain and maintain all federal, state, and local licenses and regulatory permits required for or in connection with the operation of the Association and equipment (existing and future) located at the Office, other than those relating to the practice of dentistry or the administration of drugs by Dentists employed by or associated with the Association. 3.6 Personnel. Except as specifically provided in Section 4.2 of this Agreement, Manager shall employ or otherwise retain and shall be responsible for selecting, training, supervising, and terminating, all management, administrative, clerical, secretarial, bookkeeping, accounting, payroll, billing and collection and other nonprofessional personnel as Manager deems reasonably necessary and appropriate for Manager's performance of its duties and obligations under this Agreement. Manager shall have sole responsibility for determining the salaries and MANAGEMENT SERVICES AGREEMENT - Page 7 12 providing such fringe benefits, and for withholding, as required by law, any sums for income tax, unemployment insurance, social security, or any other withholding required by applicable law or governmental requirement for any personnel described in the previous sentence. Manager shall not discriminate in its employment practices on the basis of race, religion, gender, sexual orientation, disability status, or any other factor not related to job performance. 3.7 Contract Negotiations. Manager shall advise the Association with respect to and shall negotiate on an exclusive basis, either directly or on the Association's behalf, as appropriate, all contractual arrangements with third parties as are reasonably necessary and appropriate for the Association's provision of Dental Services, including, without limitation, negotiated price agreements with third party payors, managed care organizations, or other purchasers of group health care services. No contract or arrangement regarding the provision of Dental Services shall be entered without the Association's consent. 3.8 Billing and Collection. On behalf of and for the account of the Association, Manager shall establish and maintain credit and billing and collection policies, procedures, and forms, and shall use Manager's reasonable best efforts to timely bill and collect all professional and other fees for all billable Dental Services provided by the Association, or Dentists employed by or otherwise associated with the Association. Manager shall advise and consult with the Association regarding the fees for Dental Services provided by the Association; it being understood, however, that the Association shall establish the fees to be charged for Dental Services and that Manager shall have no authority whatsoever with respect to the establishment of such fees. In connection with the billing and collection services to be provided hereunder, and throughout the Term and thereafter as provided in this Agreement, the Association hereby grants to Manager an exclusive special power of attorney and appoints Manager as the Association's exclusive true and lawful agent and attorney-in-fact, and Manager hereby accepts such special power of attorney and appointment, for the following purposes: (a) To bill the Association's patients, in the Association's name and on the Association's behalf, for all billable Dental Services provided by the Association to patients. (b) To bill, in the Association's name and on the Association's behalf, all claims for reimbursement or indemnification from Blue Cross/Blue Shield, insurance companies, Medicare, Medicaid, and all other third party payors or fiscal intermediaries for all covered billable Dental Services provided by the Association to patients. (c) To collect and receive, in the Association's name and on the Association's behalf, all accounts receivable generated by such billings and claims for reimbursement, to administer such accounts including, but not limited to, extending the time of payment of any such accounts for cash, credit or otherwise; discharging or releasing the obligors of any such accounts; suing, assigning or selling at a discount such accounts to collection agencies; or taking other measures deemed necessary by the Manager in its sole discretion to require the payment of any such accounts; provided, however, that extraordinary collection measures, such as discharging or releasing obligors or assigning or selling MANAGEMENT SERVICES AGREEMENT - Page 8 13 accounts at a discount to collection agencies shall not be undertaken without the approval of the Association. (d) To deposit all amounts collected into the Association Account which shall be and at all times remain in the Association's name. The Association covenants to transfer and deliver to Manager all funds received directly by the Association from patients or third party payors for Dental Services. Upon receipt by Manager of any funds from patients or third party payors, or from the Association pursuant hereto, for Dental Services, Manager shall immediately deposit same into the Association Account. Manager shall disburse such deposited funds to creditors and other persons on behalf of the Association, maintaining records of such receipt and disbursement of funds as directed by the Association. (e) To take possession of, endorse in the name of the Association, and deposit into the Association Account any notes, checks, money orders, insurance payments, and any other instruments received in payment of accounts receivable for Dental Services. Upon request of Manager, the Association shall execute and deliver to the financial institution wherein the Association Account is maintained, such additional documents or instruments as may be necessary to evidence or effect the special power of attorney granted to Manager by the Association pursuant to this Section 3.8 or pursuant to Section 3.9 of this Agreement. The special power of attorney granted herein shall be coupled with an interest and except as hereinafter provided shall be irrevocable. The special power of attorney shall be revocable if: (i) Manager consents in writing, (ii) the Association terminates this Agreement for cause under Section 6.2 and Manager has not purchased any of the accounts receivable of the Association, (iii) the Association terminates this Agreement for cause under Section 6.2 and Manager has collected all of the outstanding accounts receivable it has purchased, or (iv) this Agreement terminates at the end of the initial term. Revocation of the special power of attorney shall not affect the Manager's right to receive the Management Fee. 3.9 The Association Account. Manager shall have access to the Association Account solely for the purposes stated herein. In connection herewith and throughout the Term (and thereafter as provided in Section 6.2), the Association hereby grants to Manager an exclusive special power of attorney and appoints Manager as the Association's exclusive true and lawful agent and attorney-in-fact, and Manager hereby accepts such special power of attorney and appointment, to deposit into the Association Account all funds, fees, and revenues generated from the Association's provision of Dental Services and collected by Manager, and to make withdrawals from the Association Account for payments specified in this Agreement and as requested from time-to-time by the Association. Notwithstanding the exclusive special power of attorney granted to Manager hereunder, the Association, upon reasonable advance notice to Manager, may draw checks on the Association Account; provided, however, that the Association shall neither draw checks on the Association Account nor request Manager to do so if the balance remaining in the Association Account after such withdrawal would be insufficient to enable Manager to pay on behalf of the Association any Office Expense attributable to the operations of the Association or to the provision of Dental Services, the estimated Management Fee for the MANAGEMENT SERVICES AGREEMENT - Page 9 14 applicable month (based on the Management Fee for the previous month), any over due Management Fees, and/or any other obligations of the Association. Without the prior written consent of the Association, disbursements shall be related to, and in such amount as to be consistent with, the expenditures authorized by the Budget. Limits on authority to sign checks and purchase orders shall be mutually agreed upon by the Association and Manager. 3.10 Fiscal Matters. (a) Annual Budget. Annually and at least thirty (30) days prior to the commencement of each fiscal year of the Association, Manager, in consultation with the Dental Director, shall prepare and deliver to the Association a Budget, setting forth an estimate of the Association's revenues and expenses for the upcoming fiscal year including, without limitation, the Management Fee associated with the services provided by Manager hereunder, and the minimum salary of the Dentist employees of the Association as set forth in their respective employment agreements. The Budget shall be adopted by the Association after reasonable review and comment, and may be revised or modified by the Dental Director only in consultation with the Manager. In the event the parties are unable to agree on a Budget by the beginning of the fiscal year, until an agreement is reached, the Budget for the prior year shall be deemed to be adopted as the Budget for the current year, with each line item in the Budget increased or decreased by (i) the percentage by which the Adjusted Gross Revenue in the current year has increased or decreased compared to the corresponding period of the prior year, (ii) the increase or decrease from the prior year in the Consumer Price Index - Health/Dental Services, and (iii) the proportionate increase or decrease in mutually agreed upon personnel costs as measured by the increase or decrease in full-time equivalent personnel. Manager shall endeavor to manage and administer the operations of the Association as herein provided so that the actual revenues, costs and expenses of the operation and maintenance of the Association during any applicable period of the Association's fiscal year shall be consistent with the Budget. (b) Accounting and Financial Records. Manager shall establish and administer accounting procedures, controls, forms, and systems for the development, preparation, and safekeeping of administrative or financial records and books of account relating to the business and financial affairs of the Association and the provision of Dental Services. Manager shall prepare and deliver to the Association, within ninety (90) days of the end of each calendar year, a balance sheet and a profit and loss statement reflecting the financial status of the Association in regard to the provision of Dental Services as of the end of such calendar year. In addition, Manager shall prepare or assist in the preparation of any other financial statements or records as the Association may reasonably request. (c) Review of Expenditures. The Dental Director shall review all expenditures related to the operation of the Association, but shall not have the power to prohibit or invalidate any expenditure consistent with the Budget. MANAGEMENT SERVICES AGREEMENT - Page 10 15 (d) Tax Matters. (i) In General. Manager shall prepare or arrange for the preparation by an accountant approved in advance by the Association (which approval shall not be unreasonably withheld) of all appropriate tax returns and reports required of the Association. (ii) Sales and Use Taxes. Manager and the Association acknowledge and agree that to the extent that any of the services to be provided by Manager hereunder may be subject to any State sales and use taxes, Manager may have a legal obligation to collect such taxes from the Association and to remit same to the appropriate tax collection authorities. The Association agrees to pay, in addition to the payment of the Management Fee, any applicable State sales and use taxes in respect of the portion of the Management Fees attributable to such services. 3.11 Reports and Records. (a) Dental Records. Manager shall provide the personnel support to establish, monitor, and maintain procedures and policies for the timely creation, preparation, filing and retrieval of all dental records generated by the Association in connection with the Association's provision of Dental Services, and, subject to applicable law, shall ensure that dental records are available promptly to Dentists and any other appropriate persons. The Association shall ensure that all such dental records shall be retained and maintained in accordance with all applicable State and federal laws relating to the confidentiality and retention thereof. All dental records shall be and remain the property of the Association. (b) Other Reports and Records. Manager shall timely create, prepare, and file such additional reports and records as are reasonably necessary and appropriate for the Association's provision of Dental Services, and shall be prepared to analyze and interpret such reports and records upon the request of the Association. 3.12 Recruitment of the Association Personnel and Dentists. Upon the Association's request, Manager shall perform all administrative services reasonably necessary and appropriate to recruit potential dentist personnel to become employees of the Association. Manager shall provide the Association with model agreements to document the Association's employment, retention or other service arrangements with such individuals. It will be and remain the sole and complete responsibility of the Association to interview, select, contract with, supervise, control and terminate all Dentists performing Dental Services or other professional services, and Manager shall have no authority whatsoever with respect to such activities. In performing its duties for the Association hereunder. Manager shall not discriminate in its employment practices on the basis of race, religion, gender, sexual orientation, disability status, or any other factor not related to job performance. MANAGEMENT SERVICES AGREEMENT - Page 11 16 3.13 Healthcare Reimbursement and Systems Programs. Manager shall assist the Association in qualifying for and enrolling in healthcare reimbursement or assistance programs including, but not limited to, Medicare and Medicaid. Any expense incurred in qualifying for or enrolling in healthcare reimbursement or assistance programs is an Office Expense. 3.14 Corporate Dental Patient Accounts. Manager shall assist the Association in procuring large corporate dental patient accounts by making presentations to appropriate personnel at such businesses and by soliciting such businesses where Manager, at its sole discretion, determines that such solicitation would be of benefit. Any expense incurred by manager in procuring such corporate dental patient accounts shall be an Office Expense. 3.15 Advertising. Manager will coordinate all advertising efforts of the Association, and will place all advertisements for the Association. Any expense incurred for such advertising shall be an Office Expense. 3.16 Association Board of Directors Meetings. A Representative of Manager shall attend all meetings of the Board of Directors of Association, on a non-voting basis. 3.17 Legal Matters. Manager shall be the liaison between Association and counsel regarding any legal matters other than disputes arising from this Agreement. Any legal expenses incurred regarding such matters shall be an Office Expense. 3.18 Credentialing. Manager will assist the Association with a credentialing policy for its employee dentists, including, but not limited to, providing the following services: advising the Association regarding the professional qualifications and credentials of Dentists; and assisting the Association in the development of credentialing criteria and protocols. The Association will give reasonable consideration to include as a Dentist any dentist identified by Manager; however, the Association will have the authority to make the final determination as to whether any particular Dentist will be employed by the Association. 3.19 Confidential and Proprietary Information. All Confidential Information furnished to Manager will not be discussed with other persons without the Association's express written authorization, will not be used in any way directly or indirectly detrimental to the Association, and will be kept confidential by Manager and its affiliates and advisors; provided, however, that Manager may disclose Confidential Information to those of its Representatives who need to know Confidential Information for the purposes of this Agreement, it being understood and agreed to by Manager that such Representatives will be informed of the confidential nature of the Confidential Information, will agree to be bound by this Section, and will be directed by Manager not to disclose to any other person any Confidential Information. Manager agrees to be responsible for any breach of this Section by its affiliates, advisors, or Representatives. If Manager is requested or required (by oral questions, interrogatories, requests for information or documents, subpoenas, civil investigative demands, or similar processes) to disclose or produce any Confidential Information furnished in the course of its dealings with the Association or its affiliates, advisors, or Representatives, Manager will (i) provide the Association with prompt notice thereof and copies, if possible, and, if not, a description, of the Confidential Information MANAGEMENT SERVICES AGREEMENT - Page 12 17 requested or required to be produced so that the Association may seek an appropriate protective order or waive compliance with the provisions of this Section and (ii) consult with the Association as to the advisability of the Association's taking of legally available steps to resist or narrow such request. Manager further agrees that, if in the absence of a protective order or the receipt of a waiver hereunder Manager is nonetheless, in the written opinion of its legal counsel, compelled to disclose or produce Confidential Information concerning the Association to any tribunal or to stand liable for contempt or suffer other censure or penalty, Manager may disclose or produce such Confidential Information to such tribunal without liability hereunder; provided, however, that Manager shall give the Association written notice of the Confidential Information to be so disclosed or produced as far in advance of its disclosure or production as is practicable and shall use its best efforts to obtain, to the greatest extent practicable, an order or other reliable assurance that confidential treatment will be accorded to such Confidential Information so required to be disclosed or produced. 3.20 Manager's Insurance. Throughout the Term, Manager, as an Office Expense, shall obtain and maintain with commercial carriers, through self insurance or some combination thereof, appropriate worker's compensation coverage for Manager's employed personnel provided pursuant to this Agreement, and professional, casualty and comprehensive general liability insurance covering Manager, Manager's personnel, and all of Manager's equipment in such amounts, on such basis and upon such terms and conditions as Manager deems appropriate. Upon the request of the Association, Manager shall provide the Association with a certificate evidencing such insurance coverage. Manager may also carry, as an Office Expense, key man life and disability insurance on any shareholder(s) of the Association, or on any Dentist employee of the Association in amounts determined reasonable and sufficient by Manager in its sole discretion. Manager shall be the owner of any such insurance. During the first five (5) years of the term of this Agreement, the proceeds of any such disability or key man life insurance shall be used to offset the Management Fee due to the Manager. The Management Fee shall be offset dollar for dollar by the amount of the insurance proceeds. Insurance proceeds in excess of the unpaid total Management Fees due over the first five (5) years shall belong to Manager. Beginning in year six (6) of this Agreement, the proceeds of any disability or key man life insurance shall be used for recruitment of additional or replacement dentists. 3.21 Reserved Duties of Manager. Notwithstanding anything to the contrary herein, the Association shall not execute any managed care contract without the prior consent of Manager, and the Manager shall have the sole responsibility to approve the following: (a) The renovation or expansion or capital expenditures of the Association; (b) The priority of capital expenditures of the Association; (c) The relocation or addition of the Association's facilities; (d) All Human Resources matters relating to the Manager's employees. MANAGEMENT SERVICES AGREEMENT - Page 13 18 3.22 No Warranty. The Association acknowledges that Manager has not made and will not make any express or implied warranties or representations that the services provided by Manager will result in any particular amount or level of dental practice or income to the Association. ARTICLE 4 COVENANTS AND RESPONSIBILITIES OF THE ASSOCIATION 4.1 Organization and Operation. The Association, as a continuing condition of Manager's obligations under this Agreement, shall at all times during the Term be and remain legally organized and operated to provide Dental Services in a manner consistent with all State and federal laws. The Association shall operate and maintain a full time practice of dentistry with a sufficient complement of full time dentists to meet the needs of its patients, and the Association shall maintain and enforce employment agreements with all Dentists employed by the Association. The Association shall not amend the employment agreements or waive any rights thereunder without the prior approval of Manager. Recognizing that Manager would not have entered into this Agreement but for the Association's covenant to maintain employment agreements with the Dentists of the Association, the Association shall pay to Manager, in addition to the Management Fee, any liquidated damages received by the Association from a Dentist that terminates his or her employment agreement without cause. Such payment shall constitute liquidated damages of Manager for the Association's breach of the covenant contained in this Section 4.1. 4.2 Association Personnel. (a) Dentist Personnel. The Association shall retain, as an Association Expense and not as an Office Expense, a sufficient number of Dentists, as are necessary and appropriate for the provision of Dental Services, each of whom shall be bound by and subject to the applicable provisions of this Agreement. The Association hereby agrees that in the event it desires to retain additional dentists, notice of the same shall be tendered to the Manager. Based upon a review of the circumstances the Manager shall make its recommendation as to the necessity of adding additional dentists. The Association, after considering Manager's recommendation, shall then decide, in its discretion, the number of dentists to add, if any, based upon its review of the circumstances. Each Dentist retained by the Association shall hold and maintain a valid and unrestricted license to practice dentistry in the State of New Jersey. In its engagement or employment of Dentists the Association shall not discriminate on the basis of race, religion, gender, sexual orientation, disability status, or any other factor not related to professional performance. The Association shall enter into and maintain with each such retained Dentist a written employment agreement. The Association shall be responsible for paying the compensation and benefits as applicable, for all Dentists and for withholding, as required by law, any sums for income tax, unemployment insurance, social security, or any other withholding required by applicable law. Manager, on behalf MANAGEMENT SERVICES AGREEMENT - Page 14 19 of the Association, may establish and administer the compensation with respect to such individuals in accordance with the written agreement between the Association and each Dentist. Manager shall neither control nor direct any Dentist in the performance of Dental Services for patients. (b) Non-Dentist Health Care Personnel. All non-dentist health care personnel who provide patient care services shall be employed by or retained by the Association as an Office Expense and shall be under the Association's control, supervision and direction in the performance of or in connection with the rendering of Dental Services for patients. The Association shall not discriminate in its employment practices on the basis of race, religion, gender, sexual orientation, disability status, or any other factor not related to job performance. (c) Dentist Compensation. The Association retains the exclusive right to establish and adjust dentist compensation and/or the methodology to determine dentist compensation. However, the parties acknowledge that dentist compensation methodologies are extremely complex. Accordingly, the Association shall provide a written description of any revisions to its Dentist's compensation methodologies to the Manager. The Manager shall have ninety (90) days to review the proposed revisions and provide comments to the Association regarding the economic impact of such revisions on the strategic plans and goals of the Association. Before finalizing any revision to the compensation methodology the Association's shall consider the Manager's comments. 4.3 Professional Standards. As a continuing condition of Manager's obligations hereunder, each Dentist must (i) have and maintain a valid and unrestricted license to practice dentistry in the State and (ii) comply with, be controlled and governed by and otherwise provide Dental Services in accordance with applicable federal, State and municipal laws, rules, regulations, ordinances and orders, and the ethics and standard of care of the community wherein the principal office of the Association is located. Procurement of temporary staff privileges pending the completion of the dental staff approval process shall satisfy this provision, provided the Dentist actively pursues full appointment and actually receives full appointment within a reasonable time. 4.4 Dental Services. The Association shall ensure that Dentists and non-dentist health care personnel are available as necessary to provide Dental Services to patients. In the event that Dentists employed by, or partners of, the Association are not available to provide Dental Services coverage, the Association shall engage and retain locum tenens coverage. Dentists retained on a locum tenens basis shall meet all of the requirements of Section 4.3, and the cost of providing locum tenens coverage shall be an Association Expense. With the assistance of the Manager, the Association and the Dentists shall be responsible for scheduling Dental and non-dentist health care personnel coverage of all dental procedures. The Association shall cause all Dentists to exert their best efforts to develop and promote the Association in such manner as to ensure the Association is able to serve the diverse needs of the community. MANAGEMENT SERVICES AGREEMENT - Page 15 20 4.5 Peer Review/Quality Assessment. The Association shall adopt credentialing, peer review/quality assessment and utilization programs to monitor and evaluate the quality and cost-effectiveness of Dental Services provided by dental personnel of the Association. Upon request of the Association, Manager shall provide administrative assistance to the Association in performing these activities. The Association shall designate a committee of Dentists to function as a dental peer review committee to review credentials of potential recruits, perform quality assurance functions, and otherwise resolve dental competence issues. The dental peer review committee shall function pursuant to formal written polices and procedures. The Association shall require each of its dentist employees to be subject to and comply with reasonable credentialing, quality and efficiency criteria as it may adopt from time to time. All such policies shall assume effective mechanisms are in place and utilized to monitor and evaluate the delivery of cost effective quality health care, shall assume effective remedial measures are in place and taken to correct any quality or utilization problems and shall assume effective proactive measures to continuously assess and improve the quality of utilization of the Association's health care services. Additionally, these policies shall include at least the following: (a) All peer review, quality improvement and utilization management activities shall be structured so as to maximize available immunities. (b) The Association shall report regularly to Manager as to the performance of these activities. The purpose of this reporting is to help assure that the peer review, quality improvement and utilization management activities are effectively developed and implemented. This is not intended, however, to alter the basic fact that these functions are the Association's responsibilities, and that the proceedings and records are and shall continue to be protected proceedings and records of a peer review body. Reports to the Manager shall be confidential and shall not be deemed to waive any immunities or protections conferred upon such proceedings and records under New Jersey law. (c) The Manager, at its sole cost and expense, shall have the right to arrange an outside performance evaluation of the quality improvement and utilization management functions of the Association, including, to the extent deemed necessary by the Manager, the performance of such functions as they relate to individual Dentists. The results of any such evaluation shall be provided to the Dental Director, and the parties shall use good faith and best efforts to implement the reasonable recommendations of such performance evaluation. 4.6 Association's Insurance. The Association shall, as an Office Expense, obtain and maintain with commercial carriers acceptable to Manager appropriate worker's compensation coverage for the Association's employed personnel, if any, and professional and comprehensive general liability insurance covering the Association and each of the Dentists the Association retains to provide Dental Services. The insurance policy or policies shall provide for at least thirty (30) days advance written notice to the Association from the insurer as to any alteration of coverage, cancellation, or proposed cancellation for any cause. Upon the termination of this Agreement for any reason, the Association shall obtain and maintain as an Association Expense "extended reporting" coverage, in such amount and upon such conditions as determined by MANAGEMENT SERVICES AGREEMENT - Page 16 21 Manager for three (3) years following the effective date of the termination. The Association shall be responsible for paying all premiums for "tail" insurance coverage. 4.7 Indemnification. In addition to the insurance required in Section 4.6 above, the Association shall defend, protect, indemnify and hold harmless Manager from liability for any costs, fees, damages or other financial obligations associated with Manager being named as a defendant in a professional liability action against the Association or any of its employees. 4.8 Confidential and Proprietary Information. All Confidential Information furnished to the Association will not be discussed with other persons without Manager's express written authorization, will not be used in any way directly or indirectly detrimental to Manager, and will be kept confidential by the Association and its affiliates and advisors; provided, however, that the Association may disclose Confidential Information to those of its Representatives who need to know Confidential Information for the purposes of this Agreement, it being understood and agreed to by the Association that such Representatives will be informed of the confidential nature of the Confidential Information, will agree to be bound by this Section, and will be directed by the Association not to disclose to any other person any Confidential Information. The Association agrees to be responsible for any breach of this Section by its affiliates, advisors, or Representatives. If the Association is requested or required (by oral questions, interrogatories, requests for information or documents, subpoenas, civil investigative demands, or similar processes) to disclose or produce any Confidential Information furnished in the course of its dealings with Manager or its affiliates, advisors, or Representatives, the Association will (i) provide Manager with prompt notice thereof and copies, if possible, and, if not, a description, of the Confidential Information requested or required to be produced so that Manager may seek an appropriate protective order or waive compliance with the provisions of this Section and (ii) consult with Manager as to the advisability of Manager's taking of legally available steps to resist or narrow such request. The Association further agrees that, if in the absence of a protective order or the receipt of a waiver hereunder the Association is nonetheless compelled to disclose or produce Confidential Information concerning Manager to any tribunal or to stand liable for contempt or suffer other censure or penalty, the Association may disclose or produce such Confidential Information to such tribunal without liability hereunder; provided, however, that the Association shall give Manager written notice of the Confidential Information to be so disclosed or produced as far in advance of its disclosure or production as is practicable and shall use its best efforts to obtain, to the greatest extent practicable, an order or other reliable assurance that confidential treatment will be accorded to such Confidential Information so required to be disclosed or produced. 4.9 Cost Effectiveness. The Association understands and agrees that it has, in part, enlisted the services of Manager in increasing the cost- effectiveness of the dental services its dentists provide. The Association therefore covenants and agrees to assist Manager in all ways possible to increase the cost-effectiveness of the care delivered pursuant to recognized national standards, providing nothing Manager proposes which may adversely affect the quality of care delivered need to be considered by the Association or its dentists. MANAGEMENT SERVICES AGREEMENT - Page 17 22 4.10 Name, Trademark. The Association represents that it conducts its professional practice under the name of, and only under the name of "OraCare Dental Associates, P.A." and that the Association is the sole and absolute owner of the name. The Association covenants and promises that, without the prior written consent of the Manager, the Association will not: (a) take any action or omit to take any action that is reasonably likely to result in the change or loss of the name; (b) license, sell, give, or otherwise transfer the name or the right to use the name to any dental practice, dentist, professional corporation, or any other entity; or (c) cease conducting the professional practice of the Association under the name. 4.11 Availability. The Association shall provide appropriate Dentist and dentist extender staffing as necessary to assure that services are timely available for all patients. This availability shall include effective staffing of offices during normal hours of operation, as well as on-site or on-call availability on a prompt, continuing basis, 24 hours per day, seven days per week, including holidays, in accordance with generally accepted standards in the community. 4.12 Covenant Not to Solicit. For two (2) years following the termination of this Agreement, the Association shall not: (a) Directly or indirectly recruit or hire, or induce any party to recruit or hire any person who is an employee of, or who has entered into an independent contractor arrangement with the Manager or any Affiliate of the Manager; (b) Directly or indirectly, whether for itself or for any other person or entity, call upon, solicit, divert or take away, or attempt to solicit, call upon, divert or take away any customers, business, or clients of Manager; (c) Disrupt, damage, impair or interfere with the business of the Manager; or (d) Enter into any contract or arrangement for the provision of dental services with any managed care services contracted by the Manager on behalf of the Association during the term of this Agreement. ARTICLE 5 FINANCIAL ARRANGEMENT 5.1 Management Fee. The Association and Manager agree to the compensation set forth herein as being paid to Manager in consideration of a substantial commitment made by Manager hereunder and that such fees are fair and reasonable. Each month Manager shall be paid a Management Fee in the amount equal to all Office Expenses incurred by the Manager plus an MANAGEMENT SERVICES AGREEMENT - Page 18 23 amount equal to fifteen percent (15%) of the Association's Adjusted Gross Revenue. Additionally, to the extent the Office Expenses are less than twenty- eight percent (28%) of the Association's Adjusted Gross Revenue, the Manager shall be paid a bonus in an amount equal to sixty percent (60%) of the difference between the actual Office Expenses and twenty-eight percent (28%) of the Association's Adjusted Gross Revenue. The amounts to be paid the Manager under this Section 5.1 shall be payable monthly. The amounts shall be estimated based upon the previous month's operating results of the Association. Adjustments to the estimated payments shall be made to reconcile actual amounts due under this Section 5.1, and by the end of the month during each calendar year. Upon preparation of quarterly financial statements, final adjustments to the Management Fee for the quarter shall be made and any additional payments owing to the Manager or the Association shall then be made. 5.2 Reasonable Value. Payment of the Management Fee is not intended to be and shall not be interpreted or implied as permitting Manager to share in the Association's fees for Dental Services or any other services, but is acknowledged as the parties' negotiated agreement as to the reasonable fair market value of the equipment, support services, personnel, office space, management, administration and other items and services furnished by Manager pursuant to this Agreement, considering the nature and volume of the services required and the risks assumed by Manager. 5.3 Payment of Management Fee. To facilitate the payment of the Management Fee as provided in Section 5.1 hereof, the Association hereby expressly authorizes Manager to make withdrawals of the Management Fee from the Association Account as such fees become due and payable during the Term and thereafter as provided in Section 6.3. 5.4 Disputes Regarding Fees. (a) It is the parties' intent that any disputes regarding performance standards of the Manager be resolved to the extent possible by good faith negotiation. To that end, the parties agree that if the Association in good faith believes that Manager has failed to perform its obligations, and that as a result of such failure, the Association is entitled to a set-off or reduction in its Management Fees, the Association shall give Manager notice of the perceived failure and request in the notice a set-off or reduction in Management Fees. Manager and the Association shall then negotiate the dispute in good faith, and if an agreement is reached, the parties shall implement the resolution without further action. (b) If an agreement cannot be reached to resolve the dispute, the Association may submit the dispute to mediation pursuant to Section 7.6 hereof. 5.5 Accounts Receivable. To assure that the Association receives the entire amount of professional fees for its Dental Services and to assist the Association in maintaining reasonable cash flow for the payment of Office Expenses, Manager, during the Term, shall have the option to purchase, with recourse to the Association for the amount of the purchase, the accounts MANAGEMENT SERVICES AGREEMENT - Page 19 24 receivable of the Association arising during the previous month by transferring the amount set forth below into the Association Account. The consideration for the purchase shall be an amount equal to the average Adjusted Gross Revenue recorded each month (according to GAAP on an accrual basis net of Adjustments) for the six months prior to the purchase of the accounts receivable of Association less the average Office Expenses due to Manager under this Agreement for the six months prior to the purchase of the accounts receivable of Association. The Association is concurrently herewith granting to Manager a security interest in the accounts receivable, and the Association shall cooperate with Manager and execute all documents in connection with the pledge of accounts receivable to Manager. All collections in respect of such accounts receivable purchased by Manager shall be received by Manager as the agent of the Association and shall be endorsed to Manager and deposited in a bank account at a bank designated by Manager. To the extent the Association comes into possession of any payments in respect of such accounts receivable, the Association shall direct such payments to Manager for deposit in bank accounts designated by Manager. ARTICLE 6 TERM AND TERMINATION 6.1 Initial and Renewal Term. The Term of this Agreement will be for an initial period of ten (10) years after the effective date, and shall be automatically renewed for successive ten (10) year periods thereafter, provided that neither Manager nor the Association shall have given notice of termination of this Agreement at least three hundred sixty five (365) days before the end of the initial term or any renewal term, or unless otherwise terminated as provided in Section 6.2 of this Agreement. 6.2 Termination. (a) Termination By Manager. Manager may terminate this Agreement with sixty (60) days notice upon the occurrence of any one of the following events: (i) The revocation, suspension, cancellation or restriction of any Dentist's license to practice dentistry in the State if, in the discretion of the Manager, the Association will not be financially viable after such revocation, suspension, cancellation, or restriction; (ii) The Association's loss or suspension of its Medicare or Medicaid provider number, and/or the Association's restriction from treating beneficiaries of the Medicare or Medicaid programs if, in the discretion of the Manager, the Association will not be financially viable after such loss, suspension, or restriction; (iii) The dissolution of the Association or the filing of a petition in voluntary bankruptcy, an assignment for the benefit of creditors, or other action taken voluntarily or involuntarily under any state or federal statute for the protection of debtors; MANAGEMENT SERVICES AGREEMENT - Page 20 25 (iv) The Association materially defaults in the performance of its duties or obligations hereunder and such default continues for sixty (60) days after notice is given by Manager of the default; or (v) The parties are unable to reach an agreement on a new service agreement or basis for compensation after the occurrence of an event described in Section 6.2(d). (b) Termination By the Association. The Association may terminate this Agreement with ninety (90) days notice in the event that Manager materially defaults in the performance of its obligations hereunder such that the Association is unable to conduct its business and such default continues for ninety (90) days after Manager receives notice of the default. Termination by the Association hereunder shall require the affirmative vote of seventy-five percent (75%) or more of the shareholder(s) of the Association entitled to vote, each shareholder(s) voting their ownership interest in the Association. (c) Termination by Agreement. In the event the Association and Manager shall mutually agree in writing, this Agreement may be terminated on the date specified in such written agreement. (d) Legislative, Regulatory or Administrative Change. In the event of a change in the Medicare or Medicaid statutes, case law, regulations or general instructions or the adoption of new legislation any of which materially and adversely affects the manner in which either party may perform services under this Agreement, the parties shall immediately amend this Agreement to comply with the law, regulation, or policy and approximate as closely as possible the Management Fee arrangement set forth in this Agreement as it existed immediately prior to the change in law, regulation or policy. 6.3 Effects of Termination. Upon termination of this Agreement, neither party shall have any further obligations hereunder except for (i) obligations accruing prior to the date of termination, including, without limitation, payment of the Management Fees relating to services provided prior to the effective date of termination of this Agreement, and (ii) obligations, promises, or covenants set forth herein that are expressly made to extend beyond the Term, including, without limitation, indemnity provisions, which provisions shall survive the expiration or termination of this Agreement. In effectuating the provisions of this Section 6.3, the Association specifically acknowledges and agrees that Manager shall continue to collect and receive on behalf of the Association all cash collections from accounts receivable in existence at the time this Agreement is terminated to the extent that Manager has purchased accounts receivable and that Association shall direct any payments which it receives in respect of such accounts receivable to Manager for deposit in bank accounts designated by Manager. It is understood that such cash collections will represent, in part, compensation to Manager for management services already rendered and compensation on accounts receivable purchased by Manager. Unless this Agreement is terminated by the Association for cause, as defined in Section 6.2(b), Manager shall be entitled to continue to collect, on behalf of and in the name of the Association, all accounts receivable representing Dental Services provided prior to termination. MANAGEMENT SERVICES AGREEMENT - Page 21 26 Upon the expiration or termination of this Agreement for any reason or cause whatsoever, Manager shall surrender to the Association all books and records pertaining to the Association's dental practice. ARTICLE 7 MISCELLANEOUS 7.1 Administrative Services Only. Nothing in this Agreement is intended or shall be construed to allow Manager to exercise control or direction over the manner or method by which the Association and its Dentists perform Dental Services or other professional health care services. The rendition of all Dental Services and the prescription or administration of medicine and drugs shall be the sole responsibility of the Association and its Dentists, and Manager shall not interfere in any manner or to any extent therewith. Nothing contained in this Agreement shall be construed to permit Manager to engage in the practice of dentistry, it being the sole intention of the parties hereto that the services to be rendered to the Association by Manager are solely for the purpose of providing non-dental management and administrative services to the Association so as to enable the Association to devote its full time and energies to the professional conduct of its dental practice and provision of Dental Services to its patients and not to administration, or practice management. 7.2 Status of Contractor. It is expressly acknowledged that the parties hereto are "independent contractors," and nothing in this Agreement is intended and nothing shall be construed to create an employer/employee, partnership, joint venture or other type of relationship, or to allow either to exercise control or direction over the manner or method by which the other performs the services that are the subject matter of this Agreement; provided always that the services to be provided hereunder shall be furnished in a manner consistent with the standards governing such services and the provisions of this Agreement. Each party understands and agrees that (i) the other will not be treated as an employee for federal tax purposes, (ii) neither will withhold on behalf of the other any sums for income tax, unemployment insurance, social security, or any other withholding pursuant to any law or requirement of any governmental body or make available any of the benefits afforded to its employees, (iii) all of such payments, withholdings, and benefits, if any, are the sole responsibility of the party incurring the liability, and (iv) each will indemnify and hold the other harmless from any and all loss or liability arising with respect to such payments, withholdings, and benefits, if any. 7.3 Notices. All notices, reports, records, or other communications that are required or permitted to be given to the parties under this Agreement shall be sufficient in all respects if given in writing and delivered in person, by telecopy, by overnight courier, or by registered or certified mail, postage prepaid, return receipt requested, to the receiving party at the following address: MANAGEMENT SERVICES AGREEMENT - Page 22 27 Association: OraCare Dental Associates, P.A. 14755 Preston Road, Suite 300 Dallas, Texas 75240 Attn: Peter R. Barnett, D.M.D. Fax No.: 972-960-7782 Manager: OraCare Consultants, Inc. 1909 E. Route 70, First Floor Springdale Rd. & Route 70 Cherry Hill, New Jersey 08003 Attn: Mark E. Pape Fax No.: 609-751-0606 or to such other address as such party may have given to the other by notice pursuant to this Section. Notice shall be deemed given on the date of delivery, in the case of personal delivery or telecopy, or on the delivery or refusal date, as specified on the return receipt, in the case of overnight courier or registered or certified mail. 7.4 Governing Law. This Agreement shall be governed by the laws of the State of New Jersey applicable to agreements to be performed wholly within the state. The federal and state courts of New Jersey shall be the exclusive courts of jurisdiction and venue for any litigation, special proceeding or other proceeding as between the parties that may be brought, or arise out of, in connection with or by reason of this Agreement. 7.5 Assignment. Except as may be herein specifically provided to the contrary, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors, and assigns; provided, however, that the Association may not assign this Agreement without the prior written consent of Manager, which consent may be withheld. The sale, transfer, pledge, or assignment of any voting shares held by any shareholder of the Association such that the effective voting control of the Association is altered, shall be deemed an attempted assignment by the Association, and shall be null and void unless consented to in writing by Manager prior to any such transfer, pledge, assignment, or issuance. Any breach of this provision, whether or not void or voidable, shall constitute a material breach of this Agreement, and in the event of such breach, Manager may terminate this Agreement upon twenty-four (24) hours notice to the Association. In addition, Manager or the transferee shall have the right to collaterally assign its interest in this Agreement and its right to collect Management Fees hereunder to any financial institution or other third party without the consent of the Association. 7.6 Dispute Resolution. The parties shall use good faith negotiation to resolve any controversy, dispute or disagreement arising out of or relating to this Agreement or the breach of this Agreement. Any matter not resolved by negotiation shall be submitted to nonbinding mediation. If complete agreement cannot be reached within thirty (30) days of submission to mediation, any remaining issues will be resolved by binding arbitration in accordance with the MANAGEMENT SERVICES AGREEMENT - Page 23 28 following provisions of this Section. A single arbitrator mutually acceptable to the Manager and the Association who is knowledgeable in the managed care practice or in commercial matters will conduct the arbitration. The arbitrator's decision and award will be final and binding and may be entered in any court with jurisdiction. The arbitrator will not have authority to limit, expand or otherwise modify the terms of this Agreement. If the parties cannot agree on an arbitrator, each party will appoint one arbitrator and these arbitrators shall choose a single arbitrator to conduct the arbitration. The mediation and, if necessary, the arbitration will be conducted under the then current rules of the alternate dispute resolution (ADR) firm selected by the parties, or if the parties are unable to agree on an ADR firm, the parties will conduct the mediation and, if necessary, the arbitration under the then current rules and supervision of the American Arbitration Association (AAA). Manager and the Association will each bear its own attorneys' fees associated with the mediation and, if necessary, the arbitration. Manager and the Association will pay all other costs and expenses of the mediation/arbitration as the rules of the selected ADR firm provide. The parties and their representatives shall hold the existence, content and result of the mediation and arbitration in confidence. The mediator shall not consider and the arbitrator shall not be empowered to award punitive damages. There shall be no discovery during the mediation process. If an arbitration is necessary, no discovery shall be conducted except by agreement of the parties or after approval by the arbitrator, who shall attempt to minimize the burden of discovery. 7.7 Divisions and Headings. The divisions of this Agreement into articles, sections, and subsections and the use of captions and headings in connection therewith is solely for convenience and shall not affect in any way the meaning or interpretation of this Agreement. 7.8 Amendments and Agreement Execution. This Agreement and amendments hereto shall be in writing and executed in multiple copies on behalf of the Association by its Managing Director, and on behalf of Manager by its President or by an authorized officer of any successor to Manager. Each multiple copy shall be deemed an original, but all multiple copies together shall constitute one and the same instrument. 7.9 Entire Agreement. With respect to the subject matter of this Agreement, this Agreement supersedes all previous contracts and constitutes the entire agreement between the parties. Neither party shall be entitled to benefits other than those specified herein. No prior oral statements or contemporaneous negotiations or understandings or prior written material not specifically incorporated herein shall be of any force and effect, and no changes in or additions to this Agreement shall be recognized unless incorporated herein by amendment as provided herein, such amendment(s) to become effective on the date stipulated in such amendment(s). The parties specifically acknowledge that, in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. 7.10 Severability. The parties hereto have negotiated and prepared the terms of this Agreement in good faith with the intent that each every one of the terms, covenants and conditions herein be binding upon and inure to the benefit of the respective parties. Accordingly, MANAGEMENT SERVICES AGREEMENT - Page 24 29 if any one or more of the terms, provisions, promises, covenants or conditions of this Agreement or the application thereof to any person or circumstances shall be adjudged to any extent invalid, unenforceable, void or voidable for any reason whatsoever by a court of competent jurisdiction or an arbitration tribunal, such provision shall be as narrowly construed as possible, and each and all of the remaining terms, provisions, promises, covenants and conditions of this Agreement or their application to other persons or circumstances shall not be affected thereby and shall be valid and enforceable to the fullest extent permitted by law. To the extent this Agreement is in violation of applicable law, then the parties agree to negotiate in good faith to amend the Agreement, to the extent possible consistent with its purposes, to conform to law. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] MANAGEMENT SERVICES AGREEMENT - Page 25 30 IN WITNESS WHEREOF, the Association and Manager have caused this Agreement to be executed by their duly authorized representatives, all as of the day and year first above written. ASSOCIATION: ORACARE DENTAL ASSOCIATES, P.A. By:/s/ Peter R. Barnett ----------------------------------- Peter R. Barnett, President MANAGER: ORACARE CONSULTANTS, INC. By:/s/ Mark E. Pape ----------------------------------- Mark E. Pape, Senior Vice President MANAGEMENT SERVICES AGREEMENT - Page 26 EX-10.26 4 REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10.26 REVOLVING CREDIT AGREEMENT AMONG UNITED DENTAL CARE, INC., AS BORROWER NATIONSBANK OF TEXAS, N.A., AS AGENT AND THE LENDERS NAMED HEREIN, AS LENDERS $35,000,000 AS OF NOVEMBER 14, 1996 2 TABLE OF CONTENTS
PAGE ---- SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Accounting Principles . . . . . . . . . . . . . . . . . . . . 14 1.3 Rules of Construction . . . . . . . . . . . . . . . . . . . . 14 1.4 Covenant Computations . . . . . . . . . . . . . . . . . . . . 14 SECTION 2 THE REVOLVING CREDIT FACILITY . . . . . . . . . . . . . . . . 14 2.1 Commitment to Lend . . . . . . . . . . . . . . . . . . . . . . 14 2.2 LC Subfacility . . . . . . . . . . . . . . . . . . . . . . . . 15 2.3 Method of Borrowing . . . . . . . . . . . . . . . . . . . . . 18 2.4 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.5 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . 20 2.6 Special Provisions for Eurodollar Advances . . . . . . . . . . 21 2.7 Payments of the Note . . . . . . . . . . . . . . . . . . . . . 23 2.8 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.9 Termination of Commitment . . . . . . . . . . . . . . . . . . 25 2.10 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . 25 2.11 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 3 COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.1 Liens and Security Interests . . . . . . . . . . . . . . . . . 26 SECTION 4 CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 26 4.1 Initial Advance . . . . . . . . . . . . . . . . . . . . . . . 26 4.2 All Advances . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 5 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 28 5.1 Organization and Good Standing . . . . . . . . . . . . . . . . 28 5.2 Authorization and Power . . . . . . . . . . . . . . . . . . . 28 5.3 No Conflicts or Consents . . . . . . . . . . . . . . . . . . . 28 5.4 Enforceable Obligations . . . . . . . . . . . . . . . . . . . 29 5.5 No Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.6 Financial Condition . . . . . . . . . . . . . . . . . . . . . 29 5.7 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.8 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . 29 5.9 No Potential Default . . . . . . . . . . . . . . . . . . . . . 29 5.10 Material Agreements . . . . . . . . . . . . . . . . . . . . . 29 5.11 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . 29 5.12 Use of Proceeds; Margin Stock . . . . . . . . . . . . . . . . 29 5.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.14 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.15 Chief Executive Office, Etc. . . . . . . . . . . . . . . . . . 30 5.16 Compliance with Law; Governmental Authorizations . . . . . . . 30 5.17 Casualties . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.18 Sufficiency of Capital . . . . . . . . . . . . . . . . . . . . 31 5.19 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
REVOLVING CREDIT AGREEMENT i 3 5.20 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . 31 5.21 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.22 Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.23 Investment Company Act . . . . . . . . . . . . . . . . . . . . 31 5.24 Public Utility Holding Company Act . . . . . . . . . . . . . . 31 5.25 Representations and Warranties . . . . . . . . . . . . . . . . 31 5.26 Survival of Representations and Warranties . . . . . . . . . . 32 SECTION 6 AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 32 6.1 Financial Statements, Reports, and Documents . . . . . . . . . 32 6.2 Payment of Taxes and Other Indebtedness . . . . . . . . . . . 33 6.3 Maintenance of Existence and Rights; Conduct of Business . . . 33 6.4 Notice of Default . . . . . . . . . . . . . . . . . . . . . . 33 6.5 Other Notices . . . . . . . . . . . . . . . . . . . . . . . . 33 6.6 Operations and Properties . . . . . . . . . . . . . . . . . . 33 6.7 Books and Records; Access . . . . . . . . . . . . . . . . . . 33 6.8 Compliance with Law . . . . . . . . . . . . . . . . . . . . . 34 6.9 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 6.10 Authorizations and Approvals . . . . . . . . . . . . . . . . . 34 6.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 34 6.12 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 34 6.13 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 6.14 Information Relating to Proposed Acquisitions . . . . . . . . 35 6.15 After-Acquired Subsidiaries . . . . . . . . . . . . . . . . . 35 6.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 7 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 35 7.1 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . 36 7.2 Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . 36 7.3 Negative Pledge Agreements . . . . . . . . . . . . . . . . . . 36 7.4 Restrictions on Distributions . . . . . . . . . . . . . . . . 36 7.5 Limitation on Investments . . . . . . . . . . . . . . . . . . 36 7.6 Certain Transactions . . . . . . . . . . . . . . . . . . . . . 36 7.7 Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . 36 7.8 Limitation on Sale of Properties . . . . . . . . . . . . . . . 37 7.9 Liquidation, Mergers, Consolidations and Dispositions of Substantial Assets . . . . . . . . . . . . . . . . . . . . . . 37 7.10 Lines of Business . . . . . . . . . . . . . . . . . . . . . . 37 7.11 Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.12 Leases; Sale and Leaseback . . . . . . . . . . . . . . . . . . 37 7.13 Prepayment of Indebtedness . . . . . . . . . . . . . . . . . . 37 7.14 Minimum Net Worth . . . . . . . . . . . . . . . . . . . . . . 37 7.15 Fixed Charge Coverage . . . . . . . . . . . . . . . . . . . . 37 7.16 Funded Debt to EBITDA . . . . . . . . . . . . . . . . . . . . 38 7.17 Funded Debt to Total Capitalization . . . . . . . . . . . . . 38 7.18 Liquidity Coverage Ratio . . . . . . . . . . . . . . . . . . . 38 7.19 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . 38 SECTION 8 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 38 8.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . 38 8.2 Remedies Upon Event of Default . . . . . . . . . . . . . . . . 39
REVOLVING CREDIT AGREEMENT ii 4 SECTION 9 THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.1 The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 9.3 Proportionate Absorption of Losses . . . . . . . . . . . . . . 42 9.4 Delegation of Duties; Reliance . . . . . . . . . . . . . . . . 42 9.5 Limitation of Agent's Liability . . . . . . . . . . . . . . . 42 9.6 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 9.7 Collateral Matters . . . . . . . . . . . . . . . . . . . . . . 43 9.8 Limitation of Liability . . . . . . . . . . . . . . . . . . . 44 9.9 Relationship of Lenders . . . . . . . . . . . . . . . . . . . 44 9.10 Benefits of Agreement . . . . . . . . . . . . . . . . . . . . 44 SECTION 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 44 10.1 Accounting Reports . . . . . . . . . . . . . . . . . . . . . . 44 10.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 10.3 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . 45 10.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 10.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 45 10.6 Choice of Forum; Consent to Service of Process and Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . 45 10.7 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . 46 10.8 Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . 46 10.9 Nonliability of Lenders . . . . . . . . . . . . . . . . . . . 46 10.10 Article 15.10(b) . . . . . . . . . . . . . . . . . . . . . . . 46 10.11 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 46 10.12 Entirety . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 10.13 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 10.14 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 10.15 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . 49 10.16 No Third Party Beneficiary . . . . . . . . . . . . . . . . . . 49 10.17 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . 49 10.18 Multiple Counterparts . . . . . . . . . . . . . . . . . . . . 49 10.19 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 49 10.20 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 50
REVOLVING CREDIT AGREEMENT iii 5 REVOLVING CREDIT AGREEMENT THIS REVOLVING CREDIT AGREEMENT (this "AGREEMENT"), dated as of November 14, 1996, is made among UNITED DENTAL CARE, INC., a Delaware corporation ("BORROWER"), each of the Persons listed on the signature pages hereof (herein collectively called, together with each Person that becomes a Lender pursuant to SECTION 10.11, the "LENDERS," and individually a "LENDER"), and NATIONSBANK OF TEXAS, N.A., a national banking association, as agent for Lenders to the extent and in the manner provided in SECTION 9 (herein called, together with any successors and assigns, "AGENT"). R E C I T A L S 1. Borrower has requested that Lenders provide to Borrower a revolving credit facility of up to $35,000,000.00 (a) to support Borrower's and its Subsidiaries' capital expenditures and working capital needs (but not to exceed $5,000,000.00 in the aggregate at any one time outstanding), (b) to finance Permitted Acquisitions (defined below), and (c) for the issuance of letters of credit required in connection with such working capital needs (subject to the limitations described in (a) above), the OraCare Acquisition (defined below), or Permitted Acquisitions. 2. Lenders are willing to provide such a facility to Borrower, upon the terms, and subject to the conditions, hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS. 1.1 DEFINITIONS. As used in this Agreement, all exhibits and schedules hereto and in any note, certificate, report, or other Loan Document made or delivered pursuant to this Agreement, the following terms have the respective meanings assigned to them in this SECTION 1, or in the section or recital referred to below: "ACQUISITION" means any transaction, or series of related transactions, consummated on or after the date hereof, by which any Company directly or indirectly (a) acquires all or substantially all of the assets of any Person, whether through purchase of assets, merger, or otherwise, (b) acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities (or other similar ownership interests) of any Person, or (c) acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority of the general partnership interests of any Person. "ADJUSTED EURODOLLAR RATE" means, with respect to any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16th of 1%) equal to the quotient of (a) the Eurodollar Rate with respect to such Interest Period, divided by (b) the remainder of 1.00 minus the Eurodollar Reserve Requirement in effect on such date. "ADVANCE" means (a) each disbursement by Lenders of a sum or sums lent to Borrower pursuant to this Agreement, (b) each conversion of an Advance to another Type or Advance, (c) each rollover of a Eurodollar Advance to a successive Interest Period, and (d) each payment of a draw under a LC. REVOLVING CREDIT AGREEMENT 2 6 "AFFILIATE" of any Person means any other Person (a) directly or indirectly, controlling, controlled by, or under common control with, such Person, (b) that directly or indirectly beneficially owns or holds ten percent (10%) or more of any class of voting stock of such Person, or (c) ten percent (10%) or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question; provided, however, in no event shall Agent or any Lender be deemed an Affiliate of any Company. "AGENT" has the meaning set forth in the first paragraph of this Agreement. "AGENT'S LENDING OFFICE" means Agent's lending office located at 901 Main Street, Dallas, Texas 75202, or such other address as Agent may hereafter designate in writing as Agent's Lending Office by notice to Borrower and Lenders. "AGREEMENT" means this Revolving Credit Agreement, including the schedules and exhibits hereto, as the same may be renewed, extended, or modified from time-to-time. "APPLICABLE LENDING OFFICE" means for each Lender and each Type of Advance, the lending office of such Lender (or of an Affiliate of such Lender) designated for such Type of Advance below its name on the signature pages hereof or an Assignment and Acceptance, or such other office of such Lender (or of an Affiliate of such Lender) as such Lender may from time-to-time specify to Borrower and Agent as the office by which its Advances of such Type are to be made and maintained. "APPLICABLE MARGIN" means (a) the interest margin over the Base Rate or the Adjusted Eurodollar Rate, as the case may be, and (b) the applicable letter of credit fee payable pursuant to SECTION 2.8(c), in each case based upon the Funded Debt to EBITDA Ratio as of and for the most recent four (4) quarter period ending on or before the date of determination, the margin set forth opposite such ratio below:
================================================================================ APPLICABLE APPLICABLE APPLICABLE MARGIN MARGIN MARGIN FOR FUNDED DEBT BASE RATE EURODOLLAR LETTER OF CREDIT LEVEL TO EBITDA ADVANCES ADVANCES FEES RATIO ================================================================================ I Less than 1.0 0% 1.25% 0.55% to 1.0 - -------------------------------------------------------------------------------- II Less than 1.5 0% 1.5% 0.65% to 1.0 but greater than or equal to 1.0 to 1.0 - -------------------------------------------------------------------------------- III Less than 2.0 0% 1.75% 0.75% to 1.0 but greater than or equal to 1.5 to 1.0 - -------------------------------------------------------------------------------- IV Greater than 0.25% 1.85% 0.85% or equal to 2.0 to 1.0 ================================================================================
REVOLVING CREDIT AGREEMENT 2 7 The Funded Debt to EBITDA Ratio shall be determined from the then-most current of either (a) the quarterly or annual financial statements and related compliance certificate delivered pursuant to SECTION 6.1, or (b) the most recent Notice of Borrowing or Notice of LC for a Permitted Acquisition, calculating any adjustments to such ratio necessitated as a result of the Permitted Acquisition for which such Advance or Issuance was made. The adjustment, if any, to the Applicable Margin shall be effective commencing on the fifth (5th) Business Day after delivery of such financial statements (and related compliance certificate) or the respective date of Advance or Insurance for a Permitted Acquisition, as the case may be. If Borrower fails at any time to furnish to Agent and Lenders the financial statements and related compliance certificate as required to be delivered pursuant to SECTION 6.1, then the maximum Applicable Margin shall apply until such time as such financial statements and compliance certificates are so delivered. "ASSIGNEE" has the meaning set forth in SECTION 10.11(b). "ASSIGNING LENDER" has the meaning set forth in SECTION 10.11(b). "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by an Assigning Bank and its Assignee and accepted by Agent pursuant to SECTION 10.11, in substantially the form of EXHIBIT A. "ASSUMED DEBT SERVICE" means, as of any date, (a) the sum of all Funded Debt of the Companies as of such date divided by (b) five (5). "BASE RATE" means, at any time, the greater of (a) the variable rate of interest established from time-to-time by Agent as its "base rate" and set by Agent as a general reference rate of interest charged by Agent, and (b) the Federal Funds Rate plus one-half of one percent (.5%). Borrower acknowledges that Agent may, from time-to-time, extend credit to other borrowers at rates of interest varying from, and having no relationship to, such general reference rate. Each change in the Base Rate shall become effective without prior notice to Borrower automatically as of the opening of business on the date of such change in the Base Rate. "BASE RATE ADVANCE" means any Advance hereunder with respect to which the interest rate is calculated by reference to the Base Rate. "BORROWER" has the meaning set forth in the first paragraph of this Agreement. "BUSINESS DAY" means (a) any day on which Agent is open for regular business, and (b) with respect to all borrowings, payments, conversions, continuations, Interest Periods, and notices in connection with Eurodollar Advances, any day which is a Business Day described in clause (a) above and which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "CAPITAL EXPENDITURE" means any expenditure by a Person for an asset which will be used in years subsequent to the year in which the expenditure is made or which is properly classifiable in relevant financial statements of such Person as a capital asset. "CAPITAL LEASE OBLIGATIONS" means, as to any Person as of any date, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP. For purposes of this Agreement, the amount of such Capital Lease Obligations shall be the capitalized amount thereof, as determined in accordance with GAAP. REVOLVING CREDIT AGREEMENT 3 8 "CHANGE IN CONTROL" means either: (a) any Person or group of related Persons shall have acquired beneficial ownership of more than thirty-five percent (35%) of the outstanding voting shares of Borrower (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder); (b) during any period of twelve (12) consecutive calendar months, individuals who were Directors of Borrower on the first day of such period shall cease to constitute a majority of the Board of Directors of Borrower; or (c) any Person other than Borrower shall have acquired beneficial ownership of more than five percent (5%) of the outstanding voting securities (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder) of any Company (other than of Borrower). "CODE" means the Internal Revenue Code of 1986, as amended, and all regulations promulgated and rulings issued thereunder. "COLLATERAL" has the meaning set forth in SECTION 3.1. "COLLATERAL DOCUMENTS" means all security agreements, pledge agreements, and other agreements or documents executed or delivered to secure repayment of the Obligation, or any part thereof. "COMMITMENT" means, as to each Lender as of any date, the obligation of such Lender on such date to make Advances hereunder in an aggregate principal amount at any time outstanding up to but not exceeding the amount set forth below its name on the signature pages hereof (or in an Assignment and Acceptance) as its Commitment, as the same may be reduced pursuant to SECTION 2.1(b), SECTION 2.1(c), or SECTION 8.2 and as the same may be increased or decreased from time-to-time by further assignment pursuant to SECTION 10.11. "COMMITMENTS" means the Commitments of all Lenders in the original aggregate principal amount of $35,000,000.00. "COMMITMENT USAGE" means, at the time of any determination thereof, the sum of (without duplication) (a) the aggregate Principal Debt, plus (b) the LC Exposure. "COMPANIES" means Borrower and its Subsidiaries, and "COMPANY" means any one of the Companies. "CONSOLIDATED ADJUSTED NET INCOME" means, for any Person for any period, the amount which, in conformity with GAAP, would be shown on a consolidated income statement of such Person as net income for such period, after deduction of any minority interests, but excluding extraordinary gains or losses due to (a) sales or write-up of assets, (b) earnings of any Person newly acquired, if earned prior to acquisition, or (c) acquisition of any securities of such Person. "CONTRACT RATE" means (a) with respect to a Base Rate Advance, the Base Rate plus the Applicable Margin, and (b) with respect to a Eurodollar Advance, the Adjusted Eurodollar Rate plus the Applicable Margin. "DEBTOR LAWS" means all applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization, or similar laws, from time-to-time in effect, affecting the rights of creditors generally. "DEFAULTING LENDER" means any Lender that, at the time of determination thereof, is in default with respect to any of its obligations under this Agreement or the other Loan Documents. REVOLVING CREDIT AGREEMENT 4 9 "DEFAULT RATE" means a per annum rate of interest equal from day-to-day to the lesser of (a) the sum of the Base Rate plus the Applicable Margin plus four percent (4%), and (b) the Maximum Rate. "DISTRIBUTION" means, with respect to any shares of any capital stock or other equity securities or other ownership interests issued by a Person, (a) the retirement, redemption, purchase, or other acquisition for value of such securities or interests by such Person, (b) the declaration or payment of any dividends on or with respect to such securities or interests by such Person, and (c) any other payment by that Person with respect to such securities or interests. "DOLLARS" and "$" mean lawful money of the United States of America. "EBITDA" means, for any Person for any period, the sum of (a) Consolidated Adjusted Net Income, plus (b) depreciation and amortization expense, plus (c) Interest Expense, plus (d) income taxes deducted from Consolidated Adjusted Net Income in accordance with GAAP, plus (e) extraordinary losses (and any unusual losses arising in or outside the ordinary course of business of such Person not included in extraordinary losses) determined in accordance with GAAP that have been reflected in the determination of Consolidated Adjusted Net Income, minus (f) extraordinary gains (and any unusual gains arising in or outside the ordinary course of business of such Person not included in extraordinary gains) determined in accordance with GAAP that have been reflected in the determination of Consolidated Adjusted Net Income. "ELIGIBLE ASSIGNEE" means any commercial bank, savings and loan association, savings bank, finance company, insurance company, pension fund, mutual fund, or other financial institution (whether a corporation, partnership, or other entity) approved by Agent and Issuing Bank, so long as no Potential Default or Event of Default has occurred and is continuing, Borrower, such approvals not to be unreasonably withheld. "ELIGIBLE MUTUAL FUNDS" means mutual funds that are (a) regularly traded on a nationally-recognized United States public exchange on which securities, debt instruments, and/or mutual funds are regularly traded, and (b) not subject to any federal or state securities laws or other Legal Requirements which restrict or limit their sale or transfer. "ENVIRONMENTAL LAWS" means any Legal Requirement pertaining to air, emissions, water discharge, noise emissions, solid or liquid waste disposal, hazardous waste or materials, industrial hygiene, or other environmental, health, or safety matters or conditions on, under, or about real property, or any portion thereof, and similar Legal Requirements of any Governmental Authority having jurisdiction over real property, as such laws may be amended or supplemented from time-to-time, and regulations promulgated and rulings issued pursuant to such Legal Requirements. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder. "ERISA AFFILIATE" means any corporation, trade, or business (whether or not incorporated) which is a member of a group of which Borrower is a member, and which is under common control with Borrower, within the meaning of Section 414 of the Code. "EURODOLLAR ADVANCE" means any Advance hereunder with respect to which the interest rate is calculated by reference to the Adjusted Eurodollar Rate for a particular Interest Period. "EURODOLLAR RATE" means, for any Eurodollar Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16th of one percent) equal to the rate appearing on REVOLVING CREDIT AGREEMENT 5 10 the Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first (1st) day of such Interest Period for a term comparable to such Interest Period. If for any reason the Telerate Page 3750 rate is not available, then the "Eurodollar Rate" shall be the rate appearing on the Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first (1st) day of the such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on the Reuters Screen LIBO Page, then the applicable rate shall be the arithmetic mean of all such rates. If neither of the Telerate Page 3750 or Reuters Screen LIBO Page rates are available, then the "Eurodollar Rate" shall be determined on the basis of the rates at which deposits in United States dollars are offered by Agent at approximately 11:00 a.m. (London time) on the day that is two (2) Business Days preceding the first (1st) day of the relevant Interest Period to prime banks in the London interbank market for a period equal to such Interest Period commencing on the first (1st) day of such Interest Period and in an amount comparable to the principal amount of the Eurodollar Advance to be made by Agent for which such Interest Period relates. "EURODOLLAR RESERVE REQUIREMENT" means, for any Lender on any day, that percentage (expressed as a decimal fraction) that is in effect on such day, as provided by the Board of Governors of the Federal Reserve System (or any successor governmental body), applied for determining the reserve requirements of such Lender (including, without limitation, basic, supplemental, marginal, and emergency reserves) under Regulation D, with respect to "Eurocurrency liabilities" as currently defined in Regulation D, or under any similar or successor regulation with respect to Eurocurrency liabilities or Eurocurrency funding. Each determination by any Lender of the Eurodollar Reserve Requirement shall, in the absence of manifest error, be conclusive and binding. "EVENT OF DEFAULT" has the meaning set forth in SECTION 8.1. "EXISTING LC AGREEMENTS" means that certain Amended and Restated Application and Agreement for Standby Letter of Credit dated as of September 16, 1994, relating to the issuance of a letter of credit for the benefit of Omega Marine Development, Inc. and that certain Amended and Restated Application and Agreement for Standby Letter of Credit dated September 16, 1994, relating to the issuance of a letter of credit for the benefit of The Adaven Group Limited Partnership. "FEDERAL FUNDS RATE" means, on any day, the annual rate (rounded upwards, if necessary, to the nearest 0.01%) determined by Agent (which determination is conclusive and binding, absent manifest error) to be equal to the weighted average of the rates on overnight federal funds transactions with member banks of the Federal Reserve System arranged by federal funds brokers as published by the Federal Reserve Bank of New York on the next successive Business Day; provided, however, that (a) if such determination date is not a Business Day, the Federal Funds Rate for such day shall be the rate for such transactions on the next preceding Business Day as published on the next successive Business Day, or (b) if those rates are not published for any Business Day, the Federal Funds Rate shall be the average of the quotations at approximately 10:00 a.m. on such Business Day received by Agent from three (3) federal funds brokers of recognized standing selected by Agent in its sole discretion. "FUNDED DEBT" means (without duplication) Indebtedness of the type described in SUBSECTIONS (a), (b), (c), (d), (e), (f) and (g) in the definition of "Indebtedness." "FUNDED DEBT TO EBITDA" means, as of any date, the ratio of (a) the aggregate amount of Funded Debt of the Companies (without deduction for any minority interests), as of such date, to (b) EBITDA of the Companies, for the four (4) fiscal quarter period ending on the date of determination. REVOLVING CREDIT AGREEMENT 6 11 "FUNDING LOSS" has the meaning set forth in SECTION 2.6(e). "GAAP" means those generally accepted accounting principles and practices, applied on a consistent basis, which are recognized as such by the American Institute of Certified Public Accountants, acting through its Accounting Principles Board and the Financial Accounting Standards Board, and/or their respective successors, and which are applicable as of the date of this Agreement, except for changes approved by Agent or otherwise permitted under the Loan Documents. "GOVERNMENTAL AUTHORITY" means any nation or government, any state or political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government. "GOVERNMENTAL AUTHORIZATION" means any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Authority or pursuant to any Legal Requirement. "GUARANTY" of any Person means any contract or understanding of such Person pursuant to which such Person guarantees, or in effect guarantees, any Indebtedness of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including agreements to assure the holder of the Indebtedness of the Primary Obligor against loss in respect thereof; except that "Guaranty" shall not include endorsements, in the ordinary course of business, of negotiable instruments or documents for deposit or collection. The term "GUARANTEE" used as a verb has a corresponding meaning. "HAZARDOUS MATERIAL" means any hazardous, toxic, or dangerous waste, substance, or material defined as such in, or for the purpose, of any Environmental Law. "INDEBTEDNESS" means as to any Person at any time (without duplication): (a) all obligations of such Person for borrowed money; (b) all obligations of such Person evidenced by bonds, notes, debentures, or other similar instruments; (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable of such Person arising in the ordinary course of business that are not past-due by more than ninety (90) days; (d) all Capital Lease Obligations of such Person; (e) all indebtedness or other obligations of others of the types described in this definition, if Guaranteed by such Person; (f) all obligations secured by a Lien existing on property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are non-recourse to the credit of such Person; (g) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit (whether drawn or undrawn), bankers' acceptances, surety, or other bonds and similar instruments; (h) all obligations under any Interest Hedge Agreements; and (i) all liabilities of such Person in respect of unfunded vested benefits under any Plan; provided, however, that the term Indebtedness shall not include endorsements of instruments for deposit or collection in the ordinary course of business. "INDEMNITY POLICIES" means insurance contracts, policies, or other agreements providing for reimbursement of expenses or provision of services upon the occurrence of an insured event. "INTEREST EXPENSE" means, for any Person for any period, total interest expense, whether paid or accrued, but without duplication (including the interest component of Capital Lease Obligations), including, without limitation, all commissions, discounts, and other fees and charges owed with respect to letters of credit, all as determined in conformity with GAAP. "INTEREST HEDGE AGREEMENTS" means any and all agreements, devices, or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates, or forward REVOLVING CREDIT AGREEMENT 7 12 rates applicable to such party's assets, liabilities, or exchange transactions, including, but not limited to, Dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap, swap, or collar protection agreements, and forward rate currency or interest rate options, as the same may be amended or modified and in effect from time-to-time, and any and all cancellations, buy backs, reversals, terminations, or assignments of the foregoing. "INTEREST PERIOD" means, with respect to a Eurodollar Advance, a period commencing: (a) on the borrowing date of such Eurodollar Advance; or (b) on the conversion date pertaining to such Eurodollar Advance, if made pursuant to a conversion as described in SECTION 2.3(c); or (c) on the last day of the preceding Interest Period, in the case of a rollover to a successive Interest Period; and ending one (1), three (3) or six (6) months thereafter, as Borrower shall elect in accordance with SECTION 2.3(c); provided that: (i) any Interest Period that would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day, unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to Clause (i) above, end on the last Business Day of a calendar month; and (iii) if the Interest Period for any Eurodollar Advance would otherwise end after the final maturity date of the Loan, then such Interest Period shall end on the final maturity date of the Loan. "INVESTMENT" in any Person means any investment, whether by means of share purchase, loan, advance, extension of credit, capital contribution, or otherwise, in or to such Person, or the subordination of any claim against such Person to other Indebtedness of such Person. "ISSUANCE" means each issuance of an LC pursuant to this Agreement and/or an LC Agreement. "ISSUING BANK" means NationsBank of Texas, N.A., and its successors and permitted assigns. "LC" means a standby letter of credit issued by Agent under this Agreement and/or pursuant to an LC Agreement. "LC AGREEMENT" means a standby letter of credit application and agreement (in form and substance satisfactory to Agent) submitted by Borrower to Agent for an LC for its own account (and for its benefit or the benefit of any other Company); provided that this Agreement shall control any conflict between this Agreement and any such LC Agreement. "LC EXPOSURE" means, without duplication, the sum of (a) the aggregate undrawn portion of all uncancelled and unexpired LCs plus (b) the aggregate unpaid reimbursement obligations of Borrower in respect of drawings or drafts under any LC. REVOLVING CREDIT AGREEMENT 8 13 "LC SUBFACILITY" means a subfacility of the Loan for the issuance of LCs (the LC Exposure in connection with which may never exceed $32,000,000.00), as described in and subject to the limitations of SECTION 2.2. "LEGAL REQUIREMENT" means any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty as in effect on the date hereof. "LENDER" and "LENDERS" has the meanings set forth in the first paragraph of this Agreement. "LIEN" means any lien, mortgage, security interest, tax lien, pledge, negative pledge, encumbrance, conditional sale, or title retention arrangement, or any other interest in property designed to secure the repayment of Indebtedness, whether arising by agreement, or under any statute, law, or otherwise. "LIQUID ASSETS" means, for any Person as of any date, the sum of (a) cash, plus (b) Temporary Cash Investments, as of such date. "LOAN" means the revolving credit loan made, or to be made hereunder, to Borrower by Lenders pursuant to SECTION 2.1, and the letter of credit subfacility made, or to be made hereunder, to Borrower by Agent and Lenders pursuant to SECTION 2.2. "LOAN DOCUMENTS" means this Agreement, the Notes, the Collateral Documents, any fee letters described herein, any Interest Hedge Agreements with any Lender, and any agreements, documents (and with respect to this Agreement, and such other agreements and documents, any renewals, extensions, amendments, or supplements thereto), or certificates at any time executed or delivered pursuant to the terms of this Agreement. "MATERIAL ADVERSE EFFECT" means any material adverse change in, or effect upon, (a) the validity, performance, or enforceability of any Loan Document, (b) the financial condition or business operations of Borrower or the Companies, taken as a whole, or (c) the ability of Borrower or any Company to fulfill its obligations under the Loan Documents. "MAXIMUM RATE" means the highest nonusurious rate of interest (if any) permitted from day-to-day by applicable law. Agent and Lenders hereby notify and disclose to Borrower that, for purposes of Tex. Rev. Civ. Stat. Ann. art. 5069-1.04, as it may from time-to-time be amended, the "applicable rate ceiling" shall be the "indicated rate" ceiling from time-to-time in effect, as limited by article 5069-1.04(b); provided, however, that to the extent permitted by applicable law, Agent and Lenders reserve the right to change the "applicable rate ceiling" from time-to-time by further notice and disclosure to Borrower. "MOODY'S" means Moody's Investors Service, Inc., or, if Moody's no longer publishes ratings, such other ratings agency acceptable to the Required Lenders. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 3(37) of ERISA to which contributions have been made by Borrower or any ERISA Affiliate of Borrower and which is covered by Title IV of ERISA. "NET CASH PROCEEDS" means, with respect to any Permitted Equity Issuance by any Company, the amount of cash received by such Company in connection with such transaction after deducting therefrom the aggregate, without duplication, of the following amounts to the extent properly attributable to such transaction: (a) reasonable brokerage commissions, attorneys' fees, finder's fees, financial advisory fees, REVOLVING CREDIT AGREEMENT 9 14 accounting fees, underwriting fees, investment banking fees, and other similar commissions and fees (and expenses and disbursements of any of the foregoing), in each case, to the extent paid or payable by such Company; (b) printing and related expenses and filing, recording, or registration fees or charges or similar fees or charges paid by such Company; and (c) taxes paid or payable by such Company to any Governmental Authority as a result of such transactions. "NET WORTH" means, for any Person as of any date, the total stockholders' or shareholders' equity of such Person, determined in accordance with GAAP. "NOTES" means the Revolving Credit Notes in substantially the form of EXHIBIT B, executed by Borrower and delivered pursuant to the terms of this Agreement, together with any renewals, extensions, or modifications thereof, and "NOTE" means any one of the Notes. "NOTICE OF BORROWING" means, with respect to any Advance, a notice substantially in the form of EXHIBIT C. "NOTICE OF LC" means a notice substantially in the form of EXHIBIT D. "OBLIGATION" means all present and future Indebtedness, obligations, and liabilities, and all renewals and extensions thereof, or any part thereof, now or hereafter owed to Agent or any Lender by Borrower arising pursuant to any of the Loan Documents, and all renewals and extensions thereof, together with all interest accruing thereon, and costs, expenses, and attorneys' fees incurred in the enforcement or collection thereof. "ORACARE ACQUISITION" means Borrower's Acquisition of OraCare Consultants, Inc. and OraCare DPO, Inc. pursuant to the Stock Purchase Agreements. "OTHER PERMITTED INVESTMENTS" means Investments expressly permitted by any Governmental Authority. "PERMITTED ACQUISITION" means an Acquisition by a Company with respect to which each of the following conditions has been satisfied: (a) the Acquisition by such Company is of all or substantially all of (i) the capital stock of a Qualified Company, or (ii) the assets of a Qualified Company (the Qualified Company to be acquired or whose assets are being acquired is herein called the "TARGET"); (b) as of the closing of such Acquisition, the Acquisition has been approved and recommended by the Board of Directors or other applicable governing body of the Target and the Person from which the Target is to be acquired; (c) prior to the closing of such Acquisition, the Target and the Person from which the Target is to be acquired must be Solvent; (d) as of the closing of such Acquisition, after giving effect to such Acquisition, the acquiring Company must be Solvent; (e) as of the closing of such Acquisition, after giving effect to such Acquisition, no Potential Default or Event of Default shall exist or occur as a result of, and after giving effect to, such Acquisition; REVOLVING CREDIT AGREEMENT 10 15 (f) prior to the closing of such Acquisition, Borrower shall have provided to Agent (i) current financial statements and historical operating information on the Target, (ii) a pro-forma balance sheet of the Companies after giving effect to the Acquisition, together with pro-forma operating projections for the three (3) year period following the Acquisition, and (iii) a copy of the results of Borrower's due diligence with respect to the Target; (g) Agent has received a certificate, executed by the President or a Vice President of Borrower, confirming that all representations and warranties set forth in the Loan Documents continue to be true and correct in all material respects, immediately prior to, and after giving effect to, the Permitted Acquisition, and the transactions contemplated thereby, and setting forth the calculations supporting compliance with the limitations prescribed herein; and (h) if the Acquisition will result in Borrower or any other Company incurring or assuming Indebtedness (including under this Agreement) in excess of $12,000,000.00, then Agent shall have notified Borrower that the Required Lenders have approved the Acquisition of the Target (which shall be delivered within ten (10) Business Days of receipt of the information required in (f) and (g) above). "PERMITTED EQUITY ISSUANCE" means the issuance or sale by Borrower of any shares of capital stock or partnership, profits, capital, or member interests, or options, warrants, or other right to subscribe for or otherwise acquire shares of capital stock or partnership, profits, capital, or member interests, of Borrower. "PERMITTED LIENS" means: (a) Liens in favor of Agent, for the benefit of Lenders, to secure the Obligation; (b) pledges or deposits made to secure payment of worker's compensation (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions, or social security programs; (c) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, provided that such items do not materially impair the use of such property for the purposes intended, and none of which is violated in any material respect by existing or proposed structures or land use; (d) the following, to the extent no Lien has been filed in any jurisdiction or agreed to (i) Liens for taxes not yet past- due, and (ii) Liens imposed by mandatory provisions of law, such as for materialmen's, mechanic's, warehousemen's, and other like Liens arising in the ordinary course of business, securing payment of Indebtedness whose payment is not yet due; (e) Liens for taxes, assessments, and governmental charges or assessments, that are being contested in good faith by appropriate proceedings diligently conducted, and in which reserves acceptable to Agent have been provided; (f) deposits with Governmental Authorities in order to satisfy Legal Requirements that are required in the ordinary course of business and not for the purpose of securing past-due obligations; and (g) Liens arising out of attachments, judgments, or awards not exceeding $1,000,000.00 in the aggregate as to which an appeal or other appropriate proceeding or contest or review is promptly commenced, and as to which foreclosure and other enforcement proceedings (i) shall not have been commenced (unless fully bonded or other effectively stayed), and (ii) in any event, shall be promptly fully bonded or otherwise effectively stayed prior to such time as any such Lien becomes perfected; (h) Liens securing surety or appeal bonds, provided that the value of cash or property forming a part of the security with respect to such surety or appeal bonds does not exceed in the aggregate $1,000,000.00; (i) Liens securing Indebtedness permitted pursuant to SECTION 7.1(e) and covering only those assets acquired with the proceeds of such Indebtedness; (j) Liens granted by Kansas City Dental Care, Inc. to secure reimbursement obligations under letters of credit issued for the benefit of the Kansas Department of Insurance not to exceed $100,000.00 at any time outstanding; and (k) Liens in assets of a Company acquired pursuant to a Permitted Acquisition existing at the time (but not incurred in anticipation) of such Acquisition, provided that such Liens are released with fifteen (15) days after such Acquisition unless such Liens are otherwise permitted under this Agreement. REVOLVING CREDIT AGREEMENT 11 16 "PERSON" includes an individual, corporation, joint venture, general or limited partnership, trust, unincorporated organization, or government, or any agency or political subdivision thereof. "PLAN" means an employee benefit plan or other plan, maintained by Borrower or any ERISA Affiliate, and which is covered by Title IV of ERISA, or subject to the minimum funding standards under Section 412 of the Code, as amended. "PLEDGE AGREEMENTS" means the Pledge Agreements executed by each Company that owns capital stock, of or other ownership interests in, another Company in favor of Agent, for the benefit of Lender, substantially in the form of EXHIBIT E, as the same may be amended, supplemented, or modified from time-to-time, and "PLEDGE AGREEMENT" means any one of the Pledge Agreements. "POTENTIAL DEFAULT" means the occurrence of any event which with passage of time, or giving of notice, or both, could become an Event of Default. "PREPAID PLANS" means the single health care service plans (or similar plans) pursuant to which any Company arranges for the provision of dental health care services to members on a prepaid basis. "PRINCIPAL DEBT" means, at the time of any determination thereof, the aggregate unpaid principal balance of all Advances. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "PROHIBITED TRANSACTION" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "PRO RATA" and "PRO RATA PART" means, on any date of determination thereof for any Lender (a) at any time prior to the termination of the Commitments, the proportion that such Lender's Commitment bears to the Commitments of all Lenders, and (b) at any time on and after the termination of the Commitments, the proportion that (i) the sum of (without duplication) (A) the Principal Debt owed to such Lender plus (B) such Lender's proportionate part (whether held directly or through a participation therein and determined after giving effect to any participations) of the LC Exposure bears to (ii) the sum of (without duplication) (x) the Principal Debt of all Lenders plus (y) the LC Exposure of all Lenders. "QUALIFIED COMPANY" means a domestic Person whose business is comprised of more than fifty percent (50%) Prepaid Plans (as opposed to Indemnity Policies). "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, from time-to-time in effect, and shall include any successor or other regulation relating to reserve requirements applicable to member banks of the Federal Reserve System. "REPORTABLE EVENT" means any of the events set forth in Section 4043 of ERISA. "REQUIRED LENDERS" means, as of any date, any combination of Lenders (other than any Defaulting Lenders) who collectively hold sixty percent (60%) of the sum of the Commitments (other than of any Defaulting Lenders), or if the Commitments have been terminated, then of the sum of (without duplication) (a) the Principal Debt of all Lenders (other than of any Defaulting Lenders) plus (b) the LC Exposure of all Lenders (other than of any Defaulting Lenders). REVOLVING CREDIT AGREEMENT 12 17 "RESERVES" means, for any Person, accrued liabilities for future obligations under Indemnity Policies and Prepaid Plans for insured events. "SOLVENT" means, with respect to any Person, that on the date of determination (a) the fair market value of its assets is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person that would be required to be included on the balance sheet of such Person or disclosed in the financial statements of such Person in accordance with GAAP, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (d) such Person is not engaged in business or transactions, and is not about to engage in business or transactions, for which its assets would constitute an unreasonably small capital. "S & P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., a New York corporation, or if S & P no longer publishes ratings, then such other ratings agency acceptable to the Required Lenders. "STOCK PURCHASE AGREEMENTS" means (a) that certain Stock Purchase Agreement dated as of September 5, 1996, between Borrower, Frank A. Pettisani, D.D.S., Charles A. Costa, Donna Costa, and OraCare Consultants, Inc., and (b) that certain Stock Purchase Agreement dated as of September 5, 1996, between Borrower, Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani, Jr., D.D.S., Charles A. Costa and Donna Costa, and OraCare DPO, Inc. "SUBSIDIARY" of any Person means any corporation of which more than fifty percent (50%) (in number of votes) of the issued and outstanding securities having ordinary voting power for the election of at least a majority of the directors is owned or controlled, directly or indirectly, by such Person or a Subsidiary of such Person. "TAXES" means, for any Person, taxes, assessments, or other governmental charges or levies imposed upon it, its income, or any of its properties, franchises, or assets. "TEMPORARY CASH INVESTMENT" means any Investment (a) in direct obligations of the United States of America, or any agency thereof, or obligations fully guaranteed by the United States of America, or any agency thereof, provided that such obligations mature within one year of the date of acquisition thereof, (b) commercial paper rated in the highest grade by one or more national credit rating agencies, and maturing not more than 180 days from the date of creation thereof, (c) time deposits with, and certificates of deposit and bankers' acceptances issued by, Agent or any United States bank having capital surplus and undivided profits aggregating at least $1,000,000,000.00, (d) deposits maintained at other financial institutions having capital and surplus aggregating at least $1,000,000,000.00, as long as Investments in such institutions are permissible under applicable state and federal regulations to which Borrower is subject, and (e) Eligible Mutual Funds. "TERMINATION DATE" means the earlier of (a) November 30, 2000, (b) the date Lenders' commitments to fund Advances and to make Issuances hereunder are terminated pursuant to SECTION 8.2, or (c) the date that Lenders' commitments to fund Advances and to make Issuances hereunder are reduced to zero pursuant to SECTION 2.1(b) and/or SECTION 2.1(c). "TOTAL CAPITALIZATION" means, for any Person as of any date, the sum of (a) Tangible Net Worth, and (b) all Indebtedness of such Person. "TYPE" means any type of Advance (i.e., Base Rate Advance or Eurodollar Advance). REVOLVING CREDIT AGREEMENT 13 18 1.2 ACCOUNTING PRINCIPLES. Under the Loan Documents, unless otherwise stated, (a) GAAP determines all accounting and financial terms and compliance with financial covenants, (b) GAAP in effect on the date of this Agreement determines compliance with financial covenants, (c) otherwise, all accounting principles applied in a current period must be comparable in all material respects to those applied during the preceding comparable period, and (d) all accounting and financial terms and compliance with financial covenants must be for the Companies, on a consolidated basis. 1.3 RULES OF CONSTRUCTION. When used in this Agreement: (a) "or" is not exclusive; (b) a reference to a law includes any amendment or modification to such law; (c) a reference to a Person includes its permitted successors and permitted assigns; (d) except as provided otherwise, all references to the singular shall include the plural, and vice versa; (e) except as provided in this Agreement, a reference to an agreement, instrument, or document shall include such agreement, instrument, or document, as the same may be amended, modified, or supplemented from time-to-time, in accordance with its terms and as permitted by the Loan Documents; (f) all references to SECTIONS, EXHIBITS, and SCHEDULES shall be to sections of and exhibits and schedules to this Agreement, unless otherwise indicated; (g) all EXHIBITS and SCHEDULES to this Agreement shall be incorporated into this Agreement; (h) the words "include," "includes," and "including" shall be deemed to be followed by the phrase "without limitation;" and (i) except as otherwise provided herein, in the computation of time, from a specified date to a later specified date, the word "from" means "from and including," and words "to" and "until" each mean "to but excluding." 1.4 COVENANT COMPUTATIONS. For purposes of the financial covenants set forth in SECTIONS 7.15 and 7.16, EBITDA for any Person newly acquired shall be annualized based upon such Person's EBITDA from the date of Acquisition thereof through the date of determination. SECTION 2 THE REVOLVING CREDIT FACILITY. 2.1 COMMITMENT TO LEND. (a) COMMITMENT. Subject to and in reliance upon the terms, conditions, representations, and warranties in the Loan Documents, each Lender severally and not jointly agrees to lend to Borrower such Lender's Pro Rata Part of one or more Advances not to exceed such Lender's Commitment, which, subject to the Loan Documents, Borrower may borrow, repay, and reborrow under this Agreement; provided that: (i) each such Advance must occur on a Business Day and no later than the Business Day immediately preceding the Termination Date; (ii) each such Advance shall be in an amount not less than (A) $1,000,000.00 or a greater integral multiple of $500,000.00 (if a Base Rate Advance), or (B) $1,000,000.00 or a greater integral multiple of $500,000.00 (if a Eurodollar Advance); and (iii) on any date of determination, the Commitment Usage shall never exceed the Commitments. (b) VOLUNTARY TERMINATION OF COMMITMENTS. Without premium or penalty, and upon giving not less than ten (10) Business Days prior written and irrevocable notice to Agent, Borrower may terminate in whole or in part the unused portion of the Commitments; provided that: (i) each partial termination shall be in an amount of not less than $1,000,000.00 or a greater integral multiple thereof; (ii) the amount of the Commitments may not be reduced below the Commitment Usage at such time; and (iii) each reduction shall be allocated to each Lender's Commitment Pro Rata among all Lenders in accordance with their respective Pro Rata Parts. Promptly after receipt of such notice or termination or reduction, Agent shall notify each Lender of the proposed cancellation or reduction. (c) MANDATORY REDUCTION OF THE COMMITMENTS. The Commitments shall automatically be reduced on the last day of each February, May, August, and November, commencing on February 28, 1999, REVOLVING CREDIT AGREEMENT 14 19 in an amount equal to $1,750,000.00, provided that: (i) each reduction shall be allocated to each Lender's Commitment Pro Rata among all Lenders in accordance with their respective Pro Rata Part; and (ii) if the Commitment Usage exceeds the Commitments, after giving effect to such reduction in the Commitments, then Borrower shall prepay the Principal Debt or reduce (or provide cash collateral for) the LC Exposure in an amount equal to such excess. 2.2 LC SUBFACILITY. (a) ISSUANCE. Subject to the terms and conditions of this Agreement and applicable law, Issuing Bank agrees to issue LCs upon Borrower's application therefor by delivering to Agent and Issuing Bank a properly completed Notice of LC and an LC Agreement with respect thereto no later than 11:00 a.m. Dallas, Texas time three (3) Business Days before such LC is to be issued; provided that: (i) on any date of determination and after giving effect to any LC to be issued on such date, the Commitment Usage shall never exceed the Commitments; (ii) on any date of determination and after giving effect to any LC to be issued on such date, the LC Exposure shall never exceed $32,000,000.00; (iii) at the time of issuance of such LC, no Potential Default or Event of Default shall exist; (iv) each LC will be issued solely for purposes of securing obligations arising in the ordinary course of business of the Companies or required in connection with the OraCare Acquisition or a Permitted Acquisition; and (v) each LC must expire no later than the earlier of the thirtieth (30th) day prior to the Termination Date and one year from its issuance. (b) PARTICIPATION BY LENDERS. Immediately upon the issuance by Issuing Bank of any LC, Issuing Bank shall be deemed to have sold and transferred to each other Lender, and each other such Lender shall be deemed irrevocably and unconditionally to have purchased and received from Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Lender's Pro Rata Part, in such LC and all rights of Issuing Bank in respect thereof (other than rights to receive certain fees provided for in SECTION 2.2(c)). Upon issuance, renewal, or extension of an LC, Issuing Bank shall provide copies of such LC to each other Lender. (c) REIMBURSEMENT. In order to induce Issuing Bank to issue and maintain LCs and Lenders to participate therein, Borrower agrees to pay or reimburse Issuing Bank (i) on the date on which any draft is presented under any LC, the amount of any draft paid or to be paid by Issuing Bank, and (ii) promptly, upon demand, the amount of any fees in addition to the fees described in SECTION 4 Issuing Bank customarily charges to a Person similarly situated in the ordinary course of its business for amending LC Agreements, for honoring drafts, and taking similar action in connection with letters of credit; provided that: (x) if Borrower has not reimbursed Issuing Bank for any drafts paid or to be paid within 24 hours of demand therefor by Issuing Bank, Issuing Bank is hereby irrevocably authorized to fund such reimbursement obligations as, and lenders, if the conditions to making Advances have been satisfied (other than a Notice of Borrowing with respect thereto) agree to make, a Base Rate Advance to the extent of availability under the Commitments and the proceeds of such Advance shall be advanced directly to Issuing Bank in payment of Borrower's reimbursement obligation with respect to the draft under the LC; and (y) if for any reason, funds are not advanced pursuant to the Commitments, then Borrower's reimbursement obligation shall continue to be due and payable. To the extent any funding of a draft has been made by Lenders pursuant to SECTION 2.2(f), Issuing Bank shall promptly distribute any such payments received from Borrower with respect to such draft to all Lenders funding such draft according to their ratable share. Interest on any amounts remaining unpaid by Borrower (and unfunded by a Advance under the Loan) under this clause at any time from and after the date such amounts become payable until paid in full shall be payable by Borrower to Issuing Bank (x) from (and including) the date of payment of the draw by Issuing Bank until (but not including) the next succeeding Business Day, at the lesser of (A) the Maximum Rate, and REVOLVING CREDIT AGREEMENT 15 20 (B) the Base Rate plus the Applicable Margin, and (y) from (and including) such next Business Day until (but excluding) the date such reimbursement obligations are paid, at the lesser of (A) the Maximum Rate, and (B) the Default Rate. In the event any payment by Borrower received by Issuing Bank with respect to an LC and distributed to Lenders on account of their participations therein is thereafter set aside, avoided, or recovered from Issuing Bank in connection with any receivership, liquidation, or bankruptcy proceeding, each Lender which received such distribution shall, upon demand by Issuing Bank, contribute such Lender's ratable portion of the amount set aside, avoided, or recovered, together with interest at the rate required to be paid by Issuing Bank upon the amount required to be repaid by it. (d) ABSOLUTE OBLIGATIONS. Borrower's obligations under SECTION 2.2(b) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim, or defense to payment which Borrower or any other Company may have at any time against Issuing Bank or any other Person, and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the Loan Documents; (ii) the existence of any claim, setoff, defense, or other right which Borrower or any other Company may have at any time against a beneficiary named in a LC, any transferee of any LC (or any Person for whom any such transferee may be acting), Agent, Issuing Bank, any Lender, or any other Person, whether in connection with this Agreement, any LC, the transactions contemplated herein, or any unrelated transactions (including any underlying transaction between Borrower or any other Company and the beneficiary named in any such LC); (iii) any draft, certificate, or any other document presented under the LC proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; and (iv) the occurrence of any Potential Default or Event of Default. (e) PRESENTMENT. If any draft shall be presented for honor under any LC, Issuing Bank shall promptly notify Borrower of the date and amount of such draft; provided that failure to give any such notice shall not affect the obligations of Borrower hereunder. Issuing Bank shall make payment upon presentment of a draft for honor unless it appears that presentment on its face does not comply with the terms of such LC, regardless of whether (i) any default or potential default under any other agreement has occurred and (ii) the obligations under any other agreement have been performed by the beneficiary or any other Person (and Issuing Bank shall not be liable for any obligation of any Person thereunder). Issuing Bank and Lenders shall not be responsible for, and Borrower's reimbursement obligations for honored drafts shall not be affected by, any matter or event whatsoever (including, without limitation, the validity or genuineness of documents or of any endorsements thereof, even if such documents should in fact prove to be in any respect invalid, fraudulent, or forged), or any dispute among any Company, the beneficiary of any LC, or any other Person to whom any LC may be transferred, or any claims whatsoever of any Company against any beneficiary of any LC or any such transferee; provided that, nothing in this Agreement shall constitute a waiver of Borrower's right to assert any claim based upon the gross negligence or wilful misconduct of Issuing Bank or any Lender. (f) REIMBURSEMENT BY LENDERS. If Borrower fails to reimburse Issuing Bank as provided in SECTION 2.2(c) within 24 hours of the demand therefor by Issuing Bank, Issuing Bank shall promptly notify Agent and each Lender of such failure, of the date and amount of the draft paid, and of such Lender's Pro Rata Part thereof. Each Lender shall promptly and unconditionally make available to Issuing Bank in immediately available funds such Lender's Pro Rata Part of such unpaid reimbursement obligation, which funds shall be paid to Issuing Bank on or before the close of business on the Business Day on which such notice was given by Issuing Bank (if given prior to 1:00 p.m., Dallas, Texas time) or on the next succeeding Business Day (if notice was given after 1:00 p.m., Dallas, Texas time). All such amounts payable by any such Lender shall include interest thereon accruing at the Federal Funds Rate from the day the applicable draft is paid by Issuing Bank to (but not including) the date such amount is paid by such Lender to Issuing Bank. The obligations of Lenders to make payments to Issuing Bank with respect to LCs shall be irrevocable and not subject to any qualification or exception whatsoever (other than the gross negligence or wilful REVOLVING CREDIT AGREEMENT 16 21 misconduct of Issuing Bank) and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the Loan Documents; (ii) the existence of any claim, setoff, defense, or other right which Borrower or any other Company may have at any time against a beneficiary named in a LC, any transferee of any LC (or any Person for whom any such transferee may be acting), Agent, Issuing Bank, any Lender, or any other Person, whether in connection with this Agreement, any LC, the transactions contemplated herein, or any unrelated transactions (including any underlying transaction between Borrower and the beneficiary named in any such LC); (iii) any draft, certificate, or any other document presented under the LC proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; and (iv) the occurrence of any Potential Default or Event of Default. (g) DELIVERY. Borrower acknowledges that each LC will be deemed issued upon delivery to its beneficiary or Borrower. If Borrower requests any LC be delivered to Borrower rather than the beneficiary, and Borrower subsequently cancels such LC, then Borrower agrees to return it to Issuing Bank together with Borrower's written certification that it has never been delivered to such beneficiary. If any LC is delivered to its beneficiary pursuant to Borrower's instructions, no cancellation thereof by Borrower shall be effective until the return of such LC to Issuing Bank. Borrower hereby agrees that if Issuing Bank becomes involved in any dispute as a result of Borrower's cancellation of any LC, it shall indemnify Issuing Bank and Lenders for all losses, costs, damages, expenses, and reasonable attorneys' fees suffered or incurred by Issuing Bank and Lenders as a direct result thereof. (h) STANDARD OF CARE. Issuing Bank agrees with each Lender that it will exercise and give the same care and attention to each LC as it gives to its other letters of credit, and Issuing Bank's sole liability to each Lender with respect to such LCs (other than liability arising from the gross negligence or willful misconduct of Issuing Bank) shall be to distribute promptly to each Lender who has acquired a participating interest therein such Lender's ratable portion of any payments made to Issuing Bank by Borrower pursuant to SECTION 2.2(c). Each Lender and Borrower agree that, in paying any draw under any LC, Issuing Bank shall not have any responsibility to obtain any document (other than any documents required by the respective LC) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person delivering any such document. Issuing Bank, Lenders, and their respective officers, agents, and other representatives shall not be liable to any other Lender or any Company for the use which may be made of any LC or for any acts or omissions of any beneficiary thereof in connection therewith. Any action, inaction, error, delay, or omission taken or suffered by Issuing Bank or any of its officers, agents or other representatives (INCLUDING, WITHOUT LIMITATION, ANY ACTS OR OMISSIONS CONSTITUTING ORDINARY NEGLIGENCE) under or in connection with any LC, the draws, drafts, or documents relating thereto, or the transmission, dispatch, or delivery of any message or advice related thereto, if in good faith and in conformity with such laws as Issuing Bank or any of its officers, agents, or other representatives may deem applicable and in accordance with the standards of care specified in the Uniform Customs and Practice for Documentary Credits, as in effect on the date of issue of such LC by the International Chamber of Commerce, shall be binding upon the Companies and Lenders and shall not place Issuing Bank or any of its officers, agents, or other representatives under any resulting liability to any Company or any Lender. Any action taken or omitted or to be taken by Issuing Bank under or in connection with any LC if taken or omitted in the absence of gross negligence or wilful misconduct shall not create for Issuing Bank any resulting liability to any Lender or any Company. (i) CASH COLLATERAL. On the Termination Date or upon any demand by Issuing Bank while an Event of Default exists, Borrower shall provide to Issuing Bank, for the benefit of Lenders, cash collateral in an amount equal to the LC Exposure existing on such date. REVOLVING CREDIT AGREEMENT 17 22 (j) INDEMNITY. IN ADDITION TO AMOUNTS PAYABLE AS ELSEWHERE PROVIDED IN THIS AGREEMENT, BORROWER HEREBY AGREES TO PROTECT, INDEMNIFY, PAY AND SAVE ISSUING BANK AND EACH LENDER HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, DAMAGES, OR LOSSES OF, OR OWED TO THIRD PARTIES, AND ANY AND ALL RELATED COSTS, CHARGES, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES), WHICH ISSUING BANK OR ANY LENDER MAY INCUR OR BE SUBJECT TO AS A CONSEQUENCE, DIRECT OR INDIRECT, OF (A) THE ISSUANCE OF ANY LC, OR (B) THE FAILURE OF ISSUING BANK TO HONOR A DRAFT UNDER SUCH LC AS A RESULT OF ANY ACT OR OMISSION, WHETHER RIGHTFUL OR WRONGFUL, OF ANY PRESENT OR FUTURE GOVERNMENTAL AUTHORITY; PROVIDED THAT BORROWER SHALL HAVE NO LIABILITY TO INDEMNIFY ISSUING BANK OR ANY LENDER IN RESPECT OF ANY LIABILITY ARISING OUT OF THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF SUCH PARTY OR ANY OFFICERS, AGENTS, OR OTHER REPRESENTATIVES OF SUCH PARTY, BUT SPECIFICALLY INCLUDING ANY LIABILITY ARISING OUT OF THE ORDINARY NEGLIGENCE OF ISSUING BANK, AGENT, ANY LENDER, OR ANY OF THEIR OFFICERS, AGENTS, OR OTHER REPRESENTATIVES. THE PROVISIONS OF AND UNDERTAKINGS AND INDEMNIFICATIONS SET FORTH IN THIS SECTION 2.2(j) SHALL SURVIVE THE SATISFACTION AND PAYMENT OF THE OBLIGATION AND TERMINATION OF THIS AGREEMENT. (k) OTHER LC PROVISIONS. Although referenced in any LC, terms of any particular agreement or other obligation to the beneficiary are not in any manner incorporated herein. The fees and other amounts payable with respect to each LC shall be as provided in this Agreement, drafts under any LC shall be deemed part of the Obligation, and in the event of any conflict between the terms of this Agreement and any LC Agreement, the terms of this Agreement shall be controlling. 2.3 METHOD OF BORROWING. (a) APPLICATION FOR ADVANCE. Except for any Advances pursuant to SECTION 2.2(c) Borrower shall deliver to Agent a Notice of Borrowing at least one (1) Business Day prior to any Base Rate Advance and at least three (3) Business Days prior to any Eurodollar Advance. Each Notice of Borrowing must be received by Agent no later than 11:00 a.m. (Dallas, Texas time) as of the applicable date. Prior to making a Notice of Borrowing, Borrower may (without specifying whether the Advance shall be a Base Rate Advance or a Eurodollar Advance) request that Agent provide Borrower with the most recent Eurodollar Rate. Agent shall endeavor to provide such quoted rate to Borrower on the date of such request. (b) FUNDING. (i) Promptly after receipt of a Notice of Borrowing under SECTION 2.3(a), Agent shall notify each Lender by telex or telecopy, or other similar form of transmission, of the proposed Advance. Each Lender shall deposit an amount equal to its Pro Rata Part of the Advance requested by Borrower with Agent at its Lending Office, in immediately available funds not later than 11:00 a.m. (Dallas, Texas time) on the date of such proposed Advance. Upon fulfillment of all applicable conditions set forth herein, Agent shall make available to Borrower at Agent's Lending Office, not later than 2:00 p.m. (Dallas, Texas time) on the date of each Advance, the proceeds of such amounts received by Agent. The failure of any Lender to deposit the amount described above with Agent shall not relieve any other Lender of its obligations hereunder to make its Advance. (ii) Unless Agent shall have been notified by any Lender that such Lender will not make available to Agent such Lender's Pro Rata Part of a proposed Advance, Agent may in its discretion assume that such Lender has made such Advance available to Agent in accordance with this SECTION and Agent may, if it chooses, in reliance upon such assumption, make such Advance available to Borrower. If and to the extent such Lender shall not so make its Pro Rata Part of the proposed Advance available to Agent, such Lender and Borrower severally agree to pay or repay to Agent on REVOLVING CREDIT AGREEMENT 18 23 demand the amount of such Advance together with interest thereon, for each day from the date such Advance is made available to Borrower until the date such amount is paid or repaid to Agent at (A) in the case of Borrower, the interest rate applicable at the time to other Lenders' Advances made on the date of such Advance, and (B) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to Agent such amount, such amounts so repaid shall constitute such Lender's Advance for purposes of this Agreement. (c) SELECTION OF INTEREST OPTION PERIOD. (i) Upon making a Notice of Borrowing under SECTION 2.3(a), Borrower shall advise Agent as to whether the Advance shall be (A) a Eurodollar Advance, in which case Borrower shall specify the applicable Interest Period therefor, or (B) a Base Rate Advance. (ii) Subject to the dollar limits and denominations of SECTION 2.1, Borrower may (a) convert a Eurodollar Advance on the last day of the applicable Interest Period to a Base Rate Advance, (b) convert a Base Rate Advance on any Business Day to a Eurodollar Advance, and (c) elect a new Interest Period for a Eurodollar Advance, by giving a Notice of Borrowing to Agent no later than 11:00 a.m. (Dallas, Texas time) on the third (3rd) Business Day before the conversion date or the last day of the Interest Period, as the case may be (for conversion to a Eurodollar Advance or election of a new Interest Period), and no later than 11:00 a.m. (Dallas, Texas time) one (1) Business Day before the last day of the Interest Period (for conversion to a Base Rate Advance). Absent Borrower's Notice of Borrowing, a Eurodollar Advance shall be deemed converted to a Base Rate Advance effective when the applicable Interest Period expires. (iii) Notwithstanding anything to the contrary contained herein, (A) no more than three (3) Interest Periods shall be in effect at any one time with respect to Eurodollar Advances, and (B) Borrower shall have no right to request a Eurodollar Advance if the Interest Rate applicable thereto under SECTION 2.5 would exceed the Maximum Rate in effect on the first day of the Interest Period applicable to such Advance. (iv) Each Notice of Borrowing shall be irrevocable and binding on Borrower and, in respect of any Eurodollar Advance specified in such Notice of Borrowing, Borrower shall indemnify Agent and Lenders against any Funding Loss incurred by Agent or Lenders as a result of (A) any failure to fulfill, on or before the date specified for such Advance, the conditions to such Advance set forth herein, or (B) Borrower's requesting that an Advance not be made on the date specified for such Advance in the Notice of Borrowing. A certificate of Agent and each Lender establishing the amount due from Borrower according to the preceding sentence, together with a description in reasonable detail of the manner in which such amount has been calculated, shall be presumed to be correct in the absence of manifest error. 2.4 NOTES. The Loan made under SECTION 2.1 by Lenders shall be evidenced by the Notes, one payable to each Lender in the stated amount of its Commitment, in the aggregate principal amount of $35,000,000.00. REVOLVING CREDIT AGREEMENT 19 24 2.5 INTEREST RATE. (a) ALL ADVANCES. The unpaid principal of each Base Rate Advance shall bear interest from the date of Advance to the date of repayment thereof at a rate per annum that shall from day-to-day be equal to the lesser of (i) the Base Rate in effect from day-to-day plus the Applicable Margin, and (ii) the Maximum Rate. The unpaid principal of each Eurodollar Advance shall bear interest from the date of advance to the date of repayment thereof at a rate per annum that shall be equal to the lesser of (i) the Adjusted Eurodollar Rate plus the Applicable Margin, and (ii) the Maximum Rate. (b) DEFAULT RATE. All past due principal of, and to the extent permitted by applicable law, interest on, the Note, shall bear interest until paid at the lesser of (i) the Default Rate, and (ii) the Maximum Rate. (c) RECAPTURE RATE. If the applicable Contract Rate ever exceeds the Maximum Rate, thereby causing the interest charged under the Notes to be limited to the Maximum Rate, then, to the extent permitted by applicable law, any subsequent reductions in the applicable Contract Rate shall not reduce the rate of interest charged under the Notes below the Maximum Rate, until the total amount of interest accrued on the Notes equals the amount of interest that would have accrued thereon if the applicable Contract Rate had at all times been in effect. (d) GENERAL PROVISIONS AS TO INTEREST. (i) Interest will be calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed but computed as if each calendar year consisted of 360 days (unless the calculation would result in an interest rate greater than the Maximum Rate, in which event interest will be calculated on the basis of a year of 365 or 366 days, as the case may be). All interest rate determinations and calculations by Agent are presumed to be correct in the absence of manifest error. (ii) The provisions of this Agreement relating to calculation of the Base Rate and the Eurodollar Rate are included only for the purpose of determining the rate of interest or other amounts to be paid under this Agreement that are based upon those rates. Each Lender may fund and maintain its funding of all or any part of each Advance as it selects. 2.6 SPECIAL PROVISIONS FOR EURODOLLAR ADVANCES. (a) INADEQUACY OF EURODOLLAR PRICING. If with respect to an Interest Period for any Eurodollar Advance: (i) Agent determines that the basis for determining the Eurodollar Rate is not available; or (ii) a Lender reasonably determines that the Eurodollar Rate as determined by Agent will not adequately and fairly reflect the cost to such Lender of maintaining or funding the Eurodollar Advance for such Interest Period; then (A) in the case of (i), Agent shall forthwith give notice thereof to Borrower and Lenders of that determination (which is presumed to be correct in the absence of manifest error), all Advances shall be Base Rate Advances, and until Agent notifies Borrower and Lenders that such circumstances no longer exist, Lenders' commitments under this Agreement to make, or convert to, Eurodollar Advances shall be REVOLVING CREDIT AGREEMENT 20 25 suspended, and (B) in the case of (ii), such Lender shall forthwith give notice thereof to Agent and Borrower, the obligation of such Lender to make Eurodollar Advances shall be suspended, Borrower shall, at its option, either (I) repay in full the then-outstanding principal amount of all Eurodollar Advances, together with accrued interest thereon on the last day of the then current Interest Period applicable to such Eurodollar Advances, or (II) convert such Eurodollar Advances to Base Rate Advances in accordance with SECTION 2.03(c) of this Agreement on the last day of the then-current Interest Period applicable to each such Eurodollar Advance, and until such Lender notifies Agent and Borrower that such circumstances no longer exist, such Lender's commitment under this Agreement to make, or convert to, Eurodollar Advances shall be suspended. (b) ILLEGALITY OF EURODOLLAR ADVANCES. If, after the date of this Agreement, the adoption of any applicable law, rule, or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Agent or any Lender with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency shall make it unlawful or impossible for any Lender to make, maintain, or fund its Eurodollar Advances, then such Lender shall forthwith give notice thereof to Agent and Borrower. Before giving any notice pursuant to this subsection, such Lender shall designate a different Eurodollar lending office if such designation will avoid the need for giving such notice and will not be otherwise disadvantageous to any non-trivial extent to such Lender (as determined in good faith by such Lender). Upon receipt of such notice, Borrower shall either (i) repay in full the then-outstanding principal amount of any of such Lender's Eurodollar Advances, together with accrued interest thereon, or (ii) convert such Lender's Eurodollar Advances to Base Rate Advances, on either (A) the last day of the then current Interest Period applicable to such Eurodollar Advance, if such Lender may lawfully continue to maintain and fund such Eurodollar Advance to such day, or (B) immediately, if such Lender may not lawfully continue to fund and maintain such Eurodollar Advance to such day. (c) INCREASED COSTS FOR EURODOLLAR ADVANCES. If, after the date hereof, any Governmental Authority, central bank, or other comparable authority, shall at any time impose, modify, or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve requirement included in the Eurodollar Reserve Requirement), special deposit or similar requirement against assets of, deposits with, or for the account of, or credit extended by, any Lender, or shall impose on any Lender (or its Applicable Lending Office) or the interbank eurodollar market any other condition affecting its Eurodollar Advances, the Notes or such Lender's obligation to make Eurodollar Advances; and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining its Eurodollar Advances, or to reduce the amount of any sum received or receivable by such Lender under this Agreement, or under such Lender's Note, by an amount deemed by such Lender to be material, then, within five (5) days after demand by such Lender, Borrower shall pay to Agent, for the account of such Lender, such additional amount or amounts as will compensate such Lender for such increased cost or reduction. Such Lender will (i) notify Agent and Borrower of any event occurring after the date of this Agreement which will entitle such Lender to compensation pursuant to this SECTION, as promptly as practicable (but in any event within 120 days) after such Lender obtains actual knowledge of such event, and Borrower shall not be liable for any such increased costs that accrue between the date such notification is required to be given and the date it was actually given, and (ii) use good faith and reasonable efforts to designate an Applicable Lending Office for Eurodollar Advances of such Lender, if such designation will avoid the need for, or reduce the amount of, such compensation, and will not, in the sole opinion of such Lender, be disadvantageous to such Lender (provided that such Lender shall have no obligation to so designate a lending office located in the United States of America). A certificate of such Lender claiming compensation under this SECTION and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to it hereunder shall be presumed to be correct in the absence of REVOLVING CREDIT AGREEMENT 21 26 manifest error. If a Lender demands compensation under this SECTION, then Borrower may at any time, upon at least five (5) Business Days' prior notice to such Lender and Agent, either (i) repay in full the then outstanding Eurodollar Advances to such Lender, together with accrued interest thereon to the date of prepayment, or (ii) convert such Eurodollar Advances to Base Rate Advances in accordance with the provisions of this Agreement; provided, however, that Borrower shall be liable for any Funding Loss arising pursuant to such actions. (d) EFFECT ON BASE RATE ADVANCES. If notice has been given pursuant to SECTION 2.6(a) or SECTION 2.6(b), requiring the Eurodollar Advances to be repaid or converted, then unless and until Agent notifies Borrower that the circumstances giving rise to such repayment no longer apply, all Advances shall be Base Rate Advances. If Agent notifies Borrower that the circumstances giving rise to such repayment no longer apply, Borrower may thereafter select Advances to be Eurodollar Advances in accordance with SECTION 2.3(c) of this Agreement. (e) FUNDING LOSSES. Borrower shall indemnify Agent and each Lender against any loss or reasonable expense (such loss or expense is referred to herein as a "FUNDING LOSS," such term including, but not limited to, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or reemploying deposits from third parties acquired to effect or maintain such Advance or any part thereof as a Eurodollar Advance) which Agent or any Lender may sustain or incur as a consequence of (i) any failure by Borrower to fulfill on the date of any Advance hereunder the applicable conditions set forth in SECTION 4, (ii) any failure by Borrower to borrow hereunder or to convert Advances hereunder after a Notice of Borrowing has been given, (iii) any payment, prepayment, or conversion of a Eurodollar Advance required or permitted by any other provisions of this Agreement, including, without limitation, payments made due to the acceleration of the maturity of Advances pursuant to SECTION 8.2, or otherwise made on a date other than the last day of the applicable Interest Period, (iv) any default in the payment or prepayment of the principal amount of any Advance or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by notice of prepayment or otherwise), or (v) the occurrence of an Event of Default. The term "FUNDING LOSS" includes, without limitation, an amount equal to the excess, if any, as determined by Agent or any Lender of (A) its cost of obtaining the funds for the Advance being paid, prepaid, or converted or not borrowed or converted (based on the Adjusted Eurodollar Rate applicable thereto) for the period from the date of such payment, prepayment, or conversion or failure to borrow or convert to the last day of the Interest Period for such Advance (or, in the case of a failure to borrow or convert, the Interest Period for the Advance which would have commenced on the date of such failure to borrow or convert) over (B) the amount of interest (as estimated by Agent or such Lender) that would be realized by Agent or such Lender in reemploying the funds so paid, prepaid, or converted or not borrowed or converted for such period or Interest Period, as the case may be. A certificate of Agent or such Lender setting forth any amount or amounts which Agent or such Lender is entitled to receive pursuant to this SECTION 2.6(e), together with a description in reasonable detail of the manner in which such amounts have been calculated, shall be delivered to Borrower and shall be presumed to be correct in the absence of manifest error. Borrower shall pay to Agent, for itself or for the account of any such Lender, the amount shown as due on any certificate within five (5) days after its receipt of the same. Notwithstanding the foregoing, in no event shall Lender be permitted to receive any compensation hereunder constituting interest in excess of the Maximum Rate. (f) TAXES. Any Taxes payable by Agent or any Lender or ruled (by a Governmental Authority) payable by Agent or any Lender in respect of this Agreement or any other Loan Document shall, if permitted by Governmental Requirement, be paid by Borrower, together with interest and penalties, if any (except for Taxes imposed on or measured by the overall net income of Agent or such Lender). Agent or such Lender (through Agent) shall notify Borrower and deliver to Borrower a certificate setting forth in reasonable detail the calculation of the amount of payable Taxes, which certificate is presumed to be correct in the absence REVOLVING CREDIT AGREEMENT 22 27 of manifest error, and Borrower shall promptly pay that amount to Agent for its account or the account of such Lender, as the case may be. If Agent or such Lender subsequently receives a refund of the Taxes paid to it by Borrower, then the recipient shall promptly pay the refund to Borrower. (g) FOREIGN LENDERS. Each Lender that is organized under the Governmental Requirements of any jurisdiction other than the United States of America or any State thereof (i) represents to Agent and Borrower that (A) no Taxes are required to be withheld by Agent or Borrower with respect to any payments to be made to it in respect of the Obligation, and (B) it has furnished to Agent and Borrower two (2) duly completed copies of U.S. Internal Revenue Service Form 4224, Form 1001, Form W-8, or any other tax form acceptable to the Administrative Agent (wherein it claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments under the Loan Documents), and (ii) covenants to (A) provide Agent and Borrower a new tax form upon the expiration or obsolescence of any previously delivered form according to Governmental Requirement, duly executed and completed by it, and (B) comply from time-to-time with all Governmental Requirements with regard to the withholding tax exemption. If any of the foregoing is not true or the applicable forms are not provided, then Borrower or Agent (without duplication) may deduct and withhold from interest payments under the Loan Documents United States federal income tax at the full rate applicable under the Code. (h) SURVIVAL. Without prejudice to the survival of any other obligations of Borrower hereunder, the obligations of Borrower under this SECTION 2.6 shall survive the termination of this Agreement and/or the payment or assignment of the Notes. 2.7 PAYMENTS OF THE NOTE. (a) PAYMENT OF INTEREST ON THE NOTES. Interest on each Eurodollar Advance shall be due and payable as it accrues on the last day of its respective Interest Period; provided that if any Interest Period is a period greater than three (3) months, then accrued interest shall also be due and payable on the date three (3) months after the commencement of such Interest Period. Interest on each Base Rate Advance shall be due and payable as it accrues on the last day of each February, May, August, and November, commencing on February 28, 1997, and on the Termination Date. (b) PAYMENT OF PRINCIPAL OF THE NOTES. The Notes shall mature, and the principal amount thereof shall be due and payable, on the Termination Date. (c) OPTIONAL PREPAYMENTS. Upon three (3) Business Days' notice for Eurodollar Advances and one (1) Business Day's notice for Base Rate Advances, Borrower may prepay the principal of any of the Notes then outstanding, in whole or in part, at any time or from time to time; provided, however, that (i) each prepayment of less than the full outstanding principal balance of a Note shall be in an amount equal to $1,000,000.00 or any larger multiple thereof, and (ii) if Borrower prepays the principal of any Eurodollar Advance on any date other than the last day of the Interest Period applicable thereto, Borrower shall pay any Funding Loss with respect to such payment. Any optional prepayment of the principal of the Notes shall be applied to the Notes on a pro rata basis based upon the outstanding principal balances of the Notes as of the date of payment. (d) MANDATORY PREPAYMENTS. Borrower shall prepay the outstanding Principal Debt up to an amount equal to the greater of (i) $20,000,000.00, or (ii) fifty percent (50%) of the Net Cash Proceeds from any Permitted Equity Issuance (other than pursuant to options issued pursuant to employee or director stock option plans or warrants issued to employees or directors of a Company). Borrower shall make such prepayment within thirty (30) days of the offering of any such Permitted Equity Issuance. Any such prepayment of the principal of the Notes shall (i) be without premium or penalty, except for any Funding REVOLVING CREDIT AGREEMENT 23 28 Loss arising therefrom, (ii) be applied (A) first, to the outstanding Principal Debt on Pro Rata based upon the outstanding principal balances of the Notes as of the date of payment, and (B) the excess, if any, shall be released to Borrower, and (iii) not reduce the Commitments. (e) GENERAL PROVISIONS AS TO PAYMENTS. (i) All payments of principal of, and interest on, any Note to or for the account of any Lender shall be made by Borrower to Agent before 11:00 a.m. (Dallas, Texas time), in Federal or other immediately available funds at Agent's Lending Office. If the principal of, or interest on, a Note, or any other amount payable hereunder, becomes due and payable on a day other than a Business Day, then the maturity thereof shall be extended to the next succeeding Business Day. Each payment received by Agent hereunder for the account of a Lender shall be promptly distributed by Agent to such Lender. Except as otherwise provided, all payments made on any Note shall be credited, to the extent of the amount thereof, in the following manner: (A) first, against the amount of interest accrued and unpaid on such Note as of the date of such payment; (B) second, against all principal (if any) due and owing on such Note as of the date of such payment; (C) third, as a prepayment of outstanding Base Rate Advances under such Note; and (D) fourth, as a prepayment of outstanding Eurodollar Advances under such Note. Subject to the foregoing, so long as no Potential Default or Event of Default exists, payments and prepayments of principal of any Note shall be applied to such outstanding Base Rate Advances and Eurodollar Advances under such Note as Borrower shall select; provided, however, that Borrower shall select Base Rate Advances and Eurodollar Advances to be repaid in a manner designed to minimize the Funding Loss, if any, resulting from such payments; and provided further that, if Borrower shall fail to select the Base Rate Advance or Eurodollar Advance to which such payments are to be applied, or if a Potential Default or Event of Default exists at the time of such payment, then Agent shall be entitled to apply the payment to such Base Rate Advances and Eurodollar Advances in the manner it shall deem appropriate. (ii) Each payment received by Agent hereunder for the account of Lenders or any of them on the Notes shall be distributed to each Lender entitled to share in such payment, Pro Rata in proportion to the Pro Rata Parts of each Lender (less any taxes, levies, imposts, deductions, charges or withholdings excluded from the definition of Taxes). Unless Agent shall have received notice from Borrower prior to the date on which any payment is due to Lenders hereunder that Borrower will not make such payment in full, Agent may assume that Borrower has made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower shall not have so made such payment in full to Agent, each Lender shall repay to Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to Agent, at the Federal Funds Rate. 2.8 FEES. (a) TREATMENT OF FEES. Except as otherwise provided by applicable law, the fees described in this SECTION 2.8 (i) do not constitute compensation for the use, detention, or forbearance of money, (ii) are in addition to, and not in lieu of, interest and expenses otherwise described in this Agreement, (iii) shall be payable in accordance with SECTION 2.7(e), (iv) shall be non- refundable, (v) shall, to the fullest extent permitted by applicable law, bear interest, if not paid when due, at the Default Rate, and (vi) shall be calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed, but computed as if each calendar year consisted of 360 days, unless such computation would result in interest REVOLVING CREDIT AGREEMENT 24 29 being computed in excess of the Maximum Rate in which event such computation shall be made on the basis of a year of 365 or 366 days, as the case may be. (b) COMMITMENT FEES AND FEES OF AGENT. Borrower shall pay to Agent, the commitment and other fees described in that certain separate letter agreement dated of even date herewith, between Borrower and Agent, which payments shall be made on the dates specified, and in amounts calculated in accordance with, such letter agreement. (c) LC FEES. Borrower shall pay to Agent, for the ratable benefit of Lenders, in accordance with their respective Pro Rata Parts, a fee for each LC, payable in installments in advance, so long as such LC remains outstanding. Such installments shall be paid commencing on the date of issuance of the applicable LC, for the period from and including such date to but excluding the next quarterly payment date (as hereinafter specified), and thereafter on each March 31, June 30, September 30 and December 31, for the period from and including such quarterly payment date to but excluding the next quarterly payment date or (if earlier) the expiry date of such LC; provided that the LC fees in respect of LCs issued in connection with the OraCare Acquisition shall be due and payable on the expiry date set forth in such LCs. Each such installment shall be in an amount equal to the product of (A) the Applicable Margin for Letter of Credit Fees in effect on the date of payment of such fee (and applied on a per annum basis) multiplied by (B) the face amount of such LC, and pro rated (in accordance with SECTION 2.8(a)(vi)) for the period for which such installment is due. 2.9 TERMINATION OF COMMITMENT. The Commitments shall terminate on the Termination Date, and any Advances then outstanding (together with accrued interest thereon) shall be due and payable on such date. 2.10 SHARING OF PAYMENTS, ETC. If any Lender obtains any amount (whether voluntary, involuntary, or otherwise, including as a result of exercising any rights under SECTION 2.10) that exceeds the part of that payment that such Lender is entitled to receive under the Loan Documents, then such Lender shall purchase from the other Lenders participations that will cause the purchasing Lender to share the excess amount ratably with each other Lender. If all or any portion of any excess amount is subsequently recovered from the purchasing Lender, then the purchase shall be rescinded and the purchase price restored to the extent of the recovery. Borrower agrees that any Lender purchasing a participation from another Lender under this SECTION, may, to the fullest extent permitted by applicable law, exercise all of its rights of payment with respect to that participation as fully as if such lender were the direct creditor of Borrower in the amount of that participation. 2.11 SET-OFF. If an Event of Default exists, each Lender is entitled, but not obligated, to exercise (for the benefit of all Lenders in accordance with SECTION 2.10) the right of off-set and banker's Lien against each and every account and other property, or any interest therein, that Borrower may now or hereafter have with, or which is now or hereafter in the possession of, such Lender to the extent of the amount of the Obligation owed to it. SECTION 3 COLLATERAL. 3.1 LIENS AND SECURITY INTERESTS. To secure the performance by Borrower of the payment and performance of the Obligation, pursuant to the Collateral Documents, the Companies shall grant to Agent, for the ratable benefit of Lenders, a perfected, first priority Lien in all outstanding capital stock of the Companies (other than of Borrower). REVOLVING CREDIT AGREEMENT 25 30 SECTION 4 CONDITIONS PRECEDENT. 4.1 INITIAL ADVANCE. The obligations of each Lender to make its initial Advance or of Issuing Bank to make the initial Issuance hereunder are subject to the condition precedent that Agent shall have received on or before the day of such Advance all of the following, each dated (unless otherwise indicated) the date hereof, in form and substance satisfactory to Agent: (a) RESOLUTIONS. Resolutions of the Boards of Directors of each Company certified by the Secretary or an Assistant Secretary of each of them which authorize the execution, delivery, and performance by such Company of this Agreement and/or the other Loan Documents to which such Company is or is to be a party; (b) INCUMBENCY CERTIFICATE. A certificate of incumbency certified by the Secretary or an Assistant Secretary of each Company certifying the names of the officers of each such Company authorized to sign this Agreement and each of the other Loan Documents to which each such Company is or is to be a party (including the certificates contemplated herein) together with specimen signatures of such officers; (c) ARTICLES OF INCORPORATION. The articles or certificate of incorporation of each Company certified by the Secretary of State of the State of such Company's incorporation; (d) BYLAWS. The bylaws of each Company certified by the Secretary or an Assistant Secretary of each such Company; (e) GOVERNMENTAL CERTIFICATES. Certificates of the appropriate Governmental Authorities of the State of incorporation of each Company as to the existence and good standing of each of them; (f) NOTES. The Notes; (g) PLEDGE AGREEMENTS. The Pledge Agreements; (h) FINANCING STATEMENTS. Uniform Commercial Code financing statements executed by the Companies and covering the Collateral; (i) STOCK CERTIFICATES. Stock certificates evidencing all stock pledged pursuant to the Pledge Agreements, as applicable, together with stock powers duly executed in blank; (j) UCC AND TAX AND JUDGMENT LIEN SEARCHES. The results of Uniform Commercial Code searches showing all financing statements and other documents or instruments, and tax and judgment lien searches showing all tax and judgment liens, on file against each Company in such jurisdictions as Agent shall require, such searches to be as of a date no more than twenty (20) days prior to the date of the initial Advance or Issuance; (k) OPINION OF COUNSEL. Favorable opinions as to the matters set forth in EXHIBIT F hereto of Texas legal counsel to the Companies; (l) ATTORNEYS' FEES AND EXPENSES. Evidence that the costs and expenses (including attorneys' fees) referred to in SECTION 10.3, to the extent incurred, shall have been paid in full by Borrower; (m) FEES. Borrower shall have paid to Agent (i) for its own account, the fees owed by Borrower to Agent pursuant to the letter agreement of even date herewith between Borrower and Agent, and (ii) for REVOLVING CREDIT AGREEMENT 26 31 the account of all Lenders, the fees owed by Borrower to Lenders on or before the date hereof pursuant to SECTION 2.8; (n) FEDERAL RESERVE BOARD FORM U-1. For each Lender a properly completed Federal Reserve Board Form U-1 duly executed by each Company pledging stock of another Company; and (o) ACQUISITION OF ORACARE. (i) Contemporaneously with the initial Advance or Issuance hereunder, Borrower shall have acquired good title, free and clear of all Liens, to all of the issued and outstanding capital stock of OraCare Consultants, Inc., a New Jersey corporation, and OraCare DPO, Inc., a New Jersey corporation; (ii) The representations and warranties set forth in the Loan Documents are true and correct in all material respects, immediately prior to, and after giving effect to, the OraCare Acquisition, and the transactions contemplated thereby, as though OraCare Consultants, Inc. and OraCare DPO, Inc. were Subsidiaries of Borrower as of the date of such Acquisition; (iii) Agent shall have received, and be reasonably satisfied with, the Stock Purchase Agreements and the other documents governing the OraCare Acquisition, including purchase and sale documentation, covenants not to compete, indemnities provided to Borrower, and opinions of counsel (which shall provide customary assurances regarding the legal status and authority of OraCare Consultants, Inc. and OraCare DPO, Inc., and their respective Subsidiaries, regulatory matters related thereto, and the acquisition of the capital stock of such Persons, the validity and enforceability of the transaction, and assurances that Borrower shall have acquired all the issued and outstanding capital stock of OraCare Consultants, Inc. and OraCare DPO, Inc.), which opinions of counsel may be relied upon by Agent and Lenders; and (iv) Borrower shall have delivered to Agent and Lenders an opinion of counsel, in form and substance acceptable to Agent, relating to the Acquisition by Peter Barnett of OraCare Dental Associates, P.A., a New Jersey practice association, including compliance with all applicable Legal Requirements. 4.2 ALL ADVANCES. The obligations of each Lender to make any Advance (including the initial Advance) and of Issuing Bank to make any Issuance of an LC (including the initial Issuance) are subject to the following additional conditions precedent: (a) NOTICE OF BORROWING. Agent shall have received, in accordance with SECTION 2.3(a) or SECTION 2.2(a), a Notice of Borrowing or LC Request, as the case may be, executed by an authorized officer of Borrower; (b) NO DEFAULT. No Potential Default or Event of Default shall have occurred and be continuing, or would result from such Advance or Issuance; (c) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties contained in SECTION 5 and in each of the other Loan Documents shall be true and correct on and as of the date of such Advance or Issuance with the same force and effect as if such representations and warranties had been made on and as of such date, except to the extent that such representations and warranties speak to a specific date or the facts on which such representations and warranties are based have been changed by transactions permitted by the Loan Documents; REVOLVING CREDIT AGREEMENT 27 32 (d) ADDITIONAL DOCUMENTATION. Agent shall have received such additional approvals, opinions, or documents as are required by the terms and provisions of this Agreement or any other Loan Document; and (e) ADVANCES OR ISSUANCES FOR PERMITTED ACQUISITIONS. If the Advance or Issuance is in connection with a Permitted Acquisition, Agent shall have received a certificate, executed by the President or a Vice President of Borrower, confirming the satisfaction of all other requirements set forth in the definition of "Permitted Acquisition" that are required to be completed on or before consummation of the Permitted Acquisition. SECTION 5 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants as follows: 5.1 ORGANIZATION AND GOOD STANDING. Each of the Companies is a corporation duly organized and in good standing under the laws of the state of its incorporation, is duly qualified as a foreign corporation and is in good standing in all states in which it is doing business, has the corporate power and authority to own its properties and assets and to transact the business in which it is engaged in each jurisdiction in which it operates, and is or will be qualified in those states wherein it proposes to transact business in the future. 5.2 AUTHORIZATION AND POWER. Each of the Companies has full power and authority to execute, deliver, and perform the Loan Documents executed by such Person, all of which has been duly authorized by all proper and necessary corporate action. 5.3 NO CONFLICTS OR CONSENTS. Neither the execution and delivery of the Loan Documents, nor the consummation of any of the transactions therein contemplated, nor compliance with the terms and provisions thereof, will contravene or materially conflict with any provision of law, statute, or regulation to which any Company is subject, any judgment, license, order, or permit applicable to any Company, any indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument binding on any Company, or any provision of the charter or bylaws of any Company. No consent, approval, authorization, or order of any court, Governmental Authority, stockholder, or third party is required in connection with the execution, delivery, or performance by each Company of any of the Loan Documents executed by such Person, except for any change in control requirements of applicable Governmental Authorities in connection with the exercise of rights and remedies in the Collateral under the Collateral Documents. 5.4 ENFORCEABLE OBLIGATIONS. The Loan Documents have been duly executed and delivered by each Company, as appropriate, are the legal and binding obligations of each Company, as appropriate, and are enforceable in accordance with their respective terms, except as limited by Debtor Laws. 5.5 NO LIENS. Except for the Permitted Liens, all of the properties and assets of each Company are free and clear of all Liens and other adverse claims of any nature, and each Company has good and marketable title to such properties and assets. 5.6 FINANCIAL CONDITION. Borrower has delivered to Agent copies of the financial statements (a) of the Companies, as of June 30, 1996, and (b) of OraCare Consultants, Inc., and OraCare DPO, Inc. as of June 30, 1996, such financial statements are true and correct, fairly represent the financial condition of the Companies, OraCare Consultants, Inc., and OraCare DPO, Inc., as appropriate, as of such dates and have been prepared in accordance with GAAP; as of the date hereof, there are no obligations, liabilities, or Indebtedness (including contingent and indirect liabilities) of any Company, OraCare Consultants, Inc., or REVOLVING CREDIT AGREEMENT 28 33 OraCare DPO, Inc., which are material and are not reflected in such financial statements; no Material Adverse Effect has occurred since the date of such financial statements. 5.7 INDEBTEDNESS. As of the date hereof, the Companies have no Indebtedness, except as disclosed in the financial statements described in SECTION 5.6 or on SCHEDULE 5.7. 5.8 FULL DISCLOSURE. There is no fact known to Borrower that Borrower has not disclosed to Agent which could have a Material Adverse Effect. No certificate or statement delivered by any Company to Agent or any Lender in connection with this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein from being misleading. 5.9 NO POTENTIAL DEFAULT. No event has occurred and is continuing which constitutes a Potential Default or an Event of Default. 5.10 MATERIAL AGREEMENTS. Borrower has provided Agent with copies of all material contracts and agreements to which it or any of the Companies is a party, or by which any of its or their respective properties is bound, the breach of which or the occurrence of a default under would cause a Material Adverse Effect. No Company is in default in any material respect under any contract or agreement to which it is a party or by which any of its properties is bound, the breach of which or the occurrence of a default under would cause a Material Adverse Effect. 5.11 NO LITIGATION. Except as disclosed in writing on SCHEDULE 5.11 hereto, there are no actions, suits or legal, equitable, arbitration, or administrative proceedings pending, or to the knowledge of Borrower threatened, against any Company that could, if adversely determined, have a Material Adverse Effect. There are no outstanding judgments against any Company. 5.12 USE OF PROCEEDS; MARGIN STOCK. The proceeds of the Advances have been and will be used by Borrower solely for the purposes specified in the preamble. None of such proceeds will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System, or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulations. If requested by any Lender, Borrower will furnish to such Lender a statement in conformity with the requirements of the Federal Reserve Form U-1 referred to in said Regulation U to the foregoing effect. No part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. 5.13 TAXES. All tax returns required to be filed by each Company in any jurisdiction have been filed and all taxes (including mortgage recording taxes), assessments, fees, and other governmental charges upon each Company, or upon any of its properties, income, or franchises have been paid, except for taxes being contested in good faith by appropriate proceedings diligently projected and as to which adequate reserves have been established in accordance with GAAP. Borrower has no knowledge of any proposed tax assessment against any Company that will have, or is reasonably likely to have, a Material Adverse Effect. 5.14 SUBSIDIARIES. Set forth on SCHEDULE 5.14 hereto is a complete and accurate list of all Subsidiaries of Borrower as of the date hereof, showing as of such date (as to each such Subsidiary) the jurisdiction of its incorporation, the number of shares of each class of capital stock outstanding on the date hereof, the owner of the outstanding shares of each such class owned, and the jurisdictions in which such Subsidiary is qualified to do business as a foreign corporation. All of the outstanding capital stock of all REVOLVING CREDIT AGREEMENT 29 34 Subsidiaries has been validly issued, is fully paid and nonassessable, and is owned by Borrower or a Subsidiary of Borrower free and clear of all Liens, other than the Liens under the Collateral Documents. 5.15 CHIEF EXECUTIVE OFFICE, ETC. The Chief Executive office of Borrower and each other Company is in Dallas, Texas. Borrower and each other Company, as the case may be, maintain their respective principal records and books at such addresses. 5.16 COMPLIANCE WITH LAW; GOVERNMENTAL AUTHORIZATIONS. (a) Except as disclosed on SCHEDULE 5.16-1: (i) each Company is in compliance with its respective articles of incorporation, charter, and bylaws, and all Legal Requirements which are applicable to it or to the conduct or operation of its business for the ownership or use of any of its assets; and (ii) no Company has received any notice or other communication from any Governmental Authority or other Person of any event or circumstance which could constitute a violation of, or failure to comply with, any Legal Requirement. (b) Except as disclosed on SCHEDULE 5.16-1: (i) each Company is in compliance with all of the terms and requirements of each Governmental Authorization held by such Company; (ii) no Company has received any notice or other communication from any Governmental Authority or other Person of any event or circumstance which could constitute a violation of, or failure to comply with, any term or requirement of any Governmental Authorization, or of any actual or potential revocation, withdrawal, cancellation, or termination of, or material modification to, any Governmental Authorization; (iii) all applications required to have been filed for the renewal of any required Governmental Authorizations have been duly filed on a timely basis with the appropriate Governmental Authorities, and all other filings required to have been made with respect to such Governmental Authorizations have been duly made on a timely basis with the appropriate Governmental Authorities; (iv) all Governmental Authorizations of the Companies are transferrable to the Companies; (v) upon consummation of the transactions contemplated hereby, the Companies will lawfully hold all such Governmental Authorizations; and (vi) none of the Governmental Authorizations will terminate upon consummation of the transactions contemplated hereby. (c) Set forth on SCHEDULE 5.16-2 is a list of each of the Governmental Authorizations of the Companies: (i) necessary to permit each Company to lawfully conduct and operate its respective business in the manner it currently conducts and operates such business and to permit such Company to own and use its assets in the manner in which it currently owns and uses such assets; and (ii) necessary to permit each Company, upon the consummation of the transactions contemplated hereby, to lawfully conduct and operate its business and to permit each Company to own and use its assets, where the failure to have such Governmental Authorization would have a Material Adverse Effect. 5.17 CASUALTIES. Neither the business nor the properties of any Company has been adversely affected by any environmental hazard, fire, explosion, accident, drought, storm, hail, earthquake, embargo, act of God, or other casualty (whether or not covered by insurance), which could have a Material Adverse Effect. 5.18 SUFFICIENCY OF CAPITAL. Each Company is, and after consummation of this Agreement and after giving effect to all Indebtedness incurred and Liens created by the Companies in connection herewith will be, Solvent. 5.19 ERISA. The Companies are in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan. No notice of intent to terminate a Plan has been filed, nor has any Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute REVOLVING CREDIT AGREEMENT 30 35 proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings. None of the Companies nor any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan. The Companies and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their Plans, and the present value of all vested benefits under each Plan does not exceed the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation, date of the Plan and in accordance with ERISA. None of the Companies nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. 5.20 LABOR MATTERS. There are no strikes, lockouts, disputes, or other controversies pending between any Company and any of its employees, which could have a Material Adverse Effect. 5.21 INSURANCE. Each Company maintains insurance policies and programs in amounts sufficient to cover the replacement value of properties and assets of such Company. 5.22 ACQUISITION. The Stock Purchase Agreements previously delivered to Agent are true and correct copies of such agreements, and Borrower has delivered to Agent true and correct copies of all amendments, supplements, and modifications thereto. Borrower has provided to Agent all material information regarding the OraCare Acquisition. 5.23 INVESTMENT COMPANY ACT. No Company is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.24 PUBLIC UTILITY HOLDING COMPANY ACT. No Company is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.25 REPRESENTATIONS AND WARRANTIES. Each Notice of Borrowing and Notice of LC shall constitute, without the necessity of specifically containing a written statement, a representation and warranty by Borrower that no Potential Default or Event of Default exists, and that all representations and warranties contained in this SECTION 5 or in any other Loan Document are true and correct on and as of the date the requested Advance or Issuance is to be made. 5.26 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties by Borrower herein shall survive delivery of the Notes and the making of the Loan, and any investigation at any time made by or on behalf of Agent or any Lender shall not diminish Agent's or Lenders' right to rely thereon. SECTION 6 AFFIRMATIVE COVENANTS. So long as Lenders have any commitment to make Advances or Issuances hereunder, and until payment in full of the Obligation, Borrower covenants that: 6.1 FINANCIAL STATEMENTS, REPORTS, AND DOCUMENTS. Borrower shall deliver to Agent, with copies for each Lender, each of the following: (a) QUARTERLY STATEMENTS. As soon as available, and in any event within forty-five (45) days after the end of each quarterly fiscal period (except the last) of each fiscal year of Borrower, copies of the consolidated and consolidating balance sheet of the Companies as of the end of such quarterly fiscal period, and statements of income, retained earnings, and changes in cash flow of the Companies for that quarterly fiscal period and for the portion of the fiscal year ending with such period, in each case setting forth in REVOLVING CREDIT AGREEMENT 31 36 comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail, and certified by the chief financial officer of Borrower as being true and correct in all material respects and as having been prepared in accordance with GAAP, subject to year-end audit adjustments; (b) ANNUAL STATEMENTS. As soon as available and in any event within ninety (90) days after the close of each fiscal year of Borrower, copies of the consolidated and consolidating balance sheet of the Companies as of the close of such fiscal year and statements of income, retained earnings, and changes in cash flow of the Companies for such fiscal year, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and accompanied by an opinion thereon (which shall not be qualified by reason of any limitation imposed by Borrower) of independent public accountants of recognized national standing, selected by Borrower and reasonably satisfactory to Agent, to the effect that (i) such consolidated financial statements have been prepared in accordance with GAAP (except for changes in which such accountants concur), (ii) the examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, includes such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances, and (iii) in making their audit, such accountants have not become aware of any condition or event which would constitute a Potential Default or an Event of Default under any of the terms or provisions of this Agreement (insofar as any such terms or provisions pertain to accounting matters) and, if any such condition or event then exists, specifying the nature and period of existence thereof; (c) COMPLIANCE CERTIFICATE. Within forty-five (45) days after the end of each fiscal quarter of Borrower hereafter, a certificate executed by the chief financial officer or chief executive officer of Borrower, stating that a review of the activities of Borrower during such fiscal quarter has been made under his supervision, and that Borrower has performed each and every obligation and covenant contained herein, and is not in default under any of the same, or, if any such default shall have occurred, specifying the nature and status thereof, and setting forth a computation in reasonable detail as of the end of the period covered by such statements, of compliance with SECTIONS 7.14 through 7.19; (d) QUARTERLY ACTUARIAL RESERVES. As soon as available, and in any event within forty five (45) days after the end of each quarterly fiscal period of each fiscal year of Borrower, copies of all actuarial Reserves reports of each Company; (e) OTHER INFORMATION. Such other information concerning the business, properties, or financial condition of Borrower or any other Company as Agent or any Lender shall reasonably request including (i) audit reports, (ii) registration statements or other reports or notices provided to shareholders of Borrower or filed with the Securities and Exchange Commission, (iii) all material reports, filings, and other notices filed with any Governmental Authority, and (iv) all press releases and other statements made available generally by Borrower to the public concerning material developments in the business of Borrower or any other Company. 6.2 PAYMENT OF TAXES AND OTHER INDEBTEDNESS. Borrower shall, and shall cause each of the other Companies to, pay and discharge (a) all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or profits, or upon any property belonging to it, before delinquent, (b) all lawful claims (including claims for labor, materials, and supplies), which, if unpaid, might give rise to a Lien upon any of its property, and (c) all of its other Indebtedness, except as prohibited under the Loan Documents; provided, however, that Borrower and each of the other Companies shall not be required to pay any such tax, assessment, charge, or levy if and so long as the amount, applicability, or validity thereof shall currently be contested in good faith by appropriate proceedings and appropriate accruals and cash reserves therefor have been established in accordance with GAAP. REVOLVING CREDIT AGREEMENT 32 37 6.3 MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS. Borrower shall, and shall cause each of the other Companies to, preserve and maintain its corporate existence (except as permitted by SECTION 7.9) and all of its rights, privileges, and franchises necessary or desirable in the normal conduct of its business, and conduct its business in an orderly and efficient manner consistent with good business practices and in accordance with all valid regulations and orders of any Governmental Authority. 6.4 NOTICE OF DEFAULT. Borrower shall furnish to Agent, immediately upon becoming aware of the existence of any condition or event which constitutes a Potential Default or an Event of Default, written notice specifying the nature and period of existence thereof, and the action that Borrower is taking or proposes to take with respect thereto. 6.5 OTHER NOTICES. Borrower shall, and shall cause each of the other Companies to, promptly notify Agent of (a) any event or circumstance which could have a Material Adverse Effect, (b) any default by a Company under any material agreement, contract, or other instrument to which it is a party or by which any of its properties are bound, or any acceleration of the maturity of any Indebtedness owing by any Company, (c) any material adverse claim against or affecting any Company or any of its Properties, which could result in a Material Adverse Effect, and (d) the commencement of, and any material adverse determination in, any litigation with any third party or any proceeding before any Governmental Authority affecting any Company. 6.6 OPERATIONS AND PROPERTIES. Borrower shall, and shall cause each of the other Companies to, (a) act prudently and in accordance with customary industry standards in managing and operating its assets and properties, and (b) keep in good working order and condition, ordinary wear and tear excepted, all of its assets and properties which are necessary to the conduct of its business. 6.7 BOOKS AND RECORDS; ACCESS. Borrower shall, and shall cause each of the other Companies to, give any representative of Agent and each Lender access during all business hours to, and permit such representative to examine, copy, or make excerpts from, any and all books, records, and documents in the possession of Borrower or such other Company and relating to its affairs, and to inspect any of the properties of Borrower or such other Company. Borrower shall, and shall cause each of the other Companies to, maintain complete and accurate books and records of its transactions in accordance with good accounting practices. 6.8 COMPLIANCE WITH LAW. Borrower shall, and shall cause each of the other Companies to, comply with all Legal Requirements, and all orders of any Governmental Authority, a breach of which could have a Material Adverse Effect. 6.9 INSURANCE. Borrower shall, and shall cause each of the other Companies to, keep all insurable property, real and personal, adequately insured at all times in such amounts and against such risks as are customary for Persons in similar businesses operating in the same vicinity, specifically to include a policy of hazard, casualty, fire, and extended coverage insurance covering all assets, business interruption insurance (where feasible), liability insurance, and worker's compensation insurance, in every case under a policy with a financially sound and reputable insurance company, and with only such deductibles as are customary. 6.10 AUTHORIZATIONS AND APPROVALS. Borrower shall, and shall cause each of the other Companies to, promptly obtain, from time-to-time at its own expense, all such Governmental Authorizations as may be required to enable it to comply with its obligations hereunder and under the other Loan Documents. REVOLVING CREDIT AGREEMENT 33 38 6.11 FURTHER ASSURANCES. Borrower shall, and shall cause each of the other Companies to, make, execute and deliver, or file, or cause the same to be done, all such notices, additional agreements, mortgages, assignments, financing statements, or other assurances, and take any and all such other action, as Agent may, from time-to-time, deem reasonably necessary or proper in connection with any of the Loan Documents, the obligations of the Companies thereunder. 6.12 INDEMNIFICATION. (a) AS USED IN THIS SECTION: (i) "INDEMNITOR" MEANS THE COMPANIES; (ii) "INDEMNITEE" MEANS AGENT, ISSUING BANK, EACH LENDER, EACH PRESENT AND FUTURE AFFILIATE OF AGENT, ISSUING BANK, OR ANY LENDER, EACH PRESENT AND FUTURE OFFICER, AGENT, OR OTHER REPRESENTATIVE OF AGENT, ISSUING BANK, ANY LENDER, OR ANY OF THOSE AFFILIATES, AND EACH PRESENT AND FUTURE SUCCESSOR AND ASSIGN OF AGENT, ISSUING BANK, ANY LENDER, OR ANY OF THOSE AFFILIATES OR OFFICERS, AGENTS, OR OTHER REPRESENTATIVES; AND (iii) "INDEMNIFIED LIABILITIES" MEANS ALL PRESENT AND FUTURE, KNOWN AND UNKNOWN, FIXED AND CONTINGENT, ADMINISTRATIVE, INVESTIGATIVE, JUDICIAL, AND OTHER CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, INVESTIGATIONS, SUITS, PROCEEDINGS, AMOUNTS PAID IN SETTLEMENT, DAMAGES, JUDGMENTS, PENALTIES, COURT COSTS, LIABILITIES, AND OBLIGATIONS -- AND ALL PRESENT AND FUTURE COSTS, EXPENSES, AND DISBURSEMENTS (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS' FEES AND EXPENSES WHETHER OR NOT SUIT OR OTHER PROCEEDING EXISTS OR ANY INDEMNITEE IS PARTY TO ANY SUIT OR OTHER PROCEEDING) IN ANY WAY RELATED TO ANY OF THE FOREGOING -- THAT MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST ANY INDEMNITEE AND IN ANY WAY RELATING TO OR ARISING OUT OF ANY (A) LOAN DOCUMENT, TRANSACTION CONTEMPLATED BY ANY LOAN DOCUMENT, OR COLLATERAL, (B) ENVIRONMENTAL LIABILITY IN ANY WAY RELATED TO ANY COMPANY, THE COLLATERAL, OR ANY ACT, OMISSION, STATUS, OWNERSHIP, OR OTHER RELATIONSHIP, CONDITION, OR CIRCUMSTANCE CONTEMPLATED BY, CREATED UNDER, OR ARISING PURSUANT TO OR IN CONNECTION WITH ANY LOAN DOCUMENT, OR (C) INDEMNITEE'S SOLE OR CONCURRENT ORDINARY NEGLIGENCE. (b) EACH INDEMNITOR SHALL JOINTLY AND SEVERALLY INDEMNIFY EACH INDEMNITEE FROM AND AGAINST, PROTECT AND DEFEND EACH INDEMNITEE FROM AND AGAINST, HOLD EACH INDEMNITEE HARMLESS FROM AND AGAINST, AND ON DEMAND PAY OR REIMBURSE EACH INDEMNITEE FOR, ALL INDEMNIFIED LIABILITIES. (c) THE FOREGOING PROVISIONS (i) ARE NOT LIMITED IN AMOUNT EVEN IF THAT AMOUNT EXCEEDS THE OBLIGATION, (ii) INCLUDE, WITHOUT LIMITATION, REASONABLE FEES AND EXPENSES OF ATTORNEYS AND OTHER COSTS AND EXPENSES OF LITIGATION OR PREPARING FOR LITIGATION AND DAMAGES OR INJURY TO PERSONS, PROPERTY, OR NATURAL RESOURCES ARISING UNDER ANY STATUTORY OR COMMON LAW, PUNITIVE DAMAGES, FINES, AND OTHER PENALTIES, AND (iii) ARE NOT AFFECTED BY THE SOURCE OR ORIGIN OF ANY HAZARDOUS SUBSTANCE, AND (iv) ARE NOT AFFECTED BY ANY INDEMNITEE'S INVESTIGATION, ACTUAL OR CONSTRUCTIVE KNOWLEDGE, COURSE OF DEALING, OR WAIVER. (d) No Indemnitee is entitled to be indemnified under the Loan Documents for its or its agents', contractors', or employees' own fraud, gross negligence, or willful misconduct. (e) THE PROVISIONS OF AND INDEMNIFICATION AND OTHER UNDERTAKINGS UNDER THIS SECTION SURVIVE THE FORECLOSURE OF ANY LIEN OR ANY TRANSFER IN LIEU OF THAT FORECLOSURE, THE SALE OR OTHER TRANSFER OF ANY COLLATERAL TO ANY PERSON, THE SATISFACTION OF THE OBLIGATION, THE TERMINATION OF THE LOAN DOCUMENTS, AND THE RELEASE OF ANY OR ALL LIENS. REVOLVING CREDIT AGREEMENT 34 39 6.13 RESERVES. Borrower shall, and shall each of the other Companies to, maintain Reserves in accordance with all Legal Requirements of any Governmental Authority. 6.14 INFORMATION RELATING TO PROPOSED ACQUISITIONS. Borrower shall keep Agent and Lenders informed of the relevant information and status of, and will share with Agent and Lenders and provide copies to the extent possible, of all material due diligence information relating to any proposed Acquisition with respect to which Borrower or any other Company enters into a letter of intent or acquisition agreement, during the term of this Agreement. 6.15 AFTER-ACQUIRED SUBSIDIARIES. Concurrently upon the formation or Acquisition by Borrower or any other Company of any Subsidiary after the date hereof (pursuant to a Permitted Acquisition or otherwise) (an "AFTER-ACQUIRED SUBSIDIARY"), Borrower shall cause the After-Acquired Subsidiary to deliver copies of the articles of incorporation, bylaws, and resolutions (or other corresponding constituent documents) and shall cause the appropriate Company to execute a Pledge Agreement, as shall be required by Agent to create first priority Liens in favor of Agent, for the benefit of Lenders, in such After- Acquired Subsidiary's capital stock, to secure the Obligation. 6.16 ERISA. Borrower shall, and shall cause each of the other Companies to, comply with all minimum funding requirements, and all other material requirements, of ERISA, if applicable, so as not to give rise to any liability thereunder. SECTION 7 NEGATIVE COVENANTS. So long as Lenders has any commitments to make Advances or Issuances hereunder, and until payment in full of the Obligation, Borrower covenants that: 7.1 LIMITATION ON INDEBTEDNESS. Borrower shall not, and shall not permit any of the other Companies to, incur, Guarantee, or otherwise be or become, directly or indirectly, liable in respect of any Indebtedness, except (a) Indebtedness arising out of this Agreement, (b) Indebtedness secured by the Permitted Liens (except for liabilities borrowed or guaranteed after the date hereof), (c) current liabilities for taxes and assessments incurred in the ordinary course of business, (d) Indebtedness in respect of current accounts payable or accrued (other than for borrowed funds or purchase money obligations) and incurred in the ordinary course of business, provided that all such liabilities, accounts, and claims shall be promptly paid and discharged when due or in conformity with customary trade terms, (e) purchase money Indebtedness not to exceed $250,000.00 in any year or $500,000.00 at any time outstanding, (f) Guaranties permitted pursuant to SECTION 7.11, (g) Indebtedness under the Existing LC Agreements, and (h) Indebtedness payable to the sellers in connection with the OraCare Acquisition and secured by Lcs issued pursuant to this Agreement, which Indebtedness shall mature on of before Janauary 15, 1997. 7.2 NEGATIVE PLEDGE. Borrower shall not, and shall not permit any of the other Companies to, create, incur, permit, or suffer to exist any Lien upon any of its property or assets, now owned or hereafter acquired, including, without limitation, the capital stock of any Subsidiary, except for Permitted Liens. 7.3 NEGATIVE PLEDGE AGREEMENTS. Borrower shall not, and shall not permit any of the other Companies to, enter into any agreement (excluding this Agreement or any of the other Loan Documents) prohibiting the creation or assumption of any Lien upon any of its property, revenues, or assets, whether now owned or hereafter acquired, or the ability of any Company to make any payment, directly or indirectly, to Borrower or another Company by way of Distributions, advances, repayments of loans, repayments of expenses, accruals or otherwise. REVOLVING CREDIT AGREEMENT 35 40 7.4 RESTRICTIONS ON DISTRIBUTIONS. Borrower shall not directly or indirectly declare or make, or incur any liability to make, any Distribution. Borrower shall not permit any of the other Companies to directly or indirectly declare or make, or incur any liability to make, any Distribution, except Distributions to Borrower or a Company that is wholly-owned by Borrower. 7.5 LIMITATION ON INVESTMENTS. Borrower shall not, and shall not permit any of the other Companies to, make or have outstanding any Investments in any Person, except for (a) the Companies' ownership of stock of Subsidiaries (either existing on the date hereof or formed or acquired in accordance with SECTION 6.15), (b) Temporary Cash Investments, (c) Other Permitted Investments, (d) other Investments (including loans or advances to providers) not to exceed $500,000.00 in the aggregate at any time outstanding, (e) the loan to Peter Barnett, in the maximum principal amount of $953,125.00, to finance the Acquisition by Peter Barnett of OraCare Dental Associates, P.A., a New Jersey practice association, and (f) such other "cash equivalent" investments as Agent may from time-to-time approve. 7.6 CERTAIN TRANSACTIONS. Borrower shall not, and shall not permit any of the other Companies to, enter into any transaction with, or pay any management fees to, any Affiliate, other than another Company; provided, however, that the Companies may enter into transactions with Affiliates upon terms not less favorable to the Companies than would be obtainable at the time in comparable, arms-length transactions with Persons other than Affiliates. 7.7 ISSUANCE OF SHARES. Borrower shall not, and shall not permit any of the other Companies to, issue, sell, or otherwise dispose of any shares of its capital stock or other securities, or rights, warrants, or options to purchase or acquire any shares or securities, except (a) Permitted Equity Issuances, and (b) to Borrower or another Company, so long as Borrower or another Company simultaneously pledges such shares to Agent, for the benefit of Lenders, to secure the Obligation. 7.8 LIMITATION ON SALE OF PROPERTIES. Borrower shall not, and shall not permit any of the other Companies to (a) sell, assign, exchange, lease, or otherwise dispose of any of its properties, rights, assets, or business, whether now owned or hereafter acquired, including, without limitation, the capital stock of any Subsidiary, except in the ordinary course of its business and for a fair consideration, or (b) sell, assign, or discount any accounts receivable. 7.9 LIQUIDATION, MERGERS, CONSOLIDATIONS AND DISPOSITIONS OF SUBSTANTIAL ASSETS. Borrower shall not, and shall not permit any of the other Companies to, dissolve or liquidate, or become a party to any merger or consolidation, or sell, transfer, lease, or otherwise dispose of all or any substantial part of its property or assets or business; provided, however, that the foregoing shall not operate to prevent mergers or consolidations of any Subsidiary into Borrower or another Subsidiary (if such transaction does not reduce the Tangible Net Worth of the survivor) or a sale, transfer, or lease of assets by any Subsidiary to Borrower. 7.10 LINES OF BUSINESS. Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly, engage in any business other than those in which it is presently engaged, or discontinue any of its material existing lines of business. 7.11 GUARANTIES. Borrower shall not, and shall not permit any of the other Companies to, become or be liable in respect of any Guaranty, other than Guaranties by any Company of Indebtedness of providers under Prepaid Plans so long as such Indebtedness does not exceed $400,000.00 in the aggregate at any time outstanding. 7.12 LEASES; SALE AND LEASEBACK. Borrower shall not, and shall not permit any of the other Companies to, enter into any arrangement with any Person pursuant to which Borrower or any of the REVOLVING CREDIT AGREEMENT 36 41 Subsidiaries will lease, as lessee, any property which it owned as of the date hereof and which it sold, transferred, or otherwise disposed of to such other Person. 7.13 PREPAYMENT OF INDEBTEDNESS. Borrower shall not, and shall not permit any of the other Companies to, prepay any Indebtedness, except the Obligation. 7.14 MINIMUM NET WORTH. Borrower shall not permit, as of any date, Net Worth of the Companies, to be less than the sum of (a) $64,000,000.00 plus (b) one hundred percent (100%) of the Net Cash Proceeds from any Permitted Equity Issuances (other than pursuant to options issued pursuant to employee or director stock option plans or warrants issued to employees or directors of a Company) 7.15 FIXED CHARGE COVERAGE. Borrower shall not, as of the last day of each fiscal quarter of Borrower during the periods set forth below, permit the ratio of (a) the sum of (i) Consolidated Adjusted Net Income, (ii) depreciation and amortization expense, (iii) operating lease expenses, (iv) rent expenses, (v) Interest Expense, and (vi) income taxes deducted from Consolidated Adjusted Net Income in accordance with GAAP, to (b) the sum of (i) Interest Expense, (ii) Assumed Debt Service, (iii) operating lease expenses, and (iv) rent expenses, in each case for the Companies and for the four (4) fiscal quarters ending on the date of determination, to be less than the ratio set forth opposite such period below:
================================================================ PERIOD RATIO ================================================================ Date hereof through December 31, 1996 1.10 to 1.0 ---------------------------------------------------------------- January 1, 1997 through December 31, 1997 1.25 to 1.0 ---------------------------------------------------------------- January 1, 1998 through December 31, 1998 1.35 to 1.0 ---------------------------------------------------------------- January 1, 1999 through December 31, 1999 1.50 to 1.0 ---------------------------------------------------------------- January 1, 2000 and thereafter 1.75 to 1.0 ================================================================
7.16 FUNDED DEBT TO EBITDA. Borrower shall not, as of any date during the term of this Agreement, permit the Funded Debt to EBITDA Ratio to exceed 3.0 to 1.0. 7.17 FUNDED DEBT TO TOTAL CAPITALIZATION. Borrower shall not, as of any date during the term of this Agreement, permit the ratio of Funded Debt to Total Capitalization to exceed 0.50 to 1.00. 7.18 LIQUIDITY COVERAGE RATIO. Borrower shall not, as of any date during the term of this Agreement, permit the ratio of (a) Liquid Assets to (b) the sum of (i) accounts payable, (ii) accrued expenses, and (iii) Reserves, to be less than 1.5 to 1.0. 7.19 CAPITAL EXPENDITURES. Borrower shall not permit the aggregate amount of all Capital Expenditures made by the Companies during any fiscal year ending after the date hereof to exceed $5,000,000.00. REVOLVING CREDIT AGREEMENT 37 42 SECTION 8 EVENTS OF DEFAULT. 8.1 EVENTS OF DEFAULT. An "Event of Default" shall exist if any one or more of the following events (herein collectively called "EVENTS OF DEFAULT") shall occur and be continuing: (a) Borrower shall fail to pay when due the Obligation or any part thereof, including, but not limited to, fees, interest, or principal, and such failure shall continue for three (3) days after such payment becomes due; or (b) any representation or warranty made under this Agreement, or any of the other Loan Documents, shall prove to be untrue or inaccurate in any material respect, as of the date on which such representation or warranty is made or deemed to have been made; or (c) default shall occur in the performance of any of the covenants or agreements of any Company contained herein, or in any of the other Loan Documents; provided, however, if the Event of Default arises solely because of a default in the performance of a covenant contained in SECTIONS 6.2, 6.3, 6.6, 6.8, 6.9, 6.10, 6.11, 6.13 and SECTIONS 7.14 through 7.19, then Agent and Lenders shall not be entitled to exercise any right or remedy under SECTION 8.2 until thirty (30) days after such Event of Default occurs; or (d) default shall occur in the payment of any Indebtedness (other than the Obligation) of any Company in excess of $500,000.00, or default shall occur in respect of any note or credit agreement relating to any such Indebtedness, and such default shall continue for more than the period of grace, if any, specified therein; or (e) any of the Loan Documents shall cease to be legal, valid, and binding agreements enforceable against the Person executing the same in accordance with its terms, shall be terminated, become or be declared ineffective or inoperative, or cease to provide the respective liens, security interests, rights, titles, interests, remedies, powers, or privileges intended to be provided thereby; or any Company shall deny that such Person has any further liability or obligation under any of the Loan Documents; or (f) any Company shall (i) apply for or consent to the appointment of a receiver, trustee, custodian, intervenor, or liquidator of itself or of all or a substantial part of such Person's assets, (ii) file a voluntary petition in bankruptcy, admit in writing that such Person is unable to pay such Person's debts as they become due, or generally not pay such Person's debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization of an arrangement with creditors or to take advantage of any bankruptcy, or insolvency laws, (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against such Person in any bankruptcy, reorganization, or insolvency proceeding, or (vi) take corporate action for the purpose of effecting any of the foregoing; or (g) an involuntary proceeding shall be commenced against any Company seeking bankruptcy or reorganization of such Person or the appointment of a receiver, custodian, trustee, liquidator, or other similar official of such Person, or all or substantially all of such Person's assets, and such proceeding shall not have been dismissed within sixty (60) days of the filing thereof; or an order, order for relief, judgment, or decree shall be entered by any court of competent jurisdiction or other competent authority, approving a petition or complaint seeking reorganization of any Company or appointing a receiver, custodian, trustee, liquidator, or other similar official of such Person, or of all or substantially all of such Person's assets; or REVOLVING CREDIT AGREEMENT 38 43 (h) any final judgment(s) for the payment of money in excess of the sum of $500,000.00 in the aggregate shall be rendered against any Company, and such judgment(s) shall not be satisfied or discharged or enforcement thereof stayed at least ten (10) days prior to the date on which any of such Person's assets could be lawfully sold to satisfy such judgment; or (i) a Change in Control shall occur; or (j) any of the following events shall occur or exist with respect to any Company or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; or (v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could subject any Company to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any combination thereof) which in the aggregate exceed or could exceed $500,000.00. 8.2 REMEDIES UPON EVENT OF DEFAULT. If any Event of Default shall occur, Agent may, at the request of the Required Lenders, without notice, exercise any one or more of the following rights and remedies, and any other remedies provided in any of the Loan Documents, as Agent, at the request of Lenders, in their discretion may deem necessary or appropriate: (a) terminate the commitment to lend hereunder, (b) declare the Obligation, or any part thereof, to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate, or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in the Notes to the contrary notwithstanding, (c) reduce any claim to judgment, or (d) without notice of default or demand, pursue and enforce any of Agent's or Lenders' rights and remedies under the Loan Documents, or otherwise provided under or pursuant to any applicable law or agreement; provided, however, that if any Event of Default specified in SECTIONS 8.1(f) or (g) shall occur, the Obligation shall thereupon become due and payable concurrently therewith, and Lenders' obligation to lend shall immediately terminate hereunder, without any further action by Agent or Lenders and without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate, or other notice of any kind, all of which Borrower hereby expressly waives. 8.3 PERFORMANCE BY LENDER. Should Borrower fail to perform any covenant, duty, or agreement contained in any of the Loan Documents, Agent may perform or attempt to perform such covenant, duty or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Agent, promptly pay any amount expended by Agent in such performance or attempted performance to Agent at its principal office in Dallas, Texas, together with interest thereon at the Maximum Rate from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly understood that Agent shall not assume any liability or responsibility for the performance of any duties of Borrower hereunder or under any of the Loan Documents, and none of the covenants or other provisions contained in this Agreement shall, or shall be deemed to, give Agent the right or power to exercise control over the management and affairs of Borrower. REVOLVING CREDIT AGREEMENT 39 44 SECTION 9 THE AGENT. 9.1 THE AGENT. (a) APPOINTMENT. Each Lender appoints Agent (including, without limitation, each successor Agent in accordance with this SECTION 9) as its nominee and agent to act in its name and on its behalf (and Agent and each such successor accepts that appointment): (i) to act as its nominee and on its behalf in and under all Loan Documents; (ii) to arrange the means whereby its funds are to be made available to Borrower under the Loan Documents; (iii) to take any action that it properly requests under the Loan Documents (subject to the concurrence of other Lenders as may be required under the Loan Documents); (iv) to receive all documents and items to be furnished to it under the Loan Documents; (v) to be the secured party, mortgagee, beneficiary, recipient, and similar party in respect of any Collateral, for the benefit of Lenders; (vi) to promptly distribute to it all financial statements, compliance certificates, notices received hereunder, and other items specifically required to be delivered to it hereunder, and, upon request, such other material information, requests, documents, and items received under the Loan Documents; (vii) to promptly distribute to it its ratable part of each payment or prepayment (whether voluntary, as proceeds of collateral upon or after foreclosure, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents; and (viii) to deliver to the appropriate Persons requests, demands, approvals, and consents received from it. However, Agent may not be required to take any action that exposes it to personal liability or that is contrary to any Loan Document or applicable Legal Requirement. (b) SUCCESSOR. Agent may assign all of its rights and obligations as Agent under the Loan Documents to any of its Affiliates, which Affiliate shall then be the successor Agent under the Loan Documents. Agent may also voluntarily resign by notice to Borrower and Lenders, and shall resign upon the request of the Required Lenders for cause (i.e., Agent is continuing to fail to perform its responsibilities as Agent under the Loan Documents). If the initial or any successor Agent ever ceases to be a party to this Agreement or if the initial or any successor Agent ever resigns (whether voluntarily or at the request of the Required Lenders), then the Required Lenders shall (which, if no Potential Default or Event of Default exists, is subject to Borrower's approval that may not be unreasonably withheld) appoint the successor Agent from among Lenders (other than the resigning Agent). If the Required Lenders fail to appoint a successor Agent within thirty (30) days after the resigning Agent has given notice of resignation or the Required Lenders have removed the resigning Agent, then the resigning Agent may, on behalf of Lenders, appoint a successor Agent (which, if no Potential Default or Event of Default exists, is subject to Borrower's approval that may not be unreasonably withheld), which must be a commercial bank having a combined capital and surplus of at least $1,000,000,000.00 (as shown on its most recently published statement of condition) and whose debt obligations (or whose parent's debt obligations) are rated not less than Baa1 by Moody's or BBB+ by S & P. Upon its acceptance of appointment as successor Agent, the successor Agent succeeds to and becomes vested with all of the rights of the prior Agent, and the prior Agent is discharged from its duties and obligations of the Agent under the Loan Documents, and each Lender shall execute the documents that any Lender, the resigning or removed Agent, or the successor Agent reasonably request to reflect the change. After any Agent's resignation or removal as Agent under the Loan Documents, the provisions of this SECTION inure to its benefit as to any actions taken or not taken by it while it was the Agent under the Loan Documents. (c) RIGHTS AS LENDER. Agent, in its capacity as a Lender, has the same rights under the Loan Documents as any other Lender and may exercise those rights as if it were not acting as an Agent. The term "Lender," unless the context otherwise indicates, includes the Agent. Agent's resignation or removal does not impair or otherwise affect any rights that it has or may have in its capacity as an individual Lender. Each Lender and Borrower agree Agent is not a fiduciary for Lenders or for Borrower but is simply acting in the REVOLVING CREDIT AGREEMENT 40 45 capacity described in this Agreement to alleviate administrative burdens for Borrower and Lenders, that Agent has no duties or responsibilities to Lenders or Borrower except those expressly set forth in the Loan Documents, and that Agent in its capacity as a Lender has the same rights as any other Lender. (d) OTHER ACTIVITIES. Agent or any Lender may now or in the future be engaged in one or more loan, letter of credit, leasing, or other financing transactions with Borrower or another Company, act as trustee or depositary for Borrower or another Company, or otherwise be engaged in other transactions with Borrower (collectively, the "OTHER ACTIVITIES") not the subject of the Loan Documents. Without limiting the rights of Lenders specifically set forth in the Loan Documents, neither Agent nor any Lender is responsible to account to the other Lenders for those other activities, and no Lender shall have any interest in any other Lender's activities, any present or future guaranties by or for the account of Borrower that are not contemplated by or included in the Loan Documents, any present or future offset exercised by Agent or any Lender in respect of those other activities, any present or future property taken as security for any of those other activities, or any property now or hereafter in Agent's or any other Lender's possession or control that may be or become security for the obligations of Borrower arising under the Loan Documents by reason of the general description of indebtedness secured or of property contained in any other agreements, documents, or instruments related to any of those other activities (but, if any payments in respect of those guaranties or that property or the proceeds thereof is applied by Agent or any Lender to reduce the Obligation, then each Lender is entitled to share ratably in the application as provided in the Loan Documents). 9.2 EXPENSES. Should Agent commence any proceeding or in any way seek to enforce its rights under the Loan Documents, irrespective of whether as a result thereof Agent shall acquire title to any Collateral, either through foreclosure, deed in lieu of foreclosure, or otherwise, each Lender, upon demand therefor from time-to-time, shall contribute its share (based on its Pro Rata Part) of the reasonable costs and/or expenses of any such enforcement or acquisition, including, but not limited to, fees of receivers or trustees, court costs, title company charges, filing and recording fees, appraisers' fees and fees and expenses of attorneys to the extent not otherwise reimbursed by Borrower. Without limiting the generality of the foregoing, each Lender shall contribute its share (based on its Pro Rata Part) of all reasonable costs and expenses incurred by Agent (including reasonable attorneys' fees and expenses) if Agent employs counsel for advice or other representation (whether or not any suit has been or shall be filed) with respect to any Collateral or any part thereof, or any of the Loan Documents, or the attempt to enforce any Lien in any of the Collateral, or to enforce any rights of Agent or any of Borrower's or any other Company's obligations under any of the Loan Documents, but not with respect to any dispute between Agent and any other Lender(s). Any loss of principal and interest resulting from any Potential Default or Event of Default shall be shared by Lenders in accordance with their respective Pro Rata Parts. It is understood and agreed that if Agent determines that it is necessary to engage counsel for Lenders from and after the occurrence of a Potential Default or Default, then said counsel shall be selected by Agent and written notice of the same shall be delivered to Lenders. 9.3 PROPORTIONATE ABSORPTION OF LOSSES. Except as otherwise provided in the Loan Documents, nothing in the Loan Documents gives any Lender any advantage over any other Lender insofar as the Obligation is concerned or relieves any Lender from ratably absorbing any losses sustained with respect to the Obligation (except to the extent unilateral actions or inactions by any Lender result in Borrower or any other obligor on the Obligation having any credit, allowance, setoff, defense, or counterclaim solely with respect to all or any part of that Lender's Pro Rata Part of the Obligation). 9.4 DELEGATION OF DUTIES; RELIANCE. Lenders may perform any of their duties or exercise any of their rights under the Loan Documents by or through Agent, and Lenders and Agent may perform any of their duties or exercise any of their rights under the Loan Documents by or through their respective officers, agents, or other representatives. Agent, Lenders, and their respective officers, agents, or other REVOLVING CREDIT AGREEMENT 41 46 representatives (a) are entitled to rely upon (and shall be protected in relying upon) any written or oral statement believed by it or them to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinion of counsel selected by Agent or that Lender (but nothing in this CLAUSE (A) permits Agent to rely on (i) oral statements if a writing is required by this Agreement or (ii) any other writing if a specific writing is required by this Agreement), (b) are entitled to deem and treat each Lender as the owner and holder of its portion of the Obligation for all purposes until, written notice of the assignment or transfer is given to and received by Agent (and any request, authorization, consent, or approval of any Lender is conclusive and binding on each subsequent holder, assignee, or transferee of or Participant in that Lender's portion of the Obligation until that notice is given and received), (c) are not deemed to have notice of the occurrence of a Potential Default or Event of Default unless a responsible officer of Agent, who handles matters associated with the Loan Documents and transactions thereunder, has actual knowledge or Agent has been notified by a Lender or Borrower, and (d) are entitled to consult with legal counsel (including counsel for Borrower), independent accountants, and other experts selected by Agent and are not liable for any action taken or not taken in good faith by it in accordance with the advice of counsel, accountants, or experts. 9.5 LIMITATION OF AGENT'S LIABILITY. (a) EXCULPATION. Neither Agent nor any of its Affiliates or officers, agents or other representatives will be liable for any action taken or omitted to be taken by it or them under the Loan Documents in good faith and believed by it or them to be within the discretion or power conferred upon it or them by the Loan Documents or be responsible for the consequences of any error of judgment (except for fraud, gross negligence, or willful misconduct), and neither Agent nor any of its Affiliates or officers, agents, or other representatives has a fiduciary relationship with any Lender by virtue of the Loan Documents (but nothing in this Agreement negates the obligation of Agent to account for funds received by it for the account of any Lender). (b) INDEMNITY. Unless indemnified to its satisfaction against loss, cost, liability, and expense, Agent may not be compelled to do any act under the Loan Documents or to take any action toward the execution or enforcement of the powers thereby created or to prosecute or defend any suit in respect of the Loan Documents. If Agent requests instructions from Lenders, or the Required Lenders, as the case may be, with respect to any act or action in connection with any Loan Document, then Agent is entitled to refrain (without incurring any liability to any Person by so refraining) from that act or action unless and until it has received instructions. In no event, however, may Agent or any of its officers, agents, or other representatives be required to take any action that it or they determine could incur for it or them criminal or onerous civil liability. Without limiting the generality of the foregoing, no Lender has any right of action against Agent as a result of Agent's acting or refraining from acting under this Agreement in accordance with instructions of the Required Lenders. (c) RELIANCE. Agent is not responsible to any Lender or any Participant for, and each Lender represents and warrants that it has not relied upon any Agent in respect of, (i) the creditworthiness of Borrower or any other Company and the risks involved to that Lender, (ii) the effectiveness, enforceability, genuineness, validity, or the due execution of any Loan Document (except by Agent), (iii) any representation, warranty, document, certificate, report, or statement made therein (except by Agent) or furnished thereunder or in connection therewith, (iv) the adequacy of any Collateral now or hereafter securing the Obligation or the existence, priority, or perfection of any Lien now or hereafter granted or purported to be granted on the Collateral under any Loan Document, or (v) observation of or compliance with any of the terms, covenants, or conditions of any Loan Document on the part of any Company. EACH LENDER AGREES TO INDEMNIFY AGENT AND ITS OFFICERS, AGENTS, AND OTHER REPRESENTATIVES AND HOLD THEM HARMLESS FROM AND AGAINST (BUT LIMITED TO SUCH LENDER'S PRO RATA PART) ANY AND ALL LIABILITIES, OBLIGATIONS, REVOLVING CREDIT AGREEMENT 42 47 LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, REASONABLE EXPENSES, AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER THAT MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THEM IN ANY WAY RELATING TO OR ARISING OUT OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THE LOAN DOCUMENTS IF SUCH AGENT AND ITS OFFICERS, AGENTS OR OTHER REPRESENTATIVES ARE NOT REIMBURSED FOR SUCH AMOUNTS BY ANY COMPANY. ALTHOUGH AGENT AND ITS OFFICERS, AGENTS, AND OTHER REPRESENTATIVES HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN ORDINARY NEGLIGENCE, AGENT AND ITS OFFICERS, AGENTS, AND OTHER REPRESENTATIVES DO NOT HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN FRAUD, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT. 9.6 DEFAULT. While a Default exists, Lenders agree to promptly confer in order that the Required Lenders or Lenders, as the case may be, may agree upon a course of action for the enforcement of the rights of Lenders. Agent is entitled to act or refrain from taking any action (without incurring any liability to any Person for so acting or refraining) unless and until it has received instructions from Required Lenders or all Lenders, as the case may be. In actions with respect to any Company's property, Agent is acting for the ratable benefit of each Lender. 9.7 COLLATERAL MATTERS. (a) Each Lender authorizes and directs Agent to enter into the Loan Documents and agrees that any action taken by Agent concerning any Collateral (with the consent or at the request of the Required Lenders) in accordance with any Loan Document, that Agent's exercise (with the consent or at the request of the Required Lenders) of powers concerning the Collateral in any Loan Document, and that all other reasonably incidental powers are authorized and binding upon all Lenders. (b) Agent is authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender, from time-to-time before a Potential Default or Event of Default, to take any action with respect to any Collateral or Loan Documents related to Collateral that may be necessary to perfect and maintain Agent's Liens in the Collateral. (c) Except to use the same standard of care that it ordinarily uses for collateral for its sole benefit, Agent has no obligation whatsoever to any Lender or to any other Person to assure that the Collateral exists or is owned by any Company or is cared for, protected, or insured or has been encumbered or that Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority. (d) Agent shall exercise the same care and prudent judgment with respect to the Collateral and the Loan Documents as it normally and customarily exercises in respect of similar collateral and security documents. 9.8 LIMITATION OF LIABILITY. No Lender or any Participant will incur any liability to any other Lender or Participant except for acts or omissions in bad faith, and neither Agent nor any Lender or Participant will incur any liability to any other Person for any act or omission of any other Lender or any Participant. 9.9 RELATIONSHIP OF LENDERS. The Loan Documents do not create a partnership or joint venture among Agent and Lenders or among Lenders. REVOLVING CREDIT AGREEMENT 43 48 9.10 BENEFITS OF AGREEMENT. None of the provisions of this SECTION inure to the benefit of any Company or any other Person except Agent and Lenders. Therefore, no Company nor any other Person is responsible or liable for, entitled to rely upon, or entitled to raise as a defense -- in any manner whatsoever -- the failure of Agent or any Lender to comply with these provisions. SECTION 10 MISCELLANEOUS. 10.1 ACCOUNTING REPORTS. All financial reports or projections, furnished by any Person to Agent and Lenders pursuant to this Agreement shall be prepared in such form and such detail as shall be satisfactory to Agent, shall be prepared on the same basis as those prepared by such Person in prior years, and, where applicable, shall be the same financial reports and projections as those furnished to such Person's officers and directors. 10.2 WAIVER. No failure to exercise, and no delay in exercising, on the part of Agent or Lenders, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Agent and Lenders under the Loan Documents shall be in addition to all other rights provided by law. No modification or waiver of any provision of any Loan Document, nor consent to departure therefrom, shall be effective unless in writing, and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 10.3 PAYMENT OF EXPENSES. Borrower hereby agrees to pay on demand: (a) all reasonable costs and expenses of Agent in connection with the preparation, negotiation, syndication, execution, and delivery of this Agreement and the other Loan Documents including, without limitation, the legal fees and reasonable expenses of legal counsel for Agent; (b) all reasonable costs and expenses of Agent in connection with any and all amendments, modifications, renewals, extension, and supplements of any of the Loan Documents; (c) all reasonable costs and expenses of Agent and Lenders in connection with any Event of Default and the enforcement of this Agreement or any other Loan Document, including, without limitation, the fees and expenses of legal counsel for Agent and Lenders; (d) all transfer, stamp, documentary, or other similar taxes, assessments, or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents; (e) all costs, expenses, assessments, and other charges incurred in connection with any filing, registration, recording, or perfection of any security interest or Lien contemplated by this Agreement or any other Loan Document; and (f) all other reasonable costs and expenses incurred by Agent in connection with this Agreement or any other Loan Document. 10.4 NOTICES. Any communications required or permitted to be given by any of the Loan Documents must be (a) in writing and personally delivered or mailed by prepaid certified or registered mail, or (b) made by facsimile transmission delivered or transmitted, to the party to whom such notice of communication is directed, to the address of such party shown opposite its name on the signature pages hereof. Any such communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered or, if transmitted by facsimile transmission, on the day that such communication is transmitted as aforesaid subject to telephone confirmation of receipt; provided, however, that any notice received by Agent after 12:00 Noon Dallas, Texas time on any day from Borrower pursuant to SECTION 2.2 or 2.3 (with respect to a Notice of Borrowing or Notice of LC) shall be deemed for the purposes of such section to have been given by Borrower on the next succeeding day, or if mailed, on the third day after it is marked as aforesaid. Any party may change its address for purposes of this Agreement by giving notice of such change to the other parties pursuant to this SECTION 10.4. REVOLVING CREDIT AGREEMENT 44 49 10.5 GOVERNING LAW. This Agreement has been prepared, is being executed and delivered, and is intended to be performed in the State of Texas, and the substantive laws of such state and the applicable federal laws of the United States of America shall govern the validity, construction, enforcement, and interpretation of this Agreement and all of the other Loan Documents. 10.6 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION. Any suit, action, or proceeding against Borrower with respect to this Agreement, the Notes, or any judgment entered by any court in respect thereof, may be brought in the courts of the State of Texas, County of Dallas, or in the United States courts located in the State of Texas, as Agent and Lender in their sole discretion may elect and Borrower hereby irrevocably submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action, or proceeding. Borrower hereby irrevocably consents to the service of process in any suit, action, or proceeding in said court by the mailing thereof by Agent by registered or certified mail, postage prepaid, to Borrower's address shown opposite its name on the signature pages hereof. Nothing herein or in any of the other Loan Documents shall affect the right of Agent to serve process in any other manner permitted by law or shall limit the right of Agent or Lenders to bring any action or proceeding against Borrower or with respect to any of its property in courts in other jurisdiction. Borrower hereby irrevocably waives any objections which it may now or hereafter have to the laying of venue of any suit, action, or proceeding arising out of or relating to this Agreement or any Note brought in the courts located in the State of Texas, County of Dallas, and hereby further irrevocably waives any claim that any such suit, action, or proceeding brought in any such court has been brought in any inconvenient forum. Any action or proceeding by Borrower against Agent or Lenders shall be brought only in a court located in Dallas County, Texas. 10.7 INVALID PROVISIONS. Any provision of any Loan Document held by a court of competent jurisdiction to be illegal, invalid, or unenforceable shall not invalidate the remaining provisions of such Loan Document, which shall remain in full force, and the effect thereof shall be confined to the provision held invalid or illegal. 10.8 MAXIMUM INTEREST RATE. Regardless of any provision contained in any of the Loan Documents, neither Agent nor any Lender shall never be entitled to receive, collect, or apply as interest on the Notes any amount in excess of interest calculated at the Maximum Rate, and, in the event that any Agent or any Lender ever receives, collects, or applies as interest any such excess, the amount which would be excessive interest shall be deemed to be a partial prepayment of principal, and treated hereunder as such; and, if the principal amount of the Obligation is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, Borrower and Lenders shall, to the maximum extent permitted under applicable law, (a) characterize any nonprincipal payment as an expense, fee, or premium, rather than as interest; (b) exclude voluntary prepayments and the effects thereof; and (c) amortize, prorate, allocate, and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Note; provided that, if the Notes are paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, Agent and Lenders shall refund to Borrower the amount of such excess, or credit the amount of such excess against the principal amount of the Notes, and, in such event, Agent and Lenders shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving, or receiving interest in excess of interest calculated at the Maximum Rate. 10.9 NONLIABILITY OF LENDERS. The relationship between Borrower and Lenders is, and shall at all times remain, solely that of Borrower and Lenders, and Lenders have no fiduciary or other special relationship with Borrower. REVOLVING CREDIT AGREEMENT 45 50 10.10 ARTICLE 15.10(b). Borrower, Agent, and Lenders hereby agree that, except for SECTION 15.10(b) thereof, the provisions of Art. 5069-15.01 et seq. of the Revised Civil Statutes of Texas, 1925, as amended (regulating certain revolving credit loans and revolving tri-party accounts) shall not apply to the Loan Documents. 10.11 SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Agent and all Lenders. Any Lender may sell participations to one or more banks or other institutions in or to all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitments and the Advances owing to it); provided, however, that (i) such Lender's obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitments) shall remain unchanged, (ii) such Lender shall remain solely responsible to Borrower for the performance of such obligations, (iii) such Lender shall remain the holder of its Notes for all purposes of this Agreement, (iv) Borrower shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents, and (v) such Lender shall not sell a participation that conveys to the participant the right to vote or give or withhold consents under this Agreement or any other Loan Document, other than the right to vote upon or consent to (A) any increase of such Lender's Commitments, (B) any reduction of the principal amount of, or interest to be paid on, the Advances of such Lender, (C) any reduction of any commitment fee or other amount payable to such Bank under any Loan Document, or (D) any postponement of any date for the payment of any amount payable in respect of the Advances of such Lender. (b) Borrower and Lenders agree that any Lender (an "ASSIGNING LENDER") may at any time assign to one or more Eligible Assignees all, or a portion of all, of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment and Advances) (each an "ASSIGNEE"); provided, however, that (i) except in the case of an assignment of all of a Lender's rights and obligations under this Agreement and the other Loan Documents, the amount of the Commitments of the assigning Lender being assigned pursuant to each assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000.00, and (ii) the parties to each such assignment shall execute and deliver to Agent for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with the Note subject to such assignment, and a processing and recordation fee of $3,000.00. Upon such execution, delivery, acceptance, and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, or, if so specified in such Assignment and Acceptance, the date of acceptance thereof by Agent, (x) the assignee thereunder shall be a party hereto as a "Lender" and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and under the Loan Documents and (y) the Lender that is an assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a Lender's rights and obligations under the Loan Documents, such Lender shall cease to be a party thereto). (c) By executing and delivering an Assignment and Acceptance, the Assigning Lender and its Assignee confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Assigning Lender makes no representation or warranty REVOLVING CREDIT AGREEMENT 46 51 and assumes no responsibility with respect to any statements, warranties, or representations made in or in connection with the Loan Documents or the execution, legality, validity, and enforceability, genuineness, sufficiency, or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such Assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or any Company or the performance or observance by Borrower or any Company of its obligations under the Loan Documents; (iii) the Assignee confirms that it has received copies of the Loan Documents, together with copies of the financial statements referred to in SECTION 5.6 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) the Assignee will, independently and without reliance upon Agent or such assignor and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) the Assignee confirms that it is an Eligible Assignee; (vi) the Assignee appoints and authorizes Agent to take such action as Agent on its behalf and exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) the Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. (d) Agent shall maintain at its Principal Office a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time-to-time (the "REGISTER"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrower, Agent, and Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes under the Loan Documents. The Register shall be available for inspection by Borrower or any Lender at any reasonable time and from time-to- time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an Assigning Lender and Assignee representing that it is an Eligible Assignee (or other assignee permitted hereunder), together with any Note subject to such assignment, Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of EXHIBIT A, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt written notice thereof to Borrower. Within five (5) Business Days after its receipt of such notice, Borrower, at its expense, shall execute and deliver to Agent in exchange for the surrendered Note a new Note to the order of such Eligible Assignee (or other assignee permitted hereunder) in an amount equal to the portion of the Commitments assumed by it pursuant to such Assignment and Acceptance and, if the Assigning Lender has retained a portion of the Commitments, a new Note to the order of the Assigning Lender in an amount equal to the portion of the Commitments retained by it hereunder (each such promissory note shall constitute a "Note" for purposes of the Loan Documents). Such new Notes shall be in an aggregate principal amount of the surrendered Note, shall be dated the effective date of such Assignment and Acceptance, and shall otherwise be in substantially the form of EXHIBIT B. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this SECTION, disclose to the Assignee or participant or proposed Assignee or participant, any information relating to any Company furnished to such, Lender by or on behalf of any Company, subject to the confidentiality requirements in SECTION 10.19. (g) Notwithstanding any other term of this Agreement to the contrary, any Lender may (without requesting the consent of either Agent or Borrower) pledge its Note to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. REVOLVING CREDIT AGREEMENT 47 52 (h) Notwithstanding any other term of this Agreement to the contrary, any Lender may assign all, or a portion of all, of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment and Advances) to an Affiliate of such Lender or any other Lender, provided that: (i) such assignor Lender has obtained the written consent of Agent (which consent shall not be unreasonably delayed or withheld) if the effect of such assignment or delegation shall entitle such Affiliate or other Lender to claim compensation from Borrower pursuant to SECTION 2.6 and (ii) in every other case, such assignor Lender has furnished notice to, but not obtained the consent of, Agent. 10.12 ENTIRETY. THIS AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO, AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. THE PROVISIONS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH BORROWER IS A PARTY MAY BE AMENDED OR WAIVED ONLY BY AN INSTRUMENT IN WRITING, SIGNED BY THE PARTIES HERETO. 10.13 HEADINGS. Section headings are for convenience of reference only, and shall in no way affect the interpretation of this Agreement. 10.14 SURVIVAL. All representations and warranties made by Borrower herein shall survive delivery of the Note and the making of the Loan. 10.15 AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement, the Notes, or any other Loan Document to which Borrower is a party, nor any consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Lenders and Borrower, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver, or consent shall, unless in writing and signed by all of Lenders and Borrower, do any of the following: (a) increase Commitments of Lenders or subject Lenders to any additional obligations; (b) reduce the principal of, or interest on, the Notes or any fees or other amounts payable to Lenders (but not Agent) hereunder; (c) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable to Agent or Lenders hereunder; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes or the number of Lenders which shall be required for Lenders or any of them to take any action under this Agreement; (e) change any provision contained in this SECTION 10.15; or (f) release any material portion of the Collateral, except in accordance with the relevant Loan Document. Notwithstanding anything to the contrary contained in this SECTION, no amendment, waiver, or consent shall be made with respect to SECTION 9 without the prior written consent of Agent. 10.16 NO THIRD PARTY BENEFICIARY. The parties do not intend the benefits of this Agreement to inure to any third party, nor shall any Loan Document or any course of conduct by any party hereto be construed to make or render Agent or Lenders, or any of their officers, directors, agents, or employees liable (i) to any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Borrower, or (ii) for debts or claims accruing to any such Persons against Borrower. REVOLVING CREDIT AGREEMENT 48 53 10.17 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF, OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. 10.18 MULTIPLE COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. 10.19 CONFIDENTIALITY. Subject to SECTION 10.16, Agent and Lenders shall hold all nonpublic information obtained pursuant to the requirements of this Agreement and identified as confidential by Borrower or any other Company in confidence in accordance with Agent's and Lenders' customary procedures for handling confidential information of this nature, and in accordance with safe and sound banking practices; provided, however, that Agent or Lenders may make any disclosure thereof as is reasonably required by a bona fide potential assignee or participant, or as required or requested by any Governmental Authority or representative thereof, or pursuant to legal process, or as may be necessary in order to properly enforce Agent's or Lenders' rights and remedies following an Event of Default. 10.20 ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO, INCLUDING, BUT NOT LIMITED TO, THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S. D/B/A ENDISPUTE, INC. ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES, IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (a) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF BORROWER'S DOMICILE AT THE TIME OF THIS AGREEMENT'S EXECUTION, AND ADMINISTERED BY J.A.M.S., WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. (b) RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (i) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (ii) BE A WAIVER BY LENDER OF THE PROTECTION AFFORDED TO REVOLVING CREDIT AGREEMENT 49 54 IT BY 12 U.S.C. Section 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (iii) LIMIT THE RIGHT OF LENDER HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SET-OFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF OR THE APPOINTMENT OF A RECEIVER. LENDER MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING, OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. AT AGENT'S OR LENDERS' OPTION, FORECLOSURE UNDER A DEED OF TRUST OR MORTGAGE MAY BE ACCOMPLISHED BY ANY OF THE FOLLOWING: THE EXERCISE OF A POWER OF SALE UNDER THE DEED OF TRUST OR MORTGAGE, OR BY JUDICIAL SALE UNDER THE DEED OF TRUST OR MORTGAGE, OR BY JUDICIAL FORECLOSURE. NEITHER THIS EXERCISE OF SELF HELP REMEDIES, NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL, CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES TO FOLLOW] REVOLVING CREDIT AGREEMENT 50 55 SIGNATURE PAGES TO REVOLVING CREDIT AGREEMENT DATED AS OF NOVEMBER 14, 1996, EXECUTED BY UNITED DENTAL CARE, INC., NATIONSBANK OF TEXAS, N.A., AS AGENT FOR THE LENDERS DEFINED THEREIN, AND THE LENDERS IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above written. Address for Notice: UNITED DENTAL CARE, INC., a Delaware corporation, as Borrower 14755 Preston Road Suite 300 By: /s/ Mark E. Pape Dallas, Texas 75240 -------------------------------------- Attn: Mr. Mark Pape Name: Mark E. Pape Telecopy No.: (972) 960-7782 --------------------------------- Title: Senior Vice President -------------------------------- REVOLVING CREDIT AGREEMENT 56 SIGNATURE PAGES TO REVOLVING CREDIT AGREEMENT DATED AS OF NOVEMBER 14, 1996, EXECUTED BY UNITED DENTAL CARE, INC., NATIONSBANK OF TEXAS, N.A., AS AGENT FOR THE LENDERS DEFINED THEREIN, AND THE LENDERS Address for Notice: NATIONSBANK OF TEXAS, N.A., as Agent and a Lender 901 Main Street, 7th Floor By: /s/ Sueanna Miranda P.O. Box 831000 -------------------------------------- Dallas, Texas 75283-1000 Name: Sueanna Miranda Attn: Sueanna Miranda --------------------------------- Telecopy No.: (214) 508-3140 Title: Vice President -------------------------------- Applicable Lending Office Commitment: $35,000,000.00 for Base Rate Advances: 901 Main Street, 7th Floor P.O. Box 831000 Dallas, Texas 75283-1000 Applicable Lending Office for Eurodollar Advances: 901 Main Street, 7th Floor P.O. Box 831000 Dallas, Texas 75283-1000 REVOLVING CREDIT AGREEMENT 57 EXHIBITS Exhibit A - Form of Assignment and Acceptance Exhibit B - Form of Revolving Credit Note Exhibit C - Form of Notice of Borrowing Exhibit D - Notice of LC Exhibit E - Form of Pledge Agreement Exhibit F - Opinion of Counsel SCHEDULES Schedule 5.7 - Indebtedness Schedule 5.11 - Litigation Schedule 5.14 - Subsidiaries Schedule 5.16-1 - Compliance Disclosures Schedule 5.16-2 - Governmental Authorizations REVOLVING CREDIT AGREEMENT 58 EXHIBIT A FORM OF ASSIGNMENT AND ACCEPTANCE This Assignment and Acceptance (the "ASSIGNMENT AND ACCEPTANCE") is made as of _________________, 199______ (the "EFFECTIVE DATE"), between ___________ ("ASSIGNOR") and __________________ ("ASSIGNEE"). Reference is made to that certain Revolving Credit Agreement dated as of November 14, 1996 (the "CREDIT AGREEMENT") among United Dental Care, Inc. ("BORROWER"), NationsBank of Texas, N.A., a national banking association, as Agent for the Lenders defined therein (the "LENDERS"), and Lenders. This Assignment and Acceptance is executed and delivered pursuant to, and as contemplated in, the Credit Agreement. Capitalized terms used but not defined herein shall have the meanings assigned thereto in the Credit Agreement. Assignor and Assignee hereby covenant and agree as follows: 1. Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor, $ __________________ of Assignor's Commitment and Principal Debt, representing a Pro Rata Part of the Commitments and Principal Debt of _____% as of the Effective Date. The foregoing interest for all events and circumstances shall be deemed such Assignee's Pro Rata Part (in addition to any other Pro Rata Part of Assignee, if any) in the Commitments, the Principal Debt, the Loan Documents, and all payments made to or received from Borrower pursuant to the Loan Documents and is subject to the terms and conditions provided in the Loan Documents. 2. Assignor (a) hereby represents and warrants to Assignee that Assignor is the legal and beneficial owner of the Pro Rata Part being assigned by it hereunder and such interest is free and clear of any adverse claim, and (b) hereby represents and warrants that as of the date hereof the Pro Rata Part in the Commitments and the Principal Debt being assigned hereunder is _______ % without giving effect to assignments that are not yet effective. 3. Assignee hereby confirms and acknowledges that, except as specifically set forth herein, Assignor: (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents, or the execution, legality, validity, enforceability, genuineness, sufficiency, or value of the Loan Documents, or any other instrument or document furnished pursuant thereto; (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or any other person or entity which is a party to any of the Loan Documents (collectively, "OTHER PARTY"); and (c) makes no representation or warranty and assumes no responsibility with respect to the performance or observance by Borrower or any Other Party of any of its obligations under any of the Loan Documents or any other instrument or document furnished pursuant thereto. 4. Assignee hereby: (a) confirms that it has received a copy of the Loan Documents, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; and (b) agrees that it will, independently and without reliance upon Assignor or any other counterparty and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents. EXHIBITS - PAGE 1 59 5. Assignee hereby: (a) appoints and authorizes Agent under the Loan Documents to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms of the Loan Documents; and (b) agrees with Assignor for the benefit of Agent and Borrower that it will perform all of the obligations which by the terms of the Loan Documents are required to be performed by it as a counterparty (including, without limitation, the obligation to make payments pursuant to the Loan Documents) and that it shall be liable directly to Assignor, Agent, Borrower and, as provided in the Credit Agreement, to each Lender for the performance of such obligations. 6. If Assignee is organized under the laws of a jurisdiction outside the United States, it hereby represents and agrees that it has delivered or will within three (3) days after the date of the execution of this Agreement deliver to Assignor and the Administrative Agent completed and signed copies of any forms that may be required by the United States Internal Revenue Service in order to certify Assignee's exemption from United States withholding taxes with respect to any payment or distributions made or to be made to Assignee with respect to the Loan Documents. 7. As of the Effective Date, (a) Assignee shall be a party to the Loan Documents and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a counterparty thereunder, and (b) Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations in the Loan Documents with respect to the Pro Rata Part being assigned hereunder. 8. Assignee hereby represents and warrants as of the Effective Date: (a) Assignee has all necessary corporate power and authority to purchase and own the interest being assigned to it hereunder, and has all necessary corporate power and authority to perform all its obligations with respect to this Assignment and Acceptance; (b) the execution and delivery of this Assignment and Acceptance and all other instruments and documents executed in connection herewith have been duly authorized by all requisite corporate action of Assignee; and (c) no approval, authorization, order, license, or consent of, or registration or filing with, any Governmental Authority or other person is required in connection with this Assignment and Acceptance. 9. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Texas, without giving effect to the conflict of laws principles thereof. 10. This Agreement may be executed in two or more counterparts each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 11. Assignee's address for notices and payments under the Agreement and this Assignment and Acceptance are set forth in SCHEDULE 1 attached hereto and made a part hereof. Assignee may by notice in accordance with the Credit Agreement to Assignor, the Administrative Agent and Borrower change the EXHIBITS - PAGE 2 60 address or telex number or facsimile number at which notices, communications and payments are to be given to it. ASSIGNOR: ------------------------------------- By: --------------------------------- Title: ------------------------------ ASSIGNEE: ------------------------------------- By: --------------------------------- Title: ------------------------------ ACCEPTED BY AGENT THIS _____ DAY OF ___________________ AGENT: NATIONSBANK OF TEXAS, N.A. By: --------------------------------------- Name: --------------------------------- Title: --------------------------------- EXHIBITS - PAGE 3 61 SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE ADDRESS FOR NOTICES AND ACCOUNTS FOR PAYMENTS Address: -------------------------- -------------------------- -------------------------- Account for Payments: Account No.: -------------------------- Attention: -------------------------- Reference: -------------------------- Depositary: -------------------------- -------------------------- -------------------------- Applicable Lending Office - Base Rate Advances: -------------------------- -------------------------- -------------------------- Applicable Lending Office - Eurodollar Advances: -------------------------- -------------------------- -------------------------- EXHIBITS - PAGE 4 62 EXHIBIT B FORM OF REVOLVING CREDIT NOTE $ Dallas, Texas As of , 1996 -------------------- ------------ 1. FOR VALUE RECEIVED, UNITED DENTAL CARE, INC., a Delaware corporation ("MAKER"), hereby unconditionally promises to pay to the order of __ ________________________________________________________________ ("PAYEE"), at the address of Agent (defined below) set forth in the Credit Agreement defined below, the sum of _________________________ Dollars ($ _________________________ _____) (or, if less, so much thereof as may be advanced), in lawful money of the United States of America. Capitalized terms not defined herein shall have the meaning assigned to those terms in the Credit Agreement. 2. The unpaid principal amount of, and accrued unpaid interest on, this Note is payable in accordance with the Credit Agreement. 3. The unpaid principal balance advanced and outstanding hereunder shall bear interest from the date of advance until maturity at the rate per annum provided in the Credit Agreement that is selected by Maker pursuant to the Credit Agreement. The interest rate specified in this section is subject to adjustment under the circumstances described in the Credit Agreement. Interest shall be computed in the manner provided in the Credit Agreement. 4. Notwithstanding any provision contained in this Note or any other document executed or delivered in connection with this Note or in connection with the Credit Agreement, Payee shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on this Note, any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and, if Payee ever receives, collects or applies as interest any such excess, then the amount that would be excessive interest shall be applied to reduce the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full by that application, then any remaining excess shall promptly be paid to Maker. In determining whether the interest paid or payable under any specific contingency exceeds the highest lawful rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (a) characterize any non-principal payment (other than payments expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (b) exclude voluntary prepayments and the effect thereof, and (c) spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout that term. 5. This Note has been executed and delivered pursuant to a Revolving Credit Agreement (as modified, amended, renewed or extended, the "CREDIT AGREEMENT") dated as of November 14, 1996, executed by and between Maker, NationsBank of Texas, N.A., as Agent (together with any successor or assigns, the "AGENT"), Payee, and each of the Lenders defined therein, and is one of the "Notes" referred to therein, and the holder of this Note is entitled to the benefits provided in the Credit Agreement. Reference is hereby made to the Credit Agreement for a statement of (a) the obligation of Payee to advance funds hereunder, (b) the prepayment rights and obligations of Maker, and (c) the events upon which the maturity of this Note may be accelerated. EXHIBITS - PAGE 5 63 6. If the principal of, or any installment of interest on, this Note becomes due and payable on a day other than a Business Day, then the maturity thereof shall be extended to the next succeeding Business Day. If this Note, or any installment or payment due hereunder, is not paid when due, whether at maturity or by acceleration, or if it is collected through a bankruptcy, probate or other court, whether before or after maturity, then Maker shall pay all costs of collection, including, but not limited to, reasonable attorneys' fees incurred by the holder of this Note. All past due principal of, and to the extent permitted by applicable law, interest on this Note shall bear interest until paid at the rate provided in the Credit Agreement. 7. Except as expressly provided in the Credit Agreement, Maker and all sureties, endorsers, guarantors and other parties ever liable for payment of any sums payable pursuant to the terms of this Note, jointly and severally waive demand, presentment for payment, protest, notice of protest, notice of acceleration, notice of intent to accelerate, diligence in collection, the bringing of any suit against any party and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any trustee or any holder hereof, whether before or after maturity. 8. All Advances made by Payee, the respective Interest Periods thereof (if applicable), and all repayments of the principal thereof may be recorded by Payee and, before any transfer hereof, endorsed by Payee on the schedule attached hereto, or on a continuation of the schedule attached to and a part hereof, provided that the failure of Payee to record any endorsement shall not affect the obligation of Maker hereunder or under the Credit Agreement. 9. This Note is being executed and delivered, and is intended to be performed in the State of Texas. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of this Note. UNITED DENTAL CARE, INC., a Delaware corporation By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- EXHIBITS - PAGE 6 64 EXHIBIT C NOTICE OF BORROWING 1. SUBMISSION PURSUANT TO CREDIT AGREEMENT. This Notice of Borrowing is executed and delivered by United Dental Care, Inc., a Delaware corporation ("BORROWER"), to NationsBank of Texas, N.A., as Agent (the "AGENT"), pursuant to SECTION 2.3 of the Credit Agreement dated as of November 14, 1996, between Borrower, Agent, and each of the Lenders defined therein (the "AGREEMENT"). Any capitalized terms used and not defined herein shall have the meanings assigned to them in the Agreement. 2. REQUEST FOR ADVANCE. Borrower hereby requests that Lenders make an Advance to Borrower pursuant to the Agreement as follows: A. BASE RATE BORROWING. (i) Amount of Base Rate Borrowing: ---------------- (minimum of $1,000,000.00, or a greater integral multiple of $500,000.00). [ ] Borrowing [ ] Rollover/Conversion (ii) Date of Borrowing or Rollover/Conversion of Existing Borrowing: ---------------- B. EURODOLLAR BORROWING. (i) Amount of Eurodollar Borrowing: ---------------- (minimum of $1,000,000.00, or a greater integral multiple of $500,000.00). [ ] Borrowing [ ] Rollover/Conversion (ii) Date of Borrowing or Rollover/Conversion of Existing Borrowing: ---------------- (iii) Interest Period: ---------------- day/months (one, three, or six months). EXHIBITS - PAGE 7 65 3. REPRESENTATIONS, WARRANTIES AND CERTIFICATIONS. Borrower hereby represents, warrants, and certifies to Agent and Lenders that, as of the date of the Advance requested herein: (a) there exists no Potential Default or Event of Default; (b) the Companies have performed and complied with all agreements and conditions contained in the Agreement that are required to be performed or complied with by the Companies; and (c) the representations and warranties of a continuing nature contained in the Agreement and each of the other Loan Documents are true and correct in all material respects (except to the extent that they speak to a specific date or are based on facts which have changed by transactions expressly contemplated or permitted by the Credit Agreement), with the same force and effect as though made on and as of the date of the Advance. 4. PROCEEDS OF BORROWING. Agent is authorized to deposit the proceeds of the Advance requested hereby, other than an Advance constituting a rollover or conversion of an existing Advance, to:____________________________ ___________________________________. 5. EXECUTION AUTHORIZED. This Notice of Borrowing is executed on ___________________, 19__, by a responsible officer of Borrower. The undersigned, in such capacity, hereby certifies each and every matter contained herein to be true and correct. ------------------------------------ of ------------------------------------ United Dental Care, Inc., a Delaware corporation EXHIBITS - PAGE 8 66 EXHIBIT D NOTICE OF LC 1. SUBMISSION PURSUANT TO CREDIT AGREEMENT. This Notice of LC is executed and delivered by United Dental Care, Inc., a Delaware corporation ("BORROWER"), to NationsBank of Texas, N.A., as Agent (the "AGENT"), pursuant to SECTION 2.2 of the Credit Agreement dated as of November 14, 1996, between Borrower, Agent, and each of the Lenders defined therein (the "AGREEMENT"). Any capitalized terms used and not defined herein shall have the meanings assigned to them in the Agreement. 2. REQUEST FOR LC. Borrower hereby requests the issuance of an LC under the LC Subfacility, and in that connection sets forth below the terms on which such LC is requested to be issued: A. Face amount of the LC: $ ------------- B. Date on which the LC is to be issued (a Business Day): -------------- C. Expiration date of the LC: -------------- Accompanying this notice is a duly executed and properly completed LC Agreement in the form requested by Agent, together with the payment of any LC fees due and payable pursuant to the Credit Agreement. 3. REPRESENTATIONS, WARRANTIES AND CERTIFICATIONS. Borrower hereby represents, warrants, and certifies to Agent and Lenders that, as of the date of the Advance requested herein: (a) there exists no Potential Default or Event of Default; (b) the Companies have performed and complied with all agreements and conditions contained in the Agreement that are required to be performed or complied with by the Companies; and (c) the representations and warranties of a continuing nature contained in the Agreement and each of the other Loan Documents are true and correct in all material respects (except to the extent that they speak to a specific date or are based on facts which have changed by transactions expressly contemplated or permitted by the Credit Agreement), with the same force and effect as though made on and as of the date of the Advance. 4. EXECUTION AUTHORIZED. This Notice of LC is executed on ___________________, 19___, by a responsible officer of Borrower. The undersigned, in such capacity, hereby certifies each and every matter contained herein to be true and correct. --------------------------------- of --------------------------------- United Dental Care, Inc., a Delaware corporation EXHIBITS - PAGE 9 EX-10.27 5 WARRANT 1 EXHIBIT 10.27 THIS WARRANT CERTIFICATE, THE WARRANTS AND THE UNDERLYING COMMON STOCK HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR ANY STATE SECURITIES LAW. THE WARRANTS AND THE UNDERLYING SHARES OF COMMON STOCK MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL, OR OTHER EVIDENCE, REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH LAWS. AMENDED, RESTATED AND CORRECTED WARRANT CERTIFICATE VOID AFTER 5:00 P.M., DALLAS, TEXAS TIME, JANUARY 9, 2002 UNITED DENTAL CARE, INC. WARRANTS TO PURCHASE 40,000 SHARES OF COMMON STOCK This Amended, Restated and Corrected Warrant Certificate (this "Certificate") certifies that Mark E. Pape (the "Warrant Holder") is the registered holder of Warrants (the "Warrants") to purchase Forty Thousand (40,000) shares of the Common Stock, par value ten cents ($0.10) per share ("Common Stock"), of United Dental Care, Inc., a Delaware corporation (the "Corporation"). Subject to and upon the terms and conditions contained in this Certificate, each Warrant entitles the Holder to purchase from the Corporation one fully paid and nonassessable share of Common Stock of the Corporation upon presentation and surrender of this Warrant Certificate with the form of Election to Purchase duly executed at the office of the Corporation and upon proper payment of the Exercise Price (as defined below). I. EXERCISE PRICE, TERM, AND METHOD OF EXERCISE SECTION 1.01. EXERCISE PRICE. Unless adjusted as otherwise provided herein, the exercise price ("Exercise Price") for each share of Common Stock purchased upon exercise of a Warrant evidenced hereby shall be Six Dollars ($6.00) per share. The Exercise Price shall be adjusted upon the occurrence of certain events as set forth in Article II hereof. SECTION 1.02. WARRANT RIGHTS AND TERM. Each Warrant shall entitle the person in whose name the Warrant Certificate shall then be registered on the books maintained by the Corporation (the "Warrant Holder"), upon exercise thereof subject to the conditions 2 and provisions of this Certificate, including without limitation, the provisions hereof relating to adjustments upon occurrence of certain events as set forth herein, to purchase from the Corporation one fully paid and nonassessable share of Common Stock, $ .10 par value per share, of the Corporation at the then Exercise Price at any time until the earlier of the expiration of the Warrant at 5:00 p.m., Dallas, Texas time, on January 9, 2002 or if January 9, 2002 is not a business day then on the next succeeding business day (the "Expiration Date"). SECTION 1.03. EXERCISABILITY. The Warrants evidenced by this Certificate shall be exercisable in whole or in part, at any time, and from time to time, until the Expiration Date. SECTION 1.04. EXPIRATION. Unless earlier exercised by the Warrant Holder or redeemed by the Corporation, each Warrant not exercised by 5:00 p.m., Dallas, Texas time, on or before the Expiration Date shall become void, and all rights in respect thereof under this Certificate shall thereupon cease and terminate. SECTION 1.05. METHOD OF EXERCISE. Subject to the conditions and provisions of this Certificate, the Warrant Holder may exercise his rights with respect to all or any number of exercisable Warrants evidenced by a Warrant Certificate. Exercise shall be effected by surrender of this Warrant Certificate, with the form of Election to Purchase thereon duly executed and with the signature guaranteed by a bank or trust company having an office or correspondent in the United States or a broker or dealer which is a member of a registered securities exchange or the National Association of Securities Dealers, Inc., to the Corporation at its offices as designated in Section 4.04 hereof, together with the Exercise Price for each share of Common Stock to be purchased. Payment of the Exercise Price shall be made (a) by certified check payable in lawful money of the United States of America to the order of the Corporation or (b) by wire transfer (same day funds) to the designated account of the Corporation. Upon receipt of a Warrant Certificate with the form of Election to Purchase duly executed and accompanied by full and proper payment of the Exercise Price for the shares of Common Stock purchased thereby, the Corporation shall deliver to, or in accordance with the instructions of, the Warrant Holder certificates for the total number of whole shares of Common Stock for which the Warrants evidenced by this Certificate are being exercised in such names and denominations as the Warrant Holder has directed; provided, however, that if, on the date of surrender of this Certificate and payment of the Exercise Price, the transfer books for the Common Stock shall be closed, the certificates for the shares of Common Stock shall be issuable as of the date on which such books shall next be open (whether before, on or after the Expiration Date) and upon the other conditions in effect on the date of such surrender. -2- 3 Each exercise of a Warrant shall also be accompanied by an undertaking of the Warrant Holder to furnish or execute such documents as the Company may in its discretion deem necessary (1) to evidence the exercise, in whole or in part, of the Warrants evidence by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, and (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect. In the event that any Warrant Holder shall exercise rights with respect to less than all of the Warrants evidenced by this Certificate surrendered upon the exercise of Warrants, the Corporation shall cause a new Warrant Certificate for the balance of such Warrants to be executed and delivered to, or in accordance with the instructions of, such Warrant Holder. II. ADJUSTMENTS TO WARRANTS UPON CERTAIN EVENTS SECTION 2.01. ADJUSTMENTS. The number of shares of Common Stock purchasable upon the exercise of each Warrant (such shares being referred to in this Article II as the "Warrant Shares") and the Exercise Price shall be subject to adjustment as follows: (a) in case the Corporation shall at any time after January 1, 1996 (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of its shares of Common Stock other securities of the Corporation (excluding any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation), the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that each Warrant Holder shall be entitled to receive the kind and number of Warrant Shares of other securities of the Corporation which the Warrant Holder would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) In case the Corporation shall at any time after January 1, 1996 issue rights, options or warrants to all holders of its shares of Common Stock, without any charge to such holders, entitling them (for a period expiring within 45 days after the record date mentioned below in this paragraph (b)) to subscribe for or purchase shares of Common Stock at a price per share which is -3- 4 lower at the record date mentioned below than the current market price per share of Common Stock, the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon exercise of each Warrant by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such record date (calculated on a fully-diluted basis) plus the number of shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date (calculated on a fully-diluted basis) plus the number of shares which the aggregate offering price of the total number of shares of Common Stock so offered would purchase at the then current market price per share of Common Stock. Such adjustment shall be made whenever such rights, options or warrants are issued, and shall become effective retroactively immediately after the record date for the determination of shareholders entitled to receive such rights, options or warrants. On the expiration of any of such rights, options or warrants or the termination of any such right to purchase, convert or exchange any such rights, options or warrants, the number of shares of Common Stock then purchasable upon the exercise of each Warrant and the Exercise Price then in effect shall be subject to readjustment and the number of shares of Common Stock subject to the Warrants shall forthwith be decreased and the exercise price under the Warrants shall forthwith be increased to that which would have been in effect at the time of such expiration or termination had such right, option or warrant, to the extent outstanding immediately prior to such expiration or termination, never been issued. (c) In case the Corporation shall at any time after January 1, 1996 distribute to all holders of its shares of Common Stock, without any charge to such holders, (i) shares of stock other than Common Stock or (ii) evidences of its indebtedness or assets (excluding cash dividends or distributions payable out of consolidated earnings or retained earnings and excluding dividends or distributions referred to in paragraph (a) above) or (iii) rights, options or warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding those referred to in paragraph (b) above) - then in each case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant, by a fraction, of which the numerator shall be the current market price per share of Common Stock on the record date mentioned below in this paragraph (c), and of which the denominator shall be the current market price per share of Common Stock on such record date, less the then fair value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) of the portion of the shares of -4- 5 stock, assets or evidences of indebtedness, or rights, options or warrants or convertible or exchangeable securities so distributed applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. SECTION 2.02. ADJUSTMENT FOR DE MINIMIS CHANGES. No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least $.05 in the Exercise Price under each Warrant; provided, however, that any adjustments which by reason of this Section 2.02 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest cent. Anything in Section 2.01 to the contrary notwithstanding, the Corporation shall be entitled, but shall not be required, to make such changes in the number of Warrant Shares purchasable upon the exercise of each Warrant, in addition to those required by such Section, as it in its discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights, warrants or options to purchase Common Stock, or distribution of shares of stock other than Common Stock, evidences of indebtedness or assets (other than distributions of cash out of retained earnings) or convertible or exchangeable securities hereafter made by the Corporation to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. SECTION 2.03. ADJUSTMENT OF EXERCISE PRICE. Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted, as herein provided, the Exercise Price payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. SECTION 2.04. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at its option at any time during the term of the Warrants reduce the then current Exercise Price to any amount deemed appropriate by the Board of Directors of the Corporation. SECTION 2.05. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Exercise Price of such Warrant Shares is adjusted, as herein provided, the Corporation shall promptly mail to the Warrant Holder a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Corporation, which -5- 6 sets forth the number of Warrant Shares purchasable upon the exercise of each Warrant and the Exercise Price of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment, and the computation by which such adjustment was made. SECTION 2.06. EFFECT OF SALE, MERGER, OR CONSOLIDATION. In the event of any capital reorganization of the Corporation, or of any reclassification (other than a change in par value) of the Common Stock or of any conversion of the Common Stock into securities of another corporation, or the consolidation of the Corporation with, or the merger of the Corporation with or into, any other corporation where the Common Stock is converted into other securities or property (including cash) or in the event of the sale of all or substantially all of the properties and assets of the Corporation to any other corporation (each such event thereinafter being referred to as a "Capital Change"), each Warrant shall be exercisable after such Capital Change, upon the terms and conditions specified in this Agreement, only for the number of shares of stock or other securities or property (including cash), as the case may be, to which the shares of Common Stock issuable (immediately prior to such Capital Change) upon exercise of such Warrant would have been entitled upon such Capital Change. In any such case, if necessary, the provisions set forth in this Article II with respect to the rights and interests thereafter of the holders of the Warrants shall be appropriately adjusted so as to be reasonably applicable to any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrants. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock shall not be deemed to be a reclassification of the Common Stock of the Corporation for the purpose of this Section 2.06. The Corporation shall not effect any consolidation, merger, or sale resulting in a Capital Change, unless prior to or simultaneously with the consummation thereof, the Corporation or any successor corporation or corporation purchasing such assets shall assume, by written instrument executed and delivered for the benefit of the Purchasers, the obligation to deliver to the holder of each Warrant such shares of stock, securities, or property (including cash) as the Warrant Holders may be entitled to receive upon exercise of the Warrants in accordance with the foregoing provisions, and the other obligations of the Corporation under this Agreement. SECTION 2.07. NOTICE OF CERTAIN EVENTS. In the event that at any time prior to the expiration of the Warrants and prior to their exercise: (a) the Corporation shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Corporation with respect to the Common Stock); or -6- 7 (b) the Corporation shall offer for subscription to the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Corporation shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock, regardless of the effect of any such event on the outstanding number of shares of Common Stock; or (d) there shall be any Capital Change in the Corporation or any merger of the Corporation with another corporation (other than a merger with a subsidiary in which merger the Corporation is the continuing corporation and which does not result in any reclassification or change of the shares of Common Stock issuable upon exercise of the Warrants); or (e) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Corporation (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Corporation shall cause to be mailed to the Warrant Holder, not less than 10 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, or if 10 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Corporation shall lose or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on the Exercise Price and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of the Warrants. SECTION 2.08. EFFECT OF ADJUSTMENT ON WARRANT CERTIFICATES. The form of Warrant Certificate need not be changed because of any change in the Exercise Price, the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Article. The Corporation may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificates or otherwise, may be in the form as so changed. -7- 8 III. RIGHTS OF WARRANT HOLDER SECTION 3.01. NO RIGHTS AS STOCKHOLDER. The Warrant Holder, as such, shall not be entitled to vote or to receive dividends and shall otherwise be deemed to be the holder of shares of Common Stock for any purpose, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Warrant Holder, as such, any of the rights of a stockholder of the Corporation or any right to vote upon or give or withhold consent to any action of the Corporation (whether upon any reorganization, issuance of securities, reclassification or conversion of Common Stock, consolidation, merger, sale, lease, conveyance or otherwise) receive notice of meetings or other action affecting stockholders (except for notices expressly provided for in this Agreement) or receive dividends or subscription rights, until such Warrant Certificate shall have been surrendered for exercise accompanied by full and proper payment of the Exercise Price as provided in this Certificate and shares of Common Stock thereunder shall have become issuable and until such person shall have been deemed to have become a holder of record of such shares. If, at the date of surrender of such Warrant Certificate and payment of such Exercise Price, the transfer books for the Common Stock shall be closed, certificates for the shares of Common Stock shall be issuable on the date on which such books shall next be open (whether before, on or after the Expiration Date) and until such date, the Corporation shall be under no duty to deliver any certificate for such shares of Common Stock. The Warrant Holder shall, upon the exercise of Warrants, be entitled to any dividends if the record date with respect to payment of such dividends shall be a date prior to the date such shares of Common Stock became issuable upon the exercise of such Warrants. SECTION 3.02. MAINTENANCE OF SUFFICIENT AND PROPER SHARES OF COMMON STOCK. (a) The Corporation shall at all times reserve and keep available a number of authorized shares of Common Stock sufficient to permit the exercise in full of all outstanding Warrants. (b) If any shares of Common Stock issuable upon the exercise of the Warrants require registration or approval of any governmental authority, or the taking of any other action under the laws of the United States or any political subdivision thereof or any other jurisdiction before such shares of Common Stock may be legally and validly issued, then the Corporation shall in good faith and with reasonable diligence endeavor to secure such registration or approval or to take such other action as may be appropriate to allow for the lawful issuance of shares of Common Stock upon exercise of Warrants, provided that no shares of Common Stock shall be issued for the period during which the Corporation -8- 9 is endeavoring to obtain such registration or approval or is taking such other action. Warrant Holders may exercise Warrants during any such period as provided herein and shall be entitled to the issuance of the shares of Common Stock on such date as the shares of Common Stock may be legally and validly issued, at the Exercise Price and upon the other conditions in effect on the date of surrender of the Warrant Certificates accompanied by full and proper payment for the shares of Common Stock. SECTION 3.03. FRACTIONAL SHARES AND WARRANTS. (a) Anything contained herein to the contrary notwithstanding, the Corporation shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of Warrants. Warrants may not be exercised in such number as would result (except for the provisions of this Section) in the issuance of a fraction of a share of Common Stock unless the Warrant Holder is presenting for exercise Warrant Certificates representing all Warrants then owned of record by such Warrant Holder. In such event, the Corporation shall, upon the exercise of all such Warrants, issue to such Warrant Holder the largest aggregate whole number of shares of Common Stock called for thereby upon receipt of the Exercise Price for all such Warrants and pay a sum in cash equal to the remaining fraction of a share of Common Stock, multiplied by its current market price as of the last business day preceding the date on which the Warrants are presented for exercise. The current market price per share of Common Stock at any date shall be the average of the daily closing prices for 15 consecutive trading days commencing 20 trading days before the date of such computation. The closing price for each day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in either case on the principal national securities exchange on which the shares are listed or admitted to trading, or if they are not listed or admitted to trading on any national securities exchange, but are traded in the over the counter market, the average of the representative closing bid and asked quotations for the Common Stock on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or any comparable system, or if the Common Stock is not listed on NASDAQ or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. In the event that the Common Stock is not traded on any such exchange or in any such market, the current market price per share of the Common Stock shall be determined by the Board of Directors acting in good faith using customary and reasonable criteria for determining current market value. Every Warrant Holder, by the acceptance of the Warrant Certificate, expressly waives any right to exercise Warrants for a fractional share of Common Stock except as provided in this subsection. -9- 10 (b) Anything herein to the contrary notwithstanding, the Corporation shall not be required to issue fractions of Warrants on any distribution of Warrants to the Warrant Holder or to distribute Warrant Certificates that evidence fractional Warrants. The Corporation shall pay to any person entitled to a fractional interest in a Warrant, a sum in cash equal to the fraction, multiplied by its current market price as of the last business day preceding the date of such distribution. SECTION 3.04. TRANSFERABILITY. The Warrants and the rights under this Certificate are fully assignable or transferable by the Warrant Holder including by will or by the laws of descent and distribution; provided, however, that the Warrant Holder may only assign or transfer all the then unexercised Warrants to a single transferee and may not assign or transfer portions of the then unexercised Warrants to more than one transferee. The transferee of the Warranty and the rights under this Certificate including the executor or the administrator of the estate of the Warrant Holder or the person or persons acquiring the Warrants upon the death of the Warrant Holder shall have the right to become the Warrant Holder and to become the Warrant Holder and to exercise the Warrants subject to the other terms and provisions of this Certificate. SECTION 3.05. INVESTMENT PURPOSE. This Certificate and the Warrants are issued on the condition that the purchase of the Warrants and the purchase of Common Stock upon the exercise of the Warrants shall be for investment purposes, and not with a view to resale or distribution except that, in the event the Common Stock subject to the Warrant is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible, such condition shall be inoperative if in the opinion of counsel for the Corporation such condition is not required under the Securities Act of 1933 or any rules or regulations thereunder. The certificates evidencing the Common Stock issued upon the exercise of Warrants shall contain an appropriate restriction legend requiring compliance with securities laws for transfer thereof. IV. GENERAL SECTION 4.01. TAXES ON ISSUANCE OF SHARES OF COMMON STOCK. The Corporation shall promptly pay all documentary stamp taxes, if any, that may be imposed upon the Corporation with respect to the issuance or delivery of shares of Common Stock upon the exercise of Warrants, but the Corporation shall not be obligated to pay any transfer taxes with respect to the issuance or delivery of the Warrant Certificates or shares of Common Stock in a name other than that of the Warrant Holder. -10- 11 SECTION 4.02. DATES AND TIMES. If any date set forth in this Certificate shall fall on a day other than a full business day in Dallas, Texas, said date shall be deemed to be the next full business day succeeding that date. SECTION 4.03. BINDING AGREEMENT. All the covenants and provisions of this Certificate by or for the benefit of the Corporation or the Warrant Holder shall bind an inure to the benefit of their respective heirs, administrators, successors and assigns, subject to the provisions hereof limiting transferability by the Warrant Holder. Nothing expressed in this Certificate and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon or give to any person or corporation, other than the Corporation and the Warrant Holders, any legal or equitable right, remedy, or claim under or by reason of this Certificate or of any covenant, condition, stipulation, promise, or agreement herein, and all covenants, conditions, stipulations, promises, and agreements contained in this Certificate shall be for the sole and exclusive benefit of the Corporation and the Warrant Holder, and their respective heirs, administrators, successors and assigns. SECTION 4.04. NOTICES. Any communication, notice, or demand to be given hereunder shall be duly given if in writing and delivered personally or sent by first class mail, certified or registered, postage prepaid and addressed as follows: (a) If to the Corporation: United Dental Care, Inc. 14755 Preston Road Suite 300 Dallas, Texas 75240 Attention: President (b) If to Warrant Holder: Mr. Mark E. Pape 3725 MacArthur Drive Waco, TX 76708 Either party may change the address to which any communication, notice, or demand shall be given by giving notice of such change in conformity with the provisions of this Section. SECTION 4.05. GOVERNING LAW. This Certificate shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to conflict of laws. SECTION 4.06. HEADINGS. The Article and Section headings herein are for convenience only and are not part of this Certificate and shall not affect the interpretation thereof. -11- 12 SECTION 4.07. RESTATEMENT/ENTIRE AGREEMENT. The Amended, Restated and Corrected Warrant Certificate amends and restates in its entirety that certain Warranty Certificate between the Corporation and the Warrant Holder executed and dated February 6, 1995 which is replaced by this Amended, Restated and Corrected Warranty Certificate. This Certificate constitutes the sole and complete agreement between the parties, and supersedes any prior agreements or understandings, whether written or oral, with respect to the subject matter hereof. This Certificate may be amended, modified or supplemented only by a written amendment executed by the Corporation and the Warrant Holder. SECTION 4.08. COUNTERPARTS. This Certificate may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; provided, however, that all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, this Certificate has been duly executed by the Corporation and the Warrant Holder as of the date written below. DATED: 2/26, 1996 UNITED DENTAL CARE, INC. ------------- By: /s/ James B. Kingston --------------------------------------- Its: President DATED: 2/27, 1996 WARRANT HOLDER ------------- By: /s/ Mark E. Pape --------------------------------------- Mark E. Pape -12- 13 FORM OF ELECTION TO PURCHASE To United Dental Care, Inc. The undersigned hereby irrevocably elects to exercise _____ Warrants represented by this Warrant Certificate, and to purchase _____ shares of the Common Stock of United Dental Care, Inc. issuable upon the exercise of such Warrants, and requests that certificates for such shares shall be issued in the name of - -------------------------------------------------------------------------------- (Name) - -------------------------------------------------------------------------------- (Address) - -------------------------------------------------------------------------------- Social Security or other Identifying Number) and be delivered to - -------------------------------------------------------------------------------- (Name) - -------------------------------------------------------------------------------- (Address) and, if said number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the undersigned at the address stated above. Dated: ___________________, _____ Signature: ---------------------------------------------------------------------- Warrant Holder: ------------------------------------------------------- Signature Guaranteed: ----------------------------------------------------------- NOTE: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without any change whatsoever, unless this Warrant has been assigned. -13- EX-10.35 6 EXECUTIVE INCENTIVE PLAN 1 EXHIBIT 10.35 EXECUTIVE INCENTIVE PLANS FOR 1997
PORTION 1997 PORTION BASED ON BONUS BASED PERSONAL EXECUTIVE OFFICER MAXIMUM ON EPS GOALS --------- ------- -------- (a) (b) William H. Wilcox, President, CEO $300,000 100% ---- Mark E. Pape, Senior Vice $110,550 85% 15% Peter R. Barnett, Senior Vice $110,550 85% 15%
NOTES: (a) The percentage in this column reflects the portion of the maximum bonus that may be paid upon achievement of targeted earnings per share. This percentage may be reduced to zero if an established minimum level of earnings per share is not achieved. (b) The percentage in this column reflects the portion of the maximum bonus that may be awarded upon achievement of defined personal objectives. Such objectives are individually designed to reflect the executive s functional responsibilities within the context of the company s strategic and tactical objectives. This percentage may be reduced to zero if the defined personal objectives are not achieved. EX-11 7 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 UNITED DENTAL CARE, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR YEAR ENDED DECEMBER 31, 1994 1995 1996 ------ ------ ------ I. Reported net earnings --------------------- Net income before extraordinary charge . . . . . . . . . . . . . . $2,096 $3,731 $7,557 Extraordinary charge, net of tax . . . . . . . . . . . . . . . . . -- (142) -- ------ ------ ------ Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $2,096 $3,589 $7,557 ====== ====== ====== II. Primary earnings per share -------------------------- A. Shares outstanding Weighted average number of shares outstanding during period . . . . . . . . . . . . . . . . . . . . . . . . . 4,126 5,051 7,256 Shares potentially issuable upon the assumed exercise of stock options and conversion of warrants, net of assumed repurchase using the Treasury Stock method 591 398 287 ------ ------ ------ Total common shares and common equivalent shares . . . . 4,717 5,449 7,543 ====== ====== ====== B. Computation of net earnings per share Net income before extraordinary charge . . . . . . . . . . . $ 0.44 $ 0.68 $ 1.00 Extraordinary charge, net of tax . . . . . . . . . . . . . . -- (0.02) -- ------ ------ ------ Net income . . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.66 $ 1.00 ====== ====== ====== III. Fully diluted earnings per share (see NOTE below) ------------------------------------------------- A. Shares outstanding Weighted average number of shares outstanding during period . . . . . . . . . . . . . . . . . . . . . . . . . 4,126 5,051 7,256 Shares potentially issuable upon the assumed exercise of stock options and conversion of warrants, net assumed repurchase using the Treasury Stock method 592 488 287 ------ ------ ------ Total common shares and common equivalent shares . . . . 4,718 5,539 7,543 ====== ====== ====== B. Computation of net earnings per share Net income before extraordinary charge . . . . . . . . . . $ 0.44 $ 0.67 $ 1.00 Extraordinary charge, net of tax . . . . . . . . . . . . . -- (0.02) -- ------ ------ ------ Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.65 $ 1.00 ====== ====== ======
NOTE: The amounts of per share earnings on the fully diluted basis are not required to be presented in the consolidated statements of operations under the provisions of Accounting Principles board Opinion No. 15 since there is no significant difference between primary and fully diluted earnings per share. EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT NAME OF CORPORATION ------------------- 1. United Dental Care of Texas, Inc., a Texas corporation. 2. UDC Ohio, Inc. (d/b/a United Dental Care of Ohio, Inc.), an Ohio corporation. 3. United Dental Care of Pennsylvania, Inc., a Pennsylvania corporation. 4. United Dental Care of Missouri, Inc., a Missouri corporation. 5. UDC Services, Inc., a Delaware corporation. 6. Associated Companies, Inc., an Arizona corporation. 7. Associated Health Plans, Inc., an Arizona corporation. 8. UDC Dental California, Inc., a California corporation. 9. UDC Preferred, Inc., an Arizona corporation. 10. United Dental Care Insurance Company, an Arizona corporation. 11. United Dental Care of Arizona, Inc., an Arizona corporation. 12. United Dental Care of Colorado, Inc., a Colorado corporation. 13. United Dental Care of Indiana, Inc., an Indiana corporation. 14. United Dental Care of Nebraska, Inc., a Nebraska corporation. 15. United Dental Care of New Mexico, Inc., a New Mexico corporation. 16. United Dental Care of North Carolina, Inc., a North Carolina corporation. 17. United Dental Care of Utah, Inc., a Utah corporation. 18. United Dental Care of Washington, Inc., a Washington corporation. 19. Independent Dental Plans, Inc., a Michigan corporation. 20. Association Dental Plan, Inc., a District of Columbia corporation. 21. OraCare Consultants, Inc., a New Jersey corporation. 22. OraCare DPO, Inc., a New Jersey corporation. 23. Kansas City Dental Care, Inc., a Missouri corporation. 24. United Dental Care, Inc., an Oklahoma corporation. EX-23.1 9 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (number 333-20043) of United Dental Care, Inc. of our report dated February 6, 1997 appearing on page F-2 of this Form 10-K. PRICE WATERHOUSE LLP Dallas, Texas March 21, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 50,035 0 11,016 0 0 97,565 7,056 0 165,672 40,177 0 0 0 891 124,604 165,672 0 113,648 0 101,117 0 0 536 11,995 4,438 7,557 0 0 0 7,557 1.00 1.00
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