<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BIRNER DENTAL MANAGEMENT SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 8741 84-1307044
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
3801 EAST FLORIDA AVENUE, SUITE 208
DENVER, COLORADO 80210
(303) 691-2707
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
FREDERIC W.J. BIRNER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
BIRNER DENTAL MANAGEMENT SERVICES, INC.
3801 EAST FLORIDA AVENUE, SUITE 208
DENVER, COLORADO 80210
(303) 691-2707
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DENNIS M. JACKSON, ESQ. J. VAUGHAN CURTIS, ESQ.
MARK D. EBEL, ESQ. STEVEN L. POTTLE, ESQ.
HOLLAND & HART LLP ALSTON & BIRD LLP
555 17TH STREET, SUITE 3200 1201 WEST PEACHTREE STREET
DENVER, COLORADO 80202 ATLANTA, GEORGIA 30309-3424
(303) 295-8000 (404) 881-7000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, without par value............. $23,000,000 $6,969.70
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1997
SHARES
[LOGO OF PERFECT TEETH APPEARS HERE]
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COMMON STOCK
Of the shares of common stock, without par value (the "Common Stock"),
offered hereby (the "Offering"), shares are being sold by Birner Dental
Management Services, Inc. ("Birner" or the "Company") and 296,236 shares are
being sold by certain holders of Common Stock (the "Selling Shareholders").
Prior to the Offering, there has been no public market for the Common Stock. It
is currently estimated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for a discussion of the factors which
were considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the trading symbol "BDMS".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS
-------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
Total (3)........................ $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholders have agreed to indemnify the sev-
eral Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company and certain Selling Shareholders have granted the Underwriters
a 30-day over-allotment option to purchase up to and additional
shares of Common Stock, respectively, on the same terms and conditions as
set forth above. If all such additional shares are purchased by the Under-
writers, the total Price to Public, Underwriting Discount, Proceeds to Com-
pany, and Proceeds to Selling Shareholders will be $ , $ , $ , and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to certain conditions. Delivery of the shares to the Underwriters is expected
against payment to be made at the office of Wheat, First Securities, Inc.,
Richmond, Virginia, on or about , 1997.
WHEAT FIRST BUTCHER SINGER A.G. EDWARDS & SONS, INC.
The date of this Prospectus is , 1997
<PAGE>
[MAP OF LOCATION OF OFFICES APPEARS HERE]
The Company intends to furnish its shareholders with annual reports contain-
ing audited financial statements and an opinion thereon expressed by indepen-
dent certified public accountants and with quarterly reports for the first
three quarters of each fiscal year containing interim unaudited financial in-
formation.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSAC-
TIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
----------------
PERFECT TEETH(R) is a registered trademark of the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed in-
formation and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes (i) no exercise of the Underwriters' over-allotment option, (ii) the
filing and effectiveness of certain amendments to the Company's Amended and Re-
stated Articles of Incorporation, and (iii) the conversion of certain convert-
ible debentures into 1,781,971 shares of Common Stock, effective upon the con-
summation of the Offering (the "Conversion of Debentures").
THE COMPANY
The Company acquires, develops, and manages geographically dense dental prac-
tice networks in select markets, currently including Colorado and New Mexico,
and the Company believes it is the largest provider of dental management serv-
ices in Colorado. The Company and its dental practice management model, which
was developed by the Company's President, Mark Birner, D.D.S., provide a solu-
tion to the needs of dentists, patients, and third-party payors by allowing the
Company's affiliated dentists to provide high-quality, efficient dental care in
patient-friendly, family practice settings. Dentists practicing at the Offices
provide comprehensive general dentistry services, and the Company increasingly
offers specialty dental services through affiliated specialists. The Company
manages 34 Offices, of which 28 were acquired and six were de novo develop-
ments. The success of the Company's dental practice network in Colorado has led
to its expansion into New Mexico and its evaluation of additional markets.
The dental services industry is undergoing rapid change throughout the United
States. The industry is highly fragmented, with approximately 153,300 active
dentists in the United States in 1995, of which nearly 88% practiced either
alone or with one other dentist. Dental services generally have not been cov-
ered by third-party payment arrangements and consequently have been paid for by
individuals on an out-of-pocket basis. More recently, factors such as increased
consumer demand for dental services and the desire of employers to provide en-
hanced benefits for their employees have resulted in an increase in third-party
payment arrangements for dental services. These third-party payment arrange-
ments include indemnity insurance, preferred provider plans and capitated man-
aged dental care plans. Current market trends, including the rise of third-
party payment arrangements, have contributed to the increased consolidation of
practices in the dental services industry and to the formation of dental prac-
tice management companies.
The Company's focus is to manage its dental practice networks to provide an
optimum setting for dentists to develop long-term relationships with patients
by providing them with high-quality dental care. The Company affiliates with
high-quality dentists, and builds its Offices around designated managing den-
tists who are given the benefits of owning their own practices without the cap-
ital commitment and administrative burdens. In addition, managing dentists are
provided economic incentives to improve the operating performance of their Of-
fices. The Company assumes responsibility for non-dental functions within its
networks, allowing its affiliated dentists to concentrate on providing high-
quality dental care to patients. While the Company's primary emphasis is on
fee-for-service business, it has significant experience with capitated managed
dental care contracts, which are used to optimize revenue mix and facility uti-
lization.
The Company's strategy is to become the leading dental practice management
company in the markets it serves. The key elements of the Company's strategy
include (i) developing and operating geographically dense dental practice net-
works, (ii) capitalizing on its flexible growth strategy, (iii) enhancing oper-
ating performance of the Offices, (iv) capturing specialty service revenue, and
(v) developing brand identity.
The Company's expansion program is flexible, allowing the Company to enter
new markets and develop its dental practice networks through a variety of
means. The Company has demonstrated its ability to make acquisitions of large
group practices, to acquire solo and small group practices, and to develop de
novo Offices. The Company believes its experience in identifying, acquiring and
integrating solo and small group practices will become increasingly important,
as the majority of dentists practice either alone or with one other dentist.
The Company believes that its experience with multiple expansion methods allows
it to capitalize on the opportunities presented by a market and provides a sig-
nificant competitive advantage.
3
<PAGE>
The Company began operations in October 1995 with the intention of becoming
the leading dental practice management company in Colorado. Birner has experi-
enced significant growth and margin improvement. Dental office revenue, net
from the Company's Colorado operations increased from $2.1 million during the
six months ended June 30, 1996 to $6.8 million during the six months ended June
30, 1997, and contribution from dental offices increased from $289,000 to $1.2
million during these respective periods. Contribution margin at the Company's
Colorado operations increased from 13.6% to 18.2% during these respective peri-
ods. With respect to the seven practices acquired in Colorado in May 1996 (the
"Family Dental Acquisition"), during the six months prior to the Family Dental
Acquisition, dental office revenue, net for the seven practices was $2.3 mil-
lion, contribution from dental offices was ($185,000) and contribution margin
was (8.0)%. During the six months immediately following the Family Dental Ac-
quisition and the implementation of the Company's dental practice management
model, dental office revenue, net for these seven practices increased to $2.6
million, contribution from dental offices increased to $367,000 and contribu-
tion margin increased to 14.1%. The five de novo Offices opened by the Company
between January 8, 1996 and July 15, 1996 generated dental office revenue, net
of $1.3 million during the six months ended June 30, 1997, had contribution
from dental offices of $227,000 during this period, and had a contribution mar-
gin of 17.5% during this period.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company........................ shares
By the Selling Shareholders........... 296,236 shares
Common Stock to be outstanding after
the Offering.......................... shares (1)
Use of Proceeds........................ For the repayment of certain indebted-
ness, for potential acquisitions and
development of new Offices, and for
working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol................................ BDMS
</TABLE>
- --------
(1) Includes (i) 1,781,971 shares of Common Stock to be issued simultaneously
with the consummation of the Offering in connection with the Conversion of
Debentures and (ii) 37,500 shares of Common Stock issued on August 15, 1997
upon the exercise of certain warrants. Excludes (i) 287,583 shares of Com-
mon Stock reserved for issuance upon exercise of options outstanding as of
September 15, 1997 under the Birner Dental Management Services, Inc. 1995
Employee Stock Option Plan (the "Employee Plan") at a weighted average ex-
ercise price of $4.09 per share, (ii) 143,600 shares of Common Stock re-
served for issuance upon exercise of options outstanding as of September
15, 1997 under the Birner Dental Management Services, Inc. 1995 Stock Op-
tion Plan for Managed Dental Centers (the "Dental Center Plan") at a
weighted average exercise price of $3.97 per share, and (iii) 415,530
shares of Common Stock reserved for issuance upon exercise of warrants out-
standing as of September 15, 1997 at a weighted average exercise price of
$3.49 per share. See "Management" and "Shares Eligible for Future Sale."
As used in this Prospectus, "P.C." means any professional corporation operating
a dental practice, and with which the Company has entered into a management
agreement, and "Office" means any dental practice managed by the Company. The
"Additional 1996 Acquisitions" means three separate acquisitions of solo prac-
tices in July and August 1996 which were consolidated into existing Offices,
the acquisition of an interest in and the right to manage one solo practice in
August 1996, and one additional acquisition of a solo practice in September
1996. The "Early 1997 Acquisitions" means the three practices acquired through
separate acquisitions of solo practices in February 1997, April 1997, and May
1997, and the acquisition of an interest in and the right to manage one solo
practice in April 1997. The "Late 1997 Acquisitions" means the two practices
acquired through separate acquisitions of solo practices in August 1997. The
"Gentle Dental Acquisition" means the acquisition of a group of nine practices
in September 1997. All references herein to industry, financial and statistical
information are based on trade articles and industry reports that the Company
believes to be reliable and representative of the dental services industry at
the date of this Prospectus, although there can be no assurance to that effect.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
INCEPTION ---------------------------- --------------------------------------
TO DECEMBER 31, 1996 PRO FORMA 1997 PRO FORMA
1995 (1) 1996 AS ADJUSTED (2)(3) 1996 1997 AS ADJUSTED (3)(4)
--------------- -------- ------------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Dental office revenue,
net.................... $ 448 $ 7,284 $ 15,927 $ 2,122 $ 6,844 $ 10,155
Less -- amounts retained
by dental offices...... 148 1,911 4,481 589 1,617 2,677
-------- -------- -------- -------- -------- --------
Net revenue............. 300 5,373 11,446 1,533 5,227 7,478
Direct expenses......... 306 4,602 10,113 1,244 3,983 5,716
-------- -------- -------- -------- -------- --------
Contribution from dental
offices................ (6) 771 1,333 289 1,244 1,762
Corporate expenses...... 153 780 1,114 338 635 883
-------- -------- -------- -------- -------- --------
Operating (loss)
income................. (159) (9) 219 (49) 609 879
Interest (expense)
income, net............ (1) (326) (63) (47) (338) 23
-------- -------- -------- -------- -------- --------
(Loss) income before
income taxes........... (160) (335) 156 (96) 271 902
Income taxes............ -- -- 59 -- 5 338
-------- -------- -------- -------- -------- --------
Net (loss) income....... $ (160) $ (335) $ 97 $ (96) $ 266 $ 564
======== ======== ======== ======== ======== ========
Net (loss) income per
common share........... $ (.05) $ (.09) $ $ (.03) $ .07 $
======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding..... 3,039 3,736 -- 3,734 3,949 --
SELECTED OPERATING DATA:
Number of dental offices
(5).................... 4 18 34 15 22 34
Number of dentists
(5)(6)................. 6 24 49 25 27 49
Dental office revenue,
net, per office........ $112,000 $404,665 $468,464 $141,436 $311,077 $298,664
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED (7)
------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 1,790 $10,594
Working capital......................................... 1,511 10,408
Total assets............................................ 10,559 23,119
Long-term debt, less current maturities................. 7,437 397
Total shareholders' equity.............................. 1,620 21,117
</TABLE>
- --------
(1) The Company was formed on May 17, 1995, and had no substantial operations
until October 1, 1995.
(2) Gives effect to (i) the Family Dental Acquisition, (ii) the Additional 1996
Acquisitions, (iii) the Early 1997 Acquisitions, (iv) the Late 1997 Acqui-
sitions, and (v) the Gentle Dental Acquisition, all as if they had been
completed on January 1, 1996. See "Pro Forma Consolidated Financial Infor-
mation," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business -- Expansion Program -- Recent Acqui-
sitions."
(3) Gives effect to the Conversion of Debentures and to the completion of the
Offering at the assumed initial public offering price of $ per share and
the receipt and application of the estimated net proceeds therefrom as if
such transactions had been completed as of the beginning of the respective
periods presented, or for the Conversion of Debentures, from the date of
issuance. See "Use of Proceeds," "Capitalization," and "Management's Dis-
cussion and Analysis of Financial Condition and Results of Operations."
(4) Gives effect to (i) the Early 1997 Acquisitions, (ii) the Late 1997 Acqui-
sitions, and (iii) the Gentle Dental Acquisition, as if they had been com-
pleted on January 1, 1997. See "Pro Forma Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business -- Expansion Program -- Recent
Acquisitions."
(5) Data is as of the end of the respective periods presented.
(6) Includes general dentists employed by the P.C.s, but excludes specialists
who are independent contractors.
(7) Gives effect to (i) the Late 1997 Acquisitions, (ii) the Gentle Dental Ac-
quisition, (iii) the Conversion of Debentures, and (iv) the completion of
the Offering at the assumed initial public offering price of $ per share
and the receipt and application of the estimated net proceeds therefrom,
all as if such transactions had been completed on June 30, 1997. See "Use
of Proceeds," "Capitalization," "Pro Forma Consolidated Financial Informa-
tion," "Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations," and "Business -- Expansion Program -- Recent Acquisi-
tions."
----------------
The address of the Company's executive offices is 3801 East Florida Avenue,
Suite 208, Denver, CO 80210 and its telephone number is (303) 691-0680.
5
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following risk fac-
tors, in addition to the other information contained in this Prospectus, be-
fore purchasing the securities offered hereby. This Prospectus contains for-
ward-looking statements. Discussions containing such forward-looking state-
ments may be found in the material set forth below and under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in the Prospectus generally. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of fu-
ture performance and involve risks and uncertainties. Actual events or results
may differ materially from those discussed in the forward-looking statements
as a result of various factors, including, without limitation, the risk fac-
tors set forth below and the matters set forth in this Prospectus generally.
MANAGEMENT OF GROWTH; LIMITED OPERATING HISTORY
The Company has been providing dental practice management services since Oc-
tober 1995. Although the Company provides management services for 34 Offices,
the Company has been providing management services to 16 of these Offices for
less than one year. Prior to April 1997, the Company provided dental practice
management services exclusively in Colorado. The Company's growth has placed,
and will continue to place, strains on the Company's management, operations
and systems. The Company's ability to compete effectively will depend upon its
ability to hire, train and assimilate additional management and other employ-
ees, and its ability to expand, improve and effectively utilize its operating,
management, marketing and financial systems to accommodate its expanded opera-
tions. Any failure by the Company's management effectively to anticipate, im-
plement and manage the changes required to sustain the Company's growth may
have a material adverse effect on the Company's business, financial condition
and operating results. See "Business -- Expansion Program."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company has grown substantially in a relatively short period of time, in
large part through acquisitions of existing Offices and through the develop-
ment of de novo Offices. Since its organization in May 1995, the Company has
completed 31 dental practice acquisitions, three of which have been consoli-
dated into existing Offices. The integration of acquisitions may be a diffi-
cult, costly and time-consuming process, and the Company may encounter sub-
stantial unanticipated costs or other problems associated with such integra-
tion. During the period immediately following an acquisition, the Company's
expenditures related to the integration of the acquired dental practices may
exceed the operating cash flow of such dental practices. Moreover, the
Company's operating results in fiscal quarters immediately following an acqui-
sition may be adversely affected while the Company attempts to integrate the
acquired practices. As a result, there can be no assurance that future acqui-
sitions will not have a material adverse effect on the Company's business, fi-
nancial condition and operating results. See "Business -- Expansion Program."
The Company devotes substantial time and resources to acquisition-related
activities. Identifying appropriate acquisition candidates and negotiating and
consummating acquisitions can be a lengthy and costly process. Furthermore,
the Company may compete for acquisition opportunities with companies that have
greater resources than the Company. There can be no assurance that suitable
acquisition candidates will be identified or that acquisitions will be consum-
mated on terms favorable to the Company, on a timely basis or at all. If a
planned acquisition fails to occur or is delayed, the Company's quarterly fi-
nancial results may be materially lower than analysts' expectations, which
likely would cause a decline, perhaps substantial, in the market price of the
Common Stock. In addition, increasing consolidation in the dental management
services industry may result in an increase in purchase prices required to be
paid by the Company to acquire dental practices.
RISKS ASSOCIATED WITH DE NOVO OFFICE DEVELOPMENT
The Company intends to devote a substantial amount of time and resources to
identify locations in suitable markets for the development of de novo Offices.
Identifying locations in suitable geographic markets and negotiating leases
can be a lengthy and costly process. Furthermore, the Company will need to
provide each new Office
6
<PAGE>
with the appropriate equipment, furnishings, materials and supplies. To date,
the Company's average cost to open a de novo Office has been approximately
$170,000. Future de novo development may require a greater investment by the
Company. Additionally, new Offices must be staffed with one or more dentists.
Because a new Office may be staffed with a dentist with no previous patient
base, significant advertising and marketing expenditures may be required to
attract patients. There can be no assurance that a de novo Office will become
profitable for the Company. See "Business -- Expansion Program -- De Novo Of-
fice Developments."
DEPENDENCE ON MANAGEMENT AGREEMENTS, THE P.C.S AND AFFILIATED DENTISTS
The Company receives management fees for services provided to the P.C.s un-
der management agreements (the "Management Agreements"). The Company owns most
of the non-dental operating assets of the Offices but does not employ or con-
tract with dentists, employ hygienists or control the provision of dental
care. The Company's revenue is dependent on the revenue generated by the
P.C.s. Therefore, effective and continued performance of dentists providing
services for the P.C.s is essential to the Company's long-term success. Under
each Management Agreement, the Company pays substantially all of the operating
and non-operating expenses associated with the provision of dental services
except for the salaries and benefits of the dentists and hygienists. Any mate-
rial loss of revenue by the P.C.s would have a material adverse effect on the
Company's business, financial condition and operating results, and any termi-
nation of a Management Agreement (which is permitted in the event of a mate-
rial default or bankruptcy by either party) could have such an effect. In the
event of a breach of a Management Agreement by a P.C., there can be no assur-
ance that the legal remedies available to the Company will be adequate to com-
pensate the Company for its damages resulting from such breach. See "Busi-
ness -- Affiliation Model."
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal levels.
There can be no assurance that the regulatory environment in which the Company
or P.C.s operate will not change significantly in the future. In addition,
state and federal laws regulate health maintenance organizations and other
managed care organizations for which dentists may be providers. In general,
regulation of health care companies is increasing. In connection with its op-
erations in existing markets and expansion into new markets, the Company may
become subject to additional laws, regulations and interpretations or enforce-
ment actions. The laws regulating health care are broad and subject to varying
interpretations, and there is currently a lack of case law construing such
statutes and regulations. The ability of the Company to operate profitably
will depend in part upon the ability of the Company to operate in compliance
with applicable health care regulations.
The laws of many states permit a dentist to conduct a dental practice only
as an individual, a member of a partnership or an employee of a professional
corporation, limited liability company or limited liability partnership. These
laws typically prohibit, either by specific provision or as a matter of gen-
eral policy, non-dental entities, such as the Company, from practicing den-
tistry, from employing dentists and, in certain circumstances, hygienists or
dental assistants, or from otherwise exercising control over the provision of
dental services.
Many states limit the ability of a person other than a licensed dentist to
own or control equipment or offices used in a dental practice. In addition,
many states impose limits on the tasks that may be delegated by dentists to
hygienists and dental assistants. Some states regulate the advertising of den-
tal services, including the prohibition of advertising under a trade or corpo-
rate name, and a number of states regulate the content of advertisements of
dental services and the use of promotional gift items. Some states require en-
tities designated as "clinics" to be licensed, and may define clinics to in-
clude dental practices that are owned or controlled in whole or in part by
non-dentists. These laws and their interpretations vary from state to state
and are enforced by the courts and by regulatory authorities with broad dis-
cretion.
Many states have fraud and abuse laws which apply to referrals for items or
services reimbursable by any third-party payor, not just by Medicare and Med-
icaid. A number of states also impose significant penalties for submitting
false claims for dental services. Many states either prohibit or require dis-
closure of self-referral
7
<PAGE>
arrangements and impose penalties for the violation of these laws, and pro-
hibit dentists from splitting fees with non-dentists.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. Specifically, in some states, regulators may determine
that the P.C.s are engaged in the business of insurance, particularly if they
contract on a financial-risk basis directly with self-insured employers or
other entities that are not licensed to engage in the business of insurance.
If the P.C.s are determined to be engaged in the business of insurance, the
Company may be required to change the method of payment from third-party
payors and the Company's business, financial condition and operating results
may be materially and adversely affected.
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Because the P.C.s receive no revenue under
Medicare and Medicaid, the impact of these laws on the Company to date has
been negligible. There can be no assurance, however, that the P.C.s will not
have patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or inter-
pretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
Although the Company believes that its operations as currently conducted are
in material compliance with applicable laws, there can be no assurance that
the Company's contractual arrangements will not be successfully challenged as
violating applicable fraud and abuse, self-referral, false claims, fee-split-
ting, insurance, facility licensure or certificate-of-need laws or that the
enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to re-
strict the Company's existing or future operations. In the event that any leg-
islative measures, regulatory provisions or rulings or judicial decisions re-
strict or prohibit the Company from carrying on its business or from expanding
its operations to certain jurisdictions, structural and organizational modifi-
cations of the Company's organization and arrangements may be required, which
could have a material adverse effect on the Company, or the Company may be re-
quired to cease operations or change the way it conducts business.
LIMITED CAPITAL; NEED FOR ADDITIONAL FINANCING
Implementation of the Company's growth strategy has required and is expected
to continue to require significant capital resources. Such resources will be
needed to acquire or establish additional Offices, maintain or upgrade the
Company's management information systems, and for the effective integration,
operation and expansion of the Offices. The Company historically has used
principally cash and promissory notes as consideration in acquisitions of den-
tal practices and intends to continue to do so. If the Company's capital re-
quirements over the next several years exceed cash flow generated from opera-
tions and borrowings available under the Company's existing credit facility or
any successor credit facility, the Company may need to issue additional equity
securities and incur additional debt. If additional funds are raised through
the issuance of equity securities, dilution to the Company's existing share-
holders may result. Additional debt or non-Common Stock equity financings
could be required to the extent that the Common Stock fails to maintain a mar-
ket value sufficient to warrant its use for future financing needs. If addi-
tional funds are raised through the incurrence of debt, such debt instruments
will likely contain restrictive financial, maintenance and security covenants.
The Company's existing credit facility contains certain restrictions on the
Company's ability to acquire additional dental practices. The
8
<PAGE>
Company may not be able to obtain additional required capital on satisfactory
terms, if at all. The failure to raise the funds necessary to finance the ex-
pansion of the Company's operations or the Company's other capital requirements
could have a material and adverse effect on the Company's ability to pursue its
strategy and on its business, financial condition and operating results.
RELIANCE ON CERTAIN PERSONNEL
The success of the Company, including its ability to complete and integrate
acquisitions, depends on the continued services of a relatively limited number
of members of the Company's senior management, including its President, Mark
Birner, D.D.S., its Chief Executive Officer, Fred Birner, and its Chief Finan-
cial Officer, Treasurer and Secretary, Dennis Genty. The loss of the services
of one or more members of the Company's senior management or the failure to add
qualified management personnel could have a material adverse effect on the
Company's business, financial condition and operating results. See "Manage-
ment."
AVAILABILITY OF DENTISTS AND OTHER PERSONNEL
The Company's operations and expansion strategy are dependent on the avail-
ability and successful recruitment and retention of dentists, dental assis-
tants, hygienists, specialists and other personnel. The Company may not be able
to recruit or retain dentists and other personnel for its existing and newly
established Offices, which may have a material adverse effect on the Company's
expansion strategy and its business, financial condition and operating results.
RISKS ASSOCIATED WITH COST-CONTAINMENT INITIATIVES
The health care industry, including the dental services market, is experienc-
ing a trend toward cost containment, as payors seek to impose lower reimburse-
ment rates upon providers. The Company believes that this trend will continue
and will increasingly affect the provision of dental services. This may result
in a reduction in per-patient and per-procedure revenue from historic levels.
Significant reductions in payments to dentists or other changes in reimburse-
ment by payors for dental services may have a material adverse effect on the
Company's business, financial condition and operating results.
RISKS ASSOCIATED WITH CAPITATED PAYMENT ARRANGEMENTS
Part of the Company's growth strategy involves selectively obtaining
capitated managed dental care contracts. Under a capitated managed dental care
contract, the dental practice provides dental services to the members of the
plan and receives a fixed monthly capitation payment for each plan member cov-
ered for a specific schedule of services regardless of the quantity or cost of
services to the participating dental practice which is obligated to provide
them, and may receive a co-pay for each service provided. This arrangement
shifts the risk of utilization of such services to the dental group practice
that provides the dental services. Because the Company assumes responsibility
under its Management Agreements for all aspects of the operation of the dental
practices (other than the practice of dentistry) and thus bears all costs of
the provision of dental services at the Offices (other than compensation and
benefits of dentists and hygienists), the risk of over-utilization of dental
services at the Offices under capitated managed dental care plans is effec-
tively shifted to the Company. In contrast, under traditional indemnity insur-
ance arrangements, the insurance company reimburses reasonable charges that are
billed for the dental services provided.
In 1996, the Company derived approximately 21.2% of its revenues from
capitated managed dental care contracts, and 28.3% of its revenues from associ-
ated co-payments. Risks associated with capitated managed dental care contracts
include principally (i) the risk that the capitation payments and any associ-
ated co-payments do not adequately cover the costs of providing the dental
services, (ii) the risk that one or more of the P.C.s may be terminated as an
approved provider by managed dental care plans with which they contract, (iii)
the risk that the Company will be unable to negotiate future capitation ar-
rangements on satisfactory terms with managed care dental plans, and (iv) the
risk that large subscriber groups will terminate their relationship with such
managed dental care plans which would reduce patient volume and capitation and
co-payment revenue. There can be no
9
<PAGE>
assurance that the Company will be able to negotiate future capitation ar-
rangements on behalf of P.C.s on satisfactory terms or at all, or that the
fees offered in current capitation arrangements will not be reduced to levels
unsatisfactory to the Company. Moreover, to the extent that costs incurred by
the Company's affiliated dental practices in providing services to patients
covered by capitated managed dental care contracts exceed the revenue under
such contracts, the Company's business, financial condition and operating re-
sults may be materially and adversely affected.
RISKS OF BECOMING SUBJECT TO LICENSURE
Federal and state laws regulate insurance companies and certain other man-
aged care organizations. Many states also regulate the establishment and oper-
ation of networks of health care providers. In most states, these laws do not
apply to discounted-fee-for-service arrangements. These laws also do not gen-
erally apply to networks that are paid on a capitated basis, unless the entity
with which the network provider is contracting is not a licensed health in-
surer or other managed care organization. There are exceptions to these rules
in some states. For example, certain states require a license for a capitated
arrangement with any party unless the risk-bearing entity is a professional
corporation that employs the professionals. The Company believes that it is in
compliance with the insurance laws of the States of Colorado and New Mexico
with respect to the operation of its Offices in such states, but there can be
no assurance that interpretations of these laws by the regulatory authorities
in those states, or in the states in which the Company expands, will not re-
quire licensure or a restructuring of some or all of the Company's operations.
In the event that the Company is required to become licensed under these laws,
the licensure process can be lengthy and time consuming and, unless the regu-
latory authority permits the Company to continue to operate while the licen-
sure process is progressing, the Company could experience a material adverse
change in its business while the licensure process is pending. In addition,
many of the licensing requirements mandate strict financial and other require-
ments which the Company may not immediately be able to meet. Further, once li-
censed, the Company would be subject to continuing oversight by and reporting
to the respective regulatory agency. The regulatory framework of certain ju-
risdictions may limit the Company's expansion into, or ability to continue op-
erations within, such jurisdictions if the Company is unable to modify its op-
erational structure to conform with such regulatory framework. Any limitation
on the Company's ability to expand could have a material adverse effect on the
Company's business, financial condition and operating results.
RISKS ARISING FROM HEALTH CARE REFORM
Federal and state governments currently are considering various types of
health care initiatives and comprehensive revisions to the health care and
health insurance systems. Some of the proposals under consideration, or others
that may be introduced, could, if adopted, have a material adverse effect on
the Company's business, financial condition and operating results. It is un-
certain what legislative programs, if any, will be adopted in the future, or
what actions Congress or state legislatures may take regarding health care re-
form proposals or legislation. In addition, changes in the health care indus-
try, such as the growth of managed care organizations and provider networks,
may result in lower payments for the services of the Company's managed prac-
tices.
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
The Family Dental Acquisition and the Gentle Dental Acquisition resulted in
significant increases in the Company's intangible assets. At June 30, 1997,
intangible assets on the Company's pro forma consolidated balance sheet were
$8.7 million, representing 37.8% of the Company's total assets at that date.
The Company expects the amount allocable to intangible assets on its balance
sheet to increase in the future in connection with additional acquisitions,
which will increase the Company's amortization expense. In the event of any
sale or liquidation of the Company or a portion of its assets, there can be no
assurance that the value of the Company's intangible assets will be realized.
In addition, the Company continually evaluates whether events and circum-
stances have occurred indicating that any portion of the remaining balance of
the amount allocable to the Company's intangible assets may not be recover-
able. When factors indicate that the amount allocable to the Company's intan-
gible assets should be evaluated for possible impairment, the Company may be
required to reduce the carrying value of such assets. Any future determination
requiring the write off of a significant portion
10
<PAGE>
of unamortized intangible assets could have a material adverse effect on the
Company's business, financial condition and operating results. See "Pro Forma
Consolidated Financial Information."
POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY
In recent years, dentists have become subject to an increasing number of
lawsuits alleging malpractice and related legal theories. Some of these law-
suits involve large claims and significant defense costs. Any suits involving
the Company or dentists at the Offices, if successful, could result in sub-
stantial damage awards that may exceed the limits of the Company's insurance
coverage. The Company provides practice management services; it does not en-
gage in the practice of dentistry or control the practice of dentistry by the
dentists or their compliance with regulatory requirements directly applicable
to providers. There can be no assurance, however, that the Company will not
become subject to litigation in the future as a result of the dental services
provided at the Offices. The Company maintains general liability insurance for
itself and provides for professional liability insurance covering dentists,
hygienists and dental assistants at the Offices. There can be no assurance
that coverage will continue to be available upon terms satisfactory to the
Company or that the coverage will be adequate to cover losses. In addition,
certain types of risks and liabilities, including penalties and fines imposed
by governmental agencies, are not covered by insurance. Malpractice insurance,
moreover, can be expensive and varies from state to state. Successful malprac-
tice claims could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business -- Insurance."
POTENTIAL CONFLICTS OF INTEREST OF THE COMPANY'S PRESIDENT RELATING TO THE
P.C.S
The Company's President, Mark Birner, D.D.S., is the sole owner of most of
the P.C.s in Colorado. Dr. Birner is the brother of the Company's Chairman of
the Board and Chief Executive Officer, Fred Birner. As a result of Dr.
Birner's ownership of the P.C.s and his family relationships, potential con-
flicts of interest may arise in certain matters including, but not limited to,
matters related to the Management Agreements. Although Dr. Birner has a fidu-
ciary duty to the Company, there can be no assurances that the Company will
not be affected by matters in which Dr. Birner has a potential conflict of in-
terest. See "Business -- Affiliation Model," "Management" and "Certain Trans-
actions."
GEOGRAPHIC CONCENTRATION; ANTITRUST
The current geographic concentration of the Company's operations in Colorado
and New Mexico increases the risk to the Company of adverse economic or regu-
latory developments or action within these markets. The Company's strategy of
focused expansion within selected markets increases the risk to the Company
that adverse economic or regulatory developments in one or more of these mar-
kets may have a material adverse effect on the Company's business, financial
condition and operating results. The Company is subject to a range of anti-
trust laws that prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and divisions of markets. Among other things, these
laws may limit the ability of the Company to enter into management agreements
with separate dental practice groups that compete with one another in the same
geographic market. In addition, these laws may prevent acquisitions of dental
practices that would be integrated into the Company's existing networks of
dental practices if such acquisitions would substantially lessen competition
or tend to create a monopoly.
COMPETITION
The dental practice management segment of the dental services industry is
highly competitive and is expected to become increasingly more competitive.
There are several dental practice management companies that are operating in
the Company's markets. There are also a number of companies with dental prac-
tice management businesses similar to that of the Company currently operating
in other parts of the country which may enter the Company's existing markets
in the future. As the Company seeks to expand its operations into new markets,
it is likely to face competition from dental practice management companies
which already have established a strong business presence in such locations.
The Company's competitors may have greater financial or other resources or
otherwise enjoy competitive advantages which may make it difficult for the
Company to compete against them or to acquire additional Offices on terms ac-
ceptable to the Company.
11
<PAGE>
The business of providing general dental and specialty dental services is
highly competitive in the markets in which the Company operates. Competition
for providing dental services may include practitioners who have more estab-
lished practices and reputations. The Company competes against established
practices in the retention and recruitment of general dentists, specialists,
hygienists and other personnel. If the availability of such dentists, special-
ists, hygienists and other personnel begins to decline in the Company's mar-
kets, it may become more difficult to attract qualified dentists, specialists,
hygienists and other personnel. There can be no assurance that the Company will
be able to compete effectively against other existing practices or against new
single or multi-specialty dental practices that enter its markets, or to com-
pete against such practices in the recruitment and retention of qualified den-
tists, specialists, hygienists and other personnel. See "Business -- Competi-
tion."
CONCENTRATION OF OWNERSHIP
After giving effect to the sale of the shares of Common Stock offered hereby,
the Company's executive officers and directors will beneficially own approxi-
mately % of the Common Stock. As a result, these shareholders will be able to
influence and possibly control the election of the Board of Directors and the
outcome of other corporate actions requiring shareholder approval after the
sale of the shares of Common Stock offered hereby. See "Certain Transactions,"
"Principal and Selling Shareholders," and "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of Incorpo-
ration and Bylaws could delay or frustrate the removal of incumbent directors
and could make difficult a merger, tender offer or proxy contest involving the
Company, even if such events could be viewed as beneficial by the Company's
shareholders. The Board of Directors of the Company is also empowered to issue
preferred stock in one or more series without shareholder action. Any issuance
of this "blank check" preferred stock could materially limit the rights of
holders of the Common Stock and render more difficult or discourage an attempt
to obtain control of the Company by means of a tender offer, merger, proxy con-
test or otherwise. In addition, the Amended and Restated Articles of Incorpora-
tion and Bylaws contain a number of provisions which could impede a takeover or
change in control of the Company, including, among other things, providing for
staggered terms for the members of the Board, eliminating the ability of share-
holders to remove directors without cause, eliminating the right of sharehold-
ers to fill vacancies on the Board, and requiring an 80% supermajority vote of
shareholders to amend certain provisions of the Amended and Restated Articles
of Incorporation. See "Description of Capital Stock -- Anti-Takeover Provi-
sions."
SUBSTANTIAL DILUTION
Investors participating in the Offering will incur immediate and substantial
dilution in net tangible book value per share of Common Stock from the initial
public offering. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; FLUCTUATIONS IN MARKET PRICE
Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect the market price of the Common Stock. In
addition to the shares of Common Stock offered hereby, except as provided
below, approximately 4,853,795 shares (including 1,419,971 shares issuable in
connection with the Conversion of Debentures) will be eligible for sale in the
public market beginning 90 days from the date of this Prospectus pursuant to
the provisions of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). An additional 415,530 shares will be available for issuance
upon the exercise of outstanding
12
<PAGE>
warrants. The Company has granted certain piggyback and demand registration
rights to the holders of warrants to purchase 240,130 shares of the Common
Stock. An additional 431,183 shares are available for issuance upon the exer-
cise of options which have been granted pursuant to the Employee Plan and the
Dental Center Plan, and will become eligible for sale in the public market un-
der Rule 144 at various times as they become vested. The Company intends to
register such shares shortly after the consummation of the Offering. Addition-
ally, 362,000 shares issuable in connection with the Conversion of Debentures
will become eligible for sale in the public market under Rule 144 beginning in
December 1997. However, holders of Common Stock, warrants to purchase Common
Stock and options to purchase Common Stock, representing in the aggregate
4,551,914 shares of Common Stock, have agreed with the Underwriters that they
will not offer, sell, or otherwise dispose of any shares of Common Stock owned
by them for a period of 180 days after the date of this Prospectus without the
prior written consent of Wheat, First Securities, Inc., on behalf of the Un-
derwriters. Sales of substantial amounts of such shares in the public market
or the availability of such shares for future sale could adversely affect the
market price of the Common Stock and adversely affect the Company's ability to
raise additional capital through an offering of its equity securities. See
"Description of Common Stock," "Shares Eligible for Future Sale," and "Under-
writing."
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active market will develop or be sus-
tained after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offer-
ing price was determined through negotiations between the Company and the rep-
resentatives of the Underwriters, and may not be indicative of future market
prices. The market price of the Common Stock could be subject to wide fluctua-
tions in response to quarter-by-quarter variations in operating results of the
Company or its competitors, changes in earnings estimates by analysts, devel-
opments in the industry or changes in general economic conditions. See "Under-
writing."
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its Common Stock
since its formation, and the Company does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. The payment of dividends is
prohibited under the terms of the Company's existing credit facility and may
be prohibited under any future credit facility which the Company may obtain.
See "Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby are estimated to be ($ if the Un-
derwriters' over-allotment option is exercised in full), based on the assumed
initial public offering price of $ ) per share and after deducting the esti-
mated underwriting discount and offering expenses payable by the Company.
The Company expects that approximately $2.0 million of the net proceeds will
be used to repay a term loan and approximately $350,000 of the net proceeds
will be used to repay a revolving line of credit, both of which bear interest
at the prime rate plus 0.5% and mature on October 31, 1999. Approximately $1.4
million will be used to repay a note issued in connection with the Gentle Den-
tal Acquisition, which bears interest at 8.0%, and matures on September 8,
2000. The Company expects the remaining net proceeds of approximately $ to
be used for potential acquisitions and development of new Offices, for working
capital and for general corporate purposes. Pending such uses, the Company in-
tends to invest the net proceeds from the Offering in short-term, investment-
grade, interest-bearing securities. The Company is not currently a party to
any agreement with respect to any potential acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
DIVIDEND POLICY
Following the Offering, the Company does not anticipate paying dividends in
the foreseeable future. The Company's existing credit facility also prohibits
the payment of cash dividends on the Common Stock without the lender's con-
sent. Declaration or payment of dividends, if any, in the future, will be at
the discretion of the Board of Directors and will depend on the Company's then
current financial condition, results of operations, capital requirements and
other factors deemed relevant by the Board. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997 (i) on an actual basis, (ii) on a pro forma basis, after giving effect to
the Late 1997 Acquisitions, the Gentle Dental Acquisition and the Conversion
of Debentures, and (iii) on a pro forma basis, as adjusted to give effect to
the sale of the shares of Common Stock being offered by the Company
hereby at the assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. The information in the
table below is qualified in its entirety by, and should be read in conjunction
with, the Consolidated Financial Statements (including the Notes thereto) of
the Company included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt and capital
lease obligations............................... $ 144 $ 166 $ 166
Long-term debt and capital lease obligations..... 7,437 4,147 397
Shareholders' equity:
Preferred Stock, no par value, 10,000,000
shares authorized;
none outstanding.............................. -- -- --
Common Stock, no par value, 10,000,000 shares
authorized (1); 3,447,824 shares outstanding,
5,229,795 shares outstanding pro forma (2) and
shares outstanding, pro forma as
adjusted (2).................................. 1,850 8,301 21,651
Accumulated deficit............................ (229) (534) (534)
------ ------- -------
Total shareholders' equity................... 1,621 7,767 21,117
------ ------- -------
Total capitalization....................... $9,202 $12,080 $21,680
====== ======= =======
</TABLE>
- --------
(1) Authorized shares were increased on September 16, 1997 to 20,000,000.
(2) Includes 1,781,971 shares of Common Stock issuable upon the consummation
of the Offering in connection with the Conversion of Debentures. Excludes
(i) 223,323 shares of Common Stock reserved for issuance upon exercise of
options outstanding as of June 30, 1997 under the Employee Plan, (ii)
132,100 shares of Common Stock reserved for issuance upon exercise of op-
tions outstanding as of June 30, 1997 under the Dental Center Plan, and
(iii) 453,530 shares of Common Stock reserved for issuance upon exercise
of warrants outstanding as of June 30, 1997. See "Management" and "Shares
Eligible for Future Sale."
15
<PAGE>
DILUTION
Purchasers of Common Stock offered hereby will experience an immediate and
substantial dilution in the net tangible book value of the Common Stock from
the assumed initial public offering price. The pro forma net tangible book
value of the Company as of June 30, 1997 was approximately ($973,000), or
($0.19) per share. "Pro forma net tangible book value" per share represents
the pro forma tangible net worth (total tangible assets less total liabili-
ties, after giving effect to the Late 1997 Acquisitions, the Gentle Dental Ac-
quisition, and the Conversion of Debentures) of the Company before giving ef-
fect to the sale of the Common Stock offered hereby. After giving effect to
the sale by the Company of the shares of Common Stock offered hereby (at
the assumed initial public offering price of $ per share, less the esti-
mated underwriting discount and offering expenses) the pro forma net tangible
book value of the Company at June 30, 1997 would have been $ million or $
per share. This represents an immediate increase in net tangible book value of
$ per share to the existing shareholders and an immediate reduction in net
tangible book value of $ per share to new investors. Dilution is determined
by subtracting the pro forma net tangible book value per share after the Of-
fering from the amount of cash paid by a new purchaser for a share of Common
Stock. The following table illustrates the dilution described above on a per
share basis.
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price.......................... $
Net tangible book value at June 30, 1997..................... $(1.11)
Pro forma net tangible book value at June 30, 1997, after
giving effect to the Late 1997 Acquisitions, the Gentle
Dental Acquisition and the Conversion of Debentures......... $(0.19)
Increase in pro forma net tangible book value attributable to
new investors............................................... $
------
Pro forma net tangible book value after the Offering........... $
---
Dilution in net tangible book value to new investors........... $
=== ===
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1997, the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price paid per share
deemed to have been paid by the existing shareholders, and by new investors
purchasing the shares offered by the Company hereby at the assumed initial
public offering price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 3,447,824 % $ 2,059,264 % $0.60
Conversion of
Debentures............. 1,781,971 $ 6,780,000 3.80
New investors...........
--------- ----- ------------ ------- -----
Total................. 100.0% $ 100.0% $
========= ===== ============ ======= =====
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options or warrants after June 30, 1997, or of the Un-
derwriters' over-allotment option. As of June 30, 1997, stock options and war-
rants to purchase 808,953 shares of Common Stock were outstanding with a
weighted average exercise price of $3.16 per share. To the extent these op-
tions and warrants are exercised, there will be further dilution to new in-
vestors.
16
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma as adjusted consolidated statements of income for the year
ended December 31, 1996, and for the six months ended June 30, 1997, give
effect to (i) the Family Dental Acquisition, the Additional 1996 Acquisitions
(together with the Family Dental Acquisition, the "1996 Acquisitions"), the
Early 1997 Acquisitions, the Late 1997 Acquisitions and the Gentle Dental
Acquisition (together with the Early 1997 Acquisitions and the Late 1997
Acquisitions, the "1997 Acquisitions"), (ii) the Conversion of Debentures, and
(iii) the receipt and application of the estimated net proceeds from the
Offering at the assumed initial public offering price of $ per share, as if
such transactions had been completed on January 1, 1996. The pro forma as
adjusted condensed consolidated balance sheet reflects (i) the Late 1997
Acquisitions, (ii) the Gentle Dental Acquisition, (iii) the Conversion of
Debentures, and (iv) the receipt and application of the estimated net proceeds
from the Offering as if such transactions had occurred on June 30, 1997. The
pro form consolidated financial information is based on the consolidated
financial statements of the Company, giving effect to the assumptions and
adjustments in the accompanying notes to the pro forma consolidated financial
information. Although such information is based on preliminary allocations of
the purchase prices of the Late 1997 Acquisitions and the Gentle Dental
Acquisition, the Company does not expect that the final allocations of the
purchase prices will be materially different from such preliminary
allocations.
The pro forma consolidated financial information has been prepared by man-
agement based on the historical financial statements of the Company, the 1996
Acquisitions, and the 1997 Acquisitions, at and for the year ended December
31, 1996 and at and for the six months ended June 30, 1997, adjusted where
necessary to reflect these acquisitions and related operations as if the Man-
agement Agreements had been in effect during the entire periods presented.
This pro forma consolidated financial information is presented for illustra-
tive purposes and it does not purport to represent what the consolidated re-
sults of operations or financial condition of the Company for the periods or
at the date presented would have been had such transactions been consummated
as of such dates and is not indicative of the results that may be obtained in
the future.
17
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1997 ACQUISITIONS (A)
--------------------------
EARLY AND LATE GENTLE CONVERSION
1997 1997 DENTAL ACQUISITION OF PRO FORMA
HISTORICAL ACQUISITIONS ACQUISITION ADJUSTMENTS DEBENTURES OFFERING AS ADJUSTED
---------- -------------- ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dental offices revenue,
net.................... $6,843,689 $680,734 $2,630,155 -- $ -- $ -- $10,154,578
Less -- amounts retained
by dental offices...... 1,616,420 -- -- $1,028,784 (d) -- -- 2,676,481
31,277 (c)
---------- -------- ---------- ---------- -------- -------- -----------
Net revenue............ 5,227,269 680,734 2,630,155 (1,060,061) -- -- 7,478,097
Direct expenses:
Clinical salaries and
benefits.............. 1,696,082 176,029 1,458,096 (889,586)(d) -- -- 2,445,423
4,802 (c)
Dental supplies........ 512,366 43,354 184,841 -- -- -- 740,561
Laboratory fees........ 488,203 67,244 143,076 -- -- -- 698,523
Occupancy.............. 431,609 86,830 121,076 (25,165)(c) -- -- 614,350
Advertising and
marketing............. 217,130 15,860 37,230 -- -- -- 270,220
Depreciation and
amortization.......... 285,409 19,371 35,798 83,097 (e) -- -- 423,675
General and
administrative........ 352,675 251,692 387,619 (387,851)(d) -- -- 523,566
(80,569)(c)
---------- -------- ---------- ---------- -------- -------- -----------
3,983,474 660,380 2,367,736 (1,295,272) -- -- 5,716,318
---------- -------- ---------- ---------- -------- -------- -----------
Contribution from dental
offices................ 1,243,795 20,354 262,419 235,211 -- -- 1,761,779
Corporate expenses--
General and
administrative......... 588,071 -- -- 248,653 (i) -- -- 836,724
Depreciation and
amortization........... 46,416 -- -- -- -- -- 46,416
---------- -------- ---------- ---------- -------- -------- -----------
Operating income
(loss)................. 609,308 20,354 262,419 (13,442) -- -- 878,639
Interest (expense)
income, net............ (337,757) (4,584) (264) 4,848 (f) 345,996(k) 15,313(h) 23,552
(143,500)(j) 143,500(j)
---------- -------- ---------- ---------- -------- -------- -----------
Income (loss) before
income taxes........... 271,551 15,770 262,155 (152,094) 345,996 158,813 902,191
Income taxes (g)........ 5,200 -- -- -- 129,749 59,555 338,321
---------- -------- ---------- ---------- -------- -------- -----------
Net income ............. $ 266,351 $ 15,770 $ 262,155 $ (152,094) $216,247 $ 99,258 $ 563,870
========== ======== ========== ========== ======== ======== ===========
Net income per common
share.................. $ 0.07 $
========== ===========
Weighted average common
shares outstanding..... 3,949,346
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
18
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996 ACQUISITIONS (b) 1997 ACQUISITIONS (b)
------------------------- --------------------------
FAMILY ADDITIONAL EARLY AND LATE GENTLE CONVERSION
1996 DENTAL 1996 1997 DENTAL ACQUISITION OF
HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS ACQUISITION ADJUSTMENTS DEBENTURES OFFERING
---------- ----------- ------------ -------------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental offices
revenue, net.... $7,283,978 $1,977,466 $498,238 $2,052,260 $4,115,851 $ -- $ -- $ --
Less -- amounts
retained by
dental offices.. 1,910,749 -- -- -- -- 2,492,763 (d) -- --
77,812 (c)
---------- ---------- -------- ---------- ---------- ---------- -------- --------
Net revenue..... 5,373,229 1,977,466 498,238 2,052,260 4,115,851 (2,570,575) -- --
Direct
expenses --
Clinical
salaries and
benefits....... 1,749,985 1,433,613 208,448 545,352 2,333,508 (2,002,571)(d) -- --
14,406 (c)
Dental
supplies....... 777,769 166,747 31,790 133,461 340,256 -- -- --
Laboratory
fees........... 483,140 111,165 35,498 199,844 206,174 -- -- --
Occupancy....... 315,423 164,726 48,233 258,081 198,414 (114,851)(c) -- --
Advertising and
marketing...... 280,186 21,547 14,130 55,963 33,672 -- -- --
Depreciation and
amortization... 323,401 35,430 21,742 58,563 69,829 287,538 (e) -- --
General and
administrative.. 672,759 147,745 124,779 794,710 543,309 (825,245)(d) -- --
(185,540)(c)
---------- ---------- -------- ---------- ---------- ---------- -------- --------
4,602,663 2,080,973 484,620 2,045,974 3,725,162 (2,826,263) -- --
---------- ---------- -------- ---------- ---------- ---------- -------- --------
Contribution from
dental offices.. 770,566 (103,507) 13,618 6,286 390,689 255,688 -- --
Corporate
expenses--
General and
administrative.. 721,313 93,186 -- -- -- (93,186)(c) -- --
335,053 (i)
Depreciation and
amortization... 57,941 -- -- -- -- -- -- --
---------- ---------- -------- ---------- ---------- ---------- -------- --------
Operating (loss)
income.......... (8,688) (196,693) 13,618 6,286 390,689 13,821 --
Interest
(expense)
income, net..... (326,590) (33,007) (15,384) (6,286) (1,301) 22,971 (f) 295,025(k) 1,458(h)
(287,000)(j) 287,000(j)
---------- ---------- -------- ---------- ---------- ---------- -------- --------
(Loss) Income
before income
taxes........... (335,278) (229,700) (1,766) -- 389,388 (250,208) 295,025 288,458
Income taxes
(g)............. -- -- -- -- -- -- 110,634 108,172
---------- ---------- -------- ---------- ---------- ---------- -------- --------
Net (loss)
income.......... $ (335,278) $ (229,700) $ (1,766) $ -- $ 389,388 $ (250,208) $184,391 $180,286
========== ========== ======== ========== ========== ========== ======== ========
Net (loss) income
per common
share........... $ (0.09)
==========
Weighted average
common shares
outstanding..... 3,735,734
PRO
FORMA AS
ADJUSTED
-------------
<S> <C>
Dental offices
revenue, net.... $15,927,793
Less -- amounts
retained by
dental offices.. 4,481,324
-------------
Net revenue..... 11,446,469
Direct
expenses --
Clinical
salaries and
benefits....... 4,282,741
Dental
supplies....... 1,450,023
Laboratory
fees........... 1,035,821
Occupancy....... 870,026
Advertising and
marketing...... 405,498
Depreciation and
amortization... 796,503
General and
administrative.. 1,272,517
-------------
10,113,129
-------------
Contribution from
dental offices.. 1,333,340
Corporate
expenses--
General and
administrative.. 1,056,366
Depreciation and
amortization... 57,941
-------------
Operating (loss)
income.......... 219,033
Interest
(expense)
income, net..... (63,114)
-------------
(Loss) Income
before income
taxes........... 155,919
Income taxes
(g)............. 58,469
-------------
Net (loss)
income.......... $ 97,450
=============
Net (loss) income
per common
share........... $
=============
Weighted average
common shares
outstanding.....
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
19
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The adjustments reflected in the pro forma consolidated statements of income
for the six months ended June 30, 1997 and the year ended December 31, 1996
are as follows:
(a) In the pro forma consolidated statement of income for the six months ended
June 30, 1997, the 1997 Acquisitions columns present the historical reve-
nue and expenses of the Early 1997 Acquisitions made during the first six
months of 1997 for that portion of 1997 preceding the Offices' affiliation
with the Company as if these acquisitions had occurred on January 1, 1996.
The 1997 Acquisitions columns also reflect the historical revenue and ex-
penses of the Late 1997 Acquisitions made in August 1997, as if these ac-
quisitions had been made on January 1, 1996. The Gentle Dental Acquisition
column reflects the historical revenue and expenses of this acquisition as
if the acquisition had been made on January 1, 1996.
(b) In the pro forma consolidated statement of income for the year ended De-
cember 31, 1996, the 1996 Acquisitions columns present the historical rev-
enue and expenses of the 1996 Acquisitions for that portion of 1996 pre-
ceding the Offices' affiliation with the Company as if the acquisitions
had occurred on January 1, 1996. The 1997 Acquisitions columns present the
historical revenue and expenses of all 1997 Acquisitions as if they had
been acquired on January 1, 1996.
(c) To reflect the impact of applying (i) the provisions of the Management
Agreements and (ii) adjustments in compensation expense and occupancy
costs principally affecting the owners of the acquired Offices pursuant to
the provisions of employment and other agreements entered into at the time
of acquisitions, as if all such agreements were in place at January 1,
1996 for the pro forma consolidated statements of income for the year
ended December 31, 1996, and for the six months ended June 30, 1997.
(d) Certain expenses have been reclassified to be in conformity with the terms
of the Management Agreements and to be consistent with the Company's clas-
sification of similar expenses, as follows:
<TABLE>
<CAPTION>
CORPORATE CLINICAL DIRECT AMOUNTS
EXPENSES--GENERAL SALARIES AND GENERAL AND RETAINED BY
AND ADMINISTRATIVE (i) BENEFITS ADMINISTRATIVE DENTAL OFFICES
---------------------- -------------- -------------- --------------
INCREASE (DECREASE)
<S> <C> <C> <C> <C>
Year ended December 31,
1996
Family Dental
Acquisition.......... $ -- $ (512,000) $ -- $ 512,000
Additional 1996
Acquisitions......... -- (82,161) (40,366) 122,527
Early and Late 1997
Acquisitions......... -- (71,225) (449,826) 521,051
Gentle Dental
Acquisition.......... 335,053 (1,337,185) (335,053) 1,337,185
-------- ----------- --------- ----------
$335,053 $(2,002,571) $(825,245) $2,492,763
======== =========== ========= ==========
Six months ended June
30, 1997
Early and Late 1997
Acquisitions......... $ -- $ (36,550) $(139,198) $ 175,748
Gentle Dental
Acquisition.......... 248,653 (853,036) (248,653) 853,036
-------- ----------- --------- ----------
$248,653 $ (889,586) $(387,851) $1,028,784
======== =========== ========= ==========
</TABLE>
(e) To increase amortization expense for intangible assets based upon the
Company's allocation of purchase price as if the 1996 Acquisitions and
1997 Acquisitions were all completed on January 1, 1996. The intangible
assets related to the 1996 Acquisitions and the 1997 Acquisitions total
approximately $8.7 million at June 30, 1997 and are being amortized over a
period of 25 years.
(f) To eliminate interest expense related to liabilities not assumed in con-
nection with the 1996 Acquisitions and 1997 Acquisitions.
20
<PAGE>
(g) To reflect the estimated income tax effects at an estimated effective rate
of 37.5%.
(h) To eliminate interest expense on line of credit paid with proceeds of the
Offering.
(i) To reclassify corporate office salaries from direct general and adminis-
trative to corporate expenses -- general and administrative.
(j) To reflect additional interest expense on $3.4 million of acquisition debt
for the Gentle Dental Acquisition as if it had occurred on January 1, 1996
and to reflect the reduction of interest on this debt from pay off through
use of proceeds as if the Offering had occurred on January 1, 1996.
(k) To eliminate interest expense and amortization of debenture issuance costs
as if the convertible debentures had been converted to Common Stock at
date of issuance in 1996.
21
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GENTLE DENTAL
------------------------------- LATE 1997
ACQUISITION ACQUISITIONS AND CONVERSION OF PRO FORMA
HISTORICAL ACQUISITION (a) ADJUSTMENTS (b) ADJUSTMENTS (e) DEBENTURES (f) OFFERING (g) AS ADJUSTED
----------- --------------- --------------- ---------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents....... $ 1,790,117 $250,794 $ (290,794)(c) $(345,500) $ (410,250) $13,350,000 $10,594,367
(3,750,000)
Other current
assets............ 1,217,307 197,388 -- -- -- -- 1,414,695
----------- -------- ---------- --------- ----------- ----------- -----------
Total current
assets............ 3,007,424 448,182 (290,794) (345,500) (410,250) 9,600,000 12,009,062
----------- -------- ---------- --------- ----------- ----------- -----------
Property and
equipment, net..... 2,010,461 203,252 -- 57,000 -- -- 2,270,713
Intangible assets,
net................ 5,052,479 -- 3,226,663 400,500 -- -- 8,679,642
Deferred charges and
other assets....... 488,538 -- -- -- (328,523) -- 160,015
----------- -------- ---------- --------- ----------- ----------- -----------
Total assets....... $10,558,902 $651,434 $2,935,869 $ 112,000 $ (738,773) $ 9,600,000 $23,119,432
=========== ======== ========== ========= =========== =========== ===========
Current liabilities:
Accounts payable
and accrued
expenses.......... $ 1,352,062 $ 87,303 $ 100,000 $ -- $ (105,150) $ -- $ 1,434,215
Current maturities
of notes payable
and capital lease
obligations....... 144,002 7,711 (7,711)(c) 22,400 -- -- 166,402
----------- -------- ---------- --------- ----------- ----------- -----------
Total current
liabilities....... 1,496,064 95,014 92,289 22,400 (105,150) -- 1,600,617
----------- -------- ---------- --------- ----------- ----------- -----------
Notes payable and
capital lease
obligations........ 657,161 -- 3,400,000 89,600 -- (3,750,000) 396,761
Convertible
subordinated
debentures......... 6,780,000 -- -- -- (6,780,000) -- --
Other liabilities... 5,200 -- -- -- -- -- 5,200
----------- -------- ---------- --------- ----------- ----------- -----------
Total liabilities.. 8,938,425 95,014 3,492,289 112,000 (6,885,150) (3,750,000) 2,002,578
----------- -------- ---------- --------- ----------- ----------- -----------
Common stock........ 1,849,659 133,318 (133,318)(d) -- 6,451,477 15,000,000 21,651,136
(1,650,000)
Accumulated
(deficit)
earnings........... (229,182) 423,102 (423,102)(d) -- (305,100) -- (534,282)
----------- -------- ---------- --------- ----------- ----------- -----------
Total shareholders'
equity............ 1,620,477 556,420 (556,420) -- 6,146,377 13,350,000 21,116,854
----------- -------- ---------- --------- ----------- ----------- -----------
Total liabilities
and shareholders'
equity............ $10,558,902 $651,434 $2,935,869 $ 112,000 $ (738,773) $ 9,600,000 $23,119,432
=========== ======== ========== ========= =========== =========== ===========
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
22
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The adjustments reflected in the June 30, 1997 pro forma condensed consoli-
dated balance sheet are as follows:
(a) To record the historical basis of the assets acquired and liabilities as-
sumed by the Company in connection with the Gentle Dental Acquisition.
This acquisition has been accounted for using the purchase method of ac-
counting and, accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on the estimated fair values
as of June 30, 1997. The Company paid approximately $3.5 million in con-
nection with the Gentle Dental Acquisition. The pro forma purchase ac-
counting adjustments are recorded under the Acquisition Adjustments col-
umn.
The following methods and assumptions were used to estimate fair value:
Cash and cash equivalents -- The historical carrying amount approximated
fair value.
Other current assets -- Other current assets consisted primarily of ac-
counts receivable.
Property and equipment, net -- The Company performed an asset-by-asset re-
view and determined that the historical carrying amount approximated fair
value.
Intangible assets -- In connection with the allocation of the purchase
price to intangible assets, the Company analyzed the nature of each Office
with which a Management Agreement was entered into, including the number of
dentists at each Office, ability to recruit additional dentists, the Of-
fice's relative market position, the length of time each Office had been in
existence, and the term and enforceability of the Management Agreement. The
Management Agreements are for a term of 40 years and cannot be terminated
by the relevant P.C. without cause, consisting primarily of bankruptcy or
material default.
The Company believes that there is no material value allocable to the em-
ployment and noncompete agreements entered into between the P.C.s and the
individual dentists. The Company believes that the P.C.s with which it has
Management Agreements which operate the Offices are long-lived entities
with an indeterminable life and that any departing dentists and patients
can be replaced. The amounts allocated to the Management Agreements are be-
ing amortized on a straight-line method over 25 years.
The Emerging Issues Task Force of the Financial Accounting Standards Board
currently is evaluating certain matters relating to the physician practice
management industry, which the Company expects to include a review of the
consolidation of professional corporation revenues and the accounting for
business combinations. The Company is unable to predict the impact, if any,
that this review may be on the Company's acquisition strategy, allocation
of purchase price related to acquisitions and amortization life assigned to
intangible assets.
Liabilities assumed -- Given the short-term nature of the current liabili-
ties assumed and that interest rates on long term debt approximated current
rates, the historical carrying amount approximated their fair value.
(b) To record the cash paid ($100,000) and debt incurred ($3.4 million) in ex-
change for the assets acquired and liabilities assumed and to reflect a
liability ($100,000) for estimated acquisition costs, resulting in an in-
crease of intangible assets of $3,226,663.
(c) To eliminate cash not acquired ($190,794) and liabilities ($7,711) not as-
sumed by the Company as defined in the purchase agreement.
(d) To eliminate the owner's equity in connection with the purchase accounting
for the Gentle Dental Acquisition.
(e) To record cash paid ($345,500) and debt incurred ($112,000) for the assets
acquired, resulting in an increase of intangible assets of $400,500.
(f) To reflect the effect of conversion of $6,780,000 principal amount of con-
vertible subordinated debentures into 1,781,971 shares of Common Stock,
including interest of $305,100 paid to induce the conversion, accrued in-
terest of $105,150 and deferred debenture issuance costs of $328,523 off-
set against common stock.
(g) To reflect the estimated net proceeds from the sale of shares of Com-
mon Stock in the Offering at an assumed initial public offering price of
$ per share, estimated to be approximately $13,350,000 (after deducting
estimated underwriting discount and expenses of $1,650,000 for the Offer-
ing), to reflect the use of proceeds of the Offering of $3,750,000 for
payment of debt.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
The selected consolidated statement of operations data for the period from
inception (May 17, 1995) to December 31, 1995 and for the year ended December
31, 1996 and the six months ended June 30, 1997 and the selected consolidated
balance sheet data at December 31, 1995 and 1996 and June 30, 1997 for the
Company have been derived from the Consolidated Financial Statements of the
Company that have been audited by Arthur Andersen LLP, independent public ac-
countants, which are included elsewhere in this Prospectus. The selected con-
solidated statement of operations data for the six months ended June 30, 1996
have been derived from the unaudited interim consolidated financial statements
of the Company included elsewhere in this Prospectus. The selected data for
1994 and 1995 for the Company's predecessor have been derived from financial
statements of the predecessor that have been audited by Arthur Andersen LLP,
independent public accountants, which are included elsewhere in this Prospec-
tus. The following selected consolidated financial information should be read
in conjunction with the Consolidated Financial Statements and Notes thereto of
the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------------------- --------------------------------------------
SIX MONTHS
YEAR ENDED JANUARY 1, 1995 INCEPTION TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, TO SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ------------------
1994 1995 1995 (1) 1996 1996 1997
------------ ---------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Dental office revenue,
net.................... $ 692 $ 1,022 $ 448 $ 7,284 $ 2,122 $ 6,844
Less -- amounts retained
by dental offices...... 163 265 148 1,911 589 1,617
-------- -------- -------- -------- -------- --------
Net revenue............. 529 757 300 5,373 1,533 5,227
Direct expenses:
Clinical salaries and
benefits.............. 211 323 125 1,750 494 1,696
Dental supplies........ 54 53 42 778 145 512
Laboratory fees........ 53 83 28 483 143 488
Occupancy.............. 70 87 20 315 138 432
Advertising and
marketing............. 17 20 35 280 42 217
Depreciation and
amortization.......... 33 38 14 323 84 285
General and
administrative........ 72 105 42 673 198 353
-------- -------- -------- -------- -------- --------
510 709 306 4,602 1,244 3,983
-------- -------- -------- -------- -------- --------
Contribution from dental
offices................ 19 48 (6) 771 289 1,244
Corporate expenses --
General and
administrative....... -- -- 149 722 313 588
Depreciation and
amortization......... -- -- 4 58 25 47
-------- -------- -------- -------- -------- --------
Operating (loss)
income................. 19 48 (159) (9) (49) 609
Interest expense, net... (24) (29) (1) (326) (47) (338)
-------- -------- -------- -------- -------- --------
(Loss) income before
income taxes........... (5) 19 (160) (335) (96) 271
Income taxes............ -- -- -- -- -- 5
-------- -------- -------- -------- -------- --------
Net (loss) income....... $ (5) $ 19 $ (160) $ (335) $ (96) $ 266
======== ======== ======== ======== ======== ========
Net (loss) income per
common share (2)....... N/A N/A $ (.05) $ (.09) $ (.03) $ .07
======== ======== ======== ========
Weighted average common
shares outstanding..... N/A N/A 3,039 3,736 3,734 3,949
SELECTED OPERATING DATA:
Number of dental offices
(3).................... 3 3 4 18 15 22
Number of dentists
(3)(4)................. 3 3 6 24 25 27
Dental office revenue,
net per office......... $230,852 $340,855 $112,000 $404,665 $141,436 $311,077
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (3):
Cash and cash equivalents................................ $1,465 $1,798 $ 1,790
Working capital.......................................... 698 1,817 1,511
Total assets............................................. 2,908 9,553 10,559
Long-term debt, less current maturities.................. 23 6,829 7,437
Total shareholders' equity............................... 2,004 1,684 1,620
</TABLE>
- --------
(1) The Company was formed on May 17, 1995, and had no substantial operations
until October 1, 1995.
(2) Computed on the basis described in Note 2 of Notes to Consolidated Finan-
cial Statements of the Company.
(3) Data is as of the end of the respective periods presented.
(4) Includes dentists employed by the P.C.s, but excludes specialists who are
independent contractors.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion of the results of operations and financial condi-
tion of the Company should be read in conjunction with the Consolidated Finan-
cial Statements and the Notes thereto of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements. Discus-
sions containing such forward-looking statements may be found in the material
set forth below and under "Business," as well as in this Prospectus generally.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties.
Actual events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation, the risk factors set forth under "Risk Factors" and the matters
set forth in this Prospectus generally.
OVERVIEW
The Company was formed in May 1995, and currently manages 34 Offices in Col-
orado and New Mexico staffed by 49 dentists. The Company has acquired 31 Of-
fices (three of which were consolidated into existing Offices) and opened six
de novo Offices. The Company derives all of its Revenue (as defined below)
from its Management Agreements with the P.C.s. The Company expects to expand
in existing and new markets by acquiring solo and group dental practices, by
developing de novo Offices and by enhancing the operating performance of its
existing Offices. Generally, the Company seeks to acquire dental practices for
which the Company believes application of its dental practice management model
will improve operating performance.
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's success in the Colorado
market has led to its expansion into New Mexico and its evaluation of addi-
tional markets. The Company commenced operations in Colorado in October 1995
with the acquisition of three Offices, and acquired a fourth Office in Novem-
ber 1995. In 1996, the Company opened five de novo Offices, acquired 12 prac-
tices in several transactions, including a group of seven practices in connec-
tion with the Family Dental Acquisition, and five practices in connection with
the Additional 1996 Acquisitions. To date in 1997, the Company has developed
one de novo Office and has acquired 15 practices, including four practices in
connection with the Early 1997 Transactions, two practices in connection with
the Late 1997 Acquisitions, and a group of nine practices in connection with
the Gentle Dental Acquisition.
The Company has experienced significant growth in Revenue and operating
profitability. The Company has achieved these results in Colorado primarily
through the development of a dense dental practice network and the implementa-
tion of its dental practice management model. The Company's Revenue increased
from $448,000 in 1995 to $7.3 million for the year ended December 31, 1996 and
was $6.8 million in the six months ended June 30, 1997. Contribution from den-
tal offices has increased dramatically from a loss of ($6,516) in 1995, to a
profit of $771,000 in 1996, and to a profit of $1.2 million for the six months
ended June 30, 1997. Contribution from dental offices as a percentage of Reve-
nue increased from (1.5)% for the year ended December 31, 1995 to 10.6% for
the year ended December 31, 1996, and to 18.2% for the six months ended June
30, 1997. Operating income also improved substantially from a loss of
($159,000) in 1995 to a loss of ($9,000) in the year ended December 31, 1996
to an operating profit of $609,000 for the six months ended June 30, 1997. The
five de novo Offices opened by the Company between January 8, 1996 and July
15, 1996 generated Revenue of $1.3 million during the six months ended June
30, 1997, and had contribution from dental offices of $227,000 during this pe-
riod, representing a contribution margin of 17.5%.
COMPONENTS OF REVENUE AND EXPENSES
Dental office revenue, net ("Revenue") represents the revenue of the Offices
reported at estimated realizable amounts, received from third-party payors and
patients for dental services rendered at the Offices. Net revenue represents
Revenue less amounts retained by the Offices. The amounts retained by the Of-
fices represent amounts paid as salary, benefits and other payments to em-
ployed dentists and hygienists. The Company's net
25
<PAGE>
revenue is dependent on the Revenue of the Offices. Direct expenses consist of
the expenses incurred by the Company in connection with managing the Offices,
including salaries and benefits (for personnel other than dentists and hygien-
ists), dental supplies, dental laboratory fees, occupancy costs, advertising
and marketing, depreciation and amortization and general and administrative
(including office supplies, equipment leases, management information systems
and other expenses related to dental practice operations). The Company also
incurs personnel and administrative expenses in connection with maintaining a
corporate function that provides management, administrative, marketing, devel-
opment and professional services to the Offices.
Under the Management Agreements, the Company assumes responsibility for the
management of all aspects of the business of the Offices other than the provi-
sion of dental services. Under the typical Management Agreement used by the
Company, the P.C. pays the Company a management fee equal to the Adjusted
Gross Center Revenue of the P.C. less (i) all compensation paid to the den-
tists and dental hygienists employed by the P.C., and (ii) principal and in-
terest payments of loans made to the P.C. by the Company (no loans have been
made by the Company to the P.C.s). Adjusted Gross Center Revenue is dental of-
fice revenue, net less Center Expenses (all operating and non-operating ex-
penses other than federal or state income taxes or expenses expressly desig-
nated as expenses of the P.C.s). The Company's costs include all direct and
indirect costs, overhead and expenses relating to the Company's provision of
management services at the Offices under the Management Agreements, such that
substantially all costs associated with the provision of dental services at
the Offices are borne by the Company, other than the compensation and benefits
of the dentists and hygienists who are employed by the P.C.s. The Company is
responsible for preparing and has final authority with respect to annual bud-
gets for the Offices under the Management Agreements. This enables the Company
to manage the profitability of the Offices. Under the Management Agreements,
the Company provides the Offices with, among other things, the facilities, ad-
ministrative personnel and supplies, as well as numerous services, including
administrative, accounting, cash management, financial statements and reports,
budgeting including capital expenditures, recruiting, insurance, managed care
contracting, management information systems, litigation management, billing
and collection services. Each Management Agreement is for a term of 40 years.
Further, each Management Agreement generally may be terminated by the P.C.
only for cause, which includes a material default by or bankruptcy of the Com-
pany.
The Company's Revenue is derived principally from fee-for-service Revenue
and Revenue from capitated managed dental care plans. Fee-for-service Revenue
consists of Revenue of the P.C.s received from indemnity dental plans, pre-
ferred provider plans and direct payments by patients not covered by any
third-party payment arrangement. Managed dental care Revenue consists of Reve-
nue of the P.C.s received from capitated managed dental care plans, including
capitation payments and patient co-payments. Capitated managed dental care
contracts are between dental benefits organizations and the P.C.s. Under the
Management Agreements, the Company negotiates and administers these contracts
on behalf of the P.C.s. Under a capitated managed dental care contract, the
dental group practice provides dental services to the members of the dental
benefits organization and receives a fixed monthly capitation payment for each
plan member covered for a specific schedule of services regardless of the
quantity or cost of services to the participating dental group practice obli-
gated to provide them. This arrangement shifts the risk of utilization of
these services to the dental group practice providing the dental services. Be-
cause the Company assumes responsibility under the Management Agreements for
all aspects of the operation of the dental practices (other than the practice
of dentistry) and thus bears all costs of the P.C.s associated with the provi-
sion of dental services at the Office (other than compensation and benefits of
dentists and hygienists), the risk of over-utilization of dental services at
the Office under capitated managed dental care plans is effectively shifted to
the Company. In addition, dental group practices participating in a capitated
managed dental care plan often receive co-payments for more complicated or
elective procedures. In contrast, under traditional indemnity insurance ar-
rangements, the insurance company pays whatever reasonable charges are billed
by the dental group practice for the dental services provided. See "Busi-
ness -- Payor Mix."
The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs, opening new Offices and acquiring solo and group practices. The Com-
pany seeks to supplement this fee-for-service business with Revenue from con-
tracts with
26
<PAGE>
capitated managed dental care plans. Although the Company's fee-for-service
business generally is more profitable than its capitated managed dental care
business, capitated managed dental care business serves to increase facility
utilization and dentist productivity. From the year ended December 31, 1996 to
the six months ended June 30, 1997, the Company has been able to expand its
fee-for-service business relative to its total Revenue. See "Business -- Payor
Mix." For the year ended December 31, 1996, fee-for-service Revenue accounted
for 50.5% of the Company's Revenue while in the six months ended June 30, 1997
fee-for-service Revenue increased to 53.7% of Revenue.
The relative percentage of the Company's Revenue derived from fee-for-serv-
ice business and capitated managed dental care contracts varies from market to
market depending on the availability of capitated managed dental care con-
tracts in any particular market and the Company's ability to negotiate favora-
ble terms in such contracts. In addition, the profitability of managed dental
care Revenue varies from market to market depending on the level of capitation
payments and co-payments in proportion to the level of benefits required to be
provided. Variations in the relative penetration and popularity of capitated
managed dental care from market to market across the country, however, make it
difficult to determine whether the Company's experience in new markets will be
consistent with its experience in the Colorado market. The Company expects
that the level of profitability of its operations in new markets entered
through acquisition will vary depending in part on these factors and may not
replicate or be comparable to the Company's results in the Colorado market.
27
<PAGE>
RESULTS OF OPERATIONS
As a result of the recent rapid expansion of its business through acquisi-
tions and the development of de novo Offices, and the Company's limited period
of affiliation with these Offices, the Company believes that the period-to-pe-
riod comparisons set forth below may not be meaningful.
The following table sets forth the percentages of Revenue represented by
certain items reflected in the Company's consolidated statements of opera-
tions. The information contained in the table represents the historical re-
sults of the Company and does not include results of the businesses acquired
subsequent to June 30, 1997. The information that follows should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of
the Company, as well as the pro forma consolidated financial information, in-
cluded elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
INCEPTION TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------
1995 (1) 1996 1996 1997
------------ ------------ ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Dental practices revenue, net.... 100.0% 100.0% 100.0% 100.0%
Less -- amounts retained by
dental offices.................. 33.0 26.2 27.7 23.6
----- ----- ----- -----
Net revenues..................... 67.0 73.8 72.3 76.4
Direct expenses:
Clinical salaries and
benefits...................... 28.0 24.1 23.4 24.8
Dental supplies................ 9.5 10.7 6.9 7.5
Laboratory fees................ 6.3 6.7 6.7 7.1
Occupancy...................... 4.4 4.3 6.5 6.3
Advertising and marketing...... 7.7 3.8 2.0 3.2
Depreciation and amortization.. 3.1 4.4 3.9 4.2
General and administrative..... 9.5 9.2 9.3 5.1
----- ----- ----- -----
68.5 63.2 58.7 58.2
----- ----- ----- -----
Contribution from dental
offices......................... (1.5) 10.6 13.6 18.2
Corporate expenses --
General and administrative..... 33.2 9.9 14.7 8.6
Depreciation and amortization.. 0.9 0.8 1.2 0.7
----- ----- ----- -----
Operating (loss) income.......... (35.6) (0.1) (2.3) 8.9
Interest expense (net)........... (0.2) (4.5) (2.2) (4.9)
----- ----- ----- -----
(Loss) income before income
taxes........................... (35.8) (4.6) (4.5) 4.0
Income taxes..................... 0.0 0.0 0.0 0.1
----- ----- ----- -----
Net (loss) income................ (35.8)% (4.6)% (4.5)% 3.9%
===== ===== ===== =====
</TABLE>
- --------
(1) The Company was formed on May 17, 1995, and had no substantial operations
until October 1, 1995.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Dental office revenue, net. Revenue increased from $2.1 million for the six
months ended June 30, 1996 to $6.8 million in the comparable period in 1997,
an increase of $4.7 million, or 222.6%. Thirteen practices acquired between
May 30, 1996 and May 1, 1997 contributed $3.6 million of the increase, includ-
ing $2.5 million from the Family Dental Acquisition and $1.1 million from the
acquisition of six solo practices. A total of $945,562 of the increase was at-
tributable to five de novo Offices opened by the Company between January 1996
and July 1996. These de novo Offices contributed $352,134 to Revenue in the
1996 period and $1.3 million in the 1997 period. Revenue at the four Offices
that were in existence during both periods contributed $222,585 of the in-
crease, increasing from $1.3 million in 1996 to $1.6 million in 1997.
28
<PAGE>
Amounts retained by dental offices. Amounts retained by dental offices in-
creased from $588,555 for the first six months of 1996 to $1.6 million for the
comparable period in 1997, an increase of $1.0 million or 174.6%. This in-
crease was due to the increased number of Offices and the corresponding addi-
tional dentists and hygienists. As a percentage of Revenue, amounts retained
by dental offices decreased from 27.7% in 1996 to 23.6% in 1997 due to better
personnel utilization and patient scheduling efficiencies resulting from the
Company's dental practice management model.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $494,456 to $1.7 million for the six months ended June 30, 1996 and 1997,
respectively, an increase of $1.2 million or 243.0%. This increase was due
primarily to the increased number of Offices and the corresponding addition of
non-dental personnel. As a percentage of Revenue, clinical salaries and bene-
fits increased from 23.4% in 1996 to 24.8% in 1997.
Dental supplies. Dental supplies increased from $145,559 for the six months
ended June 30, 1996 to $512,366 for the comparable period in 1997, an increase
of $366,807 or 252.0%. This increase was due to the increased Revenue gener-
ated at the Offices. As a percentage of Revenue, dental supplies increased
from 6.9% in 1996 to 7.5% in 1997. This increase as a percentage of Revenue is
due to the need for supplies associated with the initiation of specialty serv-
ices during the six months ended June 30, 1997 and the Company's policy of ex-
pensing such supplies.
Laboratory fees. Laboratory fees increased from $142,658 in the first six
months of 1996 to $488,203 for the comparable period in 1997, an increase of
$345,545 or 242.2%. This increase was due to the increased Revenue generated
at the Offices. As a percentage of Revenue, laboratory fees increased from
6.7% in 1996 to 7.1% in 1997.
Occupancy. Occupancy increased from $138,257 in the first six months of 1996
to $431,609 in the comparable period in 1997, an increase of $293,352 or
212.2%. This increase was due to the increased number of Offices as well as
certain Offices which were only open for part of the six months ended June 30,
1996. As a percentage of Revenue, occupancy expense decreased slightly from
6.5% in 1996 to 6.3% in 1997.
Advertising and marketing. Advertising and marketing increased from $41,577
for the six months ended June 30, 1996 to $217,130 for the comparable 1997 pe-
riod, an increase of $175,553 or 422.2%. This increase was primarily due to
increased advertising, including television, Yellow Pages and radio advertis-
ing in the 1997 period. The Company's increased density in the Colorado market
enabled it cost effectively to increase its advertising expense. As a percent-
age of Revenue, advertising and marketing increased from 2.0% in 1996 to 3.2%
in 1997.
Depreciation and amortization. Depreciation and amortization, which consists
of depreciation and amortization expense incurred at the Offices, increased
from $83,551 in the six months ended June 30, 1996 to $285,409 in the compara-
ble 1997 period, an increase of $201,858 or 241.6%. This increase was due to
the increased number of Offices as well as certain Offices which were only
open for part of the six months ended June 30, 1996. As a percentage of Reve-
nue, depreciation and amortization increased from 3.9% in 1996 to 4.2% in
1997.
General and administrative. General and administrative, which is attribut-
able to the Offices, increased from $198,066 in the six months ended June 30,
1996 to $352,675 in the comparable period in 1997, an increase of $154,609 or
78.1%. This increase was due to the increased number of Offices as well as
certain Offices which were only open for part of the six months ended June 30,
1996. Additionally, the Company expanded its corporate infrastructure to man-
age the growth and some of these costs were passed on to the Offices. As a
percentage of Revenue, general and administrative expenses decreased from 9.3%
in 1996 to 5.1% in 1997, and this decrease was due primarily to necessary high
start up costs relative to revenues at the de novo Offices during 1996, such
as office and computer supplies, insurance and the cost of leased equipment.
29
<PAGE>
Contribution from dental offices. As a result of the above, contribution
from dental offices increased from $288,858 for the six months ended June 30,
1996 to $1.2 million for the comparable period in 1997, an increase of
$954,937 or 330.6%. As a percentage of Revenue, contribution from dental of-
fices increased from 13.6% in 1996 to 18.2% in 1997.
Corporate expenses -- general and administrative. Corporate expenses -- gen-
eral and administrative increased from $312,808 in the first six months of
1996 to $588,071 in the comparable period in 1997, an increase of $275,263 or
88.0%. This increase was due to expansion of the Company's infrastructure to
manage growth, primarily through the addition of personnel. As a percentage of
Revenue, corporate expenses -- general and administrative decreased from 14.7%
in 1996 to 8.6% in 1997.
Corporate expenses -- depreciation and amortization. Corporate expenses --
depreciation and amortization increased from $24,698 in the six months ended
June 30, 1996 to $46,416 in the comparable period in 1997, an increase of
$21,718 or 87.9%. This increase was a result of the Company's expansion of its
corporate infrastructure, primarily investments in computer equipment to man-
age future growth. As a percentage of Revenue, corporate expenses -- deprecia-
tion and amortization decreased from 1.2% in 1996 to 0.7% in 1997.
Operating (loss) income. As a result of the above, operating (loss) income
increased from a loss of ($48,648) in the six months ended June 30, 1996 to
$609,308 in the comparable period in 1997, an increase of $657,956. As a per-
centage of Revenue, operating (loss) income increased from a loss of (2.3%) in
1996 to 8.9% in 1997.
Interest expense, net. Interest expense, net increased from $47,703 in the
first six months of 1996 to $337,757 in the comparable 1997 period, an in-
crease of $290,054 or 608.0%. This increase was primarily the result of inter-
est expense and financing costs associated with the Company's $6.8 million
principal amount 9% convertible debentures issued in May 1996 and December
1996. As a percentage of Revenue, interest expense, net increased from 2.2% in
1996 to 4.9% in 1997.
Net (loss) income. As a result of the above, net (loss) income increased
from a loss of ($96,351) in the first six months of 1996 to $266,351 in the
comparable period in 1997, an increase of $362,702. Net income in 1997 was net
of income taxes of $5,200, and the Company paid no income taxes in the compa-
rable period in 1996. As a percentage of Revenue, net (loss) income increased
from a loss of (4.5%) in 1996 to 3.9% in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The year ended December 31, 1996 represents a full year of operation while
the year ended December 31, 1995 reflects operations from October 1, 1995, the
date the Company acquired its first Offices, and start-up expenses from the
Company's inception at May 17, 1995 to October 1, 1995.
Dental office revenue, net. Revenue increased from $447,995 in 1995 to $7.3
million in 1996, an increase of $6.8 million. The Company acquired its first
three Offices on October 1, 1995 and acquired its fourth Office on November
17, 1995 and, therefore, had limited operations during 1995. These four Of-
fices contributed $2.7 million of Revenue in 1996 and acquisitions made by the
Company during 1996 contributed $3.3 million. A substantial part of the $3.3
million revenue contribution was from the seven Offices in the Family Dental
Acquisition. The Company's five de novo Offices developed between January 1996
and July 1996 contributed $1.3 million to Revenue during 1996.
Amounts retained by dental offices. Amounts retained by dental offices in-
creased from $148,035 for 1995 to $1.9 million for 1996, an increase of $1.8
million. This increase was the result of the Company's full year of operations
in 1996 and growth in number of Offices managed by the Company and the corre-
sponding additional dentists and hygienists. As a percentage of Revenue,
amounts retained by dental offices decreased from 33.0% in 1995 to 26.2% in
1996 due to better personnel utilization and patient scheduling efficiencies
resulting from the Company's dental practice management model.
30
<PAGE>
Clinical salaries and benefits. Clinical salaries and benefits increased
from $125,371 to $1.7 million for 1995 and 1996, respectively, an increase of
$1.6 million. The increased clinical salaries and benefits were due primarily
to the full year of operations in 1996 and the increased number of Offices and
the corresponding addition of non-dental personnel. As a percentage of Reve-
nue, clinical salaries and benefits decreased from 28.0% in 1995 to 24.1% in
1996.
Dental supplies. Dental supplies increased from $42,392 for 1995 to $777,769
for 1996, an increase of $735,377 due to the increased Revenue generated at
the Offices. As a percentage of Revenue, dental supplies increased from 9.5%
in 1996 to 10.7% in 1997. Dental supplies as a percentage of Revenue increased
in 1996 because of the need to supply the five de novo Offices opened by the
Company from January 8, 1996 through July 15, 1996 and the need by the Company
to increase supplies at Offices acquired by the Company during 1996.
Laboratory fees. Laboratory fees increased from $28,262 for 1995 to $483,140
for 1996, an increase of $454,878. This increase was due to the increased Rev-
enue generated at the Offices. As a percentage of Revenue, laboratory fees in-
creased slightly from 6.3% in 1995 to 6.7% in 1996.
Occupancy. Occupancy increased from $19,532 for 1995 to $315,423 for 1996,
an increase of $295,891. This increase was due to the increased number of Of-
fices which grew from four at December 31, 1995, a period with only three
months of operations, to 18 Offices at December 31, 1996. As a percentage of
Revenue, occupancy expense decreased slightly from 4.4% in 1995 to 4.3% in
1996.
Advertising and marketing. Advertising and marketing increased from $34,533
for 1995 to $280,186 for 1996 period, an increase of $245,653. The Company's
only method of advertising and marketing in 1995 was Yellow Pages advertising.
The Company began television advertising in Colorado Springs in January 1996
and in the Denver market in September 1996. Additionally, the Company con-
ducted an extensive direct mail marketing campaign during the opening of each
of its de novo Offices in 1996. As a percentage of Revenue, advertising and
marketing decreased from 7.7% in 1995 to 3.8% in 1996.
Depreciation and amortization. Depreciation and amortization increased from
$13,745 in 1995 to $323,401 in 1996 an increase of $309,656. This increase was
due to the increased number of Offices as well as certain Offices which were
only open part of the year in 1995. Also contributing to the increase were the
five de novo Offices opened by the Company from January 9, 1996 to July 15,
1996. As a percentage of Revenue, depreciation and amortization increased from
3.1% in 1995 to 4.4% in 1996.
General and administrative. General and administrative increased from
$42,641 in 1995 to $672,759 in 1996, an increase of $630,118. This increase
was a result of the full year of operations during 1996 and the increased num-
ber of Offices, as well as certain Offices which were only open for part of
the year in 1995. Additionally, the Company expanded its corporate infrastruc-
ture to manage the growth and a portion of those costs are passed on to the
Offices. As a percentage of Revenue, general and administrative expenses de-
creased from 9.5% in 1995 to 9.2% in 1996.
Contribution from dental offices. As a result of the above, contribution
from dental offices increased from a loss of ($6,516) for 1995 to $770,566 for
1996, an increase of $777,082. As a percentage of Revenue, contribution from
dental offices increased from (1.5)% in 1995 to 10.6% in 1996.
Corporate expenses -- general and administrative. Corporate expenses -- gen-
eral and administrative increased from $148,825 in 1995 to $721,313 in 1996,
an increase of $572,488. This increase was due to a full period of operations
during 1996 and expansion of the Company's infrastructure to manage growth,
primarily through the addition of personnel. As a percentage of Revenue, cor-
porate expenses -- general and administrative decreased from 33.2% in 1995 to
9.9% in 1996. During 1995, the Company had certain start-up costs prior to
generating revenue on October 1, 1995 which contributed to the higher corpo-
rate expense -- general and administrative as a percentage of revenue.
31
<PAGE>
Corporate expenses -- depreciation and amortization. Corporate expenses --
depreciation and amortization increased from $3,888 in 1995 to $57,941 in
1996, an increase of $54,053. This increase was a result of the Company's ex-
pansion of its corporate infrastructure, primarily investments in computer
equipment to manage future growth. As a percentage of Revenue, corporate ex-
penses -- depreciation and amortization decreased from 0.9% in 1995 to 0.8% in
1996.
Operating (loss) income. As a result of the above, operating (loss) income
improved from a loss of ($159,229) in 1995 to a loss of ($8,688) in 1996, an
increase of $150,541. As a percentage of Revenue, operating (loss) income in-
creased from (35.6)% in 1995 to (0.1)% in 1996.
Interest expense, net. Interest expense, net increased from $1,026 in 1995
to $326,590 in 1996, an increase of $325,564. This increase was primarily the
result of interest expense and financing costs associated with the Company's
$6.8 million principal amount 9% convertible debentures issued in May 1996 and
December 1996. As a percentage of Revenue, interest expense, net increased
from 0.2% to 4.5% in 1996.
Net (loss) income. As a result of the above, net (loss) income increased
from a loss of ($160,255) in 1995 to a loss of ($335,278) in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its growth through a combina-
tion of private sales of convertible subordinated debentures and Common Stock,
cash provided by operating activities, a bank line of credit (the "Credit Fa-
cility") and seller notes.
Net cash provided by (used in) operating activities was $25,703 and
($545,583) for the years ended December 31, 1995 and 1996, respectively, and
was ($31,469) and $955,046 for the six months ended June 30, 1996 and 1997,
respectively. Net cash provided by (used in) operations during these periods,
after adding back depreciation and amortization, consisted primarily of in-
creases in accounts payable and accrued expenses. In the six months ended June
30, 1997, net income contributed $266,351 to net cash provided by operating
activities for the period.
Net cash used in investing activities was $348,161 and $4.8 million for the
years ended December 31, 1995 and 1996, respectively, and was $4.1 million and
$1.1 million in the six months ended June 30, 1996 and 1997, respectively. In
the six months ended June 30, 1996, $3.3 million was utilized for acquisitions
and $724,154 was invested in the purchase of additional property and equip-
ment, including $445,213 for the de novo Offices. In the six months ended June
30, 1997, $903,210 was utilized for acquisitions and $294,653 was invested in
the purchase of additional property and equipment, including $59,632 for a de
novo Office. In 1996, $3.7 million was utilized for acquisitions and $1.0 mil-
lion was invested in the purchase of additional property and equipment, in-
cluding $493,009 in the de novo Offices.
For the six months ended June 30, 1996 and 1997, net cash provided by fi-
nancing activities was $4.2 million and $138,831, respectively. In the six
months ended June 30, 1996, the cash provided was comprised of $5.0 million
from the private sale of convertible subordinated debentures, partially offset
by $530,353 used for the repayment of the Credit Facility and $250,837 used
for the payment of subordinated debenture issuance and other financing costs.
In the six months ended June 30, 1997, the cash provided was comprised of
$225,000 from the private sale of convertible subordinated debenture and
$250,000 in net borrowings from the Credit Facility, partially offset by
$100,116 used for the repayment of long term debt and $219,178 used to repur-
chase common stock. Net cash provided by financing activities in 1996 totaled
$5.7 million. This was comprised of $6.6 million from the private sale of con-
vertible subordinated debentures and $100,000 in net borrowings from the
Credit Facility, partially offset by $579,285 used for the repayment of long-
term debt and $401,716 used for the payment of subordinated debenture issuance
and other financing costs. Net cash provided by financing activities in 1995
totaled $1.8 million. This was comprised of $1.8 million from the private sale
of Common Stock, which was partially offset by $19,647 used for the repayment
of long-term debt.
32
<PAGE>
The Company has a Credit Facility which expires October 31, 1999. Under the
Credit Facility, the Company may borrow up to $2.8 million, including up to
$800,000 for working capital needs with such borrowings based on eligible ac-
counts receivable as defined in the credit agreement and a $2.0 million term
loan. At July 31, 1997, the borrowing base on this formula was $690,725. At
September 15, 1997, the Company has total outstanding borrowings of $2.4 mil-
lion under the Credit Facility. Borrowings of $2.0 million were used to fi-
nance the Gentle Dental Acquisition. Monthly principal payments of $33,333
commence on March 1, 1998. The amounts outstanding under the Credit Facility
bear interest at variable rates which are based upon the lender's base rate
plus 0.5%. The Credit Facility prohibits the payment of dividends, and other
distributions to shareholders and restricts or prohibits the Company from in-
curring indebtedness, incurring liens, disposing of assets, making investments
or making acquisitions, and requires the Company to maintain certain financial
ratios on an ongoing basis. The Credit Facility is secured by a lien on the
Company's accounts receivable and its Management Agreements. Additionally,
each of Fred Birner, Mark Birner, D.D.S. and Dennis Genty have provided per-
sonal guarantees of the Credit Facility up to an aggregate amount of $600,000.
Prior to completion of the Offering, the Company expects to negotiate a new
Credit Facility.
The net proceeds from the Offering will enable the Company to repay out-
standing indebtedness under the Credit Facility and to repay a note in connec-
tion with the Gentle Dental Acquisition. The Company believes that the remain-
ing net proceeds from the Offering, together with cash generated from opera-
tions and borrowings under its Credit Facility will be sufficient to fund its
anticipated working capital needs, capital expenditures and future acquisi-
tions for at least the next 12 months. In the event the Company is not able to
successfully negotiate a new Credit Facility or identifies and completes fu-
ture acquisitions more quickly than it currently anticipates, the Company's
current sources of liquidity may not be adequate. In addition, in order to
meet its long-term liquidity needs the Company may issue additional equity and
debt securities, subject to market and other conditions. There can be no as-
surance that such additional financing will be available on terms acceptable
to the Company. The failure to raise the funds necessary to finance its future
cash requirements could adversely affect the Company's ability to pursue its
strategy and could negatively affect its operations in future periods. See
"Risk Factors -- Limited Capital; Need for Additional Financing."
33
<PAGE>
BUSINESS
The Company acquires, develops, and manages geographically dense dental
practice networks in select markets, currently including Colorado and New Mex-
ico, and the Company believes it is the largest provider of dental management
services in Colorado. The Company and its dental practice management model,
which was developed by the Company's President, Mark Birner, D.D.S., provide a
solution to the needs of dentists, patients, and third-party payors by al-
lowing the Company's affiliated dentists to provide high-quality, efficient
dental care in patient-friendly, family practice settings. Dentists practicing
at the Offices provide comprehensive general dentistry services, and the Com-
pany increasingly offers specialty dental services through affiliated special-
ists. Birner manages 34 Offices, of which 28 were acquired and six were de
novo developments. The success of the Company's dental practice network in
Colorado has led to its expansion into New Mexico and its evaluation of addi-
tional markets.
DENTAL SERVICES INDUSTRY
According to the U.S. Health Care Financing Administration ("HCFA"), dental
expenditures in the U.S. increased from $30.4 billion in 1990 to $42.9 billion
in 1995. HCFA also projects that dental expenditures will reach approximately
$79.1 billion by 2005, representing an increase of approximately 84.4% over
1995 dental expenditures. The Company believes this growth is driven by (i) an
increase in the number of people covered by third-party payment arrangements
and the resulting increase in their utilization of dental services, (ii) an
increasing awareness of the benefits of dental treatments, (iii) the retention
of teeth into later stages of life, (iv) the general aging of the population,
as older patients require more extensive dental services, and (v) a growing
awareness of and demand for preventative and cosmetic services.
Traditionally, most dental patients have paid for dental services themselves
rather than through third-party payment arrangements such as indemnity insur-
ance, preferred provider plans or managed dental plans. In recent years, how-
ever, third-party payment arrangements have become more prevalent. According
to the National Association of Dental Plans, in 1995 approximately 117 million
persons, or approximately 45% of all persons in the U.S., were covered by some
form of third-party dental care plan. The remaining 143 million, or 55% of all
persons in the U.S., were not covered by any third-party plan. The Company be-
lieves that the percentage of people covered by third-party payment arrange-
ments will continue to increase, due in part to the popularity of such ar-
rangements.
Although total expenditures for dental care services in the U.S. have grown,
the dental services industry remains highly fragmented. According to the Amer-
ican Dental Association, in 1995 there were approximately 153,300 active den-
tal professionals in the U.S., of which approximately 88% practiced either
alone or with only one other dentist. Dental services typically are offered by
local providers, primarily solo practitioners or small groups of general den-
tists or specialists, practicing at a single location.
The Company believes that the fragmented dental services industry will in-
creasingly consolidate due to (i) the shift to third-party reimbursement and
the advantages enjoyed by larger group practices in negotiating with third-
party payors, (ii) the economies of scale for cost-effective management of pa-
tient care, (iii) the desire to capture revenues from higher-margin specialty
procedures, which would otherwise be referred to non-affiliated specialists,
(iv) the need for access to the capital resources necessary to acquire and
maintain state-of-the art dental equipment, clinical facilities and management
information systems, and (v) the growing importance of sophisticated marketing
programs directed toward patients and third-party payors.
THE BIRNER STRATEGY
The Company's objective is to be the leading dental practice management com-
pany in the markets it serves. The key elements of the Company's strategy in-
clude:
Develop and Operate Geographically Dense Dental Practice
Networks. Management believes that clustering its Offices allows the Company
to implement other key elements of its strategy which maximize revenue
34
<PAGE>
and operating performance. With 30 Offices in the Colorado market, the Company
has built successful, geographically dense dental practice networks, and the
Company only intends to enter markets which will support such networks.
Capitalize on Flexible Growth Strategy. Once the Company has identified an
attractive market, it can enter that market and subsequently increase the den-
sity of its dental practice network through multiple methods. The Company has
demonstrated its ability to make acquisitions of large group practices, to ac-
quire solo and small group practices, and to develop de novo Offices. The Com-
pany believes its experience in acquiring solo and small group practices will
become increasingly important, as the majority of all dentists practice either
alone or with one other dentist. Therefore, the Company believes its experi-
ence with multiple expansion methods allows it to capitalize on the opportuni-
ties presented by a market and represents a significant competitive advantage.
Enhance Operating Performance. The Company enhances the operating perfor-
mance of its Offices through the implementation and application of its dental
practice management model. Key components of this model include providing a
designated managing dentist with economic incentives to improve Office operat-
ing performance, a proprietary patient scheduling system, a training program
for non-dental employees, and a system for optimizing revenue through managing
payor mix. The Company believes its model provides an ideal setting for den-
tists to develop long-term relationships with patients.
Capture Specialty Service Revenue. By operating geographically dense net-
works, the Company can effectively utilize affiliated specialists. As the Com-
pany achieves density in a market, it intends to offer a complete range of
specialty services to its patients. This enables the Company to capture reve-
nue from specialty services that would otherwise be lost to non-affiliated
providers. Specialty services typically are provided on a fee-for-service ba-
sis and generally yield a higher margin than general dentistry services.
Develop Brand Identity. The Company's marketing programs have been designed
to reinforce the association of the PERFECT TEETH(R) name and logo with high-
quality, convenient dental care. The Company's marketing efforts are intended
to increase patient flow and generally are targeted at fee-for-service pa-
tients. Where appropriate, the Company operates its offices under the PERFECT
TEETH(R) name with the PERFECT TEETH(R) logo prominently and attractively dis-
played. The Company's geographically dense networks allow it to spread the
cost of its marketing programs, particularly television and radio advertising,
across a larger base of patient revenue.
EXPANSION PROGRAM
OVERVIEW
Since its formation in May 1995, the Company has acquired 31 practices, in-
cluding three practices that have been consolidated into existing Offices. Of
those acquired practices, 28 were located in Colorado and three were located
in New Mexico. Although the Company has acquired and integrated several group
practices, many of the Company's acquisitions have been of solo dental prac-
tices. The Company also has developed six de novo Offices. Therefore, the Com-
pany is not dependent on any particular expansion strategy and can capitalize
on the opportunities presented by a market.
35
<PAGE>
The following table sets forth the increase in the number of Offices managed
by the Company from 1995 to 1997, including the number of de novo Offices and
acquired Offices in each such year:
<TABLE>
<CAPTION>
1995 (1) 1996 1997 (2)
-------- ---- --------
<S> <C> <C> <C>
Offices at beginning of the period....................... 0 4 18
De novo Offices.......................................... 0 5 1
Acquired Offices (3)..................................... 4 9 15
--- --- ---
Offices at end of the period............................. 4 18 34
=== === ===
</TABLE>
- --------
(1) From October 1, 1995 through December 31, 1995.
(2) Through the date of this Prospectus.
(3) For 1996, does not include three practices that were acquired and consoli-
dated with existing Offices.
ACQUISITION STRATEGY
Prior to entering a new market, the Company considers the population,
demographics, market potential, competitive and regulatory environment, supply
of available dentists, needs of managed care plans or other large payors and
general economic conditions within the market. Once the Company has estab-
lished a presence in a new market, the Company seeks to increase its density
in that market by making further acquisitions and by developing de novo Of-
fices. The Company identifies potential acquisition candidates through a vari-
ety of means, including selected inquiries of dentists by the Company, direct
inquiries by dentists, referrals from other dentists, participation in profes-
sional conferences and referrals from practice brokers.
The Company seeks to identify and acquire dental practices for which the
Company believes application of its dental practice management model will im-
prove revenue and operating performance, and it has demonstrated its ability
to identify and improve such practices. The following table demonstrates how
implementation of the Company's dental practice management model has contrib-
uted to improvements in revenue and operating performance for several of the
Company's acquisitions:
<TABLE>
<CAPTION>
SIX MONTH RESULTS
-------------------------------
PRE-ACQUISITION POST-ACQUISITION
--------------- ----------------
<S> <C> <C>
Family Dental Acquisition (seven practices)
Dental office revenue, net.................... $2,300,000 $2,600,000
Contribution from dental offices.............. (185,000) 367,000
Contribution margin........................... (8.0)% 14.1%
Castle Rock Acquisition
Dental office revenue, net.................... $ 109,000 $ 167,000
Contribution from dental offices.............. (3,000) 28,000
Contribution margin........................... (2.8)% 16.8%
</TABLE>
There can be no assurance that the dental office revenue, net, contribution
from dental offices and contribution margin for the seven practices acquired
in the Family Dental Acquisition or for the Castle Rock Office will continue
to grow at these historical rates, or that the Company's operations in other
markets will grow at rates comparable to those experienced in these practices.
RECENT ACQUISITIONS
Gentle Dental Acquisition. On September 8, 1997, the Company acquired nine
dental practices operated under the name Gentle Dental which are located in
Boulder, Colorado Springs, Denver, Greeley and Longmont, Colorado for $3.5
million. The sum of $2.1 million was paid in cash, and the Company issued a
$1.4 million note which will be repaid from the proceeds of the Offering. See
"Use of Proceeds." The Gentle Dental practices
36
<PAGE>
employ 13 dentists and generated $4.1 million in revenue for the year ended
December 31, 1996 and $2.6 million in revenue for the six months ended June
30, 1997. These practices have operated with a management team headed by James
Abramowitz, D.D.S., who has practiced dentistry since 1972. Dr. Abramowitz was
an early pioneer in the negotiation of capitated managed dental care contracts
in Colorado. Dr. Abramowitz and his management team developed the Gentle Den-
tal network beginning in 1992, and they have agreed to become part of the
Company's management team. With the Gentle Dental Acquisition, the Company has
30 Offices in Colorado, solidifying the Company's presence in this market and
making it, to its knowledge, the largest dental practice network in Colorado.
New Mexico Acquisitions. The Company identified New Mexico as an attractive
new market for the implementation of its dental practice management model
based on favorable demographics, the relative low penetration of managed care,
and the absence of a dominant dental practice network. Since April 1997, the
Company has acquired three solo dental practices in Albuquerque, New Mexico.
The Company will seek to increase its density further in this market through
acquisitions of practices and the development of de novo Offices, as it has
done in the Colorado market.
DE NOVO OFFICE DEVELOPMENTS
One method by which the Company enters new markets and expands its opera-
tions in existing markets is through the development of de novo Offices. Three
of the Company's four Colorado Springs Offices and two of the Company's 20
Denver Offices were de novo developments. In addition, in August 1997, the
Company opened a de novo Office in Albuquerque, New Mexico. The Company gener-
ally locates de novo Offices in areas in which there is significant population
growth and/or population turnover. All of the Company's current de novo Of-
fices are located in supermarket-anchored shopping centers. The Company seeks
prime retail locations for its de novo Offices, generally located in high-
growth suburban areas of the market. These locations provide high visibility
of the Company's signage and easy walk-in access for its customers. Histori-
cally, the Company has used consistent office designs, colors, logo and
signage for each of its de novo Offices.
The average investment by the Company in each of its six de novo Offices has
been approximately $170,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the initial operations. The
five de novo Offices opened between January 8, 1996 and July 15, 1996 began
generating positive contribution from dental offices, on average, within three
months of opening. These five de novo Offices generated dental office revenue,
net of $1.3 million during the six months ended June 30, 1997, and had contri-
bution from dental offices of $227,000 during this period, representing a con-
tribution margin of 17.5%. From time to time, the Company has been able to ne-
gotiate favorable managed care contracts to facilitate the development of a de
novo Office and reduce the period of time it takes for a de novo Office to be-
come profitable.
THE BIRNER DENTIST PHILOSOPHY
The Company seeks to develop long-term relationships with its dentists by
building the practice at each of its Offices around a managing dentist. The
Company's dental practice management model provides managing dentists the au-
tonomy and independence of a private family practice setting without the capi-
tal commitment and the administrative burdens such as billing/collections,
payroll, accounting, and marketing. This gives the managing dentists the abil-
ity to focus primarily on providing high-quality dental care to their pa-
tients. The managing dentist retains the responsibilities of team building and
developing long-term relationships with patients and staff by building trust
and providing a friendly, relaxed atmosphere in his or her Office. The manag-
ing dentist determines which personnel, including dental assistants and hy-
gienists, to hire or terminate, and exercises his or her own clinical judgment
in matters of patient care. In addition, managing dentists are given an eco-
nomic incentive to improve the operating performance of their Offices. Each
managing dentist also has been granted stock options in the Company that typi-
cally vest over a three-to-five year period.
When the revenues of an Office justify expansion, one or more associate den-
tists can be added to the team. Associate dentists are typically recent gradu-
ates from residency programs, and usually spend up to two years
37
<PAGE>
working with a managing dentist. Depending on his or her performance and abil-
ities, an associate dentist may be given the opportunity to become a managing
dentist in another of the Offices.
OPERATIONS
EXISTING OFFICES
The Company manages a total of 34 Offices in Colorado and New Mexico. The
following table shows the location of each Office, the date each Office was
acquired or de novo developed, and the specialty dental services currently of-
fered at that Office in addition to comprehensive general dental services:
<TABLE>
<CAPTION>
LOCATION DATE ACQUIRED/DEVELOPED* SPECIALTY SERVICES
- -------- ------------------------ ------------------
<S> <C> <C>
COLORADO
Boulder September 1997 --
Castle Rock October 1995 Orthodontics
Colorado Springs
Austin Bluffs January 1996* --
Garden of the Gods July 1996* --
Uintah Gardens May 1996* Orthodontics, Oral Surgery
Union and Academy September 1997 --
Denver
64th and Ward Road January 1996* --
88th and Wadsworth September 1997 --
Arapahoe October 1995 Orthodontics
Bow Mar October 1995 Orthodontics
Buckley and Mississippi September 1997 --
Central Denver May 1996 Orthodontics
East 104th Avenue May 1996 Orthodontics
East Cornell August 1996 --
East Iliff May 1997 --
Ken Caryl September 1997 --
Leetsdale March 1996* --
Monaco and Evans November 1995 Oral Surgery, Periodontics
North Sheridan May 1996 Orthodontics, Oral Surgery
Sheridan and 64th Avenue May 1996 --
South Galena May 1996 Orthodontics
South Holly Street September 1997 --
Speer February 1997 --
West 38th Avenue May 1996 Orthodontics, Endodontics
West 120th Avenue September 1997 --
Yale April 1997 --
Fort Collins May 1996 Oral Surgery
Greeley September 1997 --
Longmont September 1997 --
Loveland September 1996 --
NEW MEXICO
Albuquerque
Candelaria April 1997 Orthodontics
Four Hills August 1997* --
Fourth Street August 1997 --
Wyoming and Candelaria August 1997 --
</TABLE>
38
<PAGE>
The Offices typically are located either in shopping centers, professional
office buildings or stand-alone buildings. Currently, all of the de novo Of-
fices are located in supermarket-anchored shopping centers. The Offices have
from three to 16 treatment rooms and range in size from 1,200 square feet to
7,400 square feet.
PATIENT SERVICES
The Company seeks to develop long-term relationships with patients. A com-
prehensive exam and evaluation is conducted during a patient's first visit.
Through patient education and other on-going relationship building, the pa-
tients develop an awareness of the benefits of a comprehensive, long-term den-
tal care plan. The Company believes that it will retain these patients longer,
and that these patients will have a higher utilization of Birner's dental
services including specialty, elective, and cosmetic services.
Dentists practicing at the Offices provide comprehensive general dentistry
services, including full coverage crowns and bridges, fillings (including
state-of-the-art gold, porcelain and composites inlays/onlays), and aesthetic
procedures such as porcelain veneers and bleaching. In addition, hygienists
provide cleanings and periodontal services including root planing and scaling.
At certain of the Offices, the patient is offered specialty dental services,
such as orthodontics, oral surgery, endodontics and periodontics. These serv-
ices are provided by affiliated specialists who rotate through several offices
in a particular market. The addition of specialty services is a key component
of the Company's strategy, as it enables the Company to capture revenue from
typically higher margin services that would otherwise be referred to non-af-
filiated providers. In addition, by offering a broad range of dental services
within a single practice, the Company is able to distinguish itself from its
competitors and realize operating efficiencies and economics of scale through
higher utilization of professionals and facilities.
DENTAL PRACTICE MANAGEMENT MODEL
The Company has developed a dental practice management model designed to
achieve its goal of providing personalized, high-quality dental care in a pa-
tient friendly setting similar to that found in a traditional private prac-
tice. The Company believes that its model differentiates it from other dental
practice management companies and provides it with significant competitive ad-
vantages in attracting and retaining dental care professionals, negotiating
with third party payors, and attracting and retaining patients. The Company's
dental practice management model consists of the following components:
Recruiting of Dentists. The Company seeks dentists with excellent skills and
experience, who are sensitive to patient needs, interested in establishing
long-term patient relationships and are motivated by financial incentives to
enhance Office operating performance. The Company believes that practice in
its network of Offices offers both recently graduated dentists and more expe-
rienced dentists advantages over a solo or smaller group practice, including
relief from the burden of administrative responsibilities and the resulting
ability to focus almost exclusively on practicing dentistry. Advantages to
dentists affiliated with the Company also include a compensation structure
that rewards productivity, employee benefits such as health insurance, a
401(k) plan, continuing education, payment of professional membership fees and
malpractice insurance, and, for affiliated specialists, the Company believes
this affiliation offers a steadier stream of referrals. The Company's efforts
to recruit dentists is focused on dentists with approximately three years or
more of practice experience. The Company typically recruits associate dentists
graduating from residency programs. In the Company's experience, many dentists
in the early stages of their careers have incurred substantial student loans.
As a result, they face significant financial constraints in starting their own
practices or buying into existing practices, especially in view of the capi-
tal-intensive nature of modern dentistry.
The Company advertises for the dentists it seeks in national and regional
dental journals, local market newspapers, and directly at dental schools with
strong residency programs. In addition, the Company has found that its exist-
ing affiliated dentists provide a good referral source for recruiting future
dentists.
Training of Non-Dental Employees. The Company has developed a formalized
training program for non-dental employees which is conducted by the Company's
field representatives. This program includes training in
39
<PAGE>
patient interaction, scheduling, use of the computer system, office procedures
and protocol, and third-party payment arrangements. Depending on a new employ-
ee's position and experience, employment with the Company begins with three to
five days of formal training. The Company encourages employees to attend con-
tinuing education seminars. In addition, the field representatives have
monthly meetings with administrative staff to review pertinent and timely top-
ics and generate ideas that can be shared with all Offices. Management be-
lieves the training program the Company has established and the on-going
monthly meetings with employees have contributed to the improvement in operat-
ing performance of its Offices.
Proprietary Patient Scheduling. The Company has developed a proprietary pa-
tient scheduling system which was designed by its President, Mark Birner,
D.D.S., to maximize Office and personnel utilization and profitability while
providing high-quality care to the patients. The Company's scheduling system
is designed to control the revenue mix by balancing fee-for-service and
capitated managed dental care patients.
Staffing Model. The Company's staffing model attempts to maximize Office
profitability by adjusting personnel according to an Office's revenue level.
Staffing at mature Offices can vary based on the number of treatment rooms,
but generally includes one to two dentists, two to four dental assistants, one
to two hygienists, one to two hygiene assistants and two to four front office
personnel. Staffing at de novo Offices typically consists of one dentist, one
dental assistant and one front office person. As the patient base builds at an
Office, additional staff are added to accommodate the growth as provided in
the staffing model developed by the Company. The Company currently has a staff
of five field representatives in Colorado, one of whom also covers New Mexico.
These field representatives, who are each responsible for up to 10 Offices,
oversee the operations and training of non-dental employees and work to imple-
ment the Company's dental practice management model to maximize revenues and
profitability.
Management Information Systems. All of the Offices, except for the nine Of-
fices recently acquired in connection with the Gentle Dental Acquisition, have
the same management information system, which allows the Company to receive
uniform data that can be analyzed easily in order to measure and improve Of-
fice operating performance. As part of its acquisition integration process,
the Company intends to convert the Offices acquired in the Gentle Dental Ac-
quisition to its management information system. The Company has installed a
computer system which enables it to link its headquarters on-line with each of
its Offices. This system allows the Company to monitor the Offices by ob-
taining real-time data relating to patient and insurance information, treat-
ment plans, scheduling, revenues and collections. In addition, various month-
end management reports are generated, including accounts receivable aging and
information that allows the Company to analyze the economics of the managed
care plans for which each Office is a provider.
The Company provides each Office with monthly operating data and financial
statements, and uses the data to make recommendations to improve Office finan-
cial performance. The Company believes that these monthly reports allow the
Offices to make periodic operating adjustments which help improve results. In
addition, the Company uses the information system to provide data for case
management.
Advertising and Marketing. The Company seeks to increase patient volume at
its Offices through television, radio, print advertising and other marketing
techniques. The Company's advertising efforts, which are principally aimed at
increasing its fee-for-service business, emphasize the high-quality care pro-
vided at its Offices and that the Company's affiliated dentists have more time
to spend with patients. Because of its market density, the Company is able
cost effectively to use television and radio advertising which are effective
at increasing patient volume.
The Company believes that its PERFECT TEETH(R) name is associated with high-
quality dental care in Colorado, and intends to operate other Offices under
this name where appropriate. When desirable, the PERFECT TEETH(R) logo is
prominently displayed in an attractive sign at each Office. The Company also
utilizes Yellow Pages advertisements, direct mail campaigns and other forms of
advertising to highlight the Office's high-quality dental care and customer-
oriented service. The Company's six de novo Offices are all located in super-
market-anchored shopping centers and have consistent design, layout and color.
40
<PAGE>
Quality Assurance. The Company has designed and implemented a quality assur-
ance program for dental personnel which includes a thorough background check,
formal training at the time of hiring, and incentives tied to new patient re-
ferrals from existing patients. Quarterly site visits to the Offices and
monthly meetings of all of the Company's dentists help reinforce elements of
the Company's quality assurance program. Each affiliated dentist is a graduate
of an accredited dental program, and state licensing authorities require den-
tists to undergo annual training. The dentists and hygienists practicing at
the Offices can obtain some of the required continuing education training
through the Company's internal training programs.
Purchasing/Vendor Relationships. The Company has negotiated arrangements
with a number of its more significant vendors, including dental laboratory and
supply providers to reduce per unit costs. By aggregating supply purchasing
and laboratory usage, the Company believes that it has received favorable
pricing compared to solo or smaller group practices. Dental equipment and sup-
plies are obtained by the Company as directed by the Offices, and administra-
tive supplies are purchased by the Company and distributed on an as-needed ba-
sis to each Office, thereby limiting storage of unused inventory and supplies.
Additionally, the Company has been able to negotiate favorable bulk purchases
of dental equipment by its Offices.
PAYOR MIX
The Company's payors include indemnity insurers, preferred provider plans,
managed dental care plans, and uninsured patients. The Company seeks to opti-
mize revenue mix at each Office between fee-for-service business and capitated
managed care plans, taking into account the local dental market. While fee-
for-service business generally is more profitable than capitated managed den-
tal care business, capitated managed dental care business serves to increase
facility utilization and dentist productivity. Consequently, the Company seeks
to supplement its fee-for-service business with revenue derived from contracts
with capitated managed dental care plans. Managed care relationships also pro-
vide increased co-payment revenue, referrals of additional fee-for-service pa-
tients and opportunities for dentists practicing at the Offices to educate pa-
tients about the benefits of elective dental procedures that may not be cov-
ered by the patients' capitated managed dental care plans.
Although only approximately 9% of individuals in the United States were en-
rolled in managed dental care plans in 1995, the Company believes that
capitated managed dental care will play an increasingly important role in the
provision of dental services. The Company believes that capitated managed den-
tal care is much more prevalent in Colorado than the national average, and,
because of its presence in Colorado, the Company has significant experience
with capitated managed dental care contracts. The Company believes that this
experience positions the Company well for an environment with increased man-
aged care penetration.
Capitated managed dental care plans typically pay participating dental group
practices a fixed monthly amount for each plan member covered for a specified
schedule of services regardless of the quantity or cost of such services. This
arrangement shifts the risk and reward of utilization and efficiency to the
dental group practice that provides the dental services. Because the Company
assumes responsibility under its Management Agreements with the P.C.s for all
aspects of the operation of the dental practices (other than the provision of
dental care) and thus bears all costs of the P.C.s associated with operating
the Offices (other than compensation and benefits of dentists and hygienists),
the risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
members of capitated managed dental care plans may pay the P.C.s additional
amounts as co-payments for more complex procedures. The relative size of capi-
tation payments and co-payments varies in accordance with the level of bene-
fits provided and plan design.
41
<PAGE>
The following table sets forth information regarding the percentage of the
Company's total revenue represented by payor type for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
PAYOR TYPE 1996 1997
- ---------- ------------ ----------------
<S> <C> <C>
Fee for service (1)............................... 50.5% 53.7%
Managed dental care
Capitation...................................... 21.2 19.8
Co-payment...................................... 28.3 26.5
----- -----
Total......................................... 100.0% 100.0%
===== =====
</TABLE>
- --------
(1) Includes revenue from indemnity dental plans, preferred provider plans and
direct payments by patients not covered by any third-party payment ar-
rangements.
During the fiscal year ended December 31, 1996, approximately 14.4% and
10.3% of the Company's dental office revenue, net came from Prudential Dental
Maintenance Organization, Inc. ("Prudential") and PacifiCare of Colorado, Inc.
("PacifiCare"), respectively. During the six months ended June 30, 1997, Pru-
dential and PacifiCare were responsible for 13.1% and 11.0%, respectively, of
the Company's dental office revenue, net.
AFFILIATION MODEL
RELATIONSHIP WITH P.C.S
Each Office is operated by a P.C. which employs or contracts with the den-
tists and dental hygienists who practice at that Office. All but five of the
P.C.s operating Offices located in Colorado are solely owned by the Company's
President, Mark Birner, D.D.S. The P.C.s operating Offices located in New Mex-
ico, and the remaining five P.C.s operating Offices in Colorado, are owned by
other licensed dentists in their respective states. The Company has entered
into an agreement with each of the owners of the P.C.s, including the
Company's President, Dr. Birner, whereby upon the death, disability, incompe-
tency or insolvency of the owner of the P.C., a loss of the owner's license to
practice dentistry, a termination of the owner's employment by the P.C. or the
Company, a conviction of the owner for a criminal offense, or a breach by the
P.C. of the Management Agreement with the Company, the Company may require the
owner to sell his or her ownership interest in the P.C. to a third-party des-
ignated by the Company at nominal value.
MANAGEMENT AGREEMENTS WITH AFFILIATED OFFICES
The Company derives all of its revenue from its Management Agreements with
the P.C.s. Under each of the Management Agreements, the Company manages the
business and marketing aspects of the Offices, including (i) providing capi-
tal, (ii) designing and implementing marketing programs, (iii) preparing bud-
gets and financial statements, (iv) negotiating on behalf of the P.C.s for the
purchase of supplies, (v) providing a patient scheduling system, (vi) staff-
ing, (vii) recruiting, (viii) training of non-dental personnel, (ix) billing
and collecting patient fees, (x) arranging for certain legal and accounting
services, and (xi) negotiating on behalf of the P.C.s with managed care orga-
nizations. The P.C. is responsible for, among other things, (i) employing and
supervising all dentists and dental hygienists, (ii) complying with all laws,
rules and regulations relating to dentists and dental hygienists, (iii) main-
taining proper patient records, and (iv) cooperating in the obtaining of pro-
fessional liability insurance.
Under the typical Management Agreement used by the Company, the P.C. pays
the Company a management fee equal to the Adjusted Gross Center Revenue of the
P.C. less (i) all compensation paid to the dentists and dental hygienists em-
ployed by the P.C., and (ii) principal and interest payments of loans made to
the P.C. by the Company (no loans have been made by the Company to the P.C.s).
Adjusted Gross Center Revenue is dental office revenue, net less Center Ex-
penses (all operating and non-operating expenses other than federal or state
income taxes or expenses expressly designated as expenses of the P.C.s). Most
operating expenses of the P.C.s are accounted for as expenses of the Company
and are recognized as incurred.
42
<PAGE>
Management Agreements are for terms of 40 years, and are structured such
that they may be terminated by the Company or by the P.C. only for "cause,"
which includes a material default by or bankruptcy of the other party. Upon
expiration or termination by either party of a Management Agreement, the P.C.
must satisfy all obligations it has to the Company. The Company agrees during
the term of the Management Agreement not to acquire or develop de novo any Of-
fices within three miles of the Office of the P.C. without the P.C.'s consent.
The Company plans to continue to use the current form of its Management
Agreement to the extent possible and marketable, as it enters into new mar-
kets. However, the terms of the Management Agreements are subject to change to
comply with existing or new regulatory requirements or to enable the Company
to compete more effectively. See "Risk Factors -- Dependence on Management
Agreements, the P.C.s and Affiliated Dentists," "-- Potential Conflict of In-
terest of the Company's President Relating to the P.C.s" and "Business -- Gov-
ernment Regulation."
EMPLOYMENT AGREEMENTS
Most dentists practicing at the Offices have entered into employment agree-
ments or independent contractor agreements with the P.C.s, the majority of
such agreements are terminable without cause by either party upon two to seven
days' notice. Such agreements typically contain non-competition provisions for
up to three to five years following their termination within a specified geo-
graphic area, usually a specified number of miles from the relevant Office,
and restrict solicitation of patients and employees of the Offices. Managing
dentists receive compensation based upon a specified amount per hour worked or
a percentage of collections attributable to their work, and a bonus based upon
the operating performance of the Office. Associate dentists are compensated
based upon a specified amount per hour worked, and a potential for bonuses in
certain situations. Specialists are compensated based upon a percentage of
collections or revenue attributable to their work. The dentists' compensation
and benefits are paid by the P.C. with whom the dentist has entered into an
employment agreement.
COMPETITION
The dental services industry is highly fragmented, consisting primarily of
solo and smaller group practices. The dental practice management segment of
this industry is highly competitive and is expected to become more competi-
tive. In this regard, the Company expects that the provision of multi-
specialty dental services at convenient locations will become increasingly
more common. The Company is aware of several dental practice management compa-
nies that are operating in its markets. Companies with dental practice manage-
ment businesses similar to that of the Company which currently operate in
other parts of the country, may begin targeting the Company's existing markets
for expansion. Such competitors may have greater financial resources or other-
wise enjoy competitive advantages which may make it difficult for the Company
to compete against them or to acquire additional Offices on terms acceptable
to the Company. As the Company seeks to expand its operations into new mar-
kets, it is likely to face competition from dental practice management compa-
nies which already have established a strong business presence in such loca-
tions.
The business of providing general dental, orthodontic and other specialty
dental services is highly competitive in the markets in which the Company op-
erates. The Company believes it competes with other providers of dental and
specialty services on the basis of factors such as brand name recognition,
convenience, cost and the quality and range of services provided. Competition
may include practitioners who have more established practices and reputations.
The Company also competes against established practices in the retention and
recruitment of general dentists, specialists, hygienists and other personnel.
If the availability of such dentists, specialists, hygienists and other per-
sonnel begins to decline in the Company's markets, it may become more diffi-
cult to attract qualified dentists, specialists, hygienists and other person-
nel to staff the Offices sufficiently or to expand them.
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal levels,
and the regulation of health care-related companies is increasing. There can
be no assurance that the regulatory environment in which the Com-
43
<PAGE>
pany or the P.C.s operate will not change significantly in the future. The
laws and regulations of all states in which the Company operates impact the
Company's operations but do not currently materially restrict the Company's
operations in those states. In addition, state and federal laws regulate
health maintenance organizations and other managed care organizations for
which dentists may be providers. In connection with its operations in existing
markets and expansion into new markets, the Company may become subject to ad-
ditional laws, regulations and interpretations or enforcement actions. The
laws regulating health care are broad and subject to varying interpretations,
and there is currently a lack of case law construing such statutes and regula-
tions. The ability of the Company to operate profitably will depend in part
upon the ability of the Company and the P.C.s to operate in compliance with
applicable healthcare regulations.
STATE REGULATION
The laws of many states permit a dentist to conduct a dental practice only
as an individual, a member of a partnership or an employee of a professional
corporation, limited liability company or limited liability partnership. These
laws typically prohibit, either by specific provision or as a matter of gen-
eral policy, non-dental entities, such as the Company, from practicing den-
tistry, from employing dentists and, in certain circumstances, hygienists or
dental assistants, or from otherwise exercising control over the provision of
dental services. Under the Management Agreements, the P.C.s control all clini-
cal aspects of the practice of dentistry and the provision of dental services
at the Offices, including the exercise of independent professional judgment
regarding the diagnosis or treatment of any dental disease, disorder or physi-
cal condition. Persons to whom dental services are provided at the Offices are
patients of the P.C.s and not of the Company and the Company does not have or
exercise any control or direction over the manner or methods in which dental
services are performed, nor does the Company interfere in any way with the ex-
ercise of professional judgment by the dentists who are employees or indepen-
dent contractors of the P.C.s.
Many states limit the ability of a person other than a licensed dentist, to
own or control equipment or offices used in a dental practice. Some states al-
low leasing of equipment and office space to a dental practice, under a bona
fide lease, if the equipment and office remain under the control of the den-
tist. Some states require all advertisements to be in the name of the dentist.
A number of states also regulate the content of advertisements of dental serv-
ices and the use of promotional gift items. In addition, many states impose
limits on the tasks that may be delegated by dentists to hygienists and dental
assistants. Some states require entities designated as "clinics" to be li-
censed, and may define clinics to include dental practices that are owned or
controlled in whole or in part by non-dentists. These laws and their interpre-
tations vary from state to state and are enforced by the courts and by regula-
tory authorities with broad discretion.
Many states have fraud and abuse laws which are similar to the federal fraud
and abuse law described below, and which in many cases apply to referrals for
items or services reimbursable by any third-party payor, not just by Medicare
and Medicaid. A number of states also impose significant penalties for submit-
ting false claims for dental services. Many states either prohibit or require
disclosure of self-referral arrangements and impose penalties for the viola-
tion of these laws, and prohibit dentists from splitting fees with non-den-
tist.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. As the P.C.s contract with third-party payors, on a capi-
tation or other basis under which the relevant P.C. assumes financial risk,
the P.C.s may become subject to state insurance laws. Specifically, in some
states, regulators may determine that the Company or the P.C.s are engaged in
the business of insurance, particularly if they contract on a financial-risk
basis directly with self-insured employers or other entities that are not li-
censed to engage in the business of insurance. To the extent that the Company
or the P.C.s are determined to be engaged in the business of insurance, the
Company may be required to change the method of payment from third-party
payors and the Company's revenue may be materially and adversely affected.
44
<PAGE>
FEDERAL REGULATION
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
under Medicare or Medicaid, the impact of these laws on the Company to date
has been negligible. There can be no assurance, however, that the P.C.s will
not have patients in the future covered by these laws, or that the scope of
these laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the
Company's business, financial condition and operating results.
The federal fraud and abuse statute prohibits, subject to certain safe har-
bors, the payment, offer, solicitation or receipt of any form of remuneration
in return for, or in order to induce: (i) the referral of a person for serv-
ice, (ii) the furnishing or arranging to furnish items or services, or (iii)
the purchase, lease or order or the arrangement or recommendation of a pur-
chase, lease or order of any item or service which is, in each case, reimburs-
able under Medicare or Medicaid. The statute reflects the federal government's
policy of increased scrutiny of joint ventures and other transactions among
healthcare providers in an effort to reduce potential fraud and abuse related
to Medicare and Medicaid costs. Because dental services are covered under var-
ious government programs, including Medicare and Medicaid, this federal law
applies to dentists and the provision of dental services.
Significant prohibitions against dentist self-referrals for services covered
by Medicare and Medicaid programs were enacted, subject to certain exceptions,
by Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibi-
tions, commonly known as Stark II, amended prior physician and dentist self-
referral legislation known as Stark I (which applied only to clinical labora-
tory referrals) by dramatically enlarging the list of services and investment
interest to which the self-referral prohibitions apply. Effective January 1,
1995, Stark II prohibits a physician or dentist, or a member of his or her im-
mediate family, from making referrals for certain "designated health services"
to entities in which the physician or dentist has an ownership or investment
interest, or with which the physician or dentist has a compensation arrange-
ment. "Designated health services" include, among other things, clinical labo-
ratory services, radiology and other diagnostic services, radiation therapy
services, durable medical equipment, prosthetics, outpatient prescription
drugs, home health services and inpatient and outpatient hospital services.
Stark II prohibitions include referrals within the physician's or dentist's
own group practice (unless such practice satisfies the "group practice" excep-
tion) and referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with, or
violation of Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its oper-
ations as presently conducted do not pose a material risk under Stark II, pri-
marily because the Company does not provide "designated health services." Nev-
ertheless, there can be no assurance that Stark II will not be interpreted or
hereafter amended in a manner that has a material adverse effect on the
Company's operations as presently conducted.
Proposed federal regulations also govern physician incentive plans associ-
ated with certain managed care organizations that offer risk-based Medicare or
Medicaid contracts. These regulations define physician incentive plans to in-
clude any compensation arrangement (such as capitation arrangements, bonuses
and withholds) that may directly or indirectly have the effect of reducing or
limiting services furnished to patients covered by the Medicare or Medicaid
programs. Direct monetary compensation which is paid by a managed care plan,
dental group or intermediary to a dentist for services rendered to individuals
covered by the Medicare or Medicaid programs is subject to these regulations,
if the compensation arrangement places the dentist at substantial financial
risk. When applicable, the regulations generally require disclosure to the
federal government or, upon request, to a Medicare beneficiary or Medicaid re-
cipient regarding such financial incentives, and require the dentist to obtain
stop-loss insurance to limit the dentist's exposure to such financial risk.
The regulations specifically prohibit physician incentive plans which involve
payments made to directly induce the limitation or reduction of medically nec-
essary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is
a risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
45
<PAGE>
The Company may be subject to Medicare rules governing billing agents. These
rules prohibit a billing agent from receiving a fee based on a percentage of
Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a
lock box account opened in the name of the applicable P.C.
Federal regulations also allow state licensing boards to revoke or restrict
a dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the default-
ing dentist's employer. The Company cannot assure compliance by dentists with
the payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including governmen-
tal insurers, are subject to significant regulation. Some payors limit the ex-
tent to which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able
to require dentists to assign their third-party payor revenues unless certain
conditions are met, such as acceptance by dentists of assignment of the payor
receivable from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In addi-
tion, governmental payment programs such as Medicare and Medicaid limit reim-
bursement for services provided by dental assistants and other ancillary per-
sonnel to those services which were provided "incident to" a dentist's servic-
es. Under these "incident to" rules, the Company may not be able to receive
reimbursement for services provided by certain members of the Company's Of-
fices' staff unless certain conditions are met, such as requirements that
services must be of a type commonly furnished in a dentist's office and must
be rendered under the dentist's direct supervision and that clinical Office
staff must be employed by the dentist or the P.C. The Company does not cur-
rently derive a significant portion of its revenue under such programs.
The operations of the Offices are also subject to compliance with regula-
tions promulgated by the Occupational Safety and Health Administration
("OSHA"), relating to such matters as heat sterilization of dental instruments
and the use of barrier techniques such as masks, goggles and gloves. The Com-
pany incurs expenses on an ongoing basis relating to OSHA monitoring and com-
pliance.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully chal-
lenged as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or
that the enforceability of such arrangements will not be limited as a result
of such laws. In addition, there can be no assurance that the business struc-
ture under which the Company operates, or the advertising strategy the Company
employs will not be deemed to constitute the unlicensed practice of dentistry
or the operation of an unlicensed clinic or health care facility. The Company
has not sought judicial or regulatory interpretations with respect to the man-
ner in which it conducts its business. There can be no assurance that a review
of the business of the Company and the P.C.s by courts or regulatory authori-
ties will not result in a determination that could materially and adversely
affect their operations or that the regulatory environment will not change so
as to restrict the Company's existing or future operations. In the event that
any legislative measures, regulatory provisions or rulings or judicial deci-
sions restrict or prohibit the Company from carrying on its business or from
expanding its operations to certain jurisdictions, structural and organiza-
tional modifications of the Company's organization and arrangements may be re-
quired which could have a material adverse effect on the Company, or the Com-
pany may be required to cease operations.
INSURANCE
The Company maintains general liability insurance for itself and provides
for professional liability insurance covering dentists, hygienists and dental
assistants at the Offices.
46
<PAGE>
LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation.
Such claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
TRADEMARK
The Company is the registered owner of the PERFECT TEETH(R) trademark in the
United States.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 208, Denver, Colorado, in approximately 3,600 square feet occupied under
a lease which expires in September 1998. The Company also leases real estate
at the location of each Office under leases ranging in term from month-to-
month to 10 years.
As of September 15, 1997, the Company had 49 affiliated dentists and 48 af-
filiated hygienists who were employed by the P.C.s, six affiliated specialists
who contract with the P.C.s to provide specialty dental services, and 214 non-
dental employees.
47
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information concerning each of the directors,
executive officers and key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Frederic W.J. Birner 40 Chairman of the Board, Chief Executive
Officer and Director
Mark A. Birner, D.D.S. 38 President and Director
Dennis N. Genty 39 Chief Financial Officer, Secretary,
Treasurer and Director
James M. Ciccarelli 45 Director
James Abramowitz, D.D.S. 52 Colorado Dental Director
Pamela K. Bernardini 41 Vice President, Controller
Susan E. Carwin 28 Field Representative
Cheryl A. Strom 27 Manager of Information Systems
</TABLE>
Frederic W.J. Birner is a founder of the Company and has served as Chairman
of the Board, Chief Executive Officer, and as a director, since the Company's
inception in May 1995. From May 1992 to September 1995, he was employed as a
Senior Vice President in the Corporate Finance Department at Cohig & Associ-
ates, Inc., an investment banking firm. From 1983 to February 1992, Mr. Birner
held various positions with Hanifen, Imhoff, Inc., an investment banking firm,
most recently as Senior Vice President in the Corporate Finance Department.
Mr. Birner received his M.S. degree from Columbia University and his B.A. de-
gree from The Colorado College. Mr. Birner is the brother of Mark A. Birner,
D.D.S.
Mark A. Birner, D.D.S. is a founder of the Company and has served as Presi-
dent, and as a director, since the Company's inception in May 1995. From Feb-
ruary 1994 to October 1995, Dr. Birner was the owner and operator of three in-
dividual dental practices. From 1986 to February 1994, he was an associate
dentist with the Family Dental Group. Dr. Birner received his D.D.S. and B.A.
degrees from the University of Colorado and completed his general practice
residency at the University of Minnesota in Minneapolis. Dr. Birner is the
brother of Frederic W.J. Birner.
Dennis N. Genty is a founder of the Company and has served as Secretary
since May 1995, and as Chief Financial Officer, Treasurer, and as a director,
since September 1995. From October 1992 to September 1995, he was employed as
a Vice President in the Corporate Finance Department at Cohig & Associates,
Inc., an investment banking firm. From May 1990 to October 1992, he was a Vice
President in the Corporate Finance Department at Hanifen, Imhoff, Inc., an in-
vestment banking firm. Mr. Genty received his M.B.A. degree from Columbia Uni-
versity and his B.S. degree from the Colorado School of Mines.
James M. Ciccarelli joined the Company as a consultant in August 1996 and
has served as a director since November 1996. Mr. Ciccarelli currently serves
as Chairman of the Board and Chief Executive Officer of Wireless Telecom,
Inc., a wireless data and network service provider. From September 1990 to
March 1993, Mr. Ciccarelli was a Vice President of Intelligent Electronics, a
high technology distribution and services company, and the President and CEO
of its Reseller Network Division. From November 1988 to September 1990, Mr.
Ciccarelli was the President of Connecting Point of America, a franchisor of
retail computer stores.
James Abramowitz, D.D.S. was the founder, owner and operator of Gentle Den-
tal, a nine practice dental practice management company which he began devel-
oping in 1972. In September 1997, Dr. Abramowitz became Colorado Dental Direc-
tor of the Company in connection with the Gentle Dental Acquisition. Dr.
Abramowitz has served on the Ethics Committee and in other positions with the
Denver Dental Society. Dr. Abramowitz received his D.D.S. degree from St.
Louis University.
Pamela K. Bernardini has served as Vice President and Controller of the Com-
pany since August 1997. From August 1986 to April 1995, Ms. Bernardini served
in several positions with Basin Exploration, Inc., an oil and gas exploration
and production company, most recently as Controller and Principal Accounting
Officer.
48
<PAGE>
Ms. Bernardini received her M.B.A. degree from the University of Denver and
her B.S. degree from Metropolitan State College. She is a Certified Public Ac-
countant.
Susan E. Carwin joined the Company in October 1995 as a field representa-
tive. From June 1993 to October 1995, Ms. Carwin served as the office manager
at the Bow Mar Office, which was acquired by the Company in October 1995. From
September 1991 to June 1993, Ms. Carwin was an office manager for a private
orthodontic practice.
Cheryl A. Strom joined the Company as Manager of Information Systems in Au-
gust 1997. From 1988 to July 1997, Ms. Strom worked at Geneva Pharmaceuticals,
Inc., a pharmaceutical company, most recently as a Systems Analyst.
The Company anticipates that one additional independent director will be
elected to the Board of Directors effective upon the consummation of the Of-
fering.
BOARD OF DIRECTORS
The Board of Directors, which currently is composed of four members, but
which the Company anticipates will consist of five members shortly after the
consummation of the Offering, is divided into three classes. One class stands
for re-election at each annual meeting of shareholders. The Board of Directors
is classified into two Class I directors (James Ciccarelli and one director to
be named later), one Class II director (Dennis Genty) and two Class III direc-
tors (Fred Birner and Mark Birner, D.D.S.), whose terms will expire upon the
election and qualification of directors at the annual meetings of shareholders
held in 1998, 1999 and 2000, respectively. At each annual meeting of share-
holders, directors will be elected by the shareholders of the Company for a
full term of three years to succeed those directors whose terms are expiring.
Officers are appointed by and serve at the discretion of the Board of Direc-
tors. Vacancies on the Board of Directors can only be filled by the vote of a
majority of the directors left in office, and shareholders do not have the
right to remove directors without cause. In October 1996, the Company entered
into an agreement with James Ciccarelli setting forth the terms and conditions
of Mr. Ciccarelli's service as a director of the Company. See "-- Consulting
and Employment Agreements."
Following the consummation of the Offering, the Board of Directors intends
to establish a Compensation Committee, which will consist of the two indepen-
dent directors. Currently, the full Board of Directors is acting as the Com-
pensation Committee. The Compensation Committee determines officers' salaries
and bonuses and administers the grant of stock options and other awards pursu-
ant to the Employee Plan and the Dental Center Plan. See "-- Executive Compen-
sation," "-- Compensation Committee Interlocks and Insider Participation,"
"Employee Stock Option Plan," and "Stock Plan for Managed Dental Centers."
Following the consummation of the Offering, the Board of Directors also in-
tends to establish an Audit Committee which will consist of at least two inde-
pendent members. The Audit Committee will recommend the appointment of audi-
tors and oversee the accounting functions of the Company.
COMPENSATION OF DIRECTORS
Directors currently do not receive any cash compensation from the Company
for their services as directors and are not presently reimbursed for expenses
in connection with attendance at Board of Directors and committee meetings. In
October 1996, the Company entered into an agreement with James Ciccarelli, a
director of the Company, setting forth the terms and conditions of Mr.
Ciccarelli's service as a director. Pursuant to such agreement, Mr. Ciccarelli
is to serve as a director of the Company until August 1, 1998. In considera-
tion for his service as a director, Mr. Ciccarelli received a warrant dated as
of August 1, 1996, to purchase 45,000 shares of Common Stock of the Company at
an exercise price of $3.50 per share. This warrant expires on August 1, 2001.
Of the 45,000 shares underlying the warrant, 22,500 shares of Common Stock be-
came vested on August 1, 1997, and the remaining 22,500 shares of Common Stock
will become vested on August 1, 1998. If Mr. Ciccarelli resigns as a director
of the Company prior to August 1, 1998, all shares underlying the warrant,
other than those
49
<PAGE>
shares which have already vested, will be forfeited. If Mr. Ciccarelli's serv-
ice as a director is terminated by the Company prior to August 1, 1998, the
shares of Common Stock underlying the warrant will vest in the ratio of the
number of months or portions of a month in which he served as a director of
the Company compared to a total of 24 months. If a "Change of Control," as
such term is defined in the Employee Plan, occurs while Mr. Ciccarelli is
serving as a member of the Board of Directors, all unvested shares of Common
Stock granted under the warrant will accelerate and become vested and fully
exercisable. This agreement also contains a confidentiality provision relating
to proprietary information of the Company. On July 15, 1997, the Board of Di-
rectors granted a second warrant to Mr. Ciccarelli as consideration for serv-
ing on the Board of Directors, which warrant gave Mr. Ciccarelli the right to
purchase 20,000 shares of Common Stock at an exercise price of $6.00 per
share, which warrant expires in July 2002. Pursuant to an agreement dated as
of September 1, 1997 between the Company and Mr. Ciccarelli, Mr. Ciccarelli
agreed to continue as an independent director of the Company, to cease provid-
ing any further marketing services to the Company, and to forfeit his right to
acquire 18,000 of the 20,000 shares of Common Stock that he is entitled to
purchase under the warrant issued to him on July 15, 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, the entire Board of Directors makes all determinations with re-
spect to executive officer compensation. The Compensation Committee that will
be established by the Board of Directors following the consummation of the Of-
fering will make those determinations in the future. No executive officer of
the Company currently serves as a member of the board of directors or compen-
sation committee of any entity that has one or more executive officers serving
as a member of the Board of Directors or as an executive officer of the Compa-
ny. See "Certain Transactions" for a description of transactions between the
Company and members of the Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
During the fiscal year ended December 31, 1996, no executive officer of the
Company was paid a total salary and bonus exceeding $100,000. The following
table sets forth the compensation paid by the Company to the Company's Chief
Executive Officer for services rendered to the Company during the fiscal year
ended December 31, 1996 (the "Named Executive Officer"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/WARRANTS(#) COMPENSATION
- --------------------------- -------- -------- ------------------- ------------
<S> <C> <C> <C> <C>
Frederic W.J. Birner,.... $ 73,750 -- 70,000 (1) --
Chairman of the Board
and
Chief Executive Officer
</TABLE>
- --------
(1) Represents shares of Common Stock issuable upon (i) exercise of an option
to purchase 30,000 shares of Common Stock granted on February 14, 1996
pursuant to the Employee Plan, with an exercise price of $2.20 per share,
(ii) conversion of a warrant to purchase 30,000 shares of Common Stock
awarded on November 1, 1996, with an exercise price of $4.00 per share,
and (iii) conversion of a warrant to purchase 10,000 shares of Common
Stock awarded on June 30, 1997, with an exercise price of $5.50 per share.
50
<PAGE>
OPTION GRANTS
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1996 to the Named Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) FISCAL YEAR (2) ($/SH)(3) DATE 5% 10%
- ---- -------------- --------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Frederic W.J. Birner.... 30,000 12.3% $2.20 2/14/03 $26,869 $62,615
</TABLE>
- --------
(1) Represents an option to purchase shares of Common Stock granted on February
14, 1996, pursuant to the Employee Plan.
(2) Based on an aggregate of 243,223 shares subject to options granted to em-
ployees pursuant to the Employee Plan during the fiscal year ended December
31, 1996.
(3) Options were granted at an exercise price equal to the fair market value of
the Common Stock, as determined by the Board of Directors on the date of
grant.
(4) The potential realizable value is calculated based on the term of the op-
tion at its time of grant (seven years) and is calculated by assuming that
the stock price on the date of grant as determined by the Board appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its
term for the appreciated price. The 5% and 10% assumed rates of apprecia-
tion are derived from the rules of the Securities and Exchange Commission
and do not represent the Company's estimate or projection of the future
Common Stock price.
OPTION EXERCISES AND HOLDINGS
The following table sets forth for the Named Executive Officer the number and
value of securities underlying unexercised in-the-money options held as of De-
cember 31, 1996. The Named Executive Officer did not exercise any options dur-
ing the fiscal year ended December 31, 1996.
AGGREGATED OPTION EXERCISES IN 1996
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Frederic W.J. Birner........ -- 30,000 -- $
</TABLE>
- --------
(1) There was no public trading market for the Common Stock at December 31,
1996. Accordingly, these values have been calculated based on the differ-
ence between the assumed initial public offering price of $ per share
and the exercise price.
EMPLOYEE STOCK OPTION PLAN
The Employee Plan was adopted by the Board of Directors effective as of Octo-
ber 30, 1995, and was amended as of September 4, 1997. The Employee Plan has
been ratified and approved by the Company's shareholders. The number of shares
of Common Stock reserved for issuance under the Employee Plan is 1,000,000.
The purpose of the Employee Plan is to further the growth and development of
the Company by affording an opportunity for stock ownership to selected employ-
ees, directors and consultants of the Company and its subsidiaries, who are re-
sponsible for the conduct and management of the Company's business or who are
involved in endeavors significant to the Company's success. The Employee Plan
provides for the grant of incentive stock options, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), to employees (including officers
and employee-directors) and non-statutory stock options to employees, directors
and
51
<PAGE>
consultants. The Employee Plan is administered by a Committee appointed by and
serving at the pleasure of the Board, consisting of not less than two direc-
tors (the "Committee"), which determines recipients and types of options to be
granted, including the exercise price, the number of shares, the grant dates,
and the exercisability thereof.
The term of any stock option granted under the Employee Plan may not exceed
10 years. Shares subject to options that have expired or have otherwise termi-
nated without having been exercised in full shall again become available for
the grant of options under the Employee Plan. The exercise price of options
granted under the Employee Plan is determined by the Committee, provided that
the exercise price of a stock option cannot be less than 100% of the fair mar-
ket value of the shares subject to the option on the date of grant. Options
granted under the Employee Plan vest at the rate specified in the option
agreements, which generally provide that options vest in three to five equal
annual installments. No stock option may be transferred by the optionee other
than by will or the laws of descent and distribution shall be exercisable dur-
ing the optionee's lifetime only by the optionee. Options granted to an
optionee terminate upon the earlier to occur of (i) the expiration date set
forth in the option agreement, (ii) the termination of employment (or, in the
case of directors or consultants, the termination of service), or (iii) the
death or disability of the optionee. An optionee whose option terminates for
any reason (other than by death or disability) may exercise an option during
the three month period following such termination (unless such option expires
sooner by its terms). Options may be exercised for up to twelve months follow-
ing termination due to death or disability (unless such options expire sooner
by their terms). Subject to certain limitations, the Committee may extend the
termination date of any stock option granted under the Employee Plan in its
sole discretion.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the op-
tion does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant by the Committee, of the shares
of Common Stock with respect to which incentive stock options are exercisable
for the first time by an optionee during any calendar year (under all such
plans of the Company and its affiliates) may not exceed $100,000.
In the event of certain "Changes in Control," the Committee may accelerate
the vesting dates of outstanding options, notwithstanding any vesting require-
ments contained in any option agreement.
As of September 15, 1997, no shares of Common Stock had been issued upon the
exercise of options granted under the Employee Plan, options to purchase
287,583 shares of Common Stock at a weighted average exercise price of $4.09
were outstanding, and 712,417 shares remained available for future grant under
the Employee Plan. The Employee Plan will terminate on October 29, 2005, un-
less sooner terminated by the Board.
STOCK OPTION PLAN FOR MANAGED DENTAL CENTERS
The Dental Center Plan was adopted by the Board effective as of October 30,
1995, and was amended as of September 4, 1997. The Dental Center Plan has been
ratified and approved by the Company's shareholders. The number of shares of
Common Stock reserved for issuance under the Dental Center Plan is 700,000.
The purpose of the Dental Center Plan is to further the growth and develop-
ment of the Company by affording an opportunity for stock ownership to se-
lected P.C.s, dentists and dental hygienists. The Dental Center Plan provides
for the grant of non-statutory stock options to the P.C.s that are parties to
Management Agreements with the Company, and to dentists or dental hygienists
who are either employed by or an owner of the P.C.s. The Dental Center Plan is
administered by the Committee, which determines recipients and types of op-
tions to be granted, including the exercise price, the number of shares, the
grant dates and the exercisability thereof.
The term of any stock option granted under the Dental Center Plan may not
exceed 10 years. Shares subject to options that have expired or have otherwise
terminated without having been exercised in full shall again
52
<PAGE>
become available for future grant under the Dental Center Plan. The exercise
price of options granted under the Dental Center Plan is determined by the
Committee, provided that the exercise price of a stock option cannot be less
than 100% of the fair market value of the shares subject to the option on the
date of grant. Options granted under the Dental Center Plan vest at the rate
specified in the option agreements, which generally provide that options vest
in three to five equal annual installments. Stock options granted to a P.C.
may be transferred to a dentist or a dental hygienist that is either employed
by or an owner of the P.C. Stock options granted to a dentist or a dental hy-
gienist may not be transferred other than by will or the laws of descent and
distribution, and shall be exercisable during the optionee's lifetime only by
such optionee. Options granted to P.C.s terminate upon the earlier to occur of
(i) the expiration date set forth in the option agreement, or (ii) such time
as the business operations of the P.C. are no longer managed by the Company.
Options granted to dentists or dental hygienists terminate upon the earlier to
occur of (i) the expiration date set forth in the option agreement, or (ii)
such time as the dentist or dental hygienist is no longer an owner of or em-
ployed by a P.C. whose business operations are managed by the Company. An
optionee whose option terminated for any reason may exercise an option during
the three month period following such termination of the option (unless such
option expires sooner by its terms). Subject to certain limitations, the Com-
mittee may extend the termination date of any stock option granted under the
Dental Center Plan in its sole discretion.
In the event of certain "Changes in Control," the Committee may accelerate
the vesting dates of outstanding options, notwithstanding any vesting require-
ments contained in any option agreement.
As of September 15, 1997, no shares of Common Stock had been issued upon the
exercise of options granted under the Dental Center Plan, options to purchase
143,600 shares of Common Stock at a weighted average exercise price of $3.97
were outstanding, and 556,400 shares remained available for future grant under
the Dental Center Plan. The Dental Center Plan will terminate on October 29,
2005, unless sooner terminated by the Board.
401(K) PLAN
As of April 1, 1997, the Company adopted a tax-qualified employee profit
sharing 401(k)/stock bonus plan (the "401(k) Plan") covering employees of the
Company and its affiliates to encourage preparation for retirement on a pre-
tax basis. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the lesser of 15% of their annual compen-
sation or the statutorily prescribed annual limit ($9,500 in 1997), and have
the amount of such reduction contributed to the 401(k) Plan. Subject to cer-
tain limitations, the 401(k) Plan provides that the Company may, at its dis-
cretion, make matching additional contributions equal to a percentage of the
employee's contribution, not to exceed 2% of such employee's compensation for
that plan year. All amounts contributed by an employee participant and earn-
ings on these contributions are fully vested at all times. Employee partici-
pants are fully vested in the contributions made by the Company on the earlier
of (i) the date the employee attains the age of 65, (ii) the date employment
terminates on account of long-term disability, (iii) the date employment ter-
minates due to death or (iv) the date the employee completes four years of
service with the Company or any of its affiliates. Employee participants may
invest their account balances, except the balances in the Profit Sharing/Stock
Bonus Contributions Account, in any one or more of the available funds, in
percentages permitted by the plan administrator. The 401(k) Plan is intended
to qualify under Section 401 of the Code, so that contributions to the 401(k)
Plan, and income earned on the 401(k) Plan contributions, are not taxable un-
til withdrawn, and so that the contributions by the Company will be deductible
when made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Articles of Incorporation provide that,
to the fullest extent permitted by Colorado law, the Company's directors shall
not be personally liable for monetary damages for breach of fiduciary duty to
the Company and its shareholders. This provision in the Amended and Restated
Articles of Incorporation does not eliminate or limit the liability of a di-
rector to the Company or to its shareholders for monetary damages otherwise
existing for: (i) any breach of the director's duty of loyalty to the Company
or to
53
<PAGE>
its shareholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) acts specified in
Section 7-108-403 of the Colorado Business Corporation Act relating to any un-
lawful distribution; or (iv) any transaction from which the director directly
or indirectly derived any improper personal benefit.
In addition, the Company's Amended and Restated Bylaws provide that the Com-
pany will indemnify its directors and executive officers and may indemnify its
other officers, employees and agents to the fullest extent permitted by Colo-
rado law. In addition, the Company must advance or reimburse directors and ex-
ecutive officers for expenses incurred by them in connection with certain
claims. The Company is also empowered under its Amended and Restated Bylaws to
enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person it is required or permitted to in-
demnify. Pursuant to this provision, the Company has entered into indemnifica-
tion agreements with each of its directors and executive officers.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
CERTAIN TRANSACTIONS
On September 24, 1997, pursuant to authority granted in the Company's
Amended and Restated Bylaws, the Company entered into indemnification agree-
ments (the "Indemnification Agreements") with its directors and executive of-
ficers. Subject to the terms and conditions of the Indemnification Agreements,
the Company shall indemnify and advance expenses to such directors and execu-
tive officers in connection with their involvement in any event or occurrence
which arises in their capacity as, or as a result of, their position with the
Company. See "Management -- Limitation of Liability and Indemnification Mat-
ters."
On July 15, 1997, James Ciccarelli, a director and consultant of the Compa-
ny, was issued a fully exercisable warrant to purchase 20,000 shares of Common
Stock of the Company, at an exercise price of $6.00 per share, in considera-
tion for his services as a director. Pursuant to an agreement dated as of Sep-
tember 1, 1997 between the Company and Mr. Ciccarelli, Mr. Ciccarelli for-
feited his right to acquire 18,000 of the 20,000 shares of Common Stock that
he is entitled to purchase under the warrant issued to him on July 15, 1997.
On June 30, 1997, the Company issued to (i) Fred Birner, the Chairman of the
Board, Chief Executive Officer and a director of the Company, a warrant to
purchase 10,000 shares of Common Stock, (ii) Mark Birner, D.D.S., the Presi-
dent and a director of the Company, a warrant to purchase 10,000 shares of
Common Stock, and (iii) Dennis Genty, the Chief Financial Officer, Treasurer,
Secretary and a director of the Company, a warrant to purchase 10,000 shares
of Common Stock. Each of the warrants has an exercise price of $5.50 per share
and expires in June 2002.
On December 16, 1996, the Company issued an aggregate of $1,380,000 princi-
pal amount of 9% Convertible Subordinated Debentures to entities controlled by
Mr. Lee Schlessman, a beneficial holder of in excess of 5% of the Company's
Common Stock. See "Description of Capital Stock -- Debentures."
On November 1, 1996, the Company issued to (i) Fred Birner, the Chairman of
the Board, Chief Executive Officer and a director of the Company, a warrant to
purchase 30,000 shares of Common Stock, (ii) Mark Birner, D.D.S., the Presi-
dent and a director of the Company, a warrant to purchase 30,000 shares of
Common Stock, and (iii) Dennis Genty, the Chief Financial Officer, Treasurer,
Secretary and a director of the Company, a warrant to purchase 30,000 shares
of Common Stock. Each of the warrants has an exercise price of $4.00 per share
and expires in November 2001.
On October 17, 1996, the Company entered into an agreement with James
Ciccarelli, a director of the Company, which agreement was terminated effec-
tive September 1, 1997, setting forth the terms and conditions
54
<PAGE>
of Mr. Ciccarelli's service as a director. Mr. Ciccarelli is to serve as di-
rector of the Company until August 1, 1998, and, in consideration therefor,
received a warrant to purchase 45,000 shares of Common Stock of the Company,
at an exercise price of $3.50 per share, which warrant was dated as of August
1, 1996, expires in August 2001, and contains certain vesting provisions. See
"Management -- Compensation of Directors."
On February 14, 1996, the Company issued to (i) Fred Birner, the Chairman of
the Board, Chief Executive Officer and a director of the Company, an option to
purchase 30,000 shares of Common Stock, (ii) Mark Birner, D.D.S., the Presi-
dent and a director of the Company, an option to purchase 28,461 shares of
Common Stock, and (iii) Dennis Genty, the Chief Financial Officer, Treasurer,
Secretary and a director of the Company, an option to purchase 18,462 shares
of Common Stock. Each of the options has an exercise price of $2.20 per share
and expires in February 2003.
On May 17, 1995, the Company issued (i) 858,000 shares of Common Stock to
Fred Birner, as a founder of the Company, at a purchase price per share of
$0.01, (ii) 814,000 shares of Common Stock to Mark Birner, D.D.S., as a foun-
der of the Company, at a purchase price per share of $0.01, and (iii) 528,000
shares of Common Stock to Dennis Genty, as a founder of the Company, at a pur-
chase price per share of $0.01.
The Company believes that the foregoing transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third par-
ties.
55
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the bene-
ficial ownership of the Company's Common Stock as of September 15, 1997, and
as adjusted to reflect the sale of the Common Stock offered hereby, by (i) all
persons known by the Company to be the beneficial owners of 5% or more of the
Common Stock, (ii) each director, (iii) each of the executive officers, (iv)
each of the Company's current shareholders who is expected to sell shares in
the Offering (the "Selling Shareholders"), and (v) all executive officers and
directors as a group. Unless otherwise indicated, the address of each of the
persons named below is in care of the Company, 3801 East Florida Avenue, Suite
208, Denver, Colorado 80210.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- NUMBER OF -------------------------
NAME NUMBER (1) PERCENT (1)(2) SHARES OFFERED NUMBER (1) PERCENT (1)(2)
- ---- ---------- -------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Frederic W.J. Birner
(3).................... 900,700 25.3% -- 900,700 %
Mark A. Birner, D.D.S.
(4).................... 856,561 24.1 -- 856,561
Dennis N. Genty (5)..... 569,662 16.1 -- 569,662
James M. Ciccarelli
(6).................... 24,500 * -- 24,500
James M. Gerken (7)..... 269,713 7.6 -- 269,713
Lee Schlessman (8)...... 631,283 15.3 46,000 585,283
Susan M. Duncan (9)..... 246,142 6.6 88,571 157,571
All executive officers
and directors
as a group (4 persons)
(10)................... 2,351,423 63.4 -- 2,351,423
OTHER SELLING SHAREHOLDERS
- --------------------------
W. Frederic Birner, M.D.
(11)................... 51,785 1.5 2,285 49,500
Caribou Bridge Fund LLC
(11)................... 10,000 * 10,000 --
William F. Eha (11)..... 28,285 * 2,000 26,285
Alice L. Fundingsland
Co. (11)............... 14,000 * 7,778 6,222
Gorge Investment LLC
(11)................... 14,285 * 9,285 5,000
James & Nancy Grosfeld
(11)................... 71,428 2.0 27,778 43,650
Jon B. Kruljac (11)..... 19,857 * 5,000 14,857
Jonathan C. Lorenz
(11)................... 21,142 * 7,142 14,000
William P. McKinnell,
Jr. (11)............... 21,142 * 4,478 16,664
Merion Partners, L.P.
(11)................... 71,428 2.0 27,000 44,428
James C. Pendergast
(11)................... 14,142 * 2,778 11,364
Michael J. Quigley
(11)................... 56,571 1.6 11,000 45,571
W. Gerald Rainer, M.D.
(11)................... 28,285 * 2,000 26,285
Rosemary Reilly (11).... 84,571 2.4 5,000 79,571
Matthew C. Rudolf (11).. 5,714 * 714 5,000
Rupinder S. Sidhu (11).. 28,571 * 11,000 17,571
TRI B. Associates (11).. 22,857 * 5,000 17,857
Western Growth Capital
(11)................... 42,857 1.2 21,427 21,430
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or in-
vestment power with respect to securities. Shares of Common Stock subject
to options, warrants and convertible debentures currently exercisable or
convertible, or exercisable or convertible within 60 days of the date of
this Prospectus, are deemed outstanding for computing the percentage of
the person or entity holding such securities but are not outstanding for
computing the percentage of
56
<PAGE>
any other person or entity. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Percentage of ownership is based on 3,485,324 shares of Common Stock out-
standing before the Offering and shares of Common Stock out-
standing after the Offering.
(3) Includes 30,000 shares of Common Stock that are issuable upon exercise of
an option having an exercise price of $2.20 per share, 30,000 shares of
Common Stock that are issuable upon exercise of a warrant having an exer-
cise price of $4.00 per share, and 10,000 shares of Common Stock that are
issuable upon exercise of a warrant having an exercise price of $5.50 per
share, all of which are vested. If the Underwriters' over-allotment op-
tion is exercised in full, Mr. Birner will sell 70,000 shares of his Com-
mon Stock, which would leave Mr. Birner with beneficial ownership of
830,700 shares of Common Stock following the Offering.
(4) Includes 28,461 shares of Common Stock that are issuable upon exercise of
an option having an exercise price of $2.20 per share, 30,000 shares of
Common Stock that are issuable upon exercise of a warrant having an exer-
cise price of $4.00 per share, and 10,000 shares of Common Stock that are
issuable upon exercise of a warrant having an exercise price of $5.50 per
share, all of which are vested. If the Underwriters' over-allotment op-
tion is exercised in full, Dr. Birner will sell 70,000 shares of his Com-
mon Stock, which would leave Dr. Birner with beneficial ownership of
786,561 shares of Common Stock following the Offering.
(5) Includes 18,462 shares of Common Stock issuable upon exercise of an op-
tion having an exercise price of $2.20 per share, 30,000 shares of Common
Stock issuable upon exercise of a warrant having an exercise price of
$4.00 per share, and 10,000 shares of Common Stock issuable upon exercise
of a warrant having an exercise price of $5.50 per share, all of which
are vested. If the Underwriters' over-allotment option is exercised in
full, Mr. Genty will sell 50,000 shares of his Common Stock, which would
leave Mr. Genty with beneficial ownership of 519,662 shares of Common
Stock following the Offering.
(6) Includes 22,500 shares of Common Stock issuable upon exercise of a war-
rant having an exercise price of $3.50 per share, that are vested or
which will vest within 60 days of the date of this Prospectus, and 2,000
shares of Common Stock issuable upon exercise of a fully vested warrant
having an exercise price of $6.00 per share. Does not include 22,500
shares of Common Stock issuable upon exercise of a warrant having an ex-
ercise price of $3.50 per share that will vest more than 60 days after
the date of this Prospectus.
(7) Includes 85,713 shares of Common Stock issuable upon conversion of deben-
tures held by Mr. Gerken that will be converted upon consummation of the
Offering.
(8) Includes of 305,714 shares issuable upon conversion of debentures held by
Mr. Schlessman. Also includes 325,569 shares issuable upon conversion of
debentures over which Mr. Schlessman has sole voting power pursuant to
certain powers of attorney, but for which he disclaims beneficial owner-
ship. The address of Mr. Schlessman is c/o Greeley Gas Company, 1301
Pennsylvania Avenue, Suite 800, Denver, CO 80203.
(9) Includes 236,142 shares issuable upon the exercise of debentures held by
Ms. Duncan. Also includes 10,000 shares issuable upon the exercise of de-
bentures held in a trust for the benefit of Ms. Duncan, but over which
Ms. Duncan does not have voting or investment control. The address of Ms.
Duncan is 2651 S. Wadsworth Circle, Lakewood, CO 80227.
(10) Includes 221,423 shares issuable upon the exercise of options and war-
rants held by all executive officers and directors as a group that are
vested or that will vest within 60 days of the date of this Prospectus.
Does not include 22,500 shares of Common Stock issuable upon exercise of
a warrant that will vest more than 60 days after the date of this Pro-
spectus.
(11) Includes shares issuable upon conversion of debentures held by such
holder that will be converted upon consummation of the Offering as
follows: W. Frederic Birner, M.D.--14,285; Caribou Bridge Fund LLC--
10,000; William F. Eha--14,285; James and Alice L. Fundingsland Co.--
14,000; Gorge Investment LLC--14,285; James & Nancy Grosfeld--71,428; Jon
B. Kruljac--12,857; Jonathan C. Lorenz--7,142; William P.
McKinnell, Jr.--7,142; Merion Partners, L.P.--71,428; C. Pendergast--
7,142; Michael J. Quigley--28,571; W. Gerald Rainer--14,285; Rosemary
Reilly--28,571; Matthew C. Rudolf--5,714; Rupinder S. Sidhu--28,571; TRI
B Associates--22,857; and Western Growth Capital--42,857.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon consummation of the Offering, the authorized capital stock of the Com-
pany will consist of 20,000,000 shares of Common Stock, without par value, of
which shares will be issued and outstanding, and 10,000,000 shares of un-
designated preferred stock, without par value (the "Preferred Stock"), issua-
ble in one or more series by the Board, of which no shares are issued and out-
standing. As of September 15, 1997, there were approximately 80 shareholders
of record.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters voted upon by shareholders, including the election of
directors. The Company's Amended and Restated Articles of Incorporation do not
provide for cumulative voting and, accordingly, the holders of a majority of
the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of the Common Stock are entitled to such dividends as may be declared
in the discretion of the Board of Directors out of funds legally available
therefore. See "Dividend Policy." Holders of Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities and any preferential liquidation rights of
any Preferred Stock then outstanding. The holders of Common Stock have no pre-
emptive rights to purchase shares of stock of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible
into any other securities of the Company. All outstanding shares of Common
Stock are, and the shares of Common Stock to be issued pursuant to the Offer-
ing will be upon payment therefore, fully paid and non-assessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of Direc-
tors as shares of one or more classes or series. Subject to the provisions of
the Company's Amended and Restated Articles of Incorporation and limitations
prescribed by law, the Board is expressly authorized to adopt resolutions to
determine the preferences, limitations and relative rights of any preferred
stock (whether in a series or as a class), including without limitation the
following: (i) the designation of any series of preferred stock, (ii) unlimit-
ed, special, conditional, or limited voting rights, or no right to vote; ex-
cept that no condition, limitation, or prohibition on voting shall eliminate
any right to vote provided by the Colorado Business Corporation Act, (iii) re-
demption rights, (iv) conversion rights, (v) distribution or dividend rights,
including the determination of whether such rights are cumulative,
noncumulative or partially cumulative, and (vi) preference rights over any
other class or series of shares with respect to distributions, including divi-
dends and distributions upon the dissolution of the Company. The Company has
no current plans to issue any shares of Preferred Stock of any class or se-
ries.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to ob-
tain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's manage-
ment. The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company
may rank prior to the Common Stock as to dividend rights, liquidation prefer-
ence or both, may have full or limited voting rights and may be convertible
into shares of Common Stock. Accordingly, the issuance of shares of Preferred
Stock may discourage bids for the Common Stock at a premium or may otherwise
adversely affect the market price of the Common Stock.
WARRANTS
As of September 15, 1997, there were warrants outstanding to purchase an ag-
gregate of 415,530 shares of Common Stock at exercise prices ranging from
$1.80 to $6.00 per share with a weighted average exercise price
58
<PAGE>
of approximately $3.49 per share. All of such warrants contain provisions for
the adjustment of exercise prices in certain events, including stock divi-
dends, stock splits, reorganizations, reclassifications or mergers. Warrants
to purchase 240,130 shares contain provisions for adjustment of the exercise
price in the event of sales of Common Stock at less than the exercise price.
The warrants expire at various dates between October 2000 and July 2002. Hold-
ers of warrants to purchase 240,130 shares of Common Stock are entitled to
certain registration rights with respect to the Common Stock issued upon exer-
cise thereof. See "-- Registration Rights."
DEBENTURES
As of September 15, 1997, there was an aggregate $6,780,000 principal amount
of 9% subordinated convertible debentures (the "Debentures") outstanding that
will convert into 1,781,971 shares of Common Stock of the Company. The Deben-
tures are subordinated unsecured obligations of the Company, bearing interest
at the rate of 9% annually. The Debentures were issued under two Indentures
(the "Indentures") between the Company and Colorado National Bank (the "Trust-
ee").
Debentures in the aggregate principal amount of $4,970,000 were issued on
May 15, 1996, maturing on May 15, 2001 (the "May Debentures"). Debentures in
the aggregate principal amount of $1,810,000 were issued on December 27, 1996,
maturing on December 27, 2001 (the "December Debentures"). Interest on the May
Debentures and December Debentures is payable semi-annually commencing on De-
cember 1, 1996 and August 1, 1997, respectively. The Debentures are subordi-
nate and junior in right of payment to the extent set forth in the Indentures
to all existing and future Senior Indebtedness (as that term is defined in the
Indentures) of the Company. The Indentures will be discharged and canceled
upon payment of all the Debentures.
CONVERSION OF THE DEBENTURES
The holders of December Debentures and May Debentures have the right, exer-
cisable at any time to maturity, to convert the principal amount thereof (or
any portion thereof that is an integral multiple of $1,000) into shares of
Common Stock of the Company at the conversion rate of $5.00 and $3.50 per
share, respectively, subject to adjustment as described below (the "Conversion
Price"). The right to convert a Debenture called for redemption will terminate
at the close of business on the date such Debenture was to be redeemed (unless
the Company shall default in making the redemption payment when due, in which
case the conversion right will terminate at the close of business on the date
such default is cured and such Debenture is redeemed); provided, however, that
if a Holder of the Debenture presents such Debenture, the right of conversion
shall terminate upon presentation of the Debenture to the Trustee (unless the
Company shall default in making the redemption payment when due, in which case
the conversion right shall terminate at the close of business on the date such
default is cured and such Debenture is redeemed). Upon conversion, a payment
will be made for accrued interest on a converted Debenture to the date of such
conversion. No fractional shares will be issued upon conversion but a cash ad-
justment will be made for any fractional interest.
The Conversion Price is subject to adjustment upon the occurrence of certain
events, including (i) the issuance of shares of Common Stock as a dividend or
distribution on the Common Stock; (ii) the subdivision or combination of out-
standing Common Stock; (iii) the issuance to all or substantially all holders
of Common Stock of rights or warrants to subscribe for or purchase Common
Stock (or securities convertible into Common Stock) at a price per share less
than the then current Conversion Price; (iv) the distribution to all holders
of Common Stock of shares of capital stock of the Company (other than Common
Stock), evidences of indebtedness or other assets; and (v) the distribution to
all or substantially all holders of Common Stock of rights or warrants to sub-
scribe for securities (other than those referred to in (iii) above). No ad-
justment of the Conversion Price will be made until cumulative adjustments to
the Conversion Price as last adjusted amount to 5% or more. No adjustment of
the Conversion Price will be made for cash or dividend distributions paid out
of consolidated net income or retained earnings.
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<PAGE>
MANDATORY CONVERSION OF THE DEBENTURES
Any time six months after the effective date of the Offering, the Company
has the right to require conversion of the December Debentures and the May De-
bentures if the Common Stock trades for 20 of 30 consecutive trading days at a
price equal to or greater than $7.50 and $6.50 per share, respectively, and
the underlying Common Stock issuable upon conversion of the Debentures can be
sold pursuant to Rule 144 of the Securities Act or if Rule 144 is not avail-
able, the Company has in place an effective registration statement under the
Securities Act covering the resale of the underlying shares of Common Stock.
The mandatory conversion will be automatically effective as of the date (the
"Conversion Date") specified in a written notice sent to all holders of the
Debentures regardless of whether the Debentures have been surrendered for con-
version. No interest will accrue on, nor will the Debentures be transferable
after the Conversion Date. Upon mandatory conversion, a payment will be made
for accrued interest to the Conversion Date. No fractional shares will be is-
sued upon conversion but a cash adjustment will be made for any fractional in-
terest. In the event of mandatory conversion, certificates for the shares of
Common Stock issuable upon conversion will not be delivered to the holders of
the Debentures until the Debentures have been surrendered to the Trustee.
REDEMPTION BY THE COMPANY
With respect to the May Debentures, 20% are to be redeemed on May 15, 1999,
another 20% on May 15, 2000 and the balance at maturity. With respect to the
December Debentures, 20% are to be redeemed on December 27, 1999, another 20%
on December 27, 2000 and the balance at maturity. All redemption amounts will
include accrued interest to the date of redemption. The Trustee will select
Debentures for redemption by lot or by a method the Trustee deems fair and ap-
propriate in its sole discretion.
AMENDMENTS AND WAIVERS
Amendment or supplement of the Indentures may be made by the Company and the
Trustee without notice to any holders of the Debentures but with the consent
of the holders of 66 2/3% in principal amount of the outstanding Debentures.
The holders of a majority in principal amount of the Debentures then outstand-
ing may waive compliance in a particular interest by the Company with any pro-
vision of the Indenture or the Debentures without notice to any holder of the
Debentures. Without the consent of the holder of each Debenture affected
thereby, however, an amendment, supplement or waiver may not (i) reduce the
amount of the Debentures whose holders must consent to an amendment, supple-
ment or waiver; (ii) reduce the rate of or change the time of payment of in-
terest on any Debenture; (iii) reduce the principal of or premium on or change
the fixed maturity of any Debenture or alter the redemption provisions with
respect thereto; (iv) alter the conversion provisions with respect to any De-
benture in a manner adverse to the holder thereof; (v) waive a default in the
payment of the principal of or premium or interest on any Debenture, (vi) make
any changes in the provisions governing waiver of defaults, events of default
or rights of holders to receive payments; (vii) modify the subordination pro-
visions of the Indenture in a manner adverse to the holders; or (viii) make
any debenture payable in money other than that stated in the Debenture. Hold-
ers of not less than a majority in principal amount of outstanding Debentures
may waive certain past defaults.
The Company and the Trustee may amend or supplement the Indentures or the
Debentures without notice to or consent of any holders of the outstanding De-
bentures in certain events, such as to comply with the liquidation and merger
provision described in the Indenture, to provide for uncertificated Debentures
in addition to or in place of certificated Debentures, to cure any ambiguity,
defect or inconsistency or to make any other change that does not adversely
affect the right of the holders of the Debentures.
INDUCEMENT TO CONVERT
In connection with the Offering, the Company offered an inducement to the
holders of the Debentures to convert all of their Debentures contingent upon
the consummation of the Offering. The inducement included paying the holders
of the Debentures two additional quarters of interest at the 9% interest rate
payable on the Debentures, and giving such holders the ability to sell certain
shares of Common Stock in the Offering. All
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<PAGE>
holders of the Debentures have elected to convert their Debentures effective
upon the consummation of the Offering.
REGISTRATION RIGHTS
Holders of warrants to purchase 240,130 shares of Common Stock of the Com-
pany (the "Registrable Securities") are entitled to certain rights with re-
spect to the registration of such shares under Securities Act of 1933, as
amended (the "Securities Act"). In the event that the Company proposes to reg-
ister any of its securities under the Securities Act for its own account or
otherwise on a form which permits the registration of such Registrable Securi-
ties (other than the Company's first underwritten public offering, a Form S-4
or a Form S-8, or their successor forms), such holders are entitled to written
notice of the proposed registration and are entitled to include, at the
Company's expense, their Registrable Securities in such registrations, subject
to certain conditions and limitations ("Piggyback Registration"). These limi-
tations include the right of the managing underwriter of any such offering to
exclude some of the Registrable Securities from such registration if it deter-
mines that marketing forces require a limitation on the number of shares to be
underwritten. The Company generally will bear all expenses incurred in connec-
tion with the Piggyback Registration, other than underwriting commissions,
transfer taxes and the underwriter's accountable and nonaccountable expenses
or the fees and expenses of any legal counsel retained by a holder of the Reg-
istrable Securities.
Subject to certain limitations in the Warrant Agreements between the Company
and the holders of the Registrable Securities, the holders of at least 70% of
the Registrable Securities then outstanding are also entitled to request that
the Company register the Registrable Securities then outstanding ("Demand Reg-
istration"). The only cost and expenses to be borne by the Company in connec-
tion with the Demand Registration are the costs and expenses that would have
otherwise been incurred by the Company if the holders of the Registrable Secu-
rities had not desired to requested the Demand Registration.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to the Company's Amended and Restated Articles of Incorporation and
under Colorado law, directors of the Company are not personally liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty,
except for liability in connection with a breach of duty of loyalty, for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for shareholder distributions illegal under Colorado
law or any transaction in which a director has derived an improper personal
benefit.
The Company's Amended and Restated Bylaws provide for mandatory indemnifica-
tion of directors and executive officers of the Company against any expense,
liability and loss to which they become subject, or which they may incur as a
result of having been a director or officer of the Company. In addition, the
Company must advance or reimburse directors and executive officers for ex-
penses incurred by them in connection with certain claims.
In addition to the indemnification provision in the Company's Amended and
Restated Bylaws, the Company has entered into an Indemnification Agreement
with each of its directors and executive officers in the belief that such in-
dividuals may become unwilling to serve the Company without assurances that
adequate liability insurance, indemnification or a combination thereof is, and
will continue to be, provided to them. See "Management-- Limitation of Liabil-
ity and Indemnification Matters."
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Upon the closing of the Offering, the Board of Directors will be divided
into three classes of directors. See "Management -- Board of Directors." In
addition, directors may not be removed by the shareholders without cause.
"Cause" is defined in the Company's Amended and Restated Articles of Incorpo-
ration to mean (i) conviction of a felony, (ii) declaration of unsound mind by
order of court, (iii) gross dereliction of duty,
61
<PAGE>
(iv) commission of any action involving moral turpitude, or (v) commission of
an action which constitutes intentional misconduct or a knowing violation of
law if such action in either event results both in an improper substantial
personal benefit and a material injury to the Corporation. The Company's
Amended and Restated Articles of Incorporation also require an 80% vote of the
shareholders to amend certain provisions of the Amended and Restated Articles
of Incorporation. These provisions could discourage potential takeover at-
tempts, including takeovers which shareholders may deem to be in their best
interests. To the extent takeover attempts are discouraged, temporary fluctua-
tions in the market price of the Company's Common Stock, which may result from
actual or rumored takeover attempts, may be inhibited. These provisions, to-
gether with the classified Board of Directors and the ability of the Board of
Directors to issue Preferred Stock without further shareholder action, also
could delay or frustrate the removal of incumbent directors or the assumption
of control by shareholders, even if such removal or assumption would be bene-
ficial to shareholders of the Company. These provisions also could discourage
or make more difficult a merger, tender offer or proxy contest, even if favor-
able to the interests of shareholders, and could depress the market price of
the Common Stock. The Board of Directors believes that these provisions are
appropriate to protect the interests of the Company and all of its sharehold-
ers. The Board of Directors has no present plans to adopt any other measures
or devices which may be deemed to have an "anti- takeover effect."
ABILITY TO ADOPT SHAREHOLDER RIGHTS PLAN
The Board of Directors may in the future resolve to issue shares of Pre-
ferred Stock or rights to acquire such shares to implement a shareholder
rights plan. A shareholder rights plan typically creates voting or other im-
pediments to discourage persons seeking to gain control of the Company by
means of a merger, tender offer, proxy contest or otherwise if such change in
control is not in the best interest of the Company and its shareholders. The
Board has no present intention of adopting a shareholder rights plan and is
not aware of any attempt to obtain control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have a total of
shares of Common Stock outstanding ( shares if the Underwriters' over-allot-
ment option is exercised in full), of which the shares offered hereby by
the Company and the shares offered hereby by the Selling Shareholders will
be freely tradeable without restriction or registration under the Securities
Act of 1933, as amended, (the "Securities Act"), unless purchased by "affili-
ates" of the Company as that term is defined under the Securities Act and the
regulations promulgated thereunder. The remaining shares of Common Stock
are "restricted securities" as that term is defined by Rule 144 promulgated
under the Securities Act. Of such shares, except as otherwise provided below,
approximately 4,853,795 shares (including 1,419,971 shares issuable in connec-
tion with the Conversion of Debentures) will be eligible for sale in the pub-
lic market beginning 90 days from the date of this Prospectus pursuant to the
provisions of Rule 144 under the Securities Act. An additional 415,530 shares
will be available for issuance upon the exercise of outstanding warrants. The
Company has granted certain piggyback and demand registration rights to the
holders of warrants to purchase 240,130 shares of the Company's Common Stock.
An additional 431,183 shares are available for issuance upon the exercise of
options which have been granted pursuant to the Employee Plan and the Dental
Center Plan, and an additional 1,268,817 shares will be available for issuance
upon the exercise of options which may be granted in the future under these
plans. Upon consummation of the Offering, the shares issuable upon exercise of
any such options will not have been registered under the Securities Act and,
therefore, when issued will be subject to resale restrictions imposed by the
Securities Act. However, the Company intends to register such shares shortly
after the consummation of the Offering. Additionally, 362,000 shares issuable
in connection with the Conversion of Debentures will become eligible for sale
in the public market under Rule 144 beginning in December 1997. All of the di-
rectors and
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<PAGE>
executive officers of the Company, each of the Selling Shareholders, and cer-
tain other holders of Common Stock, warrants to purchase Common Stock and op-
tions to purchase Common Stock, representing in the aggregate 4,551,914 shares
of Common Stock, have agreed with the Underwriters that they will not, di-
rectly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any of-
fer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) any shares of Common Stock or other
capital stock or any securities convertible into or exercisable or exchange-
able for, any rights to purchase or acquire any shares of Common Stock or
other capital stock of the Company for a period of 180 days after the date of
this Prospectus without the prior written consent of Wheat, First Securities,
Inc., on behalf of the Underwriters (the "Lockup"). Wheat, First Securities,
Inc. may, in its sole discretion, at any time and without notice, release all
or any portion of the shares of Common Stock subject to such agreement. Upon
the expiration of the Lockup, these 4,551,914 shares will become eligible for
sale subject to the restrictions and volume limitations of Rule 144. Sales of
substantial amounts of such shares in the public market or the availability of
such shares for future sale could adversely affect the market price of the
Common Stock and adversely affect the Company's ability to raise additional
capital through an offering of its equity securities. See "Description of Com-
mon Stock," "Shares Eligible for Future Sale," and "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for
one year, including an "affiliate" as that term is defined under the Securi-
ties Act, is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock or the average weekly trading volume of the Common Stock on
all exchanges and/or reported through the automated quotation system of a reg-
istered securities association during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to cer-
tain manner of sale provisions, notice requirements and the availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an "affiliate" of the
Company at any time during the 90 days preceding a sale, and who has benefi-
cially owned the shares proposed to be sold for two years, would be entitled
to sell such shares under Rule 144(k) without regard to the limitations de-
scribed above.
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<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") for which Wheat, First Se-
curities, Inc. and A.G. Edwards & Sons, Inc. are acting as Representatives
(the "Representatives"), have severally agreed, subject to the terms and con-
ditions of the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Wheat, First Securities, Inc. ....................................
A.G. Edwards & Sons, Inc. ........................................
---------
Total...........................................................
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to pur-
chase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus; that the Underwriters may al-
low to selected dealers a concession of per share; and that such dealers
may reallow a concession of per share to certain other dealers. After the
initial public offering, the offering price and the concessions may be changed
by the Representatives.
The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
up to and additional shares of Common Stock, respectively, at the ini-
tial public offering price, less underwriting discounts, as set forth on the
cover page of this Prospectus. The Underwriters may exercise such option
solely for the purpose of covering over-allotments incurred in the sale of the
shares of Common Stock offered hereby. To the extent such option is exercised,
each of the Underwriters will be committed, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the preceding table bears
to shares.
All of the directors and executive officers of the Company, each of the
Selling Shareholders and certain other holders of Common Stock, warrants to
purchase Common Stock, and options to purchase Common Stock, representing in
the aggregate 4,551,914 shares of Common Stock, have agreed that they will
not, directly or indirectly, offer, sell, offer to sell, pledge contract to
sell or grant any option to purchase or otherwise sell or dispose of (or an-
nounce any offer, sale, offer of sale, pledge contract for sale or grant of
any option to purchase or other sale or disposition of) any shares of Common
Stock or other capital stock or any securities convertible into, or exercis-
able or exchangeable for, any shares of Common Stock or other capital stock of
the Company for a period of 180 days after the date of this Prospectus, with-
out the prior written consent of Wheat, First Securities, Inc., on behalf of
the Underwriters. Wheat, First Securities, Inc. may, in its sole discretion,
at any time and without prior notice release all or any portion of the shares
of Common Stock subject to such agreements.
The Company and the Selling Shareholders have agreed to indemnify the sev-
eral Underwriters against or contribute to losses arising out of certain lia-
bilities, including liabilities under the Securities Act.
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<PAGE>
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering made hereby, there has been no public market for the
Common Stock. Consequently, the initial public offering price was determined
through negotiations between the Company and the Representatives. Among the
factors that were considered in making such determination were prevailing mar-
ket conditions, the Company's financial and operating history and condition,
its prospects and prospects for the industry in general, the management of the
Company and the market prices of securities for companies in businesses simi-
lar to that of the Company.
In connection with the Offering, certain Underwriters and selling group mem-
bers (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accor-
dance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock for the purpose of stabilizing its market price.
The Underwriters also may create a short position for the account of the Un-
derwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all
or a portion of such short position, up to shares of Common Stock, by ex-
ercising the Underwriters' over-allotment option referred to above. Wheat,
First Securities, Inc. on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may re-
claim from an Underwriter (or dealer participating in the Offering) for the
account of the other Underwriters, the selling concession with respect to the
Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the transac-
tions described in this paragraph may result in the maintenance of the price
of the Common Stock at a level above that which might otherwise prevail in the
open market. None of the transactions described in this paragraph is required,
and, if any is undertaken, it may be discontinued at any time.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Holland & Hart LLP, Denver, Colorado. Certain legal matters related
to the Offering will be passed upon for the Underwriters by Alston & Bird LLP,
Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Birner Dental Management Services,
Inc. and subsidiaries as of December 31, 1995 and 1996 and June 30, 1997, and
for the period from inception to December 31, 1995, the year ended December
31, 1996 and the six months ended June 30, 1997; Gentle Dental as of December
31, 1995 and 1996 and June 30, 1997, and for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997; Predecessor Part-
nerships for the periods from February 1, 1994 to December 31, 1994 and the
nine months ended September 30, 1995; and Family Dental Group for the years
ended December 31, 1994 and 1995 and the five months ended May 29, 1996, ap-
pearing in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with re-
spect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the "Com-
mission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the shares of Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. Statements contained in
this Prospectus as to the contents of any contract or any other document are
not necessarily complete, and in each instance, reference is made to the copy
of such contract or document filed as an exhibit to the Registration State-
ment, each such Statement being qualified in all respects by such reference.
The Registration Statement, including the exhibits and schedules thereto, may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
and its regional offices located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be ob-
tained from the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Wash-
ington, D.C. 20549 at prescribed rates. The Commission also maintains a
website at: http://www.sec.gov.
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<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June
30, 1997............................................................... F-3
Consolidated Statements of Operations for the period from inception (May
17, 1995) to December 31, 1995, the year ended December 31, 1996 and
the six months ended June 30, 1996 and 1997............................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period
from inception (May 17, 1995) to December 31, 1995, the year ended
December 31, 1996 and the six months ended June 30, 1997............... F-5
Consolidated Statements of Cash Flows for the period from inception (May
17, 1995) to December 31, 1995, the year ended December 31, 1996 and
the six months ended June 30, 1996 and 1997............................ F-6
Notes to Consolidated Financial Statements.............................. F-7
GENTLE DENTAL AND AFFILIATE
Report of Independent Public Accountants................................ F-23
Combined Balance Sheets as of December 31, 1995 and 1996 and June 30,
1997................................................................... F-24
Combined Statements of Operations for years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1996 and 1997.......... F-25
Combined Statements of Shareholder's and Partners' Equity for years
ended December 31, 1994, 1995 and 1996 and the six months ended June
30, 1997............................................................... F-26
Combined Statements of Cash Flows for years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1996 and 1997.......... F-27
Notes to Combined Financial Statements.................................. F-28
PREDECESSOR PARTNERSHIPS
Report of Independent Public Accountants................................ F-32
Combined Statements of Operations for the period from inception
(February, 1, 1994) to December 31, 1994 and the nine months ended
September 30, 1995..................................................... F-33
Combined Statements of Partners' Equity for the period from inception
(February, 1, 1994) to December 31, 1994 and the nine months ended
September 30, 1995..................................................... F-34
Combined Statements of Cash Flows for the period from inception
(February, 1, 1994) to December 31, 1994 and the nine months ended
September 30, 1995..................................................... F-35
Notes to Combined Financial Statements.................................. F-36
FAMILY DENTAL GROUP
Report of Independent Public Accountants................................ F-39
Combined Statements of Operations for the years ended December 31, 1994
and 1995 and the five months ended May 29, 1996........................ F-40
Combined Statements of Partners' Equity for the years ended December 31,
1994 and 1995 and the five months ended May 29, 1996................... F-41
Combined Statements Cash Flows for the years ended December 31, 1994 and
1995 and the five months ended May 29, 1996............................ F-42
Notes to Combined Financial Statements.................................. F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Birner Dental
Management Services, Inc.
We have audited the accompanying consolidated balance sheets of Birner Den-
tal Management Services, Inc. (a Colorado corporation) and subsidiaries as of
December 31, 1995 and 1996 and June 30, 1997 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the period
from inception (May 17, 1995) to December 31, 1995, the year ended December
31, 1996 and the six months ended June 30, 1997. 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 in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Birner Dental Management
Services, Inc. and subsidiaries as of December 31, 1995 and 1996 and June 30,
1997, and the results of their operations and their cash flows for the period
from inception (May 17, 1995) to December 31, 1995, the year ended December
31, 1996 and the six months ended June 30, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado,
August 22, 1997,
(except with respect
to the matter in
Note 14 as to which
the date is
September 8, 1997).
F-2
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $1,464,544 $1,797,552 $ 1,790,117
Accounts receivable, net of allowances of
approximately $2,400, $26,200, and
$30,300, respectively, for uncollectible
accounts................................. 77,960 848,851 980,207
Notes receivable -- related parties....... -- 30,196 30,676
Prepaid expenses.......................... 35,803 179,727 206,424
---------- ---------- -----------
Total current assets.................... 1,578,307 2,856,326 3,007,424
---------- ---------- -----------
Property and equipment, net of accumulated
depreciation and amortization of $11,004,
$276,971, and $500,913, respectively..... 266,284 1,809,775 2,010,461
OTHER NONCURRENT ASSETS:
Intangible assets, net of accumulated
amortization of $6,629, $115,819 and
$216,535................................. 770,382 4,336,759 5,052,479
Deferred charges and other assets......... 293,510 441,603 477,214
Notes receivable -- related parties, net
of current portion....................... -- 108,355 11,324
---------- ---------- -----------
Total assets............................ $2,908,483 $9,552,818 $10,558,902
========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..... $ 341,794 $ 903,235 $ 1,352,062
Current maturities of notes payable....... 530,353 94,785 99,973
Current maturities of capital lease
obligations.............................. 8,532 41,500 44,029
---------- ---------- -----------
Total current liabilities............... 880,679 1,039,520 1,496,064
LONG TERM LIABILITIES:
Deferred income taxes..................... -- -- 5,200
Notes payable............................. -- 208,215 611,720
Convertible subordinated debentures....... -- 6,555,000 6,780,000
Capital lease obligations, net of current
maturities............................... 23,400 65,957 45,441
---------- ---------- -----------
Total liabilities....................... 904,079 7,868,692 8,938,425
Commitments and Contingencies (Note 10)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000
shares authorized; none outstanding...... -- -- --
Common Stock, no par value,10,000,000
shares authorized; 3,592,824, 3,597,824
and 3,447,824 shares issued and
outstanding at December 31, 1995 and 1996
and at June 30, 1997, respectively....... 2,164,659 2,179,659 1,849,659
Accumulated deficit....................... (160,255) (495,533) (229,182)
---------- ---------- -----------
Total shareholders' equity.............. 2,004,404 1,684,126 1,620,477
---------- ---------- -----------
Total liabilities and shareholders'
equity................................. $2,908,483 $9,552,818 $10,558,902
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(MAY 17, 1995) YEAR ENDED SIX MONTHS ENDED JUNE 30
TO DECEMBER 31, DECEMBER 31,------------------------
1995 1996 1996 1997
--------------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Dental office revenue,
net...................... $ 447,995 $7,283,978 $2,121,537 $6,843,689
Less -- amounts retained
by dental offices........ 148,035 1,910,749 588,555 1,616,420
--------- ---------- ---------- ----------
Net revenue............... 299,960 5,373,229 1,532,982 5,227,269
DIRECT EXPENSES:
Clinical salaries and
benefits................. 125,371 1,749,985 494,456 1,696,082
Dental supplies........... 42,392 777,769 145,559 512,366
Laboratory fees........... 28,262 483,140 142,658 488,203
Occupancy................. 19,532 315,423 138,257 431,609
Advertising and
marketing................ 34,533 280,186 41,577 217,130
Depreciation and
amortization............. 13,745 323,401 83,551 285,409
General and
administrative........... 42,641 672,759 198,066 352,675
--------- ---------- ---------- ----------
306,476 4,602,663 1,244,124 3,983,474
--------- ---------- ---------- ----------
Contribution from dental
offices.................. (6,516) 770,566 288,858 1,243,795
Corporate expenses--
General and
administrative......... 148,825 721,313 312,808 588,071
Depreciation and
amortization........... 3,888 57,941 24,698 46,416
--------- ---------- ---------- ----------
Operating (loss) income... (159,229) (8,688) (48,648) 609,308
Interest expense, net..... (1,026) (326,590) (47,703) (337,757)
--------- ---------- ---------- ----------
(Loss) income before
income taxes............. (160,255) (335,278) (96,351) 271,551
Income taxes.............. -- -- -- 5,200
--------- ---------- ---------- ----------
Net (loss) income......... $(160,255) $ (335,278) $ (96,351) $ 266,351
========= ========== ========== ==========
Net (loss) income per
share.................... $ (.05) $ (.09) $ (.03) $ .07
========= ========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding.............. 3,038,689 3,735,734 3,733,637 3,949,346
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED TOTAL
--------------------- EARNINGS STOCKHOLDERS'
SHARES AMOUNT (DEFICIT) EQUITY
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
INCEPTION, MAY 17, 1995
Issuance of Common Stock to
founders for cash........... 2,200,000 $ 22,000 $ -- $ 22,000
Contribution of capital for
dental offices.............. -- 52,010 -- 52,010
Issuance of Common Stock
pursuant to private
placement................... 278,524 278,524 -- 278,524
Issuance of Common Stock
pursuant to private
placement................... 904,300 1,627,740 -- 1,627,740
Private placement costs...... -- (201,615) -- (201,615)
Issuance of Common Stock for
dental office acquisition... 170,000 306,000 -- 306,000
Issuance of Common Stock..... 40,000 80,000 -- 80,000
Net loss..................... -- -- (160,255) (160,255)
--------- ---------- --------- ----------
Balances, December 31, 1995.. 3,592,824 2,164,659 (160,255) 2,004,404
Issuance of Common Stock for
dental office acquisition... 5,000 15,000 -- 15,000
Net loss..................... (335,278) (335,278)
--------- ---------- --------- ----------
Balances, December 31, 1996.. 3,597,824 2,179,659 (495,533) 1,684,126
Purchase and retirement of
Common Stock................ (150,000) (330,000) -- (330,000)
Net income................... -- -- 266,351 266,351
--------- ---------- --------- ----------
Balances, June 30, 1997...... 3,447,824 $1,849,659 $(229,182) $1,620,477
========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
BIRNER DENTAL MANAGEMENT
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(MAY 17, 1995) YEAR ENDED SIX MONTHS ENDED JUNE 30
TO DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 1996 1997
--------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income....... $ (160,255) $ (335,278) $ (96,351) $ 266,351
Adjustments to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities
Depreciation and
amortization........... 17,633 381,342 108,249 331,825
Provision for bad
debts.................. 2,400 23,800 11,900 4,100
Amortization of
debenture issuance
costs.................. -- 30,261 -- 40,896
Deferred income taxes... -- -- -- 5,200
Changes in assets and
liabilities, net of
effects from
acquisitions...........
Accounts receivable..... (16,223) (555,905) (115,331) (115,456)
Prepaid expenses........ (29,953) (143,924) (42,656) (26,697)
Accounts payable and
accrued expenses....... 252,570 54,121 102,720 448,827
Other noncurrent
assets................. (40,469) -- -- --
---------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities........... 25,703 (545,583) (31,469) 955,046
---------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Notes receivable --
related parties....... -- (138,551) (138,551) 96,551
Capital expenditures.... (99,418) (486,379) (278,941) (235,021)
Development of new
dental offices......... (244,741) (493,009) (445,213) (59,632)
Cash acquired from
existing dental
offices................ 102,132 -- -- --
Acquisition of dental
offices................ (106,134) (3,677,469) (3,284,018) (903,210)
---------- ----------- ----------- -----------
Net cash used in
investing
activities........... (348,161) (4,795,408) (4,146,723) (1,101,312)
---------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from
convertible
subordinated
debentures............. -- 6,555,000 4,970,000 225,000
Net activity from line
of credit.............. -- 100,000 (530,353) 250,000
Repayment of long term
debt................... (19,647) (579,285) -- (100,116)
Payment of debenture
issuance and other
financing costs........ -- (401,716) (250,837) (16,875)
Issuances of Common
Stock, net of offering
costs.................. 1,806,649 -- -- --
Purchase and retirement
of Common Stock........ -- -- -- (219,178)
---------- ----------- ----------- -----------
Net cash provided by
financing
activities........... 1,787,002 5,673,999 4,188,810 138,831
---------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH................ 1,464,544 333,008 10,618 (7,435)
CASH AND CASH
EQUIVALENTS,
Beginning of period.... -- 1,464,544 1,464,544 1,797,552
---------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS,
End of period.......... $1,464,544 $ 1,797,552 $ 1,475,162 $ 1,790,117
========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
year for interest.... $ 14,601 $ 243,530 $ 27,650 $ 331,101
========== =========== =========== ===========
Cash paid for taxes... $ -- $ -- $ -- $ --
========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES
Contribution of capital
for dental offices..... 52,010 -- -- --
Property Purchased under
capital leases......... 31,932 107,457 58,690 --
Common Stock issued
for --
Acquisition of dental
offices................ 306,000 15,000 -- --
Notes payable for --
Acquisition of dental
offices................ 550,000 90,000 -- 130,000
Purchase and retirement
of Common Stock....... -- -- -- 110,822
Liabilities assumed
through acquisitions --
Notes payable.......... -- 130,000 -- --
Accounts payable and
accrued liabilities... 89,224 507,320 475,084 --
Accounts receivable
acquired through
acquisitions........... 91,783 238,786 218,786 20,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(1) Description of Business and Reorganization
Birner Dental Management Services, Inc. ("Birner"), a Colorado corporation
(the "Company"), was incorporated on May 17, 1995 ("Inception") and manages
dental group practices. As of December 31, 1996 and June 30, 1997, the Company
managed 18 and 22 dental practices (collectively referred to as the "Of-
fices"), respectively. Birner provides management services, which are designed
to improve the efficiency and profitability of the dental practices. These Of-
fices are organized as professional corporations and Birner provides its man-
agement activities with the Offices under long-term management agreements (the
"Management Agreements").
The Company was formed by three individuals on May 17, 1995, with an initial
capital investment of $22,000 for 2.2 million shares of Common Stock. The Com-
pany had no substantial operations until October 1, 1995, when it acquired
three dental offices from one of the founders and executed Management Agree-
ments for those practices. The Company acquired assets of approximately
$721,000, liabilities of $669,000 and recorded existing equity of $52,000 as a
contribution of capital. The assets and liabilities acquired in this transac-
tion were recorded at predecessor cost.
The Company has grown principally through acquisitions. In late 1995, the
Company acquired one existing Office. In 1996, the Company acquired twelve ex-
isting Offices, three were consolidated into existing locations, and developed
five Offices. Four existing Offices were acquired during the first six months
of 1997. Additional Offices have been acquired or are under contract subse-
quent to June 30, 1997 (Note 14). The Company's operations and expansion
strategy are dependent, in part, on the availability of dentists, hygienists
and other professional personnel and the ability to hire and assimilate addi-
tional management and other employees to accommodate expanded operations.
(2) Significant Accounting Policies
Basis of Presentation/Basis of Consolidation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. These financial statements present the financial
position and results of operations of the Company and the Offices, which are
under common control. All intercompany accounts and transactions have been
eliminated in the consolidation.
The Company has presented dental office revenue and amounts retained by den-
tal offices, consisting primarily of adjusted gross office revenue less den-
tists and hygienists salaries in accordance with the Management Agreements, in
the accompanying consolidated statements of operations to arrive at the
Company's net revenue. Under the Management Agreements, the Company assumes
responsibility for the management of most aspects of the Offices' business
(other than the provision of dental services) including personnel recruitment
and training, comprehensive administrative business and marketing support and
advice and facilities, equipment and support personnel as required to operate
the practice. Therefore, the Offices are treated as consolidated subsidiaries
and the accompanying statements of operations reflect net amounts billed to
patients as revenue and show as expenses the direct expense paid by the Compa-
ny, and the physicians' and hygienists' compensation as amounts retained by
Offices.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain financial reporting matters relating to the
physician practice management industry, which the Company expects will include
a review of the consolidation of professional corporation revenues and the ac-
counting for business combinations. The Company is unable to predict the im-
pact, if any, that this review may have on the
F-7
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(2) Significant Accounting Policies -- Continued
Company's acquisition strategy, allocation of purchase price related to acqui-
sitions, and amortization life assigned to intangible assets (Note 3).
Basis of Presentation -- Interim Financial Statements (unaudited)
The unaudited financial statements for the six months ended June 30, 1996,
omit certain footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles. All ad-
justments, consisting only of normal recurring adjustments, necessary to pres-
ent fairly the results of operations for the six months ended June 30, 1996,
have been included in the accompanying unaudited consolidated statement of op-
erations.
Dental Office Revenue, Net
"Dental office revenue, net" represents the revenue of the Offices reported
at the estimated realizable amounts from insurance companies, preferred pro-
vider and health maintenance organizations (i.e., third-party payors) and pa-
tients for services rendered, net of contractual and other adjustments. Dental
services are billed and collected by the Company in the name of the Offices.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. There are no material claims, disputes or other unset-
tled matters that exist to management's knowledge concerning third-party reim-
bursements.
During 1996 and for the six months ended June 30, 1997, 21% and 20%, respec-
tively, of the Company's revenue was derived from capitated managed dental care
contracts. Under these contracts the Offices receive a fixed monthly payment
for each covered plan member for a specific schedule of services regardless of
the quantity or cost of services provided by the Offices. The Offices may re-
ceive a co-pay from the patient for each service provided.
During the year ended December 31, 1996, approximately 14.4% and 10.3% of the
Company's gross revenue came from Prudential Dental Maintenance Organization,
Inc. ("Prudential") and PacifiCare, respectively. During the six-month period
ended June 30, 1997, Prudential and PacifiCare were responsible for 13.1% and
11.0%, respectively, of the Company's gross revenue.
Net Revenue
Net revenue represents the "Dental offices revenue, net" less amounts re-
tained by the Offices primarily for compensation paid by the professional cor-
porations to dentists and hygienists. Under the Management Agreements, the Com-
pany assumes responsibility for the management of all aspects of the Offices'
business (other than the provision of dental services) including personnel re-
cruitment and training, comprehensive administrative business and marketing
support and advice and facilities, equipment and support personnel as required
to operate the practice. The Company's historical net revenue and operating in-
come levels would be the same as those reported even if the Company employed
all of the dentists and hygienists. The Company is obligated to pay all operat-
ing expenses incurred in connection with managing the Offices, including com-
pensation for personnel other than dentists and hygienists, dental supplies,
dental laboratory fees, occupancy costs, equipment leases, management informa-
tion systems and other expenses related to the dental practice operations. The
Company retains a 100% residual interest in the net income, as defined, of the
Offices. The Company's management fee,
F-8
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(2) Significant Accounting Policies -- Continued
which is net revenue in the accompanying statements of operations, is equal to
the Offices total net revenue from patient services less amounts paid as com-
pensation to dentists and hygienists. Dentists receive compensation based upon
a specified amount per hour worked or a percentage of collections attributable
to their work, and a bonus based upon the operating performance of the Office.
The Company's net revenue is dependent upon the revenue of the Offices.
Advertising and Marketing
The costs of advertising, promotion and marketing are expensed as incurred.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include money market accounts and all highly liquid investments
with original maturities of three months or less.
Accounts Receivable
Accounts receivable represents receivables from patients and other third-
party payors for dental services provided. Such amounts are recorded net of
contractual allowances and other adjustments at time of billing. In addition,
the Company has estimated allowances for uncollectible accounts.
In those instances when payment is not received at the time of service, the
Offices record receivables without collateral from their patients, most of
whom are local residents and are insured under third-party payor agreements.
Management continually monitors and periodically adjusts the allowances asso-
ciated with these receivables.
Property and Equipment
Property and equipment are stated at cost or fair market value at dates of
acquisition, net of accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over their useful
lives of five years and leasehold improvements are amortized over the remain-
ing life of the lease. Equipment held under capital lease obligations is amor-
tized on a straight-line basis over the shorter of the lease term or estimated
life of the asset. Depreciation was $11,004, $265,967 and $223,942 for the pe-
riod from inception to December 31, 1995, the year ended December 31, 1996 and
the six months ended June 30, 1997, respectively.
Intangible Assets
The Company's dental practice acquisitions involve the purchase of tangible
and intangible assets and the assumption of certain liabilities of the ac-
quired Offices. As part of the purchase price allocation, the Company allo-
cates the purchase price to the tangible and identifiable intangible assets
acquired and liabilities assumed, based on estimated fair market values. Costs
of acquisition in excess of the net estimated fair value of tangible and iden-
tifiable intangible assets acquired and liabilities assumed is allocated to
the Management Agreement. The Management Agreement represents the Company's
right to manage the Offices during the 40 year term of the agreement. The as-
signed value of the Management Agreement is amortized using the straight-line
method over a period of 25 years.
F-9
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(2) Significant Accounting Policies -- Continued
The Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material de-
fault by Birner.
The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining amorti-
zation periods, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate are unfavorable
changes in each dental Office's relative market share and local market compet-
itive environment, current period and forecasted operating results, cash flow
levels of the dental Offices and the impact on the net revenue earned by the
Company, and legal and regulatory factors governing the practice of dentistry.
Use of Estimates
The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the financial state-
ments and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial Ac-
counting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which re-
quires the use of the asset and liability method of computing deferred income
taxes. The objective of the asset and liability method is to establish de-
ferred tax assets and liabilities for the temporary differences between the
book basis and the tax basis of the Company's assets and liabilities at en-
acted tax rates expected to be in effect when such amounts are realized or
settled.
Effects of Recently Issued Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
128, "Earnings Per Share," which supersedes APB No. 15, "Earnings Per Share."
SFAS No. 128 simplifies the requirements for reporting earnings per share
("EPS") by requiring companies only to report "basic" and "diluted" EPS. SFAS
No. 128 is effective for both interim and annual periods ending after December
15, 1997 but requires retroactive restatement upon adoption. The Company will
adopt SFAS No. 128 in the fourth quarter of 1997. The adoption of SFAS No. 128
will have no effect on previously reported loss per share for 1995 and 1996
and for the six months ended June 30, 1997 EPS would be as follows:
<TABLE>
<S> <C>
Basic................ $.07
====
Diluted.............. $.07
====
</TABLE>
Earnings Per Share
Earnings per share is computed using the weighted average number of common
and common equivalent shares outstanding for each period. Common equivalent
shares include stock options and warrants to purchase the Company's Common
Stock. Pursuant to Securities and Exchange Commission Accounting Staff Bulle-
tin No.
F-10
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(2) Significant Accounting Policies--Continued
83, common and common equivalent shares issued during the twelve months imme-
diately preceding the Company's initial public offering filing date have been
included in the calculation of common and common equivalent shares, regardless
of whether their inclusion is dilutive, using the treasury stock method and
the anticipated public offering price as if they were outstanding for all pe-
riods. Common Stock equivalents, excluding those issued within twelve months
immediately preceding the Company's initial public offering filing date, are
excluded for loss periods because their inclusion would be anti-dilutive.
(3) Acquisitions
On November 17, 1995, the Company acquired all of the assets and assumed
certain liabilities of a Colorado sole proprietorship (the "1995 Acquisition")
for shares of Common Stock and cash.
On May 29, 1996, the Company acquired all the assets and assumed all liabil-
ities of Family Dental Care Fort Collins, a sole proprietorship, Family Dental
Group I, P.C., a Colorado professional corporation and Family Dental Care
Westminster, a Colorado general partnership, collectively "Family Dental Ac-
quisition" for $3,284,018. Family Dental Acquisition consists of seven Offices
located in Colorado.
Four dental practices were acquired at various dates between July 3, 1996
and September 17, 1996. The total purchase price for these four acquisitions
was $470,000. In addition, in August 1996, the Company acquired an interest in
a Colorado practice ("East Cornell") and obtained the rights to manage the
practice. These four 1996 acquisitions and the acquired interest in East Cor-
nell are collectively referred to as the "Additional 1996 Acquisitions."
In the period January 1, 1997 through June 30, 1997, the Company acquired
three dental practices for a total purchase price of $645,000, at various
dates from January 28, 1997 through March 25, 1997. An interest in another
Colorado practice ("Yale") and the rights to manage the practice were acquired
in April 1997. The three 1997 acquisitions and the acquired interest in Yale
are collectively referred to as the "1997 Acquisitions."
The 1995 Acquisition, Family Dental Acquisition, Additional 1996 Acquisi-
tions and 1997 Acquisitions have been accounted for using the purchase method
of accounting. Accordingly, the purchase price has been allocated to the tan-
gible and intangible assets acquired and liabilities assumed based on the es-
timated fair values at the dates of acquisition. The Company does not expect
the final allocations to differ significantly from the amounts estimated at
date of acquisition. The estimated fair value of assets acquired and liabili-
ties assumed for these acquisitions are summarized as follows:
<TABLE>
<CAPTION>
FAMILY ADDITIONAL
1995 DENTAL 1996 1997
ACQUISITION ACQUISITION ACQUISITIONS* ACQUISITIONS**
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Accounts receivable, net.. $ 24,845 $ 218,786 $ -- $ 20,000
Property and equipment,
net...................... 10,350 417,755 104,713 162,000
Liabilities assumed....... -- (475,084) (15,236) --
Intangible assets......... 376,939 3,122,561 365,523 463,000
Less:Fair value of Common
Stock issued............. (306,000) -- (15,000) --
Deferred purchase price
(payable in cash)..... -- -- (90,000) (130,000)
--------- ---------- -------- ---------
Cash purchase price....... $ 106,134 $3,284,018 $350,000 $ 515,000
========= ========== ======== =========
</TABLE>
- --------
* Excluding acquired interest in East Cornell
** Excluding acquired interest in Yale
F-11
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(3) Acquisitions -- Continued
The value of the Common Stock issued in connection with the above acquisi-
tions was based primarily on prices received by the Company for the sale of
Common Stock in private placement transactions with unrelated third parties.
Operating results of the acquired practices are included in the accompanying
statements of operations from the date of acquisition.
The following unaudited pro forma information reflects the effect of Family
Dental Acquisition, Additional 1996 Acquisitions and the 1997 Acquisitions
(excluding East Cornell and Yale) on the consolidated results of operations of
the Company as if the acquisitions occurred at January 1, 1996. Future results
may differ substantially from pro forma results and cannot be considered in-
dicative of future results.
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
DECEMBER JUNE 30,
31, 1996 1997
----------- ----------
<S> <C> <C>
Dental offices revenue............................ $11,079,000 $7,158,000
=========== ==========
Net income........................................ $ (454,000) $ 276,000
=========== ==========
Net income per common share....................... $ (.12) $ .07
=========== ==========
</TABLE>
In connection with the agreements with the dentists associated with East
Cornell and Yale, whereby the Company acquired an interest in the practices
and obtained the rights to manage the practices, the Company recorded intangi-
ble assets of $522,000 related to the management agreements obtained in these
transactions. In each case, the dentist has an option to put the remaining in-
terest in the Office to the Company at an exercise price which is calculated
based upon the performance of the Office (the "put option price"). The option
is exercisable contingent upon certain conditions as outlined in the agree-
ment. The option exercise periods run for seven years beginning August 30,
1999 and April 21, 2000, respectively. When the put option is exercised, the
amount paid will be recorded as additional cost of acquisition.
F-12
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(4) Notes Receivable -- Related Parties
Notes receivable from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Note receivable from affiliated dentist and shareholder,
unsecured, 8% interest; due April 15, 2004, however,
borrower has agreed to prepay the principal and accrued
interest on this note in full on the date he receives
aggregate proceeds from the sale of his shares of
Common Stock of the Company............................ $108,355 $ --
Notes receivable from affiliated dentist, unsecured,
principal $8,000, monthly principal and interest
payments, interest rate of 8% per annum................ 5,196 --
Note receivable from CEO and shareholder, unsecured,
principal and interest due December 31, 1997, interest
rate of 6% per annum................................... 25,000 25,000
Note receivable from affiliated dentist, unsecured,
monthly principal and interest payments, interest rate
of 8% per annum........................................ -- 17,000
-------- --------
138,551 42,000
Less -- current maturities............................ (30,196) (30,676)
-------- --------
Notes receivable -- related parties, long-term........ $108,355 $ 11,324
======== ========
</TABLE>
(5) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Dental equipment......................... $ 70,757 $ 777,360 $1,004,900
Furniture and fixtures................... 25,223 183,494 268,759
Leasehold improvements................... 48,932 786,339 839,441
Computer equipment....................... 132,376 339,553 398,274
-------- ---------- ----------
277,288 2,086,746 2,511,374
Less -- Accumulated depreciation and
amortization.......................... (11,004) (276,971) (500,913)
-------- ---------- ----------
Property and equipment, net............ $266,284 $1,809,775 $2,010,461
======== ========== ==========
</TABLE>
Property and equipment held under capital leases included in the above bal-
ances and the related accumulated amortization is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Leased property and equipment.................. $ 44,587 $103,277 $103,277
Less -- Accumulated amortization............. (14,433) (31,938) (42,266)
-------- -------- --------
Leased property and equipment, net........... $ 30,154 $ 71,339 $ 61,011
======== ======== ========
</TABLE>
F-13
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(6) Deferred Charges and Other Assets
Deferred charges and other assets consist primarily of deferred debenture
costs, organization costs and Office development costs. Deferred debenture
costs are associated with the 9% convertible subordinated debentures issued in
May and December 1996. These costs are being amortized using the effective in-
terest rate method over the life of the debentures of five years (Note 8). Or-
ganization costs are amortized on a straight-line basis over the period of ex-
pected benefit of five years. Deferred financing costs are related to the ac-
quisition of the revolving credit agreement and are amortized over the life of
the revolver of three years (Note 8). Office development costs represent capi-
tal costs to third parties incurred in connection with pending acquisitions or
new Offices which are in the process of being opened. These costs will be cap-
italized when the acquisitions are finalized or when the new Offices are
opened, and will be expensed if the acquisition is not completed.
Deferred charges and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred debenture costs, net.................... $ -- $352,544 $328,523
Organization costs, net.......................... 46,808 49,954 43,666
Deferred financing costs, net.................... -- 18,913 16,951
Office development costs......................... 246,702 20,192 88,074
-------- -------- --------
$293,510 $441,603 $477,214
======== ======== ========
</TABLE>
(7) Intangible Assets
Intangible assets consist of Management Agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
AMORTIZATION -------------------- JUNE 30,
PERIOD 1995 1996 1997
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Management Agreements....... 25 years $777,011 $4,452,578 $5,269,014
Less -- Accumulated
amortization............... (6,629) (115,819) (216,535)
-------- ---------- ----------
Intangible assets, net...... $770,382 $4,336,759 $5,052,479
======== ========== ==========
</TABLE>
F-14
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(8) Notes Payable and Convertible Subordinated Debentures
Notes payable and convertible subordinated debentures consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Note payable to a bank, interest at 1.75%
over prime (10.25% at December 31, 1995),
collateralized by receivables, certain
equipment and certain guarantees by
related parties........................... $ 530,353 $ -- $ --
Revolving credit agreement with a bank not
to exceed $800,000, interest payable
quarterly at a rate of prime + 1/2% (8.75%
at December 31, 1996) personally
guaranteed by the three founders of the
Company, due in October 1999.............. -- 100,000 350,000
Acquisition notes payable --
Paid in July, 1997, interest at 8%....... -- 35,000 28,776
Paid in January, 1997.................... -- 50,000 --
Due in December, 1999, interest at 7%,
monthly principal and interest payments
of $2,239............................... -- -- 50,000
Due in May, 2000, interest at 9%, monthly
principal and interest payments of
$2,544.................................. -- -- 76,097
Convertible subordinated debentures
maturing May 15, 2001 (the "May
Debentures"), interest payable semi-
annually at a rate of 9%, 20% of
outstanding principal redeemable by the
Company in 1999 and 2000, conversion price
for the stock is $3.50 per share.......... -- 4,970,000 4,970,000
Convertible subordinated debentures
maturing December 27, 2001, (the "December
Debentures"), interest payable semi-
annually at a rate of 9%, 20% of
outstanding principal redeemable by the
Company in 1999 and 2000, conversion price
for the stock is $5.00 per share.......... -- 1,585,000 1,810,000
Notes payable assumed for an affiliated
dentist; principal of $130,000 with
monthly aggregate principal and interest
payments of $3,771; average interest rate
of 14%; maturing August 2000 to December
2000...................................... -- 118,000 99,024
Note payable to an affiliated dentist;
principal of $110,822; interest at 8%;
monthly principal and interest payments of
$2,247.................................... -- -- 107,796
--------- ---------- ----------
530,353 6,858,000 7,491,693
Less -- current maturities................. (530,353) (94,785) (99,973)
--------- ---------- ----------
Notes payable, net......................... $ -- $6,763,215 $7,391,720
========= ========== ==========
</TABLE>
Conversion of the Debentures
The holders of December Debentures and May Debentures have the right, exer-
cisable at any time to maturity, to convert the principal amount thereof (or
any portion thereof that is an integral multiple of $1,000) into shares of
Common Stock of the Company at the conversion rate of $5.00 and $3.50 per
share, respectively, subject to adjustment upon the occurrence of certain
events, as outlined in the debenture agreements.
F-15
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(8) Notes Payable and Convertible Subordinated Debentures -- Continued
Any time six months after the effective date of the Offering (see Note 14),
the Company has the right to require conversion of the December Debentures and
the May Debentures if the Common Stock trades for 20 to 30 consecutive trading
days at a price equal to or greater than $7.50 and $6.50 per share, respec-
tively. The Debentures are to be redeemed by the Company at the rate of 20% on
the third anniversary, 20% on the fourth anniversary and the balance at matu-
rity. All redemption amounts will include accrued interest to the date of re-
demption.
The maturities of notes payable and debentures are as follows:
<TABLE>
<S> <C>
Six months ending December 31, 1997.............................. $ 42,236
Years ending December 31,
1998........................................................... 110,183
1999........................................................... 1,816,752
2000........................................................... 1,418,520
2001........................................................... 4,092,988
Thereafter..................................................... 11,014
----------
$7,491,693
==========
</TABLE>
An additional $225,000 of the December Debentures were issued in January
1997.
In August 1997, the Company requested each debenture holder to convert their
debentures prior to the initial public offering (Note 14). In return for this
early conversion, the Company has agreed to pay six months of additional in-
terest and allow some of the shares obtained from the conversion to be in-
cluded in the Offering. The additional interest cost of $305,100 will be
expensed upon completing the conversion and payment of the interest. All hold-
ers of debentures have agreed to this early conversion.
(9) Shareholders' Equity
Stock Option Plans
The Employee Stock Option Plan (the "Employee Plan") was adopted by the
Board of Directors effective as of October 30, 1995, and as amended on Septem-
ber 4, 1997, has 1,000,000 shares of Common Stock reserved for issuance. The
Employee Plan provides for the grant of incentive stock options, to employees
(including officers and employee-directors) and non-statutory stock options to
employees, directors and consultants.
The Dental Center Plan (the "Dental Center Plan") was adopted by the Board
Effective as of October 30, 1995, and as amended on September 4, 1997, has
700,000 shares of Common Stock reserved for issuance. The Dental Center Plan
provides for the grant of non-statutory stock options to P.C.s that are par-
ties to Management Agreements with the Company, and to dentists or dental hy-
gienists who are either employed by or an owner of the P.C.s. The Employee
Plan and Dental Center Plan are administered by a committee appointed by the
Board, which determines recipients and types of options to be granted, includ-
ing the exercise price, the number of shares, the grant dates, and the
exercisability thereof. The term of any stock option granted may not exceed 10
years. The exercise price of options granted under the Employee Plan and the
Dental Center Plan is determined by the committee, provided that the exercise
price of a stock option cannot be less than 100% of the
F-16
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(9) Shareholders' Equity -- Continued
fair market value of the shares subject to the option on the date of grant, or
110% of the fair market value for awards to more than 10% stockholders. Op-
tions granted under the plans vest at the rate specified in the option agree-
ments, which generally provide that options vest in three to five equal annual
installments.
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123")
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for employee stock options, warrants or simi-
lar equity instruments. However, SFAS No. 123 allows the continued measurement
of compensation cost for non-compensatory options and warrants using the in-
trinsic value based method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," provided that pro forma disclosures are made of
net income or loss and net income or loss per share, assuming the fair value
based method of SFAS No. 123 had been applied. The Company adopted the disclo-
sure option of SFAS No. 123 and accounts for its stock-based compensation
plans under APB 25.
A summary of stock options under both the Employee and the Dental Center
Plans as of December 31, 1995, 1996 and June 30, 1997 and changes during the
periods then ended is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year.................. -- $ -- 25,700 $1.80 393,973 $2.86
Granted................. 25,700 $1.80 371,273 $2.93 24,400 $4.59
Canceled................ -- $ -- (3,000) $2.53 (62,950) $2.45
Exercised............... -- $ -- -- $ -- -- $ --
------ ------- -------
Outstanding at end of
period................... 25,700 393,973 355,423
====== ======= =======
Exercisable at end of
period................... -- 16,467 136,097
====== ======= =======
Weighted average fair
value of options
granted.................. $ .49 $ .84 $ 1.59
====== ======= =======
</TABLE>
The following tables summarize information about the options outstanding at
December 31, 1996 and June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
----------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.80 -- 2.60........... 202,273 5.96 $2.08 12,967 $1.80
$2.60 -- 3.40........... 52,500 6.43 $3.15 -- $ --
$3.40 -- 4.20........... 128,900 6.69 $3.81 3,500 $4.00
$4.20 -- 5.00........... 10,300 6.89 $4.25 -- $ --
------- ---- ----- ------ -----
$1.80 -- 5.00........... 393,973 6.26 $2.86 16,467 $2.27
======= ==== ===== ====== =====
</TABLE>
F-17
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(9) Shareholders' Equity -- Continued
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE JUNE 30, CONTRACTUAL EXERCISE JUNE 30, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
----------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.80 -- 2.60........... 155,023 5.35 $2.12 125,597 $2.12
$2.60 -- 3.40........... 52,500 5.71 $3.15 6,000 $3.00
$3.40 -- 4.20........... 113,500 6.20 $3.81 3,500 $4.00
$4.20 -- 5.00........... 34,400 6.53 $4.78 1,000 $5.00
------- ---- ----- ------- -----
$1.80 -- 5.00........... 355,423 5.76 $3.05 136,097 $2.23
======= ==== ===== ======= =====
</TABLE>
Warrants
At June 30, 1997, there are outstanding warrants or contractual obligations
to issue warrants to purchase approximately 453,530 shares of the Company's
Common Stock. Total warrants of 98,330 were issued in connection with the pri-
vate placement of the Company's Common Stock, 150,200 for the issuance of con-
vertible subordinated debentures and 130,000 for personal guarantees provided
for certain Company bank debt. The warrants granted for the personal guaran-
tees of Company bank debt included 30,000 to each of the three founders and
40,000 to the father of two of the founders.
A summary of warrants as of December 31, 1995, 1996 and June 30, 1997 and
changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... -- $ -- 138,330 $1.42 423,530 $3.06
Granted.................. 138,330 $1.42 285,200 $3.85 30,000 $5.50
Canceled................. -- $ -- -- $ -- -- $ --
Exercised................ -- $ -- -- $ -- -- $ --
------- ------- -------
Outstanding at end of
period.................... 138,330 423,530 453,530
======= ======= =======
Warrants exercisable at end
of period................. 138,330 378,530 408,530
======= ======= =======
Weighted average price of
warrants outstanding...... $ 1.42 $ 3.06 $ 3.22
======= ======= =======
Weighted average remaining
contractual life at end of
period.................... 4.68 4.33 3.91
======= ======= =======
</TABLE>
F-18
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(9) Shareholders' Equity -- Continued
For purposes of the pro forma disclosures under SFAS No. 123 presented be-
low, the Company has computed the fair values of all non-compensatory options
and warrants granted during 1995, 1996 and the six months ended June 30, 1997
using the Black-Scholes pricing model and the following weighted average as-
sumptions:
<TABLE>
<CAPTION>
1995 1996 1997
------- ---------- ---------
<S> <C> <C> <C>
Risk-free interest rate......................... 5.36% 5.52% 5.72%
Expected dividend yield......................... 0% 0% 0%
Expected lives outstanding...................... 3 years 3.93 years 3.8 years
Expected volatility............................. 61% 61% 61%
</TABLE>
To estimate lives of options for this valuation, it was assumed options will
be exercised one year after becoming fully vested and the Company has com-
pleted an initial public offering of its Common Stock. All options are ini-
tially assumed to vest. Cumulative compensation cost recognized in pro forma
net income or loss with respect to options that are forfeited prior to vesting
is adjusted as a reduction of pro forma compensation expense in the period of
forfeiture. Because the Company's Common Stock is not yet publicly traded, the
expected market volatility was based on the volatility of comparable publicly
traded companies. Actual volatility of the Company's Common Stock may vary.
Fair value computations are highly sensitive to the volatility factor assumed;
the greater the volatility, the higher the computed fair value of options
granted.
The total fair value of options and warrants granted was computed to be ap-
proximately $12,542, $368,872 and $100,047 for the period ended December 31,
1995, the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively. These amounts are amortized ratably over the vesting periods of
the options or recognized at the date of grant if no vesting period is re-
quired. Pro forma stock-based compensation, net of the effect of forfeitures,
was $2,040, $136,105 and $60,807 for the period ended December 31, 1995, the
year ended December 31, 1996 and the six months ended June 30, 1997, respec-
tively.
If the Company had accounted for its stock-based compensation plans in ac-
cordance with SFAS No. 123, the Company's net (loss) income and pro forma net
(loss) income per common share would have been reported as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Net (loss) income: As reported............... $(160,255) $(335,278) $266,351
Pro forma.................................. $(162,295) $(471,383) $205,544
Net (loss) income per share: As reported..... $ (.05) $ (.09) $ .07
Pro forma.................................. $ (.05) $ (.13) $ .05
</TABLE>
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise
were increased by the amount of compensation cost attributable to future serv-
ice periods and not yet recognized as pro forma expense.
(10) Commitments and Contingencies
Operating and Capital Lease Obligations
The Company leases certain office equipment and office space under leases
accounted for as operating leases. The original lease terms are generally one
to five years with options to renew the leases for specific
F-19
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(10) Commitments and Contingencies -- Continued
periods subsequent to their original terms. Rent expense for these leases to-
taled $91,187, $361,102 and $245,340 for the years ended December 31, 1995 and
1996 and the six months ended June 30, 1997, respectively. Rent expense for
leases entered into in 1997 with related parties totaled $22,788 for the six
months ended June 30, 1997.
Future minimum lease commitments for operating leases with remaining terms
of one or more years are as follows:
<TABLE>
<S> <C>
Six months ending December 31, 1997................................ $191,548
Years ending December 31,
1998............................................................. 332,566
1999............................................................. 212,960
2000............................................................. 161,753
2001............................................................. 18,682
--------
$917,509
========
</TABLE>
The Company leases certain phone systems under capital leasing arrangements.
The future minimum lease payments are as follows:
<TABLE>
<S> <C>
Six months ending December 31, 1997................................ $ 26,295
Years ending December 31,
1998............................................................. 47,962
1999............................................................. 22,186
2000............................................................. 5,512
2001............................................................. 1,616
--------
Total principal and interest....................................... 103,571
Less: interest..................................................... (14,101)
--------
Total principal.................................................... 89,470
Less: current portion.............................................. (44,029)
--------
$ 45,441
========
</TABLE>
From time to time the Company is subject to litigation incidental to its
business, which could include litigation as a result of the dental services
provided at the Offices, although the Company does not engage in the practice
of dentistry or control the practice of dentistry. The Company maintains gen-
eral liability insurance for itself and provides for professional liability
insurance to the dentists, dental hygienists and dental assistants at the Of-
fices. The Company is not presently a party to any material litigation.
(11) Income Taxes
The Company accounts for income taxes through recognition of deferred tax
assets and liabilities for the expected future income tax consequences of
events which have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and li-
abilities using enacted tax rates in effect for the year in which the differ-
ences are expected to reverse. At December 31, 1996, the Company had tax net
operating loss
F-20
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(11) Income Taxes -- Continued
carryforwards of approximately $530,000 which will expire in 2010 and 2011.
These carryforwards are expected to be utilized in 1997. For the six months
ended June 30, 1997, the Company has applied its estimated effective tax rate
(2%) for 1997.
The income tax provision for the six months ended June 30, 1997, based on es-
timated net income for the twelve months ended December 31, 1997 and use of the
Company's net operating loss carryforwards, consists of deferred federal and
state income taxes of $5,200.
The Company's effective tax rate differs from the statutory rate due to the
impact of the following (expressed as a percentage of net income (loss) before
taxes):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Statutory federal income tax expense (benefit)............... (34.0)% (34.0)%
State income tax effect, net................................. (3.3) (3.3)
Valuation allowance, net change.............................. 37.3 37.3
------ ------
--% --%
====== ======
</TABLE>
The Company's effective tax rate of 2% during the six months ended June 30,
1997, reflects the benefit of utilization of net operating loss carryforwards.
Temporary differences comprise the deferred tax assets and liabilities in the
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- ---------
<S> <C> <C>
Deferred tax asset:
Tax loss carryforwards................................ $ 59,800 $ 202,600
Accruals not currently deductible..................... -- 15,200
Depreciation for books over tax....................... -- 12,000
-------- ---------
59,800 229,800
Deferred tax liability:
Intangible asset amortization for tax over books...... (800) (47,400)
-------- ---------
Net deferred tax asset (liability).................... 59,000 182,400
Valuation allowance................................... (59,000) (182,400)
-------- ---------
$ -- $ --
======== =========
</TABLE>
The Company had established a valuation allowance at December 31, 1995 and
1996, due to the uncertainty of the utilization of tax loss carryforwards
against future taxable income.
(12) Benefit Plans
Profit Sharing 401(k)/Stock Bonus Plan
The Company has a 401(k)/stock bonus plan. Eligible employees may make volun-
tary contributions to the plan, which may be matched by the Company, at its
discretion, up to 2% of the employee's compensation. In
F-21
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(12) Benefit Plans -- Continued
addition, the Company may make a profit sharing contributions during certain
years. Such profit sharing contributions may be made, at the Company's discre-
tion, in cash or in the Common Stock of the Company. The plan was established
effective April 1, 1997, and the Company did not make any contributions to the
plan through June 30, 1997.
Other Company Benefits
The Company provides a health and welfare benefit plan to all regular full-
time employees. The plan includes health and life insurance, and a cafeteria
plan. In addition, regular full-time and regular part-time employees are enti-
tled to certain dental benefits.
(13) Disclosures about the Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," re-
quires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of
those instruments. The fair values of the Company's note payable and capital
lease obligations are based on similar rates currently available to the Compa-
ny. The carrying values and estimated fair values were estimated to be sub-
stantially the same at December 31, 1995 and 1996 and June 30, 1997. The fair
value of the Company's convertible subordinated debentures at June 30, 1997,
is estimated to be approximately $8.9 million.
(14) Subsequent Events
In July, the Company initiated the process of preparing a Registration
Statement with the Securities and Exchange Commission for the Company's ini-
tial public offering. Once effective, the Registration Statement may permit
the Company to sell shares of its common stock to the public.
The Company acquired certain assets of two unrelated New Mexico professional
corporations for approximately $457,500 in August 1997, and has executed
agreements to manage the Offices.
On September 8, 1997, the Company acquired certain assets and liabilities of
nine dental practices, operated under the name of Gentle Dental, which are lo-
cated in Colorado for $3.5 million. At closing, $2.1 million was paid and the
balance was represented by a $1.4 million note. This note is payable with in-
terest only through September 30, 1997, and then monthly principal and inter-
est payments are scheduled using a five year amortization period with a bal-
loon payment due in September 2000. This note is required to be repaid from
the proceeds of the Offering.
To finance the acquisition of Gentle Dental, the Company's credit facility
with a bank was amended on September 3, 1997, to fully incorporate a term loan
for $2,000,000. Interest at a rate of prime +1/2% is due monthly beginning in
October 1997, with monthly principal payments of $33,333 beginning in March
1998 through October 31, 1999, at which time the remaining principal balance
and all accrued interest is payable in full. The credit facility is secured by
a lien on the Company's accounts receivable and its management agreements. The
credit facility is personally guaranteed by the founders of the Company, up to
an aggregate amount of $600,000.
Subsequent to June 30, 1997, James M. Ciccarelli received, as consideration
for serving on the Board of Directors, a warrant to purchase 2,000 shares of
Common Stock at an exercise price of $6.00 per share, the warrant expires in
July 2002.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Birner Dental Management
Services, Inc.:
We have audited the accompanying combined balance sheets of JAMES ABRAMOWITZ
D.D.S., P.C.s (Colorado Professional Corporations) dba GENTLE DENTAL and Af-
filiate (see Note 1) as of December 31, 1995 and 1996 and June 30, 1997, and
the related combined statements of operations, shareholder's and partners' eq-
uity and cash flows for the years ended December 31, 1994, 1995 and 1996 and
the six months ended June 30, 1997. These financial statements are the respon-
sibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of James Abramowitz,
D.D.S., P.C.s, dba Gentle Dental and Affiliate as of December 31, 1995 and
1996 and June 30, 1997, and the combined results of their operations and their
cash flows for the years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Denver, Colorado,
August 29, 1997
(except with respect to
the matter discussed in
Note 8, as to which the
date is September 8, 1997).
F-23
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents........................... $157,948 $232,552 $250,794
Accounts Receivable, net of allowances of $35,000,
$52,500 and $62,000, respectively, for uncollecti-
ble accounts....................................... 105,167 159,663 186,550
Affiliated Accounts Receivable...................... 1,755 2,000 2,993
OTHER ASSETS........................................ 7,287 7,845 7,845
-------- -------- --------
Total current assets.............................. 272,157 402,060 448,182
FURNITURE, FIXTURES AND EQUIPMENT, NET (NOTE 4)..... 173,369 177,810 203,252
-------- -------- --------
Total assets...................................... $445,526 $579,870 $651,434
======== ======== ========
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and accrued expenses............... $ 99,302 $ 76,321 $ 77,403
Affiliated notes payable............................ 20,425 9,900 9,900
Line of credit and other current debt (Note 6)...... 72,373 21,117 7,711
-------- -------- --------
Total current liabilities......................... 192,100 107,338 95,014
COMMITMENTS AND CONTINGENCIES (NOTE 7)
Shareholder's and partners' equity:
Shareholder's and partners' equity.................. 71,126 133,318 133,318
Retained earnings................................... 182,300 339,214 423,102
-------- -------- --------
Total equity...................................... 253,426 472,532 556,420
-------- -------- --------
Total liabilities and equity...................... $445,526 $579,870 $651,434
======== ======== ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-24
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenue............. $2,000,866 $2,903,090 $4,115,851 $1,909,482 $2,630,155
OPERATING EXPENSES:
Clinical salaries and
benefits............... 1,021,133 1,640,103 2,333,508 1,050,474 1,458,096
Dental supplies......... 266,071 272,675 340,256 129,246 184,841
Laboratory fees......... 104,954 135,916 206,174 88,924 143,076
Occupancy............... 108,500 154,282 198,414 93,277 121,076
Advertising and
marketing.............. 23,423 33,193 33,672 13,335 37,230
Depreciation and
amortization........... 47,700 55,525 69,829 27,017 35,798
General and
administrative......... 406,319 449,617 543,309 248,165 387,619
---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 1,978,100 2,741,311 3,725,162 1,650,438 2,367,736
---------- ---------- ---------- ---------- ----------
Operating income........ 22,766 161,779 390,689 259,044 262,419
Interest expense........ 6,021 7,957 1,301 1,169 264
---------- ---------- ---------- ---------- ----------
Net income.............. $ 16,745 $ 153,822 $ 389,388 $ 257,875 $ 262,155
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-25
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
COMBINED STATEMENTS OF SHAREHOLDER'S AND PARTNERS' EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1993............................................ $193,854
Distributions......................................................... (74,310)
Net income............................................................ 16,745
--------
Balance, December 31, 1994............................................ 136,289
Distributions......................................................... (36,685)
Net income............................................................ 153,822
--------
Balance, December 31, 1995............................................ 253,426
Capital contributions................................................. 62,192
Distributions......................................................... (232,474)
Net income............................................................ 389,388
--------
Balance, December 31, 1996............................................ 472,532
Distributions......................................................... (178,267)
Net income............................................................ 262,155
--------
Balance, June 30, 1997................................................ $556,420
========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-26
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ ---------------------
1994 1995 1996 1996 1997
-------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............. $ 16,745 $ 153,822 $ 389,388 $ 257,875 $ 262,155
Adjustments to reconcile
net income to net cash
provided by operating
activities --
Depreciation and
amortization........... 47,700 55,525 69,829 27,017 35,798
Bad debt expense........ 24,600 10,400 17,500 8,750 9,500
Changes in operating
assets and
liabilities --
Accounts receivable... (25,293) (40,580) (71,996) (44,332) (37,040)
Affiliated accounts
receivable........... (1,103) 868 (245) (1,673) (340)
Accounts payable and
accrued expenses..... 27,213 52,598 (22,981) (48,743) 1,082
Other assets............ (912) -- (558) -- --
-------- --------- --------- --------- ---------
Net cash provided by
operating
activities........... 88,950 232,633 380,937 198,894 271,155
-------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchase of furniture,
fixtures and
equipment.............. (79,521) (72,252) (74,270) (30,077) (61,240)
Affiliated notes
payable................ -- 20,000 (10,525) (10,525) --
-------- --------- --------- --------- ---------
Net cash used in
investing
activities........... (79,521) (52,252) (84,795) (40,602) (61,240)
-------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayments of long-term
debt................... (32,868) (17,287) -- -- --
Proceeds from line of
credit................. 127,453 334,913 211,864 144,703 43,877
Repayments on line of
credit................. (75,558) (316,371) (263,120) (215,762) (57,283)
Contributions from
shareholder............ -- -- 62,192 62,192 --
Distributions to
shareholder............ (74,310) (36,685) (232,474) (85,000) (178,267)
-------- --------- --------- --------- ---------
Net cash used in
financing
activities........... (55,283) (35,430) (221,538) (93,867) (191,673)
-------- --------- --------- --------- ---------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS............ (45,854) 144,951 74,604 64,425 18,242
CASH AND CASH
EQUIVALENTS,
beginning of period.... 58,851 12,997 157,948 157,948 232,552
-------- --------- --------- --------- ---------
CASH AND CASH
EQUIVALENTS,
end of period.......... $ 12,997 $ 157,948 $ 232,552 $ 222,373 $ 250,794
======== ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 5,566 $ 8,691 $ 1,301 $ 1,170 $ 264
======== ========= ========= ========= =========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-27
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996, AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(1) Organization and Operations
The accompanying combined financial statements include the results of JAMES
ABRAMOWITZ, D.D.S. ("Dr. Abramowitz"), P.C.s (Colorado Professional Corpora-
tions) dba GENTLE DENTAL and Equity Resources Limited Partnership, ("Equity Re-
sources"), a Colorado limited partnership. Gentle Dental owns and operates nine
dental practices in Colorado. Dr. Abramowitz is also the principal owner and
general partner in Equity Resources. Equity Resources owns certain equipment
which is leased to Gentle Dental.
(2) Basis of Presentation
The accompanying combined financial statements reflect the assets and liabil-
ities, operating results and cash flows of Gentle Dental and Equity Resources
at historical costs established at the date of acquisition or formation by Dr.
Abramowitz. The accompanying financial statements are presented on a combined
basis because of common ownership and management. All intercompany accounts and
transactions have been eliminated in the combination.
Basis of Presentation -- Interim Combined Financial Statements (Unaudited)
The unaudited combined financial statements for the six months ended June 30,
1996, omit certain footnote disclosures normally included in financial state-
ments prepared in accordance with generally accepted accounting principles. All
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of the Company's operations for the six months ended
June 30, 1996, have been included in the accompanying combined unaudited state-
ments of operations and cash flows.
(3) Significant Accounting Policies
The accompanying combined financial statements have been presented on the ac-
crual basis of accounting.
Advertising and Marketing
The costs of advertising, promotion and marketing are expensed in the year
incurred.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts and all highly liquid
investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable represents receivables from patients and other third-
party payors for dental services provided. Such amounts are recorded net of
contractual allowances and estimated allowances for uncollectible accounts.
An allowance for doubtful accounts is maintained at a level which is esti-
mated by the dental practices to be necessary and adequate to provide for ex-
pected losses.
F-28
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996, AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(3) Significant Accounting Policies -- Continued
In those instances when payment is not received at the time of service, the
Gentle Dental offices record receivables without collateral from their pa-
tients, most of whom are local residents and are insured under third-party
payor agreements. Management continually monitors and periodically adjusts its
allowances associated with these receivables.
Revenue Recognition
Fees for dental services provided are recognized when the service is ren-
dered except for patient services covered under capitation agreements.
For patients under capitation agreements, the dental practices receive pay-
ments from each plan monthly, in accordance with the capitation agreement, at
a set fee per participant. The fee covers certain dental services and is not
determined based upon services performed but by the number of participants in
the plan. Revenues under these agreements are recognized when due from the
plans.
Revenue is reported at the estimated realizable amounts from insurance com-
panies, preferred provider and health maintenance organizations (i.e., third-
party payors) and patients for services rendered, net of contractual and other
adjustments.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. To management's knowledge, there are no material
claims, disputes or other unsettled matters that exist concerning third-party
reimbursements.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at historical costs. Deprecia-
tion expense is provided using the straight-line method over the estimated
useful lives of the assets, which are generally five to seven years. Leasehold
improvements are amortized over the original lease term which is generally
five years. The related depreciation expense for the years ended December 31,
1994, 1995 and 1996 and for the six months ended June 30, 1996 (unaudited) and
1997, was $47,700, $55,525, $69,829, 27,017 (unaudited) and $35,798, respec-
tively.
Income Taxes
No provision has been made for federal and state income taxes in the accom-
panying combined financial statements because Gentle Dental is an "S" Corpora-
tion and Equity Resources is a partnership and accordingly, income taxes are
the responsibility of the stockholder and partners.
Use of Estimates
The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the financial state-
ments and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-29
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996, AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(4) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Equipment and furniture................... $ 292,960 $ 367,230 $ 423,240
Leasehold improvements.................... 54,766 54,766 59,996
--------- --------- ---------
347,726 421,996 483,236
Less: Accumulated depreciation and
amortization............................. (174,357) (244,186) (279,984)
--------- --------- ---------
Net furniture, fixtures and equipment..... $ 173,369 $ 177,810 $ 203,252
========= ========= =========
</TABLE>
(5) Disclosures About the Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," re-
quires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of
those instruments. The fair values of the Company's line of credit is based on
a similar rate currently available to the Company. The carrying values and es-
timated fair values were estimated to be substantially the same at December 31,
1995 and 1996 and June 30, 1997.
(6) Line of Credit
The Company has a revolving credit agreement with a bank that is not to ex-
ceed $75,000. The outstanding balance was $71,060, $20,330 and $7,410 at Decem-
ber 31, 1995 and 1996 and June 30, 1997, respectively. Interest is payable
monthly at an internally established interest rate determined by the bank. The
interest rates for the years ended December 31, 1995 and 1996 and the period
ended June 30, 1997 were 11.75%, 11.25% and 11.50%, respectively.
(7) Commitments and Contingencies
Operating Leases
Gentle Dental offices lease their computer systems and office space under
leases accounted for as operating leases. The original lease terms are gener-
ally one to five years with options to renew the leases for specified periods
subsequent to their original terms. Lease expenses under these agreements for
the years ended December 31, 1994, 1995 and 1996 and for the six months ended
June 30, 1996 (unaudited) and 1997, was $69,843, $109,280, $132,081, $65,108
(unaudited) and $75,021, respectively. Minimum future commitments as of June
30, 1997 are as follows:
<TABLE>
<S> <C>
Six months ending December 31, 1997................................ $ 64,430
Years ending December 31,
1998............................................................. 122,394
1999............................................................. 95,022
2000............................................................. 38,492
2001............................................................. 15,840
2002............................................................. 10,752
--------
Total.............................................................. $346,930
========
</TABLE>
F-30
<PAGE>
JAMES ABRAMOWITZ, D.D.S., P.C.'S
DBA GENTLE DENTAL AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996, AND JUNE 30, 1997
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIOD)
(8) Subsequent Event
On August 21, 1997, Dr. Abramowitz entered into an agreement to sell all of
the outstanding capital stock of the nine dental practices and the dental
equipment of Equity Resources to Birner Dental Management Services, Inc., an
unrelated third party. The transaction closed on September 8, 1997.
F-31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Birner Dental Management
Services, Inc.:
We have audited the accompanying combined statements of operations, part-
ners' equity and cash flows of BOWMAR DENTAL PARTNERSHIP, ARAPAHOE DENTAL
PARTNERSHIP and CASTLE ROCK DENTAL PARTNERSHIP (Colorado partnerships) (col-
lectively, the "Predecessor Partnerships") for the period from inception (Feb-
ruary 1, 1994) to December 31, 1994, and the nine months ended September 30,
1995. These combined financial statements are the responsibility of the Part-
nerships' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements referred to above
are free of material misstatement. An audit includes examining, on a test ba-
sis, evidence supporting the amounts and disclosures in the financial state-
ments referred to above. An audit also includes assessing the accounting prin-
ciples used and significant estimates made by management, as well as evaluat-
ing the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of operations and cash flows of
the Predecessor Partnerships for the eleven months ended December 31, 1994 and
the nine months ended September 30, 1995 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Denver, Colorado,
August 22, 1997.
F-32
<PAGE>
BOWMAR DENTAL PARTNERSHIP, ARAPAHOE DENTAL
PARTNERSHIP AND CASTLE ROCK DENTAL PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 1,
1994) NINE MONTHS
TO ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
Net Revenue.......................................... $692,556 $1,022,565
DIRECT EXPENSES:
Dental and hygienists salaries....................... 163,341 265,179
Clinical salaries and benefits....................... 211,394 323,000
Dental supplies...................................... 53,794 52,558
Laboratory fees...................................... 53,479 82,713
Occupancy............................................ 70,431 87,166
Advertising and marketing............................ 16,510 19,787
Management fees...................................... 11,146 30,314
-------- ----------
Total direct expenses.............................. 580,095 860,717
General and administrative........................... 60,821 75,092
Depreciation and amortization........................ 32,671 38,489
-------- ----------
Operating income..................................... 18,969 48,267
Interest expense, net................................ (23,903) (29,007)
-------- ----------
Net (loss) income.................................... $ (4,934) $ 19,260
======== ==========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-33
<PAGE>
BOWMAR DENTAL PARTNERSHIP, ARAPAHOE DENTAL
PARTNERSHIP AND CASTLE ROCK DENTAL PARTNERSHIP
COMBINED STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<S> <C>
Inception, February 1, 1994 (Note 1)................................. $(22,003)
Partner distributions................................................ (15,566)
Partner contributions................................................ 4,617
Net loss............................................................. (4,934)
--------
Balances, December 31, 1994.......................................... (37,886)
Partner distributions................................................ (7,227)
Net income........................................................... 19,260
--------
Balances, September 30, 1995......................................... $(25,853)
========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-34
<PAGE>
BOWMAR DENTAL PARTNERSHIP, ARAPAHOE DENTAL
PARTNERSHIP AND CASTLE ROCK DENTAL PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 1, 1994) NINE MONTHS
TO ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income............................ $ (4,934) $ 19,260
Adjustments to reconcile net (loss) income to
net cash provided by operating activities --
Depreciation and amortization................ 32,671 38,489
Bad debt expense............................. 10,000 --
Changes in operating assets and
liabilities --
Accounts receivables........................ (46,751) 1,145
Affiliate receivables....................... (11,852) 22,875
Accounts payable and accrued liabilities.... 21,906 (48,055)
Other assets................................. 16,537 491
--------- ---------
Net cash provided by operating activities.. 17,577 34,205
--------- ---------
INVESTING ACTIVITIES:
Purchase of property, equipment and
improvements................................ (86,697) (9,945)
Purchase of dental partnership............... (94,271) (171,536)
--------- ---------
Net cash used in investing activities...... (180,968) (181,481)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable.................. 223,455 550,000
Repayments of notes payable.................. (4,871) (350,863)
Contributions from partners.................. 4,617 --
Distributions to partners.................... (15,566) (7,227)
--------- ---------
Net cash provided by financing activities.. 207,635 191,910
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.... 44,244 44,634
CASH AND CASH EQUIVALENTS,
beginning of period......................... 12,800 57,044
--------- ---------
CASH AND CASH EQUIVALENTS,
end of period............................... $ 57,044 $ 101,678
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest....................... $ 21,403 $ 31,507
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Liabilities acquired through acquisition..... $ -- $ 73,802
========= =========
Property purchased under capital leases...... $ 44,535 $ --
========= =========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-35
<PAGE>
BOWMAR DENTAL PARTNERSHIP, ARAPAHOE DENTAL
PARTNERSHIP AND CASTLE ROCK DENTAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
(1) Partnership Organization and Operations
The accompanying financial statements are the combined results of BOWMAR
DENTAL PARTNERSHIP ("Bowmar"), ARAPAHOE DENTAL PARTNERSHIP ("Arapahoe") and
the CASTLE ROCK DENTAL PARTNERSHIP ("Castle Rock"), (collectively, the "Prede-
cessor Partnerships"), each of which is a general partnership whose partners
are Leon Thomas, D.M.D., and Mark Birner, D.D.S. (the "Partners"). Predecessor
Partnership equity is owned and net income and losses (as defined in the part-
nership agreements) are allocated 50/50 to each partner.
Bowmar was formed in February 1994 for the purpose of operating a general
dental practice and other related activities including orthodontic services.
Dr. Thomas had acquired the dental practice in June 1993, from an unrelated
third party.
Arapahoe was formed in May 1994 for the purpose of operating a general den-
tal practice and other related activities. The partnership was acquired from
an unrelated third party.
Castle Rock was formed as a de novo practice in September 1994 for the pur-
pose of operating a general dental practice and other related activities and
commenced operations in November 1994.
(2) Basis of Presentation
The accompanying combined financial statements reflect the operations of the
Predecessor Partnerships from the date of acquisition or formation by the
Partners. The accompanying combined statement of operations for the eleven
months ended December 31, 1994 includes the operating results of Bowmar for
the eleven months ending December 31, 1994, and for Arapahoe and Castle Rock
for the periods from formation of the respective partnership to December 31,
1994. The combined statement of operations for the nine months ended September
30, 1995 includes the results of operations of the Predecessor Partnerships
through the date of the transaction with Birner Dental Management Services,
Inc. ("BDMS").
The accompanying financial statements of the Predecessor Partnerships are
presented on a combined basis because of common ownership and management. In a
transaction that closed on June 20, 1995, Mark Birner acquired the ownership
interest of Dr. Thomas and became the sole owner of the Predecessor Partner-
ships. In October 1995, the Predecessor Partnerships entered into agreements
for the sale of assets and management of its dental offices with BDMS, an af-
filiated company. Mark Birner, along with Fred Birner and Dennis Genty were
the founders of BDMS, a dental practice management company.
(3) Significant Accounting Policies
The accompanying financial statements have been presented on the accrual ba-
sis of accounting.
Revenue Recognition
Fees for dental services provided are recognized as revenue when the service
is rendered except for orthodontic services and patient services covered under
capitation agreements. Revenues are recorded net of any contractual allowance
or adjustments required under third party payor arrangements.
For orthodontic work, the Predecessor Partnerships recognize revenue in ac-
cordance with the proportional performance method of accounting for service
contracts. Under this method, revenue is recognized as services
F-36
<PAGE>
BOWMAR DENTAL PARTNERSHIP, ARAPAHOE DENTAL
PARTNERSHIP AND CASTLE ROCK DENTAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
(3) Significant Accounting Policies -- Continued
are performed and the costs associated therewith are incurred, under the terms
of contractual agreements with each patient. A significant portion, approxi-
mately 20%, of the services are performed in the initial month of the con-
tract. Billings under each contract, which average 24 months, are made equally
throughout the term of the contract with a final payment due upon the comple-
tion of the treatments.
For patients under capitation agreements, the Predecessor Partnerships re-
ceive payments from each plan monthly, in accordance with the capitation
agreement, at a set fee per participant. The fee covers certain dental serv-
ices and is not determined based upon services performed but by the number of
participants in the plan. Revenues under these agreements are recognized when
due from the plans.
Depreciation and Amortization
Depreciation expense of furniture, fixtures and equipment is provided using
the straight-line method over the estimated useful lives of the assets, which
are generally five to seven years. Leasehold improvements are amortized over
the original lease term which is generally five years. The related deprecia-
tion and amortization expense for the eleven months ended December 31, 1994,
and the nine months ended September 30, 1995 was approximately $20,588 and
$26,126, respectively. Amortization expense for intangibles being amortized
over five to seven years was $12,083 and $12,363, respectively, for the eleven
months ended December 31, 1994 and the nine months ended September 30, 1995.
Cash and Cash Equivalents
For purposes of the combined statements of cash flows, cash and cash equiva-
lents include money market accounts and all highly liquid investments with
original maturities of three months or less.
Income Taxes
No provision has been made for federal income taxes in the accompanying com-
bined financial statements because the income tax liability is the responsi-
bility of the individual partners.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is maintained at a level which is esti-
mated to be necessary and adequate to provide for expected losses.
Use of Estimates
The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the financial state-
ments and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Advertising
The costs of advertising, promotion and marketing are expensed as incurred.
F-37
<PAGE>
BOWMAR DENTAL PARTNERSHIP, ARAPAHOE DENTAL
PARTNERSHIP AND CASTLE ROCK DENTAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
(4) Transactions with Related Parties
The operations of the Predecessor Partnerships were managed, under certain
management agreements, by Professional Management Group ("PMG"), an entity
wholly owned by Dr. Thomas. PMG provided accounting, management and certain
operating services in return for basic fees of 4% of monthly cash deposits.
(5) Commitments and Contingencies
Guaranteed Payments
Each of the Predecessor Partnership agreements provide for guaranteed pay-
ments, reflected as compensation in the accompanying combined financial state-
ments, to be made to the Partners, as follows:
Bowmar, Arapahoe Each Partner is entitled to receive 35% of their
and Castle Rock respective production (as defined in the partner-
ship agreements) relating to fee for service work
or collections based upon certain fee schedules;
Dr. Birner shall be paid 27% of all payments re-
ceived in the form of co-payments and/or premiums
for the provision of dental services on a capita-
tion basis.
Bowmar Each Partner receives $1,200 per month from the
partnership in addition to the amounts summarized
above.
These arrangements were terminated with the transfer to BDMS.
Leases
The Predecessor Partnerships lease their dental equipment, computer system
and office space under lease agreements accounted for as operating leases. The
original lease terms are generally one to five years with options to renew the
lease for specified periods subsequent to their original terms. Lease expenses
under these agreements were $25,683 and $33,681 for the eleven months ended
December 31, 1994, and the nine months ended September 30, 1995, respectively.
Future minimum lease commitments for operating leases with remaining terms
of one or more years are as follows as of September 30, 1995:
<TABLE>
<S> <C>
Three months ended December 31, 1995................................ $ 9,229
Year ending December 31,
1996.............................................................. 31,479
1997.............................................................. 31,854
1998.............................................................. 10,800
-------
$83,362
=======
</TABLE>
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Birner Dental Management
Services, Inc.:
We have audited the accompanying combined statements of operations, part-
ners' equity and cash flows of FAMILY DENTAL GROUP (see Note 1), for the years
ended December 31, 1994 and 1995 and the five months ended May 29, 1996. These
combined financial statements are the responsibility of the Dental Centers'
management. Our responsibility is to express an opinion on these combined fi-
nancial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements referred to above
are free of material misstatement. An audit includes examining, on a test ba-
sis, evidence supporting the amounts and disclosures in the financial state-
ments referred to above. An audit also includes assessing the accounting prin-
ciples used and significant estimates made by management, as well as evaluat-
ing the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of operations and cash flows of
Family Dental Group for the years ended December 31, 1994 and 1995 and the
five months ended May 29, 1996, in conformity with generally accepted account-
ing principles.
Arthur Andersen LLP
Denver, Colorado,
August 22, 1997.
F-39
<PAGE>
FAMILY DENTAL GROUP (NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED FOR THE FIVE
DECEMBER 31, MONTHS ENDED
---------------------- MAY 29,
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Net Revenue............................... $3,380,995 $3,926,105 $1,977,466
DIRECT EXPENSES:
Salaries and benefits..................... 2,050,687 2,518,118 1,433,613
Dental supplies and laboratory fees....... 413,718 574,530 277,912
Occupancy................................. 221,940 280,257 164,726
Advertising and marketing................. 36,369 38,594 21,547
Management fees........................... 206,500 211,070 93,186
Bad debt expense.......................... 60,857 72,493 35,586
---------- ---------- ----------
Total direct expenses................... 2,990,071 3,695,062 2,026,570
General and administrative................ 216,220 218,755 112,159
Depreciation and amortization............. 38,913 72,799 35,430
---------- ---------- ----------
Operating profit (loss)................... 135,791 (60,511) (196,693)
Interest expense.......................... (26,202) (42,117) (33,007)
---------- ---------- ----------
Net income (loss)......................... $ 109,589 $ (102,628) $ (229,700)
========== ========== ==========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-40
<PAGE>
FAMILY DENTAL GROUP (NOTE 1)
COMBINED STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<S> <C>
Balances, December 31, 1993......................................... $ 209,249
Partner contributions............................................... 200
Partner distributions............................................... (69,557)
Net income.......................................................... 109,589
---------
Balances, December 31, 1994......................................... 249,481
Partner contributions............................................... 65,000
Partner distributions............................................... (37,441)
Net loss............................................................ (102,628)
---------
Balances, December 31, 1995......................................... 174,412
Partner contributions............................................... 90,289
Partner distributions............................................... (243,694)
Net loss............................................................ (229,700)
---------
Balances, May 29, 1996.............................................. $(208,693)
=========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-41
<PAGE>
FAMILY DENTAL GROUP (NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FOR THE FIVE
DECEMBER 31, MONTHS ENDED
-------------------- MAY 29,
1994 1995 1996
--------- --------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................... $ 109,589 $(102,628) $(229,700)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities --
Depreciation and amortization.............. 38,913 72,799 35,430
Bad debt expense........................... 60,857 72,493 35,586
Changes in operating assets and
liabilities --
Accounts receivables....................... (161,278) (84,642) (39,681)
Affiliate receivables...................... (42,236) (131,101) 152,122
Accounts payable and accrued liabilities... 66,757 233,589 142,436
Other assets............................... 2,235 (5,367) 2,918
--------- --------- ---------
Net cash provided by operating
activities.............................. 74,837 55,143 99,111
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property, equipment and
improvements.............................. (129,850) (183,631) (11,726)
Acquisition of dental partnership.......... -- (35,000) --
--------- --------- ---------
Net cash used in investing activities.... (129,850) (218,631) (11,726)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable................ -- 226,671 --
Repayments of long-term debt............... (18,639) (114,671) (19,547)
Proceeds from line of credit............... 168,116 -- 64,340
Contributions from partners................ 200 65,000 90,289
Distributions to partners.................. (69,557) (37,441) (243,694)
--------- --------- ---------
Net cash provided by (used in) financing
activities.............................. 80,120 139,559 (108,612)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 25,107 (23,929) (21,227)
CASH AND CASH EQUIVALENTS,
beginning of period....................... 20,049 45,156 21,227
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period............................. $ 45,156 $ 21,227 $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................... $ 26,202 $ 42,117 $ 33,007
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Property purchased under capital leases.... $ 65,974 $ 47,193 $ --
========= ========= =========
Notes payable issued for acquisition of
dental practices.......................... $ 75,644 $ 160,000 $ --
========= ========= =========
Property purchased through acquisition..... $ 8,904 $ 86,833 $ --
========= ========= =========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-42
<PAGE>
FAMILY DENTAL GROUP (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MAY 29, 1996
(1) Organization and Operations
The accompanying financial statements are the combined results of FAMILY
DENTAL GROUP I, P.C. ("FDGI") (a Colorado professional corporation), WESTMIN-
STER DENTAL PARTNERSHIP ("Westminster") (a Colorado general partnership) and
LEON E. THOMAS, D.M.D. dba FAMILY DENTAL CARE--FORT COLLINS ("Fort Collins")
(a sole proprietorship) (collectively, the "Dental Centers" or "Family Dental
Group"), each of which has common ownership through Leon E. Thomas, D.M.D.
("Dr. Thomas").
FDGI was incorporated in May 1984 for the purpose of acquiring and operating
general dental practices and other related activities including orthodontic
services. FDGI is a Subchapter S corporation wholly owned by Dr. Thomas.
On February 23, 1996, Dr. Thomas entered into an agreement to sell the as-
sets of the Dental Centers to Birner Dental Management Services, Inc., an un-
related third party. The transaction closed May 29, 1996.
(2) Basis of Presentation
The accompanying combined financial statements reflect the operating results
of the Dental Centers at historical costs established at date of acquisition
or formation by Dr. Thomas.
The accompanying financial statements of Family Dental Group are presented
on a combined basis because of common ownership and management.
(3) Significant Accounting Policies
The accompanying financial statements have been presented on the accrual ba-
sis of accounting.
Revenue Recognition
Fees for dental services provided are recognized when the service is ren-
dered except for orthodontic services and patient services covered under capi-
tation agreements.
For orthodontic work, the Dental Centers recognize revenue in accordance
with the proportional performance method of accounting for service contracts.
Under this method, revenue is recognized as services are performed and the
costs associated therewith are incurred, under the terms of contractual agree-
ments with each patient. A significant portion, approximately 20%, of the
services are performed in the initial month of the contract. Billings under
each contract, which average 24 months, are made equally throughout the term
of the contract with a final payment due upon the completion of the treat-
ments.
For patients under capitation agreements, the Dental Centers receive pay-
ments from each plan monthly, in accordance with the capitation agreement, at
a set fee per participant. The fee covers certain dental services and is not
determined based upon services performed but by the number of participants in
the plan. Revenues under these agreements are recognized when due from the
plans.
Depreciation and Amortization
Depreciation expense of furniture, fixtures and equipment is provided using
the straight-line method over the estimated useful lives of the assets, which
are generally five to seven years. Leasehold improvements are amortized over
the original lease term which is generally five years. The related deprecia-
tion expense for the
F-43
<PAGE>
FAMILY DENTAL GROUP (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995 AND MAY 29, 1996
(3) Significant Accounting Policies -- Continued
years ended December 31, 1994 and 1995 and the five months ended May 29, 1996
was $34,146, $60,689 and $16,017, respectively. Amortization expense for in-
tangibles being amortized over five to seven years was $4,767, $12,110 and
$19,413 for the years ended December 31, 1994 and 1995 and for the five months
ended May 29, 1996.
Cash and Cash Equivalents
For purposes of the combined statements of cash flows, cash and cash equiva-
lents include money market accounts and all highly liquid investments with
original maturities of three months or less.
Income Taxes
No provision has been made for federal income taxes in the accompanying com-
bined financial statements because the income tax liability is the responsi-
bility of Dr. Thomas, individually and the partners.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is maintained at a level which is esti-
mated by the Dental Centers to be necessary and adequate to provide for ex-
pected losses.
Advertising and Marketing
The costs of advertising, promotion and marketing are expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make estimates and assump-
tions that affect the reported amounts of revenues and expenses during the re-
porting period. Actual results could differ from those estimates.
(4) Transactions with Related Parties
The operations of the Dental Centers were managed until May 29, 1996, under
certain management agreements with varying fee amounts by Professional Manage-
ment Group ("PMG"), an entity wholly owned by Dr. Thomas. PMG provided ac-
counting, management and certain operating services. During the years ended
December 31, 1994 and 1995 and the five months ended May 29, 1996, the Dental
Centers made payments of $206,500, $211,070 and $93,186 respectively, to PMG
under these management agreements.
(5) Commitments and Contingencies
Operating Leases
The Dental Centers lease their office space under lease agreements accounted
for as operating leases. The original lease terms are generally one to five
years with options to renew the leases for specified periods subsequent to
their original terms. Lease expense under these agreements was $108,049,
$117,490 and $73,801 for the years ended December 31, 1994 and 1995 and the
five months ended May 29, 1996, respectively.
F-44
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Pro Forma Consolidated Financial Information............................. 17
Selected Consolidated Financial Information.............................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 34
Management............................................................... 48
Certain Transactions..................................................... 54
Principal and Selling Shareholders....................................... 56
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 64
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 66
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU-
RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO OF PERFECT TEETH APPEARS HERE]
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
WHEAT FIRST BUTCHER SINGER
A.G. EDWARDS & SONS, INC.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee..................................................... $6,970
NASD filing fee...................................................... 2,800
Nasdaq application fee............................................... 1,000
Blue sky qualification fee and expenses.............................. *
Printing and engraving expenses...................................... *
Legal fees and expenses.............................................. *
Accounting fees and expenses......................................... *
Transfer agent and registrar fees.................................... *
Directors and Officers Insurance..................................... *
Miscellaneous........................................................ *
------
Total.............................................................. $ *
======
</TABLE>
- --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Sections 7-109-102 and 7-109-107 of the Colorado Business Corporations
Act, the Registrant has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act").
The Company's Amended and Restated Bylaws provide that the Company will in-
demnify its directors and executive officers and may indemnify its other offi-
cers, employees and other agents to the fullest extent permitted by Colorado
law. In addition, the Company must advance or reimburse directors and execu-
tive officers for expenses incurred by them in connection with certain claims.
The Company is also empowered under its Amended and Restated Bylaws to enter
into indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Pursuant to this provision, the Company has entered into indemnification
agreements with each of its directors and executive officers.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against ex-
penses, judgments, fines, settlements and other amounts actually and reasona-
bly incurred (including expenses of a derivative action) in connection with
any proceeding, whether actual or threatened, to which any such person may be
made a party by reason of the fact that such person is or was a director or
officer of the Registrant or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the registrant and, with respect
to any criminal proceeding, had no reasonable cause to believe his or her con-
duct was unlawful. The indemnification agreements also set forth certain pro-
cedures that will apply in the event of a claim for indemnification thereun-
der.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration State-
ment provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securi-
ties Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its formation in May 1995, the Company has issued and/or sold unregis-
tered securities as set forth below:
1. In May 1995, an aggregate of 2,200,000 shares of Common Stock of the
Company were issued to the founders of the Company for a total purchase
price of $22,000.
2. In July 1995, the Company issued an aggregate of 278,524 shares of its
Common Stock to friends and family of the executive officers of the Company
in a private placement offering of its securities, for the aggregate price
of $278,524.
3. A warrant to purchase up to 8,400 shares of Common Stock of the Com-
pany was awarded to an unaffiliated individual in October 1995, at an exer-
cise price of $1.80 per share.
4. In October 1995, the Company issued a warrant to purchase up to 89,930
shares of its Common Stock to a company for services rendered to the Com-
pany as a placement agent, at exercise price of $1.80 per share.
5. Between November 1995 and December 1996, the Company issued an aggre-
gate of 904,300 shares of Common Stock of the Company to accredited invest-
ors in private placement offerings of its securities, for the aggregate
price of $1,627,740.
6. During the fiscal year ended December 31, 1995, the Company granted
options to purchase 14,300 shares of Common Stock under the Employee Plan,
with a weighted average of $1.80 per share, and 11,400 shares of Common
Stock under the Dental Center Plan, with a weighted average of $1.80 per
share.
7. In December 1995, the Company issued 170,000 shares of its Common
Stock to a certain individual in connection with the terms of an asset pur-
chase agreement, for a total value of $306,000.
8. In December 1995, the Company issued an aggregate of 40,000 shares of
its Common Stock to certain accredited investors for the total purchase
price of $80,000.
9. The Company issued an aggregate of $4,970,000 of May 1996 9% Convert-
ible Subordinated Debentures that are convertible into a total of 1,420,000
shares of Common Stock of the Company.
10. In May 1996, the Company issued a warrant to purchase up to 114,000
shares of its Common Stock to a company for services rendered to the Com-
pany as a placement agent, at exercise price of $3.50 per share.
11. In August 1996, the Company issued 5,000 shares of Common Stock to a
certain individual in connection with the terms of an asset purchase agree-
ment, for a total value of $15,000.
12. A warrant to purchase up to 45,000 shares of Common Stock of the Com-
pany was awarded to a director of the Company in August 1996, at an exer-
cise price of $3.50 per share.
13. In November 1996, the Company awarded to the founders of the Company
warrants to purchase an aggregate of 90,000 shares of Common Stock of the
Company, at an exercise price of $4.00 per share.
14. The Company issued an aggregate of $1,810,000 of December 1996 9%
Convertible Subordinated Debentures that are convertible into a total of
362,000 shares of Common Stock of the Company.
15. In December 1996, the Company issued a warrant to purchase up to
36,200 shares of its Common Stock to a company for services rendered to the
Company as a placement agent, at exercise price of $5.00 per share.
16. During the fiscal year ended December 31, 1996, the Company granted
options to purchase 243,223 shares of Common Stock under the Employee Plan,
with a weighted average of $2.59 per share, and 128,050 shares of Common
Stock under the Dental Center Plan, with a weighted average of $3.60 per
share.
17. In May 1997, the Company repurchased 150,000 shares of Common Stock
from a certain individual issued in connection with the terms of an asset
purchase agreement, for the purchase price of $330,000.
II-2
<PAGE>
18. In June 1997, the Company awarded to the founders of the Company war-
rants to purchase an aggregate of 30,000 shares of Common Stock of the Com-
pany, at an exercise price of $5.50 per share.
19. A warrant to purchase up to 2,000 shares of Common Stock of the Com-
pany was awarded to a director of the Company in July 1997, at an exercise
price of $6.00 per share.
20. In August 1997, 37,500 shares of Common Stock was issued pursuant to
an exercise of a warrant, for the total exercise price of $20,000.
21. From January 1, 1997 to September 15, 1997, the Company issued op-
tions to purchase 94,000 shares of Common Stock under the Employee Plan,
with a weighted average of $7.11 per share, and 27,400 shares of Common
Stock under the Dental Center Plan, with a weighted average of $6.17 per
share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation
3.2 Amendments to Amended and Restated Articles of Incorporation
3.3 Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 through 3.3
4.2* Specimen Stock Certificate
5.1* Opinion of Holland & Hart LLP
10.1 Form of Indemnification Agreement entered into between the Registrant
and its Directors and Executive Officers
10.2 Warrant Agreement dated December 27, 1996, between the Registrant and
Cohig & Associates, Inc.
10.3 Warrant Agreement dated May 29, 1996, between the Registrant and Cohig
10.4 Warrant Agreement dated October 3, 1995, between the Registrant and
Cohig
10.5 Warrant Certificate dated June 30, 1997, issued to Fred Birner
10.6 Warrant Certificate dated November 1, 1996, issued to Fred Birner
10.7 Warrant Certificate dated June 30, 1997, issued to Mark Birner
10.8 Warrant Certificate dated November 1, 1996, issued to Mark Birner
10.9 Warrant Certificate dated June 30, 1997, issued to Dennis Genty
10.10 Warrant Certificate dated November 1, 1996, issued to Dennis Genty
10.11 Warrant Certificate dated August 1, 1996, issued to James Ciccarelli
10.12 Warrant Certificate dated July 15, 1997 issued to James Ciccarelli
10.13 Credit Agreement, dated October 31, 1996, between the Registrant and
Key Bank of Colorado, as amended by First Amendment to Loan Documents,
dated as of September 3, 1997
10.14 Form of Managed Care Contract with Prudential
10.15 Form of Managed Care Contract with PacifiCare
10.16 Letter Agreement dated October 17, 1996, between the Registrant and
James Ciccarelli, as amended by letter agreement dated September 24,
1997 between the Registrant and James Ciccarelli
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.17 Agreement, dated August 21, 1997, between the Registrant and James
Abramowitz, D.D.S., and Equity Resources Limited Partnership, a
Colorado limited partnership
10.18 Form of Management Agreement
10.19 Employment Agreement dated September 8, 1997 between the Registrant
and James Abramowitz, D.D.S.
10.20 Form of Stock Transfer and Pledge Agreement
10.21 Indenture, dated as of December 27, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee
10.22 Indenture, dated as of May 15, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee
10.23 Birner Dental Management Services, Inc. 1995 Employee Stock Option
Plan, including forms of Incentive Stock Option Agreement and Non-
statutory Stock Option Agreement under the Employee Plan
10.24 Birner Dental Management Services, Inc. 1995 Stock Option Plan for
Managed Dental Centers, including form of Non-statutory Stock Option
Agreement under the Dental Center Plan
10.25 Profit Sharing 401(k)/Stock Bonus Plan of the Registrant
11.1 Computation of Primary and Fully Diluted Earnings Per Share
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
23.2 Consent of Holland & Hart LLP (reference is made to Exhibit 5.1)
24.1 Power of Attorney (reference is made to page II-6)
27.1* Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
</TABLE>
All schedules are omitted because they are not required, are not applicable,
or the information is included in the consolidated financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the provisions described in Item 14 or otherwise,
the Registrant has been advised that in the opinion of the Securities and Ex-
change Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for in-
demnification against such liabilities (other than the payment by the Regis-
trant of expenses incurred or paid by a director, officer, or controlling per-
son of the Registrant in the successful defense of any action, suit, or pro-
ceeding) is asserted by such director, officer, or controlling person in con-
nection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling prece-
dent, submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
The undersigned Registrant hereby undertakes that: (1) for purposes of deter-
mining any liability under the Securities Act of 1933, the information omitted
from the form of prospectus as filed as part of the registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of the registration statement as of the time it was
declared effective, and (2) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the Reg-
istrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Denver,
State of Colorado, on the 25th day of September, 1997.
Birner Dental Management Services, Inc.
/s/ Frederic W.J. Birner
By: ____________________________________
NAME: FREDERIC W.J. BIRNER
TITLE: CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Frederic
W.J. Birner as his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any or all amendments to the Registration
Statement on Form S-1 (including post-effective amendments or any abbreviated
registration statement, and any amendments thereto, filed pursuant to Rule
462(b) increasing the amount of securities for which registration is being
sought), and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and per-
form each and every act and thing requisite and necessary to be done in con-
nection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent, or substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRA-
TION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACI-
TIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Frederic W.J. Birner Chairman of the September 25,
- ------------------------------------- Board, Chief 1997
FREDERIC W.J. BIRNER Executive Officer
and Director
(Principal
Executive Officer)
/s/ Mark A. Birner, D.D.S. President and September 25,
- ------------------------------------- Director 1997
MARK A. BIRNER, D.D.S.
/s/ Dennis N. Genty Chief Financial September 25,
- ------------------------------------- Officer, Secretary, 1997
DENNIS N. GENTY Treasurer and
Director (Principal
Financial and
Accounting Officer)
/s/ James M. Ciccarelli Director September 25,
- ------------------------------------- 1997
JAMES M. CICCARELLI
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation
3.2 Amendments to Amended and Restated Articles of Incorporation
3.3 Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 through 3.3
4.2* Specimen Stock Certificate
5.1* Opinion of Holland & Hart LLP
10.1 Form of Indemnification Agreement entered into between the Registrant
and its Directors and Executive Officers
10.2 Warrant Agreement dated December 27, 1996, between the Registrant and
Cohig & Associates, Inc.
10.3 Warrant Agreement dated May 29, 1996, between the Registrant and Cohig
10.4 Warrant Agreement dated October 3, 1995, between the Registrant and
Cohig
10.5 Warrant Certificate dated June 30, 1997, issued to Fred Birner
10.6 Warrant Certificate dated November 1, 1996, issued to Fred Birner
10.7 Warrant Certificate dated June 30, 1997, issued to Mark Birner
10.8 Warrant Certificate dated November 1, 1996, issued to Mark Birner
10.9 Warrant Certificate dated June 30, 1997, issued to Dennis Genty
10.10 Warrant Certificate dated November 1, 1996, issued to Dennis Genty
10.11 Warrant Certificate dated August 1, 1996, issued to James Ciccarelli
10.12 Warrant Certificate dated July 15, 1997, issued to James Ciccarelli
10.13 Credit Agreement, dated October 31, 1996, between the Registrant and
Key Bank of Colorado, as amended by First Amendment to Loan Documents,
dated as of September 3, 1997
10.14 Form of Managed Care Contract with Prudential
10.15 Form of Managed Care Contract with PacifiCare
10.16 Letter Agreement dated October 17, 1996, between the Registrant and
James Ciccarelli, as amended by letter agreement dated September 24,
1997 between the Registrant and James Ciccarelli.
10.17 Agreement, dated August 21, 1997, between the Registrant and James
Abramowitz, D.D.S., and Equity Resources Limited Partnership, a
Colorado limited partnership
10.18 Form of Management Agreement
10.19 Employment Agreement dated September 8, 1997 between the Registrant
and James Abramowitz, D.D.S.
10.20 Form of Stock Transfer and Pledge Agreement
10.21 Indenture, dated as of December 27, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.22 Indenture, dated as of May 15, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee
10.23 Birner Dental Management Services, Inc. 1995 Employee Stock Option
Plan, including forms of Incentive Stock Option Agreement and Non-
statutory Stock Option Agreement under the Employee Plan
10.24 Birner Dental Management Services, Inc. 1995 Stock Option Plan for
Managed Dental Centers, including form of Non-statutory Stock Option
Agreement under the Dental Center Plan
10.25 Profit Sharing 401(k)/Stock Bonus Plan of the Registrant
11.1 Statement Regarding Computation of Primary and Fully Diluted Earnings
Per Share
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
23.2 Consent of Holland & Hart LLP (reference is made to Exhibit 5.1)
24.1 Power of Attorney (reference is made to page II-6)
27.1* Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BIRNER DENTAL MANAGEMENT SERVICES, INC.
A COLORADO CORPORATION
The undersigned, Dennis Genty, hereby certifies that:
ONE: He is the duly elected and acting Chief Financial Officer,
Treasurer and Secretary of Birner Dental Management Services, Inc. (the
"Corporation").
TWO: The Corporation's original Articles of Incorporation was filed
with the Secretary of State of the State of Colorado on May 17, 1995, and
amended on June 19, 1995 and further amended on June 27, 1995.
THREE: These Amended and Restated Articles of Incorporation
constitute an amendment and a restatement of the original Articles of
Incorporation filed on May 17, 1995, as amended, pursuant to Section 7-110-107
of the Colorado Business Corporation Act (the "Act"), and supersedes the
Corporation's original Articles of Incorporation and all amendments or
supplements thereto or restatements thereof.
FOUR: The Amended and Restated Articles of Incorporation were
adopted by unanimous written consent of the Board of Directors on August 1,
1997, and by the shareholders at a special meeting held on September 4, 1997.
The number of votes cast for the Amended and Restated Articles of Incorporation
by each voting group was sufficient for approval by such voting group.
FIVE: The text of the Corporation's Amended and Restated Articles of
Incorporation is hereby amended and restated to read in its entirety as follows:
"ARTICLE I
NAME
----
The name of the Corporation is Birner Dental Management Services, Inc.
ARTICLE II.
CAPITAL; SHAREHOLDERS
---------------------
2.1 AUTHORIZED CAPITAL. (a) The aggregate number of shares which
------------------
the Corporation shall have the authority to issue is 20,000,000 shares of common
stock, without par value and 10,000,000 shares of preferred stock, without par
value. Such preferred stock may be issued in series. Except as otherwise
expressly provided by law, and subject to the voting rights, if any, provided to
the holders of preferred stock by these Articles of Incorporation, the common
stock has exclusive voting rights on all
1
<PAGE>
matters requiring a vote of shareholders. Except for and subject to those rights
expressly granted to the holders of the preferred stock, or except as may be
provided by law, the holders of common stock shall have exclusively all other
rights of shareholders.
(b) The Corporation's Board of Directors shall have the authority,
without shareholder action, to determine the preferences, limitations and
relative rights of any preferred stock (whether in a series or as a class),
including without limitation the following: (i) the designation of any series of
preferred stock; (ii) unlimited, special, conditional, or limited voting rights,
or no right to vote; except that no condition, limitation, or prohibition on
voting shall eliminate any right to vote provided by the Colorado Business
Corporation Act; (iii) redemption rights; (iv) conversion rights, (v)
distribution or dividend rights, including the determination of whether such
rights are cumulative, non-cumulative or partially cumulative, and (vi)
preference rights over any other class or series of shares with respect to
distributions, including dividends and distributions upon the dissolution of the
Corporation.
2.2 VOTING OF SHARES. Each shareholder of record entitled to vote
----------------
shall have one vote for each share of stock standing in his name on the books of
the Corporation, except that in the election of directors he shall have the
right to vote such number of shares for as many persons as there are directors
to be elected. Cumulative voting shall not be allowed in the election of
directors or for any other purpose.
2.3 QUORUM; VOTE REQUIRED. At all meetings of shareholders, a
---------------------
majority of the shares entitled to vote at such meeting, represented in person
or by proxy, shall constitute a quorum; and at any meeting at which a quorum is
present the affirmative vote of a majority of the votes cast on the matter
represented at such meeting and entitled to vote on the subject matter shall be
the act of the shareholders, unless the vote of a greater proportion or number
is required by the laws of Colorado.
ARTICLE III.
NO PREEMPTIVE RIGHTS
--------------------
No shareholder of the Corporation shall have any preemptive or similar
right to acquire or subscribe for any additional unissued shares of stock, or
other securities of any class, or rights, warrants or options to purchase stock
or scrip, or securities of any kind convertible into stock or carrying stock
purchase warrants or privileges.
ARTICLE IV.
BOARD OF DIRECTORS
------------------
The corporate powers shall be exercised by or under the authority of,
and the business and affairs of the Corporation shall be managed under the
direction of, a Board of Directors.
2
<PAGE>
ARTICLE V.
LIMITATION ON LIABILITY
-----------------------
To the fullest extent permitted by the Act, as the same exists or may
hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except that this provision shall not eliminate or
limit the liability of a director to the Corporation or to its shareholders for
monetary damages otherwise existing for (i) any breach of the director's duty of
loyalty to the Corporation or to its shareholders; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) acts specified in Section 7-108-403 of the Act relating to any
unlawful distribution; or (iv) any transaction from which the director directly
or indirectly derived any improper personal benefit. If the Act is hereafter
amended to eliminate or limit further the liability of a director, then, in
addition to the elimination and limitation of liability provided by the
preceding sentence, the liability of each director shall be eliminated to the
fullest extent permitted by the Act as so amended. Any repeal or modification of
this Article by the shareholders of the Corporation shall be prospective only
and shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
ARTICLE VI.
INDEMNIFICATION
---------------
The Corporation shall indemnify officers, directors, employees or agents to
the extent provided in the Bylaws.
ARTICLE VII.
OFFICES
-------
7.1 REGISTERED AGENT. The street address of the registered office of the
----------------
Corporation is 3801 East Florida Avenue, Suite 208, Denver, Colorado 80210.
The name of its registered agent at such address is Dennis Genty. The written
consent of the registered agent to the appointment as such is stated below.
7.2 PRINCIPAL OFFICE. The address of the Corporation's principal office
----------------
is 3801 East Florida Avenue, Suite 208, Denver, Colorado 80210."
3
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and verified these
Amended and Restated Articles of Incorporation on September 4, 1997.
BIRNER DENTAL MANAGEMENT SERVICES, INC.,
a Colorado corporation
By:___________________________________
Name: Dennis Genty
Title: Chief Financial Officer, Treasurer
and Secretary
4
<PAGE>
CONSENT OF REGISTERED AGENT
The undersigned registered agent of Birner Dental Management Services,
Inc., does hereby confirm the address for such agent and consent to such
registered agent's appointment as such registered agent, all as set forth in
Article VII. above, as provided in Section 7-102-102(1)(f) of the Colorado
Business Corporation Act.
_____________________________________
Name: Dennis Genty
5
<PAGE>
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BIRNER DENTAL MANAGEMENT SERVICES, INC.
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Amended and Restated Articles of Incorporation:
FIRST: The following amendment to the Amended and Restated Articles of
Incorporation was adopted by unanimous written consent of the Board of Directors
on August 1, 1997, and by the shareholders at a special meeting held on
September 4, 1997. The number of votes cast for the amendment to the Amended
and Restated Articles of Incorporation by each voting group was sufficient for
approval by such voting group:
ARTICLE II. Section 2.3 is hereby deleted in its entirety and substituted
with the following therefor:
"2.3 QUORUM AND VOTING REQUIREMENTS FOR SHAREHOLDERS' MEETINGS.
---------------------------------------------------------
(a) Quorum. A majority of the votes entitled to be cast on a matter by a
------
voting group shall constitute a quorum of that voting group for action on
that matter at any meeting of shareholders. (When used in these Amended
and Restated Articles of Incorporation, the term "voting group" or "voting
groups" shall have the meaning assigned by the Act.)
(b) Voting. Except as is otherwise required by the Act or these Amended
------
and Restated Articles of Incorporation, action by a voting group on a
matter other than the election of directors is approved if a quorum exists
and if the votes cast within the voting group favoring the action exceed
the votes cast within the voting group opposing the action; provided,
however, that with respect to amendments of this Article II. Section
2.3(b), Article IV. Section 4.2 and Article VIII of these Amended and
Restated Articles of Incorporation, the approval by eighty percent (80%) of
the votes of each voting group entitled to vote on such matter shall be
required.
SECOND: The following amendment to the Amended and Restated Articles of
Incorporation was adopted by unanimous written consent of the Board of Directors
on August 1, 1997, and by the shareholders at a special meeting held on
September 4, 1997. The number of votes cast for the amendment to the
<PAGE>
Amended and Restated Articles of Incorporation by each voting group was
sufficient for approval by such voting group:
ARTICLE IV. is hereby deleted in its entirety and substituted with the
following therefor:
"ARTICLE IV.
BOARD OF DIRECTORS
------------------
4.1 POWERS. The corporate powers shall be exercised by or under the
------
authority of, and the business and affairs of the Corporation shall be
managed under the direction of, a board of directors.
4.2 NUMBER AND TERMS. The terms of the directors shall be staggered in
----------------
accordance with the following provisions: The total number of directors
shall be divided into three groups, with each group containing one-third of
the total, as near as may be. The terms of directors in the first group
shall expire at the first annual shareholders' meeting after their
election, the terms of directors in the second group shall expire at the
second annual shareholders' meeting after their election, and the terms of
directors in the third group shall expire at the third annual shareholders'
meeting after their election. Upon the expiration of the initial staggered
terms, directors shall be elected for terms of three years to succeed those
whose terms expire.
The number of Directors of the Corporation shall be fixed by resolution
duly adopted from time to time by the Board of Directors. The directors,
other than those who may be elected by the holders of any series of
undesignated Preferred Stock of the Corporation, shall be classified, with
respect to the term for which they severally hold office, into three
classes, as nearly equal in number as possible. The initial Class I
director of the Corporation shall be James Ciccarelli; the initial Class II
director of the Corporation shall be Dennis Genty; and the initial Class
III directors of the Corporation shall be Fred Birner and Mark Birner. The
initial Class I director shall serve for a term expiring at the annual
meeting of stockholders to be held in 1998, the initial Class II director
shall serve for a term expiring at the annual meeting of stockholders to be
held in 1999, and the initial Class III directors shall serve for a term
expiring at the annual meeting of stockholders to be held in 2000. At each
annual meeting of stockholders, the successor or successors of the class of
directors whose term expires at that meeting shall be elected by a
plurality of the votes cast at such meeting and entitled to vote in the
election of directors and shall hold office for a term expiring at the
annual meeting of stockholders held in the third year following the year of
their election. The directors elected to
2
<PAGE>
each class shall hold office until their successors are duly elected and
qualified or until their earlier resignation or removal.
4.3 VACANCIES. Any and all vacancies in the Board of Directors, however
---------
occurring, including, without limitation, by reason of an increase in size
of the Board of Directors, or the death, resignation, disqualification or
removal of a director, shall be filled solely by the affirmative vote of a
majority of the remaining directors then in office, even if less than a
quorum of the Board of Directors. Any director appointed in accordance
with the preceding sentence shall hold office for the remainder of the full
term of the class of directors in which the new directorship was created or
the vacancy occurred and until such director's successor shall have been
duly elected and qualified or until his or her earlier resignation or
removal. When the number of directors is increased or decreased, the Board
of Directors shall determine the class or classes to which the increased or
decreased number of directors shall be apportioned; provided, however, that
no decrease in the number of directors shall shorten the term of any
incumbent director. In the event of a vacancy in the Board of Directors,
the remaining directors, except as otherwise provided by law, may exercise
the powers of the full Board of Directors until the vacancy is filled.
4.4. REMOVAL. Subject to the rights, if any, of any series of
-------
undesignated Preferred Stock to elect directors and to remove any director
whom the holders of any such stock have the right to elect, any director
(including persons elected by directors to fill vacancies in the Board of
Directors) may be removed from office only for cause. At least 30 days
prior to any meeting of stockholders at which it is proposed that any
director be removed from office, written notice of such proposed removal
shall be sent to the director whose removal will be considered at the
meeting. For purposes of these Amended and Restated Articles of
Incorporation, "cause," with respect to the removal of any director shall
mean only (i) conviction of a felony, (ii) declaration of unsound mind by
order of court, (iii) gross dereliction of duty, (iv) commission of any
action involving moral turpitude, or (v) commission of an action which
constitutes intentional misconduct or a knowing violation of law if such
action in either event results both in an improper substantial personal
benefit and a material injury to the Corporation."
THIRD: The following amendment to the Amended and Restated Articles
of Incorporation was adopted by unanimous written consent of the Board of
Directors on August 1, 1997, and by the shareholders at a special meeting held
on September 4, 1997. The number of votes cast for the amendment to the
Articles of Incorporation by each voting group was sufficient for approval by
such voting group:
ARTICLE VIII. is hereby added as follows:
3
<PAGE>
"ARTICLE VIII.
AMENDMENT OF ARTICLES OF INCORPORATION
--------------------------------------
The Corporation reserves the right to amend or repeal these Amended
and Restated Articles of Incorporation in the manner now or hereafter
prescribed by statute and these Amended and Restated Articles of
Incorporation, and all rights conferred upon stockholders herein are
granted subject to this reservation. No amendment or repeal of these
Amended and Restated Articles of Incorporation shall be made unless the
same is first approved by the Board of Directors pursuant to a resolution
adopted by the Board of Directors in accordance with Section 7-110-103 of
the Act, and, except as otherwise provided by law, thereafter approved by
the stockholders. Whenever any vote of the holders of voting stock is
required, and in addition to any other vote of holders of voting stock that
is required by these Amended and Restated Articles of Incorporation or by
law, the affirmative vote of a majority of the total votes eligible to be
cast by holders of voting stock with respect to such amendment or repeal,
voting together as a single class, at a duly constituted meeting of
stockholders called expressly for such purpose shall be required to amend
or repeal any provisions of these Amended and Restated Articles of
Incorporation; provided, however, that the affirmative vote of not less
than eighty percent (80%) of the total votes entitled to be cast by holders
of voting stock, voting together as a single class, shall be required to
amend or repeal Article II. Section 2.3(b), Article IV. Section 4.2 and
this Article VIII of these Amended and Restated Articles of Incorporation."
4
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this_____ day of____________,1997.
BIRNER DENTAL MANAGEMENT SERVICES, INC.,
a Colorado corporation
By:___________________________________
Name: Dennis Genty
Title: Chief Financial Officer, Treasurer
and Secretary
5
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED BYLAWS
OF
BIRNER DENTAL MANAGEMENT SERVICES, INC.
(A COLORADO CORPORATION)
EFFECTIVE AS OF __________, 1997
<PAGE>
BYLAWS
OF
BIRNER DENTAL MANAGEMENT SERVICES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. OFFICES.............................................................................................. 1
1. Business Offices......................................................................................... 1
2. Principal Office......................................................................................... 1
3. Registered Office........................................................................................ 1
ARTICLE II. SHAREHOLDERS' MEETINGS.............................................................................. 1
1. Annual Meetings.......................................................................................... 1
2. Special Meetings......................................................................................... 2
3. Place of Special Meetings................................................................................ 2
4. Notice of Meetings....................................................................................... 3
5. Shareholders' List....................................................................................... 3
6. Organization............................................................................................. 4
7. Agenda and Procedure..................................................................................... 4
8. Quorum................................................................................................... 5
9. Adjournment.............................................................................................. 5
10. Voting.................................................................................................. 5
11. Inspectors.............................................................................................. 6
12. Meeting by Telecommunication............................................................................ 7
ARTICLE III. BOARD OF DIRECTORS................................................................................. 8
1. Authority, Election and Tenure........................................................................... 8
2. Number and Qualification................................................................................. 8
3. Regular Meetings......................................................................................... 8
4. Special Meetings......................................................................................... 9
5. Place of Meetings........................................................................................ 9
6. Notice of Meetings....................................................................................... 9
7. Quorum and Voting........................................................................................ 10
8. Organization, Agenda and Procedure....................................................................... 10
9. Resignation.............................................................................................. 10
10. Removal................................................................................................. 10
11. Vacancies............................................................................................... 10
12. Executive and Other Committees.......................................................................... 11
13. Compensation of Directors............................................................................... 12
14. Meeting by Telecommunication............................................................................ 12
ARTICLE IV. WAIVER OF NOTICE BY SHAREHOLDERS AND DIRECTORS AND ACTION OF SHAREHOLDERS AND DIRECTORS BY CONSENT.. 13
1. Waiver of Notice......................................................................................... 13
2. Action Without a Meeting................................................................................. 14
</TABLE>
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ARTICLE V. OFFICERS............................................................................................. 14
1. Election and Tenure...................................................................................... 14
2. Resignation, Removal and Vacancies....................................................................... 15
3. Chairman of the Board.................................................................................... 15
4. President................................................................................................ 16
5. Vice Presidents.......................................................................................... 16
6. Secretary................................................................................................ 17
7. Treasurer................................................................................................ 17
8. Assistant Secretaries and Assistant Treasurers........................................................... 17
9. Bond of Officers......................................................................................... 18
10. Compensation............................................................................................ 18
ARTICLE VI. INDEMNIFICATION..................................................................................... 18
1. Indemnification.......................................................................................... 18
2. Provisions Not Exclusive................................................................................. 19
3. Effect of Modification of Act............................................................................ 19
4. Definitions.............................................................................................. 19
5. Insurance................................................................................................ 20
6. Expenses as a Witness.................................................................................... 21
7. Notice to Shareholders................................................................................... 21
ARTICLE VII. EXECUTION OF INSTRUMENTS; LOANS; CHECKS AND ENDORSEMENTS; DEPOSITS; PROXIES........................ 22
1. Execution of Instruments................................................................................. 22
2. Borrowing................................................................................................ 22
3. Loans to Directors, Officers and Employees............................................................... 23
4. Checks and Endorsements.................................................................................. 23
5. Deposits................................................................................................. 23
6. Proxies.................................................................................................. 23
ARTICLE VIII. SHARES OF STOCK................................................................................... 24
1. Certificates of Stock.................................................................................... 24
2. Shares Without Certificates.............................................................................. 24
3. Record................................................................................................... 25
4. Transfer of Stock........................................................................................ 25
5. Transfer Agents and Registrars; Regulations.............................................................. 25
6. Lost, Destroyed or Mutilated Certificates................................................................ 25
ARTICLE IX. CORPORATE SEAL...................................................................................... 26
ARTICLE X. FISCAL YEAR.......................................................................................... 26
ARTICLE XI. CORPORATE RECORDS................................................................................... 26
1. Corporate Records........................................................................................ 26
2. Addresses of Shareholders................................................................................ 26
3. Fixing Record Date....................................................................................... 27
4. Inspection of Corporate Records.......................................................................... 27
5. Distribution of Financial Statements..................................................................... 27
6. Audits of Books and Accounts............................................................................. 27
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ARTICLE XII. EMERGENCY BYLAWS AND ACTIONS....................................................................... 28
ARTICLE XIII. AMENDMENTS........................................................................................ 28
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BYLAWS
OF
BIRNER DENTAL MANAGEMENT SERVICES, INC.
(A COLORADO CORPORATION)
ARTICLE I.
OFFICES
1. BUSINESS OFFICES. The Corporation may have one or more offices at
such place or places within or without the State of Colorado as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
2. PRINCIPAL OFFICE. The initial principal office of the Corporation
shall be as set forth in the Articles of Incorporation. The Board of Directors,
from time to time, may change the principal office of the Corporation.
3. REGISTERED OFFICE. The registered office of the Corporation shall
be as set forth in the Articles of Incorporation, unless changed as provided by
the provisions of the Colorado Business Corporation Act, as it may be amended
from time to time, or any successor law (the "Act").
ARTICLE II.
SHAREHOLDERS' MEETINGS
1. ANNUAL MEETINGS. The annual meetings of shareholders for the
election of directors to succeed those directors whose terms expire and for the
transaction of such other business as may come before the meeting shall be held
each year at such date, time and place, either within or without the State of
Colorado, as may be designated by resolution of the Board of
<PAGE>
Directors from time to time; provided, however, that an annual meeting
shareholders shall be held each year on a date that is within the earlier of six
months after the close of the last fiscal year or fifteen months after the last
annual meeting. If the day so fixed for such annual meeting shall be a legal
holiday at the place of the meeting, then such meeting shall be held on the next
succeeding business day at the same hour.
2. SPECIAL MEETINGS. Special meetings of shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the Articles
of Incorporation, may be called at any time by the President or by the Board of
Directors and shall be called by the President or the Secretary upon one or more
written demands (which shall state the purpose or purposes therefor) signed and
dated by the holders of shares representing not less than ten percent of all
votes entitled to be cast on any issue proposed to be considered at the meeting.
The record date for determining the shareholders entitled to demand a special
meeting is the date of the earliest of any of the demands pursuant to which the
meeting is called, or the date that is 60 days before the date on which the
first of such demands is received, whichever is later. Business transacted at
any special meeting of shareholders shall be limited to the purpose or purposes
stated in the notice of such meeting.
3. PLACE OF SPECIAL MEETINGS. Special meetings of shareholders shall
be held at such place or places, within or without the State of Colorado, as may
be determined by the Board of Directors and designated in the notice of the
meeting, or, if no place is so determined and designated in the notice, special
meetings of shareholders shall be held at the principal office of the
Corporation.
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4. NOTICE OF MEETINGS. Not less than 10 nor more than 60 days prior
to each annual or special meeting of shareholders, written notice of the date,
time and place of each annual and special shareholders' meeting shall be given
to each shareholder entitled to vote at such meeting; provided, however, that if
the authorized shares of the Corporation are proposed to be increased, at least
30 days' notice in like manner shall be given; and provided, further, that if
the Act prescribes notice requirements for particular circumstances (as in the
case of the sale, lease or exchange of the Corporation's assets other than in
the usual and regular course of business, or the merger or dissolution of the
Corporation), the provisions of the Act shall govern. Notice may be given in
person; by telephone, telegraph, teletype, electronically transmitted facsimile,
or other form of wire or wireless communication; and, if so given, shall be
effective when received by the shareholder. Notice may also be given by deposit
in the United States mail, postage prepaid, if addressed to the shareholder at
the address of such shareholder shown in the Corporation's current record of
shareholders, and, of so given, shall be effective when mailed. If three
successive notices mailed to any shareholder in accordance with the provisions
of this Section 4 are returned as undeliverable, no further notices to such
shareholder shall be necessary until another address for such shareholder is
made known to the Corporation. The notice of a special meeting shall, in
addition, state the meeting's purposes.
5. SHAREHOLDERS' LIST. A complete record of the shareholders
entitled to notice of any shareholders' meeting (or an adjourned meeting
described in Section 9 of this Article II) shall be prepared by the Secretary of
the Corporation. Such shareholders' list shall be arranged by voting groups
and, within each voting group by class or series of shares, shall be
alphabetical within each class or series and shall show the address of, and the
number of shares of each such
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class and series that are held by, each shareholder. (When used in these Bylaws,
the term "voting group" or "voting groups" shall have the meaning assigned by
the Act.) The shareholders' list shall be available for inspection by any
shareholder beginning on the earlier of ten days before the meeting for which
the list was prepared or two business days after notice is given and continuing
through the meeting and any adjournment thereof at the Corporation's principal
office or at a place identified in the notice of the meeting in the city where
the meeting will be held. A shareholder or his agent or attorney is entitled on
written demand to inspect and, subject to the requirements of the Act, to copy
the list during regular business hours and during the period it is available for
inspection.
6. ORGANIZATION. The Chairman of the Board, or, in the Chairman of
the Board's absence, the President, shall call meetings of shareholders to order
and act as chairperson of such meetings. In the absence of said officers, any
shareholder entitled to vote at the meeting, or any proxy of any such
shareholder, may call the meeting to order and a chairperson shall be elected by
a majority of the votes present and entitled to be cast at the meeting. The
Secretary or any Assistant Secretary of the Corporation or any person appointed
by the chairperson may act as secretary of such meetings.
7. AGENDA AND PROCEDURE. The Board of Directors shall have the
responsibility of establishing an agenda for each meeting of shareholders,
subject to the rights of shareholders to raise matters, if any, which may
properly be brought before the meeting although not included within the agenda.
The chairperson shall be charged with the orderly conduct of all meetings of
shareholders.
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8. QUORUM. Shares entitled to vote as a separate voting group may
take action on a matter at a meeting only if a quorum of those shares exists
with respect to that matter. Unless otherwise provided in the Act or in the
Corporation's Articles of Incorporation, a majority of the votes entitled to be
cast on a matter by a voting group constitutes a quorum of that voting group for
action on that matter. In the absence of a quorum at any shareholders' meeting,
a majority of the votes present in person or represented by proxy and entitled
to vote on any matter at the meeting may adjourn the meeting from time to time
for a period not to exceed 120 days from the original date of the meeting
without further notice (except as provided in Section 9 of this Article II)
until a quorum shall be present or represented.
9. ADJOURNMENT. When a meeting is for any reason adjourned to
another date, time or place, notice need not be given of the adjourned meeting
if the date, time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, any business may be transacted
which might have been transacted at the original meeting. If the adjournment is
for more than 120 days from the date of the original meeting, or if, after the
adjournment, a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder as of the new record
date.
10. VOTING.
(a) Except as provided by law or in the Articles of
Incorporation, at every meeting of shareholders, or with respect to corporate
action which may be taken without a meeting, each outstanding share having
voting power is entitled to one vote, and each fractional share, if any is
outstanding, is entitled to a corresponding fractional vote, on each matter
voted on at a shareholders' meeting.
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(b) A shareholder may vote the shareholder's shares in person or
by proxy. A shareholder may appoint a proxy by signing an appointment form,
either personally or by the shareholder's attorney-in-fact. A shareholder may
appoint a proxy by transmitting or authorizing the transmission of a telegram,
teletype or other electronic transmission providing a written statement of the
appointment to the proxy, to a proxy solicitor, proxy support service
organization, or other person duly authorized by the proxy to receive
appointments as agent for the proxy, or to the Corporation; except that the
transmitted appointment shall set forth or be transmitted with written evidence
from which it can be determined that the shareholder transmitted or authorized
the transmission of the appointment. An appointment of a proxy is not effective
against the Corporation until the appointment is received by the Corporation.
The appointment is effective for eleven months unless a different period is
expressly provided in the appointment form. An appointment of a proxy shall be
revocable by the shareholder except as may be permitted or provided by law.
(c) When a quorum is present at any meeting of shareholders,
action on a matter, other than the election of directors, by a voting group is
approved if the votes cast within the voting group favoring the action exceed
the votes cast within the voting group opposing the action, unless the matter is
one upon which a different vote is required by express provision of a statute,
or the Articles of Incorporation, or these Bylaws, in which case such express
provision shall govern and control the decision on such matter.
11. INSPECTORS. The chairperson of the meeting may at any time
appoint two or more inspectors to serve at a meeting of the shareholders. Such
inspectors shall decide upon the qualifications of voters, including the
validity of proxies, accept and count the votes for and
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against the matters presented, report the results of such votes, and subscribe
and deliver to the secretary of the meeting a certificate stating the number of
shares of stock within each voting group that is issued and outstanding and
entitled to vote thereon and the number of shares within each voting group that
voted for and against the matters presented. The voting inspectors need not be
shareholders of the Corporation, and any director or officer of the Corporation
may be an inspector on any matter other than a vote for or against such
director's or officer's election to any position with the Corporation or on any
other matter in which such officer or director may be directly interested.
12. MEETING BY TELECOMMUNICATION. If and only if permitted by the
Board of Directors, any or all of the shareholders may participate in an annual
or special shareholders' meeting by, or the meeting may be conducted through the
use of, any means of communication by which all persons participating in the
meeting may hear each other during the meeting. If the Board of Directors
determines to allow shareholders to participate in a shareholders' meeting by
telecommunication, the Board shall establish the terms and conditions under
which shareholders may participate by such means and shall cause the notice of
the meeting to contain such terms and conditions. Only shareholders who comply
with the terms and conditions indicated in such notice shall be entitled to so
participate by telecommunication in the shareholders' meeting. A shareholder
participating in a meeting by telecommunication in compliance with the terms and
conditions established by the Board of Directors is deemed to be present in
person at the meeting.
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ARTICLE III.
BOARD OF DIRECTORS
1. AUTHORITY, ELECTION AND TENURE. All corporate power shall be
exercised by or under the authority of, and the business and affairs of the
Corporation shall be managed by, a Board of Directors. The Board of Directors
shall be elected at each annual meeting of shareholders. In an election of
directors, that number of candidates equaling the number of directors to be
elected having the highest number of votes cast in favor of their election shall
be elected to the Board of Directors. The directors shall serve for staggered
terms as provided in the Corporation's Articles of Incorporation; provided,
however, that a director shall continue to serve, despite the expiration of his
or her term, until such director's successor shall be elected and shall qualify,
or until such director's earlier death, resignation or removal.
2. NUMBER AND QUALIFICATION. The number of directors shall be fixed
from time to time by resolution of the Board of Directors and may be increased
or decreased from time to time by resolution of the Board of Directors, but no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Directors must be natural persons at least eighteen
years of age but need not be shareholders or residents of the State of Colorado.
3. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such dates, times and places as may be determined by the Board
of Directors. Regular meetings of the Board of Directors may be held without
notice of the date, time, place or purpose of the meeting.
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<PAGE>
4. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by the President at any time and shall be called by the President or
the Secretary on the written request of any two directors.
5. PLACE OF MEETINGS. Any meeting of the Board of Directors may be
held at such place or places either within or without the State of Colorado as
shall from time to time be determined by the Board of Directors and as shall be
designated in the resolution of the Board of Directors fixing the date, time and
place of the regular meetings of the Board of Directors or in the notice of
special meeting.
6. NOTICE OF MEETINGS. Notice of the date, time and place of each
special meeting of directors shall be given to each director at least two days
prior to such meeting. The notice of a special meeting of the Board of
Directors need not state the purposes of the meeting. Notice to each director
of any special meeting may be given in person; by telephone, telegraph,
teletype, electronically transmitted facsimile, or other form of wire or
wireless communication; or by mail or private carrier. Oral notice to a
director of any special meeting is effective when communicated. Written notice
to a director of any special meeting, including without limitation notice sent
by electronic mail, is effective at the earliest of: (a) the date received; (b)
five days after it is deposited in the United States mail, properly addressed to
the last address for the director shown on the records of the Corporation, first
class postage prepaid; (c) the date shown on the return receipt if mailed by
registered or certified mail, return receipt requested, postage prepaid, in the
United States mail and if the return receipt is signed by or on behalf of the
director to whom the notice is addressed.
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7. QUORUM AND VOTING. A majority of the number of directors fixed by
or in accordance with Section 2 of this Article III shall constitute a quorum at
all meetings of the Board of Directors. The vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, except as otherwise required by the Act.
8. ORGANIZATION, AGENDA AND PROCEDURE. The Chairman of the Board or,
in the absence of the Chairman of the Board, the President shall act as
chairperson of the meetings of the Board of Directors. The Secretary, any
Assistant Secretary, or any other person appointed by the chairperson shall act
as secretary of each meeting of the Board of Directors. The agenda of and
procedure for such meetings shall be as determined by the Board of Directors.
9. RESIGNATION. Any director of the Corporation may resign at any
time by giving written resignation notice to the Corporation or the Secretary of
the Corporation at the Corporation's principal office. Such resignation shall
take effect at the date of receipt of such notice or at any later time specified
therein and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective, unless it so provides.
A director who resigns may deliver to the Secretary of State for filing a
statement to that effect.
10. REMOVAL. Any director may be removed only for cause at a special
meeting of the shareholders called and held for such purpose if the number of
votes cast in favor of removal exceeds the number of votes cast against removal.
A vacancy in the Board of Directors caused by any such removal shall be filled
solely by the Board of Directors, as provided in Section 11 of this Article III.
11. VACANCIES. Any and all vacancies in the Board of Directors,
however occurring, including, without limitation, by reason of an increase in
size of the Board of Directors, or the
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death, resignation, disqualification or removal of a director, shall be filled
solely by the affirmative vote of a majority of the remaining directors then in
office, even if less than a quorum of the Board of Directors. Any director
appointed in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been duly elected and qualified or until his or her earlier
resignation or removal. When the number of directors is increased or decreased,
the Board of Directors shall determine the class or classes to which the
increased or decreased number of directors shall be apportioned; provided,
however, that no decrease in the number of directors shall shorten the term of
any incumbent director. In the event of a vacancy in the Board of Directors, the
remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
12. EXECUTIVE AND OTHER COMMITTEES. Except as otherwise required by
the Act, the Board of Directors, by resolution adopted by the greater of a
majority of the number of directors fixed by or in accordance with Section 2 of
this Article III or the number of directors required to take action pursuant to
Section 7 of this Article III, may designate from among its members an executive
committee and one or more other committees each of which, to the extent provided
in the resolution and except as otherwise prescribed by the Act, shall have and
may exercise all of the authority of the Board of Directors in the management of
the Corporation, except that no committee shall: (a) authorize distributions;
(b) approve or propose to shareholders action that the Act requires to be
approved by shareholders; (c) fill vacancies on the Board of Directors or on any
of its committees; (d) amend the Articles of Incorporation; (e) adopt, amend, or
repeal these Bylaws; (f) approve a plan of merger not requiring shareholder
approval; (g) authorize or approve
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reacquisition of shares, except according to a formula or method prescribed by
the Board of Directors; or (h) authorize or approve the issuance or sale of
shares, or a contract for the sale of shares, or determine the designation and
relative rights, preferences, and limitations of a class or series of shares,
except that with respect to this clause (h) the Board of Directors may authorize
a committee to do so within limits specifically prescribed by the Board of
Directors. The provision of these Bylaws governing meetings, action without
meeting, notice, waiver of notice, and quorum and voting requirements of the
Board of Directors shall apply to committees and the members thereof.
13. COMPENSATION OF DIRECTORS. Each director may be paid such
compensation as fixed from time to time by resolution of the Board of Directors,
together with reimbursement for the reasonable and necessary expenses incurred
by such director in connection with the performance of such director's duties.
Nothing herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity or any of its subsidiaries in any
other capacity and receiving proper compensation therefor.
14. MEETING BY TELECOMMUNICATION. One or more members of the Board of
Directors or any committee designated by the Board of Directors may hold or
participate in a meeting of the Board of Directors or such committee through the
use of any means of communication by which all persons participating can hear
each other at the same time.
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ARTICLE IV.
WAIVER OF NOTICE BY SHAREHOLDERS AND DIRECTORS AND ACTION
OF SHAREHOLDERS AND DIRECTORS BY CONSENT
1. WAIVER OF NOTICE. A shareholder may waive any notice required by
the Act or by the Articles of Incorporation or these Bylaws, and a director may
waive any notice of a directors' meeting, whether before or after the date or
time stated in the notice as the date or time when any action will occur or has
occurred. The waiver shall be in writing, be signed by the shareholder or
director entitled to the notice, and be delivered to the Corporation for
inclusion in the minutes or filing with the corporate records, but such delivery
and filing shall not be conditions of the effectiveness of the waiver.
Attendance of a shareholder at a meeting waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting
because of lack of notice or defective notice, and waives objection to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice unless the shareholder
objects to considering the matter when it is presented. A director's attendance
at or participation in a meeting waives any required notice to him or her of the
meeting unless the director, at the beginning of the meeting or promptly upon
his or her later arrival, objects to holding the meeting or transacting business
at the meeting because of lack of notice or defective notice and does not
thereafter vote for or assent to action taken at the meeting, or if special
notice was required of a particular purpose pursuant to the Act, the director
objects to transacting business with respect to the purpose for which such
special notice was required and does not thereafter vote for or assent to action
taken at the meeting with respect to such purpose.
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2. ACTION WITHOUT A MEETING. Any action required or permitted to be
taken at a meeting of the shareholders, directors or members of an executive or
other committee, as applicable, may be taken without a meeting if all
shareholders entitled to vote with respect to such action, or all directors or
all members of an executive or other committee, as the case may be, give written
consent to such action in writing. The record date for determining shareholders
entitled to take action without a meeting is the date a writing upon which the
action is taken, pursuant to this Section 2 of Article IV, is first received by
the Corporation. Any shareholder who has signed a writing describing and
consenting to action taken pursuant to this Section 2 of this Article IV may
revoke such consent by a writing signed by such shareholder describing the
action and stating that the shareholder's prior consent thereto is revoked, if
such writing is received by the Corporation before the effectiveness of the
action. Action taken without a meeting shall be effective: in the case of an
action of shareholders, as of the date the last writing necessary to effect the
action is received by the Corporation unless all of the writings necessary to
effect the action specify another date, which may be before or after the date
the writings are received by the Corporation; and in the case of directors'
action, action is taken when the last director signs a writing describing the
action taken unless before such time the Secretary has received a written
revocation of the consent of any other director, and any action so taken shall
be effective at the time taken unless the directors specify a different
effective date.
ARTICLE V.
OFFICERS
1. ELECTION AND TENURE. The executive officers of the Corporation
shall consist of a Chairman of the Board, a President, a Secretary and
Treasurer, each of whom shall be appointed
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annually by the Board of Directors. The Board of Directors may also designate
and appoint such other officers and assistant officers as may be deemed
necessary. The Board of Directors may delegate to any such officer the power to
appoint or remove subordinate officers, agents or employees. Any two or more
offices may be held by the same person. Each officer so appointed shall continue
in office until a successor shall be appointed and shall qualify, or until the
officer's earlier death, resignation or removal. Each officer shall be a natural
person who is eighteen years of age or older.
2. RESIGNATION, REMOVAL AND VACANCIES. Any officer may resign at any
time by giving written notice of resignation to the Board of Directors or the
President. Such resignation shall take effect when the notice is received by
the Corporation unless the notice specifies a later effective date, and
acceptance of the resignation shall not be necessary to render such resignation
effective. Any officer may at any time be removed by the Board of Directors.
If any office becomes vacant for any reason, the vacancy may be filled by the
Board of Directors. An officer appointed to fill a vacancy shall be appointed
for the unexpired term of such officer's predecessor in office and shall
continue in office until a successor shall be elected or appointed and shall
qualify, or until such officer's earlier death, resignation or removal. The
appointment of an officer shall not itself create contract rights in favor of
the officer, and the removal of an officer does not affect the officer's
contract rights, if any, with the Corporation and the resignation of an officer
does not affect the Corporation's contract rights, if any, with the officer.
3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the
chief executive officer of the corporation and shall have general charge,
supervision and authority over the property, affairs and business of the
corporation, and over its several offices, subject, however, to
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the control of the Board of Directors. He shall, when present, preside at all
meetings of shareholders and of the Board of Directors. He shall have authority
to cause the employment or appointment of such employees and agents of the
corporation (other than officers or agents elected or appointed by the Board) as
the conduct of the business of the corporation may require, and to fix their
compensation, to remove or suspend any employee or agent who shall not have been
appointed by the Board, and in general shall perform all duties incident to the
office of Chairman of the Board and such other duties as from time to time may
be assigned to him by the board of Directors, or as prescribed herein.
4. PRESIDENT. In the absence of the Chairman of the Board, or if
authorized by the Chairman of the Board, the President shall preside at meetings
of the shareholders. The President shall have general and active management of
the business of the Corporation; shall see that all orders and resolutions of
the Board of Directors are carried into effect; and shall perform all duties as
may from time to time be assigned by the Board of Directors.
5. VICE PRESIDENTS. The Vice Presidents, if any, shall perform such
duties and possess such powers as from time to time may be assigned to them by
the Board of Directors or the President. In the absence of the President or in
the event of the inability or refusal of the President to act, the Vice
President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated by the Board of Directors, or in the absence
of any designation, then in the order of the election or appointment of the Vice
Presidents) shall perform the duties of the President and when so performing
shall have all the powers of and be subject to all the restrictions upon the
President.
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6. SECRETARY. The Secretary shall perform such duties and shall have
such powers as may from time to time be assigned by the Board of Directors or
the President. In addition, the Secretary shall perform such duties and have
such powers as are incident to the office of Secretary including, without
limitation, the duty and power to give notice of all meetings of shareholders
and the Board of Directors, the preparation and maintenance of minutes of the
directors' and shareholders' meetings and other records and information required
to be kept by the Corporation under Article XI and for authenticating records of
the Corporation, and to be custodian of the corporate seal and to affix and
attest to the same on documents, the execution of which on behalf of the
Corporation is authorized by these Bylaws or by the action of the Board of
Directors.
7. TREASURER. The Treasurer shall perform such duties and shall have
such powers as may from time to time be assigned by the Board of Directors or
the President. In addition, the Treasurer shall perform such duties and have
such powers as are incident to the office of Treasurer including, without
limitation, the duty and power to keep and be responsible for all funds and
securities of the Corporation, to deposit funds of the Corporation in
depositories selected in accordance with these Bylaws, to disburse such funds as
ordered by the Board of Directors, making proper accounts thereof, and to render
as required by the Board of Directors statements of all these transactions taken
as Treasurer and of the financial condition of the Corporation.
8. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant
Secretaries and Assistant Treasurers, if any, shall perform such duties as shall
be assigned to them by the Secretary or the Treasurer, respectively, or by the
President or the Board of Directors. In the
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absence, inability or refusal to act of the Secretary or the Treasurer, the
Assistant Secretaries or Assistant Treasurers, respectively, in the order
designated by the Board of Directors, or in the absence of any designation, then
in the order of their election or appointment, shall perform the duties and
exercise the powers of the Secretary or Treasurer, as the case may be.
9. BOND OF OFFICERS. The Board of Directors may require any officer
to give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for such terms and conditions as
the Board of Directors may specify, including without limitation for the
faithful performance of such officer's duties and for the restoration to the
Corporation of any property belonging to the Corporation in such officer's
possession or under the control of such officer.
10. COMPENSATION. Officers of the Corporation shall be entitled to
such salaries, emoluments, compensation or reimbursement as shall be fixed or
authorized from time to time by the Board of Directors.
ARTICLE VI.
INDEMNIFICATION
1. INDEMNIFICATION. To the extent permitted or required by the Act
and any other applicable law, if any director or executive officer of the
Corporation is made a party to or is involved in any proceeding because such
person is or was a director or officer of the Corporation, the Corporation shall
(a) indemnify such person from and against any liability, including but not
limited to expenses of investigation and preparation, expenses in connection
with appearance as a witness, and fees and disbursements of counsel, accountants
or other experts, incurred by such person in such proceeding, and (b) advance to
such person expenses incurred in such proceeding.
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The Corporation may in its discretion, but is not obligated in any way to,
indemnify and advance expenses to other offices, employees or agents of the
Corporation to the same extent as to a director or executive officer, and the
Corporation may indemnify an employee, fiduciary, or agent of the Corporation to
a greater extent than expressly permitted herein for officers and directors if
not inconsistent with public policy.
2. PROVISIONS NOT EXCLUSIVE. The foregoing provisions for
indemnification and advancement of expenses are not exclusive, and the
Corporation may at its discretion provide for indemnification or advancement of
expenses in a resolution of its shareholders or directors, in a contract or in
its Articles of Incorporation.
3. EFFECT OF MODIFICATION OF ACT. Any repeal or modification of the
foregoing provisions of this Article for indemnification or advancement of
expenses shall not affect adversely any right or protection stated in such
provisions with respect to any act or omission occurring prior to the time of
such repeal or modification. If any provision of this Article or any part
thereof shall be held to be prohibited by or invalid under applicable law, such
provision or part thereof shall be deemed amended to accomplish the objectives
of the provision or part thereof as originally written to the fullest extent
permitted by law, and all other provisions or parts shall remain in full force
and effect.
4. DEFINITIONS. As used in this Article, the following terms have
the following meanings:
(a) Act. When used with reference to an act or omission occurring
prior to the effectiveness of any amendment to the Act which occurs after the
effectiveness of the adoption of this Article, the term "Act" shall include such
amendment only to the extent that the amendment
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permits a corporation to provide broader indemnification rights than the Act
permitted prior to the amendment.
(b) Corporation. The term "Corporation" includes any domestic or
foreign entity that is a predecessor of the Corporation by reason of a merger or
other transaction in which the predecessor's existence ceased upon consummation
of the transaction.
(c) Director or Officer. A "director" or "officer" is an
individual who is or was a director or officer of the Corporation or an
individual who, while a director or officer of the Corporation, is or was
serving at the Corporation's request as a director, officer, partner, trustee,
employee, fiduciary, or agent of another domestic or foreign corporation or
other person or entity or of an employee benefit plan. A director or officer is
considered to be serving an employee benefit plan at the Corporation's request
if his or her duties to the Corporation also impose duties on, or otherwise
involve services by, the director or officer to the plan or to participants in
or beneficiaries of the plan. The terms "director" and "officer" include, unless
the context requires otherwise, the estate or personal representative of a
director, or officer.
(d) Liability. The term "liability" means the obligation incurred
with respect to a proceeding to pay a judgment, settlement, penalty, fine
(including any excise tax assessed with respect to an employee benefit plan), or
reasonable expenses.
(e) Proceeding. The term "proceeding" means any threatened,
pending or completed action, suit, or proceeding whether civil, criminal,
administrative or investigative, and whether formal or informal.
5. INSURANCE. The Corporation may purchase and maintain insurance on
behalf of a person who is or was a director, officer, employee, fiduciary, or
agent of the Corporation, or who,
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while a director, officer, employee, fiduciary, or agent of the Corporation, is
or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee, fiduciary, or agent of another domestic or foreign
corporation or other person or entity or of an employee benefit plan, against
liability asserted against or incurred by the person in that capacity or arising
from his or her status as a director, officer, employee, fiduciary, or agent,
whether or not the Corporation would have power to indemnify the person against
the same liability under the Act. Any such insurance may be procured from any
insurance company designated by the Board of Directors, whether such insurance
company is formed under the laws of this state or any other jurisdiction of the
United States or elsewhere, including any insurance company in which the
Corporation has an equity or any other interest through stock ownership or
otherwise.
6. EXPENSES AS A WITNESS. The Corporation may pay or reimburse
expenses incurred by a director, officer, employee, fiduciary, or agent in
connection with an appearance as a witness in a proceeding at a time when he or
she has not been made a named defendant or respondent in the proceeding.
7. NOTICE TO SHAREHOLDERS. If the Corporation indemnifies or
advances expenses to a director or executive officer under this Article in
connection with a proceeding by or in the right of the Corporation, the
Corporation shall give written notice of the indemnification or advance to the
shareholders with or before the notice of the next shareholders' meeting. If
the next shareholder action is taken without a meeting at the instigation of the
Board of Directors, such notice shall be given to the shareholders at or before
the time the first shareholder signs a writing consenting to such action.
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ARTICLE VII.
EXECUTION OF INSTRUMENTS; LOANS; CHECKS AND ENDORSEMENTS;
DEPOSITS; PROXIES
1. EXECUTION OF INSTRUMENTS. The President or any Vice President
shall have the power to execute and deliver on behalf of and in the name of the
Corporation any instrument requiring the signature of an officer of the
Corporation, except as otherwise provided in these Bylaws or when the execution
and delivery of the instrument shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation. Unless authorized
to do so by these Bylaws or by the Board of Directors, no officer, agent or
employee shall have any power or authority to bind the Corporation in any way,
to pledge its credit or to render it liable pecuniarily for any purpose or in
any amount.
2. BORROWING. No loan shall be contracted on behalf of the
Corporation, and no evidence of indebtedness shall be issued, endorsed or
accepted in its name, unless authorized by the Board of Directors or a committee
designated by the Board of Directors so to act. Such authority may be general
or confined to specific instances. When so authorized, an officer may (a)
effect loans at any time for the Corporation from any bank or other entity and
for such loans may execute and deliver promissory notes or other evidences of
indebtedness of the Corporation; and (b) mortgage, pledge or otherwise encumber
any real or personal property, or any interest therein, owned or held by the
Corporation as security for the payment of any loans or obligation of the
Corporation, and to that end may execute and deliver for the Corporation such
instruments as may be necessary or proper in connection with such transaction.
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3. LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES. The Corporation may
lend money to, guarantee the obligations of and otherwise assist directors,
officers and employees of the Corporation, or directors of another corporation
of which the Corporation owns a majority of the voting stock, only upon
compliance with the requirements of the Act.
4. CHECKS AND ENDORSEMENTS. All checks, drafts or other orders for
the payment of money, obligations, notes or other evidences of indebtedness,
bills of lading, warehouse receipts, trade acceptances and other such
instruments shall be signed or endorsed for the Corporation by such officers or
agents of the Corporation as shall from time to time be determined by resolution
of the Board of Directors, which resolution may provide for the use of facsimile
signatures.
5. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the Corporation's credit in such banks
or other depositories as shall from time to time be determined by resolution of
the Board of Directors, which resolution may specify the officers or agents of
the Corporation who shall have the power, and the manner in which such power
shall be exercised, to make such deposits and to endorse, assign and deliver for
collection and deposit checks, drafts and other orders for the payment of money
payable to the Corporation or its order.
6. PROXIES. Unless otherwise provided by resolution adopted by the
Board of Directors, the President or any Vice President: (a) may from time to
time appoint one or more agents of the Corporation, in the name and on behalf of
the Corporation, (i) to cast the votes which the Corporation may be entitled to
cast as the holder of stock or other securities in any other corporation,
association or other entity whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock or other securities of such
other corporation,
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association or other entity, or (ii) to consent in writing to any action by such
other corporation, association or other entity; (b) may instruct the person so
appointed as to the manner of casting such votes or giving such consent; and (c)
may execute or cause to be executed in the name and on behalf of the Corporation
and under its corporate seal, or otherwise, all such written proxies or other
instruments as may be deemed necessary or proper.
ARTICLE VIII.
SHARES OF STOCK
1. CERTIFICATES OF STOCK. The shares of the Corporation may but need
not be represented by certificates. Unless the Act or another law expressly
provides otherwise, the fact that the shares are not represented by certificates
shall have no effect on the rights and obligations of shareholders. If the
shares are represented by certificates, such certificates shall be signed either
manually or in facsimile by the President and the Secretary or such other
representatives of the Corporation as are designated by the Board of Directors.
If the person who signed, either manually or in facsimile, a share certificate,
no longer holds office when the certificate is issued, the certificate is
nevertheless valid. Every certificate representing shares issued by the
Corporation shall state the number and class of shares and the designation of
the series, if any, the certificate represents, and shall otherwise be in such
form as is required by law and as the Board of Directors shall prescribe.
2. SHARES WITHOUT CERTIFICATES. The Board of Directors may authorize
the issuance of any class or series of shares of the Corporation without
certificates. Such authorization shall not affect shares already represented by
certificates until they are surrendered to the Corporation. Within a reasonable
time following the issue or transfer of shares without certificates, the
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Corporation shall send the shareholder a complete written statement of the
information required on certificates by the Act.
3. RECORD. A record shall be kept of the names and addresses of the
Corporation's shareholders, in a form that permits preparation of a list of
shareholders that is arranged by voting group and within each voting group by
class or series of shares, that is alphabetical within each class or series, and
that shows the addresses of, and the number of shares of each class and series
and the date of issuance of the shares (and in case of cancellation, the date of
cancellation) held by, each shareholder. The person or other entity in whose
name shares of stock stand on the books of the Corporation shall be deemed the
owner thereof, and thus a holder of record of such shares of stock, for all
purposes as regards the Corporation.
4. TRANSFER OF STOCK. Transfers of shares of the stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by such registered holder's attorney thereunto authorized,
and on the surrender of the certificate or certificates for such shares properly
endorsed.
5. TRANSFER AGENTS AND REGISTRARS; REGULATIONS. The Board of
Directors may appoint one or more transfer agents or registrars with respect to
shares of the stock of the Corporation. The Board of Directors may make such
rules and regulations as it may deem expedient and as are not inconsistent with
these Bylaws, concerning the issue, transfer and registration of certificates
for shares of the stock of the Corporation.
6. LOST, DESTROYED OR MUTILATED CERTIFICATES. In case of the alleged
loss, destruction or mutilation of a certificate representing stock of the
Corporation, a new certificate
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may be issued in place thereof, in such manner and upon such terms and
conditions as the Board of Directors may prescribe, and shall be issued in such
situations as required by the Act.
ARTICLE IX.
CORPORATE SEAL
The corporate seal shall be in the form approved by resolution of the
Board of Directors. Said seal may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner reproduced. The impression of
the seal may be made and attested by either the Secretary or any Assistant
Secretary for the authentication of contracts or other papers requiring the
seal.
ARTICLE X.
FISCAL YEAR
The fiscal year of the Corporation shall be the year established by
the Board of Directors.
ARTICLE XI.
CORPORATE RECORDS
1. CORPORATE RECORDS. The Corporation shall comply with the
provisions of the Act regarding maintenance of records and shall keep such
records at such place as the Act may designate or, if the Act does not designate
the place for such records, then at such place or places as may be from time to
time designated by the Board of Directors.
2. ADDRESSES OF SHAREHOLDERS. Each shareholder shall furnish to the
Secretary of the Corporation or the Corporation's transfer agent an address to
which notices from the Corporation, including notices of meetings, may be
directed and if any shareholder shall fail so to
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designate such an address, it shall be sufficient for any such notice to be
directed to such shareholder at such shareholder's address last known to the
Secretary or transfer agent.
3. FIXING RECORD DATE. The Board of Directors may fix in advance a
date as a record date for the determination of the shareholders entitled to a
notice of or to vote at any meeting of shareholders or entitled to receive
payment of any dividend or other distribution or allotment of rights in respect
of any change, conversion or exchange of stock, or for the purpose of any other
lawful action. Such record date shall not be more than 70 days before the
meeting or action requiring a determination of shareholders; except that the
record date for determining shareholders entitled to take action without a
meeting or entitled to be given notice of action so taken is the date upon which
a writing upon which such action is taken is first received by the Corporation.
Only such shareholders as shall be shareholders of record on the date so fixed
shall be so entitled with respect to the matter to which the same relates. If
the Board of Directors shall not fix a record date as above provided, then the
record date shall be determined in accordance with the Act.
4. INSPECTION OF CORPORATE RECORDS. Shareholders shall have those
rights to inspect and copy the Corporation's records as provided in the Act.
5. DISTRIBUTION OF FINANCIAL STATEMENTS. Upon the written request of
any shareholder of the Corporation, the Corporation shall mail to such
shareholder its last annual and most recently published financial statement, if
any.
6. AUDITS OF BOOKS AND ACCOUNTS. The Corporation's books and
accounts may be audited at such times and by such auditors as shall be specified
and designated by resolution of the Board of Directors.
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ARTICLE XII.
EMERGENCY BYLAWS AND ACTIONS
Subject to repeal or change by action of the shareholders, the Board
of Directors may adopt emergency bylaws and exercise other powers in accordance
with and pursuant to the provisions of the Act.
ARTICLE XIII.
AMENDMENTS
Unless the Act, the Articles of Incorporation or a particular Bylaw
reserves the right to amend the Bylaws exclusively to the shareholders, the
Board of Directors may amend or repeal these Bylaws or adopt new bylaws. The
shareholders may also amend or repeal these Bylaws or adopt new bylaws.
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EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
BIRNER DENTAL MANAGEMENT SERVICES INC.
1. EFFECTIVE DATE: September __, 1997
2. PARTIES:
Birner Dental Management Services, Inc. ___________________________
3801 East Florida Avenue ___________________________
Suite 201 ___________________________
Denver, Colorado 80210 ___________________________
(the "Company") ("Indemnified Party")
3. RECITALS/AGREEMENT:
a. At the request of Birner Dental Management Services, Inc.
(the "Company"), the signatory hereto (the "Indemnified Party") currently serves
as a director, officer or manager of the Company (as defined below), or in a
combination of these positions. As such, Indemnified Party may be subjected to
claims, suits or proceedings.
b. The Company's Bylaws and Article 109 of the Colorado
Business Corporation Act contemplate that contracts may be made between the
Company and members of its Board of Directors, officers and employees with
respect to indemnification.
c. In consideration of Indemnified Party's acceptance and
continuation of service as a director, officer or manager, or in a combination
of these positions, after the date of this Agreement, and in consideration of
the mutual covenants stated herein, the parties agree as follows.
4. DEFINITIONS: As used in this Agreement, the following terms have
the following meanings:
a. Change in Control. A "Change in Control" shall be deemed to
have occurred if any of the following events occurs: (i) any "person" (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) becomes after the date hereof the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 30% or more of the total
number of votes that may be cast for the election of directors of the Company
(for purposes of this definition, the "voting securities"); (ii) at least 40% of
the directors of the Company constitute persons who were not, at the time of
their first election to the Board of Directors of the Company, candidates
proposed by a majority of the Company's Board of Directors in office prior to
the time of such first election; (iii) either stockholder approval of the
dissolution of the Company or the actual dissolution of the Company; (iv) a sale
or other disposition, or the last sale
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or other disposition to occur in a series of sales and/or other dispositions
within any 12-month period ("Serial Sales"), by the Company of assets which (at
the time of the sale or disposition or, in the case of Serial Sales, as of the
beginning of such 12-month period) account for more than 75% of the total assets
or 40% of the revenues of the Company, as determined in accordance with
generally accepted accounting principles; provided, however, that no sale or
disposition of assets or stock shall be taken into account to the extent that
the proceeds of such sale or disposition (whether in cash or in-kind) are
reinvested in the Company or are, in the case of proceeds received in-kind, used
in the ongoing conduct of the Company, provided further that such a reinvestment
shall not be deemed to have occurred unless made within 12 months of such sale
or disposition and provided further that, the term reinvestment shall include,
among other things, the use of proceeds to repay debt incurred in connection
with the operation of the business in which the assets sold or disposed of were
used; (v) the stockholders shall approve any merger, consolidation, or like
business combination or reorganization of the Company, the consummation of which
would result in the voting securities of the Company outstanding immediately
prior thereto representing (by remaining outstanding or being converted into
securities of the surviving entity or otherwise) less than 70% of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger, consolidation, business combination or reorganization; or (vi) any
other event which the Company's Board of Directors determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
b. Corporation Law. The term "Corporation Law" means the
Colorado Business Corporation Act as it exists on the date of this Agreement and
as it may be hereafter amended from time to time. In the case of any amendment
of the Colorado Business Corporation Act after the date of this Agreement, when
used in reference to an act or omission occurring prior to effectiveness of such
amendment (unless prohibited by law), the term "Corporation Law" shall include
such amendment only to the extent that the amendment permits the Company to
provide broader indemnification rights than the Colorado Business Corporation
Act permitted the Company to provide prior to the amendment.
c. Director, Officer or Manager. As used in reference to a
position held by Indemnified Party, the term "director," "officer" or "manager"
means a director, officer or manager (as designated by the person's title in the
case of a manager) of the Company and, while a director, officer or manager of
the Company, Indemnified Party's serving at the Company's request as a director,
officer, manager, partner, trustee, employee, agent or fiduciary of any
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan (including without limitation any service as a director, officer,
manager, employee, agent or fiduciary which imposes duties on, or involves
services by, such director, officer, manager, employee or agent with respect to
any employee benefit plan, its participants or beneficiaries). The terms
"director," "officer" and "manager" also include, unless the context otherwise
requires, the estate or personal representative of a director, officer or
manager. The terms "director" and "officer" shall also include any such broader
definition as may be provided in the Corporation Law with amendments after the
date of this Agreement.
d. Potential Change in Control. A "Potential Change in
Control" shall be deemed to have occurred if (i) the Company enters into an
agreement, the consummation of which would result in the occurrence of a Change
in Control, (ii) any
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person or entity (including the Company) publicly announces an intention to take
or to consider taking actions which, if consummated, would constitute a Change
in Control, or (iii) the Board of Directors adopts a resolution to the effect
that, for purposes of this Agreement, a potential Change in Control has
occurred.
e. Proceeding. The term "proceeding" means any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal.
f. Reviewing Party. "Reviewing Party" means the person or body
determined in accordance with Section 9.
5. AGREEMENT TO INDEMNIFY: The Company shall indemnify, and keep
indemnified, Indemnified Party in accordance with, and to the full extent
permitted and/or required by, the Corporation Law and any other applicable law
from and against any expenses (including but not limited to attorneys' fees,
expenses of investigation and preparation, and fees and disbursements of
Indemnified Party's accountants or other experts), judgments, fines (including
but not limited to excise taxes assessed on a person with respect to an employee
benefit plan), penalties and amounts paid in settlement (including without
limitation all interest, assessments and other charges paid or payable in
connection with any of the foregoing) actually and reasonably incurred by
Indemnified Party in connection with any proceeding in which Indemnified Party
was or is made a party or was or is involved (for example, as a witness) by
reason of the fact that Indemnified Party is or was a director, officer or
manager of the Company.
6. D&O INSURANCE: So long as Indemnified Party may be subject to any
possible proceeding by reason of the fact that Indemnified Party is or was a
director or officer of the Company, to the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnified Party shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
applicable to any then current director or officer of the Company.
7. ADVANCES: In the event of any proceeding in which Indemnified Party is
a party or is involved and which may give rise to a right of indemnification
from the Company pursuant to this Agreement, following written request to the
Company by Indemnified Party, the Company shall pay to Indemnified Party, in
accordance with and to the full extent permitted and/or required by the
Corporation Law, amounts to cover reasonable expenses incurred by Indemnified
Party in such proceeding in advance of its final disposition if: (1) the
Indemnified Party furnishes to the Company a written affirmation of the
Indemnified Party's good faith belief that he or she has met the standard of
conduct described in section 7-109-102 of the Corporation Law; (2) the
Indemnified Party furnishes to the Company a written undertaking, executed
personally or on the Indemnified Party's behalf, to repay the advance if it is
ultimately determined that he or she did not meet the standard of conduct; and
(3) a determination is made that the facts then known to those making the
determination would not preclude indemnification under this Agreement or the
Corporation Law.
8. BURDEN OF PROOF: If under applicable law, the entitlement of
Indemnified Party to be indemnified or advanced expenses hereunder depends upon
whether a standard of conduct has been met, the burden of proof of establishing
that
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Indemnified Party did not act in accordance with such standard shall rest with
the Company. Indemnified Party shall be presumed to have acted in accordance
with such standard and to be entitled to indemnification or the advancement of
expenses (as the case may be) unless, based upon a preponderance of the
evidence, it shall be determined that Indemnified Party has not met such
standard. For purposes of this Agreement, unless otherwise expressly stated, the
termination of any proceeding by judgment, order, settlement (whether with or
without court approval), conviction, or upon a plea of nolo contendere or its
equivalent, is not, of itself, determinative that the Indemnified Party did not
meet the standard of conduct described in Section 7-109-102.
9. DETERMINATION REGARDING STANDARD OF CONDUCT; REVIEWING PARTY: Any
determination as to whether Indemnified Party has met an applicable standard of
conduct for indemnification or advancement of expenses and any evaluation as to
the reasonableness of amounts claimed by Indemnified Party shall be made by the
Reviewing Party. If there has not been a Change of Control after the date of
this Agreement, the Reviewing Party shall be the Board of Directors of the
Company or such other committee, body or person(s) designated or appointed by
the Board of Directors or by a committee of the Board of Directors of the
Company as permitted by the Corporation Law. If there has been a Change of
Control after the date of this Agreement and if so requested by the Indemnified
Party, the Reviewing Party shall be an independent legal counsel who is selected
by the Indemnified Party and approved by the Company (which approval shall not
be unreasonably withheld). For this purpose, "independent legal counsel" means a
law firm or a member of a law firm that neither is at the time, nor in the past
five years has been, retained to represent (i) the Company or the Indemnified
Party in any matter material to either such party or (ii) any other party to the
Proceeding giving rise to a claim for indemnification under this Agreement.
Notwithstanding the foregoing, the term "independent legal counsel" shall not
include any person who, under the applicable standards of professional conduct
then prevailing under the law of the State of Colorado, would have a conflict of
interest in representing either the Company or the Indemnified Party in an
action to determine the Indemnified Party's rights under this Agreement. The
Company agrees to pay the reasonable fees of the independent legal counsel
referenced above and to indemnify fully such independent legal counsel against
any and all expenses (including without limitation attorneys' fees),
liabilities, losses and damages arising out of or relating to this Agreement or
its engagement pursuant to this Agreement.
10. NOTICE TO THE COMPANY: Indemnified Party shall notify the
Secretary of the Company in writing of any matter for which Indemnified Party
intends to seek indemnification hereunder as soon as reasonably practicable
following the receipt by Indemnified Party of written notice thereof; provided,
--------
however, that delay in so notifying the Company shall not constitute a waiver or
release by Indemnified Party of rights hereunder.
11. COUNSEL FOR PROCEEDING; SETTLEMENTS: In the event of any proceeding in
which Indemnified Party is a party or is involved and which may give rise to a
right of indemnification hereunder, the Company shall have the right to retain
counsel, satisfactory to Indemnified Party in his or her discretion, to
represent Indemnified Party and any others the Company may designate in such
proceeding. In any such proceeding, Indemnified Party shall have the right to
retain Indemnified Party's own counsel, but the fees and expenses of such
counsel shall be at the expense of Indemnified
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Party unless (a) the retention of such counsel has been specifically authorized
by the Company; (b) representation of Indemnified Party and another party by the
same counsel would be inappropriate, in the reasonable judgment of Indemnified
Party, due to actual or potential differing interests between them; (c) the
counsel retained by the Company and satisfactory to Indemnified Party has
advised Indemnified Party, in writing, that such counsel's representation of
Indemnified Party would be likely to involve such counsel in representing
differing interests which could adversely affect either the judgment or loyalty
of such counsel to Indemnified Party, whether it be a conflicting, inconsistent,
diverse or other interest; or (d) the Company shall fail to retain counsel for
Indemnified Party in such proceeding. Notwithstanding the foregoing, if an
insurance carrier has supplied directors' and officers' liability insurance
covering a proceeding and is entitled to retain counsel for the defense of such
proceeding, then the insurance carrier shall retain counsel to conduct the
defense of such proceeding unless Indemnified Party and the Company concur in
writing that the insurance carrier's doing so is undesirable. The Company shall
not be liable under this Agreement for any settlement of any proceeding effected
without its written consent. The Company shall not settle any proceeding in any
manner which would impose any penalty or limitation on Indemnified Party without
Indemnified Party's written consent. Consent to a proposed settlement of any
proceeding shall not be unreasonably withheld by either the Company or
Indemnified Party.
12. ENFORCEMENT; ACTION TO DETERMINE COMPLIANCE WITH STANDARD OF CONDUCT:
The Company acknowledges that Indemnified Party is relying upon this Agreement
in serving as a director, officer or manager of the Company. If a claim for
indemnification or advancement of expenses is not paid in full by the Company
within sixty days, or within twenty days in the case of a claim for advancement
of expenses, after a written claim has been received from Indemnified Party by
the Company, Indemnified Party may at any time bring a legal action against the
Company to recover the unpaid amount of the claim. Indemnified Party shall also
be entitled to be paid by the Company all reasonable fees and expenses
(including without limitation fees of counsel) in bringing and prosecuting such
claim, unless as a part of the legal action concerning such claim the court
having jurisdiction over the action determines that each of the material
assertions made by Indemnified Party as a basis for the action was not made in
good faith or was frivolous. Neither the failure of the Reviewing Party or the
Company (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the Indemnified Party is proper in the
circumstances nor an actual determination by the Reviewing Party or the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) that the Indemnified Party is not entitled to indemnification
shall be a defense to the action, be admissible as evidence, or create a
presumption that the Indemnified Party is not so entitled. Any such action shall
be de novo, and the Indemnified Party shall not be prejudiced by reason of any
such adverse determination. If an action is brought pursuant to this Section, a
final nonappealable order in such action shall constitute the ultimate
determination of the Indemnified Party's right to indemnification. Whether or
not Indemnified Party has met any applicable standard of conduct, the Court in
such suit may order indemnification or the advancement of expenses as the Court
deems proper (subject to any express limitation of the Corporation Law).
Further, the Company shall indemnify Indemnified Party from and against any and
all expenses (including without limitation attorneys' fees) and, if requested by
Indemnified Party, shall (within twenty days of such request) advance such
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expenses to Indemnified Party, which are incurred by Indemnified Party in
connection with any claim asserted against or legal action brought by
Indemnified Party for recovery under any directors' and officers' liability
insurance policies maintained by the Company, regardless of whether Indemnified
Party is unsuccessful in whole or in part in such claim or suit.
13. PROCEEDINGS BY INDEMNIFIED PARTY: Notwithstanding other provisions of
this Agreement to the contrary, prior to a Change in Control, the Company shall
not indemnify Indemnified Party and advance expenses to Indemnified Party in
connection with any proceeding (or part thereof) initiated by Indemnified Party
against the Company or any director, officer or manager of the Company unless
such proceeding (or part thereof) was authorized by the Board of Directors of
the Company or such other committee, body or person(s) designated or appointed
by the Board of Directors, or a committee of the Board of Directors, of the
Company, as permitted by the Corporation Law.
14. ESTABLISHMENT OF TRUST: In the event of a Potential Change in Control,
the Company shall, upon written request by Indemnified Party, create a trust for
the benefit of Indemnified Party (and possibly others as described below) and
from time to time upon written request of Indemnified Party shall fund such
trust in an amount sufficient to satisfy any and all expenses and other amounts
for which indemnification may be sought under this Agreement and which at the
time of each such request are reasonably anticipated to be incurred, are
proposed to be paid by Indemnified Party, have actually been paid by Indemnified
Party or have actually been claimed in a proceeding. The amount or amounts to be
deposited in the trust pursuant to the foregoing funding obligation shall be
determined by mutual agreement of the Company and Indemnified Party or, if they
are unable to reach such mutual agreement within ten days after any such request
by Indemnified Party for funding, by a Reviewing Party who is selected in
accordance with Section 9 of this Agreement as if a Change of Control had
occurred. In determining any such amounts, the parties or the Reviewing Party
(as the case may be) shall take into account the availability of any amounts
under any directors' and officers' liability insurance. At the Company's
discretion, the trust created by the Company at the request of the Indemnified
Party pursuant to the foregoing obligation may also be for the benefit of other
existing or former officers, directors or employees of the Company with respect
to indemnification and advancement of expenses, and may be a trust previously
created and existing at the time for the benefit of any such persons. If and to
the extent authorized by the parties or Reviewing Party, as the case may be,
when determining the amounts to be deposited in the trust, the trust may
commingle and combine into one or more funds amounts held for Indemnified Person
and such other persons. The terms of the trust shall provide that upon a Change
in Control (i) the trust shall not be revoked or the principal thereof invaded,
without the written consent of Indemnified Party, (ii) the trustee shall advance
within twenty days of a request by Indemnified Party, any and all expenses to
Indemnified Party (and Indemnified Party hereby agrees to reimburse the trust
under the circumstances under which Indemnified Party would be required to
reimburse the Company under Section 7 of this Agreement), (iii) the trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the trustee shall pay promptly (but in any event within
sixty days after a written claim for indemnification) to Indemnified Party all
amounts for which the Indemnified Party is entitled to indemnification pursuant
to this Agreement; and (v) all unexpended funds in such trust shall revert to
the Company upon a final determination by the
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Reviewing Party or a court of competent jurisdiction, as the case may be, that
Indemnified Party has been fully indemnified under the terms of this Agreement.
The trustee shall be an individual or entity chosen by Indemnified Party and
approved by the Company (whose approval shall not be unreasonably withheld). All
income earned on the assets held in the trust shall be reported as income by the
Company for federal, state, local and foreign tax purposes. The Company shall
pay all costs of establishing and maintaining the trust and shall indemnify the
trustee against any and all expenses (including without limitation attorneys'
fees), liabilities, losses and damages arising out of or relating to this
Agreement or the establishment and maintenance of the trust. Nothing in this
Section 14 shall relieve the Company of any of its obligations under this
Agreement.
15. NONEXCLUSIVITY: The rights of Indemnified Party for indemnification
and advancement of expenses under this Agreement shall not be deemed exclusive
of, or in limitation of, any rights to which Indemnified Party may be entitled
under Colorado law, the Company's Articles of Incorporation or Bylaws, vote of
shareholders or otherwise.
16. MISCELLANEOUS:
a. Effectiveness. This Agreement is effective for, and shall
apply to, (i) any claim which is asserted or threatened before, on or after the
date of this Agreement but for which no action, suit or proceeding has actually
been brought prior to the date of this Agreement and (ii) any action, suit or
proceeding which is threatened before, on or after the date of this Agreement
but which is not pending prior to the date of this Agreement. Thus, this
Agreement shall not apply to any action, suit or proceeding which has actually
been brought before the date of this Agreement. So long as the foregoing
standard of effectiveness has been satisfied, this Agreement shall be effective
for and shall be applied to acts or omissions prior to, on or after the date of
this Agreement.
b. Survival; Continuation. The rights of Indemnified Party
hereunder shall inure to the benefit of the Indemnified Party (even after
Indemnified Party ceases to be a director, officer or manager), Indemnified
Party's personal representative, heirs, executors, administrators and
beneficiaries; and this Agreement shall be binding upon the Company, its
successors and assigns. The rights of Indemnified Party under this Agreement
shall continue so long as Indemnified Party may be subject to any possible
proceeding because of the fact that Indemnified Party was a director, officer or
manager of the Company. If the Company sells, leases, exchanges or otherwise
disposes of, in a single transaction or series of related transactions, all or
substantially all of its property and assets, the Company shall, as a condition
precedent to such transaction, cause effective provision to be made so that the
person or entity acquiring such property and assets shall become bound by and
replace the Company under this Agreement.
c. Partial Indemnification. If the Indemnified Party is
entitled to indemnification by the Company for some or a portion of expenses,
judgments, penalties, fines or settlement amounts actually incurred by the
Indemnified Party in a proceeding but not, however, for the total amount
thereof, the Company shall nevertheless indemnify the Indemnified Party for the
portion of such expenses, judgments, penalties, fines or settlement amounts to
which the Indemnified Party is entitled.
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d. No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any proceeding
against the Indemnified Party to the extent the Indemnified Party has otherwise
actually received payment (under any insurance policy, bylaw or otherwise) of
the amounts otherwise subject to indemnification under this Agreement.
e. Governing Law. This Agreement shall be governed by the laws
of the State of Colorado, without regard to the conflict of laws principles
thereof.
f. Severability. If any provision of this Agreement shall be
held to be prohibited by or invalid under applicable law, such provision shall
be deemed amended to accomplish the objectives of the provision as originally
written to the full extent permitted by law and all other provisions shall
remain in full force and effect.
g. Amendment. No amendment, termination or cancellation of this
Agreement shall be effective unless in writing signed by the Company and
Indemnified Party.
h. Subrogation. In the event of payment under this Agreement
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnified Party, who shall execute all papers required
and shall do everything that may be necessary to secure such rights, including
the execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
i. Headings. The headings in this Agreement are for convenience
only and are not to be considered in construing this Agreement.
j. Counterparts. This Agreement may be executed in
counterparts, both of which shall be deemed an original, and together shall
constitute one document.
The parties have executed this Agreement as of the Effective Date first
above stated.
BIRNER DENTAL MANAGEMENT
SERVICES INC. INDEMNIFIED PARTY
By: By:
------------------------------- ------------------------------
Name: Name:
-------------------------- -------------------------
Title: Title:
------------------------- ------------------------
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EXHIBIT 10.2
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COHIG & ASSOCIATES, INC.
WARRANT AGREEMENT
Dated as of December 27, 1996
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of December 27, 1996, is
made and entered into by and between BIRNER DENTAL MANAGEMENT SERVICES, Inc., a
Colorado corporation (the "Company"), and COHIG & ASSOCIATES, INC. ("Cohig").
The Company agrees to issue and sell, and Cohig agrees to purchase, for the
price of $100, warrants to purchase up to an aggregate of 36,200 shares
("Shares") of the Company's Common Stock, subject to the terms and conditions
set forth below.
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and Cohig, for value received, hereby agree as follows:
SECTION 1. DEFINITIONS.
The following terms used in this agreement shall have the following
meanings (unless otherwise expressly provided herein):
1.1. The "Act." The Securities Act of 1933, as amended.
1.2. The "Commission." The Securities and Exchange Commission.
1.3. The "Company." Birner Dental Management Services, Inc.
1.4. "Common Stock." The Company's Common Stock.
1.5. "Current Market Price." The Current Market Price shall be determined
as follows:
(i) if the security at issue is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or
quoted on the National Market System of the National Association of
Securities Dealers Automated Quotation System, Inc. ("NASDAQ") quotation
service, the current value shall be the last reported sale price of that
security on such exchange or system on the last business day prior to the
date of the applicable exercise of this Warrant or, if no such sale is made
on such day, the average of the highest closing bid and lowest asked price
for such day on such exchange or system; or
(ii) if the security at issue is not so listed or quoted or admitted
to unlisted trading privileges, the current market value shall be the
average of the last reported highest bid and lowest asked prices quoted on
NASDAQ or, if not so quoted, then by the National Quotation Bureau, Inc. on
the last business day prior to the day of the applicable exercise of this
Warrant; or
(iii) if the security at issue is not so listed or quoted or admitted
to unlisted trading privileges and bid and asked prices are not reported,
the current market value shall be determined in such reasonable manner as
may be prescribed from time to time by the Board of Directors of the
Company, subject to the objection and arbitration procedure as described in
Section (6) below.
1.6. "Exercise Date." December 27, 1996.
1.7. "Exercise Price." $5.00 per Share, as modified in accordance with
Section (4), below.
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1.8. "Expiration Date." December 27, 2001.
1.9. "Holder" or "Warrantholder." Cohig & Associates, Inc., and any
valid transferee thereof pursuant to Section (3.1) below.
1.10. "NASD." The National Association of Securities Dealers, Inc.
1.11. "NASDAQ." The automated quotation system operated by NASDAQ, Inc.
1.12. "Termination of Business." Any sale, lease or exchange of all, or
substantially all, of the Company's assets or business or any dissolution,
liquidation or winding up of the Company.
1.13. "Warrants." The warrants issued in accordance with the terms of
this Agreement and any Warrants issued in substitution for or replacement of
such warrants, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.14. "Warrant Securities." The Common Stock purchasable upon exercise
of a Warrant including the Common Stock underlying unexercised portions of a
Warrant.
1.15. "1995 Warrant Agreement." The Warrant Agreement dated October 3,
1995, between the Company and Cohig & Associates, Inc.
1.16. "1995 Warrant Securities." The Common Stock purchasable upon
exercise of the Warrants issued pursuant to the 1995 Warrant Agreement, as
defined in the 1995 Warrant Agreement.
1.17. "1996 Warrant Agreement." The Warrant Agreement dated May 29,
1996, between the Company and Cohig & Associates, Inc.
1.18. "1996 Warrant Securities." The Common Stock purchasable upon
exercise of the Warrants issued pursuant to the 1996 Warrant Agreement, as
defined in the 1996 Warrant Agreement.
SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANT.
2.1. Exercise of Warrant. Subject to the terms of this Agreement, the
Warrantholder shall have the right, at any time during the period commencing at
9:00 a.m., Denver Time, on the Exercise Date and ending at 5:00 p.m., Denver
Time, on the Expiration Date, to purchase from the Company up to the number of
fully paid and nonassessable Shares to which the Warrantholder may at the time
be entitled to purchase pursuant to this Agreement, upon surrender to the
Company, at its principal office, of the certificate evidencing the Warrants to
be exercised, together with the purchase form on the reverse thereof, or the
Cashless Exercise Form in the case of a cashless exercise pursuant to Section
(2.2) herein, duly filled in and signed, and upon payment to the Company of the
Exercise Price for the number of Shares in respect of which such Warrants are
then exercised, but in no event for less than 100 Shares (unless fewer than an
aggregate of 100 shares are then purchasable under all outstanding Warrants held
by a Warrantholder).
2.2. Payment of Exercise Price. Payment of the aggregate Exercise Price
shall be made
(i) in cash or by check, or any combination thereof; or
(ii) upon the request of the Warrantholder and the acceptance by
the Company, which acceptance may be withheld by the Company in its sole
discretion, by means of a "Cashless Exercise." In the event of a
Cashless Exercise, the Warrantholder shall exchange its Warrant for such
number of shares of Common Stock determined by multiplying the number of
Shares by a fraction, the numerator of which shall be the difference
between the then-current market price per
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share of Common Stock and the Exercise Price, and the denominator of
which shall be the then-current market price per share of Common Stock.
For purposes of this Section (2.2) only, the "then current market price
per share of Common Stock" at any date shall be deemed to be the average
of the daily closing prices for 20 consecutive trading days commencing
the 21st trading day before such date. The closing price for each day
shall be the last sales price regular way or, in case no such reported
sales take place on such day, the average of the last reported bid and
asked prices regular way, in either case on the principal national
securities exchange on which the Common Stock is admitted to trading or
listed or, if not listed or admitted to trading on any such exchange,
the representative closing bid price as reported by Nasdaq or another
similar organization if Nasdaq is no longer reporting such information
or, if no such price is available, the fair market price as reasonably
determined by the Board of Directors.
2.3. Issuance of Shares. Upon such surrender of the Warrants and payment
of such Exercise Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Warrantholder and in such name or names as the Warrantholder may designate, a
certificate or certificates for the number of full Shares so purchased upon the
exercise of the Warrant, together with cash, as provided in Section (12) hereof,
in respect of any fractional Shares otherwise issuable upon such surrender. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become the holder of
record of such securities as of the date of surrender of the warrants and be
divided or combined, upon request to the Company by the Warrantholder, into a
certificate or certificates representing the right to purchase the same
aggregate number of Shares.
SECTION 3. TRANSFERABILITY AND FORM OF WARRANT.
3.1. Limitation on Transfer. This Warrant may not be sold, transferred,
assigned, pledged or hypothecated until the Exercise Date, except in compliance
with Section (8) hereof. Any assignment or transfer of this Warrant shall be
made by the presentation and surrender of this Warrant to the Company at its
principal office or the office of its transfer agent, if any, accompanied by a
duly executed Assignment Form, in the form attached to and by this reference
incorporated in this Warrant as Exhibit B. Upon the presentation and surrender
of these items to the Company, the Company, at its sole expense, shall execute
and deliver to the new Holder or Holders a new Warrant or Warrants, containing
the same terms and conditions as this Warrant, in the name of the new Holder or
Holders as named in the Assignment Form, and this Warrant shall at that time be
canceled.
3.2. Exchange of Certificate. Any Warrant certificate may be exchanged
for another certificate or certificates entitling the Warrantholder to purchase
a like aggregate number of Shares as the certificate or certificates surrendered
then entitled such Warrantholder to purchase. Any Warrantholder desiring to
exchange a Warrant certificate shall make such request in writing delivered to
the Company, and shall surrender, properly endorsed, with signatures guaranteed,
the certificate evidencing the Warrant to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
certificate as so requested.
3.3. Mutilated, Lost, Stolen, or Destroyed Certificate. In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrantholder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant certificate
or certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount, at the applicant's cost. Applicants for such
substitute Warrant certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
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3.4. Form of Certificate. The text of the Warrant and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by its
President or by a Vice President and attested to by its Secretary or an
Assistant Secretary. A Warrant bearing the signature of an individual who was at
any time the proper officer of the Company shall bind the Company,
notwithstanding that such individual shall have ceased to hold such officer
prior to the delivery of such Warrant or did not hold such office on the date of
this Agreement.
The Warrants shall be dated as of the date of signature thereof by
the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
SECTION 4. ADJUSTMENT OF NUMBER SHARES.
The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
4.1. Adjustments. The number of Shares purchasable upon the exercise of
the Warrants shall be subject to adjustments as follows:
(a) In case the Company shall (i) pay a dividend in Common Stock to
Holders of Common Stock, (ii) make a distribution in shares of Common
Stock to holders of Common Stock, (iii) subdivide its outstanding Common
Stock into a greater number of shares, or (iv) combine its outstanding
Common Stock into a smaller number of shares, the Exercise Price in
effect immediately prior thereto shall be adjusted so that the holder of
any Warrant thereafter surrendered for exercise shall be entitled to
receive the number of Shares of Common Stock which it would have owned
had such Warrant been exercised immediately prior to the happening of
such event. An adjustment made pursuant to this subsection (4.1.(a))
shall become effective immediately after the record date in the case of
a dividend or distribution in shares and shall become effective
immediately after the effective date in the case of subdivision or
combination.
(b) No adjustment in the number of Shares purchasable pursuant to
the Warrants shall be required unless such adjustment would require an
increase or decrease of at least one percent in the number of Shares
then purchasable upon the exercise of the Warrants or, if the Warrants
are not then exercisable, the number of Shares purchasable upon the
exercise of the Warrants on the first date thereafter that the Warrants
become exercisable; provided, however, that any adjustments which by
reason of this subsection (4.1(b)) are not required to be made
immediately shall be carried forward and taken into account in any
subsequent adjustment.
(c) Whenever the number of Shares purchasable upon the exercise of
the Warrant is adjusted, as herein provided, the Exercise Price payable
upon exercise of the 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 the Warrant immediately prior to such adjustment,
and of which the denominator shall be the number of Warrant Shares so
purchasable immediately thereafter.
(d) Whenever the number of Shares purchasable upon exercise of the
Warrants is adjusted as herein provided, the Company shall cause to be
promptly mailed to the Warrantholder by first class mail, postage
prepaid, notice of such adjustment and a certificate of the chief
financial officer of the Company setting forth the number of Shares
purchasable upon the exercise of the Warrants after such adjustment, a
brief statement of the facts requiring such adjustment and the
computation by which such adjustment was made.
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(e) For the purpose of this Section (4.1), the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common
Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any
time, as a result of an adjustment made pursuant to this Section (4),
the Warrantholder shall become entitled to purchase any securities of
the Company other than Common Stock, (y) if the Warrantholder's right to
purchase is on any other basis than that available to all holders of the
Company's Common Stock, the Company shall obtain an opinion of an
independent investment banking firm valuing such other securities and
(z) thereafter the number of such other securities so purchasable upon
exercise of the Warrants shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Shares contained in this Section (4).
(f) Upon the expiration of any rights, options, warrants, or
conversion privileges, if such shall have not been exercised, the number
of Shares purchasable upon exercise of the Warrants, to the extent the
Warrants have not then been exercised, shall, upon such expiration, be
readjusted and shall thereafter be such as they would have been had they
been originally adjusted (or had the original adjustment not been
required, as the case may be) on the basis of (i) the fact that the only
shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights, options,
warrants, or conversion privileges, and (ii) the fact that such shares
of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants, or
conversion privileges whether or not exercised; provided, however, that
no such readjustment shall have the effect of decreasing the number of
Shares purchasable upon exercise of the Warrants by an amount in excess
of the amount of the adjustment initially made in respect of the
issuance, sale, or grant of such rights, options, warrants, or
conversion rights.
4.2. No Adjustment for Dividends. Except as provided in Section (4.1),
no adjustment in respect of any dividends or distributions out of earnings shall
be made during the term of the Warrants or upon the exercise of the Warrants.
4.3. No Adjustment in Certain Cases. No adjustments shall be made
pursuant to Section (4) hereof in connection with the issuance of the Common
Stock upon exercise of the Warrants. No adjustments shall be made pursuant to
Section (4) hereof in connection with the exercise of Warrants presently
outstanding; or the issuance of shares upon conversion of the Company's 9%
Convertible Subordinated Debentures; or the grant or exercise of options to
purchase, or the issuance of shares upon exercise of such options, under the
Company's stock option plan for directors, employees, and consultants. No
adjustment shall be made pursuant to Section 4.4(b) or (c) hereof unless: (i)
the Current Market Price of the securities received in the merger or
consolidation as of its Effective Date pursuant to Section 4.4(b); or (ii) the
value of the consideration that would be received by a Warrantholder pursuant to
Section 4.4(c) if he exercised his Warrants immediately prior to the sale or
conveyance (and assuming the exercise of all outstanding Warrants and conversion
of all outstanding convertible stock that have an exercise price or conversion
price equal to or less than the Exercise Price); is less than the Exercise
Price. If the consideration to be received is other than cash, the value of the
consideration to be received shall be the Current Market Price as of the
Effective Date of such sale or conveyance of securities received; or the fair
market value of other assets received as determined by an independent appraisal
of such assets.
4.4. Effect of Reclassification, Consolidation, Merger, or Sale on
Exercise Privilege. If any of the following shall occur, namely: (a) any
reclassification or change of outstanding shares of Common Stock issuable upon
exercise of Warrants (other than a change in par value, or from par value to no
par value, or from no par value to par value, or as a result of a subdivision or
combination), (b) any consolidation or merger to which the Company is a party
other than a merger in which the Company is the continuing corporation and which
does not result in any reclassification of, or change (other than a change in
name, or par value, or from
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par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination) in, outstanding shares of Common Stock, or (c) any
sale or conveyance, of all or substantially all of the property or business of
the Company as an entirety, then the Company, or such successor or purchasing
corporation, as the case may be, shall, as a condition precedent to such
reclassification, change, consolidation, merger, sale or conveyance, execute and
deliver to Cohig as representative of each holder of a Warrant then unexercised
and outstanding, an amendment to this Agreement providing that the
Warrantholders shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action, to receive, upon exercise of
the Warrants, the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock deliverable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Such
amendment shall provide for the adjustments of the Exercise Price which shall be
as nearly equivalent as may be practicable to the adjustments of the Exercise
Price provided for in this Section 4. If, in the case of any such
reclassification, change, consolidation, merger, sale or conveyance, the stock
or other securities and property (including cash) receivable thereupon by a
holder of Common Stock includes shares of stock or other securities and property
of a corporation other than the successor or purchasing corporation, as the case
may be, in such consolidation, merger, sale or conveyance, then such amendment
shall also be executed by such other corporation and shall contain such
additional provisions to protect the interests of the Warrantholders as the
Board of Directors of the Company shall reasonably consider necessary by reason
of the foregoing. The provision of this Section 4.4 shall similarly apply to
successive consolidations, mergers, sales, or conveyances.
In the event the Company shall execute an amendment to this Agreement as
provided in this subsection (4.4), the Company shall promptly send each
Warrantholder an Officers' Certificate briefly stating the reasons for the
amendment, the kind or amount of shares of stock or securities or property
(including cash) receivable by Warrantholders upon exercise of their Warrants
after any such reclassification, change, consolidation, merger, sale or
conveyance, any adjustments to be made with respect thereto, and that all
conditions precedent have been complied with.
4.5. Par Value of Shares of Common Stock. Before taking any action which
would cause an adjustment effectively reducing the portion of the Exercise Price
allocable to each Share below the par value per share of the Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Common Stock
upon exercise of the Warrants.
4.6. Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section (4), and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section (4).
4.7. Statement on Warrant Certificates. Irrespective of any adjustments in
the number of securities issuable upon exercise of the Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time in
its sole discretion (which shall be conclusive), 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 certificate thereafter issued, whether upon
registration of transfer of, or in exchange or substitution for, an outstanding
Warrant certificate, may be in the form so changed.
4.8. Treasury Stock. For purposes of this Section (4), shares of Common
Stock owned or held at any relevant time by, or for the account of, the Company,
in its treasury or otherwise, shall not be deemed to be outstanding for purposes
of the calculations and adjustments described.
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SECTION 5. NOTICE TO HOLDERS.
If, prior to the expiration of this Warrant either by its terms or by
its exercise in full, any of the following shall occur:
(i) the Company shall declare a dividend or authorize any
other distribution on its Common Stock; or
(ii) the Company shall authorize the granting to the
shareholders of its Common Stock of rights to subscribe for or purchase
any securities or any other similar rights; or
(iii) any reclassification, reorganization or similar change of
the Common Stock, or any consolidation or merger to which the Company is
a party, or the sale, lease, or exchange of any significant portion of
the assets of the Company; or
(iv) the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) any purchase, retirement or redemption by the Company of
its Common Stock;
then, and in any such case, the Company shall deliver to the Holder or Holders
written notice thereof at least 10 days prior to the earliest applicable date
specified below with respect to which notice is to be given, which notice shall
state the following:
(x) the date on which a record is to be taken for the purpose
of such dividend, distribution or rights, or, if a record is not to be
taken, the date as of which the shareholders of Common Stock of record
to be entitled to such dividend, distribution or rights are to be
determined;
(y) the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution, liquidation, winding
up or purchase, retirement or redemption is expected to become
effective, and the date, if any, as of which the Company's shareholders
of Common Stock of record shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, sale, transfer,
dissolution, liquidation, winding up, purchase, retirement or
redemption; and
(z) if any matters referred to in the foregoing clauses (x)
and (y) are to be voted upon by shareholders of Common Stock, the date
as of which those shareholders to be entitled to vote are to be
determined.
SECTION 6. OFFICERS' CERTIFICATE.
Whenever the Exercise Price or the aggregate number of Warrant
Securities purchasable pursuant to this Warrant shall be adjusted as required by
the provisions of Section (4) above, the Company shall promptly file with its
Secretary or an Assistant Secretary at its principal office, and with its
transfer agent, if any, an officers' certificate executed by the Company's
President and Secretary or Assistant Secretary, describing the adjustment and
setting forth, in reasonable detail, the facts requiring such adjustment and the
basis for and calculation of such adjustment in accordance with the provisions
of this Warrant. Each such officers' certificate shall be made available to the
Holder or Holders of this Warrant for inspection at all reasonable times, and
the Company, after each such adjustment, shall promptly deliver a copy of the
officers' certificate relating to that adjustment to the Holder or Holders of
this Warrant. The officers' certificate described in this Section (6) shall be
deemed to be conclusive as to the correctness of the adjustment reflected
therein if, and only if, no Holder of this Warrant delivers written notice to
the Company of an objection to the adjustment within 30 days after the officers'
certificate is delivered to the Holder or Holders of this Warrant. The Company
will make its books and records available for inspection and copying during
normal business hours by the Holder so as to permit a determination as to the
correctness of the adjustment. If
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written notice of an objection is delivered by a Holder to the Company and the
parties cannot reconcile the dispute, the Holder and the Company shall submit
the dispute to arbitration pursuant to the provisions of Section 19 below.
Failure to prepare or provide the officers' certificate shall not modify the
parties' rights hereunder.
SECTION 7. RESERVATION OF WARRANT SECURITIES.
There has been reserved, and the Company shall at all times keep
reserved so long as the Warrants remain outstanding, out of its authorized and
unissued Common Stock, such number of shares of Common Stock as shall be subject
to purchase under the Warrants. Every transfer agent for the Common Stock and
other securities of the Company issuable upon the exercise of the Warrants will
be irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every transfer agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants. The Company will supply every such transfer agent with
duly executed stock and other certificates, as appropriate, for such purpose and
will provide or otherwise make available any cash which may be payable as
provided in Section 12 hereof.
SECTION 8. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
8.1. Restrictions on Transfer. The Warrantholder agrees that prior to
making any disposition of the Warrants or the Shares, other than to officers of
Cohig, the Warrantholder shall give written notice to the Company describing
briefly the manner in which any such proposed disposition is to be made; and no
such disposition shall be made if the Company has notified the Warrantholder
that in the opinion of counsel a registration statement or other notification or
post-effective amendment thereto (hereinafter collectively a "Registration
Statement") under the Act is required with respect to such disposition and no
such Registration Statement has been filed by the Company with, and declared
effective, if necessary, by, the Commission.
8.2. Piggy-Back Registration Right. If at any time prior to the
Expiration Date the Company files a registration statement with the Commission
pursuant to the Act, or pursuant to any other act passed after the date of this
Agreement, which filing provides for the sale of securities by the Company to
the public, or files a Regulation A offering statement under the Act, the
Company shall offer to the Holder or Holders of this Warrant and the holders of
any Warrant Securities the opportunity to register or qualify the Warrant
Securities at the Company's sole expense, regardless of whether the Holder or
Holders of this Warrant or the holders of Warrant Securities or both may have
previously availed themselves of any of the registration rights described in
this Section (8); provided, however, that in the case of a Regulation A
offering, the opportunity to qualify shall be limited to the amount of the
available exemption after taking into account the securities that the Company
wishes to qualify. Notwithstanding anything to the contrary, this Section (8.2)
shall not be applicable to a registration statement registering securities
issued pursuant to an employee benefit plan or as to a transaction subject to
Rule 145 promulgated under the Act or which a form S-4 registration statement
could be used; nor shall it be applicable to the first underwritten registered
public offering of the Company.
The Company shall deliver written notice to the Holder or Holders of
this Warrant and to any holders of the Warrant Securities of its intention to
file a registration statement or Regulation A offering statement under the Act
at least 60 days prior to the filing of such registration statement or offering
statement, and the Holder or Holders and holders of Warrant Securities shall
have 30 days thereafter to request in writing that the Company register or
qualify the Warrant Securities or the Warrant Securities underlying the
unexercised portion of this Warrant in accordance with this Section (8.2). Upon
the delivery of such a written request within the specified time, the Company
shall be obligated to include in its contemplated registration statement or
offering statement all information necessary or advisable to register or qualify
the Warrant Securities or Warrant Securities underlying the unexercised portion
of this Warrant for a public offering, if the Company does file the contemplated
registration statement or offering statement; provided, however, that neither
the delivery of the notice by the Company nor the delivery of a request by a
Holder or by a holder of Warrant
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Securities shall in any way obligate the Company to file a registration
statement or offering statement. Furthermore, notwithstanding the filing of a
registration statement or offering statement, the Company may, at any time prior
to the effective date thereof, determine not to offer the securities to which
the registration statement or offering statement relates, other than the
Warrant, Warrant Securities and Warrant Securities underlying the unexercised
portion of this Warrant. Notwithstanding the foregoing, if, as a qualification
of any offering in any state or jurisdiction in which the Company (by vote of
its Board of Directors) or any underwriter determines in good faith that it
wishes to offer securities registered in the offering, it is required that
offering expenses be allocated in a manner different from that provided above,
then the offering expenses shall be allocated in whatever manner is most nearly
in compliance with the provisions set out above.
If the registration for which the Company gives notice is for a registered
public offering involving an underwriting, the Company shall so advise as part
of the written notice given pursuant to this Section. In such event, the right
of any Warrantholder or holder of Shares to registration pursuant to this
Section (8.2) shall be conditioned upon such holder's participation in such
underwriting, and the inclusion of Shares in the underwriting shall be limited
to the extent provided herein. All holders proposing to distribute their Shares
through such underwriting shall (together with the Company and the other holders
distributing their Shares through such underwriting) enter into an underwriting
agreement in customary form with the managing underwriter selected for such
underwriting by the Company. Notwithstanding any other provision of this
Section, if the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, such underwriter may
limit the amount of securities to be included in the registration and
underwriting by the holders of Company securities exercising "piggyback"
registration rights (including the Warrantholder and each holder of Warrants and
Shares). The Company shall so advise all such holders, and the number of shares
of such securities that may be included in the registration and underwriting
shall be allocated (a) first to investors who purchased securities in the
Company's private placement made pursuant to a Confidential Private Placement
Memorandum dated July 28, 1995; and (b) then if the limitation provides for
additional securities to be included, among all of the Warrantholders (including
the holders of the warrants pursuant to this Agreement and holders of warrants
issued pursuant to the 1995 and 1996 Warrant Agreement) in proportion, as nearly
as practicable, to the respective amounts of securities requested to be included
in such registration held by such holders at the time of filing the registration
statement, provided however, that no security holder other than one exercising a
demand registration right and other than as specifically referenced herein shall
have superior rights with respect to inclusion in a registration than those of
the Warrantholder and each holder of Warrants and Shares and if any party is
granted such superior rights hereafter the Warrantholder and each holder of
Warrants and Shares shall be deemed to be automatically granted similar rights.
The Company shall advise all such holders of any such limitations and of the
number or securities that may be included in the registration. Any securities
excluded or withdrawn from such underwriting shall not be transferred prior to
one hundred twenty (120) days after the effective date of the registration
statement relating thereto, or such shorter period of time as the underwriters
may require.
The Company shall comply with the requirements of this Section (8.2) and
the related requirements of Section (8.6) at its own expense. That expense shall
include, but not be limited to, legal, accounting, consulting, printing, federal
and state filing fees, NASD fees, out-of-pocket expenses incurred by counsel,
accountants and consultants retained by the Company, and miscellaneous expenses
directly related to the registration statement or offering statement and the
offering. However, this expense shall not include the portion of any
underwriting commissions, transfer taxes and the underwriter's accountable and
nonaccountable expense allowances attributable to the offer and sale of the
Warrant, Warrant Securities and the Warrant Securities underlying the
unexercised portion of this Warrant, or the fees and expenses of any legal
counsel retained by a Holder, all of which expenses shall be borne by the Holder
or Holders of this Warrant and the holders of the Warrant Securities registered
or qualified.
8.3. Inclusion of Information. In the event that the Company registers or
qualifies the Warrant Securities pursuant to Section (8.2) above, the Company
shall include in the registration statement or qualification, and the prospectus
included therein, all information and materials necessary or advisable to comply
with the applicable statutes and regulations so as to permit the public sale of
the Warrant Securities or the Warrant Securities underlying the unexercised
portion of this Warrant. As used in Section (8.2),
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reference to the Company's securities shall include, but not be limited to, any
class or type of the Company's securities or the securities of any of the
Company's subsidiaries or affiliates.
8.4. Registration Statement Filed by Holder. In addition to the
registration rights described in Section (8.2) above, at any time that the
Company has securities registered under the Securities Exchange Act of 1934,
upon the written request of Holders of warrants and holders of Warrant
Securities representing at least 70% of the aggregate number of Warrant
Securities and 1995 and 1996 Warrant Securities issued pursuant to this Warrant
Agreement and pursuant to the 1995 and 1996 Warrant Agreements, the Company, as
promptly as possible after delivery of such request, shall cooperate with the
requesting Holders or holders in preparing and signing any registration
statement or offering statement that the Holders or holders may desire to file
in order to sell or transfer the Warrant and Warrant Securities. Within 10 days
after the delivery of the written request described above, the Company shall
deliver written notice to all other Holders of this Warrant and holders of
Warrant Securities, if any, advising them that the Company is proceeding with a
registration statement or offering statement and that their Warrant and Warrant
Securities will be included therein if they so desire and agree to pay their pro
rata share of the cost of registration or qualification and provided that the
Holder or holder delivers written notice to the Company of their desire to be
included and their agreement to pay their pro rata share of the cost within 30
days after the delivery of the Company's notice to them. The Company will supply
all information necessary or advisable for any such registration statements or
offering statements; provided, however, that all the costs and expenses of such
registration statements or offering statements shall be borne, in a manner
proportionate to the number of securities for which they indicate a desire to
register, by the Holders of this Warrant and the holders of Warrant Securities
who seek the registration or qualification of their Warrant, Warrant Securities
or Warrant Securities underlying the unexercised portion of their Warrant. In
determining the amount of costs and expenses to be borne by those Holders or
holders, the only costs and expenses of the Company to be included are the
additional costs and expenses that would not have otherwise been incurred by the
Company if those Holders or holders had not desired to file a registration
statement or offering statement. As an example, and without limitation, audit
fees would not be charged to those Holders or holders if or to the extent that
the Company would have incurred the same audit fees for its year-end or other
use in the absence of the registration statement or offering statement. The
Holders or holders responsible for the costs and expenses shall reimburse the
Company for those reimbursable costs and expenses reasonably incurred by the
Company within 30 days after the initial effective date of the registration
statement or qualification at issue.
No other securities of the Company of any type shall be included in, be the
subject of, or be publicly offered pursuant to any registration statement or
offering statement filed within 180 days following the latest effective date of
any registration statement or offering statement filed pursuant to this Section
(8.4) unless (i) the Company obtains the prior written consent of Cohig upon
such terms and conditions as Cohig in its sole discretion may deem desirable,
and (ii) the owners or holders of those other securities, including, without
limitation, the Company, agree to bear an equitable portion, reasonably
acceptable to Cohig of the costs and expenses of the registration statement or
offering statement filed pursuant to this Section (8.4).
8.5. Payment of Exercise Price from Proceeds. In the event that any such
Registration Statement is utilized for a public offering of any of the Shares to
be received upon exercise of the Warrants pursuant to this Section (8), the
Warrantholder may elect to pay the exercise price of the Warrants to the Company
out of the proceeds of the sale of the Shares pursuant to the Registration
Statement concurrently with the closing of such sale of the Shares.
8.6. Condition of Company's Obligations. As to each registration statement
or offering statement, the Company's obligations contained in this Section (8)
shall be conditioned upon a timely receipt by the Company in writing of the
following:
(i) Information as to the terms of the contemplated public offering
furnished by and on behalf of each Holder or holder intending to make a
public distribution of the Warrant Securities or Warrant Securities
underlying the unexercised portion of the Warrant; and
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(ii) Such other information as the Company may reasonably require
from such Holders or holders, or any underwriter for any of them, for inclusion
in the registration statement or offering statement
8.7. Additional Requirements. In each instance in which the Company shall
take any action to register or qualify the Warrant Securities or the Warrant
Securities underlying the unexercised portion of this Warrant, if any, pursuant
to this Section (8), the Company shall do the following:
(i) supply to Cohig, as the representative of the Holders of the
Warrant and the holders of Warrant Securities whose Warrant Securities are being
registered or qualified, two (2) conformed copies of each registration statement
or offering statement, and all amendments thereto, and a reasonable number of
copies of the preliminary, final or other prospectus or offering circular, all
prepared in conformity with the requirements of the Act and the rules and
regulations promulgated thereunder, and such other documents as Cohig shall
reasonably request;
(ii) cooperate with respect to (A) all necessary or advisable
actions relating to the preparation and the filing of any registration
statements or offering statements, and all amendments thereto, arising from the
provisions of this Section (8), (B) all reasonable efforts to establish an
exemption from the provisions of the Act or any other federal or state
securities statutes, (C) all necessary or advisable actions to register or
qualify the public offering at issue pursuant to federal securities statutes and
the state "blue sky" securities statutes of each jurisdiction that the Holders
of the Warrant or holders of Warrant Securities shall reasonably request, and
(D) all other necessary or advisable actions to enable the Holders of the
Warrant Securities to complete the contemplated disposition of their securities
in each reasonably requested jurisdiction; and
(iii) keep all registration statements or offering statements to
which this Section (8) applies, and all amendments thereto, effective under the
Act for a period of at least 9 months after their initial effective date and
cooperate with respect to all necessary or advisable actions to permit the
completion of the public sale or other disposition of the securities subject to
a registration statement or offering statement.
8.8. Cohig as Representative. For purposes of subsection (8.7(i)) above, by
the receipt of this Warrant or any Warrant Securities, all Holders and all
holders of Warrant Securities acknowledge and agree that Cohig is and shall be
their representative.
8.9. Survival. The Company's obligations described in this Section (8)
shall continue in full force and effect regardless of the exercise, surrender,
cancellation or expiration of this Warrant.
SECTION 9. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes, if any, attributable to
the initial issuance of the Warrants or the securities comprising the Shares;
provided, however, the Company shall not be required to pay any tax which may be
payable in respect of any transfer of the Warrants or the securities comprising
the Shares.
SECTION 10. INDEMNIFICATION AND CONTRIBUTION.
10.1. Indemnification By Company. In the event of the filing of any
Registration Statement with respect to the Warrant Shares pursuant to Section
(8) hereof, the Company agrees to indemnify and hold harmless the Warrantholder
or any holder of Warrant Shares and each person, if any, who controls the
Warrantholder or any holder of Warrant Shares within the meaning of the Act,
against any and all loss, claim, damage or liability, joint or several (which
shall, for all purposes of this Agreement include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which such
Warrantholder or any holder
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of Warrant Shares may become subject, under the Act or otherwise, insofar as
such loss, claim, damage, or liability (or action with respect thereto) arises
out of or is based upon (a) any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus, or the Final Prospectus or any amendment
or supplement thereto; or (b) the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus or
the Final Prospectus or any amendment or supplement thereto a material fact
required to be stated therein or necessary to make the statements therein not
misleading; except that the Company shall not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by such Warrantholder or the holder
of such Warrant Shares specifically for use in the preparation of the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus and
the Final Prospectus or any amendment or supplement thereto. This indemnity will
be in addition to any liability which the Company may otherwise have.
10.2. Indemnification By Warrantholders. The Warrantholders and the holders
of Warrant Shares agree that they, severally, but not jointly, shall indemnify
and hold harmless the Company, each other person referred to in subparts (1),
(2) and (3) of Section 11(a) of the Act in respect of the Registration
Statement and each person, if any, who controls the Company within the meaning
of the Act, against any and all loss, claim, damage or liability, joint or
several (which shall, for all purposes of this Agreement include, but not be
limited to, all costs of defense and investigation and all attorneys' fees), to
which the Company may become subject under the Act or otherwise, insofar as such
loss, claim, damage, liability (or action in respect thereto) arises out of or
are based upon (a) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or the Final Prospectus or any amendment or
supplement thereto; or (b) the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus or
the Final Prospectus or any amendment or supplement thereto a material fact
required to be stated therein or necessary to make the statements therein not
misleading; except that such indemnification shall be available in each such
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon information and in conformity with written information furnished to the
Company by the Warrantholder or the holder of Warrant Shares specifically for
use in the preparation thereof. This indemnity will be in addition to any
liability which such Warrantholder or holder of Warrant Shares may otherwise
have.
10.3. Right to Provide Defense. Promptly after receipt by an indemnified
party under Section (10.1) or (10.2) above of written notice of the
commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such section, notify
the indemnifying party in writing of the claim or the commencement of that
action; the failure to notify the indemnifying party shall not relieve it of any
liability which it may have to an indemnified party, except to the extent that
the indemnifying party did not otherwise have knowledge of the commencement of
the action and the indemnifying party's ability to defend against the action was
prejudiced by such failure. Such failure shall not relieve the indemnifying
party from any other liability which it may have to the indemnified party. If
any such claim or action shall be brought against an indemnified party, and it
shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under such section for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; except that Cohig shall
have the right to employ counsel to represent it and the other Warrantholders of
holders of Shares who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by such persons against the Company
under such section if, in Cohig's reasonable judgment, it is advisable for Cohig
and those Warrantholders or holders of Shares to be represented by separate
counsel, and in that event the fees and expenses of such separate counsel shall
be paid by the Company.
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10.4. Contribution. If the indemnification provided for in Sections (10.1)
and (10.2) of this Agreement is unavailable or insufficient to hold harmless an
indemnified party, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of the losses, claims,
damages, or liabilities referred to in Sections (10.1) or (10.2) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Warrantholders on the other; or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect the relative benefits referred to
in clause (i) above but also the relative fault of the Company on the one hand
and the Warrantholders on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Warrantholders shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
unitemized expenses received by the Underwriters, in each case as set forth in
the table on the cover page of the Final Prospectus. Relative fault shall be
determined by reference to, among other things, whether the untrue statement of
a material fact or the omission to state a material fact relates to information
supplied by the Company or the Underwriter and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
untrue statement or omission. For purposes of this Section (10.4), the term
"damages" shall include any counsel fees or other expenses reasonably incurred
by the Company or the Underwriters in connection with investigating or defending
any action or claim which is the subject of the contribution provisions of this
Section (10.4). No person adjudged guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it shall promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in Section (10.4) hereof).
SECTION 11. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
This Warrant, the Warrant Securities, and all other securities issued or
issuable upon exercise of this Warrant, may not be offered, sold or transferred,
in whole or in part, except in compliance with the Act, and except in compliance
with all applicable state securities laws. The Company may cause substantially
the following legends, or their equivalents, to be set forth on each certificate
representing the Warrant Securities, or any other security issued or issuable
upon exercise of this Warrant, not theretofore distributed to the public or sold
to underwriters, as defined by the Act, for distribution to the public pursuant
to Section 8 above:
(i) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE
SECURITIES LAWS ("STATE ACTS") AND ARE RESTRICTED
SECURITIES AS THAT TERM IS DEFINED IN RULE 144 UNDER THE
ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR
OTHERWISE TRANSFERRED) EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR QUALIFICATION UNDER THE ACT AND
APPLICABLE STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND APPLICABLE STATE ACTS, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY."
(ii) Any legend required by applicable state securities laws.
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Any certificate issued at any time in exchange or substitution for any
certificate bearing such legends (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act of 1933, as amended (the "Act"), or the securities
represented thereby) shall also bear the above legends unless, in the opinion of
the Company's counsel, the securities represented thereby need no longer be
subject to such restrictions.
SECTION 12. FRACTIONAL SHARES.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of all or any part of this Warrant. With respect to any
fraction of a share of any security called for upon any exercise of this
Warrant, the Company shall pay to the Holder an amount in money equal to that
fraction multiplied by the Current Market Price of that share.
SECTION 13. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER.
Nothing contained in this Agreement or in the Warrants shall be construed
as conferring upon the Warrantholder or its transferees any rights as a
stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect to any meeting of
stockholders for the election of directors of the Company or any other matter.
The Company covenants, however, that for so long as this Warrant is at least
partially unexercised, it will furnish any Holder of this Warrant with copies of
all reports and communications furnished to the shareholders of the Company. In
addition, if at any time prior to the expiration of the Warrants and prior to
their exercise, any one or more of the following events shall occur:
(i) any action which would require an adjustment pursuant to Section
(4.1) (except subsections (4.1(e)) and (4.1(h)) or (4.4); or
(ii) a dissolution, liquidation, or winding up of the Company (other
than in connection with a consolidation, merger, or sale of its property,
assets, and business as an entirety or substantially as an entirety) shall
be proposed:
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section (16) hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation, or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive notice or any
defect therein shall not affect the validity of any action taken with respect
thereto.
SECTION 14. CHARGES DUE UPON EXERCISE.
The Company shall pay any and all issue or transfer taxes, including, but
not limited to, all federal or state taxes, that may be payable with respect to
the transfer of this Warrant or the issue or delivery of Warrant Securities upon
the exercise of this Warrant.
SECTION 15. WARRANT SECURITIES TO BE FULLY PAID.
The Company covenants that all Warrant Securities that may be issued and
delivered to a Holder of this Warrant upon the exercise of this Warrant and
payment of the Exercise Price will be, upon such delivery, validly and duly
issued, fully paid and nonassessable.
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<PAGE>
SECTION 16. NOTICES.
Any notice pursuant to this Agreement by the Company or by a Warrantholder
or a holder of Shares shall be in writing and shall be deemed to have been duly
given if delivered or mailed by certified mail, return receipt requested:
(i) If to a Warrantholder or a holder of Shares, addressed to Cohig
& Associates, Inc., 6300 South Syracuse Way, Suite 430, Englewood, Colorado
80111, Attention: Corporate Finance Department; or
(ii) If to the Company addressed to it at 3801 East Florida Avenue,
Suite 208, Denver, Colorado 80210, Attention: CEO.
Each party may from time to time change the address to which notices to it
are to be delivered or mailed hereunder by notice in accordance herewith to the
other party.
SECTION 17. MERGER OR CONSOLIDATION OF THE COMPANY.
The Company will not merge or consolidate with or into any other
corporation or sell all or substantially all of its property to another
corporation, unless the provisions of Section (4.4) are complied with.
SECTION 18. APPLICABLE LAW.
This Warrant shall be governed by and construed in accordance with the laws
of the State of Colorado, and courts located in Colorado shall have exclusive
jurisdiction over all disputes arising hereunder.
SECTION 19. ARBITRATION.
The Company and the Holder, and by receipt of this Warrant or any Warrant
Securities, all subsequent Holders or holders of Warrant Securities, agree to
submit all controversies, claims, disputes and matters of difference with
respect to this Warrant, including, without limitation, the application of this
Section (19) to arbitration in Denver, Colorado, according to the rules and
practices of the American Arbitration Association from time to time in force;
provided, however, that if such rules and practices conflict with the applicable
procedures of Colorado courts of general jurisdiction or any other provisions of
Colorado law then in force, those Colorado rules and provisions shall govern.
This agreement to arbitrate shall be specifically enforceable. Arbitration may
proceed in the absence of any party if notice of the proceeding has been given
to that party. The parties agree to abide by all awards rendered in any such
proceeding. These awards shall be final and binding on all parties to the extent
and in the manner provided by the rules of civil procedure enacted in Colorado.
All awards may be filed, as a basis of judgment and of the issuance of execution
for its collection, with the clerk of one or more courts, state or federal,
having jurisdiction over either the party against whom that award is rendered or
its property. No party shall be considered in default hereunder during the
pendency of arbitration proceedings relating to that default.
SECTION 20. MISCELLANEOUS PROVISIONS.
(a) Subject to the terms and conditions contained herein, this Warrant
shall be binding on the Company and its successors and shall inure to the
benefit of the original Holder, its successors and assigns and all holders of
Warrant Securities and the exercise of this Warrant in full shall not terminate
the provisions of this Warrant as it relates to holders of Warrant Securities.
(b) If either party to this Agreement fails to perform any of its
obligations hereunder, it shall be liable to the other party for all damages,
costs and expenses resulting from the failure, including, but not limited to,
all reasonable attorney's fees and disbursements.
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<PAGE>
(c) This Warrant cannot be changed or terminated or any performance or
condition waived in whole or in part except by an agreement in writing signed by
the party against whom enforcement of the change, termination or waiver is
sought; provided, however, that any provisions hereof may be amended, waived,
discharged or terminated upon the written consent of the Company and Cohig.
(d) If any provision of this Warrant shall be held to be invalid, illegal
or unenforceable, such provision shall be severed, enforced to the extent
possible, or modified in such a way as to make it enforceable, and the
invalidity, illegality or unenforceability shall not affect the remainder of
this Warrant.
(e) The Company agrees to execute such further agreements, conveyances,
certificates and other documents as may be reasonably requested by the Holder to
effectuate the intent and provisions of this Warrant.
(f) Paragraph headings used in this Warrant are for convenience only and
shall not be taken or construed to define or limit any of the terms or
provisions of this Warrant. Unless otherwise provided, or unless the context
shall otherwise require, the use of the singular shall include the plural and
the use of any gender shall include all genders.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
BIRNER DENTAL MANAGEMENT
SERVICES, INC.
By: /s/ FRED BIRNER
--------------------------------------
Fred Birner, Chief Executive Officer
COHIG & ASSOCIATES, INC.
By: /s/ [SIGNATURE ILLEGIBLE]
--------------------------------------
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<PAGE>
EXHIBIT A
---------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS ("STATE ACTS") AND ARE
RESTRICTED SECURITIES AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE ACT AND APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
Warrant Certificate No. CDW-7-
WARRANTS TO PURCHASE
_____ SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, _______________ , the registered
holder hereof or assigns (the "Warrantholder"), is entitled to purchase from
Birner Dental Management Services, Inc. (the "Company"), at any time during the
period commencing at 9:00 a.m., Colorado time, on December 27, 1996, and
expiring at 5:00 p.m., Colorado time, on December 27, 2001, at the purchase
price per Share of $5.00 (the "Exercise Price"), the number of shares of Common
Stock of the Company set forth above (the "Shares"). The number of shares of
Common Stock of the Company purchasable upon exercise of the Warrants evidenced
hereby shall be subject to adjustment from time to time as set forth in the
Warrant Agreement dated December 27, 1996.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check or by Cashless Exercise subject to the
provisions of Section 2.2 of the Warrant Agreement (as that term is defined
therein).
The Warrants evidenced hereby represent the right to purchase an aggregate
of up to 36,200 Shares and are issued under and in accordance with Warrant
Agreement dated as of December 27, 1996, between the Company and Cohig &
Associates, Inc. and are subject to the terms and provisions contained in the
Warrant Agreement, to all of which the Warrantholder by acceptance hereof
consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company in the manner and subject to the
limitations set forth in the Warrant Agreement.
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<PAGE>
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT
SERVICES, INC.
By: __________________________________________
Dated:
[Seal]
Attest:
_______________________________
Secretary
PURCHASE FORM
-------------
Dated _________ ___
The undersigned hereby irrevocably elects to exercise the Warrant
represented by this Warrant Certificate to the extent of purchasing ___________
Shares of Birner Dental Management Services, Inc. (the "Company") and hereby
tenders payment of the exercise price thereof. If the number of Shares purchased
are not all the Shares purchasable pursuant to the Warrants represented by this
Warrant Certificate, a new Warrant Certificate should be issued and delivered to
the undersigned at the address stated below.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name_______________________________________________________________________
(please type or print in block letters)
Address____________________________________________________________________
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<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED,_______________________, hereby sells, assigns and
transfers unto
Name ______________________________________________________________________
(Please type or print in block letters)
Address ___________________________________________________________________
the right to purchase Shares of the Company represented by this Warrant
Certificate to the extent of ______ Shares as to which such right is exercisable
and does hereby irrevocably constitute and appoint ______________ attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises. If the number of Shares assigned are not all the Shares
purchasable pursuant to the Warrants represented by this Warrant Certificate, a
new Warrant Certificate should be issued and delivered to the undersigned.
Signature______________________________ Dated ___________________________
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS IT
APPEARS UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
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<PAGE>
CASHLESS EXERCISE FORM
----------------------
Pursuant to Section 2.2 of the Warrant Agreement, the Holder hereby
irrevocably elects to convert Warrants with respect to Shares of the Company
into __________ Shares of the Company. A conversion calculation is attached
hereto as Exhibit B-1.
The undersigned requests that certificates for such Shares be issued as
follows:
Name:__________________________________________________________________
Address:_______________________________________________________________
Deliver to:____________________________________________________________
and that a new Warrant Certificate for the balance remaining of the Warrants, if
any, subject to the Warrant be registered in the name of, and delivered to, the
undersigned at the address stated above.
Signature __________________________________ Dated ___________________
...............................................................................
Exhibit B-1
CALCULATION OF WARRANT CONVERSION
---------------------------------
Converted Securities = Net Value
---------
FMV
FMV = $ ____________
Net Value = Aggregate FMV - Aggregate Exercise Price
= $ ____________ - _____________
= $ ____________
Converted Shares = ______________
Fractional Converted Shares = ______________(1)
- ----------------------------------
(1) The Company to pay for fractional Shares in cash @ $________ per Share.
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<PAGE>
EXHIBIT 10.3
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COHIG & ASSOCIATES, INC.
WARRANT AGREEMENT
Dated as of May 29, 1996
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of May 29, 1996, is made
and entered into by and between BIRNER DENTAL MANAGEMENT SERVICES, Inc., a
Colorado corporation (the "Company"), and COHIG & ASSOCIATES, INC. ("Cohig").
The Company agrees to issue and sell, and Cohig agrees to purchase, for the
price of $100, warrants to purchase up to an aggregate of 114,000 shares
("Shares") of the Company's Common Stock, subject to the terms and conditions
set forth below.
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and Cohig, for value received, hereby agree as follows.
SECTION 1. DEFINITIONS.
The following terms used in this agreement shall have the following
meanings (unless otherwise expressly provided herein):
1.1. The "Act." The Securities Act of 1933, as amended.
1.2. The "Commission." The Securities and Exchange Commission.
1.3. The "Company." Birner Dental Management Services, Inc.
1.4. "Common Stock." The Company's Common Stock.
1.5. "Current Market Price." The Current Market Price shall be
determined as follows:
(i) if the security at issue is listed on a national
securities exchange or admitted to unlisted trading privileges on such an
exchange or quoted on the National Market System of the National
Association of Securities Dealers Automated Quotation System, Inc.
("NASDAQ") quotation service, the current value shall be the last reported
sale price of that security on such exchange or system on the last business
day prior to the date of the applicable exercise of this Warrant or, if no
such sale is made on such day, the average of the highest closing bid and
lowest asked price for such day on such exchange or system; or
(ii) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges, the current market value shall be
the average of the last reported highest bid and lowest asked prices quoted
on NASDAQ or, if not so quoted, then by the National Quotation Bureau, Inc.
on the last business day prior to the day of the applicable exercise of
this Warrant; or
(iii) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges and bid and asked prices are not
reported, the current market value shall be determined in such reasonable
manner as may be prescribed from time to time by the Board of Directors of
the Company, subject to the objection and arbitration procedure as
described in Section (6) below.
1.6. "Exercise Date." May 29, 1996.
1.7. "Exercise Price." $3.50 per Share, as modified in accordance with
Section (4), below.
1.8. "Expiration Date." May 29, 2001.
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<PAGE>
1.9. "Holder " or "Warrantholder." Cohig & Associates, Inc., and any
valid transferee thereof pursuant to Section (3.1) below.
1.10. "NASD." The National Association of Securities Dealers, Inc.
1.11. "NASDAQ." The automated quotation system operated by NASDAQ, Inc.
1.12. "Termination of Business." Any sale, lease or exchange of all, or
substantially all, of the Company's assets or business or any dissolution,
liquidation or winding up of the Company.
1.13. "Warrants." The warrants issued in accordance with the terms of
this Agreement and any Warrants issued in substitution for or replacement of
such warrants, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.14. "Warrant Securities." The Common Stock purchasable upon exercise of
a Warrant including the Common Stock underlying unexercised portions of a
Warrant.
1.15. "1995 Warrant Agreement. " The Warrant Agreement dated October 3,
1995, between Company and Cohig & Associates, Inc.
1.16. "1995 Warrant Securities." The Common Stock purchasable upon
exercise of the Warrants issued pursuant to the 1995 Warrant Agreement, as
defined in the 1995 Warrant Agreement.
1.17. "1997 Warrant Agreement." The Warrant Agreement dated December 27,
1996, between the Company and Cohig & Associates, Inc.
1.18. "1997 Warrant Securities." The Common Stock purchasable upon
exercise of the Warrants issued pursuant to the 1997 Warrant Agreement, as
defined in the 1997 Warrant Agreement.
SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANT.
2.1. Exercise of Warrant Subject to the terms of this Agreement, the
Warrantholder shall have the right, at any time during the period commencing at
9:00 a.m., Denver Time, on the Exercise Date and ending at 5:00 p.m., Denver
Time, on the Expiration Date, to purchase from the Company up to the number of
fully paid and nonassessable Shares to which the Warrantholder may at the time
be entitled to purchase pursuant to this Agreement, upon surrender to the
Company, at its principal office, of the certificate evidencing the Warrants to
be exercised, together with the purchase form on the reverse thereof, or the
Cashless Exercise Form in the case of a cashless exercise pursuant to Section
(2.2) herein, duly filled in and signed, and upon payment to the Company of the
Exercise Price for the number of Shares in respect of which such Warrants are
then exercised, but in no event for less than 100 Shares (unless fewer than an
aggregate of 100 shares are then purchasable under all outstanding Warrants held
by a Warrantholder).
2.2. Payment of Exercise Price. Payment of the aggregate Exercise Price
shall be made
(i) in cash or by check, or any combination thereof; or
(ii) upon the request of the Warrantholder and the acceptance by the
Company, which acceptance may be withheld by the Company in its sole
discretion, by means of a "Cashless Exercise." In the event of a Cashless
Exercise, the Warrantholder shall exchange its Warrant for such number of
shares of Common Stock determined by multiplying the number of Shares by a
fraction, the numerator of which shall be the difference between the then-
current market price per share of Common Stock and the Exercise Price, and
the denominator of which shall be the then-current market price per share
of Common Stock. For purposes of this Section (2.2) only, the "then
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<PAGE>
current market price per share of Common Stock" at any date shall be deemed
to be the average of the daily closing prices for 20 consecutive trading
days commencing the 21st trading day before such date. The closing price
for each day shall be the last sales price regular way or, in case no such
reported sales take place on such day, the average of the last reported bid
and asked prices regular way, in either case on the principal national
securities exchange on which the Common Stock is admitted to trading or
listed or, if not listed or admitted to trading on any such exchange, the
representative closing bid price as reported by Nasdaq or another similar
organization if Nasdaq is no longer reporting such information or, if no
such price is available, the fair market price as reasonably determined by
the Board of Directors.
2.3. Issuance of Shares. Upon such surrender of the Warrants and payment
of such Exercise Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Warrantholder and in such name or names as the Warrantholder may designate, a
certificate or certificates for the number of full Shares so purchased upon the
exercise of the Warrant, together with cash, as provided in Section (12) hereof,
in respect of any fractional Shares otherwise issuable upon such surrender. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become the holder of
record of such securities as of the date of surrender of the warrants and be
divided or combined, upon request to the Company by the Warrantholder, into a
certificate or certificates representing the right to purchase the same
aggregate number of Shares.
SECTION 3. TRANSFERABILITY AND FORM OF WARRANT.
3.1. Limitation on Transfer. This Warrant may not be sold, transferred,
assigned, pledged or hypothecated until the Exercise Date, except in compliance
with Section (8) hereof. Any assignment or transfer of this Warrant shall be
made by the presentation and surrender of this Warrant to the Company at its
principal office or the office of its transfer agent, if any, accompanied by a
duly executed Assignment Form, in the form attached to and by this reference
incorporated in this Warrant as Exhibit B. Upon the presentation and surrender
of these items to the Company, the Company, at its sole expense, shall execute
and deliver to the new Holder or Holders a new Warrant or Warrants, containing
the same terms and conditions as this Warrant, in the name of the new Holder or
Holders as named in the Assignment Form, and this Warrant shall at that time be
canceled.
3.2. Exchange of Certificate. Any Warrant certificate may be exchanged
for another certificate or certificates entitling the Warrantholder to purchase
a like aggregate number of Shares as the certificate or certificates surrendered
then entitled such Warrantholder to purchase. Any Warrantholder desiring to
exchange a Warrant certificate shall make such request in writing delivered to
the Company, and shall surrender, properly endorsed, with signatures guaranteed,
the certificate evidencing the Warrant to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
certificate as so requested.
3.3. Mutilated, Lost, Stolen, or Destroyed Certificate. In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrantholder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificates or certificates lost, stolen or destroyed, a new Warrant
certificate or certificates of like tenor and representing an equivalent right
or interest, but only upon recept of evidence satisfactory to the Company of
such loss, theft or destruction of such Warrant and a bond of indemnity, if
requested, also satisfactory in form and amount, at the applicant's cost.
Applicants for such substitute Warrant certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
3.4. Form of Certificate. The text of the Warrant and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by its
President or by a Vice President and attested
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<PAGE>
to by its Secretary or an Assistant Secretary. A Warrant bearing the signature
of an individual who was at any time the proper officer of the Company shall
bind the Company, notwithstanding that such individual shall have ceased to hold
such officer prior to the delivery of such Warrant or did not hold such office
on the date of this Agreement.
The Warrants shall be dated as of the date of signature thereof by
the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
4.1. Adjustments. The number of Shares purchasable upon the exercise of
the Warrant shall be subject to adjustments as follows:
(a) In case the Company shall (i) pay a dividend in Common Stock
to Holders of Common Stock, (ii) make a distribution in shares of Common
Stock to holders of Common Stock, (iii) subdivide its outstanding Common
Stock into a greater number of shares, or (iv) combine its outstanding
Common Stock into a smaller number of shares, the Exercise Price in effect
immediately prior thereto shall be adjusted so that the holder of any
Warrant thereafter surrendered for exercise shall be entitled to receive
the number of Shares of Common Stock which it would have owned had such
Warrant been exercised immediately prior to the happening of such event. An
adjustment made pursuant to this subsection (4.1.(a)) shall become
effective immediately after the record date in the case of a dividend or
distribution in shares and shall become effective immediately after the
effective date in the case of subdivision or combination.
(b) No adjustment in the number of Shares purchasable pursuant
to the Warrants shall be required unless such adjustment would require an
increase or decrease of at least one percent in the number of Shares then
purchasable upon the exercise of the Warrants or, if the Warrants are not
then exercisable, the number of Shares purchasable upon the exercise of the
Warrants on the first date thereafter that the Warrants become exercisable;
provided, however, that any adjustments which by reason of this subsection
(4.1(b)) are not required to be made immediately shall be carried forward
and taken into account in any subsequent adjustment.
(c) Whenever the number of Shares purchasable upon the exercise
of the Warrant is adjusted, as herein provided, the Exercise Price payable
upon exercise of the 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 the Warrant immediately prior to such adjustment, and of which
the denominator shall be the number of Warrant Shares so purchasable
immediately thereafter.
(d) Whenever the number of Shares purchasable upon exercise of
the Warrants is adjusted as herein provided, the Company shall cause to be
promptly mailed to the Warrantholder by first class mail, postage prepaid,
notice of such adjustment and a certificate of the chief financial officer
of the Company setting forth the number of Shares purchasable upon the
exercise of the Warrants after such adjustment, a brief statement of the
facts requiring such adjustment and the computation by which such
adjustment was made.
(e) For the purpose of this Section (4.1), the term "Common
Stock" shall mean (i) the class of stock designated as the Common Stock of
the Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to this
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<PAGE>
Section (4), the Warrantholder shall become entitled to purchase any
securities of the Company other than Common Stock, (y) if the
Warrantholder's right to purchase is on any other basis than that available
to all holders of the Company's Common Stock, the Company shall obtain an
opinion of an independent investment banking firm valuing such other
securities and (z) thereafter the number of such other securities so
purchasable upon exercise of the Warrants shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Shares contained in this
Section (4).
(f) Upon the expiration of any rights, options, warrants, or
conversion privileges, if such shall have not been exercised, the number of
Shares purchasable upon exercise of the Warrants, to the extent the
Warrants have not then been exercised, shall, upon such expiration, be
readjusted and shall thereafter be such as they would have been had they
been originally adjusted (or had the original adjustment not been required,
as the case may be) on the basis of (i) the fact that the only shares of
Common Stock so issued were the shares of Common Stock, if any, actually
issued or sold upon the exercise of such rights, options, warrants, or
conversion privileges, and (ii) the fact that such shares of Common Stock,
if any, were issued or sold for the consideration actually received by the
Company upon such exercise plus the consideration, if any, actually
received by the Company for the issuance, sale or grant of all such rights,
options, warrants, or conversion privileges whether or not exercised;
provided, however, that no such readjustment shall have the effect of
decreasing the number of Shares purchasable upon exercise of the Warrants
by an amount in excess of the amount of the adjustment initially made in
respect of the issuance, sale, or grant of such rights, options, warrants,
or conversion rights.
4.2. No Adjustment for Dividends. Except as provided in Section (4.1),
no adjustment in respect of any dividends or distributions out of earnings shall
be made during the term of the warrants of upon the exercise of the Warrants.
4.3. No Adjustment in Certain Cases. No adjustments shall be made
pursuant to Section (4) hereof in connection with the issuance of the Common
Stock upon exercise of the Warrants. No adjustments shall be made pursuant to
Section (4) hereof in connection with the exercise of Warrants presently
outstanding; or the issuance of shares upon conversion of the Company's 9%
Convertible Subordinated Debentures; or the grant or exercise of options to
purchase, or the issuance of shares upon exercise of such options, under the
Company's stock option plan for directors, employees, and consultants. No
adjustment shall be made pursuant to Section 4.4(b) or (c) hereof unless: (i)
the Current Market Price of the securities received in the merger or
consolidation as of its Effective Date pursuant to Section 4.4(b); or (ii) the
value of the consideration that would be received by a Warrantholder pursuant to
Section 4.4(c) if he exercised his Warrants immediately prior to the sale or
conveyance (and assuming the exercise of all outstanding Warrants and conversion
of all outstanding convertible stock that have an exercise price or conversion
price equal to or less than the Exercise Price); is less than the Exercise
Price. If the consideration to be received is other than cash, the value of the
consideration to be received shall be the Current Market Price as of the
Effective Date of such sale or conveyance of securities received; or the fair
market value of other assets received as determined by an independent appraisal
of such assets.
4.4. Effect of Reclassification, Consolidation, Merger, or Sale on
Exercise Privilege. If any of the following shall occur, namely: (a) any
reclassification or change of outstanding shares of Common Stock issuable upon
exercise of Warrants (other than a change in par value, or from par value to no
par value, or from no par value to par value, or as a result of a subdivision or
combination), (b) any consolidation or merger to which the Company is a party
other than a merger in which the Company is the continuing corporation and which
does not result in any reclassification of, or change (other than a change in
name, or par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination) in, outstanding
shares of Common Stock, or (c) any sale or conveyance, of all or substantially
all of the property or business of the Company as an entirety, then the
Company, of such successor or purchasing corporation, as the case may be, shall,
as a condition precedent to such reclassification, change, consolidation,
merger, sale or conveyance, execute and deliver to Cohig as representative of
each holder of a Warrant then
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unexercised and outstanding, an amendment to this Agreement providing that the
Warrantholders shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action, to receive, upon exercise of
the Warrants, the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock deliverable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Such
amendment shall provide for the adjustments of the Exercise Price which shall be
as nearly equivalent as may be practicable to the adjustments of the Exercise
Price provided for in this Section 4. If, in the case of any such
reclassification, change, consolidation, merger, sale or conveyance, the stock
or other securities and property (including cash) receivable thereupon by a
holder of Common Stock includes shares of stock or other securities and property
of a corporation other than the successor or purchasing corporation, as the case
may be, in such consolidation, merger, sale or conveyance, then such amendment
shall also be executed by such other corporation and shall contain such
additional provisions to protect the interests of the Warrantholders as the
Board of Directors of the Company shall reasonably consider necessary by reason
of the foregoing. The provision of this Section 4.4 shall similarly apply to
successive consolidations, mergers, sales, or conveyances.
In the event the Company shall execute an amendment to this Agreement as
provided in this subsection (4.4), the Company shall promptly send each
Warrantholder an Officers' Certificate briefly stating the reasons for the
amendment, the kind or amount of shares of stock or securities or property
(including cash) receivable by Warrantholders upon exercise of their Warrants
after any such reclassification, change, consolidation, merger, sale or
conveyance, any adjustments to be made with respect thereto, and that all
conditions precedent have been complied with.
4.5. Par Value of Shares of Common Stock. Before taking any action which
would cause an adjustment effectively reducing the portion of the Exercise Price
allocable to each Share below the par value per share of the Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Common Stock
upon exercise of the Warrants.
4.6. Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section (4), and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section (4).
4.7 Statement on Warrant Certificates. Irrespective of any adjustments
in the number of securities issuable upon exercise of the Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time in
its sole discretion (which shall be conclusive), 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 certificate thereafter issued, whether upon
registration of transfer of, or in exchange or substitution for, an outstanding
Warrant certificate, may be in the form so changed.
4.8. Treasury Stock. For purposes of this Section (4), shares of Common
Stock owned or held at any relevant time by, or for the account of, the Company,
in its treasury or otherwise, shall not be deemed to be outstanding for purposes
of the calculations and adjustments described.
SECTION 5. NOTICE TO HOLDERS.
If, prior to the expiration of this Warrant either by its terms or by its
exercise in full, any of the following shall occur.
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(i) the Company shall declare a dividend or authorize any other
distribution on its Common Stock; or
(ii) the Company shall authorize the granting to the shareholders
of its Common Stock of rights to subscribe for or purchase any securities
or any other similar rights; or
(iii) any reclassification, reorganization or similar change of
the Common Stock, or any consolidation or merger to which the Company is a
party, or the sale, lease, or exchange of any significant portion of the
assets of the Company; or
(iv) the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) any purchase, retirement or redemption by the Company of its
Common Stock;
then, and in any such case, the Company shall deliver to the Holder or Holders
written notice thereof at least 10 days prior to the earliest applicable date
specified below with respect to which notice is to be given, which notice shall
state the following:
(x) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights, or, if a record is not to be taken,
the date as of which the shareholders of Common Stock of record to be
entitled to such dividend, distribution or rights are to be determined;
(y) the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution, liquidation, winding up
of purchase, retirement or redemption is expected to become effective, and
the date, if any, as of which the Company's shareholders of Common Stock of
record shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution, liquidation, winding
up, purchase, retirement or redemption; and
(z) if any matters referred to in the foregoing clauses (x) and
(y) are to be voted upon by shareholders of Common Stock, the date as of
which those shareholders to be entitled to vote are to be determined.
SECTION 6. OFFICERS' CERTIFICATE.
Whenever the Exercise Price or the aggregate number of Warrant Securities
purchasable pursuant to this Warrant shall be adjusted as required by the
provisions of Section (4) above, the Company shall promptly file with its
Secretary or an Assistant Secretary at its principal office, and with its
transfer agent, if any, an officers' certificate executed by the Company's
President and Secretary or Assistant Secretary, describing the adjustment and
setting forth, in reasonable detail, the facts requiring such adjustment and the
basis for and calculation of such adjustment in accordance with the provisions
of this Warrant. Each such officers' certificate shall be made available to the
Holder or Holders of this Warrant for inspection at all reasonable times, and
the Company, after each such adjustment, shall promptly deliver a copy of the
officers' certificate relating to that adjustment to the Holder or Holders of
this Warrant. The officers' certificate described in this Section (6) shall be
deemed to be conclusive as to the correctness of the adjustment reflected
therein if, and only if, no Holder of this Warrant delivers written notice to
the Company of an objection to the adjustment within 30 days after the officers'
certificate is delivered to the Holder or Holders of this Warrant. The Company
will make its books and records available for inspection and copying during
normal business hours by the Holder so as to permit a determination as to the
correctness of the adjustment. If written notice of an objection is delivered by
a Holder to the Company and the parties cannot reconcile the dispute, the Holder
and the Company shall submit the dispute to arbitration pursuant to the
provisions of Section 19 below. Failure to prepare or provide the officers'
certificate shall not modify the parties' rights hereunder.
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SECTION 7. RESERVATION OF WARRANT SECURITIES.
There has been reserved, and the Company shall at all times keep reserved
so long as the Warrants remain outstanding, out of its authorized and unissued
Common Stock, such number of shares of Common Stock as shall be subject to
purchase under the Warrants. Every transfer agent for the Common Stock and other
securities of the Company issuable upon the exercise of the Warrants will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every transfer agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants. The Company will supply every such transfer agent with
duly executed stock and other certificates, as appropriate, for such purpose and
will provide or otherwise make available any cash which may be payable as
provided in Section 12 hereof.
SECTION 8. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
8.1. Restrictions on Transfer. The Warrantholder agrees that prior to
making any disposition of the Warrants or the Shares, other than to officers of
Cohig, the Warrantholder shall give written notice to the Company describing
briefly the manner in which any such proposed disposition is to be made; and no
such disposition shall be made if the Company has notified the Warrantholder
that in the opinion of counsel a registration statement or other notification or
post-effective amendment thereto (hereinafter collectively a "Registration
Statement") under the Act is required with respect to such disposition and no
such Registration Statement has been filed by the Company with, and declared
effective, if necessary, by, the Commission.
8.2. Piggy-Back Registration Right. If at any time prior to the
Expiration Date the Company files a registration statement with the Commission
pursuant to the Act, or pursuant to any other act passed after the date of this
Agreement, which filing provides for the sale of securities by the Company to
the public, or files a Regulation A offering statement under the Act, the
Company shall offer to the Holder or Holders of this Warrant and the holders of
any Warrant Securities the opportunity to register or qualify the Warrant
Securities at the Company's sole expense, regardless of whether the Holder or
Holders of this Warrant or the holders of Warrant Securities or both may have
previously availed themselves of any of the registration rights described in
this Section (8); provided, however, that in the case of a Regulation A
offering, the opportunity to qualify shall be limited to the amount of the
available exemption after taking into account the securities that the Company
wishes to qualify. Notwithstanding anything to the contrary, this Section (8.2)
shall not be applicable to a registration statement registering securities
issued pursuant to an employee benefit plan or as to a transaction subject to
Rule 145 promulgated under the Act or which a form S-4 registration statement
could be used; nor shall it be applicable to the first underwritten registered
public offering of the Company.
The Company shall deliver written notice to the Holder or Holders of this
Warrant and to any holders of the Warrant Securities of its intention to file a
registration statement or Regulation A offering statement under the Act at least
60 days prior to the filing of such registration statement or offering
statement, and the Holder or Holders and holders of Warrant Securities shall
have 30 days thereafter to request in writing that the Company register or
qualify the Warrant Securities or the Warrant Securities underlying the
unexercised portion of this Warrant in accordance with this Section (8.2). Upon
the delivery of such a written request within the specified time, the Company
shall be obligated to include in its contemplated registration statement or
offering statement all information necessary or advisable to register or qualify
the Warrant Securities or Warrant Securities underlying the unexercised portion
of this Warrant for a public offering, if the Company does file the contemplated
registration statement or offering statement; provided, however, that neither
the delivery of the notice by the Company nor the delivery of a request by a
Holder or by a holder of Warrant Securities shall in any way obligate the
Company to file a registration statement or offering statement. Furthermore,
notwithstanding the filing of a registration statement or offering statement,
the Company may, at any time prior to the effective date thereof, determine not
to offer the securities to which the registration statement or offering
statement relates, other than the Warrant, Warrant Securities and Warrant
Securities underlying the unexercised portion of this Warrant. Notwithstanding
the foregoing, if, as a qualification of any
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offering in any state or jurisdiction in which the Company (by vote of its Board
of Directors) or any underwriter determines in good faith that it wishes to
offer securities registered in the offering, it is required that offering
expenses be allocated in a manner different from that provided above, then the
offering expenses shall be allocated in whatever manner is most nearly in
compliance with the provisions set out above.
If the registration for which the Company gives notice is for a registered
public offering involving an underwriting, the Company shall so advise as part
of the written notice given pursuant to this Section. In such event, the right
of any Warrantholder or holder of Shares to registration pursuant to this
Section (8.2) shall be conditioned upon such holder's participation in such
underwriting, and the inclusion of Shares in the underwriting shall be limited
to the extent provided herein. All holders proposing to distribute their Shares
through such underwriting shall (together with the Company and the other holders
distributing their Shares through such underwriting) enter into an underwriting
agreement in customary form with the managing underwriter selected for such
underwriting by the Company. Notwithstanding any other provision of this
Section, if the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, such underwriter may
limit the amount of securities to be included in the registration and
underwriting by the holders of Company securities exercising "piggyback"
registration rights (including the Warrantholder and each holder of Warrants and
Shares). The Company shall so advise all such holders, and the number of shares
of such securities that may be included in the registration and underwriting
shall be allocated (a) first to investors who purchased securities in the
Company's private placement made pursuant to a Confidential Private Placement
Memorandum dated July 28, 1995; and (b) then if the limitation provides for
additional securities to be included, among all of the Warrantholders (including
the holders of the warrants pursuant to this Agreement and holders of warrants
issued pursuant to the 1995 and 1997 Warrant Agreement) in proportion, as nearly
as practicable, to the respective amounts of securities requested to be included
in such registration held by such holders at the time of filing the registration
statement, provided, however, that no security holder other than one exercising
a demand registration right and other than as specifically referenced herein
shall have superior rights with respect to inclusion in a registration than
those of the Warrantholder and each holder of Warrants and Shares and if any
party is granted such superior rights hereafter the Warrantholder and each
holder of Warrants and Shares shall be deemed to be automatically granted
similar rights. The Company shall advise all such holders of any such
limitations and of the number or securities that may be included in the
registration. Any securities excluded or withdrawn from such underwriting shall
not be transferred prior to one hundred twenty (120) days after the effective
date of the registration statement relating thereto, or such shorter period of
time as the underwriters may require.
The Company shall comply with the requirements of this Section (8.2) and
the related requirements of Section (8.6) at its own expense. That expense shall
include, but not be limited to, legal, accounting, consulting, printing, federal
and state filing fees, NASD fees, out-of-pocket expenses incurred by counsel,
accountants and consultants retained by the Company, and miscellaneous expenses
directly related to the registration statement or offering statement and the
offering. However, this expense shall not include the portion of any
underwriting commissions, transfer taxes and the underwriter's accountable and
nonaccountable expense allowances attributable to the offer and sale of the
Warrant, Warrant Securities and the Warrant Securities underlying the
unexercised portion of this Warrant, or the fees and expenses of any legal
counsel retained by a Holder, all of which expenses shall be borne by the Holder
or Holders of this Warrant and the holders of the Warrant Securities registered
or qualified.
8.3. Inclusion of Information. In the event that the Company registers
or qualifies the Warrant Securities pursuant to Section (8.2) above, the Company
shall include in the registration statement or qualification, and the prospectus
included therein, all information and materials necessary or advisable to comply
with the applicable statutes and regulations so as to permit the public sale of
the Warrant Securities or the Warrant Securities underlying the unexercised
portion of this Warrant. As used in Section (8.2), reference to the Company's
securities shall include, but not be limited to, any class or type of the
Company's securities or the securities of any of the Company's subsidiaries or
affiliates.
8.4. Registration Statement Filed by Holder. In addition to the
registration rights described in Section (8.2) above, at any time that the
Company has securities registered under the Securities Exchange
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Act of 1934, upon the written request of Holders of warrants and holders of
Warrant Securities representing at least 70% of the aggregate number of Warrant
Securities and 1995 and 1997 Warrant Securities issued pursuant to this Warrant
Agreement and pursuant to the 1995 and 997 Warrant Agreements, the Company, as
promptly as possible after delivery of such request, shall cooperate with the
requesting Holders or holders in preparing and signing any registration
statement or offering statement that the Holders or holders may desire to file
in order to sell or transfer the Warrant and Warrant Securities. Within 10 days
after the delivery of the written request described above, the Company shall
deliver written notice to all other Holders of this Warrant and holders of
Warrant Securities, if any, advising them that the Company is proceeding with a
registration statement or offering statement and that their Warrant and Warrant
Securities will be included therein if they so desire and agree to pay their pro
rata share of the cost of registration or qualification and provided that the
Holder or holder delivers written notice to the Company of their desire to be
included and their agreement to pay their pro rata share of the cost within 30
days after the delivery of the Company's notice to them. The Company will supply
all information necessary or advisable for any such registration statements or
offering statements; provided, however, that all the costs and expenses of such
registration statements or offering statements shall be borne, in a manner
proportionate to the number of securities for which they indicate a desire to
register, by the Holders of this Warrant and the holders of Warrant Securities
who seek the registration or qualification of their Warrant, Warrant Securities
or Warrant Securities underlying the unexercised portion of their Warrant. In
determining the amount of costs and expenses to be borne by those Holders or
holders, the only costs and expenses of the Company to be included are the
additional costs and expenses that would not have otherwise been incurred by the
Company if those Holders or holders had not desired to file a registration
statement or offering statement. As an example, and without limitation, audit
fees would not be charged to those Holders or holders if or to the extent that
the Company would have incurred the same audit fees for its year-end or other
use in the absence of the registration statement or offering statement. The
Holders or holders responsible for the costs and expenses shall reimburse the
Company for those reimbursable costs and expenses reasonably incurred by the
Company within 30 days after the initial effective date of the registration
statement or qualification at issue.
No other securities of the Company of any type shall be included in, be the
subject of, or be publicly offered pursuant to any registration statement or
offering statement filed within 180 days following the latest effective date of
any registration statement or offering statement filed pursuant to this Section
(8.4) unless (i) the Company obtains the prior written consent of Cohig upon
such terms and conditions as Cohig in its sole discretion may deem desirable,
and (ii) the owners or holders of those other securities, including, without
limitation, the Company, agree to bear an equitable portion, reasonably
acceptable to Cohig of the costs and expenses of the registration statement or
offering statement filed pursuant to this Section (8.4).
8.5. Payment of Exercise Price from Proceeds. In the event that any such
Registration Statement is utilized for a public offering of any of the Shares to
be received upon exercise of the Warrants pursuant to this Section (8), the
Warrantholder may elect to pay the exercise price of the Warrants to the Company
out of the proceeds of the sale of the Shares pursuant to the Registration
Statement concurrently with the closing of such sale of the Shares.
8.6. Condition of Company's Obligations. As to each registration
statement or offering statement, the Company's obligations contained in this
Section (8) shall be conditioned upon a timely receipt by the Company in writing
of the following:
(i) Information as to the terms of the contemplated public
offering furnished by and on behalf of each Holder or holder intending to
make a public distribution of the Warrant Securities or Warrant Securities
underlying the unexercised portion of the Warrant; and
(ii) Such other information as the Company may reasonably require
from such Holders or holders, or any underwriter for any of them, for
inclusion in the registration statement or offering statement.
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8.7. Additional Requirements. In each instance in which the Company
shall take any action to register or qualify the Warrant Securities or the
Warrant Securities underlying the unexercised portion of this Warrant, if any,
pursuant to this Section (8), the Company shall do the following:
(i) supply to Cohig, as the representative of the Holders of the
Warrant and the holders of Warrant Securities whose Warrant Securities are
being registered or qualified, two (2) conformed copies of each
registration statement or offering statement, and all amendments thereto,
and a reasonable number of copies of the preliminary, final or other
prospectus or offering circular, all prepared in conformity with the
requirements of the Act and the rules and regulations promulgated
thereunder, and such other documents as Cohig shall reasonably request;
(ii) cooperate with respect to (A) all necessary or advisable
actions relating to the preparation and the filing of any registration
statements or offering statements, and all amendments thereto, arising from
the provisions of this Section (8), (B) all reasonable efforts to establish
an exemption from the provisions of the Act or any other federal or state
securities statutes, (C) all necessary or advisable actions to register or
qualify the public offering at issue pursuant to federal securities
statutes and the state "blue sky" securities statutes of each jurisdiction
that the Holders of the Warrant or holders of Warrant Securities shall
reasonably request, and (D) all other necessary or advisable actions to
enable the Holders of the Warrant Securities to complete the contemplated
disposition of their securities in each reasonably requested jurisdiction;
and
(iii) keep all registration statements or offering statements to
which this Section (8) applies, and all amendments thereto, effective under
the Act for a period of at least 9 months after their initial effective
date and cooperate with respect to all necessary or advisable actions to
permit the completion of the public sale or other disposition of the
securities subject to a registration statement or offering statement.
8.8. Cohig as Representative. For purposes of subsection (8.7(i)) above,
by the receipt of this Warrant or any Warrant Securities, all Holders and all
holders of Warrant Securities acknowledge and agree that Cohig is and shall be
their representative.
8.9. Survival. The Company's obligations described in this Section (8)
shall continue in full force and effect regardless of the exercise, surrender,
cancellation or expiration of this Warrant.
SECTION 9. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes, if any, attributable to
the initial issuance of the Warrants or the securities comprising the Shares;
provided, however, the Company shall not be required to pay any tax which may be
payable in respect of any transfer of the Warrants or the securities comprising
the Shares.
SECTION 10. INDEMNIFICATION AND CONTRIBUTION.
10.1. Indemnification By Company. In the event of the filing of any
Registration Statement with respect to the Warrant Shares pursuant to Section
(8) hereof, the Company agrees to indemnify and hold harmless the Warrantholder
or any holder of Warrant Shares and each person, if any, who controls the
Warrantholder or any holder of Warrant Shares within the meaning of the Act,
against any and all loss, claim, damage or liability, joint or several (which
shall, for all purposes of this Agreement include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which such
Warrantholder or any holder of Warrant Shares may become subject, under the Act
or otherwise, insofar as such loss, claim, damage, or liability (or action with
respect thereto) arises out of or is based upon (a) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Effective Prospectus, or the Final
Prospectus or any amendment or supplement thereto; or (b) the omission
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or alleged omission to state in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or the Final Prospectus or any amendment or
supplement thereto a material fact required to be stated therein or necessary to
make the statements therein not misleading; except that the Company shall not be
liable in any such case to the extent, but only to the extent, that any such
loss, claim, damage, or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by such Warrantholder or the holder of such Warrant Shares specifically
for use in the preparation of the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus or any amendment
or supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
10.2. Indemnification By Warrantholders. The Warrantholders and the
holders of Warrant Shares agree that they, severally, but not jointly, shall
indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any and all loss, claim, damage or liability,
joint or several (which shall, for all purposes of this Agreement include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees), to which the Company may become subject under the Act or otherwise,
insofar as such loss, claim, damage, liability (or action in respect thereto)
arises out of or are based upon (a) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or the Final Prospectus or any
amendment or supplement thereto; or (b) the omission or alleged omission to
state in the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or the Final Prospectus or any amendment or supplement thereto a
material fact required to be stated therein or necessary to make the statements
therein not misleading; except that such indemnification shall be available in
each such case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon information and in conformity with written information furnished to the
Company by the Warrantholder or the holder of Warrant Shares specifically for
use in the preparation thereof. This indemnity will be in addition to any
liability which such Warrantholder or holder of Warrant Shares may otherwise
have.
10.3. Right to Provide Defense. Promptly after receipt by an indemnified
party under Section (10.1) or (10.2) above of written notice of the commencement
of any action, the indemnified party shall, if a claim in respect thereof is to
be made against the indemnifying party under such section, notify the
indemnifying party in writing of the claim or the commencement of that action;
the failure to notify the indemnifying party shall not relieve it of any
liability which it may have to an indemnified party, except to the extent that
the indemnifying party did not otherwise have knowledge of the commencement of
the action and the indemnifying party's ability to defend against the action was
prejudiced by such failure. Such failure shall not relieve the indemnifying
party from any other liability which it may have to the indemnified party. If
any such claim or action shall be brought against an indemnified party, and it
shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under such section for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; except that Cohig shall
have the right to employ counsel to represent it and the other Warrantholders of
holders of Shares who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by such persons against the Company
under such section if, in Cohig's reasonable judgement, it is advisable for
Cohig and those Warrantholders or holders of Shares to be represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company.
10.4. Contribution. If the indemnification provided for in Sections
(10.1) and (10.2) of this Agreement is unavailable or insufficient to hold
harmless an indemnified party, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims,
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damages, or liabilities referred to in Sections (10.1) or (10.2) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Warrantholders on the other; or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect the relative benefits referred to
in clause (i) above but also the relative fault of the Company on the one hand
and the Warrantholders on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Warrantholders shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
unitemized expenses received by the Underwriters, in each case as set forth in
the table on the cover page of the Final Prospectus. Relative fault shall be
determined by reference to, among other things, whether the untrue statement of
a material fact or the omission to state a material fact relates to information
supplied by the Company or the Underwriter and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
untrue statement or omission. For purposes of this Section (10.4), the term
"damages" shall include any counsel fees or other expenses reasonably incurred
by the Company or the Underwriters in connection with investigating or defending
any action or claim which is the subject of the contribution provisions of this
Section (10.4). No person adjudged guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it shall promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in Section (10.4) hereof).
SECTION 11. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
This Warrant, the Warrant Securities, and all other securities issued or
issuable upon exercise of this Warrant, may not be offered, sold or transferred,
in whole or in part. except in compliance with the Act, and except in compliance
with all applicable state securities laws. The Company may cause substantially
the following legends, or their equivalents, to be set forth on each certificate
representing the Warrant Securities, of any other security issued or issuable
upon exercise of this Warrant, not theretofore distributed to the public or sold
to underwriters, as defined by the Act, for distribution to the public pursuant
to Section 8 above.
(i) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE
SECURITIES LAWS ("STATE ACTS") AND ARE RESTRICTED SECURITIES
AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR QUALIFICATION UNDER THE ACT AND APPLICABLE
STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT AND APPLICABLE STATE ACTS, THE AVAILABILITY OF
WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY."
(ii) Any legend required by applicable state securities laws.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legends (except a new certificate issued upon
completion of public distribution pursuant to a registration statement under the
Securities Act of 1933, as amended (the "Act"), or the securities represented
thereby) shall also bear the above legends unless, in the opinion of the
Company's counsel, the securities represented thereby need no longer be subject
to such restrictions.
Birner Dental Management
1996 Warrants
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<PAGE>
SECTION 12. FRACTIONAL SHARES.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of all or any part of this Warrant. With respect to any
fraction of a share of any security called for upon any exercise of this
Warrant, the Company shall pay to the Holder an amount in money equal to that
fraction multiplied by the Current Market Price of that share.
SECTION 13. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER.
Nothing contained in this Agreement or in the Warrants shall be construed
as conferring upon the Warrantholder or its transferees any rights as a
stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect to any meeting of
stockholders for the election of directors of the Company or any other matter.
The Company covenants, however, that for so long as this Warrant is at least
partially unexercised, it will furnish any Holder of this Warrant with copies of
all reports and communications furnished to the shareholders of the Company. In
addition, if at any time prior to the expiration of the Warrants and prior to
their exercise, any one or more of the following events shall occur:
(i) any action which would require an adjustment pursuant to
Section (4.1) (except subsections (4.1(e)) and (4.1(h)) or (4.4); or
(ii) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation, merger, or sale of its
property, assets, and business as an entirety or substantially as an
entirety) shall be proposed:
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section (16) hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation, or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive notice or any
defect therein shall not affect the validity of any action taken with respect
thereto.
SECTION 14. CHARGES DUE UPON EXERCISE.
The Company shall pay any and all issue or transfer taxes, including, but
not limited to, all federal or state taxes, that may be payable with respect to
the transfer of this Warrant or the issue or delivery of Warrant Securities upon
the exercise of this Warrant.
SECTION 15. WARRANT SECURITIES TO BE FULLY PAID.
The Company covenants that all Warrant Securities that may be issued and
delivered to a Holder of this Warrant upon the exercise of this Warrant and
payment of the Exercise Price will be, upon such delivery, validly and duly
issued, fully paid and nonassessable.
SECTION 16. NOTICES.
Any notice pursuant to this Agreement by the Company or by a Warrantholder
or a holder of Shares shall be in writing and shall be deemed to have been duly
given if delivered or mailed by certified mail, return receipt requested:
(i) If to a Warrantholder or a holder of Shares, addressed to
Cohig & Associates, Inc., 6300 South Syracuse Way, Suite 430, Englewood,
Colorado 80111, Attention: Corporate Finance Department; or
Birner Dental Management
1996 Warrants
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<PAGE>
(ii) If to the Company addressed to it at 3801 East Florida
Avenue, Suite 208, Denver, Colorado 80210, Attention: CEO.
Each party may from time to time change the address to which notices to it
are to be delivered mailed hereunder by notice in accordance herewith to the
other party.
SECTION 17. MERGER OR CONSOLIDATION OF THE COMPANY.
The Company will not merge or consolidate with or into any other
corporation or sell all or substantially all of its property to another
corporation, unless the provisions of Section (4.4) are complied with.
SECTION 18. APPLICABLE LAW.
This Warrant shall be governed by and construed in accordance with the laws
of the State of Colorado, and courts located in Colorado shall have exclusive
jurisdiction over all disputes arising hereunder.
SECTION 19. ARBITRATION.
The Company and the Holder, and by receipt of this Warrant or any Warrant
Securities, all subsequent Holders or holders of Warrant Securities, agree to
submit all controversies, claims, disputes and matters of difference with
respect to this Warrant, including, without limitation, the application of this
Section (19) to arbitration in Denver, Colorado, according to the rules and
practices of the American Arbitration Association from time to time in force;
provided, however, that if such rules and practices conflict with the applicable
procedures of Colorado courts of general jurisdiction or any other provisions of
Colorado law then in force, those Colorado rules and provisions shall govern.
This agreement to arbitrate shall be specifically enforceable. Arbitration may
proceed in the absence of any party if notice of the proceeding has been given
to that party. The parties agree to abide by all awards rendered in any such
proceeding. These awards shall be final and binding on all parties to the extent
and in the manner provided by the rules of civil procedure enacted in Colorado.
All awards may be filed, as a basis of judgment and of the issuance of execution
for its collection, with the clerk of one or more courts, state or federal,
having jurisdiction over either the party against whom that award is rendered or
its property. No party shall be considered in default hereunder during the
pendency of arbitration proceedings relating to that default.
SECTION 20. MISCELLANEOUS PROVISIONS.
(a) Subject to the terms and conditions contained herein, this Warrant
shall be binding on the Company and its successors and shall inure to the
benefit of the original Holder, its successors and assigns and all holders of
Warrant Securities and the exercise of this Warrant in full shall not terminate
the provisions of this Warrant as it relates to holders of Warrant Securities.
(b) If either party to this Agreement fails to perform any of its
obligations hereunder, it shall be liable to the other party for all damages,
costs and expenses resulting from the failure, including, but not limited to,
all reasonable attorney's fees and disbursements.
(c) This Warrant cannot be changed or terminated or any performance or
condition waived in whole or in part except by an agreement in writing signed by
the party against whom enforcement of the change, termination or waiver is
sought; provided, however, that any provisions hereof may be amended, waived,
discharged or terminated upon the written consent of the Company and Cohig.
(d) If any provision of this Warrant shall be held to be invalid,
illegal or unenforceable, such provision shall be severed, enforced to the
extent possible, or modified in such a way as to make it enforceable, and the
invalidity, illegality or unenforceability shall not affect the remainder of
this Warrant.
Birner Dental Management
1996 Warrants
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<PAGE>
(e) The Company agrees to execute such further agreements, conveyances,
certificates and other documents as may be reasonably requested by the Holder to
effectuate the intent and provisions of this Warrant.
(f) Paragraph headings used in this Warrant are for convenience only
and shall not be taken construed to define or limit any of the terms or
provisions of this Warrant. Unless otherwise provided, or unless the context
shall otherwise require, the use of the singular shall include the plural and
the use of any gender shall include all genders.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By: /s/ Fred Birner
------------------------------------
Fred Birner, Chief Executive Officer
COHIG & ASSOCIATES, INC.
By: [signature illegible]
------------------------------------
Birner Dental Management
1996 Warrants
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<PAGE>
EXHIBIT A
--------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS ("STATE ACTS") AND ARE
RESTRICTED SECURITIES AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE ACT AND APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
Warrant certificate No. CDW-___
WARRANTS TO PURCHASE
____SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, __________, the registered holder,
hereof or assigns (the "Warrantholder"), is entitled to purchase from Birner
Dental Management Services, Inc. (the "Company"), at any time during the period
commencing at 9:00 a.m., Colorado time, on May 29, 1996, and expiring at 5:00
p.m., Colorado time, on May 29, 2001, at the purchase price per Share of $3.50
(the "Exercise Price"), the number of shares of Common Stock of the Company set
forth above (the "Shares"). The number of shares of Common Stock of the Company
purchasable upon exercise of the Warrants evidenced hereby shall be subject to
adjustment from time to time as set forth in the Warrant Agreement dated May 29,
1996.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check or by Cashless Exercise subject to the
provisions of Section 2.2 of the Warrant Agreement (as that term is defined
therein).
The Warrants evidenced hereby represent the right to purchase an aggregate
of up to 114,000 Shares and are issued under and in accordance with Warrant
Agreement dated as of May 29, 1996, between the Company and Cohig & Associates,
Inc. and are subject to the terms and provisions contained in the Warrant
Agreement, to all of which the Warrantholder by acceptance hereof consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company in the manner and subject to
the limitations set forth in the Warrant Agreement.
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<PAGE>
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Dated:
[Seal of Birner Dental Management Services, Inc. appears here]
Attest:
___________________________
Secretary
PURCHASE FORM
-------------
Dated__________
The undersigned hereby irrevocably elects to exercise the Warrant
represented by this Warrant Certificate to the extent of purchasing _____ Shares
of Birner Dental Management Services, Inc. (the "Company") and hereby tenders
payment of the exercise price thereof. If the number of Shares purchased are not
all the Shares purchasable pursuant to the Warrants represented by this Warrant
Certificate, a new Warrant Certificate should be issued and delivered to the
undersigned at the address stated below.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name _____________________________________________________________________
(please type or print in block letters)
Address __________________________________________________________________
Birner Dental Management
1996 Warrants
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<PAGE>
ASSIGNMENT FORM
----------------
FOR VALUE RECEIVED, _____________, hereby sells, assigns and transfers unto
Name ______________________________________________________________________
(Please type or print in block letters)
Address ___________________________________________________________________
the right to purchase Shares of the Company represented by this Warrant
Certificate to the extent of _____ Shares as to which such right is exercisable
and does hereby irrevocably constitute and appoint _______________ attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises. If the number of Shares assigned are not all the Shares
purchasable pursuant to the Warrants represented by this Warrant Certificate, a
new Warrant Certificate should be issued and delivered to the undersigned.
Signature ________________________________ Dated _____________________
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS IT
APPEARS UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Birner Dental Management
1996 Warrants
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<PAGE>
CASHLESS EXERCISE FORM
----------------------
Pursuant to Section 2.2 of the Warrant Agreement, the Holder hereby
irrevocably elects to convert Warrants with respect to Shares of the Company
into _____ Shares of the Company. A conversion calculation is attached hereto as
Exhibit B-1.
The undersigned requests that certificates for such Shares be issued as
follows:
Name: _____________________________________________________________________
Address: __________________________________________________________________
Deliver to: _______________________________________________________________
and that a new Warrant Certificate for the balance remaining of the Warrants, if
any, subject to the Warrant be registered in the name of, and delivered to, the
undersigned at the address stated above.
Signature ____________________________________ Dated ___________________
................................................................................
Exhibit B-1
CALCULATION OF WARRANT CONVERSION
--------------------------------
Converted Securities = Net Value
---------
FMV
FMV = $________________
Net Value = Aggregate FMV - Aggregate Exercise Price
= $________________ - ____________________
= $________________
Converted Shares = _________________
Fractional Converted Shares = _________________(1)
__________________________
(1) The Company to pay for fractional Shares in cash @ $_________ per Share.
Birner Dental Management
1996 Warrants
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<PAGE>
EXHIBIT 10.4
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COHIG & ASSOCIATES, INC.
WARRANT AGREEMENT
Dated as of October 3, 1995
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of October 3, 1995,
is made and entered into by and between BIRNER DENTAL MANAGEMENT SERVICES, Inc.,
a Colorado corporation (the "Company"), and COHIG & ASSOCIATES, INC. ("Cohig").
The Company agrees to issue and sell, and Cohig agrees to purchase, for
the price of $100, warrants to purchase up to an aggregate of 89,930 shares
("Shares") of the Company's Common Stock, subject to the terms and conditions
set forth below.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and Cohig, for value received, hereby agree as follows:
SECTION 1. DEFINITIONS.
The following terms used in this agreement shall have the following
meanings (unless otherwise expressly provided herein):
1.1 The "Act." The Securities Act of 1933, as amended.
1.2. The "Commission." The Securities and Exchange Commission.
1.3. The "Company " Birner Dental Management Services, Inc.
1.4 "Common Stock." The Company's Common Stock.
1.5. "Current Market Price." The Current Market Price shall be
determined as follows:
(i) if the security at issue is listed on a national
securities exchange or admitted to unlisted trading privileges on such
an exchange or quoted on the National Market System of the National
Association of Securities Dealers Automated Quotation System, Inc.
("NASDAQ") quotation service, the current value shall be the last
reported sale price of that security on such exchange or system on the
last business day prior to the date of the applicable exercise of this
Warrant or, if no such sale is made on such day, the average of the
highest closing bid and lowest asked price for such day on such exchange
or system; or
(ii) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges, the current market value shall
be the average of the last reported highest bid and lowest asked prices
quoted on NASDAQ or, if not so quoted, then by the National Quotation
Bureau, Inc. on the last business day prior to the day of the applicable
exercise of this Warrant; or
(iii) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges and bid and asked prices are not
reported, the current market value shall be determined in such
reasonable manner as may be prescribed from time to time by the Board of
Directors of the Company, subject to the objection and arbitration
procedure as described in Section (6) below.
1.6. "Exercise Date." October 3, 1995.
1.7. "Exercise Price." $1.80 per Share, as modified in accordance
with Section (4), below.
1.8. "Expiration Date." October 3, 2000.
<PAGE>
1.9. "Holder" or "Warrantholder." Cohig & Associates, Inc., and any
valid transferee thereof pursuant to Section (3.1) below.
1.10. "NASD." The National Association of Securities Dealers, Inc.
1.11. "NASDAQ." The automated quotation system operated by NASDAQ, Inc.
1.12. "Termination of Business." Any sale; lease or exchange of all, or
substantially all, of the Company's assets or business or any dissolution,
liquidation or winding up of the Company.
1.13. "Warrants." The warrants issued in accordance with the terms of
this Agreement and any Warrants issued in substitution for or replacement of
such warrants, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.14. "Warrant Securities." The Common Stock purchasable upon exercise
of a Warrant including the Common Stock underlying unexercised portions of a
Warrant.
1.15. "1996 Warrant Agreement." The Warrant Agreement dated May 29,
1996, between the Company and Cohig & Associates, Inc.
1.16. "1996 Warrant Securities." The Common Stock purchasable upon
exercise of the warrants issued pursuant to the 1996 Warrant Agreement, as
defined in the 1996 Warrant Agreement.
1.17. "1997 Warrant Agreement." The Warrant Agreement dated December
27, 1996, between the Company and Cohig & Associates, Inc.
1.18. "1997 Warrant Securities." The Common Stock purchasable upon
exercise of the Warrants issued pursuant to the 1997 Warrant Agreement, as
defined in the 1997 Warrant Agreement.
SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANT.
2.1. Exercise of Warrant. Subject to the terms of this Agreement, the
Warrantholder shall have the right, at any time during the period commencing at
9:00 a.m., Denver Time, on the Exercise Date and ending at 5:00 p.m., Denver
Time, on the Expiration Date, to purchase from the Company up to the number of
fully paid and nonassessable Shares to which the Warrantholder may at the time
be entitled to purchase pursuant to this Agreement, upon surrender to the
Company, at its principal office, of the certificate evidencing the Warrants to
be exercised, together with the purchase form on the reverse thereof, or the
Cashless Exercise Form in the case of a cashless exercise pursuant to Section
(2.2) herein, duly filled in and signed, and upon payment to the Company of the
Exercise Price for the number of Shares in respect of which such Warrants are
then exercised, but in no event for less than 100 Shares (unless fewer than an
aggregate of 100 shares are then purchasable under all outstanding Warrants held
by a Warrantholder).
2.2. Payment of Exercise Price. Payment of the aggregate Exercise Price
shall be made
(i) in cash or by check, or any combination thereof; or
(ii) upon the request of the Warrantholder and the acceptance by
the Company, which acceptance may be withheld by the Company in its sole
discretion, by means of a "Cashless Exercise." In the event of a
Cashless Exercise, the Warrantholder shall exchange its Warrant for such
number of shares of Common Stock determined by multiplying the number of
Shares by a fraction, the numerator of which shall be the difference
between the then-current market price per share of Common Stock and the
Exercise Price, and the denominator of which shall be the then-current
market price per share of Common Stock. For purposes of this Section
(2.2) only, the "then
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<PAGE>
current market price per share of Common Stock" at any date shall be
deemed to be the average of the daily closing prices for 20 consecutive
trading days commencing the 21st trading day before such date. The
closing price for each day shall be the last sales price regular way or,
in case no such reported sales take place on such day, the average of
the last reported bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common Stock is
admitted to trading or listed or, if not listed or admitted to trading
on any such exchange, the representative closing bid price as reported
by Nasdaq or another similar organization if Nasdaq is no longer
reporting such information or, if no such price is available, the fair
market price as reasonably determined by the Board of Directors.
2.3. Issuance of Shares. Upon such surrender of the Warrants and payment
of such Exercise Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Warrantholder and in such name or names as the Warrantholder may designate, a
certificate or certificates for the number of full Shares so purchased upon the
exercise of the Warrant, together with cash, as provided in Section (12) hereof,
in respect of any fractional Shares otherwise issuable upon such surrender. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become the holder of
record of such securities as of the date of surrender of the warrants and be
divided or combined, upon request to the Company by the Warrantholder, into a
certificate or certificates representing the right to purchase the same
aggregate number of Shares.
SECTION 3. TRANSFERABILITY AND FORM OF WARRANT.
3.1. Limitation on Transfer. This Warrant may not be sold, transferred,
assigned, pledged or hypothecated until the Exercise Date, except in compliance
with Section (8) hereof. Any assignment or transfer of this Warrant shall be
made by the presentation and surrender of this Warrant to the Company at its
principal Office or the Office of its transfer agent, if any, accompanied by a
duly executed Assignment Form, in the form attached to and by this reference
incorporated in this Warrant as Exhibit B. Upon the presentation and surrender
of these items to the Company, the Company, at its sole expense, shall execute
and deliver to the new Holder or Holders a new Warrant or Warrants, containing
the same terms and conditions as this Warrant, in the name of the new Holder or
Holders as named in the Assignment Form, and this Warrant shall at that time be
canceled.
3.2. Exchange of Certificate. Any Warrant certificate may be exchanged
for another certificate or certificates entitling the Warrantholder to purchase
a like aggregate number of Shares as the certificate or certificates surrendered
then entitled such Warrantholder to purchase. Any Warrantholder desiring to
exchange a Warrant certificate shall make such request in writing delivered to
the Company, and shall surrender, properly endorsed, with signatures guaranteed,
the certificate evidencing the Warrant to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
certificate as so requested.
3.3. Mutilated, Lost, Stolen, or Destroyed Certificate. In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrantholder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant certificate
or certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount, at the applicant's cost. Applicants for such
substitute Warrant certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
3.4. Form of Certificate. The text of the Warrant and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided.
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<PAGE>
The Warrants shall be executed on behalf of the Company by its President or by a
Vice President and attested to by its Secretary or an Assistant Secretary. A
Warrant bearing the signature of an individual who was at any time the proper
officer of the Company shall bind the Company, notwithstanding that such
individual shall have ceased to hold such officer prior to the delivery of such
Warrant or did not hold such office on the date of this Agreement.
The Warrants shall be dated as of the date of signature thereof
by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
4.1. Adjustments. The number of Shares purchasable upon the exercise of
the Warrants shall be subject to adjustments as follows:
(a) In case the Company shall (i) pay a dividend in Common Stock
to Holders of Common Stock, (ii) make a distribution in shares of Common
Stock to holders of Common Stock, (iii) subdivide its outstanding Common
Stock into a greater number of shares, or (iv) combine its outstanding
Common Stock into a smaller number of shares, the Exercise Price in
effect immediately prior thereto shall be adjusted so that the holder of
any Warrant thereafter surrendered for exercise shall be entitled to
receive the number of Shares of Common Stock which it would have owned
had such Warrant been exercised immediately prior to the happening of
such event. An adjustment made pursuant to this subsection (4.1.(a))
shall become effective immediately after the record date in the case of
a dividend or distribution in shares and shall become effective
immediately after the effective date in the case of subdivision or
combination.
(b) No adjustment in the number of Shares purchasable pursuant to
the Warrants shall be required unless such adjustment would require an
increase or decrease of at least one percent in the number of Shares
then purchasable upon the exercise of the Warrants or, if the Warrants
are not then exercisable, the number of Shares purchasable upon the
exercise of the Warrants on the first date thereafter that the Warrants
become exercisable; provided, however, that any adjustments which by
reason of this subsection (4.1(b)) are not required to be made
immediately shall be carried forward and taken into account in any
subsequent adjustment.
(c) Whenever the number of Shares purchasable upon the exercise of
the Warrant is adjusted, as herein provided, the Exercise Price payable
upon exercise of the 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 the Warrant immediately prior to such adjustment,
and of which the denominator shall be the number of Warrant Shares so
purchasable immediately thereafter.
(d) Whenever the number of Shares purchasable upon exercise of the
Warrants is adjusted as herein provided, the Company shall cause to be
promptly mailed to the Warrantholder by first class mail, postage
prepaid, notice of such adjustment and a certificate of the chief
financial officer of the Company setting forth the number of Shares
purchasable upon the exercise of the Warrants after such adjustment, a
brief statement of the facts requiring such adjustment and the
computation by which such adjustment was made.
(e) For the purpose of this Section (4.1), the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common
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Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any
time, as a result of an adjustment made pursuant to this Section (4),
the Warrantholder shall become entitled to purchase any securities of
the Company other than Common Stock, (y) if the Warrantholder's right to
purchase is on any other basis than that available to all holders of the
Company's Common Stock, the Company shall obtain an opinion of an
independent investment banking firm valuing such other securities and
(z) thereafter the number of such other securities so purchasable upon
exercise of the Warrants shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Shares contained in this Section (4).
(f) Upon the expiration of any rights, options, warrants, or
conversion privileges, if such shall have not been exercised, the number
of Shares purchasable upon exercise of the Warrants, to the extent the
Warrants have not then been exercised, shall, upon such expiration, be
readjusted and shall thereafter be such as they would have been had they
been originally adjusted (or had the original adjustment not been
required, as the case may be) on the basis of (i) the fact that the only
shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights, options,
warrants, or conversion privileges, and (ii) the fact that such shares
of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants, or
conversion privileges whether or not exercised; provided, however, that
no such readjustment shall have the effect of decreasing the number of
Shares purchasable upon exercise of the Warrants by an amount in excess
of the amount of the adjustment initially made in respect of the
issuance, sale, or grant of such rights, options, warrants, or
conversion rights.
4.2. No Adjustment for Dividends. Except as provided in Section
(4.1), no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of the Warrants or upon the exercise of
the Warrants.
4.3. No Adjustment in Certain Cases. No adjustments shall be made
pursuant to Section (4) hereof in connection with the issuance of the Common
Stock upon exercise of the Warrants. No adjustments shall be made pursuant to
Section (4) hereof in connection with the exercise of Warrants presently
outstanding; or the issuance of shares upon conversion of the Company's 9%
Convertible Subordinated Debentures; or the grant or exercise of options to
purchase, or the issuance of shares upon exercise of such options, under the
Company's stock option plan for directors, employees, and consultants. No
adjustment shall be made pursuant to Section 4.4(b) or (c) hereof unless: (i)
the Current Market Price of the securities received in the merger or
consolidation as of its Effective Date pursuant to Section 4.4(b); or (ii) the
value of the consideration that would be received by a Warrantholder pursuant to
Section 4.4(c) if he exercised his Warrants immediately prior to the sale or
conveyance (and assuming the exercise of all outstanding Warrants and conversion
of all outstanding convertible stock that have an exercise price or conversion
price equal to or less than the Exercise Price); is less than the Exercise
Price. If the consideration to be received is other than cash, the value of the
consideration to be received shall be the Current Market Price as of the
Effective Date of such sale or conveyance of securities received; or the fair
market value of other assets received as determined by an independent appraisal
of such assets.
4.4 Effect of Reclassification, Consolidation, Merger, or Sale on
Exercise Privilege. If any of the following shall occur, namely: (a) any
reclassification or change of outstanding shares of Common Stock issuable upon
exercise of Warrants (other than a change in par value, or from par value to no
par value, or from no par value to par value, or as a result of a subdivision or
combination), (b) any consolidation or merger to which the Company is a party
other than a merger in which the Company is the continuing corporation and which
does not result in any reclassification of, or change (other than a change in
name, or par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination) in, outstanding
shares of Common Stock, or (c) any sale or conveyance, of all or substantially
all of the property
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or business of the Company as an entirety, then the Company, or such successor
or purchasing corporation, as the case may be, shall, as a condition precedent
to such reclassification, change, consolidation, merger, sale or conveyance,
execute and deliver to Cohig as representative of each holder of a Warrant then
unexercised and outstanding, an amendment to this Agreement providing that the
Warrantholders shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action, to receive, upon exercise of
the Warrants, the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock deliverable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Such
amendment shall provide for the adjustments of the Exercise Price which shall be
as nearly equivalent as may be practicable to the adjustments of the Exercise
Price provided for in this Section 4. If, in the case of any such
reclassification, change, consolidation, merger, sale or conveyance, the stock
or other securities and property (including cash) receivable thereupon by a
holder of Common Stock includes shares of stock or other securities and property
of a corporation other than the successor or purchasing corporation, as the case
may be, in such consolidation, merger, sale or conveyance, then such amendment
shall also be executed by such other corporation and shall contain such
additional provisions to protect the interests of the Warrantholders as the
Board of Directors of the Company shall reasonably consider necessary by reason
of the foregoing. The provision of this Section 4.4 shall similarly apply to
successive consolidations, mergers, sales, or conveyances.
In the event the Company shall execute an amendment to this Agreement as
provided in this subsection (4.4), the Company shall promptly send each
Warrantholder an Officers' Certificate briefly stating the reasons for the
amendment, the kind or amount of shares of stock or securities or property
(including cash) receivable by Warrantholders upon exercise of their Warrants
after any such reclassification, change, consolidation, merger, sale or
conveyance, any adjustments to be made with respect thereto, and that all
conditions precedent have been complied with.
4.5. Par Value of Shares of Common Stock. Before taking any action
which would cause an adjustment effectively reducing the portion of the Exercise
Price allocable to each Share below the par value per share of the Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Common Stock
upon exercise of the Warrants.
4.6. Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section (4), and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section (4).
4.7. Statement on Warrant Certificates. Irrespective of any
adjustments in the number of securities issuable upon exercise of the Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement. However, the Company may, at any
time in its sole discretion (which shall be conclusive), 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 certificate thereafter issued,
whether upon registration of transfer of, or in exchange or substitution for, an
outstanding Warrant certificate, may be in the form so changed.
4.8. Treasury Stock. For purposes of this Section (4), shares of
Common Stock owned or held at any relevant time by, or for the account of, the
Company, in its treasury or otherwise, shall not be deemed to be outstanding for
purposes of the calculations and adjustments described.
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SECTION 5. NOTICE TO HOLDERS.
If, prior to the expiration of this Warrant either by its terms or by
its exercise in full, any of the following shall occur:
(i) the Company shall declare a dividend or authorize any
other distribution on its Common Stock; or
(ii) the Company shall authorize the granting to the
shareholders of its Common Stock of rights to subscribe for or purchase
any securities or any other similar rights; or
(iii) any reclassification, reorganization or similar change
of the Common Stock, or any consolidation or merger to which the Company
is a party, or the sale, lease, or exchange of any significant portion
of the assets of the Company; or
(iv) the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) any purchase, retirement or redemption by the Company of
its Common Stock;
then, and in any such case, the Company shall deliver to the Holder or Holders
written notice thereof at least 10 days prior to the earliest applicable date
specified below with respect to which notice is to be given, which notice shall
state the following:
(x) the date on which a record is to be taken for the
purpose of such dividend, distribution or rights, or, if a record is not
to be taken, the date as of which the shareholders of Common Stock of
record to be entitled to such dividend, distribution or rights are to be
determined;
(y) the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution, liquidation, winding
up or purchase, retirement or redemption is expected to become
effective, and the date, if any, as of which the Company's shareholders
of Common Stock of record shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, sale, transfer,
dissolution, liquidation, winding up, purchase, retirement or
redemption; and
(z) if any matters referred to in the foregoing clauses (x)
and (y) are to be voted upon by shareholders of Common Stock, the date
as of which those shareholders to be entitled to vote are to be
determined.
SECTION 6. OFFICERS' CERTIFICATE.
Whenever the Exercise Price or the aggregate number of Warrant
Securities purchasable pursuant to this Warrant shall be adjusted as required by
the provisions of Section (4) above, the Company shall promptly file with its
Secretary or an Assistant Secretary at its principal office, and with its
transfer agent, if any, an officers' certificate executed by the Company's
President and Secretary or Assistant Secretary, describing the adjustment and
setting forth, in reasonable detail, the facts requiring such adjustment and the
basis for and calculation of such adjustment in accordance with the provisions
of this Warrant. Each such officers' certificate shall be made available to the
Holder or Holders of this Warrant for inspection at all reasonable times, and
the Company, after each such adjustment, shall promptly deliver a copy of the
officers' certificate relating to that adjustment to the Holder or Holders of
this Warrant. The officers' certificate described in this Section (6) shall be
deemed to be conclusive as to the correctness of the adjustment reflected
therein if, and only if, no Holder of this Warrant delivers written notice to
the Company of an objection to the adjustment within 30 days after the officers'
certificate is delivered to the Holder or Holders of this Warrant. The Company
will make its books and records available for inspection and copying during
normal
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business hours by the Holder so as to permit a determination as to the
correctness of the adjustment. If written notice of an objection is delivered by
a Holder to the Company and the parties cannot reconcile the dispute, the Holder
and the Company shall submit the dispute to arbitration pursuant to the
provisions of Section 19 below. Failure to prepare or provide the officers'
certificate shall not modify the parties' rights hereunder.
SECTION 7. RESERVATION OF WARRANT SECURITIES.
There has been reserved, and the Company shall at all times keep
reserved so long as the Warrants remain outstanding, out of its authorized and
unissued Common Stock, such number of shares of Common Stock as shall be subject
to purchase under the Warrants. Every transfer agent for the Common Stock and
other securities of the Company issuable upon the exercise of the Warrants will
be irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every transfer agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants. The Company will supply every such transfer agent with
duly executed stock and other certificates, as appropriate, for such purpose and
will provide or otherwise make available any cash which may be payable as
provided in Section 12 hereof.
SECTION 8. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
8.1. Restrictions on Transfer. The Warrantholder agrees that prior to
making any disposition of the Warrants or the Shares, other than to officers of
Cohig, the Warrantholder shall give written notice to the Company describing
briefly the manner in which any such proposed disposition is to be made; and no
such disposition shall be made if the Company has notified the Warrantholder
that in the opinion of counsel a registration statement or other notification or
post-effective amendment thereto (hereinafter collectively a "Registration
Statement") under the Act is required with respect to such disposition and no
such Registration Statement has been filed by the Company with, and declared
effective, if necessary, by, the Commission.
8.2. Piggy-Back Registration Right. If at any time prior to the
Expiration Date the Company files a registration statement with the Commission
pursuant to the Act, or pursuant to any other act passed after the date of this
Agreement, which filing provides for the sale of securities by the Company to
the public, or files a Regulation A offering statement under the Act, the
Company shall offer to the Holder or Holders of this Warrant and the holders of
any Warrant Securities the opportunity to register or qualify the Warrant
Securities at the Company's sole expense, regardless of whether the Holder or
Holders of this Warrant or the holders of Warrant Securities or both may have
previously availed themselves of any of the registration rights described in
this Section (8); provided, however, that in the case of a Regulation A
offering, the opportunity to qualify shall be limited to the amount of the
available exemption after taking into account the securities that the Company
wishes to qualify. Notwithstanding anything to the contrary, this Section (8.2)
shall not be applicable to a registration statement registering securities
issued pursuant to an employee benefit plan or as to a transaction subject to
Rule 145 promulgated under the Act or which a form S-4 registration statement
could be used; nor shall it be applicable to the first underwritten registered
public offering of the Company.
The Company shall deliver written notice to the Holder or Holders of
this Warrant and to any holders of the Warrant Securities of its intention to
file a registration statement or Regulation A offering statement under the Act
at least 60 days prior to the filing of such registration statement or offering
statement, and the Holder or Holders and holders of Warrant Securities shall
have 30 days thereafter to request in writing that the Company register or
qualify the Warrant Securities or the Warrant Securities underlying the
unexercised portion of this Warrant in accordance with this Section (8.2). Upon
the delivery of such a written request within the specified time, the Company
shall be obligated to include in its contemplated registration statement or
offering statement all information necessary or advisable to register or qualify
the Warrant Securities or Warrant Securities underlying the unexercised portion
of this Warrant for a public offering, if the Company does file the contemplated
registration statement or offering statement; provided, however, that neither
the
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delivery of the notice by the Company nor the delivery of a request by a Holder
or by a holder of Warrant Securities shall in any way obligate the Company to
file a registration statement or offering statement. Furthermore,
notwithstanding the filing of a registration statement or offering statement,
the Company may, at any time prior to the effective date thereof, determine not
to offer the securities to which the registration statement or offering
statement relates, other than the Warrant, Warrant Securities and Warrant
Securities underlying the unexercised portion of this Warrant. Notwithstanding
the foregoing, if, as a qualification of any offering in any state or
jurisdiction in which the Company (by vote of its Board of Directors) or any
underwriter determines in good faith that it wishes to offer securities
registered in the offering, it is required that offering expenses be allocated
in a manner different from that provided above, then the offering expenses shall
be allocated in whatever manner is most nearly in compliance with the provisions
set out above.
If the registration for which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise as part of the written notice given pursuant to this Section. In such
event, the right of any Warrantholder or holder of Shares to registration
pursuant to this Section (8.2) shall be conditioned upon such holder's
participation in such underwriting, and the inclusion of Shares in the
underwriting shall be limited to the extent provided herein. All holders
proposing to distribute their Shares through such underwriting shall (together
with the Company and the other holders distributing their Shares through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section, if the managing underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten, such underwriter may limit the amount of securities to be
included in the registration and underwriting by the holders of Company
securities exercising "piggyback" registration rights (including the
Warrantholder and each holder of Warrants and Shares). The Company shall so
advise all such holders, and the number of shares of such securities that may be
included in the registration and underwriting shall be allocated (a) first to
investors who purchased securities in the Company's private placement made
pursuant to a Confidential Private Placement Memorandum dated July 28, 1995; and
(b) then if the limitation provides for additional securities to be included,
among all of the Warrantholders (including the holders of the warrants pursuant
to this Agreement and holders of warrants issued pursuant to the 1996 and 1997
Warrant Agreement) in proportion, as nearly as practicable, to the respective
amounts of securities requested to be included in such registration held by such
holders at the time of filing the registration statement, provided, however,
that no security holder other than one exercising a demand registration right
and other than as specifically referenced herein shall have superior rights with
respect to inclusion in a registration than those of the Warrantholder and each
holder of Warrants and Shares and if any party is granted such superior rights
hereafter the Warrantholder and each holder of Warrants and Shares shall be
deemed to be automatically granted similar rights. The Company shall advise all
such holders of any such limitations and of the number or securities that may be
included in the registration. Any securities excluded or withdrawn from such
underwriting shall not be transferred prior to one hundred twenty (120) days
after the effective date of the registration statement relating thereto, or such
shorter period of time as the underwriters may require.
The Company shall comply with the requirements of this Section (8.2) and
the related requirements of Section (8.6) at its own expense. That expense shall
include, but not be limited to, legal, accounting, consulting, printing, federal
and state filing fees, NASD fees, out-of-pocket expenses incurred by counsel;
accountants and consultants retained by the Company, and miscellaneous expenses
directly related to the registration statement or offering statement and the
offering. However, this expense shall not include the portion of any
underwriting commissions, transfer taxes and the underwriter's accountable and
nonaccountable expense allowances attributable to the offer and sale of the
Warrant, Warrant Securities and the Warrant Securities underlying the
unexercised portion of this Warrant, or the fees and expenses of any legal
counsel retained by a Holder, all of which expenses shall be borne by the Holder
or Holders of this Warrant and the holders of the Warrant Securities registered
or qualified.
8.3. Inclusion of Information. In the event that the Company registers
or qualifies the Warrant Securities pursuant to Section (8.2) above, the Company
shall include in the registration statement of qualification, and the prospectus
included therein, all information and materials necessary or advisable to
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comply with the applicable statutes and regulations so as to permit the public
sale of the Warrant Securities or the Warrant Securities underlying the
unexercised portion of this Warrant. As used in Section (8.2), reference to the
Company's securities shall include, but not be limited to, any class or type of
the Company's securities or the securities of any of the Company's subsidiaries
or affiliates.
8 4. Registration Statement Filed by Holder. In addition to the
registration rights described in Section (8.2) above, at any time that the
Company has securities registered under the Securities Exchange Act of 1934,
upon the written request of Holders of warrants and holders of Warrant
Securities representing at least 70% of the aggregate number of Warrant
Securities and 1996 and 1997 Warrant Securities issued pursuant to this Warrant
Agreement and pursuant to the 1996 and 1997 Warrant Agreements, the Company, as
promptly as possible after delivery of such request, shall cooperate with the
requesting Holders or holders in preparing and signing any registration
statement or offering statement that the Holders or holders may desire to file
in order to sell or transfer the Warrant and Warrant Securities. Within 10 days
after the delivery of the written request described above, the Company shall
deliver written notice to all other Holders of this Warrant and holders of
Warrant Securities, if any, advising them that the Company is proceeding with a
registration statement or offering statement and that their Warrant and Warrant
Securities will be included therein if they so desire and agree to pay their
pro rata share of the cost of registration or qualification and provided that
the Holder or holder delivers written notice to the Company of their desire to
be included and their agreement to pay their pro rata share of the cost within
30 days after the delivery of the Company's notice to them. The Company will
supply all information necessary or advisable for any such registration
statements or offering statements; provided, however, that all the costs and
expenses of such registration statements or offering statements shall be borne,
in a manner appropriate to the number of securities for which they indicate a
desire to register, by the Holders of this Warrant and the holders of Warrant
Securities who seek the registration or qualification of their Warrant, Warrant
Securities or Warrant Securities underlying the unexercised portion of their
Warrant. In determining the amount of costs and expenses to be borne by those
Holders or holders, the only costs and expenses of the Company to be included
are the additional costs and expenses that would not have otherwise been
incurred by the Company if those Holders or holders had not desired to file a
registration statement or offering statement. As an example, and without
limitation, audit fees would not be charged to those Holders or holders if or to
the extent that the Company would have incurred the same audit fees for its
year-end or other use in the absence of the registration statement or offering
statement. The Holders or holders responsible for the costs and expenses shall
reimburse the Company for those reimbursable costs and expenses reasonably
incurred by the Company within 30 days after the initial effective date of the
registration statement or qualification at issue.
No other securities of the Company of any type shall be included in, be
the subject of, or be publicly offered pursuant to any registration statement or
offering statement filed within 180 days following the latest effective date of
any registration statement or offering statement filed pursuant to this Section
(8.4) unless (i) the Company obtains the prior written consent of Cohig upon
such terms and conditions as Cohig in its sole discretion may deem desirable,
and (ii) the owners or holders of those other securities, including, without
limitation, the Company, agree to bear an equitable portion, reasonably
acceptable to Cohig of the costs and expenses of the registration statement or
offering statement filed pursuant to this Section (8.4).
8.5. Payment of Exercise Price from Proceeds. In the event that any such
Registration Statement is utilized for a public offering of any of the Shares to
be received upon exercise of the Warrants pursuant to this Section (8), the
Warrantholder may elect to pay the exercise price of the Warrants to the Company
out of the proceeds of the sale of the Shares pursuant to the Registration
Statement concurrently with the closing of such sale of the Shares.
8.6. Condition of Company's Obligations. As to each registration
statement or offering statement, the Company's obligations contained in this
Section (8) shall be conditioned upon a timely receipt by the Company in writing
of the following:
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(i) Information as to the terms of the contemplated public
offering furnished by and on behalf of each Holder or holder intending
to make a public distribution of the Warrant Securities or Warrant
Securities underlying the unexercised portion of the Warrant; and
(ii) Such other information as the Company may reasonably
require from such Holders or holders, or any underwriter for any of
them, for inclusion in the registration statement or offering statement.
8.7. Additional Requirements. In each instance in which the Company
shall take any action to register or qualify the Warrant Securities or the
Warrant Securities underlying the unexercised portion of this Warrant, if any,
pursuant to this Section (8), the Company shall do the following:
(i) supply to Cohig, as the representative of the Holders of
the Warrant and the holders of Warrant Securities whose Warrant
Securities are being registered or qualified, two (2) conformed copies
of each registration statement or offering statement, and all amendments
thereto, and a reasonable number of copies of the preliminary, final or
other prospectus or offering circular, all prepared in conformity with
the requirements of the Act and the rules and regulations promulgated
thereunder, and such other documents as Cohig shall reasonably request;
(ii) cooperate with respect to (A) all necessary or advisable
actions relating to the preparation and the filing of any registration
statements or offering statements, and all amendments thereto; arising
from the provisions of this Section (8), (B) all reasonable efforts to
establish an exemption from the provisions of the Act or any other
federal or state securities statutes, (C) all necessary or advisable
actions to register or qualify the public offering at issue pursuant to
federal securities statutes and the state "blue sky" securities statutes
of each jurisdiction that the Holders of the Warrant or holders of
Warrant Securities shall reasonably request, and (D) all other necessary
or advisable actions to enable the Holders of the Warrant Securities to
complete the contemplated disposition of their securities in each
reasonably requested jurisdiction; and
(iii) keep all registration statements or offering statements
to which this Section (8) applies, and all amendments thereto, effective
under the Act for a period of at least 9 months after their initial
effective date and cooperate with respect to all necessary or advisable
actions to permit the completion of the public sale or other disposition
of the securities subject to a registration statement or offering
statement.
8.8. Cohig as Representative. For purposes of subsection (8.7(i))
above, by the receipt of this Warrant or any Warrant Securities, all Holders and
all holders of Warrant Securities acknowledge and agree that Cohig is and shall
be their representative.
8.9. Survival. The Company's obligations described in this Section
(8) shall continue in full force and effect regardless of the exercise,
surrender, cancellation or expiration of this Warrant.
SECTION 9. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes, if any, attributable
to the initial issuance of the Warrants or the securities comprising the Shares;
provided, however, the Company shall not be required to pay any tax which may be
payable in respect of any transfer of the Warrants or the securities comprising
the Shares.
SECTION 10. INDEMNIFICATION AND CONTRIBUTION.
10.1. Indemnification By Company. In the event of the filing of any
Registration Statement with respect to the Warrant Shares pursuant to Section
(8) hereof, the Company agrees to indemnify and hold
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harmless the Warrantholder or any holder of Warrant Shares and each person, if
any, who controls the Warrantholder or any holder of Warrant Shares within the
meaning of the Act, against any and all loss, claim, damage or liability, joint
or several (which shall, for all purposes of this Agreement include, but not be
limited to, all costs of defense and investigation and all attorneys' fees), to
which such Warrantholder or any holder of Warrant Shares may become subject,
under the Act or otherwise, insofar as such loss, claim, damage, or liability
(or action with respect thereto) arises out of or is based upon (a) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus, or
the Final Prospectus or any amendment or supplement thereto; or (b) the omission
or alleged omission to state in the Registration Statement. any Preliminary
Prospectus the Effective Prospectus or the Final Prospectus or any amendment or
supplement thereto a material fact required to be stated therein or necessary to
make the statements therein not misleading; except that the Company shall not be
liable in any such case to the extent, but only to the extent, that any such
loss, claim, damage, or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by such Warrantholder or the holder of such Warrant Shares specifically
for use in the preparation of the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus or any amendment
or supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
10.2. Indemnification By Warrantholders. The Warrantholders and the
holders of Warrant Shares agree that they, severally, but not jointly, shall
indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any and all loss, claim, damage or liability,
joint or several (which shall, for all purposes of this Agreement include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees), to which the Company may become subject under the Act or otherwise,
insofar as such loss, claim, damage, liability (or action in respect thereto)
arises out of or are based upon (a) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or the Final Prospectus or any
amendment or supplement thereto; or (b) the omission or alleged omission to
state in the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or the Final Prospectus or any amendment or supplement thereto a
material fact required to be stated therein or necessary to make the statements
therein not misleading; except that such indemnification shall be available in
each such case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon information and in conformity with written information furnished to the
Company by the Warrantholder or the holder of Warrant Shares specifically for
use in the preparation thereof. This indemnity will be in addition to any
liability which such Warrantholder or holder of Warrant Shares may otherwise
have.
10.3. Right to Provide Defense. Promptly after receipt by an indemnified
party under Section (10.1) or (10.2) above of written notice of the
commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such section, notify
the indemnifying party in writing of the claim or the commencement of that
action; the failure to notify the indemnifying party shall not relieve it of any
liability which it may have to an indemnified party, except to the extent that
the indemnifying party did not otherwise have knowledge of the commencement of
the action and the indemnifying party's ability to defend against the action was
prejudiced by such failure. Such failure shall not relieve the indemnifying
party from any other liability which it may have to the indemnified party. If
any such claim or action shall be brought against an indemnified party, and it
shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under such section for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; except that Cohig shall
have
-12-
<PAGE>
the right to employ counsel to represent it and the other Warrantholders of
holders of Shares who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by such persons against the Company
under such section if, in Cohig's reasonable judgment, it is advisable for Cohig
and those Warrantholders or holders of Shares to be represented by separate
counsel, and in that event the fees and expenses of such separate counsel shall
be paid by the Company.
10.4. Contribution. If the indemnification provided for in Sections
(10.1) and (10.2) of this Agreement is unavailable or insufficient to hold
harmless an indemnified party, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages, or liabilities referred to in Sections (10.1) or (10.2) above
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Warrantholders on the other; or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect the relative
benefits referred to in clause (i) above but also the relative fault of the
Company on the one hand and the Warrantholders on the other in connection with
the statements or omissions which resulted in such losses, claims, damages, or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Warrantholders shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and unitemized expenses received by the Underwriters, in
each case as set forth in the table on the cover page of the Final Prospectus.
Relative fault shall be determined by reference to, among other things, whether
the untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or the Underwriter and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such untrue statement or omission. For purposes of this
Section (10.4), the term "damages" shall include any counsel fees or other
expenses reasonably incurred by the Company or the Underwriters in connection
with investigating or defending any action or claim which is the subject of the
contribution provisions of this Section (10.4). No person adjudged guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it shall promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in Section (10.4) hereof).
SECTION 11. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
This Warrant, the Warrant Securities, and all other securities issued or
issuable upon exercise of this Warrant, may not be offered, sold or transferred,
in whole or in part, except in compliance with the Act, and except in compliance
with all applicable state securities laws. The Company may cause substantially
the following legends, or their equivalents, to be set forth on each certificate
representing the Warrant Securities, or any other security issued or issuable
upon exercise of this Warrant, not theretofore distributed to the public or sold
to underwriters, as defined by the Act, for distribution to the public pursuant
to Section 8 above:
(i) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE
SECURITIES LAWS ("STATE ACTS") AND ARE RESTRICTED SECURITIES
AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR QUALIFICATION UNDER THE ACT AND APPLICABLE
STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT AND
-13-
<PAGE>
APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS TO
BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY."
(ii) Any legend required by applicable state securities laws.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legends (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act of 1933, as amended (the "Act"), or the securities
represented thereby) shall also bear the above legends unless, in the opinion of
the Company's counsel, the securities represented thereby need no longer be
subject to such restrictions.
SECTION 12. FRACTIONAL SHARES.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of all or any part of this Warrant. With respect to any
fraction of a share of any security called for upon any exercise of this
Warrant, the Company shall pay to the Holder an amount in money equal to that
fraction multiplied by the Current Market Price of that share.
SECTION 13. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER.
Nothing contained in this Agreement or in the Warrants shall be
construed as conferring upon the Warrantholder or its transferees any rights as
a stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect to any meeting of
stockholders for the election of directors of the Company or any other matter.
The Company covenants, however, that for so long as this Warrant is at least
partially unexercised, it will furnish any Holder of this Warrant with copies of
all reports and communications furnished to the shareholders of the Company. In
addition, if at any time prior to the expiration of the Warrants and prior to
their exercise, any one or more of the following events shall occur:
(i) any action which would require an adjustment pursuant to
Section (4.1) (except subsections (4.1(e)) and (4.1(h)) or (4.4); or
(ii) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation, merger, or sale of its
property, assets, and business as an entirety or substantially as an
entirety) shall be proposed:
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section (16) hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation, or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive notice or any
defect therein shall not affect the validity of any action taken with respect
thereto.
SECTION 14. CHARGES DUE UPON EXERCISE.
The Company shall pay any and all issue or transfer taxes, including,
but not limited to, all federal or state taxes, that may be payable with respect
to the transfer of this Warrant or the issue or delivery of Warrant Securities
upon the exercise of this Warrant
-14-
<PAGE>
SECTION 15. WARRANT SECURITIES TO BE FULLY PAID.
The Company covenants that all Warrant Securities that may be issued and
delivered to a Holder of this Warrant upon the exercise of this Warrant and
payment of the Exercise Price will be, upon such delivery, validly and duly
issued, fully paid and nonassessable.
SECTION 16. NOTICES.
Any notice pursuant to this Agreement by the Company or by a
Warrantholder or a holder of Shares shall be in writing and shall be deemed to
have been duly given if delivered or mailed by certified mail, return receipt
requested:
(i) If to a Warrantholder or a holder of Shares, addressed
to Cohig & Associates, Inc., 6300 South Syracuse Way, Suite 430,
Englewood, Colorado 80111, Attention: Corporate Finance Department; or
(ii) If to the Company addressed to it at 3801 East Florida
Avenue, Suite 208, Denver, Colorado 80210, Attention CEO.
Each party may from time to time change the address to which notices to
it are to be delivered or mailed hereunder by notice in accordance herewith to
the other party.
SECTION 17. MERGER OR CONSOLIDATION OF THE COMPANY.
The Company will not merge or consolidate with or into any other
corporation or sell all or substantially all of its property to another
corporation, unless the provisions of Section (4.4) are complied with.
SECTION 18. APPLICABLE LAW.
This Warrant shall be governed by and construed in accordance with the
laws of the State of Colorado, and courts located in Colorado shall have
exclusive jurisdiction over all disputes arising hereunder.
SECTION 19. ARBITRATION.
The Company and the Holder, and by receipt of this Warrant or any
Warrant Securities, all subsequent Holders or holders of Warrant Securities,
agree to submit all controversies, claims, disputes and matters of difference
with respect to this Warrant, including, without limitation, the application of
this Section (19) to arbitration in Denver, Colorado, according to the rules and
practices of the American Arbitration Association from time to time in force;
provided, however, that if such rules and practices conflict with the applicable
procedures of Colorado courts of general jurisdiction or any other provisions of
Colorado law then in force, those Colorado rules and provisions shall govern.
This agreement to arbitrate shall be specifically enforceable. Arbitration may
proceed in the absence of any party if notice of the proceeding has been given
to that party. The parties agree to abide by all awards rendered in any such
proceeding. These awards shall be final and binding on all parties to the extent
and in the manner provided by the rules of civil procedure enacted in Colorado.
All awards may be filed, as a basis of judgment and of the issuance of execution
for its collection, with the clerk of one or more courts, state or federal,
having jurisdiction over either the party against whom that award is rendered or
its property. No party shall be considered in default hereunder during the
pendency of arbitration proceedings relating to that default
-15-
<PAGE>
SECTION 20. MISCELLANEOUS PROVISIONS.
(a) Subject to the terms and conditions contained herein, this Warrant
shall be binding on the Company and its successors and shall inure to the
benefit of the original Holder, its successors and assigns and all holders of
Warrant Securities and the exercise of this Warrant in full shall not terminate
the provisions of this Warrant as it relates to holders of Warrant Securities.
(b) If either party to this Agreement fails to perform any of its
obligations hereunder, it shall be liable to the other party for all damages,
costs and expenses resulting from the failure, including, but not limited to,
all reasonable attorney's fees and disbursements.
(c) This Warrant cannot be changed or terminated or any performance or
condition waived in whole or in part except by an agreement in writing signed by
the party against whom enforcement of the change, termination or waiver is
sought; provided, however, that any provisions hereof may be amended, waived,
discharged or terminated upon the written consent of the Company and Cohig.
(d) If any provision of this Warrant shall be held to be invalid,
illegal or unenforceable, such provision shall be severed, enforced to the
extent possible, or modified in such a way as to make it enforceable, and the
invalidity, illegality or unenforceability shall not affect the remainder of
this Warrant.
(e) The Company agrees to execute such further agreements, conveyances,
certificates and other documents as may be reasonably requested by the Holder to
effectuate the intent and provisions of this Warrant.
(f) Paragraph headings used in this Warrant are for convenience only and
shall not be taken or construed to define or limit any of the terms or
provisions of this Warrant. Unless otherwise provided, or unless the context
shall otherwise require, the use of the singular shall include the plural and
the use of any gender shall include all genders.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
BIRNER DENTAL MANAGEMENT
SERVICES. INC.
By: /s/ FRED BIRNER
-----------------------------------------
Fred Birner, Chief Executive Officer
COHIG & ASSOCIATES, INC.
By: [SIGNATURE ILLEGIBLE]
----------------------------------------
-16-
<PAGE>
EXHIBIT A
--------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS ("STATE ACTS") AND ARE
RESTRICTED SECURITIES AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE ACT AND APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
Warrant Certificate No. CDW-5-
WARRANTS TO PURCHASE
_____ SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, ____________________, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from Birner Dental Management Services, Inc. (the "Company"), at any
time during the period commencing at 9:00 a.m., Colorado time, on October 3,
1995, and expiring at 5:00 p.m., Colorado time, on October 3, 2000, at the
purchase price per Share of $1.80 (the "Exercise Price"), the number of shares
of Common Stock of the Company set forth above (the "Shares"). The number of
shares of Common Stock of the Company purchasable upon exercise of the Warrants
evidenced hereby shall be subject to adjustment from time to time as set forth
in the Warrant Agreement dated October 3, 1995.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check or by Cashless Exercise subject to the
provisions of Section 2.2 of the Warrant Agreement (as that term is defined
therein).
The Warrants evidenced hereby represent the right to purchase an
aggregate of up to 89,930 Shares and are issued under and in accordance with
Warrant Agreement dated as of October 3, 1995, between the Company and Cohig &
Associates, Inc. and are subject to the terms and provisions contained in the
Warrant Agreement, to all of which the Warrantholder by acceptance hereof
consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company in the manner and subject to the
limitations set forth in the Warrant Agreement.
<PAGE>
This Warrant Certificate does not entitle any Warrantholder to any of
the rights of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT
SERVICES, INC.
By: _________________________________________
Dated:
[Seal]
Attest:
_____________________________
Secretary
PURCHASE FORM
-------------
Dated ___________
The undersigned hereby irrevocably elects to exercise the Warrant
represented by this Warrant Certificate to the extent of purchasing _____ Shares
of Birner Dental Management Services, Inc. (the "Company") and hereby tenders
payment of the exercise price thereof. If the number of Shares purchased are not
all the Shares purchasable pursuant to the Warrants represented by this Warrant
Certificate, a new Warrant Certificate should be issued and delivered to the
undersigned at the address stated below.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name _______________________________________________________________
(please type or print in block letters)
Address ____________________________________________________________
-2-
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _________________________, hereby sells, assigns
and transfers unto
Name _________________________________________________________________
(Please type or print in block letters)
Address ______________________________________________________________
the right to purchase Shares of the Company represented by this Warrant
Certificate to the extent of _____ Shares as to which such right is exercisable
and does hereby irrevocably constitute and appoint _______________ attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises. If the number of Shares assigned are not all the Shares
purchasable pursuant to the Warrants represented by this Warrant Certificate, a
new Warrant Certificate should be issued and delivered to the undersigned.
Signature _________________________ Dated ___________________________
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS IT
APPEARS UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
-3-
<PAGE>
CASHLESS EXERCISE FORM
----------------------
Pursuant to Section 2.2 of the Warrant Agreement, the Holder hereby
irrevocably elects to convert Warrants with respect to Shares of the Company
into _____ Shares of the Company. A conversion calculation is attached hereto as
Exhibit B-1.
The undersigned requests that certificates for such Shares be issued as
follows:
Name: _________________________________________________________________
Address: ______________________________________________________________
Deliver to: ___________________________________________________________
and that a new Warrant Certificate for the balance remaining of the Warrants, if
any, subject to the Warrant be registered in the name of, and delivered to, the
undersigned at the address stated above.
Signature ______________________________ Dated _______________________
................................................................................
Exhibit B-1
CALCULATION OF WARRANT CONVERSION
---------------------------------
Converted Securities = Net Value
---------
FMV
FMV = $ ___________
Net Value = Aggregate FMV - Aggregate
Exercise Price
= $ _________ - __________
= $ _________
Converted Shares = _________
Fractional Converted Shares = ___________(1)
_____________
(1) The Company to pay for fractional Shares in cash @ $ ________ per Share.
-4-
<PAGE>
EXHIBIT 10.5
WARRANTS TO PURCHASE
10,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Fred Birner the registered holder
hereof or assigns (the "Warrantholder"), is entitled to purchase from Birner
Dental Management Services, Inc. (the "Company"), at any time during the period
commencing at 9:00 a.m., Colorado time, on June 30, 1997, and ending at 5:00
p.m., Colorado time, on June 30, 2002, at the purchase price per Share of $5.50
(the "Exercise Price"), together with the purchase form attached, or the
Cashless Exercise form in the case of a Cashless Exercise, the Warrantholder
shall exchange its warrant for such number of shares of Common Stock determined
by multiplying the number of shares by a fraction, the numerator of which shall
be the difference between the then-current market price per share of Common
Stock and the Exercise Price, and the denominator of which shall be the then-
current price per share of Common Stock. The number of shares of Common Stock of
the Company purchasable upon exercise of the Warrants evidenced hereby shall be
subject to adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: June 30, 1997
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.6
WARRANTS TO PURCHASE
30,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Fred Birner the registered holder
hereof or assigns (the "Warrantholder"), is entitled to purchase from Birner
Dental Management Services, Inc. (the "Company"), at any time during the period
commencing at 9:00 a.m., Colorado time, on November 1, 1996, and ending at 5:00
p.m., Colorado time, on November 1, 2001, at the purchase price per Share of
$4.00 (the "Exercise Price"), together with the purchase form attached, or the
Cashless Exercise form in the case of a Cashless Exercise, the Warrantholder
shall exchange its warrant for such number of shares of Common Stock determined
by multiplying the number of shares by a fraction, the numerator of which shall
be the difference between the then-current market price per share of Common
Stock and the Exercise Price, and the denominator of which shall be the then-
current price per share of Common Stock. The number of shares of Common Stock of
the Company purchasable upon exercise of the Warrants evidenced hereby shall be
subject to adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: November 1, 1996
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.7
WARRANTS TO PURCHASE
10,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Mark Birner, D.D.S., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from Birner Dental Management Services, Inc. (the "Company"), at any
time during the period commencing at 9:00 a.m., Colorado time, on June 30, 1997,
and ending at 5:00 p.m., Colorado time, on June 30, 2002, at the purchase price
per Share of $5.50 (the "Exercise Price"), together with the purchase form
attached, or the Cashless Exercise form in the case of a Cashless Exercise, the
Warrantholder shall exchange its warrant for such number of shares of Common
Stock determined by multiplying the number of shares by a fraction, the
numerator of which shall be the difference between the then-current market price
per share of Common Stock and the Exercise Price, and the denominator of which
shall be the then-current price per share of Common Stock. The number of shares
of Common Stock of the Company purchasable upon exercise of the Warrants
evidenced hereby shall be subject to adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: June 30, 1997
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.8
WARRANTS TO PURCHASE
30,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Mark A. Birner, D.D.S., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from Birner Dental Management Services, Inc. (the "Company"), at any
time during the period commencing at 9:00 a.m., Colorado time, on November 1,
1996, and ending at 5:00 p.m., Colorado time, on November 1, 2001, at the
purchase price per Share of $4.00 (the "Exercise Price"), together with the
purchase form attached, or the Cashless Exercise form in the case of a Cashless
Exercise, the Warrantholder shall exchange its warrant for such number of shares
of Common Stock determined by multiplying the number of shares by a fraction,
the numerator of which shall be the difference between the then-current market
price per share of Common Stock and the Exercise Price, and the denominator of
which shall be the then-current price per share of Common Stock. The number of
shares of Common Stock of the Company purchasable upon exercise of the Warrants
evidenced hereby shall be subject to adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: November 1, 1996
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.9
WARRANTS TO PURCHASE
10,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Dennis Genty, the registered
holder hereof or assigns (the "Warrantholder"), is entitled to purchase from
Birner Dental Management Services, Inc. (the "Company"), at any time during the
period commencing at 9:00 a.m., Colorado time, on June 30, 1997, and ending at
5:00 p.m., Colorado time, on June 30, 2002, at the purchase price per Share of
$5.50 (the "Exercise Price"), together with the purchase form attached, or the
Cashless Exercise form in the case of a Cashless Exercise, the Warrantholder
shall exchange its warrant for such number of shares of Common Stock determined
by multiplying the number of shares by a fraction, the numerator of which shall
be the difference between the then-current market price per share of Common
Stock and the Exercise Price, and the denominator of which shall be the then-
current price per share of Common Stock. The number of shares of Common Stock of
the Company purchasable upon exercise of the Warrants evidenced hereby shall be
subject to adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: June 30, 1997
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.10
WARRANTS TO PURCHASE
30,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Dennis Genty, the registered
holder hereof or assigns (the "Warrantholder"), is entitled to purchase from
Birner Dental Management Services, Inc. (the "Company"), at any time during the
period commencing at 9:00 a.m., Colorado time, on November 1, 1996, and ending
at 5:00 p.m., Colorado time, on November 1, 2001, at the purchase price per
Share of $4.00 (the "Exercise Price"), together with the purchase form attached,
or the Cashless Exercise form in the case of a Cashless Exercise, the
Warrantholder shall exchange its warrant for such number of shares of Common
Stock determined by multiplying the number of shares by a fraction, the
numerator of which shall be the difference between the then-current market price
per share of Common Stock and the Exercise Price, and the denominator of which
shall be the then-current price per share of Common Stock. The number of shares
of Common Stock of the Company purchasable upon exercise of the Warrants
evidenced hereby shall be subject to adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: November 1, 1996
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.11
WARRANTS TO PURCHASE
45,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Jim Ciccarelli, the registered
holder hereof or assigns (the "Warrantholder"), is entitled to purchase from
Birner Dental Management Services, Inc. (the "Company"), at any time during the
period commencing at 9:00 a.m., Colorado time, on August 1, 1996, and ending at
5:00 p.m., Colorado time, on August 1, 2001, at the purchase price per Share of
$3.50 (the "Exercise Price"), together with the purchase form attached, or the
Cashless Exercise form in the case of a Cashless Exercise, the Warrantholder
shall exchange its warrant for such number of shares of Common Stock determined
by multiplying the number of shares by a fraction, the numerator of which shall
be the difference between the then-current market price per share of Common
Stock and the Exercise Price, and the denominator of which shall be the then-
current price per share of Common Stock. Such Warrants vest 22,500 on August 1,
1997 and 22,500 on August 1, 1998 pursuant to the terms outlined in the letter
dated October 17, 1996. The number of shares of Common Stock of the Company
purchasable upon exercise of the Warrants evidenced hereby shall be subject to
adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: August 1, 1996
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.12
WARRANTS TO PURCHASE
2,000 SHARES OF COMMON STOCK
BIRNER DENTAL MANAGEMENT SERVICES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
This certifies that, for value received, Jim Ciccarelli, the registered
holder hereof or assigns (the "Warrantholder"), is entitled to purchase from
Birner Dental Management Services, Inc. (the "Company"), at any time during the
period commencing at 9:00 a.m., Colorado time, on July 15, 1997, and ending at
5:00 p.m., Colorado time, on July 15, 2002, at the purchase price per Share of
$6.00 (the "Exercise Price"), together with the purchase form attached, or the
Cashless Exercise form in the case of a Cashless Exercise, the Warrantholder
shall exchange its warrant for such number of shares of Common Stock determined
by multiplying the number of shares by a fraction, the numerator of which shall
be the difference between the then-current market price per share of Common
Stock and the Exercise Price, and the denominator of which shall be the then-
current price per share of Common Stock. The number of shares of Common Stock of
the Company purchasable upon exercise of the Warrants evidenced hereby shall be
subject to adjustment from time to time.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the Warrant Price at the principal
office of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash or by check.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of the
right of a stockholder of the Company.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________
Mark A. Birner, President
Dated: July 15, 1997
Attest:
____________________
Secretary
<PAGE>
EXHIBIT 10.13
________________________________________________________________________________
CREDIT AGREEMENT
Dated as of October 31, 1996
Among
BIRNER DENTAL MANAGEMENT SERVICES, INC.
As Borrower
and
KEY BANK OF COLORADO
as Lender
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. DEFINITIONS..................................................... 1
SECTION 1.1. Defined Terms............................................ 1
-------------
SECTION 1.2. Terms Generally.......................................... 9
---------------
ARTICLE II. THE CREDIT..................................................... 10
SECTION 2.1 Commitment............................................... 10
----------
SECTION 2.2. Loans.................................................... 10
-----
SECTION 2.3. Notice of Borrowings..................................... 10
--------------------
SECTION 2.4. Note; Repayment of Loans................................. 10
------------------------
SECTION 2.5. Fees..................................................... 11
----
SECTION 2.6. Interest on Loans........................................ 11
-----------------
SECTION 2.7. Default Interest......................................... 11
----------------
SECTION 2.8. Termination and Reduction of Commitments................. 12
----------------------------------------
SECTION 2.9. Prepayment............................................... 12
----------
SECTION 2.10. Reserve Requirements; Change in Circumstances............ 12
---------------------------------------------
SECTION 2.11. Payments................................................. 14
--------
ARTICLE III. REPRESENTATIONS AND WARRANTIES................................ 14
SECTION 3.1. Organization; Powers..................................... 14
--------------------
SECTION 3.2. Authorization............................................ 14
-------------
SECTION 3.3. Enforceability........................................... 15
--------------
SECTION 3.4. Governmental Approvals................................... 15
----------------------
SECTION 3.5. Financial Statements..................................... 15
--------------------
SECTION 3.6. No Material Adverse Change............................... 15
--------------------------
SECTION 3.7. Title to Properties; Possession Under Leases............. 15
--------------------------------------------
SECTION 3.8. Subsidiaries............................................. 15
------------
SECTION 3.9. Litigation; Compliance with Laws......................... 16
--------------------------------
SECTION 3.10. Agreements............................................... 16
----------
SECTION 3.11. Use of Proceeds.......................................... 16
---------------
SECTION 3.12. Tax Returns.............................................. 16
-----------
SECTION 3.13. No Material Misstatements................................ 16
-------------------------
SECTION 3.14. Employee Benefit Plans................................... 16
----------------------
ARTICLE IV. CONDITIONS OF LENDING.......................................... 17
SECTION 4.1. All Borrowings........................................... 17
--------------
i
<PAGE>
SECTION 4.2. Closing Date............................................. 17
------------
ARTICLE V. AFFIRMATIVE COVENANTS........................................... 18
SECTION 5.1. Existence; Businesses and Properties..................... 18
------------------------------------
SECTION 5.2. Insurance................................................ 19
---------
SECTION 5.3. Obligations and Taxes.................................... 19
---------------------
SECTION 5.4. Financial Statements, Reports, etc....................... 19
----------------------------------
SECTION 5.5. Litigation and Other Notices............................. 21
----------------------------
SECTION 5.6. ERISA.................................................... 21
-----
SECTION 5.7. Maintaining Records; Access to Properties and
---------------------------------------------
Inspections.............................................. 21
-----------
SECTION 5.8. Use of Proceeds.......................................... 22
---------------
ARTICLE VI. NEGATIVE COVENANTS............................................. 22
SECTION 6.1. Indebtedness............................................. 22
------------
SECTION 6.2. Liens.................................................... 22
-----
SECTION 6.3. Sale and Lease-Back Transactions......................... 23
--------------------------------
SECTION 6.4. Investments, Loans and Advances.......................... 23
-------------------------------
SECTION 6.5. Mergers, Consolidations and Sales of Assets.............. 23
-------------------------------------------
SECTION 6.6. Dividends and Distributions.............................. 24
---------------------------
SECTION 6.7. Transactions with Affiliates............................. 24
----------------------------
SECTION 6.8. Business of Borrower..................................... 24
--------------------
SECTION 6.9. Current Ratio............................................ 24
-------------
SECTION 6.10. EBITDA to Interest Ratio................................. 24
------------------------
SECTION 6.11. Ratio of EBITDA (less Cash Taxes) to Principal Payments
-------------------------------------------------------
Plus Interest Expense.................................... 25
---------------------
SECTION 6.12. Senior Debt to EBITDA.................................... 25
---------------------
SECTION 6.13. Consolidated Net Worth................................... 25
----------------------
SECTION 6.14. Consolidated Acquisition Expenditures.................... 25
-------------------------------------
SECTION 6.15. Amendment or Modification of Subordinated Convertible
-----------------------------------------------------
Debt..................................................... 26
----
ARTICLE VII. EVENTS OF DEFAULT............................................. 26
ARTICLE VIII. MISCELLANEOUS................................................ 28
SECTION 8.1. Notices.................................................. 28
-------
SECTION 8.2. Survival of Agreement.................................... 29
---------------------
SECTION 8.3. Binding Effect........................................... 29
--------------
SECTION 8.4. Successors and Assigns................................... 29
----------------------
SECTION 8.5. Expenses; Indemnity...................................... 29
-------------------
SECTION 8.6. Right of Setoff.......................................... 30
---------------
ii
<PAGE>
SECTION 8.7. Applicable Law........................................... 31
--------------
SECTION 8.8. Waivers; Amendment....................................... 31
------------------
SECTION 8.9. Interest Rate Limitation................................. 31
------------------------
SECTION 8.10. Entire Agreement......................................... 31
----------------
SECTION 8.11. Waiver of Jury Trial..................................... 32
--------------------
SECTION 8.12. Severability............................................. 32
------------
SECTION 8.13. Counterparts............................................. 32
------------
SECTION 8.14. Jurisdiction; Consent to Service of Process.............. 32
-------------------------------------------
iii
<PAGE>
CREDIT AGREEMENT dated as of October 31, 1996, between BIRNER DENTAL
MANAGEMENT SERVICES, INC., a Colorado corporation (the "Borrower"), and KEY
BANK OF COLORADO, a Colorado corporation (the "Lender").
The Borrower has requested the Lender to extend credit in order to enable
the Borrower, subject to the terms and conditions of this Agreement, to borrow
on a revolving basis, at any time and from time to time prior to the Maturity
Date (as defined herein), an aggregate principal amount at any time outstanding
not in excess of $800,000.00. The proceeds of such borrowings are to be used to
provide working capital and for other general corporate purposes. The Lender is
willing to extend such credit to the Borrower on the terms and subject to the
conditions set forth herein.
Accordingly, the Borrower and the Lender agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1. Defined Terms. As used in this Agreement, the following words
-------------
and terms shall have the meanings specified below:
"Account Receivable" means any account receivable, account, chattel paper,
------------------
general intangible, document, or instrument owned, acquired, or received by a
person, including, but not limited to any and all rights, interest, or claims
accruing to Borrower either in its own right or pursuant to the terms of any
lease agreement, assignment or other instrument by and between the Borrower and
any other person in and to all accounts, contract rights, general intangibles
and right to payment of every kind or description now or at any time hereafter
arising, directly or indirectly, out of the operations of Borrower and/or the
provision of services by or on behalf of Borrower.
"Acquired Practice Obligation" means the amount of Indebtedness incurred,
----------------------------
assumed, guaranteed or which Borrower has otherwise agreed to be responsible for
in connection with a dental practice (an "Acquired Practice" or "Acquired
Practices") acquired by Borrower.
"Affiliate" shall mean, when used with respect to a specified person,
---------
another person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the person
specified.
1
<PAGE>
"Asset Sale" means the date, transfer or other disposition, the extent
----------
consummated after the Closing Date, by Borrower to another person of any asset
of Borrower, other than sales, transfers or other dispositions in the ordinary
course of business.
"Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if
---------
necessary, to the next 1/16 of 1%) equal to the Prime Rate in effect on such day
in effect on such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall
----------
mean the rate of interest per annum announced from time to time by the Lender as
its prime rate in effect at its principal office in Cleveland, Ohio; each change
in the Prime Rate shall be effective on the date such change is announced. The
Prime Rate may not be publicly announced or published and does not necessarily
represent the lowest or best rate at which Lender will extend credit.
"Business Day" shall mean any day (other than a day which is a Saturday,
------------
Sunday or legal holiday in the State of Colorado) on which banks are open for
business in Denver, Colorado.
"Capital Lease Obligations" of any person shall mean the obligations of
-------------------------
such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
"Consolidated Debt Payments" for any person, for any period, means the sum
---------------------------
of Consolidated Interest Expense and the amount of principal due and payable
during such period for any Indebtedness of such person.
"Borrowing" shall have the meaning set forth in Section 2.3.
---------
"Borrowing Base" means an amount equal to 75% of the Eligible Accounts
--------------
Receivable.
"Borrowing Base Certificate" has the meaning assigned to that term in
--------------------------
Section 5.4(d).
"Change in Management" shall mean any change in the management of Borrower,
--------------------
without Lender's prior written consent, which results in any of the Guarantors
no longer be employed as senior executives of Borrower on a full-time basis.
"Closing Date" shall mean October 31, 1996.
------------
2
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as the same may be
----
amended from time to time.
"Commitment" shall mean the Commitment of Lender to make Loans hereunder as
----------
set forth in Section 2.1, as the same may be reduced from time to time pursuant
to Section 2.8.
"Consolidated Acquisition Expenditures" for any person means, for any
-------------------------------------
period, the aggregate gross amount expended by such person and its consolidated
subsidiaries, net of subordinated debt and the issuance of equity in Borrower as
otherwise permitted in this Agreement to acquire one or more Acquired Practices.
"Consolidated Amortization Expense" for any person means, for any period,
---------------------------------
the consolidated amortization expense of such person for such period, determined
on a consolidated basis for such person and its subsidiaries in conformity with
GAAP.
"Consolidated Current Assets" means, with respect to any person as at any
---------------------------
date of determination, the total assets of such person and its consolidated
subsidiaries which may properly be classified as current assets on a
consolidated balance sheet of such person and its subsidiaries in accordance
with GAAP.
"Consolidated Current Liabilities" means, with respect to any person as at
--------------------------------
any date of determination, the total liabilities of such person and its
consolidated subsidiaries which may properly be classified as current
liabilities on a consolidated balance sheet of such person and its consolidated
Subsidiaries in accordance with GAAP.
"Consolidated Depreciation Expense" for any person means, for any period,
---------------------------------
the consolidated depreciation expense of such person for such period, determined
on a consolidated basis for such person and its consolidated Subsidiaries in
conformity with GAAP.
"Consolidated EBITDA" for any person means, for any period, the difference
-------------------
between (A) the sum of the amounts for such period of (i) Consolidated Net
Income, (ii) Consolidated Tax Expense, (iii) Consolidated Interest Expense, (iv)
Consolidated Amortization Expense and (v) Consolidated Depreciation Expense less
----
(B) net gains on sales of assets to the extent included in Consolidated Net
Income, whether or not extraordinary (excluding sales in the ordinary course of
business) and other extraordinary gains, all as determined on a consolidated
basis for such person and its consolidated Subsidiaries in accordance with GAAP.
3
<PAGE>
"Consolidated Interest Expense" for any person shall mans, for any period,
-----------------------------
the sum of (x) total interest expense (including that attributable to Capital
Leases in accordance with GAAP) and (y) total cash dividends paid on any
preferred stock, in each case of such person and its Subsidiaries on a
consolidated basis with respect to all outstanding Indebtedness and preferred
stock of such person and its Subsidiaries, including, without limitation, all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing.
"Consolidated Net Income" for any person means, for any period, the net
-----------------------
income (or loss) of such person and its Subsidiaries on a consolidated basis for
such period taken as a single accounting period determined on a consolidated
basis for such person and its consolidated Subsidiaries in conformity with GAAP;
provided that there shall be excluded (i) the income (or loss) of any other
- --------
person (other than consolidated Subsidiaries of such person) in which any third
person (other than such person or any of its consolidated Subsidiaries) has a
joint interest, except to the extent of the amount of dividends or other
distributions actually paid to such person or any of its Subsidiaries by such
other person during such period, (ii) the income (or loss) of any other person
accrued prior to the date it becomes a consolidated Subsidiary of such person or
is merged into or consolidated with such person or any of its consolidated
Subsidiaries or such other person's assets are acquired by such person or any of
its consolidated Subsidiaries, and (iii) the income of any consolidated
Subsidiary of such -person to the extent that the declaration or payment of
dividends or similar distributions by that consolidated Subsidiary of that
income is not at the time permitted by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that consolidated Subsidiary.
"Consolidated Net Worth" of any person means, at any time for the
----------------------
determination thereof, the sum of the capital stock and additional paid-in
capital plus retained earnings (or minus accumulated deficit) of such person and
its consolidated Subsidiaries, all as determined on a consolidated basis for
such person and its consolidated Subsidiaries in conformity with GAAP.
"Consolidated Senior Debt" for any person, for any period, means
-------------------------
Indebtedness of such person and its consolidated subsidiaries which is not
subordinated in right of payment to the Loans.
"Consolidated Tax Expense" for any person means, for any period, the
------------------------
consolidated tax expense of such person for such period, determined on a
consolidated basis for such person and its consolidated Subsidiaries in
conformity with GAAP.
"Contingent Obligations" means, as to any person, without duplication, any
----------------------
obligation of such person guaranteeing or intended to guarantee any
indebtedness, leases, dividends or
4
<PAGE>
other obligations of any other person in any manner, whether directly or
indirectly. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the maximum amount that such person may be obligated to expend
pursuant to the terms of such Contingent Obligation or, if such Contingent
Obligation is not so limited, the stated or determinable amount of the primary
obligation in respect to which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof (assuming such person is required to perform thereunder) as determined
by such person in good faith. The amount of Contingent Obligations shall not
include any amounts included in the definition of Acquired Practice Obligations.
"Control" shall mean the possession, directly or indirectly, of the power
-------
to direct or cause the direction of the management or policies of a person,
whether through the ownership of voting securities, by contract or otherwise.
"Default" shall mean any event or condition which upon notice, lapse of
-------
time or both would constitute an Event of Default.
"dollars" or "$" shall mean lawful money of the United States of America.
------- -
"Eligible Accounts Receivable" means, as at any applicable date of
----------------------------
determination, the aggregate face amount of the Accounts Receivable included in
the definition of Account Receivable hereunder without duplication, in each case
less (without duplication) the aggregate amount of all reserves, limited and
deductions with respect to such Accounts Receivable set forth below or as
otherwise provided in this Agreement and less the aggregate amount of all
returns, discounts, claims, credits, charges and allowances of any nature with
respect to such Accounts Receivable (whether issued, owing, granted or
outstanding). Unless otherwise approved in writing by the Lender in its sole
discretion, no individual Account Receivable shall be deemed to be an Eligible
Account Receivable if:
(a) the Borrower does not have legal and valid title to the Accounts
Receivable; or
(b) the Account Receivable is not the valid, binding and legally
enforceable obligation of the account debtor subject, as to enforceability, only
to (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws at the time in effect affecting the enforceability of creditors' rights
generally and (ii) judicial discretion in connection with the remedy of specific
performance and other equitable remedies; or
(c) the Account Receivable arises out of sale made by any Borrower to an
Affiliate of any Borrower; or
5
<PAGE>
(d) (i) the Account Receivable or any portion thereof is unpaid more that
the earlier of (A) 90 days after the original invoice date, or (B) 120 days
after the services were provided, or goods sold, which gave rise to such Account
Receivable; or
(e) The Account Receivable, when aggregated with all other Accounts
Receivable of the same account debtor (or any Affiliate thereof), exceeds
twenty percent (20%) in face value of all Accounts Receivable of the Borrower
then outstanding, to the extent of such excess;
(f) (i) the account debtor is also a creditor of the Borrower, to the
extent of the amount owed by the Borrower to the account debtor, (ii) the
Account Receivable is subject to any claim on the part of the account debtor
disputing liability under such Account Receivable in whole or in part, to the
extent of the amount of such dispute or (iii) the Account Receivable otherwise
is or is reasonably likely to become subject to any right or setoff or any
counterclaim, claim or defense by the account debtor, to the extent of the
amount of such setoff or counterclaim, claim or defense; or
(g) the Lender does not have a valid and perfected first priority security
interest in such Account Receivable; or
(h) it is from the same account debtor (or any Affiliate thereof) and fifty
percent (50%) or more, in face amount, of other Accounts Receivable from either
such account debtor or any Affiliate thereof are due or unpaid for more than the
applicable period of time after the original invoice date for such Account set
forth in paragraph (d) above; or
(i) the Lender determines in good faith in accordance with its internal
credit policies that (i) collection of the Account Receivable is insecure or
(ii) the Account Receivable may not be paid by reason of the account debtor's
financial inability to pay.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
the same may be amended from time to time.
"ERISA Affiliate" shall mean any trade or business (whether or not
---------------
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.
"Event of Default" shall have the meaning assigned to such term in Article
----------------
VII.
"Facility Fee" shall have the meaning assigned to such term in Section
------------
2.5(a).
"Fees" shall mean the Facility Fee and the Origination Fee.
----
6
<PAGE>
"Financial Officer" of any corporation shall mean the chief financial
-----------------
officer, principal accounting officer, Treasurer or Controller of such
corporation.
"Financing Proceeds" means the cash (other than Net Cash Proceeds)
------------------
received by the Borrower directly or indirectly, from any financing transaction
of whatever kind or nature.
"GAAP" shall mean generally accepted accounting principles.
----
"Governmental Authority" shall mean any Federal, state, local or foreign
----------------------
court or governmental agency, authority, instrumentality or regulatory body.
"Guarantee" of or by any person shall mean any obligation, contingent or
---------
otherwise, of such person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the "primary obligor") in any
manner, whether directly or indirectly, and including any obligation of such
person, direct or indirect, (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness, (b) to purchase property, securities or services for the purpose
of assuring the owner of such Indebtedness of the payment of such Indebtedness
or (c) to maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness; provided, however, that the term Guarantee
--------
shall not include (i) endorsements for collection or deposit, in either case in
the ordinary course of business or (ii) Acquired Practice Obligations.
"Guarantor" or "Guarantors" shall mean Fred Birner, Mark Birner and Dennis
--------- ----------
Genty.
"Indebtedness" of any person shall mean, without duplication, (a) all
------------
obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such person
upon which interest charges are customarily paid, (d) all obligations of such
person under conditional sale or other title retention agreements relating to
property or assets purchased by such person, (e) all obligations of such person
issued or assumed as the deferred purchase price of property or services, (f)
all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien on property owned or acquired by such person, whether or not the
obligations secured thereby have been assumed, (g) all Guarantees by such person
of Indebtedness of others, (h) all Capital Lease obligations of such person, (i)
all obligations of such person in respect of interest rate protection agreements
and (j) all obligations of such person as an account party in respect of letters
of credit and bankers' acceptances. The Indebtedness of any person shall
include the Indebtedness of any partnership in which such person is a general
partner.
7
<PAGE>
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed of
----
trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a
third party with respect to such securities.
"Loans" shall mean the loans made by Lender pursuant to Section 2.1.
-----
"Loan Documents" shall mean this Agreement, the Note, Security Agreement,
--------------
Guarantees executed by each of the Guarantor UCC-1 Financing Statements, and any
other instruments or documents evidencing, securing or relating to the Loan.
"Material Adverse Effect" shall mean (a) a materially adverse effect on the
-----------------------
business, assets, operations, prospects or condition, financial or otherwise, of
the Borrower and the Subsidiaries taken as a whole, (b) material impairment of
the ability of the Borrower or any Subsidiary to perform any of its obligations
under any Loan Document to which it is or will be a party or (c) material
impairment of the rights of or benefits available to the Lender under any Loan
Document.
"Maturity Date" shall mean October 31, 1999.
-------------
"Net Cash Proceeds" means with respect to any Asset Sale, the aggregate
-----------------
cash payments received by the Borrower, from such Asst Sale, net of direct
expenses of sale; provided that, with respect to the taxes, expenses shall only
--------
include taxes to the extent that taxes are payable in cash in the current year
or in the next succeeding year with respect to the current year as a result of
such Asset Sale.
"Net Equity Proceeds" means the proceeds of any offering of equity in any
-------------------
person (other than the Subordinated Convertible Debt) net of all costs and
expenses incurred in connection with such offering.
"Note" shall mean the promissory note of the Borrower, substantially in the
----
form of Exhibit A, evidencing the Loan.
"Origination Fee" shall have the meaning assigned to such term in Section
---------------
2.5(b).
"PBGC" shall mean the Pension Benefit Guarantee Corporation referred to and
----
defined in ERISA and any successor thereto.
8
<PAGE>
"person" shall mean any natural person, corporation, business trust, joint
------
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Plan" shall mean any pension plan subject to the provisions of Title IV of
----
ERISA or Section 412 of the Code which is maintained for employees of the
Borrower or any ERISA Affiliate.
"Repayment Date" shall have the meaning given such term in Section 2.11.
--------------
"Reportable Event" shall mean any reportable event as defined in Section
-----------------
4043(b) of ERISA or the regulations issued thereunder with respect to a Plan
(other than a Plan maintained by an ERISA Affiliate which is considered an ERISA
Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code).
"Responsible Officer" of any corporation shall mean any executive officer
-------------------
or financial officer of such corporation and any other officer or similar
official thereof responsible for the administration of the obligations of such
corporation in respect of this Agreement.
"Statutory Reserves" shall mean a fraction (expressed as a decimal), the
------------------
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by any banking authority to which the Lender is subject.
"subsidiary" shall mean, with respect to any person (herein referred to as
----------
the "parent"), any corporation, partnership, association or other business
entity (a) of which securities or other ownership interests representing more
than 50% of the equity or more than 50% of the ordinary voting power or more
than 50% of the general partnership interests are, at the time any determination
is being made, owned, controlled or held, or (b) which is, at the time any
determination is made, otherwise Controlled, by the parent or one or more
subsidiaries of the parent or by the parent and one or more subsidiaries of the
parent.
"Subsidiary" shall mean any subsidiary of the Borrower.
----------
"Transactions" shall have the meaning assigned to such term in Section 3.2.
------------
SECTION 1.2. Terms Generally. The definitions in Section 1.1. shall apply
---------------
equally to both the singular and plural forms of the terms defined. Except as
otherwise expressly provided herein, all terms of an accounting or financial
nature shall be construed in accordance with GAAP, as in effect from time to
time; provided, however, that, for
-------- -------
9
<PAGE>
purposes of determining compliance with any covenant set forth in Article VI,
such terms shall be construed in accordance with GAAP as in effect on the date
of this Agreement applied on a basis consistent with the application used in the
Borrower's audited financial statements referred to in Section 3.5.
ARTICLE II. THE CREDIT
SECTION 2.1 Commitment. Subject to the terms and conditions and relying
----------
upon the representations and warranties herein set forth, Lender agrees to make
Loans to the Borrower, at any time and from time to time and until the earlier
of the Maturity Date and the termination of the Commitment in accordance with
the terms hereof, in an aggregate principal amount at any time outstanding not
to exceed $800,000.00, subject to reductions in the maximum amount of the
Commitment from time to time pursuant to Section 2.8. The Borrower may borrow,
pay or prepay and reborrow Loans on or after the Closing Date and prior to the
Maturity Date, subject to the terms, conditions and limitations set forth
herein.
SECTION 2.2. Loans. The Loans comprising each Borrowing shall be in an
-----
aggregate principal amount which is an integral multiple of $25,000.00 and not
less than $25,000.00 (or an aggregate principal amount equal to the remaining
balance of the Commitment, as the case may be).
SECTION 2.3. Notice of Borrowings. The Borrower shall give the Lender
--------------------
written notice not later than 12:00 (noon), Denver, Colorado, time, one Business
Day before a proposed borrowing (a "Borrowing"). Such notice shall be
irrevocable and shall in each case refer to this Agreement. Each notice of
Borrowing shall be deemed a representation by Borrower that all conditions
precedent to such Borrowing have been satisfied.
SECTION 2.4. Note; Repayment of Loans. The Loans shall be evidenced by a
------------------------
Note duly executed on behalf of the Borrower, dated the Closing Date, in
substantially the form attached hereto as Exhibit A with the blanks
appropriately filled, payable to the order of Lender in a principal amount equal
to the Commitment. The outstanding principal balance of the Loans, as evidenced
by such Note, shall be payable on the Maturity Date, unless earlier due pursuant
to the provisions of Article VII. The Note shall bear interest from the date of
the first Borrowing on the outstanding principal balance thereof as set forth in
Section 2.6. The Lender shall, and is hereby authorized by the Borrower to,
endorse on the schedule attached to the Note (or on a continuation of such
schedule attached to such Note and made a part thereof), or otherwise to record
in Lender's internal records, an appropriate notation evidencing the date and
amount of each Loan, each payment and prepayment of principal of the Loans, each
payment of interest on the Loans and the other information provided for on such
schedule; provided, however, that the failure of the Lender to make such a
-----------------
notation or
10
<PAGE>
any error therein shall not affect the obligation of the Borrower to repay the
Loans made by Lender in accordance with the terms of this Agreement and the
Note.
SECTION 2.5. Fees.
----
(a) The Borrower agrees to pay to the Lender on the last day of March,
June, September and December in each year, and on the date on which the
Commitment shall be terminated as provided herein, a facility fee (the "Facility
Fee") of 0.4% per annum on the maximum amount of the Commitment then in effect.
If the maximum amount of the Commitment has been reduced during any calendar
quarter, the Facility Fee shall be calculated based on the average maximum
amount of the Commitment during such calendar quarter. All Facility Fees shall
be computed on the basis of the actual number of days elapsed in a year of 360
days. The Facility Fee due shall commence to accrue on the date of this
Agreement and shall cease to accrue on the date on which the Commitment shall be
terminated as provided herein.
(b) The Borrower agrees to pay on the Closing Date, an origination fee (the
"Origination Fee") in an amount equal to 1% of the maximum principal amount of
the Commitment.
(c) All Fees shall be paid on the dates due, in immediately available
funds. Once paid, none of the Fees shall be refundable under any circumstances.
SECTION 2.6. Interest on Loans.
-----------------
(a) Subject to the provisions of Section 2.7, the Loan shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 360
days) at a rate per annum equal to the Base Rate.
(b) Interest on the Loans shall be payable, in arrears, on the outstanding
principal balance of the Loans on the first day of each calendar quarter during
the term of this Agreement, except as otherwise provided in this Agreement.
SECTION 2.7. Default Interest. If the Borrower shall default in the
----------------
payment of the principal of or interest on the Loans or any other amount due or
becoming due hereunder, by acceleration or otherwise, the Borrower shall on
demand from time to time pay interest, to the extent permitted by law, on such
defaulted amount up to (but not including) the date of actual payment (after as
well as before judgment) at a rate (the "Default Rate") per annum (computed on
the basis of the actual number of days elapsed over a year of 360 days) equal to
the Base Rate plus 4%.
11
<PAGE>
SECTION 2.8. Termination and Reduction of Commitments.
----------------------------------------
(a) The Commitment shall be automatically terminated at 5:00 p.m., Denver,
Colorado time, on the Maturity Date.
(b) Upon at least three Business Days' prior irrevocable written notice to
the Lender, the Borrower may at any time in whole, permanently terminate, or
from time to time in part, permanently reduce, the Commitment; provided,
--------
however, that each partial reduction shall be in whole increments of
$100,000.00.
(c) The Borrower shall pay to the Lender, on the date of each termination
or reduction, the Facility Fees on the amount of the Commitment so terminated or
reduced accrued through the date of such termination or reduction.
SECTION 2.9. Prepayment.
----------
(a) The Borrower shall have the right at any time and from time to time to
prepay any Borrowing, in whole or in part, upon at least one Business Day's
prior written notice to the Lender; provided, however, that each partial
--------
prepayment shall be in an amount which is an integral multiple of $25,000.00 and
not less than $25,000.00.
(b) On the date of any termination or reduction of the Commitment pursuant
to Section 2.8, the Borrower shall pay or prepay so much of the Borrowings as
shall be necessary in order that the aggregate principal amount of the Loans
outstanding will not exceed the aggregate amount of the Commitment after giving
effect to such termination or reduction.
(c) Each notice of prepayment shall specify the prepayment date and the
principal amount of each Borrowing (or portion thereof) to be prepaid, shall be
irrevocable and shall commit the Borrower to prepay such Borrowing by the amount
stated therein on the date stated therein. All prepayments under this Section
2.9 shall be without premium or penalty. All prepayments under this Section 2.9
shall be accompanied by accrued interest on the principal amount being prepaid
to the date of payment.
SECTION 2.10. Reserve Requirements; Change in Circumstances.
---------------------------------------------
(a) Notwithstanding any other provision herein, if after the date of this
Agreement any change in applicable law or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall change the basis of taxation of payments to the Lender of any fees or
other amounts payable hereunder (other than taxes imposed on the overall net
12
<PAGE>
income of Lender by the jurisdiction in which Lender has its principal office or
by any political subdivision or taxing authority therein), or shall impose,
modify or deem applicable any reserve, special deposit or similar requirement
against assets of, deposits with or for the account of or credit extended by
Lender or shall impose on Lender any other condition affecting this Agreement,
and the result of any of the foregoing shall be to increase the cost to the
Lender of making or maintaining the Loans to reduce the amount of any sum
received or receivable by Lender hereunder or under the Note (whether of
principal, interest or otherwise) by an amount deemed by Lender to be material,
then the Borrower will pay to Lender upon demand such additional amount or
amounts as will compensate Lender for such additional costs incurred or
reduction suffered.
(b) The adoption after the date hereof of any other law, rule, regulation
or guideline regarding capital adequacy, or any change in any of the foregoing
or in the interpretation or administration of any of the foregoing by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Lender (or any
lending office of Lender) or Lender's holding company with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on Lender's capital or on the capital of
Lender's holding company, if any, as a consequence of this Agreement or the Loan
made by Lender pursuant hereto to a level below that which Lender or Lender's
holding company could have achieved but for such adoption, change or compliance
(taking into consideration Lender's policies and the policies of Lender's
holding company with respect to capital adequacy) by an amount deemed by Lender
to be material, then from time to time the Borrower shall pay to Lender such
additional amount or amounts as will compensate Lender or Lender's holding
company for any such reduction suffered.
(c) A certificate of Lender setting forth such amount or amounts as shall
be necessary to compensate Lender or its holding company as specified in
paragraph (a) or (b) above, as the case may be, shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
Lender the amount shown as due an any such certificate delivered by it within 10
days after its receipt of the same.
(d) Failure on the part of Lender to demand compensation for any increased
costs or reduction in amounts received or receivable or reduction in return on
capital with respect to any period shall not constitute a waiver of Lender's
right to demand compensation with respect to such period or any other period.
The protection of this Section shall be available to Lender regardless of any
possible contention of the invalidity or inapplicability of the law, rule,
regulation, guideline or other change or condition which shall have occurred or
been imposed. If any amounts are payable pursuant to this Section 2.10, Lender
shall apply the
13
<PAGE>
provisions of Section 2.10 on a non-discriminatory basis to all similarly
situated borrowers of Lender.
SECTION 2.11. Payments. The Borrower shall make each payment (including
--------
principal of or interest on any Borrowing or any Fees or other amounts)
hereunder and under any other Loan Document not later than 12:00 (noon), Denver,
Colorado time, on the date when due in dollars to the Lender at its offices at
3600 South Yosemite Street, Denver, Colorado 80237, in immediately available
funds. Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of
interest or Fees, if applicable.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to Lender that:
SECTION 3.1. Organization; Powers. The Borrower and each Subsidiary (a)
--------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, (b) has all requisite power and
authority to own its property and assets and to carry on its business as now
conducted and as proposed to be conducted, (c) is qualified to do business in
every jurisdiction where such qualification is required, except where the
failure so to qualify would not result in a Material Adverse Effect, and (d) in
the case of the Borrower, has the corporate power and authority to execute,
deliver and perform its obligations under each of the Loan Documents and each
other agreement or instrument contemplated thereby to which it is or will be a
party and to borrow hereunder.
SECTION 3.2. Authorization. The execution, delivery and performance by
-------------
the Borrower of each of the Loan Documents and the borrowings hereunder
(collectively, the "Transactions" (a) have been duly authorized by all requisite
------------
corporate and, if required, stockholder action and (b) will not (i) violate (A)
any provision of law, statute, rule or regulation, or of the certificate or
articles of incorporation or other constitutive documents or by-laws of the
Borrower or any Subsidiary, (B) any order of any Governmental Authority or (C)
any provision of any indenture, agreement or other instrument to which the
Borrower or any Subsidiary is a party or by which any of them or any of their
property is or may be bound, (ii) be in conflict with, result in a breach of or
constitute (alone or with notice or lapse of time or both) a default under any
such indenture, agreement or other instrument or (iii) result in the creation or
imposition of any Lien upon any property or assets of the Borrower or any
subsidiary.
14
<PAGE>
SECTION 3.3. Enforceability. This Agreement has been duly executed and
--------------
delivered by the Borrower and constitutes, and each other Loan Document when
executed and delivered by the Borrower will constitute, a legal, valid and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms.
SECTION 3.4. Governmental Approvals. No action, consent or approval of,
----------------------
registration or filing with or any other action by any Governmental Authority is
or will be required in connection with the Transactions, except such as have
been made or obtained and are in full force and effect.
SECTION 3.5. Financial Statements. The Borrower has heretofore furnished
--------------------
to Lender its consolidated and consolidating balance sheets and statements of
income and changes in financial condition (a) as of and for the fiscal year
ended December 31, 1995, audited by and accompanied by the opinion of the
independent public accountants, and (b) as of and for the fiscal quarter and the
portion of the fiscal year ended, June 30, 1996, certified by its chief
financial officer. Such financial statements present fairly the financial
condition and results of operations of the Borrower and its consolidated
subsidiaries as of such dates and for such periods. Such balance sheets and the
notes thereto disclose all material liabilities, direct or contingent, of the
Borrower and its consolidated subsidiaries as of the dates thereof. Such
financial statements were prepared in accordance with GAAP applied on a
consistent basis.
SECTION 3.6. No Material Adverse Change. There has been no material
--------------------------
adverse change in the business, assets, operations, prospects or condition,
financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole,
since June 30, 1996.
SECTION 3.7. Title to Properties; Possession Under Leases. (a) The
--------------------------------------------
Borrower and each of the Subsidiaries has good and marketable title to, or valid
leasehold interests in, all its material properties and assets, except for minor
defects in title that do not interfere with its ability to conduct its business
as currently conducted or to utilize such properties and assets for their
intended purposes. All such material properties and assets are free and clear
of Liens, other than Liens expressly permitted by Section 6.2.
(b) The Borrower and each of the Subsidiaries has complied with all
material obligations under all material leases to which it is a party and all
such leases are in full force and effect. The Borrower and each of the
Subsidiaries enjoys peaceful and undisturbed possession under all such material
leases.
SECTION 3.8. Subsidiaries. Schedule 3.8 sets forth as of the Closing
------------
Date a list of all Subsidiaries of the Borrower and the percentage ownership
interest of the Borrower therein.
15
<PAGE>
SECTION 3.9. Litigation; Compliance with Laws. (a) Except as set forth in
--------------------------------
Schedule 3.9, there are not any actions, suits or proceedings at law or in
equity or by or before any Governmental Authority now pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
Subsidiary or any business, property or rights of any such person (i) which
involve any Loan Document or the Transactions or (ii) as to which there is a
reasonable possibility of an adverse determination and which, if adversely
determined, could, individually or in the aggregate, result in a Material
Adverse Effect.
(b) Neither the Borrower nor any of the Subsidiaries is in violation of any
law, rule or regulation, or in default with respect to any judgment, writ,
injunction or decree of any Governmental Authority, where such violation or
default could result in a Material Adverse Effect.
SECTION 3.10. Agreements. To Borrower's knowledge, after reasonable
----------
inquiry, neither the Borrower nor any of its Subsidiaries is in default in any
manner under any provision of any indenture or other agreement or instrument
evidencing Indebtedness, or any other material agreement or instrument to which
it is a party or by which it or any of its properties or assets are or may be
bound, where such default could result in a Material Adverse Effect.
SECTION 3.11. Use of Proceeds. The Borrower will use the proceeds of the
---------------
Loans only for the purposes specified in the preamble to this Agreement.
SECTION 3.12. Tax Returns. The Borrower and the Subsidiary has filed or
-----------
caused to be filed all Federal, state and local tax returns required to have
been filed by it and has paid or caused to be paid all taxes shown to be due and
payable on such returns or on any assessments received by it, except taxes that
are being contested in accordance with Section 5.3.
SECTION 3.13. No Material Misstatements. To Borrower's knowledge, after
-------------------------
reasonable inquiry, no information, report, financial statement, exhibit or
schedule furnished by or on behalf of the Borrower to the Lender in connection
with the negotiation of any Loan Document or included therein or delivered
pursuant thereto contained, contains or will contain any material misstatement
of fact or omitted, omits or will omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were, are or will be made, not misleading.
SECTION 3.14. Employee Benefit Plans. The Borrower and each of its ERISA
----------------------
Affiliates is in compliance in all material respects with the applicable
provisions of ERISA and the regulations and published interpretations
thereunder. No Reportable Event has occurred as to which the Borrower or any
ERISA Affiliate was required to file a report with
16
<PAGE>
the PBGC, and the present value of all benefit liabilities under each Plan
(based on those assumptions used to fund such Plan) did not, as of the last
annual valuation date applicable thereto, exceed by a material amount the value
of the assets of such Plan.
ARTICLE IV. CONDITIONS OF LENDING
The obligations of Lender to make the Loan hereunder are subject to the
satisfaction of the following conditions:
SECTION 4.1. All Borrowings. On the date of each Borrowing:
--------------
(a) The Lender shall have received a notice of such borrowing as required
by Section 2.3.
(b) The representations and warranties set forth in Article III hereof
shall be true and correct in all material respects on and as of the date of such
Borrowing with the same effect as though made on and as of such date, except to
the extent such representations and warranties expressly relate to an earlier
date.
(c) The Borrower shall be in compliance with all the terms and provisions
set forth herein and in each other Loan Document on its part to be observed or
performed, and at the time of and immediately after such Borrowing no Event of
Default or Default shall have occurred and be continuing.
Each Borrowing shall be deemed to constitute a representation and warranty
by the Borrower on the date of such borrowing as to the matters specified in
paragraphs (b) and (c) of this Section 4.1.
SECTION 4.2. Closing Date. On the Closing Date:
------------
(a) Lender shall have received a duly executed Note complying with the
provisions of Section 2.04, and all other Loan Documents required herein.
(b) Lender shall have received a favorable written opinion from Holland &
Hart, counsel for the Borrower, dated the Closing Date and addressed to the
Lender, to the effect set forth in Exhibit B hereto.
(c) Lender shall have received a Guaranty executed by each of the
Guarantors in the form attached as Exhibit C.
17
<PAGE>
(d) All legal matters incident to this Agreement and the borrowings
hereunder shall be satisfactory to the Lender and its counsel.
(e) The Lender shall have received (i) a copy of the certificate or
articles of incorporation, including all amendments thereto, of the Borrower,
certified as of a recent date by the Secretary of State of the state of its
organization, and a certificate as to the good standing of the Borrower as of a
recent date, from such Secretary of State; (ii) a certificate of the Secretary
or Assistant Secretary of the Borrower dated the Closing Date and certifying (A)
that attached thereto is a true and complete copy of the by-laws of the Borrower
as in effect on the Closing Date and at all times since a date prior to the date
of the resolutions described in clause (B) below, (B) that attached thereto is a
true and complete copy of resolutions duly adopted by the Board of Directors of
the Borrower authorizing the execution, delivery and performance of the Loan
Documents and the borrowings hereunder, and that such resolutions have not been
modified, rescinded or amended and are in full force and effect, (C) that the
certificate or articles of incorporation of the Borrower have not been amended
since the date of the last amendment thereto shown on the certificate of good
standing furnished pursuant to clause (i) above, and (D) as to the incumbency
and specimen signature of each officer executing any Loan Document or any other
document delivered in connection herewith on behalf of the Borrower; (iii) a
certificate of another officer as to the incumbency and specimen signature of
the Secretary or Assistant Secretary executing the certificate pursuant to (ii)
above; and (iv) such other documents as Lender or counsel for the Lender, may
reasonably request.
(f) The Lender shall have received a certificate, dated the Closing Date
and signed by a Financial Officer of the Borrower, confirming compliance with
the conditions precedent set forth in paragraphs (b) and (c) of Section 4.1.
ARTICLE V. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with Lender that so long as this
Agreement shall remain in effect or the principal of or interest on any Loan,
any Fees or any other expenses or amounts payable under any Loan Document shall
be unpaid, unless the Lender shall otherwise consent in writing, the Borrower
will, and will cause each of the Subsidiaries to:
SECTION 5.1. Existence; Businesses and Properties. (a) Do or cause to be
------------------------------------
done all things necessary to preserve, renew and keep in full force and effect
its legal existence.
(b) Do or cause to be done all things necessary to obtain, preserve, renew,
extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations,
18
<PAGE>
patents, copyrights, trademarks and trade names material to the conduct of its
business; maintain and operate such business in substantially the manner in
which it is presently conducted and operated; comply in all material respects
with all applicable laws, rules, regulations and orders of any Governmental
Authority, whether now in effect or hereafter enacted; and at all times maintain
and preserve all property material to the conduct of such business and keep such
property in good repair, working order and condition and from time to time make,
or cause to be made, all needful and proper repairs, renewals, additions,
improvements and replacements thereto necessary in order that the business
carried on in connection therewith may be properly conducted at all times.
SECTION 5.2. Insurance. Keep its insurable properties adequately insured
---------
at all times by financially sound and reputable insurers; maintain such other
insurance, to such extent and against such risks, including fire and other risks
insured against by extended coverage, as is customary with companies in the same
or similar businesses, including (A) public liability insurance against claims
for personal injury or death or property damage occurring upon, in, about or in
connection with the use of any properties owned, occupied or controlled by it
and (B) malpractice insurance for each of the dentists participating in
Borrower's dental healthcare network in amounts which are in compliance with
applicable laws and regulations; and maintain such other insurance as may be
required by law.
SECTION 5.3. Obligations and Taxes. Pay its Indebtedness and other
---------------------
obligations promptly and in accordance with their terms and pay and discharge
promptly all taxes, assessments and governmental charges or levies imposed upon
it or upon its income or profits or in respect of its property, before the same
shall become delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise which, if unpaid, might give rise to a Lien
upon such properties or any part thereof; Provided, however, that such payment
--------
and discharge shall not be required with respect to any such tax, assessment,
charge, levy or claim so long as the validity or amount thereof shall be
contested in good faith by appropriate proceedings and the Borrower shall set
aside on its books adequate reserves with respect thereto.
SECTION 5.4. Financial Statements, Reports, etc.. In the case of the
-----------------------------------
Borrower shall furnish to Lender:
(a) within 180 days after the end of each fiscal year, its consolidated and
consolidating balance sheets and related statements of income and changes in
financial position, showing the financial condition of the Borrower and its
consolidated subsidiaries as of the close of such fiscal year and the results of
its operations and the operations of such subsidiaries during such year, all
audited by Arthur Anderson or other independent public accountants of recognized
national standing acceptable to the Lender and accompanied by an opinion of such
accountants (which shall not be qualified in any material respect) to the effect
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that such consolidated financial statements fairly present the financial
condition and results of operations of the Borrower on a consolidated basis in
accordance with GAAP consistently applied;
(b) within 60 days after the end of each fiscal quarter of each fiscal year
(including, without limitation, the year-ending quarter), its consolidated and
consolidating balance sheets and related statements of income and changes in
financial position, showing the financial condition of the Borrower and its
consolidated subsidiaries as of the close of such fiscal quarter and the results
of its operations and the operations of such subsidiaries during such fiscal
quarter and the then elapsed portion of the fiscal year, all certified by one of
its Financial Officers as fairly presenting the financial condition and results
of operations of the Borrower on a consolidated basis in accordance with GAAP
consistently applied, subject to normal year-end audit adjustments;
(c) concurrently with any delivery of financial statements under (a) or (b)
above, a certificate of the accounting firm or Financial Officer opining on or
certifying such statements (which certificate, when furnished by an accounting
firm, may be limited to accounting matters and disclaim responsibility for legal
interpretations) (i) certifying that no Event of Default or Default has occurred
or, if such an Event of Default or Default has occurred, specifying the nature
and extent thereof and any corrective action taken or proposed to be taken with
respect thereto and (ii) setting forth computations in reasonable detail
satisfactory to the Lender demonstrating compliance with the covenants contained
in Sections 6.9 through 6.13, inclusive;
(d) Within ten (10) days after the end of each month, the Borrowers shall
deliver to Lender (x) a borrowing base certificate in the form of Exhibit D
hereto (the "Borrowing Base Certificate") detailing the Borrowers' Eligible
Accounts Receivable as of the last day of such month, and (y) an Acquired
Practice Obligation report, detailing any Acquired Practice Obligations incurred
in the previous month, each of which shall be certified as complete and correct
on behalf of the Borrower by the chief executive officer, chief financial
officer, controller or other Authorized Officer of the Borrower, respectively.
In addition, each Borrowing Base Certificate shall have attached to it an
accounts receivable aging report. If the Borrower fails to deliver any such
Borrowing Base Certificate within twenty (20) days after the end of such month,
then the Borrowing Base shall be deemed to be $0 until such time as the Borrower
delivers such required Borrowing Base Certificate.
(e) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by it
with the Securities and Exchange commission, or any governmental authority
succeeding to any of or all the functions of said Commission, or with any
national securities exchange, or distributed to its shareholders, as the case
may be;
20
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(f) copies of all reports, statements, notices and other materials
delivered by Borrower to holders of the Subordinated Convertible Debt (as
defined herein); and
(g) promptly, from time to time, such other information regarding the
operations, business affairs and financial condition of the Borrower or any
subsidiary, or compliance with the terms of any Loan Document, as the Lender may
reasonably request.
SECTION 5.5. Litigation and Other Notices. Furnish to the Lender prompt
----------------------------
written notice of the following:
(a) any Event of Default or Default, specifying the nature and extent
thereof and the corrective action (if any) proposed to be taken with respect
thereto;
(b) the filing or commencement of, or any threat or notice of intention of
any person to file or commence, any action, suit or proceeding, whether at law
or in equity or by or before any Governmental Authority, against the Borrower or
any Affiliate thereof which, if adversely determined, could result in a Material
Adverse Effect; and
(c) any development that has resulted in, or could reasonably be
anticipated to result in, a Material Adverse Effect.
SECTION 5.6. ERISA. (a) Comply in all material respects with the
-----
applicable provisions of ERISA and (b) furnish to the Lender (i) as soon as
possible, and in any event within 30 days after any Responsible officer of the
Borrower either knows or has reason to know that any Reportable Event has
occurred that alone or together with any other Reportable Event could reasonably
be expected to result in liability of the Borrower to the PBGC in an aggregate
amount exceeding $10,000, a statement of a Financial Officer setting forth
details as to such Reportable Event and the action proposed to be taken with
respect thereto, together with a copy of the notice, if any, of such Reportable
Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any
notice the Borrower may receive from the PBGC relating to the intention of the
PBGC to terminate any Plan or Plans (other than a Plan maintained by an ERISA
Affiliate which is considered an ERISA Affiliate only pursuant to subsection (m)
or (o) of Section 412 of the Code) or to appoint a trustee to administer any
Plan or Plans, and (iii) within 10 days after a filing with the PBGC pursuant to
Section 412(n) of the Code of a notice of failure to make a required installment
or other payment with respect to a Plan,, a statement of a Financial officer
setting forth details as to such failure and the action proposed to be taken
with respect thereto, together with a copy of such notice given to the PBGC.
SECTION 5.7. Maintaining Records; Access to Properties and Inspections.
---------------------------------------------------------
Maintain all financial records in accordance with GAAP and permit any
representatives
21
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designated by Lender to visit and inspect the financial records and the
properties of the Borrower or any Subsidiary at reasonable times upon reasonable
prior notice and as often as requested and to make extracts from and copies of
such financial records, and permit any representatives designated by Lender to
discuss the affairs, finances and condition of the Borrower or any Subsidiary
with the officers thereof and independent accountants therefor.
SECTION 5.8. Use of Proceeds. Use the proceeds of the Loans only for the
---------------
purposes set forth in the preamble to this Agreement.
ARTICLE VI. NEGATIVE COVENANTS
The Borrower covenants and agrees with Lender that, so long as this
Agreement shall remain in effect or the principal of or interest on any Loan,
any Fees or any other expenses or amounts payable under any Loan Document shall
be unpaid, unless the Lender shall otherwise consent in writing, the Borrower
will not, and will not cause or permit any of the Subsidiaries to:
SECTION 6.1. Indebtedness. Incur, create, assume or permit to exist any
------------
Indebtedness, except:
(a) Indebtedness represented by those certain 9% Convertible Subordinated
Debentures due 2001 (the "Subordinated Convertible Debt") issued by Borrower;
(b) Indebtedness represented by the Note;
(c) Indebtedness for which the proceeds (net of expenses directly related
to such indebtedness, such as origination fees, legal fees, etc.) are paid
solely to Lender for application against, and to reduce the outstanding
principal balance of, the Loans;
(d) Acquired Practice Obligations; and
(e) Indebtedness subordinated to the Loans pursuant to a Subordination and
Standstill Agreement satisfactory to Lender.
SECTION 6.2. Liens. Create, incur, assume or permit to exist any Lien on
-----
any property or assets (including stock or other securities of any person,
including any Subsidiary) now owned or hereafter acquired by it or on any income
or rights in respect of any thereof, except:
22
<PAGE>
(a) Liens for taxes not yet due or which are being contested in compliance
with Section 6.3;
(b) pledges and deposits made in the ordinary course of business in
compliance with workmen's compensation, unemployment insurance and other social
security laws or regulations; and
(c) zoning restrictions, easements, rights-of-way, restrictions on use of
real property and other similar encumbrances incurred in the ordinary course of
business which, in the aggregate, are not substantial in amount and do not
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the business of the Borrower or any of its
Subsidiaries.
SECTION 6.3. Sale and Lease-Back Transactions. Enter into any
--------------------------------
arrangement, directly or indirectly, with any person whereby it shall sell or
transfer any property, real or personal, used or useful in its business, whether
now owned or hereafter acquired, and thereafter rent or lease such property or
other property which it intends to use for substantially the same purpose or
purposes as the property being sold or transferred.
SECTION 6.4. Investments, Loans and Advances. Purchase, hold or acquire
-------------------------------
any capital stock, evidences of indebtedness or other securities of, make or
permit to exist any loans or advances to, or make or permit to exist any
investment or any other interest in, any other person, except:
(a) investments by the Borrower existing on the date hereof in the capital
stock of the Subsidiaries;
(b) Permitted Investments; and
(c) advances or loans (the "Dentist Advances") to an Acquired Practice
provided, that, the Dental Advances are evidenced by negotiable promissory
notes, which shall be pledged to Lender as further security for the Loans, in
form reasonably satisfactory to Lender.
SECTION 6.5. Mergers, Consolidations and Sales of Assets. Merge into or
--------------------------------------------
consolidate with any other person, or permit any other person to merge into or
consolidate with it, or sell, transfer, lease or otherwise dispose of (in one
transaction or in a series of transactions) all or any substantial part of its
assets (whether now owned or hereafter acquired) or any capital stock of any
Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a
series of transactions) all or any substantial part of the assets of any other
person, except that (a) the Borrower may purchase and sell inventory in the
ordinary
23
<PAGE>
course of business (b) the Borrower may enter into one or more Asset Sales
provided that the Net Cash Proceeds are paid over to Lender for application
against, and to reduce the outstanding principal of, the Loans and (c) Borrower
may acquire one or more Acquired Practices, provided that no Event of Default
exists hereunder.
SECTION 6.6. Dividends and Distributions. Declare or pay, directly or
---------------------------
indirectly, any dividend or make any other distribution (by reduction of capital
or otherwise), whether in cash, property, securities or a combination thereof,
with respect to any shares of its capital stock or directly or indirectly
redeem, purchase, retire or otherwise acquire for value (or permit any
Subsidiary to purchase or acquire) any shares of any class of its capital stock
or set aside any amount for any such purpose; provided, however, that any
--------
Subsidiary may declare and pay dividends or make other distributions to the
Borrower.
SECTION 6.7. Transactions with Affiliates. Sell or transfer any property
----------------------------
or assets to, or purchase or acquire any property or assets of, or otherwise
engage in any other transactions with, any of its Affiliates, except (i) in
connection with the Acquired Practices or (ii) so long as no Default or Event of
Default shall have occurred and be continuing, the Borrower or any Subsidiary
may engage in any of the foregoing transactions in the ordinary course of
business at prices and on terms and conditions not less favorable to the
Borrower or such Subsidiary than could be obtained on an arm's-length basis from
unrelated third parties.
SECTION 6.8. Business of Borrower. Engage at any time in any business or
--------------------
business activity other than the business currently conducted by it and business
activities reasonably incidental thereto.
SECTION 6.9. Current Ratio. Borrower shall not permit the ratio of
-------------
Consolidated Current Assets to Consolidated Current Liabilities, at any time, to
be less than 2.0 to 1.0.
SECTION 6.10. EBITDA to Interest Ratio. Borrower shall not permit the
------------------------
ratio of Consolidated EBITDA to Consolidated Interest Expense, on a rolling four
calendar quarter basis, to be less than the following ratios:
Period Ratio
------ -----
As of December 31, 1996 1.25
As of June 30, 1997 1.50
As of September 30, 1997 1.75
24
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As of Maturity Date 2.0
SECTION 6.11. Ratio of EBITDA (less Cash Taxes) to Principal Payments Plus
------------------------------------------------------------
Interest Expense. Borrower shall not permit, at any time, the ratio of
- ----------------
Consolidated EBITDA (less Cash Taxes for such measuring period) to Consolidated
Debt Payments, on a rolling four calendar quarter basis, to be less than the
following ratios:
Period Ratio
------ -----
As of December 31, 1996 1.0
As of March 31, 1997 1.2
As of June 30, 1997 1.3
As of September 30, 1997 1.4
As of December 31, 1997 1.5
and the end of each calendar
quarter thereafter until the
Maturity Date.
SECTION 6.12. Senior Debt to EBITDA. Borrower shall not permit, at any
---------------------
time, to ratio of Consolidated Senior Debt to Consolidated EBITDA, to be greater
than 3.0 to 1.0; provided, however, that nothing contained herein shall be
deemed a consent or approval by Lender of the issuance of any Consolidated
Senior Debt.
SECTION 6.13. Consolidated Net Worth. Borrower shall not permit, at any
----------------------
time, Consolidated Net Worth to be less than the sum of (i) 80% of Borrower's
Consolidated Net Worth as of the Closing Date, (ii) 50% of Net Equity Proceeds
and (iii) 50% of Borrower's Consolidated Net Income from the Closing Date
through and including the date of determining the foregoing amount.
SECTION 6.14. Consolidated Acquisition Expenditures. Borrower shall not
--------------------------------------
make, in any calendar year beginning in 1997, Consolidated Acquisition
Expenditures in excess of $5,000,000.00.
Year Ending Amount
----------- ------
25
<PAGE>
SECTION 6.15. Amendment or Modification of Subordinated Convertible Debt.
-----------------------------------------------------------
Amend or modify, without Lender's prior written consent, any terms, conditions
or provisions of the Subordinated Convertible Debt.
ARTICLE VII. EVENTS OF DEFAULT
In case of the happening of any of the following events ("Events of
Default"):
(a) any representation or warranty made or deemed made in or in connection
with any Loan Document or the borrowings hereunder, or any representation,
warranty, statement or information contained in any report, certificate,
financial statement or other instrument furnished in connection with or pursuant
to any Loan Document, shall prove to have been false or misleading in any
material respect when so made, deemed made or furnished;
(b) default shall be made in the payment of any principal of any Loan when
and as the same shall become due and payable, whether at the due date thereof or
at a date fixed for prepayment thereof or by acceleration thereof or otherwise,
which default is not cured within three (3) days after written notice from
Lender;
(c) default shall be made in the payment of any interest on any Loan or any
Fee or any other amount (other than an amount referred to in (b) above) due
under any Loan Document, when and as the same shall become due and payable, and
such default shall continue unremedied for a period of five (5) days;
(d) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any material covenant, condition or agreement
contained in Article V or in Article VI, which default is not cured within
thirty (30) days after written notice from Lender; provided, that, with respect
to Sections 6.9 through and including 6.14 any violation thereof shall be deemed
material;
(e) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any material covenant, condition or agreement
contained in any Loan Document (other than those specified in (b), (c) or (d)
above) and such default shall continue unremedied for a period of thirty (30)
days after notice thereof from the Lender to the Borrower;
(f) the Borrower or any Subsidiary shall (i) fail to pay any principal or
interest, regardless of amount, due in respect of any Indebtedness in a
principal amount in excess of $100,000, when and as the same shall become due
and payable, or (ii) fail to observe or perform any other term, covenant,
condition or agreement contained in any agreement or instrument evidencing or
governing any such Indebtedness;
26
<PAGE>
(g) an involuntary proceeding shall be commenced or an involuntary petition
shall be filed in a court of competent jurisdiction seeking (i) relief in
respect of the Borrower or any Subsidiary, or of a substantial part of the
property or assets of the Borrower or a Subsidiary, under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other Federal or
state bankruptcy, insolvency, receivership or similar law, (ii) the appointment
of a receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower or any Subsidiary or for a substantial part of the property or
assets of the Borrower or a Subsidiary or (iii) the winding-up or liquidation of
the Borrower or any Subsidiary; and such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of the
foregoing shall be entered;
(h) the Borrower or any Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other Federal or
state bankruptcy, insolvency, receivership or similar law, (ii) consent to the
institution of, or fail to contest in a timely and appropriate manner, any
proceeding or the filing of any petition described in (g) above, (iii) apply for
or consent to the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any Subsidiary or for a
substantial part of the property or assets of the Borrower or any Subsidiary,
(iv) file an answer admitting the material allegations of a petition filed
against it in any such proceeding, (v) make a general assignment for the benefit
of creditors, (vi) become unable, admit in writing its inability or fail
generally to pay its debts as they become due or (vii) take any action for the
purpose of effecting any of the foregoing;
(i) one or more judgments for the payment of money in an aggregate amount
in excess of $100,000.00 shall be rendered against the Borrower, any Subsidiary
or any combination thereof and the same shall remain undischarged for a period
of 30 consecutive days during which execution shall not be effectively stayed,
or any action shall be legally taken by a judgment creditor to levy,upon assets
or properties of the Borrower or any Subsidiary to enforce any such judgment;
(j) a Reportable Event or Reportable Events, or a failure to make a
required payment (within the meaning of Section 412(n)(1)(A) of the Code), shall
have occurred with respect to any Plan or Plans that reasonably could be
expected to result in liability of the Borrower to the PBGC or to a Plan in an
aggregate amount exceeding $25,000.00 and, within 30 days after the reporting of
any such Reportable Event to the Lender or after the receipt by the Lender of
the statement required pursuant to Section 5.6, the Lender shall have notified
the Borrower in writing that (i) the Lender have made a determination that, on
the basis of such Reportable Event or Reportable Events or the failure to make a
required payment, there are reasonable grounds (A) for the termination of such
Plan or Plans by the PBGC, (B) for the appointment by the appropriate United
States District Court of a trustee to
27
<PAGE>
administer such Plan or Plans or (C) for the imposition of a lien in favor of a
Plan and (ii) as a result thereof an Event of Default exists hereunder; or a
trustee shall be appointed by a United States District court to administer any
such Plan or Plans; or the PBGC shall institute proceedings to terminate any
Plan or Plans; or
(l) there shall have occurred a Change in Management;
then, and in every such event and at any time thereafter during the continuance
of such event, the Lender may by notice to the Borrower, take either or both of
the following actions, at the same or different times: (i) terminate forthwith
the Commitment and (ii) declare the Loans then outstanding to be forthwith due
and payable, whereupon the principal of the Loans, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrower accrued hereunder and under any other Loan Document, shall become
forthwith due and payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived by the Borrower,
anything contained herein or in any other Loan Document to the contrary
notwithstanding; and in any event with respect to the Borrower described in para
graph (g) or (h) above, the Commitment shall automatically terminate and the
principal of the Loans then outstanding, together with accrued interest thereon
and any unpaid accrued Fees and all other liabilities of the Borrower accrued
hereunder and under any other Loan Document, shall automatically become due and
payable, without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived by the Borrower, anything contained
herein or in any other Loan Document to the contrary notwithstanding.
ARTICLE VIII. MISCELLANEOUS
SECTION 8.1. Notices. Notices and other communications provided for
-------
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed or sent by telex, graphic scanning or other telegraphic
communications equipment of the sending party, as follows:
(a) if to the Borrower, to it at 3801 East Florida, Suite 208, Denver,
Colorado 80210, Attention of Fred Birner, Chief Executive Officer, Telecopy
No. 691-0889.
(b) if to the Lender, to it at 3600 South Yosemite, 4th Floor, Denver,
CO 80237, Attention of Michael Hobbs, Vice President, Telecopy No. (303)
741-3958.
All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given on the date of receipt if
28
<PAGE>
delivered by hand or overnight courier service or sent by telex, graphic
scanning or other telegraphic communications equipment of the sender, or on the
date five Business Days after dispatch by certified or registered mail if
mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section 9.1 or in accordance with the latest unrevoked
direction from such party given in accordance with this Section 9.1.
SECTION 8.2. Survival of Agreement. All covenants, agreements,
---------------------
representations and warranties made by the Borrower herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Lender and shall survive the making by the Lender
of the Loan, and the execution and delivery to the Lender of the Note evidencing
such Loan, regardless of any investigation made by the Lender or on their
behalf, and shall continue in full force and effect as long as the principal of
or any accrued interest on any Loan or any Fee or any other amount payable under
this Agreement or any other Loan Document is outstanding and unpaid and so long
as the Commitments have not been terminated.
SECTION 8.3. Binding Effect. This Agreement shall become effective when
--------------
it shall have been executed by the Borrower and the Lender, and thereafter shall
be binding upon and inure to the benefit of the Borrower and the Lender and
their respective successors and assigns, except that the Borrower shall not have
the right to assign its rights hereunder or any interest herein without the
prior consent of the Lender.
SECTION 8.4. Successors and Assigns. (a) Whenever in this Agreement any
----------------------
of the parties hereto is referred to, such reference shall be deemed to include
the successors and assigns of such party; and all covenants, promises and
agreements by or on behalf of the Borrower, the Lender that are contained in
this Agreement shall bind and inure to the benefit of their respective
successors and assigns.
(b) Lender may assign to one or more assignees all or a portion of its
interests, rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loan at the time owing to it and the Note held
by it); provided, that Lender shall not assign (except within the Key Bank
system) greater than 49% of the Loan;
SECTION 8.5. Expenses; Indemnity. (a) The Borrower agrees to pay all out-
-------------------
of-pocket expenses incurred by the Lender in connection with the preparation of
this Agreement and the other Loan Documents or in connection with any
amendments, modifications or waivers of the provisions hereof or thereof
(whether or not the transactions hereby contemplated shall be consummated) or
incurred by the Lender in connection with the enforcement or protection of its
rights in connection with this Agreement and the other Loan Documents or in
connection with the Loan made or the Note issued hereunder, including the
29
<PAGE>
fees and disbursements of Brownstein Hyatt Farber & Strickland, P.C., counsel
for the Lender, and, in connection with any such amendment, modification or
waiver or any such enforcement or protection, the fees and disbursements of any
other counsel for the Lender. The Borrower further agrees that it shall
indemnify the Lender from and hold them harmless against any documentary taxes,
assessments or charges made by any Governmental Authority by reason of the
execution and delivery of this Agreement or any of the other Loan Documents.
(b) The Borrower agrees to indemnify the Lender and its directors,
officers, employees and agents (each such person being called an "Indemnitee")
against, and to hold each Indemnitee harmless from, any and all losses, claims,
damages, liabilities and related expenses, including reasonable counsel fees and
expenses, incurred by or asserted against any Indemnitee arising out of, in any
way connected with, or as a result of (i) the execution or delivery of this
Agreement or any other Loan Document or any agreement or instrument contemplated
thereby, the performance by the parties thereto of their respective obligations
thereunder or the consummation of the transactions contemplated thereby, (ii)
the use of the proceeds of the Loan or (iii) any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether or not any
Indemnitee is a party thereto; provided that such indemnity shall not, as to any
--------
Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or wilful misconduct of such Indemnitee.
(c) The provisions of this Section 8.5 shall remain operative and in full
force and effect regardless of the expiration of the term of this Agreement, the
consummation of the transactions contemplated hereby, the repayment of any of
the Loan, the invalidity or unenforceability of any term or provision of this
Agreement or any other Loan Document, or any investigation made by or on behalf
of the Lender. All amounts due under this Section 8.5 shall be payable on
written demand therefor.
SECTION 8.6. Right of Setoff. If an Event of Default shall have occurred
---------------
and be continuing Lender is hereby authorized at any time and from time to time,
to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by Lender to or for the credit or
the account of the Borrower against any of and all the obligations of the
Borrower now or hereafter existing under this Agreement and other Loan Documents
held by Lender, irrespective of whether or not Lender shall have made any demand
under this Agreement or such other Loan Document and although such obligations
may be unmatured. The rights of Lender under this Section are in addition to
other rights and remedies (including other rights of setoff) which Lender may
have.
30
<PAGE>
SECTION 8.7. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
--------------
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF
COLORADO.
SECTION 8.8. Waivers; Amendment. (a) No failure or delay of the Lender in
------------------
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of Lender hereunder and under the other
Loan Documents are cumulative and exclusive of any rights or remedies which they
would otherwise have. No waiver of any provision of this Agreement or any other
Loan Document or consent to any departure by the Borrower therefrom shall in any
event be effective unless the same shall be permitted by paragraph (b) below,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No notice or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances. Each holder of any of the Notes shall be bound
by any amendment, modification, waiver or consent authorized as provided herein,
whether or not such Note shall have been marked to indicate such amendment,
modification, waiver or consent.
(b) Neither this Agreement nor any provision hereof may be waived, amended
or modified except pursuant to an agreement or agreements in writing entered
into by the Borrower and the Lender.
SECTION 8.9. Interest Rate Limitation. Notwithstanding anything herein
------------------------
or in the Notes to the contrary, if at any time the applicable interest rate,
together with all fees and charges which are treated as interest under
applicable law (collectively the "Charges"), as provided for herein or in any
other document executed in connection herewith, or otherwise contracted for,
charged, received, taken or reserved by Lender, shall exceed the maximum lawful
rate (the "Maximum Rate") which may be contracted for, charged, taken, received
or reserved by Lender in accordance with applicable law, the rate of interest
payable under the Note, together with all Charges payable to Lender, shall be
limited to the Maximum Rate.
SECTION 8.10. Entire Agreement. This Agreement and the other Loan
----------------
Documents constitute the entire contract between the parties relative to the
subject matter hereof. Any previous agreement among the parties with respect to
the subject matter hereof is superseded by this Agreement and the other Loan
Documents. Nothing in this Agreement or in the other Loan Documents, expressed
or implied, is intended to confer upon any party other than the parties hereto
any rights, remedies, obligations or liabilities under or by reason of this
Agreement or the other Loan Documents.
31
<PAGE>
SECTION 8.11. Waiver of Jury Trial. Each party hereto hereby waives, to
--------------------
the fullest extent permitted by applicable law, any right it may have to a trial
by jury in respect of any litigation directly or indirectly arising out of,
under or in connection with this Agreement or any of the other Loan Documents.
Each party hereto (a) certifies that no representative, agent or attorney of any
other party has represented, expressly or otherwise, that such other party would
not, in the event of litigation, seek to enforce the foregoing waiver and (b)
acknowledges that it and the other parties hereto have been induced to enter
into this Agreement and the other Loan Documents, as applicable, by, among other
things, the mutual waivers and certifications in this Section 8.11.
SECTION 8.12. Severability. In the event any one or more of the
------------
provisions contained in this Agreement or in any other Loan Document should be
held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall
endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 8.13. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall constitute an original but all of which when
taken together shall constitute but one contract, and shall become effective as
provided in Section 8.3.
SECTION 8.14. Jurisdiction; Consent to Service of Process. (a) The
-------------------------------------------
Borrower hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any Colorado State court or
Federal court of the United States of America sitting in Denver, Colorado, and
any appellate court from any thereof, in any action or proceeding arising out of
or relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such Colorado State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that Lender
may otherwise have to bring any action or proceeding relating to this Agreement
or the other Loan Documents against the Borrower or its properties in the courts
of any jurisdiction.
(b) The Borrower hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection 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 the other Loan Documents in any
Colorado State or Federal court. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense
32
<PAGE>
or an inconvenient forum to the maintenance of such action or proceeding in any
such court.
(c) Each party to this Agreement irrevocably consents to service of process
in the manner provided for notices in Section 8.1. Nothing in this Agreement
will affect the right of any party to this Agreement to serve process in any
other manner permitted by law.
* * * * * *
33
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement
to be duly executed by their respective authorized officers as of the day and
year first above written.
BIRNER DENTAL MANAGEMENT
SERVICES, INC.
By [illegible signature]
------------------------------------------------
Title: CEO
--------------------------------------------
KEY BANK OF COLORADO
By [illegible signature]
------------------------------------------------
Title: Vice President
--------------------------------------------
<PAGE>
EXHIBIT A
PROMISSORY NOTE
---------------
$800,000.00
Denver, Colorado
October 31, 1996
FOR VALUE RECEIVED, the undersigned, BIRNER DENTAL MANAGEMENT SERVICES,
INC., a Colorado corporation ("Borrower"), whose address is 3801 E. Florida
--------
Ave., Suite 208, Denver, Colorado 8021O, promises to pay to the order of KEY
BANK OF COLORADO ("Lender"), at its office at 3600 South Yosemite Street,
------
Denver, Colorado 80237 (or at such other place as Lender shall designate in
writing), in lawful money of the United States of America, the principal sum of
Eight Hundred Thousand Dollars ($800,000.00) or so much thereof as may be
advanced by Lender and remain unpaid from time to time, pursuant to the terms of
that certain Credit Agreement of even date, to which the Borrower and Lender are
parties (as the same may from time to time be amended or supplemented, the
"Credit Agreement"), together with interest on said principal sum or such part
----------------
thereof advanced by Lender, from the date of each advance made by Lender (an
"Advance") until repaid in full, at the rate and at the times set forth in the
-------
Credit Agreement. The loan evidenced by this Note is a revolving loan, whereby
the Borrower may borrow, repay and reborrow the principal indebtedness evidenced
hereby.
1. Credit Agreement. This Note (the "Note") is the Note referred to in the
---------------- ----
Credit Agreement and is entitled to the benefits thereof. The proceeds of this
Note have been advanced for the uses specified in the Credit Agreement.
Capitalized terms used herein, unless otherwise defined herein, shall have the
meanings given them in the Credit Agreement.
2. Interest and Payments. The outstanding principal balance of this Note
---------------------
shall bear interest, from the date of each Advance made by Lender until repaid
in full, at the Base Rate specified in the Credit Agreement, which interest
shall be due and payable, in arrears, as provided in the Credit Agreement. Upon
the Maturity Date or earlier upon termination of the Credit Agreement, the
entire outstanding principal balance of this Note, together with all accrued but
unpaid interest thereon and all other sums due hereunder, shall be due and
payable in full. The Borrower shall have the right to prepay the outstanding
principal balance of this Note, together with all accrued but unpaid interest
thereon and all other sums due hereunder, in full or in part, as set forth in
the Credit Agreement. All payments of principal, interest and any other sums on
this Note due from the Borrower to Lender shall be made to Lender in lawful
money of the United States of America in the manner set forth in the Credit
Agreement.
3. Application of Proceeds. All payments hereunder by Borrower shall be
-----------------------
applied by Lender:
<PAGE>
First, to the payment of all reimbursable expenses,
-----
liabilities and advances made or incurred by Lender in connection
herewith including reasonable attorneys fees incurred in connection
with any enforcement action taken with respect to this Note;
Second, to the payment of any other amounts due (other than
------
principal and interest) under this Note or the Credit Agreement;
Third, to the payment of all interest accrued and unpaid on
-----
the outstanding indebtedness; and
Fourth, to the payment of the outstanding principal balance
------
of the outstanding indebtedness.
4. Default. Time is of the essence hereof. The occurrence of any Event
-------
of Default under the Credit Agreement shall be a default hereunder and, upon the
occurrence of any such default, the payment of all principal, interest and any
other sums due in accordance with the terms of this Note shall, at the option of
Lender, be accelerated and such principal, interest and other sums shall be
immediately due and payable without notice or demand, and Lender shall have the
option to foreclose or to require foreclosure of any or all liens and security
interests securing the payment hereof and/or to exercise any other rights and
remedies available to Lender hereunder or under the Credit Agreement. From and
after an Event of Default, the outstanding principal balance shall accrue
interest at the Default Rate.
5. Governing Law. As additional consideration for the extension of credit,
-------------
Borrower understands and agrees that the loan evidenced by this Note is made in
the State of Colorado and the provisions hereof will be construed in accordance
with the laws of the State of Colorado. The parties consent to the personal
jurisdiction of the courts and the venue specified in the Credit Agreement.
6. Maximum Interest. The provisions of this Note are hereby expressly
----------------
limited so that in no event whatsoever, whether by reason of demand or
acceleration of the maturity of this Note or otherwise, shall the amount paid,
or agreed to be paid ("Interest"), to Lender for the use, forbearance or
--------
retention of the money loaned hereunder exceed the maximum amount permissible
under applicable law. If, from any circumstance whatsoever, performance or
fulfillment of any provision of this Note shall, at the time of performance or
fulfillment of such provision shall be due, exceed the limit for Interest
prescribed by law, then ipso facto the obligation to be performed or fulfilled
shall be reduced to such limit and if, from any circumstance whatsoever, Lender
shall ever receive anything of value deemed Interest by applicable law in excess
of the maximum lawful amount, an amount equal to any excessive Interest shall be
applied to the reduction of the principal (whether or not then due) or at the
option of Lender be paid over to the Borrower, and not to the payment of
Interest.
2
<PAGE>
7. Miscellaneous Provisions.
------------------------
(a) The Borrower hereby waives demand for payment, presentment for
payment, protest, notice of protest, notice of dishonor, notice of nonpayment,
notice of acceleration of maturity, diligence in taking any action to collect
sums owing hereunder and all duty or obligation of Lender to effect, protect,
perfect, retain or enforce any security for the payment of this Note or to
proceed against any collateral before otherwise enforcing this Note.
(b) This Note and each payment of principal and interest hereunder
shall be paid when due without deduction or setoff of any kind or nature or for
any costs whatsoever.
(c) The Borrower agrees to reimburse Lender upon demand for all
reasonable out-of-pocket expenses, including, without limitation, reasonable
attorneys' fees and costs, incurred in connection with Lender's collection of
payments due from Borrower hereunder.
(d) The Borrower agrees that Lender may from time to time extend the
maturity of this Note or the time any payment is due under this Note and may
accept further security or release security for the payment of this Note,
without in any way affecting any obligations of the Borrower to Lender.
3
<PAGE>
IN WITNESS WHEREOF, the Borrower has executed this Note to be effective
as of the day and year first-above written.
BIRNER DENTAL MANAGEMENT SERVICES,
INC., a Colorado corporation
By: _______________________________
Name: _________________________
Title: ________________________
STATE OF__________________ )
) (S)
COUNTY OF_________________ )
The foregoing instrument was acknowledged, signed before me this ____ day
of November, 1996, by _____________ as ____________ of Birner Dental Management
Services, Inc., a Colorado corporation.
WITNESS my hand and official seal.
My commission expires: _________________________________
_______________________________________
Notary Public
4
<PAGE>
EXHIBIT B
[LETTERHEAD OF HOLLAND & HART LLP APPEARS HERE]
October 31, 1996
Key Bank of Colorado
3600 So. Yosemite, 4th Floor
Denver, Colorado 80237
Attention: Michael Hobbs, Vice President
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of October 31, 1996 (the
"Agreement") between Birner Dental Management Services, Inc. ("Borrower") and
Key Bank of Colorado ("Lender"). We are rendering this opinion as counsel for
the Borrower pursuant to Section 4.2(b) of the Agreement. The terms "Management
Agreement" or "Management Agreements" as used herein shall mean the standard
form of Management Agreement entered into between the Borrower and various
professional corporations engaged in the provision of dental services ("Perfect
Teeth PCs"). The term "management services" shall mean the management services
provided to the Perfect Teeth PCs under the Management Agreements. Capitalized
terms not defined herein have the meanings specified in the Agreement.
For purposes of this opinion, we have examined the Loan Documents. In
addition, we have examined originals or copies certified or otherwise identified
to our satisfaction, such records, agreements, documents and other instruments
and of certificates or comparable documents of public officials and of officers
of the Borrower, and have made such inquiries of such officers as we have deemed
relevant and necessary as the basis of the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals, the conformity
to original documents of documents submitted to us as certified or photostatic
copies, the authenticity of the originals of such latter documents, the due
authorization, execution and delivery of the Agreement and of the Loan Documents
by all parties thereto other than the Borrower, the capacity of all natural
persons who are parties to the Loan Documents, and that the Loan Documents are
enforceable in accordance with their respective terms against all parties
thereto other than the Borrower and the Guarantors. As to all questions of fact
material to
<PAGE>
[LETTERHEAD OF HOLLAND & HART LLP APPEARS HERE]
Key Bank of Colorado
October 30, 1996
Page 2
this opinion, we have relied upon certificates or other comparable documents of
officers of the Borrower and upon the representations and warranties of the
Borrower contained in the Agreement.
Based upon and subject to the qualifications and assumptions set forth
herein, we are of the opinion that:
1. The Borrower is duly incorporated, validly existing and in good
standing under the laws of the State of Colorado and has the corporate power and
authority to execute the Loan Documents and perform its obligations thereunder.
2. The Borrower has taken all necessary corporate action to authorize the
execution, delivery and performance of each of the Loan Documents and to grant
the security interests contemplated thereby.
3. No consent, authorization or approval by, notice of filings with, or
other act by or and in respect of, any governmental authority is required in
connection with the execution, delivery and performance by the Borrower of any
of the Loan Documents.
4. The Loan Documents are legal, valid and binding obligations of the
Borrower and the Guarantors, as applicable, enforceable against the Borrower and
Guarantors, as applicable, in accordance with their respective terms, except to
the extent enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by the effect
of general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
5. The Loan Documents are in form sufficient to grant a security interest
in that portion of the Collateral covered by the Security Agreement, which is
subject to Article 9 of the Colorado Uniform Commercial Code.
6. We have found no Colorado court cases or any regulations adopted by the
Colorado Board of Dental Examiners which address the validity of the management
services under the Colorado Dental Practice Act (C.R.S. (S)(S) 12-35-101 to 12-
35-135) (the "Dental Practice Act"). Among other matters, the Dental Practice
Act prohibits a person from being a "proprietor" of a place where dental
services are being performed, the conduct of dentistry in a corporate capacity,
the practice by a licensed dentist or dental hygienist as a partner, agent or
employee of any person not licensed to practice dentistry or the sharing of
<PAGE>
[LETTERHEAD OF HOLLAND & HART LLP APPEARS HERE]
Key Bank of Colorado
October 30, 1996
Page 3
professional fees with anyone other than with whom a dentist is lawfully
associated. We believe the purpose of the limitations of the Dental Practice
Act is to ensure that each licensed dentist or dental hygienist is not subject
to control by an unlicensed person or entity in the exercise of his or her
independent judgment in the performance of dental services. Assuming that the
management services are conducted in strict compliance with the terms of the
Management Agreements, we believe a Colorado court should determine that the
management services do not violate the Dental Practice Act since (i) the
dentists and dental hygienists are employed by the Perfect Teeth PCs and not
by the Borrower; (ii) the Borrower does not own any of the equipment or material
specifically used in the conduct of dentistry; and (iii) the Borrower is not
entitled to and does not exercise any control over the independent judgment of
the dentists or dental hygienists employed by the Perfect Teeth PCs.
The foregoing opinions are subject to the following qualifications:
a. Certain remedies, waivers and other provisions of the Loan
Documents may not be enforceable, but such unenforceability will not render the
Loan Documents invalid as a whole or preclude the judicial enforcement of the
obligation of the Borrower to repay the principal, together with interest (to
the extent not deemed a penalty).
b. The opinions expressed herein are qualified to the extent that the
validity, binding nature and enforceability against the Borrower and the
Guarantors of the Loan Documents may be limited or otherwise affected by the
unenforceability under certain circumstances of provisions indemnifying or
prospectively releasing, a party against liability for its own wrongful or
negligent acts or where a release or indemnification provision is contrary to
public policy.
c. We express no opinion as to the perfection or priority of the
liens or security interests created by the Loan Documents.
d. We express no opinion herein as to laws of any jurisdictions
other than the laws of the State of Colorado.
e. Our opinions are based upon Colorado laws and case decisions of
this state and upon facts now known to us; we expressly disavow any obligation
to advise you with respect to future changes in law or to our knowledge, or as
to any event or change of condition occurring subsequent to the date of this
letter.
<PAGE>
[LETTERHEAD OF HOLLAND & HART LLP APPEARS HERE]
Key Bank of Colorado
October 30, 1996
Page 4
The opinions expressed in this letter are strictly limited to the matters
stated herein, and no other opinions may be implied. This opinion is provided as
a legal opinion only, effective as of the date of this letter, and not as a
guaranty or warranty of the matters discussed herein. The opinions expressed in
this letter are solely for the information of the Lender in connection with the
execution and delivery of the Loan Documents and may not be relied upon in any
respect by any other person or for any other purpose. This letter may not be
published, quoted or referred to, or filed with, any person without our prior
written consent.
Very truly yours,
/s/ Holland & Hart
<PAGE>
EXHIBIT C
GUARANTY
--------
THIS GUARANTY, is made by FRED BIRNER, DR. MARK BIRNER, AND DENNIS GENTY
(collectively, the "Guarantor") to KEY BANK OF COLORADO ("Lender") as of the
31st day of October, 1996.
W I T N E S S E T H:
-------------------
WHEREAS, Birner Dental Management Services, Inc., a Colorado corporation,
("Borrower"), has applied to Lender for a revolving line of credit in the amount
of $800,000 (the "Loan"); and
WHEREAS, the Loan is evidenced and secured by that certain Credit Agreement
(the "Credit Agreement") of even date herewith between Borrower and Lender, and
that certain promissory note in the stated principal amount of $800,000, or so
much thereof as may be advanced by Lender and remain unpaid from time to time,
executed by Borrower and payable to the order of Lender (the "Note"). The Note,
Credit Agreement and such other documents and instruments, as same may from time
to time be amended or replaced, are sometimes collectively referred to herein as
the "Loan Documents"; and
WHEREAS, Lender is willing to make the Loan only on the condition that
payment of all amounts owing from time to time under the Loan Documents,
including, without limitation, principal and interest under the Note, be fully
guaranteed by Guarantor and that performance, observance and discharge of each
and every other obligation, covenant and agreement contained in the Loan
Documents be fully guaranteed by Guarantor. (All amounts guaranteed hereby,
including, without limitation, principal and interest under the Note, are
sometimes collectively referred to herein as the "Indebtedness"); and
WHEREAS, the extension of the Loan is of substantial benefit to Guarantor
and, therefore, Guarantor desires to guarantee payment of the Indebtedness and
performance, observance and discharge of each and every other obligation,
covenant and agreement contained in the Loan Documents all on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in order to induce Lender to extend the Loan to Borrower,
in consideration of the premises and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby
covenants and agrees as follows:
1. Guarantor hereby irrevocably and unconditionally fully guarantees to
Lender (a) the due, prompt and complete payment of the Indebtedness, including,
without limitation, principal, interest, fees, penalties and charges payable
under the Note, and (b) the due, prompt
<PAGE>
and complete observance, performance and discharge of each and every other
obligation, covenant and agreement contained in the Loan Documents, and (c) the
due, prompt and complete payment of all costs and expenses (including, without
limitation, attorneys' fees) incurred by Lender in collection of the
Indebtedness or the enforcement of this Guaranty against Guarantor.
2. Guarantor hereby grants to Lender, in Lender's uncontrolled discretion
and without notice to Guarantor, the power and authority to deal in any lawful
manner with the Indebtedness and the other obligations guaranteed hereby, and
without limiting the generality of the foregoing, further power and authority,
from time to time:
(a) to renew, compromise, extend, accelerate or otherwise change the
time or place of payment of or to otherwise change the terms of the Indebtedness
or the terms of performance of any of the other obligations guaranteed hereby,
including, without limitation, to increase or decrease any rate of interest
contained in any of the Loan Documents;
(b) to modify or to waive any of the terms of any agreement with
Borrower pertaining to the Indebtedness and/or the other obligations guaranteed
hereby;
(c) to take and hold security for the payment of the Indebtedness
and/or performance of the other obligations guaranteed hereby and to impair,
exhaust, exchange, enforce, waive or release any such security including,
without limitation, the release and disposition of collateral, from time to time
as specified in the Credit Agreement;
(d) to direct the order or manner of sale of any such security as
Lender in its discretion may determine;
(e) to grant any indulgence, forbearance or waiver with respect to
the Indebtedness or any of the other obligations guaranteed hereby; and/or
(f) to agree to any valuation by Lender of any collateral securing
payment of any of the Indebtedness which is supported by an appraisal prepared
by an independent nationally recognized appraisal firm in any proceedings under
the United States Bankruptcy Code concerning Borrower and/or Guarantor.
The liability of Guarantor hereunder shall not be affected, impaired or reduced
in any way by any action taken by Lender under the foregoing provisions or any
other provision hereof (except as provided in paragraphs 27 and 28 hereof, or by
any delay, failure or refusal of Lender to exercise any right or remedy Lender
may have against Borrower or any other person, firm or corporation, including
other guarantors, if any, liable for all or any part of the Indebtedness or any
of the other obligations guaranteed hereby.
3. Guarantor agrees that if any of the Indebtedness is not paid according
to the tenor thereof, whether by acceleration or otherwise, Guarantor shall
immediately upon receipt of written demand therefor from Lender, pay all of the
Indebtedness in like manner as if the
2
<PAGE>
Indebtedness constituted the direct and primary obligation of Guarantor.
Guarantor further agrees that if any other obligation, covenant or agreement
guaranteed hereby, is not observed, performed or discharged as required,
Guarantor shall, immediately upon receipt of written demand therefor from
Lender, observe, perform or discharge such obligation, covenant or agreement in
like manner as if same constituted the direct and primary obligation of
Guarantor.
4. Satisfaction by Guarantor of any liability hereunder incident to a
particular default under the Loan Documents or the occurrence of an additional
default under the Loan Documents shall not discharge Guarantor except with
respect to the default satisfied, it being the intent hereof that this Guaranty
and the obligations of Guarantor hereunder shall be continuing and irrevocable
until the Note has been paid in full. Notwithstanding the foregoing or anything
else set forth herein, and in addition thereto, if at any time all or any part
of any payment received by Lender from Guarantor under or with respect to this
Guaranty is or must be rescinded or returned for any reason whatsoever
(including, but not limited to, determination that said payment was a voidable
preference under insolvency, bankruptcy or reorganization laws), then
Guarantor's obligations hereunder shall, to the extent of the payment rescinded
or returned, be deemed to have continued in existence, notwithstanding such
previous receipt of payment by Lender, and Guarantor's obligations hereunder
shall continue to be effective or be reinstated, as the case may be, as to such
payment, all as though such previous payment to Lender had never been made. The
provisions of the foregoing sentence shall survive termination of this Guaranty,
cancellation of the Note and termination of the other Loan Documents and shall
remain a valid and binding obligation of Guarantor until satisfied.
5. Guarantor hereby waives notice of acceptance of this Guaranty by
Lender, and this Guaranty shall immediately be binding upon Guarantor.
6. Guarantor hereby waives and agrees not to assert or take advantage of:
(a) any right to require Lender to proceed against Borrower or any
other person or to proceed against or exhaust any security held by Lender at any
time or to pursue any other remedy in Lender's power before proceeding against
Guarantor hereunder;
(b) demand, presentment for payment, notice of non-payment, protest,
notice of protest and all other notices of any kind, including, without
limitation, notice of the existence, creation or incurring of any new or
additional indebtedness or obligation or of any action or non-action on the part
of Borrower, Lender, any endorser or creditor of Borrower or Guarantor or on the
part of any other person whomsoever under this or any other instrument in
connection with any obligation or evidence of indebtedness held by Lender or in
connection with the Indebtedness;
(c) any defense based upon an election of remedies by Lender,
including, without limitation, an election to proceed by non-judicial rather
than judicial foreclosure which destroys or otherwise impairs any or all of the
subrogation rights of Guarantor, the right of Guarantor to proceed against
Borrower for reimbursement, or both;
3
<PAGE>
(d) all duty or obligation on Lender's part to perfect, protect, not
impair, retain or enforce any security for the payment of the Indebtedness or
performance of any of the other obligations guaranteed hereby;
(e) any right of recourse against Lender by reason of any action
Lender may take or omit to take under this Guaranty or under any of the other
Loan Documents, including, without limitation, any such action which directly or
indirectly results in or aids the discharge of Borrower for any indebtedness,
whether by operation of law or otherwise;
(f) any defense arising by reason of the application by Borrower of
the proceeds of any of the Indebtedness for purposes other than the purposes
represented by Borrower or Lender or intended or understood by Lender or
Guarantor;
(g) any duty on the part of Lender to disclose to Guarantor any facts
Lender may now or hereafter know about Borrower, regardless of whether Lender
has reason to believe that any such facts materially increase the risk beyond
that which Guarantor intends to assume or has reason to believe that such facts
are unknown to Guarantor or has a reasonable opportunity to communicate such
facts to Guarantor, it being understood and agreed that Guarantor is fully
responsible for being and keeping informed of the financial condition of
Borrower and of any and all circumstances bearing on the risk of non-payment of
the Indebtedness and/or non-performance of any of the other obligations
guaranteed hereby; and
(h) the benefits of Sections 13-50-102 and 13-50-103 of the Colorado
Revised Statutes.
7. All existing and future indebtedness of Borrower to Guarantor or to
any person controlled or owned in whole or in part by Guarantor, the right of
Guarantor to withdraw or to cause or permit any person controlled or owned in
whole or in part by Guarantor to withdraw any capital invested by Guarantor or
such person in Borrower (other than salary and compensation for services), is
hereby deferred, postponed and subordinated to the Indebtedness and the liens
and security interests of the Loan Documents. Furthermore, except as expressly
provided herein, without the prior written consent of Lender, such subordinated
indebtedness shall not be paid and such capital shall not be withdrawn in whole
or in part nor shall Guarantor accept or cause or permit any person controlled
or owned in whole or in part by Guarantor to accept any payment of or on account
of any such subordinated indebtedness or as a withdrawal of capital while this
Guaranty is in effect. At Lender's request, Guarantor shall cause Borrower to
pay to Lender all or any part of such subordinated indebtedness and any capital
which Guarantor or any such person controlled or owned by Guarantor is entitled
to withdraw, which amount shall be applied against the Indebtedness. Each
payment by Borrower in violation of this Guaranty shall be received by the
person to whom paid in trust for Lender, and Guarantor shall cause the same to
be paid to Lender immediately on account of the Indebtedness. No such payment
shall reduce or affect in any manner the liability of Guarantor under this
Guaranty. Notwithstanding the foregoing, provided that no Event of Default has
occurred or is continuing under the Loan Documents, (i) Borrower shall be
permitted to pay interest on indebtedness owed
4
<PAGE>
to any Guarantor by Borrower and (ii) Borrower shall be permitted to pay
principal on any indebtedness owed by Borrower to any Guarantor so long as such
payment is not within six (6) months prior to the Maturity Date.
8. Guarantor shall file in any bankruptcy or other proceeding in which the
filing of claims is required by law, all claims which Guarantor may have against
Borrower relating to any indebtedness of Borrower to Guarantor and will assign
to Lender all rights of Guarantor thereunder. If Guarantor does not file any
such claim, Lender, as attorney-in-fact for Guarantor, is hereby authorized to
do so in the name of Guarantor or, in Lender's discretion, to assign the claim
to a nominee and to cause proof of claim to be filed in the name of Lender's
nominee. In all such cases, whether in administration, bankruptcy or otherwise,
the person or persons authorized to pay such claim shall, upon notice thereof,
pay to Lender the full amount thereof and, to the full extent necessary for that
purpose, Guarantor hereby assigns to Lender all of Guarantor's rights to any
payments or distributions to which Guarantor would otherwise be entitled.
9. With or without notice to Guarantor, Lender, in Lender's sole discretion
and at any time and from time to time and in such manner and upon such terms as
Lender deems fit, may: (a) apply any or all payments or recoveries from Borrower
or from any other guarantor or endorser under any other instrument or realized
from any security, in such manner and order of priority as Lender may determine,
to any indebtedness of Borrower to Lender, whether or not such indebtedness is
guaranteed hereby or is otherwise secured or is due at the time of such
application; or (b) refund to Borrower any payment received by Lender upon the
Indebtedness without affecting in any way Guarantor's obligation or liability
hereunder.
10. The amount of Guarantor's liability and all rights, powers and remedies
of Lender hereunder shall be cumulative and not alternative and such rights,
powers and remedies shall be in addition to all rights, powers and remedies
given to Lender under the Loan Documents and/or otherwise by law. This
Guaranty is in addition to and exclusive of the guaranty of any other guarantor
of the Indebtedness and/or the other obligations guaranteed hereby.
11. The liability of Guarantor under this Guaranty shall be an absolute,
direct, immediate and unconditional guarantee of payment and not of
collectibility. The obligations of Guarantor hereunder are independent of the
obligations of Borrower and, in the event of any default hereunder, a separate
action or actions may be brought and prosecuted against Guarantor, whether or
not Borrower is joined therein or a separate action or actions are brought
against Borrower. Lender may maintain successive actions for other defaults.
Lender's rights hereunder shall not be exhausted by its exercise of any of its
rights or remedies or by any such action or by any number of successive actions
until and unless the Indebtedness has been paid in full.
12. Notwithstanding the fact that Borrower may be a corporation, limited
liability company or a partnership, Lender is not to be concerned to see or
inquire into the powers of Borrower, its directors, officers, managers,
partners, associates or other agents acting or
5
<PAGE>
purporting to act on its behalf, Guarantor hereby representing that such powers
exist, and monies in fact borrowed from Lender in connection with the Loan in
the professed exercise of such powers shall be deemed to form a part of the
liabilities guaranteed, even though the borrowing or obtaining of such monies be
in excess of the powers of Borrower or of the directors, partners, officers,
associates or other agents thereof, or shall be in any way irregular, defective
or informal.
13. Guarantor hereby agrees to provide Lender signed and dated financial
statements detailing the assets and liabilities of Guarantor, in form and
substance acceptable to Lender, no later than ninety (90) days following the end
of each calendar year while this Guaranty remains in effect. Guarantor hereby
warrants and represents to Lender that any and all balance sheets, net worth
statements and other financial data which have heretofore been given or may
hereafter be given to Lender with respect to Guarantor did or will at the time
of such delivery fairly and accurately present the financial condition of the
persons and entities covered thereby.
14. Lender, in its sole discretion, may at any time enter into agreements
with Borrower or with any other person to amend, modify or change any of the
Loan Documents or any document or agreement relating in any way to the terms and
provisions of the Loan Documents or may at any time waive or release any
provision or provisions thereof and, with reference thereto, may make and enter
into all such agreements as Lender may deem proper or desirable, without any
notice or further assent from Guarantor and without in any manner impairing or
affecting this Guaranty or any of Lender's rights or Guarantor's obligations
hereunder.
15. Guarantor hereby agrees to pay to Lender, upon demand, attorneys' fees
and all costs and other expenses which Lender expends or incurs in collecting or
compromising the Indebtedness or in enforcing this Guaranty against Guarantor
whether or not suit is filed, including, without limitation, all costs,
attorneys' fees and expenses incurred by Lender in connection with any
insolvency, bankruptcy, reorganization, arrangement or other similar
proceedings involving Borrower and/or Guarantor which in any way affect the
exercise by Lender of its rights and remedies hereunder. Any and all such costs,
attorneys' fees and expenses not so paid shall bear interest at the Default
Rate, as defined in the Credit Agreement, from the date incurred by Lender until
paid by Guarantor.
16. Should any one or more provisions of this Guaranty be determined to be
illegal or unenforceable, all other provisions nevertheless shall be effective.
17. In the event that Guarantor timely pays any of the Indebtedness and/or
timely performs any of the other obligations guaranteed hereby, said payment
and/or performance by Guarantor shall be deemed to have cured the applicable
default under the Loan Documents.
18. No provision of this Guaranty or right of Lender hereunder can be
waived nor can Guarantor be released from Guarantor's obligations hereunder
except by a writing duly executed by Lender. This Guaranty may not be modified,
amended, revised, revoked, terminated,
6
<PAGE>
changed or varied in any way whatsoever except by the express terms of a writing
duly executed by Lender.
19. When the context and construction so require, all words used in the
singular herein shall be deemed to have been used in the plural, and the
masculine shall include the feminine and neuter and vice versa. The word
"person" as used herein shall include any individual, company, firm,
association, partnership, corporation, trust or other legal entity of any kind
whatsoever.
20. In the event that any or all of the Indebtedness is assigned by Lender
(subject to the limitations on Lender's assignment rights as set forth in the
Credit Agreement), this Guaranty shall automatically be assigned therewith in
whole or in part, as applicable, without the need of any express assignment and
when so assigned, Guarantor shall be bound as set forth herein to the
assignee(s) without in any manner affecting Guarantor's liability hereunder for
any part of the Indebtedness retained by Lender. In the event that Guarantor is
comprised of one or more persons, then, for all purposes herein the term
"Guarantor" shall mean each of the persons and/or entities comprising Guarantor,
separately, and/or (as the context requires) all of said persons and/or entities
together (i.e. all covenants, representations and warranties made by Guarantor
hereunder are jointly and severally made by each and all of the persons and/or
entities comprising Guarantor and said persons and/or entities comprising
Guarantor shall be jointly and severally liable for performance of all
obligations of Guarantor hereunder except as expressly provided in paragraphs 27
and 28 below) and Lender may exercise any or all of its rights hereunder against
all of said persons and/or entities or any one or more of same individually, as
determined by Lender in its sole subjective discretion, the liability of each
such person and/or entity being for the entire Indebtedness and the entire other
obligations guaranteed hereby.
21. This Guaranty shall inure to the benefit of and bind the heirs, legal
representatives, administrators, executors, successors and assigns of Lender and
Guarantor.
22. This Guaranty shall be governed by and construed in accordance with the
laws of the State of Colorado, except to the extent that any of such laws may
now or hereafter be preempted by Federal law, in which case, such Federal law
shall so govern and be controlling. In any action brought under or arising out
of this Guaranty, Guarantor hereby consents to the jurisdiction of any competent
court within the State of Colorado and consents to service of process by any
means authorized by the law of the State of Colorado. Except as provided in any
other written agreement now or at any time hereafter in force between Lender and
Guarantor, this Guaranty shall constitute the entire agreement of Guarantor with
Lender with respect to the subject matter hereof, and no representation,
understanding, promise or condition concerning the subject matter hereof shall
be binding upon Lender unless expressed herein.
23. All notices, demands, requests or other communications to be sent by
one party to the other hereunder or required by law shall be in writing and
shall be deemed to have been validly given or served by delivery of same in
person to the addressee or by depositing same with Federal Express or Airborne
for next business day delivery or by depositing same in the
7
<PAGE>
United States mail, postage prepaid, registered or certified mail, return
receipt requested, addressed as follows:
Lender: Key Bank of Colorado
3600 South Yosemite, Suite 410
Denver, Colorado 80237
Attention: Michael Hobbs, Vice President
Telephone No. (303) 804-8389
Telecopy No. (303) 741-3958
Guarantor: Fred Birner
Mark Birner
Dennis Genty
Birner Dental Management Services, Inc.
3801 E. Florida Ave., Suite 208
Denver, Colorado 80210
All notices, demands and requests shall be effective upon such
personal delivery or upon being deposited with Federal Express, Airborne or in
the United States mail as required above. However, with respect to notices,
demands or requests so deposited with Federal Express, Airborne or in the United
States mail, the time period in which a response to any such notice, demand or
request must be given shall commence to run from the next business day
following any such deposit with Federal Express or Airborne or, in the case of a
deposit in the United States mail as provided above, the date on the return
receipt of the notice, demand or request reflecting the date of delivery or
rejection of the same by the addressee thereof. Rejection or other refusal to
accept or the inability to deliver because of changed address of which no notice
was given shall be deemed to be receipt of the notice, demand or request sent.
By giving to the other party hereto at least 30 days' written notice thereof in
accordance with the provisions hereof, the parties hereto shall have the right
from time to time to change their respective addresses and each shall have the
right to specify as its address any other address within the United States of
America.
24. Guarantor hereby agrees that this Guaranty, the Indebtedness and all
other obligations guaranteed hereby, shall remain in full force and effect at
all times hereinafter until paid and/or performed in full notwithstanding any
action or undertakings by, or against, Lender, Guarantor and/or Borrower, and/or
concerning any collateral securing the Loan any proceeding in the United States
Bankruptcy Court pursuant to any Chapter of the Bankruptcy Code or the Rules of
Bankruptcy Procedure as same may be applicable from time-to-time, including,
without limitation, any proceeding relating to valuation of collateral, election
or imposition of secured or unsecured claim status upon claims by Lender.
25. This Guaranty may be executed in any number of counterparts, each of
which shall be effective only upon delivery and thereafter shall be deemed an
original, and all of which
8
<PAGE>
shall be taken to be one and the same instrument, for the same effect as if all
parties hereto had signed the same signature page. Any signature page of this
Guaranty may be detached from any counterpart of this Guaranty without impairing
the legal effect of any signatures thereon and may be attached to another
counterpart of this Guaranty identical in form hereto but having attached to it
one or more additional signature pages.
26. Guarantor shall not have any rights of subrogation against Borrower
with respect to any of the Indebtedness paid by Guarantor hereunder or any of
the obligations performed by Guarantor hereunder, and Guarantor hereby waives
and relinquishes any such rights of subrogation, for so long as any portion of
the Indebtedness shall remain outstanding. Furthermore, Guarantor hereby waives
and relinquishes any and all claims Guarantor may now have or may hereafter have
against Borrower arising out of or in any way related to the Indebtedness, this
Guaranty and the other Loan Documents and/or the performance by Guarantor of its
obligations hereunder for so long as any portion of the Indebtedness shall
remain outstanding. Guarantor warrants and agrees that the foregoing waivers and
each other waiver set forth herein are made with Guarantor's full knowledge of
their significance and consequences and that under the circumstances, said
waivers are reasonable and not contrary to public policy or law. If any of said
waivers are determined to be contrary to any applicable law or public policy,
such waiver shall be effective only to the maximum extent permitted by such law
or public policy.
27. Notwithstanding anything to the contrary contained herein, the
liability of Fred Birner, Dr. Mark Birner and Dennis Genty shall be joint and
several, but shall be limited initially to $300,000 each (for a total of
$900,000) plus any attorneys fees, costs or expenses incurred by Lender to
collect such sums from any one or more of such individuals. For example, if the
amount of unpaid Indebtedness to be collected by Lender is $250,000 (and the
provisions of paragraph 29 have not been met), Lender may collect such sum from
any one Guarantor or all or any of the Guarantors. However, if the amount of
unpaid Indebtedness is $500,000, Lender may collect only a maximum of $300,000
(subject to the limitations of paragraph 29) from any individual Guarantor and
the balance must be collected from one or both of the other Guarantors.
28. The $300,000 limitation on the individual liability of each Guarantor
hereunder, shall be further reduced by $50,000 for each full calendar quarter
that Borrower is in full compliance with the covenants, conditions and
obligations set forth in the Loan Documents, including, without limitation, the
financial covenants and ratios in the Credit Agreement. As an example of the
foregoing, if Borrower is in full compliance with the Loan Documents from the
date hereof until March 31, 1997, then, effective as of April 1, 1997, the
maximum liability of each Guarantor shall be $250,000. Further, if Borrower is
in full compliance with the Loan Documents from the date hereof until June 30,
1998, the liability of each Guarantor shall be extinguished and this Guaranty
shall be of no further force or effect, and upon request, Lender shall
acknowledge the termination of each Guarantor's liability hereunder.
9
<PAGE>
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the day
and year first above written.
______________________________________
Fred Birner
______________________________________
Dr. Mark Birner
______________________________________
Dennis Genty
10
<PAGE>
STATE OF __________ )
) ss.
COUNTY OF _________ )
The foregoing instrument was acknowledged before me this ____ day of
November, 1996, by Fred Birner.
WITNESS my hand and official seal.
My commission expires: ______________________________________
___________________________
Notary Public
STATE OF __________ )
) ss.
COUNTY OF _________ )
The foregoing instrument was acknowledged before me this ____ day of
November, 1996, by Dr. Mark Birner.
WITNESS my hand and official seal.
My commission expires: ______________________________________
___________________________
Notary Public
STATE OF __________ )
) ss.
COUNTY OF _________ )
The foregoing instrument was acknowledged before me this ____ day of
November, 1996, by Dennis Genty.
WITNESS my hand and official seal.
My commission expires: ______________________________________
___________________________
Notary Public
11
<PAGE>
EXHIBIT D
BIRNER DENTAL MANAGEMENT SERVICES, INC.
BORROWING BASE CERTIFICATE
AS OF __________
The undersigned officer of Birner Dental Management Services, Inc.
hereby certifies that the following is a true and accurate calculation of the
Borrowing Base as of the date specified above, determined in accordance with the
requirements of the Credit Agreement dated October 31, 1996 between Birner
Dental Management Services, Inc. ("Borrower") and Key Bank of Colorado
("Lender").
_______________________________________
Name: _________________________________
Title: ________________________________
Date: _________________________________
Accounts Receivable Aging Schedule:
1-30 Day 31-61 Day 61-90 Day 90+Day Total
________ _________ _________ ______ _____
________________________________________________________________________________
BORROWING BASE CALCULATION:
ACCOUNTS RECEIVABLE PORTION:
Accounts Receivable
Less:/1/
(a) Accounts Receivable to which Borrower does
not have valid title ________
(b) Accounts Receivable which are not the binding
obligation of the account debtor ________
__________
/1/ Reference is made to the definitions of "Eligible Accounts Receivable" in
Section 1.1 of the Credit Agreement. Information must be provided in accordance
with such definitions. Captions set forth below are for reference purposes only
and may not reflect the actual definition in the Credit Agreement.
<PAGE>
(c) Accounts Receivable arising from services provided by
Borrower to an Affiliate of Borrower ___
(d) Accounts Receivable which are unpaid more than the
earlier of ninety (90) days after the original invoice
date or one hundred five (105) days after the services
were provided ___
(e) Accounts Receivable which, when aggregated with all
other Accounts Receivable of the same account debtor
or Affiliate, exceed 20% in face value of all
Accounts Receivable of Borrower ___
(f) Accounts Receivable (i) wherein the account debtor is
also a creditor of the Borrower, (ii) which are subject
to dispute or (iii) which are or are likely to become
subject to any right of setoff or other claim or defense ___
(g) Accounts Receivable in which the Lender does not
have a valid perfected first priority security
interest ___
(h) Accounts Receivable from the same account debtor in
which 50% or more of the other Account Receivables
from such account debtor are unpaid within the applicable
period of time set forth above ___
(i) Accounts Receivable which may not be collectible due to
account debtor's financial inability to pay or collection
is otherwise insecure ___
Eligible Accounts Receivable ===
BORROWING BASE:
75% of Eligible Accounts Receivable ___
Less Total outstanding principal balance of Revolving Credit
Loan ___
Revolving Credit Availability ===
2
<PAGE>
FIRST AMENDMENT TO LOAN DOCUMENTS
---------------------------------
THIS FIRST AMENDMENT TO LOAN DOCUMENTS (this "Amendment"), made as of the
---------
_____ day of September, 1997, is between BIRNER DENTAL MANAGEMENT SERVICES,
INC., a Colorado corporation ("Borrower") and KEYBANK NATIONAL BANKING
--------
ASSOCIATION, a national banking association ("Lender").
------
R E C I T A L S:
---------------
A. Lender has made a loan (the "Loan") to Borrower, which Loan is
----
evidenced and/or secured by a Promissory Note (the "Note") dated as of October
----
31, 1996 in the stated principal amount of $800,000.00 executed by Borrower and
payable to the order of Lender, and a Guaranty (the "Guaranty") dated as of
--------
October 31, 1996, executed by Fred Birner, Mark Birner and Dennis Genty
(collectively, the "Guarantors") securing payment of the Note, and by a
----------
Security Agreement (the "Security Agreement") dated as of October 31, 1996 from
------------------
Borrower for the benefit of Lender also securing payment of the Note, and by a
Credit Agreement (the "Credit Agreement") dated as of October 31, 1996 between
----------------
Borrower and Lender, and by certain other documents or instruments (the Note,
the Security Agreement, the Credit Agreement and such other documents and
instruments, as same may from time to time be amended or replaced, are sometimes
collectively referred to herein as the "Loan Documents").
--------------
B. On even date herewith, Borrower has executed and delivered to Lender
that certain promissory note (the "Term Note") in the original principal amount
---------
of Two Million and No/100 Dollars ($2,000,000.00), the proceeds of which loan
(the "Term Loan") are to be used for the purposes specified herein.
---------
C. Borrower and Lender desire to amend the terms and conditions contained
in the Credit Agreement, Security Agreement, the other Loan Documents and the
Guaranty to set forth certain terms and conditions regarding the Term Loan, and
to cross-default and cross-collateralize the Term Note with the Loan Documents.
NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties hereto hereby covenant and agree as follows:
1. CERTAIN DEFINITIONS. Capitalized terms used in this Amendment which
-------------------
are not defined herein shall have the meanings ascribed to such terms in the
Loan Documents.
<PAGE>
2. CREDIT AGREEMENT AMENDMENTS. The Credit Agreement is hereby amended
---------------------------
to fully incorporate the Term Loan, and all references in the Credit Agreement
to the "Loan," shall expressly include the Term Loan, except as follows:
a. The Term Loan is a non-revolving loan, and any amounts paid or prepaid
with respect to the Term Loan shall not be available for reborrowing under the
Credit Agreement.
b. No Facility Fee shall be due or payable with respect to the Term Loan.
c. In connection with the execution of this Amendment, Borrower shall pay
Lender an origination fee with respect to the Term Loan (the "Term Loan
Origination Fee") in an amount equal to 0.5% ($10,000.00) of the maximum amount
of the Term Loan.
d. Notwithstanding Section 2.6(b) of the Credit Agreement, interest on the
Term Loan shall be due and payable, in arrears, on the first day of each
calendar month, beginning on October 1, 1997 and continuing through and
including the Maturity Date. In addition, beginning on March 1, 1998, and
continuing on the first day of each calendar month thereafter, in addition to
the monthly payments of interest, Borrower shall pay monthly installments of
principal with respect to the Term Loan in the amount of $33,333.33 until the
Maturity Date, at which time the remaining principal balance of the Term Loan,
and all accrued interest thereon, shall be due and payable in full.
e. The Term Note shall be hereafter included in the definition of the
"Loan Documents" set forth in the Credit Agreement, and as a result, any default
under the Term Note which is not timely cured shall constitute an Event of
Default under the Credit Agreement.
f. The proceeds of the Term Loan shall be used exclusively for the
acquisition of the Abramowitz/Equity Resources dental practices, and all costs
incurred by Borrower related to the acquisition of such practices.
3. AMENDMENTS OF THE SECURITY AGREEMENT. The Security Agreement is hereby
------------------------------------
amended to include the Term Note in the definition of the "Obligations" set
forth in Paragraph 6 of the Security Agreement.
4. OTHER LOAN DOCUMENT AMENDMENTS. Each of the other Loan Documents is
------------------------------
hereby amended to reflect the additional indebtedness of Borrower to Lender, as
evidenced by the Term Note, and to incorporate the amendments to the Credit
Agreement and Security Agreement as set forth in Paragraphs 2 and 3 above.
5. GUARANTY AMENDMENTS. The Guaranty is hereby amended to reflect the
-------------------
amendments to the Credit Agreement, Security Agreement and the other Loan
Documents and to provide that all references therein to the Credit Agreement,
Security Agreement and/or the other Loan Documents shall include the amendments
made herein, and the Guarantors acknowledge that a default under the Term Note
which is not timely cured shall cause a default
-2-
<PAGE>
under the Note; provided, however, in no event shall the Guarantors be liable
for the repayment of the Term Loan, and the liability of the Guarantors shall
continue to be limited in the manner, and the amounts, set forth in Paragraphs
27 and 28 of the Guaranty.
6. DOCUMENT RATIFICATION. Except as set forth in Paragraphs 1 through 5
---------------------
above, all of the terms and conditions contained in the Credit Agreement, the
Security Agreement and other Loan Documents and the Guaranty shall remain the
same and in full force and effect, and are hereby ratified, reaffirmed and
republished.
7. PAYMENT OF COSTS AND FEES; CONDITIONS PRECEDENT TO DISBURSEMENTS.
-------------------------------------------------- -------------
Notwithstanding anything to the contrary set forth herein, in the Term Note, the
Credit Agreement, the Security Agreement, the other Loan Documents or the
Guaranty, Lender shall not be required to make any further disbursements of
proceeds of the Term Loan until the following shall have occurred:
a. Borrower shall have paid to Lender the Term Loan Origination Fee,
and shall have paid all closing costs and expenses of Lender incurred in
connection with this Amendment and all legal fees of Lender's counsel
relating to this Amendment.
b. Borrower shall have delivered to Lender an opinion of Borrower's
counsel in form satisfactory to Lender and Lender's counsel.
c. Borrower shall have delivered to Lender a certificate of good
standing issued by the Secretary of State of the State of Colorado
confirming that the Borrower remains a corporation duly formed and in good
standing in the State of Colorado.
d. Lender shall have received UCC searches confirming that no liens,
claims or encumbrances exist upon any of Borrower's assets, except as
expressly permitted by the Credit Agreement.
e. Lender shall have received and approved copies of the acquisition
documents related to the acquisition of the Abramowitz/ Equity Resources
dental practices.
F. Borrower shall have delivered to Lender borrowing resolutions
confirming the authority of the individual executing the Term Note and this
Amendment on behalf of the Borrower.
8. REPRESENTATION OF BORROWER. Borrower hereby confirms that, as of the
--------------------------
date hereof, (i) Borrower is in compliance with each of the representations,
warranties and covenants of Borrower set forth in the Loan Documents, (ii) no
Event of Default exists under the Loan Documents and (iii) no fact or condition
exists, which with the passage of time and/or giving of notice, would constitute
an Event of Default under the Loan Documents.
-3-
<PAGE>
9. CONTROLLING LAW. The terms and provisions of this Amendment shall be
---------------
construed in accordance with and governed by the laws of the State of Colorado.
10. BINDING EFFECT. This Amendment shall be binding upon and inure to the
--------------
benefit of the parties hereto, their successors and assigns.
11. CAPTIONS. The paragraph captions utilized herein are in no way
--------
intended to interpret or limit the terms and conditions hereof, rather, they are
intended for purposes of convenience only.
12. COUNTERPARTS. This Amendment may be executed in any number of
------------
counterparts, each of which shall be effective only upon delivery and thereafter
shall be deemed an original, and all of which shall be taken to be one and the
same instrument, for the same effect as if all parties hereto had signed the
same signature page. Any signature page of this Amendment may be detached from
any counterpart of this Amendment without impairing the legal effect of any
signatures thereon and may be attached to another counterpart of this Amendment
identical in form hereto but having attached to it one or more additional
signature pages.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
LENDER:
KEYBANK NATIONAL ASSOCIATION, a national banking
association
By: ______________________________
Title:________________________
BORROWER:
BIRNER DENTAL MANAGEMENT SERVICES, INC.,
a Colorado corporation
By:_____________________________
Title:____________________
* * * * *
-4-
<PAGE>
Executed this ____ day of September, 1997 for the sole purpose of
acknowledging and consenting to the amendment to the Loan Documents.
GUARANTORS:
_________________________________________
MARK BIRNER
_________________________________________
FRED BIRNER
_________________________________________
DENNIS GENTY
-5-
<PAGE>
DRAFT
PROMISSORY NOTE
---------------
$2,000,000.00 Denver, Colorado
August __, 1997
FOR VALUE RECEIVED, the undersigned, BIRNER DENTAL MANAGEMENT SERVICES,
INC., a Colorado corporation, (collectively, the "Borrower"), whose address is
--------
3801 East Florida, Suite 208, Denver, Colorado 80210, promises to pay to the
order of KEYBANK NATIONAL ASSOCIATION, a national banking association
("Lender"), at its office at 600 South Cherry Street, Suite 1000, Denver,
------
Colorado 80222 (or at such other place as Lender shall designate in writing), in
lawful money of the United States of America, the principal sum of Two Million
Dollars ($2,000,000.00) or so much thereof as may be advanced by Lender and
remain unpaid from time to time, pursuant to the terms of that certain Credit
Agreement dated October 31, 1996, as amended by that certain First Amendment to
Loan Documents of even date, to which the Borrower and Lender are parties
(collectively, the "Credit Agreement"), together with interest on said
----------------
principal sum or such part thereof advanced by Lender, from the date of each
advance made by Lender (an "Advance") until repaid in full, at the rate and at
-------
the times set forth in the Credit Agreement. Amounts paid or repaid hereunder
may not be reborrowed.
1. Credit Agreement. This Note (the "Note") is the Term Note referred
---------------- ----
to in the Credit Agreement and is entitled to the benefits thereof. The proceeds
of this Note have been advanced for the uses specified in the Credit Agreement.
Capitalized terms used herein, unless otherwise defined herein, shall have the
meanings given them in the Credit Agreement.
2. Interest and Payments. The outstanding principal balance of this Note
---------------------
shall bear interest, from the date of each Advance made by Lender until repaid
in full, at the Base Rate specified in the Credit Agreement. Periodic payments
of principal and interest shall be due and payable in accordance with the Credit
Agreement. Upon the Maturity Date or earlier upon termination of the Credit
Agreement, the entire outstanding principal balance of this Note, together with
all accrued but unpaid interest thereon and all other sums due hereunder, shall
be due and payable in full. The Borrower shall have the right to prepay the
outstanding principal balance of this Note, together with all accrued but unpaid
interest thereon and all other sums due hereunder, in full or in part, as set
forth in the Credit Agreement. All payments of principal, interest and any other
sums on this Note due from the Borrower to Lender shall be made to Lender in
lawful money of the United States of America in the manner set forth in the
Credit Agreement.
<PAGE>
3. Application of Proceeds. All payments hereunder by Borrower shall be
-----------------------
applied by Lender:
First, to the payment of all reimbursable expenses, liabilities
-----
and advances made or incurred by Lender in connection herewith including
reasonable attorneys fees incurred in connection with any enforcement
action taken with respect to this Note;
Second, to the payment of any other amounts due (other than
------
principal and interest) under this Note or the Credit Agreement;
Third, to the payment of all interest accrued and unpaid on the
-----
outstanding indebtedness; and
Fourth, to the payment of the outstanding pr1ncipal balance of
------
the outstanding indebtedness.
4. Default. Time is of the essence hereof. The occurrence of any Event
-------
of Default under the Credit Agreement shall be a default hereunder and, upon the
occurrence of any such default, the payment of all principal, interest and any
other sums due in accordance with the terms of this Note shall, at the option of
Lender, be accelerated and such principal, interest and other sums shall be
immediately due and payable without notice or demand, and Lender shall have the
option to foreclose or to require foreclosure of any or all liens and security
interests securing the payment hereof and/or to exercise any other rights and
remedies available to Lender hereunder or under the Credit Agreement. From and
after an Event of Default, the outstanding principal balance shall accrue
interest at the Default Rate.
5. Governing Law. As additional consideration for the extension of
-------------
credit, Borrower understands and agrees that the loan evidenced by this Note is
made in the State of Colorado and the provisions hereof will be construed in
accordance with the laws of the State of Colorado. The parties consent to the
personal jurisdiction of the courts and the venue specified in the Credit
Agreement.
6. Maximum Interest. The provisions of this Note are hereby expressly
----------------
limited so that in no event whatsoever, whether by reason of demand or
acceleration of the maturity of this Note or otherwise, shall the amount paid,
or agreed to be paid ("Interest"), to Lender for the use, forbearance or
--------
retention of the money loaned hereunder exceed the maximum amount permissible
under applicable law. If, from any circumstance whatsoever, performance or
fulfillment of any provision of this Note shall, at the time of performance or
fulfillment of such provision shall be due, exceed the limit for Interest
prescribed by law, then ipso facto the obligation to be performed or fulfilled
shall be reduced to such limit and if, from any circumstance whatsoever, Lender
shall ever receive anything of value deemed Interest by applicable law in excess
of the maximum lawful amount, an amount equal to any excessive Interest shall be
applied to the reduction of the principal (whether or not then due) or at the
option of Lender be paid over to the Borrower, and not to the payment of
Interest.
2
<PAGE>
7. Miscellaneous Provisions.
------------------------
(a) The Borrower hereby waives demand for payment, presentment for
payment, protest, notice of protest, notice of dishonor, notice of nonpayment,
notice of acceleration of maturity, diligence in taking any action to collect
sums owing hereunder and all duty or obligation of Lender to effect, protect,
perfect, retain or enforce any security for the payment of this Note or to
proceed against any collateral before otherwise enforcing this Note.
(b) This Note and each payment of principal and interest hereunder
shall be paid when due without deduction or setoff of any kind or nature or for
any costs whatsoever.
(c) The Borrower agrees to reimburse Lender upon demand for all
reasonable out-of-pocket expenses, including, without limitation, reasonable
attorneys' fees and costs, incurred in connection with Lender's collection of
payments due from Borrower hereunder.
(d) The Borrower agrees that Lender may from time to time extend
the maturity of this Note or the time any payment is due under this Note and may
accept further security or release security for the payment of this Note,
without in any way affecting any obligations of the Borrower to Lender.
IN WITNESS WHEREOF, the Borrower has executed this Note as of the
day and year first-above written.
BIRNER DENTAL MANAGEMENT SERVICES,
INC., a Colorado corporation
By: __________________________________________
Name: ____________________________________
Title: ___________________________________
3
<PAGE>
EXHIBIT 10.14
PRIMARY CARE DENTIST AGREEMENT
------------------------------
(hereinafter called "Agreement")
effective October 1, 1996
BETWEEN
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
-------------------------------------------
and its affiliates and subsidiaries
(hereinafter called "The Prudential")
and
Perfect Teeth-East Cornell
(Contracting Dentist, hereinafter called "You")
Since The Prudential has established a managed dental care coverage program
(hereinafter referred to as the "Coverage Plan") and wishes to enter into an
agreement whereby you will provide dental care services under said Coverage
Plan; and,
Since you desire to enter into an agreement to provide said dental care services
and become a Primary Care Dentist;
It is mutually agreed as follows:
ARTICLE I - DEFINITIONS
-----------------------
The meaning of the terms used in this Agreement shall be as defined in
Attachment A to this Agreement, except where the context makes it clear that
such meaning is not intended.
ARTICLE II- OBLIGATIONS AND
---------------------------
RESPONSIBILITIES OF PRIMARY CARE DENTIST
----------------------------------------
You agree that your obligations and responsibilities are as described below:
A. You agree to provide Basic Dental Services to those Covered Persons who have
chosen you as their Primary Care Dentist. A roster of such Covered Persons
shall be provided to you by The Prudential and updated monthly. You shall
provide appropriate treatment and appointment availability for Covered
Persons consistent with existing office policy for patients not covered by a
Coverage Plan. You further agree to accept such Covered Persons as patients
and will not close your practice to such Covered Persons until you have
accepted at least 200 Covered Persons as patients, unless such requirement
has been explicitly waived in writing by the Regional Dental Director. You
further agree that you shall accept any current patient of record as a
Covered Person at any time regardless of the total number of Covered Persons
accepted as patients.
B. You may provide appropriate dental services which are not covered under a
Coverage Plan. In such cases, you must inform the Covered Person that such
services are not covered, that he/she is responsible for payment, and the
amount due for such services. You may charge up to your usual fees for such
services.
C. You agree to submit to The Prudential encounter information on forms
supplied by or acceptable to The Prudential. The forms shall show all Basic
Dental Services provided to each Covered Person and the copayment amounts
collected from Covered Persons. Encounter information shall be submitted at
least monthly.
D. You agree that all referrals to Specialty Dentists or any other Dentist
shall be made in accordance with guidelines established by The Prudential.
Ed 05/95
PCDA
1
<PAGE>
E. You agree not to subcontract or otherwise delegate any duties under this
Agreement without the express written consent of The Prudential. This
provision does not apply to any services legally performed by a fully
licensed Dentist associate, dental hygienist or dental assistant employed by
the Primary Care Dentist. It is understood that all Dentist associates
providing services to Covered Persons must be fully credentialed by The
Prudential.
F. If this Agreement is terminated, you agree to complete all treatment in
progress and, upon request, forward copies of all Covered Persons' records,
radiographs and study models, at no cost to Covered Persons or The
Prudential, to the Covered Persons' new Primary Care Dentists within 30 days
after completion of treatment in progress. While such treatment is in
progress, all terms of this Agreement, including reimbursement arrangements,
will remain as prior to the termination of the Agreement.
G. You agree to comply with all administrative requirements, guidelines and
procedures described by The Prudential in the Dental Office Guide or any
successor document, as well as any supplemental changes issued in writing by
The Prudential.
H. You agree to participate in the Coverage Plan's Quality Improvement Program,
peer review and complaint resolution programs as described in the Dental
Office Guide. You further agree to abide by the terms, recommendations and
decisions of these programs.
I. You shall maintain professional liability insurance appropriate to the
professional activities assumed under this Agreement. The amount of such
insurance shall be determined by The Prudential. You must provide The
Prudential with evidence of such coverage prior to the effective date of
this Agreement and agree to provide such evidence when and as often as may
be reasonably requested by The Prudential.
J. You agree to comply with all applicable Federal, State and local laws and
regulations, including, but not limited to, those regarding employment
discrimination.
ARTICLE III- LEGAL RELATIONSHIP OF THE PRUDENTIAL TO PRIMARY CARE
-----------------------------------------------------------------
DENTISTS
--------
The relationship between you and The Prudential is that of independent
contractor. None of the provisions of this Agreement are intended to create, or
to be construed as creating, any agency, partnership, joint venture and/or
employee-employer relationships.
ARTICLE IV- GENERAL PROVISIONS
------------------------------
The following additional conditions and provisions apply:
A. Nothing contained in this Agreement shall be construed to require you to
recommend or perform any procedure or course of treatment which you deem to
be professionally unacceptable.
B. If you are an individual Dentist, you represent and warrant that you are
licensed to practice dentistry in the jurisdiction where services are
provided; that your license to practice dentistry has not been revoked,
suspended or placed on probation during the past five years; and that you
shall maintain an unrestricted license to practice dentistry and be eligible
for a Federal Drug Enforcement Agency permit throughout the term of this
Agreement. If you are a legal representative of a group dental practice or
corporation, you represent and warrant for each Dentist in said group dental
practice or corporation who provides Basic Dental Services to Covered
Persons that he/she meets
Ed 05/95
PCDA
2
<PAGE>
the above requirements. You further agree to provide evidence of such
licensure and your DEA permit, as well as any other documentation that may
be required by any Federal, state or local law, prior to the effective date
of this Agreement and thereafter when and as often as may be reasonably
requested by The Prudential.
C. This Agreement, together with any attachments, supplements, addenda,
amendments or modifications, comprise the complete Primary Care Dentist
Agreement. Neither of the parties has made representations or warranties
other than those set forth in this Agreement and such attachments,
supplements, addenda, amendments or notifications, if any.
D. The Prudential and its representatives shall have the right to conduct
reviews of your dental office operations and dental records of Covered
Persons. All such reviews will be made during normal working hours or at
such other time that is mutually agreed upon.
E. The Prudential shall indemnify and hold you harmless from any and all
claims, lawsuits, settlements, and liabilities incurred as a result of
actions taken or not taken by The Prudential in the administration of the
Coverage Plans.
F. You shall indemnify and hold The Prudential harmless from any and all
claims, lawsuits, settlements, and liabilities incurred as a result of
professional services provided or not provided by you with respect to any
Covered Person.
G. In the event that any portion of this Agreement is found to be void or
illegal, the validity or enforceability of any other portion shall not be
affected.
H. The waiver by either party of a breach or violation of any provision of this
Agreement shall not operate as, nor be construed as, a waiver of any
subsequent breach thereof.
I. All rights and remedies under this Agreement are cumulative and not
alternative. This Agreement shall be construed and governed by the laws of
the state in which the Primary Care Dentist principally conducts business.
ARTICLE V - PRIMARY CARE DENTIST REIMBURSEMENT
----------------------------------------------
Your reimbursement shall be subject to the following conditions:
A. Your reimbursement shall be determined as shown in Attachment B to this
Agreement. You agree to look solely to The Prudential for compensation for
covered services provided to Covered Persons, and, except, for any
copayments as specified below that the Covered Person is required to pay,
shall not assert any claim for payment for such services against Covered
Persons (or persons acting on their behalf) in the event of nonpayment by
The Prudential due to insolvency, breach of this Agreement or any other
reason. You further agree that this provision A shall survive the
termination of this Agreement, regardless of the reason for termination, and
this section shall be construed to be for the benefit of Covered Persons.
B. You may also be paid additional performance payments based on other data,
including, but not limited to, Covered Persons' satisfaction, results of
annual reviews conducted by The Prudential or its representatives, Quality
Improvement Program results, and compliance with administrative practices
and guidelines established by The Prudential.
C. You shall not demand or receive any form of reimbursement for covered
services from Covered Persons, except for copayment amounts as shown in the
Dental Office Guide. The copay amounts for the listed dental procedures
and/or office visits shall be determined as either a fixed dollar amount per
specified procedures or as a percentage
Ed 05/95
PCDA
3
<PAGE>
of your fee (based on your usual fee schedule as filed with and approved by
The Prudential) and/or as a fixed dollar amount per office visit as
determined by the plan code shown in the Dental Office Guide.
D. You agree that, if a Covered Person who is eligible for benefits under a
Coverage Plan is also eligible for benefits under an Alternate Dental Plan,
either currently or in the future, you shall be reimbursed under the
Coverage Plan of benefits in accordance with the terms of this Agreement.
You further agree that no benefits shall be payable under the Alternate
Dental Plan for any services you render to said Covered Person, unless The
Prudential has given express written consent to waive this requirement for
that Covered Person.
E. You agree that should you choose not to provide certain Basic Dental
Services to Covered Persons, The Prudential may, at its option, adjust your
monthly compensation accordingly. You further agree that, if you are deemed
responsible for the cost of any services due to unauthorized referral to
another Dentist and if The Prudential has paid for such services, The
Prudential may, at its option, recoup such cost by adjustment(s) to your
monthly compensation.
ARTICLE VI - TERM AND TERMINATION
---------------------------------
A. Subject to the conditions set forth in this Article, the term of this
Agreement shall commence on the effective date shown on the first page of
this Agreement and shall continue for a period of twelve (12) months. It
shall automatically renew at the end of this period and every twelve (12)
months thereafter unless either party gives 90 days written notice of its
intention to terminate the Agreement on the renewal date. Such notice shall
be mailed to the last known address of the other party via prepaid,
certified mail, return receipt requested.
B. Any breach of the provisions of this Agreement by either party may
constitute grounds for immediate termination of the Agreement. Notice of
termination by either party shall be mailed to the last known address of the
other party via prepaid, certified mail, return receipt requested.
C. This Agreement may be unilaterally terminated at any time, by either party,
by giving 90 days written notice mailed to the last known address of the
other party, prepaid, certified mail, return receipt requested.
D. Regardless of any other provisions of this Article, this Agreement may be
immediately terminated by The Prudential if it determines that such
immediate termination is in the best medical/dental interests of a Covered
Person(s). Notice of such termination shall be mailed to the last known
address of the Primary Care Dentist via prepaid, certified mail, return
receipt requested.
Ed 05/95
PCDA
4
<PAGE>
ARTICLE VII - CHANGES IN THIS AGREEMENT
---------------------------------------
This Agreement, may be modified by The Prudential by giving thirty (30) days
written notice to the Primary Care Dentist. Such modification will take effect
at the end of said 30-day period unless, within that period, you send to The
Prudential written request for termination of this Agreement.
ARTICLE: VIII - NOTICES
-----------------------
Any notices required to be given pursuant to the terms and provisions of this
Agreement shall be in writing and shall be sent to:
Primary Care Dentist at: Perfect Teeth-East Cornell
12200 East Cornell Avenue, Suite E
Aurora, Colorado 80014
The Prudential at: The Prudential Insurance Company of America
580 East Easy Street
Simi Valley, CA 93065
Either party may, at any time, designate any other address in place of those
given above by written notice to the other party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CONTRACTING DENTIST:
Name: Mark Birner, DDS
Date:__________________ By:_______________________________
Group Dental Practice or Corporation Name
Perfect Teeth-East Cornell
Witness :______________________
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA:
Date:________________ By:__________________________________
Witness:_______________________
Ed 05/95
PCDA
5
<PAGE>
ATTACHMENT A
------------
As used in this Agreement, each of the following terms shall have the meaning
set forth herein:
A. "Alternate Dental Plan" means any other dental expense benefit coverage plan
offered to Covered Persons by the employer or other group contractholder
concurrently with the Coverage Plan. This does not include any dental
expense plan offered by a different employer/group contractholder or any
dental expense plan underwritten or administered by an insurer, third party
payer or claims services administrator other than The Prudential.
B. "Basic Dental Services" means the dental services shown in the Dental Office
Guide as covered services to be provided by the Primary Care Dentist.
C. "Contracting Dentist" ("You") means a person who is a Dentist or a person
who is a legal representative of a group dental practice or corporation
with the authority to bind such group dental practice or corporation to the
terms of this Agreement.
D. "Coverage Plan" means a plan of managed dental care benefits which is
provided or administered by The Prudential for:
1. One or more employers or other groups through contracts such as the
following: Group dental expense benefit insurance coverage contracts;
group health maintenance coverage contracts, group service plan
contracts or group administrative service contracts.
2. One or more individuals through contracts such as: Individual dental
expense benefits insurance coverage contracts; individual health
maintenance coverage contracts; or, individual Medicare or Medicaid
risk contracts.
E. "Covered Person" means any person covered under a Coverage Plan.
F. "Dental Office Guide" means a manual given to Primary Care Dentists which
outlines administrative guidelines and procedures in connection with
providing services to Covered Persons. This shall also include supplementary
written communications including, but not limited to, letters, memoranda and
bulletins which add to or modify the procedures and guidelines in the Dental
Office Guide. "Dental Office Guide" may also be referred to as "Personal
Dentist Guide."
G. "Dentist" means a person with an unrestricted license to practice dentistry
in the jurisdiction where the services are provided.
H. "Primary Care Dentist" means a Dentist who has entered into a Primary Care
Dentist Agreement with The Prudential to:
1. Provide Basic Dental Services to Covered Persons;
2. Maintain the appropriate continuity of Covered Persons' dental care;
and,
3. Initiate referral of covered Persons to Specialty Dentists where
appropriate.
"Primary Care Dentist" may also be referred to as "Personal Dentist."
I. "Quality Improvement Program" (QIP) means the process designed to
objectively and systematically monitor and evaluate the quality and
appropriateness of dental care, pursue opportunities to improve dental care
and resolve identified differences.
Ed 05/95
PCDA
1
<PAGE>
J. "Regional Dental Director" means a Dentist who is employed by The Prudential
to coordinate and supervise the delivery of dental care services for Covered
Persons through Personal and Specialty Dentists. Where approval or
authorization of the Regional Dental Director is required by this Agreement,
the Regional Dental Director may designate another person for that purpose.
K. "Specialty Dentist" means a Dentist who has entered into a Specialty Dentist
Agreement with The Prudential and who is Board-certified, Board-eligible or
holds a State specialty license to provide Specialty Dental Services to
Covered Persons upon referral by Primary Care Dentists as authorized by the
Regional Dental Director.
L. "Specialty Dental Services" means specialty dental care services which are
covered under Coverage Plans and are provided by Specialty Dentists.
Ed 05/95
PCDA
2
<PAGE>
ATTACHMENT B
------------
The Prudential will reimburse the Primary Care Dentist for Basic Dental Services
provided to Covered Persons in accordance with the provisions below:
A. Primary Reimbursement under this Agreement will be based upon the time
expended by the Primary Care Dentist at the rate of $80.00 per hour,
(prorated for any portion thereof), including all copayments collected from
Covered Persons, as determined by The Prudential, for the Basic Dental
Services performed by the Primary Care Dentist pursuant to this Agreement.
B. Secondary Reimbursement may apply. Such amount will be based upon the time
expended by the Primary Care Dentist at the rate of $50.00 per hour
(prorated for any portion thereof), including all copayments collected from
Covered Persons, as determined by The Prudential, for the Basic Dental
Services performed by the Primary Care Dentist pursuant to this Agreement.
C. The Prudential will establish a Utilization Maximum for the Primary Care
Dentist. The Utilization Maximum will be based upon the number of Covered
Persons who have selected Contracting Dentist as their Primary Care Dentist
and the employer utilization pattern for each Covered Person's Coverage
Plan. The employer utilization pattern is determined by The Prudential
pursuant to its utilization review analysis.
D. If the amount of the Primary Care Dentist's Primary Reimbursement, as
determined under A., above, is equal to or less than the Utilization
Maximum, The Prudential will reimburse the Primary Care Dentist the sum of:
1. The Primary Reimbursement determined under A., above; and,
2. The difference between the Primary Reimbursement and the Utilization
Maximum, subject to a maximum of 50% of the Primary Reimbursement.
E. If the amount of the Primary Care Dentist's Primary Reimbursement, as
determined under A., above, is greater than the Utilization Maximum, The
Prudential will recalculate the Primary Care Dentist's reimbursement based
upon provision B., above. The Company will reimburse the Primary Care
Dentist the greater of:
1. The Secondary Reimbursement, as determined under B., above; or,
2. The Utilization Maximum.
F. All reimbursements made to the Primary Care Dentist during the continuance
of the Agreement will be made within fifteen (15) days following the end of
the period for which the reimbursements are due.
Ed 05/95
PCDA
<PAGE>
EXHIBIT 10.15
TABLE OF CONTENTS
-----------------
AGREEMENT BETWEEN PACIFICARE AND DENTIST
I. DEFINITIONS........................................................
1.1 ADA Procedure Codes...........................................
1.2 Agreement.....................................................
1.3 Covered Benefit and Covered Service...........................
1.4 Employer Group................................................
1.5 PacifiCare....................................................
1.6 PacifiCare, Inc...............................................
1.7 Member........................................................
1.8 Panel.........................................................
1.9 Participating Provider or Dentist.............................
1.10 Plan or Plans.................................................
1.11 State.........................................................
II. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT........
2.1 Service Delivery System Completion............................
2.2 Approval of Market and Allocation of Resources................
2.3 Governmental Approval.........................................
III. COVENANTS OF PACIFICARE............................................
3.1 Identification of PacifiCare Members..........................
3 2 Administration and Marketing Services.........................
3.3 Advertising...................................................
IV. COVERED SERVICES...................................................
4.1 DENTIST'S Obligation to Deliver Covered Services..............
4.2 Specialty Services............................................
4.3 Benefit Changes...............................................
4.4 Panel Closure.................................................
V. PAYMENT FOR SERVICES...............................................
5.1 Basis of Payment..............................................
5.2 Fees Due Directly From Members for Services Not Covered.......
5.3 Member Copayments and Deductibles.............................
5.4 Third Party Coverage..........................................
5.5 Withholds.....................................................
VI. UTILIZATION MANAGEMENT.............................................
6.1 Policies and Procedures.......................................
6.2 Referrals and Subcontracting by DENTIST.......................
VII. QUALITY MANAGEMENT.................................................
7.1 PacifiCare Quality Management Program.........................
7.2 Peer Review...................................................
7.3 Quality Management Compliance.................................
VIII. OBLIGATIONS OF THE DENTIST.........................................
8.1 Availability..................................................
8.2 Address(es)...................................................
8.3 Reports.......................................................
8.4 Dental Records................................................
8.5 In-Service Orientation........................................
8.6 No Billing of Members.........................................
8.7 Service Standards.............................................
8.8 Retention of Records..........................................
8.9 Credentials...................................................
8.10 Prescribing Practices.........................................
8.11 Member Contact................................................
8.12 Non-Solicitation of Members...................................
CO DENCAP 12193:2/95 ED Initials ____
____
<PAGE>
8.13 Investigation and Resolution of Complaints......................
8.14 Quality Improvement Process.....................................
IX. INSURANCE...............................................................
9.1 Responsibility For Own Acts.....................................
9.2 Liability Coverage.............................................
9.3 Certificate of Insurance........................................
X. TERM, TERMINATION, RENEWAL, RENEGOTIATION...............................
10.1 Term............................................................
10.2 Automatic Renewal and Notice of Intent to Terminate.............
10.3 Renegotiation of Terms..........................................
10.4 Bankruptcy......................................................
10.5 Early Termination...............................................
10.6 Adverse Governmental Action.....................................
10.7 Material Breach.................................................
10.8 No Contact With Members.........................................
XI. GENERAL PROVISIONS......................................................
11.1 Relationship Between the Parties................................
11.2 Non-Exclusive Agreement.........................................
11.3 Uses of Names and Trademarks....................................
11.4 Use of PacifiCare's Trade Secrets by DENTIST....................
11.5 Governing Law...................................................
11.6 Interpretation..................................................
11.7 Non-Discrimination..............................................
11.8 Assignment......................................................
11.9 Sale of Business/Transfer of Assets.............................
11.10 Enforcement.....................................................
11.11 Severability....................................................
11.12 Arbitration Between Parties.....................................
11.13 Execution by PacifiCare.........................................
11.14 Provider Incentives.............................................
11.15 Appeals Process for Senior Plan Members.........................
11.16 Notices.........................................................
11.17 Waiver..........................................................
11.18 Entire Agreement................................................
11.19 Confidentiality.................................................
11.20 Exhibits........................................................
EXHIBITS:
A - PacifiCare Specialty Care Guidelines
B - Services Reimbursement
C - PacifiCare Dental Co-Payment Schedule
CO DENCAP 12/93:2/95 ED Initials _________
_________
<PAGE>
AGREEMENT BETWEEN PACIFICARE AND DENTIST
This Agreement is made and becomes effective this _____ day of __________ ,
19__, between PacifiCare of Colorado, Inc., a Colorado corporation, (hereinafter
"PacifiCare"), and __________ (hereinafter "DENTIST") to provide __________
services.
The parties by their mutual covenants, agree as follows:
I. DEFINITIONS
-----------
1.1 ADA PROCEDURE CODES means American Dental Association codes.
1.2 AGREEMENT means this DENTIST Agreement.
1.3 COVERED BENEFIT and COVERED SERVICE means benefits and services
provided by and through PacifiCare's various Commercial, Senior and
other Plans, as set forth in the applicable PacifiCare Evidence of
Coverage or policy, including any amendments thereto, which is the
document that sets out a summary of benefits or services to which
each individual Member is entitled. Each Member's Evidence of
Coverage or policy is incorporated herein by reference and can be
reviewed by the Participating Provider using his/her selected mode
of eligibility verification or by contacting PacifiCare.
1.4 EMPLOYER GROUP shall mean the group, corporation, partnership or
organization which has entered into, or will enter into a Contract
with PacifiCare to provide PacifiCare benefits to its members or
employees.
1.5 PACIFICARE means PacifiCare of Colorado, Inc. a wholly-owned
subsidiary of PacifiCare, Inc.
1.6 PACIFICARE, INC. means PacifiCare, Inc., a California corporation
and the parent company of PacifiCare of Colorado, Inc.
1.7 MEMBER means a person enrolled in any PacifiCare plan.
1.8 PANEL shall mean those Members assigned to a DENTIST. Once the
DENTIST receives capitation payment for a Member, that Member is
included as part of the DENTIST'S Panel whether or not services
have been rendered to the Member.
1.9 PARTICIPATING PROVIDER OR DENTIST means the person licensed to
practice dentistry who has entered into a DENTIST'S Agreement, or
is an employee of a GROUP having a GROUP Agreement.
1.10 PLAN or PLANS means all programs offered by PacifiCare, and all
other affiliated corporations of the PacifiCare, Inc. group of
companies ant its subsidiaries including temporary emergency
coverage for members of reciprocal HMO affiliates through
PacifiCare's participation in UltraLink(SM), a Nation-wide Network.
PacifiCare, in its sole discretion, may offer or make available
some, and not all, of its programs or plans through or under this
Agreement.
1.11 STATE means the State of Colorado.
II. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT
-----------------------------------------------------------
2.1 Service Delivery System Completion. This Agreement is contingent
----------------------------------
upon PacifiCare's execution of contracts with other general
dentists and appropriate dental specialists who collectively
constitute a service delivery system. PacifiCare shall pursue these
agreements in good faith but PacifiCare cannot covenant that such
agreements can be reached.
2.2 Approval of Market and Allocation of Resources. Upon completion of
----------------------------------------------
the development of the service delivery system, PacifiCare shall
reevaluate the market for its services and its resources to expand
into the market. Upon completion of this reevaluation PacifiCare
may, at PacifiCare's sole discretion, elect to delay or abandon the
completion of any or all PacifiCare Plans. If PacifiCare does make
such election, PacifiCare shall notify DENTIST of such election.
Such election by PacifiCare is not a breach of any covenant of this
Agreement and will be a complete and total discharge of
PacifiCare's obligations, covenants and conditions under this
Agreement.
2.3 Governmental Approval. This Agreement is contingent upon PacifiCare
---------------------
receiving approval from the appropriate local, state and federal
governmental or quasi-governmental agencies, which have regulatory
or quasi-regulatory powers over PacifiCare or its programs. Such
agencies may include, but are not limited to, HCFA and relevant
state agencies.
<PAGE>
III. COVENANTS OF PACIFICARE
-----------------------
3.1 Identification of PacifiCare Members. PacifiCare shall furnish
------------------------------------
DENTIST with a means of identifying those PacifiCare Members who
are enrolled in the PacifiCare Plans. The determination of
eligibility of a Member shall be made by the Employer Group and
PacifiCare, before DENTIST renders any dental services. PacifiCare
shall notify DENTIST if a person requesting services pursuant to
this Agreement is eligible for such services and the nature and
extent of benefits to which the Member is entitled. PacifiCare
shall provide DENTIST with an eligibility list of Members updated
monthly. In cases where a Member requests services prior to
appearing on an eligibility list, DENTIST will accept oral
confirmation of eligibility provided by PacifiCare's Dental
Director or designated agent. In emergency or after hours
situations DENTIST shall provide emergency treatment without oral
confirmation from PacifiCare. Should the patient subsequently be
found to be ineligible, PacifiCare shall pay DENTIST as if the
patient were a PacifiCare Member. The reimbursement will occur
after the DENTIST has made two (2) written attempts to collect the
appropriate fees from the non-plan patient.
3.2 Administrative and Marketing Services. PacifiCare shall perform
-------------------------------------
the administrative, claims processing, marketing, enrollment,
quality management and utilization management functions that are
required of a federally qualified HMO and a HCFA contractor.
PacifiCare shall have the responsibility of all payment and fund
administration as further defined in this Agreement.
3.3 Advertising. PacifiCare shall have sole responsibility for the
-----------
advertising and marketing of PacifiCare Plans. DENTIST may not
advertise the Plans without the prior written approval of
PacifiCare.
IV. COVERED SERVICES
----------------
4.1 DENTIST'S Obligation to Deliver Covered Services. DENTIST agrees
------------------------------------------------
to render all necessary dental care to each Member according to
the terms and conditions of each Benefit Plan as authorized in the
Member's Evidence of Coverage. All such dental services and
related material shall be of quality equal to or higher than the
quality of services and material provided by DENTIST to DENTIST'S
non-Panel patients.
4.2 Specialty Services. Services shall be rendered in accordance with
------------------
PacifiCare Specialty Care Guidelines which are attached as Exhibit
A. If DENTIST is unable to provide a specific service, DENTIST
will request authorization to refer the Member to a specialist.
DENTIST is not financially obligated for the payment of referred
services which fall within the PacifiCare Specialty Care
Guidelines attached as Exhibit A.
4.2-1 DENTIST shall bear 50% of PacifiCare's cost for each Member
of his/her panel referred to a specialist for treatment
outside the PacifiCare Specialty Care Guidelines.
4.2-2 It is the responsibility of the DENTIST to request a
specialty referral for the Member in accordance with
PacifiCare's policies and procedures.
4.2-3 It is the responsibility of PacifiCare to contract with and
select the appropriate, qualified specialist after the
DENTIST refers the Member to PacifiCare for specialty
treatment.
4.3 Benefit Changes. It is understood that PacifiCare may enter into
---------------
agreements with new employer groups during the term of this
Agreement for which DENTIST will provide services to Members as
provided herein. The benefits, terms and conditions of the various
agreements between the employer groups and PacifiCare may be
changed from time to time during the term of this Agreement.
PacifiCare agrees to notify DENTIST in writing of the nature and
extent of such changes. If DENTIST does not notify PacifiCare of
his/her disapproval of said changes within a ten (10) day period,
DENTIST shall be bound by, and agrees to said changes in that
particular agreement and will provide services as set forth in
said new plan.
4.4 Panel Closure. The DENTIST may close Panel to additional
-------------
PacifiCare Members provided that sixty (60) days' notice is given
in accordance with paragraph 11.17. If the DENTIST elects to close
his/her Panel it is understood that:
4.4-1 This closure will apply equally to all PacifiCare Members
and employer groups.
4.4-2 Panel closure will be indicated on subsequent PacifiCare
Provider Lists.
4.4-3 All current Panel Members will continue to receive dental
treatment in accordance with the PacifiCare Specialty Care
Guidelines attached as Exhibit A.
4.4-4 PacifiCare reserves the right to close a DENTIST'S Panel
provided that a sixty (60) day notice is given.
<PAGE>
V. PAYMENT FOR SERVICES
--------------------
5.1 Basis of Payment. PacifiCare shall pay DENTIST monthly a
----------------
capitation fee which shall be payment for all services provided by
DENTIST to Members who select at the time of enrollment or are
assigned to the DENTIST. Payment shall be made in accordance with
Exhibit B "Services Reimbursement" of this Agreement.
5.1-2 Financial Risks. DENTIST represents and warrants that it
---------------
fully understands the payment arrangements between itself
and PacifiCare for services to be provided pursuant to this
Agreement and those services for which it is financially
responsible, as set forth in this Agreement and in the
Exhibits attached hereto. DENTIST further represents and
warrants that it has conducted its own analysis pursuant to
Colorado regulation and that it is fully apprised of the
financial risks it is undertaking by the execution, delivery
and performance of this Agreement and that it is fully
capable of undertaking those risks.
5.2 Fees Due Directly From Members for Services Not Covered. Instances
-------------------------------------------------------
may arise where DENTIST performs services for a Member which are
not a Covered Benefit. In such case, DENTIST shall obtain payment
directly from the Member and PacifiCare shall not be liable for
the applicable fee for such excluded services which shall be
billed by DENTIST.
5.3 Member Copayments and Deductibles. DENTIST shall collect and
---------------------------------
retain any applicable copayment and deductible from Members
specifically authorized in the PacifiCare Dental Co-Payment
Schedule, attached as Exhibit C.
5.4 Third Party Coverage. DENTIST will make every attempt to identify
--------------------
other third party coverage (healthcare coverage, third party
liability, worker's compensation, etc.) and provide that
information to PacifiCare. DENTIST agrees to bill, where
appropriate, any other carrier for services rendered to PacifiCare
Members. DENTIST may retain 100% of such recoveries.
5.5 Withholds. DENTIST agrees that PacifiCare shall have the right to
---------
withhold or defer DENTIST'S payment by any amount incurred by
PacifiCare or Members because of the DENTIST'S failure to perform
his/her contractual obligations.
VI. UTILIZATION MANAGEMENT
----------------------
6.1 Policies and Procedures. DENTIST agrees to comply with all
-----------------------
PacifiCare Utilization Management policies and procedures.
6.2 Referrals and Subcontracting by DENTIST. DENTIST shall not refer
---------------------------------------
PacifiCare patients to other consulting specialists or providers
without prior authorization from the PacifiCare Dental Director or
his/her designate. PacifiCare will not be financially responsible
for unauthorized consultations.
VII. QUALITY MANAGEMENT
------------------
7.1 PacifiCare Quality Management Program. The DENTIST agrees to comply
-------------------------------------
with the PacifiCare Quality Management Program for both hospital-
based and office-based care. This includes but is not limited to:
Random office and hospital review and case specific review,
appropriate response to issues identified by PacifiCare or
governmental agencies. Failure to comply can result in termination
of this Agreement.
7.2 Peer Review. The Dental Director may appoint a Dental Advisory
-----------
Committee or Peer Review Committee consisting of dentists who shall
advise and assist him/her in the supervision of standards of
professional care, utilization of service, quality management
review, matters relating to the doctor-patient relationship and all
matters involving problems within the scope of professional ethics.
The decision of the Dental Director, the Dental Advisory Committee
or Peer Review Committee on all such matters shall be final and
binding on the parties hereto.
7.3 Quality Management Compliance. PacifiCare reserves the right to
-----------------------------
conduct periodic audits and/or site surveys for the purpose of
evaluating compliance with quality management standards. DENTIST
will respond appropriately to all quality issues addressed to the
quality management committee within the requested time frame but
not to exceed 14 days of receipt. Failure to comply may result in
termination of this Agreement.
VIII. OBLIGATIONS OF THE DENTIST
--------------------------
8.1 Availability. DENTIST shall provide services during DENTIST'S
------------
normal working hours. DENTIST shall also provide twenty-four (24)
hour emergency services. DENTIST shall provide routine, non-
emergent, and
<PAGE>
treatment in progress appointments to all eligible Members upon
request within twenty-eight (28) days. In emergency situations,
DENTIST shall furnish such care immediately or, if appropriate,
not more than twenty-four (24) hours after request. Dental
emergencies include, but are not limited to, hemorrhage, acute
pain, infection of dental origin, or traumatic injury. In the
event DENTIST makes an arrangement with another dentist to
provide on call coverage, DENTIST shall be responsible for
ensuring conformance with this section of this Agreement and for
compensation of such dentist for on-call services rendered.
8.2 Address(es). DENTIST shall ordinarily render all care services
-----------
to PacifiCare Members at the address(es) set forth next to his
signature below.
8.3 Reports. DENTIST shall report all of the health care services
-------
that are provided to PacifiCare Members through and in
compliance with PacifiCare systems and billing procedures.
8.4 Dental Records. DENTIST shall make available to the PacifiCare
--------------
Dental Director or designee all information in the Member's
chart and shall promptly provide copies of any documents
contained therein, if requested for the purpose of determining
eligibility, liability or appropriate care issues. PacifiCare
shall strictly maintain the confidentiality of any such records,
shall not disclose any information except as required by law.
8.4-1 DENTIST also agrees to allow PacifiCare's inspection of
PacifiCare Members' dental records to the extent that such
inspection may be required by properly authorized
governmental agencies.
8.4-2 Whenever a Member changes dentists, DENTIST will furnish
copies of all dental records and x-rays reports or any
other patient care data, within thirty (30) days, or
sooner if necessary, to the Member's new provider at no
charge.
8.5 In-Service Orientation. The DENTIST shall provide orientation
----------------------
time to PacifiCare for in-service training for all of the
DENTIST'S staff within thirty (30) days of the effective date of
this Agreement and on a periodic basis thereafter. The staff of
the DENTIST shall be available for orientation with PacifiCare
staff at reasonable times for procedural and systems change
orientation.
8.6 No Billing of Members.
---------------------
8.6-1 No Charges. The DENTIST shall not impose any charges on
----------
PacifiCare Members for Covered Benefits shown in the
applicable Evidence of Coverage and shall regard the
PacifiCare payment as payment in full for all benefits
covered by this Agreement with the exception of co-
payments specifically authorized in the applicable
Evidence of Coverage and consistent with the Member's
PacifiCare benefits. DENTIST shall also be entitled to
receive payment for third party claims. DENTIST will
never, under any circumstances, including non-payment by
PacifiCare, the insolvency of PacifiCare, or breach or
termination of this Agreement, seek compensation from,
maintain any action against, have any recourse against, or
impose any additional charge on any PacifiCare Member for
Covered Benefits and DENTIST shall hold PacifiCare Members
harmless from liability for any monies owed by PacifiCare
to DENTIST. DENTIST shall look only to PacifiCare for
payment for Covered Benefits or for sums owed by
PacifiCare. DENTIST shall be bound by the Claims Payment
Denial paragraph of this Agreement. If PacifiCare receives
notice that DENTIST has billed or collected from a Member
for any Covered Benefit or non-authorized service,
PacifiCare may refund that amount to Member and may offset
that amount from any payment to DENTIST.
8.6-2 No Collection Action Against Members. Neither DENTIST nor
------------------------------------
its agents, trustees or assignees, may maintain any action
at law against a Member to collect sums owed by
PacifiCare.
8.6-3 Survival of Covenants. DENTIST further agrees that these
---------------------
provisions shall survive the termination of this Agreement
regardless of the cause giving rise to termination and
shall be construed to be for the benefit of the Member,
and that these provisions supersede any oral or written
agreement to the contrary now existing or hereafter
entered into between DENTIST and Member or any persons
acting on their behalf.
8.6-4 Collection of Copayments. These provisions shall not
------------------------
preclude DENTIST from collecting the copayments that are
specifically authorized by the Member's Evidence of
Coverage.
8.7 Service Standards. DENTIST shall provide clean facilities and
-----------------
equipment; maintain adequate, courteous, neat, consumer-
oriented, properly credentialed staff; maintain orderly and
efficient systems for receiving patients; maintain orderly and
efficient systems for the provision of patient services; and
maintain dental records. DENTIST will allow PacifiCare Dental
Director, or his designee, to inspect dental facilities,
equipment and PacifiCare Members' dental records, and review all
phases of professional ancillary care provided to Members by
DENTIST.
<PAGE>
8.8 Retention of Records. DENTIST agrees that it will retain
--------------------
financial and dental records relating to PacifiCare Members as
required of PacifiCare by properly authorized governmental
agencies for a period of the longer of two (2) years from the
termination of this Agreement or such time period as may be
required by applicable law, regulation or customary practice.
8.9 Credentials. DENTIST agrees to complete a PacifiCare application
-----------
for him/herself and for any paraprofessionals under his/her
supervision and shall provide all other information including
information on malpractice cases necessary for PacifiCare to
complete the credentialing process. DENTIST agrees to notify
PacifiCare within one week of an agreement or subcontract with
any new dentist so PacifiCare may initiate the credentialing
process. DENTIST authorizes the licensing bureaus, affiliations
and/or persons to give any information regarding DENTIST.
DENTIST hereby releases said licensing bureaus, affiliations
and/or persons from all liability for any damage whatsoever for
issuing this information. DENTIST agrees to notify PacifiCare
within forty-eight (48) hours of any revisions, revocation, or
limitation of his (or any dentist of the dental group, if
applicable) license to practice, narcotics license, or hospital
privileges or malpractice carrier change or termination. If a
dental group, DENTIST will notify PacifiCare of any changes in
the dentists of the group who may treat PacifiCare Members
within forty-eight hours (48). PacifiCare may provide temporary
authorization for new dentists to treat PacifiCare Members
during the credentialing process.
8.10 Prescribing Practices. DENTIST agrees to prescribe medication
---------------------
from the PacifiCare Formulary and to obtain prior authorization
from PacifiCare for any non-formulary medication. DENTIST
authorizes participating pharmacist to select and dispense
generic drugs in substitution for brand or trade name drugs
where an appropriate generic substitute with adequate
bioavailability is available.
8.11 Member Contact. DENTIST agrees not to directly contact
--------------
PacifiCare Members in regards to business related matters
pertaining to PacifiCare Plans without PacifiCare's prior
written approval.
8.12 Non-Solicitation of Members. During the initial and any
---------------------------
succeeding term of this Agreement and for a period of one (1)
year following the date of termination of this Agreement,
DENTIST will not knowingly or directly advise any PacifiCare
Member to disenroll from PacifiCare and will not solicit any
Member to become enrolled with any other Health Maintenance
Organization, provider organization or any other similar
hospitalization or dental payment plan or insurance program. No
DENTIST, employee, or subcontractor of the DENTIST shall make
any derogatory remarks regarding PacifiCare to any Members.
8.13 Investigation and Resolution of Complaints. A report providing a
------------------------------------------
summary of occurrence shall be made by the DENTIST for each
event which has a high potential for liability or results in a
ninety (90) day notice or legal claim being served. PacifiCare
shall be sent a copy of the summary of occurrence report within
forty eight (48) hours. These occurrences shall be investigated
and resolved jointly by the DENTIST and PacifiCare.
8.14 Quality Improvement Process. As a provider of health care
---------------------------
services to PacifiCare Members, DENTIST acknowledges the
importance of quality management systems in providing superior
customer service. Therefore, DENTIST shall, with the support of
PacifiCare, cooperate in a quality management program to ensure
quality customer service. DENTIST and PacifiCare agree that
quality management programs may address, but are not limited to
the following: Administrative Services, Access to health care
services, Utilization Management, Clinical Quality Assessment,
DENTIST and PacifiCare administrative interface, and Management
information and report systems.
IX. INSURANCE
---------
9.1 Responsibility For Own Acts. Each party will be responsible for
---------------------------
its own acts or omissions and any and all claims, liabilities,
injuries, suits, and demands and expenses of all kinds which may
result or arise out of any alleged malfeasance or neglect caused
or alleged to have been caused by that party, its employees or
representatives, in the performance or omission of any act or
responsibility of that party under this Agreement. In the event
that a claim is made against both parties, it is the intent of
both parties to cooperate in the defense of said claim and to
cause their insurers to do likewise. However both parties shall
have the right to take any and all actions they believe
necessary to protect their interest.
9.2 Liability Coverage. DENTIST has and shall retain in effect
------------------
during the term of this Agreement professional liability
("malpractice") insurance and primary general liability coverage
in the minimum amount of Five Hundred Thousand ($500,000) per
occurrence and One Million Five Hundred Thousand Dollars
($1,500,000) annual aggregate, Worker's Compensation in the
statutory amount at a minimum. If DENTIST has a claims-made
malpractice/professional liability insurance policy, then this
policy shall be kept in effect for at least five (5) years past
any termination of this Agreement or DENTIST may purchase "tail"
coverage. Said "tail" policy shall have the same policy limits
as the primary professional liability policy.
<PAGE>
9.3 Certificate of Insurance. The DENTIST will provide PacifiCare
------------------------
with a Certificate of Insurance evidencing professional and
general liability coverage within thirty (30) days prior to the
execution of this Agreement and annually thereafter within
thirty (30) days of the renewal of the Agreement. The
Certificate of Insurance shall contain a provision whereby the
DENTIST will notify PacifiCare of any change in coverage,
including termination of the policy, at least thirty (30) days
prior to any such change.
X. TERM, TERMINATION, RENEWAL, RENEGOTIATION
-----------------------------------------
10.1 Term. The term of this Agreement shall begin on the effective
----
date of this Agreement and continue for one (1) year.
10.2 Automatic Renewal and Notice of Intent to Terminate. This
---------------------------------------------------
Agreement shall be automatically renewed for one (1) year
term, without additions or modifications of its terms, unless
either party shall provide the other with written notice of its
intent to terminate this Agreement. Either party may terminate
this Agreement without cause by giving the other party sixty
(60) days' prior written notice.
10.3 Renegotiation of Terms. Either party may request renegotiation
----------------------
of any of the provisions of this Agreement by providing the
other party with written notice. Such notice shall state those
provisions of the Agreement which the notifying party would like
to discuss. Immediately following any such request for
renegotiation, the parties shall commence and continue
negotiations in good faith.
10.4 Bankruptcy. Notwithstanding any provision in this Agreement, if
----------
at any time there shall be filed by or against a party to this
Agreement, in any court, tribunal, administrative agency or any
other forum having jurisdiction, pursuant to any applicable law,
either of the United States or of any state, a petition in
bankruptcy or insolvency or for reorganization or for the
appointment of a receiver, trustee or conservator of all or a
portion of the party's property or if a party makes an
assignment for the benefit of creditors, and if this action is
not dismissed after ninety (90) calendar days, this Agreement
may be immediately cancelled and terminated by the other party.
10.5 Early Termination
-----------------
10.5-1 Events Causing Early Termination. Notwithstanding any
--------------------------------
other provision in this Agreement, PacifiCare may
terminate this Agreement at any time upon notice to
DENTIST of the occurrence of any of the following
events:
(a) DENTIST'S conviction of a felony or
misdemeanor of moral turpitude.
(b) DENTIST'S diagnosis of severe mental or
emotional disturbance.
(c) Professional incompetence of DENTIST, or
non-performance of professional
responsibility.
(d) Failure of DENTIST to comply with
PacifiCare's quality assurance or
utilization review procedures or standards,
or availability and accessibility standards.
(e) DENTIST'S addiction to alcohol, narcotics,
or other drugs; physical disability which
impairs DENTIST's ability to practice his or
her profession in a competent manner; or
loss or suspension of the licenses required
to fulfill this Agreement.
(f) DENTIST'S failure to notify PacifiCare
within 48 hours of any change in DENTIST'S
participation or status in a diversion or
like substance abuse rehabilitation program.
(g) DENTIST'S failure to maintain malpractice or
general liability insurance.
(h) DENTIST'S failure to provide satisfactory
personal and professional references and
credentials, or to provide verifiable
information regarding past employment,
training, hospital affiliation, or
professional licensing for him/herself or
any paraprofessional under his/her
supervision.
(i) DENTIST being a party to or having been a
party to malpractice or other litigation or
arbitration that has resulted in substantial
judgments, settlements or awards against
DENTIST.
(j) DENTIST'S failure to comply with standards,
as established by PacifiCare, including, but
not limited to, appointment availability,
utilization, provision of
<PAGE>
services and cost-effective use of services
unless adequately justified as determined by
PacifiCare.
(k) DENTIST'S direct contact of PacifiCare Members
in regard to matters pertaining to the
PacifiCare Plans without PacifiCare's prior
written approval or DENTIST'S making any
repeated disparaging remarks about PacifiCare or
expressing opinions regarding Pacificare or any
of its affiliates that are negative in nature.
(l) DENTIST'S solicitation of Members during the
initial and any succeeding term of this
AGREEMENT, or knowingly or directly advising any
PacifiCare Member to become enrolled with any
other Health Maintenance Organization, provider
organization, or any other similar dental plan
or insurance program.
10.5-2 Effects of Termination. Upon termination of this Agreement for
----------------------
any reason, the following shall occur:
(a) Care in Progress. DENTIST shall complete work
----------------
started prior to the termination date. If a
prosthetic impression has been taken. DENTIST
will complete the fixed or removable
prosthesis. If any individual procedure is
already in progress, DENTIST will complete
procedure.
(b) Transfer of Dental Records. Upon receiving a
--------------------------
signed request from the Member, the DENTIST
agrees to furnish copies of all dental records,
x-rays, laboratory reports or any other patient
care data within thirty (30) days, or sooner if
necessary, to the Member's new provider. In the
event of the termination of this Agreement by
the DENTIST, records will be transferred at no
charge to the Member, PacifiCare or the newly
selected dentist. In the event of termination
of this Agreement by PacifiCare, PacifiCare
shall reimburse DENTIST $5.00 per Member for
cost of copying records and DENTIST agrees to
participate in the orderly transition of
records. This applies solely to Members who
request said records.
(c) Payment for Services. DENTIST shall be paid the
--------------------
last monthly capitation payment sixty (60) days
following the termination date of this
Agreement. PacifiCare shall be entitled to make
any adjustments in such final capitation payment
as may be necessary so that all treatment
started prior to termination is properly
completed.
10.6 Adverse Governmental Action. In the event any action of any
---------------------------
department, branch, or bureau of the federal, state, or local
government materially adversely affects either party, then that
party shall notify the other of the nature of this action,
including in the notice a copy of the adverse action. The
parties shall meet within thirty (30) days and shall, in good
faith, attempt to negotiate a modification to this Agreement
that minimizes the adverse affect. Notwithstanding paragraph
10.2 above, if the parties fail to reach a negotiated
modification concerning the adverse action, then the affected
party may terminate this Agreement by giving at least one
hundred twenty (120) days' notice or may terminate sooner if
agreed to by both parties.
10.7 Material Breach. Either party may terminate this Agreement by
---------------
providing the other party with a minimum of sixty (60) days'
prior written notice in the event the other party commits a
material breach of any provision of this Agreement. The notice
must specify the nature of said material breach. The breaching
party shall have thirty (30) days from receipt of the notice to
correct the material breach. In the event the breaching party
fails to cure the material breach within the thirty (30) day
period, this Agreement shall automatically terminate upon
completion of the sixty (60) days' notice period,
notwithstanding any other provision in this Agreement.
In the event the material breach creates an emergency or a
situation whereby the nonbreaching party is in significant
jeopardy as to its ability to perform under this Agreement in
the manner so intended by the parties to this Agreement, then
the nonbreaching party may give forty-eight (48) hours' notice
of the material breach to the other party. If the breaching
party fails to cure the material breach within this forty-eight
(48) hour time frame, this Agreement shall automatically
terminate at the end of the forty-eight (48) hour notice,
notwithstanding any other provision in this Agreement.
10.8 No Contact With Members. The DENTIST has been advised,
-----------------------
acknowledges and agrees that PacifiCare has expended a great
deal of time, effort and money in developing its business and
obtaining the Members that are enrolled in PacifiCare. Because
of this, PacifiCare considers, and DENTIST acknowledges, that
PacifiCare's Members constitute an important corporate asset and
its Member list constitutes valuable proprietary information.
<PAGE>
In consideration of PacifiCare providing current Plan Members,
as well as future Plan Members, to the DENTIST, DENTIST
acknowledges and agrees that in the event this Agreement should
terminate for any reason, PacifiCare will suffer irreparable
harm and injury if the DENTIST attempts to, or does, communicate
with PacifiCare Members in any way concerning said termination.
Understanding this, the DENTIST expressly waives DENTIST'S
rights to contact PacifiCare Members in any way about the
termination of this Agreement, including those Members who are
patients of the DENTIST, and expressly agrees not to communicate
in any form or manner with such Members concerning the
termination; the options such Members may have to join other
health care service plans (including HMO's) or to switch to
other providers as a result of the termination; or the fact that
the DENTIST will no longer be the Member's health care provider.
PacifiCare agrees to advise its Members of (a) the termination
of this Agreement not less than thirty (30) days prior to the
date of said termination, (b) their rights regarding such
termination, and (c) the fact that they will no longer be able
to obtain health care from the DENTIST once the Agreement has
terminated.
Understanding and acknowledging the foregoing, the DENTIST
agrees to rely exclusively upon PacifiCare's communication to
its Members concerning termination of this Agreement and agrees
not to interfere in any way with the relationship between
PacifiCare and its Members. If the DENTIST should (i)
communicate with said Members concerning termination of this
Agreement and/or attempt directly, indirectly or by implication
to advise or encourage such Members to switch to either another
health care service plan (including HMO's) or to another
provider (including the DENTIST), or to disenroll from
PacifiCare for any reason, or (ii) submit PacifiCare's Member
list or its equivalent to another health care service plan
(including HMO's) for any purpose, or (iii) invite PacifiCare
Members to attend sales presentations by any other health care
service plan (including HMO's) on or off DENTIST'S premises,
then such activity will constitute a breach of this contractual
provision and the DENTIST agrees PacifiCare may promptly seek a
temporary restraining order and/or injunction to preclude such
activity as well as all appropriate damages resulting from
DENTIST'S breach of this provision.
XI. GENERAL PROVISIONS
------------------
11.1 Relationship Between the Parties. PacifiCare and DENTIST are
--------------------------------
independent contractors. Nothing in this Agreement shall be
construed to create a principal-agent, employer-employee,
master-servant, partnership or joint venture relationship.
11.2 Non-Exclusive Agreement. DENTIST agrees this is not an exclusive
-----------------------
agreement and that PacifiCare may contract with other providers
to serve in the same capacity as the DENTIST.
11.3 Use of Names and Trademarks. PacifiCare and the DENTIST each
---------------------------
reserve the right to control the use of its name, symbols,
trademarks, or other marks currently existing or later
established. However, either party may use the other party's
symbols, trademarks or other marks with the prior written
approval of the other party. PacifiCare shall be allowed to use
the name of the DENTIST in its promotional activities and
marketing campaign as first approved by DENTIST which will not
be unreasonably withheld.
11.4 Use of PacifiCare's Trade Secrets by DENTIST. As part of the
--------------------------------------------
consideration for PacifiCare to enter into this Agreement,
DENTIST agrees that it shall not use, or divulge to anyone,
Pacificare's trade secrets. A trade secret means information,
including but not limited to programs, methods, techniques and
processes, that has independent economic value from not being
generally known to either the public or to other persons who can
obtain economic value from its disclosure or use. Examples of
PacifiCare trade secrets include, but are not limited to, actual
and potential membership lists, compiled information concerning
its Members, key provider agreements, billing rates, and
operations manuals. This paragraph shall not be applicable to
information that is already in the public domain or that has
been made available to the public by PacifiCare.
11.5 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with all current and future applicable state and
federal laws (such as the Patient Self Determination Act
included in the OBRA of 1990 Public Law 101-508), rules and
regulations, as amended, including the legal requirements set
forth in the contract between PacifiCare and all appropriate
governmental agencies. Both parties acknowledge and agree that
they are subject to the current applicable laws, rules,
regulations and requirements and any future changes thereto when
implemented, shall be binding on both parties. Any provision
required to be in this Agreement by said laws, rules,
regulations and requirements whether or not set forth herein
shall be incorporated by reference in this Agreement and shall
bind both parties. In the event of a conflict between this
Agreement and any applicable law, rule, regulation or
requirement, the applicable law, rule or regulation will govern.
11.6 Interpretation. Neither PacifiCare nor the DENTIST shall be
--------------
deemed the drafter of this Agreement. If this Agreement is ever
interpreted or construed by a court of law, such court shall not
construe this Agreement or any provision hereof against either
party as drafter.
11.7 Non-Discrimination. In accordance with Executive Order 11246,
------------------
PacifiCare is required to comply with the following requirements
and to include these provisions in every subcontract so that
they are binding on each
<PAGE>
subcontractor. Therefore, the parties agree to render the
services contemplated herein without regard to race, age, sex,
religion, creed, color, national origin or ancestry of any
Member. During the term of this Agreement, the DENTIST and any
subcontractors shall not unlawfully discriminate against any
employee or applicant for employment because of race, religion,
color, national origin, ancestry, physical handicap, medical
condition, sexual orientation, marital status, age (over 40) or
sex. The DENTIST and subcontractors shall ensure that the
evaluation and treatment of their employees and applicants for
employment are free of such discrimination. The DENTIST and
subcontractors shall comply with the provisions of all
applicable local, state and federal equal employment
opportunity, fair employment and affirmative action laws, and
regulations. The DENTIST and its subcontractors shall give
written notice of their obligations under this clause to labor
organizations with which they have a collective bargaining or
other agreement. The DENTIST shall include the nondiscrimination
and compliance provisions of this clause in all subcontracts to
perform work under this Agreement.
11.8 Assignment. The rights and/or obligations of this Agreement may
----------
not be assigned, delegated, transferred, conveyed or sold
without the prior written consent of the other party, except
that PacifiCare may assign, delegate, transfer, convey or sell
its rights and/or obligations to a parent, subsidiary or
affiliate or to an entity into which PacifiCare is merged or
with which PacifiCare is consolidated or to a purchaser of all
or substantially all of its assets or as part of a corporate
reorganization.
11.9 Sale of Business/Transfer of Assets. If the DENTIST desires to
-----------------------------------
sell, transfer or convey his/her business or any substantial
portion, or all, of his/her business assets to another entity,
the DENTIST shall so advise PacifiCare at least one hundred and
twenty (120) days prior to the sale, transfer or conveyance
date. The DENTIST warrants and covenants this Agreement will be
part of the transfer, conveyance or sale and will be assumed by
the new entity and that the new entity will honor and be fully
bound by the terms and conditions of the Agreement.
Notwithstanding the above, if PacifiCare in its sole discretion,
is of the opinion the Agreement cannot be satisfactorily
performed by the assuming entity or does not want to do business
with that entity for whatever reason. Pacificare may terminate
this Agreement by giving the DENTIST sixty (60) day's written
notice, notwithstanding any other provision in the Agreement.
11.10 Enforcement. If any action at law or in equity is necessary to
-----------
enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to payment by the other party of
reasonable attorneys' fees, costs and necessary disbursement and
expenses in addition to any other relief to which the prevailing
party may be entitled.
11.11 Severability. If any provision of this Agreement is deemed to be
------------
invalid or unenforceable by a court of competent jurisdiction or
in arbitration, the same shall be deemed severable from the
remainder of this Agreement and shall not cause the invalidity
or unenforceability of the remainder of the Agreement.
11.12 Arbitration Between Parties. Should any dispute arise between
---------------------------
the parties over any provision of this Agreement or over any
performance of this Agreement, the dispute shall be submitted to
binding arbitration. This arbitration shall be conducted
according to the rules of the American Arbitration Association,
but need not necessarily be conducted by that organization. Each
party shall initially equally contribute to the costs of the
arbitration. During the arbitration, each party shall bear its
own attorneys' fees. Upon an award of the arbitrator, the
prevailing party shall be entitled to recover its share of
arbitration costs expended, and all its other costs, including
its attorneys' fees. In the event the arbitrator fails to render
an award within thirty (30) days after submission of the matter
for decision, or such longer times as the parties may stipulate,
then either party may elect to have all further arbitration
proceedings terminated and the matter submitted for judicial
resolution. All reasonable costs and fees incurred during the
arbitration shall then be awarded by the court to the prevailing
party.
11.13 Execution by PacifiCare. This Agreement shall not be binding
-----------------------
until executed by a person authorized to do so by PacifiCare and
an executed copy thereof is delivered to DENTIST.
11.14 Provider Incentives. Both PacifiCare and the DENTIST understand
-------------------
and agree that any payments made directly or indirectly to the
DENTIST under any DENTIST incentive provisions set forth in this
Agreement are not made as an inducement to reduce or limit
dentally necessary services to any specific PacifiCare Member.
11.15 Appeals Process for Senior Plan Members. DENTIST shall follow
---------------------------------------
the appeals process for Senior Plan Members as set forth by
Federal law and regulation. The DENTIST shall be bound by any
and all HCFA language requirements of initial determination
letters and other correspondence directed to Senior Plan
Members. The DENTIST shall be bound by PacifiCare's
determination of appeal cases.
<PAGE>
11.16 Notices. Any and all notices required to be given pursuant to
-------
the terms of this Agreement must be given by United States
mail, postage prepaid, return receipt requested or may be
telefaxed with proof of receipt thereof or hand delivered to the
specific person listed below and at the following address:
If to PacifiCare: Director of Dental Services
PacifiCare of Colorado, Inc.
6455 South Yosemite
Englewood, CO 80111
If to DENTIST: ____________________________________
____________________________________
____________________________________
11.17 Waiver. The waiver by either party of a failure to perform any
------
covenant or condition set forth in this Agreement shall not act
as a waiver of performance for a subsequent breach of the same
or any other covenant or condition.
11.18 Entire Agreement. This Agreement constitutes the entire
----------------
understanding between the parties and shall bind and inure to
the benefit of both parties and their successors and assigns. No
change, amendment or alteration shall be effective unless in
writing and signed by both parties. This Agreement shall
supersede all prior written and/or oral agreements with this
DENTIST that pertain to the subject of this Agreement, including
any amendments, addendums, letters of understanding and any
other documents relating thereto, and both PacifiCare and the
DENTIST mutually agree to terminate any prior agreements
pertaining to the subject of this Agreement on the effective
date of this Agreement.
11.19 Confidentiality. The terms of this Agreement and in particular
---------------
the provisions regarding payment for services, are confidential
and shall not be disclosed except as necessary to the
performance of this Agreement or as required by law. DENTIST
shall not disseminate or publish information developed under
this Agreement or contained in reports to be furnished pursuant
to this Agreement without prior written approval of PacifiCare.
DENTIST acknowledges that a PacifiCare contracted provider may
be responsible for payment for services rendered pursuant to
this Agreement. DENTIST agrees to PacifiCare's disclosure of
this Agreement's rate schedule, with DENTIST'S prior written
consent, to a PacifiCare contracted provider to the extent
necessary for determination of payment. DENTIST acknowledges and
agrees that any rate information about other PacifiCare
contracted providers disclosed to DENTIST by PacifiCare for the
performance of this Agreement is confidential and shall not be
used by DENTIST for any other purpose or disclosed by DENTIST in
any manner.
11.20 Exhibits. All exhibits attached to this Agreement, and
--------
referenced herein, are incorporated into and made part of this
Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Agreement.
For DENTIST:
Date: ______________________________________________________________________
By: ______________________________________________________________________
(Please Print)
Title: __________________________________________________________________
Signature:__________________________________________________________________
TAX ID NUMBER:______________________________________________________________
For PacifiCare:
Date: __________________________________________________________________
By: James J. Swayze
------------------------------------------------------------------
Title: Vice President of Commercial Sales and Marketing
------------------------------------------------------------------
Signature:__________________________________________________________________
Initials ______
______
<PAGE>
EXHIBITS
--------
A. PacifiCare Specialty Care Guidelines
B. Services Reimbursement
C. PacifiCare Dental Co-Payment Schedule
<PAGE>
EXHIBIT A
---------
PACIFICARE SPECIALTY CARE GUIDELINES
------------------------------------
I. PURPOSE:
- -- --------
To provide uniform guidelines of responsibility for General Dentists, to
ensure that the level of specialized care provided by general
practitioners is appropriate.
II. POLICY:
- --- -------
It is the policy of PacifiCare, Inc. and it's subsidiaries that general
dentists provide the complete range of dental treatments for which they
are licensed. Patients are only referred to specialists for treatment
of conditions that are beyond the capability of the general
practitioner.
A. Anesthesia
-- -----------
The general Dentist is expected to be an expert in controlling
pain through the use of relaxation techniques and local
anesthesia. The administration of general anesthesia, hypnosis
and other similar procedures is not a requirement.
B. Periodontics
-- ------------
The general Dentist is responsible for the diagnosis and
maintenance of his/her patient's periodontal care. The Dentist
must be adept at surveying the patient's periodontal situation
and home care motivation. The Dentist is responsible for all
non-surgical treatment including, but not limited to,
prophylaxis, subgingival curettage, root planing, oral hygiene
instruction, root amputation, and minor occlusal adjustment.
Specialty referral procedures may include: gingival surgery,
osseous surgery, complete occlusal equilibration, orthodontic
appliances, and complicated periodontal treatment planning.
C. Oral Surgery
-- ------------
The general Dentist is responsible for providing Oral Surgery
for erupted and devastated dentition including uncomplicated
extractions, root sectioning and retrieval, soft tissue
impaction, intra-oral I & D, and/or routine minor surgical
procedures. Bony impactions, moderate sized biopsies,
frenectomies, and osseous recontouring may be referred to an
Oral Surgeon.
D. Endodontics
-- -----------
All routine endodontic procedures are the responsibility of the
general Dentist. The Dentist must also provide emergency pulpal,
I & D, and bleaching treatment. Complicated "tried and failed"
cases, apicoectomies, apexification and retro fillings may be
referred to an appropriate specialist.
E. Pedodontics
-- -----------
The general Dentist is responsible for the routine care of
children of all ages. Routine care includes, fillings, stainless
steel crowns, space maintainers, prophylaxis and fluoride
treatment. Young children with complicated management problems
may constitute an appropriate referral to a specialist. Approval
---
of specialty care will not be authorized for children over six
(6) years of age because of management problems. Some
handicapped individuals may be considered as exceptions to this
policy. In all cases, at least two (2) attempts will be made to
treat the patient, including necessary diagnostic and preventive
care.
F. Restorative and Prosthetics
-- ---------------------------
The general Dentist is required to perform all appropriate
operative, crown and bridge and removable prosthetic treatment.
The Dentist should be proficient in procedures that are
considered Covered and non-Covered Benefits. Some of the non-
covered procedures that should be available to the patient on a
fee-for-service basis include stress-breakers, precision
attachments and procedures for aesthetic reasons only.
<PAGE>
G. Orthodontics
-- ------------
General Dentists are not expected to have extensive orthodontic
training and are not required to provide this care. Not all
PacifiCare Members have orthodontic coverage. Patients with
Panel Orthodontic coverage must be referred to a Panel
Orthodontic office. This referral will be expedited through the
PacifiCare Dental Director's office. If the patient is covered
under PacifiCare's Orthodontic Plans I-V, the referral may be
made to any orthodontist, however, preference is to be given to
a Panel Orthodontist.
H. Miscellaneous
-- -------------
The general Dentist is responsible for providing routine
emergency and after hours emergency care, diagnostic and
treatment planning procedures, TMJ dysfunction identification,
diagnostic therapy, and the coordination of multi-disciplined
treatment as needed.
<PAGE>
FIRST AMENDMENT
TO THE
AGREEMENT BETWEEN
PACIFICARE OF COLORADO, INC.
AND
DENTIST
THIS AMENDMENT is made and entered into effective ____________, 199_ to
that certain Agreement Between PacifiCare and Dentist, dated ______________,199_
("the Agreement").
PURPOSE
WHEREAS, TakeCare Administrative Services Corporation ("TASC") is an
affiliate of PacifiCare of Colorado, Inc. ("PacifiCare") which contracts with
employers and others to administer self-insured employee welfare benefit plans;
and
WHEREAS, TASC has entered into network rental agreements with PacifiCare
through which TASC provides networks of PacifiCare providers, including dental
providers, to such self-insured plans; and
WHEREAS, the parties desire to amend the Agreement to acknowledge such
network rental arrangements and express agreement to the provision of dental
services to the beneficiaries of such self-insured plans on the same terms as
dental services are provided to PacifiCare Members.
NOW, THEREFORE, it is hereby agreed as follows:
A. The definitions in Article I of the Agreement are amended as follows:
1.5 PACIFICARE means PacifiCare of Colorado, Inc., a wholly-owned
subsidiary of TakeCare Administrative Services Corporation, an Indiana
corporation.
1.6 [Deleted in its entirety]
1.7 MEMBER means person enrolled in a PacifiCare Plan, as well as
any person who is entitled to receive benefits under a network rental
arrangement, self-insured plan or other arrangement with a Payor who has
contracted with PacifiCare or TASC.
1.10 PLAN OR PLANS means all programs offered by PacifiCare, and by
all affiliated corporations of the PacifiCare, Inc. group of companies,
as well as any insurance, self-insurance, multi-employer or prepaid
health care service plan providing benefits or services for hospital or
medical care or treatment.
B. Article I of the Agreement is further amended by the addition of the
following new definition:
1.12 PAYOR means, without limitation, an insurance carrier, health
service corporation, health care plan, health maintenance organization,
employer, employee welfare benefit plan, multiple employer welfare
arrangement, a state or federal governmental agency, third party
administrator or any other individual or entity which under contract or
law has an obligation to pay for or provide and arrange for health care
services to Members.
C. Article VIII, Section 8.6-3 of the Agreement amended by the addition of
the following sentence:
Any modifications, additions or deletions to the provisions of this
section shall become effective on a date no earlier than thirty (30)
days after the Colorado Insurance Commissioner has received written
notice of such proposed change.
D. Article VIII, Section 8.6 of the Agreement is further amended by the
addition of the following section:
8.6 Self-insured Payors. Notwithstanding the above provisions of
-------------------
this Section 8.6, Dentist shall be entitled to bill and collect fees
from any Member who is a part of a Plan established by a self-insured
Payor who has failed to make payment to PacifiCare and PacifiCare is
unable, in turn, to make payment to Dentist.
E. Article XI, Section 11.16 is amended to read as follows:
<PAGE>
11.16 Notices. Any and all notices required to given pursuant to the
-------
terms of this Agreement must be given by United States mail, postage
prepaid, return receipt requested or may be telefaxed with proof of
receipt thereof or hand delivered to the specific person listed below
and at the following address:
If to PacifiCare: Director of Dental Services
PacifiCare of Colorado, Inc.
6455 South Yosemite
Englewood, Colorado 80111
If to Dentist: ____________________________
____________________________
____________________________
F. The first sentence of Exhibit A, Section II is amended as follows:
It is the policy of TASC and its subsidiaries that general dentists
provide the complete range of dental treatments for which they are
licensed.
G. Except as otherwise expressly stated in this First Amendment, the terms
and conditions of the Agreement are hereby ratified and affirmed, and
shall remain in full force and effect. Notwithstanding anything to the
contrary contained in the Agreement, to the extent the terms and
provisions of this First Amendment are inconsistent with, or conflict
with, the terms and conditions of the Agreement, the terms and
provisions of this First Amendment shall govern and control.
IN WITNESS WHEREOF, this First Amendment has been executed by the
authorized parties on the date and year shown below.
PACIFICARE OF COLORADO, INC. DENTIST
By: __________________________ By: __________________________
James J. Swayze
Vice President
Commercial Sales and Marketing Title: _______________________
Date: ________________________ Date: ________________________
<PAGE>
SECOND AMENDMENT TO THE
AGREEMENT BETWEEN
PACIFICARE OF COLORADO, INC.
AND DENTIST
THIS AMENDMENT is made and entered into effective __________, 1997 to
that certain Agreement Between PacifiCare and Dentist, dated __________, 199_
("the Agreement").
WHEREAS, the parties agree to amend the Agreement to comply with a
change in law.
NOW, THEREFORE, it is hereby agreed as follows:
A. Article VIII is amended by the deletion of Sections 8.11 and 8.12 in
their entirety.
B. Article X is amended by the deletion of Sections 10.5-1 (k) and (l) and
Section 10.8 in their entirety. Article X is further amended by the
addition of a new Section 10.8 to read as follows:
Notwithstanding the foregoing provisions, PacifiCare shall not
terminate this Agreement because Dentist expresses disagreement
with a decision by PacifiCare, or an entity representing or
working for PacifiCare, to deny or limit benefits to a Member or
because Dentist assists a Member to seek reconsideration of
PacifiCare's decision, or because Dentist discusses with a
current, former or prospective patient any aspect of the
patient's dental condition, any proposed treatments or treatment
alternatives whether covered by a Plan or not, policy provisions
of a Plan, or Dentist's personal recommendation regarding
selection of a dental plan based on Dentist's personal knowledge
of the dental needs of such Member. Dentist shall not be
prohibited from protesting or expressing disagreement with a
medical decision or medical policy of PacifiCare.
C. Except as otherwise expressly stated in this Second Amendment, the terms
and conditions of the Agreement are hereby ratified and affirmed, and
shall remain in full force and effect. Notwithstanding anything to the
contrary contained in the Agreement, to the extent the terms and
provisions of this Second Amendment are inconsistent with, or conflict
with, the terms and conditions of the Agreement, the terms and
provisions of this Second Amendment shall govern and control.
IN WITNESS WHEREOF, this Second Amendment is effective on the date first
above shown.
PACIFICARE OF COLORADO, INC. DENTIST
By: ________________________ By: ________________________
Title: _____________________ Title: _____________________
<PAGE>
EXHIBIT 10.16
October 17, 1996
James Ciccarelli
3025 South Parker Road
Suite 1000
Aurora, CO 80014
Dear Jim:
This letter (the "Agreement"), effective as of August 1, 1996, sets forth
the terms and conditions of your part-time employment with Birner Dental
Management Services, Inc. ("BDMS") and your service as a director of BDMS.
Service as a Director
- ---------------------
You have agreed to serve as a director of BDMS for a term commencing with
your election to the Board of Directors of BDMS and continuing until August 1,
1998. You have agreed to resign as a director of BDMS on August 1, 1998 unless
prior to that time you and BDMS have agreed that you should continue to serve as
a director.
Part-time Employment
- --------------------
You will report directly to, and be subject to the direction and control of
Fred Birner, Chief Executive Officer of BDMS. You will provide such managerial
advice and services as requested by him for one day per week during the term of
this Agreement. Your part-time employment hereunder shall terminate on August 1,
1998, unless you and BDMS agree in writing to extend that date. Beginning in
January 1997 you will be paid a gross compensation of $2,500 per month. You will
not be included in any employee medical, dental, health, retirement, insurance
or other employee benefit plans and programs, including paid vacation, now
existing or hereafter adopted by BDMS for the benefit of any group of its
executive officers or for the general benefit of its employees.
Stock Options
- -------------
You will receive options to acquire 45,000 shares of BDMS Common Stock at
an exercise price of $3.50 per share, pursuant to the Birner Dental Management
Services, Inc. 1995 Employee Stock Option Plan ("Employee Plan"). 22,500 options
will vest and become exercisable on August 1, 1997, if you are still employed by
BDMS hereunder and are serving as a
<PAGE>
James Ciccarelli
October 17, 1996
Page Two
member of its Board of Directors; options for the remaining 22,500 shares will
vest and become exercisable on August 1, 1998 if you have continued to be
employed by BDMS hereunder and have served as a director of BDMS until that
date. If you resign as a director of BDMS prior to August 1, 1997, none of your
options will be vested and thus will be forfeited. If you resign as a director
of BDMS after August 1, 1997 but prior to August 1, 1998, all options other than
those which become vested and exercisable on August 1, 1997 will be forfeited.
If a "Change of Control" as defined in the Employee Plan occurs while you are
still serving as a director of BDMS, all of your unvested options will vest and
become exercisable. If your employment with BDMS or your service as a director
of BDMS is terminated by BDMS prior to August 1, 1998, your options will vest
and become exercisable in the ratio of the number of months or portions of a
month in which you have been an employee and have served as a director of BDMS
hereunder, compared to a total of 24 months. Thus, if your employment is
terminated by BDMS on May 1, 1997, your options will become vested at the rate
of 9/24th of the total options of 16,875 shares. BDMS acknowledges for purposes
of determining the vesting of your options, you commenced work for BDMS on
August 1, 1996. All of the other terms and conditions of your options will be in
accordance with the terms and conditions of the Employee Plan.
Confidentiality
- ---------------
Both during and after you cease to be employed by BDMS or serve as a
director of BDMS, you agree to preserve and protect the confidentiality of all
confidential information concerning the practices of BDMS that is not generally
known and is of considerable importance to BDMS, including, without limitation,
costs, profits, patients' names and dental records, and any other data and
information, whether or not of a similar nature (the "Proprietary Information").
You acknowledge that your relationship to BDMS with respect to the Proprietary
Information is fiduciary in nature, and you agree not to make use of the
Proprietary Information obtained in the course of your employment by BDMS and
service as a director of BDMS hereunder. You agree to maintain the terms of the
Management Agreements, the Employment Agreements and other agreements to which
BDMS or its affiliated Perfect Teeth Dental Centers are parties and all of the
Proprietary Information in confidence and shall not disclose the same to any
person not employed by BDMS at any time, either during or after your employment
by BDMS of service as a director of BDMS, or use such information or the
Proprietary Information in connection with your employment by or investment in a
third party. This restriction shall not apply to information which (a) is or
becomes generally available to or known by the public (other than as the result
of an unpermitted disclosure directly or indirectly made by you or your
representatives, or advisors; (b) is or becomes available to you on a non-
confidential basis from a source other than BDMS or its affiliates, advisors,
agents or representatives (a "furnishing party"), provided that such furnishing
party is not and was not bound by a Confidentiality Agreement with or other
obligation of secrecy to BDMS of which you have knowledge; or (c)
2
<PAGE>
James Ciccarelli
October 17, 1996
Page Three
has already been or is hereafter independently acquired or developed by you
without violating any Confidentiality Agreement with or other obligation of
secrecy to BDMS or the furnishing party.
Termination
- -----------
The Board of Directors of BDMS may terminate your employment hereunder
without cause by written notice to you. In the event of such termination, BDMS
shall pay your salary to the effective date of such termination and your options
shall be vested as provided above. Your employment with BDMS shall terminate by
reason of your death. Any amounts then due to you but not yet paid to you, shall
be promptly paid to your estate. If your employment hereunder is terminated by
BDMS, you agree to resign as a director of BDMS upon the request of BDMS.
Governing Law
- -------------
This Agreement will be governed by and construed in accordance with the
laws of the State of Colorado without regard to its conflicts of laws,
principles or rules.
If the foregoing correctly sets forth our agreement with respect to your
part-time employment by BDMS and your service as a director of BDMS, please sing
one copy of this letter in the space provided below and return it to us.
Very truly yours,
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By: ___________________________________________
Fred Birner
Chief Executive Officer
Accepted and agreed to this
______ day of October, 1996.
_____________________________
James Ciccarelli
3
<PAGE>
September __, 1997
James Ciccarelli
3025 South Parker Road
Suite 1000
Aurora, CO 80014
Dear Jim:
This letter agreement (the "Agreement"), effective as of September 1, 1997,
amends the letter agreement dated October 17, 1996 between Birner Dental
Management Services, Inc. (the "Company") and you (the "Prior Agreement"). The
Prior Agreement set forth, among other things, the terms and conditions for your
provision of managerial advice and services to the Company on a part-time basis.
All such provisions relating to your provision of managerial advice and services
are hereby terminated effective as of September 1, 1997, including the Company's
obligation to compensate you for such services.
Moreover, you hereby agree to forfeit your right to acquire 18,000 shares
of the warrant to purchase 20,000 shares of Common Stock that was issued to you
on July 15, 1997 (the "Warrant") for the purpose of providing additional
compensation to you for such services. You agree to surrender the Warrant to
the Company for cancellation, and the Company agrees to issue to you a new
warrant to purchase 2,000 shares, dated as of July 15, 1997, representing the
shares pursuant to the Warrant that are not being forfeited.
In addition, you and the Company agree that the reference in the Prior
Agreement to certain options to be granted to you to acquire 45,000 shares of
the Company's Common Stock should have been a reference to a warrant to purchase
45,000 shares of the Company's Common Stock, which warrant was previously
delivered to you and is dated as of August 1, 1996. All terms and conditions
set forth in the Prior Agreement relating to this warrant to purchase 45,000
shares of the Company's Common Stock shall remain in full force and effect.
All other terms and conditions set forth in the Prior Agreement shall also
remain in full force and effect.
<PAGE>
If the foregoing correctly sets forth our agreement, please sign one copy
of this Agreement in the space provided below and return it to us.
Very Truly Yours,
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:_____________________________
Fred Birner
Chief Executive Officer
Accepted and agreed to this
___ day of September, 1997
____________________________
James Ciccarelli
<PAGE>
EXHIBIT 10.17
AGREEMENT
This Agreement, dated August 21, 1997, is between Birner Dental
Management Services, Inc., a Colorado corporation ("Buyer"), James Abramowitz,
D.D.S. ("Abramowitz") and Equity Resources Limited Partnership, a Colorado
limited partnership ("Equity Resources"). Abramowitz and Equity Resources are
collectively referred to herein as "Sellers").
NOW, THEREFORE, in consideration for the mutual promises set forth
herein and other consideration, the receipt and sufficiency of which are hereby
acknowledged, Sellers and Buyer agree as follows:
ARTICLE I. GRANT OF OPTION
---------------
Section 1.01. Grant of Option. In consideration of the sum of Fifty
------------ ---------------
Thousand Dollars ($50,000) paid to Sellers by Buyer (the "Option Payment") and
other valuable consideration, Buyer is hereby granted the option (the "Option")
from the date hereof until midnight Denver time on December 31, 1997 (the
"Option Period"), to acquire from Abramowitz all of the outstanding capital
stock of the nine Colorado professional corporations listed on Exhibit 1.01
hereto (the "Professional Corporations") and all of the assets owned by Equity
Resources, of every kind, character and description ("the Assets") described in
and on the terms set forth in Article II below. Buyer agrees to use its
reasonable efforts to help Sellers recruit dentists for the Professional
Corporations during the Option Period. This Option shall be exercisable by
notice in writing given by Buyer to Sellers prior to the expiration of the
Option Period.
ARTICLE II. TERMS OF SALE
-------------
Section 2.01. Sale of Shares. If the Option is exercised, subject to
------------ --------------
the terms hereof, Abramowitz agrees to sell and Buyer agrees to purchase from
Abramowitz, all of the outstanding shares of capital stock (the "Shares") of the
Professional Corporations.
Section 2.02. Sale of Assets. If the Option is exercised, subject to
------------ --------------
the terms hereof, Equity Resources agrees to convey to Buyer, and Buyer agrees
to acquire, all the assets owned by Equity Resources of every kind, character
and description (the "Assets"), which are leased to the Professional
Corporations or used by them in the general dentistry practices conducted by
them (collectively the "Practice").
Section 2.03. Assumption of Obligations and Liabilities of Equity
------------ ---------------------------------------------------
Resources. Buyer shall assume and agree to pay or perform from and after the
- ---------
Closing Date, promptly as they
<PAGE>
become due, only those obligations and liabilities of Equity Resources set forth
below in this Section 2.03 (the "Assumed Obligations"). Except for the Assumed
Obligations, Buyer shall not assume or be deemed to have assumed and shall not
be responsible for any other obligation or liability of Equity Resources, direct
or indirect, known or unknown, choate or inchoate, absolute or contingent. The
Assumed Obligations are: the obligations or liabilities of Equity Resources that
relate to periods, events or circumstances occurring on or after the Closing
Date, and not to events or circumstances occurring prior to the Closing Date in
and under the leases listed on Exhibit 2.03 (the "Assumed Leases"); provided,
------------
however, that (a) each of the Assumed Leases shall be on the same terms and
conditions as are in effect prior to and on the date hereof; (b) Buyer shall
assume no obligation or liability in, to or under any such lease, that is not
included on Exhibit 2.03; and (c) Buyer shall assume no obligation or liability
------------
in, to or under any Assumed Lease, the performance of which would be illegal.
Section 2.04. Computation of Price. Buyer agrees that, subject to
------------ --------------------
the terms hereof, at Closing, Buyer shall pay to Sellers for the Shares and
Assets a purchase price (the "Purchase Price") of Three Million, Five Hundred
Thousand Dollars ($3,500,000). The Purchase Price shall be payable at Closing
as follows: (i) Two Million, Fifty Thousand Dollars ($2,050,000) by certified
check or wire transfer to an account designated by Sellers, calculated as
follows: $2,100,000, less the Option Payment; and (ii) the unsecured promissory
note (the "Note") of Buyer in the amount of One Million, Four Hundred Thousand
Dollars ($1,400,000) bearing interest at 8% per year. The Note shall be payable
as follows: interest from the Closing Date to September 30, 1997 shall be paid
on September 30, 1997 and thereafter the Note shall be payable in 35 equal
monthly installments of principal and interest in the amount of $28,386.95, with
the first such installment being due and payable on October 31, 1997 and a final
balloon payment of all unpaid principal and accrued interest thereon being due
and payable on the third anniversary of the Closing Date. The Note shall be
paid in full, without any premium or penalty, if Buyer closes an initial public
offering ("IPO") of its common stock. Such payment shall occur within 10 days
after the closing of the IPO. The Note shall be subordinate to up to Three
Million Dollars ($3,000,000) of bank debt and shall rank pari passu with up to
---- -----
Three Hundred Fifty Thousand ($350,000) of existing debt incurred by Buyer to
acquire dental practices ("acquisition debt"). Buyer agrees that so long as the
Note remains unpaid, Buyer will not incur additional indebtedness unless any
such additional indebtedness which would cause the aggregate outstanding bank
debt which is senior to the Note to exceed $3,000,000 and the aggregate
acquisition debt to exceed $350,000 is by its terms expressly subordinate to the
Note. Buyer further agrees that if Buyer fails to pay any installment under the
Note when due and such default continues for three days after written notice of
such default is given by Sellers to Buyer, Abramowitz shall be released from any
obligations under the covenant not to compete contained in Article VIII. The
Option Payment shall be credited against the cash portion of the Purchase Price
due at Closing.
Section 2.05. Escrow. Seller shall place $100,000 in an escrow
------------ ------
account for a period of 30 days after Closing. If, 30 days after Closing, the
expenses of the expense categories, as listed in Exhibit 2.05, of the Practices
are greater than the income from all
2
<PAGE>
sources for the Practices, the amount of the shortfall shall be withdrawn from
the escrow account and paid to Buyer, after which all the remaining funds in the
escrow account shall immediately be paid to Seller.
Section 2.06. Allocation of Purchase Price. A portion of the
------------ ----------------------------
Purchase Price equal to the book value of the Assets shall be allocated to the
Assets and the balance of the Purchase Price shall be allocated to the Shares.
Buyer and Sellers shall report the purchase of the Assets and Shares in
accordance with such determination, and each shall promptly notify the other of
any adjustment to such allocation proposed by any taxing authority.
Section 2.07. Sales Taxes. Buyer shall pay all sales taxes
------------ -----------
associated with the transactions contemplated by this Agreement.
Section 2.08. Fees and Commissions. Sellers acknowledge that Sellers
------------ --------------------
will owe a brokerage fee or other compensation to Precise Consultants in
connection with the transactions contemplated by this Agreement, and agrees to
pay such fees or compensation. Buyer represents that it has no agreement with
any person or entity to pay any finder's fees or agent's commissions in
connection with the transactions contemplated by this Agreement.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
OF SELLERS
Sellers jointly and severally represent and warrant to Buyer the
following:
Section 3.01. Organization and Standing. Each Professional
------------ -------------------------
Corporation is a Colorado corporation, duly incorporated and validly existing
under the laws of the State of Colorado and has all requisite power and
authority to own or lease its properties and Assets and to conduct its business
as presently conducted. Equity Resources is a limited partnership duly formed
and validly existing under the laws of the State of Colorado and has all
requisite power and authority to own or lease its properties and conduct its
business as presently conducted.
Section 3.02. Authority, Binding Obligation. Each of Abramowitz,
------------ -----------------------------
each Professional Corporation and Equity Resources has all requisite power,
authority and capacity to enter into this Agreement and to perform the
transactions and obligations to be performed by him or it hereunder. Except for
any consents required from the landlords under the office space leases covering
the offices of the Professional Corporations, no consent, authorization,
approval, license, permit, order of, or filing with any governmental authority
or any third party is required in connection with the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by each
Professional Corporation and by each of Abramowitz and Equity Resources, and is
a valid and binding obligation of such person or entity, enforceable against
such person or entity, in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy,
3
<PAGE>
insolvency, fraudulent conveyance, reorganization, moratorium or similar laws,
both state and federal, affecting the enforcement of creditors' rights in
general, or by general principles of equity, whether applied in a court of law
or equity.
Section 3.03. Ownership of Shares. Abramowitz owns the Shares, free
------------ -------------------
and clear of all liens, encumbrances, adverse interests, options or rights to
acquire the Shares held by third parties whatsoever. Such Shares are not
subject to, bound or affected by any proxies, voting agreements or other
restrictions on the ownership thereof.
Section 3.04. Title to Assets. Equity Resources has, as of the date
------------ ---------------
hereof, good and marketable title to the Assets, free and clear of any and all
liens, claims, security interests, or encumbrances of any kind other than liens
for current taxes not yet delinquent and any liens of landlords under office
space leases.
Section 3.05. Accounts Receivable. Each of the accounts receivable
------------ -------------------
of the Professional Corporations is a valid, binding and legally enforceable
obligation owned by such Professional Corporations, free and clear of all liens
and encumbrances. Such accounts receivable arose in the ordinary and usual
course of the Practice consistent with past practices.
Section 3.06. Tangible Personal Property and Equipment. All tangible
------------ ----------------------------------------
personal property and equipment owned or leased by the Professional Corporations
are in good operating condition, working order and repair and are fully suitable
for the uses for which they are employed in the conduct of the Practice.
Section 3.07. Contracts. The Assets are not subject to any leases or
------------ ---------
agreements other than the Assumed Leases. The Professional Corporations are not
parties to any agreements or leases other than those set forth on Exhibit 3.07
(the "Contracts"). With respect to each of the Assumed Leases and Contracts:
(a) such agreement is valid, binding, enforceable and in full force and effect;
(b) no party to such agreement is in breach or default, and to Sellers'
knowledge, no event has occurred that with notice or lapse of time would
constitute a breach or default or permit termination, modification or
acceleration thereunder; (c) no party to such agreement has repudiated any
provision thereof; (d) there are no disputes, oral agreements or forbearance
programs in effect as to such agreement; and (e) Sellers have performed and
satisfied in full each obligation required to be performed by Sellers under such
agreement, to the extent such performance was required on or before the Closing
Date.
Section 3.08. Financial Statements. Sellers have furnished to Buyer
------------ --------------------
unaudited cash basis financial statements of the Professional Corporations for
the twelve months ended December 31, 1996 and the six months ended June 30, 1997
relating to the Practice. Such financial statements are true, complete and
correct in all material respects as of the date and for the period stated and
present fairly the financial position of the Professional Corporations at such
date and the results of operations for the Practice, for the period ended on
such date.
4
<PAGE>
Section 3.09. Environmental Laws. To Sellers' knowledge, Sellers
------------ ------------------
have obtained all permits, licenses and other authorizations that are required
for the conduct of the Practice and have complied with all federal, state and
local laws and regulations promulgated thereunder relating to pollution or
protection of the environment.
Section 3.10. Litigation. There are no claims, suits, proceedings
------------ ----------
(arbitration or otherwise) or investigations pending, or to Sellers' knowledge,
threatened against Sellers or the Professional Corporations at law or in equity
in any court or by or before any governmental agency, and to Sellers' knowledge,
there are no, and have not been any facts, conditions or incidents that may
result in any such actions, suits, proceedings (arbitration or otherwise), or
investigations. Sellers and the Professional Corporations are not in default in
respect of any judgment, order, injunction or decree of any court or
governmental agency. There have been no significant disciplinary, revocation or
suspension proceedings or similar types of claims, actions or proceedings,
hearings or investigations against Sellers or the Professional Corporations or,
to Sellers' knowledge, any of their respective employees.
Section 3.11. No Conflicts. The execution, delivery and performance
------------ ------------
of this Agreement will not conflict with, violate or constitute a default under,
or accelerate or permit acceleration of performance required by any Contract.
Section 3.12. Tax Returns and Payments. Each Professional
------------ ------------------------
Corporation has filed all federal, state and local tax returns required to be
filed, and has timely paid all income, sales, use, ad valorem, franchise,
personal or real property taxes, withholding taxes or any other taxes that are
payable, for periods prior to the Closing Date, whether or not so shown on any
such tax returns. Sellers have not received any notice of, nor do Sellers have
any knowledge of, any deficiency or any assessment of any proposed deficiency or
assessment from any governmental authority with respect to the Professional
Corporations. There are no audits pending with respect to the Professional
Corporations, and there are no outstanding agreements or waivers by or with
respect to the Professional Corporations that extend the statutory period of
limitations applicable to any federal, state or local tax returns for any
period.
Section 3.13. Absence of Certain Changes or Events. Since June 30,
------------ ------------------------------------
1997, there has not been (i) any material or adverse change in the Practice or
in the financial condition of any Professional Corporation, (ii) or any sale,
lease or other disposition of, or any damage, destruction or loss to or of any
of the assets or properties owned or leased by any Professional Corporation;
(iii) any termination or amendment of any Contract or entry into any new
agreement by any Professional Corporation; or (iv) any material increase in the
compensation of or loans to, or the granting of any other benefits to employees
of the Professional Corporations.
Section 3.14. Compliance with Laws. Each Professional Corporation is
------------ --------------------
in compliance with all requirements of federal, state or local laws and
regulations, including
5
<PAGE>
those regarding employment conditions and practices, and has withheld all
amounts required to be withheld by such laws or regulations.
Section 3.15. Employment Agreements. There are no written or oral
------------ ---------------------
agreements with any employee of the Professional Corporations other than those
described on Exhibit Section 3.15. None of the Professional Corporations is a
party to, nor is it bound by any, collective bargaining agreements.
Section 3.16. Insurance. The dental malpractice insurance, public
------------ ---------
liability insurance, workers compensation insurance and other insurance which
cover each Professional Corporation and its employees are set forth on Schedule
3.16.
Section 3.17. Intellectual Property. Exhibit 3.17 sets forth all
------------ ---------------------
trade names and registered or unregistered trademarks and service marks which
are owned by Sellers or the Professional Corporations and used in the Practice.
Intellectual property and techniques used previously by the Professional
Corporations and developed by Abramowitz can be utilized by Abramowitz after his
employment is terminated.
Section 3.18. Employee Benefit Plans and Arrangements. Except as set
------------ ---------------------------------------
forth on Exhibit 3.18, there are no plans, agreements, customs or practices,
which provide employee compensation or benefits to any current, former or
retired employee, including but not limited to arrangements for or with respect
to life or health insurance, pension, profit sharing, (S) 401(k) plans, deferred
or inactive compensation, vacation, severance pay, sick leave or consulting
arrangements.
Section 3.19. Disclosure. No representation, warranty or statement
------------ ----------
made by Sellers in this Agreement, nor any information delivered to Buyer by
Sellers, contains or will contain any untrue statement of material fact or omits
or will omit to state a material fact necessary to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading. Sellers do not know of any fact or condition (other than general
economic conditions) that materially adversely affect the condition, properties,
assets, liabilities, business, operations or prospects of the Practice that has
not been set forth herein.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
-------------------------------
OF BUYER
--------
Buyer represents and warrants to Sellers the following:
Section 4.01. Organization and Good Standing. Buyer is a corporation
------------ ------------------------------
duly incorporated and validly existing in good standing under the laws of the
State of Colorado and has the corporate power and authority to own its property
and assets and to transact its business as presently conducted.
6
<PAGE>
Section 4.02. Authority, Binding Obligation. Buyer has all requisite
------------ -----------------------------
power, authority and capacity to enter into this Agreement and perform the
transactions and obligations to be performed by Buyer hereunder. The execution,
delivery and performance of this Agreement by Buyer have been duly and validly
authorized by all necessary action on the part of Buyer. No consent,
authorization, approval, license, permit, order of, or filing with any
governmental authority or any third party is required in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Buyer and is the valid and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms, except as
enforcement may be limited by general principles of equity, whether applied in a
court of law or equity, and by bankruptcy, insolvency, fraudulent conveyance and
similar laws affecting creditors' rights and remedies generally.
Section 4.03. Buyer agrees that in the event of a public offering it
------------
will carry a minimum of $5 million of Directors' and Officers' insurance. In
Abramowitz' capacity as an officer he would be covered under such insurance.
ARTICLE V. CONDITIONS PRECEDENT
--------------------
Section 5.01. Conditions Precedent to Obligations of Buyer. The
------------ --------------------------------------------
obligations of Buyer are subject to satisfaction at the Closing of the following
conditions: (a) Sellers shall have complied in all material respects with their
agreements, obligations and covenants contained herein; and (b) the
representations and warranties made by Sellers in this Agreement shall be true
and correct in all material respects, as if made on and as of the Closing Date.
Section 5.02. Conditions Precedent to Obligations of Sellers. The
------------ ----------------------------------------------
obligations of Sellers are subject to satisfaction at the Closing of the
following conditions: (a) Buyer shall have complied in all material respects
with each of its agreements, obligations and covenants contained herein; and (b)
the representations and warranties made by Buyer in this Agreement shall be true
and correct in all material respects, as if made on and as of the Closing Date.
ARTICLE VI. CLOSING
-------
Section 6.01. Closing. If the Option is exercised, the closing of
------------ -------
the transactions contemplated by this Agreement (the "Closing") shall take place
on September 5, 1997, at 10:00 a.m. at the office of Buyer or at such other time
and on such other date as is specified in Buyer's notice of exercise of the
Option (the "Closing Date").
Section 6.02. Documents to be Delivered by Sellers. At the
------------ ------------------------------------
Closing, pursuant to this Agreement, Sellers shall deliver to Buyer duly
executed originals of the following:
7
<PAGE>
(a) a general conveyance as to all Assets, with a general warranty of title and
any other appropriate instruments in such reasonable form as shall be requested
by Buyer and its counsel and reasonably satisfactory to Sellers and their
counsel; (b) certificates representing the Shares, together with duly executed
stock powers transferring the Shares to Buyer; (c) an assignment of the Assumed
Leases; and (d) such further certificates, schedules, exhibits or other
instruments as may be necessary to consummate the transactions herein
contemplated.
Section 6.03. Documents and Other Items to be Delivered by Buyer. At
------------ --------------------------------------------------
the Closing, pursuant to this Agreement, Buyer shall deliver to Sellers duly
executed originals of the following: (a) appropriate instruments of assumption
as to all Assumed Leases and any other appropriate instruments in such
reasonable or customary form as shall be requested by Sellers and their counsel
and reasonably satisfactory to Buyer and its counsel; (b) such certificates or
other instruments as may be necessary to consummate the transactions herein
contemplated; (c) a certified check or wire transfer for the portion of the
Purchase Price to be paid at Closing; and (c) the Note.
ARTICLE VII. COVENANTS
---------
Section 7.01. Indemnification by Sellers. If the Option is exercised
------------ --------------------------
and Closing occurs, Sellers shall indemnify and hold harmless Buyer, its
officers, directors, shareholders, employees and agents (each an Indemnified
Party) from and against any and all claims, losses, liabilities, damages, liens,
penalties, costs and expenses, any interest imposed in connection therewith,
expenses of investigation and reasonable fees and disbursements of counsel and
other experts incurred or suffered by an Indemnified Party which may arise
directly or indirectly out of (a) the breach of any representation, warranty,
covenant or agreement made by Sellers in this Agreement, or in any instrument
executed and delivered by Sellers to Buyer; (b) any liability or obligation of
Equity Resources which is not being assumed by Buyer hereunder, including
without limitation, any debts or liabilities of Equity Resources which are
incurred or which arise from events or circumstances existing prior to the
Closing Date, and (c) any failure of Sellers to pay any federal or state income
taxes payable by them with respect to all periods prior to the Closing Date.
All amounts to which an Indemnified Party is entitled to indemnification
hereunder may be offset against amounts due under the Note.
Section 7.02. Indemnification by Buyer. If the Option is exercised
------------ ------------------------
and Closing occurs, Buyer shall indemnify and hold harmless Sellers from and
against any and all claims, losses, liabilities, damages, liens, penalties,
costs and expenses, any interest imposed in connection therewith, expenses of
investigation and reasonable fees and disbursements of counsel and other experts
incurred or suffered by Sellers; (a) resulting from liabilities and obligations
under the Assumed Leases and Contracts which are to be paid, performed and
discharged from and after the Closing Date; and (b) resulting directly or
indirectly from the
8
<PAGE>
breach of any representation, warranty, covenant or agreement made by Buyer in
this Agreement, or in any instrument executed and delivered by Buyer to Sellers.
Section 7.03. Additional Information. From the date hereof until the
------------ ----------------------
Closing Date, Seller agrees to cooperate with Buyer in the conduct of its due
diligence relating to the Practice, including but not limited to, allowing Buyer
to visit the offices of the Professional Corporations and the furnishing to
Buyer of copies of contracts with dentists, contracts with non-dentist
employees, all office leases, completion of managed care capitation contract
schedule in form supplied by Buyer, completion of summary schedules of contracts
with dentists, contracts with non-dentists and office leases in form supplied by
Buyer, the furnishing of copies of all other material contracts such as
equipment leases and bank debt agreements and copies of bank statements for the
year ended December 31, 1996 and the seven months ended July 31, 1997, and
preparation of a schedule of fees by office and a detailed listing of accounts
receivable as of July 31, 1997 for each office.
Section 7.04. Employment. After Closing, Buyer agrees to employ and
------------ ----------
Abramowitz to be employed as its Colorado Dental Director for a salary of
$100,000 per year, pursuant to the form of Employment Agreement attached hereto
as Exhibit B.
Section 7.05. Negative Covenants. From the date hereof to the
------------ ------------------
earlier of the expiration of the Option Period or the Closing Date, Sellers
shall not, and shall not permit any of the Professional Corporations, without
the prior written consent of Buyer, to (a) amend or otherwise change its
Articles of Incorporation or Bylaws or other governing documents; (b) merge,
consolidate or otherwise combine with any corporation or other entity; (c) issue
or sell or authorize for issuance or sale, or grant any options or make other
agreements with respect to the issue or sale or conversion of, any shares of its
capital stock, phantom shares or other share-equivalents, or any other of its
securities; (d) sell, pledge, encumber or otherwise transfer any shares of its
capital stock or enter into any agreements for the sale, pledge, encumbrance or
other transfer of such shares; (e) authorize or incur any long-term debt, or
mortgage or pledge; (f) split, combine or reclassify any of its capital stock;
(g) subject to lien or other encumbrance any of its properties; (h) establish or
acquire any additional offices providing dental services, or enter into
management or other agreements with any offices providing dental services; (i)
enter into or change any material agreement, contract or commitment in excess of
$10,000; (j) incur any indebtedness or agree to any existing indebtedness; or
(k) sell or otherwise dispose of any of its assets or properties other than in
the ordinary course of its business. Notwithstanding the foregoing, Sellers may
cause the Professional Corporations to draw down funds under the existing
$75,000 line of credit provided that no amounts remain outstanding under the
line of credit on the Closing Date. If any amount is outstanding under the
letter of credit on the Closing Date, Buyer may reduce the principal of the Note
by such amount and the monthly payments under the Note shall be correspondingly
adjusted. Sellers have advised Buyer that Sellers propose to lease up to 4,000
square feet of space to expand Sellers' Arvada office. Sellers will promptly
provide Buyer with copies of the proposed lease and other Buyer information
concerning the proposed expansion. Buyer shall advise Sellers by September 5,
1997 as to whether Buyer consents to such expansion.
9
<PAGE>
Section 7.06 Conduct Pending Closing. From the date hereof to the
------------ -----------------------
earlier of the Expiration of the Option Period or the Closing Date, Sellers will
use reasonable efforts consistent with their prior business practices, and will
cause each of the Professional Corporations to (a) maintain its corporate
existence in good standing; (b) maintain the general character of its business
and conduct its respective business in the ordinary and usual course; (c) timely
pay all amounts due under existing indebtedness, when due under the terms
thereof; (d) maintain cash flow and cash position consistent with its past
practices; and (e) maintain and preserve intact its business organization,
employees, and advantageous business relationships and retain the services of
its officers and key employees.
ARTICLE VIII. COVENANT NOT TO COMPETE
-----------------------
Abramowitz hereby agrees that if the Closing occurs, he will not for a
period of five years after the Closing Date, (i) open, manage or operate any
offices for the practice of dentistry, or directly or indirectly engage in, for
his own account or as an employee of or consultant to, or have any interest in,
any person, firm, corporation, partnership, limited liability company or other
entity, or business (whether as an officer, director, partner, member, agent,
equity interest owner, securityholder, creditor or otherwise), that engages in
or manages any dental practice activities or engages in or proposes to engage in
the development of a Network (as hereafter defined) of managed dental practices
within the Denver and Colorado Springs metropolitan areas, or within five miles
of any office in the State of Colorado for the practice of dentistry managed by
Buyer, whether such offices currently exist, are acquired pursuant to this
Agreement or are hereafter established, and (ii) solicit any of the patients or
dentists or other employees of Buyer or the entities which own and operate such
dental offices managed by Buyer to work for Abramowitz or any entity in which he
is an officer, director, partner, member, agent, equity interest owner,
securityholder, or creditor. Further, Abramowitz agrees that if the Closing
occurs, he will not for a period of one year after the Closing Date hire any
employees of Buyer or the entities which own and operate the dental offices
managed by Buyer to work for him or any entity in which he is an officer,
director, partner, member, agent, equity interest owner, securityholder or
creditor. A "Network" shall mean three or more dental offices. Notwithstanding
the foregoing, if Abramowitz is not then employed by Buyer, Abramowitz may
practice dentistry full time at a single office or work part-time dentistry at
one or two offices in the State of Colorado so long as these entities do not
engage in or propose to engage in the development of a Network of dental
practices. Further, if Abramowitz quits his employment with Buyer, he can hire
up to two former (but not current) employees of Buyer if Abramowitz decides to
practice dentistry as permitted in the preceding sentence. Buyer agrees that
Abramowitz can be employed by a Network if such Network does not have any
operations in a state where Buyer has operations. The obligations of Abramowitz
under this Article VIII are unique and he acknowledges and agrees that any
breach or threatened breach of such obligations may result in irreparable harm
and substantial damages to the Buyer. Accordingly, in the event of a breach or
threatened breach by
10
<PAGE>
Abramowitz of any of the provisions of this Article VIII, Buyer shall have the
right, in addition to exercising any other remedies at law or equity which may
be available to it, to obtain ex parte, preliminary, interlocutory, temporary or
-- -----
permanent injunctive relief, specific performance and other equitable remedies
in any court of competent jurisdiction to prevent Abramowitz from violating such
provision or provisions or to prevent the continuance of any violation thereof,
together with an award or judgment for any and all damages, losses, liabilities,
- -------------
expenses and costs incurred by Buyer in connection with, or as a result of, the
enforcement of this Agreement. Abramowitz hereby expressly waives any
requirement based on any statute, rule or procedure, or other source, that Buyer
post a bond as a condition of obtaining any of the above described remedies.
ARTICLE IX. TERMINATION
-----------
Section 9.01. Termination. This Agreement may be terminated on or
------------ -----------
before the Closing Date by Buyer, upon written notice to Sellers if Buyer
decides for any reason not to consummate the purchase of the Shares and Assets
hereunder. Unless terminated earlier by Buyer, this Agreement shall terminate
at midnight, Denver time on December 31, 1997.
Section 9.02. Retention of Option Payment. If Buyer exercises its
------------ ---------------------------
right to terminate under Section 9.01 or Closing has not occurred on or before
December 31, 1997, Sellers shall be entitled to retain the Option Payment and
both parties shall be released from any further obligations hereunder.
ARTICLE X. MISCELLANEOUS
-------------
Section 10.01. Survival of Representations and Warranties. Unless
------------- ------------------------------------------
otherwise provided, all the representations and warranties contained in this
Agreement and in any certificate or other instrument delivered pursuant to this
Agreement shall survive until the second anniversary of the Closing Date.
Section 10.02. Successors. This Agreement shall not be assigned,
------------- ----------
provided however, that Buyer shall have the right to assign this Agreement in
whole or in part to any professional corporation formed by Buyer. No such
assignment shall relieve Buyer of its obligations hereunder. This Agreement
shall be binding on, and insure to the benefit of the parties and their
respective successors and assigns. This Agreement shall not confer any rights
or remedies upon any person other than the parties hereto and their respective
successors and permitted assigns.
Section 10.03. Further Assurances. From time to time hereafter and
------------- ------------------
without further consideration, Sellers shall execute and deliver such additional
or further instruments of conveyance, assignment and transfer and take such
actions as Buyer may reasonably request in order to convey more effectively to
Buyer the Shares and the Assets.
11
<PAGE>
Section 10.04. Notices. All notices 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 address of the
party set forth below or to such other address as such party may have given to
the other party pursuant to this Section 8.04. 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.
If to Buyer: Birner Dental Management Services, Inc.
Suite 201
3301 East Florida Avenue
Denver, Colorado 80210
Attention: Fred Birner
Chief Executive Officer
with a copy to: Dennis M. Jackson, Esq.
Holland & Hart
P.O. Box 8749
Denver, CO 80201
If to Sellers: _____________________________
with a copy to: _____________________________
or to such other address as either party shall notify the other.
Section 10.05. No Waivers. Investigations or examinations made by
------------- ----------
either party, its or their counsel, accountants, employees or representatives
and information obtained as a result thereof shall not constitute a waiver of
any representation, warranty, covenant or agreement of the other party.
Section 10.06. Entire Agreement. This Agreement sets forth the
------------- ----------------
entire understanding of the parties with respect to the subject matter hereof
and thereof. Any previous agreements or understandings between the parties
regarding the subject matter hereof are merged into and superseded by this
Agreement.
Section 10.07. Applicable Law. This Agreement and the rights and
------------- --------------
obligations of the parties hereunder shall be governed by and construed and
interpreted in accordance with, the laws of the State of Colorado, without
giving effect to any conflicts of laws principles.
12
<PAGE>
Section 10.08. Prorations. Sellers and Buyer agree that personal
------------- ----------
property taxes with respect to the Assets shall be divided or prorated between
Sellers and Buyer based on their respective periods of ownership and occupancy
through and after the Closing Date.
Section 10.09. Dispute Resolution. Any controversy, disagreement,
------------- ------------------
claim, legal action or proceeding arising out of or relating to this Agreement
or transactions contemplated hereby shall be settled by arbitration in the City
and County of Denver, Colorado, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association (unless the parties agree
otherwise), which rules shall be enlarged to include the right to discovery and
deposition as provided by Colorado courts of general jurisdiction, and judgment
upon the award and/or decision of the Arbitrator(s) may be entered in any Court
having jurisdiction and shall be final and binding and not subject to appeal.
Section 10.10. Costs and Attorneys' Fees. In the event that
------------- -------------------------
litigation or arbitration is commenced by any party to honor the terms of this
Agreement, the prevailing party shall be entitled to costs of suit and
reasonable attorneys' fees related to such suit. The parties agree that all
litigation arising from the terms of this agreement shall be conducted in the
courts of City and County of Denver, Colorado. Buyer and Sellers consent to the
jurisdiction of such courts.
Section 10.11. Time of the Essence. Time is of the essence for all
------------- -------------------
matters contained in this Agreement.
SELLERS:
EQUITY RESOURCES LIMITED PARTNERSHIP
a Colorado limited partnership
By:_________________________________________
Its General Partner
____________________________________________
James Abramowitz
13
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BUYER:
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:__________________________________________
Name:
Title:
14
<PAGE>
EXHIBIT 10.18
BIRNER DENTAL MANAGEMENT SERVICES, INC.
MANAGEMENT AGREEMENT
PERFECT TEETH/__________ P.C.
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
MANAGEMENT AGREEMENT
--------------------
THIS MANAGEMENT AGREEMENT, dated as of _________, by and between BIRNER
DENTAL MANAGEMENT SERVICES, INC., a Colorado corporation ("BDMS"), and PERFECT
TEETH/________ P.C., a Colorado professional corporation, (the "Professional
Entity").
RECITALS
WHEREAS, the Professional Entity operates a dental practice with offices in
the facilities identified in Exhibit 1.2 (the "Center") and furnishes care to
-----------
the general public through the services of the dentist(s) affiliated with the
Professional Entity (the "Dentists(s)");
WHEREAS, BDMS is a management company which among other things provides
administrative, marketing, and business advice and support to entities engaged
in the practice of dentistry;
WHEREAS, BDMS is also engaged in the development, management and
coordination of a dental provider network organized to provided managed care
dental services to health plan and other dental care purchasers.
WHEREAS, BDMS's services are designed to improve the efficiency and
profitability of dental practices while enhancing the ability of the dentists in
such practices to render quality dental care to their patients;
WHEREAS, the Professional Entity and BDMS mutually desire to enter into a
business relationship under the terms of this Agreement to help the Professional
Entity achieve the above goals.
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
I. RESPONSIBILITIES AND OBLIGATIONS OF BDMS
1.1 Appointment. Professional Entity hereby appoints BDMS as its sole
-----------
and exclusive agent for the management, and administration of the business
functions and business affairs of Professional Entity, and BDMS hereby accepts
such appointment, subject at all times to the provisions of this Agreement. BDMS
shall provide the Professional Entity with comprehensive administrative,
business, and marketing support and advice, and such facilities, equipment, and
2
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support personnel as reasonably required by the Professional Entity to operate
its practice, as determined by BDMS as the sole and exclusive business manager
of the Center and agrees that BDMS shall have all power and authority reasonably
necessary to manage the business affairs of the Center and carry out BDMS's
duties under this Agreement, subject to the requirements of the Dental Practice
Law of Colorado relating to the retention of control by dentists over the
practice of dentistry.
BDMS is expressly authorized to negotiate and execute on behalf of
Professional Entity contracts that do not relate to the provision of dental
services. Professional Entity shall give BDMS thirty (30) days prior notice of
Professional Entity's intent to execute any agreement obligating Professional
Entity to perform dental services or otherwise creating a binding legal
obligation on Professional Entity.
1.2 Facilities and Equipment. The parties expressly agree that all
------------------------
equipment, office space, facilities, and material provided by BDMS to the
Professional Entity hereunder shall be provided to the Professional Entity by
BDMS under this Agreement or another agreement or arrangement under which the
Professional Entity shall maintain complete care, custody, and control of the
foregoing. Subject to the foregoing, BDMS agrees to provide or arrange for on
behalf of the Professional Entity the offices, facilities, furnishings,
equipment, and related services described in Exhibit 1.2 hereto, as such Exhibit
-----------
may be amended from time to time, and, on an ongoing basis, shall provide for
the maintenance and upkeep of the foregoing. BDMS additionally agrees, on an
ongoing basis, to evaluate and consult with the Professional Entity on the
equipment needs of and the efficiency and adequacy of the facilities utilized by
the Center.
1.3 Personnel and Payroll. The parties expressly acknowledge and agree
---------------------
that the Professional Entity shall exercise control over all decisions relating
to office personnel and hours of practice. Subject to the foregoing, BDMS shall
consult with and advise the Professional Entity on the Center's staffing needs
and on the hiring and employment of the Center's staff. BDMS shall employ all
of the Center's staff, except for the Dentists and dental hygienists, if any.
Additionally, BDMS shall be responsible for staff scheduling and for the
performance of all payroll and payroll accounting functions. BDMS shall advise
the Professional Entity on the establishment of incentive and profit sharing
plans for the Center's staff to reward individuals for contributing to increased
productivity in the Center.
1.4 Business Systems, Procedures and Forms. In consultation with the
--------------------------------------
Professional Entity, BDMS shall establish standardized business systems and
procedures for the Center developed by BDMS, including, but not limited to, a
patient scheduling system developed by BDMS (the "BDMS Patient Scheduling
System") that is designed to improve the Center's operating efficiency. BDMS
shall provide training to the Center's staff in the implementation and operation
of such standardized systems and procedures. BDMS shall additionally provide
the Professional Entity with and train the Center's staff in the use of
standardized clinical forms, including without limitation forms for patient
evaluations and treatment plans. The Professional Entity expressly acknowledges
and agrees that it shall have no property rights in the foregoing systems,
procedures and clinical forms, and further agrees that such systems, procedures,
and forms shall be deemed to constitute Confidential Information within the
meaning of Section 2.7
-----------
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hereof and subject to the restrictions on the use, appropriation, and
reproduction of such Confidential Information provided in Section 2.7.
-----------
1.5 Purchasing, Accounts Payable and Inventory Control. BDMS shall be
--------------------------------------------------
responsible for the performance of the Professional Entity's purchasing and
accounts payable functions. In consultation with the Professional Entity, BDMS
shall purchase and maintain all inventory and supplies reasonably required by
the Center.
1.6 Information Systems and Accounting. In consultation with the
----------------------------------
Professional Entity, BDMS shall establish, maintain, and train the Center's
staff in the use of information systems to produce financial and operational
information concerning the Center's operations. BDMS shall analyze such
information on an ongoing basis and consult with the Professional Entity on
enhancing the Center's productivity. BDMS shall provide or arrange for all
accounting and bookkeeping services related to the Center's operations, provided
that such services are incurred in the ordinary course of business.
1.7 Legal Compliance and Services. BDMS shall be responsible for
-----------------------------
ensuring compliance with all rules, regulations and ordinances applicable to the
Center's operations, and shall arrange for all legal services reasonably
required by the Center, but excluding the costs of malpractice suits.
1.8 Marketing. The parties expressly acknowledge and agree that the
---------
Professional Entity shall exercise control over all policies and decisions
relating to pricing, credit, refunds, warranties and advertising. Subject to
the foregoing, in consultation with the Professional Entity, BDMS shall design
and execute a marketing plan to promote the Dentist's professional services.
Such marketing plan may include, as BDMS and the Professional Entity determine
to be appropriate, direct mail advertising, newspaper, yellow pages, and radio
and television advertising, special promotions and pricing programs, and direct
marketing to employers, insurance companies, and other payors. All marketing
activities hereunder shall be conducted in compliance with all applicable laws
and regulations governing advertising by the dental profession.
1.9 Planning. BDMS will assess the potential of and advise the
--------
Professional Entity on the establishment of dental offices in new locations and
will provide assistance to the Professional Entity in the opening of such new
offices, including assistance in the location of such offices and in the sale of
existing practices, as appropriate.
1.10 Financial Services. BDMS shall be responsible for (i) billing and
------------------
collecting payments for all professional services rendered by the Dentist(s) or
clinical staff to patients, with all such billing and collecting to be done in
the name of the Professional Entity; (ii) receiving payments from patients,
insurance companies and all other third party payors; (iii) taking possession of
and endorsing in the name of the Professional Entity any notes, checks, money
orders, insurance payments and other instruments received in payment of accounts
receivable; (iv) performance of all payroll functions; (v) preparing and
submitting to the Dentist monthly operating data and quarterly financial reports
with respect to the operations of the Center; and
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(vii) paying all Center Expenses, as set forth in Section 3.1. No funds from
-----------
the Medicare and Medicaid programs shall be billed or collected by the
Professional Entity. The Professional Entity and the Dentist hereby appoints
BDMS for the term of this Agreement to be their true and lawful attorney-in-fact
for the purposes set forth above in this section.
1.11 Disbursement of Funds. (a) All monies collected for the
---------------------
Professional Entity by BDMS pursuant to Section 1.10 above shall be deposited
------------
into an account (the "Professional Entity Account") with a bank whose deposits
are insured with the Federal Deposit Insurance Corporation. BDMS shall make all
disbursements therefrom. BDMS shall account for all monies so disbursed from
the Professional Entity Account. From the funds collected and deposited by BDMS
in the Professional Entity Account, BDMS shall make the following disbursements
promptly when payable.
(i) Compensation payable to all employees of the
Professional Entity, and all taxes and assessments payable to
local, state and Federal governments in connection with the
employment of such personnel; and
(ii) All sums otherwise due and payable by the Professional
Entity as Center Expenses, as defined in Article III hereof, as
well as fees payable to BDMS pursuant to Article III hereof.
(b) In the event the funds in the Professional Entity Account
will, at any time, be insufficient to cover current expenses, BDMS shall notify
the Professional Entity and BDMS may advance to the Professional Entity the
necessary funds to pay current expenses for the benefit of the Professional
Entity, which advances will be deemed to be loans to the Professional Entity to
be repaid upon such terms and at such rate of interest as agreed to by the
Professional Entity and BDMS.
1.12 Records. BDMS shall supervise and maintain custody of all files
-------
and records relating to the business operations of the Center, including but not
limited to accounting, billing, and collection records. The parties expressly
acknowledge and agree that patient records shall at all times be and remain the
property and under the control of the Professional Entity and shall be located
at the Professional Entity's facilities so that they are readily accessible for
patient care. The management of all files and records shall comply with
applicable state and federal statutes. BDMS shall use its reasonable efforts to
preserve the confidentiality of patient medical records and use information
contained in such records only for the limited purpose necessary to perform the
services set forth herein; provided, however, in no event shall a breach of said
confidentiality be deemed a default under this Agreement.
1.13 Covenant Not to Compete. BDMS agrees that during the term of this
-----------------------
Agreement, BDMS agrees not to establish, develop or open any offices in
affiliation with a dentist for the provision of dental services within three
miles of Centers covered by this Agreement without the express written consent
of the Professional Entity.
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1.14 Internal Management of Professional Entity. Matters involving the
------------------------------------------
internal management, control, or finances of Professional Entity shall remain
the sole responsibility of the Professional Entity and the shareholders of
Professional Entity. The Professional Entity shall in its employment agreement
with any dentist who is also a shareholder of Professional Entity cause said
dentist to issue to BDMS or its designee an irrevocable proxy coupled with an
interest to secure any and all obligations undertaken by said shareholder to
BDMS.
1.15 Contract Negotiations. BDMS shall advise Professional Entity with
---------------------
respect to and negotiate, either directly or on Professional Entity's behalf, as
appropriate, all contractual arrangements with third parties as are reasonably
necessary and appropriate for Professional Entity's provision of professional
services, including without limitation, negotiated price agreements with third
party payors, alternative delivery systems, or other purchasers of group dental
services.
1.16 No Warranty. Professional Entity acknowledges that BDMS has not
-----------
made and will not make any express or implied warranties or representations that
the services provided by BDMS will result in any particular amount or level of
dental practice or income to Professional Entity.
II. OBLIGATIONS OF THE PROFESSIONAL ENTITY.
2.1 Employment of Dentists and Rendering of Patient Care. The
----------------------------------------------------
Professional Entity shall be responsible for the employment and professional
supervision of all Dentist(s) affiliated with the Professional Entity and all
dental care rendered to patients shall be rendered by such Dentist(s).
Additionally, the Professional Entity shall be responsible for the employment of
dental hygienists, if any, and for the professional supervision of such
hygienists in their rendering of patient care.
2.2 Professional Services. The Professional Entity shall use and occupy
---------------------
the offices and facilities designated on Exhibit 1.2 exclusively for the
-----------
practice of dental services, and shall comply with all applicable local rules,
ordinances and all standards of dental care. It is expressly acknowledged by
the parties that the dental practice conducted at the Center shall be conducted
solely by the Dentists associated with the Professional Entity, and no other
dentist shall be permitted to use or occupy the Center. The Professional Entity
shall provide professional services to patients hereunder in compliance at all
times with ethical standards and laws and regulations applying to the dental
profession. The Professional Entity shall ensure that each dentist to provide
dental services to patients is licensed by the state in which the Center is
located. In the event that any disciplinary, malpractice or other actions are
initiated against any such dentist, the Professional Entity shall immediately
inform BDMS of such action and the underlying facts and circumstances. The
Professional Entity agrees to cooperate with and participate in quality
assurance/utilization review programs established by BDMS or mandated by
accreditation and/or licensure standards applicable to the practice of
dentistry. Deficiencies discovered in the performance of any personnel or in the
quality of professional services shall be reported immediately to BDMS, and
appropriate steps shall be taken by the Professional Entity at once to remedy
such deficiencies.
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2.3 Records. The Professional Entity will keep or cause to be kept
-------
accurate, complete and timely medical and other records of all patients. Such
records shall be sufficient to enable BDMS, on behalf of the Professional
Entity, to obtain payment for the services provided by the Dentist.
2.4 Professional Expenses. The Professional Entity shall be solely
---------------------
responsible for the cost of professional licensure fees, membership in
professional associations, and continuing education incurred by the Dentist.
The Professional Entity shall ensure that the Dentist participates in such
continuing education as is necessary for such Dentist to remain current in his
or her professional knowledge and skills.
2.5 Professional Insurance Eligibility. The Professional Entity shall
----------------------------------
cooperate in the obtaining and retaining of professional liability insurance by
assuring that each of its Dentists is insurable, and participating in an on-
going risk management program.
2.6 Employment Agreement. The parties recognize that the services to be
--------------------
provided by BDMS are feasible only if the Professional Entity operates an active
dental practice in which it and each dentist associated with the Professional
Entity devote their full time and attention. The Professional Entity will cause
each individual Dentist who becomes affiliated with the Center after the date
hereof to enter into an employment agreement, which will provide, among other
things, that in the event of a breach of the Dentist's agreement not to compete
with the Professional Entity provided for in such employment agreement, BDMS
shall be entitled to receive liquidated damages equaling the greater of (a) such
Dentist's income, as shown on the W-2 form prepared by the Dentist, for the most
recent year; or (b) $200,000. Such payment shall be made to BDMS by the
Professional Entity simultaneously with the payment by the breaching Dentist to
the Professional Entity.
2.7 Confidentiality. The Professional Entity agrees and acknowledges
---------------
that all materials provided by BDMS to the Professional Entity constitute
"Confidential Information" and are disclosed in confidence and with the
understanding that it constitutes valuable business information developed by
BDMS at great expenditures for time, effort, and money. The Professional Entity
further agrees that it shall not, directly or indirectly, without the express
prior written consent of BDMS, use or disclose such Confidential Information for
any purpose other than in connection with the services to be rendered hereunder.
The Professional Entity further agrees: (i) to keep strictly confidential and
hold in trust all Confidential Information and not disclose such Confidential
Information to any third party, including its affiliates without the express
prior written consent of BDMS; and (ii) to impose this obligation of
confidentiality on its affiliates, partners, employees and independent
contractors. The Professional Entity acknowledges that the disclosure of
Confidential Information to it by BDMS is done in reliance upon its
representations and covenants in this Agreement. Upon expiration or termination
of this Agreement by either party for any reason whatsoever, the Professional
Entity shall immediately return and shall cause its affiliates, partners,
shareholders and independent contractors to immediately return to BDMS all
Confidential Information, and the Professional Entity will not, and will cause
its affiliates, partners, employees and independent contractors not to,
thereafter
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use, appropriate, or reproduce such Confidential Information. The Professional
Entity further expressly acknowledges and agrees that any such use,
appropriation, or reproduction of any such Confidential Information by any of
the foregoing after the expiration or termination of this Agreement will result
in irreparable injury to BDMS, that the remedy at law for the foregoing would be
inadequate, and that in the event of any such use, appropriation, or
reproduction of any such Confidential Information after the termination or
expiration of this Agreement, BDMS, in addition to any other remedies or damages
available to it shall be entitled to injunctive or other equitable relief
without the necessity of proving actual damages but such rights to relief shall
not preclude BDMS from other remedies which may be available to it hereunder.
2.8 Sublease of Center. The Professional Entity agrees to sublease from
------------------
BDMS the Center or Centers leased by BDMS at which the Professional Entity is
practicing pursuant to the form of Center Sublease Agreement attached hereto as
Exhibit 2.8 (the "Sublease").
- -----------
2.9 Covenant Not to Compete. During the term of this Agreement, the
-----------------------
Professional Entity, and any of its shareholders, agree not to establish,
develop or open any offices for the provision of dental services without the
express written consent of BDMS. For a period of three years following the
termination or expiration of this Agreement, the Professional Entity and any of
its shareholders shall be prohibited from advertising in print (except for
yellow page advertising and announcements for the opening of a practice) or
electronic media of any kind and shall be prohibited from soliciting in any
manner patients, dentists or staff associated with the Center.
2.10 Name, trademark. Professional Entity represents and warrants that
---------------
Professional Entity will conduct its practice during the term of this agreement
exclusively under the name of Perfect Teeth. BDMS grants to Professional Entity
a non-exclusive license for the use of said name. The license shall expire upon
the termination or expiration of this Agreement. Professional Entity covenants
and promises that without the prior written consent of BDMS, Professional Entity
will not:
(a) take any action that could result in the loss of registration,
qualification or licensure of the name;
(b) fail to take any necessary action that will maintain the
registration, qualification, or licensure current;
(c) license, sell, give, or otherwise transfer the name or the
right to use the name to any medical practice, dentist, professional corporation
or any other entity; or
(d) cease conducting the professional practice of Professional
Entity under the name.
8
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III. FINANCIAL ARRANGEMENTS
3.1 Management Fees: BDMS shall receive a Management Fee as follows,
---------------
subject to the provisions of Section 3.4 below:
-----------
(a) a management fee (the "Management Fee") equal to the result of:
(i) Adjusted Gross Center Revenue of the Professional Entity; less;
(ii) The sum of
(1) Amounts payable by the Professional Entity to the Dentist
in accordance with the Employment Agreement, and,
(2) Dental Hygienist compensation (if any) payable by the
Professional Entity to the Hygienist in accordance with the
his or her employment terms, and,
(3) interest and principal repayments of loans made to the
Professional Entity by BDMS, and,
(4) rents and other payments by the Professional Entity to
BDMS under the Sublease.
(b) The amounts to be paid to BDMS under this Section 3.1 shall be
-----------
payable monthly based on the estimated operating results for the
previous month of the Professional Entity. These amounts shall
be subject to adjustment after the actual operating results for
the month in question are available and any excess payment to the
Professional Entity may be deducted in determining the amount to
be paid to BDMS under this Section 3.1 for any future month.
-----------
After the audited financial statements of the Professional Entity
for the year are available, adjustments shall be made to the
amounts previously paid under this Section 3.1 to conform to the
-----------
Adjusted Gross Center Revenue and Operating Margin as determined
based on such audited financial statements. Any excess amounts
owed to BDMS shall be paid promptly to BDMS by the Professional
Entity.
3.2 Accounts Receivable. On approximately the first business day of
-------------------
each month, BDMS shall purchase the accounts receivable of the Professional
Entity arising during the previous month, by payment of cash, or other readily
available funds into an account of the Professional Entity. The purchase price
for all accounts receivable (whether for orthodontic services or otherwise)
which have amounts due on a deferred basis shall be equal to the amount due in
such month on such accounts receivable. BDMS shall pay in each subsequent month
to Professional Entity the amounts due under such accounts receivable for such
month. The consideration for the
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purchase shall be an amount equal to all fees accrued and booked each month (net
of Adjustments) less the Management Fee due to BDMS under Section 3.1 above.
-----------
3.3 Center Expenses. BDMS shall be responsible for the payment of
---------------
all Center Expenses as defined below (other than those described in Section
3.4(c)(iv) below and rents and other amounts payable under the Sublease),
incurred during the term of this Agreement and requiring cash expenditures
without reimbursement by the Professional Entity, unless otherwise agreed to by
the parties hereto. The Professional Entity shall be responsible for the
payment of the Center Expenses described in Section 3.4(c)(iv) and all rents and
other amounts payable under the Sublease.
3.4 Definitions. For the purposes of this Agreement, the following
-----------
definitions shall apply:
(a) "Adjusted Gross Center Revenue" shall mean Gross Revenue of
the Center less any Adjustments.
(b) "Adjustments" shall mean any adjustments to Gross Revenue
for uncollectible accounts, professional courtesies and other activities that do
not generate a collectible fee.
(c) "Center Expenses" shall mean all operating and non-
operating expenses incurred in the operation of the Center, including, without
limitation:
(i) Salaries, benefits, and other direct costs of all
employees of BDMS at the Center, including dental
assistants (but excluding all dental hygienists and
Dentists);
(ii) Direct costs of all employees or consultants of BDMS
who provide services to or in connection with the
Center required for improved clinic performance, such
as work management, materials management, purchasing,
charge and coding analysis, laboratory, marketing and
business office consultation;
(iii) Other expenses incurred by BDMS in carrying out its
obligations under this Agreement including, but not
limited to utilities, janitorial services, laboratory
services, supplies, advertising and any direct
expense reasonably allocable to the Center;
(iv) Principal and interest repayments of loans made to
the Professional Entity by BDMS;
(v) Depreciation expense associated with the Professional
Entity's assets and the assets of BDMS used at the
Center and the amortization of
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intangible asset value as a result of any acquisition or
merger of another dental practice relating to the Center;
(vi) Interest expense on indebtedness incurred by BDMS to
finance any of its obligations hereunder or services
provided hereunder;
(vii) Malpractice insurance expenses, lease expenses (including
rents and other amounts payable under the Sublease) and
Dentist recruitment expenses;
(viii) Personal property and other taxes assessed against BDMS's
or Professional Entity's assets used in connection with
the operation of the Center, commencing on the date of
this Agreement;
(ix) In the event an opportunity arises for the Professional
Entity to merge with or acquire the assets of another
dental practice, actual out-of-pocket expenses of BDMS
personnel working on a specified merger or acquisition,
whether or not such transaction is completed;
(x) Corporate overhead charges or any other expenses of BDMS
or any corporation affiliated with the Professional Entity
other than the kind of items listed above, but including
the Professional Entity's pro rata share of the expenses
of the accounting and computer services provided to all
PERFECT TEETH dental centers managed by BDMS as reasonably
allocated to the Center by BDMS; and,
(xi) A monthly collection reserve in the amount of 5% of
Adjusted Gross Center Revenue;
"Center Expenses" shall not include:
(i) Any federal or state income taxes; or
(ii) Any expenses which are expressly designated herein as
expenses or responsibilities of the Professional Entity.
(d) "Gross Revenue" shall mean all fees and charges recorded or booked
each month by or on behalf of the Professional Entity as a result of
professional dental services personally furnished to patients by the
Dentist and other fees or income generated in their capacity as a
professional prior to any Adjustments.
(e) Operating Margin" shall mean the result of Adjusted Gross Center
Revenue less (i) Center Expenses, and (ii) salary expenses paid by the
Professional Entity to the Dentist/Dentists and dental hygienists for
services provided at the Center in accordance with the employment
agreements entered into by them with the
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Professional Entity, including the cost of all employment
benefits and any cash bonus given to a dental hygienist by the
Professional Entity.
IV. INSURANCE AND INDEMNITY
4.1 Insurance to be Maintained by the Professional Entity.
-----------------------------------------------------
Throughout the term of this Agreement, the Professional Entity shall maintain
comprehensive professional liability insurance with limits of not less than
$1,000,000 per claim and with aggregate policy limits of not less than
$3,000,000 per dentist providing services at the Center and a separate limit for
the Professional Entity. The Professional Entity shall be responsible for all
such liabilities in excess of the limits of such policies. BDMS agrees to
negotiate for and cause premiums to be paid with respect to such insurance.
Premiums and deductibles with respect to such policies shall be a Center
Expense.
4.2 Insurance to be Maintained by BDMS. Throughout the term of
----------------------------------
this Agreement, BDMS will use reasonable efforts to provide and maintain, as a
Center Expense, (a) comprehensive professional liability insurance for all
professional employees of BDMS with limits as determined reasonable by BDMS; and
(b) comprehensive general liability and property insurance covering the Center
premises and operations.
4.3 Tail Insurance Coverage. The Professional Entity will cause
-----------------------
each individual Dentist providing services at the Center to enter into an
agreement with the Professional Entity that upon termination of such
Professional Entity's relationship with the Dentist for any reason, tail
insurance coverage will be purchased by each Dentist. Such provisions may be
contained in employment agreements, restrictive covenant agreements or other
agreements entered into by the Professional Entity and the individual Dentists,
and the Professional Entity hereby covenants with BDMS to enforce such
provisions relating to the tail insurance coverage or to provide such coverage
at the expense of the Professional Entity.
4.4 Additional Insureds. The Professional Entity and BDMS agree to
-------------------
use their reasonable efforts to have each other named as an additional insured
on the other's respective professional liability insurance programs.
4.5 Indemnification. The Professional Entity shall indemnify, hold
---------------
harmless and defend BDMS, its officers, directors, shareholders and employees,
from and against any and all liability, loss, damage, claim, causes of action,
and expenses (including reasonable attorneys' fees), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly, by or
as a result of the performance of medical or dental services or the performance
of any intentional acts, negligent acts or omissions by the Professional Entity
and/or its affiliates, its shareholders, agents, employees and/or subcontractors
(other than BDMS) during the term hereof. BDMS shall indemnify, hold harmless
and defend the Professional Entity, directors, shareholders and employees, from
and against any and all liability, loss, damage, claim, causes of action, and
expenses (including reasonable attorneys' fees), caused or asserted to have been
caused, directly or indirectly, by or as a result of the performance of any
intentional acts, negligent acts or
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omissions by BDMS and/or its shareholders, agents, employees and/or
subcontractors (other than the Professional Entity) during the term of this
Agreement.
V. TERM AND TERMINATION
5.1 Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall expire on the fortieth (40th) anniversary hereof unless earlier
terminated pursuant to the terms hereof.
5.2 Termination by the Professional Entity. The Professional
--------------------------------------
Entity may terminate this Agreement as follows:
(a) In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by BDMS, or upon other
action taken or suffered, voluntarily or involuntarily, under any federal or
state law for the benefit of debtors by BDMS, except for the filing of a
petition in involuntary bankruptcy against BDMS which is dismissed within thirty
(30) days thereafter, the Professional Entity may give written notice of the
immediate termination of this Agreement.
(b) In the event BDMS shall materially default in the
performance of any duty or obligation imposed upon it by this Agreement and such
default shall continue for a period of ninety (90) days after written notice
thereof has been given to BDMS by the Professional Entity, the Professional
Entity may terminate this Agreement.
5.3 Termination by BDMS. BDMS may terminate this Agreement as
-------------------
follows:
(a) In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by the Professional
Entity, or upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors by the Professional
Entity, except for the filing of a petition in involuntary bankruptcy against
the Professional Entity which is dismissed within thirty (30) days thereafter,
BDMS may give written notice of the immediate termination of this Agreement.
(b) In the event the Professional Entity shall materially
default in the performance of any duty or obligation imposed upon it by this
Agreement, and such default shall continue for a period of ninety (90) days
after written notice thereof has been given to the Professional Entity by BDMS,
BDMS may terminate this Agreement.
5.4 Patient Records. Upon termination of this Agreement, the
---------------
Professional Entity shall retain all patient medical records maintained by the
Professional Entity or BDMS in the name of the Professional Entity. During the
term of this Agreement, and thereafter, the Professional Entity or its designee
shall have reasonable access during normal business hours to the Professional
Entity's and BDMS's records, including, but not limited to, records of
collections, expenses and disbursements as kept by BDMS in performing BDMS's
obligations under this Agreement, and the Professional Entity may copy any or
all such records.
13
<PAGE>
VI. INDEPENDENT CONTRACTORS
6.1 Professional Entity's Control Over Professional Services.
--------------------------------------------------------
Notwithstanding the authority granted to BDMS herein, BDMS and the Professional
Entity agree that the affiliated Dentist personally or through any of his
professional employees or agents, shall have control or supervision over the
provision of all professional services, with the sole authority to direct the
professional, and ethical aspects of his dental practice, and to select the
course of treatment for a patient or the manner in which such treatment is
carried out. BDMS will have no authority, directly or indirectly, to perform,
and will not perform, any dental function. BDMS may, however, advise the
Professional Entity as to the relationship between its performance of dental
functions and the overall administrative and business functioning of its
practice.
6.2 Independent Relationship. The Professional Entity and BDMS
------------------------
intend to act and perform as independent contractors, and the provisions hereof
are not intended to create any partnership, joint venture, agency or employment
relationship between the parties. The Professional Entity will not have any
claim under this Agreement, or otherwise, against BDMS for vacation pay, sick
leave, unemployment insurance, worker's compensation, disability benefits or
employee benefits of any kind.
6.3 Other Professionals. No provision of this Agreement is intended to
-------------------
limit BDMS's right, authority, or ability under applicable law to contract with
other dentists or to employ, contract with, or enter into any partnership or
joint venture with any health care professional.
VII. DISPUTES.
7.1 Mediation. The parties shall first attempt to settle all disputes
---------
arising under this Agreement through mediation at the local offices of Judicial
Arbiter Group, Inc. ("JAG"). The complaining party shall (i) give notice to the
other party of the alleged breach within 30 days of discovery of such alleged
breach, and (ii) contact JAG to schedule a settlement conference within 30 days
of giving such notice to the other party. If the parties so agree, a retired
judge from the JAG panel may preside over the mediation. If the parties are
unable to agree upon a retired judge, JAG will provide a list of three available
judges and each party shall strike one judge from the list. The remaining judge
will serve as the mediator at the settlement conference.
7.2 Arbitration. All disputes arising under this Agreement which are
-----------
not resolved through mediation, as provided above, shall be submitted to JAG for
binding arbitration. Neither party may initiate arbitration until mediation is
completed. The complaining party must initiate arbitration within 30 days of
the completion or termination of mediation by sending written notice of its
intention to arbitrate to all parties and to JAG. The notice shall contain a
description of the dispute, the amount, if any, involved, and the remedy sought.
If the parties so agree, a retired judge from the JAG panel may preside over the
arbitration. If the parties are unable to agree upon a retired judge, JAG will
provide a list of three available judges and each party shall strike one judge
from the list. The remaining judge will serve as the arbitrator. In the event of
arbitra-
14
<PAGE>
tion, the rules and procedures set forth in Exhibit 7.2., attached
------------
hereto, shall govern at the arbitration hearing.
7.3 General. A party's failure to initiate either mediation or
-------
arbitration within the periods prescribed above constitutes an absolute bar to
the institution of any proceedings upon the claimed breach. In the event the
responding party fails to reasonably cooperate in the selection of a mediator
and/or the selection of an arbitrator or refuses to participate in the mediation
and/or arbitration requested by the complaining party, the complaining party may
file a verified request to JAG, containing the factual basis for the request and
claim, to independently appoint a former judge employed by JAG to enter a
default award in favor of the complaining party. The default award shall be
enforceable as an arbitration award under this agreement. Such an award shall be
entered no earlier than twenty days after the personal service of a notice of
application of a default award upon the responding party and the failure to the
responding to file with JAG a written notice of intent to cooperate and
participate in the dispute resolution provisions of this Agreement or to provide
a verified response in opposition to the Complaining party's request for a
default award.
7.4 Attorneys' Fees. If arbitration is commenced by either party to
---------------
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
VIII. GENERAL PROVISIONS
8.1 Assignment. BDMS shall have the right to assign its rights
----------
hereunder to any person, firm or corporation. Except as set forth above,
neither BDMS nor the Professional Entity shall have the right to assign their
respective rights and obligations hereunder without the written consent of the
other party. Subject to this provision, this Agreement shall be binding upon
the parties hereto, and their successors and assigns.
8.2 Whole Agreement; Modification. There are no other agreements or
-----------------------------
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement, and such written modification(s) shall be attached
hereto.
8.3 Notices. All notices required or permitted by this Agreement
-------
shall be in writing and shall be addressed as follows:
15
<PAGE>
if to BDMS: Birner Dental Management Services, Inc.
Suite 208
3801 East Florida Avenue
Denver, Colorado 80210
Attention: Fred Birner
Chief Executive Officer
with a copy to: Holland & Hart
Suite 3200
555 Seventeenth Street
Denver, Colorado 80210
Attention: Dennis M. Jackson
if to the
Professional Entity:
or to such other address as either party shall notify the other.
8.4 Waiver of Provisions. Any waiver of any terms and conditions hereof
--------------------
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
other terms and conditions hereof.
8.5 Governing Law. The validity, interpretation and performance of this
-------------
Agreement shall be governed by and construed in accordance with the laws of the
state of Colorado. The parties acknowledge that BDMS is not authorized or
qualified to engage in any activity which may be construed or deemed to
constitute the practice of dentistry. To the extent any act or service required
of BDMS in this Agreement should be construed or deemed, by any governmental
authority, agency or court to constitute the practice of dentistry, the
performance of said act or service by BDMS shall be deemed waived and forever
unenforceable and the provisions of Section 8.11 shall be applicable.
------------
8.6 Events Excusing Performance. Neither party shall be liable to the
---------------------------
other party for failure to perform any of the services required herein in the
event of strikes, lock-outs, calamities, acts of Gods, unavailability of
supplies or other events over which that party has no control for so long as
such events continue, and for a reasonable period of time thereafter.
8.7 Compliance with Applicable Laws. Both parties shall comply with all
-------------------------------
applicable federal, state and local laws, regulations and restrictions in the
conduct of their obligations under this Agreement.
16
<PAGE>
8.8 Severability. The provisions of this Agreement shall be deemed
------------
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
8.9 Additional Documents. Each of the parties hereto agrees to execute
--------------------
any document or documents that may be requested from time to time by the other
party to implement or complete such party's obligations pursuant to this
Agreement.
8.10 Confidentiality. Neither party hereto shall disseminate or release to
---------------
any third party any information regarding any provision of this Agreement, or
any financial information regarding the other (past, present or future) that was
obtained by the other in the course of the negotiation of this Agreement or in
the course of the performance of this Agreement, without the other party's
written approval; provided, however, the foregoing shall not apply to
information which is required to be disclosed by law including securities laws,
or pursuant to court order.
8.11 Contract Modifications for Prospective Legal Events. In the event any
---------------------------------------------------
state or federal laws or regulations, now existing or enacted or promulgated
after the effective date of this Agreement, are interpreted by judicial
decision, a regulatory agency or legal counsel for both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
laws or regulations, the Professional Entity and BDMS shall amend this Agreement
as necessary. To the maximum extent possible, any such amendment shall preserve
the underlying economic and financial arrangements between the Professional
Entity and BDMS.
8.12 Language Construction. The language in all parts of this Agreement
---------------------
shall be construed, in all cases, according to parties acknowledge that each
party and its counsel have reviewed and revised this Agreement and that the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of this Agreement.
8.13 Gender and Number. Whenever the context of this Agreement requires,
-----------------
the gender of all words herein shall include the masculine, feminine, and
neuter, and the number of all words herein shall include the singular and
plural.
8.14 No Obligation to Third Parties. None of the obligations and duties of
------------------------------
BDMS or the Professional Entity under this Agreement shall in any way or in any
manner be deemed to create any obligation of BDMS or of the Professional Entity
to, or any rights in, any person or entity not a party to this Agreement.
8.15 Force Majeure. Neither party shall be liable or deemed to be in
-------------
default for any delay or failure in performance under this Agreement or other
interruption of service deemed to result, directly or indirectly, from acts of
God, civil or military authority, acts of public enemy, war, accidents, fires,
explosion earthquakes, floods, other similar cause beyond the reasonable control
of either party unless such delay or failure in performance is expressly
addressed elsewhere in this Agreement. In the even there is a failure to perform
on behalf of either party as a result of a force majeure event described above,
and the failure continues for more than thirty (30)
17
<PAGE>
consecutive days, either party may seek from alternative sources on an interim
basis the services required to be provided by the other party hereunder. The
interim services may only be provided while the condition creating the force
majeure exists or until the party obligated hereunder to perform the services is
able to perform its obligations substantially.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
BIRNER DENTAL MANAGEMENT SERVICES,
INC. ("BDMS")
By:_____________________________________________
Chief Executive Officer
PERFECT TEETH/________ P.C.
("Professional Entity")
By:_____________________________________________
President
18
<PAGE>
EXHIBIT 1.2
TO
MANAGEMENT AGREEMENT
DATED ________
BETWEEN
BIRNER DENTAL MANAGEMENT SERVICES, INC.
AND
PERFECT TEETH/_______ P.C.
Location of Dental Center
-------------------------
Furnishings, Equipment and Services Provided
--------------------------------------------
by or Arranged for by BDMS
--------------------------
All furnishing and equipment in the office
except the dental equipment
SERVICES
--------
Accounting
Payroll
Collections
Personnel
Advertising & Marketing
Capital
Collective Bargaining
Exhibit 1.2 - Page 1
<PAGE>
EXHIBIT 2.8
TO
MANAGEMENT AGREEMENT
DATED _________
BETWEEN
BIRNER DENTAL MANAGEMENT SERVICES, INC.
AND
PERFECT TEETH/_________ P.C.
CENTER SUBLEASE AGREEMENT
THIS SUBLEASE is made the ____ day of ___________, between Birner
Dental Management Services, Inc., a Colorado corporation ("Landlord") and
Perfect Teeth/________ P.C., a Colorado professional corporation ("Tenant").
RECITALS
Landlord, as tenant, entered into a lease dated ___________ (the
"Prime Lease"), with ____________, as Landlord (the "Prime Landlord"), leasing
the premises described in Exhibit A (the "Premises") attached to this Center
Sublease Agreement (the "Sublease"). Landlord desires to sublet to Tenant and
Tenant wishes to sublet the premises from Landlord.
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties agree as follows:
l. Sublease of Premises. Landlord subleases the premises to Tenant
--------------------
and Tenant subleases the premises from Landlord according to this Sublease.
Title to the premises shall remain in the name of Landlord but Tenant shall have
complete care, custody and control over the premises during the term of this
Sublease.
2. Term. The term of this Sublease will commence on _________,
----
and end on the day on which the term of the Prime Lease expires or is
terminated, unless sooner terminated in accordance with this Sublease.
3. Rent. On the first day of each month Tenant will pay Landlord
----
$________ and any additional rent described in paragraph 6 hereof.
Exhibit 2.8 - Page 1
<PAGE>
4. Use. The premises will be used for the conduct of a general
---
dentistry practice and for no other purpose.
5. No Assignment. Tenant will not assign this Sublease nor sublet
-------------
the premises in whole or in part, and will not permit Tenant's interest in this
Sublease to be vested in any third party by operation of law or otherwise.
6. Additional Rent. If Landlord is charged for additional rent or
---------------
other sums pursuant to the provisions of the Prime Lease, Tenant will be liable
for all of such additional rent or sums. Any rent or other sums payable by
Tenant under this paragraph 6 will be collectible as additional rent. If
Landlord receives any refund pursuant to the Prime Lease, Tenant will be
entitled to the return of so much of it as is attributable to prior payments by
Tenant.
7. The Prime Lease. This Sublease is subject and subordinate to
---------------
the Prime Lease. Except as may be inconsistent with the terms of this Sublease,
all the terms, covenants and conditions in the Prime Lease apply to this
Sublease as if Landlord were the landlord under the Prime Lease and Tenant were
the tenant under it. In the case of any breach of this Sublease by Tenant,
Landlord will have all rights against Tenant that would be available to the
Landlord against the tenant under the Prime Lease if the breach were by the
tenant under the Prime Lease. Tenant will not do or permit anything to be done
that is a default under the Prime Lease. Tenant will indemnify and hold
Landlord harmless from and against all claims by reason of any breach or default
on the part of Tenant of the Prime Lease. Tenant represents that it has read
and is familiar with the terms of the Prime Lease.
8. Services. The only services or rights to which Tenant is
--------
entitled are those to which Landlord is entitled under the Prime Lease, and for
all such services and rights, Tenant will look to the Prime Landlord.
9. Termination of Management Agreement. Landlord and Tenant are
-----------------------------------
parties to that certain Birner Dental Management Services, Inc. Agreement dated
__________ (the "Management Agreement"), pursuant to which Landlord has agreed
to provide long term management and other services to Tenant and services in
connection with the development of a dental health care provider network. In
the event the Management Agreement is terminated by either Landlord or Tenant,
Landlord shall have the option to terminate this Sublease upon 10 days' written
notice to Tenant.
10. Entireties; Amendment. All prior understandings and agreements
---------------------
between Landlord and Tenant are merged within this Sublease, which fully and
completely sets forth their understanding. This Sublease may not be changed or
terminated orally or in any manner other than by an agreement in writing, and
signed by the party against whom enforcement of the change or termination is
sought.
Exhibit 2.8 - Page 2
<PAGE>
11. Notices. Any notice or demand which either Landlord or Tenant
-------
may or must give to the other will be in writing and will be delivered
personally or sent by United States first class mail, addressed if to Landlord:
Birner Dental Management Services, Inc.
Suite 208
3801 East Florida Avenue
Denver, Colorado 80210
Attention: Fred Birner
Chief Executive Officer
and, if to Tenant: Perfect Teeth/_______ P.C.
Either Landlord or Tenant may, by notice in writing, direct that future notices
or demands be sent to a different address. Notices will be effective upon
receipt.
12. Binding Effect. The covenants and agreements in this Sublease
--------------
will bind and inure to the benefit of Landlord, Tenant, and their respective
successors and permitted assigns.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Sublease as
of the date first written above.
LANDLORD:
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:______________________________________________
Title:___________________________________________
TENANT:
PERFECT TEETH/_______ P.C.
By:______________________________________________
Title:___________________________________________
Exhibit 2.8 - Page 3
<PAGE>
EXHIBIT A
TO
CENTER SUBLEASE AGREEMENT
DATED _________
BETWEEN
BIRNER DENTAL MANAGEMENT SERVICES, INC.
AND
PERFECT TEETH/______ P.C.
Premises
--------
Exhibit 2.8 - Page 4
<PAGE>
EXHIBIT 7.2
TO
MANAGEMENT AGREEMENT
DATED _________
BETWEEN
BIRNER DENTAL MANAGEMENT SERVICES, INC.
AND
PERFECT TEETH/______ P.C.
Arbitration Rules and Procedures
--------------------------------
1. Prehearing Conference. The arbitrator shall schedule a prehearing conference
---------------------
to reach agreement on procedural matters, arrange for the exchange of
information, obtain stipulations, and attempt to narrow the issues.
2. Discovery. The parties shall submit a proposed discovery schedule to the
---------
arbitrator at the prehearing conference. The scope and duration of discovery
shall be within the sole discretion of the arbitrator.
3. The Hearing.
-----------
a. The parties shall file briefs with the arbitrator at least three days
before the hearing, specifying the facts each intends to prove and
analyzing the applicable law.
b. The parties have the right to representation by legal counsel throughout
the arbitration proceedings.
c. Judicial rules of evidence and procedure relating to the conduct of the
hearing, examination of witnesses, and presentation of evidence shall not
apply. Any relevant evidence, including hearsay, shall be admitted by the
arbitrator if it is the sort of evidence on which responsible persons are
accustomed to rely in the conduct of serious affairs, regardless of the
admissibility of such evidence in a court of law.
d. Within reasonable limitations, both sides at the hearing may call and
examine witnesses for relevant testimony, introduce relevant exhibits or
other documents, cross-examine or impeach witnesses who have testified
orally on any matter relevant to the issues, and otherwise rebut evidence,
as long as these rights are exercised in an efficient and expeditious
manner.
Exhibit 7.2 - Page 1
<PAGE>
e. Any party desiring a stenographic record may secure a court reporter to
attend the proceedings. The requesting party shall notify the other party
of the arrangements in advance of the hearing and shall pay for the cost
incurred.
f. Any party may request the oral evidence to be given under oath.
4. The Award.
---------
a. The arbitrator's decision shall be based on the evidence introduced at the
hearing, including all logical and reasonable inferences therefrom. The
arbitrator may grant any remedy or relief which is just and equitable.
b. The award shall be made in writing and signed by the arbitrator. It shall
contain a concise statement of the reasons in support of the decision.
c. The award shall be mailed promptly to the parties, but no later than 30
days from the closing of the hearing.
d. The award can be judicially enforced pursuant to the provisions of
C.R.C.P. 109(a). It is final and binding and therefore there may be no
direct appeal from the award on the grounds of error in the application of
the law.
Exhibit 7.2 - Page 2
<PAGE>
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 8/th/ day of September, 1997, by and between
James Abramowitz, D.D.S. (the "Executive"), and Birner Dental Management
Services, Inc., a Colorado corporation (the "Company").
W I T N E S S E T H:
--------------------
WHEREAS, the Executive desires to provide his services to the Company and
the Company desires to employ the Executive upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual promises,
covenants and agreements contained herein, and intending to be legally bound,
the parties hereby agree as follows:
1. Employment and Term.
-------------------
The Company will employ the Executive, and the Executive hereby accepts
employment with the Company, for an initial term commencing on the date hereof,
and continuing for a period of one (1) year until and including the same month
and day in 1998 (the "Initial Term"), unless such employment is earlier
terminated as provided herein. After expiration of the Initial Term,
Executive's employment under this Agreement shall continue until terminated as
provided herein.
2. Duties.
------
The Executive shall serve in the capacity of Colorado Dental Director.
During the term of his employment hereunder, the Executive shall devote not less
than thirty (30) hours per week to the performance of his duties for the
Company. The Executive's duties shall include but not be limited to, assisting
with the smooth transition and integration of the current Gentle Dental offices
with the Company's dental office network, dentist education and training, staff
education and training, overseeing the performance of certain dental offices in
the Company's network and consultation with the Company's management on
strategy.
3. Compensation.
------------
The Company shall pay the Executive, and the Executive shall accept, as
full compensation for all services rendered hereunder, a salary (the "Salary")
and the other compensation and benefits provided hereunder. The Executive's
Salary effective the date his employment commences with the Company shall be at
an annual rate of One Hundred Thousand Dollars ($100,000), payable in
approximately equal installments at such intervals as are consistent with the
Company's pay periods for salaried executive employees.
<PAGE>
(a) Benefits.
--------
(i) The Executive shall be eligible to participate in
retirement, group insurance, medical, dental, vacation and any other plans
or programs of substantially similar character as are made generally
available to executive employees of the Company which do not duplicate the
benefits otherwise specifically provided in this Agreement. All such
benefits are to be provided by the Company, subject to the terms of any
welfare or pension plan sponsored by the Company.
(ii) The Executive shall be eligible to participate in the
Company's Employee Stock Option Plan (the "Plan"). Executive shall receive
an option to purchase Twenty-five Thousand (25,000) shares at a price equal
to the greater of the price at which the Company's common stock is sold in
an initial public offering or $8.00 per share. Such options shall become
eligible for exercise in equal amounts monthly over the twenty-four (24)
months following the close of the grant and shall be upon the other terms
and conditions of the Plan. If Executive is terminated without cause by
the Company such option shall vest in full immediately.
(iii) The Company shall reimburse the Executive for all expenses
incurred by him in the performance of his duties pursuant to this
Agreement.
(iv) The Company shall pay the lease payments on the van
currently leased by the Executive and the monthly charges for use of the
car phone in such van during the time Executive is employed hereunder.
(v) The Executive shall receive such other benefits and/or
allowances as are permitted to him from time to time by the Company.
4. Confidentiality.
---------------
While employed by the Company under this Agreement and at all times
thereafter, the Executive shall not, without the prior written consent of the
Company, divulge to any third party or use for his own benefit or the benefit of
any third party, or for any purpose other than the exclusive benefit of the
Company, any confidential or proprietary business or technical information
revealed, obtained or developed in the course of his employment with the Company
or his duties performed for the Company or which is otherwise the property of
the Company or any of its subsidiaries or affiliated companies; provided that,
nothing contained herein shall restrict the Executive's use or disclosure of
such information (i) in the proper course of conduct of the Company's business,
(ii) known generally to the public (other than that which he may have disclosed
in breach of this Agreement) or (iii) as required by law so long as the
Executive gives the Company prior notice of such required disclosure
2
<PAGE>
unless precluded from doing so by legal authority, or (iv) possessed by
Executive at the time of the execution of this Agreement.
5. Covenant Not to Compete.
-----------------------
The Executive, while performing duties for the Company hereunder, and after
termination of his employment by the Company for any reason, shall be subject to
the terms of his agreement not to compete contained in Article VIII of the
Agreement dated August 21, 1997 between the Company and Executive and Equity
Resources Limited Partnership.
6. Enforcement.
-----------
(a) Injunctive Relief. The parties recognize that, in the event
-----------------
of any breach by the Executive of any of the provisions of Section 4 or 5
hereof, the Company will suffer continuing and irreparable harm for which the
Company will not have an adequate remedy at law. The Executive hereby waives
any and all right to assert any claim or defense that the Company has an
adequate remedy at law for any such breach. In recognition thereof, the Company
and the Executive hereby agree that, in the event of any such breach, the
Company will be entitled to seek injunctive relief or any other appropriate
remedy to enforce such provisions. The parties further agree that this Section
6 shall not in any way limit remedies at law or in equity otherwise available to
the Company. In the event the Company seeks injunctive relief and is
unsuccessful on the merits, or terminates such action prior to entry of a
judgment or other ruling on the merits, other than a termination of such action
due to a settlement agreement between the Company and the Executive, the Company
shall reimburse the Executive for his reasonable attorneys' fees.
(b) Arbitration. In the event of any dispute between the parties
-----------
under or relating to this Agreement or relating to the Executive's employment by
the Company, such dispute shall be submitted to and settled by arbitration in
the State of Colorado in accordance with the Employment Dispute Resolution Rules
of the American Arbitration Association then in effect, by an arbitrator or
arbitrators selected in accordance with said rules. The arbitrator(s) shall
have the right and authority to determine how their award or decision as to each
issue and matter in dispute may be implemented or enforced. Any decision or
award shall be final and conclusive on the parties; there shall be no appeal
therefrom other than for claimed bias, fraud or misconduct by the arbitrator(s);
judgment upon any award or decision may be entered in any court of competent
jurisdiction in the State of Colorado or elsewhere; and the parties hereto
consent to the application by any party in interest to any court of competent
jurisdiction for confirmation or enforcement of such award. The party against
whom a decision or award is made shall pay the fees of the American Arbitration
Association. Notwithstanding the foregoing, the Company, at its sole option,
shall be entitled to enforce its rights, as contemplated by Section 6(a) hereof,
to injunctive and other equitable relief in
3
<PAGE>
the event of breach of Section 4 or 5 hereof by arbitration pursuant to this
Section 6(b) or directly in any court of competent jurisdiction.
7. Termination of Employment.
-------------------------
(a) Death. The Executive's employment hereunder shall terminate
-----
in the event of the Executive's death. Except for any salary and benefits
accrued, vested and unpaid as of the date of any such termination and except for
any benefits to which the Executive or his heirs or personal representatives may
be entitled under and in accordance with the terms of any employee benefit plan,
policy or program maintained by the Company, the Company shall be under no
further obligation hereunder to the Executive or his heirs or personal
representatives, and the Executive or his heirs and personal representatives no
longer shall be entitled to receive any payments or any other rights or benefits
under this Agreement.
(b) Disability. The Company may terminate the Executive's
----------
employment hereunder for "Disability," if an independent physician mutually
selected by the Executive or his representative and the Board of Directors or
its designee has determined that the Executive has been substantially unable to
render to the Company services of the character contemplated by Section 2 of
this Agreement, by reason of a physical or mental illness or other condition
continuing for more than one hundred and eighty (180) consecutive days or for
shorter periods aggregating more than two hundred and twenty (220) days in any
period of twelve (12) consecutive months (excluding in each case days on which
the Executive was on vacation). In the event of such Disability, the Executive
shall be entitled to receive any salary and benefits accrued, vested and unpaid
as of the date of any such termination and any benefits to which the Executive
may be entitled under and in accordance with the terms of any employee benefit
plan, policy or program maintained by the Company. The Company shall be under
no further obligation hereunder to the Executive, and the Executive no longer
shall be entitled to receive any other payments, rights of benefits under this
Agreement.
(c) Termination by the Company or the Executive. The Company or
-------------------------------------------
the Executive may terminate the Executive's employment hereunder at any time,
provided that the terminating party has given the other party thirty (30) days'
written notice of termination, termination being effective upon expiration of
the notice period. In the event of such termination, the Executive shall be
entitled to receive a severance benefit equal to the Salary at the rate in
effect at the time of termination for one (1) month, and shall also be entitled
to receive any salary, performance bonus, and benefits accrued, vested and
unpaid as of the date of any such termination and to the continuation for the
same one (1) month period of any benefits to which the Executive may be entitled
under and in accordance with the terms of any employee benefit plan, policy or
program maintained by the Company; and upon the Executive's receipt of such
severance benefit, performance bonus, salary and benefits, the Company shall be
under no
4
<PAGE>
further obligation hereunder to the Executive and the Executive no longer shall
be entitled to receive any payment or any other rights or benefits under this
Agreement.
8. Place of Employment.
-------------------
The Company agrees that the principal location at which the Executive is to
render his services hereunder will be in the State of Colorado, unless a
modification is understood and agreed to in writing by Executive and Company.
9. Withholding Taxes.
-----------------
Anything to the contrary herein notwithstanding, all payments required to
be made hereunder by the Company to the Executive, or his estate or
beneficiaries, shall be subject to the withholding of such amounts as the
Company may reasonably determine it should withhold pursuant to any applicable
law or regulation.
10. Survival.
--------
The Agreement shall survive any termination of the Executive's employment
hereunder unless otherwise provided herein.
11. Miscellaneous.
-------------
(a) Successors and Assigns. The Company may assign this
----------------------
Agreement to, and only to, an entity which is owned more than fifty percent
(50%), directly or indirectly, by the Company, and any person or entity which
acquires all or substantially all of the Company's business, provided such
assignee agrees by a written agreement in form satisfactory to Executive to
assume the Company's obligations hereunder, and subject to the foregoing, upon
such assignment this Agreement shall inure to the benefit of and be binding upon
such entity. This Agreement shall not be assignable by the Executive and shall
inure to the benefit of and be binding upon him and his personal representative
and other legal representatives.
(b) Notice. Any notice or communication required or permitted
------
under this Agreement shall be made in writing or sent by certified or registered
mail, return receipt requested and postage prepaid, addressed as follows:
If to the Executive:
James Abramowitz, D.D.S.
6091 South Moline Way
Englewood, Colorado 80111-5836
5
<PAGE>
If to the Company:
Birner Dental Management Services, Inc.
3801 East Florida Avenue
Suite 208
Denver, Colorado 80210
or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above. Notice shall be
deemed given when received by the other party, including by his or its agent.
(c) Entire Agreement: Amendments. This Agreement contains the
-----------------------------
entire agreement and understanding of the parties relating to the subject matter
hereof and supersedes all prior discussions, agreements and understandings
relating thereto between them. This Agreement may not be changed or modified,
except by an agreement in writing executed by the Company, and by the Executive.
(d) Waiver. The waiver of a breach of any term or provision of
------
this Agreement shall not operate as or be construed to be a waiver of any other
subsequent breach of this Agreement.
(e) Governing Law. All questions concerning the construction,
-------------
validity, enforcement and interpretation of this Agreement, and the performance
of the obligations imposed by this Agreement, shall be governed by the laws of
the State of Colorado applicable to contracts made and wholly to be performed in
such state, without regard to choice of law principles.
(f) Severability. In the event that any one or more of the
------------
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable, in any respect, such invalidity or
unenforceability shall not affect any other provision of this Agreement. Such
invalid, illegal or unenforceable provision(s) shall be deemed modified to the
extent necessary to make it (them) valid, legal and enforceable.
(g) Captions. All captions and section headings used herein are
--------
for convenient reference only and do not form a part of this Agreement.
(h) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall constitute one and the same Agreement.
(i) Computation of Time. In computing any period of time
-------------------
pursuant to this Agreement, the day of the act, event or default from which the
designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday. Likewise, if
the period of time
6
<PAGE>
concludes on a Saturday, Sunday or legal holiday, the period shall run until the
end of the next day thereafter which is not a Saturday, Sunday, or legal
holiday.
(j) Pronouns and Plurals. All pronouns and variations thereof
--------------------
shall be deemed to refer to the masculine, feminine, neuter, singular, or plural
as the identity of the person or persons may require.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first above written.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:/s/ Fred Birner
----------------------------
Name: Fred Birner
------------------------
Title: Chief Executive Officer
------------------------
JAMES ABRAMOWITZ, D.D.S.
/s/ James Abramowitz
-------------------------------
James Abramowitz, D.D.S.
7
<PAGE>
EXHIBIT 10.20
STOCK TRANSFER AND PLEDGE AGREEMENT
This Agreement is made as of September 24, 1997 by and between Scott
Kissinger ("Dentist"), an individual licensed to practice dentistry in the State
of Colorado, whose mailing address is _________________ and Birner Dental
Management Services, Inc. ("Secured Party"), a Colorado corporation whose
mailing address is 3801 East Florida Avenue, Suite 208, Denver, CO 80210.
RECITALS
A. Perfect Teeth/Bowmar P.C. ("P.C.") is a Colorado professional
corporation which conducts the authorized professional services related to a
dental practice, and which employs dentists and dental hygienists.
B. Dentist is the sole shareholder of P.C.
C. Pursuant to the Birner Dental Management Services, Inc. Management
Agreement dated October 30, 1995 between P.C. and Secured Party (the "Management
Agreement"), Secured Party provides certain management and other services to
P.C.
D. Dentist has agreed to sell all of P.C.'s shares owned by Dentist to a
designee of Secured Party for value if certain events occur, and Secured Party
desires its designee to purchase such shares if certain events occur.
E. Dentist desires to pledge to, and grant a security interest in, all of
P.C.'s shares owned by Dentist to Secured Party, in order to secure the
obligation referenced in Recital D above, and Secured Party desires to accept
such pledge and security interest.
AGREEMENT
In consideration of the above Recitals and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
"Collateral" means the shares of P.C. capital stock owned by Dentist
consisting of all of the validly issued and outstanding shares of P.C.
"Transferee" means the dentist(s) licensed to practice dentistry in
Colorado chosen by Secured Party to be the purchaser of the Collateral.
<PAGE>
ARTICLE II.
CONDITIONAL AGREEMENT TO TRANSFER STOCK
To the extent possible, Dentist shall immediately notify Secured Party if
any of the following events occurs (collectively, "Events of Transfer"), and
shall thereafter transfer the Collateral to Transferee at such time and place as
shall be determined solely by Secured Party, for the Purchase Price set forth
in Article V below:
a. Dentist dies;
b. Dentist loses his license to practice dentistry in the State of
Colorado for any reason;
c. There is a default under the Management Agreement by P.C.;
d. Dentist ceases to be employed by P.C.;
e. Dentist becomes insolvent by reason of his inability to pay his
debts as they mature; is adjudicated bankrupt or insolvent; files a petition in
bankruptcy, reorganization or similar proceeding under the bankruptcy laws of
the United States or has such a petition filed against him which is not
discharged within thirty (30) days; has a receiver or other custodian, permanent
or temporary, appointed for his business, assets or property; has his bank
accounts, property or accounts attached; has execution levied against his
business or property; makes an assignment for the benefit of his creditors; or
has any of his Shares attached or levied upon for payment of his debts;
f. Dentist is adjudicated incompetent by any court of law or becomes
permanently disabled such that Dentist is unable to render any dental services;
g. For any reason not otherwise an Event of Transfer, Dentist no
longer meets the qualifications to be a shareholder of a Colorado professional
corporation;
h. Dentist is convicted in a court of competent jurisdiction of any
felony offense or any misdemeanor offense involving moral turpitude;
i. If Dentist is employed by Secured Party or any wholly-owned
subsidiary of Secured Party, Dentist ceases to be employed by Secured Party or
any such subsidiary; or
j. This Agreement is breached by Dentist.
ARTICLE III.
GRANT OF SECURITY INTEREST
Dentist hereby pledges to, and grants a security interest in, the
Collateral to Secured Party to secure the obligations set forth in Article II
above.
2
<PAGE>
ARTICLE IV.
DESIGNATION OF TRANSFEREE
Secured Party shall designate a Transferee to purchase the Collateral upon
the occurrence of an Event of Transfer.
ARTICLE V.
PAYMENT OF PURCHASE PRICE
The purchase price for the Collateral purchased by Transferee (the
"Purchase Price') shall be $1.00 per share of the P.C. capital stock
constituting the Collateral. The Purchase Price shall be payable to Dentist or
his personal representative in cash upon transfer of the Collateral to
Transferee.
ARTICLE VI.
COMMERCIALLY REASONABLE DISPOSITION
The parties acknowledge that it would be impossible to realize a
commercially reasonable price on the disposition of the pledged Collateral by
public sale and very difficult to do so by private sale, except on the terms and
conditions in Articles IV and V of this Agreement. Therefore, the parties
hereto acknowledge that a disposition of the Collateral under Articles IV and V
is a commercially reasonable disposition, and agree that the determination of
the Purchase Price under Article V is commercially reasonable and that they will
be bound by such price.
ARTICLE VII.
TERM
This Agreement shall continue for as long as the Management Agreement, or
any renewal thereof, is in effect.
ARTICLE VIII.
REPRESENTATIONS AND WARRANTIES OF DENTIST
Section 8.1 Qualification and Individual Power. Dentist is an individual
----------------------------------
licensed to practice dentistry in the State of Colorado. Dentist has all
required individual power and authority and all licenses, permits and
authorizations necessary to own and operate a dental practice in the State of
Colorado, and to execute, deliver and perform this Agreement.
Section 8.2 Non-Contravention. Neither the execution or the delivery of
-----------------
this Agreement, nor the consummation of the transactions contemplated hereby,
will conflict with, result in a breach of, constitute a default under, result in
a violation of, result in the creation of any lien, security interest, charge or
encumbrance upon the Collateral other than that contained in this Agreement,
give any third party the right to accelerate any obligation, or require any
authorization, consent, approval, exemption or other action by or notice to any
court, other governmental body, or other third party, under any
3
<PAGE>
indenture, mortgage, lease, loan agreement or other agreement or instrument to
which Dentist is bound or affected, or any law, statute, rule, regulation,
judgment or decree to which Dentist is subject.
Section 8.3 Collateral. Dentist holds of record and owns beneficially
----------
100% of the shares of capital stock of P.C., free and clear of any restrictions
on transfer, taxes, mortgage, pledge, lien, encumbrance, charge or other
security interest, option, warrant, purchase rights, contracts, commitments,
equities, claims and demands. Dentist is not a party to any option, warrant,
purchase right, or other contract or commitment that could require Dentist to
sell, transfer, or otherwise dispose of any of the Collateral, other than
pursuant to this Agreement. Dentist is not a party to any voting trust, proxy or
other agreement or understanding with respect to the voting of any of the
Collateral with any party other than Secured Party or the P.C.
Section 8.4 Legal Proceedings. There are no actions, suits, proceedings,
-----------------
orders or investigations pending or threatened against Dentist, at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, and to the best of Dentist's knowledge, there is no basis for the
foregoing.
ARTICLE IX.
INDEMNIFICATION
Dentist shall indemnify Secured Party from and against any loss, liability,
damage or expense (including reasonable legal expenses and costs) which Secured
Party may suffer, sustain or become subject to as a result of or in connection
with the breach by Dentist of any representation, warranty, covenant or
agreement contained in this Agreement.
ARTICLE X.
CUSTODY AND HANDLING OF COLLATERAL AND RECORDS
Section 10.1 Protection of the Secured Party's Security Interest. Upon
---------------------------------------------------
execution of this Agreement, Dentist shall deliver to Secured Party the share
certificate(s) representing the Collateral, duly endorsed in blank or, if not
endorsed in blank, Dentist shall give the Secured Party a duly executed stock
power in blank.
Section 10.2 No Authority to Sell. Dentist shall not sell, assign,
--------------------
pledge, hypothecate, encumber, or otherwise transfer any item of Collateral
except as expressly provided in this Agreement. Dentist may sell or assign the
Collateral only to a purchaser or assignee approved by Secured Party who agrees
in writing with Secured Party to be bound by the terms of this Agreement. Any
such purchase as assignee must be a person qualified to be a shareholder of a
-----------
professional corporation. If any item of Collateral or any right therein is
transferred contrary to this Agreement, Secured Party shall retain a security
interest in such item and in the proceeds of such disposition.
4
<PAGE>
Section 10.3 Issuance of Additional P.C. Stock. Dentist agrees not to
---------------------------------
take any actions to issue additional shares of capital stock of P.C. without
Secured Party's consent.
Section 10.4 Resignation as Director and Officer. Upon the occurrence of
-----------------------------------
any Event of Transfer, Dentist shall resign all positions held as an officer or
director of P.C.
ARTICLE XI.
DEFAULT AND REMEDIES
Section 11.1 Remedies Upon Occurrence of Event of Transfer. Upon the
---------------------------------------------
occurrence of any Event of Transfer and continuously thereafter until waived in
writing, Secured Party shall have the right and option to immediately sell the
Collateral to Transferee or to exercise any other remedy available to the
Secured Party as a secured party under law or equity.
Section 11.2 Construction of Rights and Remedies and Waiver of Notice and
------------------------------------------------------------
Consent.
- -------
a. This Article applies to all rights and remedies provided by this
Agreement or by law or equity.
b. Unless otherwise expressly provided herein, any right or remedy may
be pursued without notice to or further consent of Dentist, both of which
Dentist waives.
c. No forbearance in exercising any right or remedy shall operate as a
waiver thereof; no forbearance in exercising any right or remedy on any one or
more occasions shall operate as a waiver thereof on any future occasion; and no
single or partial exercise of any right or remedy shall preclude any other
exercise thereof or the exercise of any other right or remedy.
ARTICLE XII.
MISCELLANEOUS
Section 12.1 Notices. All notices, reports, or other communications
-------
which are required or permitted to be given to the parties under this Agreement
shall be given in writing and delivered in person, by telecopy, overnight
courier or certified mail (postage prepaid, return receipt requested), to the
receiving party at such party's address set forth on the first page of this
Agreement, 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 certified mail.
Section 12.2 Governing Law. This Agreement shall be governed by,
-------------
construed and enforced in accordance with the laws of the State of Colorado.
5
<PAGE>
Section 12.3 No Assignment; Binding Effect. Dentist may not assign
-----------------------------
to any person or entity any or all of its rights and obligations under this
Agreement. The Agreement shall be binding upon and inure to the benefit of the
parties' successors and permitted assigns.
Section 12.4 Merger; Amendment. This Agreement contains the complete
-----------------
agreement among the parties with respect to the subject matter hereof and
supersedes any prior agreements and understandings, written or oral. This
Agreement may be amended or renewed in whole or in part by written agreement
signed by each of the parties hereto.
Section 12.5 Severability. The invalidity or unenforceability of any
------------
part of this Agreement will not affect the validity or enforceability of any
other part of this Agreement.
Section 12.6 Further Assurances. Dentist shall perform any acts that
------------------
may be deemed necessary or desirable by Secured Party, including the execution
of such further instruments, documents and agreements as are deemed necessary or
desirable by Secured Party, in order to better evidence and reflect the
transactions described herein and contemplated hereby, and to carry into effect
the intents and purposes of this Agreement.
Section 12.7 Survival of Representations, Warranties and Covenants. All
-----------------------------------------------------
representations, warranties and covenants of Dentist shall survive the execution
and delivery of this Agreement and shall survive the expiration or termination
of this Agreement, to the full extent necessary for their enforcement and for
the protection of Secured Party.
Section 12.8 This Agreement Controls. In the event of any conflict
-----------------------
between the provisions of this Agreement and those of any other agreement
between Dentist and Secured Party, the provisions of this Agreement shall
control.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
BIRNER DENTAL MANAGEMENT
SERVICES, INC.
By:____________________________________
Its:___________________________________
DENTIST
By:____________________________________
6
<PAGE>
EXHIBIT 10.21
______________________________________________________________________________
BIRNER DENTAL MANAGEMENT SERVICES, INC.
$2,500,000
9% Convertible Subordinated Debentures
due December 27, 2001
___________________________________________________
INDENTURE
Dated as of December 27, 1996
___________________________________________________
COLORADO NATIONAL BANK
Trustee
______________________________________________________________________________
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------- ---------------------- ------------
A Form of Security A-1
<PAGE>
TABLE OF CONTENTS
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE...................... 1
SECTION 1.1 Definitions................................................... 1
SECTION 1.2 Other Definitions............................................. 4
SECTION 1.3 Incorporation by reference of Trust Indenture Act............. 5
SECTION 1.4 Rules of Construction......................................... 6
ARTICLE 2. THE SECURITIES.................................................. 6
SECTION 2.1 Form and Dating............................................... 6
SECTION 2.2 Execution and Authentication.................................. 6
SECTION 2.3 Registrar, Paying Agent and Conversion Agent.................. 7
SECTION 2.4 Paying Agent to Hold Money in Trust........................... 8
SECTION 2.5 Securityholder Lists.......................................... 8
SECTION 2.6 Transfer and Exchange......................................... 8
SECTION 2.7 Replacement Securities........................................ 9
SECTION 2.8 Outstanding Securities........................................ 10
SECTION 2.9 Treasury Securities........................................... 10
SECTION 2.10 Temporary Securities......................................... 10
SECTION 2.11 Cancellation................................................. 10
ARTICLE 3. REDEMPTION AND PURCHASES........................................ 11
SECTION 3.1 Redemption by the Company..................................... 11
SECTION 3.2 Selection of Securities to be Redeemed........................ 11
SECTION 3.3 Notice of Redemption.......................................... 11
SECTION 3.4 Effect of Notice of Redemption................................ 12
SECTION 3.5 Deposit of Redemption Price................................... 12
i
<PAGE>
SECTION 3.6 Securities Redeemed in Part................................... 13
SECTION 3.7 Repayment to the Company...................................... 13
ARTICLE 4. CONVERSION...................................................... 13
SECTION 4.1 Conversion at Option of Holders............................... 13
SECTION 4.2 Conversion Procedure.......................................... 14
SECTION 4.3 Fractional Shares............................................. 15
SECTION 4.4 Taxes on Conversion........................................... 15
SECTION 4.5 Company to Provide Common Stock............................... 15
SECTION 4.6 Adjustment of Conversion Price................................ 16
SECTION 4.7 No Adjustment................................................. 18
SECTION 4.8 Equivalent Adjustments........................................ 18
SECTION 4.9 Adjustment for Tax Purposes................................... 18
SECTION 4.10 Notice of Adjustment......................................... 19
SECTION 4.11 Notice of Certain Transactions............................... 19
SECTION 4.12 Effect of Reclassification, Consolidation, Merger or Sale on
Conversion Privilege......................................... 19
SECTION 4.13 Trustee's Disclaimer......................................... 20
SECTION 4.14 Voluntary Reduction.......................................... 21
SECTION 4.15 Mandatory Conversion......................................... 21
SECTION 4.16 Restrictions on Transfer..................................... 21
ARTICLE 5. SUBORDINATION................................................... 22
SECTION 5.1 Securities Subordinated to Senior Indebtedness................ 22
SECTION 5.2 Securities Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation, Reorganization,
etc........................................................... 23
SECTION 5.3 Securityholders to be Subrogated to Right of Holders of Senior
Indebtedness.................................................. 25
ii
<PAGE>
SECTION 5.4 Obligations of the Company Unconditional...................... 25
SECTION 5.5 Company Not to Make Payment with Respect to Securities In
Certain Circumstances......................................... 25
SECTION 5.6 Notice to Trustee............................................. 27
SECTION 5.7 Application by Trustee of Monies Deposited with It............ 27
SECTION 5.8 Subordination Rights Not Impaired by Acts or Omissions of
Company or Holders of Senior Indebtedness..................... 28
SECTION 5.9 Trustee to Effectuate Subordination........................... 28
SECTION 5.10 Right of Trustee to Hold Senior Indebtedness................. 28
SECTION 5.11 Article 5 Not to Prevent Events of Default................... 28
SECTION 5.12 No Fiduciary Duty Created to Holders of Senior Indebtedness.. 29
SECTION 5.13 Article Applicable to Paying Agents.......................... 29
ARTICLE 6. COVENANTS....................................................... 29
SECTION 6.1 Payment of Securities......................................... 29
SECTION 6.2 SEC Reports................................................... 29
SECTION 6.3 Liquidation................................................... 30
SECTION 6.4 Compliance Certificates....................................... 30
SECTION 6.5 Notice of Defaults............................................ 31
SECTION 6.6 Payment of Taxes and Other Claims............................. 31
SECTION 6.7 Corporate Existence........................................... 31
SECTION 6.8 Maintenance of Properties..................................... 31
SECTION 6.9 Further Instruments and Acts.................................. 32
ARTICLE 7. SUCCESSOR CORPORATION........................................... 32
SECTION 7.1 When Company May Merge, etc................................... 32
SECTION 7.2 Successor Corporation Substituted............................. 32
iii
<PAGE>
ARTICLE 8. DEFAULT AND REMEDIES............................................ 33
SECTION 8.1 Events of Default............................................. 33
SECTION 8.2 Acceleration.................................................. 34
SECTION 8.3 Other Remedies................................................ 35
SECTION 8.4 Waiver of Defaults and Events of Default...................... 35
SECTION 8.5 Control by Majority........................................... 35
SECTION 8.6 Limitation on Suits........................................... 36
SECTION 8.7 Rights of Holders to Receive Payment.......................... 36
SECTION 8.8 Collection Suit by Trustee.................................... 36
SECTION 8.9 Trustee May File Proof of Claim............................... 37
SECTION 8.10 Priorities................................................... 37
SECTION 8.11 Undertaking for Costs........................................ 38
ARTICLE 9. TRUSTEE......................................................... 38
SECTION 9.1 Duties of Trustee............................................. 38
SECTION 9.2 Rights of Trustee............................................. 39
SECTION 9.3 Individual Rights of Trustee.................................. 39
SECTION 9.4 Trustee's Disclaimer.......................................... 39
SECTION 9.5 Notice of Default or Events of Default........................ 40
SECTION 9.6 Reports by Trustee to Holders................................. 40
SECTION 9.7 Compensation and Indemnity.................................... 40
SECTION 9.8 Replacement of Trustee........................................ 41
SECTION 9.9 Successor Trustee by Merger, etc.............................. 42
SECTION 9.10 Eligibility; Disqualification................................ 42
SECTION 9.11 Preferential Collection of Claims Against Company............ 42
iv
<PAGE>
ARTICLE 10. SATISFACTION AND DISCHARGE OF INDENTURE........................ 42
SECTION 10.1 Termination of Company's Obligations......................... 42
SECTION 10.2 Application of Trust Money................................... 43
SECTION 10.3 Repayment to Company......................................... 43
SECTION 10.4 Reinstatement................................................ 44
ARTICLE 11. AMENDMENTS, SUPPLEMENTS AND WAIVERS............................ 44
SECTION 11.1 Without Consent of Holders................................... 44
SECTION 11.2 With Consent of Holders...................................... 44
SECTION 11.3 Compliance with Trust Indenture Act.......................... 45
SECTION 11.4 Revocation and Effect of Consents............................ 46
SECTION 11.5 Notation On or Exchange of Securities........................ 46
SECTION 11.6 Trustee to Sign Amendments, etc.............................. 46
ARTICLE 12. MISCELLANEOUS.................................................. 46
SECTION 12.1 Trust Indenture Act Controls................................. 46
SECTION 12.2 Notices...................................................... 46
SECTION 12.3 Communications by Holders with Other Holders................. 47
SECTION 12.4 Certificate and Opinion as to Conditions Precedent........... 47
SECTION 12.5 Record Date for Vote or Consent of Securityholders........... 48
SECTION 12.6 Rules by Trustee, Paying Agent, Registrar.................... 48
SECTION 12.7 Legal Holidays............................................... 48
SECTION 12.8 Governing Law................................................ 49
SECTION 12.9 No Adverse Interpretation of Other Agreements................ 49
SECTION 12.10 No Recourse Against Others.................................. 49
SECTION 12.11 Successors.................................................. 49
SECTION 12.12 Multiple Counterparts....................................... 49
v
<PAGE>
SECTION 12.13 Separability................................................ 49
SECTION 12.14 Table of Contents, Headings, etc............................ 49
vi
<PAGE>
INDENTURE dated as of December 27, 1996 between BIRNER DENTAL
MANAGEMENT SERVICES, INC., a Colorado corporation (the "Company"), and COLORADO
NATIONAL BANK, a national banking association, as Trustee (the "Trustee").
Both parties agree as follows for the benefit of the other and for the
equal and ratable benefit of the registered holders of the Company's 9%
Convertible Subordinated Debentures due December 27, 2001.
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE.
SECTION 1.1 DEFINITIONS.
-----------
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"Control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Agent" means any Registrar, Paying Agent or Conversion Agent.
"Associate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act, as such Rule is in
effect on the date of this Indenture.
"Bank Debt" means any and all amounts payable under or in respect of
any loan agreement between the Company and any commercial bank, promissory notes
executed by the Company in connection therewith, or any other related agreement,
including principal, premium (if any), interest (including, without limitation,
any interest accruing subsequent to the filing of a petition or other action
concerning bankruptcy or other similar proceeding, whether or not constituting
an allowed claim in any such proceedings), fees, charges, expenses,
reimbursement obligations, guarantees and all other amounts payable thereunder
or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or
any authorized committee of the Board of Directors.
"Business Day" means a day that is not a Legal Holiday.
"Capitalized Lease Obligation" means indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with generally accepted accounting principles
and the amount of such indebtedness shall be the capitalized amount of such
obligations determined in accordance with such principles.
<PAGE>
"Cash" or "cash" means such coin or currency of the United States as
at any time of payment is legal tender for the payment of public and private
debts.
"Common Stock" means the common stock of the Company as it exists on
the date of this Indenture or as it may be constituted from time to time.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to this Indenture and thereafter means the
successor.
"Default" or "default" means any event which is, or after notice of
passage of time, or both, would be, an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder" or Securityholder" means the person in which name a Security
is registered on the Registrar's books.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"May 1996 Debentures" means the 9% Convertible Subordinated Debentures
due May 15, 2001 issued pursuant to the May 1996 Indenture.
"May 1996 Indenture" means the Indenture dated as of May 15, 1996
between Birner Dental Management Services, Inc. and Colorado National Bank as
Trustee.
"Non-payment Event of Default" means a default on Senior Indebtedness
of which the Company has received notice (other than a Payment Event of Default)
that occurs and is continuing and that permits the holders of the Senior
Indebtedness to accelerate the maturity of such Senior Indebtedness.
"Officer" means the Chairman of the Board and Chief Executive Officer,
the President, any Vice President, the Controller, the Chief Financial Officer,
the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers or
by an Officer and an Assistant Treasurer or Assistant Secretary of the Company;
provided, however, that for purposes of Section 6.4, "Officers' Certificate"
- -------- -------
means a certificate signed by the Chief Executive Officer, Chief Financial
Officer or Controller of the Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Payment Event of Default" means any default in the payment of
principal of (or premium, if any) or interest on Senior Indebtedness beyond any
applicable grace period with respect thereto.
2
<PAGE>
"Person" or person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or government or other agency or political
subdivision thereof.
"Principal" or "principal" of a debt security, including Securities,
means the principal of the security plus, when appropriate, the premium, if any,
on the security.
"Redemption Date" or "redemption date", when used with respect to any
Security to be redeemed, means the date fixed for such redemption pursuant to
this Indenture, as set forth in the form of Security annexed as Exhibit A
---------
hereto.
"Redemption Price" or "redemption price", when used with respect to
any Security to be redeemed, means the price fixed for such redemption pursuant
to this Indenture, as set forth in the form of Security annexed as Exhibit A
---------
hereto.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Securities" means the 9% Convertible Subordinated Debentures due
December 27, 2001 or any of them (each a "Security"), as amended or supplemented
from time to time, that are issued under this Indenture.
"Senior Indebtedness" means (a) the principal of and premium, if any,
and interest (including, without limitation, any interest accruing subsequent to
the filing of a petition or other action concerning bankruptcy or other similar
proceedings, whether or not constituting an allowed claim in any such
proceedings) on the following, whether presently outstanding or hereafter
incurred or created: all indebtedness or obligations of the Company for money
borrowed (other than that evidenced by the Securities) or assets acquired and
which is evidenced by a note, bond, debenture or similar instrument (including a
purchase money mortgage) given in connection with the acquisition of any
property or assets (other than inventory or other similar property acquired in
the ordinary course of business) including securities, (b) all obligations
constituting Bank Debt (including without limitation principal, interest, fees
and expenses) including without limitation all obligations under the Credit
Agreement dated as of October 31, 1996 between the Company as borrower and Key
Bank of Colorado as lender; (c) all obligations for the payment of money
relating to a Capitalized Lease Obligation; (d) any liabilities of others
described in the preceding clauses (a), (b) and (c) which the Company has
guaranteed or which are otherwise its legal liability; and (e) renewals,
extensions, refundings, restructurings, amendments and modifications of any such
indebtedness or guarantee. Notwithstanding, anything to the contrary in this
Indenture or the Securities, "Senior Indebtedness" shall not include (x) any
indebtedness of the Company to a Subsidiary except to the extent any such
indebtedness is pledged by such Subsidiary as security for any Bank Debt, or (y)
any indebtedness or guarantee of the Company which by its terms or the terms of
the instrument creating or evidencing it is not superior in right of payment of
the Securities, or (z) the May 1996 Debentures.
3
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"Subsidiary" means any corporation of which at least a majority of the
outstanding capital stock having voting power under ordinary circumstances to
elect directors of such corporation shall at the time be held directly by the
Company, by the Company and one or more Subsidiaries or by one or more
Subsidiaries.
"TIA" means the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 and as in effect on the date of this Indenture,
except as provided in Section 11.3 hereof, and except to the extent any
amendment to the Trust Indenture Act expressly provides for application of the
Trust Indenture Act as in effect on another date.
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means the successor.
"Trust Officer" means any officer within the Corporate Trust
Department (or any similarly titled or successor group) of the Trustee,
including without limitation any Vice President, Assistant Vice President, any
trust officer, any Assistant Secretary or any other officer customarily
performing functions similar to those performed by any of the above-designated
officers who shall, in any case, be responsible for the administration of this
Indenture or have familiarity with it, and also means, with respect to a
particular corporate matter, any other officer of the Trustee to whom corporate
trust matters are referred because of this knowledge of and familiarity with the
particular subject.
SECTION 1.2 OTHER DEFINITIONS.
-----------------
Defined in
Term Section
---- -------
"Bankruptcy Law"............................... 8.1
"Company Order" ............................... 2.2
"Conversion Date".............................. 4.2
"Conversion Agent"............................. 2.3
"Conversion Price"............................. 4.1
"Conversion Shares"............................ 4.6
"Current fair market value per share of
Common Stock"................................. 4.3
"Custodian".................................... 8.1
4
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Defined in
Term Section
---- -------
"Distribution Date"............................ 4.6
"Distribution Record Date"..................... 4.6
"Event of Default"............................. 8.1
"Legal Holiday"................................ 12.7
"Mandatory Conversion Date".................... 4.15
"Pay the Securities"........................... 5.5
"Paying Agent"................................. 2.3
"Payment Blockage Period"...................... 5.5
"Registrar".................................... 2.3
"Rights"....................................... 4.6
"Rights Record Date"........................... 4.6
"U.S. Government Obligations".................. 10.1
"1933 Act"..................................... 4.15
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, even though
the Indenture is not subject to the TIA, the provision of the TIA is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"Indenture securities" means the Securities.
"Indenture security holder" means a Securityholder.
"Indenture to be qualified" means this Indenture.
"Indenture trustee" or "institutional trustee" means the
Trustee.
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"Obligor" on the indenture securities means the Company or any
other obligor on the Securities.
All other terms used in this Indenture that are defined in the TIA,
defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them therein.
SECTION 1.4 RULES OF CONSTRUCTION.
---------------------
Unless the context otherwise requires:
(1) a term has the meaning assigned to it; an accounting term not
otherwise defined has the meaning assigned to it in accordance with
generally accepted accounting principles in effect on the date hereof, and
any other reference in this Indenture to "generally accepted accounting
principles" refers to generally accepted accounting principles in effect on
the date hereof;
(2) "or" is not exclusive;
(3) words in the singular include the plural, and words in the plural
include the singular;
(4) provisions apply to successive events and transactions; and
(5) "herein", "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE 2. THE SECURITIES
SECTION 2.1 FORM AND DATING.
---------------
The Securities and the Trustee's certificate of authentication shall
be substantially in the form of Exhibit A, which is incorporated in and made
---------
part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rule, agreements to which the
Company is subject or usage. The Company shall approve the form of the
Securities and any notation, legend or endorsement on them. Each Security shall
be dated the date of its authentication except for the Securities initially
issued hereunder which shall be dated December 27, 1996.
SECTION 2.2 EXECUTION AND AUTHENTICATION.
----------------------------
Two Officers shall sign the Securities for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Securities.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
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A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee shall authenticate and make available for delivery
Securities for original issue in the aggregate principal amount of up to
$2,500,000, upon a written order or orders of the Company signed by two Officers
or by an Officer and an Assistant Treasurer or Assistant Secretary of the
Company (a "Company Order"). The Company Order shall specify the amount of
Securities to be authenticated and the date on which the original issue of
Securities is to be authenticated. The aggregate principal amount of Securities
outstanding at any time may not exceed $2,500,000, except as provided in Section
2.7.
The Trustee or its agent shall act as the initial authenticating
agent. Thereafter, the Trustee may appoint an authenticating agent acceptable
to the Company to authenticate Securities. An authenticating agent may
authenticate Securities whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
The Securities shall be issuable only in registered form without
coupons only in denominations of $1,000 and any integral multiple thereof.
SECTION 2.3 REGISTRAR, PAYING AGENT AND CONVERSION AGENT.
--------------------------------------------
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange (the "Registrar"), an
office or agency where Securities may be presented for payment (the "Paying
Agent"), an office or agency where Securities may be presented for conversion
(the "Conversion Agent") and an office or agency where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may have one or more co-Registrars, one or more
additional Paying Agents and one or more additional Conversion Agents. The term
"Registrar" includes any co-Registrar, the term "Paying Agent" includes any
additional Paying Agent and the term "Conversion Agent" includes any additional
Conversion Agent.
The Company shall enter into an appropriate agreement with any Agent
not a party to this Indenture. The agreement shall implement the provisions of
this Indenture that relate to such Agent. The Company shall notify the Trustee
of the name and address of any Agent not a party to this Indenture. If the
Company fails to maintain a Registrar, Paying Agent, Conversion Agent or agent
for service of notice or demands, or fails to give the foregoing notice, the
Trustee shall act as such. The Company or any Affiliate of the Company may act
as Paying Agent (except for the purposes of Article 10), Registrar or Conversion
Agent.
7
<PAGE>
The Company initially appoints the Trustee as Registrar, Paying Agent,
Conversion Agent and agent for service of notices and demands in connection with
the Securities.
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST.
-----------------------------------
On or prior to each due date of the principal of or interest on any
Securities, the Company shall deposit with the Paying Agent a sum sufficient to
pay such principal or interest so becoming due. Subject to Section 5.7, the
Paying Agent shall hold in trust for the benefit of Securityholders or the
Trustee, all money held by the Paying Agent for the payment of principal of or
interest on the Securities, and shall notify the Trustee of any default by the
Company (or any other obligor on the Securities) in making any such payment. If
the Company or an Affiliate of the Company acts as Paying Agent, it shall on or
before each due date of the principal of or interest on any Securities segregate
the money and hold it as a separate trust fund. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee and the
Trustee may at any time during the continuance of any default, upon written
request to a Paying Agent, require such Paying Agent to forthwith pay to the
Trustee all sums so held in trust by such Paying Agent. Upon doing so, the
Paying Agent (other than the Company) shall have no further liability for the
money.
SECTION 2.5 SECURITYHOLDER LISTS.
--------------------
The Trustee shall preserve in as current form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee on or before each semi-annual interest payment date and at such
other times as the Trustee may request in writing a list in such form and as of
such date as the Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.6 TRANSFER AND EXCHANGE.
---------------------
When a Security is presented to the Registrar with a request to
register a transfer thereof or to exchange such security for an equal principal
amount of Securities or other authorized denominations, the Registrar shall
register the transfer or make the exchange as requested; provided that every
security presented or surrendered for registration of transfer or exchange shall
be duly endorsed and accompanied by a written instrument of transfer in form
satisfactory to the Registrar duly executed by the Holder thereof or his
attorney duly authorized in writing. To permit registration of transfers and
exchanges, upon surrender of any Security for registration of transfer or
exchange at the office or agency maintained pursuant to Section 2.3, the Company
shall execute and the Trustee shall authenticate Securities at the Registrar's
request. The Company shall provide at its expense to the Trustee sufficient
forms of the Securities for transfer or exchange Any exchange or transfer shall
be without charge, except that the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be
8
<PAGE>
imposed in relation thereto, but this provision shall not apply to any exchange
pursuant to Section 2.10, 3.6, or 11.5.
Neither the Company nor the Trustee shall be required to exchange or
register a transfer of (a) any Securities for a period of 15 days next preceding
any selection of Securities to be redeemed or (b) any Securities or portions
thereof selected or called for redemption (except, in the case of redemption of
a Security in part, the portion not to be redeemed) or (c) any Securities or
portion thereof surrendered for conversion.
All Securities issued upon any transfer or exchange of Securities
shall be valid obligations of the Company, evidencing the same debt, and
entitled to the same benefits under this Indenture as the Securities surrendered
upon such exchange or transfer.
SECTION 2.7 REPLACEMENT SECURITIES.
----------------------
If any mutilated Security is surrendered to the Company or the
Trustee, or the Company and the Trustee receive evidence to their satisfaction
of the destruction, loss or theft of any Security, and there is delivered to the
Company and the Trustee such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute, and upon its written request the Trustee shall
authenticate and deliver, in exchange for any such mutilated Security or in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor and
principal amount, bearing a number not contemporaneously outstanding.
In any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, or is about to be redeemed by the Company
pursuant to Article 3, the Company in its discretion may, instead of issuing a
new Security, pay or redeem such Security, as the case may be.
Upon the issuance of any new Securities under this Section 2.7, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) in connection
therewith.
Every new Security issued pursuant to this Section 2.7 in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section 2.7 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
9
<PAGE>
SECTION 2.8 OUTSTANDING SECURITIES.
----------------------
Securities outstanding at any time are all Securities authenticated by
the Trustee, except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.8 as not outstanding.
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee received proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on a Redemption Date or maturity date money sufficient to pay the
principal of, premium, if any, and accrued interest on Securities payable on
that date, then on and after that date such Securities cease to be outstanding
and interest on them ceases to accrue.
Subject to the restrictions contained in Section 2.9, a Security does
not cease to be outstanding because the Company or an Affiliate of the Company
holds the Security.
SECTION 2.9 TREASURY SECURITIES.
-------------------
In determining whether the Holders of the required principal amount of
Securities have concurred in any notice, direction, waiver or consent,
Securities owned by the Company or any other obligor on the Securities or by any
Affiliate of the Company or of such other obligor shall be disregarded, except
that for purposes of determining whether the Trustee shall be protected in
relying on any such notice, direction, waiver or consent, only Securities which
the Trustee has actual knowledge are so owned shall be so disregarded.
Securities so owned which have been pledged in good faith shall not be
disregarded if the pledgee established to the satisfaction of the Trustee the
pledgee's right so to act with respect to the Securities and that the pledgee is
not the Company or any other obligor on the Securities of any Affiliate of the
Company or of such other obligor.
SECTION 2.10 TEMPORARY SECURITIES.
--------------------
Until definitive Securities are ready for delivery, the Company may
prepare and execute, and, upon the order of the Company, the Trustee shall
authenticate and deliver temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities but may have variation that
the Company with the consent of the Trustee considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare and the
Trustee shall authenticate and deliver definitive Securities in exchange for
temporary Securities.
SECTION 2.11 CANCELLATION.
------------
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar, the Paying Agent and the Conversion Agent shall
forward to the Trustee
10
<PAGE>
or its agent any Securities surrendered to them for transfer, exchange, payment
or conversion. The Trustee and no one else shall cancel and dispose of, in
accordance with its standard procedures, all Securities surrendered for
transfer, exchange, redemption, payment, conversion or cancellation and shall
deliver a certificate of such disposition to the Company unless the Company
directs the Trustee to deliver canceled Securities to the Company. The Company
may not issue new Securities to replace Securities it has paid or delivered to
the Trustee for cancellation or that any Holder has converted pursuant to
Article 4 or had converted pursuant to Section 4.15.
ARTICLE 3. REDEMPTION AND PURCHASES.
SECTION 3.1 REDEMPTION BY THE COMPANY.
-------------------------
Except as provided in this Section 3.1, the Securities may not be
redeemed by the Company. The Company will pay to the Trustee not less than one
business day before each of December 27, 1999 and December 27, 2000, a sum on
each such day equal to 20% of the aggregate principal amount of the Securities
initially issued hereunder. Each such payment shall be applied to the
redemption of Securities on such December 27 ("Redemption Date") as herein
provided. The Redemption Price shall be equal to the principal amount of the
Securities being redeemed. Accrued interest shall be paid to the Redemption
Date on Securities redeemed.
SECTION 3.2 SELECTION OF SECURITIES TO BE REDEEMED.
--------------------------------------
The Trustee shall, not more than 60 days prior to the Redemption Date,
select the Securities to be redeemed by lot or by a method the Trustee considers
fair and appropriate; provided that such method is not prohibited by any stock
exchange or market on which the Securities are then listed. The Trustee shall
make the selection from the Securities outstanding and not previously called for
redemption. Securities in denominations of $1,000 may only be redeemed in
whole. The Trustee may select for redemption portions (equal to $1,000 or any
multiple thereof) of the principal of Securities that have denominations larger
than $1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption.
SECTION 3.3 NOTICE OF REDEMPTION.
--------------------
At least 20 days before a Redemption Date, the Company shall mail or
cause to be mailed a notice of redemption by first-class mail to each Holder of
Securities to be redeemed at such Holder's address as it appears on the
Registrar's books.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the Redemption Date;
(2) the Redemption Price;
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<PAGE>
(3) the then current Conversion Price;
(4) the name and address of the Paying Agent and the Conversion Agent;
(5) that Securities called for redemption must be presented and
surrendered to the Paying Agent to collect the Redemption Price;
(6) that the Securities called for redemption may be converted at any
time before the close of business on the Redemption Date;
(7) that Holders who wish to convert Securities must satisfy the
requirements in paragraph 7 of the Securities;
(8) that, unless the Company defaults in making the redemption
payment, interest on Securities called for redemption ceases to accrue on
and after the Redemption Date and the only remaining right of the Holder is
to receive payment of the Redemption Price upon presentation and surrender
to the Paying Agent of the Securities; and
(9) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the
Redemption Date, upon presentation and surrender of each Security, a new
Security or Securities in principal amount equal to the unredeemed portion
thereof will be issued.
At the Company's request, the Trustee shall give the notice of
redemption (which shall be prepared by the Company) in the Company's name and at
the Company's expense.
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION.
------------------------------
Once notice of redemption is mailed, Securities called for redemption
become due and payable on the Redemption Date and at the Redemption Price stated
in the notice, except for Securities that are converted in accordance with the
provisions of Section 4.1 hereof. Upon presentation and surrender to the Paying
Agent, such Securities shall be paid at the Redemption Price, plus accrued
interest to the Redemption Date.
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE.
---------------------------
On or prior to the Redemption Date, the Company shall deposit with the
Paying Agent (or if the Company or an Affiliate of the Company acts as Paying
Agent, shall segregate and hold in trust) money sufficient to pay the Redemption
Price of and accrued interest on all Securities to be redeemed on that date,
other than Securities or portions thereof called for redemption on that date
which have been delivered by the Company to the Trustee for cancellation or have
been converted. The Paying Agent shall return to the Company any money not
required for that purpose because of the conversion of Securities pursuant to
Article 4 or otherwise. If such money is then held by the
12
<PAGE>
Company or an Affiliate of the Company in trust and is not required for such
purpose, it shall be discharged from the trust.
SECTION 3.6 SECURITIES REDEEMED IN PART.
---------------------------
Upon presentation and surrender of a Security that redeemed in part,
the Company shall execute and the Trustee shall authenticate for and deliver to
the Holder a new Security equal in principal amount to the unredeemed portion of
the Security surrendered.
SECTION 3.7 REPAYMENT TO THE COMPANY.
------------------------
If any of the Securities called for redemption under Section 3.1 are
converted into Common Stock pursuant to the terms hereof, the Company shall be
entitled to a credit equal to the principal amount of such Securities or
portions thereof which have been converted. In such event, subject to the
provisions of Section 5.7, to the extent that the aggregate amount of cash
deposited by the Company pursuant to Section 3.1 exceeds the aggregate amount
needed to redeem the Securities called for redemption (other than Securities
converted into Common Stock prior to the Redemption Date), then promptly after
the Business Day following the Redemption Date, the Trustee or the Paying Agent,
as the case may be, shall return any such excess to the Company.
ARTICLE 4. CONVERSION
SECTION 4.1 CONVERSION AT OPTION OF HOLDERS.
-------------------------------
A Holder of a Security may convert such Security into Common Stock at
any time prior to December 27, 2001, at the Conversion Price then in effect;
provided that, if such Security is called for redemption pursuant to Article 3,
such conversion right shall terminate at the close of business on the Redemption
Date for such Security (unless the Company shall default in making the
redemption payment when due, in which case the conversion right shall terminate
at the close of business on the date such default is cured and such Security is
redeemed); provided, further, that if the Holder of a Security presents such
-------- -------
Security for redemption prior to the close of business on the Redemption Date
for such Security, the right of conversion shall terminate upon presentation of
the Security to the Trustee (unless the Company shall default in making the
redemption payment when due, in which case the conversion right shall terminate
at the close of business on the date such default is cured and such Security is
redeemed). The number of shares of Common Stock issuable upon conversion of a
Security shall be determined by dividing the principal amount of the Security or
portion thereof surrendered for conversion by the Conversion Price in effect on
the Conversion Date. The initial conversion price is $5.00 per share and is
subject to adjustment as provided in this Article 4. "Conversion Price" means
the initial conversion price and as it may hereafter be adjusted pursuant to
this Article 4.
13
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A Holder may convert a portion of a Security equal to $1,000 or any
integral multiple thereof. Provisions of this Indenture that apply to
conversion of all of a Security also apply to conversion of a portion of a
Security.
A Holder of Securities is not entitled to any rights of a holder of
Common Stock until such Holder has converted his Securities into Common Stock,
and only to the extent such Securities are deemed to have been converted to
Common Stock pursuant to this Article 4.
SECTION 4.2 CONVERSION PROCEDURE.
--------------------
To convert a Security, a Holder must (i) complete and manually sign
the conversion notice attached to the Security and deliver such notice to the
Conversion Agent, (ii) surrender the Security to the Conversion Agent, (iii)
furnish appropriate endorsements and transfer documents if required by the
Registrar or the Conversion Agent, (iv) execute any investment letters or other
documents required by the Company pursuant to Section 4.16, and (v) pay any
transfer or similar tax, if required. The date on which the Holder satisfies
all of those requirements is the "Conversion Date." On such date, the rights of
the Holder as a Holder of the Security or portion thereof converted shall cease.
As soon as practicable after the Conversion Date, the Company shall deliver to
the Holder through the Conversion Agent a certificate for the number of whole
shares of Common Stock issuable upon the conversion and cash in lieu of any
fractional shares pursuant to Section 4.3.
The person in whose name the certificate is registered shall be deemed
to be a shareholder of record on the Conversion Date; provided, however, that no
-------- -------
surrender of a Security on any date when the stock transfer books of the Company
shall be closed shall be effective to constitute the person or persons entitled
to receive the shares of Common Stock upon such conversion as the record holder
or holders of such shares of Common Stock on such date, but such surrender shall
be effective to constitute the person or persons entitled to receive such shares
of Common Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding day on which such stock transfer books
are open; provided, further, that such conversion shall be at the conversion
-------- -------
rate in effect on the date that such Security shall have been surrendered for
conversion, as if the stock transfer books of the Company had not been closed.
Payment of accrued interest on a converted Security will be made to
the Conversion Date on the next succeeding interest payment date. No adjustment
will be made for dividends or distributions on shares of Common Stock issued
upon conversion of a Security.
If a Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon the conversion shall be based on
the aggregate principal amount of Securities converted.
14
<PAGE>
Upon surrender of a Security that is converted in part, the Company
shall execute, and the Trustee shall authenticate and deliver to the Holder, a
new Security equal in principal amount to the unconverted portion of the
Security surrendered.
SECTION 4.3 FRACTIONAL SHARES.
-----------------
The Company will not issue fractional shares of Common Stock upon
conversion of Securities. In lieu thereof, the Company will pay an amount in
cash based upon the then current fair market value per share of the Common Stock
on the last trading day prior to the Conversion Date. Current fair market value
per share of Common Stock on any date shall mean the average of the closing
prices of the Common Stock sold on such date on all securities exchanges,
including the National Market System of NASDAQ, on which the Common Stock may
then be listed, or if there have been no such sales on any such exchange on such
day, the average of such closing prices on the last trading day prior to the
Conversion Date on which sales of the Common Stock on such exchanges occurred.
If the Common Stock is not listed on such date on any such exchange, then the
current fair market value per share of Common Stock shall be as determined by
the Board of Directors of the Company (whose determination shall be conclusive
evidence of such current fair market value).
SECTION 4.4 TAXES ON CONVERSION.
-------------------
If a Holder converts a Security, the Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of shares
of Common Stock upon such conversion. However, the Holder shall pay any such
tax which is due because the Holder requests the shares to be issued in a name
other than the Holder's name. The Conversion Agent may refuse to deliver the
certificates representing the Common Stock being issued in a name other than the
Holder's name until the Conversion Agent receives a sum sufficient to pay any
tax which will be due because the shares are to be issued in a name other than
the Holder's name. Nothing herein shall preclude any tax withholding required
by law or regulations.
SECTION 4.5 COMPANY TO PROVIDE COMMON STOCK.
-------------------------------
The Company shall, prior to issuance of any Securities hereunder, and
from time to time as may be necessary, reserve, out of its authorized but
unissued Common Stock a sufficient number of shares of Common Stock to permit
the conversion of all outstanding Securities for shares of Common Stock.
All shares of Common Stock delivered upon conversion of the Securities
shall be newly issued shares or treasury shares, shall be duly authorized,
validly issued, fully paid and nonassessable and shall be free from preemptive
rights and free of any lien or adverse claim.
The Company will endeavor promptly to comply with all Federal and
state securities laws regulating the offer and delivery of shares of Common
Stock upon
15
<PAGE>
conversion of Securities, if any, and will list or cause to have quoted such
shares of Common Stock on each national securities exchange or in the over-the-
counter market or such other market on which the Common Stock is then listed or
quoted.
SECTION 4.6 ADJUSTMENT OF CONVERSION PRICE.
------------------------------
The Conversion Price shall be adjusted from time to time by the
Company as follows:
(1) In case the Company shall (i) pay a dividend in shares of Common
Stock to Holders of Common Stock, (ii) make a distribution in shares of
Common Stock to holders of Common Stock, (iii) subdivide its outstanding
Common Stock into a greater number of shares, or (iv) combine its
outstanding Common Stock into a smaller number of shares, the Conversion
Price in effect immediately prior thereto shall be adjusted so that the
Holder of any Security thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock which such Holder
would have owned had such Security been converted immediately prior to the
happening of such event. An adjustment made pursuant to this subsection
(a) shall become effective immediately after the record date in the case of
a dividend or distribution in shares and shall become effective immediately
after the effective date in the case of subdivision or combination.
(2) In case the Company shall issue rights or warrants to all or
substantially all holders of its Common Stock entitling them (for a period
commencing no earlier than the record date described below and expiring not
more than 45 days after such record date) to subscribe for or purchase
shares of Common Stock (or securities convertible into Common Stock) at a
price per share less than the current Conversion Price per share of Common
Stock on the record date for the determination of shareholders entitled to
receive such rights or warrants ("Rights Record Date"), the Conversion
Price shall be adjusted so that the same shall equal the price determined
by multiplying the Conversion Price immediately prior to the Rights Record
Date by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding immediately prior to such Rights Record Date, plus
the number of shares which the aggregate offering price of the total number
of shares of Common Stock so offered (or the aggregate conversion price of
the convertible securities so offered) would purchase at such Conversion
Price, and of which the denominator shall be the number of shares of Common
Stock outstanding immediately prior to such Rights Record Date plus the
number of additional shares of Common Stock offered (or into which the
convertible securities so offered are convertible). Such adjustment shall
be made successively whenever any such rights or warrants are issued, and
shall become effective on the date of such issuance retroactively to
immediately after the opening of business on the day following the Rights
Record Date. If at the end of the period during which such rights or
warrants are exercisable not all warrants or rights shall have been
exercised, the adjusted Conversion Price shall be immediately readjusted to
what it would have been based upon the number of
16
<PAGE>
additional shares of Common Stock actually issued (or the number of shares
of Common Stock issuable upon conversion of convertible securities actually
issued).
(3) In case the Company shall distribute to all holders of its Common
Stock any shares of capital stock of the Company (other than Common Stock)
or evidences of its indebtedness or other assets (excluding cash dividends
or other cash distributions to the extent paid from consolidated net income
or retained earnings of the Company), or shall distribute to all or
substantially all holders of its Common Stock rights or warrants to
subscribe for or purchase any of its securities (excluding those referred
to in subsection (b) above), then in each such case the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of
such distribution by a fraction of which the numerator shall be the current
Conversion Price on the record date for the determination of shareholders
entitled to receive such distribution ("Distribution Record Date"), less
the fair market value on such Distribution Record Date (as determined by
the Board of Directors of the Company, whose determination shall be
conclusive evidence of such fair market value) of the portion of the
capital stock or assets or evidences of indebtedness so distributed or of
such rights or warrants applicable to one share of Common Stock, and of
which the denominator shall be the Conversion Price on such Distribution
Record Date. Such adjustment shall become effective on the date of such
distribution retroactively to immediately after the opening of business on
the day after the Distribution Record Date. Notwithstanding the foregoing,
in the event that the Company shall distribute rights or warrants (other
than those referred to in subsection (b) above)("Rights") pro rata to
holders of Common Stock, the Company may, in lieu of making any adjustment
pursuant to this Section 4.6, make proper provision so that each holder of
a Security who converts such Security (or any portion thereof) after the
record date for such distribution and prior to the expiration or redemption
of the Rights shall be entitled to receive upon such conversion, in
addition to the shares of Common Stock issuable upon such conversion (the
"Conversion Shares"), a number of Rights to be determined as follows: (i)
if such conversion occurs on or prior to the date for the distribution to
the holders of Rights of separate certificates evidencing such Rights (the
"Distribution Date"), the same number of Rights to which a holder of a
number of shares of Common Stock equal to the number of Conversion Shares
is entitled at the time of such conversion in accordance with the terms and
provisions of and applicable to the Rights; and (ii) if such conversion
occurs after the Distribution Date, the same number of Rights to which a
holder of the number of shares of Common Stock into which the principal
amount of the Security so converted was convertible immediately prior to
the Distribution Date would have been entitled on the Distribution Date in
accordance with the terms and provisions of and applicable to the Rights.
(4) In any case in which this Section 4.6 shall require that an
adjustment be made immediately following a record date established for
purposes of Section 4.6, the Company may elect to defer (but only until 5
Business Days following the
17
<PAGE>
filing by the Company with the Trustee of the certificate described in
Section 4.10 below) issuing to the holder of any Security converted after
such record date the shares of Common Stock and other capital stock of the
Company issuable upon such conversion over and above the shares of Common
Stock and other capital stock of the Company issuable upon such conversion
only on the basis of the Conversion Price prior to adjustment; and, in lieu
of the shares the issuance of which is so deferred, the Company shall issue
or cause its transfer agents to issue due bills or other appropriate
evidence of the right to receive such shares.
SECTION 4.7 NO ADJUSTMENT.
-------------
No adjustment in the Conversion Price shall be required unless the
adjustment would require an increase or decrease of at least 5% in the
Conversion Price as last adjusted; provided, however, that any adjustments which
-------- -------
by reason of this Section 4.7 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Article 4 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment to the Conversion Price
shall be made for cash or dividend distributions paid out of consolidated net
income or retained earnings.
No adjustment need be made for a transaction referred to in Section
4.6 if all Securityholders are entitled to participate in the transaction on a
basis and with notice that the Board of Directors determines to be fair and
appropriate in light of the basis and notice on which holders of Common Stock
participate in the transaction.
No adjustment need be made for rights to purchase Common Stock or
issuances or Common Stock pursuant to a Company plan for reinvestment of
dividends or interest.
No adjustment need be made for a change to par value of the Common
Stock.
To the extent that the Securities become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
SECTION 4.8 EQUIVALENT ADJUSTMENTS.
----------------------
In the event that, as a result of an adjustment made pursuant to
Section 4.6 above, the holder of any Security thereafter surrendered for
conversion shall become entitled to receive any shares of capital stock of the
Company other than shares of its Common Stock, thereafter the Conversion Price
of such other shares so receivable upon conversion of any Securities shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common Stock
contained in this Article 4.
SECTION 4.9 ADJUSTMENT FOR TAX PURPOSES.
---------------------------
The Company shall be entitled to make such reductions in the
Conversion Price, in addition to those required by Section 4.6, as it in its
discretion shall determine to be
18
<PAGE>
advisable in order that any stock dividends, subdivision of shares, distribution
of rights to purchase stock or securities, or a distribution of securities
convertible into or exchangeable for stock hereafter made by the Company to its
stockholders shall not be taxable.
SECTION 4.10 NOTICE OF ADJUSTMENT.
--------------------
Whenever the Conversion Price is adjusted, the Company shall promptly
mail to Securityholders a notice of the adjustment and file with the Trustee an
Officers' Certificate briefly stating the facts requiring the adjustment and the
manner of computing it. The certificate shall be conclusive evidence of the
correctness of such adjustment.
SECTION 4.11 NOTICE OF CERTAIN TRANSACTIONS.
------------------------------
In the event that:
(1) The Company takes any action which would require an adjustment in
the Conversion Price;
(2) The Company consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation and stockholders of
the Company must approve the transaction; or
(3) There is a dissolution or liquidation of the Company,
the Company shall mail to Securityholders and file with the Trustee a
notice stating the proposed record or effective date, as the case may be. The
Company shall mail the notice at least 10 days before such date. Failure to
mail such notice or any defect therein shall not affect the validity of any
transaction referred to in clause (1), (2) or (3) of this Section 4.11.
SECTION 4.12 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE ON
------------------------------------------------------------
CONVERSION PRIVILEGE.
--------------------
If any of the following shall occur, namely: (i) any reclassification
or change of outstanding shares of Common Stock issuable upon conversion of
Securities (other than a change in par value, or from par value to no par value,
or from no par value to par value, or as a result of a subdivision or
combination), (ii) any consolidation or merger to which the Company is a party
other than a merger in which the Company is the continuing corporation and which
does not result in any reclassification of, or change (other then a change in
name, or par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), in, outstanding
shares of Common Stock, or (iii) any sale or conveyance, of all or substantially
all of the property or business of the Company as an entirety, then the Company,
or such successor or purchasing corporation, as the case may be, shall, as a
condition precedent to such reclassification, change, consolidation, merger,
sale or conveyance, execute and deliver to the Trustee a supplemental indenture
providing that the Holder of each Security then
19
<PAGE>
outstanding shall have the right to convert such Security into the kind and
amount of shares of stock and other securities and property (including cash)
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock deliverable upon
conversion of such Security immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such supplemental indenture shall
provide for adjustments of the Conversion Price which shall be as nearly
equivalent as may be practicable to the adjustments of the Conversion Price
provided for in this Article 4. The foregoing, however, shall not in any way
affect the right a holder of a Security may otherwise have, pursuant to clause
(ii) of the last sentence of subsection (3) of Section 4.6, to receive Rights
upon conversion of a Security. If, in the case of any such consolidation,
merger, sale or conveyance, the stock or other securities and property
(including cash) receivable thereupon by a holder of Common Stock includes
shares of stock or other securities and property of a corporation other than the
successor or purchasing corporation, as the case may be, in such consolidation,
merger, sale or conveyance then such supplemental indenture shall also be
executed by such other corporation and shall contain such additional provisions
to protect the interests of the Holders of the Securities as the Board of
Directors of the Company shall reasonably consider necessary by reason of the
foregoing. The provision of this Section 4.12 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
In the event the Company shall execute a supplemental indenture to
this Section 4.12, the Company shall promptly file with the Trustee an Officers'
Certificate briefly stating the reasons therefor, the kind or amount of shares
of stock or securities or property (including cash) receivable by Holders of the
Securities upon the conversion of their Securities after any such
reclassification, change, consolidation, merger, sale or conveyance, any
adjustment to be made with respect thereto and that all conditions precedent
have been complied with.
SECTION 4.13 TRUSTEE'S DISCLAIMER.
--------------------
The Trustee has no duty to determine when an adjustment under this
Article 4 should be made, how it should be made or what such adjustment should
be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying upon, the Officers' Certificate
with respect thereto which the Company is obligated to file with the Trustee
pursuant to Section 4.10. The Conversion Price, amount of Common Stock to be
received upon conversion, and the amount of cash payment in lieu of fractional
shares shall be calculated and determined by the Company, and Trustee may rely
conclusively thereon and shall have no liability for any distributions made in
accordance with such calculations by the Company. The Trustee makes no
representation as to the validity of value or any securities or assets issued
upon conversion of Securities, and the Trustee shall not be responsible for the
Company's failure to comply with any provisions of this Article 4.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section
20
<PAGE>
4.12, but may accept as conclusive evidence of the correctness thereof, and
shall be protected in relying upon, the Officers' Certificate with respect
thereto which the Company is obligated to file with the Trustee pursuant to
Section 4.12.
SECTION 4.14 VOLUNTARY REDUCTION.
-------------------
The Company from time to time may reduce the Conversion Price by any
amount for any period of time if the period is at least 20 days or such longer
period as may be required by law and if the reduction is irrevocable during the
period; provided, that in no event may the Conversion Price be less than the par
value of a share of Common Stock.
SECTION 4.15 MANDATORY CONVERSION.
--------------------
If the Company completes an initial public offering of its Common
Stock, at any time after 180 days after the effective date of the registration
statement covering such offering filed under the Securities Act of 1933, as
amended (the "1933 Act"), the Company has the right to require holders of the
Securities to convert their Securities into Common Stock at the then current
Conversion Price. Such right may be exercised by the Company only if (i) the
Common Stock has traded for 20 of 30 consecutive trading days on any national
securities exchange or on the NASDAQ System at a closing price equal to or
greater than $7.50 per share, and (ii) if the shares of Common Stock issuable
upon conversion of the Securities can be resold by the Holders pursuant to Rule
144 adopted under the 1933 Act, or if Rule 144 is not available, the Company has
in place an effective registration statement under the 1933 Act covering the
resale by the Holders of the Common Stock issuable upon conversion of the
Securities.
The mandatory conversion will be automatically effective as of the
date (the "Mandatory Conversion Date") specified in a written notice sent to all
Holders of the Securities regardless of whether the Securities have been
surrendered for conversion. No interest will accrue on, nor will the Securities
be transferable after the Mandatory Conversion Date. Upon mandatory conversion,
payment will be made for accrued interest on the Securities to the Mandatory
Conversion Date. No fractional shares will be issued upon conversion but a cash
adjustment will be made for any fractional interest as provided in Section 4.3.
No adjustment will be made for dividends or distributions on shares of Common
Stock issued upon mandatory conversion of the Securities. In the event of
mandatory conversion, certificates for the shares of Common Stock issuable upon
the conversion will not be delivered to any Holders of the Securities until the
Securities owned by such Holder have been surrendered to the Trustee.
SECTION 4.16 RESTRICTIONS ON TRANSFER.
------------------------
Unless otherwise instructed by the Company, all instruments
representing the Securities and certificates representing any shares of Common
Stock issued upon conversion of the Securities and any and all securities issued
in replacement thereof or in exchange therefor shall bear the following legend,
or one substantially similar thereto:
21
<PAGE>
"The securities represented hereby have not been registered under the
Securities Act of 1933 (the "Act") or any applicable state securities
laws ("State Acts") and are restricted securities as that term is
defined in Rule 144 under the Act. The securities may not be offered
for sale, sold or otherwise transferred except pursuant to an
effective registration statement or qualification under the Act and
applicable State Acts or pursuant to an exemption from registration
under the Act and applicable State Acts, the availability of which is
to be established to the satisfaction of the Company."
The Trustee shall permit transfer of the Securities and any shares of
Common Stock issued upon conversion of the Securities only upon written
instructions from the Company or its counsel that such transfer is permitted
under the Act and applicable State Acts. Unless otherwise instructed by the
Company, each Holder who is a transferee of the Securities or shares of Common
Stock issuable upon the conversion of the Securities (including Holders whose
securities are converted) may be required to execute investment letters and
other documents as required by the Company. If instructed in writing by the
Company or its counsel, there shall be also placed on any instruments
representing the Securities and any shares of Common Stock issued upon
conversion of the Securities and any and all securities issued in replacement
thereof or in exchange therefor, any legend as may be required by the securities
laws of the state in which the Holder of such Securities or shares of Common
Stock resides.
ARTICLE 5. SUBORDINATION.
SECTION 5.1 SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
----------------------------------------------
The Company covenants and agrees, and each Holder of Securities issued
hereunder by such Holder's acceptance thereof likewise covenants and agrees,
that all Securities shall be issued subject to the provisions of this Article 5;
and each Person holding any Security, whether upon original issue or upon
transfer or assignment thereof, accepts and agrees to be bound by such
provisions. The Securities shall not be superior, or subordinate in right of
payment, to the May 1996 Debentures.
The Company shall not be limited in its rights to make principal and
interest payments on, or redemptions of the May 1996 Debentures on the dates
required by and in accordance with the terms of the May 1996 Debentures and the
May 1996 Indenture even if, after such payments on or redemptions of the May
1996 Debentures, the Company may not have sufficient funds to make principal and
interest payments on, or redemptions required by Article 3 of this Indenture of,
the Securities, to be made thereafter under the terms of the Securities and this
Indenture.
The payment of the principal of, premium, if any, and interest on all
Securities issued hereunder shall, to the extent and in the manner hereinafter
set forth, be subordinated and subject in right of payment to the indefeasible
prior payment in full, in
22
<PAGE>
cash, of all Senior Indebtedness, whether outstanding at the date of this
Indenture or thereafter created, incurred, assumed or guaranteed.
SECTION 5.2 SECURITIES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR INDEBTEDNESS
-------------------------------------------------------------------
ON DISSOLUTION, LIQUIDATION, REORGANIZATION, ETC., OF THE COMPANY.
-----------------------------------------------------------------
Upon any payment or distribution of the assets of the Company of any
kind or character, whether in cash, property or securities (including any
collateral at any time securing the Securities), to creditors upon any
dissolution, winding-up, total or partial liquidation, or reorganization,
liquidation, receivership proceedings, or upon an assignment for the benefit of
creditors, or any other marshalling of the assets and liabilities of the
Company, or otherwise), then in such event:
(1) all Senior Indebtedness (including principal thereof, interest
thereon and fees and expenses relating thereto) and up to $5,000 of the
reasonable fees and expenses of the Trustee shall first be paid in full, in
cash, or have provision made for such payment in a manner reasonably
satisfactory to the holders of Senior Indebtedness, before any payment is
made on account of the principal of or interest on the indebtedness
evidenced by the Securities, or any deposit is made pursuant to Section
6.3;
(2) any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted, or securities of
the Company or any other company, trust or corporation provided for by a
plan of reorganization or readjustment, junior, or the payment of which is
otherwise subordinate, at least to the extent provided in this Article 5,
with respect to the Securities to the payment of all Senior Indebtedness at
that time outstanding and to the payment of all securities issued in
exchange therefor to the holders of the Senior Indebtedness at the time
outstanding), to which the Holders or the Trustee on behalf of the Holders
would be entitled except for the provisions of this Article 5, including
any such payment or distribution which may be payable or deliverable by
reason of the payment of another debt of the Company being subordinated to
the payment of the Securities, shall be paid or delivered by any debtor,
Custodian or other person making such payment or distribution, directly to
(i)s the holders of the Senior Indebtedness or their representative or
representatives, or the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness may have
been issued, ratably according to the aggregate amounts remaining unpaid on
account of the principal of, interest on and fees and expenses relating to
the Senior Indebtedness held or represented by each, and (ii) the Trustee
with respect to up to $5,000 of the reasonable fees and expenses of the
Trustee, for application to payment of all Senior Indebtedness and up to
$5,000 of the reasonable fees and expenses of the
23
<PAGE>
Trustee remaining unpaid on a pro rata basis according to the outstanding
amount of Senior Indebtedness (including interest, fees and expenses) and
reasonable fees and expenses of the Trustee (up to a maximum of $5,000), to
the extent necessary to pay all Senior Indebtedness and up to $5,000 of the
reasonable fees and expenses of the Trustee in full, in cash, after giving
effect to any concurrent payment or distribution, or provision therefor, to
the holders of such Senior Indebtedness or the Trustee, as the case may be;
and
(3) in the event that, notwithstanding the foregoing provisions of
this Section 5.2, any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted, or securities of
the Company or any other company, trust or corporation provided for by a
plan of reorganization or readjustment, junior, or the payment of which is
otherwise subordinate, at least to the extent provided for in this Article
5, with respect to the Securities, to the payment in full, in cash, of all
Senior Indebtedness at the time outstanding and to the payment of all
securities issued in exchange therefor to the holders of Senior
Indebtedness at the time outstanding), shall be received by the Trustee on
behalf of the Holders or the Holders before all Senior Indebtedness and up
to $5,000 of the reasonable fees and expenses of the Trustee are paid in
full, in cash, or provision made for their payment in a manner reasonably
satisfactory to the holders of Senior Indebtedness, such payment or
distribution (subject to the provisions of Section 5.6 and 5.7) shall be
held in trust for the benefit of, and shall be immediately paid or
delivered by the Trustee on behalf of the Holders or such Holders, as the
case may be, to (i) the holders of Senior Indebtedness remaining unpaid or
unprovided for, or their representative or representatives, or the trustee
or trustees under any indenture pursuant to which any instruments
evidencing any of such Senior Indebtedness may have been issued, ratably
according to the aggregate amounts remaining unpaid on account of the
principal of, interest on and fees and expenses relating to the Senior
Indebtedness held or represented by each, and (ii) the Trustee with respect
to up to $5,000 of the reasonable fees and expenses of the Trustee, for
application to the payment of all Senior Indebtedness and up to $5,000 of
the reasonable fees and expenses of the Trustee remaining unpaid on a pro
rata basis according to the outstanding amount of Senior Indebtedness
(including interest, fees and expenses) and reasonable fees and expenses of
the Trustee (up to a maximum of $5,000), to the extent necessary to pay all
Senior Indebtedness and up to $5,000 of the reasonable fees and expenses
of the Trustee in full, in cash, after giving effect to any concurrent
payment or distribution, or provision therefor, to the holders of such
Senior Indebtedness or the Trustee, as the case may be.
The Company shall give prompt notice to the Trustee of any
dissolution, winding-up, liquidation or reorganization of the Company.
Upon any distribution of assets of the Company referred to in this
Article 5, the Trustee, subject to the provisions of Section 9.1 and 9.2, and
the Holders shall be entitled to rely upon any order or decree by any court of
competent jurisdiction in which such dissolution, winding-up, liquidation or
reorganization proceeding is pending, or a
24
<PAGE>
certificate of the liquidating trustee or agent or other person making any
distribution to the Trustee or to the Holders, for the purpose of ascertaining
the persons entitled to participate in such distribution, the holders of the
Senior Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article 5.
SECTION 5.3 SECURITYHOLDERS TO BE SUBROGATED TO RIGHT OF HOLDERS OF SENIOR
--------------------------------------------------------------
INDEBTEDNESS.
------------
Subject to the prior payment in full, in cash, of all Senior
Indebtedness then due, the Holders shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness until the principal of and
interest on the Securities shall be paid in full, and for purposes of such
subrogation, no payments or distributions to the holders of Senior Indebtedness
of assets, whether in cash, property or securities, distributable to the holders
of Senior Indebtedness under the provisions hereof to which the Holders would be
entitled except for the provisions of this Article 5, and no payment pursuant to
the provisions of this Article 5 to the holders of Senior Indebtedness by the
Holders shall, as among the Company, its creditors other than the holders of
Senior Indebtedness, and the Holders, be deemed to be a payment by the Company
to or on account of Senior Indebtedness, it being understood that the provisions
of this Article 5 are, and are intended, solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
SECTION 5.4 OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
----------------------------------------
Nothing contained in this Article 5 or elsewhere in this Indenture or
in any Security is intended to or shall impair, as among the Company, its
creditors other than the holders of Senior Indebtedness, and the Holders, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders the principal of and interest on the Securities, as and when the same
shall become due and payable in accordance with the terms of the Securities, or
to affect the relative rights of the Holders and other creditors of the Company
other than the holders of Senior Indebtedness, nor shall anything herein or
therein prevent the Trustee or any Holder from exercising all remedies otherwise
permitted by applicable law upon the happening of an Event of Default under this
Indenture, subject to the provisions of Article 8, and the rights, if any, under
this Article 5 of the holders of Senior Indebtedness in respect of assets,
whether in cash, property or securities, of the Company received upon the
exercise of any such remedy.
SECTION 5.5 COMPANY NOT TO MAKE PAYMENT WITH RESPECT TO SECURITIES IN CERTAIN
-----------------------------------------------------------------
CIRCUMSTANCES.
-------------
(1) Upon the occurrence of a Payment Event of Default, unless and
until the amount of such Senior Indebtedness then due shall have been paid
in full, in cash, or provision made therefor in a manner reasonably
satisfactory to the
25
<PAGE>
holders of such Senior Indebtedness, or such default shall have been cured
or waived or shall have ceased to exist, the Company shall not pay
principal of, premium, if any, or interest on the Securities or make any
deposit pursuant to Sections 6.3 or 10.1 and shall not repurchase, redeem
or otherwise retire any Securities (collectively, "Pay the Securities").
(2) Unless Section 5.2 shall be applicable, upon (1) the occurrence of
a Non-payment Event of Default and (2) receipt by the Company and the
Trustee from the representative of the holders of Senior Indebtedness to
which the Non-payment Event of Default applies of written notice of such
occurrence, then the Company shall not Pay the Securities for a period (the
"Payment Blockage Period") commencing on the earlier of the date of receipt
by the Company or the Trustee of such notice from such representative and
ending on the earlier of (subject to any blockage of payments that may then
be in effect under subsection (a) of this Section) (x) the date 180 days
after such date, (y) the date such Non-payment Event of Default shall have
been cured or waived in writing or shall have ceased to exist or such
Senior Indebtedness shall have been discharged, or (z) the date such
Payment Blockage Period shall have been terminated by written notice to the
Company or the Trustee from the representative of the holders of the Senior
Indebtedness initiating such Payment Blockage Period, after which, in case
of clause (x), (y) or (z), as the case may be, the Company shall resume
making any and all required payments. Notwithstanding any other provision
of this Agreement, only one Payment Blockage Period may be commenced within
any consecutive 365-day period, and no event of default with respect to any
Senior Indebtedness which existed or was continuing on the date of the
commencement of any Payment Blockage Period with respect to the Senior
Indebtedness the holders of which initiated such Payment Blockage Period
shall be, or can be made, the basis for the commencement of a second
Payment Blockage Period whether or not within a period of 365 consecutive
days unless such event of default shall have been cured or waived for a
period of not less than 90 consecutive days. In no event will a Payment
Blockage Period extend beyond 179 days.
(3) In the event that, notwithstanding the foregoing provisions of
this Section 5.5, any payment on account of principal of or interest on the
Securities shall be made by or on behalf of the Company and received by the
Trustee, any Holder or any Paying Agent (or, if the Company is acting as
its own Paying Agent, money for any such payment shall be segregated and
held in trust), after the happening of a default under any Senior
Indebtedness, then, unless and until the amount of such Senior Indebtedness
then due shall have been paid in full in cash, or provision made therefor
or such default shall have been cured or waived, such payment (subject, in
each case, to the provisions of Sections 5.6 and 5.7) shall be held in
trust for the benefit of, and shall be immediately paid over to, the
holders of Senior Indebtedness or their representative or representatives
or the trustee or trustees under any indenture under which any instruments
evidencing any of the Senior Indebtedness may have been issued, ratably
according to the aggregate amounts remaining unpaid on account of the
principal of and interest on
26
<PAGE>
the Senior Indebtedness held or represented by each, for application to the
payment of all Senior Indebtedness remaining unpaid to the extent necessary
to pay all Senior Indebtedness in accordance with its terms, after giving
effect to any concurrent payment or distribution to or for the benefit of
the holders of Senior Indebtedness. The Company shall give prompt written
notice to the Trustee of any default under any Senior Indebtedness or under
any agreement pursuant to which Senior Indebtedness may have been issued.
SECTION 5.6 NOTICE TO TRUSTEE.
-----------------
The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Securities. Notwithstanding the provisions of
this Article 5 or any other provision of this Indenture, the Trustee shall not
at any time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee, unless and until the
Trustee shall have received written notice thereof from the Company or from the
holder or holders of Senior Indebtedness or from their representative or
representatives; and, prior to the receipt of any such written notice, the
Trustee, subject to the provisions of Sections 9.1 and 9.2, shall be entitled to
assume conclusively that such facts do not exist.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a person representing himself to be a holder of Senior
Indebtedness (or a representative of such holder) to establish that such notice
has been given by a holder of Senior indebtedness or a representative of any
such holder. In the event that the Trustee determines in good faith that
further evidence is required with respect to the right of any person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article 5, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such person, the extent of which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
each person under this Article 5, and if such evidence is not furnished, the
Trustee may defer any payment to such person pending judicial determination as
to the right of such person to receive such payment.
SECTION 5.7 APPLICATION BY TRUSTEE OF MONIES DEPOSITED WITH IT.
--------------------------------------------------
Money or U.S. Government Obligations deposited in trust with the
Trustee pursuant to Sections 6.3 and 10.1 and not in violation of this Article 5
shall be for the sole benefit of Securityholders and shall thereafter not be
subject to the subordination provisions of this Article 5. Otherwise, any
deposit of monies by the Company with the Trustee or any Paying Agent (whether
or not in trust) for the payment of the principal of or interest on any
Securities shall be subject to the provisions of Sections 5.1, 5.2, 5.3 and 5.5;
except that, if two Business Days prior to the date on which by the terms of
this Indenture any such monies may become payable for any purpose (including,
without limitation, the payment of either the principal of or interest on any
Security) the Trustee
27
<PAGE>
shall not have received with respect to such monies the notice provided for in
Section 5.6, then the Trustee or any Paying Agent shall have full power and
authority to receive such monies and to apply such monies to the purpose for
which they were received, and shall not be affected by any notice to the
contrary which may be received by it on or after such date. This Section 5.7
shall be construed solely for the benefit of the Trustee and the Paying Agent
and shall not otherwise affect the rights that holders of Senior Indebtedness
may have to recover any such payments from the Holders in accordance with the
provisions of this Article 5.
SECTION 5.8 SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF COMPANY
-----------------------------------------------------------------
OR HOLDERS OF SENIOR INDEBTEDNESS.
---------------------------------
No right of any present or future holders of any Senior Indebtedness
to enforce subordination, as herein provided, shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
non-compliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof which any such holder may have or
be otherwise charged with. The holders of any Senior Indebtedness may extend,
renew, modify or amend the terms of such Senior Indebtedness or any security
therefor and release, sell or exchange such security and otherwise deal freely
with the Company, all without affecting the liabilities and obligations of the
parties to this Indenture or the Holders. No provision in any supplemental
indenture which affects the superior position of the holders of the Senior
Indebtedness shall be effective against the holders of the Senior Indebtedness
unless the holders of such Senior Indebtedness (required pursuant to the terms
of such Senior Indebtedness to give such consent) have consented thereto.
SECTION 5.9 TRUSTEE TO EFFECTUATE SUBORDINATION.
-----------------------------------
Each holder of a Security by his acceptance thereof authorizes and
directs the Trustee in his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article 5 and
appoints the Trustee his attorney-in-fact for any and all such purposes.
SECTION 5.10 RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS.
--------------------------------------------
The Trustee, in its individual capacity, shall be entitled to all of
the rights set forth in this Article 5 in respect of any Senior Indebtedness at
any time held by it to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall be construed to deprive the
Trustee of any of its rights as such holder.
SECTION 5.11 ARTICLE 5 NOT TO PREVENT EVENTS OF DEFAULT.
------------------------------------------
The failure to make a payment on account of the principal of or
interest on the Securities by reason of any provision in this Article 5 shall
not be construed as preventing the occurrence of any Event of Default under
Section 8.1.
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SECTION 5.12 NO FIDUCIARY DUTY CREATED TO HOLDERS OF SENIOR INDEBTEDNESS.
-----------------------------------------------------------
Notwithstanding any other provision in this Article 5, the Trustee
shall not be deemed to owe any fiduciary duty to the holders of Senior
Indebtedness by virtue of the provisions of this Article 5.
SECTION 5.13 ARTICLE APPLICABLE TO PAYING AGENTS.
-----------------------------------
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article 5 shall in such case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully for all intents and purposes as if such Paying Agent were named
in this Article 5 in addition to or in place of the Trustee; provided, however,
-------- -------
that Sections 5.6, 5.10 and 5.12 shall not apply to the Company if it acts as
Paying Agent.
ARTICLE 6. COVENANTS
SECTION 6.1 PAYMENT OF SECURITIES.
---------------------
The Company shall promptly make all payments in respect of the
Securities on the dates and in the manner provided in the Securities and this
Indenture. An installment of principal or interest shall be considered paid on
the date it is due if the Paying Agent (other than the Company or an Affiliate
of the Company) holds on that date money designated for and sufficient to pay
the installment. The Company shall pay interest on overdue principal at the
rate borne by the Securities per annum; it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 6.2 SEC REPORTS.
-----------
If the Company subsequently becomes subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file
all reports and other information and documents which it is required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act and within 15
days after it files them with the SEC, the Company shall file copies of all such
reports, information and other documents with the Trustee. The Company will
cause any quarterly and annual reports which it mails to its stockholders to be
mailed to the Holders of the Securities.
In the event the Company is at any time not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will
prepare on an annual basis, complete audited consolidated financial statements
including, but not limited to, a balance sheet, a statement of income and
retained earnings, a statement of cash flows and all appropriate notes. All
such financial statements will be prepared in accordance with generally accepted
accounting principles consistently applied, except for changes with which the
Company's independent accountants concur. The Company will cause a copy of such
financial statements to be filed with the Trustee and mailed to the Holders of
the
29
<PAGE>
Securities within 95 days after the end of each fiscal year of the Company,
commencing with the fiscal year ending December 31, 1996.
SECTION 6.3 LIQUIDATION.
-----------
Subject to the provisions of Article 5, so far as they may be
applicable hereto, the Board of Directors or the shareholders of the Company may
not adopt a plan of liquidation which plan provides for, contemplates or the
effectuation of which is preceded by (a) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company otherwise
than substantially as an entirety (Article 7 of this Indenture being the Article
which governs any such sale, lease, conveyance or other disposition
substantially as an entirety), and (b) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and of
the remaining assets of the Company to the holders of the capital stock of the
Company, unless the Company shall in connection with the adoption of such plan
make provision for, or agree that prior to making any liquidating distributions
it will make provision for, the satisfaction of the Company's obligations
hereunder and under the Securities as to the payment of the principal and
interest. The Company shall be deemed to make provision for such payments only
if (1) the Company irrevocably deposits in trust with the Trustee money or U.S.
Government Obligations maturing as to principal and interest in such amounts and
at such times as are sufficient, without consideration of any reinvestment of
such interest, to pay the principal of and interest on the Securities then
outstanding to maturity and to pay all other sums payable by it hereunder, or
(2) there is an express assumption of the due and punctual payment of the
Company's obligations hereunder and under the Securities and the performance and
observance of all covenants and conditions to be performed by the Company
hereunder, by the execution and delivery of a supplemental indenture in form
satisfactory to the Trustee by a person who acquires, or will acquire (otherwise
than pursuant to a lease) a portion of the assets of the Company, and which
person will have assets (immediately after the acquisition) and aggregate
earnings (for such person's four full fiscal quarters immediately preceding such
acquisition) equal to not less than the assets of the Company (immediately
preceding such acquisition) and the aggregate earnings of the Company (for is
four full fiscal quarters immediately preceding the acquisition), respectively,
and which is a corporation organized under the laws of the United States, any
State thereof or the District of Columbia; provided, however, that Company shall
-------- -------
not make any liquidating distribution until after the Company shall have
certified to the Trustee with an Officers' Certificate at least five days prior
to the making of any liquidating distribution that it has complied with the
provisions of this Section 6.3.
SECTION 6.4 COMPLIANCE CERTIFICATES.
-----------------------
The Company shall deliver to the Trustee within 120 days after the end
of each fiscal year of the Company, an Officers' Certificate as to the signer's
knowledge of the Company's compliance with all conditions and covenants on its
part contained in this Indenture and stating whether or not the signer knows of
any default or Event of Default. If such signer knows of such a default or
Event of Default, the Certificate shall
30
<PAGE>
describe the default or Event of Default and the efforts to remedy the same. For
the purposes of this Section 6.4, compliance shall be determined without regard
to any grace period or requirement of notice provided pursuant to the terms of
this Indenture. The Certificate need not comply with Section 12.4 hereof.
SECTION 6.5 NOTICE OF DEFAULTS.
------------------
In the event that indebtedness of the Company in an aggregate amount
in excess of $500,000 is declared due and payable before its maturity because of
the occurrence of any default under such indebtedness, the Company will promptly
give written notice to the Trustee of such declaration or of the occurrence of
any event which, with the giving of notice or the passage of time or both, would
entitle the holder or holders of such indebtedness to declare such indebtedness
due and payable before its maturity.
SECTION 6.6 PAYMENT OF TAXES AND OTHER CLAIMS.
---------------------------------
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company, directly or by reason
of its ownership of any Subsidiary or upon the income, profits or property of
the Company, and (2) all material lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a lien upon the property of the
Company; provided, however, that the Company shall not be required to pay or
-------- -------
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which adequate provision has been made.
SECTION 6.7 CORPORATE EXISTENCE.
-------------------
Subject to Section 6.3 and Article 7, the Company will do or cause to
be done all things necessary to preserve and keep in full force and effect its
corporate existence and rights (charter and statutory); provided, however, that
-------- -------
the Company shall not be required to preserve any right if the Board of
Directors shall determine that the preservation is no longer desirable in the
conduct of the Company's business and that the loss thereof is not, and will not
be, adverse in any material respect to the Holders.
SECTION 6.8 MAINTENANCE OF PROPERTIES.
-------------------------
Subject to Section 6.3, the Company will cause all material properties
owned, leased or licensed in the conduct of its business to be maintained and
kept in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof and thereto, all as in the
judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times
while any Securities are outstanding; provided, however, that nothing in this
-------- -------
Section 6.8 shall prevent the Company from discontinuing the maintenance of any
such properties if, in the judgment of the Board of Directors,
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<PAGE>
such discontinuance is desirable in the conduct of the Company's business and is
not, and will not be, adverse in any material respect to the Holders.
SECTION 6.9 FURTHER INSTRUMENTS AND ACTS.
----------------------------
Upon request of the Trustee, the Company will execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purposes of this Indenture.
ARTICLE 7. SUCCESSOR CORPORATION
SECTION 7.1 WHEN COMPANY MAY MERGE, ETC.
----------------------------
The Company shall not consolidate with or merge with or into, or
transfer all or substantially all of its assets to, any person unless:
(1) Either the Company shall be the resulting or surviving entity or
such person is a corporation organized and existing under the laws of the
United States, a State thereof or the District of Columbia, and such person
expressly assumes by supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the
Company under the Securities and this Indenture (in which case all such
obligations of the Company shall terminate); and
(2) Immediately before and immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of
the Company as a result of such transaction as having been incurred by the
Company at the time of such transaction, no default or Event of Default
shall have occurred and be continuing.
The Company shall deliver to the Trustee prior to the proposed
transaction an Officers' Certificate and an Opinion of Counsel, each of which
shall comply with Section 12.4 and shall state that such consolidation, merger
or transfer and such supplemental indenture comply with this Article 7 and that
all conditions precedent herein provided for relating to such transaction have
been complied with.
SECTION 7.2 SUCCESSOR CORPORATION SUBSTITUTED.
---------------------------------
Upon any consolidation or merger, or any transfer of all or
substantially all of the assets of the Company in accordance with Section 7.1,
the successor corporation formed by such consolidation or into which the Company
is merged or to which such transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this Indenture
with the same effect as if such successor corporation had been named as the
Company herein.
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<PAGE>
ARTICLE 8. DEFAULT AND REMEDIES
SECTION 8.1 EVENTS OF DEFAULT.
-----------------
An "Event of Default" occurs if:
(1) The Company defaults in the payment of interest on any Security
when the same becomes due and payable and the default continues for a
period of 30 days;
(2) The Company defaults in the payment of the principal of any
Security when the same becomes due and payable at maturity, upon redemption
or otherwise;
(3) The Company fails to comply with any of its other agreements
contained in the Securities or this Indenture and the default continues for
the period and after the notice specified below;
(4) The Company shall fail to pay at maturity or at a date fixed for
prepayment or by acceleration (provided, however, such acceleration is not
withdrawn, canceled or otherwise annulled within 10 days following the
occurrence of such acceleration) principal of, premium, if any, or interest
under any bond, debenture, note or other evidence of indebtedness for money
borrowed or under any mortgage, indenture or other instrument under which
there may be issued or by which there may be secured or evidenced any
indebtedness of money borrowed by the Company or under any guarantee of
payment by the Company of indebtedness for money borrowed, whether such
indebtedness or guarantee now exists or shall hereafter be created;
provided, however, no such Event of Default shall exist under this Section
8.1(4) unless the aggregate amount (which is due and unpaid whether by
reason of maturity or at a date fixed for prepayment or by acceleration,
provided, however, such acceleration is not withdrawn, canceled or
otherwise annulled within 10 days following the occurrence of such
acceleration) of such principal, premium, if any, and interest is in excess
of $500,000.
(5) The Company or any Subsidiary pursuant to or within the meaning of
any Bankruptcy Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief against it in an
involuntary case or proceeding;
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property; or
(D) makes a general assignment for the benefit of its creditors;
or
33
<PAGE>
(6) a court of competent jurisdiction enters an order or decree under
any Bankruptcy law that:
(A) is for relief against the Company or any Subsidiary in an
involuntary case or proceeding;
(B) appoints a Custodian of the Company or any Subsidiary or for
all or substantially all of the property of any of them; or
(C) orders the liquidation of the Company or any Subsidiary;
and in each case the order or decree remains unstayed and in effect
for 60 days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator, sequestrator or similar official under
any Bankruptcy Law.
A default under clause (3) is not an Event of Default until the
Trustee notifies the Company or the Holders of at least 25% in principal amount
of the Securities then outstanding notify the Company and the Trustee, of the
default, and the Company does not cure the default within 30 days after receipt
of such notice. The notice given pursuant to this Section 8.1 must specify the
default, demand that it be remedied and state that the notice is a "Notice of
Default." When a default is cured, it ceases.
Subject to the provisions of Sections 9.1 and 9.2, the Trustee shall
not be charged with knowledge of any Event of Default unless written notice
thereof shall have been given to a Trust Officer at the corporate trust office
of the Trustee by the Company, the Paying Agent, any Holder or an agent of any
Holder.
SECTION 8.2 ACCELERATION.
------------
If an Event of Default (other than an Event of Default specified in
Section 8.1(5) or (6)) occurs and is continuing, the Trustee may, by notice to
the Company, or the Holders of at least 25% in principal amount of the
Securities then outstanding may, by notice to the Company and the Trustee, and
the Trustee shall, upon the request of such Holders, declare all unpaid
principal of and accrued interest to the date of acceleration on the Securities
then outstanding (if not then due and payable) to be due and payable upon any
such declaration, the same shall become and be immediately due and payable;
provided, however, that as long as any Bank Debt shall be outstanding, any
- -------- -------
acceleration pursuant to the preceding clause shall not be effective until the
earlier of (a) 5 Business Days following a notice of acceleration given to the
Company and only if on such fifth Business Day, the Event of Default triggering
such notice of acceleration shall be continuing, or (b) the acceleration of the
Bank Debt. The Holders delivering the notice of acceleration shall deliver a
copy of such notice to the holders of such Bank Debt contemporaneously with the
delivery of such notice to the Company and the Trustee. If
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<PAGE>
an Event of Default specified in Section 8.1(5) or (6) occurs, all unpaid
principal of and accrued interest on the Securities then outstanding shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Securityholder. The Holders of a majority
in principal amount of the Securities then outstanding by notice to the Trustee
may rescind an acceleration and its consequences if (i) all existing Events of
Default, other than the nonpayment of the principal of and accrued interest on
the Securities which has become due solely by such declaration of acceleration,
have been cured or waived; (ii) to the extent the payment of such interest is
lawful, interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of acceleration, had
been paid; (iii) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction; and (iv) all payments due to the Trustee
and any predecessor Trustee under Section 9.7 have been made.
SECTION 8.3 OTHER REMEDIES.
--------------
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of the principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
SECTION 8.4 WAIVER OF DEFAULTS AND EVENTS OF DEFAULT.
----------------------------------------
Subject to Sections 8.7 and 11.2, the Holders of a majority in
principal amount of the Securities then outstanding by notice to the Trustee may
waive an existing default or Event of Default and its consequences, except a
default in the payment of the principal of or interest on any Security as
specified in clauses (1) and (2) of Section 8.1. When a default or Event of
Default is waived, it is cured and ceases.
SECTION 8.5 CONTROL BY MAJORITY.
-------------------
The Holders of a majority in principal amount of the Securities then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, that the Trustee determines may be unduly
prejudicial to the rights of another Securityholder or the Trustee, or that may
involve the Trustee in personal liability; provided that the Trustee may take
any other action deemed proper by the Trustee which is not inconsistent with
such direction.
35
<PAGE>
SECTION 8.6 LIMITATION ON SUITS.
-------------------
A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities (except actions for payment of overdue principal or
interest or for the conversion of the Securities pursuant to Article 4) unless:
(1) the Holder gives to the Trustee written notice of a continuing
Event of Default;
(2) the Holders of at least 25% in principal amount of the then
outstanding Securities make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer to the Trustee indemnity satisfactory
to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Securities then outstanding.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over such other
Securityholder.
SECTION 8.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
------------------------------------
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Security to receive payment of the principal of and interest on
the Security, on or after the respective due dates expressed in the Security, or
to bring suit for the enforcement of any such payment on or after such
respective dates, is absolute and unconditional and shall not be impaired or
affected without the consent of the Holder.
SECTION 8.8 COLLECTION SUIT BY TRUSTEE.
--------------------------
In an Event of Default in the payment of principal or interest
specified in Section 8.1(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company or another obligor on the Securities for the whole amount of principal
and accrued interest remaining unpaid, together with interest on overdue
principal and, to the extent that payment of such interest is lawful, interest
on overdue installments of interest, in each case at the rate per annum borne by
the Securities and such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
36
<PAGE>
SECTION 8.9 TRUSTEE MAY FILE PROOF OF CLAIM.
-------------------------------
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Securityholder allowed in any judicial proceedings relative to the Company (or
any other obligor on the Securities), its creditors or its property and shall be
entitled and empowered to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceeding is hereby authorized by each
Securityholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Securityholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 9.7, and to the
extent that such payment of the reasonable compensation, expenses, disbursements
and advances in any such proceedings shall be denied for any reason, payment of
the same shall be secured by a lien on, and shall be paid out of, any and all
distributions, dividends, monies, securities and other property which the
Securityholders may be entitled to receive in such proceedings, whether in
liquidation, or under any plan of reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or the Trustee to authorize or accept or adopt on behalf of any
Securityholder any plan or reorganization, arrangement or composition affecting
the Securities or the rights of any Holder thereof, or to authorize the Trustee
to vote in respect of the claim of any Securityholder in any such proceeding.
SECTION 8.10 PRIORITIES.
----------
If the Trustee collects any money pursuant to this Article 8, it shall
pay out the money in the following order:
First, to the Trustee for amounts due under Section 9.7;
Second, to the holders of Senior Indebtedness to the extent required
by Article 5;
Third, to Securityholders for amounts due and unpaid on the Securities
of principal and interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securities for principal and
interest, respectively; and
Fourth, to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 8.10.
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SECTION 8.11 UNDERTAKING FOR COSTS.
---------------------
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defense made by the party litigant.
This Section 8.11 does not apply to suit made by the Trustee, a suit by a
Holder pursuant to Section 8.7, or a suit by Holders of more than 10% in
principal amount of the Securities then outstanding.
ARTICLE 9. TRUSTEE
SECTION 9.1 DUTIES OF TRUSTEE.
-----------------
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties as are specifically set
forth in this Indenture and no others; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. The
Trustee, however, shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section 9.1;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 8.5.
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(d) The Trustee may refuse to perform any duty or exercise any right
or power unless it receives indemnity satisfactory to it against any loss,
liability, expense or fee.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 9.1.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held
in trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 9.2 RIGHTS OF TRUSTEE.
-----------------
Subject to Section 9.1:
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officer's Certificate or an Opinion of Counsel, which shall conform to Section
12.4(b). The Trustee shall not be liable for any action it takes or omits to
take in good faith in reliance on such Certificate or Opinion.
(c) The Trustee may act through its agents and shall not be
responsible for the misconduct or negligence of any agent appointed with
reasonable care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers.
(e) The Trustee may consult with counsel and the advice or opinion of
such counsel as to matters of law shall be full and complete authorization and
protection in respect of any action taken, omitted or suffered by it hereunder
in good faith and in accordance with the advice or opinion of such counsel.
SECTION 9.3 INDIVIDUAL RIGHTS OF TRUSTEE.
----------------------------
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or an
affiliate of the Company with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to Sections 9.10 and 9.11.
SECTION 9.4 TRUSTEE'S DISCLAIMER.
--------------------
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the
39
<PAGE>
proceeds from the Securities, and it shall not be responsible for any
statement in the Securities other than its certificate of authentication.
SECTION 9.5 NOTICE OF DEFAULT OR EVENTS OF DEFAULT.
--------------------------------------
If a default or an Event of Default occurs and is continuing and if it
is known to the Trustee, the Trustee shall mail to each Securityholder notice of
the default or Event of Default within 90 days after it occurs. Except in the
case of a default or an Event of Default in payment of the principal of or
interest on any Security, the Trustee may withhold the notice if and so long as
a committee of its Trust Officers in good faith determines that withholding the
notice is in the interest of Securityholders.
SECTION 9.6 REPORTS BY TRUSTEE TO HOLDERS.
-----------------------------
If such report is required by TIA Section 313, within 60 days after
each February 1, beginning with the February 1 following the date of this
Indenture, the Trustee shall mail to each Securityholder a brief report dated as
of such February 1 that complies with TIA Section 313(a).
A copy of each report at the time of its mailing to Securityholders
shall be mailed to the Company and filed with the SEC and each stock exchange,
if any, on which the securities are listed. The Company shall notify the
Trustee whenever the Securities become listed on any stock exchange and any
changes in the stock exchanges on which the Securities are listed.
SECTION 9.7 COMPENSATION AND INDEMNITY.
--------------------------
The Company shall pay to the Trustee from time to time reasonable
compensation for its services, including reasonable Trustee default fees, (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust). The Company shall reimburse the
Trustee upon request for all reasonable disbursements, expenses and advances
incurred or made by it. Such expenses may include the reasonable compensation,
disbursements and expenses of Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any loss, liability or expense incurred by it in connection with its
duties under this Indenture or any action or failure to act as authorized or
within the discretion or rights or powers conferred upon the Trustee hereunder.
The Trustee shall notify the Company promptly of any claim asserted against the
Trustee for which it may seek indemnity. The Trustee shall have the option of
undertaking the defense of such claims; provided, however, that if the Trustee
-------- -------
opts not to defend itself, the Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need
not pay for any settlement without its written consent, which consent shall not
be unreasonably withheld.
40
<PAGE>
The Company need not reimburse the Trustee for any expense or
indemnify it against any loss or liability incurred by it through its negligence
or bath faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a senior claim to which the Securities are hereby made
subordinate on all money or property held or collected by the Trustee, except
such money or property held in trust to pay the principal of and interest on
particular Securities. The obligations of the Company under this Section 9.7 to
compensate or indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall be secured by a lien prior to that of
the Securities upon all property and funds held or collected by the Trustee as
such, except funds held in trust for the benefit of the Holders of particular
Securities. The obligations of the Company under this Section 9.7 shall survive
the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 8.1(5) or (6) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy law.
SECTION 9.8 REPLACEMENT OF TRUSTEE.
----------------------
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the Securities then outstanding may remove the
Trustee by so notifying the Trustee and may appoint a successor Trustee with the
Company's written consent. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 9.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee.
If a successor Trustee does not take office within 45 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of 10% in principal amount of the Securities then outstanding may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 9.10 any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
41
<PAGE>
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee and be released from its obligations (exclusive of any
liabilities Trustee may have incurred while acting as Trustee) hereunder, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. A successor Trustee shall mail notice of its succession
to each Securityholder.
Notwithstanding replacement of the Trustee pursuant to this Section
9.8, the Company's obligations under Section 9.7 hereof shall continue for the
benefit of the retiring Trustee.
SECTION 9.9 SUCCESSOR TRUSTEE BY MERGER, ETC.
--------------------------------
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust assets to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee, provided such transferee corporation
shall qualify and be eligible under Section 9.10.
SECTION 9.10 ELIGIBILITY; DISQUALIFICATION.
-----------------------------
This Indenture shall always have a Trustee who satisfies the
requirements of paragraphs(1), (2) and (5) of TIA Section 310(a). If at any
time the Trustee shall cease to satisfy any such requirements, it shall resign
immediately in the manner and with the effect specified in this Article 9. The
Trustee shall be subject to the provisions of TIA Section 310(b). Nothing
herein shall prevent the Trustee from filing with the SEC the application
referred to in the penultimate paragraph of TIA Section 319(b).
SECTION 9.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
-------------------------------------------------
The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated
therein.
ARTICLE 10. SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 10.1 TERMINATION OF COMPANY'S OBLIGATIONS.
------------------------------------
The Company may terminate all of its obligations under the Securities
and this Indenture (exception those obligations referred to in the immediately
succeeding paragraph) if all Securities previously authenticated and delivered
(other than destroyed, lost or stolen Securities which have been replaced or
paid or Securities for whose payment money has theretofore been held in trust
and thereafter repaid to the Company, as provided in Section 10.3) have been
delivered to the Trustee for cancellation and the Company has paid all sums
payable by it hereunder, or if the Company irrevocably
42
<PAGE>
deposits in trust with the Trustee money or U.S. Government Obligations maturing
as to principal and interest in such amounts and at such times as are
sufficient, without consideration of any reinvestment of such interest, to pay
the principal of and interest on the Securities then outstanding to maturity or
to the date fixed for redemption and to pay all other sums payable by it
hereunder provided that, as long as any Bank Credit Agreement shall be in force
and effect, at least five Business Days prior to making such payment of deposit,
the Company shall give notice to the lender(s) under any Bank Credit Agreement
then in force, of its intention to make such payment or deposit. The Company may
make an irrevocable deposit pursuant to this Section 10.1 only if at such time
it is not prohibited from doing so under the provisions of Article 5 and the
Company shall have delivered to the Trustee and any such Paying Agent an
Officer's Certificate to that effect and that all other conditions to such
deposit have been complied with.
The Company's obligations in paragraph 12 of the Securities, in
Section 2.3, 2.4, 2.5, 2.6, 2.7, 2.11, 6.1, 9.7, 9.8 and 10.4, and in Article 4
shall survive until the Securities are no longer outstanding. Thereafter, the
Company's obligations in such paragraph 12 and in Section 9.7 shall survive.
After such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Securities and this Indenture, except for those surviving obligations specified
above.
"U.S. Government Obligations" means direct non-callable obligations
of, or none-callable obligations guaranteed by, the United States of America for
the payment of which guarantee or obligation the full faith and credit of the
Untied States is pledged.
SECTION 10.2 APPLICATION OF TRUST MONEY.
--------------------------
The Trustee or the Paying Agent shall hold in trust, for the benefit
of the Holders, money or U.S. Government Obligations deposited with it pursuant
to Section 10.1, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with this Indenture to the payment of the
principal of and interest on the Securities. Money and U.S. Government
Obligations so held in trust shall not be subject to the subordination
provisions of Article 5.
SECTION 10.3 REPAYMENT TO COMPANY.
--------------------
Subject to Section 10.1, the Trustee and the Paying Agent shall
promptly pay to the Company upon request any excess money or U.S. Government
Obligations held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon request
any money held by them for the payment of principal or interest that remains
unclaimed for two years after a right to such money has matured; provided,
--------
however, that the Trustee or such Paying Agent, before being required to make
- -------
any such payment, may at the expense of the Company cause to be published once
in a newspaper of general circulation
43
<PAGE>
in the City of New York or mail to each Holder entitled to such money notice
that such money remains unclaimed and that after a date specified therein, which
shall be at least 30 days from the date of such publication or mailing, any
unclaimed balance of such money then remaining will be repaid to the Company.
After payment to the Company, Securityholders entitled to money must look to the
Company for payment as general creditors unless otherwise prohibited by law.
SECTION 10.4 REINSTATEMENT.
-------------
If the Trustee or the Paying Agent is unable to apply any money or
U.S. Government Obligations in accordance with Section 10.1 by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Securities
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 10.1 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with Section
10.1; provided, however, that if the Company has made any payment of the
-------- -------
principal of or interest on any Securities because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive any such payment from the money or U.S. Government
Obligations held by the Trustee or the Paying Agent.
ARTICLE 11. AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.1 WITHOUT CONSENT OF HOLDERS.
--------------------------
The Company and the Trustee may amend or supplement this Indenture or
the Securities without notice to or consent of any Securityholder:
(a) to comply with Sections 6.3 and 7.1;
(b) to provide for uncertificated Securities in addition to or in
place of certificated Securities;
(c) to cure any ambiguity, defect or inconsistency, or to make any
other change that does not adversely affect the rights of any Securityholder; or
(d) to comply with the provisions of the TIA, if this Indenture is
then subject to the TIA.
SECTION 11.2 WITH CONSENT OF HOLDERS.
-----------------------
The Company and the Trustee may amend or supplement this Indenture or
the Securities without notice to any Securityholder with the written consent of
the Holders of 66-2/3% in principal amount of the Securities then outstanding.
The Holders of a majority in principal amount of the Securities then outstanding
may waive compliance in a particular instance by the Company with any provision
of this Indenture or the
44
<PAGE>
Securities without notice to any Securityholder. Subject to Section 10.4,
without the written consent of each Securityholder affected, however, an
amendment, supplement or waiver, including a waiver pursuant to Section 8.4, may
not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the rate of or change the time for payment of interest on
any Security;
(3) reduce the principal of or premium on or change the fixed maturity
of any Security or alter the redemption provisions with respect thereto;
(4) alter the conversion provisions with respect to any Security in a
manner adverse to the holder thereof;
(5) waive a default in the payment of the principal of or premium or
interest on any Security;
(6) make any changes in Section 8.4, 8.7 or this sentence;
(7) modify the provisions of Article 5 hereof in a manner adverse to
the Holders; or
(8) make any Security payable in money other than that stated in the
Security.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such amendment, supplement or waiver.
An amendment under this Section 11.2 may not make any change that
adversely affects the rights under Article 5 of any holder of an issue of Senior
Indebtedness unless the holders of that issue, pursuant to its terms, consent to
the change.
SECTION 11.3 COMPLIANCE WITH TRUST INDENTURE ACT.
-----------------------------------
Every amendment to or supplement of this Indenture or the Securities
shall, if required, comply with TIA as in effect at the date of such amendment
or supplement.
45
<PAGE>
SECTION 11.4 REVOCATION AND EFFECT OF CONSENTS.
---------------------------------
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder a Security or portion of a Security that evidences the same debt as the
consenting Holder's Security, even if notation of the consent is not make on any
Security. However, any such Holder or subsequent Holder may revoke the consent
as to his Security or portion of a Security if the Trustee receives the notice
of revocation before the date the amendment, supplement or waiver becomes
effective.
After an amendment, supplement or waiver becomes effective, it shall
bind every Securityholder, unless it makes a change described in any of clauses
(1) through (8) of Section 11.2. In that case the amendment, supplement or
waiver shall bind each Holder of a Security that evidences the same debt as the
consenting Holder's Security.
SECTION 11.5 NOTATION ON OR EXCHANGE OF SECURITIES.
-------------------------------------
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee.
The Trustee may place an appropriate notation on the Security about the changed
terms and return it to the Holder. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the Security shall issue and the
Trustee shall authenticate a new Security that reflects the changed terms.
SECTION 11.6 TRUSTEE TO SIGN AMENDMENTS, ETC.
-------------------------------
The Trustee shall sign any amendment or supplement authorized pursuant
to this Article 11 if the amendment or supplement does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may but need not sign it. In signing or refusing to sign such amendment
or supplement, the Trustee shall be entitled to receive and, subject to Section
9.1 shall be fully protected in relying upon, an Opinion of Counsel stating that
such amendment or supplement is authorized or permitted by this Indenture. The
Company shall not sign an amendment or supplement until the Board of Directors
approves it.
ARTICLE 12. MISCELLANEOUS
SECTION 12.1 TRUST INDENTURE ACT CONTROLS.
----------------------------
If the Trust Indenture Act applies and any provision of this Indenture
limits, qualifies or conflicts with the duties imposed by any of Sections 310 to
317, inclusive, of the TIA through operation of Section 318(c) thereof, such
imposed duties shall control.
SECTION 12.2 NOTICES.
-------
Any notice or communication shall be given in writing and delivered in
person or mailed by first-class mail, postage prepaid, addressed as follows:
46
<PAGE>
if to the Company:
Birner Dental Management Services, Inc.
3801 E. Florida Avenue
Suite 208
Denver, Colorado 80210
Attention: Chief Executive Officer
if to the Trustee:
Colorado National Bank
950 Seventeenth Street
Suite 2450
Denver, CO 80202
Attention: Adam Dalmy, Corporate Trust Department
Such notices or communications shall be effective when received.
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notice or communications.
Any notice or communication mailed to a Securityholder shall be mailed
by first-class mail to him at his address shown on the register kept by the
Registrar.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication to a Securityholder is mailed in
the manner provided above, it is duly given, whether or not the addressee
receives it.
SECTION 12.3 COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.
--------------------------------------------
Securityholders may communicate pursuant to TIA Section 312(b) with
other Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other person shall
have the protection of TIA Section 312(c).
SECTION 12.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
--------------------------------------------------
(a) Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee
at the request of the Trustee:
(1) an Officer's Certificate stating that, in the opinion of the
signers, all conditions precedent (including any covenants compliance with
which constitutes a condition precedent), if any, provided for this
Indenture relating to the proposed action have been complied with; and
47
<PAGE>
(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent (including any covenants compliance
with which constitutes a condition precedent) have been complied with.
(b) Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture (other
than annual certificates provided pursuant to Section 6.4 hereof) shall include:
(1) a statement that the person making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with;
(4) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with; provided, however, that
-------- -------
with respect to matters of fact an Opinion of Counsel may rely on an
Officer's Certificate or certificates of public officials.
SECTION 12.5 RECORD DATE FOR VOTE OR CONSENT OF SECURITYHOLDERS.
--------------------------------------------------
The Company (or, in the event deposits have been made pursuant to
Sections 6.3 or 10.1, the Trustee), may set a record date for purposes of
determining the identify of Securityholders entitled to vote or consent to any
action by vote or consent authorized or permitted under this Indenture, which
record date shall be the later of 10 days prior to the first solicitation of
such vote or consent or the date of the most recent list of Securityholders
furnished to the Trustee pursuant to Section 2.5 hereof prior to such
solicitation. If a record date is fixed, those persons who were Holders or
Securities at such record date (or their duly designated proxies), and only
those persons, shall be entitled to take such action by vote or consent or to
revoke any vote or consent previously given, whether or not such persons
continue to be Holders after such record date.
SECTION 12.6 RULES BY TRUSTEE, PAYING AGENT, REGISTRAR.
-----------------------------------------
The Trustee may make reasonable rules for action by or at a meeting
Holders. The Registrar or the Paying Agent may make reasonable rules for its
functions.
SECTION 12.7 LEGAL HOLIDAYS.
--------------
A "Legal Holiday" is a Saturday, or a Sunday or a day on which state
or Federally chartered banking institutions in New York, New York or the city
and state where the
47
<PAGE>
Trustee's corporate trust operations are located, which initially are Denver,
Colorado are not required to be open. If a payment date is a Legal Holiday at a
place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period.
SECTION 12.8 GOVERNING LAW.
-------------
The laws of the State of Colorado shall govern this Indenture and the
Securities without regard to principles of conflicts of law.
SECTION 12.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
---------------------------------------------
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or a Subsidiary. any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 12.10 NO RECOURSE AGAINST OTHERS.
--------------------------
All liability described in paragraph 17 of the Securities of any
director, officer, employee or stockholder, as such, of the Company is waived
and released.
SECTION 12.11 SUCCESSORS.
----------
All agreements of the Company in this Indenture and the Securities
shall bind its successor. All agreements of the Trustee in this Indenture shall
bind its successor.
SECTION 12.12 MULTIPLE COUNTERPARTS.
---------------------
The parties may sign multiple counterparts of this Indenture. Each
signed counterpart shall be deemed an original, but all of them together
represent the same agreement.
SECTION 12.13 SEPARABILITY.
------------
In case any provisions in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 12.14 TABLE OF CONTENTS, HEADINGS, ETC.
--------------------------------
The table of contents, cross-reference sheet and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
as of this ____ day of ____________, 199__.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:_____________________________________________
Name:
Title:
[SEAL OF BIRNER DENTAL MANAGEMENT
SERVICES, INC. APPEARS HERE]
Attest:
____________________________
Name:_______________________
Title:______________________
COLORADO NATIONAL BANK
as Trustee
By:_____________________________________________
Name:
Title:
[SEAL OF COLORADO NATIONAL BANK
APPEARS HERE]
Attest:
___________________________
Name:______________________
Title:_____________________
50
<PAGE>
EXHIBIT A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 ("THE ACT") OR ANY APPLICABLE STATE SECURITIES LAWS ("STATE ACTS")
AND ARE RESTRICTED SECURITIES AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT.
THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE ACT AND APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF BIRNER DENTAL MANAGEMENT SERVICES, INC.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
9% CONVERTIBLE SUBORDINATED DEBENTURE DUE DECEMBER 27, 2001
BIRNER DENTAL MANAGEMENT SERVICES, INC., a Colorado corporation, promises
to pay to________________________________ or registered assigns the principal
sum of______________________ Dollars on December 27, 2001.
Interest Payment Dates: February 1 and August 1
Regular Record Dates: January 15 and July 15
This Debenture is convertible as set forth herein. Additional provisions
of this Debenture are set forth in Paragraphs 1 through 22 hereof.
Dated: BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:____________________________________________
Name: Mark Birner
Title: President
[SEAL OF BIRNER DENTAL MANAGEMENT
SERVICES, INC. APPEARS HERE]
Attest:
By:_________________________________
Secretary
Trustee's Certificate of Authentication:
This is one of the Securities referred to
in the within-mentioned Indenture.
COLORADO NATIONAL BANK
as Trustee
By:__________________________________
A-1
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
9% CONVERTIBLE SUBORDINATED DEBENTURE DUE DECEMBER 27, 2001
1. Interest.
--------
Birner Dental Management Services, Inc., a Colorado corporation (the
"Company"), promises to pay interest on the principal amount of this Debenture
at the rate per annum shown above. The Company shall pay interest semi-annually
on February 1 and August 1 of each year, commencing August 1, 1997. Interest on
the Debentures will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date of first issuance of this
Debenture under the Indenture (as defined below). Interest will be computed on
the basis of a 360-day year of twelve 30-day months.
2. Method of Payment.
-----------------
The Company will pay interest on this Debenture (except defaulted
interest) to the person who is the registered Holder of this Debenture at the
close of business on January 15 and July 15 next preceding the Interest Payment
Date. The Holder must surrender this Debenture to the Paying Agent to collect
payment of principal. The Company will pay principal and interest in money of
the United States that at the time of payment is legal tender for payment of
public and private debts. The Company, however, may pay principal and interest
by its check payable in such money. It may mail an interest check to the
Holder's registered address.
3. Paying Agent, Registrar and Conversion Agent.
--------------------------------------------
Initially, Colorado National Bank (the "Trustee") will act as Paying
Agent, Registrar and Conversion Agent. The Company may change any Paying Agent,
Registrar or Conversion Agent without notice to the holder. The Company or any
of its Subsidiaries may act as Paying Agent, Registrar or Conversion Agent.
4. Indenture, Limitations.
----------------------
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its 9% Convertible Subordinated Debentures due December
27, 2001 (the "Debentures"), issued under an Indenture dated as of December 27,
1996 (the "Indenture"), between the Company and the Trustee. The terms of this
Debenture include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended, and as in
effect on the date of the Indenture. This Debenture is subject to all such
terms, and the holder of this Debenture is referred to the Indenture and said
Act for a statement of them.
A-2
<PAGE>
The Debentures are subordinated unsecured obligations of the Company
limited to up to $2,500,000 aggregate principal amount. The Indenture does not
limit other debt of the Company, secured or unsecured, including Senior
Indebtedness.
5. Redemption by the Company.
-------------------------
Except as provided in this Paragraph 5, the Debentures may not be
redeemed by the Company. The Company will redeem on each of December 27, 1999
and December 27, 2000, 20% of the aggregate principal amount of the Debentures
initially issued under the Indenture. The Redemption Price shall be equal to
the principal amount of the Debentures being redeemed on such December 27
("Redemption Date"). Accrued interest shall be paid to the date of redemption
on Debentures redeemed on such December 27 ("Redemption Date"). The Trustee
shall select the Debentures to be redeemed by lot or by a method the Trustee
considers fair and appropriate; provided that such method is not prohibited by
any stock exchange or market on which the Debentures are then listed. The
Trustee shall make the selection from the Debentures outstanding and not
previously called for redemption. Debentures in denominations of $1,000 may
only be redeemed in whole. The Trustee may select for redemption portions
(equal to $1,000 or any multiple thereof) of the principal Debentures that have
denominations larger than $1,000.
6. Notice of Redemption.
--------------------
Notice of redemption will be mailed by first class mail at least 20 days
before the Redemption Date to each Holder of Debentures to be redeemed at his
registered address. Debentures in denominations larger than $1,000 may be
redeemed in part, but only in whole multiples of $1,000. On and after the
Redemption Date, subject to the deposit with the Paying Agent of funds
sufficient to pay the Redemption Price, interest ceases to accrue on Debentures
or portions of them called for redemption.
7. Conversion.
----------
A Holder of a Debenture may convert such Debenture into shares of Common
Stock of the Company at any time prior to maturity; provided that if the
Debenture is called for redemption, the conversion right will terminate at the
close of business on the Redemption Date for such Debenture (unless the Company
shall default in making the redemption payment when due, in which case the
conversion right shall terminate at the close of business on the date such
default is cured and such Debenture is redeemed); provided, further, that if the
-------- -------
Holder of a Debenture presents such Debenture for redemption prior to the close
of business on the Redemption Date for such Debenture the right of conversion
shall terminate upon presentation of the Debenture to the Trustee (unless the
Company shall default in making the redemption payment when due, in which case
the conversion right shall terminate on the close of business on the date such
default is cured and such Debenture is redeemed). The initial Conversion Price
is $5.00 per share, subject to adjustment under certain circumstances. The
number of shares issuable upon conversion of a Debenture is determined by
dividing the principal amount
A-3
<PAGE>
converted by the Conversion Price in effect on the conversion date. Payment of
accrued interest on a converted Debenture will be made to the conversion date on
the next succeeding interest payment date. Upon conversion, no adjustment for
dividends will be made for dividends or distributions on shares of Common Stock
issued upon conversion of a Debenture. No fractional shares will be issued upon
conversion; in lieu thereof, an amount will be paid in cash based upon the
Conversion Price of the Common Stock on the last trading day prior to the date
of conversion.
To convert a Debenture, a Holder must (a) complete and manually sign the
conversion notice attached hereto and deliver such notice to the Conversion
Agent, (b) surrender the Debenture to the Conversion Agent, (c) furnish
appropriate endorsements or transfer documents if required by the Registrar or
the Conversion Agent, (d) execute any investment letters or other documents
required by the Company, and (e) pay any transfer or similar tax, if required.
If a Holder surrenders a Debenture for conversion between the record date for
the payment of an installment of interest and the next interest payment date,
the amount of interest payable on such interest payment date will be the amount
accrued to the date of conversion on the principal amount of the Debenture or
portion thereof then converted. A Holder may convert a portion of a Debenture
equal to $1,000 or any integral multiple thereof.
8. Restrictions on Transfer.
------------------------
Unless otherwise instructed by the Company, any and all instruments
representing the Debentures and certificates representing any shares of Common
Stock issued upon conversion of the Debentures and any and all securities issued
in replacement thereof or in exchange therefor to bear the following legend, or
one substantially similar thereto:
"The securities represented hereby have not been registered under
the Securities Act of 1933 (the "Act") or any applicable state
securities laws ("State Acts") and are restricted securities as
that term is defined in Rule 144 under the Act. The securities may
not be offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement or qualification
under the Act and applicable State Acts or pursuant to an
exemption from registration under the Act and applicable State
Acts, the availability of which is to be established to the
satisfaction of the Company."
The Trustee shall permit transfer of the Debentures and any shares of Common
Stock issued upon conversion of the Debentures only upon written instructions
from the Company or its counsel that such transfer is permitted under the Act
and applicable State Acts. Unless otherwise instructed by the Company, each
Holder who is a transferee of the Debentures or shares of Common Stock issuable
upon the conversion of the Debentures (including Holders whose Debentures are
converted) may be required to execute investment letters and other documents as
required by the Company. If
A-4
<PAGE>
instructed in writing by the Company or its counsel, there should also be placed
on any instruments representing the Debentures and certificates representing any
shares of Common Stock issued upon conversion of the Debentures and any and all
securities issued in replacement thereof or in exchange therefor, any legend as
may be required by the securities laws of the state in which the Holder of such
Debentures or shares of Common Stock resides.
9. Subordination.
-------------
The indebtedness evidenced by the Debentures is, to the extent and in the
manner provided in the Indenture, subordinate and junior in right of payment to
the prior payment in full of all Senior Indebtedness of the Company, as defined
in the Indenture. Senior Indebtedness must be paid before any payment may be
made to any Holder of this Debenture. Any Holder by accepting this Debenture
agrees to and shall be bound by such subordination provisions and authorizes the
Trustee to give them effect.
In addition to all other rights of Senior Indebtedness described in the
Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness and
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any terms of any instrument relating to the
Senior Indebtedness or any extension or renewal of the Senior Indebtedness.
10. Denominations, Transfer, Exchange.
---------------------------------
The Debentures are in registered form without coupons in denominations of
$1,000 and integral multiples of $1,000. A Holder may register the transfer of
or exchange Debentures in accordance with the Indenture. The Register may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes or other governmental charges that may
be imposed by law or permitted by the Indenture.
11. Persons Deemed Owners.
---------------------
The registered holder of a Debenture may be treated as the owner of it
for all purposes.
12. Unclaimed Money.
---------------
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent will pay the money back to the Company at
its request. After that, Holders entitled to money must look solely to the
Company for payment.
A-5
<PAGE>
13. Amendment, Supplement, Waiver.
-----------------------------
Subject to certain exceptions, the Indenture or the Debentures may be
amended or supplemented with the consent of the Holders of 66-2/3% in principal
amount of the Debentures then outstanding and any past default or compliance
with any provision may be waived in a particular instance with the consent of
the Holders of a majority in principal amount of the Debentures then
outstanding. Without the consent of or notice to any Holder, the Company and
the Trustee may amend or supplement the Indenture or the Debentures to, among
other things, provide for uncertificated Debentures in addition to or in place
of certificated Debentures, or to cure any ambiguity, defect or inconsistency or
make any other change that does not adversely affect the rights of any Holder.
14. Successor Corporation.
---------------------
When a successor corporation assumes all the obligations of its
predecessor under the Debentures and the Indenture, the predecessor corporation
will be released from those obligations.
15. Defaults and Remedies.
---------------------
An Event of Default is: default for 30 days in payment of interest on
the Debentures; default in payment of principal on the Debentures when due;
failure by the Company for 30 days after notice to it to comply with any of its
other agreements contained in the Indenture or the Debentures; certain events of
bankruptcy, insolvency or reorganization of the Company or any of its
subsidiaries; and certain defaults on other indebtedness. If an Event of
Default (other than as a result of certain events of bankruptcy, insolvency or
reorganization), occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the Debentures then outstanding may declare all
unpaid principal of and accrued interest to the date of acceleration on the
Debentures then outstanding to be due and payable immediately, all as and to the
extent provided in the Indenture. If an Event of Default occurs as a result of
certain events of bankruptcy, insolvency or reorganization, all unpaid principal
of and accrued interest on the Debentures then outstanding shall become due and
payable immediately without any declaration or other act on the part of the
-----------
Trustee or any Holder, all as and to the extent provided in the Indenture.
Holders may not enforce the Indenture or the Debentures except as provided in
the Indenture. The Trustee may require indemnity satisfactory to it before it
enforces the Indenture or the Debentures. Subject to certain limitations,
Holders of a majority in principal amount of the Debentures then outstanding may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders notice of any continuing default (except a default in
payment of principal or interest) if it determines that withholding notice is in
their interests. The Company is required to file periodic reports with the
Trustee as to the absence of default.
A-6
<PAGE>
16. Trustee Dealings with the Company.
---------------------------------
Colorado National Bank, the Trustee under the Indenture, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or an Affiliate of the Company, and may
otherwise deal with the Company or an Affiliate of the Company, as if it were
not the Trustee.
17. No Recourse Against Others.
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Debentures or the Indenture or for any claim based on, in respect or by reason
of, such obligations or their creation. The Holder of this Debenture by
accepting this Debenture waives and releases all such liability. The waiver and
release are part of the consideration for the issue of this Debenture.
18. Discharge Prior to Maturity.
---------------------------
If the Company deposits with the Trustee or the Paying Agent money or
U.S. Government Obligations sufficient to pay the principal of and interest on
the Debentures to maturity, the Company will be discharged from the Indenture
except for certain Sections thereof.
19. Authentication.
--------------
This Debenture shall not be valid until the Trustee or an authenticating
agent signs the certificate of authentication on this Debenture.
20. Abbreviations and Definitions.
-----------------------------
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN or JTWROS (= joint tenants with right of survivorship and
not as tenants in common), CUST (= Custodian), POA (= Power of Attorney), DTD (=
dated), TTEE (= Trustee), FBO (= for benefit of) and U/G/M/A (= Uniform Gifts to
Minors Act).
All capitalized terms used in this Debenture and not specifically defined
herein are defined in the Indenture and are used herein as so defined.
21. Indenture to Control.
--------------------
In the case of any conflict between the provisions of this Debenture and
the Indenture, the provisions of the Indenture shall control.
The Company will furnish to any Holder, upon written request and without
charge, a copy of the Indenture. Requests may be made to: Birner Dental
Management
A-7
<PAGE>
Services, Inc., Suite 208, 3801 East Florida Avenue, Denver, Colorado 80210,
Attention: Chief Executive Officer.
22. Surrender of Debentures
-----------------------
Holders surrendering Debentures for redemption or conversion should send
them to:
Colorado National Bank
Principal Operations Center
First Trust N.A.
180 East 5th Street
4th Floor
Bond Drop Window
St. Paul, Minnesota 55101
A-8
<PAGE>
ASSIGNMENT FORM
To assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to:_________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Insert assignee's name, soc. sec. or tax I.D. no.)
_______________________________________________________________________________
_______________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint:
_______________________________________________________________________________
agent to transfer this Debenture on the books of the Company. The Agent may
substitute another to act for him.
Date:__________________________________________
Your signature:________________________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
________________________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
*Signature guaranteed by:
_____________________________________
By:__________________________________
_____________________
*The signature must be guaranteed by an eligible institution (as defined in
Rule 17Ad-15 under the Exchange Act) that participates in a Securities Transfer
Association recognized signature guarantee program or such other guarantee
acceptable to the Trustee.
A-9
<PAGE>
CONVERSION NOTICE
To convert this Debenture into common Stock of the Company, check the box: [ ]
To convert only part of this Debenture, state the amount:_______________________
If you want the stock certificate made out in another person's name, fill in the
form below:
________________________________________________________________________________
(insert other person's soc. sec. or tax I.D. no.)
________________________________________________________________________________
(Print or type other person's name, address and zip code)
________________________________________________________________________________
________________________________________________________________________________
Date:_______________________________
Your signature:_________________________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
_________________________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
*Signature guaranteed by:_______________________________________
________________________________________________________________________________
By:_____________________________________________________________________________
___________________
*The signature must be guaranteed by an eligible institution (as defined in
Rule 17Ad-15 under the Exchange Act) that participates in a Securities Transfer
Association recognized signature guarantee program or such other guarantee
acceptable to the Trustee.
A-10
<PAGE>
EXHIBIT 10.22
================================================================================
BIRNER DENTAL MANAGEMENT SERVICES, INC.
$5,000,000
9% Convertible Subordinated Debentures
due May 15, 2001
--------------------------------------
INDENTURE
Dated as of May 15, 1996
--------------------------------------
COLORADO NATIONAL BANK
Trustee
================================================================================
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------ ---------------------- -------------
A Form of Security A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE..................................................................... 1
SECTION 1.01. DEFINITIONS................................................................................................. 1
SECTION 1.02. OTHER DEFINITIONS........................................................................................... 4
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT........................................................... 5
SECTION 1.04. RULES OF CONSTRUCTION....................................................................................... 5
ARTICLE 2. THE SECURITIES................................................................................................. 6
SECTION 2.01. FORM AND DATING............................................................................................. 6
SECTION 2.02. EXECUTION AND AUTHENTICATION................................................................................ 6
SECTION 2.03. REGISTRAR, PAYING AGENT AND CONVERSION AGENT................................................................ 7
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST......................................................................... 7
SECTION 2.05. SECURITYHOLDER LISTS........................................................................................ 7
SECTION 2.06. TRANSFER AND EXCHANGE....................................................................................... 8
SECTION 2.07. REPLACEMENT SECURITIES...................................................................................... 8
SECTION 2.08. OUTSTANDING SECURITIES...................................................................................... 9
SECTION 2.09. TREASURY SECURITIES......................................................................................... 9
SECTION 2.10. TEMPORARY SECURITIES........................................................................................ 9
SECTION 2.11. CANCELLATION................................................................................................ 10
ARTICLE 3. REDEMPTION AND PURCHASES....................................................................................... 10
SECTION 3.01. REDEMPTION BY THE COMPANY................................................................................... 10
SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED...................................................................... 10
SECTION 3.03. NOTICE OF REDEMPTION........................................................................................ 10
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.............................................................................. 11
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE................................................................................. 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 3.06. SECURITIES REDEEMED IN PART................................................................................. 12
SECTION 3.07. REPAYMENT TO THE COMPANY.................................................................................... 12
ARTICLE 4. CONVERSION..................................................................................................... 12
SECTION 4.01. CONVERSION AT OPTION OF HOLDERS............................................................................. 12
SECTION 4.02. CONVERSION PROCEDURE........................................................................................ 13
SECTION 4.03. FRACTIONAL SHARES........................................................................................... 13
SECTION 4.04. TAXES ON CONVERSION......................................................................................... 14
SECTION 4.05. COMPANY TO PROVIDE COMMON STOCK............................................................................. 14
SECTION 4.06. ADJUSTMENT OF CONVERSION PRICE.............................................................................. 15
SECTION 4.07. NO ADJUSTMENT............................................................................................... 16
SECTION 4.08. EQUIVALENT ADJUSTMENTS...................................................................................... 17
SECTION 4.09. ADJUSTMENT FOR TAX PURPOSES................................................................................. 17
SECTION 4.10. NOTICE OF ADJUSTMENT........................................................................................ 17
SECTION 4.11. NOTICE OF CERTAIN TRANSACTIONS.............................................................................. 17
SECTION 4.12. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE ON CONVERSION PRIVILEGE........................... 18
SECTION 4.13. TRUSTEE'S DISCLAIMER........................................................................................ 19
SECTION 4.14. VOLUNTARY REDUCTION......................................................................................... 19
SECTION 4.15. MANDATORY CONVERSION........................................................................................ 19
SECTION 4.16. RESTRICTIONS ON TRANSFER.................................................................................... 20
ARTICLE 5. SUBORDINATION.................................................................................................. 20
SECTION 5.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.............................................................. 20
SECTION 5.02. SECURITIES SUBORDINATED TO PRIORI PAYMENT OF ALL SENIOR INDEBTEDNESS ON DISSOLUTION,
LIQUIDATION, REORGANIZATION, ETC., OF THE COMPANY........................................................... 21
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 5.03. SECURITYHOLDERS TO BE SUBROGATED TO RIGHT OF HOLDERS OF SENIOR INDEBTEDNESS........................... 23
SECTION 5.04. OBLIGATIONS OF THE COMPANY UNCONDITIONAL.............................................................. 23
SECTION 5.05. COMPANY NOT TO MAKE PAYMENT WITH RESPECT TO SECURITIES IN CERTAIN CIRCUMSTANCES....................... 23
SECTION 5.06. NOTICE TO TRUSTEE..................................................................................... 24
SECTION 5.07. APPLICATION BY TRUSTEE OF MONIES DEPOSITED WITH IT.................................................... 25
SECTION 5.08. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF COMPANY OR HOLDERS OF SENIOR INDEBTEDNESS... 25
SECTION 5.09. TRUSTEE TO EFFECTUATE SUBORDINATION................................................................... 25
SECTION 5.10. RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS.......................................................... 26
SECTION 5.11. ARTICLE 5 NOT TO PREVENT EVENTS OF DEFAULT............................................................ 26
SECTION 5.12. NO FIDUCIARY DUTY CREATED TO HOLDERS OF SENIOR INDEBTEDNESS........................................... 26
SECTION 5.13. ARTICLE APPLICABLE TO PAYING AGENTS................................................................... 26
ARTICLE 6. COVENANTS................................................................................................ 27
SECTION 6.01. PAYMENT OF SECURITIES................................................................................. 27
SECTION 6.02. SEC REPORTS........................................................................................... 27
SECTION 6.03. LIQUIDATION........................................................................................... 27
SECTION 6.04. COMPLIANCE CERTIFICATES............................................................................... 28
SECTION 6.05. NOTICE OF DEFAULTS.................................................................................... 28
SECTION 6.06. PAYMENT OF TAXES AND OTHER CLAIMS..................................................................... 28
SECTION 6.07. CORPORATE EXISTENCE................................................................................... 28
SECTION 6.08. MAINTENANCE OF PROPERTIES............................................................................. 29
SECTION 6.09. FURTHER INSTRUMENTS AND ACTS.......................................................................... 29
ARTICLE 7 SUCCESSOR COPORATION...................................................................................... 29
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
SECTION 7.01. WHEN COMPANY MAY MERGE, ETC........................................................................... 29
SECTION 7.02. SUCCESSOR CORPORATION SUBSTITUTED..................................................................... 30
ARTICLE 8 DEFAULT AND REMEDIES...................................................................................... 30
SECTION 8.01. EVENTS OF DEFAULT..................................................................................... 30
SECTION 8.02. ACCELERATION.......................................................................................... 31
SECTION 8.03. OTHER REMEDIES........................................................................................ 32
SECTION 8.04. WAIVER OF DEFAULTS AND EVENTS OF DEFAULT.............................................................. 32
SECTION 8.05. CONTROL BY MAJORITY................................................................................... 33
SECTION 8.06. LIMITATION ON SUITS................................................................................... 33
SECTION 8.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.................................................................. 33
SECTION 8.08. COLLECTION SUIT BY TRUSTEE............................................................................ 33
SECTION 8.09. TRUSTEE MAY FILE PROOF OF CLAIM....................................................................... 34
SECTION 8.10. PRIORITIES............................................................................................ 34
SECTION 8.11. UNDERTAKING FOR COSTS................................................................................. 35
ARTICLE 9 TRUSTEE................................................................................................... 35
SECTION 9.01. DUTIES OF TRUSTEE..................................................................................... 35
SECTION 9.02. RIGHTS OF TRUSTEE..................................................................................... 36
SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE.......................................................................... 36
SECTION 9.04. TRUSTEE'S DISCLAIMER.................................................................................. 36
SECTION 9.05. NOTICE OF DEFAULT OR EVENTS OF DEFAULT................................................................ 37
SECTION 9.06. REPORTS BY TRUSTEE TO HOLDERS......................................................................... 38
SECTION 9.07. COMPENSATION AND INDEMNITY............................................................................ 38
SECTION 9.08. REPLACEMENT OF TRUSTEE................................................................................ 39
SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC...................................................................... 39
SECTION 9.10. ELIGIBILITY; DISQUALIFICATION......................................................................... 40
SECTION 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY..................................................... 40
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE 10 SATISFACTION AND DISCHARGE OF INDENTURE.................................................................. 40
SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS................................................................. 40
SECTION 10.02. APPLICATION OF TRUST MONEY........................................................................... 41
SECTION 10.03. REPAYMENT TO COMPANY................................................................................. 41
SECTION 10.04. REINSTATEMENT........................................................................................ 41
ARTICLE 11 AMENDMENTS, SUPPLEMENTS AND WAIVERS...................................................................... 42
SECTION 11.01. WITHOUT CONSENT OF HOLDERS........................................................................... 42
SECTION 11.02. WITH CONSENT OF HOLDERS.............................................................................. 42
SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT.................................................................. 43
SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS.................................................................... 43
SECTION 11.05. NOTATION ON OR EXCHANGE OF SECURITIES................................................................ 43
SECTION 11.06. TRUSTEE TO SIGN AMENDMENTS, ETC...................................................................... 44
ARTICLE 12 MISCELLANEOUS............................................................................................ 44
SECTION 12.01. TRUST INDENTURE ACT CONTROLS......................................................................... 44
SECTION 12.02. NOTICES.............................................................................................. 44
SECTION 12.03. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS......................................................... 45
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT................................................... 45
SECTION 12.05. RECORD DATE FOR VOTE OR CONSENT OF SECURITYHOLDERS................................................... 45
SECTION 12.06. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR............................................................ 46
SECTION 12.07. LEGAL HOLIDAYS....................................................................................... 46
SECTION 12.08. GOVERNING LAW........................................................................................ 46
SECTION 12.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS........................................................ 46
SECTION 12.10. NO RECOURSE AGAINST OTHERS........................................................................... 47
SECTION 12.11. SUCCESSORS........................................................................................... 47
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 12.12. MULTIPLE COUNTERPARTS................................................................................ 47
SECTION 12.13. SEPARABILITY......................................................................................... 47
SECTION 12.14. TABLE OF CONTENTS, HEADINGS, ETC..................................................................... 47
</TABLE>
vi
<PAGE>
INDENTURE dated as of May 15, 1996 between BIRNER DENTAL MANAGEMENT
SERVICES, INC., a Colorado corporation (the "Company"), and COLORADO NATIONAL
BANK, a national banking association, as Trustee (the "Trustee").
Both parties agree as follows for the benefit of the other and for the
equal and ratable benefit of the registered holders of the Company's 9%
Convertible Subordinated Debentures due May 15, 2001.
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
-----------
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"Control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Agent" means any Registrar, Paying Agent or Conversion Agent.
"Associate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act, as such Rule is in
effect on the date of this Indenture.
"Bank Debt" means any and all amounts payable under or in respect of
any loan agreement between the Company and any commercial bank, promissory notes
executed by the Company in connection therewith, or any other related agreement,
including principal, premium (if any), interest (including, without limitation,
any interest accruing subsequent to the filing of a petition or other action
concerning bankruptcy or other similar proceeding, whether or not constituting
an allowed claim in any such proceedings), fees, charges, expenses,
reimbursement obligations, guarantees and all other amounts payable thereunder
or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or
any authorized committee of the Board of Directors.
"Business Day" means a day that is not a Legal Holiday.
"Capitalized Lease Obligation" means indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with generally accepted accounting principles
and the amount of such indebtedness shall be the capitalized amount of such
obligations determined in accordance with such principles.
"Cash" or "cash" means such coin or currency of the United States as
at any time of payment is legal tender for the payment of public and private
debts.
"Common Stock" means the common stock of the Company as it exists on
the date of this Indenture or as it may be constituted from time to time.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to this Indenture and thereafter means the
successor.
1
<PAGE>
"Default" or "default" means any event which is, or after notice of
passage of time, or both, would be, an Event of Default.
"Holder" or Securityholder" means the person in which name a Security
is registered on the Registrar's books.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"Non-payment Event of Default" means a default on Senior Indebtedness
of which the Company has received notice (other than a Payment Event of Default)
that occurs and is continuing and that permits the holders of the Senior
Indebtedness to accelerate the maturity of such Senior Indebtedness.
"Officer" means the Chairman of the Board and Chief Executive Officer,
the President, any Vice President, the Controller, the Chief Financial Officer,
the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers or
by an Officer and an Assistant Treasurer or Assistant Secretary of the Company;
provided, however, that for purposes of Section 6.04, "Officers' Certificate"
- -------- -------
means a certificate signed by the Chief Executive Officer, Chief Financial
Officer or Controller of the Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Payment Event of Default" means any default in the payment of
principal of (or premium, if any) or interest on Senior Indebtedness beyond any
applicable grace period with respect thereto.
"Person" or person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or government or other agency or political
subdivision thereof.
"Principal" or "principal" of a debt security, including Securities,
means the principal of the security plus, when appropriate, the premium, if any,
on the security.
"Redemption Date" or "redemption date", when used with respect to any
Security to be redeemed, means the date fixed for such redemption pursuant to
this Indenture, as set forth in the form of Security annexed as Exhibit A
---------
hereto.
"Redemption Price" or "redemption price", when used with respect to
any Security to be redeemed, means the price fixed for such redemption pursuant
to this Indenture, as set forth in the form of Security annexed as Exhibit A
---------
hereto.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Securities" means the 9% Convertible Subordinated Debentures due May
15, 2001 or any of them (each a "Security"), as amended or supplemented from
time to time, that are issued under this Indenture.
"Senior Indebtedness" means (a) the principal of and premium, if any,
and interest (including, without limitation, any interest accruing subsequent to
the filing of a petition or other
2
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action concerning bankruptcy or other similar proceedings, whether or not
constituting an allowed claim in any such proceedings) on the following, whether
presently outstanding or hereafter incurred or created: all indebtedness or
obligations of the Company for money borrowed (other than that evidenced by the
Securities) or assets acquired and which is evidenced by a note, bond, debenture
or similar instrument (including a purchase money mortgage) given in connection
with the acquisition of any property or assets (other than inventory or other
similar property acquired in the ordinary course of business) including
securities, (b) all obligations constituting Bank Debt (including without
limitation principal, interest, fees and expenses); (c) all obligations of the
Company, (c) all obligations for the payment of money relating to a Capitalized
Lease Obligation; (d) any liabilities of others described in the preceding
clauses (a), (b) and (c) which the Company has guaranteed or which are otherwise
its legal liability; and (e) renewals, extensions, refundings, restructurings,
amendments and modifications of any such indebtedness or guarantee.
Notwithstanding, anything to the contrary in this Indenture or the Securities,
"Senior Indebtedness" shall not include (x) any indebtedness of the Company to a
Subsidiary except to the extent any such indebtedness is pledged by such
Subsidiary as security for any Bank Debt, or (y) any indebtedness or guarantee
of the Company which by its terms or the terms of the instrument creating or
evidencing it is not superior in right of payment of the Securities.
"Subsidiary" means any corporation of which at least a majority of the
outstanding capital stock having voting power under ordinary circumstances to
elect directors of such corporation shall at the time be held directly by the
Company, by the Company and one or more Subsidiaries or by one or more
Subsidiaries.
"TIA" means the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 and as in effect on the date of this Indenture,
except as provided in Section 11.03 hereof, and except to the extent any
amendment to the Trust Indenture Act expressly provides for application of the
Trust Indenture Act as in effect on another date.
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means the successor.
"Trust Officer" means any officer within the Corporate Trust
Department (or any similarly titled or successor group) of the Trustee,
including without limitation any Vice President, Assistant Vice President, any
trust officer, any Assistant Secretary or any other officer customarily
performing functions similar to those performed by any of the above-designated
officers who shall, in any case, be responsible for the administration of this
Indenture or have familiarity with it, and also means, with respect to a
particular corporate matter, any other officer of the Trustee to whom corporate
trust matters are referred because of this knowledge of and familiarity with the
particular subject.
3
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SECTION 1.02. OTHER DEFINITIONS.
-----------------
Defined in
Term Section
---- -------
"Bankruptcy Law"................................ 8.01
"Company Order"................................. 2.02
"Conversion Date"............................... 4.02
"Conversion Agent".............................. 2.03
"Conversion Price".............................. 4.06
"Conversion Shares"............................. 4.06
"Custodian"..................................... 8.01
"Distribution Date.............................. 4.06
"Distribution Record Date"...................... 4.06
"Event of Default".............................. 8.01
"Exchange Act".................................. 3.07
"Legal Holiday"................................. 12.07
"Mandatory Conversion Date"..................... 4.15
"Paying Agent".................................. 2.03
"Payment Blockage Period"....................... 5.05
"Registrar"..................................... 2.03
"Rights"........................................ 4.06
"Rights Record Date"............................ 4.06
4
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"U.S. Government Obligations".......... 10.01
"1933 Act"............................. 10.01
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, even though
the Indenture is not subject to the TIA, the provision of the TIA is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"Indenture securities" means the Securities.
"Indenture security holder" means a Securityholder.
"Indenture to be qualified" means this Indenture.
"Indenture trustee" or "institutional trustee" means the Trustee.
"Obligor" on the indenture securities means the Company or any
other obligor on the Securities.
All other terms used in this Indenture that are defined in the TIA,
defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them therein.
SECTION 1.04. RULES OF CONSTRUCTION.
---------------------
Unless the context otherwise requires:
(1) a term has the meaning assigned to it; an accounting term not
otherwise defined has the meaning assigned to it in accordance
with generally accepted accounting principles in effect on the
date hereof, and any other reference in this Indenture to
"generally accepted accounting principles" refers to generally
accepted accounting principles in effect on the date hereof;
(2) "or" is not exclusive;
(3) words in the singular include the plural, and words in the plural
include the singular;
(4) provisions apply to successive events and transactions; and
(5) "herein", "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article,
Section or other subdivision.
5
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ARTICLE 2. THE SECURITIES
SECTION 2.01. FORM AND DATING.
---------------
The Securities and the Trustee's certificate of authentication shall
be substantially in the form of Exhibit A, which is incorporated in and made
---------
part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rule, agreements to which the
Company is subject or usage. The Company shall approve the form of the
Securities and any notation, legend or endorsement on them. Each Security shall
be dated the date of its authentication except for the Securities initially
issued hereunder which shall be dated May 15, 1996.
SECTION 2.02. EXECUTION AND AUTHENTICATION.
----------------------------
Two Officers shall sign the Securities for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Securities.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee shall authenticate and make available for delivery
Securities for original issue in the aggregate principal amount of up to
$5,000,000, upon a written order or orders of the Company signed by two Officers
or by an Officer and an Assistant Treasurer or Assistant Secretary of the
Company (a "Company Order"). The Company Order shall specify the amount of
Securities to be authenticated and the date on which the original issue of
Securities is to be authenticated. The aggregate principal amount of Securities
outstanding at any time may not exceed $5,000,000, except as provided in Section
2.07.
The Trustee or its agent shall act as the initial authenticating
agent. Thereafter, the Trustee may appoint an authenticating agent acceptable
to the Company to authenticate Securities. An authenticating agent may
authenticate Securities whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
The Securities shall be issuable only in registered form without
coupons only in denominations of $1,000 and any integral multiple thereof.
6
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SECTION 2.03. REGISTRAR, PAYING AGENT AND CONVERSION AGENT.
--------------------------------------------
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange (the "Registrar"), an
office or agency where Securities may be presented for payment (the "Paying
Agent"), an office or agency where Securities may be presented for conversion
(the "Conversion Agent") and an office or agency where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may have one or more co-Registrars, one or more
additional Paying Agents and one or more additional Conversion Agents. The term
"Registrar" includes any co-Registrar, the term "Paying Agent" includes any
additional Paying Agent and the term "Conversion Agent" includes any additional
Conversion Agent.
The Company shall enter into an appropriate agreement with any Agent
not a party to this Indenture. The agreement shall implement the provisions of
this Indenture that relate to such Agent. The Company shall notify the Trustee
of the name and address of any Agent not a party to this Indenture. If the
Company fails to maintain a Registrar, Paying Agent, Conversion Agent or agent
for service of notice or demands, or fails to give the foregoing notice, the
Trustee shall act as such. The Company or any Affiliate of the Company may act
as Paying Agent (except for the purposes of Section 6.04 and Article 10),
Registrar or Conversion Agent.
The Company initially appoints the Trustee as Registrar, Paying Agent,
Conversion Agent and agent for service of notices and demands in connection with
the Securities.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
-----------------------------------
On or prior to each due date of the principal of or interest on any
Securities, the Company shall deposit with the Paying Agent a sum sufficient to
pay such principal or interest so becoming due. Subject to Section 5.07, the
Paying Agent shall hold in trust for the benefit of Securityholders or the
Trustee, all money held by the Paying Agent for the payment of principal of or
interest on the Securities, and shall notify the Trustee of any default by the
Company (or any other obligor on the Securities) in making any such payment. If
the Company or an Affiliate of the Company acts as Paying Agent, it shall on or
before each due date of the principal of or interest on any Securities segregate
the money and hold it as a separate trust fund. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee and the
Trustee may at any time during the continuance of any default, upon written
request to a Paying Agent, require such Paying Agent to forthwith pay to the
Trustee all sums so held in trust by such Paying Agent. Upon doing so, the
Paying Agent (other than the Company) shall have no further liability for the
money.
SECTION 2.05. SECURITYHOLDER LISTS.
--------------------
The Trustee shall preserve in as current form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee on or before each semi-annual interest payment date and at such
other times as the Trustee may request in writing a list in such form and
7
<PAGE>
as of such date as the Trustee may reasonably require of the names and addresses
of Securityholders.
SECTION 2.06. TRANSFER AND EXCHANGE.
---------------------
When a Security is presented to the Registrar with a request to
register a transfer thereof or to exchange such security for an equal principal
amount of Securities or other authorized denominations, the Registrar shall
register the transfer or make the exchange as requested; provided that every
security presented or surrendered for registration of transfer or exchange shall
be duly endorsed and accompanied by a written instrument of transfer in form
satisfactory to the Registrar duly executed by the Holder thereof or his
attorney duly authorized in writing. To permit registration of transfers and
exchanges, upon surrender of any Security for registration of transfer or
exchange at the office or agency maintained pursuant to Section 2.03, the
Company shall execute and the Trustee shall authenticate Securities at the
Registrar's request. The Company shall provide at its expense to the Trustee
sufficient forms of the Securities for transfer or exchange Any exchange or
transfer shall be without charge, except that the Company may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto, but this provision shall not apply to any exchange
pursuant to Section 2.10, 3.06, or 11.05.
Neither the Company nor the Trustee shall be required to exchange or
register a transfer of (a) any Securities for a period of 15 days next preceding
any selection of Securities to be redeemed or (b) any Securities or portions
thereof selected or called for redemption (except, in the case of redemption of
a Security in part, the portion not to be redeemed) or (c) any Securities or
portion thereof surrendered for conversion.
All Securities issued upon any transfer or exchange of Securities
shall be valid obligations of the Company, evidencing the same debt, and
entitled to the same benefits under this Indenture as the Securities surrendered
upon such exchange or transfer.
SECTION 2.07. REPLACEMENT SECURITIES.
----------------------
If any mutilated Security is surrendered to the Company or the
Trustee, or the Company and the Trustee receive evidence to their satisfaction
of the destruction, loss or theft of any Security, and there is delivered to the
Company and the Trustee such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute, and upon its written request the Trustee shall
authenticate and deliver, in exchange for any such mutilated Security or in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor and
principal amount, bearing a number not contemporaneously outstanding.
In any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, or is about to be redeemed by the Company
pursuant to Article 3, the Company in its discretion may, instead of issuing a
new Security, pay or redeem such Security, as the case may be.
8
<PAGE>
Upon the issuance of any new Securities under this Section 2.07, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) in connection
therewith.
Every new Security issued pursuant to this Section 2.07 in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section 2.07 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.08. OUTSTANDING SECURITIES.
----------------------
Securities outstanding at any time are all Securities authenticated by
the Trustee, except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.08 as not outstanding.
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee received proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on a Redemption Date or maturity date money sufficient to pay the
principal of, premium, if any, and accrued interest on Securities payable on
that date, then on and after that date such Securities cease to be outstanding
and interest on them ceases to accrue.
Subject to the restrictions contained in Section 2.09, a Security does
not cease to be outstanding because the Company or an Affiliate of the Company
holds the Security.
SECTION 2.09. TREASURY SECURITIES.
-------------------
In determining whether the Holders of the required principal amount of
Securities have concurred in any notice, direction, waiver or consent,
Securities owned by the Company or any other obligor on the Securities or by any
Affiliate of the Company or of such other obligor shall be disregarded, except
that for purposes of determining whether the Trustee shall be protected in
relying on any such notice, direction, waiver or consent, only Securities which
the Trustee has actual knowledge are so owned shall be so disregarded.
Securities so owned which have been pledged in good faith shall not be
disregarded if the pledgee established to the satisfaction of the Trustee the
pledgee's right so to act with respect to the Securities and that the pledgee is
not the Company or any other obligor on the Securities of any Affiliate of the
Company or of such other obligor.
SECTION 2.10. TEMPORARY SECURITIES.
--------------------
Until definitive Securities are ready for delivery, the Company may
prepare and execute, and, upon the order of the Company, the Trustee shall
authenticate and deliver temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities but may
9
<PAGE>
have variation that the Company with the consent of the Trustee considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate and deliver definitive
Securities in exchange for temporary Securities.
SECTION 2.11. CANCELLATION.
------------
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar, the Paying Agent and the Conversion Agent shall
forward to the Trustee or its agent any Securities surrendered to them for
transfer, exchange, payment or conversion. The Trustee and no one else shall
cancel and dispose of, in accordance with its standard procedures, all
Securities surrendered for transfer, exchange, redemption, payment, conversion
or cancellation and shall deliver a certificate of such disposition to the
Company unless the Company directs the Trustee to deliver cancelled Securities
to the Company. The Company may not issue new Securities to replace Securities
it has paid or delivered to the Trustee for cancellation or that any Holder has
converted pursuant to Article 4 or had converted pursuant to Section 4.15.
ARTICLE 3. REDEMPTION AND PURCHASES
SECTION 3.01. REDEMPTION BY THE COMPANY.
-------------------------
Except as provided in this Section 3.01, the Securities may not be
redeemed by the Company. The Company will pay to the Trustee not less than one
business day before each of May 15, 1999 and May 15, 2000, a sum on each such
day equal to 20% of the aggregate principal amount of the Securities initially
issued hereunder. Each such payment shall be applied to the redemption of
Securities on such May 15 ("Redemption Date") as herein provided. The
Redemption Price shall be equal to the principal amount of the Securities being
redeemed. Accrued interest shall be paid to the Redemption Date on Securities
redeemed.
SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED.
--------------------------------------
The Trustee shall, not more than 60 days prior to the Redemption Date,
select the Securities to be redeemed by lot or by a method the Trustee considers
fair and appropriate; provided that such method is not prohibited by any stock
exchange or market on which the Securities are then listed. The Trustee shall
make the selection from the Securities outstanding and not previously called for
redemption. Securities in denominations of $1,000 may only be redeemed in whole.
The Trustee may select for redemption portions (equal to $1,000 or any multiple
thereof) of the principal of Securities that have denominations larger than
$1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption.
SECTION 3.03. NOTICE OF REDEMPTION.
--------------------
At least 20 days before a Redemption Date, the Company shall mail or
cause to be mailed a notice of redemption by first-class mail to each Holder of
Securities to be redeemed at such Holder's address as it appears on the
Registrar's books.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the Redemption Date;
(2) the Redemption Price;
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(3) the then current Conversion Price;
(4) the name and address of the Paying Agent and the Conversion
Agent;
(5) that Securities called for redemption must be presented and
surrendered to the Paying Agent to collect the Redemption Price;
(6) that the Securities called for redemption may be converted
at any time before the close of business on the Redemption Date;
(7) that Holders who wish to convert Securities must satisfy the
requirements in paragraph 7 of the Securities;
(8) that, unless the Company defaults in making the redemption
payment, interest on Securities called for redemption ceases to accrue
on and after the Redemption Date and the only remaining right of the
Holder is to receive payment of the Redemption Price upon presentation
and surrender to the Paying Agent of the Securities; and
(9) if any Security is being redeemed in part, the portion of
the principal amount of such Security to be redeemed and that, after
the Redemption Date, upon presentation and surrender of each Security,
a new Security or Securities in principal amount equal to the
unredeemed portion thereof will be issued.
At the Company's request, the Trustee shall give the notice of
redemption (which shall be prepared by the Company) in the Company's name and at
the Company's expense.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
------------------------------
Once notice of redemption is mailed, Securities called for redemption
become due and payable on the Redemption Date and at the Redemption Price stated
in the notice, except for Securities that are converted in accordance with the
provisions of Section 4.01 hereof. Upon presentation and surrender to the
Paying Agent, such Securities shall be paid at the Redemption Price, plus
accrued interest to the Redemption Date.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.
---------------------------
On or prior to the Redemption Date, the Company shall deposit with the
Paying Agent (or if the Company or an Affiliate of the Company acts as Paying
Agent, shall segregate and hold in trust) money sufficient to pay the Redemption
Price of and accrued interest on all Securities to be redeemed on that date,
other than Securities or portions thereof called for redemption on that date
which have been delivered by the Company to the Trustee for cancellation or have
been converted. The Paying Agent shall return to the Company any money not
required for that purpose because of the conversion of Securities pursuant to
Article 4 or otherwise. If such money is then held by the Company or an
Affiliate of the Company in trust and is not required for such purpose, it shall
be discharged from the trust.
11
<PAGE>
SECTION 3.06. SECURITIES REDEEMED IN PART.
---------------------------
Upon presentation and surrender of a Security that redeemed in part,
the Company shall execute and the Trustee shall authenticate for and deliver to
the Holder a new Security equal in principal amount to the unredeemed portion of
the Security surrendered.
SECTION 3.07. REPAYMENT TO THE COMPANY.
------------------------
If any of the Securities called for redemption under Section 3.01 are
converted into Common Stock pursuant to the terms hereof, the Company shall be
entitled to a credit equal to the principal amount of such Securities or
portions thereof which have been converted. In such event, subject to the
provisions of Section 5.07, to the extent that the aggregate amount of cash
deposited by the Company pursuant to Section 3.01 exceeds the aggregate amount
needed to redeem the Securities called for redemption (other than Securities
converted into Common Stock prior to the Redemption Date), then promptly after
the Business Day following the Redemption Date, the Trustee or the Paying Agent,
as the case may be, shall return any such excess to the Company.
ARTICLE 4. CONVERSION
SECTION 4.01. CONVERSION AT OPTION OF HOLDERS.
-------------------------------
A Holder of a Security may convert such Security into Common Stock at
any time prior to May 15, 2001, at the Conversion Price then in effect; provided
that, if such Security is called for redemption pursuant to Article 3, such
conversion right shall terminate at the close of business on the Redemption Date
for such Security (unless the Company shall default in making the redemption
payment when due, in which case the conversion right shall terminate at the
close of business on the date such default is cured and such Security is
redeemed); provided, further, that if the Holder of a Security presents such
-------- -------
Security for redemption prior to the close of business on the Redemption Date
for such Security, the right of conversion shall terminate upon presentation of
the Security to the Trustee (unless the Company shall default in making the
redemption payment when due, in which case the conversion right shall terminate
at the close of business on the date such default is cured and such Security is
redeemed). The number of shares of Common Stock issuable upon conversion of a
Security shall be determined by dividing the principal amount of the Security or
portion thereof surrendered for conversion by the Conversion Price in effect on
the Conversion Date. The initial conversion price ("Conversion Price") is $3.50
per share and is subject to adjustment as provided in this Article 4.
"Conversion Price" means the initial conversion price and as it may hereafter be
adjusted pursuant to this Article 4.
A Holder may convert a portion of a Security equal to $1,000 or any
integral multiple thereof. Provisions of this Indenture that apply to
conversion of all of a Security also apply to conversion of a portion of a
Security.
A Holder of Securities is not entitled to any rights of a holder of
Common Stock until such Holder has converted his Securities into Common Stock,
and only to the extent such Securities are deemed to have been converted to
Common Stock pursuant to this Article 4.
12
<PAGE>
SECTION 4.02. CONVERSION PROCEDURE.
--------------------
To convert a Security, a Holder must (i) complete and manually sign
the conversion notice attached to the Security and deliver such notice to the
Conversion Agent, (ii) surrender the Security to the Conversion Agent, (iii)
furnish appropriate endorsements and transfer documents if required by the
Registrar or the Conversion Agent, (iv) execute any investment letters or other
documents required by the Company pursuant to Section 4.16, and (v) pay any
transfer or similar tax, if required. The date on which the Holder satisfies
all of those requirements is the "Conversion Date." On such date, the rights of
the Holder as a Holder of the Security or portion thereof converted shall cease.
As soon as practicable after the Conversion Date, the Company shall deliver to
the Holder through the Conversion Agent a certificate for the number of whole
shares of Common Stock issuable upon the conversion and cash in lieu of any
fractional shares pursuant to Section 4.03.
The person in whose name the certificate is registered shall be deemed
to be a shareholder of record on the Conversion Date; provided, however, that no
-------- -------
surrender of a Security on any date when the stock transfer books of the Company
shall be closed shall be effective to constitute the person or persons entitled
to receive the shares of Common Stock upon such conversion as the record holder
or holders of such shares of Common Stock on such date, but such surrender shall
be effective to constitute the person or persons entitled to receive such shares
of Common Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding day on which such stock transfer books
are open; provided, further, that such conversion shall be at the conversion
-------- -------
rate in effect on the date that such Security shall have been surrendered for
conversion, as if the stock transfer books of the Company had not been closed.
Payment of accrued interest on a converted Security will be made to
the Conversion Date on the next succeeding interest payment date. No adjustment
will be made for dividends or distributions on shares of Common Stock issued
upon conversion of a Security.
If a Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon the conversion shall be based on
the aggregate principal amount of Securities converted.
Upon surrender of a Security that is converted in part, the Company
shall execute, and the Trustee shall authenticate and deliver to the Holder, a
new Security equal in principal amount to the unconverted portion of the
Security surrendered.
SECTION 4.03. FRACTIONAL SHARES.
-----------------
The Company will not issue fractional shares of Common Stock upon
conversion of Securities. In lieu thereof, the Company will pay an amount in
cash based upon the then current fair market value per share of the Common Stock
on the last trading day prior to the Conversion Date. Current fair market value
per share of Common Stock on any date shall mean the average of the closing
prices of the Common Stock sold on such date on all securities exchanges,
including the National Market System of NASDAQ, on which the Common Stock may
then be listed, or if there have been no such sales on any such exchange on such
day, the average of such closing prices on the last trading day prior to the
Conversion Date on which sales of the Common Stock on such exchanges occurred.
If the Common Stock is not listed on such date on any such exchange, then the
current fair market value per share of Common Stock shall be as determined
13
<PAGE>
by the Board of Directors of the Company (whose determination shall be
conclusive evidence of such fair market value).
SECTION 4.04. TAXES ON CONVERSION.
-------------------
If a Holder converts a Security, the Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of shares
of Common Stock upon such conversion. However, the Holder shall pay any such
tax which is due because the Holder requests the shares to be issued in a name
other than the Holder's name. The Conversion Agent may refuse to deliver the
certificates representing the Common Stock being issued in a name other than the
Holder's name until the Conversion Agent receives a sum sufficient to pay any
tax which will be due because the shares are to be issued in a name other than
the Holder's name. Nothing herein shall preclude any tax withholding required
by law or regulations.
SECTION 4.05. COMPANY TO PROVIDE COMMON STOCK.
-------------------------------
The Company shall, prior to issuance of any Securities hereunder, and
from time to time as may be necessary, reserve, out of its authorized but
unissued Common Stock a sufficient number of shares of Common Stock to permit
the conversion of all outstanding Securities for shares of Common Stock.
All shares of Common Stock delivered upon conversion of the Securities
shall be newly issued shares or treasury shares, shall be duly authorized,
validly issued, fully paid and nonassessable and shall be free from preemptive
rights and free of any lien or adverse claim.
The Company will endeavor promptly to comply with all Federal and
state securities laws regulating the offer and delivery of shares of Common
Stock upon conversion of Securities, if any, and will list or cause to have
quoted such shares of Common Stock on each national securities exchange or in
the over-the-counter market or such other market on which the Common Stock is
then listed or quoted.
14
<PAGE>
SECTION 4.06. ADJUSTMENT OF CONVERSION PRICE.
------------------------------
The Conversion Price shall be adjusted from time to time by the
Company as follows:
(1) In case the Company shall (i) pay a dividend in shares of Common
Stock to Holders of Common Stock, (ii) make a distribution in shares of
Common Stock to holders of Common Stock, (iii) subdivide its outstanding
Common Stock into a greater number of shares, or (iv) combine its
outstanding Common Stock into a smaller number of shares, the Conversion
Price in effect immediately prior thereto shall be adjusted so that the
Holder of any Security thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock which such Holder
would have owned had such Security been converted immediately prior to the
happening of such event. An adjustment made pursuant to this subsection
(a) shall become effective immediately after the record date in the case of
a dividend or distribution in shares and shall become effective immediately
after the effective date in the case of subdivision or combination.
(2) In case the Company shall issue rights or warrants to all or
substantially all holders of its Common Stock entitling them (for a period
commencing no earlier than the record date described below and expiring not
more than 45 days after such record date) to subscribe for or purchase
shares of Common Stock (or securities convertible into Common Stock) at a
price per share less than the current Conversion Price per share of Common
Stock on the record date for the determination of shareholders entitled to
receive such rights or warrants ("Record Date Conversion Pricights Record
Date"), the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying the Record Date Conversion Price
immediately prior to the Rights Record Date by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding on such
record dimmediately prior to such Rights Record Date, plus the number of
shares which the aggregate offering price of the total number of shares of
Common Stock so offered (or the aggregate conversion price of the
convertible securities so offered) would purchase at such Record Date
Conversion Price, and of which the denominator shall be the number of
shares of Common Stock outstanding immediately prior to such Rights on such
record dRecord Date plus the number of additional shares of Common Stock
offered (or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively whenever any such
rights or warrants are issued, and shall become effective on the date of
such issuance retroactively to immediately after such record dthe opening
of business on the day following the Rights Record Date. If at the end of
the period during which such rights or warrants are exercisable not all
warrants or rights shall have been exercised, the adjusted Conversion Price
shall be immediately readjusted to what it would have been based upon the
number of additional shares of Common Stock actually issued (or the number
of shares of Common Stock issuable upon conversion of convertible
securities actually issued).
(3) In case the Company shall distribute to all holders of its Common
Stock any shares of capital stock of the Company (other than Common Stock)
or evidences of its indebtedness or other assets (excluding cash dividends
or other cash distributions to the extent paid from consolidated net income
or retained earnings of the Company), or shall distribute to all or
substantially all holders of its Common Stock rights or warrants to
subscribe for or purchase any of its securities (excluding those referred
to in subsection (b) above), then in each such case the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of
such distribution by a fraction of which the numerator shall be the current
Conversion Price on the record date for the determination of shareholders
entitled
15
<PAGE>
to receive such distribution ("Distribution Record distribution
Date"), less the fair market value on such record Distribution Record
Date (as determined by the Board of Directors of the Company, whose
determination shall be conclusive evidence of such fair market value)
of the portion of the capital stock or assets or evidences of
indebtedness so distributed or of such rights or warrants applicable
to one share of Common Stock, and of which the denominator shall be
the Conversion Price on such record Distribution Record Date. Such
adjustment shall become effective immediately after such record date
for the determination of shareholders entitled to receive such
distribution.on the date of such distribution retroactively to
immediately after the opening of business on the day after the
Distribution Record Date. Notwithstanding the foregoing, in the event
that the Company shall distribute rights or warrants (other than those
referred to in subsection (b) above)("Rights") pro rata to holders of
Common Stock, the Company may, in lieu of making any adjustment
pursuant to this Section 4.06, make proper provision so that each
holder of a Security who converts such Security (or any portion
thereof) after the record date for such distribution and prior to the
expiration or redemption of the Rights shall be entitled to receive
upon such conversion, in addition to the shares of Common Stock
issuable upon such conversion (the "Conversion Shares"), a number of
Rights to be determined as follows: (i) if such conversion occurs on
or prior to the date for the distribution to the holders of Rights of
separate certificates evidencing such Rights (the "Distribution
Date"), the same number of Rights to which a holder of a number of
shares of Common Stock equal to the number of Conversion Shares is
entitled at the time of such conversion in accordance with the terms
and provisions of and applicable to the Rights; and (ii) if such
conversion occurs after the Distribution Date, the same number of
Rights to which a holder of the number of shares of Common Stock into
which the principal amount of the Security so converted was
convertible immediately prior to the Distribution Date would have been
entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights.
(4) In any case in which this Section 4.06 shall require that an
adjustment be made immediately following a record date established for
purposes of Section 4.06, the Company may elect to defer (but only
until 5 Business Days following the filing by the Company with the
Trustee of the certificate described in Section 4.10 below) issuing to
the holder of any Security converted after such record date the shares
of Common Stock and other capital stock of the Company issuable upon
such conversion over and above the shares of Common Stock and other
capital stock of the Company issuable upon such conversion only on the
basis of the Conversion Price prior to adjustment; and, in lieu of the
shares the issuance of which is so deferred, the Company shall issue
or cause its transfer agents to issue due bills or other appropriate
evidence of the right to receive such shares.
SECTION 4.07. NO ADJUSTMENT.
-------------
No adjustment in the Conversion Price shall be required unless the
adjustment would require an increase or decrease of at least 5% in the
Conversion Price as last adjusted; provided, however, that any adjustments which
-------- -------
by reason of this Section 4.07 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Article 4 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment to the Conversion Price
shall be made for cash or dividend distributions paid out of consolidated net
income or retained earnings.
No adjustment need be made for a transaction referred to in Section
4.06 if all Securityholders are entitled to participate in the transaction on a
basis and with notice that the Board of Directors determines to be fair and
appropriate in light of the basis and notice on which holders of Common Stock
participate in the transaction.
16
<PAGE>
No adjustment need be made for rights to purchase Common Stock or
issuances or Common Stock pursuant to a Company plan for reinvestment of
dividends or interest.
No adjustment need be made for a change to par value of the Common
Stock.
To the extent that the Securities become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
SECTION 4.08. EQUIVALENT ADJUSTMENTS.
----------------------
In the event that, as a result of an adjustment made pursuant to
Section 4.06 above, the holder of any Security thereafter surrendered for
conversion shall become entitled to receive any shares of capital stock of the
Company other than shares of its Common Stock, thereafter the Conversion Price
of such other shares so receivable upon conversion of any Securities shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common Stock
contained in this Article 4.
SECTION 4.09. ADJUSTMENT FOR TAX PURPOSES.
---------------------------
The Company shall be entitled to make such reductions in the
Conversion Price, in addition to those required by Section 4.06, as it in its
discretion shall determine to be advisable in order that any stock dividends,
subdivision of shares, distribution of rights to purchase stock or securities,
or a distribution of securities convertible into or exchangeable for stock
hereafter made by the Company to its stockholders shall not be taxable.
SECTION 4.10. NOTICE OF ADJUSTMENT.
--------------------
Whenever the Conversion Price is adjusted, the Company shall promptly
mail to Securityholders a notice of the adjustment and file with the Trustee an
Officers' Certificate briefly stating the facts requiring the adjustment and the
manner of computing it. The certificate shall be conclusive evidence of the
correctness of such adjustment.
SECTION 4.11. NOTICE OF CERTAIN TRANSACTIONS.
------------------------------
In the event that:
(1) The Company takes any action which would require an
adjustment in the Conversion Price;
17
<PAGE>
(2) The Company consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation and stockholders of
the Company must approve the transaction; or
(3) There is a dissolution or liquidation of the Company,
the Company shall mail to Securityholders and file with the Trustee a notice
stating the proposed record or effective date, as the case may be. The Company
shall mail the notice at least 10 days before such date. Failure to mail such
notice or any defect therein shall not affect the validity of any transaction
referred to in clause (1), (2) or (3) of this Section 4.11.
SECTION 4.12. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE ON
------------------------------------------------------------
CONVERSION PRIVILEGE.
--------------------
If any of the following shall occur, namely: (i) any reclassification or
change of outstanding shares of Common Stock issuable upon conversion of
Securities (other than a change in par value, or from par value to no par value,
or from no par value to par value, or as a result of a subdivision or
combination), (ii) any consolidation or merger to which the Company is a party
other than a merger in which the Company is the continuing corporation and which
does not result in any reclassification of, or change (other then a change in
name, or par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), in, outstanding
shares of Common Stock, or (iii) any sale or conveyance, of all or substantially
all of the property or business of the Company as an entirety, then the Company,
or such successor or purchasing corporation, as the case may be, shall, as a
condition precedent to such reclassification, change, consolidation, merger,
sale or conveyance, execute and deliver to the Trustee a supplemental indenture
providing that the Holder of each Security then outstanding shall have the right
to convert such Security into the kind and amount of shares of stock and other
securities and property (including cash) receivable upon such reclassification,
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock deliverable upon conversion of such Security immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance. Such supplemental indenture shall provide for adjustments of the
Conversion Price which shall be as nearly equivalent as may be practicable to
the adjustments of the Conversion Price provided for in this Article 4. The
foregoing, however, shall not in any way affect the right a holder of a Security
may otherwise have, pursuant to clause (ii) of the last sentence of subsection
(3) of Section 4.06, to receive Rights upon conversion of a Security. If, in the
case of any such consolidation, merger, sale or conveyance, the stock or other
securities and property (including cash) receivable thereupon by a holder of
Common Stock includes shares of stock or other securities and property of a
corporation other than the successor or purchasing corporation, as the case may
be, in such consolidation, merger, sale or conveyance then such supplemental
indenture shall also be executed by such other corporation and shall contain
such additional provisions to protect the interests of the Holders of the
Securities as the Board of Directors of the Company shall reasonably consider
necessary by reason of the foregoing. The provision of this Section 4.12 shall
similarly apply to successive consolidations, mergers, sales or conveyances.
In the event the Company shall execute a supplemental indenture to this
Section 4.12, the Company shall promptly file with the Trustee an Officers'
Certificate briefly stating the reasons therefor, the kind or amount of shares
of stock or securities or property (including cash) receivable by Holders of the
Securities upon the conversion of their Securities after any such
reclassification, change, consolidation, merger, sale or conveyance, any
adjustment to be made
18
<PAGE>
with respect thereto and that all conditions precedent have been complied with.
SECTION 4.13. TRUSTEE'S DISCLAIMER.
--------------------
The Trustee has no duty to determine when an adjustment under this
Article 4 should be made, how it should be made or what such adjustment should
be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying upon, the Officers' Certificate
with respect thereto which the Company is obligated to file with the Trustee
pursuant to Section 4.10. The Conversion Price, amount of Common Stock to be
received upon conversion, and the amount of cash payment in lieu of fractional
shares shall be calculated and determined by the Company, and Trustee may rely
conclusively thereon and shall have no liability for any distributions made in
accordance with such calculations by the Company. The Trustee makes no
representation as to the validity of value or any securities or assets issued
upon conversion of Securities, and the Trustee shall not be responsible for the
Company's failure to comply with any provisions of this Article 4.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 4.12, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 4.12.
SECTION 4.14. VOLUNTARY REDUCTION.
-------------------
The Company from time to time may reduce the Conversion Price by any
amount for any period of time if the period is at least 20 days or such longer
period as may be required by law and if the reduction is irrevocable during the
period; provided, that in no event may the Conversion Price be less than the par
value of a share of Common Stock.
SECTION 4.15. MANDATORY CONVERSION.
--------------------
If the Company completes an initial public offering of its Common
Stock, at any time after 180 days after the effective date of the registration
statement covering such offering filed under the Securities Act of 1933, as
amended (the "1933 Act"), the Company has the right to require holders of the
Securities to convert their Securities into Common Stock at the then current
Conversion Price. Such right may be exercised by the Company only if (i) the
Common Stock has traded for 20 of 30 consecutive trading days on any national
securities exchange or on the NASDAQ System at a closing price equal to or
greater than $6.50 per share, and (ii) if the shares of Common Stock issuable
upon conversion of the Securities can be resold by the Holders pursuant to Rule
144 adopted under the 1933 Act, or if Rule 144 is not available, the Company has
in place an effective registration statement under the 1933 Act covering the
resale by the Holders of the Common Stock issuable upon conversion of the
Securities.
The mandatory conversion will be automatically effective as of the
date (the "Mandatory Conversion Date") specified in a written notice sent to all
Holders of the Securities regardless of whether the Securities have been
surrendered for conversion. No interest will accrue on, nor will the Securities
be transferable after the Mandatory Conversion Date. Upon mandatory conversion,
payment will be made for accrued interest on the Securities to the Mandatory
Conversion Date. No fractional shares will be issued upon conversion but a cash
adjustment will be made for any fractional interest as provided in Section 4.03.
No adjustment will be made for dividends or
19
<PAGE>
distributions on shares of Common Stock issued upon mandatory conversion of the
Securities. In the event of mandatory conversion, certificates for the shares of
Common Stock issuable upon the conversion will not be delivered to any Holders
of the Securities until the Securities owned by such Holder have been
surrendered to the Trustee.
SECTION 4.16. RESTRICTIONS ON TRANSFER.
------------------------
Unless otherwise instructed by the Company, all instruments
representing the Securities and certificates representing any shares of Common
Stock issued upon conversion of the Securities and any and all securities issued
in replacement thereof or in exchange therefor toshall bear the following
legend, or one substantially similar thereto:
"The securities represented hereby have not been registered under
the Securities Act of 1933 (the "Act") or any applicable state
securities laws ("State Acts") and are restricted securities as
that term is defined in Rule 144 under the Act. The securities may
not be offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement or qualification
under the Act and applicable State Acts or pursuant to an exemption
from registration under the Act and applicable State Acts, the
availability of which is to be established to the satisfaction of
the Company."
The Trustee shall permit transfer of the Securities and any shares of Common
Stock issued upon conversion of the Securities only upon written instructions
from the Company or its counsel that such transfer is permitted under the Act
and applicable State Acts. Unless otherwise instructed by the Company, each
Holder who is a transferee of the Securities or shares of Common Stock issuable
upon the conversion of the Securities (including Holders whose securities are
converted) may be required to execute investment letters and other documents as
required by the Company. If instructed in writing by the Company or its
counsel, there shall be also placed on any instruments representing the
Securities and any shares of Common Stock issued upon conversion of the
Securities and any and all securities issued in replacement thereof or in
exchange therefor, any legend as may be required by the securities laws of the
state in which the Holder of such Securities or shares of Common Stock resides.
ARTICLE 5. SUBORDINATION
SECTION 5.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
----------------------------------------------
The Company covenants and agrees, and each Holder of Securities issued
hereunder by such Holder's acceptance thereof likewise covenants and agrees,
that all Securities shall be issued subject to the provisions of this Article 5;
and each Person holding any Security, whether upon
20
<PAGE>
original issue or upon transfer or assignment thereof, accepts and agrees to be
bound by such provisions.
The payment of the principal of, premium, if any, and interest on all
Securities issued hereunder shall, to the extent and in the manner hereinafter
set forth, be subordinated and subject in right of payment to the indefeasible
prior payment in full, in cash, of all Senior Indebtedness, whether outstanding
at the date of this Indenture or thereafter created, incurred, assumed or
guaranteed.
SECTION 5.02. SECURITIES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
------------------------------------------------------
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION, REORGANIZATION, ETC.,
---------------------------------------------------------------
OF THE COMPANY.
--------------
Upon any payment of distribution of the assets of the Company of any
kind or character, whether in cash, property or securities (including any
collateral at any time securing the Securities), to creditors upon any
dissolution, winding-up, total or partial liquidation, or reorganization,
liquidation, receivership proceedings, or upon an assignment for the benefit of
creditors, or any other marshalling of the assets and liabilities of the
Company, or otherwise), then in such event:
(1) all Senior Indebtedness (including principal thereof, interest
thereon and fees and expenses relating thereto) and up to $5,000 of the
reasonable fees and expenses of the Trustee shall first be paid in full, in
cash, or have provision made for such payment in a manner reasonably
satisfactory to the holders of Senior Indebtedness, before any payment is
made on account of the principal of or interest on the indebtedness
evidenced by the Securities, or any deposit is made pursuant to Section
6.03;
(2) any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted, or securities of
the Company or any other company, trust or corporation provided for by a
plan of reorganization or readjustment, junior, or the payment of which is
otherwise subordinate, at least to the extent provided in this Article 5,
with respect to the Securities to the payment of all Senior Indebtedness at
that time outstanding and to the payment of all securities issued in
exchange therefor to the holders of the Senior Indebtedness at the time
outstanding), to which the Holders or the Trustee on behalf of the Holders
would be entitled except for the provisions of this Article 5, including
any such payment or distribution which may be payable or deliverable by
reason of the payment of another debt of the Company being subordinated to
the payment of the Securities, shall be paid or delivered by any debtor,
Custodian or other person making such payment or distribution, directly to
(i)s the holders of the Senior Indebtedness or their representative or
representatives, or the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness may have
been issued, ratably according to the aggregate amounts remaining unpaid on
account of the principal of, interest on and fees and expenses relating to
the Senior Indebtedness held or represented by each, and (ii) the Trustee
with respect to up to $5,000 of the reasonable fees and expenses of the
Trustee, for application to payment of all Senior Indebtedness and up to
$5,000 of the reasonable fees and expenses of the Trustee remaining unpaid
on a pro rata basis according to the outstanding amount of Senior
Indebtedness (including interest, fees and expenses) and reasonable fees
and expenses of the Trustee (up to a maximum of $5,000), to the extent
necessary to pay all Senior Indebtedness and up to $5,000 of the reasonable
fees and expenses of the Trustee in full, in cash, after giving
21
<PAGE>
effect to any concurrent payment or distribution, or provision therefor, to
the holders of such Senior Indebtedness or the Trustee, as the case may be;
and
(3) in the event that, notwithstanding the foregoing provisions
of this Section 5.02, any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or
securities (other than securities of the Company as reorganized or
readjusted, or securities of the Company or any other company, trust
or corporation provided for by a plan of reorganization or
readjustment, junior, or the payment of which is otherwise
subordinate, at least to the extent provided for in this Article 5,
with respect to the Securities, to the payment in full, in cash, of
all Senior Indebtedness at the time outstanding and to the payment of
all securities issued in exchange therefor to the holders of Senior
Indebtedness at the time outstanding), shall be received by the
Trustee on behalf of the Holders or the Holders before all Senior
Indebtedness and up to $5,000 of the reasonable fees and expenses of
the Trustee are paid in full, in cash, or provision made for their
payment in a manner reasonably satisfactory to the holders of Senior
Indebtedness, such payment or distribution (subject to the provisions
of Section 5.06 and 5.07) shall be held in trust for the benefit of,
and shall be immediately paid or delivered by the Trustee on behalf of
the Holders or such Holders, as the case may be, to (i) the holders of
Senior Indebtedness remaining unpaid or unprovided for, or their
representative or representatives, or the trustee or trustees under
any indenture pursuant to which any instruments evidencing any of such
Senior Indebtedness may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the principal of,
interest on and fees and expenses relating to the Senior Indebtedness
held or represented by each, and (ii) the Trustee with respect to up
to $5,000 of the reasonable fees and expenses of the Trustee, for
application to the payment of all Senior Indebtedness and up to $5,000
of the reasonable fees and expenses of the Trustee remaining unpaid on
a pro rata basis according to the outstanding amount of Senior
Indebtedness (including interest, fees and expenses) and reasonable
fees and expenses of the Trustee (up to a maximum of $5,000), to the
extent necessary to pay all Senior Indebtedness and up to $5,000 of
the reasonable fees and expenses of the Trustee in full, in cash,
after giving effect to any concurrent payment or distribution, or
provision therefor, to the holders of such Senior Indebtedness or the
Trustee, as the case may be.
The Company shall give prompt notice to the Trustee of any
dissolution, winding-up, liquidation or reorganization of the Company.
Upon any distribution of assets of the Company referred to in this
Article 5, the Trustee, subject to the provisions of Section 9.01 and 9.02, and
the Holders shall be entitled to rely upon any order or decree by any court of
competent jurisdiction in which such dissolution, winding-up, liquidation or
reorganization proceeding is pending, or a certificate of the liquidating
trustee or agent or other person making any distribution to the Trustee or to
the Holders, for the purpose of ascertaining the persons entitled to participate
in such distribution, the holders of the Senior Indebtedness and other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article 5.
22
<PAGE>
SECTION 5.03. SECURITYHOLDERS TO BE SUBROGATED TO RIGHT OF HOLDERS OF SENIOR
--------------------------------------------------------------
INDEBTEDNESS.
------------
Subject to the prior payment in full, in cash, of all Senior
Indebtedness then due, the Holders shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness until the principal of and
interest on the Securities shall be paid in full, and for purposes of such
subrogation, no payments or distributions to the holders of Senior Indebtedness
of assets, whether in cash, property or securities, distributable to the holders
of Senior Indebtedness under the provisions hereof to which the Holders would be
entitled except for the provisions of this Article 5, and no payment pursuant to
the provisions of this Article 5 to the holders of Senior Indebtedness by the
Holders shall, as among the Company, its creditors other than the holders of
Senior Indebtedness, and the Holders, be deemed to be a payment by the Company
to or on account of Senior Indebtedness, it being understood that the provisions
of this Article 5 are, and are intended, solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
SECTION 5.04. OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
----------------------------------------
Nothing contained in this Article 5 or elsewhere in this Indenture or
in any Security is intended to or shall impair, as among the Company, its
creditors other than the holders of Senior Indebtedness, and the Holders, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders the principal of and interest on the Securities, as and when the same
shall become due and payable in accordance with the terms of the Securities, or
to affect the relative rights of the Holders and other creditors of the Company
other than the holders of Senior Indebtedness, nor shall anything herein or
therein prevent the Trustee or any Holder from exercising all remedies otherwise
permitted by applicable law upon the happening of an Event of Default under this
Indenture, subject to the provisions of Article 8, and the rights, if any, under
this Article 5 of the holders of Senior Indebtedness in respect of assets,
whether in cash, property or securities, of the Company received upon the
exercise of any such remedy.
SECTION 5.05. COMPANY NOT TO MAKE PAYMENT WITH RESPECT TO SECURITIES IN CERTAIN
-----------------------------------------------------------------
CIRCUMSTANCES.
-------------
(1) Upon the occurrence of a Payment Event of Default, unless and
until the amount of such Senior Indebtedness then due shall have been
paid in full, in cash, or provision made therefor in a manner
reasonably satisfactory to the holders of such Senior Indebtedness, or
such default shall have been cured or waived or shall have ceased to
exist, the Company shall not pay principal of, premium, if any, or
interest on the Securities or make any deposit pursuant to Sections
6.03 or 10.01 and shall not repurchase, redeem or otherwise retire any
Securities (collectively, "Pay the Securities").
(2) Unless Section 5.02 shall be applicable, upon (1) the
occurrence of a Non-payment Event of Default and (2) receipt by the
Company and the Trustee from the representative of the holders of
Senior Indebtedness to which the Non-payment Event of Default applies
of written notice of such occurrence, then the Company shall not Pay
the Securities for a period (the "Payment Blockage Period") commencing
on the earlier of the date of receipt by the Company or the Trustee of
such notice from such representative and ending on the earlier of
(subject to any blockage of payments that may then be in effect under
subsection (a) of this Section) (x) the date 180 days after such date,
(y) the date
23
<PAGE>
such Non-payment Event of Default shall have been cured or waived in
writing or shall have ceased to exist or such Senior Indebtedness
shall have been discharged, or (z) the date such Payment Blockage
Period shall have been terminated by written notice to the Company or
the Trustee from the representative of the holders of the Senior
Indebtedness initiating such Payment Blockage Period, after which, in
case of clause (x), (y) or (z), as the case may be, the Company shall
resume making any and all required payments. Notwithstanding any other
provision of this Agreement, only on Payment Blockage Period may be
commenced within any consecutive 365-day period, and no event of
default with respect to any Senior Indebtedness which existed or was
continuing on the date of the commencement of any Payment Blockage
Period with respect to the Senior Indebtedness the holders of which
initiated such Payment Blockage Period shall be, or can be made, the
basis for the commencement of a second Payment Blockage Period whether
or not within a period of 365 consecutive days unless such event of
default shall have been cured or waived for a period of not less than
90 consecutive days. In no event will a Payment Blockage Period extend
beyond 179 days.
(3) In the event that, notwithstanding the foregoing provisions
of this Section 5.05, any payment on account of principal of or
interest on the Securities shall be made by or on behalf of the
Company and received by the Trustee, any Holder or any Paying Agent
(or, if the Company is acting as its own Paying Agent, money for any
such payment shall be segregated and held in trust), after the
happening of a default under any Senior Indebtedness, then, unless and
until the amount of such Senior Indebtedness then due shall have been
paid in full in cash, or provision made therefor or such default shall
have been cured or waived, such payment (subject, in each case, to the
provisions of Sections 5.06 and 5.07) shall be held in trust for the
benefit of, and shall be immediately paid over to, the holders of
Senior Indebtedness or their representative or representatives or the
trustee or trustees under any indenture under which any instruments
evidencing any of the Senior Indebtedness may have been issued,
ratably according to the aggregate amounts remaining unpaid on account
of the principal of and interest on the Senior Indebtedness held or
represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness in accordance with its terms, after giving effect
to any concurrent payment or distribution to or for the benefit of the
holders of Senior Indebtedness. The Company shall give prompt written
notice to the Trustee of any default under any Senior Indebtedness or
under any agreement pursuant to which Senior Indebtedness may have
been issued.
SECTION 5.06. NOTICE TO TRUSTEE.
-----------------
The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Securities. Notwithstanding the provisions of
this Article 5 or any other provision of this Indenture, the Trustee shall not
at any time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee, unless and until the
Trustee shall have received written notice thereof from the Company or from the
holder or holders of Senior Indebtedness or from their representative or
representatives; and, prior to the receipt of any such written notice, the
Trustee, subject to the provisions of Sections 9.01 and 9.02, shall be entitled
to assume conclusively that such facts do not exist.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a person representing himself to be a holder of Senior
Indebtedness (or a representative of such holder) to establish that such notice
has been given by a holder of Senior indebtedness or a representative of
24
<PAGE>
any such holder. In the event that the Trustee determines in good faith that
further evidence is required with respect to the right of any person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article 5, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such person, the extent of which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
each person under this Article 5, and if such evidence is not furnished, the
Trustee may defer any payment to such person pending judicial determination as
to the right of such person to receive such payment.
SECTION 5.07. APPLICATION BY TRUSTEE OF MONIES DEPOSITED WITH IT.
--------------------------------------------------
Money or U.S. Government Obligations deposited in trust with the
Trustee pursuant to Sections 6.03 and 10.01 and not in violation of this Article
5 shall be for the sole benefit of Securityholders and shall thereafter not be
subject to the subordination provisions of this Article 5. Otherwise, any
deposit of monies by the Company with the Trustee or any Paying Agent (whether
or not in trust) for the payment of the principal of or interest on any
Securities shall be subject to the provisions of Sections 5.01, 5.02, 5.03 and
5.05; except that, if two Business Days prior to the date on which by the terms
of this Indenture any such monies may become payable for any purpose (including,
without limitation, the payment of either the principal of or interest on any
Security) the Trustee shall not have received with respect to such monies the
notice provided for in Section 5.06, then the Trustee or any Paying Agent shall
have full power and authority to receive such monies and to apply such monies to
the purpose for which they were received, and shall not be affected by any
notice to the contrary which may be received by it on or after such date. This
Section 5.07 shall be construed solely for the benefit of the Trustee and the
Paying Agent and shall not otherwise affect the rights that holders of Senior
Indebtedness may have to recover any such payments from the Holders in
accordance with the provisions of this Article 5.
SECTION 5.08. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF COMPANY
-----------------------------------------------------------------
OR HOLDERS OF SENIOR INDEBTEDNESS.
---------------------------------
No right of any present or future holders of any Senior Indebtedness
to enforce subordination, as herein provided, shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
non-compliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof which any such holder may have or
be otherwise charged with. The holders of any Senior Indebtedness may extend,
renew, modify or amend the terms of such Senior Indebtedness or any security
therefor and release, sell or exchange such security and otherwise deal freely
with the Company, all without affecting the liabilities and obligations of the
parties to this Indenture or the Holders. No provision in any supplemental
indenture which affects the superior position of the holders of the Senior
Indebtedness shall be effective against the holders of the Senior Indebtedness
unless the holders of such Senior Indebtedness (required pursuant to the terms
of such Senior Indebtedness to give such consent) have consented thereto.
SECTION 5.09. TRUSTEE TO EFFECTUATE SUBORDINATION.
-----------------------------------
Each holder of a Security by his acceptance thereof authorizes and
directs the Trustee in his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article 5 and
appoints the Trustee his attorney-in-fact for any and all such purposes.
25
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SECTION 5.10. RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS.
--------------------------------------------
The Trustee, in its individual capacity, shall be entitled to all of
the rights set forth in this Article 5 in respect of any Senior Indebtedness at
any time held by it to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall be construed to deprive the
Trustee of any of its rights as such holder.
SECTION 5.11. ARTICLE 5 NOT TO PREVENT EVENTS OF DEFAULT.
------------------------------------------
The failure to make a payment on account of the principal of or
interest on the Securities by reason of any provision in this Article 5 shall
not be construed as preventing the occurrence of any Event of Default under
Section 8.01.
SECTION 5.12. NO FIDUCIARY DUTY CREATED TO HOLDERS OF SENIOR INDEBTEDNESS.
-----------------------------------------------------------
Notwithstanding any other provision in this Article 5, the Trustee
shall not be deemed to owe any fiduciary duty to the holders of Senior
Indebtedness by virtue of the provisions of this Article 5.
SECTION 5.13. ARTICLE APPLICABLE TO PAYING AGENTS.
-----------------------------------
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article 5 shall in such case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully for all intents and purposes as if such Paying Agent were named
in this Article 5 in addition to or in place of the Trustee; provided, however,
-------- -------
that Sections 5.06, 5.10 and 5.12 shall not apply to the Company if it acts as
Paying Agent.
26
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ARTICLE 6. COVENANTS
SECTION 6.01. PAYMENT OF SECURITIES.
---------------------
The Company shall promptly make all payments in respect of the
Securities on the dates and in the manner provided in the Securities and this
Indenture. An installment of principal or interest shall be considered paid on
the date it is due if the Paying Agent (other than the Company or an Affiliate
of the Company) holds on that date money designated for and sufficient to pay
the installment. The Company shall pay interest on overdue principal at the
rate borne by the Securities per annum; it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 6.02. SEC REPORTS.
-----------
If the Company subsequently becomes subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file
all reports and other information and documents which it is required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act and within 15
days after it files them with the SEC, the Company shall file copies of all such
reports, information and other documents with the Trustee. The Company will
cause any quarterly and annual reports which it mails to its stockholders to be
mailed to the Holders of the Securities.
In the event the Company is at any time not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will
prepare on an annual basis, complete audited consolidated financial statements
including, but not limited to, a balance sheet, a statement of income and
retained earnings, a statement of cash flows and all appropriate notes. All
such financial statements will be prepared in accordance with generally accepted
accounting principles consistently applied, except for changes with which the
Company's independent accountants concur. The Company will cause a copy of such
financial statements to be filed with the Trustee and mailed to the Holders of
the Securities within 95 days after the end of each fiscal year of the Company,
commencing with the fiscal year ending December 31, 1996.
SECTION 6.03. LIQUIDATION.
-----------
Subject to the provisions of Article 5, so far as they may be
applicable hereto, the Board of Directors or the shareholders of the Company may
not adopt a plan of liquidation which plan provides for, contemplates or the
effectuation of which is preceded by (a) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company otherwise
than substantially as an entirety (Article 7 of this Indenture being the Article
which governs any such sale, lease, conveyance or other disposition
substantially as an entirety), and (b) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and of
the remaining assets of the Company to the holders of the capital stock of the
Company, unless the Company shall in connection with the adoption of such plan
make provision for, or agree that prior to making any liquidating distributions
it will make provision for, the satisfaction of the Company's obligations
hereunder and under the Securities as to the payment of the principal and
interest. The Company shall be deemed to make provision for such payments only
if (1) the Company irrevocably deposits in trust with the Trustee money or U.S.
Government Obligations maturing as to principal and interest in such amounts and
at such times as are sufficient, without consideration of any reinvestment of
such interest, to pay the principal of and interest on the Securities then
outstanding to maturity and to pay all other sums payable by it
27
<PAGE>
hereunder, or (2) there is an express assumption of the due and punctual payment
of the Company's obligations hereunder and under the Securities and the
performance and observance of all covenants and conditions to be performed by
the Company hereunder, by the execution and delivery of a supplemental indenture
in form satisfactory to the Trustee by a person who acquires, or will acquire
(otherwise than pursuant to a lease) a portion of the assets of the Company, and
which person will have assets (immediately after the acquisition) and aggregate
earnings (for such person's four full fiscal quarters immediately preceding such
acquisition) equal to not less than the assets of the Company (immediately
preceding such acquisition) and the aggregate earnings of the Company (for is
four full fiscal quarters immediately preceding the acquisition), respectively,
and which is a corporation organized under the laws of the United States, any
State thereof or the District of Columbia; provided, however, that Company shall
-------- -------
not make any liquidating distribution until after the Company shall have
certified to the Trustee with an Officers' Certificate at least five days prior
to the making of any liquidating distribution that it has complied with the
provisions of this Section 6.03.
SECTION 6.04. COMPLIANCE CERTIFICATES.
-----------------------
The Company shall deliver to the Trustee within 120 days after the end
of each fiscal year of the Company, an Officers' Certificate as to the signer's
knowledge of the Company's compliance with all conditions and covenants on its
part contained in this Indenture and stating whether or not the signer knows of
any default or Event of Default. If such signer knows of such a default or
Event of Default, the Certificate shall describe the default or Event of Default
and the efforts to remedy the same. For the purposes of this Section 6.04,
compliance shall be determined without regard to any grace period or requirement
of notice provided pursuant to the terms of this Indenture. The Certificate
need not comply with Section 12.04 hereof.
SECTION 6.05. NOTICE OF DEFAULTS.
------------------
In the event that indebtedness of the Company in an aggregate amount
in excess of $500,000 is declared due and payable before its maturity because of
the occurrence of any default under such indebtedness, the Company will promptly
give written notice to the Trustee of such declaration or of the occurrence of
any event which, with the giving of notice or the passage of time or both, would
entitle the holder or holders of such indebtedness to declare such indebtedness
due and payable before its maturity.
SECTION 6.06. PAYMENT OF TAXES AND OTHER CLAIMS.
---------------------------------
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company, directly or by reason
of its ownership of any Subsidiary or upon the income, profits or property of
the Company, and (2) all material lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a lien upon the property of the
Company; provided, however, that the Company shall not be required to pay or
-------- -------
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which adequate provision has been made.
SECTION 6.07. CORPORATE EXISTENCE.
-------------------
Subject to Section 6.03 and Article 7, the Company will do or cause to
be done all things
28
<PAGE>
necessary to preserve and keep in full force and effect its corporate existence
and rights (charter and statutory); provided, however, that the Company shall
-------- -------
not be required to preserve any right if the Board of Directors shall determine
that the preservation is no longer desirable in the conduct of the Company's
business and that the loss thereof is not, and will not be, adverse in any
material respect to the Holders.
SECTION 6.08. MAINTENANCE OF PROPERTIES.
-------------------------
Subject to Section 6.03, the Company will cause all material
properties owned, leased or licensed in the conduct of its business to be
maintained and kept in good condition, repair and working order and supplied
with all necessary equipment and will cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof and thereto, all as
in the judgment of the Company may be necessary so that the business carried on
in connection therewith may be properly and advantageously conducted at all
times while any Securities are outstanding; provided, however, that nothing in
-------- -------
this Section 6.08 shall prevent the Company from discontinuing the maintenance
of any such properties if, in the judgment of the Board of Directors, such
discontinuance is desirable in the conduct of the Company's business and is not,
and will not be, adverse in any material respect to the Holders.
SECTION 6.09. FURTHER INSTRUMENTS AND ACTS.
----------------------------
Upon request of the Trustee, the Company will execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purposes of this Indenture.
ARTICLE 7
SUCCESSOR CORPORATION
SECTION 7.01. WHEN COMPANY MAY MERGE, ETC.
----------------------------
The Company shall not consolidate with or merge with or into, or
transfer all or substantially all of its assets to, any person unless:
(1) Either the Company shall be the resulting or surviving entity
or such person is a corporation organized and existing under the laws
of the United States, a State thereof or the District of Columbia, and
such person expressly assumes by supplemental indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Securities and this Indenture (in
which case all such obligations of the Company shall terminate); and
(2) Immediately before and immediately after giving effect to
such transaction and treating any indebtedness which becomes an
obligation of the Company as a result of such transaction as having
been incurred by the Company at the time of such transaction, no
default or Event of Default shall have occurred and be continuing.
The Company shall deliver to the Trustee prior to the proposed
transaction an Officers' Certificate and an Opinion of Counsel, each of which
shall comply with Section 12.04 and shall state that such consolidation, merger
or transfer and such supplemental indenture comply with this Article 7 and that
all conditions precedent herein provided for relating to such transaction have
29
<PAGE>
been complied with.
SECTION 7.02. SUCCESSOR CORPORATION SUBSTITUTED.
---------------------------------
Upon any consolidation or merger, or any transfer of all or
substantially all of the assets of the Company in accordance with Section 7.01,
the successor corporation formed by such consolidation or into which the Company
is merged or to which such transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this Indenture
with the same effect as if such successor corporation had been named as the
Company herein.
ARTICLE 8
DEFAULT AND REMEDIES
SECTION 8.01. EVENTS OF DEFAULT.
-----------------
An "Event of Default" occurs if:
(1) The Company defaults in the payment of interest on any
Security when the same becomes due and payable and the default
continues for a period of 30 days;
(2) The Company defaults in the payment of the principal of any
Security when the same becomes due and payable at maturity, upon
redemption or otherwise;
(3) The Company fails to comply with any of its other agreements
contained in the Securities or this Indenture and the default
continues for the period and after the notice specified below;
(4) The Company shall fail to pay at maturity or at a date fixed
for prepayment or by acceleration (provided, however, such
acceleration is not withdrawn, cancelled or otherwise annulled within
10 days following the occurrence of such acceleration) principal of,
premium, if any, or interest under any bond, debenture, note or other
evidence of indebtedness for money borrowed or under any mortgage,
indenture or other instrument under which there may be issued or by
which there may be secured or evidenced any indebtedness of money
borrowed by the Company or under any guarantee of payment by the
Company of indebtedness for money borrowed, whether such indebtedness
or guarantee now exists or shall hereafter be created; provided,
however, no such Event of Default shall exist under this Section
8.01(4) unless the aggregate amount (which is due and unpaid whether
by reason of maturity or at a date fixed for prepayment or by
acceleration, provided, however, such acceleration is not withdrawn,
cancelled or otherwise annulled within 10 days following the
occurrence of such acceleration) of such principal, premium, if any,
and interest is in excess of $500,000.
(5) The Company or any Subsidiary pursuant to or within the
meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief against it
in an
30
<PAGE>
involuntary case or proceeding;
(C) consents to the appointment of a Custodian of it or for
all or substantially all of its property; or
(D) makes a general assignment for the benefit of its
creditors; or
(6) a court of competent jurisdiction enters an order or decree
under any Bankruptcy law that:
(A) is for relief against the Company or any Subsidiary in
an involuntary case or proceeding;
(B) appoints a Custodian of the Company or any Subsidiary or
for all or substantially all of the property of any of them; or
(C) orders the liquidation of the Company or any Subsidiary;
and in each case the order or decree remains unstayed and in
effect for 60 days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator, sequestrator or similar official under
any Bankruptcy Law.
A default under clause (3) is not an Event of Default until the
Trustee notifies the Company or the Holders of at least 25% in principal amount
of the Securities then outstanding notify the Company and the Trustee, of the
default, and the Company does not cure the default within 30 days after receipt
of such notice. The notice given pursuant to this Section 8.01 must specify the
default, demand and that it be remedied and state that the notice is a "Notice
of Default." When a default is cured, it ceases.
Subject to the provisions of Sections 9.01 and 9.02, the Trustee shall
not be charged with knowledge of any Event of Default unless written notice
thereof shall have been given to a Trust Officer at the corporate trust office
of the Trustee by the Company, the Paying Agent, any Holder or an agent of any
Holder.
SECTION 8.02. ACCELERATION.
------------
If an Event of Default (other than an Event of Default specified in
Section 8.01(5) or (6)) occurs and is continuing, the Trustee may, by notice to
the Company, or the Holders of at least 25% in principal amount of the
Securities then outstanding may, by notice to the Company and the Trustee, and
the Trustee shall, upon the request of such Holders, declare all unpaid
principal of and accrued interest to the date of acceleration on the Securities
then outstanding (if not then due and payable) to be due and payable upon any
such declaration, the same shall become and be immediately due and payable;
provided, however, that as long as any Bank Debt shall be outstanding, any
- -------- -------
acceleration pursuant to the preceding clause shall not be effective until the
earlier of (a) 5 Business Days following a notice of acceleration given to the
Company and only if on such fifth Business Day, the Event of Default triggering
such notice of acceleration shall be continuing, or (b) the acceleration of the
Bank Debt. The Holders delivering the notice of acceleration shall deliver a
copy of such notice to the holders of such Bank Debt contemporaneously with the
delivery of such notice to the Company and the Trustee. If an Event of Default
specified in Section 8.01(5) or (6) occurs, all unpaid principal of and accrued
interest
31
<PAGE>
on the Securities then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Securityholder. The Holders of a majority in principal
amount of the Securities then outstanding by notice to the Trustee may rescind
an acceleration and its consequences if (i) all existing Events of Default,
other than the nonpayment of the principal of and accrued interest on the
Securities which has become due solely by such declaration of acceleration, have
been cured or waived; (ii) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue principal, which has
become due otherwise than by such declaration of acceleration, had been paid;
(iii) the rescission would not conflict with any judgment or decree of a court
of competent jurisdiction; and (iv) all payments due to the Trustee and any
predecessor Trustee under Section 9.07 have been made.
SECTION 8.03. OTHER REMEDIES.
--------------
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of the principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
SECTION 8.04. WAIVER OF DEFAULTS AND EVENTS OF DEFAULT.
----------------------------------------
Subject to Sections 8.07 and 11.02, the Holders of a majority in
principal amount of the Securities then outstanding by notice to the Trustee may
waive an existing default or Event of Default and its consequences, except a
default in the payment of the principal of or interest on any
32
<PAGE>
Security as specified in clauses (1) and (2) of Section 8.01. When a default or
Event of Default is waived, it is cured and ceases.
SECTION 8.05. CONTROL BY MAJORITY.
-------------------
The Holders of a majority in principal amount of the Securities then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, that the Trustee determines may be unduly
prejudicial to the rights of another Securityholder or the Trustee, or that may
involve the Trustee in personal liability; provided that the Trustee may take
any other action deemed proper by the Trustee which is not inconsistent with
such direction.
SECTION 8.06. LIMITATION ON SUITS.
-------------------
A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities (except actions for payment of overdue principal or
interest or for the conversion of the Securities pursuant to Article 4) unless:
(1) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least 25% in principal amount of the then
outstanding Securities make a written request to the Trustee to pursue
the remedy;
(3) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Securities then outstanding.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over such other
Securityholder.
SECTION 8.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
------------------------------------
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Security to receive payment of the principal of and interest on
the Security, on or after the respective due dates expressed in the Security, or
to bring suit for the enforcement of any such payment on or after such
respective dates, is absolute and unconditional and shall not be impaired or
affected without the consent of the Holder.
SECTION 8.08. COLLECTION SUIT BY TRUSTEE.
--------------------------
In an Event of Default in the payment of principal or interest
specified in Section 8.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee
33
<PAGE>
of an express trust against the Company or another obligor on the Securities for
the whole amount of principal and accrued interest remaining unpaid, together
with interest on overdue principal and, to the extent that payment of such
interest is lawful, interest on overdue installments of interest, in each case
at the rate per annum borne by the Securities and such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
SECTION 8.09. TRUSTEE MAY FILE PROOF OF CLAIM.
-------------------------------
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Securityholder allowed in any judicial proceedings relative to the Company (or
any other obligor on the Securities), its creditors or its property and shall be
entitled and empowered to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceeding is hereby authorized by each
Securityholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Securityholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 9.07, and to
the extent that such payment of the reasonable compensation, expenses,
disbursements and advances in any such proceedings shall be denied for any
reason, payment of the same shall be secured by a lien on, and shall be paid out
of, any and all distributions, dividends, monies, securities and other property
which the Securityholders may be entitled to receive in such proceedings,
whether in liquidation, or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or the Trustee to authorize or accept or adopt on behalf
of any Securityholder any plan or reorganization, arrangement or composition
affecting the Securities or the rights of any Holder thereof, or to authorize
the Trustee to vote in respect of the claim of any Securityholder in any such
proceeding.
SECTION 8.10. PRIORITIES.
----------
If the Trustee collects any money pursuant to this Article 8, it shall
pay out the money in the following order:
First, to the Trustee for amounts due under Section 9.07;
Second, to the holders of Senior Indebtedness to the extent
required by Article 5;
34
<PAGE>
Third, to Securityholders for amounts due and unpaid on the
Securities of principal and interest, ratably, without preference or priority of
any kind, according to the amounts due and payable on the Securities for
principal and interest, respectively; and
Fourth, to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 8.10.
SECTION 8.11. UNDERTAKING FOR COSTS.
---------------------
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defense made by the party litigant.
This Section 8.11 does not apply to suit made by the Trustee, a suit by a
Holder pursuant to Section 8.07, or a suit by Holders of more than 10% in
principal amount of the Securities then outstanding.
ARTICLE 9
TRUSTEE
SECTION 9.01. DUTIES OF TRUSTEE.
-----------------
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of his own
affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties as are
specifically set forth in this Indenture and no others; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture. The Trustee, however, shall examine the
certificates and opinions to determine whether or not they conform to
the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b) of
this Section 9.01;
35
<PAGE>
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 8.05.
(d) The Trustee may refuse to perform any duty or exercise any right
or power unless it receives indemnity satisfactory to it against any loss,
liability, expense or fee.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 9.01.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held
in trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 9.02. RIGHTS OF TRUSTEE.
-----------------
Subject to Section 9.01:
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officer's Certificate or an Opinion of Counsel, which shall conform to Section
12.04(b). The Trustee shall not be liable for any action it takes or omits to
take in good faith in reliance on such Certificate or Opinion.
(c) The Trustee may act through its agents and shall not be
responsible for the misconduct or negligence of any agent appointed with
reasonable care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers.
(e) The Trustee may consult with counsel and the advice or opinion of
such counsel as to matters of law shall be full and complete authorization and
protection in respect of any action taken, omitted or suffered by it hereunder
in good faith and in accordance with the advice or opinion of such counsel.
SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE.
----------------------------
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or an
affiliate of the Company with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to Sections 9.10 and 9.11.
SECTION 9.04. TRUSTEE'S DISCLAIMER.
--------------------
The Trustee makes no representation as to the validity or adequacy of
this Indenture or
36
<PAGE>
the Securities, it shall not be accountable for the Company's use of the
proceeds from the Securities, and it shall not be responsible for any statement
in the Securities other than its certificate of authentication.
SECTION 9.05. NOTICE OF DEFAULT OR EVENTS OF DEFAULT.
--------------------------------------
If a default or an Event of Default occurs and is continuing and if it
is known to the Trustee, the Trustee shall mail to each Securityholder notice of
the default or Event of Default within 90 days after it occurs. Except in the
case of a default or an Event of Default in payment of the principal of or
interest on any Security, the Trustee may withhold the notice if and so long as
a committee of its Trust Officers in good faith determines that withholding the
notice is in the interest of Securityholders.
37
<PAGE>
SECTION 9.06. REPORTS BY TRUSTEE TO HOLDERS.
If such report is required by TIA '313, within 60 days after each
February 1, beginning with the February 1 following the date of this Indenture,
the Trustee shall mail to each Securityholder a brief report dated as of such
February 1 that complies with TIA '313(a).
A copy of each report at the time of its mailing to Securityholders
shall be mailed to the Company and filed with the SEC and each stock exchange,
if any, on which the securities are listed. The Company shall notify the
Trustee whenever the Securities become listed on any stock exchange and any
changes in the stock exchanges on which the Securities are listed.
SECTION 9.07. COMPENSATION AND INDEMNITY.
--------------------------
The Company shall pay to the Trustee from time to time reasonable
compensation for its services, including reasonable Trustee default fees, (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust). The Company shall reimburse the
Trustee upon request for all reasonable disbursements, expenses and advances
incurred or made by it. Such expenses may include the reasonable compensation,
disbursements and expenses of Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any loss, liability or expense incurred by it in connection with its
duties under this Indenture or any action or failure to act as authorized or
within the discretion or rights or powers conferred upon the Trustee hereunder.
The Trustee shall notify the Company promptly of any claim asserted against the
Trustee for which it may seek indemnity. The Trustee shall have the option of
undertaking the defense of such claims; provided, however, that if the Trustee
-------- -------
opts not to defend itself, the Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need
not pay for any settlement without its written consent, which consent shall not
be unreasonably withheld.
The Company need not reimburse the Trustee for any expense or
indemnify it against any loss or liability incurred by it through its negligence
or bath faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a senior claim to which the Securities are hereby made
subordinate on all money or property held or collected by the Trustee, except
such money or property held in trust to pay the principal of and interest on
particular Securities. The obligations of the Company under this Section 9.07
to compensate or indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall be secured by a lien prior to that of
the Securities upon all property and funds held or collected by the Trustee as
such, except funds held in trust for the benefit of the Holders of particular
Securities. The obligations of the Company under this Section 9.07 shall
survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 8.01(5) or (6) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy law.
38
<PAGE>
SECTION 9.08. REPLACEMENT OF TRUSTEE.
----------------------
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the Securities then outstanding may remove the
Trustee by so notifying the Trustee and may appoint a successor Trustee with the
Company's written consent. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 9.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee.
If a successor Trustee does not take office within 45 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of 10% in principal amount of the Securities then outstanding may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 9.10 any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee and be released from its obligations (exclusive of any
liabilities Trustee may have incurred while acting as Trustee) hereunder, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. A successor Trustee shall mail notice of its succession
to each Securityholder.
Notwithstanding replacement of the Trustee pursuant to this Section
9.08, the Company's obligations under Section 9.07 hereof shall continue for the
benefit of the retiring Trustee.
SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
---------------------------------
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust assets to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee, provided such transferee corporation
shall qualify and be eligible under Section 9.10.
39
<PAGE>
SECTION 9.10. ELIGIBILITY; DISQUALIFICATION.
-----------------------------
This Indenture shall always have a Trustee who satisfies the
requirements of paragraphs(1), (2) and (5) of TIA '310(a). If at any time the
Trustee shall cease to satisfy any such requirements, it shall resign
immediately in the manner and with the effect specified in this Article 9. The
Trustee shall be subject to the provisions of TIA '310(b). Nothing herein shall
prevent the Trustee from filing with the SEC the application referred to in the
penultimate paragraph of TIA '319(b).
SECTION 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
-------------------------------------------------
The Trustee shall comply with TIA '311(a), excluding any creditor
relationship listed in TIA '311(b). A trustee who has resigned or been removed
shall be subject to TIA '311(a) to the extent indicated therein.
ARTICLE 10
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS.
------------------------------------
The Company may terminate all of its obligations under the Securities
and this Indenture (exception those obligations referred to in the immediately
succeeding paragraph) if all Securities previously authenticated and delivered
(other than destroyed, lost or stolen Securities which have been replaced or
paid or Securities for whose payment money has theretofore been held in trust
and thereafter repaid to the Company, as provided in Section 10.03) have been
delivered to the Trustee for cancellation and the Company has paid all sums
payable by it hereunder, or if the Company irrevocably deposits in trust with
the Trustee money or U.S. Government Obligations maturing as to principal and
interest in such amounts and at such times as are sufficient, without
consideration of any reinvestment of such interest, to pay the principal of and
interest on the Securities then outstanding to maturity or to the date fixed for
redemption and to pay all other sums payable by it hereunder provided that, as
long as any Bank Credit Agreement shall be in force and effect, at least five
Business Days prior to making such payment of deposit, the Company shall give
notice to the lender(s) under any Bank Credit Agreement then in force, of its
intention to make such payment or deposit. The Company may make an irrevocable
deposit pursuant to this Section 10.01 only if at such time it is not prohibited
from doing so under the provisions of Article 5 and the Company shall have
delivered to the Trustee and any such Paying Agent an Officer's Certificate to
that effect and that all other conditions to such deposit have been complied
with.
The Company's obligations in paragraph 12 of the Securities, in
Section 2.03, 2.04, 2.05, 2.06, 2.07, 2.11, 6.01, 9.07, 9.08 and 10.04, and in
Article 4 shall survive until the Securities are
40
<PAGE>
no longer outstanding. Thereafter, the Company's obligations in such paragraph
12 and in Section 9.07 shall survive.
After such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Securities and this Indenture, except for those surviving obligations specified
above.
"U.S. Government Obligations" means direct non-callable obligations
of, or none-callable obligations guaranteed by, the United States of America for
the payment of which guarantee or obligation the full faith and credit of the
Untied States is pledged.
SECTION 10.02. APPLICATION OF TRUST MONEY.
--------------------------
The Trustee or the Paying Agent shall hold in trust, for the benefit
of the Holders, money or U.S. Government Obligations deposited with it pursuant
to Section 10.01, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with this Indenture to the payment of the
principal of and interest on the Securities. Money and U.S. Government
Obligations so held in trust shall not be subject to the subordination
provisions of Article 5.
SECTION 10.03. REPAYMENT TO COMPANY.
--------------------
Subject to Section 10.01, the Trustee and the Paying Agent shall
promptly pay to the Company upon request any excess money or U.S. Government
Obligations held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon request
any money held by them for the payment of principal or interest that remains
unclaimed for two years after a right to such money has matured; provided,
--------
however, that the Trustee or such Paying Agent, before being required to make
- -------
any such payment, may at the expense of the Company cause to be published once
in a newspaper of general circulation in the City of New York or mail to each
Holder entitled to such money notice that such money remains unclaimed and that
after a date specified therein, which shall be at least 30 days from the date of
such publication or mailing, any unclaimed balance of such money then remaining
will be repaid to the Company. After payment to the Company, Securityholders
entitled to money must look to the Company for payment as general creditors
unless otherwise prohibited by law.
SECTION 10.04. REINSTATEMENT.
-------------
If the Trustee or the Paying Agent is unable to apply any money or
U.S. Government Obligations in accordance with Section 10.01 by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Securities
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 10.01 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with Section
10.01; provided, however, that if the Company has made any payment of the
-------- -------
principal of or interest on any Securities because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive any such payment from the money or U.S. Government
Obligations held by the Trustee or the Paying Agent.
41
<PAGE>
ARTICLE 11
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.01. WITHOUT CONSENT OF HOLDERS.
--------------------------
The Company and the Trustee may amend or supplement this Indenture or
the Securities without notice to or consent of any Securityholder:
(a) to comply with Sections 6.03 and 7.01;
(b) to provide for uncertificated Securities in addition to or in
place of certificated Securities;
(c) to cure any ambiguity, defect or inconsistency, or to make any
other change that does not adversely affect the rights of any Securityholder; or
(d) to comply with the provisions of the TIA, if this Indenture is
then subject to the TIA.
SECTION 11.02. WITH CONSENT OF HOLDERS.
-----------------------
The Company and the Trustee may amend or supplement this Indenture or
the Securities without notice to any Securityholder with the written consent of
the Holders of 66-2/3% in principal amount of the Securities then outstanding.
The Holders of a majority in principal amount of the Securities then outstanding
may waive compliance in a particular instance by the Company with any provision
of this Indenture or the Securities without notice to any Securityholder.
Subject to Section 10.04, without the written consent of each Securityholder
affected, however, an amendment, supplement or waiver, including a waiver
pursuant to Section 8.04, may not:
(1) reduce the amount of Securities whose Holders must consent
to an amendment, supplement or waiver;
(2) reduce the rate of or change the time for payment of
interest on any Security;
(3) reduce the principal of or premium on or change the fixed
maturity of any Security or alter the redemption provisions with
respect thereto;
(4) alter the conversion provisions with respect to any
Security in a manner adverse to the holder thereof;
(5) waive a default in the payment of the principal of or
premium or interest on any Security;
(6) make any changes in Section 8.04, 8.07 or this sentence;
(7) modify the provisions of Article 5 hereof in a manner
adverse to the Holders; or
42
<PAGE>
(8) make any Security payable in money other than that stated
in the Security.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such amendment, supplement or waiver.
An amendment under this Section 11.02 may not make any change that
adversely affects the rights under Article 5 of any holder of an issue of Senior
Indebtedness unless the holders of that issue, pursuant to its terms, consent to
the change.
SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT.
-----------------------------------
Every amendment to or supplement of this Indenture or the Securities
shall, if required, comply with TIA as in effect at the date of such amendment
or supplement.
SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS.
---------------------------------
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder a Security or portion of a Security that evidences the same debt as the
consenting Holder's Security, even if notation of the consent is not make on any
Security. However, any such Holder or subsequent Holder may revoke the consent
as to his Security or portion of a Security if the Trustee receives the notice
of revocation before the date the amendment, supplement or waiver becomes
effective.
After an amendment, supplement or waiver becomes effective, it shall
bind every Securityholder, unless it makes a change described in any of clauses
(1) through (8) of Section 11.02. In that case the amendment, supplement or
waiver shall bind each Holder of a Security that evidences the same debt as the
consenting Holder's Security.
SECTION 11.05. NOTATION ON OR EXCHANGE OF SECURITIES.
-------------------------------------
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee.
The Trustee may place an appropriate notation on the Security about the changed
terms and return it to the Holder. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the
43
<PAGE>
Security shall issue and the Trustee shall authenticate a new Security that
reflects the changed terms.
SECTION 11.06. TRUSTEE TO SIGN AMENDMENTS, ETC.
--------------------------------
The Trustee shall sign any amendment or supplement authorized pursuant
to this Article 11 if the amendment or supplement does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may but need not sign it. In signing or refusing to sign such amendment
or supplement, the Trustee shall be entitled to receive and, subject to Section
9.01 shall be fully protected in relying upon, an Opinion of Counsel stating
that such amendment or supplement is authorized or permitted by this Indenture.
The Company shall not sign an amendment or supplement until the Board of
Directors approves it.
ARTICLE 12
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS.
----------------------------
If the Trust Indenture Act applies and any provision of this Indenture
limits, qualifies or conflicts with the duties imposed by any of Sections 310 to
317, inclusive, of the TIA through operation of Section 318(c) thereof, such
imposed duties shall control.
SECTION 12.02. NOTICES.
-------
Any notice or communication shall be given in writing and delivered in
person or mailed by first-class mail, postage prepaid, addressed as follows:
if to the Company:
Birner Dental Management Services, Inc.
3801 E. Florida Avenue
Suite 208
Denver, Colorado 80210
Attention: Chief Executive Officer
if to the Trustee:
Colorado National Bank
950 Seventeenth Street
Suite 2450
Denver, CO 80202
Attention: Adam Dalmy, Corporate Trust Department
Such notices or communications shall be effective when received.
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notice or communications.
44
<PAGE>
Any notice or communication mailed to a Securityholder shall be mailed
by first-class mail to him at his address shown on the register kept by the
Registrar.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication to a Securityholder is mailed in
the manner provided above, it is duly given, whether or not the addressee
receives it.
SECTION 12.03. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.
--------------------------------------------
Securityholders may communicate pursuant to TIA '312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other person shall
have the protection of TIA '312(c).
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
--------------------------------------------------
(a) Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee
at the request of the Trustee:
(1) an Officer's Certificate stating that, in the opinion
of the signers, all conditions precedent (including any covenants
compliance with which constitutes a condition precedent), if any,
provided for this Indenture relating to the proposed action have been
complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent (including any covenants
compliance with which constitutes a condition precedent) have been
complied with.
(b) Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture (other
than annual certificates provided pursuant to Section 6.04 hereof) shall
include:
(1) a statement that the person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has
made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or
condition has been complied with;
(4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with; provided,
--------
however, that with respect to matters of fact an Opinion of Counsel
-------
may rely on an Officer's Certificate or certificates of public
officials.
SECTION 12.05. RECORD DATE FOR VOTE OR CONSENT OF SECURITYHOLDERS.
--------------------------------------------------
The Company (or, in the event deposits have been made pursuant to
Sections 6.03 or
45
<PAGE>
10.01, the Trustee), may set a record date for purposes of determining the
identify of Securityholders entitled to vote or consent to any action by vote or
consent authorized or permitted under this Indenture, which record date shall be
the later of 10 days prior to the first solicitation of such vote or consent or
the date of the most recent list of Securityholders furnished to the Trustee
pursuant to Section 2.05 hereof prior to such solicitation. If a record date is
fixed, those persons who were Holders or Securities at such record date (or
their duly designated proxies), and only those persons, shall be entitled to
take such action by vote or consent or to revoke any vote or consent previously
given, whether or not such persons continue to be Holders after such record
date.
SECTION 12.06. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR.
-----------------------------------------
The Trustee may make reasonable rules for action by or at a meeting
Holders. The Registrar or the Paying Agent may make reasonable rules for its
functions.
SECTION 12.07. LEGAL HOLIDAYS.
--------------
A "Legal Holiday" is a Saturday, or a Sunday or a day on which state
or Federally chartered banking institutions in New York, New York or the city
and state where the Trustee's corporate trust operations are located, which
initially are Denver, Colorado are not required to be open. If a payment date
is a Legal Holiday at a place of payment, payment may be made at that place on
the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
SECTION 12.08. GOVERNING LAW.
-------------
The laws of the State of Colorado shall govern this Indenture and the
Securities without regard to principles of conflicts of law.
SECTION 12.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
---------------------------------------------
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or a Subsidiary. any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
46
<PAGE>
SECTION 12.10. NO RECOURSE AGAINST OTHERS.
--------------------------
All liability described in paragraph 17 of the Securities of any
director, officer, employee or stockholder, as such, of the Company is waived
and released.
SECTION 12.11. SUCCESSORS.
----------
All agreements of the Company in this Indenture and the Securities
shall bind its successor. All agreements of the Trustee in this Indenture shall
bind its successor.
SECTION 12.12. MULTIPLE COUNTERPARTS.
---------------------
The parties may sign multiple counterparts of this Indenture. Each
signed counterpart shall be deemed an original, but all of them together
represent the same agreement.
SECTION 12.13. SEPARABILITY.
------------
In case any provisions in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 12.14. TABLE OF CONTENTS, HEADINGS, ETC.
---------------------------------
The table of contents, cross-reference sheet and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
[The remainder of this page intentionally left blank]
47
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
as of this 15/th/ day of May, 1996.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:/s/ Fred Birner
_____________________________________________
Name: Fred Birner
Title: CEO
[SEAL]
Attest:
/s/ Dennis Genty
________________________________________
Name: Dennis Genty
___________________________________
Title: CEO
__________________________________
COLORADO NATIONAL BANK
as Trustee
By:/s/ Adam M. Dalmy
____________________________________________
Name: Adam M. Dalmy
Title: Vice President
[SEAL OF
COLORADO NATIONAL BANK
APPEARS HERE]
Attest:
/s/ William W. MacMillan
________________________________________
Name: William W. MacMillan
___________________________________
Title: Vice President
__________________________________
48
<PAGE>
EXHIBIT A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 ("THE ACT") OR ANY APPLICABLE STATE SECURITIES LAWS ("STATE ACTS")
AND ARE RESTRICTED SECURITIES AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT.
THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE ACT AND APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF BIRNER DENTAL MANAGEMENT SERVICES, INC.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
9% CONVERTIBLE SUBORDINATED DEBENTURE DUE MAY 15, 2001
BIRNER DENTAL MANAGEMENT SERVICES, INC., a Colorado corporation, promises
to pay to _______________________ or registered assigns the principal sum of
_________________ Dollars on May 15, 2001.
Interest Payment Dates: June 1 and December 1
Regular Record Dates: May 15 and November 15
This Debenture is convertible as set forth herein. Additional provisions
of this Debenture are set forth in Paragraphs 1 through 22 hereof.
Dated: BIRNER DENTAL MANAGEMENT SERVICES, INC.
By: _______________________________________________
Name: Fred Birner
Title: Chief Executive Officer
[SEAL]
Attest:
By:___________________________
Secretary
Trustee's Certificate of Authentication:
This is one of the Securities referred to
in the within-mentioned Indenture.
COLORADO NATIONAL BANK
as Trustee
By:___________________________
A-1
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
9% CONVERTIBLE SUBORDINATED DEBENTURE DUE MAY 15, 2001
1. Interest.
--------
Birner Dental Management Services, Inc., a Colorado corporation (the
"Company"), promises to pay interest on the principal amount of this Debenture
at the rate per annum shown above. The Company shall pay interest semi-annually
on June 1 and December 1 of each year, commencing December 1, 1996. Interest on
the Debentures will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date of first issuance of the
Debentures under the Indenture (as defined below); provided that, if there is
not an existing default in the payment of interest, and if this Debenture is
authenticated after May 29, 1996 and between a record date referred to on the
facirst page hereof and the next succeeding interest payment date, interest
shall accrue from such interest payment date. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
2. Method of Payment.
-----------------
The Company will pay interest on this Debenture (except defaulted
interest) to the person who is the registered Holder of this Debenture at the
close of business on May 15 and November 15 next preceding the Interest Payment
Date. The Holder must surrender this Debenture to the Paying Agent to collect
payment of principal. The Company will pay principal and interest in money of
the United States that at the time of payment is legal tender for payment of
public and private debts. The Company, however, may pay principal and interest
by its check payable in such money. It may mail an interest check to the
Holder's registered address.
3. Paying Agent, Registrar and Conversion Agent.
--------------------------------------------
Initially, Colorado National Bank (the "Trustee") will act as Paying
Agent, Registrar and Conversion Agent. The Company may change any Paying Agent,
Registrar or Conversion Agent without notice to the holder. The Company or any
of its Subsidiaries may act as Paying Agent, Registrar or Conversion Agent.
4. Indenture, Limitations.
----------------------
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its 9% Convertible Subordinated Debentures due May 15,
2001 (the "Debentures"), issued under an Indenture dated as of May 15, 1996 (the
"Indenture"), between the Company and the Trustee. The terms of this Debenture
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended, and as in effect on
the date of the Indenture. This Debenture is subject to all such terms, and the
holder of this Debenture is referred to the Indenture and said Act for a
statement of them.
A-2
<PAGE>
The Debentures are subordinated unsecured obligations of the Company
limited to up to $5,000,000 aggregate principal amount. The Indenture does not
limit other debt of the Company, secured or unsecured, including Senior
Indebtedness.
5. Redemption by the Company.
-------------------------
Except as provided in this Section 5.Paragraph 5, the Debentures may
not be redeemed by the Company. The Company will redeem on each of May 15, 1999
and May 15, 2000, 20% of the aggregate principal amount of the Debentures
initially issued under the Indenture. The Redemption Price shall be equal to
the principal amount of the Debentures being redeemed. Accrued interest shall
be paid to the date of redemption on Debentures redeemed. The Trustee shall
select the Debentures to be redeemed by lot or by a method the Trustee considers
fair and appropriate; provided that such method is not prohibited by any stock
exchange or market on which the Debentures are then listed. The Trustee shall
make the selection from the Debentures outstanding and not previously called for
redemption. Debentures in denominations of $1,000 may only be redeemed in
whole. The Trustee may select for redemption portions (equal to $1,000 or any
multiple thereof) of the principal Debentures that have denominations larger
than $1,000.
6. Notice of Redemption.
--------------------
Notice of redemption will be mailed by first class mail at least 20
days before the Redemption Date to each Holder of Debentures to be redeemed at
his registered address. Debentures in denominations larger than $1,000 may be
redeemed in part, but only in whole multiples of $1,000. On and after the
Redemption Date, subject to the deposit with the Paying Agent of funds
sufficient to pay the Redemption Price, interest ceases to accrue on Debentures
or portions of them called for redemption.
7. Conversion.
----------
A Holder of a Debenture may convert such Debenture into shares of
Common Stock of the Company at any time prior to maturity; provided that if the
Debenture is called for redemption, the conversion right will terminate at the
close of business on the Redemption Date for such Debenture (unless the Company
shall default in making the redemption payment when due, in which case the
conversion right shall terminate at the close of business on the date such
default is cured and such Debenture is redeemed); provided, further, that if the
-------- -------
Holder of a Debenture presents such Debenture for redemption prior to the close
of business on the Redemption Date for such Debenture the right of conversion
shall terminate upon presentation of the Debenture to the Trustee (unless the
Company shall default in making the redemption payment when due, in which case
the conversion right shall terminate on the close of business on the date such
default is cured and such Debenture is redeemed). The initial conversion
pConversion Price is $3.50 per share, subject to adjustment under certain
circumstances. The number of shares issuable upon conversion of a Debenture is
determined by dividing the principal amount converted by the conversion
pConversion Price in effect on the conversion date. Payment of accrued interest
on a converted Debenture will be made to the conversion date on the next
succeeding interest payment date. Upon conversion, no adjustment for dividends
will be made for dividends or distributions on shares of Common Stock issued
upon conversion of a Debenture. No fractional shares will be
A-3
<PAGE>
issued upon conversion; in lieu thereof, an amount will be paid in cash based
upon the conversion pConversion Price of the Common Stock on the last trading
day prior to the date of conversion.
To convert a Debenture, a Holder must (a) complete and manually sign
the conversion notice attached hereto and deliver such notice to the Conversion
Agent, (b) surrender the Debenture to the Conversion Agent, (c) furnish
appropriate endorsements or transfer documents if required by the Registrar or
the Conversion Agent, (d) execute any investment letters or other documents
required by the Company, and (e) pay any transfer or similar tax, if required.
If a Holder surrenders a Debenture for conversion between the record date for
the payment of an installment of interest and the next interest payment date,
the amount of interest payable on such interest payment date will be the amount
accrued to the date of conversion on the principal amount of the Debenture or
portion thereof then converted. A Holder may convert a portion of a Debenture
equal to $1,000 or any integral multiple thereof.
8. Restrictions on Transfer.
------------------------
Unless otherwise instructed by the Company, the Trustee shall cause
any and all instruments representing the Debentures and certificates
representing any shares of Common Stock issued upon conversion of the Debentures
and any and all securities issued in replacement thereof or in exchange therefor
to bear the following legend, or one substantially similar thereto:
"The securities represented hereby have not been registered under the
Securities Act of 1933 (the "Act") or any applicable state securities
laws ("State Acts") and are restricted securities as that term is
defined in Rule 144 under the Act. The securities may not be offered
for sale, sold or otherwise transferred except pursuant to an
effective registration statement or qualification under the Act and
applicable State Acts or pursuant to an exemption from registration
under the Act and applicable State Acts, the availability of which is
to be established to the satisfaction of the Company."
The Trustee shall permit transfer of the Debentures and any shares of Common
Stock issued upon conversion of the Debentures only upon written instructions
from the Company or its counsel that such transfer is permitted under the Act
and applicable State Acts. Unless otherwise instructed by the Company, each
Holder who is a transferee of the Debentures or shares of Common Stock issuable
upon the conversion of the Debentures (including Holders whose dDebentures are
converted) may be required to execute investment letters and other documents as
required by the Company. If instructed in writing by the Company or its
counsel, there should also be placed on any instruments representing the
Debentures and certificates representing any shares of Common Stock issued upon
conversion of the Debentures and any and all securities issued in replacement
thereof or in exchange therefor, any legend as may be required by the securities
laws of the state in which the Holder of such Debentures or shares of Common
Stock resides.
9. Subordination.
-------------
The indebtedness evidenced by the Debentures is, to the extent and in
the manner provided in the Indenture, subordinate and junior in right of payment
to the prior payment in full of all Senior Indebtedness of the Company, as
defined in the Indenture. Senior Indebtedness must
A-4
<PAGE>
be paid before any payment may be made to any Holder of this Debenture. Any
Holder by accepting this Debenture agrees to and shall be bound by such
subordination provisions and authorizes the Trustee to give them effect.
In addition to all other rights of Senior Indebtedness described in
the Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness
and entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any terms of any instrument relating to the
Senior Indebtedness or any extension or renewal of the Senior Indebtedness.
10. Denominations, Transfer, Exchange.
---------------------------------
The Debentures are in registered form without coupons in denominations
of $1,000 and integral multiples of $1,000. A Holder may register the transfer
of or exchange Debentures in accordance with the Indenture. The Register may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes or other governmental charges that may
be imposed by law or permitted by the Indenture.
11. Persons Deemed Owners.
---------------------
The registered holder of a Debenture may be treated as the owner of
it for all purposes.
12. Unclaimed Money.
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent will pay the money back to the
Company at its request. After that, Holders entitled to money must look solely
to the Company for payment.
13. Amendment, Supplement, Waiver.
-----------------------------
Subject to certain exceptions, the Indenture or the Debentures may be
amended or supplemented with the consent of the Holders of 66-2/3% in principal
amount of the Debentures then outstanding and any past default or compliance
with any provision may be waived in a particular instance with the consent of
the Holders of a majority in principal amount of the Debentures then
outstanding. Without the consent of or notice to any Holder, the Company and
the Trustee may amend or supplement the Indenture or the Debentures to, among
other things, provide for uncertificated Debentures in addition to or in place
of certificated Debentures, or to cure any ambiguity, defect or inconsistency or
make any other change that does not adversely affect the rights of any Holder.
14. Successor Corporation.
---------------------
When a successor corporation assumes all the obligations of its
predecessor under the Debentures and the Indenture, the predecessor corporation
will be released from those obligations.
A-5
<PAGE>
15. Defaults and Remedies.
---------------------
An Event of Default is: default for 30 days in payment of interest on
the Debentures; default in payment of principal on the Debentures when due;
failure by the Company for 30 days after notice to it to comply with any of its
other agreements contained in the Indenture or the Debentures; certain events of
bankruptcy, insolvency or reorganization of the Company or any of its
subsidiaries; and certain defaults on other indebtedness. If an Event of
Default (other than as a result of certain events of bankruptcy, insolvency or
reorganization), occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the Debentures then outstanding may declare all
unpaid principal of and accrued interest to the date of acceleration on the
Debentures then outstanding to be due and payable immediately, all as and to the
extent provided in the Indenture. If an Event of Default occurs as a result of
certain events of bankruptcy, insolvency or reorganization, all unpaid principal
of and accrued interest on the Debentures then outstanding shall become due and
payable immediately without any declaration or other act on the part of the
-----------
Trustee or any Holder, all as and to the extent provided in the Indenture.
Holders may not enforce the Indenture or the Debentures except as provided in
the Indenture. The Trustee may require indemnity satisfactory to it before it
enforces the Indenture or the Debentures. Subject to certain limitations,
Holders of a majority in principal amount of the Debentures then outstanding may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders notice of any continuing default (except a default in
payment of principal or interest) if it determines that withholding notice is in
their interests. The Company is required to file periodic reports with the
Trustee as to the absence of default.
16. Trustee Dealings with the Company.
---------------------------------
Colorado National Bank, the Trustee under the Indenture, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or an Affiliate of the Company, and may
otherwise deal with the Company or an Affiliate of the Company, as if it were
not the Trustee.
17. No Recourse Against Others.
--------------------------
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Debentures or the Indenture or for any claim based on, in respect or by reason
of, such obligations or their creation. The Holder of this Debenture by
accepting this Debenture waives and releases all such liability. The waiver and
release are part of the consideration for the issue of this Debenture.
18. Discharge Prior to Maturity.
---------------------------
If the Company deposits with the Trustee or the Paying Agent money or
U.S. Government Obligations sufficient to pay the principal of and interest on
the Debentures to maturity, the Company will be discharged from the Indenture
except for certain Sections thereof.
A-6
<PAGE>
19. Authentication.
--------------
This Debenture shall not be valid until the Trustee or an
authenticating agent signs the certificate of authentication on this Debenture.
20. Abbreviations and Definitions.
-----------------------------
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN or JTWROS (= joint tenants with right of survivorship and
not as tenants in common), CUST (= Custodian), POA (= Power of Attorney), DTD
Custodian(= dated), TTEE (= Trustee), FBO (= for benefit of) and U/G/M/A (=
Uniform Gifts to Minors Act).
All capitalized terms used in this Debenture and not specifically
defined herein are defined in the Indenture and are used herein as so defined.
21. Indenture to Control.
--------------------
In the case of any conflict between the provisions of this Debenture
and the Indenture, the provisions of the Indenture shall control.
The Company will furnish to any Holder, upon written request and
without charge, a copy of the Indenture. Requests may be made to: Birner
Dental Management Services, Inc., Suite 208, 3801 East Florida Avenue, Denver,
Colorado 80210, Attention: Chief Executive Officer.
Surrender of Debentures
- -----------------------
Holders surrendering Debentures for redemption or conversion
should send them to:
Colorado National Bank
Principal Operations Center
First Trust N.A.
180 East 5/th/ Street
4/th/ Floor
Bond Drop Window
St. Paul, Minnesota 55101
A-7
<PAGE>
ASSIGNMENT FORM
To assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to ______________________
____________________________________________________________________
____________________________________________________________________
(Insert assignee's name, soc. sec. or tax I.D. no.)
____________________________________________________________________
____________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint:
____________________________________________________________________
agent to transfer this Debenture on the books of the Company. The Agent may
substitute another to act for him.
Date: _______________________________________________
Your signature:_____________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
_____________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
*Signature guaranteed by:
_____________________________________________________
By: _________________________________________________
______________
*The signature must be guaranteed by an eligible institution (as defined in
Rule 17Ad-15 under the Exchange Act) that participates in a Securities Transfer
Association recognized signature guarantee program or such other guarantee
acceptable to the Trustee.
<PAGE>
CONVERSION NOTICE
To convert this Debenture into common Stock of the Company, check the box: [ ]
To convert only part of this Debenture, state the amount:______________________
If you want the stock certificate made out in another person's name, fill in the
form below:
______________________________________________________________________
(insert other person's soc. sec. or tax I.D. no.)
______________________________________________________________________
(Print or type other person's name, address and zip code)
______________________________________________________________________
______________________________________________________________________
Date: _______________________________________________
Your signature:________________________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
________________________________________________________________
(Sign exactly as your name appears on the other side of this
Debenture)
*Signature guaranteed by____________________________________________
____________________________________________________________________
By: ________________________________________________________________
______________
*The signature must be guaranteed by an eligible institution (as defined in
Rule 17Ad-15 under the Exchange Act) that participates in a Securities Transfer
Association recognized signature guarantee program or such other guarantee
acceptable to the Trustee.
<PAGE>
EXHIBIT 10.23
BIRNER DENTAL MANAGEMENT SERVICES, INC.
1995 EMPLOYEE STOCK OPTION PLAN
SECTION 1: PURPOSE
-------------------
The purpose of the Birner Dental Management Services, Inc. 1995
Employee Stock Option Plan (the "Plan") is to further the growth and development
of Birner Dental Management Services, Inc. (the "Company") by affording an
opportunity for stock ownership to selected employees, directors and consultants
of the Company and its subsidiaries who are responsible for the conduct and
management of its business or who are involved in endeavors significant to its
success.
SECTION 2: DEFINITIONS
-----------------------
Unless otherwise indicated, the following words when used herein shall
have the following meanings:
(a) "Affiliate" shall mean, with respect to any person or entity, a
person or entity that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such person or entity.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Change in Control" shall be deemed to have occurred:
(1) At such time as a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of the Company having 50% or
more of the total number of votes that may be cast for the election of
Directors of the Company; or
(2) On the date on which the stockholder(s) of the Company
approve: (i) any agreement for a merger or consolidation of the
Company with another corporation, provided that there shall be no
change of control if the persons and entities who were the
stockholders of the Company immediately before such merger or
consolidation continue to own, directly or indirectly, more than two-
thirds of the outstanding voting securities of the corporation
resulting from such merger or consolidation in substantially the same
proportion as their ownership of the voting securities of the Company
outstanding immediately before such merger or consolidation; or (ii)
any sale, exchange or
<PAGE>
other disposition of all or substantially all of the Company's assets;
or
(3) on the effective date of any sale, exchange or other
disposition of greater than 50% in fair market value of the Company's
assets, other than in the ordinary course of business, whether in a
single transaction or a series of related transactions.
In determining whether clause (1) of the preceding sentence has been
satisfied, the third person owning shares must be someone other than a
person or an Affiliate of a person that, as of October 30, 1995, was the
beneficial owner of shares of the Company having 20% or more of the total
number of votes that may be cast for the election of Directors of the
Company. The Committee's reasonable determination as to whether such an
event has occurred shall be final and conclusive.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Common Stock" shall mean the Company's common stock (no par
value per share) and any share or shares of the Company's capital stock
hereafter issued or issuable in substitution for such shares.
(f) "Director" shall mean a member of the Board of Directors.
(g) "Incentive Stock Option" shall mean any option granted to an
eligible employee under the Plan, which the Company intends at the time the
option is granted to be an Incentive Stock Option within the meaning of
Section 422 of the Code.
(h) "Nonqualified Stock Option" shall mean any option granted to an
eligible employee, Director or consultant under the Plan which is not an
Incentive Stock Option.
(i) "Option" shall mean and refer collectively to Incentive Stock
Options and Nonqualified Stock Options.
(j) "Option Agreement" means the agreement specified in Section 7.2.
(k) "Optionee" shall mean any employee, Director or consultant who is
granted an Option under the Plan. "Optionee" shall also mean the personal
representative of an Optionee and any other person who acquires the right
to exercise an Option by bequest or inheritance.
2
<PAGE>
(l) "Parent" shall mean a parent corporation of the Company as
defined in Section 424(e) of the Code.
(m) "Subsidiary" shall mean a subsidiary corporation of the Company
as defined in Section 424(f) of the Code.
SECTION 3: EFFECTIVE DATE
--------------------------
The effective date of the Plan is October 30, 1995; provided, however,
that the adoption of the Plan by the Board of Directors is subject to approval
and ratification by the shareholders of the Company within 12 months of the
effective date. Options granted under the Plan prior to approval of the Plan by
the shareholders of the Company shall be subject to approval of the Plan by the
shareholders of the Company.
SECTION 4: ADMINISTRATION
--------------------------
4.1 Administrative Committee. The Plan shall be administered by a
------------------------
Committee appointed by and serving at the pleasure of the Board of Directors,
consisting of not less than two Directors (the "Committee"). The Board of
Directors may from time to time remove members from or add members to the
Committee, and vacancies on the Committee, howsoever caused, shall be filled by
the Board of Directors.
4.2 Committee Meetings and Actions. The Committee shall hold
------------------------------
meetings at such times and places as it may determine. A majority of the members
of the Committee shall constitute a quorum, and the acts of the majority of the
members present at a meeting or a consent in writing signed by all members of
the Committee shall be the acts of the Committee and shall be final, binding and
conclusive upon all persons, including the Company, its Subsidiaries, its
shareholders, and all persons having any interest in Options which may be or
have been granted pursuant to the Plan.
4.3 Powers of Committee. The Committee shall have the full and
-------------------
exclusive right to grant and determine terms and conditions of all Options
granted under the Plan and to prescribe, amend and rescind rules and regulations
for administration of the Plan. In granting Options, the Committee shall take
into consideration the contribution the Optionee has made or may make to the
success of the Company or its Subsidiaries and such other factors as the
Committee shall determine.
4.4 Interpretation of Plan. The determination of the Committee as
----------------------
to any disputed question arising under the Plan, including questions of
construction and interpretation, shall be final, binding and conclusive upon all
persons, including the Company, its Subsidiaries, its shareholders, and all
persons
3
<PAGE>
having any interest in Options which may be or have been granted pursuant to the
Plan.
4.5 Indemnification. Each person who is or shall have been a member
---------------
of the Committee or of the Board of Directors shall be indemnified and held
harmless by the Company against and from any loss, cost, liability or expense
that may be imposed upon or reasonably incurred in connection with or resulting
from any claim, action, suit or proceeding to which such person may be a party
or in which such person may be involved by reason of any action taken or failure
to act under the Plan and against and from any and all amounts paid in
settlement thereof, with the Company's approval, or paid in satisfaction of a
judgment in any such action, suit or proceeding against him, provided such
person shall give the Company an opportunity, at its own expense, to handle and
defend the same before undertaking to handle and defend it on such person's own
behalf. The foregoing right of indemnification shall not be exclusive of, and
is in addition to, any other rights of indemnification to which any person may
be entitled under the Company's Articles of Incorporation or Bylaws, as a matter
of law, or otherwise, or any power that the Company may have to indemnify them
or hold them harmless.
SECTION 5: STOCK SUBJECT TO THE PLAN
-------------------------------------
5.1 Number. The aggregate number of shares of Common Stock which
------
may be issued under Options granted pursuant to the Plan shall not exceed
300,000 shares. Shares which may be issued under Options may consist, in whole
or in part, of authorized but unissued stock or treasury stock of the Company
not reserved for any other purpose.
5.2 Unused Stock. If any outstanding Option under the Plan expires
------------
or for any other reason ceases to be exercisable, in whole or in part, other
than upon exercise of the Option, the shares which were subject to such Option
and as to which the Option had not been exercised shall continue to be available
under the Plan.
5.3 Adjustment for Change in Outstanding Shares. If there is any
-------------------------------------------
change, increase or decrease, in the outstanding shares of Common Stock which is
effected without receipt of additional consideration by the Company, by reason
of a stock dividend, recapitalization, merger, consolidation, stock split,
combination or exchange of stock, or other similar circumstances, then in each
such event, the Committee shall make an appropriate adjustment in the aggregate
number of shares of stock available under the Plan, the number of shares of
stock subject to each outstanding Option and the Option prices in order to
prevent the dilution or enlargement of any Optionee's rights. In making such
adjustments, fractional shares shall be rounded to the nearest
4
<PAGE>
whole share. The Committee's determinations in making adjustments shall be
final and conclusive.
5.4 Reorganization or Sale of Assets. If the Company is merged or
--------------------------------
consolidated with another corporation and the Company is not the surviving
corporation, or if all or substantially all of the assets of the Company are
acquired by another entity, or if the Company is liquidated or reorganized,
(each of such events being referred to hereinafter as a "Reorganization Event"),
the Committee shall, as to outstanding Options, either (1) make appropriate
provision for the protection of any such outstanding Options by the substitution
on an equitable basis of appropriate stock of the Company, or of the merged,
consolidated or otherwise reorganized corporation, which will be issuable in
respect of the Common Stock, provided that no additional benefits shall be
conferred upon Optionees as a result of such substitution, and provided further
that the excess of the aggregate fair market value of the shares subject to the
Options immediately after such substitution over the purchase price thereof is
not more than the excess of the aggregate fair market value of the shares
subject to such Options immediately before such substitution over the purchase
price thereof, or (2) upon written notice to all Optionees, which notice shall
be given not less than 20 days prior to the effective date of the Reorganization
Event, provide that all unexercised Options must be exercised within a specified
number of days (which shall not be less than ten) of the date of such notice or
such Options will terminate. In response to a notice provided pursuant to
clause (2) of the preceding sentence, an Optionee may make an irrevocable
election to exercise the Optionee's Option contingent upon and effective as of
the effective date of the Reorganization Event. The Committee may, in its sole
discretion, accelerate the exercise dates of outstanding Options in connection
with any Reorganization Event.
SECTION 6: ELIGIBILITY
-----------------------
All full- or part-time employees of the Company and its Subsidiaries
who are responsible for the conduct and management of its business or who are
involved in endeavors significant to its success shall be eligible to receive
both Incentive Stock Options and Nonqualified Stock Options under the Plan.
Directors and consultants who are neither full- nor part-time employees of the
Company or its Subsidiaries but who are involved in endeavors significant to its
success shall be eligible to receive Nonqualified Stock Options, but not
Incentive Stock Options, under the Plan. Any Director who is otherwise eligible
to participate, who makes an election in writing not to receive any grants under
the Plan, shall not be eligible to receive any such grants during the period set
forth in such election.
5
<PAGE>
SECTION 7: GRANT OF OPTIONS
----------------------------
7.1 Grant of Options. The Committee may from time to time in its
----------------
discretion determine which of the eligible employees, Directors and consultants
of the Company or its Subsidiaries should receive Options, the type of Options
to be granted (whether Incentive Stock Options or Nonqualified Stock Options),
the number of shares subject to such Options, and the dates on which such
Options are to be granted. No employee may be granted Incentive Stock Options
to the extent that the aggregate fair market value (determined as of the time
each Option is granted) of the Common Stock with respect to which any such
Options are exercisable for the first time during a calendar year (under all
incentive stock option plans of the Company and its Parent and Subsidiaries)
would exceed $100,000.
7.2 Option Agreement. Each Option granted under the Plan shall be
----------------
evidenced by a written Option Agreement setting forth the terms upon which the
Option is granted. Each Option Agreement shall designate the type of Options
being granted (whether Incentive Stock Options or Nonqualified Stock Options),
and shall state the number of shares of Common Stock, as designated by the
Committee, to which that Option pertains. More than one Option may be granted
to an eligible person.
7.3 Option Price. The option price per share of Common Stock under
------------
each Option shall be determined by the Committee and stated in the Option
Agreement. The option price for Incentive Stock Options granted under the Plan
shall not be less than 100% of the fair market value (determined as of the day
the Option is granted) of the shares subject to the Option. The option price for
Nonqualified Stock Options granted under the Plan shall not be less than 100% of
the fair market value (determined as of the day the Option is granted) of the
shares subject to the Option.
7.4 Determination of Fair Market Value. If the Common Stock is listed
----------------------------------
upon an established stock exchange or exchanges, then the fair market value per
share shall be deemed to be the average of the quoted closing prices of the
Common Stock on such stock exchange or exchanges on the day for which the
determination is made, or if no sale of the Common Stock shall have been made on
any stock exchange on that day, on the next preceding day on which there was
such a sale. If the Common Stock is not listed upon an established stock
exchange but is traded in the NASDAQ National Market System, the fair market
value per share shall be deemed to be the closing price of the Common Stock in
the National Market System on the day for which the determination is made, or if
there shall have been no trading of the Common Stock on that day, on the next
preceding day on which there was such trading. If the Common Stock is not
listed upon an established stock exchange and is not traded in the
6
<PAGE>
National Market System, the fair market value per share shall be deemed to be
the mean between the dealer "bid" and "ask" closing prices of the Common Stock
on the NASDAQ System on the day for which the determination is made, or if there
shall have been no trading of the Common Stock on that day, on the next
preceding day on which there was such trading. If none of these conditions
apply, the fair market value per share shall be deemed to be an amount as
determined in good faith by the Committee by applying any reasonable valuation
method.
7.5 Duration of Options. Each Option shall be of a duration as
-------------------
specified in the Option Agreement; provided, however, that the term of each
Option shall be no more than ten years from the date on which the Option is
granted and shall be subject to early termination as provided herein.
7.6 Additional Limitations on Grant. No Incentive Stock Option
-------------------------------
shall be granted to an employee who, at the time the Incentive Stock Option is
granted, owns stock (as determined in accordance with Section 424(d) of the
Code) representing more than 10% of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary, unless the
option price of such Incentive Stock Option is at least 110% of the fair market
value (determined as of the day the Incentive Stock Option is granted) of the
stock subject to the Incentive Stock Option and the Incentive Stock Option by
its terms is not exercisable more than five years from the date it is granted.
7.7 Other Terms and Conditions. The Option Agreement may contain such
--------------------------
other provisions, which shall not be inconsistent with the Plan, as the
Committee shall deem appropriate, including, without limitation, provisions that
relate the Optionee's ability to exercise an Option to the passage of time or
the achievement of specific goals established by the Committee or the occurrence
of certain events specified by the Committee.
SECTION 8: EXERCISE OF OPTIONS
-------------------------------
8.1 Manner of Exercise. Subject to the limitations and conditions
------------------
of the Plan or the Option Agreement, an Option shall be exercisable, in whole or
in part, from time to time, by giving written notice of exercise to the
Secretary of the Company, which notice shall specify the number of shares of
Common Stock to be purchased and shall be accompanied by (1) payment in full to
the Company of the purchase price of the shares to be purchased, plus (2)
payment in full of such amount as the Company shall determine to be sufficient
to satisfy any liability it may have for any withholding of federal, state or
local income or other taxes incurred by reason of the exercise of the Option,
and (3) a representation meeting the requirements of Section 12.2 if requested
by the Company, and (4) a Stock
7
<PAGE>
Restriction Agreement meeting the requirements of Section 12.3 if requested by
the Company.
8.2 Payment of Purchase Price. Payment for shares and withholding
-------------------------
taxes shall be in the form of either (1) cash, (2) a certified or bank cashier's
check to the order of the Company, or (3) shares of the Common Stock, properly
endorsed to the Company, in an amount the fair market value of which on the date
of receipt by the Company (as determined in accordance with Section 7.4) equals
or exceeds the aggregate option price of the shares with respect to which the
Option is being exercised, or (4) in any combination thereof; provided, however,
that no payment may be made in shares of Common Stock unless payment in such
form and upon such exercise has been approved in advance by the Committee. Upon
the exercise of any Option, the Company, in its sole discretion, may make
financing available to the Optionee for the payment of the purchase price on
such terms and conditions as the Committee shall specify.
SECTION 9: CHANGE IN CONTROL
-----------------------------
The Committee may, in its sole discretion, accelerate the exercise
dates of outstanding Options upon the occurrence of a Change in Control,
notwithstanding any vesting requirements contained in any Option Agreement.
SECTION 10: EFFECT OF TERMINATION OF EMPLOYMENT
------------------------------------------------
10.1 Termination of Employment Other Than Upon Death or Disability.
-------------------------------------------------------------
Upon termination of an Optionee's employment with the Company or a Subsidiary
other than upon death or disability (within the meaning of Section 22(e)(3) of
the Code), an Optionee may, at any time within three months after the date of
termination but not later than the date of expiration of the Option, exercise
the Option to the extent the Optionee was entitled to do so on the date of
termination. Any Options not exercisable as of the date of termination and any
Options or portions of Options of terminated Optionees not exercised as provided
herein shall terminate.
10.2 Termination By Death of Optionee. If an Optionee shall die
--------------------------------
while in the employ of the Company or a Subsidiary or within a period of three
months after the termination of employment with the Company or a Subsidiary
under circumstances to which Section 10.1 apply, the personal representatives of
the Optionee's estate or the person or persons who shall have acquired the
Option from the Optionee by bequest or inheritance may exercise the Option at
any time within the year after the date of death but not later than the
expiration date of the Option, to the extent the Optionee was entitled to do so
on the date of death. Any Options not exercisable as of the date of
8
<PAGE>
death and any Options or portions of Options of deceased Optionees not exercised
as provided herein shall terminate.
10.3 Termination By Disability of Optionee. Upon termination of an
-------------------------------------
Optionee's employment with the Company or a Subsidiary by reason of the
Optionee's disability (within the meaning of Section 22(e)(3) of the Code), the
Optionee may exercise the Option at any time within one year after the date of
termination but not later than the expiration date of the Option, to the extent
the Optionee was entitled to do so on the date of termination. Any Options not
exercisable as of the date of termination and any Options or portions of Options
of disabled Optionees not exercised as provided herein shall terminate.
10.4 Termination of Directors and Consultants. For purposes of this
----------------------------------------
Section 10, a termination of employment shall be deemed to include the
termination of a Director's service as a member of the Board of Directors and
the termination of a consulting arrangement in the case of consultants.
10.5 Extension of Option Termination Date. The Committee, in its sole
------------------------------------
discretion, may extend the termination date of an Option granted under the Plan
without regard to the preceding provisions of this Section 10. In such event,
the termination date shall be a date selected by the Committee in its sole
discretion, but not later than the latest expiration date of the Option
permitted pursuant to Section 7.5. Such extension may be made in the Option
Agreement as originally executed or by amendment to the Option Agreement, either
prior to or following termination of an Optionee's employment. The Committee
shall have no power to extend the termination date of an Incentive Stock Option
beyond the periods provided in Sections 10.1, 10.2 and 10.3 prior to the
termination of the Optionee's employment or without the approval of the
Optionee, which may be granted or withheld in the Optionee's sole discretion.
Any extension of the termination date of an Incentive Stock Option shall be
deemed to be the grant of a new Option for purposes of the Code.
SECTION 11: NON-TRANSFERABILITY OF OPTION
------------------------------------------
Options granted pursuant to the Plan are not transferable by the
Optionee other than by Will or the laws of descent and distribution and shall be
exercisable during the Optionee's lifetime only by the Optionee. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the
Option contrary to the provisions hereof, or upon the levy of any attachment or
similar process upon the Option, the Option shall immediately become null and
void.
9
<PAGE>
SECTION 12: ISSUANCE OF SHARES
-------------------------------
12.1 Transfer of Shares to Optionee. As soon as practicable after the
------------------------------
Optionee has given the Company written notice of exercise of an Option and has
otherwise met the requirements of Section 8.1, the Company shall issue or
transfer to the Optionee the number of shares of Common Stock as to which the
Option has been exercised and shall deliver to the Optionee a certificate or
certificates therefor, registered in the Optionee's name. In no event shall the
Company be required to transfer fractional shares to the Optionee, and in lieu
thereof, the Company may pay an amount in cash equal to the fair market value
(as determined in accordance with Section 7.4) of such fractional shares on the
date of exercise. If the issuance or transfer of shares by the Company would
for any reason, in the opinion of counsel for the Company, violate any
applicable federal or state laws or regulations, the Company may delay issuance
or transfer of such shares to the Optionee until compliance with such laws can
reasonably be obtained. In no event shall the Company be obligated to effect or
obtain any listing, registration, qualification, consent or approval under any
applicable federal or state laws or regulations or any contract or agreement to
which the Company is a party with respect to the issuance of any such shares.
12.2 Investment Representation. Upon demand by the Company, the
-------------------------
Optionee shall deliver to the Company a representation in writing that the
purchase of all shares with respect to which notice of exercise of the Option
has been given by the Optionee is being made for investment only and not for
resale or with a view to distribution, and containing such other representations
and provisions with respect thereto as the Company may require. Upon such
demand, delivery of such representation promptly and prior to the transfer or
delivery of any such shares and prior to the expiration of the option period
shall be a condition precedent to the right to purchase such shares.
12.3 Stock Restriction Agreement. Upon demand by the Company, the
---------------------------
Optionee shall execute and deliver to the Company a Stock Restriction Agreement
in such form as the Company may provide at the time of exercise of the Option.
Such Agreement may include, without limitation, restrictions upon the Optionee's
right to transfer shares, including the creation of an irrevocable right of
first refusal in the Company and its designees, and provisions requiring the
Optionee to transfer the shares to the Company or the Company's designees upon a
termination of employment. Upon such demand, execution of the Stock Restriction
Agreement by the Optionee prior to the transfer or delivery of any shares and
prior to the expiration of the option period shall be a condition precedent to
the right to
10
<PAGE>
purchase such shares, unless such condition is expressly waived in writing by
the Company.
SECTION 13: AMENDMENTS
-----------------------
The Board of Directors may at any time and from time to time alter,
amend, suspend or terminate the Plan or any part thereof as it may deem proper,
except that no such action shall diminish or impair the rights under an Option
previously granted. Unless the shareholders of the Company shall have given
their approval, the total number of shares for which Options may be issued under
the Plan shall not be increased, except as provided in Section 5.3, and no
amendment shall be made which reduces the price at which the Common Stock may be
offered under the Plan below the minimum required by Section 7.3, except as
provided in Section 5.3, or which materially modifies the requirements as to
eligibility for participation in the Plan. Subject to the terms and conditions
of the Plan, the Board of Directors may modify, extend or renew outstanding
Options granted under the Plan, or accept the surrender of outstanding Options
to the extent not theretofore exercised and authorize the granting of new
Options in substitution therefor, except that no such action shall diminish or
impair the rights under an Option previously granted without the consent of the
Optionee.
SECTION 14: TERM OF PLAN
-------------------------
This Plan shall terminate on October 29, 2005; provided, however, that
the Board of Directors may at any time prior thereto suspend or terminate the
Plan.
SECTION 15: RIGHTS AS STOCKHOLDER
----------------------------------
An Optionee shall have no rights as a stockholder of the Company with
respect to any shares of Common Stock covered by an Option until the date of the
issuance of the stock certificate for such shares.
SECTION 16: NO EMPLOYMENT RIGHTS
---------------------------------
Nothing contained in this Plan or in any Option granted under the Plan
shall confer upon any Optionee any right with respect to the continuation of
such Optionee's employment by the Company or any Subsidiary or interfere in any
way with the right of the Company or any Subsidiary, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the Optionee from the
rate in existence at the time of the grant of the Option.
11
<PAGE>
SECTION 17: GOVERNING LAW
--------------------------
This Plan, and all Options granted under this Plan, shall be construed
and shall take effect in accordance with the laws of the State of Colorado,
without regard to the conflicts of laws rules of such State.
12
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
OPTIONEE: ________________________
DATE OF GRANT: ____________________
AGREEMENT between Birner Dental Management Services, Inc. (the
"Company"), and the above named Optionee ("Optionee"), an employee of the
Company or a Subsidiary thereof.
The Company and Optionee agree as follows:
1. Grant of Option.
---------------
Optionee is hereby granted an Incentive Stock Option, within the
meaning of Section 422 of the Code (the "Option"), to purchase Common Stock of
the Company pursuant to the Birner Dental Management Services, Inc. 1995
Employee Stock Option Plan (the "Plan"). The Option and this Agreement are
subject to and shall be construed in accordance with the terms and conditions of
the Plan, as now or hereinafter in effect. Any terms which are used in this
Agreement without being defined and which are defined in the Plan shall have the
meaning specified in the Plan.
2. Date of Grant.
-------------
The date of the grant of the Option is the date first set forth above,
the date of the action by the Committee which administers the Plan (the
"Committee") in granting the same.
3. Number and Price of Shares.
--------------------------
The number of shares as to which the Option is granted is the number
set forth in Schedule 3A to this Agreement. The purchase price per share is the
amount set forth in Schedule 3B to this Agreement.
4. Expiration Date.
---------------
Unless sooner terminated as provided in Section 10 of the Plan, the
Option shall expire and terminate on the date set forth in Schedule 4 to this
Agreement, and in no event shall the Option be exercisable after that date.
<PAGE>
5. Manner of Exercise.
------------------
Except as provided in this Agreement, the Option shall be exercisable,
in whole or in part, from time to time, in the manner provided in Section 8 of
the Plan.
6. Time of Exercise.
----------------
The Option granted hereby shall become vested in and exercisable by
Optionee in the installments, on the dates and subject to the conditions set
forth in Schedule 6 to this Agreement; provided, however, that Optionee must
have been continuously employed by the Company or a Subsidiary thereof from the
date of grant of the Option until the date specified on Schedule 6 or until the
conditions specified on Schedule 6 have been satisfied.
7. Stock Restriction Agreement.
---------------------------
Upon exercise of the Option, the Optionee shall execute and deliver to
the Company a Stock Restriction Agreement in substantially the form attached to
this Agreement as Exhibit A. Execution and delivery of the Stock Restriction
---------
Agreement prior to the transfer or delivery of any shares and prior to the
expiration of the option period shall be a condition precedent to the right to
purchase such shares.
8. Nontransferability of Option.
----------------------------
The Option is not transferable by Optionee other than by Will or the
laws of descent and distribution, and the Option shall be exercisable during
Optionee's lifetime only by Optionee. Upon any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of the Option contrary to the
provisions hereof, or upon the levy of any attachment or similar process upon
the Option, the Option shall immediately become null and void.
2
<PAGE>
9. Withholding for Taxes.
---------------------
The Company shall have the right to deduct from Optionee's salary any
federal or state taxes required by law to be withheld with respect to the
exercise of the Option or any disqualifying disposition of the Common Stock
acquired upon exercise of the Option.
10. Legends.
-------
Certificates representing Common Stock acquired upon exercise of this
Option may contain such legends and transfer restrictions as the Company shall
deem reasonably necessary or desirable, including, without limitation, legends
restricting transfer of the Common Stock until there has been compliance with
federal and state securities laws and until Optionee or any other holder of the
Common Stock has paid the Company such amounts as may be necessary in order to
satisfy any withholding tax liability of the Company resulting from a
disqualifying disposition described in Section 422(a) of the Code.
11. Employee Benefits.
-----------------
Optionee agrees that the grant and vesting of the Option and the
receipt of shares of Common Stock upon exercise of the Option will constitute
special incentive compensation that will not be taken into account as "salary"
or "compensation" or "bonus" in determining the amount of any payment under any
pension, retirement, profit sharing or other remuneration plan of the Company.
12. Amendment.
---------
Subject to the terms and conditions of the Plan, the Committee may
modify, extend or renew the Option, or accept the surrender of the Option to the
extent not theretofore exercised and authorize the granting of new Options in
substitution therefor, except that no such action shall diminish or impair the
rights under the Option without the consent of the Optionee.
13. Interpretation.
--------------
The interpretations and constructions of any provision of and
determinations on any question arising under the Plan or this Agreement shall be
made by the Committee, and all such interpretations, constructions and
determinations shall be final and conclusive as to all parties.
14. Receipt of Plan.
---------------
By entering into this Agreement, Optionee acknowledges (i) that he or
she has received and read a copy of the Plan and (ii) that this Agreement is
subject to and shall be construed in accordance with the terms and conditions of
the Plan, as now or hereinafter in effect.
3
<PAGE>
15. Governing Law.
-------------
This Agreement shall be construed and shall take effect in accordance
with the laws of the State of Colorado, without regard to the conflicts of laws
rules of such State.
16. Miscellaneous.
-------------
This Agreement constitutes the entire understanding and agreement of
the parties with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between the parties with respect hereto. If
any provision of this Agreement, or the application thereof, shall for any
reason and to any extent be invalid or unenforceable, the remainder of this
Agreement and the application of such provision to other circumstances shall be
interpreted so as best to reasonably effect the intent of the parties hereto.
All notices or other communications which are required to be given or may be
given to either party pursuant to the terms of this Agreement shall be in
writing and shall be delivered personally or by registered or certified mail,
postage prepaid, to the address of the parties as set forth following the
signature of such party. Notice shall be deemed given on the date of delivery in
the case of personal delivery or on the delivery or refusal date as specified on
the return receipt in the case of registered or certified mail. Either party may
change its address for such communications by giving notice thereof to the other
party in conformity with this Section 16.
IN WITNESS WHEREOF, the Company by a duly authorized officer of the
Company and Optionee have executed this Agreement on _____________, effective as
of the date of grant.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By: _______________________________
Title: ____________________________
Address: __________________________
___________________________________
___________________________________
4
<PAGE>
OPTIONEE
___________________________________
Address: __________________________
___________________________________
___________________________________
5
<PAGE>
SCHEDULES
to
STOCK OPTION AGREEMENT
Schedule
- --------
4A Number of Shares of Stock:
------------------------- -------------------------
4B Purchase Price per Share:
------------------------ -------------------------
5 Expiration Date:
--------------- ----------------------------------
7 Vesting Schedule:
----------------
Number of Shares
Date Which Become Exercisable
---- ------------------------
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
Additional Conditions to Vesting: Notwithstanding the foregoing, no
--------------------------------
portion of the Option shall be vested and exercisable until the following
conditions have been satisfied:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
6
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
OPTIONEE:
DATE OF GRANT:
AGREEMENT between Birner Dental Management Services, Inc. (the "Company"),
and the above named Optionee ("Optionee"), an employee of the Company or a
Subsidiary thereof.
The Company and Optionee agree as follows:
1. Grant of Option.
---------------
Optionee is hereby granted a Nonqualified Stock Option (the "Option") to
purchase Common Stock of the Company pursuant to the Birner Dental Management
Services, Inc. 1995 Employee Stock Option Plan (the "Plan"). The Option is not
intended to qualify as an Incentive Stock Option within the meaning of Section
422 of the Code. The Option and this Agreement are subject to and shall be
construed in accordance with the terms and conditions of the Plan, as now or
hereinafter in effect. Any terms which are used in this Agreement without being
defined and which are defined in the Plan shall have the meaning specified in
the Plan.
2. Date of Grant.
-------------
The date of the grant of the Option is the date first set forth above, the
date of the action by the Committee which administers the Plan (the "Committee")
in granting the same.
3. Number and Price of Shares.
--------------------------
The number of shares as to which the Option is granted is the number set
forth in Schedule 3A to this Agreement. The purchase price per share is the
amount set forth in Schedule 3B to this Agreement.
4. Expiration Date.
---------------
Unless sooner terminated as provided in Section 10 of the Plan, the Option
shall expire and terminate on the date set forth in Schedule 4 to this
Agreement, and in no event shall the Option be exercisable after that date.
<PAGE>
5. Manner of Exercise.
------------------
Except as provided in this Agreement, the Option shall be exercisable, in
whole or in part, from time to time, in the manner provided in Section 8 of the
Plan.
6. Time of Exercise.
----------------
The Option granted hereby shall become vested in and exercisable by Optionee
in the installments, on the dates and subject to the conditions set forth in
Schedule 6 to this Agreement; provided, however, that Optionee must have been
continuously employed by the Company or a Subsidiary thereof from the date of
grant of the Option until the date specified on Schedule 6 or until the
conditions specified on Schedule 6 have been satisfied.
7. Stock Restriction Agreement.
---------------------------
Upon exercise of the Option, the Optionee shall execute and deliver to the
Company a Stock Restriction Agreement in substantially the form attached to this
Agreement as Exhibit A. Execution and delivery of the Stock Restriction
---------
Agreement prior to the transfer or delivery of any shares and prior to the
expiration of the option period shall be a condition precedent to the right to
purchase such shares.
8. Nontransferability of Option.
----------------------------
The Option is not transferable by Optionee other than by Will or the laws of
descent and distribution, and the Option shall be exercisable during Optionee's
lifetime only by Optionee. Upon any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of the Option contrary to the provisions
hereof, or upon the levy of any attachment or similar process upon the Option,
the Option shall immediately become null and void.
9. Withholding for Taxes.
---------------------
The Company shall have the right to deduct from Optionee's salary any
federal or state taxes required by law to be withheld with respect to the
exercise of the Option.
10. Legends.
-------
Certificates representing Common Stock acquired upon exercise of this
Option may contain such legends and transfer restrictions as the Company shall
deem reasonably necessary or desirable, including, without limitation, legends
restricting
2
<PAGE>
transfer of the Common Stock until there has been compliance with federal and
state securities laws.
11. Employee Benefits.
-----------------
Optionee agrees that the grant and vesting of the Option and the receipt of
shares of Common Stock upon exercise of the Option will constitute special
incentive compensation that will not be taken into account as "salary" or
"compensation" or "bonus" in determining the amount of any payment under any
pension, retirement, profit sharing or other remuneration plan of the Company.
12. Amendment.
---------
Subject to the terms and conditions of the Plan, the Committee may modify,
extend or renew the Option, or accept the surrender of the Option to the extent
not theretofore exercised and authorize the granting of new Options in
substitution therefor, except that no such action shall diminish or impair the
rights under the Option without the consent of the Optionee.
13. Interpretation.
--------------
The interpretations and constructions of any provision of and
determinations on any question arising under the Plan or this Agreement shall be
made by the Committee, and all such interpretations, constructions and
determinations shall be final and conclusive as to all parties.
14. Receipt of Plan.
---------------
By entering into this Agreement, Optionee acknowledges (i) that he or she
has received and read a copy of the Plan and (ii) that this Agreement is subject
to and shall be construed in accordance with the terms and conditions of the
Plan, as now or hereinafter in effect.
15. Governing Law.
-------------
This Agreement shall be construed and shall take effect in accordance with
the laws of the State of Colorado, without regard to the conflicts of laws rules
of such State.
16. Miscellaneous.
-------------
This Agreement constitutes the entire understanding and agreement of the
parties with respect to the subject matter hereof and supersedes all prior and
contemporaneous
3
<PAGE>
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto. If any provision of
this Agreement, or the application thereof, shall for any reason and to any
extent be invalid or unenforceable, the remainder of this Agreement and the
application of such provision to other circumstances shall be interpreted so as
best to reasonably effect the intent of the parties hereto. All notices or
other communications which are required to be given or may be given to either
party pursuant to the terms of this Agreement shall be in writing and shall be
delivered personally or by registered or certified mail, postage prepaid, to the
address of the parties as set forth following the signature of such party.
Notice shall be deemed given on the date of delivery in the case of personal
delivery or on the delivery or refusal date as specified on the return receipt
in the case of registered or certified mail. Either party may change its
address for such communications by giving notice thereof to the other party in
conformity with this Section 16.
IN WITNESS WHEREOF, the Company by a duly authorized officer of the Company
and Optionee have executed this Agreement on _____________, effective as of the
date of grant.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By: _______________________________
Title: ____________________________
Address: __________________________
___________________________________
___________________________________
OPTIONEE
___________________________________
Address: __________________________
___________________________________
___________________________________
4
<PAGE>
SCHEDULES
to
NONQUALIFIED STOCK OPTION AGREEMENT
Schedule
- --------
3A Number of Shares of Stock:
-------------------------
3B Purchase Price per Share:
------------------------
4 Expiration Date:
---------------
6 Vesting Schedule:
----------------
Number of Shares
Date Which Become Exercisable
---- ------------------------
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
________ _________
Additional Conditions to Vesting: Notwithstanding the foregoing, no portion
--------------------------------
of the Option shall be vested and exercisable until the following conditions
have been satisfied:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
5
<PAGE>
EXHIBIT 10.24
BIRNER DENTAL MANAGEMENT SERVICES, INC.
1995 STOCK OPTION PLAN FOR MANAGED DENTAL CENTERS
SECTION 1: PURPOSE
-------------------
The purpose of the Birner Dental Management Services, Inc. 1995 Stock
Option Plan for Managed Dental Centers (the "Plan") is to further the growth and
development of Birner Dental Management Services, Inc. (the "Company") by
affording an opportunity for stock ownership to selected dental centers,
dentists and dental hygienists.
SECTION 2: DEFINITIONS
-----------------------
Unless otherwise indicated, the following words when used herein shall have
the following meanings:
(a) "Board of Directors" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(c) "Common Stock" shall mean the Company's common stock (no par value per
share) and any share or shares of the Company's capital stock hereafter issued
or issuable in substitution for such shares.
(d) "Option" shall mean nonqualified stock options granted to Optionees
hereunder.
(e) "Option Agreement" means the agreement specified in Section 7.2.
(f) "Optionee" shall mean any Qualifying Dental Center or Qualifying
Person which is granted an Option under the Plan. "Optionee" shall also mean the
personal representative of any individual Optionee and any other person who
acquires the right to exercise an Option from an individual Optionee by bequest
or inheritance.
(g) "Qualifying Dental Center" means a dental center which is a party to a
management agreement with the Company calling for the management by the Company
of the business operations of such dental center.
(h) "Qualifying Person" means a dentist or dental hygienist who is either
employed by or an owner of a Qualifying Dental Center.
<PAGE>
SECTION 3: EFFECTIVE DATE
--------------------------
The effective date of the Plan is October 30, 1995; provided, however,
that the adoption of the Plan by the Board of Directors is subject to approval
and ratification by the shareholders of the Company within 12 months of the
effective date. Options granted under the Plan prior to approval of the Plan by
the shareholders of the Company shall be subject to approval of the Plan by the
shareholders of the Company.
SECTION 4: ADMINISTRATION
--------------------------
4.1 Administrative Committee. The Plan shall be administered by a
------------------------
Committee appointed by and serving at the pleasure of the Board of Directors,
consisting of not less than two Directors (the "Committee"). The Board of
Directors may from time to time remove members from or add members to the
Committee, and vacancies on the Committee, howsoever caused, shall be filled by
the Board of Directors.
4.2 Committee Meetings and Actions. The Committee shall hold meetings
------------------------------
at such times and places as it may determine. A majority of the members of the
Committee shall constitute a quorum, and the acts of the majority of the members
present at a meeting or a consent in writing signed by all members of the
Committee shall be the acts of the Committee and shall be final, binding and
conclusive upon all persons, including the Company, its shareholders, and all
persons having any interest in Options which may be or have been granted
pursuant to the Plan.
4.3 Powers of Committee. The Committee shall have the full and
-------------------
exclusive right to grant and determine terms and conditions of all Options
granted under the Plan and to prescribe, amend and rescind rules and regulations
for administration of the Plan. In granting Options, the Committee shall take
into consideration the contribution the Optionee has made or may make to the
success of the Company and such other factors as the Committee shall determine.
4.4 Interpretation of Plan. The determination of the Committee as to any
----------------------
disputed question arising under the Plan, including questions of construction
and interpretation, shall be final, binding and conclusive upon all persons,
including the Company, its shareholders, and all persons having any interest in
Options which may be or have been granted pursuant to the Plan.
4.5 Indemnification. Each person who is or shall have been a member of
---------------
the Committee or of the Board of Directors shall be indemnified and held
harmless by the Company against and from any loss, cost, liability or expense
that may be imposed upon or reasonably incurred in connection with or resulting
from any claim, action, suit or proceeding to which such person may be a
2
<PAGE>
party or in which such person may be involved by reason of any action taken or
failure to act under the Plan and against and from any and all amounts paid in
settlement thereof, with the Company's approval, or paid in satisfaction of a
judgment in any such action, suit or proceeding against him, provided such
person shall give the Company an opportunity, at its own expense, to handle and
defend the same before undertaking to handle and defend it on such person's own
behalf. The foregoing right of indemnification shall not be exclusive of, and
is in addition to, any other rights of indemnification to which any person may
be entitled under the Company's Articles of Incorporation or Bylaws, as a matter
of law, or otherwise, or any power that the Company may have to indemnify them
or hold them harmless.
SECTION 5: STOCK SUBJECT TO THE PLAN
-------------------------------------
5.1 Number. The aggregate number of shares of Common Stock which may be
------
issued under Options granted pursuant to the Plan shall not exceed 200,000
shares. Shares which may be issued under Options may consist, in whole or in
part, of authorized but unissued stock or treasury stock of the Company not
reserved for any other purpose.
5.2 Unused Stock. If any outstanding Option under the Plan expires or for
------------
any other reason ceases to be exercisable, in whole or in part, other than upon
exercise of the Option, the shares which were subject to such Option and as to
which the Option had not been exercised shall continue to be available under the
Plan.
5.3 Adjustment for Change in Outstanding Shares. If there is any change,
-------------------------------------------
increase or decrease, in the outstanding shares of Common Stock which is
effected without receipt of additional consideration by the Company, by reason
of a stock dividend, recapitalization, merger, consolidation, stock split,
combination or exchange of stock, or other similar circumstances, then in each
such event, the Committee shall make an appropriate adjustment in the aggregate
number of shares of stock available under the Plan, the number of shares of
stock subject to each outstanding Option and the Option prices in order to
prevent the dilution or enlargement of any Optionee's rights. In making such
adjustments, fractional shares shall be rounded to the nearest whole share. The
Committee's determinations in making adjustments shall be final and conclusive.
5.4 Reorganization or Sale of Assets. If the Company is merged or
--------------------------------
consolidated with another corporation and the Company is not the surviving
corporation, or if all or substantially all of the assets of the Company are
acquired by another entity, or if the Company is liquidated or reorganized,
(each of such events being referred to hereinafter as a "Reorganization Event"),
the Committee shall, as to outstanding
3
<PAGE>
Options, either (1) make appropriate provision for the protection of any such
outstanding Options by the substitution on an equitable basis of appropriate
stock of the Company, or of the merged, consolidated or otherwise reorganized
corporation, which will be issuable in respect of the Common Stock, provided
that no additional benefits shall be conferred upon Optionees as a result of
such substitution, and provided further that the excess of the aggregate fair
market value of the shares subject to the Options immediately after such
substitution over the purchase price thereof is not more than the excess of the
aggregate fair market value of the shares subject to such Options immediately
before such substitution over the purchase price thereof, or (2) upon written
notice to all Optionees, which notice shall be given not less than 20 days prior
to the effective date of the Reorganization Event, provide that all unexercised
Options must be exercised within a specified number of days (which shall not be
less than ten) of the date of such notice or such Options will terminate. In
response to a notice provided pursuant to clause (2) of the preceding sentence,
an Optionee may make an irrevocable election to exercise the Optionee's Option
contingent upon and effective as of the effective date of the Reorganization
Event. The Committee may, in its sole discretion, accelerate the exercise dates
of outstanding Options in connection with any Reorganization Event.
SECTION 6: ELIGIBILITY
-----------------------
All Qualifying Dental Centers and Qualifying Persons shall be eligible
to receive Options under the Plan. A Director of the Company who is otherwise
eligible to participate, who makes an election in writing not to receive any
grants under the Plan, shall not be eligible to receive any such grants during
the period set forth in such election.
SECTION 7: GRANT OF OPTIONS
----------------------------
7.1 Grant of Options. The Committee may from time to time in its
----------------
discretion determine which of Qualifying Dental Centers and Qualifying Persons
should receive Options, the number of shares subject to such Options, and the
dates on which such Options are to be granted.
7.2 Option Agreement. Each Option granted under the Plan shall be
----------------
evidenced by a written Option Agreement setting forth the terms upon which the
Option is granted. Each Option Agreement shall state the number of shares of
Common Stock, as designated by the Committee, to which that Option pertains.
More than one Option may be granted to an eligible person.
7.3 Option Price. The option price per share of Common Stock under each
------------
Option shall be determined by the Committee and stated in the Option Agreement.
The option price
4
<PAGE>
shall not be less than 100% of the fair market value (determined as of the day
the Option is granted) of the shares subject to the Option.
7.4 Determination of Fair Market Value. If the Common Stock is listed
----------------------------------
upon an established stock exchange or exchanges, then the fair market value per
share shall be deemed to be the average of the quoted closing prices of the
Common Stock on such stock exchange or exchanges on the day for which the
determination is made, or if no sale of the Common Stock shall have been made on
any stock exchange on that day, on the next preceding day on which there was
such a sale. If the Common Stock is not listed upon an established stock
exchange but is traded in the NASDAQ National Market System, the fair market
value per share shall be deemed to be the closing price of the Common Stock in
the National Market System on the day for which the determination is made, or if
there shall have been no trading of the Common Stock on that day, on the next
preceding day on which there was such trading. If the Common Stock is not
listed upon an established stock exchange and is not traded in the National
Market System, the fair market value per share shall be deemed to be the mean
between the dealer "bid" and "ask" closing prices of the Common Stock on the
NASDAQ System on the day for which the determination is made, or if there shall
have been no trading of the Common Stock on that day, on the next preceding day
on which there was such trading. If none of these conditions apply, the fair
market value per share shall be deemed to be an amount as determined in good
faith by the Committee by applying any reasonable valuation method.
7.5 Duration of Options. Each Option shall be of a duration as specified
-------------------
in the Option Agreement; provided, however, that the term of each Option shall
be no more than ten years from the date on which the Option is granted and shall
be subject to early termination as provided herein.
7.6 Other Terms and Conditions. The Option Agreement may contain such
--------------------------
other provisions, which shall not be inconsistent with the Plan, as the
Committee shall deem appropriate, including, without limitation, provisions that
relate the Optionee's ability to exercise an Option to the passage of time or
the achievement of specific goals established by the Committee or the occurrence
of certain events specified by the Committee.
SECTION 8: EXERCISE OF OPTIONS
-------------------------------
8.1 Manner of Exercise. Subject to the limitations and conditions of the
------------------
Plan or the Option Agreement, an Option shall be exercisable, in whole or in
part, from time to time, by giving written notice of exercise to the Secretary
of the Company, which notice shall specify the number of shares of
5
<PAGE>
Common Stock to be purchased and shall be accompanied by (1) payment in full to
the Company of the purchase price of the shares to be purchased, plus (2)
payment in full of such amount as the Company shall determine to be sufficient
to satisfy any liability it may have for any withholding of federal, state or
local income or other taxes incurred by reason of the exercise of the Option,
and (3) a representation meeting the requirements of Section 12.2 if requested
by the Company, and (4) a Stock Restriction Agreement meeting the requirements
of Section 12.3 if requested by the Company.
8.2 Payment of Purchase Price. Payment for shares and withholding taxes
-------------------------
shall be in the form of either (1) cash, (2) a certified or bank cashier's check
to the order of the Company, or (3) shares of the Common Stock, properly
endorsed to the Company, in an amount the fair market value of which on the date
of receipt by the Company (as determined in accordance with Section 7.4) equals
or exceeds the aggregate option price of the shares with respect to which the
Option is being exercised, or (4) in any combination thereof; provided, however,
that no payment may be made in shares of Common Stock unless payment in such
form and upon such exercise has been approved in advance by the Committee.
SECTION 9: CHANGE IN CONTROL
-----------------------------
The Committee may, in its sole discretion, accelerate the exercise
dates of outstanding Options upon the occurrence of a change in control of the
Company, notwithstanding any vesting requirements contained in any Option
Agreement.
SECTION 10: EFFECT OF TERMINATION OF RELATIONSHIP
--------------------------------------------------
10.1 Effect of Termination of Relationship. Options granted under this
-------------------------------------
Plan to a Qualifying Dental Center shall terminate, in the manner provided in
Section 10.2, at such time as the business operations of such dental center are
no longer managed by the Company. Options granted under this Plan to a
Qualifying Person shall terminate, in the manner provided in Section 10.2, at
such time as such dentist or dental hygienist is no longer an employee or owner
of a dental center whose business operations are managed by the Company. An
event which causes the termination of an Option as described in this Section
10.1 shall be referred to hereinafter as a "Disqualifying Event".
10.2 Termination of Option. An Optionee may, at any time within three
---------------------
months after the date of a Disqualifying Event but not later than the date of
expiration of the Option, exercise the Option to the extent the Optionee was
entitled to do so on the date of the Disqualifying Event. Any Options not
exercisable as of the date of the Disqualifying Event, and any Options or
portions of Options not exercised within the three month period
6
<PAGE>
following a Disqualifying Event as provided herein, shall terminate.
10.3 Extension of Option Termination Date. The Committee, in its sole
------------------------------------
discretion, may extend the termination date of an Option granted under the Plan
without regard to the preceding provisions of this Section 10. In such event,
the termination date shall be a date selected by the Committee in its sole
discretion, but not later than the latest expiration date of the Option
permitted pursuant to Section 7.5. Such extension may be made in the Option
Agreement as originally executed or by amendment to the Option Agreement, either
prior to or following a Disqualifying Event.
SECTION 11: NON-TRANSFERABILITY OF OPTION
------------------------------------------
Options granted pursuant to the Plan are not transferable by the
Optionee, except that (i) Options granted to a Qualifying Dental Center may be
transferred to a person who is a Qualifying Person with respect to such
Qualifying Dental Center and (ii) Options granted to a Qualifying Person may be
transferred by Will or the laws of descent and distribution. Options granted to
a Qualifying Person shall be exercisable during such Optionee's lifetime only by
such Optionee. Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of the Option contrary to the provisions hereof, or upon the
levy of any attachment or similar process upon the Option, the Option shall
immediately become null and void.
SECTION 12: ISSUANCE OF SHARES
-------------------------------
12.1 Transfer of Shares to Optionee. As soon as practicable after the
------------------------------
Optionee has given the Company written notice of exercise of an Option and has
otherwise met the requirements of Section 8.1, the Company shall issue or
transfer to the Optionee the number of shares of Common Stock as to which the
Option has been exercised and shall deliver to the Optionee a certificate or
certificates therefor, registered in the Optionee's name. In no event shall the
Company be required to transfer fractional shares to the Optionee, and in lieu
thereof, the Company may pay an amount in cash equal to the fair market value
(as determined in accordance with Section 7.4) of such fractional shares on the
date of exercise. If the issuance or transfer of shares by the Company would
for any reason, in the opinion of counsel for the Company, violate any
applicable federal or state laws or regulations, the Company may delay issuance
or transfer of such shares to the Optionee until compliance with such laws can
reasonably be obtained. In no event shall the Company be obligated to effect or
obtain any listing, registration, qualification, consent or approval under any
applicable federal or state laws or regulations or any
7
<PAGE>
contract or agreement to which the Company is a party with respect to the
issuance of any such shares.
12.2 Investment Representation. Upon demand by the Company, the Optionee
-------------------------
shall deliver to the Company a representation in writing that the purchase of
all shares with respect to which notice of exercise of the Option has been given
by the Optionee is being made for investment only and not for resale or with a
view to distribution, and containing such other representations and provisions
with respect thereto as the Company may require. Upon such demand, delivery of
such representation promptly and prior to the transfer or delivery of any such
shares and prior to the expiration of the option period shall be a condition
precedent to the right to purchase such shares.
12.3 Stock Restriction Agreement. Upon demand by the Company, the Optionee
---------------------------
shall execute and deliver to the Company a Stock Restriction Agreement in such
form as the Company may provide at the time of exercise of the Option. Such
Agreement may include, without limitation, restrictions upon the Optionee's
right to transfer shares, including the creation of an irrevocable right of
first refusal in the Company and its designees, and provisions requiring the
Optionee to transfer the shares to the Company or the Company's designees upon a
Disqualifying Event. Upon such demand, execution of the Stock Restriction
Agreement by the Optionee prior to the transfer or delivery of any shares and
prior to the expiration of the option period shall be a condition precedent to
the right to purchase such shares, unless such condition is expressly waived in
writing by the Company.
SECTION 13: AMENDMENTS
-----------------------
The Board of Directors may at any time and from time to time alter,
amend, suspend or terminate the Plan or any part thereof as it may deem proper,
except that no such action shall diminish or impair the rights under an Option
previously granted. Subject to the terms and conditions of the Plan, the Board
of Directors may modify, extend or renew outstanding Options granted under the
Plan, or accept the surrender of outstanding Options to the extent not
theretofore exercised and authorize the granting of new Options in substitution
therefor, except that no such action shall diminish or impair the rights under
an Option previously granted without the consent of the Optionee.
SECTION 14: TERM OF PLAN
-------------------------
This Plan shall terminate on October 29, 2005; provided, however, that
the Board of Directors may at any time prior thereto suspend or terminate the
Plan.
8
<PAGE>
SECTION 15: RIGHTS AS STOCKHOLDER
----------------------------------
An Optionee shall have no rights as a stockholder of the Company with
respect to any shares of Common Stock covered by an Option until the date of the
issuance of the stock certificate for such shares.
SECTION 16: GOVERNING LAW
--------------------------
This Plan, and all Options granted under this Plan, shall be construed
and shall take effect in accordance with the laws of the State of Colorado,
without regard to the conflicts of laws rules of such State.
9
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
OPTIONEE:
--------------------------
DATE OF GRANT:
---------------------
AGREEMENT between Birner Dental Management Services, Inc. (the "Company"),
and the above named Optionee ("Optionee").
The Company and Optionee agree as follows:
1. Grant of Option.
---------------
Optionee is hereby granted a nonqualified stock option (the "Option") to
purchase Common Stock of the Company pursuant to the Birner Dental Management
Services, Inc. 1995 Stock Option Plan for Managed Dental Centers (the "Plan").
The Option is not intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code. The Option and this Agreement are subject to
and shall be construed in accordance with the terms and conditions of the Plan,
as now or hereinafter in effect. Any terms which are used in this Agreement
without being defined and which are defined in the Plan shall have the meaning
specified in the Plan.
2. Status of Optionee.
------------------
Optionee represents and warrants that the Optionee is either a Qualifying
Dental Center or a Qualifying Person.
3. Date of Grant.
-------------
The date of the grant of the Option is the date first set forth above, the
date of the action by the Committee which administers the Plan (the "Committee")
in granting the same.
4. Number and Price of Shares.
--------------------------
The number of shares as to which the Option is granted is the number set
forth in Schedule 4A to this Agreement. The purchase price per share is the
amount set forth in Schedule 4B to this Agreement.
5. Expiration Date.
---------------
Unless sooner terminated as provided in Section 10 of the Plan, the Option
shall expire and terminate on the date set forth in Schedule 5 to this
Agreement, and in no event shall the Option be exercisable after that date.
6. Manner of Exercise.
------------------
Except as provided in this Agreement, the Option shall be exercisable, in
whole or in part, from time to time, in the manner provided in Section 8 of the
Plan.
<PAGE>
7. Time of Exercise.
----------------
The Option granted hereby shall become vested in and exercisable by
Optionee in the installments, on the dates and subject to the conditions set
forth in Schedule 7 to this Agreement; provided, however, that Optionee must
have been either a Qualifying Dental Center or a Qualifying Person continuously
from the date of the Option until the date specified on Schedule 7 or until the
conditions specified on Schedule 7 have been satisfied.
8. Stock Restriction Agreement.
---------------------------
Upon exercise of the Option, the Optionee shall execute and deliver to the
Company a Stock Restriction Agreement in substantially the form attached to this
Agreement as Exhibit A. Execution and delivery of the Stock Restriction
---------
Agreement prior to the transfer or delivery of any shares and prior to the
expiration of the option period shall be a condition precedent to the right to
purchase such shares.
9. Nontransferability of Option.
----------------------------
The Option is not transferable by Optionee, except that (i) Options granted
to a Qualifying Dental Center may be transferred to a person who is a Qualifying
Person with respect to such Qualifying Dental Center and (ii) Options granted to
a Qualifying Person may be transferred by Will or the laws of descent and
distribution. No such transfer shall be effective unless and until the
Company has received written notice thereof, and upon either such transfer, the
transferree shall be deemed automatically to have accepted all of the terms and
conditions of this Agreement and the Plan, and the transferree shall thereafter
be deemed to be a signatory party to this Agreement in the position of the
Optionee. Options granted to a Qualifying Person shall be exercisable during
such Optionee's lifetime only by the Optionee. Upon any attempt to transfer,
assign, pledge, hypothecate or otherwise dispose of the Option contrary to the
provisions hereof, or upon the levy of any attachment or similar process upon
the Option, the Option shall immediately become null and void.
10. Withholding for Taxes.
---------------------
The Company shall have the right to deduct from Optionee's salary any
federal or state taxes required by law to be withheld with respect to the
exercise of the Option.
11. Legends.
-------
Certificates representing Common Stock acquired upon exercise of this
Option may contain such legends and transfer restrictions as the Company shall
deem reasonably necessary or desirable, including, without limitation, legends
restricting transfer of the Common Stock until there has been compliance with
federal and state securities laws.
2
<PAGE>
12. Amendment.
---------
Subject to the terms and conditions of the Plan, the Committee may modify,
extend or renew the Option, or accept the surrender of the Option to the extent
not theretofore exercised and authorize the granting of new Options in
substitution therefor, except that no such action shall diminish or impair the
rights under the Option without the consent of the Optionee.
13. Interpretation.
--------------
The interpretations and constructions of any provision of and
determinations on any question arising under the Plan or this Agreement shall be
made by the Committee, and all such interpretations, constructions and
determinations shall be final and conclusive as to all parties.
14. Receipt of Plan.
---------------
By entering into this Agreement, Optionee acknowledges (i) that Optionee
has received and reviewed or had reviewed a copy of the Plan and (ii) that this
Agreement is subject to and shall be construed in accordance with the terms and
conditions of the Plan, as now or hereinafter in effect.
15. Independent Contractors.
-----------------------
Nothing contained in this Agreement or the Plan shall be deemed or
construed as creating any relationship between the parties hereto other than
that of independent contractors as parties to this Agreement, including without
limitation any relationship as joint venturers or partners or as employer or
employee. Neither party shall have the power to control the activities and
operations of the other and their status is, and at all time, will continue to
be, that of independent contractors with respect to each other. Neither party
shall hold itself out as having any authority or relationship in contravention
of this Section.
16. Governing Law.
-------------
This Agreement shall be construed and shall take effect in accordance with
the laws of the State of Colorado, without regard to the conflicts of laws rules
of such State.
17. Miscellaneous.
-------------
This Agreement constitutes the entire understanding and agreement of the
parties with respect to the subject matter hereof and supersedes all prior and
contemporaneous agreements or understandings, inducements or conditions, express
or implied, written or oral, between the parties with respect hereto. If any
provision of this Agreement, or the application thereof, shall for any reason
and to any extent be invalid or unenforceable, the remainder of this Agreement
and the application of such provision to other circumstances shall be
interpreted so as best to reasonably effect the intent of the parties hereto.
All notices or other communications which are required to be given or may be
given to either party pursuant to the terms of this Agreement shall be in
writing and shall be delivered personally or by registered or certified mail,
postage prepaid, to the address of
3
<PAGE>
the parties as set forth following the signature of such party. Notice shall be
deemed given on the date of delivery in the case of personal delivery or on the
delivery or refusal date as specified on the return receipt in the case of
registered or certified mail. Either party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section 16.
IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement
on 7/28/97, effective as of the date of grant.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
Address:
-------------------------------
---------------------------------------
---------------------------------------
OPTIONEE
If an individual:
---------------------------------------
Signature
---------------------------------------
Printed Name
If an entity:
By:
------------------------------------
Title:
---------------------------------
Address:
-------------------------------
---------------------------------------
---------------------------------------
4
<PAGE>
EXHIBIT 10.25
SUMMARY PLAN DESCRIPTION
for the
BIRNER DENTAL MANAGEMENT SERVICES, INC.
SAVINGS PLAN
AND
TRUST AGREEMENT
April 1997
<PAGE>
TABLE OF CONTENTS
-----------------
INTRODUCTION............................................................ 1
PLAN IDENTIFICATION INFORMATION......................................... 2
TYPE OF PLAN............................................................ 3
PARTICIPATION AND SERVICE............................................... 3
Eligibility to Participate........................................... 3
How You Earn Service for Purposes of Eligibility to Participate...... 4
PLAN CONTRIBUTIONS...................................................... 4
Compensation Used in Calculating Plan Contributions.................. 4
Salary Reduction Contributions....................................... 4
Limitations on Salary Reduction Contributions........................ 4
Making Changes in Your Contributions................................. 5
Employer Matching Contributions...................................... 5
Special Employer Contributions....................................... 5
Profit Sharing/Stock Bonus Contribution.............................. 6
Eligibility for an Allocation of Profit Sharing/Stock Bonus
Contributions...................................................... 6
Allocation Formula................................................... 6
Allocation of Stock and Cash Dividends............................... 6
Rollover Contributions and Transferred Benefits...................... 6
Limits on Contributions.............................................. 7
Special "Top-Heavy" Rule............................................. 7
MAINTENANCE AND INVESTMENT OF YOUR ACCOUNTS............................. 7
Maintenance of Accounts.............................................. 7
Investment of Accounts............................................... 8
VESTING................................................................. 8
Years of Service for Vesting Purposes................................ 9
Breaks in Service.................................................... 9
Effect of Breaks in Service.......................................... 9
Forfeitures.......................................................... 10
Pay-Back Rule........................................................ 10
Treatment of Forfeitures............................................. 10
PAYMENT OF BENEFITS..................................................... 10
Form of Payment...................................................... 10
Special Rules Applicable to Distributions in Stock................... 10
Timing of Distribution............................................... 12
Payment of Benefits Upon Death....................................... 12
Payment of Benefits Upon Disability.................................. 12
IN-SERVICE DISTRIBUTIONS................................................ 13
Distributions Prior to Termination of Employment..................... 13
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 i
<PAGE>
In-Service Distributions............................................. 13
TAXATION OF BENEFITS.................................................... 14
CIRCUMSTANCES THAT COULD AFFECT YOUR PLAN BENEFITS...................... 14
AMENDMENT OR TERMINATION OF THE PLAN.................................... 15
CLAIMS PROCEDURE........................................................ 15
RIGHTS UNDER ERISA...................................................... 16
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 ii
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
SAVINGS PLAN AND TRUST AGREEMENT
INTRODUCTION
The Birner Dental Management Services, Inc. Savings Plan and
Trust Agreement (the "Plan") was established effective April 1, 1997 by Birner
Dental Management Services, Inc. (the "Employer") for the benefit of its
eligible employees. The Plan may also be adopted by related employees. All of
the employers who have adopted the Plan as of any particular time are
collectively referred to as the "Employer" in this booklet and may be referred
to individually as Participating Employers. However, only Birner Dental
Management Services, Inc. has the authority to amend or terminate the Plan,
because it is the Plan Sponsor. You may obtain a complete list of the
Participating Employers upon written request to the Plan Administrator, and
such a list is available for examination by you at any time at the offices of
the Plan Administrator.
The Plan consists of a formal plan document and a trust agreement, both of
which are intended to be "qualified" under the Internal Revenue Code. From
time to time, the Internal Revenue Service ("IRS") may require that certain
changes be made to the plan document or the trust agreement. In addition,
the Employer may amend the Plan at any time for any reason. You will be advised
if there are changes that significantly affect the information in this
booklet.
This booklet (your "Summary Plan Description" or "SPD") is provided to
explain to you, in easy to understand language, how the Plan works. It
describes your benefits and rights as well as your obligations under the Plan.
It is important for you to understand that because this booklet is only a
summary, it cannot cover all the details of the Plan or how the rules will
apply to every person in every situation. All off the specific rules governing
the Plan are contained in the official plan document and trust agreement. You
can get copies of the plan document and trust agreement from the Plan
Administrator. There may be a minimal charge for copying costs.
Every effort has been made to accurately describe the complicated
provisions of the Plan. In the event there is any conflict between the SPD and
the plan document and trust agreement, the official plan documents will always
be followed in the actual determination of your benefits or rights.
If you have any questions concerning your benefits, you should contact the
Plan Administrator.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 1
<PAGE>
PLAN IDENTIFICATION INFORMATION
EMPLOYER AND PLAN SPONSOR: Birner Dental Management Services, Inc.
3801 E. Florida Ave., Suite 208
Denver, CO 80210
EMPLOYER IDENTIFICATION
NUMBER ("EIN") OF PLAN SPONSOR: 84-1307044
PLAN NAME: Birner Dental Management Services, Inc.
Savings Plan and Trust Agreement
PLAN IDENTIFICATION NUMBER: 001
PLAN YEAR: January 1 through December 31, except for
the short period from April 1, 1997
through December 31, 1997.
PLAN ADMINISTRATOR: Birner Dental Management Services, Inc.
3801 E. Florida Ave., Suite 208
Denver, CO 80210
(303) 691-0680
The Plan Administrator is responsible for
providing you with information
regarding your rights and benefits under
the Plan, filing various reports and
forms with the Department of Labor and
the Internal Revenue Service, making
all discretionary determinations under
the Plan, and giving distribution
directions to the Trustee.
AGENT FOR SERVICE
OF LEGAL PROCESS: Dennis Genty
Chief Financial Officer
Birner Dental Management Services, Inc.
3801 E. Florida Ave., Suite 208
Denver, CO 80210
Legal process also may be served on the
Trustee or the Plan Administrator.
TRUSTEE: Norwest Bank
1740 Broadway
Denver, CO 80274
(303) 861-8811
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 2
<PAGE>
TYPE OF PLAN
The Plan is a profit sharing 401(k)/stock bonus plan. The purpose of the
Plan is to encourage you to prepare for your retirement by permitting you to
save on a pre-tax basis, which is permitted under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"). To further encourage you
to save money through the Plan, the Employer may make matching contributions on
a portion of the amount you save. In addition, the Plan provides that the
Employer may make a profit sharing contribution on your behalf for certain Plan
Years. At the Employer's discretion, the profit sharing contribution may be made
in Employer stock, so that you and your beneficiaries may share in the success
of the Employer through stock ownership.
Under this type of plan, there is no fixed dollar amount of retirement
benefits. The amount of your benefit from the Plan will equal the amount of your
account balance at the time your benefits are distributed. The amount in your
account(s) will refect the Employer's contributions, your contributions, if any,
the length of time you participated in the Plan, your success in investing your
account, the success of the Trustee in investing any profit sharing
contributions made in cash, and the value of the Employer stock that has been
allocated under the Plan.
Although a governmental agency known as the Pension Benefit Guaranty
Corporation ("PBGC") insures the benefits payable under plans which provide for
fixed and determinable retirement benefits, the PBGC does not include this
Plan within its insurance program because this Plan does not provide a fixed
and determinable retirement benefit.
PARTICIPATION AND SERVICE
Eligibility to Participate. You are eligible to participate in the Plan
when you satisfy the following eligibility requirements:
. You have completed six months of Service.
. You are an employee of the Employer other than a member of a collective
-----------
bargaining unit whose union contract does not provide for your
participation or a nonresident alien.
If you were employed by the Employer on or before April 1, 1997 (the
effective date of the Plan), you became a participant on that date. If you were
hired after that date, you will enter the Plan on the January 1, April 1, July 1
or October 1 (if you are employed on that date) coincident with or next
following the date you satisfy the eligibility requirements.
Example: If you begin work on February 15 and you are
credited with six months of Service by the following August
14, you will enter the Plan on the next October 1.
You do not need to complete any form in order to become a participant.
However, you should complete a beneficiary designation form to indicate to whom
benefits should be paid in the event of your death after you have accrued
benefits under the Plan. In addition, if you wish to make Salary Reduction
Contributions, as discussed in the Plan Contributions section, you must complete
a form authorizing the Employer to make the contributions and a form indicating
how you want your account balances invested, as discussed in the Maintenance
and Investment of Accounts section.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 3
<PAGE>
If you terminate employment after becoming a participant in the Plan
and later return to employment, you will become a participant immediately upon
your reemployment. If you terminate employment after satisfying the Plan's
eligibility conditions but before actually becoming a participant in the Plan,
you will become a participant in the Plan immediately if you return to
employment on or after the next Plan entry date. If you terminate employment
before satisfying the eligibility conditions and later return to employment,
you must satisfy the eligibility conditions before you are eligible to
participate in the Plan.
HOW YOU EARN SERVICE FOR PURPOSES OF ELIGIBILITY TO PARTICIPATE. Your
service is measured in "Hours of Service" as follows:
Hours of Service. Generally, you will be credited with 45 Hours of Service
----------------
for each week in which you work at least one hour and for which the Employer
pays you (or for which you are entitled to payment). The maximum number of hours
for which you may receive credit for any week is 45 hours even if you actually
work more than 45 hours during a particular week.
Except as in the paragraph entitled "Breaks in Service" in the Vesting
section, and except for Service with the Employer prior to attaining age 18,
all of your service with the Employer is counted for Plan purposes.
PLAN CONTRIBUTIONS
COMPENSATION USED IN CALCULATING PLAN CONTRIBUTIONS. For purposes of
calculating your Salary Reduction Contributions to the Plan, your Compensation
includes the total remuneration that you received from the Employer during
the Plan Year while you were a participant for services rendered. In addition,
Compensation includes salary reduction-type contributions to this Plan or any
other 401(k) plan maintained by the Employer, a cafeteria plan, a flexible
spending account or a dependent care assistance plan. Profit Sharing/Stock
Bonus Contributions are allocated among eligible participants based on their
"Compensation" as defined in the previous sentence. (SPECIAL NOTE: Under
federal law the amount of Compensation that may be considered for Plan
purposes is limited to a dollar amount which is indexed and may change from
year to year. For the Plan Year beginning January 1, 1997, this limit is
$160,000.)
SALARY REDUCTION CONTRIBUTIONS. As a participant in the Plan, you may
elect to reduce your Compensation and have the Employer contribute the amount of
the reduction to the Plan on your behalf. These contributions are called "Salary
Reduction Contributions." Because you do not receive these amounts, these
contributions ARE NOT subject to federal income tax and, in most states, state
income tax, in the year in which they are made. Thus, you delay paying income
taxes on this money until it is actually paid out of the Plan to you. Your
Salary Reduction Contributions ARE subject to Social Security ("FICA") taxes.
LIMITATIONS ON SALARY REDUCTION CONTRIBUTIONS. In general, you may elect to
contribute any percentage of your Compensation from 1% to 15%. However,
there are certain exceptions to the 15% limit:
1. Under federal law, the maximum amount of salary reduction-type
contributions you can make to all 401(k) plans in which you participate
in any calendar year is $9,500. The limit is indexed for increases in
the cost of living and may be
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increased in future calendar years. This dollar limit applies to
your Salary Reduction Contributions under this Plan as well as
any other 401(k) savings plans in which you may participate in
the same year. The Form W-2 you receive from each employer for
the calendar year will list your total salary reduction
contributions for that calendar year under that employer's plan.
If your total exceeds the maximum amount, IN ORDER TO AVOID
CERTAIN PENALTY TAXES, you should have the excess amount
distributed from one of the plans. If you decide you want the
excess contributions distributed from this Plan, you must notify
the Plan Administrator by the March 31st following the end of
the calendar year in which you made the excess salary reduction
contribution. The Trustee then will refund the excess amount to
you, adjusted to reflect earnings or losses, by April 15th.
(SPECIAL NOTE: The dollar limit does not apply to rollover
---
contributions or transferred benefits, as discussed below, or to
any amount you contribute on a salary reduction basis under a
cafeteria plan, flexible spending account plan or dependent care
assistance plan.)
2. There is also a limit on the amount of Salary Reduction
Contributions that can be made to the Plan in any year by
certain highly compensated participants. The exact limit will
vary from year to year because it is calculated by comparing,
the average amount of Salary Reduction Contributions made by all
of the nonhighly compensated participants to the average amount
of Salary Reduction Contributions made by all of the highly
compensated participants. If this limit is exceeded, (a) excess
amounts, adjusted to reflect earnings or losses, may be
distributed to certain of the highly compensated participants,
or (b) a Special Employer Contribution may be made and allocated
among the nonhighly compensated participants.
3. Federal law also limits the total amount that can be added to
your accounts under the Plan and any other qualified plans
maintained by the Employer. In general, the limit is the lesser
of 25% of your taxable income from the Employer or $30,000.
MAKING CHANGES IN YOUR CONTRIBUTIONS. You may begin or resume making
contributions, or change the rate of your contributions once in any calendar
quarter, effective for the first day of the next pay period. You may discontinue
making contributions as of the first day of any pay period. To effect any of
these types of changes, you must complete the appropriate form provided by the
Plan Administrator, in the period of time established by the Plan
Administrator.
EMPLOYER MATCHING CONTRIBUTIONS. To encourage you to make contributions
to the Plan, the employer may, in its sole discretion, make Employer Matching
Contributions equal to a percentage of your Salary Reduction Contributions not
exceeding a maximum of 2% of your Compensation for that Plan Year. To be
eligible for Employer Matching Contributions, you must be employed on the last
day of the Plan Year and have completed at least 1,000 Hours of Service for the
Employer during the Plan Year, unless your employment terminated due to
retirement at or after age 65 (the Plan's normal retirement age), disability, or
death.
SPECIAL EMPLOYER CONTRIBUTIONS. For any Plan Year, the Employer may
make a Special Employer Contribution to the Plan to enable the Plan to pass
certain nondiscrimination tests under federal law. The Plan Administrator will
allocate the Special Employer Contribution, if any, to the Salary Reduction
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Contributions accounts of the nonhighly compensated participants. The Plan
Administrator will base each nonhighly compensated employee's allocation of the
Special Employer Contribution, if any, upon his or her proportionate share of
Compensation paid during the Plan Year to all nonhighly compensated
participants.
PROFIT SHARING/STOCK BONUS CONTRIBUTION. In addition to the Employer's
Matching Contributions, each year the Employer, in its sole discretion, will
determine whether it will make a Profit Sharing Contribution and the amount, if
any, of its contribution. The Employer is not required to make a Profit Sharing
Contribution for any Plan Year. In its sole discretion, the Employer may make
any Profit Sharing Contribution in the form of Employer stock (a "Stock Bonus
Contribution").
ELIGIBILITY FOR AN ALLOCATION OF PROFIT SHARING/STOCK BONUS CONTRIBUTIONS.
To be eligible for an allocation of a Profit Sharing/Stock Bonus Contribution,
you must be employed on the last day of the Plan Year and have completed at
least 1,000 Hours of Service for the Employer during the Plan Year, unless your
employment terminated due to retirement at age 65 (the Plan's normal retirement
age), disability or death.
ALLOCATION FORMULA. The Profit Sharing/Stock Bonus Contribution will be
allocated among all eligible participants on a pro rata basis using a fraction
calculated by dividing each participant's Compensation by the total Compensation
for all eligible participants.
EXAMPLE:
Assume there are five eligible participants in the Plan for the Plan Year,
with Compensation of $12,500, $23,200, $35,000, $47,500 and $72,300,
respectively. The total Compensation for all of the eligible participants
is $190,500. The Employer decides to contribute $15,000 to the Plan as a
Profit Sharing/Stock Bonus Contribution. The allocation is calculated
below.
<TABLE>
<CAPTION>
<C> <S> <C>
Participant A [$12,500/$190,500] x $15,000 = $ 984
Participant B [$23,200/$190,500] x $15,000 = 1,827
Participant C [$35,000/$190,500] x $15,000 = 2,756
Participant D [$47,500/$190,500] x $15,000 = 3,740
Participant E [$72,300/$190,500] x $15,000 = 5,693
-------
Total allocation $15,000
</TABLE>
ALLOCATION OF STOCK AND CASH DIVIDENDS. Any Employer stock received by
the Trustee as a stock split or dividend or as a result of the reorganization or
other recapitalization of the Employer will be allocated to you as of the last
day of each Plan Year based on the number of shares of Employer stock in your
Profit Sharing/Stock Bonus Contributions Account. Any cash dividend declared by
the Employer with respect to Employer stock in the Plan will be allocated to
your Profit Sharing/Stock Bonus Contributions Account based on the number of
shares of Employer stock in your account.
ROLLOVER CONTRIBUTIONS AND TRANSFERRED BENEFITS. If you previously worked
for another employer, you may have accumulated benefits under another employer-
sponsored qualified pension or profit sharing plan. Under certain
circumstances, you may be able to put some or all of those benefits into this
Plan by making a "Rollover Contribution" or having your vested benefits directly
rolled into this Plan from your prior employer's plan. If you are a newly hired
employee, you may make a Rollover Contribution before you are eligible to
participate in the Plan. However, you will not be eligible to make
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<PAGE>
any Salary Reduction Contributions or have any Employer contributions allocated
to your account until you have satisfied the eligibility requirements.
Most types of benefit payments can be rolled over. These types of
payments are called "eligible rollover distributions." However, the following
types of benefit payments cannot be rolled over: payments attributable to
------
after-tax contributions you made; installment or annuity payments made over a
period of at least 10 years or over your life expectancy or the joint life
expectancy of you and your beneficiary; or payments required to be made to you
after you have attained age 70 1/2.
If you already received a benefit payment that is an eligible rollover
distribution, within 60 days of the date you received your distribution, you
--------------
may contribute to the Plan some or all of the amount you received (plus an
additional amount equal to the taxes that were withheld). If you deposited
benefits you received from a prior employer's plan in a "Rollover IRA", you may
have the benefits in your Rollover IRA, including any earnings allocated while
the funds were in the Rollover IRA, distributed to you and contribute them to
this Plan within 60 days of the date you receive them. For this purpose, a
"Rollover IRA" is an Individual Retirement Account that contains only funds
----
received from one or more prior employers' qualified plans and no funds you
--
contributed in the form of IRA contributions. If you have not already received
your benefit payment from your prior employer's plan, you may elect to have some
or all of your benefit made payable directly to this Plan and thus have no
taxes withheld from your benefit.
The Plan Administrator must approve all Rollover Contributions. If you have
benefits from another employer's plan or in a Rollover IRA and you want to put
these funds into this Plan, contact the Plan Administrator to obtain the
necessary forms and to determine whether your funds are eligible.
LIMITS ON CONTRIBUTIONS. Under federal law, the maximum amount that may be
allocated to your accounts in any Plan Year is the lesser of 25% of your
compensation or $30,000. This limit applies to your Salary Reduction
Contributions as well as to all contributions the Employer makes on your behalf
and any forfeitures (as described in the Vesting section) allocated to your
account. This limit does not apply to any Rollover Contributions you make to
the Plan.
SPECIAL "TOP-HEAVY" RULE. Federal law also provides that a special rule
applies for any Plan Year in which the Plan is "top-heavy." A plan is
considered "top-heavy" if the account balances of certain highly paid
participants (the "key participants") total 60% or more of the total assets
in the Plan. The special rule is that each non-key participant must receive a
"top-heavy minimum contribution" under the Plan. Generally, the amount of the
top-heavy minimum contribution is the lesser of 3% of Compensation or the
maximum percentage allocated to any key participant. Non-key participants are
entitled to the top-heavy minimum contribution if they are employed on the last
day of the Plan Year, regardless of whether they completed 1,000 hours of
service in the Plan Year. You will be notified in any year in which the Plan is
"top heavy."
MAINTENANCE AND INVESTMENT OF YOUR ACCOUNTS.
MAINTENANCE OF ACCOUNTS. All contributions to the Plan are held in a
trust fund. The Trustee appointed by the Employer is responsible for managing
the assets in the trust fund, maintaining accurate and detailed records
concerning the assets in the trust fund and, at the direction of the Plan
Administrator, making all distributions under the Plan. The Trustee will
establish and maintain one or more accounts on your behalf, as applicable.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
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<PAGE>
The last day of each Plan Year is designated as a "valuation date." As
of each valuation date, the accounts of all participants will be updated to
reflect all contributions, distributions, in-service distributions, and earnings
or losses due to investment performance. The Employer stock held in the Plan
will be valued annually by the Trustee as of the last day of each Plan Year. At
the discretion of the Plan Administrator, accounts may be valued on a more
frequent basis. Currently, the Plan Administrator intends to value all accounts
(with the exception of the Profit Sharing/Stock Bonus Contributions Account)
each business day.
INVESTMENT OF ACCOUNTS. The Trustee is responsible for investing the
assets in the trust fund and for preparing statements concerning the performance
of the investment of the trust fund. The Plan Administrator and the Employer
will review the investment performance with the Trustee on a regular basis.
Under (S) 404(c) of the Employee Retirement Income Security Act of 1974
("ERISA"), if participants in a qualified pension or profit sharing plan are
permitted to direct the investment of their accounts in a broad range of
investment alternatives, the fiduciaries of the Plan are absolved from liability
or responsibility for any loss resulting to a Plan participant as a result of
the participant's investment decisions. Except with respect to participants'
Profit Sharing Contributions Accounts, which are not subject to participant
investment direction, the Plan is intended to be a plan that satisfies the
requirements of ERISA (S) 404(c). Accordingly, the Trustee maintains a variety
of investment funds in which you may elect to invest your account balances.
You may invest your account balances, except the balance in your Profit
Sharing/Stock Bonus Contributions Account, in any one or more of the available
funds, in the percentages permitted by the Plan Administrator. When you become
a participant, you will receive information concerning the various funds that
are available. You will also be advised as investment funds are added or
deleted. You may direct the investment of your accounts by completing a
Participant Direction of Investment form provided by the Plan Administrator and
submitting it within the time period specified by the Plan Administrator. You
may change your investment elections as of any business day.
A11 Profit Sharing/Stock Bonus Contributions made in the form of Employer
stock will be held by the Trustee. All Employer Profit Sharing/Stock Bonus
Contributions made in the form of cash will be invested by the Trustee in its
discretion, and are not subject to your investment direction. In addition, any
dividend received on Employer stock in either stock or cash will be invested by
the Trustee in its discretion. If Employer stock is allocated to participants,
each participant will have the right to direct the Trustee on the voting of his
or her shares with respect to any corporate matter which requires more than a
majority vote.
VESTING
Whether you are entitled to receive some or all of your account balances
when your employment terminates or are entitled to receive an in-service
distribution depends on whether you are "vested." Being vested means you have
earned a nonforfeitable right to receive some or all of the amount allocated to
your accounts in the Plan.
You are always 100% vested in your Salary Reduction Contributions account
and Rollover Contributions accounts, if any. You or your beneficiary will become
100% vested in your Employer Matching Contributions account and Profit
Sharing Contributions account (your "Employer accounts") on the earliest of the
following dates:
1. The date you attain age 65, which is the Plan's normal retirement
age.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
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<PAGE>
2. The date your employment terminates on account of disability
(For Plan purposes, "disability" means you have been determined
by the Plan Administrator to be incapable of engaging in
substantially gainful employment as a result of a physical or
mental condition that is expected to last for a continuous
period of not less than 12 months.).
3. The date your employment terminates due to your death.
4. The date you complete four years of service.
If you terminate employment prior to any of the above dates, you will be
vested in your Employer accounts in accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Service Nonforfeitable Percentage
---------------- -------------------------
<S> <C>
Less than 1.............. 0%
1.............. 0%
2.............. 33%
3.............. 67%
4 or more...... 100%
</TABLE>
YEARS OF SERVICE FOR VESTING PURPOSES. Generally, you will earn one
Year of Service for each Plan Year in which you are credited with 1,000 or more
Hours of Service, beginning with the Plan Year in which you are hired.
BREAKS IN SERVICE. You will incur a one-year Break in Service as of the
last day of any Plan Year in which you are credited with fewer than 501 Hours
of Service. While this most often occurs when your employment terminates, it can
also occur if you work a limited amount of time in a Plan Year (for example,
if you work on a part-time basis). You will incur a Forfeiture Break in Service
on the last day of your fifth consecutive one-year Break in Service.
Solely for the purpose of preventing a Break in Service, in addition
to the Hours of Service credited for time worked or paid, as discussed above,
you may be credited with up to 501 Hours of Service for a period of time during
which you were absent from work because of your pregnancy, the birth of your
child or the placement of a child with you in connection with an adoption, or to
care for your child immediately after the child's birth, placement or adoption.
This additional credit will be applied in the Plan year in which the absence
began if it is needed to prevent a Break in Service. Otherwise, this additional
credit will be applied in the following Plan Year, if it is needed to prevent a
Break in Service.
EFFECT OF BREAKS IN SERVICE. If you do not incur a Break in Service,
your service with the Employer will be considered to be continuous even if you
leave the Employer and are subsequently rehired. If you incur a Break in Service
after you are vested in any portion of your Employer accounts and are
- -----
subsequently rehired, all of your prior service will be restored. If you incur a
Break in Service before you are vested in any portion of your Employer accounts
------
and return to work, your prior service will be restored only if you return to
-------
work before you incur a Forfeiture Break in Service.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
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<PAGE>
FORFEITURES. If your employment terminates and you are not vested in any
portion of your Employer accounts, your entire Employer accounts will be
forfeited as of the date you terminate employment. If your employment
terminates and you are vested in only a portion of your Employer accounts, the
nonvested portion of your accounts will be forfeited on the earlier of the
following:
(1) The date you incur a Forfeiture Break in Service, or
(2) The date you receive a distribution of the vested portion
of your account (Note: See the special pay-back rule described
below).
If you return to work with the Employer before incurring a Forfeiture Break in
Service and you did not receive a distribution of the vested portion of your
Employer accounts, the nonvested portion of your Employer accounts would still
be in the Plan in those accounts.
PAY-BACK RULE. If the nonvested portion of your Employer accounts was
forfeited because you received a distribution of the vested portion of your
accounts, you can have the nonvested portion restored if you (l) are reemployed
by the Employer before incurring a Forfeiture Break in Service and (2) "pay
back" the distribution you received prior to the earlier of the time you
otherwise would incur a Forfeiture Break in Service, or no later than five years
after you return to employment with the Employer.
If you are reemployed and have any questions about the treatment of your
prior service or your prior account balances or your right to repay any
distribution you received, contact the Plan Administrator.
TREATMENT OF FORFEITURES. If there are participant forfeitures under
the Plan, the Plan Administrator will apply them to restore forfeited amounts
and then will use remaining forfeitures attributable to Matching
Contributions to reduce the Matching Contributions it would otherwise make
and use remaining forfeitures attributable to Profit Sharing Contributions to
reduce the Profit Sharing Contributions it would otherwise make (forfeitures of
Employer stock will be used to reduce the shares the Employer would otherwise
contribute) in the Plan Year following the Plan Year in which the forfeitures
occur.
PAYMENT OF BENEFITS
FORM OF PAYMENT. Your vested benefit attributable to all of your
accounts except for the Employer stock in your Profit Sharing/Stock Bonus
Contributions Account will be paid to you in a lump sum cash payment. Your
Profit Sharing Contributions Account balance representing Employer stock will be
distributed to you in the form of whole shares of stock, plus cash for any
fractional shares.
SPECIAL RULES APPLICABLE TO DISTRIBUTIONS IN STOCK. If you receive a
distribution in stock, special rules apply that affect your ability to sell or
otherwise dispose of the stock.
(1) Right of First Refusal. The stock is subject to a "right of first
refusal." This means that generally before stock which has been
distributed from the Plan may be sold, given or otherwise
transferred to another person, the Employer must be given the right
to repurchase the stock. Stock certificates distributed from the
Plan will contain language indicating that the stock cannot be
disposed of without the right of first refusal having been
exercised by the Employer. Information concerning how the Employer
must be notified concerning any intended disposition of the stock
will also be furnished at the time
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
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<PAGE>
the stock is distributed from the Plan. If you receive an offer for the
Employer stock from an independent third party at a price higher than that
offered by the Employer, the Employer must agree to pay the higher price
if it wishes to purchase the stock.
(2) Put Option. The Employer stock is also subject to a "put option." This
means that you or your beneficiary may require, during either of two put
option periods, that the Employer repurchase, at their fair market value,
some or all of the shares of stock. The first put option period is the 60-
day period following the date the stock is distributed from the Plan. The
second put option period is the 60-day period that begins on the date the
Employer receives the valuation of Employer stock in the year following the
year in which the initial distribution from the Plan occurs. When stock is
distributed from the Plan, the recipient will be given additional
information and forms concerning the exercise of put option rights.
(3) Restrictions on Transfer. Except upon prior written consent of the
Employer, neither you nor your beneficiaries may sell, assign, give,
encumber, transfer or otherwise dispose of any Employer stock without
complying with the terms of the Plan.
(4) Fair Market Value of Employer Stock. The Employer must purchase any
Employer stock under its right of first refusal or if a participant
exercises his or her put option at "fair market value." If the Employer
stock is publicly traded, fair market value will be based on the most
recent closing price in public trading, as reported in The Wall Street
---------------
Journal or any other publication of general circulation designated by the
-------
Plan Administrator. If the Employer stock cannot be valued on the basis of
its closing price in recent public trading, its fair market value will be
determined annually (valued as of the last day of the Plan Year) by an
independent appraisal by a person who customarily makes such appraisals.
(5) Manner of Payment Under Right of First Refusal or Put Option. When the
Employer exercises its option to buy Employer stock under its right of
first refusal or when a participant notifies the Employer in writing that a
put option is being exercised, the Employer must make payment for the
Employer stock in lump sum or, if the distribution constitutes a "total
distribution," the Employer has the discretion to make payment in
substantially equal installments over a period not exceeding 5 years. A
total distribution to a participant or beneficiary is the distribution,
within one year, of the entire balance of the participant's accounts under
the Plan. If payment is made in a lump sum, the Employer must pay the
participant or beneficiary the fair market value (discussed above) of the
Employer stock no later than 30 days after the date the participant or
beneficiary exercises the put option. If payment is made in installments in
the case of a total distribution, the Employer must make the first
installment payment no later than 30 days after the participant or
beneficiary exercises the put option. For installment amounts not paid
within 30 days of the exercise of the put option, the Employer must
evidence the balance of the purchase price by executing a promissory note,
payable to the selling participant or beneficiary. The note will bear a
reasonable rate of interest, and the Employer must provide adequate
security. The note will provide for equal annual installments with interest
payable with each installment, and will provide for acceleration in the
event of 30 days' default of the payment on interest or principal. With
limited exceptions, the note will grant to the Employer the right to prepay
the note in whole or in part at any time without penalty.
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<PAGE>
TIMING OF DISTRIBUTION. Generally, if your vested account balance is $3.500
------
or less, your benefit will automatically be paid to you within 60 days after the
- -------
close of the Plan Year in which you terminate employment for any reason
including death, disability or attainment of normal retirement age. However,
your benefit will never be distributed earlier than 30 days after the date you
receive information concerning your rollover rights, unless you waive the
remainder of the 30-day notice period by returning a completed request for
distribution form.
Generally, if your vested account balance exceeds $3.500, you may elect to
--------------
receive your distribution at any time (by submitting a request for distribution
form), or you may defer your distribution (by failing to submit a request for
distribution form) until as late as the April 1 following the calendar year in
which you attain age 70 1/2 (your "required beginning date"). Under federal law,
benefit payments must commence no later than your required beginning date. If
the Plan Administrator is unable to locate you at your last address of record,
payment of your benefits under the Plan may be delayed. Therefore, if you decide
to postpone distribution of your benefit, it is important that you notify the
Employer of any changes in your mailing address and/or name. To request a
distribution, you must submit your request for distribution form approximately
90 days prior to the date you wish to receive your distribution. For each Plan
Year your account balances remain in the trust fund, they will be invested in
accordance with your investment direction (and the discretion of the Trustee for
the Profit Sharing/Stock Bonus account) unless the Plan no longer permits you to
direct the investment of your account.
Prior to any distribution of your benefits, you will be furnished with
information concerning your rights, if any, to roll some or all of your
distribution, to an "eligible retirement plan" that accepts rollover
contributions. Not all plans will accept a rollover in the form or stock, so you
should inquire carefully prior to making a decision regarding a direct rollover.
You have the right to consider your rollover rights for a minimum of 30 days
following the date you receive the information. In certain circumstances, you
may waive the remaining portion of your 30-day election period by submitting
your request for distribution form.
PAYMENT OF BENEFITS UPON DEATH. If you die prior to receiving all of your
benefits under the Plan, the Trustee will pay the balance of your account to
your beneficiary. Generally, benefits must be paid to your beneficiary within
five years of the date of your death or, if payments commence within one year
of the date of your death, over the lifetime of your beneficiary. You should
complete a beneficiary designation form when you enroll in the Plan and
whenever your personal circumstances change. If you are married, your spouse
must consent to any beneficiary designation that does not name him or her as
- ----
your sole beneficiary.
PAYMENT OF BENEFITS UPON DISABILITIES. If your employment terminates on
account of disability, you will be entitled to receive your benefits as
described above. In general, disability under the Plan means that you are
incapable of engaging in substantial gainful employment because of a physical or
mental condition and the disability is expected to last for a continuous period
of not less than 12 months. The Plan Administrator may require a physical
examination in order to confirm the disability. If you become disabled and do
not receive Compensation from the Employer, you will not receive an allocation
of the Employer's contribution to the Plan during the period of disability.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/27/1997 12
<PAGE>
IN-SERVICE DISTRIBUTIONS
DISTRIBUTIONS PRIOR TO TERMINATION OF EMPLOYMENT. Generally, the Plan is
designed to provide for your financial security when you are no longer working.
However, in some circumstances, it may be in your best interest to be able to
have access to your benefits prior to termination of your employment.
Consequently, the Plan provides that you may withdraw funds from certain of your
accounts.
IN-SERVICE DISTRIBUTIONS. The Plan provides the following types of in-
service distributions
DISTRIBUTIONS AFTER ATTAINING NORMAL RETIREMENT AGE - You become 100%
---------------------------------------------------
vested in all of your accounts as of your normal retirement age. You may
withdraw any portion of your Employer Matching Contributions Account,
Salary Reduction Contributions Account, and Rollover Contributions Account,
if any, after attaining normal retirement age.
HARDSHIP DISTRIBUTIONS FROM YOUR SALARY REDUCTION CONTRIBUTIONS ACCOUNT -
-----------------------------------------------------------------------
If you have a financial hardship, as described below, you may withdraw some
or all of your Salary Reduction Contributions (but not any earnings
credited to your account). The following types of expenses or circumstances
are considered to constitute financial hardship for Plan purposes.
. Expenses for medical care for you, your spouse or any of your
dependents.
. Expenses (other than your regular mortgage payments) directly related
to the purchase of your primary home (or a residence that will become
your primary home within a reasonable period of time).
. Tuition and related education fees for the next 12 months of post-
secondary education for you, your spouse, children or any of your
dependents.
. Funds required to prevent your being evicted or to prevent foreclosure
on the mortgage on your home.
. Funeral expenses for a member of your family.
. Expenses related to your disability.
. Any other expenses determined by the Commissioner of the Internal
Revenue Service to constitute heavy and immediate financial need.
Hardship distributions are subject to the approval of the Plan
Administrator and the following conditions:
. You cannot withdraw any "extra" money. The amount of your hardship
distribution will be limited to the specific amount of the immediate
financial need, plus any taxes that you must pay on the amount
distributed.
. Your request must specify the amount and nature of the financial
hardship and you must submit proof of the hardship.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 13
<PAGE>
. To be eligible for a hardship distribution, you must have already taken
out the maximum loans permitted (if any) from your accounts in the Plan
and obtained all other loans and distributions permitted under any
other plans maintained by the Employer.
. If you receive a hardship distribution, you will not be permitted to
make any Salary Reduction Contributions for 12 months following the
date you receive your hardship distribution. In addition, the annual
dollar limit on the amount of Salary Reduction Contributions you may
make will be reduced for the calendar year following the year in which
you receive your hardship distribution by the amount of Salary
Reduction Contributions you made in the year in which you received your
hardship distribution.
Your request for an in-service distribution will be processed within 90 days (or
as soon as administratively possible) after the date you submit an In-Service
Distribution Request.
TAXATION OF BENEFITS
Current federal income tax laws do not require you to report as income
amounts contributed to the Plan by you as Salary Reduction Contributions or the
Employer or any earnings on any or your accounts until the money is distributed
to you. Your distribution may be eligible for special tax treatment such as
income averaging. Alternatively you may be able to defer paying taxes on the
taxable portion of your distribution by having it directly rolled over to an
eligible retirement plan or by making a "rollover" contribution to an eligible
retirement plan. Approximately 30 days before you receive any distribution from
the Plan, you will be given information concerning your rollover rights and an
election form on which to choose whether to have some or all of your
distribution directly rolled to another plan. You should consult your own tax
adviser with respect to the proper method of reporting any distribution you
receive from the Plan. If you have not attained age 59 1/2 at the time you
receive a distribution under the Plan, the law, with limited exceptions, imposes
a 10% penalty on the taxable portion of your distribution.
CIRCUMSTANCES THAT COULD EFFECT YOUR PLAN BENEFITS
The Plan is designed to provide you with funds for your financial security
when you are no longer working. Because the Plan is a "qualified" plan under
federal law, your vested rights to your benefits are protected in a number of
ways. However, there are some circumstances under which your benefits may be
forfeited, delayed or decreased as follows:
. If your employment terminates before you are vested in any portion of
an account that is subject to the vesting schedule, the amount in that
account will be forfeited.
. If your employment terminates after you are vested in a portion, but
not all, of an account that is subject to the vesting schedule, the
nonvested portion may be forfeited if you do not return to work for the
Employer before incurring a forfeiture Break in Service.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 14
<PAGE>
. In general, your benefits cannot be paid to your creditors or assigned
by you as collateral. However, if the Plan Administrator receives a
court order that constitutes a "qualified domestic relations order,"
some or all of your vested benefits may be paid to your spouse, former
spouse or other dependents.
. If you are vested when your employment terminates and you elect to
defer payment of your benefits but you do not keep the Plan
Administrator advised of changes in your name or address, payment of
your benefits may be delayed.
AMENDMENT OR TERMINATION OF THE PLAN
Although the Employer intends to continue the Plan, the Employer has the
right to amend or terminate the Plan at any time. If the Plan is terminated, you
would receive benefits under the Plan based on your account balance accumulated
as of the date of the termination of the Plan. If the Plan is terminated, all of
your accounts will be 100% vested.
CLAIMS PROCEDURE
You do not need to file a formal claim with the Plan Administrator to
receive your benefits under the Plan. When an event occurs which entitles you to
a distribution of your benefits under the Plan, the Plan Administrator
automatically will notify you regarding the distribution of your benefits.
However, if you disagree with the Plan Administrator's determination of the
amount of your benefits under the Plan or with respect to any other decision the
Plan Administrator may make regarding your interest in the Plan, the Plan
contains the appeal procedure you should follow. In brief, if the Plan
Administrator of the Plan determines that it should deny benefits to you or to
your beneficiary making a claim for benefits, the Plan Administrator will give
you or your beneficiary adequate notice in writing setting forth specific
reasons for the denial and referring you or your beneficiary to the pertinent
provisions of the Plan supporting the Plan Administrator's decision. If you or
your beneficiary disagrees with the Plan Administrator, you or your beneficiary,
or a duly authorized representative, must appeal the adverse determination in
writing to the Plan Administrator within 75 days after the receipt of the notice
of denial of benefits. If you or your beneficiary fails to appeal a denial
within the 75-day period, the Plan Administrator's determination will be final
and binding.
If you or your beneficiary appeals to the Plan Administrator, you, your
beneficiary or your duly authorized representative must submit the issues and
comments you feel are pertinent to permit the Plan Administrator to re-examine
all facts and make a final determination with respect to the denial. In most
cases, a decision will be made within 60 days of a request on appeal unless
special circumstances would make the rendering of a decision within the 60-day
period unfeasible. In any event, the Plan Administrator must render a decision
within 120 days after its receipt of a request for review.
The Plan Administrator has discretionary and final authority to interpret
and construe provisions of the Plan and decide any questions about the rights of
you and your beneficiaries under the Plan. The Plan Administrator is entitled to
delegate the authority to determine the amounts of benefits payable to any
eligible individual. The Plan Administrator also has absolute discretion in
carrying out its responsibilities under the Plan. All interpretations and
decisions of the Plan Administrator will be final and binding.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 15
<PAGE>
If you are a retired participant or a beneficiary receiving benefits, the
benefits you presently are receiving will continue in the same amount and for
the same period provided in the mode of settlement initially selected. If you
are a terminated participant with a vested benefit, you may obtain a statement
of the dollar amount of your vested benefit upon request to the Plan
Adminisirator. There is no Plan provision which reduces, changes, terminates,
forfeits or suspends the benefits of a retired participant, a beneficiary
receiving benefits or a terminated participant's vested benefit amount.
RIGHTS UNDER ERISA
As a participant in this Plan, you are entitled to certain rights and
protections under the Employee Retirement Income Security Act of 1974 ("ERISA").
ERISA provides that all Plan participants shall be entitled to:
(a) Examine without charge at the Plan Administrator's office and at other
specified locations (such as work sites) all Plan documents, including
insurance contracts and copies of all documents filed by the Plan with the
U.S. Department of Labor such as detailed annual reports and Plan
descriptions.
(b) Obtain copies of all Plan documents and other Plan information upon written
request to the Plan Administrator. The Plan Administrator may make a
reasonable charge for the copies.
(c) Receive a summary of the Plan's annual financial report. ERISA requires the
Plan Administrator to furnish each participant with a copy of this summary
annual report.
(d) Obtain a statement telling you that you have a right to receive a
retirement benefit at the normal retirement age under the Plan and what
your benefit would be at normal retirement age if you stop working under
the Plan now. If you do not have a right to a retirement benefit, the
statement will advise you of the number of additional years you must work
to receive a retirement benefit. You must request this statement in
writing. The law does not require the Plan Administrator to give this
statement more than once a year. The Plan must provide the statement free
of charge.
In addition to creating rights for Plan participants, ERISA imposes duties
upon the people who are responsible for the operation of the employee benefit
plan. The people who operate this Plan, called "fiduciaries" of the Plan, have a
duty to do so prudently and in the interest of you and other Plan participants
and beneficiaries. No one, including your Employer, your union or any other
person may fire you or otherwise discriminate against you in any way to prevent
you from obtaining a retirement benefit or from exercising your rights under
ERISA.
If your claim for a retirement benefit is denied in whole or in part, you
must receive a written explanation of the reason for the denial. You have the
right to have the Plan Administrator review and reconsider your claim.
Under ERISA, there are steps you can take to enforce the above rights. For
instance, if you request materials from the Plan and do not receive the
materials within 30 days, you may file suit in a federal court. In such a case,
the court may require the Plan Administrator to provide the materials and pay
you up to $100 a day until you receive the materials unless the materials were
not sent because of reasons beyond the control of the Plan Administrator. If you
have a claim for benefits which is denied or ignored, in whole or in part, you
may file suit in a state or federal court. If it should happen that Plan
fiduciaries misuse the Plan's money or if you are discriminated against for
asserting your rights, you may
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 16
<PAGE>
seek assistance from the U.S. Department of Labor, or you may file suit in a
federal court. The court will decide who should pay court costs and legal fees.
If you are successful, the court may order the person you have sued to pay these
costs and fees. If you lose, the court may order you to pay these costs and
fees, for example, if it finds your claim is frivolous.
If you have any questions about your Plan, you should contact the Plan
Administrator. If you have any questions about this statement or about your
rights under ERISA, you should contact the nearest Area Office of the U.S.
Labor-Management Services Administration, Department of Labor.
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN AND TRUST AGREEMENT
4/24/97 17
<PAGE>
SUMMARY OF MATERIAL MODIFICATIONS
TO THE
BIRNER DENTAL MANAGEMENT SERVICES, INC. SAVINGS PLAN
Plan Number 001
Under the Plan, Birner Dental has the authority to permit additional
related employers to adopt the Plan as participating employers, or to permit
current participating employers to withdraw from the Plan. You may obtain a
complete list of the employers participating the Plan upon written request to
the Plan administrator, and such a list is available for examination by you at
any time at the offices of the Plan administrator.
This notice constitutes a summary of material modifications. You should
file this notice with your copy of the summary plan description ("SPD") for the
Plan because it changes certain information contained in the SPD.
Birner Dental Management Services, Inc.
Employer Identification Number 84-1307044
<PAGE>
EXHIBIT 11.1
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
Computation of Primary and Fully Diluted Earnings Per Share
<TABLE>
<CAPTION>
Year Ended Six Months Ended
Inception (May 17, 1995) December 31, June 30,
to December 31, 1995 1996 1997
-----------------------------------------------------------------------------------------
Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income (160,255) (160,255) (335,278) (335,278) 266,351 266,351
Weighted average common
shares outstanding 2,897,876 2,897,876 3,594,921 3,594,921 3,547,824 3,547,824
Plus - cheap stock options and
warrants 140,813 140,813 140,813 140,813 140,813 140,813
Plus - common stock equivalents Anti-Dilutive Anti-Dilutive Anti-Dilutive Anti-Dilutive 260,709 260,709
Adjusted weighted average common
shares outstanding 3,038,689 3,038,689 3,735,734 3,735,734 3,949,346 3,949,346
Net (loss) income per share $ (0.05) $ (0.05) $ (0.09) $ (0.09) $ 0.07 $ 0.07
-----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our re-
ports and to all references to our Firm included in or made a part of this reg-
istration statement.
/s/ ARTHUR ANDERSEN LLP
_______________________________
Denver, Colorado,
September 25, 1997.
