<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NO. 333-36391
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
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) 691-0680
(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) 691-0680
(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
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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............. $24,840,000 $7,527.28
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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 NOVEMBER 7, 1997
1,800,000 SHARES
LOGO
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COMMON STOCK
Of the 1,800,000 shares of common stock, without par value (the "Common
Stock"), offered hereby (the "Offering"), 1,533,816 shares are being sold by
Birner Dental Management Services, Inc. ("Birner" or the "Company") and 266,184
shares are being sold by certain holders of Common Stock (the "Selling Share-
holders"). Prior to the Offering, there has been no public market for the Com-
mon Stock. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for a discus-
sion of the factors which were considered in determining the initial public of-
fering 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 $690,938.
(3) The Company and certain Selling Shareholders have granted the Underwriters
a 30-day over-allotment option to purchase up to 80,000 and 190,000 addi-
tional shares of Common Stock, respectively, on the same terms and condi-
tions as set forth above. If all such additional shares are purchased by
the Underwriters, the total Price to Public, Underwriting Discount, Pro-
ceeds to Company, 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>
LOCATION OF OFFICES
[MAP OF COLORADO AND NEW MEXICO SHOWING LOCATION OF OFFICES]
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 1,633,142 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 op-
timum settings 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 dentists
who are given the benefits of owning their own practices without the capital
commitment and administrative burdens. In addition, managing dentists are pro-
vided 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 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 con-
tracts, which are used to optimize revenue mix and facility utilization.
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 $4.6 million during the
nine months ended September 30, 1996 to $11.4 million during the nine months
ended September 30, 1997, and contribution from dental offices (net revenue
less direct expenses) increased from $651,000 to $2.0 million during these re-
spective periods. Contribution margin (contribution from dental offices as a
percentage of net revenue) at the Company's Colorado operations increased from
14.3% to 17.5% during these respective periods. With respect to the seven prac-
tices acquired in Colorado in May 1996 (the "Family Dental Acquisition"), dur-
ing the six months prior to the Family Dental Acquisition, dental office reve-
nue, net for the seven practices was $2.3 million, contribution from dental of-
fices was ($185,000) and contribution margin was (8.0)%. During the six months
immediately following the Family Dental Acquisition 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 of-
fices increased to $367,000 and contribution 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 margin of 17.5% during this period.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company........................ 1,533,816 shares
By the Selling Shareholders........... 266,184 shares
Common Stock to be outstanding after
the Offering.......................... 6,362,993 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) 1,633,142 shares of Common Stock to be issued simultaneously
with the consummation of the Offering in connection with the Conversion of
Debentures and (ii) 34,387 shares of Common Stock issued on August 15, 1997
upon the exercise of certain warrants. Excludes (i) 306,721 shares of Com-
mon Stock reserved for issuance upon exercise of options outstanding as of
October 31, 1997 under the Birner Dental Management Services, Inc. 1995 Em-
ployee Stock Option Plan (the "Employee Plan") at a weighted average exer-
cise price of $5.65 per share, (ii) 149,303 shares of Common Stock reserved
for issuance upon exercise of options outstanding as of October 31, 1997
under the Birner Dental Management Services, Inc. 1995 Stock Option Plan
for Managed Dental Centers (the "Dental Center Plan") at a weighted average
exercise price of $5.12 per share, and (iii) 381,040 shares of Common Stock
reserved for issuance upon exercise of warrants outstanding as of October
31, 1997 at a weighted average exercise price of $3.81 per share. See "Man-
agement" and "Shares Eligible for Future Sale."
As used in this Prospectus, "P.C." means any professional corporation operating
a dental practice with which the Company has entered into a management agree-
ment, "Office" means any dental practice managed by the Company, and "de novo
Office" means an Office that has been developed by the Company internally, as
compared to a previously existing dental practice that has been acquired. 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.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 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 $ 4,555 $ 11,370 $15,839
Less -- amounts retained
by dental offices...... 148 1,911 4,481 1,140 2,786 4,296
-------- -------- -------- -------- -------- -------
Net revenue............. 300 5,373 11,446 3,415 8,584 11,543
Direct expenses......... 306 4,602 10,099 2,764 6,592 8,947
-------- -------- -------- -------- -------- -------
Contribution from dental
offices................ (6) 771 1,347 651 1,992 2,596
Corporate expenses...... 153 780 1,114 646 1,198 1,550
-------- -------- -------- -------- -------- -------
Operating (loss)
income................. (159) (9) 233 5 794 1,046
Interest (expense)
income, net............ (1) (326) (63) (162) (553) (22)
-------- -------- -------- -------- -------- -------
(Loss) income before
income taxes........... (160) (335) 170 (157) 241 1,024
Income taxes............ -- -- 64 -- 5 384
-------- -------- -------- -------- -------- -------
Net (loss) income....... $ (160) $ (335) $ 106 $ (157) $ 236 $ 640
======== ======== ======== ======== ======== =======
Net (loss) income per
common share........... $ (.06) $ (.10) $ .02 $ (.05) $ .06 $ .09
======== ======== ======== ======== ======== =======
Weighted average common
shares outstanding..... 2,786 3,426 5,959 3,425 3,634 6,801
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
-------- ------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 1,323 $12,092
Working capital......... 230 11,679
Total assets............ 15,123 25,117
Long-term debt, less
current maturities..... 10,361 335
Total shareholders'
equity................. 1,590 22,756
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
INCEPTION ---------------------------- --------------------------------------
TO DECEMBER 31, 1996 PRO FORMA 1997 PRO FORMA
1995 (1) 1996 AS ADJUSTED (2)(3) 1996 1997 AS ADJUSTED
--------------- -------- ------------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of dental offices
(6).................... 4 18 34 18 34 34
Number of dentists
(6)(7)................. 6 24 49 25 53 53
Dental office revenue,
net, per office........ $112,000 $404,665 $468,464 $253,062 $334,408 $465,87(3)(4)
</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 $11.00 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 respec-
tive periods presented, or for the Conversion of Debentures, from the date
of issuance. See "Use of Proceeds," "Capitalization," and "Management's
Discussion 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) Gives effect to (i) the Conversion of Debentures, and (ii) the completion
of the Offering at the assumed initial public offering price of $11.00 per
share and the receipt and application of the estimated net proceeds there-
from, all as if such transactions had been completed on September 30, 1997.
See "Use of Proceeds," "Capitalization," "Pro Forma Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business -- Expansion Program -- Recent
Acquisitions."
(6) Data is as of the end of the respective periods presented.
(7) Includes general dentists employed by the P.C.s, but excludes specialists
who are independent contractors.
----------------
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.
DEMANDS ON MANAGEMENT FROM 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 growth has required the hiring and training of additional em-
ployees to oversee the operations and training of non-dental employees in the
new Offices, the use of management resources to integrate the operations of
the new Offices with the operations of the Company, and the incurring of in-
cremental costs to convert to or install the Company's management information
system. 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 success of the Company's acquisition strategy
will depend on factors which include the following:
Ability to Identify Suitable Dental Practices. The Company devotes substan-
tial time and resources to acquisition-related activities. Identifying appro-
priate 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 consummated 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 financial results may be materi-
ally lower than analysts' expectations, which likely would cause a decline,
perhaps substantial, in the market price of the Common Stock. In addition, in-
creasing consolidation in the dental management services industry may result
in an increase in purchase prices required to be paid by the Company to ac-
quire dental practices.
Integration of Dental Practices. The integration of acquired dental prac-
tices into the Company's networks is a difficult, costly and time consuming
process which, among other things, requires the Company to attract and retain
competent and experienced management and administrative personnel and to im-
plement and integrate reporting and tracking systems, management information
systems and other operating systems. In addition, such integration may require
the expansion of accounting controls and procedures and the evaluation of cer-
tain personnel functions. There can be no assurance that substantial unantici-
pated problems, costs or delays associated with such integration efforts or
with such acquired practices will not occur. As the Company pursues its acqui-
sition strategy, there can be no assurance that the Company will be able suc-
cessfully to integrate acquired practices in a timely manner or at all, or
that any acquired practices will have a positive impact on the Company's re-
sults of operations and financial condition.
6
<PAGE>
Management of Acquisitions. The success of the Company's acquisition strat-
egy will depend in part on the Company's ability to manage effectively an in-
creasing number of Offices, some of which are expected to be located in mar-
kets geographically distant from markets in which the Company presently oper-
ates. The addition of Offices may impair the Company's ability to provide man-
agement services efficiently and successfully to existing Offices and to man-
age and supervise adequately the Company's employees. The Company's results of
operations and financial condition could be materially adversely affected if
it is unable to do so effectively.
Availability of Funds for Acquisitions. The Company's acquisition strategy
will require that substantial capital investment and adequate financing be
available to the Company. Funds are needed for (i) the purchase of assets of
dental practices, (ii) the integration of operations of acquired dental prac-
tices, and (iii) the purchase of additional equipment and technology for ac-
quired practices. In addition, increasing consolidation in the dental services
industry may result in an increase in purchase prices required to be paid by
the Company to acquire dental practices. Any inability of the Company to ob-
tain suitable financing could cause the Company to limit or otherwise modify
its acquisition strategy, which could have a material adverse effect on the
Company's results of operations and financial condition. See " -- Need for Ad-
ditional Capital; Uncertainty of Additional Financing."
Ability to Increase Revenues and Operating Income of Acquired Practices. A
key element of the Company's growth strategy is to increase revenues and oper-
ating income at its acquired Offices. There can be no assurance that the
Company's revenues and operating income from its acquired Offices will improve
at rates comparable to the historical improvement rates experienced by the
Company's existing Offices or at all, or that revenues or operating income
from existing Offices will continue to improve at such historical rates or at
all. Any failure by the Company in improving revenues or operating income at
its Offices could have a material adverse effect on the Company's results of
operations and financial condition.
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 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 Of-
fice will become profitable for the Company. See "Business -- Expansion Pro-
gram -- De Novo Office 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 and prin-
cipal and interest payments of loans made to the P.C. by the Company. Any ma-
terial loss of revenue by the P.C.s would have a material adverse effect on
the Company's business, financial condition and operating
7
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results, and any termination of a Management Agreement (which is permitted in
the event of a material 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 assurance that the legal remedies available to the Company will be
adequate to compensate the Company for its damages resulting from such breach.
See "Business -- 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, including Colorado and New Mexico, 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 spe-
cific provision or as a matter of general policy, non-dental entities, such as
the Company, from practicing dentistry, from employing dentists and, in cer-
tain circumstances, hygienists or dental assistants, or from otherwise exer-
cising control over the provision of dental services.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist to own or control dental equipment or offices used in a den-
tal practice. In addition, Colorado, New Mexico, and many other states impose
limits on the tasks that may be delegated by dentists to hygienists and dental
auxiliaries. Some states, including Colorado, regulate the content of adver-
tisements of dental services. Some states require entities designated as
"clinics" to be licensed, 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 interpretations vary from state to state and are enforced by the
courts and by regulatory authorities with broad discretion.
Many states, including Colorado and New Mexico, also prohibit "fee-split-
ting" by dentists with any party except other dentists in the same profes-
sional corporation or practice entity. In most cases, these laws have been
construed as applying to the practice of paying a portion of a fee to another
person for referring a patient or otherwise generating business, and not to
prohibit payment of reasonable compensation for facilities and services (other
than the generation of referrals), even if the payment is based on a percent-
age of the practice's revenues.
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, including Colorado and New Mexico, prohibit the
submitting of false claims for dental services.
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
8
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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, fi-
nancial 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. See "Busi-
ness -- Government Regulation".
NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF 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 limits to $5.0 million the amount the
Company may spend in any calendar year to acquire dental practices. The Com-
pany 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 require-
ments could have a material and adverse effect on the Company's ability to
pursue its strategy and on its business, financial condition and operating re-
sults. See "Use of Proceeds" and "Management's Discussion and Analysis of Fi-
nancial Condition and Results of Operations -- Liquidity and Capital Re-
sources."
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. Some key employees have
only recently joined the Company. The Company believes its future success will
depend in part upon its ability to attract and retain qualified management
personnel. Competition for such personnel is intense and the Company competes
for qualified personnel with numerous other employers, some of which have
greater financial and other resources than the Company. The loss of the serv-
ices of one or more members of the Company's senior management or the failure
to add or retain qualified management personnel could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Management."
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DEPENDENCE UPON 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 operat-
ing results. See "Business -- Operations -- Dental Practice Model."
RISKS ASSOCIATED WITH COST-CONTAINMENT INITIATIVES
The health care industry, including the dental services market, is experi-
encing a trend toward cost containment, as payors seek to impose lower reim-
bursement rates upon providers. The Company believes that this trend will con-
tinue 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 re-
imbursement 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 20.4% of its revenues from
capitated managed dental care contracts, and 28.0% of its revenues from asso-
ciated co-payments. Risks associated with capitated managed dental care con-
tracts include principally (i) the risk that the capitation payments and any
associated co-payments do not adequately cover the costs of providing the den-
tal 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
arrangements 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 capita-
tion and co-payment revenue. There can be no assurance that the Company will
be able to negotiate future capitation arrangements on behalf of P.C.s on sat-
isfactory terms or at all, or that the fees offered in current capitation ar-
rangements will not be reduced to levels unsatisfactory to the Company. More-
over, to the extent that costs incurred by the Company's affiliated dental
practices in providing services to patients covered by capitated managed den-
tal care contracts exceed the revenue under such contracts, the Company's
business, financial condition and operating results may be materially and ad-
versely affected. See "Business -- Operations -- Payor Mix."
RISKS OF BECOMING SUBJECT TO LICENSURE
Federal and state laws regulate insurance companies and certain other man-
aged care organizations. Many states, including Colorado, also regulate the
establishment and operation 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 generally apply to networks that are paid on a
capitated basis, unless the entity with which the network provider is
10
<PAGE>
contracting is not a licensed health insurer or other managed care organiza-
tion. 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 profession-
als. The Company believes its current activities do not constitute the provi-
sion of insurance in Colorado or New Mexico, and thus, it is in compliance
with the insurance laws of these states with respect to the operation of its
Offices. There can be no assurance that these laws will not be changed or that
interpretations of these laws by the regulatory authorities in those states,
or in the states in which the Company expands, will not require 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 regulatory authority
permits the Company to continue to operate while the licensure process is pro-
gressing, the Company could experience a material adverse change in its busi-
ness while the licensure process is pending. In addition, many of the licens-
ing requirements mandate strict financial and other requirements which the
Company may not immediately be able to meet. Further, once licensed, the Com-
pany would be subject to continuing oversight by and reporting to the respec-
tive regulatory agency. The regulatory framework of certain jurisdictions may
limit the Company's expansion into, or ability to continue operations within,
such jurisdictions if the Company is unable to modify its operational struc-
ture 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.
ACCOUNTING TREATMENT FOR PHYSICIAN PRACTICE MANAGEMENT COMPANIES
The Emerging Issues Task Force, an advisory committee of the Financial Ac-
counting Standards Board, is currently evaluating certain matters relating to
accounting practices for physician practice management companies, which the
Company expects will include a review of the consolidation of the financial
statements of professional corporations and professional associations with
which such companies have management agreements and the accounting for busi-
ness combinations. There can be no assurance that any required changes to the
accounting and financial reporting practices of physician practice management
companies resulting from this review would not have a material adverse effect
on the Company's reported financial condition and results of operations.
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 September 30,
1997, intangible assets on the Company's pro forma consolidated balance sheet
were $8.9 million, representing 59% 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 acquisi-
tions, 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 re-
alized. In addition, the Company continually evaluates whether events and cir-
cumstances 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 of unamortized intangible as-
sets could have a material adverse effect on the Company's business, financial
condition and operating results. See "Pro Forma Consolidated Financial Infor-
mation."
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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. While the Company believes it
has adequate liability insurance coverage, there can be no assurance that the
coverage will be adequate to cover losses or that coverage will continue to be
available upon terms satisfactory to the Company. In addition, certain types
of risks and liabilities, including penalties and fines imposed by governmen-
tal agencies, are not covered by insurance. Malpractice insurance, moreover,
can be expensive and varies from state to state. Successful malpractice claims
could have a material adverse effect on the Company's business, financial con-
dition 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 25 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 conflicts of
interest may arise in certain matters including, but not limited to, matters
related to the Management Agreements. Although Dr. Birner has a fiduciary duty
to the Company, there can be no assurances that the Company will not be af-
fected by matters in which Dr. Birner has a potential conflict of interest.
The Company will require that any transactions with Dr. Birner which relate to
his ownership of the stock of a P.C. (other than in connection with the acqui-
sition of a new practice) or with any P.C. of which he is the sole shareholder
be approved by a majority of the members of its Board of Directors other than
Fred Birner and Dr. Birner. See "Business -- Affiliation Model," "Management"
and "Certain Transactions."
GEOGRAPHIC CONCENTRATION
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.
ANTITRUST
The Company is subject to a range of anti-trust laws that prohibit anti-com-
petitive conduct, including price fixing, concerted refusals to deal and divi-
sions 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 addi-
tion, 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 monop-
oly.
RISKS ASSOCIATED WITH NON-COMPETITION COVENANTS AND OTHER ARRANGEMENTS WITH
MANAGING DENTISTS
The Management Agreements require the P.C.s to enter into employment agree-
ments with dentists which include non-competition provisions typically for
three to five years after termination of employment within a specified geo-
graphic area, usually a specified number of miles from the relevant Office,
and restrict solicitation of employees and patients. In Colorado, covenants
not to compete are prohibited by statute with certain exceptions. One excep-
tion permits enforcement of covenants not to compete against executive and
management personnel and officers and employees who constitute professional
staff to executive and management personnel.
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<PAGE>
Permitted covenants not to compete are enforceable in Colorado only to the ex-
tent their terms are reasonable in both duration and geographic scope. New
Mexico courts have enforced covenants not to compete if their terms are found
to be reasonable. It is thus uncertain whether a court will enforce a covenant
not to compete in those states in a given situation. In addition, there is
little judicial authority regarding whether a practice management agreement
will be viewed as the type of protectable business interest that would permit
it to enforce such a covenant or to require a P.C. to enforce such covenants
against dentists formerly employed by the P.C. Since the intangible value of a
Management Agreement depends primarily on the ability of the P.C. to preserve
its business, which could be harmed if employed dentists went into competition
with the P.C., a determination that the covenants not to compete contained in
the employment agreements between the P.C. and its employed dentists are unen-
forceable could have a material adverse impact on the Company. See "Busi-
ness -- Affiliation Model -- Employment Agreements." In addition, the Company
is a party to various agreements with managing dentists who own the P.C.s,
which restrict the dentists' ability to transfer the shares in the P.C.s. See
"Business -- Affiliation Model -- Relationship with P.C.s." There can be no
assurance that these agreements will be enforceable in a given situation. A
determination that these agreements are not enforceable could have a material
adverse impact on the Company.
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. See "Business -- Competition."
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 compete against such practices in the recruitment and retention of qual-
ified dentists, specialists, hygienists and other personnel. See "Business --
Competition."
BROAD DISCRETION OF MANAGEMENT IN APPLYING PROCEEDS OF OFFERING
The Company expects to use approximately $11.3 million of the net proceeds
of the Offering for potential acquisitions and development of additional de
novo Offices, for working capital and for general corporate purposes. Accord-
ingly, the Company's management will retain broad discretion as to the alloca-
tion of a substantial portion of the net proceeds from this Offering. See "Use
of Proceeds."
POSSIBLE CONTROL BY MANAGEMENT SHAREHOLDERS
After giving effect to the sale of the shares of Common Stock offered here-
by, the Company's executive officers and directors will beneficially own ap-
proximately 32.8% 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 af-
ter the sale of the shares of Common Stock offered hereby. See "Certain Trans-
actions," "Principal and Selling Shareholders," and "Shares Eligible for Fu-
ture Sale."
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ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of Incor-
poration and Bylaws could delay or frustrate the removal of incumbent direc-
tors and could make difficult a merger, tender offer or proxy contest involv-
ing 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 empow-
ered to issue preferred stock in one or more series without shareholder ac-
tion. 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 contest or otherwise. In addition, the Amended and Re-
stated Articles of Incorporation 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 shareholders to remove directors without
cause, eliminating the right of shareholders to fill vacancies on the Board,
and requiring an 80.0% supermajority vote of shareholders to amend certain
provisions of the Amended and Restated Articles of Incorporation. See "De-
scription of Capital Stock -- Anti-Takeover Provisions."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors participating in the Offering will incur immediate and substantial
dilution of approximately $8.84 in the pro forma 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 1,800,000 shares of Common Stock offered hereby, except as
provided below, approximately 4,314,007 shares (including 1,139,208 shares is-
suable 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 381,040 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 220,199 shares of the Common Stock. An additional 456,024
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 will be-
come eligible for sale in the public market under Rule 144 at various times as
they become vested. The Company intends to register such shares shortly after
the consummation of the Offering. Additionally, 227,750 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 4,107,457 shares of Common Stock,
have entered into a lock-up agreement (each, a "Lock-up Agreement") with the
Underwriters pursuant to which 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 Underwriters. 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 "Underwriting."
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
sustained after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public
offering price was determined through negotiations between the Company and the
representatives of the Underwriters, and may not be
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<PAGE>
indicative of future market prices. The market price of the Common Stock could
be subject to wide fluctuations in response to quarter-by-quarter variations
in operating results of the Company or its competitors, changes in earnings
estimates by analysts, developments in the industry or changes in general
economic conditions. See "Underwriting."
RESTRICTIONS ON PAYMENT OF DIVIDENDS
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."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,533,816 shares of
Common Stock offered by the Company hereby are estimated to be $15.0 million
($15.8 million if the Underwriters' over-allotment option is exercised in
full), based on the assumed initial public offering price of $11.00) per share
and after deducting the estimated 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 $11.3
million to be used for potential acquisitions and development of new Offices,
for working capital and for general corporate purposes. Pending such uses, the
Company intends 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 "Risk
Factors -- Broad Discretion of Management in Applying Proceeds of Offering"
and "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."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at Septem-
ber 30, 1997 (i) on an actual basis, (ii) on a pro forma basis, after giving
effect to the Conversion of Debentures, and (iii) on a pro forma basis, as ad-
justed to give effect to the sale of the 1,533,816 shares of Common Stock be-
ing offered by the Company hereby at the assumed initial public offering price
of $11.00 per share and the application of the estimated net proceeds there-
from. The information in the table below is qualified in its entirety by, and
should be read in conjunction with, the Consolidated Financial Statements (in-
cluding the Notes thereto) of the Company included elsewhere in this Prospec-
tus:
<TABLE>
<CAPTION>
SEPTEMBER 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.............................. $ 653 $ 653 $ 149
Long-term debt and capital lease obligations.... 10,361 3,581 335
Shareholders' equity:
Preferred Stock, no par value, 10,000,000
shares authorized;
none outstanding............................. -- -- --
Common Stock, no par value, 20,000,000 shares
authorized; 3,196,035 shares outstanding,
4,829,177 shares outstanding pro forma (1)
and 6,362,993 shares outstanding, pro forma
as adjusted (1).............................. 1,850 8,321 23,321
Accumulated deficit........................... (260) (565) (565)
------- ------- -------
Total shareholders' equity.................. 1,590 7,756 22,756
------- ------- -------
Total capitalization...................... $12,604 $11,990 $23,240
======= ======= =======
</TABLE>
- --------
(1) Includes 1,633,142 shares of Common Stock issuable upon the consummation
of the Offering in connection with the Conversion of Debentures. Excludes
(i) 245,374 shares of Common Stock reserved for issuance upon exercise of
options outstanding as of September 30, 1997 under the Employee Plan, (ii)
131,681 shares of Common Stock reserved for issuance upon exercise of op-
tions outstanding as of September 30, 1997 under the Dental Center Plan,
and (iii) 381,041 shares of Common Stock reserved for issuance upon exer-
cise of warrants outstanding as of September 30, 1997. See "Management"
and "Shares Eligible for Future Sale."
17
<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 September 30, 1997 was approximately ($1.3 million),
or ($.26) per share. "Pro forma net tangible book value" per share represents
the pro forma tangible net worth (total tangible assets less total liabilities,
after giving effect to the Conversion of Debentures) of the Company before giv-
ing effect to the sale of the Common Stock offered hereby. After giving effect
to the sale by the Company of the 1,533,816 shares of Common Stock offered
hereby (at the assumed initial public offering price of $11.00 per share, less
the estimated underwriting discount and offering expenses) the pro forma net
tangible book value of the Company at September 30, 1997 would have been ap-
proximately $13.7 million or $2.16 per share. This represents an immediate in-
crease in net tangible book value of $2.42 per share to the existing sharehold-
ers and an immediate reduction in net tangible book value of $8.84 per share to
new investors. Dilution is determined by subtracting the pro forma net tangible
book value per share after the Offering from the amount of cash paid by a new
purchaser for a share of Common Stock. The following table illustrates the di-
lution described above on a per share basis.
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $11.00
Net tangible book value at September 30, 1997............. $(2.42)
Pro forma net tangible book value at September 30, 1997,
after giving effect to the Conversion of Debentures...... $ (.26)
Increase in pro forma net tangible book value attributable
to new investors......................................... $ 2.42
------
Pro forma net tangible book value after the Offering........ $ 2.16
------
Dilution in net tangible book value to new investors........ $ 8.84
======
</TABLE>
The following table summarizes on a pro forma basis as of September 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 pub-
lic offering price of $11.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 3,196,035 50.2% $ 2,059,264 8.0% $ .64
Conversion of Debentures... 1,633,142 25.7 6,780,000 26.4 4.15
New investors.............. 1,533,816 24.1 16,871,976 65.6 11.00
--------- ----- ----------- ----- -----
Total.................... 6,362,993 100.0% $25,711,240 100.0% $4.04
========= ===== =========== ===== =====
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options or warrants after September 30, 1997, or of the
Underwriters' over-allotment option. As of September 30, 1997, stock options
and warrants to purchase 758,096 shares of Common Stock were outstanding with a
weighted average exercise price of $4.16 per share. To the extent these options
and warrants are exercised, there will be further dilution to new investors.
18
<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 nine months ended September 30, 1997,
give effect to (i) the seven Colorado dental offices acquired on May 29, 1996,
the "Family Dental Acquisition," the four Colorado dental offices acquired at
various dates between July 3, 1996 and September 17, 1996, the "Additional
1996 Acquisitions" (together with the Family Dental Acquisition, the "1996
Acquisitions"), the three Colorado dental practices acquired between January
28, 1997 and March 25, 1997, the "Early 1997 Acquisitions," the two New Mexico
dental offices acquired in August 1997, the "Late 1997 Acquisitions," and the
nine Colorado dental practices acquired on September 8, 1997, 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
$11.00 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 Conversion of Debentures, and (ii) the receipt and application of the
estimated net proceeds from the Offering as if such transactions had occurred
on September 30, 1997. The pro forma 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.
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 nine months ended September 30, 1997, adjusted
where necessary to reflect these acquisitions and related operations as if the
Management 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.
19
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 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.................... $11,369,868 $798,001 $3,671,760 $ -- $ -- $ -- $15,839,629
Less -- amounts retained
by dental offices...... 2,786,409 -- -- 1,478,629 (d) -- -- 4,296,316
31,278 (c)
----------- -------- ---------- ---------- -------- -------- -----------
Net revenue............ 8,583,459 798,001 3,671,760 (1,509,907) -- -- 11,543,313
Direct expenses:
Clinical salaries and
benefits.............. 3,033,401 223,016 2,146,252 (1,306,791)(d) -- -- 4,100,680
4,802 (c)
Dental supplies........ 751,759 49,954 256,109 -- -- -- 1,057,822
Laboratory fees........ 793,640 78,749 186,051 -- -- -- 1,058,440
Occupancy.............. 718,660 97,402 173,632 (25,165)(c) -- -- 964,529
Advertising and
marketing............. 285,947 16,261 47,131 -- -- -- 349,339
Depreciation and
amortization.......... 391,891 22,423 40,890 128,649 (e) -- -- 583,853
General and
administrative........ 616,389 304,146 536,414 (524,553)(d) -- -- 832,827
(99,569)(c)
----------- -------- ---------- ---------- -------- -------- -----------
6,591,687 791,951 3,386,479 (1,822,627) -- -- 8,947,490
----------- -------- ---------- ---------- -------- -------- -----------
Contribution from dental
offices................ 1,991,772 6,050 285,281 312,720 -- -- 2,595,823
Corporate expenses--
General and
administrative......... 1,127,058 -- -- 352,715(d) -- -- 1,479,773
Depreciation and
amortization........... 70,532 -- -- -- -- -- 70,532
----------- -------- ---------- ---------- -------- -------- -----------
Operating income
(loss)................. 794,182 6,050 285,281 (39,995) -- -- 1,045,518
Interest (expense)
income, net............ (553,572) (6,050) (457) 6,507 (f) 518,994 (k) 12,760 (h) (21,818)
(219,000)(j) 219,000 (j)
----------- -------- ---------- ---------- -------- -------- -----------
Income (loss) before
income taxes........... 240,610 -- 284,824 (252,488) 518,994 231,760 1,023,700
Income taxes (g)........ 5,200 -- -- -- 194,623 86,910 383,888
----------- -------- ---------- ---------- -------- -------- -----------
Net income ............. $ 235,410 $ -- $ 284,824 $ (252,488) $324,371 $144,850 $ 639,812
=========== ======== ========== ========== ======== ======== ===========
Net income per common
share.................. $ 0.06 $ 0.09
=========== ===========
Weighted average common
and common equivalent
shares outstanding..... 3,634,122 6,801,061
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
20
<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 69,829 273,788 (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 (2,840,013) -- --
---------- ---------- -------- ---------- ---------- ---------- -------- --------
Contribution from
dental offices.. 770,566 (103,507) 13,618 6,286 390,689 269,438 -- --
Corporate
expenses--
General and
administrative.. 721,313 93,186 -- -- -- (93,186)(c) -- --
335,053 (d)
Depreciation and
amortization... 57,941 -- -- -- -- -- -- --
---------- ---------- -------- ---------- ---------- ---------- -------- --------
Operating (loss)
income.......... (8,688) (196,693) 13,618 6,286 390,689 27,571 -- --
Interest
(expense)
income, net..... (326,590) (33,007) (15,384) (6,286) (1,301) 22,971 (f) 295,025(k) 1,458(h)
(292,000)(j) 292,000(j)
---------- ---------- -------- ---------- ---------- ---------- -------- --------
(Loss) Income
before income
taxes........... (335,278) (229,700) (1,766) -- 389,388 (241,458) 295,025 293,458
Income taxes
(g)............. -- -- -- -- -- -- 110,634 110,047
---------- ---------- -------- ---------- ---------- ---------- -------- --------
Net (loss)
income.......... $ (335,278) $ (229,700) $ (1,766) $ -- $ 389,388 $ (241,458) $184,391 $183,411
========== ========== ======== ========== ========== ========== ======== ========
Net (loss) income
per common
share........... $ (0.10)
==========
Weighted average
common and
common
equivalent
shares
outstanding..... 3,425,668
<CAPTION>
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... 782,753
General and
administrative.. 1,272,517
------------
10,099,379
------------
Contribution from
dental offices.. 1,347,090
Corporate
expenses--
General and
administrative.. 1,056,366
Depreciation and
amortization... 57,941
------------
Operating (loss)
income.......... 232,783
Interest
(expense)
income, net..... (63,114)
------------
(Loss) Income
before income
taxes........... 169,669
Income taxes
(g)............. 63,626
------------
Net (loss)
income.......... $ 106,043
============
Net (loss) income
per common
share........... $ 0.02
============
Weighted average
common and
common
equivalent
shares
outstanding..... 5,958,871
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
21
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The adjustments reflected in the pro forma consolidated statements of income
for the nine months ended September 30, 1997 and the year ended December 31,
1996 are as follows:
(a) In the pro forma consolidated statement of income for the nine months
ended September 30, 1997, the 1997 Acquisitions columns present the his-
torical revenue and expenses of the Early 1997 Acquisitions made during
the first nine months of 1997 for that portion of 1997 preceding the Of-
fices' affiliation with the Company as if these acquisitions had occurred
on January 1, 1996. The 1997 Acquisitions columns also reflect the histor-
ical revenue and expenses of the Late 1997 Acquisitions made in August
1997, as if these acquisitions had been made on January 1, 1996. The Gen-
tle 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 nine months ended September 30, 1997.
These items consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
1996 SEPTEMBER 30, 1997
------------ ------------------
<S> <C> <C>
Reduction in corporate general and
administrative costs for management fees
paid pursuant to a contract that was
terminated on acquisition................. $ (93,186) $ --
Reduction in occupancy costs due to
execution of new lease for office space on
acqusiition............................... $(114,851) $(25,165)
Changes in compensation to dentists as a
result of new employment agreements
executed on acquisition--
(reductions).............................. $(185,540) $(99,569)
increases................................. 77,812 31,278
Increase in clinical salaries and
benefits.................................. $ 14,406 $ 4,802
</TABLE>
The above adjustments are based on the Company's assessment that the con-
duct of the practices are not reasonably likely to be affected by the
changes in the dentist - owners' incentive structure.
(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
======== =========== ========= ==========
Nine months ended
September 30, 1997
Early and Late 1997
Acquisitions......... $ -- $ (36,550) $(171,838) $ 208,388
Gentle Dental
Acquisition.......... 352,715 (1,270,241) (352,715) 1,270,241
-------- ----------- --------- ----------
$352,715 $(1,306,791) $(524,553) $1,478,629
======== =========== ========= ==========
</TABLE>
22
<PAGE>
(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 September 30, 1997 and are being amortized
over a period of 25 years. The additional amortization was $273,788 and
$128,649 for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively.
(f) To eliminate interest expense related to liabilities not assumed in con-
nection with the 1996 Acquisitions ($15,384 in 1996) and the 1997 Acquisi-
tions ($7,587 in 1996 and $6,507 for the nine months ended September 30,
1997).
(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. This calculation is based on $100,000 outstanding for two months
in 1996, interest payable at 8.75% ($1,458) and $350,000 outstanding for
five months during the nine-month period ended September 30, 1997
($12,760).
(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. Acqui-
sition debt consists of a $2.0 million note, interest payable at 9.0%
($180,000 for the year ended December 31, 1996 and $135,000 for the nine
months ended September 30, 1997) and a $1.4 million note, interest payable
at 8.0% ($112,000 for the year ended December 31, 1996 and $84,000 for the
nine months ended September 30, 1997).
(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. Detail is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Interest expense on debentures at
9%................................. $265,419 457,650
Amortization of debenture offering
costs.............................. 29,606 61,344
-------- --------
$295,025 $518,994
======== ========
</TABLE>
23
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERSION OF PRO FORMA
HISTORICAL DEBENTURES (A) OFFERING (B) AS ADJUSTED
----------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ $ 1,322,874 $ (481,350) $15,000,000 $12,091,524
(3,750,000)
Other current assets.... 2,074,628 -- (466,442) 1,608,186
----------- ----------- ----------- -----------
Total current assets.... 3,397,502 (481,350) 10,783,558 13,699,710
----------- ----------- ----------- -----------
Property and equipment,
net..................... 2,365,484 -- -- 2,365,484
Intangible assets, net... 8,961,625 -- -- 8,961,625
Deferred charges and
other assets............ 398,182 (308,074) -- 90,108
----------- ----------- ----------- -----------
Total assets............ $15,122,793 $ (789,424) $10,783,558 $25,116,927
=========== =========== =========== ===========
Current liabilities:
Accounts payable and
accrued expenses....... $ 2,513,908 $ (176,250) $ (466,442) $ 1,871,216
Current maturities of
notes payable and
capital lease
obligations............ 653,291 -- (503,886) 149,405
----------- ----------- ----------- -----------
Total current
liabilities............ 3,167,199 (176,250) (970,328) 2,020,621
----------- ----------- ----------- -----------
Notes payable and capital
lease obligations....... 3,580,858 -- (3,246,114) 334,744
Convertible subordinated
debentures.............. 6,780,000 (6,780,000) -- --
Other liabilities........ 5,200 -- -- 5,200
----------- ----------- ----------- -----------
Total liabilities....... 13,533,257 (6,956,250) (4,216,442) 2,360,565
----------- ----------- ----------- -----------
Common stock............. 1,849,659 6,471,926 16,871,976 25,193,561
(1,871,976) (1,871,976)
Accumulated (deficit)
earnings................ (260,123) (305,100) -- (565,223)
----------- ----------- ----------- -----------
Total shareholders'
equity................. 1,589,536 6,166,826 15,000,000 22,756,362
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity... $15,122,793 $ (789,424) $10,783,558 $25,116,927
=========== =========== =========== ===========
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
24
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The adjustments reflected in the September 30, 1997 pro forma condensed con-
solidated balance sheet are as follows:
(a) To reflect the effect of conversion of $6,780,000 principal amount of con-
vertible subordinated debentures into 1,633,142 shares of Common Stock,
including interest of $305,100 paid to induce the conversion, accrued in-
terest of $176,250 and deferred debenture issuance costs of $308,074 off-
set against common stock.
(b) To reflect the estimated net proceeds from the sale of 1,533,816 shares of
Common Stock in the Offering at an assumed initial public offering price
of $11.00 per share, estimated to be approximately $15,000,000 (after de-
ducting estimated underwriting discount and expenses of $1,871,976 for the
Offering), to reflect the use of proceeds of the Offering of $3,750,000
for payment of debt and $466,442 of payables related to costs of the Of-
fering.
25
<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 selected consolidated balance sheet data at December 31, 1995
and 1996 for the Company have been derived from the Consolidated Financial
Statements of the Company that have been audited by Arthur Andersen LLP, inde-
pendent public accountants, which are included elsewhere in this Prospectus.
The selected consolidated statement of operations data for the nine months
ended September 30, 1996 and 1997 have been derived from the unaudited interim
consolidated financial statements of the Company for the six months ended June
30, 1996, and the three months ended September 30, 1996 and 1997, and the au-
dited consolidated financial statements of the Company for the six months
ended June 30, 1997, included elsewhere in this Prospectus. The selected data
for 1994 and 1995 for the Company's predecessor have been derived from finan-
cial statements of the predecessor that have been audited by Arthur Andersen
LLP, independent public accountants, which are included elsewhere in this Pro-
spectus. 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(1)
----------------------------- -------------------------------------------------
NINE MONTHS
YEAR ENDED JANUARY 1, 1995 INCEPTION TO YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, TO SEPTEMBER 30, DECEMBER 31, DECEMBER 31, -----------------------
1994 1995 1995 (2) 1996 1996 1997
------------ ---------------- ------------ ------------ -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Dental office revenue, net.......... $ 692 $ 1,022 $ 448 $ 7,284 $ 4,555 $ 11,370
Less -- amounts retained by dental
offices............................ 163 265 148 1,911 1,140 2,786
-------- -------- -------- -------- -------- --------
Net revenue......................... 529 757 300 5,373 3,415 8,584
Direct expenses:
Clinical salaries and benefits..... 211 323 125 1,750 1,137 3,033
Dental supplies.................... 54 53 42 778 291 753
Laboratory fees.................... 53 83 28 483 298 793
Occupancy.......................... 70 87 20 315 210 719
Advertising and marketing.......... 17 20 35 280 145 286
Depreciation and amortization...... 33 38 14 323 198 392
General and administrative......... 72 105 42 673 485 616
-------- -------- -------- -------- -------- --------
510 709 306 4,602 2,764 6,592
-------- -------- -------- -------- -------- --------
Contribution from dental offices.... 19 48 (6) 771 651 1,992
Corporate expenses --
General and administrative........ -- -- 149 722 611 875
Acquisition costs................. -- -- -- -- -- 252
Depreciation and amortization..... -- -- 4 58 35 71
-------- -------- -------- -------- -------- --------
Operating (loss) income............. 19 48 (159) (9) 5 794
Interest expense, net............... (24) (29) (1) (326) (162) (553)
-------- -------- -------- -------- -------- --------
(Loss) income before income taxes... (5) 19 (160) (335) (157) 241
Income taxes........................ -- -- -- -- -- 5
-------- -------- -------- -------- -------- --------
Net (loss) income................... $ (5) $ 19 $ (160) $ (335) $ (157) $ 236
======== ======== ======== ======== ======== ========
Net (loss) income per common share
(3)(6)............................. N/A N/A $ (.06) $ (.10) $ (.05) $ .06
======== ======== ======== ========
Weighted average common shares
outstanding........................ N/A N/A 2,786 3,426 3,425 3,634
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (4):
Cash and cash equivalents........... $ 1,465 $ 1,798 $ 1,323
Working capital..................... 698 1,817 230
Total assets........................ 2,908 9,553 15,123
Long-term debt, less current
maturities......................... 23 6,829 10,361
Total shareholders' equity.......... 2,004 1,684 1,590
<CAPTION>
PREDECESSOR THE COMPANY(1)
----------------------------- -------------------------------------------------
NINE MONTHS
YEAR ENDED JANUARY 1, 1995 INCEPTION TO YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, TO SEPTEMBER 30, DECEMBER 31, DECEMBER 31, -----------------------
1994 1995 1995 (2) 1996 1996 1997
------------ ---------------- ------------ ------------ -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of offices (4)............... 3 3 4 18 18 34
Number of dentists (4)(5)........... 3 3 6 24 24 53
Dental office revenue, net per
office............................. $230,852 $340,855 $112,000 $404,665 $253,062 $334,408
</TABLE>
- --------
(1) The comparability of the data presented is affected by acquisitions of Of-
fices and development of de novo Offices. The Company was operating four
Offices as of December 1995. During 1996 the Company acquired nine Offices
and opened five de novo Offices. Fifteen additional Office acquisitions
and one de novo Office increased the Company's operations for the nine
months ended September 30, 1997.
(2) The Company was formed on May 17, 1995, and had no substantial operations
until October 1, 1995.
(3) Computed on the basis described in Note 2 of Notes to Consolidated Finan-
cial Statements of the Company.
(4) Data is as of the end of the respective periods presented.
(5) Includes dentists employed by the P.C.s, but excludes specialists who are
independent contractors.
(6) Supplementary earnings (loss) per share, giving effect to the portion of
the use of proceeds to be used to repay certain debt for the nine months
ended September 30, 1997 is $.07, and, for the year ended December 31,
1996, (.10).
26
<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 53 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. In addition, the Company as-
sumes a number of responsibilities when it acquires a new practice or develops
a de novo Office, which are set forth in the Management Agreement, as de-
scribed below. 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 ap-
plication of its dental practice management model will improve operating per-
formance. See "Business -- Operations -- Dental Practice Management Model."
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 combined purchase amounts for the four Offices acquired in 1995, the 12
practices acquired in 1996, and the 15 practices acquired in 1997 were
$412,134, $4,372,338 and $5,315,263, respectively. 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 Offices. The five de novo Offices opened
between January 8, 1996 and July 15, 1996 began generating positive contribu-
tion from dental offices, on average, within three months of opening. See
"Risk Factors -- Risks Associated with De Novo Office Development" and "Busi-
ness -- Expansion Program."
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
27
<PAGE>
opened by the Company between January 8, 1996 and July 15, 1996 generated Rev-
enue of $1.3 million during the six months ended June 30, 1997, and had con-
tribution from dental offices of $227,000 during this period, representing a
contribution margin of 17.5%.
At September 30, 1997, the Company's total assets of $15.1 million included
$8.9 million of identifiable intangible assets related to Management Agree-
ments. At that date, the Company's total shareholders' equity was $1.6 mil-
lion. The Company reviews the recorded amount of intangible assets and other
fixed assets for impairment for each Office whenever events or changes in cir-
cumstances indicate the carrying amount of the assets may not be recoverable.
If this review indicates that the carrying amount of the assets may not be re-
coverable as determined based on the undiscounted cash flows of each Office,
whether acquired or developed, 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 Office, relative market share and local market
competitive environment, current period and forecasted operating results, cash
flow levels of Offices and the impact on the net revenue earned by the Compa-
ny, and the legal and regulatory factors governing the practice of dentistry.
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 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 hygienists), dental supplies,
dental laboratory fees, occupancy costs, advertising and marketing, deprecia-
tion and amortization and general and administrative (including office sup-
plies, equipment leases, management information systems and other expenses re-
lated to dental practice operations). The Company also incurs personnel and
administrative expenses in connection with maintaining a corporate function
that provides management, administrative, marketing, development and profes-
sional services to the Offices.
Under the Management Agreements, the Company manages the business and mar-
keting aspects of the Offices, including (i) providing capital, (ii) designing
and implementing marketing programs, (iii) negotiating on behalf of the P.C.s
for the purchase of supplies, (iv) providing a patient scheduling system, (v)
staffing, (vi) recruiting, (vii) training of non-dental personnel, (viii)
billing and collecting patient fees, (ix) arranging for certain legal and ac-
counting services, and (x) negotiating on behalf of the P.C.s with managed
care organizations. The P.C. is responsible for, among other things, (i) em-
ploying and supervising all dentists and dental hygienists, (ii) complying
with all laws, rules and regulations relating to dentists and dental hygien-
ists, (iii) maintaining proper patient records, and (iv) cooperating in the
obtaining of professional 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. Adjusted Gross Center Revenue is comprised of all
fees and charges booked each month by or on behalf of the P.C. as a result of
dental services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do
not generate a collectible fee. The Company's costs include all direct and in-
direct costs, overhead and expenses relating to the Company's provision of
management services at each Office under a Management Agreement, including (i)
salaries, benefits and other direct costs of employees of the Company that
work at the Office, including dental assistants, (ii) direct costs of all em-
ployees or consultants of the Company who provide services to or in connection
with the Office, (iii) utilities, janitorial, laboratory, supplies, advertis-
ing and other expenses incurred by the Company in carrying out its obligations
under the Management Agreement, (iv) depreciation expense associated with the
P.C.'s assets and the assets of the Company used at the Office, and the amor-
tization of intangible asset value as a result of any acquisition or merger of
another dental practice relating to the Office, (v) interest expense on in-
debtedness incurred by the Company to finance any of its obligations under the
Management Agreement, (vi) malpractice insurance expenses, lease expenses and
dentist recruitment expenses, (vii) personal property and other taxes assessed
against the Company's or the P.C.'s assets used in connection with the opera-
tion of the Office,
28
<PAGE>
(viii) out-of-pocket expenses of the Company's personnel related to mergers or
acquisitions involving the P.C., (ix) corporate overhead charges or any other
expenses of Company including the P.C.'s pro rata share of the expenses of the
accounting and computer services provided by the Company, and (x) a collection
reserve in the amount of 5.0% of Adjusted Gross Center Revenue. As a result,
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. This enables the
Company to manage the profitability of the Offices. 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 Company.
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 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 in-
crease facility utilization and dentist productivity. From the year ended De-
cember 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 51.6% of the Company's Revenue while in the six months
ended June 30, 1997 fee-for-service Revenue increased to 53.3% 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.
29
<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. The information that follows should be read in conjunc-
tion with the Consolidated Financial Statements and Notes thereto of the Com-
pany, as well as the pro forma consolidated financial information, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
INCEPTION TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 (1) 1996 1996 1997
------------ ------------ ----------- -----------
(UNAUDITED) (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 25.0 24.5
----- ----- ----- -----
Net revenues................ 67.0 73.8 75.0 75.5
Direct expenses:
Clinical salaries and
benefits................. 28.0 24.1 25.0 26.7
Dental supplies........... 9.5 10.7 6.4 6.6
Laboratory fees........... 6.3 6.7 6.5 7.0
Occupancy................. 4.4 4.3 4.6 6.3
Advertising and
marketing................ 7.7 3.8 3.2 2.5
Depreciation and
amortization............. 3.1 4.4 4.4 3.4
General and
administrative........... 9.5 9.2 10.6 5.5
----- ----- ----- -----
68.5 63.2 60.7 58.0
----- ----- ----- -----
Contribution from dental
offices.................... (1.5) 10.6 14.3 17.5
Corporate expenses --
General and
administrative........... 33.2 9.9 13.4 7.7
Acquisition Costs......... -- -- -- 2.2
Depreciation and
amortization............. 0.9 0.8 0.8 0.6
----- ----- ----- -----
Operating (loss) income..... (35.6) (0.1) 0.1 7.0
Interest expense (net)...... (0.2) (4.5) (3.6) (4.9)
----- ----- ----- -----
(Loss) income before income
taxes...................... (35.8) (4.6) (3.5) 2.1
Income taxes................ 0.0 0.0 -- 0.1
----- ----- ----- -----
Net (loss) income........... (35.8)% (4.6)% (3.5)% 2.0%
===== ===== ===== =====
</TABLE>
- --------
(1) The Company was formed on May 17, 1995, and had no substantial operations
until October 1, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER
30, 1996
Dental office revenue, net. Revenue increased from $4.6 million for the nine
months ended September 30, 1996 to $11.4 million in the comparable period in
1997, an increase of $6.8 million, or 149.6%. Thirteen practices acquired be-
tween May 30, 1996 and May 1, 1997 contributed $4.7 million of the increase,
including $2.7 million from the Family Dental Acquisition and $2.0 million
from the acquisition of six solo practices. The Gentle Dental Acquisition that
was completed on September 8, 1997 contributed $367,376 of the increase, and
two practices acquired August 29, 1997 and one de novo Office opened August
11, 1997 in Albuquerque contributed a total of $104,237 of the increase. A to-
tal of $1.2 million of the increase was attributable to five de novo Offices
opened by the Company between January 1996 and July 1996. These de novo Of-
fices contributed $820,460 to Revenue in the 1996 period and $2.0 million in
the 1997 period. Revenue at the four Offices that were in existence during
both periods contributed $422,750 of the increase, increasing from $2.0 mil-
lion in 1996 to $2.4 million in 1997.
30
<PAGE>
Amounts retained by dental offices. Amounts retained by dental offices in-
creased from $1.1 million for the first nine months of 1996 to $2.8 million
for the comparable period in 1997, an increase of $1.7 million or 144.4%. This
increase was due to the increased number of Offices and the corresponding ad-
ditional dentists and hygienists. As a percentage of Revenue, amounts retained
by dental offices decreased from 25.0% in 1996 to 24.5% 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 $1.1 million to $3.0 million for the nine months ended September 30, 1996
and 1997, respectively, an increase of $1.9 million or 166.8%. This increase
was due primarily to the increased number of Offices and the corresponding ad-
dition of non-dental personnel. As a percentage of Revenue, clinical salaries
and benefits increased from 25.0% in 1996 to 26.7% in 1997.
Dental supplies. Dental supplies increased from $290,617 for the nine months
ended September 30, 1996 to $751,759 for the comparable period in 1997, an in-
crease of $461,142 or 158.7%. This increase was due to the increased Revenue
generated at the Offices. As a percentage of Revenue, dental supplies in-
creased marginally from 6.4% in 1996 to 6.6% in 1997. This increase as a per-
centage of Revenue is due to the need for supplies associated with the initia-
tion of specialty services during the six months ended June 30, 1997 and the
Company's policy of expensing such supplies.
Laboratory fees. Laboratory fees increased from $298,310 in the first nine
months of 1996 to $793,640 for the comparable period in 1997, an increase of
$495,330 or 166.0%. This increase was due to the increased Revenue generated
at the Offices. As a percentage of Revenue, laboratory fees increased from
6.5% in 1996 to 7.0% in 1997.
Occupancy. Occupancy increased from $210,166 in the first nine months of
1996 to $718,660 in the comparable period in 1997, an increase of $508,494 or
241.9%. This increase was due to the increased number of Offices as well as
certain Offices which were only open for part of the nine months ended June
30, 1996. As a percentage of Revenue, occupancy expense increased from 4.6% in
1996 to 6.3% in 1997.
Advertising and marketing. Advertising and marketing increased from $145,383
for the nine months ended September 30, 1996 to $285,947 for the comparable
1997 period, an increase of $140,564 or 96.7%. This increase was primarily due
to increased advertising, including television, Yellow Pages and radio adver-
tising in the 1997 period. The Company's increased density in the Colorado
market enabled it cost effectively to increase its advertising expense. As a
percentage of Revenue, advertising and marketing decreased from 3.2% in 1996
to 2.5% in 1997.
Depreciation and amortization. Depreciation and amortization, which consists
of depreciation and amortization expense incurred at the Offices, increased
from $197,727 in the nine months ended September 30, 1996 to $391,891 in the
comparable 1997 period, an increase of $194,164 or 98.2%. This increase was
due to the increased number of Offices as well as certain Offices which were
only open for part of the nine months ended September 30, 1996. As a percent-
age of Revenue, depreciation and amortization decreased from 4.4% in 1996 to
3.4% in 1997.
General and administrative. General and administrative, which is attribut-
able to the Offices, increased from $484,854 in the nine months ended Septem-
ber 30, 1996 to $616,389 in the comparable period in 1997, an increase of
$131,535 or 27.1%. This increase was due to the increased number of Offices as
well as certain Offices which were only open for part of the nine months ended
September 30, 1996. Additionally, the Company expanded its corporate infra-
structure to manage the growth and some of these costs were passed on to the
Offices. As a percentage of Revenue, general and administrative expenses de-
creased from 10.6% in 1996 to 5.5% in 1997, and this decrease was due primar-
ily to necessary high start up costs relative to revenues at the de novo Of-
fices during 1996, such as office and computer supplies, insurance and the
cost of leased equipment.
31
<PAGE>
Contribution from dental offices. As a result of the above, contribution
from dental offices increased from $651,006 for the nine months ended Septem-
ber 30, 1996 to $2.0 million for the comparable period in 1997, an increase of
$1.3 million or 206.0%. As a percentage of Revenue, contribution from dental
offices increased from 14.3% in 1996 to 17.5% in 1997.
Corporate expenses -- general and administrative. Corporate expenses -- gen-
eral and administrative increased from $610,543 in the first nine months of
1996 to $874,824 in the comparable period in 1997, an increase of $264,281 or
43.3%. 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 13.4%
in 1996 to 7.7% in 1997.
Corporate expenses -- depreciation and amortization. Corporate expenses --
depreciation and amortization increased from $35,184 in the nine months ended
September 30, 1996 to $70,532 in the comparable period in 1997, an increase of
$35,348 or 100.5%. This increase was a result of the Company's expansion of
its corporate infrastructure, primarily investments in computer equipment to
manage future growth. As a percentage of Revenue, corporate expenses -- depre-
ciation and amortization decreased from 0.8% in 1996 to 0.6% in 1997.
Acquisition costs. During the nine months ended September 30, 1997, the Com-
pany incurred a one-time charge of $252,234 related to due diligence costs and
audit fees in connection with a potential acquisition of a group of dental
practices. As a result of its due diligence, the Company has determined not to
proceed with the acquisition at this time.
Operating income. As a result of the above, operating income increased from
$5,279 in the nine months ended September 30, 1996 to $794,182 in the compara-
ble period in 1997, an increase of $788,903. As a percentage of Revenue, oper-
ating income increased from 0.1% in 1996 to 7.0% in 1997.
Interest expense, net. Interest expense, net increased from $161,735 in the
first nine months of 1996 to $553,572 in the comparable 1997 period, an in-
crease of $391,837 or 242.3%. 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 3.6% in
1996 to 4.9% in 1997.
Net (loss) income. As a result of the above, net (loss) income increased
from a loss of ($156,456) in the first nine months of 1996 to $235,410 in the
comparable period in 1997, an increase of $391,866. 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 (3.5%) in 1996 to 2.0% 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.
32
<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.
33
<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 ($201,344) and $1.7 million for the nine months ended September 30, 1996
and 1997, respectively. Net cash provided by (used in) operations during these
periods, after adding back depreciation and amortization, consisted primarily
of increases in accounts payable and accrued expenses. In the nine months
ended September 30, 1997, net income contributed $235,410 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 $4.7 million and
$3.7 million in the nine months ended September 30, 1996 and 1997, respective-
ly. In the nine months ended September 30, 1996, $3.7 million was utilized for
acquisitions and $880,824 was invested in the purchase of additional property
and equipment, including $470,215 for the de novo Offices. In the nine months
ended September 30, 1997, $3.4 million was utilized for acquisitions and
$621,702 was invested in the purchase of additional property and equipment,
including $70,794 for a de novo Office. These capital expenditures were par-
tially offset by $200,058 of cash obtained from the acquisition of existing
dental offices. In 1996, $3.7 million was utilized for acquisitions and $1.0
million was invested in the purchase of additional property and equipment, in-
cluding $493,009 in the de novo Offices.
For the nine months ended September 30, 1996 and 1997, net cash provided by
financing activities was $4.0 million and $1.6 million, respectively. In the
nine months ended September 30, 1996, the cash provided was comprised of $5.0
million from the private sale of convertible subordinated debentures, par-
tially offset by $530,353 used for the repayment of the Credit Facility,
$152,193 for the payment of long term debt and $251,321 used for the payment
of subordinated debenture issuance and other financing costs. In the nine
months ended September 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 and proceeds of $2.0 million from a
term loan used to finance the Gentle Dental Acqusition. This was partially
offset by $466,442 for costs associated with the public offering, $179,130
used for the repayment of long term debt and $219,178 used to repurchase com-
mon stock. Net cash provided by financing activities in 1996 totaled $5.7 mil-
lion. This was comprised of $6.6 million from the private sale of convertible
subordinated debentures and $100,000 in net borrowings from the Credit Facili-
ty, 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 fi-
nancing 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.
34
<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 September 30, 1997, the Company had total outstanding borrowings of
$2.4 million under the Credit Facility. 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.
The Company currently has outstanding approximately $6.8 million in princi-
pal amount of 9.0% convertible debentures, which debentures will be converted
into 1,633,142 shares of Common Stock, effective upon the consummation of the
Offering, in connection with the Conversion of Debentures. The Company also
has outstanding a note in the principal amount of $1.4 million issued in con-
nection with the Gentle Dental Acquisition, which bears interest at 8.0%. The
Company plans to repay this note from the proceeds of the Offering. The Com-
pany also has outstanding indebtedness of approximately $400,000 represented
by notes issued in connection with various practice acquisitions, each of
which bears interest at 8.0%. The Company's current material commitments for
capital expenditures total approximately $860,000, consisting of approximately
$350,000 for the expansion of one Office and approximately $170,000 for each
of three planned de novo Office developments. The Company anticipates that
these capital expenditures will be funded by cash on hand, cash generated by
operations, or borrowings under the Company's Credit Facility. The Company's
accumulated deficit as of September 30, 1997 was approximately $260,123, and
the Company's working capital on that date was approximately $230,303.
The net proceeds from the Offering will enable the Company to repay out-
standing indebtedness under the Credit Facility and to repay the $1.4 million
note issued in connection with the Gentle Dental Acquisition. The Company be-
lieves that the remaining net proceeds from the Offering, together with cash
generated from operations and borrowings under its Credit Facility will be
sufficient to fund its anticipated working capital needs, capital expenditures
and future acquisitions for at least the next 12 months. In the event the Com-
pany is not able to successfully negotiate a new Credit Facility or identifies
and completes future 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 addi-
tional equity and debt securities, subject to market and other conditions.
There can be no assurance 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 -- Need for Additional Capital; Uncertainty
of Additional Financing."
35
<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
36
<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.
37
<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-ACQUISI-
TION 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
38
<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, in the
form of a bonus based upon the operating performance of the Office. Each man-
aging 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
39
<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>
40
<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
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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.
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<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. The Company negotiates the managed
care contracts on behalf of the P.C.s, but the P.C.s enter into the contracts
with the various managed care plans. Managed care relationships also provide
increased co-payment revenue, referrals of additional fee-for-service patients
and opportunities for dentists practicing at the Offices to educate patients
about the benefits of elective dental procedures that may not be covered 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 its experience with
capitated managed dental care contracts positions the Company well for an en-
vironment with increased managed 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.
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<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)............................... 51.6% 53.3%
Managed dental care
Capitation...................................... 20.4 20.4
Co-payment...................................... 28.0 26.3
----- -----
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 13.7% and
10.0% 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 13.4% and 11.3%, 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
the managing dentists for such Offices. The Company has entered into agree-
ments with each of the owners of the P.C.s operating Offices in New Mexico and
with the Company's President, Dr. Birner, as the owner of 25 P.C.s operating
Colorado Offices. These agreements provide that upon the death, disability,
incompetency or insolvency of the owner of the P.C., a loss of the owner's li-
cense 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 shares in the P.C. to a third-party
designated by the Company at nominal value. Each agreement with Dr. Birner
also permits the Company in its sole discretion to require Dr. Birner to
transfer his shares in the P.C. to another party designated by the Company.
These agreements also prohibit the dentist from transferring or pledging the
shares in the P.C.s owned by the dentists except to parties approved by the
Company who agree to be bound by the terms of the agreements. Upon a transfer
of the shares to another party, the dentist agrees to resign all positions
held as an officer or the director of the P.C.
Two of the five managing dentists who own P.C.s operating Offices in Colo-
rado have entered into stock purchase, pledge and security agreements with the
Company. Under these agreements, if certain events occur including the failure
of the dentist to perform his obligations under the employment agreement with
the P.C., the cessation of the dentist's employment with the P.C. for any rea-
son, the death or insolvency of the dentist or the dentist's causing the P.C.
to breach its obligations under the Management Agreement, then the Company may
cause the P.C. to redeem the dentist's ownership interest in the P.C. for an
agreed price which is not considered to be material by the Company. Two of the
three directors of these P.C.s are nominees of the Company and the dentists
have given Fred Birner irrevocable proxies to vote their shares in the P.C.s.
In two of the remaining three Colorado P.C.s owned by managing dentists, the
Company has a right of first refusal to purchase the shares owned by managing
dentists and the right to elect one-half of the directors and vote one-half of
the shares in such P.C.s. In the final Colorado P.C. owned by a managing den-
tist, the Company has its nominees serving as two of the three directors and
has an irrevocable proxy to vote the shares in the P.C. The Company can thus
cause the P.C. to redeem the shares pursuant to its employment agreement with
the dentist if the employment of the dentist by the P.C. ceases for any rea-
son.
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<PAGE>
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) negotiating on
behalf of the P.C.s for the purchase of supplies, (iv) providing a patient
scheduling system, (v) staffing, (vi) recruiting, (vii) training of non-dental
personnel, (viii) billing and collecting patient fees, (ix) arranging for cer-
tain legal and accounting services, and (x) negotiating on behalf of the P.C.s
with managed care organizations. 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) maintaining proper patient records, and (iv) cooperating in
the obtaining of professional 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. Adjusted Gross Center Revenue is comprised of all
fees and charges booked each month by or on behalf of the P.C. as a result of
dental services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do
not generate a collectible fee. The Company's costs include all direct and in-
direct costs, overhead and expenses relating to the Company's provision of
management services at the Offices under the Management Agreements, including
(i) salaries, benefits and other direct costs of employees of the Company that
work at the Office, including dental assistants, (ii) direct costs of all em-
ployees or consultants of the Company who provide services to or in connection
with the Office, (iii) utilities, janitorial, laboratory, supplies, advertis-
ing and other expenses incurred by the Company in carrying out its obligations
under the Management Agreement, (iv) depreciation expense associated with the
P.C.'s assets and the assets of the Company used at the Office, and the amor-
tization of intangible asset value as a result of any acquisition or merger of
another dental practice relating to the Office, (v) interest expense on in-
debtedness incurred by the Company to finance any of its obligations under the
Management Agreement, (vi) malpractice insurance expenses, lease expenses and
dentist recruitment expenses, (vii) personal property and other taxes assessed
against the Company's or the P.C.'s assets used in connection with the opera-
tion of the Office, (viii) out-of-pocket expenses of the Company's personnel
related to mergers or acquisitions involving the P.C., (ix) corporate overhead
charges or any other expenses of Company including the P.C.'s pro rata share
of the expenses of the accounting and computer services provided by the Compa-
ny, and (x) a collection reserve in the amount of 5.0% of Adjusted Gross Cen-
ter Revenue. As a result, substantially all costs associated with the provi-
sion 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.
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. However, the terms of the Management Agree-
ments are subject to change to comply with existing or new regulatory require-
ments or to enable the Company to compete more effectively. See "Risk Fac-
tors -- Dependence on Management Agreements, the P.C.s and Affiliated Den-
tists," "-- Potential Conflict of Interest of the Company's President Relating
to the P.C.s" and "Business -- Government 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
45
<PAGE>
two to seven days' notice. Some of the employment agreements for managing den-
tists who are also the shareholder of a P.C. have terms of 20 to 30 years and
are only terminable by the P.C. upon the occurrence of certain events. Upon
termination of employment of the managing dentists for any reason, the P.C.
has the right to redeem the shares of the P.C. held by the managing dentist.
Such agreements typically contain non-competition provisions for up to three
to five years following their termination within a specified geographic area,
usually a specified number of miles from the relevant Office, and restrict so-
licitation 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 situ-
ations. 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, including Valley Forge Dental Associ-
ates, Inc. Dentalco, Inc. and Dental Health Clinics of America. Companies with
dental practice management 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 otherwise 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 markets, it is likely to face competition from dental
practice management companies which already have established a strong business
presence in such locations.
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 Company or the
P.C.s operate will not change significantly in the future. The laws and regu-
lations of all states in which the Company operates impact the Company's oper-
ations 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 additional laws, regula-
tions 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 regulations. 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 reg-
ulations.
STATE REGULATION
The laws of many states, including Colorado and New Mexico, 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
46
<PAGE>
company or limited liability partnership. These laws typically prohibit, ei-
ther by specific provision or as a matter of general policy, non-dental enti-
ties, such as the Company, from practicing dentistry, from employing dentists
and, in certain circumstances, hygienists or dental assistants, or from other-
wise exercising control over the provision of dental services. Under the Man-
agement Agreements, the P.C.s control all clinical 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 physical 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 exercise of professional
judgment by the dentists who are employees or independent contractors of the
P.C.s.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist, to own or control dental equipment or offices used in a den-
tal practice. Some states allow 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 dentist. Some states, including New Mexico, require
all advertisements to be in the name of the dentist. A number of states, in-
cluding Colorado, also regulate the content of advertisements of dental serv-
ices. In addition, Colorado, New Mexico, and many other states impose limits
on the tasks that may be delegated by dentists to hygienists and dental assis-
tants. Some states require entities designated as "clinics" to be licensed,
and may define clinics to include dental practices that are owned or con-
trolled in whole or in part by non-dentists. These laws and their interpreta-
tions 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, including Colorado and New Mexico, prohibit
the submitting of false claims for dental services.
Many states, including Colorado and New Mexico, also prohibit "fee-split-
ting" by dentists with any party except other dentists in the same profes-
sional corporation or practice entity. In most cases, these laws have been
construed as applying to the practice of paying a portion of a fee to another
person for referring a patient or otherwise generating business, and not to
prohibit payment of reasonable compensation for facilities and services (other
than the generation of referrals), even if the payment is based on a percent-
age of the practice's revenues.
In addition, many states have laws prohibiting paying or receiving any remu-
neration, direct or indirect, that is intended to include referrals for health
care items or services, including dental items and services.
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. In Colorado and New Mexico, the
P.C.s currently only contract on a financial-risk basis with entities that are
licensed to engage in the business of insurance and thus are not subject to
the insurance laws of those states. 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.
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
47
<PAGE>
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 interpreta-
tions thereunder could have a material adverse effect on the Company's busi-
ness, 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.
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.
48
<PAGE>
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.
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.
49
<PAGE>
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 208, Denver, Colorado, in approximately 4,685 square feet occupied under
a lease which expires in September 1998, and the Company believes this facil-
ity is adequate for its current needs. The Company also leases real estate at
the location of each Office under leases ranging in term from month-to-month
to 10 years. The Company generally anticipates leasing and developing new Of-
fices in its current markets as well as in certain other geographic markets
rather than significantly expanding the size of its existing Offices.
As of October 31, 1997, the Company had 53 affiliated dentists and 54 affil-
iated 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 241 non-
dental employees.
50
<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 40 Chief Financial Officer, Secretary,
Treasurer and Director
James M. Ciccarelli 45 Director
Joseph D. Sansone 54 Director (effective upon consummation of the
Offering)
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 and Chief Executive Officer since the Company's inception in May
1995. From May 1992 to September 1995, he was employed as a Senior Vice Presi-
dent in the Corporate Finance Department at Cohig & Associates, Inc., an in-
vestment banking firm. From 1983 to February 1992, Mr. Birner held various po-
sitions with Hanifen, Imhoff, Inc., an investment banking firm, most recently
as Senior Vice President in the Corporate Finance Department. Mr. Birner re-
ceived his M.S. degree from Columbia University and his B.A. degree 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.
Joseph D. Sansone has been appointed as a director of the Company effective
upon consummation of the Offering. Mr. Sansone has served as President, Chief
Executive Officer and Chairman of the Board of Pediatric Services of America,
Inc. ("PSA") a publicly-traded, pediatric home health care provider, since
PSA's formation in 1989. Mr Sansone received his M.B.A. degree from Georgia
State University and his B.S. degree from Northeastern University.
51
<PAGE>
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. Ms. Bernardini received her M.B.A. degree from the University of Den-
ver and her B.S. degree from Metropolitan State College. She is a Certified
Public Accountant.
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.
BOARD OF DIRECTORS
The Board of Directors, which currently is composed of four members, but
which will consist of five members effective upon the consummation of the Of-
fering, is divided into three classes. One class stands for re-election at
each annual meeting of shareholders. The Board of Directors is classified into
one Class I director (James Ciccarelli), two Class II directors (Dennis Genty
and Joseph Sansone) and two Class III directors (Fred Birner and Mark Birner,
D.D.S.), whose terms will expire upon the election and qualification of direc-
tors at the annual meetings of shareholders held in 1998, 1999 and 2000, re-
spectively. At each annual meeting of shareholders, 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 Directors. Vacancies on the Board of Direc-
tors can only be filled by the vote of a majority of the directors left in of-
fice, 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."
The Board of Directors has established an Audit Committee effective upon the
consummation of the Offering consisting of James Ciccarelli and Joseph
Sansone, the two independent members of the Board of Directors. The Audit Com-
mittee will recommend the appointment of auditors 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
52
<PAGE>
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
consideration for his service as a director, Mr. Ciccarelli received a warrant
dated as of August 1, 1996, to purchase 41,265 shares of Common Stock of the
Company at an exercise price of $3.82 per share. This warrant expires on Au-
gust 1, 2001. Of the 41,265 shares underlying the warrant, 20,633 shares of
Common Stock became vested on August 1, 1997, and the remaining 20,632 shares
of Common Stock will become vested on August 1, 1998. If Mr. Ciccarelli re-
signs as a director of the Company prior to August 1, 1998, all shares under-
lying the warrant, other than those shares which have already vested, will be
forfeited. If Mr. Ciccarelli's service as a director is terminated by the Com-
pany prior to August 1, 1998, the shares of Common Stock underlying the war-
rant 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 confiden-
tiality provision relating to proprietary information of the Company. On July
15, 1997, the Board of Directors granted a second warrant to Mr. Ciccarelli as
consideration for serving on the Board of Directors, which warrant gave Mr.
Ciccarelli the right to purchase 18,340 shares of Common Stock at an exercise
price of $6.54 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 providing any further marketing services to the Company,
and to forfeit his right to acquire 16,506 of the 18,340 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
ANNUAL COMPENSATION 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 -- 64,190 (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 27,510 shares of Common Stock granted on February 14, 1996
pursuant to the Employee Plan, with an exercise price of $2.40 per share,
(ii) conversion of a warrant to purchase 27,510 shares of Common Stock
awarded on November 1, 1996, with an exercise price of $4.36 per share,
and (iii) conversion of a warrant to purchase 9,170 shares of Common Stock
awarded on June 30, 1997, with an exercise price of $6.00 per share.
53
<PAGE>
OPTION GRANTS
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1996 to the Named Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(#) (1) FISCAL YEAR (2) ($/SH) (3) DATE 5% 10%
- ---- -------------- --------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Frederic W.J. Birner.... 27,510 12.3% $2.40 2/14/03 $26,878 $62,638
</TABLE>
- --------
(1) Represents an option to purchase shares of Common Stock granted on Febru-
ary 14, 1996, pursuant to the Employee Plan.
(2) Based on an aggregate of 223,723 shares subject to options granted to em-
ployees pursuant to the Employee Plan during the fiscal year ended Decem-
ber 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 appreci-
ates 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 appre-
ciation are derived from the rules of the Securities and Exchange Commis-
sion and do not represent the Company's estimate or projection of the fu-
ture 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
December 31, 1996. The Named Executive Officer did not exercise any options
during 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........ -- 27,510 -- $50,894
</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 fair market value of the underlying securities at Decem-
ber 31, 1996 of $4.25 per share, as determined by the Company's Board of
Directors, and the exercise price.
EMPLOYEE STOCK OPTION PLAN
The Employee Plan was adopted by the Board of Directors effective as of Oc-
tober 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 917,000.
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 em-
ployees, directors and consultants of the Company and its subsidiaries, who
are responsible for the conduct and management of the Company's business or
who are involved in endeavors significant to the Company's success. The Em-
ployee Plan provides for the grant of
54
<PAGE>
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 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 directors (the "Commit-
tee"), 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 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 October 31, 1997, no shares of Common Stock had been issued upon the
exercise of options granted under the Employee Plan, options to purchase
306,721 shares of Common Stock at a weighted average exercise price of $5.65
were outstanding, and 610,279 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 641,900.
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.
55
<PAGE>
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 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 hygienist 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. Op-
tions granted to P.C.s terminate upon the earlier to occur of (i) the expira-
tion 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 employed 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 Committee may extend the ter-
mination 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 October 31, 1997, no shares of Common Stock had been issued upon the
exercise of options granted under the Dental Center Plan, options to purchase
149,303 shares of Common Stock at a weighted average exercise price of $5.12
were outstanding, and 492,597 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
56
<PAGE>
Incorporation does not eliminate or limit the liability of a director 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 its
shareholders; (ii) acts or omissions not in good faith or which involve inten-
tional misconduct or a knowing violation of law; (iii) acts specified in Sec-
tion 7-108-403 of the Colorado Business Corporation Act relating to any unlaw-
ful 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 October 31, 1997, the Company issued to (i) Fred Birner, the Chairman of
the Board and Chief Executive Officer of the Company, an option to purchase
12,000 shares of Common Stock, (ii) Mark Birner, D.D.S., the President and a
director of the Company, an option to purchase 12,000 shares of Common Stock,
and (iii) Dennis Genty, the Chief Financial Officer, Treasurer, Secretary and
a director of the Company, an option to purchase 12,000 shares of Common
Stock. Each of the options has an exercise price of $9.90 per share and ex-
pires in October 2002.
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 18,340 shares of Common
Stock of the Company, at an exercise price of $6.54 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 16,506 of the 18,340 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 9,170 shares of Common Stock, (ii) Mark Birner, D.D.S., the President
and a director of the Company, a warrant to purchase 9,170 shares of Common
Stock, and (iii) Dennis Genty, the Chief Financial Officer, Treasurer, Secre-
tary and a director of the Company, a warrant to purchase 9,170 shares of Com-
mon Stock. Each of the warrants has an exercise price of $6.00 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."
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<PAGE>
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 27,510 shares of Common Stock, (ii) Mark Birner, D.D.S., the Presi-
dent and a director of the Company, a warrant to purchase 27,510 shares of
Common Stock, and (iii) Dennis Genty, the Chief Financial Officer, Treasurer,
Secretary and a director of the Company, a warrant to purchase 27,510 shares
of Common Stock. Each of the warrants has an exercise price of $4.36 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 of Mr.
Ciccarelli's service as a director. Mr. Ciccarelli is to serve as director of
the Company until August 1, 1998, and, in consideration therefor, received a
warrant to purchase 41,265 shares of Common Stock of the Company, at an exer-
cise price of $3.82 per share, which warrant was dated as of August 1, 1996,
expires in August 2001, and contains certain vesting provisions. See "Manage-
ment -- 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 27,510 shares of Common Stock, (ii) Mark Birner, D.D.S., the Presi-
dent and a director of the Company, an option to purchase 26,099 shares of
Common Stock, and (iii) Dennis Genty, the Chief Financial Officer, Treasurer,
Secretary and a director of the Company, an option to purchase 16,930 shares
of Common Stock. Each of the options has an exercise price of $2.40 per share
and expires in February 2003.
On May 17, 1995, the Company issued (i) 761,751 shares of Common Stock to
Fred Birner, as a founder of the Company, at a purchase price per share of
$0.01, (ii) 722,687 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) 468,770
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's President, Mark Birner, D.D.S., is the sole shareholder of 25
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. All of the P.C.s owned
by Dr. Birner have entered into Management Agreements on substantially the
same terms as the Management Agreements with the P.C.s which are owned by den-
tists who are not employees of the Company. Dr. Birner has also entered into
agreements with the Company for each P.C. owned by him pursuant to which the
Company may require him to sell his interest in the P.C. to a third party des-
ignated by the Company for nominal value upon the occurrence of certain
events. See "Business - Affiliation Model - Relationships with P.C.s." Dr.
Birner's ownership of these P.C.s and his family relationships could result in
potential conflicts of interest in certain matters, including but not limited
to, matters related to the Management Agreements. The Company will require
that any transactions with Dr. Birner which relate to his ownership of the
stock of a P.C. (other than in connection with the acquisition of a new prac-
tice) or with any P.C. of which he is the sole shareholder be approved by a
majority of the members of its Board of Directors other than Fred Birner and
Dr. Birner.
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.
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<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).................... 825,941 25.3% -- 825,941 12.9%
Mark A. Birner, D.D.S.
(4).................... 785,466 24.1 -- 785,466 12.2
Dennis N. Genty (5)..... 522,380 16.1 -- 522,380 8.1
James M. Ciccarelli
(6).................... 22,467 * -- 22,467 *
Joseph D. Sansone(7).... -- * -- -- *
James M. Gerken (8)..... 247,259 7.6 -- 247,259 3.9
Lee Schlessman (9)...... 578,516 15.3 42,201 536,315 8.4
Susan M. Duncan (10).... 225,749 6.6 81,198 144,551 2.3
All executive officers
and directors
as a group (5 persons)
(11)................... 2,156,254 63.4 -- 2,156,254 32.8
<CAPTION>
OTHER SELLING
SHAREHOLDERS
- -------------
<S> <C> <C> <C> <C> <C>
W. Frederic Birner, M.D.
(12)................... 47,476 1.5 2,095 45,381 *
Caribou Bridge Fund LLC
(12)................... 9,162 * 9,162 -- *
William F. Eha (12)..... 25,927 * 1,834 24,093 *
Alice L. Fundingsland
Co. (12)............... 12,844 * 7,132 5,712 *
Gorge Investment LLC
(12)................... 25,927 * 8,489 17,438 *
James & Nancy Grosfeld
(12)................... 65,445 2.0 25,472 39,973 *
Jon B. Kruljac (12)..... 18,199 * 4,585 13,614 *
Jonathan C. Lorenz
(12)................... 19,382 * 6,544 12,838 *
William P. McKinnell,
Jr. (12)............... 19,382 * 4,106 15,276 *
Merion Partners, L.P.
(12)................... 91,121 2.8 24,759 66,362 1.0
James C. Pendergast
(12)................... 12,963 * 2,547 10,416 *
Michael J. Quigley
(12)................... 51,854 1.6 10,087 41,767 *
W. Gerald Rainer, M.D.
(12)................... 25,927 * 1,834 24,093 *
Rosemary Reilly (12).... 77,530 2.4 4,585 72,945 1.1
Rupinder S. Sidhu
(12)(13)............... 168,651 5.1 10,087 158,564 2.5
Western Growth Capital
BDM Holdings LLC (12).. 39,267 1.2 19,467 19,800 *
</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
59
<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 3,196,035 shares of Common Stock out-
standing before the Offering and 6,362,993 shares of Common Stock out-
standing after the Offering.
(3) Includes 27,510 shares of Common Stock that are issuable upon exercise of
an option having an exercise price of $2.40 per share, 27,510 shares of
Common Stock that are issuable upon exercise of a warrant having an exer-
cise price of $4.36 per share, and 9,170 shares of Common Stock that are
issuable upon exercise of a warrant having an exercise price of $6.00 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
755,941 shares of Common Stock following the Offering.
(4) Includes 26,099 shares of Common Stock that are issuable upon exercise of
an option having an exercise price of $2.40 per share, 27,510 shares of
Common Stock that are issuable upon exercise of a warrant having an exer-
cise price of $4.36 per share, and 9,170 shares of Common Stock that are
issuable upon exercise of a warrant having an exercise price of $6.00 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
715,466 shares of Common Stock following the Offering.
(5) Includes 16,930 shares of Common Stock issuable upon exercise of an op-
tion having an exercise price of $2.40 per share, 27,510 shares of Common
Stock issuable upon exercise of a warrant having an exercise price of
$4.36 per share, and 9,170 shares of Common Stock issuable upon exercise
of a warrant having an exercise price of $6.00 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 484,380 shares of Common
Stock following the Offering.
(6) Includes 20,633 shares of Common Stock issuable upon exercise of a war-
rant having an exercise price of $3.82 per share, that are vested or
which will vest within 60 days of the date of this Prospectus, and 1,834
shares of Common Stock issuable upon exercise of a fully vested warrant
having an exercise price of $6.54 per share. Does not include 20,632
shares of Common Stock issuable upon exercise of a warrant having an ex-
ercise price of $3.82 per share that will vest more than 60 days after
the date of this Prospectus.
(7) Mr. Sansone has been elected to the Company's Board effective upon con-
summation of the Offering. In connection with Mr. Sansone's election to
the Board, the Company has granted to Mr. Sansone, effective upon consum-
mation of the Offering, an option to purchase 10,000 shares of Common
Stock, which option shall have an exercise price equal to the initial
public offering price, and shall vest over a three year period.
(8) Includes 78,534 shares of Common Stock issuable upon conversion of deben-
tures held by Mr. Gerken that will be converted upon consummation of the
Offering.
(9) Includes 280,128 shares issuable upon conversion of debentures held by
Mr. Schlessman. Also includes 298,388 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.
(10) Includes 216,575 shares issuable upon the exercise of debentures held by
Ms. Duncan. Also includes 9,174 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.
(11) Includes 203,046 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 20,632 shares of Common Stock issuable upon exercise of
a warrant that will vest more than 60 days after the date of this Pro-
spectus.
(12) 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.--13,089; Caribou Bridge Fund LLC--
9,162; William F. Eha--13,089; James and Alice L. Fundingsland Co.--
12,844; Gorge Investment LLC--13,089; James & Nancy Grosfeld--65,445; Jon
B. Kruljac--11,780; Jonathan C. Lorenz--6,544; William P.
McKinnell, Jr.--6,544; Merion Partners, L.P.--65,445; C. Pendergast--
6,544; Michael J. Quigley--26,178; W. Gerald Rainer--13,089; Rosemary
Reilly--26,178; Rupinder S. Sidhu--26,178; and Western Growth Capital BDM
Holdings LLC--39,267.
(13) Includes 91,121 shares owned by Merion Partners, L.P. Mr. Sidhu is the
President of the corporate general partner of Merion Partners, L.P. Mr.
Sidhu disclaims beneficial ownership of all shares owned by Merion
Partners, L.P.
60
<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 6,362,993 shares will be issued and outstanding, and 10,000,000 shares
of undesignated preferred stock, without par value (the "Preferred Stock"),
issuable in one or more series by the Board, of which no shares are issued and
outstanding. As of October 31, 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 October 31, 1997, there were warrants outstanding to purchase an ag-
gregate of 381,040 shares of Common Stock at exercise prices ranging from
$1.96 to $6.54 per share with a weighted average exercise price
61
<PAGE>
of approximately $3.81 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 220,199 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 220,199 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 October 31, 1997, there was an aggregate $6,780,000 principal amount
of 9.0% subordinated convertible debentures (the "Debentures") outstanding
that will convert into 1,633,142 shares of Common Stock of the Company. The
Debentures are subordinated unsecured obligations of the Company, bearing in-
terest at the rate of 9% annually. The Debentures were issued under two Inden-
tures (the "Indentures") between the Company and Colorado National Bank (the
"Trustee").
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 $5.45 and $3.82 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 5.0% 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, 20.0% are to be redeemed on May 15,
1999, another 20.0% on May 15, 2000 and the balance at maturity. With respect
to the December Debentures, 20.0% are to be redeemed on December 27, 1999, an-
other 20.0% 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 appropriate 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 two-thirds of the principal amount of the outstanding Deben-
tures. The holders of a majority in principal amount of the Debentures then
outstanding may waive compliance in a particular interest by the Company with
any provision of the Indenture or the Debentures without notice to any holder
of the Debentures. Without the consent of the holder of each Debenture af-
fected thereby, however, an amendment, supplement or waiver may not (i) reduce
the amount of the Debentures whose holders must consent to an amendment, sup-
plement or waiver; (ii) reduce the rate of or change the time of payment of
interest 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
Debenture 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 de-
fault or rights of holders to receive payments; (vii) modify the subordination
provisions 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 9.0% interest
rate payable on the Debentures, and giving such holders the ability to sell
certain shares of Common Stock in the Offering. All
63
<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 220,199 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 70.0%
of the Registrable Securities then outstanding are also entitled to request
that the Company register the Registrable Securities then outstanding ("Demand
Registration"). The only cost and expenses to be borne by the Company in con-
nection with the Demand Registration are the costs and expenses that would
have otherwise been incurred by the Company if the holders of the Registrable
Securities 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,
64
<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 80.0% vote of
the shareholders to amend certain provisions of the Amended and Restated Arti-
cles of Incorporation. These provisions could discourage potential takeover
attempts, 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 6,362,993
shares of Common Stock outstanding (6,632,993 shares if the Underwriters'
over-allotment option is exercised in full), of which the 1,533,816 shares of-
fered hereby by the Company and the 266,184 shares offered hereby by the Sell-
ing Shareholders will be freely tradeable without restriction or registration
under the Securities Act of 1933, as amended, (the "Securities Act"), unless
purchased by "affiliates" of the Company as that term is defined under the Se-
curities Act and the regulations promulgated thereunder. The remaining
4,832,993 shares of Common Stock are "restricted securities" as that term is
defined by Rule 144 promulgated under the Securities Act. Of such shares, ex-
cept as otherwise provided below, approximately 4,314,007 shares (including
1,139,208 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. An additional 381,040 shares will be available for issuance upon the ex-
ercise of outstanding warrants. The Company has granted certain piggyback and
demand registration rights to the holders of warrants to purchase 220,199
shares of the Company's Common Stock. An additional 456,024 shares are avail-
able for issuance upon the exercise of options which have been granted pursu-
ant to the Employee Plan and the Dental Center Plan, and an additional
1,102,876 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, 227,750 shares issuable in connection with the Conver-
sion of Debentures will become eligible for sale in the public market under
Rule 144 in December 1997. All
65
<PAGE>
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 aggre-
gate 4,107,457 shares of Common Stock, have agreed with the Underwriters that
they will not, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, 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 exchangeable 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 Se-
curities, Inc., on behalf of the Underwriters (the "Lock-up"). 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 a Lock-up
Agreement. Upon the expiration of the Lock-up, these 4,107,457 shares will be-
come 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 Common Stock," "Shares Eligible for Future Sale," and "Under-
writing."
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.
66
<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........................................................... 1,800,000
=========
</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 80,000 and 190,000 additional shares of Common Stock, respectively, at
the initial public offering price, less underwriting discounts, as set forth
on the cover page of this Prospectus. The Underwriters may exercise such op-
tion 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 ex-
ercised, each of the Underwriters will be committed, subject to certain condi-
tions, 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 1,800,000 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 4,107,457 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.
67
<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 270,000 shares of Common Stock, by
exercising 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.
68
<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.
69
<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, June 30,
1997 and September 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, the
six months ended June 30, 1996 and 1997 and the three months ended
September 30, 1996 and 1997............................................ F-4
Consolidated Statements of Shareholders' Equity for the period from
inception (May 17, 1995) to December 31, 1995, the year ended December
31, 1996, the six months ended June 30, 1997 and the three months ended
September 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, the
six months ended June 30, 1996 and 1997 and the three months ended
September 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, the six months ended June 30, 1996 and 1997 the three
months ended September 30, 1996, and the period from July 1, 1997 to
September 8, 1997...................................................... F-25
Combined Statements of Shareholder's and Partners' Equity for years
ended December 31, 1994, 1995 and 1996, the six months ended June 30,
1997 and the period from July 1, 1997 to September 8, 1997............. F-26
Combined Statements of Cash Flows for years ended December 31, 1994,
1995 and 1996, the six months ended June 30, 1996 and 1997, the three
months ended September 30, 1996, and the period from July 1, 1997 to
September 8, 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,
September 8, 1997,
(except with respect
to the matters in
Notes 1 and 8 as to
which the dates are
October 20, 1997,
and November 6,
1997, respectively).
F-2
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
---------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.. $1,464,544 $1,797,552 $ 1,790,117 $ 1,322,874
Accounts receivable, net of
allowances of
approximately $2,400,
$26,200, $30,300, and
$33,400, respectively, for
uncollectible accounts.... 77,960 848,851 980,207 1,252,264
Notes receivable -- related
parties................... -- 30,196 30,676 30,381
Prepaid expenses........... 35,803 179,727 206,424 325,541
Deferred offering costs.... -- -- -- 466,442
---------- ---------- ----------- -----------
Total current assets..... 1,578,307 2,856,326 3,007,424 3,397,502
---------- ---------- ----------- -----------
Property and equipment, net
of accumulated
depreciation and
amortization of $11,004,
$276,971, $500,913, and
$571,255, respectively.... 266,284 1,809,775 2,010,461 2,365,484
OTHER NONCURRENT ASSETS:
Intangible assets, net of
accumulated amortization
of $6,629, $115,819,
$216,535 and $276,790..... 770,382 4,336,759 5,052,479 8,961,625
Deferred charges and other
assets.................... 293,510 441,603 477,214 388,477
Notes receivable -- related
parties, net of current
portion................... -- 108,355 11,324 9,705
---------- ---------- ----------- -----------
Total assets............. $2,908,483 $9,552,818 $10,558,902 $15,122,793
========== ========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and
accrued expenses.......... $ 341,794 $ 903,235 $ 1,352,062 $ 2,513,908
Current maturities of notes
payable................... 530,353 94,785 99,973 609,161
Current maturities of
capital lease
obligations............... 8,532 41,500 44,029 44,130
---------- ---------- ----------- -----------
Total current
liabilities............. 880,679 1,039,520 1,496,064 3,167,199
LONG TERM LIABILITIES:
Deferred income taxes...... -- -- 5,200 5,200
Notes payable.............. -- 208,215 611,720 3,546,470
Convertible subordinated
debentures................ -- 6,555,000 6,780,000 6,780,000
Capital lease obligations,
net of current
maturities................ 23,400 65,957 45,441 34,388
---------- ---------- ----------- -----------
Total liabilities........ 904,079 7,868,692 8,938,425 13,533,257
Commitments and
Contingencies (Note 10)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par
value, 10,000,000 shares
authorized; none
outstanding............... -- -- -- --
Common Stock, no par value,
20,000,000 shares
authorized; 3,294,620,
3,299,205, 3,161,655 and
3,196,035 shares issued
and outstanding at
December 31, 1995 and
1996, at June 30, 1997 and
September 30, 1997,
respectively.............. 2,164,659 2,179,659 1,849,659 1,849,659
Accumulated deficit........ (160,255) (495,533) (229,182) (260,123)
---------- ---------- ----------- -----------
Total shareholders'
equity.................. 2,004,404 1,684,126 1,620,477 1,589,536
---------- ---------- ----------- -----------
Total liabilities and
shareholders' equity.... $2,908,483 $9,552,818 $10,558,902 $15,122,793
========== ========== =========== ===========
</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 SIX MONTHS ENDED JUNE THREE MONTHS ENDED
(MAY 17, 1995) YEAR ENDED 30, SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, ----------------------- ----------------------
1995 1996 1996 1997 1996 1997
--------------- ------------ ----------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Dental office revenue,
net.................... $ 447,995 $7,283,978 $2,121,537 $6,843,689 $2,433,571 $4,526,179
Less -- amounts retained
by dental offices...... 148,035 1,910,749 588,555 1,616,420 551,515 1,169,989
--------- ---------- ---------- ---------- ---------- ----------
Net revenue............. 299,960 5,373,229 1,532,982 5,227,269 1,882,056 3,356,190
DIRECT EXPENSES:
Clinical salaries and
benefits............... 125,371 1,749,985 494,456 1,696,082 642,519 1,337,319
Dental supplies......... 42,392 777,769 145,559 512,366 145,058 239,393
Laboratory fees......... 28,262 483,140 142,658 488,203 155,652 305,437
Occupancy............... 19,532 315,423 138,257 431,609 107,266 287,051
Advertising and
marketing.............. 34,533 280,186 41,577 217,130 103,806 68,817
Depreciation and
amortization........... 13,745 323,401 83,551 285,409 114,176 106,482
General and
administrative......... 42,641 672,759 198,066 352,675 251,431 263,714
--------- ---------- ---------- ---------- ---------- ----------
306,476 4,602,663 1,244,124 3,983,474 1,519,908 2,608,213
--------- ---------- ---------- ---------- ---------- ----------
Contribution from dental
offices................ (6,516) 770,566 288,858 1,243,795 362,148 747,977
Corporate expenses--
General and
administrative....... 148,825 721,313 312,808 588,071 297,735 286,753
Acquisition costs..... -- -- -- -- -- 252,234
Depreciation and
amortization......... 3,888 57,941 24,698 46,416 10,486 24,116
--------- ---------- ---------- ---------- ---------- ----------
Operating (loss)
income................. (159,229) (8,688) (48,648) 609,308 53,927 184,874
Interest expense, net... (1,026) (326,590) (47,703) (337,757) (114,032) (215,815)
--------- ---------- ---------- ---------- ---------- ----------
(Loss) income before
income taxes........... (160,255) (335,278) (96,351) 271,551 (60,105) (30,941)
Income taxes............ -- -- -- 5,200 -- --
--------- ---------- ---------- ---------- ---------- ----------
Net (loss) income....... $(160,255) $ (335,278) $ (96,351) $ 266,351 (60,105) (30,941)
========= ========== ========== ========== ========== ==========
Net (loss) income per
share.................. $ (.06) $ (.10) $ (.03) $ .07 $ (.02) $ (.01)
========= ========== ========== ========== ========== ==========
Weighted average number
of common and common
equivalent shares
outstanding............ 2,786,478 3,425,668 3,423,745 3,621,550 3,426,751 3,307,974
</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........... 2,017,400 $ 22,000 $ -- $ 22,000
Contribution of capital for
dental offices.............. -- 52,010 -- 52,010
Issuance of Common Stock
pursuant to private
placement................... 255,407 278,524 -- 278,524
Issuance of Common Stock
pursuant to private
placement................... 829,243 1,627,740 -- 1,627,740
Private placement costs...... -- (201,615) -- (201,615)
Issuance of Common Stock for
dental office acquisition... 155,890 306,000 -- 306,000
Issuance of Common Stock..... 36,680 80,000 -- 80,000
Net loss..................... -- -- (160,255) (160,255)
--------- ---------- --------- ----------
Balances, December 31, 1995.. 3,294,620 2,164,659 (160,255) 2,004,404
Issuance of Common Stock for
dental office acquisition... 4,585 15,000 -- 15,000
Net loss..................... (335,278) (335,278)
--------- ---------- --------- ----------
Balances, December 31, 1996.. 3,299,205 2,179,659 (495,533) 1,684,126
Purchase and retirement of
Common Stock................ (137,550) (330,000) -- (330,000)
Net income................... -- -- 266,351 266,351
--------- ---------- --------- ----------
Balances, June 30, 1997...... 3,161,655 1,849,659 (229,182) 1,620,477
Exercise of warrants......... 34,380 -- -- --
Net loss..................... -- -- (30,941) (30,941)
--------- ---------- --------- ----------
Balances, September 30, 1997
(unaudited)................. 3,196,035 $1,849,659 $(260,123) $1,589,536
========= ========== ========= ==========
</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 SIX MONTHS ENDED THREE MONTHS ENDED
(MAY 17, 1995) YEAR ENDED JUNE 30, SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, ------------------------ ---------------------
1995 1996 1996 1997 1996 1997
--------------- ------------ ----------- ----------- --------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income....... $ (160,255) $ (335,278) $ (96,351) $ 266,351 $ (60,105) $ (30,941)
Adjustments to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities
Depreciation and
amortization........... 17,633 381,342 108,249 331,825 124,663 130,597
Provision for bad
debts.................. 2,400 23,800 11,900 4,100 5,950 3,036
Amortization of
debenture issuance
costs.................. -- 30,261 -- 40,896 16,808 23,391
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) (286,769) (115,173)
Prepaid expenses........ (29,953) (143,924) (42,656) (26,697) (94,991) (93,626)
Accounts payable and
accrued expenses....... 252,570 54,121 102,720 448,827 124,569 796,583
Other noncurrent
assets................. (40,469) -- -- -- -- --
---------- ----------- ----------- ----------- --------- ----------
Net cash provided by
(used in) operating
activities........... 25,703 (545,583) (31,469) 955,046 (169,875) 713,867
---------- ----------- ----------- ----------- --------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Notes receivable --
related parties....... -- (138,551) (138,551) 96,551 22,186 1,914
Capital expenditures.... (99,418) (486,379) (278,941) (235,021) (131,668) (315,887)
Development of new
dental offices......... (244,741) (493,009) (445,213) (59,632) (25,002) (11,162)
Cash acquired from
existing dental
offices................ 102,132 -- -- -- -- 200,058
Acquisition of dental
offices................ (106,134) (3,677,469) (3,284,018) (903,210) (388,638) (2,510,577)
---------- ----------- ----------- ----------- --------- ----------
Net cash used in
investing
activities........... (348,161) (4,795,408) (4,146,723) (1,101,312) (523,122) (2,635,654)
---------- ----------- ----------- ----------- --------- ----------
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 -- --
Proceeds from notes
payable................ -- -- -- -- -- 2,000,000
Repayment of long term
debt................... (19,647) (579,285) -- (100,116) (152,193) (79,014)
Payment of debenture
issuance and other
financing costs........ -- (401,716) (250,837) (16,875) (484) --
Payment of public
offering costs......... -- -- -- -- -- (466,442)
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 (152,677) 1,454,544
---------- ----------- ----------- ----------- --------- ----------
NET INCREASE (DECREASE)
IN CASH................ 1,464,544 333,008 10,618 (7,435) (845,674) (467,243)
CASH AND CASH
EQUIVALENTS,
Beginning of period.... -- 1,464,544 1,464,544 1,797,552 1,475,162 1,790,117
---------- ----------- ----------- ----------- --------- ----------
CASH AND CASH
EQUIVALENTS,
End of period.......... $1,464,544 $ 1,797,552 $ 1,475,162 $ 1,790,117 $ 629,488 $1,322,874
========== =========== =========== =========== ========= ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for interest.. $ 14,601 $ 243,530 $ 27,650 $ 331,101 $ 35,671 $ 10,744
---------- ----------- ----------- ----------- --------- ----------
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 -- 48,767 --
Common Stock issued
for --
Acquisition of dental
offices................ 306,000 15,000 -- -- 15,000 --
Notes payable for --
Acquisition of dental
offices................ 550,000 90,000 -- 130,000 90,000 1,512,000
Purchase and retirement
of Common Stock....... -- -- -- 110,822 -- --
Liabilities assumed
incurred for
acquisitions --
Notes payable.......... -- 130,000 -- -- 130,000 --
Accounts payable and
accrued liabilities... 89,224 507,320 475,084 -- 32,236 365,263
Accounts receivable
acquired through
acquisitions........... 91,783 238,786 218,786 20,000 20,000 159,920
Other assets acquired
through acquisitions... -- -- -- -- -- 25,491
</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 PERIODS)
(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, and Septem-
ber 30, 1997 the Company managed 18, 22 and 34 dental practices (collectively
referred to as the "Offices"), respectively. Birner provides management serv-
ices, which are designed to improve the efficiency and profitability of the
dental practices. These Offices are organized as professional corporations and
Birner provides its management 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 2,017,400 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 were acquired in August 1997 and nine Offices were
acquired in September 1997. 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 additional man-
agement and other employees to accommodate expanded operations.
On October 20, 1997, the Company's shareholders approved a .917-for-one re-
verse stock split. The Company's financial statements have been retroactively
adjusted for all periods presented to reflect this transaction.
(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 the control of the Company. All intercompany accounts and transactions
have been eliminated in the consolidation.
Because the Offices are treated as consolidated subsidiaries, the accompany-
ing statements of operations reflect net amounts billed to patients as ad-
justed gross revenue and reflect the physicians' and hygienists' compensation
as amounts retained by the Offices to arrive at net revenue. Direct expenses
consist of all the expenses incurred in operating the Offices and paid by the
Company. 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
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 PERIODS)
(2) Significant Accounting Policies--Continued
the practice. The accompanying consolidated financial statements are presented
without regard to where the costs are incurred since under the management and
other agreements the Company believes it has perpetual and unilateral control
over the assets and operations of substantially all of the 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 ex-
penses and the accounting for business combinations. The Company is unable to
predict the impact, if any, that this review may have on the Company's acqui-
sition strategy, allocation of purchase price related to acquisitions, and am-
ortization 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 state-
ments prepared in accordance with generally accepted accounting principles.
All adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial condition at September 30, 1997, and the results
of operations for the six months ended June 30, 1996, and the three months
ended September 30, 1996 and 1997 have been included in the accompanying unau-
dited consolidated financial statements.
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 un-
settled matters that exist to management's knowledge concerning third-party
reimbursements.
During 1996 and for the six months ended June 30, 1997, 20% 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 pay-
ment for each covered plan member for a specific schedule of services regard-
less of the quantity or cost of services provided by the Offices. The Offices
may receive a co-pay from the patient for each service provided.
During the year ended December 31, 1996, approximately 13.7% and 10.0% of
the Company's gross revenue came from Prudential Dental Maintenance Organiza-
tion, Inc. ("Prudential") and PacifiCare, respectively. During the six-month
period ended June 30, 1997, Prudential and PacifiCare were responsible for
13.4% and 11.3%, respectively, of the Company's gross revenue.
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 PERIODS)
(2) Significant Accounting Policies--Continued
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
Company assumes responsibility for the management of all aspects of the Of-
fices' business (other than the provision of dental services) including per-
sonnel recruitment 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 income levels would be the same as those reported even if the Com-
pany employed all of the dentists and hygienists. The Company is obligated to
pay all operating expenses incurred in connection with managing the Offices,
including compensation for personnel other than dentists and hygienists, den-
tal supplies, dental laboratory fees, occupancy costs, equipment leases, man-
agement information 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, 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 compensation 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.
Contribution From Dental Offices
The "contribution from dental offices" represents the excess of net revenue
from the operations of the offices over direct expenses associated with oper-
ating the Offices. The revenue and direct expense amounts relate exclusively
to business activities associated with the Offices. The contribution from den-
tal offices provides an indication of the level of earnings generated from the
operation of the Offices to cover corporate expenses, interest expense charges
and income taxes.
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.
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 PERIODS)
(2) Significant Accounting Policies -- Continued
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.
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 Offices acquired over the remaining amortiza-
tion 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 competitive en-
vironment, 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.
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 PERIODS)
(2) Significant Accounting Policies--Continued
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 reported net (loss) income per share for 1995, 1996 and
the six and three-month periods ended June 30, 1997 and September 30, 1997.
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. 83, common and common equivalent shares issued during the twelve
months immediately 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 of $11 as if they were out-
standing for all periods. Common Stock equivalents, excluding those issued
within twelve months immediately preceding the Company's initial public offer-
ing filing date, are excluded for loss periods because their inclusion would
be anti-dilutive.
(3) Acquisitions
During 1995, 1996 and 1997, the Company acquired various dental practices.
In connection with each Office acquisition, the Company entered into contrac-
tual arrangements, including Management Agreements which have a term of 40
years. Pursuant to these contractual arrangements the Company manages all as-
pects of the Offices, other than the provision of dental services, and be-
lieves it has perpetual and unilateral control over the assets and business
operations of the Offices. Accordingly, acquisitions are considered business
combinations under APB #16.
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.
At various dates between July 3, 1996 and September 17, 1996 the Company ac-
quired all the assets of four dental practices for a total purchase price of
$470,000. In addition, in August 1996, the Company acquired the operating as-
sets in a Colorado practice ("East Cornell") and obtained certain rights to
manage the practice. These four 1996 acquisitions and the East Cornell acqui-
sition are collectively referred to as the "Additional 1996 Acquisitions."
In the period January 1, 1997 through June 30, 1997, the Company acquired
all the assets of three dental practices for a total purchase price of
$645,000, at various dates from January 28, 1997 through March 25, 1997. All
the assets in another Colorado practice ("Yale") and certain rights to manage
the practice were acquired in April 1997. The three 1997 acquisitions and the
Yale acquisition are collectively referred to as the "Early 1997 Acquisi-
tions."
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 PERIODS)
(3) Acquisitions -- Continued
The Company acquired two unrelated New Mexico dental practices for approxi-
mately $457,500 in August 1997 (the "Late 1997 Acquisitions").
On September 8, 1997, the Company acquired nine dental practices, operated
under the name of Gentle Dental, located in Colorado for $3.5 million.
The 1995 Acquisition, Family Dental Acquisition, Additional 1996 Acquisi-
tions, Early 1997 Acquisitions, Late 1997 Acquisitions and the Gentle Dental
Acquisition have been accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the tangible and intan-
gible assets acquired and liabilities assumed based on the estimated fair val-
ues at the dates of acquisition. The Company does not expect the final alloca-
tions to differ significantly from the amounts estimated at date of acquisi-
tion. The estimated fair value of assets acquired and liabilities assumed for
these acquisitions are summarized as follows:
<TABLE>
<CAPTION>
FAMILY ADDITIONAL EARLY LATE GENTLE
1995 DENTAL 1996 1997 1997 DENTAL
ACQUISITION ACQUISITION ACQUISITIONS* ACQUISITIONS** ACQUISITIONS ACQUISITION
----------- ----------- ------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable, net.. $ 24,845 $ 218,786 $ -- $ 20,000 $ -- $ 159,920
Property and equipment,
net...................... 10,350 417,755 104,713 162,000 13,000 96,478
Other Assets.............. -- -- -- -- -- 225,549
Liabilities assumed....... -- (475,084) (15,236) -- (2,500) (362,763)
Intangible assets......... 376,939 3,122,561 365,523 463,000 444,500 3,380,816
Less:Fair value of Common
Stock issued....... (306,000) -- (15,000) -- -- --
Deferred purchase price
(payable in cash)..... -- -- (90,000) (130,000) (112,000) (1,400,000)
--------- ---------- -------- --------- --------- -----------
Cash purchase price....... $ 106,134 $3,284,018 $350,000 $ 515,000 $ 343,000 $ 2,100,000
========= ========== ======== ========= ========= ===========
</TABLE>
- --------
* Excluding acquired interest in East Cornell
** Excluding acquired interest in Yale
East Cornell and Yale are not treated as business combinations because the
contractual arrangements do not provide complete and unilateral control of the
operations of the Offices.
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, the 1997 Acquisitions (ex-
cluding East Cornell and Yale) and the Gentle Dental Acquisition on the con-
solidated results of operations of the Company as if the acquisitions occurred
at January 1, 1996. Future results may differ substantially from pro forma re-
sults and cannot be considered indicative of future results.
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 PERIODS)
(3) Acquisitions -- Continued
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
DECEMBER SEPTEMBER 30,
31, 1996 1997
----------- -------------
<S> <C> <C>
Net revenue..................................... $11,321,000 $11,543,000
=========== ===========
Net income (loss)............................... $ (252,000) $ 468,000
=========== ===========
Net income (loss) per common share.............. $ (.07) $ .13
=========== ===========
</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.
(4) Notes Receivable -- Related Parties
Notes receivable from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997
------------ -------- -------------
(UNAUDITED)
<S> <C> <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 25,000
Note receivable from affiliated dentist,
unsecured, monthly principal and
interest payments, interest rate of 8%
per annum............................... -- 17,000 15,086
-------- -------- --------
138,551 42,000 40,086
Less -- current maturities............. (30,196) (30,676) (30,381)
-------- -------- --------
Notes receivable -- related parties,
long-term............................. $108,355 $ 11,324 $ 9,705
======== ======== ========
</TABLE>
(5) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Dental equipment........... $ 70,757 $ 777,360 $1,004,900 $1,171,869
Furniture and fixtures..... 25,223 183,494 268,759 306,549
Leasehold improvements..... 48,932 786,339 839,441 962,233
Computer equipment......... 132,376 339,553 398,274 496,088
-------- ---------- ---------- ----------
277,288 2,086,746 2,511,374 2,936,739
Less -- Accumulated
depreciation and
amortization............ (11,004) (276,971) (500,913) (571,255)
-------- ---------- ---------- ----------
Property and equipment,
net..................... $266,284 $1,809,775 $2,010,461 $2,365,484
======== ========== ========== ==========
</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 PERIODS)
(5) Property and Equipment -- Continued
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, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Leased property and equipment.. $ 44,587 $103,277 $103,277 $103,277
Less -- Accumulated
amortization................ (14,433) (31,938) (42,266) (47,431)
-------- -------- -------- --------
Leased property and
equipment, net.............. $ 30,154 $ 71,339 $ 61,011 $ 55,846
======== ======== ======== ========
</TABLE>
(6) Deferred Charges, Other Assets and Deferred Offering Costs
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. During the
three months ended September 30, 1997, the Company wrote off $252,234 of costs
for an acquisition that was not completed.
Deferred charges and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred debenture costs, net..... $ -- $352,544 $328,523 $308,074
Organization costs, net........... 46,808 49,954 43,666 40,521
Deferred financing costs, net..... -- 18,913 16,951 28,720
Office development costs.......... 246,702 20,192 88,074 11,162
-------- -------- -------- --------
$293,510 $441,603 $477,214 $388,477
======== ======== ======== ========
</TABLE>
Costs associated with the Offering of $466,442 have been deferred at Septem-
ber 30, 1997. If the Offering is successful, these costs will be offset
against the proceeds of the Offering; if the Offering is not successful, these
costs will be expensed.
(7) Intangible Assets
Intangible assets consist of Management Agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
AMORTIZATION -------------------- JUNE 30, SEPTEMBER 30,
PERIOD 1995 1996 1997 1997
------------ -------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Management Agreements... 25 years $777,011 $4,452,578 $5,269,014 $9,238,415
Less -- Accumulated
amortization........... (6,629) (115,819) (216,535) (276,790)
-------- ---------- ---------- ----------
Intangible assets, net.. $770,382 $4,336,759 $5,052,479 $8,961,625
======== ========== ========== ==========
</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 PERIODS)
(8) Notes Payable and Convertible Subordinated Debentures
Notes payable and convertible subordinated debentures consist of the follow-
ing:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
--------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <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............. -- 100,000 350,000 350,000
Term Loan with a bank,
principal of $2,000,000,
interest at 9%, monthly
principal payments of
$33,333 commencing on March
1, 1998..................... -- -- -- 2,000,000
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 50,000
Due in May 2000, interest
at 9%, monthly principal
and interest payments of
$2,544.................... -- -- 76,097 70,132
Due September 2002,
interest at 9%, monthly
interest and principal
payments of $2,325........ -- -- -- 110,515
Due September 2000,
interest at 8%, monthly
interest and principal
payments of $28,387....... -- -- -- 1,400,000
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 $3.82
per share................... -- 4,970,000 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 $5.45
per share................... -- 1,585,000 1,810,000 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 71,802
Note payable to an affiliated
dentist; principal of
$110,822; interest at 8%;
monthly principal and
interest payments of
$2,247...................... -- -- 107,796 103,182
--------- ---------- ---------- -----------
530,353 6,858,000 7,491,693 10,935,631
Less -- current maturities... (530,353) (94,785) (99,973) (609,161)
--------- ---------- ---------- -----------
Notes payable, net........... $ -- $6,763,215 $7,391,720 $10,326,470
========= ========== ========== ===========
</TABLE>
Under provisions of the credit agreement and term loan, the Company is sub-
ject to various financial ratio covenants. As of September 30, 1997, the Com-
pany was not in compliance with one such covenant. However, the Company re-
ceived a waiver on November 6, 1997, from the bank for the covenant require-
ment.
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 PERIODS)
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 $5.45 and $3.82 per
share, respectively, subject to adjustment upon the occurrence of certain
events, as outlined in the debenture agreements.
(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>
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 917,000 shares of Common Stock reserved for issuance. The Em-
ployee 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
641,900 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 PERIODS)
(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, June 30, 1997 and September 30, 1997 and
changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
1995 1996 JUNE 30, 1997 SEPTEMBER 30, 1997
--------------- ----------------- ----------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 23,567 $1.96 361,273 $3.12 325,923 $ 3.36
Granted............... 23,567 $1.96 340,457 $3.20 22,375 $5.01 88,949 $ 8.04
Canceled.............. -- $ -- (2,751) $2.76 (57,725) $2.67 (37,817) $ 2.62
Exercised............. -- $ -- -- $ -- -- $ -- -- $ --
------ ------- ------- ----------
Outstanding at end of
period................. 23,567 361,273 325,923 377,055
====== ======= ======= ==========
Exercisable at end of
period................. -- 15,100 124,801 110,596
====== ======= ======= ==========
Weighted average fair
value of options
granted................ $ .53 $ .92 $ 1.73 $ 2.50
====== ======= ======= ==========
</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>
$1.96 -- 2.84........... 185,484 5.96 $2.27 11,890 $1.96
$2.84 -- 3.71........... 48,143 6.43 $3.44 -- $ --
$3.71 -- 4.58........... 118,201 6.69 $4.15 3,210 $4.36
$4.58 -- 5.45........... 9,445 6.89 $4.63 -- $ --
------- ---- ----- ------ -----
$1.96 -- 5.45........... 361,273 6.26 $3.12 15,100 $2.48
======= ==== ===== ====== =====
</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 PERIODS)
(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>
$1.96 -- 2.84........... 142,156 5.35 $2.31 115,172 $2.31
$2.84 -- 3.71........... 48,143 5.71 $3.44 5,502 $3.27
$3.71 -- 4.58........... 104,080 6.20 $4.15 3,210 $4.36
$4.58 -- 5.45........... 31,544 6.53 $5.21 917 $5.45
------- ---- ----- ------- -----
$1.96 -- 5.45........... 325,923 5.76 $3.33 124,801 $2.43
======= ==== ===== ======= =====
</TABLE>
Warrants
At June 30, 1997, there are outstanding warrants or contractual obligations
to issue warrants to purchase approximately 415,887 shares of the Company's
Common Stock. Total warrants of 90,169 were issued in connection with the pri-
vate placement of the Company's Common Stock, 137,733 for the issuance of con-
vertible subordinated debentures and 119,210 for personal guarantees provided
for certain Company bank debt. The warrants granted for the personal guaran-
tees of Company bank debt included 27,510 to each of the three founders and
36,680 to the father of two of the founders. In August 1997, this individual
was issued 34,380 shares of Common Stock in a cashless exercise of the war-
rants.
A summary of warrants as of December 31, 1995, 1996, June 30, 1997, and Sep-
tember 30, 1997 and changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
1995 1996 JUNE 30, 1997 SEPTEMBER 30, 1997
---------------- ---------------- ---------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 126,849 $1.55 388,377 $3.34 415,887 $3.51
Granted............... 126,849 $1.55 261,528 $4.20 27,510 $6.00 1,834 $6.54
Canceled.............. -- $ -- -- $ -- -- $ -- -- --
Exercised............. -- $ -- -- $ -- -- $ -- (36,680) $ .54
------- ------- ------- ----------
Outstanding at end of
period................. 126,849 388,377 415,887 381,041
======= ======= ======= ==========
Warrants exercisable at
end of period.......... 126,849 347,112 374,622 360,409
======= ======= ======= ==========
Weighted average price
of warrants
outstanding............ $ 1.55 $ 3.34 $ 3.51 $3.81
======= ======= ======= ==========
Weighted average
remaining contractual
life at end of period.. 4.68 4.33 3.91 3.77
======= ======= ======= ==========
</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 PERIODS)
(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, the six months ended June 30, 1997 and
the three months ended September 30, 1997 using the Black-Scholes pricing
model and the following weighted average assumptions:
<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, $100,047, and $225,717 for the period ended De-
cember 31, 1995, the year ended December 31, 1996, the six months ended June
30, 1997 and the three months ended September 30, 1997, respectively. These
amounts are amortized ratably over the vesting periods of the options or rec-
ognized at the date of grant if no vesting period is required. Pro forma
stock-based compensation, net of the effect of forfeitures, was $2,040,
$136,105, $60,807 and $58,731 for the period ended December 31, 1995, the year
ended December 31, 1996, the six months ended June 30, 1997 and the three
months ended September 30, 1997, respectively.
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>
SIX MONTHS THREE MONTHS
ENDED ENDED
1995 1996 JUNE 30, 1997 SEPTEMBER 30, 1997
--------- --------- ------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net (loss) income: As
reported............... $(160,255) $(335,278) $266,351 $(30,941)
Pro forma............. $(162,295) $(471,383) $205,544 $(89,672)
Net (loss) income per
share: As reported..... $ (.06) $ (.10) $ .07 $ (.01)
Pro forma............. $ (.06) $ (.14) $ .06 $ (.03)
</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 PERIODS)
(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 PERIODS)
(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
of 2% for 1997.
The income tax provision for the six months ended June 30, 1997, based on
estimated 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 vol-
untary 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 PERIODS)
(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 substan-
tially 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 esti-
mated to be approximately $8.9 million.
(14) Subsequent Events
In July, the Company initiated the process of preparing a Registration State-
ment with the Securities and Exchange Commission for the Company's initial pub-
lic offering ("Offering"). Once effective, the Registration Statement may per-
mit the Company to sell shares of its common stock to the public.
In July 1997, James M. Ciccarelli received, as consideration for serving on
the Board of Directors, a warrant to purchase 1,834 shares of Common Stock at
an exercise price of $6.54 per share, the warrant expires in July 2002.
On October 31, 1997, the Company granted an option to purchase 12,000 shares
of common stock to each of its three officers. The options have an exercise
price of $9.90 per share and expire in October, 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>
PERIOD FROM
YEARS ENDED SIX MONTHS ENDED JULY 1, 1997
DECEMBER 31, JUNE 30, THREE MONTHS ENDED THROUGH
-------------------------------- ---------------------- SEPTEMBER 30, SEPTEMBER 8,
1994 1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ----------- ---------- ------------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue............. $2,000,866 $2,903,090 $4,115,851 $1,909,482 $2,630,155 $1,051,903 $1,041,605
OPERATING EXPENSES:
Clinical salaries and
benefits............... 1,021,133 1,640,103 2,333,508 1,050,474 1,458,096 610,358 688,156
Dental supplies......... 266,071 272,675 340,256 129,246 184,841 68,903 71,268
Laboratory fees......... 104,954 135,916 206,174 88,924 143,076 34,904 42,975
Occupancy............... 108,500 154,282 198,414 93,277 121,076 38,612 52,556
Advertising and
marketing.............. 23,423 33,193 33,672 13,335 37,230 7,940 9,901
Depreciation and
amortization........... 47,700 55,525 69,829 27,017 35,798 15,781 5,092
General and
administrative......... 406,319 449,617 543,309 248,165 387,619 171,649 148,795
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses.............. 1,978,100 2,741,311 3,725,162 1,650,438 2,367,736 948,147 1,018,743
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income........ 22,766 161,779 390,689 259,044 262,419 103,756 22,862
Interest expense........ 6,021 7,957 1,301 1,169 264 30 193
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. $ 16,745 $ 153,822 $ 389,388 $ 257,875 $ 262,155 $ 103,726 $ 22,669
========== ========== ========== ========== ========== ========== ==========
Pro forma information:
Net income before
taxes................. $ 16,745 $ 153,822 $ 389,388 $ 257,875 $ 262,155 $ 103,726 $ 22,669
Income tax provision... 6,279 57,683 146,021 96,703 98,308 38,897 8,501
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 10,466 $ 96,139 $ 243,368 $ 161,172 $ 163,847 $ 64,829 $ 14,168
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to combined financial statementsare 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
Distributions ....................................................... (182,069)
Net income........................................................... 22,669
---------
Balance, September 8, 1997 (unaudited)............................... $ 397,020
=========
</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 THREE MONTHS JULY 1, 1997
DECEMBER 31, JUNE 30, ENDED TO
------------------------------ --------------------- SEPTEMBER 30, SEPTEMBER 8,
1994 1995 1996 1996 1997 1996 1997
-------- --------- --------- ----------- --------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............. $ 16,745 $ 153,822 $ 389,388 $ 257,875 $ 262,155 $103,726 $ 22,669
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 15,781 5,092
Bad debt expense........ 24,600 10,400 17,500 8,750 9,500 4,250 (9,000)
Changes in operating
assets and
liabilities --
Accounts receivable... (25,293) (40,580) (71,996) (44,332) (37,040) (6,607) 36,516
Affiliated accounts
receivable........... (1,103) 868 (245) (1,673) (340) (60,601) (1,712)
Accounts payable and
accrued expenses..... 27,213 52,598 (22,981) (48,743) 1,082 9,481 (21,598)
Other assets............ (912) -- (558) -- -- (558) (7,820)
-------- --------- --------- --------- --------- -------- ---------
Net cash provided by
operating
activities........... 88,950 232,633 380,937 198,894 271,155 65,472 24,147
-------- --------- --------- --------- --------- -------- ---------
INVESTING ACTIVITIES:
Purchase of furniture,
fixtures and
equipment.............. (79,521) (72,252) (74,270) (30,077) (61,240) (10,368) (10,924)
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) (10,368) (10,924)
-------- --------- --------- --------- --------- -------- ---------
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 12,414 218,479
Repayments on line of
credit................. (75,558) (316,371) (263,120) (215,762) (57,283) (12,063) (225,585)
Contributions from
shareholder............ -- -- 62,192 62,192 -- -- --
Distributions to
shareholder............ (74,310) (36,685) (232,474) (85,000) (178,267) (85,500) (182,069)
-------- --------- --------- --------- --------- -------- ---------
Net cash used in
financing
activities........... (55,283) (35,430) (221,538) (93,867) (191,673) (85,149) (189,175)
-------- --------- --------- --------- --------- -------- ---------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS............ (45,854) 144,951 74,604 64,425 18,242 (30,045) (175,952)
CASH AND CASH
EQUIVALENTS,
beginning of period.... 58,851 12,997 157,948 157,948 232,552 222,373 250,794
-------- --------- --------- --------- --------- -------- ---------
CASH AND CASH
EQUIVALENTS,
end of period.......... $ 12,997 $ 157,948 $ 232,552 $ 222,373 $ 250,794 $192,328 $ 74,842
======== ========= ========= ========= ========= ======== =========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 5,566 $ 8,691 $ 1,301 $ 1,170 $ 264 $ 30 $ 193
======== ========= ========= ========= ========= ======== =========
</TABLE>
The accompanying notes to combined financial statementsare 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 PERIODS)
(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
Resources"), 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 equip-
ment which is leased to Gentle Dental.
(2) Basis of Presentation
The accompanying combined financial statements reflect the assets and lia-
bilities, operating results and cash flows of Gentle Dental and Equity Re-
sources at historical costs established at the date of acquisition or forma-
tion 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
statements prepared in accordance with generally accepted accounting princi-
ples. All adjustments, consisting only of normal recurring adjustments, neces-
sary to present fairly the results of the Company's operations for the six
months ended June 30, 1996 and the period from July 1, 1997 to September 8,
1997 have been included in the accompanying combined unaudited statements of
operations and cash flows.
(3) Significant Accounting Policies
The accompanying combined financial statements have been presented on the
accrual 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 liq-
uid 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 PERIODS)
(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.
Pro Forma
The pro forma income tax provision and related information presented on the
combined statements of operations reflects a provision for taxes as if Gentle
Dental had been a tax paying corporation for each of the periods presented.
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 PERIODS)
(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 De-
cember 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 PERIODS)
(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
======== ==========
Pro forma information:
Income (loss) before taxes......................... $ (4,934) $ 19,260
Income tax provision............................... -- 5,372
-------- ----------
Net income (loss).................................. $ (4,934) $ 13,888
======== ==========
</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.
Pro Forma Income Taxes
The pro forma income tax provision and related information presented on the
combined statements of operations reflects a provision for taxes as if the
Predecessor Partnerships had been tax paying corporations for each of the pe-
riods presented.
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, Arapa- Each Partner is entitled to receive 35% of their
hoe and Castle respective production (as defined in the partner-
Rock 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)
========== ========== ==========
Pro forma information
Income (loss) before taxes.............. $ 109,589 $ (102,628) $ (229,700)
Income tax provision (benefit).......... 41,096 (38,486) (2,610)
---------- ---------- ----------
Net income (loss)....................... $ 68,493 $ (64,142) $ (227,090)
========== ========== ==========
</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.
Pro Forma
The pro forma income tax provision and related information presented on the
combined statements of operations reflects a provision for taxes as if the
Dental Centers had been tax paying corporations for each of the periods pre-
sented.
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.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Birner Dental Management Services, Inc. Pro Forma Consolidated Financial
Information............................................................. 19
Selected Consolidated Financial Information.............................. 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 36
Management............................................................... 51
Certain Transactions..................................................... 57
Principal and Selling Shareholders....................................... 59
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 69
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.
1,800,000 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................................................... $ 7,528
NASD filing fee.................................................... 2,984
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............................................................ $690,938
========
</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 2,017,400 shares of Common Stock of the
Company were issued to Fred Birner, Mark Birner and Dennis Genty, the
founders of the Company, for a total purchase price of $22,000.
2. In June 1995, a warrant to purchase 36,680 shares of the Company's
Common Stock was issued to W. Frederic Birner, M.D., father of Fred Birner,
Chief Executive Officer of the Company, at an exercise price of $.55 per
share.
3. In July 1995, the Company issued an aggregate of 255,407 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.
4. A warrant to purchase up to 7,702 shares of Common Stock of the Com-
pany was awarded to Tom Wolf in October 1995, at an exercise price of $1.96
per share.
5. In October 1995, the Company issued a warrant to purchase up to 82,466
shares of its Common Stock to a Cohig & Associates ("Cohig") for services
rendered to the Company as a placement agent, at exercise price of $1.96
per share.
6. Between July 1995 and December 1995, the Company issued an aggregate
of 829,243 shares of Common Stock of the Company to accredited investors in
private placement offerings of its securities, for the aggregate price of
$1,627,740.
7. During the fiscal year ended December 31, 1995, the Company granted
options to purchase 13,113 shares of Common Stock under the Employee Plan,
with a weighted average of $1.96 per share, and 10,454 shares of Common
Stock under the Dental Center Plan, with a weighted average of $1.96 per
share.
8. In December 1995, the Company issued 155,890 shares of its Common
Stock to Paul Valuck, D.D.S. in connection with the terms of an asset pur-
chase agreement, for a total value of $306,000.
9. In December 1995, the Company issued an aggregate of 36,680 shares of
its Common Stock to certain accredited investors for the total purchase
price of $80,000.
10. On May 29, 1996, the Company issued to accredited investors in a pri-
vate placement an aggregate of $4,970,000 of May 1996 9.0% Convertible Sub-
ordinated Debentures that are convertible into a total of 1,301,039 shares
of Common Stock of the Company.
11. In May 1996, the Company issued a warrant to purchase up to 104,538
shares of its Common Stock to Cohig for services rendered to the Company as
a placement agent, at exercise price of $3.82 per share.
12. In August 1996, the Company issued 4,585 shares of Common Stock to
Robert F. Utberg, D.M.D. in connection with the terms of an asset purchase
agreement, for a total value of $15,000.
13. A warrant to purchase up to 41,265 shares of Common Stock of the Com-
pany was awarded to James Ciccarelli, a director of the Company in August
1996, at an exercise price of $3.82 per share.
14. In November 1996, the Company awarded to Fred Birner, Mark Birner and
Dennis Genty, the founders of the Company warrants to purchase an aggregate
of 82,530 shares of Common Stock of the Company, at an exercise price of
$4.36 per share.
15. The Company issued to accredited investors in a private placement an
aggregate of $1,810,000 of December 1996 9.0% Convertible Subordinated De-
bentures that are convertible into a total of 332,103 shares of Common
Stock of the Company.
16. In December 1996, the Company issued a warrant to purchase up to
33,195 shares of its Common Stock to Cohig for services rendered to the
Company as a placement agent, at an exercise price of $5.45 per share.
II-2
<PAGE>
17. During the fiscal year ended December 31, 1996, the Company granted
options to purchase 223,723 shares of Common Stock under the Employee Plan,
with a weighted average of $2.82 per share, and 116,734 shares of Common
Stock under the Dental Center Plan, with a weighted average of $3.93 per
share.
18. In May 1997, the Company repurchased 137,550 shares of Common Stock
from Paul Valuck, D.D.S. issued in connection with the terms of an asset
purchase agreement, for the purchase price of $330,000.
19. In June 1997, the Company awarded to Fred Birner, Mark Birner and
Dennis Genty, the founders of the Company warrants to purchase an aggregate
of 27,510 shares of Common Stock of the Company, at an exercise price of
$6.00 per share.
20. A warrant to purchase up to 1,834 shares of Common Stock of the Com-
pany was awarded to James Ciccarelli, a director of the Company in July
1997, at an exercise price of $6.54 per share.
21. In August 1997, 34,387 shares of Common Stock was issued to W. Frede-
ric Birner, M.D. pursuant to an exercise of a warrant, for the total exer-
cise price of $20,000.
22. From January 1, 1997 to October 31, 1997, the Company issued options
to purchase 149,199 shares of Common Stock under the Employee Plan, with a
weighted average of $8.49 per share, and 49,625 shares of Common Stock un-
der the Dental Center Plan, with a weighted average of $7.84 per share.
The sales of securities described in paragraphs 1 through 6, 8 through 16
and 18 through 21 were issued in reliance upon the exemption from registration
under the Securities Act provided by Section 4(2) thereof or Regulation D
thereunder. The purchasers were either accredited investors as defined in Reg-
ulation D or sophisticated investors and all had adequate access, through
their relationships with the Company and its officers, to information about
the Company. The purchasers represented their intention to acquire the securi-
ties for investment only and not with a view to or for sale in connection with
any distribution thereof and appropriate legends were placed on the share cer-
tificates or contained in the instruments representing the securities. The
sales of securities described in paragraphs 7, 17 and 22 were issued in reli-
ance upon the exemption from registration under the Securities Act provided by
Rule 701 promulgated thereunder for transactions pursuant to compensatory ben-
efit plans as provided under Rule 701. The options granted under the Employee
Plan were granted to selected employees, directors and consultants of the Com-
pany. The options granted under the Dental Center Plan were granted to se-
lected P.C.s which are parties to management agreements with the Company and
to dentists and dental hygienists employed by the P.C.s.
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
3.4 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTXT2
------- --------------------------
<C> <S>
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
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
10.26 Form of Stock Transfer and Pledge Agreement with Mark Birner, D.D.S.
10.27 Stock Purchase, Pledge and Security Agreement, dated October 27, 1997,
between the Company and William Bolton, D.D.S.
10.28 Stock Purchase, Pledge and Security Agreement, dated October 27, 1997,
between the Company and Scott Kissinger, D.D.S.
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)
23.3 Consent of Person About to Become Director
24.1** Power of Attorney (reference is made to page II-6)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
*** Replaces Exhibit 10.25 filed previously.
II-4
<PAGE>
(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
may be permitted to directors, officers, and controlling persons of the Regis-
trant pursuant to the provisions described in Item 14 or otherwise, the Regis-
trant has been advised that in the opinion of the Securities and Exchange Com-
mission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnifica-
tion against such liabilities (other than the payment by the Registrant of ex-
penses incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, 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.
The undersigned Registrant hereby undertakes that: (1) for purposes of de-
termining any liability under the Securities Act, the information omitted from
the form of prospectus as filed as part of the registration statement in reli-
ance upon Rule 430A and contained in the form of prospectus filed by the Reg-
istrant 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, each post-effective amendment that contains a form of pro-
spectus shall be deemed to be a new registration statement relating to the se-
curities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act the Registrant
certifies that it has caused this Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Denver, State of Colorado, on the 7th day of November, 1997.
Birner Dental Management Services,
Inc.
*
By: _________________________________
NAME: FREDERIC W.J. BIRNER
TITLE: CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Board, Chief November 7, 1997
- ------------------------------------- Executive Officer
FREDERIC W.J. BIRNER and Director
(Principal
Executive Officer)
President and
* Director November 7, 1997
- -------------------------------------
MARK A. BIRNER, D.D.S.
Chief Financial
* Officer, Secretary, November 7, 1997
- ------------------------------------- Treasurer and
DENNIS N. GENTY Director (Principal
Financial and
Accounting Officer)
Director
* November 7, 1997
- -------------------------------------
JAMES M. CICCARELLI
* By power-of-attorney
/s/ Frederic W.J. Birner
- -------------------------------------
FREDERIC W.J. BIRNER
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
Exhibit 3.4
BYLAWS
OF
BIRNER MANAGEMENT SERVICES, INC.
Adopted May 17, 1995
<PAGE>
INDEX TO BYLAWS
OF
BIRNER MANAGEMENT SERVICES, INC.
<TABLE>
Page
----
<S> <C>
ARTICLE I - Offices
- --------------------
Section 1.01 Business Offices.................................. 1
Section 1.02 Registered Office................................. 1
ARTICLE II - Shareholders
- -------------------------
Section 2.01 Annual Meeting.................................... 1
Section 2.02 Special Meetings.................................. 1
Section 2.03 Place of Meetings................................. 2
Section 2.04 Notice of Meetings................................ 2
Section 2.05 Waiver of Notice.................................. 3
Section 2.06 Fixing of Record Date............................. 3
Section 2.07 Shareholders' List................................ 4
Section 2.08 Proxies........................................... 4
Section 2.09 Quorum and Voting Rights.......................... 5
Section 2.10 Extraordinary Matters; Voting Rights.............. 5
Section 2.11 Conflicting Interest Transactions;
Notice Rights.................................... 5
Section 2.12 Voting of Shares.................................. 7
Section 2.13 Voting of Shares by Certain Holders............... 7
Section 2.14 Action Without a Meeting.......................... 8
ARTICLE III - Board of Directors
- --------------------------------
Section 3.01 General Powers.................................... 9
Section 3.02 Number, Tenure and Qualifications................. 9
Section 3.03 Resignation....................................... 10
Section 3.04 Removal........................................... 10
Section 3.05 Vacancies......................................... 10
Section 3.06 Regular Meetings.................................. 11
Section 3.07 Special Meetings.................................. 11
Section 3.08 Meetings by Telephone............................. 11
Section 3.09 Notice of Meetings................................ 11
Section 3.10 Waiver of Notice.................................. 12
Section 3.11 Presumption of Assent............................. 12
Section 3.12 Quorum and Voting Rights.......................... 13
Section 3.13 Action Without a Meeting.......................... 13
Section 3.14 Executive and Other Committees.................... 13
Section 3.15 Compensation...................................... 13
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE IV -Officers
- --------------------
<S> <C>
Section 4.01 Number and Qualifications............. 15
Section 4.02 Appointment and Term of Office........ 15
Section 4.03 Compensation.......................... 15
Section 4.04 Resignation........................... 15
Section 4.05 Removal............................... 16
Section 4.06 Vacancies............................. 16
Section 4.07 Authority and Duties.................. 16
Section 4.08 Surety Bonds.......................... 18
ARTICLE V - Stock
- -----------------
Section 5.01 Issuance of Shares.................... 18
Section 5.02 Stock Certificates; Uncertificated
Shares.............................. 18
Section 5.03 Consideration for Shares.............. 19
Section 5.04 Lost Certificates..................... 19
Section 5.05 Transfer of Shares.................... 19
Section 5.06 Holders of Record..................... 20
Section 5.07 Shares Held for Account of Another.... 20
Section 5.08 Transfer Agents, Registrars and
Paying Agents....................... 20
ARTICLE VI - Indemnification
- ----------------------------
Section 6.01 Definitions........................... 20
Section 6.02 Right to Indemnification.............. 21
Section 6.03 Advancement of Expenses............... 22
Section 6.04 Burden of Proof....................... 23
Section 6.05 Notification and Defense of Claim..... 23
Section 6.06 Notice to Shareholders of
Indemnification of Directors........ 24
Section 6.07 Enforcement........................... 25
Section 6.08 Proceedings by a Party................ 25
Section 6.09 Subrogation........................... 25
Section 6.10 Other Payments........................ 25
Section 6.11 Insurance............................. 26
Section 6.12 Indemnification of Officers,
Employees, Fiduciaries and Agents... 26
Section 6.13 Other Rights and Remedies............. 26
Section 6.14 Applicability; Effect................. 26
Section 6.15 Severability.......................... 27
ARTICLE VII - Miscellaneous
- -----------
Section 7.01 Voting of Securities by the
Corporation......................... 27
Section 7.02 Seal.................................. 28
Section 7.03 Fiscal Year........................... 28
Section 7.04 Amendments............................ 28
</TABLE>
-ii-
<PAGE>
BYLAWS
OF
BIRNER MANAGEMENT SERVICES, INC.
ARTICLE I
Offices
Section 1.01 Business Offices. The corporation may have such offices,
----------------
either within or outside Colorado, as the board of directors may from time to
time determine or as the business of the corporation may require.
Section 1.02 Registered Office. The registered office of the
-----------------
corporation required by the Colorado Business Corporation Act (the "Act") to be
maintained in Colorado shall be as set forth in the articles of incorporation,
unless changed as provided by law.
ARTICLE II
Shareholders
Section 2.01 Annual Meeting. An annual meeting of the shareholders
--------------
shall be held on the second Tuesday in the month of May in each year, or on such
other date as may be determined by the board of directors, beginning with the
year 1996, for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the day fixed for the annual
meeting is a legal holiday in Colorado, the meeting shall be held on the next
succeeding business day. If the election of directors shall not be held on the
day designated herein for any annual meeting of the shareholders, or at any
adjournment thereof, the board of directors shall cause the election to be held
at a meeting of the shareholders as soon thereafter as conveniently may be.
Failure to hold an annual meeting as required by these bylaws shall not
invalidate any action taken by the board of directors or officers of the
corporation.
Section 2.02 Special Meetings. Special meetings of the shareholders,
----------------
for any purpose or purposes, unless otherwise prescribed by statute, may be
called by the president or the board of directors, and shall be called by the
president or the board of directors at the written, dated and executed, demand
of the holders of not less than one-tenth
<PAGE>
of all the votes of the corporation entitled to be cast on any proposed issue to
be considered. A written demand shall contain the purpose or purposes for which
the meeting shall be held. Notice of the special meeting must be given within 30
days after the date of the call or demand in accordance with Section 2.04.
Section 2.03 Place of Meetings. Each meeting of the shareholders
-----------------
shall be held at such place, either within or outside Colorado, as may be
designated in the notice of meeting, or, if no place is designated in the
notice, at the principal office of the corporation if in Colorado or, if the
principal office is not located in Colorado, at the registered office of the
corporation in Colorado.
Section 2.04 Notice of Meetings. Except as otherwise required by law,
------------------
written notice of each meeting of the shareholders stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called shall be given, either personally
(including delivery by private courier) or by first class, certified or
registered mail, to each shareholder of record entitled to notice of such
meeting, not less than 10 nor more than 60 days before the date of the meeting,
except that if the authorized shares of the corporation are to be increased, at
least 30 days notice shall be given, and, if the sale, lease, exchange or other
disposition of all or substantially all of the property and assets of the
corporation not in the usual and regular course of business is to be voted on,
at least 20 days notice shall be given. Such notice shall be deemed to be given
in person when delivered to the shareholder by telephone, telegraph, teletype,
electronically transmitted facsimile or other form of wire or wireless
communication or by mail or private carrier. If mailed, such notice shall be
deemed to be given as to each shareholder when deposited in the United States
mail, addressed to the shareholder at the shareholder's address shown in the
corporation's current record of shareholders, with postage thereon prepaid, but,
if three successive notices mailed to the last-known address of any shareholder
of record 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. Written notice to the corporation may be addressed to its
registered agent at its registered address or to the corporation or its
secretary at its principal office. Notice is effective on the earliest of the
date received, five days after mailing or the date shown on the return receipt,
if applicable. If a meeting is adjourned to another time or place, notice need
not be given if the time and place thereof
-2-
<PAGE>
are announced at the meeting, unless the adjournment is for more than 30 days or
if after the adjournment a new record date is fixed, in either of which case
notice of the adjourned meeting shall be given to each shareholder of record
entitled to vote at the meeting in accordance with the foregoing provisions of
this Section 2.04.
Section 2.05 Waiver of Notice. Whenever notice is required by law,
----------------
the articles of incorporation or these bylaws to be given to any shareholder, a
waiver thereof in writing signed by the shareholder entitled to such notice,
whether before, at or after the time stated therein, shall be equivalent to the
giving of such notice. By attending a meeting, a shareholder (a) waives
objection to lack of notice or defective notice of such meeting unless the
shareholder, at the beginning of the meeting, objects to the holding of the
meeting or the transacting of business at the meeting because of lack of notice
or defective notice, and (b) waives objection to consideration at such meeting
of a particular matter not within the purpose or purposes described in the
notice of such meeting unless the shareholder objects to considering the matter
when it is presented.
Section 2.06 Fixing of Record Date. For the purpose of determining
---------------------
shareholders entitled to notice of or to vote at any meeting of the shareholders
or any adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the board of directors may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be not
more than 70 days prior to the date on which the particular action, requiring
such determination of shareholders, is to be taken. A record date fixed for the
purpose of determining shareholders entitled to notice of a meeting of the
shareholders shall be fixed not less than 10 days immediately preceding such
meeting (30 days if the authorized stock is to be increased, 20 days if the
sale, lease, exchange or other disposition of all or substantially all of the
property and assets of the corporation not in the usual and regular course of
business is to be considered). If no record date is so fixed, the date on which
notice of the meeting is mailed or the date on which the resolution of the board
of directors declaring the dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of the shareholders has been made
as provided in this Section, such determination shall apply to any adjournment
thereof. Notwithstanding the foregoing provisions of this Section, the record
date for determining shareholders entitled
-3-
<PAGE>
to take action without a meeting as provided in Section 2.14 below shall be the
date specified in such Section.
Section 2.07 Shareholders' List. After fixing the record date, the
------------------
officer or agent having charge of the stock transfer books for shares of the
corporation shall make a complete record of the shareholders entitled to be
given notice of the meeting or any adjournment thereof. The 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 class and series that are held by,
each shareholder. For a period of 10 days before such meeting or two business
days after notice of the meeting is given, whichever is earlier, this record
shall be kept on file at the principal office of the corporation, whether within
or outside Colorado, and shall be subject to inspection by any shareholder or
his agent or attorney for any purpose germane to the meeting at any time during
usual business hours. Such record shall also be produced and kept open at the
time and place of the meeting and any adjournment thereof and shall be subject
to the inspection of any shareholder or his agent or attorney for any purpose
germane to the meeting during the whole time of the meeting. The original stock
transfer books shall be prima facie evidence as to who are the shareholders
entitled to examine such record or transfer books or to vote at any meeting of
the shareholders.
Section 2.08 Proxies. At any meeting of the shareholders, a
-------
shareholder may vote by proxy. Without limiting the manner in which a
shareholder may appoint a proxy to vote or otherwise act for the shareholder,
the following shall constitute valid means of such appointment: (a) a
shareholder may appoint a proxy by signing an appointment form, either
personally or by the shareholder's attorney-in-fact; or (b) 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. Such appointment of a proxy shall be filed
with the corporation before or at the time of the meeting. No appointment of a
proxy shall be valid after 11 months from the date of its execution, unless
otherwise provided in the appointment form.
-4-
<PAGE>
Section 2.09 Quorum and Voting Rights. At all meetings of
------------------------
shareholders, a majority of the outstanding shares of the corporation entitled
to vote on a matter, represented in person or by proxy, shall constitute a
quorum with respect to each matter. If a quorum is present, 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 vote of a greater proportion or
number is otherwise required by the Act, the articles of incorporation or these
bylaws. Notwithstanding the foregoing, an amendment to the articles of
incorporation that adds, changes or deletes a greater quorum or voting
requirement shall meet the same quorum requirement and be adopted by the same
vote and voting groups required to take action under the quorum and voting
requirements then in effect or proposed to be adopted, whichever is greater. In
the absence of a quorum on any matter, a majority of the shares so represented
may adjourn the meeting with respect to such matter from time to time for a
period not to exceed 60 days at any one adjournment. At any such adjourned
meeting, at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the original meeting.
Section 2.10 Extraordinary Matters: Voting Rights. Notwithstanding
------------------------------------
the provisions of Section 2.09, the following actions shall be approved by each
voting group entitled to vote separately on the subject matter by a majority of
all of the votes entitled to be cast by such voting group: (a) adopting an
amendment or amendments to the articles of incorporation which would create
dissenters' rights; (b) authorizing the sale, lease, exchange or other
disposition of all or substantially all of the property and assets of the
corporation, with or without its goodwill, not in the usual and regular course
of business; (c) approving a plan of merger, consolidation or exchange that is
required to be approved by the shareholders; (d) adopting a resolution submitted
by the board of directors to dissolve the corporation; and (e) adopting a
resolution submitted by the board of directors to revoke voluntary dissolution
proceedings.
Section 2.11 Conflicting Interest Transaction; Notice Rights. A
-----------------------------------------------
conflicting interest transaction is any loan or other assistance by the
corporation to a director or to an entity in which a director of the corporation
is a director or officer or has a financial interest; a guaranty by the
corporation of an obligation of a director or of an obligation of an entity in
which a director of the corporation is a
-5-
<PAGE>
director or officer or has a financial interest; or a contract or transaction
between the corporation and a director or between the corporation and an entity
in which a director of the corporation is a director or officer or has a
financial interest.
No conflicting interest transaction shall be void or voidable or be
enjoined, set aside or give rise to an award of damages or other sanctions in a
proceeding by a shareholder or by or in the right of the corporation, solely
because the conflicting interest transaction involves a director of the
corporation or an entity in which a director of the corporation is a director or
officer or has a financial interest or solely because the director is present at
or participates in the meeting of the corporation's board of directors or of the
committee of the board of directors which authorizes, approves or ratifies the
conflicting interest transaction or solely because the director's vote is
counted for such purpose, if: (a) the material facts as to the director's
relationship or interest and as to the conflicting interest transaction are
disclosed or are known to the board of directors or the committee, and the board
of directors or committee in good faith authorizes, approves or ratifies the
conflicting interest transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors are less than a
quorum; or (b) the material facts as to the director's relationship or interest
and as to the conflicting interest transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the conflicting interest transaction
is specifically authorized, approved or ratified in good faith by a vote of the
shareholders; or (c) the conflicting interest transaction is fair as to the
corporation as of the time it is authorized, approved or ratified by the board
of directors, a committee thereof or the shareholders.
A board of directors or a committee thereof shall not authorize a
loan, by the corporation to a director of the corporation or to an entity in
which a director of the corporation is a director or officer or has a financial
interest, or a guaranty, by the corporation of an obligation of a director of
the corporation or of an obligation of an entity in which a director of the
corporation is a director or officer or has a financial interest, pursuant to
(a) until at least 10 days after written notice of the proposed authorization of
the loan or guaranty has been given to the shareholders who would be entitled to
vote thereon if the issue of the loan or guaranty were submitted to a vote of
the shareholders.
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Section 2.12 Voting of Shares. Subject to the provisions of Section
----------------
2.06, each outstanding share of record, regardless of class, is entitled to one
vote, and each outstanding fractional share of record is entitled to a
corresponding fractional vote, on each matter submitted to a vote of the
shareholders either at a meeting thereof or pursuant to Section 2.14, except to
the extent that the voting rights of the shares of any class or classes are
limited, increased or denied by the articles of incorporation as permitted by
the Act. In the election of directors, each record holder of stock entitled to
vote at such election shall have the right to vote the number of shares owned by
him for as many persons as there are directors to be elected, and for whose
election he has the right to vote. Cumulative voting shall not be allowed.
Section 2.13 Voting of Shares by Certain Holders.
-----------------------------------
(a) Shares Held or Controlled by the Corporation. No shares held
--------------------------------------------
by another corporation shall be voted at any meeting or counted in determining a
quorum if a majority of the shares entitled to vote for the election of
directors of such other corporation is held by this corporation.
(b) Shares Held by Another Corporation. Shares standing in the
----------------------------------
name of another corporation may be voted by such officer, agent or proxy as the
bylaws of such corporation may prescribe or, in the absence of such provision,
as the board of directors of such corporation may determine.
(c) Shares Held by More Than One Person. Shares standing of
-----------------------------------
record in the names of two or more persons, whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the entirety or
otherwise, or if two or more persons have the same fiduciary relationship
respecting the same shares, voting with respect to the shares shall have the
following effects: (i) if only one person votes, his act binds all; (ii) if two
or more persons vote, the act of the majority so voting binds all; (iii) if two
or more persons vote, but the vote is evenly split on any particular matter,
each faction may vote the shares in question proportionally, or any person
voting the shares of a beneficiary, if any, may apply to any court of competent
jurisdiction in Colorado to appoint an additional person to act with the persons
so voting the shares, in which case the shares shall be voted as determined by a
majority of such persons; and (iv) if a tenancy is held in unequal interests,
majority or even split for the purposes of subparagraph (iii) shall be a
majority or even split in interest. The foregoing
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effects of voting shall not be applicable if the secretary of the corporation is
given written notice of alternative voting provisions and is furnished with a
copy of the instrument or order wherein the alternative voting provisions are
stated.
(d) Shares Held in Trust or by a Personal Representative. Shares
----------------------------------------------------
held by an administrator, executor, guardian, conservator or other personal
representative may be voted by him, either in person or by proxy, without a
transfer of such shares into his name. Shares standing in the name of a trustee
may be voted by him, either in person or by proxy, but no trustee shall be
entitled to vote shares held by him without a transfer of such shares into his
name.
(e) Shares Held by a Receiver. Shares standing in the name of a
-------------------------
receiver may be voted by such receiver and shares held by or under the control
of a receiver may be voted by such receiver without the transfer thereof into
his name if authority so to do is contained in an appropriate order of the court
by which such receiver was appointed.
(f) Pledged Shares. A shareholder whose shares are pledged shall
--------------
be entitled to vote such shares until the shares have been transferred into the
name of the pledgee, and thereafter the pledgee shall be entitled to vote the
shares so transferred.
(g) Redeemable Shares Called for Redemption. Redeemable shares
---------------------------------------
that have been called for redemption shall not be entitled to vote on any matter
and shall not be deemed outstanding shares on and after the date on which
written notice of redemption has been mailed to shareholders and a sum
sufficient to redeem such shares has been deposited with a bank, trust company
or other financial institution with irrevocable instruction and authority to pay
the redemption price to the holders of the shares upon surrender of certificates
therefor.
(h) Shares Held in a Fiduciary Capacity. The corporation may vote
------------------------------------
any shares, including its own shares, held by it in a fiduciary
capacity.
Section 2.14 Action Without a Meeting. Any action required or permitted
-------------------------
to be taken at a meeting of the shareholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by all of the shareholders entitled to vote
with respect to the subject matter thereof. Such consent (which may be signed in
counterparts) shall have the same force and effect as a
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unanimous vote of the shareholders and may be stated as such in any document.
Unless the consent specifies a different effective date, action taken without a
meeting pursuant to a consent in writing as provided herein shall be effective
when all shareholders entitled to vote on the subject matter have signed the
consent. The record date for determining shareholders entitled to take action
without a meeting or entitled to be given notice is the date a writing upon
which the action is taken is first received by the corporation. All consents
signed pursuant to this Section 2.14 shall be either delivered to the
corporation or received by the corporation by electronically transmitted
facsimile or other form of wire or wireless communication providing the
corporation with a complete copy thereof, including a copy of the signatures for
inclusion in the minutes or for filing with the corporate records. Any
shareholder who has signed a writing describing and consenting to action taken
pursuant to this section may revoke such consent by a writing signed by the
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 corporation has actually received consents signed by all
shareholders, regardless of the effective date reflected in the consents or at
any time before a specified effective date if the date specified in the consent
is subsequent to the date the signed consents are received. Unless otherwise
provided by the articles of incorporation, one or more shareholders may
participate in a meeting of the shareholders by, or the meeting may be conducted
through the use of, any means of communication equipment by which all persons
participating in the meeting can hear each other at the same time. Such
participation shall constitute presence in person at the meeting.
ARTICLE III
Board of Directors
Section 3.01 General Powers. All 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, the board of directors,
except as otherwise provided in the Act, the articles of incorporation or these
bylaws.
Section 3.02 Number, Tenure and Qualifications. The number
---------------------------------
of directors of the corporation shall be as fixed from time to time by
resolution of the board of directors or shareholders. Except as provided in
Sections 2.01 and 3.05, directors shall be elected at each annual meeting of the
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shareholders. Each director shall hold office until the next annual meeting of
the shareholders and thereafter until his successor shall have been elected and
qualified, or until his earlier death, resignation or removal. Directors must be
natural persons at least 18 years old but need not be residents of Colorado or
shareholders of the corporation.
Section 3.03 Resignation. Any director may resign at any
------------
time by giving written notice to the corporation. A director's resignation is
effective when it is received by the corporation unless the notice specifies a
later effective date, and the acceptance of such resignation shall not be
necessary to make it effective.
Section 3.04 Removal. At a meeting called expressly for that
-------
purpose, the entire board of directors or any lesser number may be removed, with
or without cause, only if the number of votes cast in favor of removal exceeds
the number of votes cast against removal by those shares then entitled to vote
at an election of directors; except that if the holders of shares of any class
of stock are entitled to elect one or more directors by the provisions of the
articles of incorporation, the provisions of this Section 3.04 shall apply, with
respect to the removal of a director or directors so elected by such class, to
the vote of the holders of the outstanding shares of that class and not to the
vote of the outstanding shares as a whole. Any reduction in the authorized
number of directors shall not have the effect of shortening the term of any
incumbent director unless such director is also removed from office in
accordance with this Section 3.04.
Section 3.05 Vacancies. Unless otherwise required in the
---------
articles of incorporation, any vacancy occurring in the board of directors,
including vacancies due to an increase in the number of directors, may be filled
by the affirmative vote of a majority of the remaining directors though less
than a quorum, or by the affirmative vote of two directors if there are only two
directors remaining, or by a sole remaining director, or by the shareholders if
there are no directors remaining. The term of a director elected by the
directors in office to fill a vacancy expires at the next annual shareholders'
meeting at which directors are elected. The term of a director elected by the
shareholders to fill a vacancy shall be the unexpired term of his or her
predecessor in office; except that, if the director's predecessor had been
elected by the directors in office to fill a vacancy, the term of a director
elected by the shareholders shall be the unexpired term of the last predecessor
elected by the shareholders. If the vacant office was held by a director
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elected by a voting group of shareholders: (a) if one or more of the remaining
directors were elected by the same voting group, only such directors are
entitled to vote to fill the vacancy if it is filled by directors, and they may
do so by the affirmative vote of a majority of such directors remaining in
office; and (b) only the holders of shares of that voting group are entitled to
vote to fill the vacancy if it is filled by the shareholders.
Section 3.06 Regular Meetings. A regular meeting of the
----------------
board of directors shall be held immediately after and at the same place as the
annual meeting of the shareholders, or as soon thereafter as conveniently may
be, at the time and place, either within or outside Colorado, determined by the
board, for the purpose of electing officers and for the transaction of such
other business as may come before the meeting. Failure to hold such meeting,
however, shall not invalidate any action taken by any officer then or thereafter
in office. The board of directors may provide, by resolution, the time and
place, either within or outside Colorado, for the holding of additional regular
meetings without other notice than such resolution.
Section 3.07 Special Meetings. Special meetings of the board
-----------------
of directors may be called by or at the request of the president or any two
directors. The person or persons authorized to call special meetings of the
board of directors may fix any convenient place, either within or outside
Colorado, as the place for holding any special meeting of the board called by
them.
Section 3.08 Meetings by Telephone. Unless otherwise
---------------------
provided by the articles of incorporation, one or more members of the board of
directors may participate in a meeting of the board by, or the meeting may be
conducted through the use of, any communications equipment by which all persons
participating in the meeting can hear each other at the same time. Such
participation shall constitute presence in person at the meeting.
Section 3.09 Notice of Meetings. Notice of each meeting of
------------------
the board of directors (except those regular meetings for which notice is not
required) stating the place, day and hour of the meeting shall be given to each
director at least two days prior thereto by the mailing of written notice by
first class, certified or registered mail, or at least two days prior thereto by
personal delivery (including delivery by private courier to the director or
delivered to the last
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address of the director furnished by him to the corporation for such purpose) of
written notice or by telephone, telegraph, teletype, electronically transmitted
facsimile or other form of wire or wireless communication, except that, in the
case of a meeting to be held pursuant to Section 3.08, notice may be given by
telephone one day prior thereto. The method of notice need not be the same to
each director. Notice shall be deemed to be given at the earliest of (a) the
date received, but, if the director is no longer at the address of record, then
the date delivery was attempted; (b) five days after mailing; or (c) the date
shown on the return receipt, if mailed by registered or certified mail, return
receipt requested, and the receipt is signed by or on behalf of the addressee.
Neither the business to be transacted at nor the purpose of any meeting of the
board of directors need be specified in the notice of such meeting unless
otherwise required by statute.
Section 3.10 Waiver of Notice. Whenever notice is required
----------------
by law, the articles of incorporation or these bylaws to be given to the
directors, a waiver thereof in writing signed by the director entitled to such
notice, whether before, at or after the time stated therein, shall be equivalent
to the giving of such notice. Such waiver shall be delivered to the corporation
for filing with the corporate records, but such delivery and filing shall not be
conditions of the effectiveness of the waiver. A director's attendance at, or
participation in a meeting, waives any required notice to him or her of the
meeting unless: (a) at the beginning of the meeting, or promptly upon his or her
later arrival, the director 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 (b) if
special notice was required of a particular purpose, 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. Neither the business to be transacted at
nor the purpose of any meeting of the board of directors need be specified in
the waiver of notice of such meeting unless otherwise required by statute.
SECTION 3.11 Presumption of Assent. A director of the
---------------------
corporation who is present at a meeting of the board of directors at which
action on any corporate matter is taken shall be presumed to have assented to
the action taken unless the director: (a) objects at the beginning of the
meeting, or promptly upon his or her arrival, to holding the meeting or
transacting business at the meeting and does not thereafter
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vote for or assent to any action taken at the meeting; (b) contemporaneously
requests that his dissent or abstention as to any specific action taken be
entered in the minutes of such meeting; or (c) causes written notice of his
dissent or abstention as to any specific action to be received by the presiding
officer of such meeting before its adjournment or by the corporation immediately
after adjournment of such meeting. The right of dissent or abstention as to a
specific action taken at a meeting of the board is not available to a director
who votes in favor of such action.
Section 3.12 Quorum and Voting Rights. Except as otherwise
-------------------------
may be required by law, the articles of incorporation or these bylaws, a
majority of the number of directors fixed in accordance with these bylaws,
present in person, shall constitute a quorum for the transaction of business at
any meeting of the board of directors, and the vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the board of directors. If less than such majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice other than an announcement at the meeting, until a quorum
shall be present. No director may vote or act by proxy or power of attorney at
any meeting of directors.
Section 3.13 Action Without a Meeting. Any action required
------------------------
or permitted to be taken at a meeting of the directors may be taken without a
meeting and without prior notice if a consent in writing, setting forth the
action so taken, shall be signed by all of the directors. Such consent (which
may be signed in counterparts) shall have the same force and-effect as a
unanimous vote of the directors and may be stated as such in any document.
Unless the consent specifies a different effective date, action taken without a
meeting pursuant to a consent in writing as provided herein is effective when
all directors have signed the consent; however, the consent shall not be
effective if, before all of the directors have signed the consent, any director
has revoked his or her consent by a writing signed by the director and received
by the secretary or any other person authorized by the bylaws or the board of
directors to receive such a revocation. All consents signed pursuant to this
Section 3.13 shall be delivered to the secretary of the corporation for
inclusion in the minutes or for filing with the corporate records.
Section 3.14 Executive and Other Committees. The board of
------------------------------
directors, by resolution adopted by a majority of the directors in office when
the action is taken, may designate
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from among its members an executive committee and one or more other committees,
each of which, to the extent provided in the resolution establishing such
committee, shall have and may exercise all of the authority of the board of
directors in the management of the business and affairs of the corporation,
except that no such committee shall have the power or authority to (a) authorize
distributions, (b) approve or propose to the shareholders actions or proposals
required by law to be approved by the shareholders, (c) fill vacancies on the
board of directors or any committee thereof, including any committee authorized
by this Section 3.14, (d) adopt, amend or repeal the bylaws, (e) approve a plan
of merger not requiring shareholder approval, (f) amend articles of
incorporation to the extent permitted by law to be amended by the full board of
directors, (g) authorize or approve reacquisition of shares of the corporation,
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 any 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 the board of
directors may authorize a committee or an officer to do so within limits
specifically prescribed by the board of directors. The delegation of authority
to any committee shall not operate to relieve the board of directors or any
member of the board from any responsibility imposed by law. Subject to the
foregoing, the board of directors may provide such powers, limitations and
procedures for such committees as the board deems advisable; except that each
committee shall be governed by the procedures set forth in Sections 3.06 (except
as they relate to an annual meeting) and 3.07 through 3.13 as if the committee
were the board of directors. Each committee shall keep regular minutes of its
meetings, which shall be reported to the board of directors when required and
submitted to the corporation for inclusion in the corporate records.
Section 3.15 Compensation. By resolution of the board of
------------
directors, notwithstanding the provisions of Section 2.11, a director may be
paid his expenses, if any, of attendance at each meeting of the board of
directors and each meeting of any committee of the board of which he is a member
and may be paid a fixed sum for attendance at each such meeting or a stated
salary, or both a fixed sum and a stated salary. Subject to Section 2.11, no
such payment shall preclude any director from serving the corporation in any
other capacity and receiving compensation therefor.
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ARTICLE IV
Officers
Section 4.01 Number and Qualifications. The officers of the
-------------------------
corporation shall consist of a president, a secretary, a treasurer and such
other officers, including a chairman of the board, one or more vice- presidents
and a controller, as may from time to time be appointed by the board. In
addition, the board of directors or the president may appoint such assistant and
other subordinate officers, including assistant vice- presidents, assistant
secretaries and assistant treasurers, as it or he shall deem necessary or
appropriate. Any number of offices may be held by the same person. An officer
shall be a natural person who is at least 18 years old.
Section 4.02 Appointment and Term of Office. Except as
------------------------------
provided in Sections 4.01 and 4.06, the officers of the corporation shall be
appointed by the board of directors annually at the first meeting of the board
held after each annual meeting of the shareholders as provided in Section 3.06.
If the appointment of officers shall not be held as provided herein, such
appointment shall be held as soon thereafter as conveniently may be. Each
officer shall hold office until his successor shall have been duly appointed and
shall have qualified, or until the expiration of his term in office if appointed
for a specified period of time, or until his earlier death, resignation or
removal.
Section 4.03 Compensation. Officers shall receive such
------------
compensation for their services as may be authorized or ratified by the board of
directors and no officer shall be prevented from receiving compensation by
reason of the fact that he is also a director of the corporation. Appointment as
an officer shall not of itself create a contract or other right to compensation
for services performed as such officer.
Section 4.04 Resignation. Any officer may resign at any
-----------
time, subject to any rights or obligations under any existing contracts between
the officer and the corporation, giving written notice of resignation to the
corporation. A resignation of an officer is effective when the notice is
received by the corporation unless the notice specifies a later effective date.
If a resignation is made effective at a later date, the board of directors may
permit the officer to remain in office until the effective date and may fill the
pending vacancy before the effective date if the board of directors provides
that the successor does not take office until the effective date, or the board
of directors may remove
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the officer at any time before the effective date and may fill the resulting
vacancy. An officer's resignation shall take effect at the time specified in
such notice and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. An officer's
resignation does not affect the corporation's contract rights, if any, with the
officer.
Section 4.05 Removal. Any officer may be removed with or
-------
without cause at any time by the board of directors or, in the case of assistant
and other subordinate officers, by the board of directors or the president
(whether or not such officer was appointed by the president) whenever in its or
his judgment, as the case may be, the best interests of the corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. The appointment of an officer shall
not in itself create contract rights.
Section 4.06 Vacancies. A vacancy in any office, however occurring,
---------
may be filled by the board of directors or, if such office may be filled by the
president as provided in Section 4.01, by the president, for the unexpired
portion of the term.
Section 4.07 Authority and Duties. The officers of the corporation
--------------------
shall have the authority and shall exercise the powers and perform the duties
specified below and as may be additionally specified by the president, the board
of directors or these bylaws (and, in all cases where the duties of any officer
are not prescribed by the bylaws or by the board of directors, such officer
shall follow the orders and instructions of the president), except that in any
event each officer shall exercise such powers and perform such duties as may be
required by law:
(a) President. The president shall, subject to the direction and
---------
supervision of the board of directors, (i) be the chief executive officer of the
corporation and have general and active control of its affairs and business and
general supervision of its officers, agents and employees; (ii) unless there is
a chairman of the board, preside at all meetings of the shareholders and the
board of directors; (iii) see that all orders and resolutions of the board of
directors are carried into effect; and (iv) perform all other duties incident to
the office of president and as from time to time may be assigned to him by the
board of directors.
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(b) Vice-Presidents. The vice-president, if any (or, if
---------------
there is more than one, then each vice-president), shall assist the president
and shall perform such duties as may be assigned to him by the president or by
the board of directors. The vice-president, if there is one (or, if there is
more than one, then the vice-president designated by the board of directors, or,
if there be no such designation, then the vice-presidents in order of their
election), shall, at the request of the president or, in his absence or
inability or refusal to act, perform the duties of the president and when so
acting shall have all the powers of and be subject to all the restrictions upon
the president. Assistant vice-presidents, if any, shall have such powers and
perform such duties as may be assigned to them by the president or by the board
of directors.
(c) Secretary. The secretary shall:
---------
(i) prepare and maintain the minutes of the proceedings of the shareholders, the
board of directors and any committees of the board; (ii) see that all notices
are duly given in accordance with the provisions of these bylaws or as required
by law; (iii) be custodian of the corporate records and of the seal of the
corporation; (iv) keep at the corporation's registered office or principal place
of business within or outside Colorado a record containing the names and
addresses of all shareholders and the number and class of shares held by each
unless such a record shall be kept at the office of the corporation's transfer
agent or registrar; (v) have general charge of the stock books of the
corporation, unless the corporation has a transfer agent; (vi) authenticate
records of the corporation; and (vii) in general, perform all duties incident to
the office of secretary and such other duties as from time to time may be
assigned to him by the president or by the board of directors. Assistant
secretaries, if any, shall have the same duties and powers, subject to
supervision by the secretary.
(d) Treasurer. The treasurer shall: (i) be the principal
---------
financial officer of the corporation and have the care and custody of all its
funds, securities, evidences of indebtedness and other personal property and
deposit the same in accordance with the instructions of the board of directors;
(ii) receive and give receipts and acquittances for moneys paid in on account of
the corporation, and pay out of the funds on hand all bills, payrolls and other
just debts of the corporation of whatever nature upon maturity; (iii) unless
there is a controller, be the principal accounting officer of the corporation
and as such prescribe and maintain the methods and systems of accounting to be
followed, keep complete books and records of account, prepare and file all
local, state and
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federal tax returns, prescribe and maintain an adequate system of internal audit
and prepare and furnish to the president and the board of directors statements
of account showing the financial position of the corporation and the results of
its operations; (iv) upon request of the board, make such reports to it as may
be required at any time; and (v) perform all other duties incident to the office
of treasurer and such other duties as from time to time may be assigned to him
by the board of directors or the president. Assistant treasurers, if any, shall
have the same powers and duties, subject to the supervision by the treasurer.
SECTION 4.08 Surety Bonds. The board of directors may require any
------------
officer or agent of the corporation to execute to the corporation a bond in such
sums and with such sureties as shall be satisfactory to the board, conditioned
upon the faithful performance of his duties and for the restoration to the
corporation of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
ARTICLE V
Stock
Section 5.01 Issuance of Shares. The issuance or sale by the
------------------
corporation of any shares of its authorized capital stock of any class shall be
made only upon authorization by the board of directors, except as otherwise may
be provided by law. No shares shall be issued until full consideration has been
received therefor. Every issuance of shares shall be recorded on the books
maintained for such purpose by or on behalf of the corporation.
Section 5.02 Stock Certificates: Uncertificated Shares. The shares of
-----------------------------------------
stock of the corporation shall be represented by certificates, except that the
board of directors may authorize the issuance of any class or series of stock of
the corporation without certificates as provided by law. If shares are
represented by certificates, such certificates shall be signed either manually
or in facsimile in the name of the corporation by one or more officers
designated in the bylaws or by the board of directors and sealed with the seal
of the corporation or with a facsimile thereof. If the issuing corporation is
authorized to issue different classes of shares or different series within a
class, the share certificate shall contain a summary, on the front or the back,
of the designations, preferences, limitations and relative rights applicable to
each class, the
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variations in preferences, limitations and rights determined for each series,
and the authority of the board of directors to determine variations for future
classes or series. Alternatively, each certificate may state conspicuously on
its front or back that the corporation will furnish to the shareholder this
information on request in writing and without charge. 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. Certificates
of stock shall be in such form consistent with law as shall be prescribed by the
board of directors.
Section 5.03 Consideration for Shares. Shares shall be issued for such
------------------------
consideration expressed in dollars as shall be fixed from time to time by the
board of directors. Such consideration shall consist of any tangible or
intangible property or benefit to the corporation, including cash, promissory
notes, services performed and other securities of the corporation; however, the
promissory note of a subscriber or an affiliate of the subscriber for shares
shall not constitute consideration for the shares unless the note is negotiable
and is secured by collateral, other than the shares, having a fair market value
at least equal to the principal amount of the note. For the purposes of this
Section, "promissory note" means a negotiable instrument on which there is an
obligation to pay independent of collateral and does not include a nonrecourse
note.
Section 5.04 Lost Certificates. In case of the alleged loss,
-----------------
destruction or mutilation of a certificate of stock, the board of directors may
direct the issuance of a new certificate in lieu thereof upon such terms and
conditions in conformity with law as it may prescribe. The board of directors
may in its discretion require a bond in such form and amount and with such
surety as it may determine before issuing a new certificate.
Section 5.05 Transfer of Shares. Upon presentation and surrender to
------------------
the corporation or to the corporation's transfer agent of a certificate of stock
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, payment of all transfer taxes, if any, and the
satisfaction of any other requirements of law, including inquiry into and
discharge of any adverse claims of which the corporation has notice, the
corporation or the transfer agent shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transfer on the
books maintained for such purpose by or on behalf of the corporation. No
transfer of shares shall be effective until it has been entered on such books.
The
-19-
<PAGE>
corporation or the corporation's transfer agent may require a signature guaranty
or other reasonable evidence that any signature is genuine and effective before
making any transfer. Transfers of uncertificated shares shall be made in
accordance with applicable provisions of law.
Section 5.06 Holders of Record. The corporation shall be entitled to
-----------------
treat the holder of record of any share of stock as the holder in fact thereof,
and accordingly shall not be bound to recognize any equitable or other claim to
or interest in such share on the part of any other person whether or not it
shall have express or other notice thereof, except as may be required by the
laws of Colorado.
Section 5.07 Shares Held for Account of Another. The board of
----------------------------------
directors, in the manner provided by the Act, may adopt a procedure whereby a
shareholder of the corporation may certify in writing to the corporation that
all or a portion of the shares registered in the name of such shareholder are
held for the account of a specified person or persons. Upon receipt by the
corporation of a certification complying with such procedure, the persons
specified in the certification shall be deemed, for the purpose or purposes set
forth therein, to be the holders of record of the number of shares specified in
place of the shareholder making the certification.
Section 5.08 Transfer Agents, Registrars and Paying Agents. The board
---------------------------------------------
of directors may at its discretion appoint one or more transfer agents,
registrars or agents for making payment upon any class of stock, bond, debenture
or other security of the corporation. Such agents and registrars may be located
either within or outside Colorado. They shall have such rights and duties and
shall be entitled to such compensation as may be agreed.
ARTICLE VI
Indemnification
Section 6.01 Definitions. For purposes of this Article, the following
-----------
terms shall have the meanings set forth below:
(a) "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.
-20-
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(b) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director 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 of an employee benefit plan. A director 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 to the plan or to participants in or beneficiaries of the plan.
"Director" includes, unless the context requires otherwise, the estate or
personal representative of a director.
(c) "Expenses" includes counsel fees.
(d) "Liability" means the obligation incurred with respect to a
proceeding to pay a judgment, settlement, penalty, fine, including an excise tax
assessed with respect to an employee benefit plan, or reasonable Expenses.
(e) "Official Capacity" means, when used with respect to a Director,
the office of Director in the Corporation and, when used with respect to a
person other than a Director as contemplated in section 7-109-107 of the Act (an
officer, employee, fiduciary and agent), the office in the Corporation held by
the officer or the employment, fiduciary or agency relationship undertaken by
the employee, fiduciary or agent on behalf of the Corporation. "Official
Capacity" does not include service for any other domestic or foreign
corporation or other person or employee benefit plan.
(f) "Party" includes a person who was, is or is threatened to be made
a named defendant or respondent in a proceeding.
(g) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal.
Section 6.02 Right to Indemnification. Subject to Section 6.04, the
------------------------
Corporation shall indemnify any person made a Party because the person is or was
a Director to a Proceeding against Liability incurred in, relating to, or as a
result of, the Proceeding to the fullest extent permitted by law, including
without limitation in circumstances in which, in the absence of this Section
6.02, indemnification would be discretionary under the Act if: (a) the person
conducted
-21-
<PAGE>
himself or herself in good faith; (b) the person reasonably believed: (I) in the
case of conduct in an Official Capacity with the Corporation, that his or her
conduct was in the Corporation's best interests; and (II) in all other cases,
that his or her conduct was at least not opposed to the Corporation's best
interests; and (c) in the case of any criminal Proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful. A Director's
conduct with respect to an employee benefit plan for a purpose the Director
reasonably believed to be in the interests of the participants in or
beneficiaries of the plan is conduct that satisfies the requirement of (b)(II)
above. A Director's conduct with respect to an employee benefit plan for a
purpose that the Director did not reasonably believe to be in the interests of
the participants in or beneficiaries of the plan shall be deemed not to satisfy
the requirements of (a) above. The termination of a Proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the Director did not meet the
standard of conduct described in this section. However, the Corporation may not
indemnify a Director under this section: (a) in connection with a Proceeding by
or in the right of the Corporation in which the Director was adjudged liable to
the Corporation; or (b) in connection with any other Proceeding charging that
the Director derived an improper personal benefit, whether or not involving
action in an Official Capacity, in which Proceeding the Director was adjudged
liable on the basis that he or she derived an improper personal benefit.
Indemnification permitted under this section in connection with a Proceeding by
or in the right of the Corporation is limited to reasonable Expenses incurred in
connection with the Proceeding.
In addition to the foregoing, the Corporation shall indemnify a person
who was wholly successful, on the merits or otherwise, in the defense of any
Proceeding to which the person was a Party because the person is or was a
Director, against reasonable Expenses incurred by him or her in connection with
the Proceeding.
Section 6.03 Advancement of Expenses. The Corporation may pay for or
-----------------------
reimburse the reasonable Expenses incurred by a Director who is a Party to a
Proceeding in advance of final disposition of the Proceeding if: (a) the
Director furnishes to the Corporation a written affirmation of the Director's
good faith belief that he or she has met the standard of conduct described in
section 6.02; (b) the Director furnishes to the Corporation a written
undertaking, executed personally or on the Director's behalf, to repay the
advance if it is ultimately determined that he or she did not
-22-
<PAGE>
meet the standard of conduct; and (c) a determination is made that the facts
then known to those making the determination would not preclude indemnification
under this article. The undertaking required by (b) of this section shall be an
unlimited general obligation of the Director but need not be secured and may be
accepted without reference to financial ability to make repayment.
Section 6.04 Burden of Proof. The Corporation may not indemnify a
---------------
Director under Section 6.02 unless authorized in the specific case after a
determination has been made that indemnification of the Director is permissible
in the circumstances because the Director has met the standard of conduct set
forth in Section 6.02. The Corporation shall not advance Expenses to a Director
under Section 6.03 unless authorized in the specific case after the written
affirmation and undertaking are received and the determination required by
Section 6.03 has been made. The determinations required by this section shall be
made: (a) by the board of directors by a majority vote of those present at a
meeting at which a quorum is present, and only those Directors not parties to
the Proceeding shall be counted in satisfying the quorum; or (b) if a quorum
cannot be obtained, by a majority vote of a committee of the board of directors
designated by the board of directors, which committee shall consist of two or
more Directors not parties to the Proceeding; except that Directors who are
parties to the Proceeding may participate in the designation of Directors for
the committee. If a quorum cannot be obtained as contemplated in (a) above, and
a committee cannot be established under (b) above, or, even if a quorum is
obtained or a committee is designated, if a majority of the Directors
constituting such quorum or such committee so directs, the determination
required to be made by this section shall be made: by independent legal counsel
selected by a vote of the board of directors or the committee or, if a quorum of
the full board cannot be obtained and a committee cannot be established, by
independent legal counsel selected by a majority vote of the full board of
directors; or by the shareholders. Authorization or indemnification and advance
of Expenses shall be made in the same manner as the determination that
indemnification or advance of Expenses is permissible; except that, if the
determination that indemnification or advance of Expenses is permissible is made
by independent legal counsel, authorization of indemnification and advance of
Expenses shall be made by the body that selected such counsel.
Section 6.05 Notification and Defense of Claim. Promptly after receipt
---------------------------------
by a Party of notice of the commencement of any Proceeding, the Party shall, if
a claim respect thereof is to be made against the Corporation under
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this Article, notify the Corporation in writing of the commencement thereof;
provided, however, that delay in so notifying the Corporation shall not
constitute a waiver or release by the Party of any rights under this Article.
With respect to any such Proceeding: (a) the Corporation shall be entitled to
participate therein at its own expense; (b) any counsel representing the Party
to be indemnified in connection with the defense or settlement thereof shall be
counsel mutually agreeable to the Party and to the Corporation; and (c) the
Corporation shall have the right, at its option, to assume and control the
defense or settlement thereof, with counsel satisfactory to the Party. If the
Corporation assumes the defense of the Proceeding, the Party shall have the
right to employ its own counsel, but the fees and Expenses of such counsel
incurred after notice from the Corporation of its assumption of the defense of
such Proceeding shall be at the expense of the Party unless (i) the employment
of such counsel has been specifically authorized by the Corporation, (ii) the
Party shall have reasonably concluded that there may be a conflict of interest
between the Corporation and the Party in the conduct of the defense of such
Proceeding, or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of 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 the Party and the Corporation concur in
writing that the insurance carrier's doing so is undesirable. The Corporation
shall not be liable under this Article for any amounts paid in settlement of any
Proceeding effected without its written consent. The Corporation shall not
settle any Proceeding in any manner that would impose any penalty or limitation
on a Party without the Party's written consent. Consent to a proposed settlement
of any Proceeding shall not be unreasonably withheld by either the Corporation
or the Party.
Section 6.06 Notice to Shareholders of Indemnification of Director. If
-----------------------------------------------------
the Corporation indemnifies or advances Expenses to a Director 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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<PAGE>
Section 6.07 Enforcement. The right to indemnification and advancement
-----------
of Expenses granted by this Article shall be enforceable in any court of
competent jurisdiction if the Corporation denies the claim, in whole or in part,
or if no disposition of such claim is made within 90 days after the written
request for indemnification or advancement of Expenses is received. If
successful in whole or in part in such suit, the Party's Expenses incurred in
bringing and prosecuting such claim shall also be paid by the Corporation.
Whether or not the Party has met any applicable standard of conduct, been
adjudged liable to the Corporation or derived improper personal benefit, 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 Act). Further,
the Corporation shall indemnify a Party from and against any and all Expenses
and, if requested by the Party, shall (within 10 business days of such request)
advance such Expenses to the Party which are incurred by the Party in connection
with any claim asserted against or suit brought by the Party for recovery under
any directors' and officers' liability insurance policies maintained by the
Corporation, regardless of whether the Party is unsuccessful in whole or in part
in such claim or suit.
Section 6.08 Proceedings by a Party. The Corporation shall indemnify,
----------------------
advance or reimburse Expenses incurred by a Director 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.
Section 6.09 Subrogation. In the event of any payment under this
-----------
Article, the Corporation shall be subrogated to the extent of such payment to
all of the rights of recovery of the indemnified Party, who shall execute all
papers and do everything that may be necessary to assure such rights of
subrogation to the Corporation.
Section 6.10 Other Payments. The Corporation shall not be liable under
--------------
this Article to make any payment in connection with any Proceeding against or
involving a Party to the extent the Party has otherwise actually received
payment (under any insurance policy, agreement or otherwise) of the amounts
otherwise indemnifiable hereunder. A Party shall repay to the Corporation the
amount of any payment the Corporation makes to the Party under this Article in
connection with any Proceeding against or involving the Party, to the extent the
Party has otherwise actually received payment (under any insurance policy,
agreement or otherwise) of such amount.
-25-
<PAGE>
Section 6.11 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, 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
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 Section 6.02 or
6.12. 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 Colorado 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.
Section 6.12 Indemnification of Officers, Employees, Fiduciaries and
-------------------------------------------------------
Agents. An officer is entitled to mandatory indemnification and to apply for
- ------
court- ordered indemnification under the Act, in each case to the same extent as
a Director. The Corporation shall indemnify and advance expenses to an officer,
employee, fiduciary or agent of the Corporation to the same extent as to a
Director. In addition, the Corporation may also indemnify and advance expenses
to an officer, employee, fiduciary or agent who is not a Director to a greater
extent than provided to a Director, if not inconsistent with public policy, and
if provided for by general or specific action of its board of directors or
shareholders, or contract.
Section 6.13 Other Rights and Remedies. The rights to indemnification
-------------------------
and advancement of Expenses provided in this Article shall be in addition to any
other rights to which a Party may have or hereafter acquire under any law,
provision of the articles of incorporation, any other or further provision of
these bylaws, vote of the shareholders or Directors, agreement or otherwise. The
Corporation shall have the right, but shall not be obligated, to indemnify or
advance Expenses to any agent of the Corporation not otherwise covered by this
Article in accordance with and to the fullest extent permitted by the Act.
Section 6.14 Applicability; Effect. The rights to indemnification and
---------------------
advancement of Expenses provided in this Article shall be applicable to acts or
omissions that occurred
-26-
<PAGE>
prior to the adoption of this Article, shall continue as to any Party during the
period such Party serves in any one or more of the capacities covered by this
Article, shall continue thereafter so long as the Party may be subject to any
possible Proceeding by reason of the fact that he served in any one or more of
the capacities covered by this Article, and shall inure to the benefit of the
estate and personal representatives of each such person. Any repeal or
modification of this Article or of any section or provision hereof shall not
affect any rights or obligations then existing. All rights to indemnification
under this Article shall be deemed to be provided by a contract between the
Corporation and each Party covered hereby.
Section 6.15 Severability. If any provision of this Article shall be
------------
held to be invalid, illegal or unenforceable for any reason whatsoever (a) the
validity, legality and enforceability of the remaining provisions of this
Article (including without limitation, all portions of any sections of this
Article containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (b) to the fullest extent
possible, the provisions of this Article (including, without limitation, all
portions of any section of this Article containing any such provision held to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent of this
Article that each Party covered hereby is entitled to the fullest protection
permitted by law.
ARTICLE VII
Miscellaneous
Section 7.01 Voting of Securities by the Corporation. Unless otherwise
---------------------------------------
provided by resolution of the board of directors, on behalf of the corporation
the president or any vice-president shall attend in person or by substitute
appointed by him, or shall execute written instruments appointing a proxy or
proxies to represent the corporation at, all meetings of the shareholders of any
other corporation, association or other entity in which the corporation holds
any stock or other securities, and may execute written waivers of notice with
respect to any such meetings. At all such meetings and otherwise, the president
or any vice-president, in person or by substitute or proxy as aforesaid, may
vote the stock or other securities so held by the corporation and may execute
written consents and any other instruments with
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respect to such stock or securities and may exercise any and all rights and
powers incident to the ownership of said stock or securities, subject, however,
to the instructions, if any, of the board of directors.
Section 7.02 Seal. The corporate seal of the corporation shall be in
----
such form as adopted by the board of directors, and any officer of the
corporation may, when and as required, affix or impress the seal, or a facsimile
thereof, to or on any instrument or document of the corporation.
Section 7.03 Fiscal Year. The fiscal year of the corporation shall be as
-----------
established by the board of directors.
Section 7.04 Amendments. The directors may amend or repeal these bylaws
----------
unless the articles of incorporation reserve such power exclusively to the
shareholders in whole or in part or the shareholders, in amending or repealing a
particular bylaw provision, provide expressly that the directors may not amend
or repeal such bylaw. The shareholders may amend or repeal the bylaws even
though the bylaws may also be amended or repealed by the directors.
(END)
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<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 2,657,353 2,657,353 3,296,543 3,296,543 3,253,355 3,253,355
Plus - cheap stock options and
warrants 129,125 129,125 129,125 129,125 129,125 129,125
Plus - common stock equivalents Anti-Dilutive Anti-Dilutive Anti-Dilutive Anti-Dilutive 239,070 239,070
Adjusted weighted average common
shares outstanding 2,786,478 2,786,478 3,425,668 3,425,668 3,621,550 3,621,550
Net (loss) income per share $ (0.06) $ (0.06) $ (0.10) $ (0.10) $ 0.07 $ 0.07
-----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10.25
HOLLAND & HART
DEFINED CONTRIBUTION BASIC PLAN DOCUMENT
AND
TRUST AGREEMENT
Holland & Hart
Suite 2900
555 17th Street
Denver, Colorado 80202
(303) 295-8000
<PAGE>
HOLLAND & HART
DEFINED CONTRIBUTION BASIC PLAN DOCUMENT
AND TRUST AGREEMENT
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1.01 Account.................................................. 1
1.02 Accounting Date.......................................... 1
1.03 Accrued Benefit.......................................... 1
1.04 Adoption Agreement....................................... 1
1.05 Aggregate Contributions.................................. 1
1.06 Annual Additions......................................... 1
1.07 Beneficiary.............................................. 1
1.08 Break in Service......................................... 1
1.09 Cash or Deferred Arrangement............................. 1
1.10 Code..................................................... 2
1.11 Compensation............................................. 2
1.12 Defined Benefit Plan..................................... 2
1.13 Defined Benefit Plan Fraction............................ 2
1.14 Defined Contribution Plan................................ 2
1.15 Defined Contribution Plan Fraction....................... 2
1.16 Determination Date....................................... 2
1.17 Distribution Restrictions................................ 3
1.18 Earned Income............................................ 3
1.19 Effective Date........................................... 3
1.20 Elective Deferrals....................................... 3
1.21 Elective Deferrals Account............................... 3
1.22 Eligible Employee........................................ 3
1.23 Employee................................................. 3
1.24 Employee Contributions Account........................... 3
1.25 Employer................................................. 3
1.26 Employer Contributions Account........................... 3
1.27 Employer Nonelective Contributions....................... 3
1.28 Employment Commencement Date............................. 3
1.29 ERISA.................................................... 3
1.30 Excess Amount............................................ 3
1.31 Excess Aggregate Contributions........................... 3
1.32 Excess Contributions..................................... 3
1.33 Excess Deferrals......................................... 3
1.34 Forfeiture Break in Service.............................. 4
1.35 Highly Compensated Employee.............................. 4
1.36 Highly Compensated Group................................. 5
1.37 Hour of Service.......................................... 5
1.38 Key Employee............................................. 6
1.39 Leased Employee.......................................... 7
1.40 Limitation Year.......................................... 7
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
1.41 Matching Contributions................................... 7
1.42 Matching Contributions Account........................... 7
1.43 Maximum Permissible Amount............................... 7
1.44 Nonforfeitable........................................... 7
1.45 Nonhighly Compensated Employee........................... 7
1.46 Nonhighly Compensated Group.............................. 7
1.47 Non-Key Employee......................................... 7
1.48 Nontransferable Annuity.................................. 7
1.49 Normal Retirement Date................................... 8
1.50 100% Limitation.......................................... 8
1.51 Owner-Employee........................................... 8
1.52 Participant.............................................. 8
1.53 Period of Severance...................................... 8
1.54 Permissive Aggregation Group............................. 8
1.55 Permitted Disparity Level................................ 9
1.56 Plan..................................................... 9
1.57 Plan Administrator....................................... 9
1.58 Plan Entry Date.......................................... 9
1.59 Plan Year................................................ 9
1.60 Profit Sharing Contributions............................. 9
1.61 Profit Sharing Contributions Account..................... 9
1.62 Reemployment Date........................................ 9
1.63 Related Group............................................ 9
1.64 Required Aggregation Group............................... 9
1.65 Required Beginning Date.................................. 9
1.66 Rollover Contributions Account........................... 9
1.67 Self-Employed Individual................................. 10
1.68 Service.................................................. 10
1.69 Service for Predecessor Employer......................... 10
1.70 Shareholder-Employee..................................... 10
1.71 Testing Compensation..................................... 10
1.72 Top Heavy Plan........................................... 11
1.73 Trust.................................................... 12
1.74 Trust Fund............................................... 12
1.75 Trustee.................................................. 12
1.76 Valuation Date........................................... 12
1.77 Voluntary Deductible Employee Contributions Account...... 12
1.78 Voluntary Nondeductible Employee Contributions Account... 13
1.79 Year of Service - Participation.......................... 13
1.80 Year of Service - Vesting................................ 13
ARTICLE II
EMPLOYEES ENTITLED TO PARTICIPATE
2.01 Eligibility.............................................. 14
2.02 Year of Service - Participation.......................... 14
2.03 Break In Service - Participation......................... 14
2.04 Participation Upon Reemployment.......................... 14
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
2.05 Change in Eligible Employee Status...................... 15
2.06 Election Not to Participate............................. 15
ARTICLE III
CONTRIBUTIONS
3.01 Amount of Employer Contributions........................ 16
3.02 Minimum Employer Contribution........................... 16
3.03 Payment of Employer Contribution........................ 17
3.04 Return of Employer Contributions........................ 17
3.05 Rollover Contributions.................................. 17
3.06 Voluntary Nondeductible Employee Contributions.......... 18
ARTICLE IV
ALLOCATIONS TO ACCOUNTS
4.01 Individual Accounts..................................... 19
4.02 Allocation of Contributions and Forfeitures............. 20
4.03 Allocation of Minimum Contribution...................... 20
4.04 Forfeitures............................................. 20
4.05 Eligibility to Receive Allocation of Employer
Contribution and Forfeitures.......................... 20
4.06 Accounting for Distributions............................ 20
4.07 Value of Participant's Accrued Benefit.................. 20
4.08 Allocation and Distribution of Net Income, Gain, or
Loss.................................................. 21
4.09 Allocation of Voluntary Nondeductible Employee
Contributions......................................... 21
4.10 Limitations on Allocations to Participants' Accounts.... 22
4.11 Code (S) 415 Definitions................................ 23
4.12 Contributions Under a Cash or Deferred Arrangement...... 25
4.13 Voluntary Nondeductible Employee Contributions and
Matching Contributions - Special Discrimination Test.. 28
4.14 Definitions............................................. 31
ARTICLE V
PARTICIPANT VESTING
5.01 Vesting Upon Retirement................................. 34
5.02 Vesting Upon Disability................................. 34
5.03 Vesting Upon Death...................................... 34
5.04 Employee Contribution - Forfeitability.................. 34
5.05 Vesting Schedule........................................ 34
5.06 Year of Service - Vesting............................... 34
5.07 Break in Service - Vesting.............................. 35
5.08 Amendment to Vesting Schedule........................... 35
5.09 Distributions to Partially Vested Participants.......... 35
5.10 Deemed Distributions to 0% Vested Participants.......... 35
5.11 Forfeiture Occurs....................................... 35
5.12 Restoration of Forfeited Accrued Benefit................ 36
5.13 Time and Method of Restoration.......................... 36
</TABLE>
iii
<PAGE>
ARTICLE VI
DISTRIBUTIONS
<TABLE>
<CAPTION>
<S> <C>
6.01 Distributions Not Exceeding $3,500........................... 38
6.02 Distributions Exceeding $3,500............................... 38
6.03 Distributions on Account of Attaining Age 70 1/2............. 39
6.04 Distributions Under Domestic Relations Orders................ 41
6.05 In-Service Distributions 42
6.06 Distribution of Voluntary Employee Contributions............. 43
6.07 Distribution Methods, Consents, and Election................. 43
6.08 Annuity Distributions to Participants and Surviving Spouses.. 44
6.09 Joint and Survivor Annuity................................... 45
6.10 Preretirement Survivor Annuity............................... 45
6.11 Surviving Spouse Elections................................... 45
6.12 Waiver Election - Qualified Joint and Survivor Annuity....... 46
6.13 Waiver Election - Preretirement Survivor Annuity............. 46
6.14 Direct Rollover/Transfer Provisions.......................... 47
ARTICLE VII
PLAN LOANS
7.01 Availability of Participant Loans............................ 49
7.02 Requirements................................................. 49
7.03 Loan Application............................................. 50
7.04 Limitation on Loan Amount.................................... 50
7.05 Evidence of Loan............................................. 50
7.06 Security for Loan............................................ 50
7.07 Loan Treated as Directed Investment.......................... 50
7.08 Loan Policy.................................................. 50
ARTICLE VIII
ADMINISTRATIVE PROVISIONS
8.01 Plan Administrator........................................... 51
8.02 Term......................................................... 51
8.03 Plan Administrator's Powers and Duties....................... 51
8.04 Funding Policy............................................... 52
8.05 Manner of Action............................................. 52
8.06 Unclaimed Account Procedure.................................. 52
8.07 Beneficiary Designation...................................... 53
8.08 No Beneficiary Designation................................... 54
8.09 Information to Plan Administrator............................ 54
8.10 Information to Participants and Beneficiaries................ 54
8.11 Appeal Procedure for Denial of Benefits...................... 55
8.12 Liability and Indemnification................................ 55
</TABLE>
iv
<PAGE>
ARTICLE IX
AMENDMENT, MERGER AND TERMINATION
<TABLE>
<CAPTION>
<S> <C>
9.01 Amendment by Employer................................... 56
9.02 Merger/Direct Transfer.................................. 56
9.03 Termination............................................. 57
</TABLE>
ARTICLE X
MISCELLANEOUS
<TABLE>
<CAPTION>
<S> <C>
10.01 Exclusive Benefit...................................... 59
10.02 No Responsibility for Employer Action.................. 59
10.03 Fiduciaries Not Insurers............................... 59
10.04 Waiver of Notice....................................... 59
10.05 Word Usage............................................. 59
10.06 State Law.............................................. 59
10.07 Employment Not Guaranteed.............................. 59
10.08 Assignment or Alienation............................... 60
</TABLE>
ARTICLE XI
LIFE INSURANCE PROVISIONS
<TABLE>
<CAPTION>
<S> <C>
11.01 Insurance Benefit...................................... 61
11.02 Limitation on Life Insurance Protection................ 61
11.03 Definitions............................................ 62
11.04 Dividend Plan.......................................... 63
11.05 Insurance Company Duties and Obligations............... 63
</TABLE>
ARTICLE XII
TRUST AGREEMENT
<TABLE>
<CAPTION>
<S> <C>
12.01 Acceptance............................................. 64
12.02 Bond................................................... 64
12.03 Receipt of Contribution................................ 64
12.04 Payments From the Trust Fund........................... 64
12.05 Exclusive Benefit...................................... 64
12.06 Trustee Investment Powers.............................. 65
12.07 Trustee Powers, Rights and Duties...................... 66
12.08 Investment Manager..................................... 67
12.09 Investment of the Trust Fund........................... 67
12.10 Employer Direction of Investment....................... 67
12.11 Participant Direction of Investment.................... 68
12.12 Records and Accounts................................... 68
12.13 Valuation of the Trust Fund............................ 68
12.14 Tax Returns............................................ 68
12.15 Fees and Expenses...................................... 68
12.16 Change of Trustee...................................... 68
</TABLE>
v
<PAGE>
HOLLAND & HART
DEFINED CONTRIBUTION BASIC PLAN DOCUMENT
AND TRUST AGREEMENT
By executing an Adoption Agreement to this Defined Contribution Basic Plan
Document and Trust Agreement, the Employer establishes or continues a Plan and
Trust intended to conform to and qualify under Code (S) 401 and (S) 501 for the
exclusive benefit of the Employer's Employees and the Employees' Beneficiaries.
The Employer is establishing or continuing the Plan for the purpose of providing
retirement benefits to Employees.
If the Employer adopts this Plan as a restated Plan in substitution for,
and in amendment of, an existing retirement plan, the provisions of this Plan,
as a restated Plan, shall apply solely to an Employee who performs one Hour of
Service for the Employer on or after the restated Effective Date of the
Employer's Plan. If an earlier effective date for a provision in this restated
Plan applies, the provision shall be effective as of the earlier effective date
notwithstanding the later general Effective Date of the restated Plan.
ARTICLE I
DEFINITIONS
1.01 ACCOUNT shall mean the separate account or one of the separate
accounts which the Trustee shall maintain for a Participant under the Plan.
1.02 ACCOUNTING DATE shall mean the last day of the Plan Year.
1.03 ACCRUED BENEFIT shall mean the total amount in the Participant's
Employer Contributions Account and the Participant's Employee Contributions
Account.
1.04 ADOPTION AGREEMENT shall mean the instrument executed by the Employer
adopting this Defined Contribution Basic Plan Document and Trust Agreement. The
terms of this Defined Contribution Basic Plan Document and Trust Agreement, as
modified by the terms of an adopting Employer's Adoption Agreement, shall
constitute a separate Plan and Trust to be construed as a single agreement.
Each elective provision of the Adoption Agreement shall correspond by section
reference to the section of the Defined Contribution Basic Plan Document and
Trust Agreement which grants the election.
1.05 AGGREGATE CONTRIBUTIONS shall have the meaning assigned to it by
Section 4.14.
1.06 ANNUAL ADDITIONS shall have the meaning assigned to it by Section
4.11.
1.07 BENEFICIARY shall mean a person designated by a Participant who is or
may become entitled to a benefit under the Plan. A Beneficiary who becomes
entitled to a benefit under the Plan shall remain a Beneficiary under the Plan
until the Trustee has fully distributed the Participant's benefit to such
Beneficiary.
1.08 BREAK IN SERVICE shall have the meaning assigned to it by Section 2.03
for purposes of participation and shall have the meaning assigned to it by
Section 5.07 for purposes of vesting.
1.09 CASH OR DEFERRED ARRANGEMENT shall have the meaning assigned to it by
Section 4.14.
1
<PAGE>
1.10 CODE shall mean the Internal Revenue Code of 1986, as amended.
1.11 COMPENSATION shall mean Testing Compensation in accordance with the
first paragraph of Section 1.71, except to the extent provided in the Employer's
Adoption Agreement, effective for Plan Years beginning after December 31, 1988.
In the case of a Self-Employed Individual, Compensation shall mean Earned
Income, except to the extent provided in the Employer's Adoption Agreement,
effective for Plan Years beginning after December 31, 1988. However, effective
for Plan Years beginning after December 31, 1988, Compensation shall not include
amounts in excess of $200,000 (or such larger amount as the Commissioner of
Internal Revenue may prescribe). In determining the Compensation of a
Participant for purposes of the $200,000 limitation, the Plan Administrator
shall increase a Participant's Compensation by the Compensation of the
Participant's spouse and any lineal descendants of the Participant who have not
attained age 19 before the close of the Plan Year if the Participant is a more
than 5% owner of the Employer or a Highly Compensated Employee in the group of
the top 10 Employees ranked by Compensation. If the application of the
immediately preceding sentence causes the $200,000 limitation to be exceeded,
then (except for the purpose of determining the portion of Compensation up to
the Permitted Disparity Level if this Plan provides for a Permitted Disparity
Level in Section 3.01 or Section 4.02) the $200,000 limitation shall be prorated
among the family members in proportion to each family member's Compensation as
determined under this Section prior to the application of the $200,000
limitation.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan Years
beginning on or after January 1, 1994, the annual Compensation of each Employee
taken into account under the Plan shall not exceed the OBRA '93 Annual
Compensation Limit. The OBRA '93 Annual Compensation Limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with Code (S) 401(a)(17)(B). The cost-of-living adjustment in effect for a
calendar year applies to any period, not exceeding 12 months, over which
Compensation is determined (determination period) beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
Annual Compensation Limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in this
Plan to the limitation under Code (S) 401(a)(17) shall mean the OBRA '93 Annual
Compensation Limit set forth in this provision.
If Compensation for any prior determination period is taken into account in
determining an Employee's benefits accruing in the current Plan Year, the
Compensation for that prior determination period is subject to the OBRA '93
Annual Compensation Limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of the
first Plan Year beginning on or after January 1, 1994, the OBRA '93 Annual
Compensation Limit is $150,000.
1.12 DEFINED BENEFIT PLAN shall have the meaning assigned to it by Section
4.11.
1.13 DEFINED BENEFIT PLAN FRACTION shall have the meaning assigned to it by
Section 4.11.
1.14 DEFINED CONTRIBUTION PLAN shall have the meaning assigned to it by
Section 4.11.
1.15 DEFINED CONTRIBUTION PLAN FRACTION shall have the meaning assigned to
it by Section 4.11.
1.16 DETERMINATION DATE shall mean the last day of the preceding Plan Year,
except that the Determination Date for the first Plan Year shall be the last day
of the first Plan Year.
2
<PAGE>
1.17 DISTRIBUTION RESTRICTIONS shall have the meaning assigned to it by
Section 4.14.
1.18 EARNED INCOME shall mean net earnings from self-employment in the
trade or business with respect to which the Employer has established the Plan if
personal services of the individual are a material income producing factor. The
Plan Administrator shall calculate Earned Income by excluding items not included
in gross income, excluding the deductions allocable to those items, and
subtracting the deductions allowed by Code (S) 404 to the Self-Employed
Individual. For Plan Years beginning after December 31, 1989, the Plan
Administrator shall subtract from Earned Income the deduction allowed to the
Self-Employed Individual by Code (S) 164(f).
1.19 EFFECTIVE DATE shall mean the Effective Date of this document as
stated in the Adoption Agreement.
1.20 ELECTIVE DEFERRALS shall have the meaning assigned to it by Section
4.14.
1.21 ELECTIVE DEFERRALS ACCOUNT shall have the meaning assigned to it by
Section 4.01.
1.22 ELIGIBLE EMPLOYEE shall mean an Employee, except to the extent
specifically excluded under the Adoption Agreement.
1.23 EMPLOYEE shall mean an individual who performs services for the
Employer or the Related Group (including a Self-Employed Individual and a Leased
Employee, but excluding any independent contractor).
1.24 EMPLOYEE CONTRIBUTIONS ACCOUNT shall have the meaning assigned to it
by Section 4.01.
1.25 EMPLOYER shall mean a Corporation, Partnership, or Self-Employed
Individual who executes an Adoption Agreement, and any other Corporation,
Partnership, or Self-Employed Individual that the entity who executed the
Adoption Agreement allows to execute a participation agreement. Solely for
purposes of applying the Code (S) 415 limitations of Article IV, Employer shall
mean the Employer and all members of the Related Group as modified by Code (S)
415(h).
1.26 EMPLOYER CONTRIBUTIONS ACCOUNT shall have the meaning assigned to it
by Section 4.01.
1.27 EMPLOYER NONELECTIVE CONTRIBUTIONS shall have the meaning assigned to
it by Section 4.14.
1.28 EMPLOYMENT COMMENCEMENT DATE shall mean the date on which an Employee
first performs an Hour of Service for the Employer.
1.29 ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended.
1.30 EXCESS AMOUNT shall have the meaning assigned to it in Section 4.11.
1.31 EXCESS AGGREGATE CONTRIBUTIONS shall have the meaning assigned to it
by Section 4.14.
1.32 EXCESS CONTRIBUTIONS shall have the meaning assigned to it by Section
4.14.
1.33 EXCESS DEFERRALS shall the meaning assigned to it by Section 4.14.
3
<PAGE>
1.34 FORFEITURE BREAK IN SERVICE shall mean five consecutive Breaks in
Service (as defined in Section 5.07).
1.35 HIGHLY COMPENSATED EMPLOYEE shall mean any Employee who performs
service for the Employer during the Plan Year who:
(a) owned more than 5% of the Employer;
(b) received Testing Compensation from the Employer in excess of
$75,000 (as adjusted pursuant to Code (S) 414(q)(1)) and is one
of the 100 Employees who received the most Testing Compensation
from the Employer during the Plan Year;
(c) received Testing Compensation from the Employer in excess of
$50,000 (as adjusted pursuant to Code (S) 414(q)(1)), was a
member of the top-paid group for the Plan Year, and is one of the
100 Employees who received the most Testing Compensation from the
Employer during the Plan Year; or
(d) was an officer of the Employer, received Testing Compensation
from the Employer that was greater than 50% of the dollar
limitation in effect under Code (S) 415(b)(1)(A), and is one of
the 100 Employees who received the most Testing Compensation from
the Employer during the Plan Year.
Highly Compensated Employee shall also mean any Employee who performs
Service for the Employer during the preceding Plan Year (or 12 month period
preceding the Plan Year) who:
(a) owned more than 5% of the Employer;
(b) received Testing Compensation from the Employer in excess of
$75,000 (as adjusted pursuant to Code (S) 414(q)(1));
(c) received Testing Compensation from the Employer in excess of
$50,000 (as adjusted pursuant to Code (S) 414(q)(1)) and was a
member of the top-paid group for such Plan Year; or
(d) was an officer of the Employer and received Testing Compensation
from the Employer that was greater than 50% of the dollar
limitation in effect under Code (S) 415(b)(1)(A).
An Employee is a member of the top-paid group for any Plan Year if the
Employee is in the group consisting of the top 20% of the Employees when
ranked on the basis of Testing Compensation paid during the Plan Year.
If no officer received Testing Compensation from the Employer that was
greater than 50% of the dollar limitation in effect under Code (S)
415(b)(1)(A) for the Plan Year or the preceding 12 month period, the Plan
Administrator shall treat the highest paid officer as a Highly Compensated
Employee. The number of officers taken into account shall not exceed the
greater of three or 10% of the total number of Employees (after application
of the Code (S) 414(q) exclusions), but no more than 50 officers.
4
<PAGE>
Highly Compensated Employee shall also mean a highly compensated
former Employee. A highly compensated former Employee includes any Employee
who separated or was deemed to have separated from Service prior to the
Plan Year, performs no Service for the Employer during the Plan Year, and
was a Highly Compensated Employee for either the Plan Year in which he or
she separated from Service or any Plan Year ending on or after the
Employee's 55th birthday.
If the spouse, lineal ascendant, lineal descendant, or the spouse of a
lineal ascendant or descendent of a more than 5% owner (who is either an
Employee or a former Employee) or one of the 10 most Highly Compensated
Employees (ranked on the basis of Testing Compensation paid during a Plan
Year) is an Employee, the Plan Administrator shall aggregate the Highly
Compensated Employee and the Highly Compensated Employee's family members
treating them as a single Employee receiving Testing Compensation and Plan
contributions equal to the sum of the Testing Compensation and Plan
contributions for all such family members.
For purposes of this Section, "Employer" shall mean an entity
participating in the Plan and any entity participating in the Plan that is
a member of the same Related Group; Highly Compensated Employees shall be
determined separately with respect to each such Employer. The Plan
Administrator shall administer the requirements of this Section in
accordance with Code (S) 414(q) and the Treasury regulations thereunder.
1.36 HIGHLY COMPENSATED GROUP shall have the meaning assigned to it by
Section 4.14.
1.37 HOUR OF SERVICE shall mean:
(a) Each hour for which the Employer, either directly or indirectly,
pays an Employee, or for which the Employee is entitled to
payment, for the performance of duties during the Plan Year. The
Plan Administrator shall credit Hours of Service under this
paragraph (a) to the Employee for the Plan Year in which the
Employee performs the duties, irrespective of when paid.
(b) Each hour for which the Employer, either directly or indirectly,
pays an Employee, or for which the Employee is entitled to
payment (irrespective of whether the employment relationship is
terminated), for reasons other than for the performance of duties
during a Plan Year, such as leave of absence, vacation, holiday,
sick leave, illness, incapacity (including disability), layoff,
jury duty, or military duty. The Plan Administrator shall not
credit more than 501 Hours of Service under this paragraph (b) to
an Employee on account of any single continuous period during
which the Employee does not perform any duties (whether or not
such period occurs during a single Plan Year). The Plan
Administrator shall credit Hours of Service under this paragraph
(b) in accordance with the rules of paragraphs (b) and (c) of
Labor Reg. (S) 2530.200b-2, which is incorporated herein by this
reference.
(c) Each hour for back pay, irrespective of mitigation of damages, to
which the Employer has agreed or for which the Employee has
received an award. The Plan Administrator shall credit Hours of
Service under this paragraph (c) to the Employee for the Plan
Years to which the award or the agreement pertains rather than
for the Plan Year in which the award, agreement, or payment is
made.
5
<PAGE>
The Plan Administrator shall not credit an Hour of Service under more than
one of the above paragraphs. The Plan Administrator shall credit Hours of
Service the Employee completes for members of any Related Group and shall credit
Hours of Service the Employee completes as a Leased Employee. If the Plan
Administrator is to credit Hours of Service to an Employee for the 12 month
period beginning with the Employee's Employment Commencement Date or with an
anniversary of such date, then that 12 month period shall be substituted for the
term "Plan Year" wherever the term "Plan Year" appears in this Section.
Solely for purposes of determining whether the Employee incurs a Break in
Service under any provision of this Plan, the Plan Administrator shall credit
Hours of Service during an Employee's unpaid absence due to maternity or
paternity leave on the basis of the number of Hours of Service the Employee
would receive if the Employee were paid during the absence or, if the Plan
Administrator cannot determine the number of Hours of Service the Employee would
receive, on the basis of eight hours per day during the absence. The Plan
Administrator shall consider an Employee on maternity or paternity leave if the
Employee's absence is due to the Employee's pregnancy, the birth of the
Employee's child, the placement with the Employee of an adopted child, or the
care of the Employee's child immediately following the child's birth or
placement. The Plan Administrator shall credit only the number of Hours of
Service (up to 501 Hours of Service) necessary to prevent the Employee's Break
in Service. The Plan Administrator shall credit all Hours of Service described
in this paragraph to the Plan Year in which the absence begins or, if the
Employee does not need these Hours of Service to prevent a Break in Service in
the Plan Year in which the absence begins, the Plan Administrator shall credit
these Hours of Service to the immediately following Plan Year.
The Employer shall elect in its Adoption Agreement the method the Plan
Administrator shall use in crediting an Employee with Hours of Service.
1.38 KEY EMPLOYEE shall mean any Employee, former Employee, or the
Beneficiary of an Employee or former Employee, if the Employee or former
Employee at any time during the Plan Year which includes the Determination Date
or any of the four preceding Plan Years:
(a) is an officer of the Employer earning Testing Compensation
greater than 50% of the limitation under Code (S) 415(b)(1)(A) in
effect for such Plan Years. No more than 50 Employees, or if
lesser, the greater of three Employees or 10% of the Employees
shall be treated as officers;
(b) is one of the Employees earning Testing Compensation of more than
the dollar limitation under Code (S) 415(c)(1)(A) and owns one of
the 10 largest interests in the Employer;
(c) owns more than 5% of the Employer; or
(d) owns more than 1% of the Employer and earns Testing Compensation
in excess of $150,000.
The constructive ownership rules of Code (S) 318 (or the principles of that
section, in the case of an unincorporated Employer) shall apply to determine
ownership in the Employer. The Plan Administrator shall determine who is a Key
Employee in accordance with Code (S) 416(i)(1) and the Treasury regulations
thereunder.
6
<PAGE>
1.39 LEASED EMPLOYEE shall mean an individual (other than a common law
employee of the Employer) who, pursuant to an agreement between the Employer and
a leasing organization, has performed services for the Employer on a
substantially full time basis for a period of at least one year, and the
individual's service is of a type historically performed by common law employees
in the business field of the Employer. The Employer shall treat contributions
or benefits provided to the Leased Employee by the leasing organization as
contributions or benefits provided by the Employer to the extent attributable to
services the Leased Employee performed for the Employer. Notwithstanding the
preceding provisions of this paragraph, the Plan shall not treat an individual
as a Leased Employee if:
(a) the Leased Employee is covered by a money purchase pension plan
providing:
(1) a nonintegrated employer contribution rate of at least 10%
of Testing Compensation (including amounts which are
excludable from the Leased Employee's gross income under
Code (S)(S) 125, 402(a)(8), 402(h), or 403(b)),
(2) immediate participation, and
(3) full and immediate vesting; and
(b) Leased Employees do not constitute more than 20% of the
Employer's Nonhighly Compensated Employees.
1.40 LIMITATION YEAR shall mean the Plan Year, unless otherwise specified
by the Employer in the Adoption Agreement.
1.41 MATCHING CONTRIBUTIONS shall have the meaning assigned to it by
Section 4.14.
1.42 MATCHING CONTRIBUTIONS ACCOUNT shall have the meaning assigned to it
by Section 4.01.
1.43 MAXIMUM PERMISSIBLE AMOUNT shall have the meaning assigned to it by
Section 4.11.
1.44 NONFORFEITABLE shall mean a Participant's or Beneficiary's
unconditional claim, legally enforceable against the Plan, to the Participant's
Accrued Benefit.
1.45 NONHIGHLY COMPENSATED EMPLOYEE shall mean an Employee who is not a
Highly Compensated Employee and who is not a family member aggregated with a
Highly Compensated Employee.
1.46 NONHIGHLY COMPENSATED GROUP shall have the meaning assigned to it by
Section 4.14.
1.47 NON-KEY EMPLOYEE shall mean a Participant who is not a Key Employee
and who is employed by the Employer on the Accounting Date of the Plan Year,
regardless of whether the Participant satisfies the requirements of Section 4.05
during the Plan Year.
1.48 NONTRANSFERABLE ANNUITY shall mean an annuity which by its terms
provides that it may not be sold, assigned, discounted, pledged as collateral
for a loan, or held as security by or to any person other than the insurance
company which issued such annuity.
7
<PAGE>
1.49 NORMAL RETIREMENT DATE shall mean the date elected by the Employer in
the Adoption Agreement. If the Employer requires an Employee to retire upon
attaining a certain age, the Employer shall elect a Normal Retirement Date under
its Adoption Agreement which does not exceed that mandatory retirement age.
1.50 100% LIMITATION shall have the meaning assigned to it by Section 4.11.
1.51 OWNER-EMPLOYEE shall mean a Self-Employed Individual who is the sole
proprietor (if the Employer is a sole proprietorship) or a partner who owns more
than 10% of either the capital or profits interest in the partnership (if the
Employer is a partnership). The following special provisions shall apply to
Owner-Employees:
(a) If the Plan provides contributions or benefits for an Owner-Employee
or group of Owner-Employees who control the trade or business with
respect to which this Plan is established, and the Owner-Employee or
Owner-Employees also control as Owner-Employees one or more other
trades or businesses, plans must exist or be established with respect
to all the controlled trades or businesses so that when the plans are
combined they form a single plan which satisfies the requirements of
Code (S) 401(a) and Code (S) 401(d) with respect to the employees of
the controlled trades or businesses.
(b) The Plan shall exclude any Owner-Employee or group of Owner-Employees
if that Owner-Employee or that group controls any other trade or
business, unless the employees of the other controlled trade or
business are included in a plan which satisfies the requirements of
Code (S) 401(a) and Code (S) 401(d). The other qualified plan shall
provide contributions and benefits which are not less favorable than
the contributions and benefits provided for the Owner-Employee or
group of Owner-Employees under this Plan, or if an Owner-Employee is
covered under another qualified plan as an Owner-Employee, then the
plan established with respect to the trade or business the Owner-
Employee does control shall provide contributions or benefits as
favorable as those provided under the most favorable plan of the trade
or business the Owner-Employee does not control.
(c) For purposes of paragraphs (a) and (b) of this Section, an Owner-
Employee or group of Owner-Employees controls a trade or business if
the Owner-Employee or Owner-Employees together (1) own the entire
interest in the unincorporated trade or business, or (2) in the case
of a partnership, own more than 50% of either the capital interest or
the profits interest in the partnership. An Owner-Employee or group
of Owner-Employees shall be treated as owning any interest in a
partnership which is owned, directly or indirectly, by a partnership
which such Owner-Employees or such group of Owner-Employees are
considered to control within the meaning of the preceding sentence.
1.52 PARTICIPANT shall mean any Eligible Employee who has entered the Plan
on a Plan Entry Date in accordance with the provisions of Section 2.01. An
Employee who becomes a Participant shall remain a Participant under the Plan
until the Trustee has fully distributed the Participant's Nonforfeitable Accrued
Benefit. In addition, Participant shall have the meaning assigned to it by
Section 4.14.
1.53 PERIOD OF SEVERANCE shall have the meaning assigned to it by Section
2.02.
1.54 PERMISSIVE AGGREGATION GROUP shall mean the Required Aggregation Group
combined with any other plan maintained by the Employer, but only if such group
would satisfy in the aggregate the
8
<PAGE>
requirements of Code (S) 401(a)(4) and Code (S) 410. The Plan Administrator
shall determine which plans to take into account in determining the Permissive
Aggregation Group.
1.55 PERMITTED DISPARITY LEVEL shall mean the dollar amount determined
under the option elected by the Employer in Adoption Agreement Section 3.01 or
4.02, as applicable.
1.56 PLAN shall mean the retirement plan established or continued by the
Employer in the form of the Adoption Agreement and the Defined Contribution
Basic Plan Document and Trust Agreement. All section references within the Plan
are Plan section references unless the context clearly indicates otherwise.
1.57 PLAN ADMINISTRATOR shall mean the Employer or the person designated by
the Employer to hold the position of Plan Administrator. If two or more members
of a Related Group execute the Adoption Agreement or execute a participation
agreement with respect to the Plan, and the Employer does not designate a Plan
Administrator, "Plan Administrator" shall mean the entity executing the first
signature line of the Adoption Agreement.
1.58 PLAN ENTRY DATE shall mean the dates specified by the Employer in the
Adoption Agreement.
1.59 PLAN YEAR shall mean the 12 month period ending on the date elected by
the Employer in the Adoption Agreement.
1.60 PROFIT SHARING CONTRIBUTIONS shall have the meaning assigned to it by
Section 4.14.
1.61 PROFIT SHARING CONTRIBUTIONS ACCOUNT shall have the meaning assigned
to it by Section 4.01.
1.62 REEMPLOYMENT DATE shall mean the date the Employee first performs an
Hour of Service for the Employer subsequent to incurring a Break in Service as
defined in Section 2.03.
1.63 RELATED GROUP shall mean a controlled group of corporations (as
defined in Code (S) 414(b)), trades or businesses (whether or not incorporated)
which are under common control (as defined in Code (S) 414(c)), an affiliated
service group (as defined in Code (S) 414(m)), and any other entity required to
be aggregated with the Employer pursuant to Code (S) 414(o) and the Treasury
regulations thereunder. If the Employer is a member of a Related Group, the
Plan shall treat all Employees of the members of such Related Group as if
employed by a single employer. Solely for purposes of applying the Code (S) 415
limitations of Article IV, the Plan Administrator shall determine any Related
Group by modifying Code (S) 414(b) and (c) in accordance with Code (S) 415(h).
1.64 REQUIRED AGGREGATION GROUP shall mean (a) each qualified plan of the
Employer in which at least one Key Employee participates at any time during the
five Plan Year period ending on the Determination Date (regardless of whether
the Plan has terminated); and (b) any other qualified plan of the Employer which
enables a plan described in (a) to meet the requirements of Code (S) 401(a)(4)
or Code (S) 410.
1.65 REQUIRED BEGINNING DATE shall have the meaning assigned to it by
Section 6.03.
1.66 ROLLOVER CONTRIBUTIONS ACCOUNT shall have the meaning assigned to it
by Section 4.01.
9
<PAGE>
1.67 SELF-EMPLOYED INDIVIDUAL shall mean an individual who has Earned
Income for the taxable year from the trade or business for which the Plan is
established. Self-Employed Individual shall also mean an individual who would
have had Earned Income if the trade or business for which the Plan is
established had any net profits.
1.68 SERVICE shall mean any period of time the Employee is in the employ of
the Employer, including any period the Employee is on an unpaid leave of absence
authorized by the Employer under a uniform, nondiscriminatory policy established
by the Employer.
1.69 SERVICE FOR PREDECESSOR EMPLOYER shall mean the extent to which the
Employer shall take into account service with a predecessor employer. If the
Employer maintains the plan of a predecessor employer, the Plan shall treat
service of the Employee with the predecessor employer as service with the
Employer. If the Employer does not maintain the plan of the predecessor
employer, the Employer shall state in its Adoption Agreement the extent to which
the Plan shall take into account service with the predecessor employer.
1.70 SHAREHOLDER-EMPLOYEE shall mean an Employee or officer who, at any
time during the Employer's taxable year, owns more than 5%, either directly or
by attribution under Code (S) 318(a)(1), of the outstanding stock in an Employer
which is a Subchapter S corporation.
1.71 TESTING COMPENSATION shall have the meaning elected by the Employer in
the Adoption Agreement. Amounts included as Compensation are only those amounts
actually paid to a Participant.
Code (S) 415(c)(3) Compensation. If the Employer elects to have the Code
-------------------------------
(S) 415(c)(3) definition apply, Testing Compensation shall mean the
Employee's Earned Income, wages, salaries, fees for professional service,
and other amounts received for personal services actually rendered in the
course of employment with the Employer maintaining the Plan (including, but
not limited to, commissions paid salesmen, compensation for services on the
basis of a percentage of profits, commissions on insurance premiums, tips,
and bonuses) for the Plan Year or Limitation Year. Testing Compensation
shall not include:
(a) Employer contributions to a plan of deferred compensation to the
extent the contributions are not includable in the gross income of the
Employee for the taxable year in which contributed;
(b) distributions from a plan of deferred compensation (except for
distributions from an unfunded nonqualified plan includable in the
Employee's gross income);
(c) amounts realized from the exercise of a nonqualified stock option, or
when restricted stock or property held by an Employee either becomes
freely transferable or is no longer subject to a substantial risk of
forfeiture;
(d) amounts realized from the sale, exchange, or other disposition of
stock acquired under a qualified stock option;
(e) amounts which receive special tax benefits to the extent not
includable in the gross income of the Employee; or
(f) amounts which exceed $200,000 (or such larger indexed amount
determined by the Commissioner of Internal Revenue in accordance with
Code (S) 401(a)(17)).
W-2 Compensation. If the Employer elects to have the W-2 compensation
----------------
definition apply, Testing Compensation shall mean the Employee's Earned
Income and wages within the meaning
10
<PAGE>
of Code (S) 3401(a) and all other payments of remuneration to the Employee
by the Employer (in the course of the Employer's trade or business) for
which the Employer is required to furnish the Employee a written statement
under Code (S)(S) 6041(d), 6051(a)(3) and 6052, determined without regard
to any rules under Code (S) 3401(a) that limit the remuneration included in
wages based on the nature or location of the employment or the services
performed. Testing Compensation shall not include amounts which exceed
$200,000 (or such larger indexed amount determined by the Commissioner of
Internal Revenue in accordance with Code (S) 401(a)(17)).
The Employer shall specify in its Adoption Agreement whether Testing
Compensation shall include Employer contributions which are not includable in
the gross income of the Employee under Code (S)(S) 125, 402(a)(8), 402(h), or
403(b). The Employer's election pursuant to the immediately preceding sentence
shall apply to Testing Compensation for purposes of Code (S)(S) 401(m), 401(k),
401(a)(4), and 401(l). For purposes of the Key Employee determination and the
Highly Compensated Employee determination, the Plan Administrator shall apply
the Testing Compensation definition by including Employer contributions which
are not includable in the gross income of the Employee under Code (S)(S) 125,
402(a)(8), 402(h), or 403(b) and by disregarding the Code (S) 401(a)(17)
limitation. For purposes of the Code (S) 415 limitations of Sections 4.10 and
4.11, the Plan Administrator shall apply the Testing Compensation definition by
excluding Employer contributions which are not includable in the gross income of
the Employee under Code (S)(S) 125, 402(a)(8), 402(h), or 403(b). If the Plan
is a profit sharing plan with a Cash or Deferred Arrangement, Testing
Compensation shall also have the meaning assigned to it by Section 4.14(n).
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan Years
beginning on or after January 1, 1994, the annual Testing Compensation of each
Employee taken into account under the Plan shall not exceed the OBRA '93 Annual
Compensation Limit. The OBRA '93 Annual Compensation Limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with Code (S) 401(a)(17)(B). The cost-of-living adjustment in effect for a
calendar year applies to any period, not exceeding 12 months, over which Testing
Compensation is determined (determination period) beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
Annual Compensation Limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in this
Plan to the limitation under Code (S) 401(a)(17) shall mean the OBRA '93 Annual
Compensation Limit set forth in this provision.
If Testing Compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the current Plan Year,
the Testing Compensation for that prior determination period is subject to the
OBRA '93 Annual Compensation Limit in effect for that prior determination
period. For this purpose, for determination periods beginning before the first
day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93
Annual Compensation Limit is $150,000.
1.72 TOP HEAVY PLAN shall mean that the top heavy ratio for the Plan as of
the Determination Date exceeds 60% for a Plan Year if this Plan is the only
qualified plan maintained by the Employer. The top heavy ratio is a fraction.
The numerator of the fraction is the sum of the present value of Accrued
Benefits of all Key Employees as of the Determination Date (including any
contribution not made as of the Determination Date but which Code (S) 416 and
the Treasury regulations thereunder require the Plan Administrator to take into
account), and distributions made within the five Plan Year period immediately
preceding the Determination Date. The denominator of the fraction is a similar
sum
11
<PAGE>
determined for all Employees. The Plan Administrator shall calculate the top
heavy ratio by disregarding the Accrued Benefit attributable to voluntary
deductible Employee contributions, if any, and by disregarding the Accrued
Benefit of any Non-Key Employee who was formerly a Key Employee. The Plan
Administrator shall calculate the top heavy ratio by disregarding the Accrued
Benefit (including distributions, if any, of the Accrued Benefit) of an
individual who has not received credit for at least one Hour of Service with the
Employer during the five Plan Year period ending on the Determination Date. The
Plan Administrator shall calculate the top heavy ratio, including the extent to
which it shall take into account distributions, rollovers, and transfers, in
accordance with Code (S) 416 and the Treasury regulations thereunder.
If the Employer maintains other qualified plans, this Plan is a Top Heavy
Plan only if it is part of a Required Aggregation Group, and the top heavy ratio
for both the Required Aggregation Group and the Permissive Aggregation Group
exceeds 60%. The Plan Administrator shall calculate the top heavy ratio in the
same manner as required by the first paragraph of this Section, taking into
account all plans within the Required Aggregation Group and the Permissive
Aggregation Group. To the extent the Plan Administrator must take into account
distributions to an Employee, the Plan Administrator shall include distributions
from a terminated plan which would have been part of the Required Aggregation
Group if it were in existence on the Determination Date. The Plan Administrator
shall calculate the present value of Accrued Benefits and any other amounts
necessary for this calculation under Defined Benefit Plans included within the
group in accordance with the method elected by the Employer in the Adoption
Agreement, Code (S) 416, and the Treasury regulations thereunder. The accrued
benefit under a Defined Benefit Plan of a Participant other than a Key Employee
shall be determined under the method, if any, that uniformly applies for accrual
purposes under all Defined Benefit Plans maintained by the Employer, or, if
there is no uniform method, as if the Employee's benefit accrued not more
rapidly than the slowest accrual rate permitted under the fractional rule of
accrual of Code (S) 411(b)(1)(C). If an aggregated plan does not have a
valuation date coinciding with the Determination Date, the Plan Administrator
shall value the Accrued Benefits in the aggregated plan as of the most recent
valuation date falling within the 12 month period ending on the Determination
Date, except as Code (S) 416 and the Treasury regulations thereunder require for
the first and second plan year of a Defined Benefit Plan. The Plan
Administrator shall calculate the top heavy ratio with reference to the
Determination Dates that fall within the same calendar year.
1.73 TRUST shall mean the separate trust created by the Employer under the
Defined Contribution Basic Plan Document and Trust Agreement.
1.74 TRUST FUND shall mean all property of every kind held or acquired by
the Trustee under the Plan other than insurance contracts.
1.75 TRUSTEE shall mean the person or persons who execute the Adoption
Agreement as the Trustee, or any person who accepts the position of Trustee in
writing. The Trustee shall maintain the Plan of the Employer as a separate Plan
and as a separate Trust, independent from the plan and trust of any other
corporation, partnership, or self-employed individual who may adopt the Holland
& Hart Defined Contribution Basic Plan Document and Trust Agreement.
1.76 VALUATION DATE shall mean each date on which the Trustee values the
Trust Fund.
1.77 VOLUNTARY DEDUCTIBLE EMPLOYEE CONTRIBUTIONS ACCOUNT shall have the
meaning assigned to it by Section 4.01.
12
<PAGE>
1.78 VOLUNTARY NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS ACCOUNT shall have the
meaning assigned to it by Section 4.01.
1.79 YEAR OF SERVICE - PARTICIPATION shall have the meaning described in
Section 2.02.
1.80 YEAR OF SERVICE - VESTING shall have the meaning described in Section
5.06.
* * * END OF ARTICLE 1 * * *
13
<PAGE>
ARTICLE II
EMPLOYEES ENTITLED TO PARTICIPATE
2.01 ELIGIBILITY. Each Eligible Employee shall become a Participant in the
-----------
Plan in accordance with the method elected by the Employer in the Adoption
Agreement. If this Plan is a restated Plan, each Employee who was a Participant
in the Plan on the day before the Effective Date shall continue as a Participant
in the Plan. If the Employer elects a method in the Adoption Agreement that
requires less than 1 Year of Service, an Employee shall not be required to
complete a minimum number of Hours of Service during the period.
2.02 YEAR OF SERVICE - PARTICIPATION. For purposes of eligibility to
-------------------------------
participate under Section 2.01, the Plan shall count all of an Employee's Years
of Service with the Employer and the Related Group.
If the Employer elects a method other than the elapsed time method under
Section 1.37, Year of Service shall mean a 12 consecutive month period during
which the Employee completes not less than 1,000 Hours of Service, measuring the
beginning of the first 12 month period from the Employment Commencement Date,
and measuring succeeding 12 month periods in accordance with the method elected
by the Employer in its Adoption Agreement.
If the Employer elects the elapsed time method under Section 1.37, the Plan
Administrator shall credit an Employee for the aggregate of all time periods
commencing with the Employee's Employment Commencement Date or Reemployment Date
and ending on the date a Break in Service begins. An Employee shall also
receive credit for any Period of Severance of less than 12 consecutive months.
Fractional periods of a year shall be expressed in terms of days. Period of
Severance shall mean a continuous period of time during which the Employee is
not employed by the Employer. A Period of Severance begins on the date the
Employee retires, quits, or is discharged, or if earlier, the 12 month
anniversary of the date on which the Employee was otherwise first absent from
service. In the case of an individual who is absent from work for maternity or
paternity reasons (as determined under Section 1.37), the 12 consecutive month
period beginning on the first anniversary of the first date of such absence
shall not constitute a Period of Severance.
2.03 BREAK IN SERVICE - PARTICIPATION. If the Employer chooses the two
--------------------------------
year participation option in Adoption Agreement Section 2.01, an Employee shall
incur a "Break in Service" if during a Year of Service (as defined in Section
2.02) the Employee does not complete more than 500 Hours of Service for the
Employer. The Plan shall treat an Employee who incurs a one year Break in
Service and who has never become a Participant as a new Employee on the date the
Employee first performs an Hour of Service for the Employer after the Break in
Service.
2.04 PARTICIPATION UPON REEMPLOYMENT. A Participant whose employment
-------------------------------
terminates shall reenter the Plan as a Participant on the Participant's
Reemployment Date. An Employee who satisfies the Plan's eligibility conditions
but who terminates employment prior to becoming a Participant shall become a
Participant on the later of the Plan Entry Date on which the Employee would have
entered the Plan had he or she not terminated employment or the Participant's
Reemployment Date. An Employee who terminates employment prior to satisfying
the Plan's eligibility conditions shall become a Participant in accordance with
the Plan's eligibility conditions of Adoption Agreement Section 2.01.
14
<PAGE>
2.05 CHANGE IN ELIGIBLE EMPLOYEE STATUS. If a Participant does not
----------------------------------
terminate employment, but is not an Eligible Employee or ceases to be an
Eligible Employee by reason of employment within an employment classification
excluded from participation by the Employer under the Adoption Agreement, then
during the period such Participant is not an Eligible Employee, the Plan
Administrator shall not allocate any Employer contributions or forfeitures to
the Participant's Accounts except to the extent the Participant rendered
services for the Employer as an Eligible Employee. However, during such period,
the Participant, without regard to employment classification, shall continue to
receive credit for vesting under Article V for each included Year of Service and
the Participant's Accrued Benefit shall continue to share fully in Trust Fund
allocations under Section 4.08. A Participant who is no longer an Eligible
Employee will participate immediately upon becoming an Eligible Employee. An
Employee who is not an Eligible Employee shall participate immediately upon
becoming an Eligible Employee if the Employee has satisfied the requirements of
Section 2.01 other than being an Eligible Employee.
2.06 ELECTION NOT TO PARTICIPATE. The Employer shall specify in its
---------------------------
Adoption Agreement whether an Eligible Employee shall be permitted to elect not
to participate in the Plan. A Participant shall not be permitted to make such
an election. For an election to be effective for a particular Plan Year, the
Eligible Employee shall file the election in writing with the Plan Administrator
not later than 60 days prior to the Accounting Date of that Plan Year. The
Employer shall not make a contribution under the Plan for the Eligible Employee
for the Plan Year for which the election is effective, nor for any succeeding
Plan Year. The Plan Administrator shall furnish an Eligible Employee any form
required for purposes of an election under this Section. An election timely
filed shall be effective for the entire Plan Year.
* * * END OF ARTICLE 2 * * *
15
<PAGE>
ARTICLE III
CONTRIBUTIONS
3.01 AMOUNT OF EMPLOYER CONTRIBUTIONS. For each Plan Year, the Employer
--------------------------------
shall contribute to the Trust the amount determined by application of the
contribution option elected by the Employer in its Adoption Agreement, taking
into account only the Participants who satisfy the conditions for an allocation
of Employer contributions under Section 4.05 and only the Participant's
Compensation taken into account under Section 4.05. A Participant who remains
in the employ of the Employer after attaining the Normal Retirement Date shall
continue to participate in Employer contributions. The Employer, from its
records, shall determine the amount of any contributions to be made by it to the
Trust under the terms of the Plan. The Employer shall not make a contribution
to the Trust for any Plan Year to the extent the contribution would exceed the
limitations imposed by Article IV.
Limitation on Allocations if Employer Maintains a Money Purchase Pension
------------------------------------------------------------------------
Plan and a Defined Benefit Pension Plan. If the Plan is a money purchase
- ---------------------------------------
pension plan and the Employer maintains a defined benefit plan under which at
least one Participant in this Plan participates, the Employer shall determine
its contribution under this Section by reducing the total contribution, to the
extent necessary, to equal the maximum deductible amount under Code (S)
404(a)(7). If the Employer reduces its contribution under this paragraph, the
Employer shall determine its contribution with respect to each Participant by
adjusting each percentage by the same ratio as the reduced total Employer
contribution for the Plan Year bears to the total Employer contribution
determined without application of Code (S) 404(a)(7).
Contributions Made Pursuant to a Cash or Deferred Arrangement. Subject to
-------------------------------------------------------------
the limitations of Article III and Article IV, any Participant shall be entitled
to make contributions pursuant to a Cash or Deferred Arrangement if the Plan is
a Profit Sharing Plan with a Cash or Deferred Arrangement, and the Employer
permits such contributions in the Adoption Agreement. Contributions made
pursuant to a Cash or Deferred Arrangement shall be limited in a manner which
meets the requirements of Section 4.12.
3.02 MINIMUM EMPLOYER CONTRIBUTION. If this Plan is a Top Heavy Plan in
-----------------------------
any Plan Year, the contribution for each Non-Key Employee shall be at least
equal to a minimum contribution.
If the contribution rate for the Key Employee with the highest contribution
rate is greater than or equal to 3%, the minimum contribution shall be 3% of
Testing Compensation for each Non-Key Employee. If the contribution rate for
the Key Employee with the highest contribution rate is less than 3%, the minimum
contribution for each Non-Key Employee shall equal the highest contribution rate
for a Key Employee.
The contribution rate is the sum of Employer contributions (not including
Employer contributions to Social Security) and forfeitures allocated to the Key
Employee's Account for the Plan Year divided by the Key Employee's Testing
Compensation for the Plan Year. To determine the contribution rate, the Plan
Administrator shall treat all qualified top heavy defined contribution plans
maintained by the Employer as a single plan. For Plan Years beginning after
December 31, 1988, the Plan Administrator shall not treat Elective Deferrals
made to any plan pursuant to a Cash or Deferred Arrangement as Employer
contributions for any Non-Key Employee; however, the Plan Administrator shall
treat Elective Deferrals made to any plan pursuant to a Cash or Deferred
Arrangement as Employer contributions for all Key Employees.
16
<PAGE>
Notwithstanding the preceding provisions of this Section, if a Defined
Benefit Plan maintained by the Employer which benefits a Key Employee depends on
this Plan to satisfy the antidiscrimination rules of Code (S) 401(a)(4) or the
coverage rules of Code (S) 410 (or another plan benefiting the Key Employee so
depends on such Defined Benefit Plan), the minimum contribution for a Non-Key
Employee shall be 3% of the Non-Key Employee's Testing Compensation regardless
of the highest contribution rate for any Key Employee.
If the contribution rate for the Plan Year with respect to a Non-Key
Employee is less than the minimum contribution, the Employer shall increase its
contribution for such Non-Key Employee to the extent necessary so that the
contribution rate for the Plan Year shall equal the minimum contribution. If
more than one entity maintains this Plan, each entity shall make the additional
contribution attributable to the Testing Compensation it pays the Non-Key
Employee, unless the members enter into a separate written agreement allocating
the responsibility for the additional contribution in another manner.
If the Employer maintains, or has maintained, other qualified plans or if a
Non-Key Employee participates in another top heavy qualified plan maintained by
the Employer, the Plan Administrator shall administer this Section as modified
by Adoption Agreement Section 3.02.
3.03 PAYMENT OF EMPLOYER CONTRIBUTION. The Employer shall pay all Employer
--------------------------------
contributions to the Trustee not later than the due date, including extensions,
of the Employer's federal income tax return for the year. The Employer shall
make contributions under a Cash or Deferred Arrangement to the Trust within an
administratively reasonable period of time after withholding the corresponding
Compensation from the Participant no later than the time prescribed by the Code
or by Treasury regulations. Contributions under a Cash or Deferred Arrangement
shall be Employer contributions for all purposes under this Plan, except to the
extent the Code or Treasury regulations prohibit the use of these contributions
to satisfy the qualifications requirements of the Code.
3.04 RETURN OF EMPLOYER CONTRIBUTIONS. Upon written request from the
--------------------------------
Employer, the Trustee shall return to the Employer the amount of the Employer's
contribution made by mistake of fact. Any contribution made by the Employer
because of a mistake of fact must be returned to the Employer within one year
after the date when the contribution was made. The Trustee shall not increase
the amount of the Employer contribution to be returned for any earnings
attributable to the contribution, but the Trustee shall decrease the Employer
contribution to be returned for any losses attributable to the contribution. In
the event that the Commissioner of Internal Revenue determines that the Plan is
not initially qualified under the Code, any contribution made contingent upon
that initial qualification by the Employer shall be returned to the Employer
within one year after the date the initial qualification is denied, but only if
the application for the qualification is made by the time prescribed by law for
filing the Employer's return for the taxable year in which the Employer adopted
the Plan, or such later date as the Secretary of the Treasury may prescribe.
3.05 ROLLOVER CONTRIBUTIONS. The Employer shall specify in the Adoption
----------------------
Agreement whether rollover contributions shall be permitted under the Plan. If
so authorized by the Adoption Agreement, any Employee (prior to satisfying the
Plan's eligibility conditions) or Participant, after filing with the Trustee the
form prescribed by the Plan Administrator, may contribute cash or other property
to the Trust other than as a voluntary nondeductible Employee contribution if
the contribution is a "rollover contribution" which the Code permits an Employee
to transfer either directly or indirectly from one qualified plan to another
qualified plan. Before accepting a rollover contribution, the Trustee may
require an Employee to furnish satisfactory evidence that the proposed transfer
is in fact a rollover contribution which the Code permits an Employee to make to
a qualified plan. A rollover contribution shall not be considered an Annual
Addition under Article IV.
17
<PAGE>
The Trustee shall invest the rollover contribution in a segregated
investment Account for the Employee's sole benefit subject to Section 4.08
unless the Trustee, in its sole discretion, agrees to invest the rollover
contribution as part of the Trust Fund. The Trustee shall hold, administer, and
distribute a rollover contribution in the same manner as any Employer
contribution made to the Trust. If an Employee makes a rollover contribution to
the Trust prior to satisfying the Plan's eligibility conditions, the Plan
Administrator and Trustee shall treat the Employee as a Participant for all
purposes of the Plan except that the Employee shall not be considered a
Participant for purposes of sharing in Employer contributions or Participant
forfeitures under the Plan until such Employee actually becomes a Participant in
the Plan.
3.06 VOLUNTARY NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS. Subject to the
----------------------------------------------
limitations of Article III and Article IV, any Participant, as of any Accounting
Date, shall be entitled to make voluntary nondeductible Employee contributions
to the Trust if the Employer permits such contributions in the Adoption
Agreement, and the Plan is a Profit Sharing Plan with a Cash or Deferred
Arrangement. A Participant shall make a voluntary nondeductible Employee
contribution for a particular Plan Year not later than 30 days after the
Accounting Date of that Plan Year. The Plan Administrator shall not accept
voluntary deductible Employee contributions after December 31, 1986. Voluntary
nondeductible Employee contributions and matching contributions on such
contributions, if any, for Plan Years beginning after December 31, 1986 shall be
limited in a manner which meets the requirements of Code (S) 401(m) and Section
4.13.
* * * END OF ARTICLE 3 * * *
18
<PAGE>
ARTICLE IV
ALLOCATIONS TO ACCOUNTS
4.01 INDIVIDUAL ACCOUNTS. The Plan Administrator shall maintain a separate
-------------------
Account or multiple Accounts in the name of each Participant to reflect the
Participant's Accrued Benefit under the Plan. If a Participant reenters the
Plan subsequent to having a Forfeiture Break in Service, the Plan Administrator
shall maintain a separate Account for the Participant's pre-Forfeiture Break in
Service Accrued Benefit and a separate Account for the Participant's post-
Forfeiture Break in Service Accrued Benefit, unless or until the Participant's
entire Accrued Benefit under the Plan is 100% Nonforfeitable.
Employer Contributions Account. The Plan Administrator shall maintain, or
------------------------------
shall direct the Trustee to maintain, an Employer Contributions Account to
reflect the Participant's Accrued Benefit derived from Employer contributions
and the income, expenses, gains, and losses attributable to the Participant's
Employer contributions, adjusted in accordance with Article IV. If the Plan is
a Profit Sharing Plan with a Cash or Deferred Arrangement, Employer
contributions shall include Elective Deferrals, Matching Contributions, Employer
Nonelective Contributions, and Profit Sharing Contributions, as determined under
Section 3.01; however, the Plan Administrator shall maintain, or shall direct
the Trustee to maintain, separate Accounts in the name of each Participant to
reflect the Participant's Accrued Benefit under the Plan derived from the
following types of Employer contributions.
Profit Sharing Contributions Account. The Plan Administrator shall
------------------------------------
maintain, or shall direct the Trustee to maintain, a separate Account in
the name of each Participant to reflect the Participant's Accrued Benefit
under the Plan derived from the Profit Sharing Contributions.
Elective Deferrals Account. If the Plan permits or has ever permitted
--------------------------
contributions under a Cash or Deferred Arrangement, the Plan Administrator
shall maintain an Elective Deferrals Account in the name of each
Participant to reflect the Participant's Accrued Benefit under the Plan
derived from contributions made under a Cash or Deferred Arrangement and
Employer Nonelective Contributions.
Matching Contributions Account. If the Plan permits or has ever permitted
------------------------------
Matching Contributions under a Cash or Deferred Arrangement, the Plan
Administrator shall maintain a Matching Contributions Account in the name
of each Participant to reflect the Participant's Accrued Benefit under the
Plan derived from Matching Contributions.
Employee Contributions Account. The Plan Administrator shall maintain, or
------------------------------
shall direct the Trustee to maintain, separate Accounts in the name of each
Participant to reflect the Participant's Accrued Benefit under the Plan
derived from the following types of Employee contributions and the income,
expenses, gains, and losses attributable to the Participant's Employee
contributions, adjusted in accordance with Article IV.
Voluntary Deductible Employee Contributions Account. If the Plan permitted
---------------------------------------------------
voluntary deductible Employee contributions for certain Plan Years
beginning prior to January 1, 1987, the Plan Administrator shall maintain a
Voluntary Deductible Employee Contributions Account in the name of each
Participant to reflect the Participant's Accrued Benefit under the Plan
derived from deductible Employee contributions.
Voluntary Nondeductible Employee Contributions Account. If the Plan
------------------------------------------------------
permits or has ever permitted voluntary nondeductible Employee
contributions, the Plan Administrator shall maintain
19
<PAGE>
a Voluntary Nondeductible Employee Contributions Account in the name of
each Participant to reflect the Participant's Accrued Benefit under the
Plan derived from nondeductible Employee contributions.
Rollover Contributions Account. If the Plan permits or has ever permitted
------------------------------
rollover contributions in accordance with Section 3.05, the Plan
Administrator shall maintain a Rollover Contributions Account in the name
of each Participant who has contributed a rollover contribution (within the
meaning of Section 3.05).
4.02 ALLOCATION OF CONTRIBUTIONS AND FORFEITURES. After any restoration
-------------------------------------------
allocation required by Article V, the Plan Administrator shall allocate and
credit each annual Employer contribution and forfeitures, if any. The Plan
Administrator shall make all Plan allocations for a particular Plan Year as of
the Accounting Date of that Plan Year. If more than one entity maintains the
Plan, the Plan Administrator shall allocate all Employer contributions and
forfeitures to each Participant in the Plan in accordance with this Article,
without regard to which contributing Employer employs the Participant. A
Participant's Compensation includes Compensation from all participating
Employers, irrespective of which Employers are contributing to the Plan. The
Plan Administrator shall allocate and credit the Employer contributions to the
Participants' Accounts in accordance with the method elected by the Employer in
the Adoption Agreement.
4.03 ALLOCATION OF MINIMUM CONTRIBUTION. The Plan Administrator shall
----------------------------------
allocate any additional contribution to the Employer Contributions Account of
the Non-Key Employee for whom the Employer makes the contribution in accordance
with Section 3.02. If the Plan is a Profit Sharing Plan with a Cash or Deferred
Arrangement, the Plan Administrator shall allocate any minimum contribution to
the Participant's Profit Sharing Contributions Account.
4.04 FORFEITURES. The Plan Administrator shall treat the amount of
-----------
forfeitures arising under Article V in the manner specified by the Employer in
its Adoption Agreement. The Plan Administrator shall subtract all forfeitures
when they occur under Article V from the Participants' Employer Contributions
Accounts which incurred the forfeitures.
4.05 ELIGIBILITY TO RECEIVE ALLOCATION OF EMPLOYER CONTRIBUTION AND
--------------------------------------------------------------
FORFEITURES. If the Employer elects an option in Section 1.37 other than the
- -----------
elapsed time method, the Plan Administrator shall determine a Participant's
eligibility to receive an allocation of Employer contributions and forfeitures
in accordance with the method elected by the Employer in the Adoption Agreement.
If the Employer elects the elapsed time method, each Participant shall
share in Employer contributions for the period beginning on the date the
Participant enters the Plan and ending on the date the Participant severs
employment with the Employer and all members of any Related Group or ending on
the date the Participant is no longer an Eligible Employee.
4.06 ACCOUNTING FOR DISTRIBUTIONS. The Plan Administrator shall subtract
----------------------------
all distributions made to a Participant or to the Participant's Beneficiary from
the Participant's Account when made.
4.07 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each
--------------------------------------
Participant's Accrued Benefit consists of that proportion of the net worth (at
fair market value) of the Trust Fund which the balance in the Participant's
Accounts (excluding the cash value of the any life insurance contracts) bears to
the Accounts of all Participants (excluding the cash value of the any life
insurance contracts), plus the cash surrender value of any insurance contracts
held by the Trustee on the Participant's life.
20
<PAGE>
For purposes of a distribution under the Plan, the value of a Participant's
Accrued Benefit shall be its value as of the Valuation Date immediately
preceding the date of the distribution. Any distribution (other than a
distribution from a segregated Account) made to a Participant (or to the
Participant's Beneficiary) more than 90 days after the most recent Valuation
Date shall include interest on the amount of the distribution as an expense of
the Trust Fund. The interest accrues from such Valuation Date to the date of
the distribution at the rate of 5% annually.
4.08 ALLOCATION AND DISTRIBUTION OF NET INCOME, GAIN, OR LOSS. As of each
--------------------------------------------------------
Valuation Date the Plan Administrator shall adjust the Accounts to reflect net
income, gain, or loss since the last Valuation Date in accordance with the
provisions of this Section. If the Plan is a Profit Sharing Plan with a Cash or
Deferred Arrangement, the Plan Administrator shall adjust any contributions made
pursuant to a Cash or Deferred Arrangement to reflect net income, gain, or loss
on each Valuation Date in accordance with the method elected by the Employer in
Adoption Agreement Section 4.08.
(a) Trust Fund Accounts. The allocation provisions of this paragraph
-------------------
shall apply to all Participant Accounts other than segregated
investment Accounts. The Plan Administrator first shall adjust the
Participant Accounts, beginning with the balances of the Accounts on
the last Valuation Date, by:
(1) reducing the appropriate Accounts for any forfeitures arising
under Article V,
(2) reducing the appropriate Accounts for distributions since the
last Valuation Date,
(3) reducing the appropriate Accounts for insurance premiums paid
since the last Valuation Date with respect to any life insurance
contracts (see Section 11.01), and
(4) reducing the appropriate Accounts for the cash value of any life
insurance contracts.
The Plan Administrator then, subject to the restoration allocation
requirements of Article V, shall allocate the net income, gain, or
loss pro rata to the Participant Accounts, as adjusted by the
immediately preceding sentence. The allocable net income, gain, or
loss shall be the net income (or net loss), including the increase or
decrease in the fair market value of assets, since the last Valuation
Date.
(b) Segregated Investment Accounts. A segregated investment Account shall
------------------------------
receive all income it earns and shall bear all expense or loss it
incurs. As of the Valuation Date, the Plan Administrator shall reduce
a segregated Account for any forfeiture after the Plan Administrator
has made all other allocations, changes, or adjustments to the
segregated investment Account for the Plan Year.
(c) Additional rules. An Excess Amount or suspense account (see Section
----------------
4.10) shall not share in the allocation of net income, gain, or loss
described in this Section.
4.09 ALLOCATION OF VOLUNTARY NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS. The
------------------------------------------------------------
Plan Administrator shall allocate and credit a voluntary nondeductible Employee
contribution made for a particular Plan Year to the contributing Participant's
Voluntary Nondeductible Employee Contributions Account as of the earlier of the
Valuation Date following the contribution or the Accounting Date of the Plan
Year to which the contribution relates.
21
<PAGE>
4.10 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. The amount of
----------------------------------------------------
Annual Additions which the Plan Administrator may allocate under this Plan on a
Participant's behalf for a Limitation Year may not exceed the Maximum
Permissible Amount. If the amount the Employer otherwise would contribute to
the Participant's Accounts would cause the Annual Additions for the Limitation
Year to exceed the Maximum Permissible Amount, the Employer shall reduce the
amount of its contribution so that the Annual Additions for the Limitation Year
shall equal the Maximum Permissible Amount. The Excess Amount will be deemed to
consist of the Annual Additions last allocated. The Plan Administrator shall
determine the Excess Amount by treating the Annual Additions attributable to a
welfare benefit fund or an individual medical account, if any, as allocated
first, irrespective of the actual allocation date.
Prior to determining the Participant's actual Testing Compensation for the
Limitation Year, the Employer may determine the Maximum Permissible Amount for a
Participant on the basis of a reasonable estimation of the Participant's Testing
Compensation for the Limitation Year, uniformly determined for all Participants
similarly situated. As soon as is administratively feasible after the end of
the Limitation Year, the Plan Administrator shall determine the Maximum
Permissible Amount for the Limitation Year based on the Participant's actual
Testing Compensation for the Limitation Year.
Disposition of Excess Amount. If there is an Excess Amount with respect to
----------------------------
a Participant for a Limitation Year because of contributions based on estimated
Testing Compensation, the allocation of forfeitures or a reasonable error in
determining the amount of Elective Deferrals, the Plan Administrator shall
dispose of such Excess Amount as follows:
(a) The Plan Administrator shall return any voluntary nondeductible
Employee contributions and any Elective Deferrals to the Participant
to the extent that the return would reduce the Excess Amount.
(b) If, after the application of paragraph (a) of this Section, an Excess
Amount still exists, and the Plan covers the Participant at the end of
the Limitation Year, then the Plan Administrator shall use the Excess
Amount to reduce future Employer contributions (including any
allocation of forfeitures) under the Plan for the next Limitation Year
and for each succeeding Limitation Year, as is necessary, for the
Participant.
(c) If, after the application of paragraph (a) of this Section, an Excess
Amount still exists, and the Plan does not cover the Participant at
the end of a Limitation Year, then the Plan Administrator shall hold
the Excess Amount unallocated in a suspense account. The Plan
Administrator shall apply the suspense account to reduce Employer
contributions for all remaining Participants in the next Limitation
Year, and in each succeeding Limitation Year if necessary. If a
suspense account is in existence at any time during a Limitation Year,
all amounts in the suspense account must be allocated to Participant's
Accounts before any Employer or Employee contributions may be made to
the Plan for the Limitation Year.
(d) The Plan Administrator shall not distribute any Excess Amounts to
Participants, former Participants, or Beneficiaries.
If there is an Excess Amount with respect to a Participant for a Limitation
Year for any reason other than forfeitures, the estimation of Testing
Compensation or reasonable error in determining the amount of Elective
Deferrals, the Plan Administrator shall dispose of such Excess Amount by (1)
effective for Plan Years beginning on and after January 1, 1994, returning any
voluntary nondeductible Employee contributions and any Elective Deferrals to the
Participant to the extent that the return would reduce the Excess Amount and (2)
to the extent an Excess Amount exists after the return of any voluntary
nondeductible Employee contributions and Elective Deferrals, by reallocating the
Excess Amount to the
22
<PAGE>
remaining Participants who are eligible for an allocation of Employer
contributions for the Plan Year in which the Limitation Year ends. The Plan
Administrator shall make this reallocation on the basis of the allocation method
under the Plan as if the Participant whose Accounts otherwise would receive the
Excess Amount is not eligible for an allocation of Employer contributions.
More than One Plan. The Employer shall specify in the Adoption Agreement
------------------
the manner in which the Excess Amount shall be allocated between the plans of
the Employer.
Defined Benefit Plan Limitation. The Employer shall specify in its
-------------------------------
Adoption Agreement the method to satisfy the Defined Benefit Plan limitation.
4.11 CODE (S) 415 DEFINITIONS. For purposes of this Article, the following
------------------------
terms shall have the meaning described in the paragraphs below:
(a) ANNUAL ADDITIONS shall mean the sum of the following amounts allocated
on behalf of a Participant for a Limitation Year, of (1) all Employer
contributions; (2) all forfeitures; and (3) all Employee contributions
effective for Plan Years beginning after December 31, 1986. Except to
the extent provided in Treasury regulations, Annual Additions shall
include Excess Deferrals, Excess Contributions, and Excess Aggregate
Contributions, irrespective of whether the Plan distributes or
forfeits such excess amounts. Annual Additions shall also include
Excess Amounts reapplied to reduce Employer contributions under
Section 4.10. Amounts allocated after March 31, 1984 to an individual
medical account (as defined in Code (S) 415(l)(2)) and included as
part of a pension and annuity plan maintained by the Employer shall be
Annual Additions. Furthermore, Annual Additions shall include
contributions paid or accrued after December 31, 1985 for taxable
years ending after December 31, 1985 attributable to post-retirement
medical benefits allocated to the separate account of a key employee
(as defined in Code (S) 419A(d)(3)) under a welfare benefit fund (as
defined in Code (S) 419(e)) maintained by the Employer, but only for
purposes of the dollar limitation applicable to the Maximum
Permissible Amount.
(b) DEFINED BENEFIT PLAN shall mean a retirement plan which does not
provide for individual accounts for Employer contributions. The Plan
Administrator shall treat all Defined Benefit Plans (whether or not
terminated) maintained by the Employer as a single plan.
(c) DEFINED BENEFIT PLAN FRACTION shall mean the fraction described below:
Projected annual benefit of the Participant
under all Defined Benefit Plans of the Employer
-------------------------------------------------------
The lesser of (1) 125% (subject to the 100%
Limitation described in paragraph (h)
of this Section) of the dollar
limitation in effect under Code (S) 415(b)(1)(A)
for the Limitation Year, or (2) 140% of the
Participant's average Testing Compensation for the
Participant's highest three consecutive Years of Service
To determine the denominator of this fraction, the Plan Administrator
shall make any adjustment required under Code (S) 415(b) and shall
determine a Year of Service in accordance with Section 5.06. The
"projected annual benefit" is the annual retirement benefit (adjusted
to an actuarially equivalent straight life annuity if the plan
expresses
23
<PAGE>
such benefit in a form other than a straight life annuity or qualified
joint and survivor annuity) of the Participant under the terms of the
Defined Benefit Plan with the assumptions that the Participant
continues employment until the normal retirement age as stated in the
Defined Benefit Plan (or current age, if later), that the
Participant's compensation continues at the same rate as in effect in
the Limitation Year under consideration, and that all other relevant
factors used to determine benefits under the Defined Benefit Plan
remain constant as of the current Limitation Year for all future
Limitation Years.
Current Accrued Benefit. If the Participant accrued benefits in one
-----------------------
or more Defined Benefit Plans maintained by the Employer which were in
existence on May 5, 1986, the dollar limitation used in the
denominator of this fraction shall not be less than the Participant's
current accrued benefit. A Participant's current accrued benefit is
the sum of the annual benefits under such defined benefit plans which
the Participant had accrued as of the end of the 1986 Limitation Year
(the last Limitation Year beginning before January 1, 1987),
determined without regard to any change in the terms or conditions of
the Plan made after May 5, 1986 and without regard to any cost of
living adjustment occurring after May 5, 1986. This current accrued
benefit rule applies only if the Defined Benefit Plans individually
and in the aggregate satisfied the requirements of Code (S) 415 as in
effect at the end of the 1986 Limitation Year.
(d) DEFINED CONTRIBUTION PLAN shall mean a retirement plan which provides
for an individual account for each participant and for benefits based
solely on the amount contributed to the participant's account, and any
income, expenses, gains, losses, and forfeitures of accounts of other
participants which the plan may allocate to such participant's
account. The Plan Administrator shall treat all Defined Contribution
Plans (whether or not terminated) maintained by the Employer as a
single plan. For purposes of the limitations of this Article, the
Plan Administrator shall treat employee contributions made to a
Defined Benefit Plan maintained by the Employer as a separate Defined
Contribution Plan. The Plan Administrator shall also treat as a
Defined Contribution Plan an individual medical account (as defined in
Code (S) 415(l)(2)) included as part of a Defined Benefit Plan
maintained by the Employer and, for taxable years ending after
December 31, 1985, a welfare benefit fund under Code (S) 419(e)
maintained by the Employer to the extent there are post-retirement
medical benefits allocated to the separate account of a key employee
(as defined in Code (S) 419A(d)(3)).
(e) DEFINED CONTRIBUTION PLAN FRACTION shall mean the fraction described
below:
The sum as of the close of the Limitation Year of the
Annual Additions to the Participant's Accounts under all
Defined Contribution Plans of the Employer
-----------------------------------------------------------
The sum of the lesser of the following amounts determined
for the Limitation Year and for each prior Year of Service
with the Employer: (1) 125% (subject to the 100%
Limitation in paragraph (h) of this
Section) of the dollar limitation in
effect under Code (S) 415(c)(1)(A) for the Limitation Year
(determined without regard to the special dollar
limitations for employee stock ownership plans), or
(2) 35% of the Participant's Testing Compensation for the
Limitation Year
24
<PAGE>
For purposes of determining the Defined Contribution Plan fraction,
the Plan Administrator shall not recompute Annual Additions in
Limitation Years beginning prior to January 1, 1987 to treat all
Employee contributions as Annual Additions. If the Plan satisfied Code
(S) 415 for Limitation Years beginning prior to January 1, 1987, the
Plan Administrator shall redetermine the Defined Contribution Plan
Fraction and the Defined Benefit Plan Fraction as of the end of the
1986 Limitation Year in accordance with this paragraph. If the sum of
the redetermined fractions exceeds 1.0, the Plan Administrator shall
subtract permanently from the numerator of the Defined Contribution
Plan Fraction an amount equal to the product of (1) the excess of the
sum of the fractions over 1.0, times (2) the denominator of the
Defined Contribution Plan Fraction. In making the adjustment, the Plan
Administrator shall disregard any accrued benefit under the Defined
Benefit Plan which is in excess of the current accrued benefit (as
determined in Section 4.11(c)). This Plan continues any transitional
rules applicable to the determination of the Defined Contribution Plan
Fraction under the Employer's Plan as of the end of the 1986
Limitation Year.
(f) EXCESS AMOUNT shall mean the excess of the Participant's Annual
Additions for the Limitation Year over the Maximum Permissible Amount.
(g) MAXIMUM PERMISSIBLE AMOUNT shall mean the lesser of (1) $30,000 (or,
if greater, 25% of the defined benefit dollar limitation under Code
(S) 415(b)(1)(A)), or (2) 25% of the Participant's Testing
Compensation for the Limitation Year. If there is a short Limitation
Year because of a change in Limitation Year, the Plan Administrator
shall multiply the $30,000 (or adjusted) limitation by the following
fraction:
Number of months in the short Limitation Year
-----------------------------------------------
12
(h) 100% LIMITATION shall mean, if it applies, that the Plan Administrator
shall determine the denominator of the Defined Benefit Plan Fraction
and the denominator of the Defined Contribution Plan Fraction by
substituting 100% for 125% each place 125% appears in the definition
of Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction under this Section. The 100% Limitation applies during any
Limitation Year this Plan is Top Heavy Plan only if (1) the Plan's top
heavy ratio exceeds 90%, or (2) the Plan's top heavy ratio is greater
than 60%, and the Employer does not provide extra minimum benefits
which satisfy Code (S) 416(h)(2).
4.12 CONTRIBUTIONS UNDER A CASH OR DEFERRED ARRANGEMENT. This Section
--------------------------------------------------
shall apply only if the Plan is a profit sharing plan with a Cash or Deferred
Arrangement effective for Plan Years beginning after December 31, 1986.
$7,000 Limitation. A Participant's Elective Deferrals for a calendar year
-----------------
beginning after December 31, 1986 shall not exceed $7,000 or the adjusted
limitation in effect at the beginning of the calendar year (the "$7,000
Limitation"). If the Employer determines the Participant's Elective Deferrals
for a calendar year would exceed the $7,000 Limitation, the Employer shall
suspend the Participant's Elective Deferrals until the following January 1. If
a Participant makes Elective Deferrals to another Cash or Deferred Arrangement,
or contributes under a simplified employee pension cash or deferred arrangement,
Code (S) 403(b) annuity, Code (S) 457 plan, or Code (S) 501(c)(18) plan
(irrespective of whether the Employer maintains the other plan), and the
Participant's contributions exceed the $7,000 limitation,
25
<PAGE>
the Participant shall have the right to provide the Plan Administrator with a
written claim for Excess Deferrals made for a calendar year. The Participant
shall submit the claim no later than the March 31 following the close of the
particular calendar year and the claim shall specify the amount of the
Participant's Elective Deferrals under this Plan which are Excess Deferrals. If
the total amount of a Participant's Elective Deferrals under this Plan and any
other plan maintained by the Employer exceed the $7,000 Limitation for any
calendar year, the Participant shall be deemed to have designated such excess
amount as an Excess Deferral, and the Excess Deferral shall be distributed to
the Participant in accordance with this Section.
Distribution of Excess Deferrals. If, after the close of a calendar year,
--------------------------------
the Plan Administrator determines a Participant's Elective Deferrals exceed the
$7,000 limitation, the Plan Administrator shall distribute the Excess Deferral,
as adjusted for allocable income or loss. If the Plan Administrator receives a
timely claim as described in the preceding paragraph, it shall distribute the
Excess Deferrals specified by the Participant in his or her claim. The Plan
Administrator shall make all distributions under this paragraph no later than
April 15 of the calendar year following the calendar year in which the Excess
Deferral occurred. If the Plan Administrator distributes the Excess Deferrals
by the appropriate April 15, it may make the distribution irrespective of any
other provision under this Plan or under the Code. If the Plan Year is not a
calendar year, the Employer shall determine to which Plan Year the Excess
Deferrals relate by treating the last deferrals made for the calendar year as
the Excess Deferrals.
Determination of Allocable Income or Loss to Excess Deferrals. The Plan
-------------------------------------------------------------
Administrator shall adjust Excess Deferrals for any income or loss. The
Employer shall specify in its Adoption Agreement whether income or loss shall be
adjusted to the date of distribution or adjusted to the last day of the calendar
year.
Adjustment to the Date of Distribution. If the Employer elects to adjust
--------------------------------------
income or loss to the date of the distribution, the income or loss
allocable to the Excess Deferrals is the sum of: (1) income or loss
allocable to the Participant's Elective Deferrals Account for the calendar
year multiplied by the following fraction:
Participant's Excess Deferrals for the calendar year
----------------------------------------------------------------
Participant's Elective Deferrals Account without regard to any
income or loss occurring during such calendar year
and (2) 10% of the amount determined under (1) multiplied by the number of
whole calendar months between the end of the calendar year and the date of
distribution, counting the month of distribution if distribution occurs
after the 15th of such month.
Adjustment to the Last Day of the Calendar Year. If the Employer elects to
-----------------------------------------------
adjust income or loss to the last day of the calendar year, the income or
loss allocable to Excess Deferrals is the income or loss allocable to the
Participant's Elective Deferrals multiplied by the following fraction:
Participant's Excess Deferrals for the calendar year
----------------------------------------------------------------
Participant's Elective Deferrals Account without regard to any
income or loss occurring during such calendar year.
Actual Deferral Percentage Test. For each Plan Year, the Plan
-------------------------------
Administrator shall determine whether the Elective Deferrals satisfy the actual
deferral percentage ("ADP") test.
26
<PAGE>
(a) If the average ADP for the Nonhighly Compensated Group exceeds 8%, the
Plan shall satisfy the ADP test if the average ADP for the Highly
Compensated Group does not exceed 1.25 times the average ADP of the
Nonhighly Compensated Group.
(b) If the average ADP for the Nonhighly Compensated Group equals or
exceeds 2% but does not exceed 8%, the Plan shall satisfy the ADP test
if the average ADP for the Highly Compensated Group does not exceed
the average ADP for the Nonhighly Compensated Group by more than two
percentage points.
(c) If the average ADP for the Nonhighly Compensated Group is less than
2%, the Plan shall satisfy the ADP test if the average ADP for the
Highly Compensated Group is not more than twice the average ADP for
Nonhighly Compensated Group.
Calculation of ADP. The "average ADP" for a group is the average of the
------------------
separate ADPs calculated for each Participant who is a member of that group. A
Participant's ADP for a Plan Year is the ratio of the Participant's Elective
Deferrals (including the Excess Deferrals for each Highly Compensated Employee
except to the extent that the Excess Deferrals are included in the ACP test if
the ADP test is satisfied both with and without exclusion of these Elective
Deferrals and excluding Excess Deferrals for each Nonhighly Compensated
Employee) for the Plan Year to the Employee's Testing Compensation for the Plan
Year. Each Participant's ADP shall be calculated to the nearest 100th of 1%.
For aggregated family members treated as a single Highly Compensated Employee,
the ADP of the family unit is the ADP determined by combining the Elective
Deferrals and Testing Compensation of all aggregated family members. The Plan
Administrator may determine (in a manner consistent with Treasury regulations)
the ADPs of the Participants by taking into account Employer Nonelective
Contributions or Matching Contributions, or both, made to this Plan or to any
other qualified plan maintained by the Employer, which are 100% Nonforfeitable
at all times and which are subject to the Distribution Restrictions. For
purposes of calculating the ADP test, Elective Deferrals, Employer Nonelective
Contributions and Matching Contributions must be made before the last day of the
12 month period immediately following the Plan Year to which contributions
relate. The Employer shall maintain records sufficient to demonstrate
satisfaction of the ADP test and the amount of Employer Nonelective
Contributions or Matching Contributions, if any, used in such test.
A Highly Compensated Employee's ADP shall include Elective Deferrals under
any other cash or deferred arrangement maintained by the Employer. If a Highly
Compensated Employee participates in two or more cash or deferred arrangements
that have different Plan Years, all cash or deferred arrangements ending with or
within the same calendar year shall be treated as a single arrangement.
A Nonhighly Compensated Employee's ADP shall not include Elective Deferrals
under another cash or deferred arrangement maintained by the Employer unless the
Employer treats the Cash or Deferred Arrangement under this Plan and the other
cash or deferred arrangement as a unit for coverage and discrimination purposes.
For Plan Years beginning after December 31, 1989, plans may be treated as a unit
for coverage and discrimination purposes only if they have the same Plan Year.
The Plan Administrator shall not aggregate an employee stock ownership plan
within the meaning of Code (S) 4975(e)(7) ("ESOP") (or the ESOP portion of a
plan) with a non-ESOP plan (or non-ESOP portion of a plan).
Distribution of Excess Contributions. If the Plan Administrator determines
------------------------------------
the Plan fails to satisfy the ADP test for a Plan Year, it shall distribute the
Excess Contributions, as adjusted for allocable income or loss, from the
Participant's Elective Deferrals Account no later than the last day of the
succeeding Plan Year. However, the Employer will incur an excise tax equal to
10% of the amount of Excess
27
<PAGE>
Contributions for a Plan Year not distributed to the appropriate Highly
Compensated Employees during the first 2 1/2 months of the next Plan Year. The
Plan Administrator shall distribute to each Highly Compensated Employee his or
her respective share of the Excess Contributions. The Plan Administrator shall
determine the respective shares of Excess Contributions by starting with the
Highly Compensated Employee who has the greatest ADP, reducing his or her ADP to
the next highest ADP, then, if necessary, reducing the ADP of the Highly
Compensated Employees at the next highest ADP level (including the ADP of the
Highly Compensated Employees whose ADP the Plan Administrator already has
reduced), and continuing in this manner until the average ADP for the Highly
Compensated Group satisfies the ADP test. If a Highly Compensated Employee is
part of an aggregated family group, the Plan Administrator shall, in accordance
with the applicable Treasury regulations, shall determine each aggregated family
member's allocable hare of the Excess Contributions assigned to the family unit.
The amount of Excess Contributions to be distributed to any Highly Compensated
Employee shall be reduced by the amount of any Excess Deferrals previously
distributed to the Highly Compensated Employee for the taxable year ending in
the same Plan Year.
Determination of Allocable Income or Loss to Excess Contributions. The
-----------------------------------------------------------------
Plan Administrator shall adjust Excess Contributions for any income or loss.
The Employer shall specify in its Adoption Agreement whether income or loss
shall be adjusted to the date of distribution or adjusted to the last day of the
Plan Year.
Adjustment to the Date of Distribution. If the Employer elects to adjust
--------------------------------------
income or loss to the date of the distribution, the income or loss
allocable to the Excess Contributions is the sum of: (1) income or loss
allocable to the Participant's Elective Deferrals Account for the Plan Year
multiplied by the following fraction:
Participant's Excess Contributions for the Plan Year
----------------------------------------------------------------
Participant's Elective Deferrals Account without regard to any
income or loss occurring during such Plan Year
and (2) 10% of the amount determined under (1) multiplied by the number of
whole calendar months between the end of the Plan Year and the date of
distribution, counting the month of distribution if distribution occurs
after the 15th of such month.
Adjustment to the Last Day of the Plan Year. If the Employer elects to
-------------------------------------------
adjust income or loss to the last day of the Plan Year, the income or loss
allocable to the Excess Contributions is the income or loss allocable to
the Participant's Elective Deferrals Account for the Plan Year multiplied
by the following fraction:
Participant's Excess Contributions for the Plan Year
----------------------------------------------------------------
Participant's Elective Deferrals Account without regard to any
income or loss occurring during such Plan Year.
4.13 VOLUNTARY NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS AND MATCHING
-----------------------------------------------------------
CONTRIBUTIONS - SPECIAL DISCRIMINATION TEST. This Section shall apply only if
- -------------------------------------------
the Plan is a profit sharing plan with a Cash or Deferred Arrangement, or if the
Plan permits voluntary nondeductible Employee contributions in Adoption
Agreement Section 3.06. For Plan Years beginning after December 31, 1986, the
Plan Administrator shall determine whether the Matching Contributions, if any,
and voluntary nondeductible Employee contributions described in Section 3.06, if
any, satisfy one of the following average contribution percentage ("ACP") tests:
28
<PAGE>
(a) The ACP for the Highly Compensated Group does not exceed 1.25 times
the ACP for the Nonhighly Compensated Group; or
(b) The ACP for the Highly Compensated Group does not exceed the ACP for
the Nonhighly Compensated Group by more than two percentage points (or
the lesser amount prescribed by the multiple use limitation described
in this Section) and the ACP for the Highly Compensated Group is not
more than twice the ACP for the Nonhighly Compensated Group.
Calculation of ACP. The average contribution percentage for a group is the
------------------
average of the separate contribution percentages calculated for each Participant
who is a member of that group. A Participant's contribution percentage for a
Plan Year is the ratio of the Participant's Aggregate Contributions for the Plan
Year to the Participant's Testing Compensation for the Plan Year. Each
Participant's contribution percentage shall be calculated to the nearest 100th
of 1%. For aggregated family members treated as a single Highly Compensated
Employee, the contribution percentage of the family unit is the contribution
percentage determined by combining the Aggregate Contributions and Testing
Compensation of all aggregated family members. For purposes of calculating the
ACP test, Employee contributions shall be considered to have been made in the
Plan Year in which contributed to the Trust, and Matching Contributions and
Employer Nonelective Contributions shall be considered to have been made in the
Plan Year if made before the last day of the 12 month period immediately
following the Plan Year to which contributions relate.
The Plan Administrator, in a manner consistent with Treasury regulations,
may determine the contribution percentages of the Participants by taking into
account Employer Nonelective Contributions (other than Employer Nonelective
Contributions used to satisfy the ADP test under a Cash or Deferred Arrangement)
or Elective Deferrals, or both, made to this Plan or to any other qualified plan
maintained by the Employer. The Plan Administrator shall not include Employer
Nonelective Contributions in the ACP test unless the allocation of Employer
Nonelective Contributions is nondiscriminatory when the Plan Administrator takes
into account Employer Nonelective Contributions and Profit Sharing
Contributions, and also when the Plan Administrator takes into account only the
Profit Sharing Contributions. The Plan Administrator shall not include Elective
Deferrals in the ACP test unless the plan which includes the Elective Deferrals
satisfies the ADP test both with and without the Elective Deferrals included in
this ACP test. For Plan Years beginning after December 31, 1989, the Plan
Administrator shall not include in the ACP test any Employer Nonelective
Contributions or Elective Deferrals under another qualified plan unless that
plan has the same plan year as this Plan. The Plan Administrator shall not
include in the ACP test Matching Contributions that are forfeited because the
contributions to which they relate are Excess Deferrals, Excess Contributions,
or Excess Aggregate Contributions. The Plan Administrator shall maintain
records to demonstrate compliance with the ACP test, including the extent to
which the Plan used Employer Nonelective Contributions or Matching Contributions
to satisfy the test.
A Highly Compensated Employee's Aggregate Contributions taken into account
shall include any Matching Contributions (other than Matching Contributions used
to satisfy the ADP test under a Cash or Deferred Arrangement) and any employee
contributions made on his or her behalf to any other plan maintained by the
Employer, unless the other plan is an employee stock ownership plan within the
meaning of Code (S) 4975(e)(7) ("ESOP"). If the plans have different plan
years, the Plan Administrator shall determine the combined aggregate
contributions on the basis of the plan years ending in the same calendar year.
If the Employer treats two plans as a unit for coverage or
nondiscrimination purposes, the Employer shall combine the plans to determine
whether either plan satisfies the ACP test. This
29
<PAGE>
aggregation rule applies to the contribution percentage determination for all
Participants, irrespective of whether a Participant is a Highly Compensated
Employee or a Nonhighly Compensated Employee. For Plan Years beginning after
December 31, 1989, an aggregation of plans under this paragraph shall not apply
to plans which have different plan years, and the Plan Administrator shall not
aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-
ESOP portion of a plan).
Distribution of Excess Aggregate Contributions. The Plan Administrator
----------------------------------------------
shall determine Excess Aggregate Contributions after determining Excess
Deferrals and Excess Contributions. If the Plan Administrator determines that
the Plan fails to satisfy the ACP test for a Plan Year, it must distribute the
Excess Aggregate Contributions, as adjusted for allocable income or loss, during
the next Plan Year. However, the Employer will incur an excise tax equal to 10%
of the taxable amount of Excess Aggregate Contributions for a Plan Year not
distributed to the appropriate Highly Compensated Employees during the first 2
1/2 months of that next Plan Year. The Plan Administrator shall distribute to
each Highly Compensated Employee his or her respective share of the Excess
Aggregate Contributions. The Plan Administrator shall determine the respective
shares of Excess Aggregate Contributions by starting with the Highly Compensated
Employee who has the greatest contribution percentage, reducing his or her
contribution percentage to the next highest contribution percentage, then, if
necessary, reducing the contribution percentage of the Highly Compensated
Employees at the next highest contribution percentage level (including the
contribution percentage of the Highly Compensated Employees whose contribution
percentage the Plan Administrator already has reduced), and continuing in this
manner until the ACP for the Highly Compensated Group satisfies the ACP test.
If a Highly Compensated Employee is part of an aggregated family group, the Plan
Administrator, in accordance with the applicable Treasury regulations, shall
determine each aggregated family member's allocable share of the Excess
Aggregate Contributions assigned to the family unit.
Determination of Allocable Income or Loss to Excess Aggregate
-------------------------------------------------------------
Contributions. The Plan Administrator shall adjust Excess Aggregate
- -------------
Contributions for any income or loss. The Employer shall specify in Adoption
Agreement Section 4.12 whether income or loss shall be adjusted to the date of
distribution or adjusted to the last day of the Plan Year.
Adjustment to the Date of Distribution. If the Employer elects to adjust
--------------------------------------
income or loss to the date of the distribution, the income or loss
allocable to the Excess Aggregate Contributions is the sum of: (1) income
or loss allocable to the Participant's Accrued Benefit attributable to
Aggregate Contributions for the Plan Year multiplied by the following
fraction:
Participant's Excess Aggregate Contributions for the Plan Year
-----------------------------------------------------------------------
Participant's Accrued Benefit attributable to Aggregate Contributions
without regard to any income or loss occurring during such Plan Year
and (2) 10% of the amount determined under (1) multiplied by the number of
whole calendar months between the end of the Plan Year and the date of
distribution, counting the month of distribution if distribution occurs
after the 15th of such month. The Accrued Benefit attributable to
Aggregate Contributions shall mean the Accrued Benefit attributable to
voluntary nondeductible Employee contributions, Matching Contributions
(other than Matching Contributions used to satisfy the ADP test under a
Cash or Deferred Arrangement), and Elective Deferrals taken into account in
the ACP test for the Plan Year or any prior Plan Year.
Adjustment to the Last Day of the Plan Year. If the Employer elects to
-------------------------------------------
adjust income or loss to the last day of the Plan Year, the income or loss
allocable to the Excess Aggregate Contributions
30
<PAGE>
is the income or loss allocable to the Participant's Accrued Benefit
attributable to Aggregate Contributions for the Plan Year multiplied by the
following fraction:
Participant's Excess Aggregate Contributions for the Plan Year
------------------------------------------------------------------------
Participant's Accrued Benefit attributable to Aggregate Contributions
without regard to any income or loss occurring during such Plan Year
The Accrued Benefit attributable to Aggregate Contributions shall mean the
Accrued Benefit attributable to voluntary nondeductible Employee
contributions, Matching Contributions (other than Matching Contributions
used to satisfy the ADP test under a Cash or Deferred Arrangement), and
Elective Deferrals taken into account in the ACP test for the Plan Year or
any prior Plan Year.
Characterization of Excess Aggregate Contributions. The Plan Administrator
--------------------------------------------------
shall treat a Highly Compensated Employee's allocable share of Excess Aggregate
Contributions attributable to this Plan first as attributable to his or her
voluntary nondeductible Employee contributions and then to Employer Nonelective
Contributions used in the ACP test.
Multiple Use Limitation. For Plan Years beginning after December 31, 1988,
-----------------------
if at least one Highly Compensated Employee is includable in the ADP test under
a Cash or Deferred Arrangement maintained by the Employer and in the ACP test
under this Section, the sum of the Highly Compensated Group's ADP and ACP may
not exceed the multiple use limitation.
The multiple use limitation is the sum of (a) and (b):
(a) 125% of the greater of: (1) the ADP of the Nonhighly Compensated
Group under the Cash or Deferred Arrangement; or (2) the ACP of the
Nonhighly Compensated Group for the Plan Year beginning with or within
the Plan Year of the Cash or Deferred Arrangement.
(b) 2% plus the lesser of (a)(1) or (a)(2), but no more than twice the
lesser of (a)(1) or (a)(2).
The Plan Administrator shall determine whether the Plan satisfies the
multiple use limitation after applying the ADP test to the Cash or Deferred
Arrangement and the ACP test under this Section and after making any corrective
distributions required by those tests. If the Plan Administrator determines the
Plan has failed to satisfy the multiple use limitation, the Plan Administrator
shall correct the failure by treating the excess amount as Excess Aggregate
Contributions under this Section. The multiple use limitation shall not apply
unless, prior to its application, the ADP and the ACP of the Highly Compensated
Group each exceeds 125% of the respective percentages for the Nonhighly
Compensated Group.
4.14 DEFINITIONS. For purposes of applying the ADP test in Section 4.12
-----------
and the ACP test in 4.13, the following definitions shall apply:
(a) AGGREGATE CONTRIBUTIONS shall mean Matching Contributions (other than
Matching Contributions used to satisfy the actual deferral percentage
test under a Cash or Deferred Arrangement) and voluntary and mandatory
nondeductible Employee contributions.
(b) CASH OR DEFERRED ARRANGEMENT shall mean that a Participant may elect
to have the Employer make payments on behalf of the Participant either
as Employer contributions to the Plan or to the Participant directly
in cash.
31
<PAGE>
(c) DISTRIBUTION RESTRICTIONS shall mean that the Participant may not
receive a distribution of the specified contributions (nor earnings on
those contributions) except in the event of:
(1) the Participant's death, disability, termination of employment,
or attainment of age 59 1/2,
(2) financial hardship satisfying the requirements of Code (S) 401(k)
and the applicable Treasury regulations,
(3) a plan termination, without establishment of a successor defined
contribution plan (other than an ESOP),
(4) a sale of substantially all of the assets (within the meaning of
Code (S) 409(d)(2)) used in a trade or business, but
distributions shall only be permitted to an Employee who
continues employment with the corporation acquiring those assets,
or
(5) a sale by a corporation of its interest in a subsidiary (within
the meaning of Code (S) 409(d)(3)), but distributions shall only
be permitted to an Employee who continues employment with the
subsidiary.
For Plan Years beginning after December 31, 1988, a distribution on
account of financial hardship, as described in clause (2), shall not
include earnings on Elective Deferrals credited after the last day of
the last Plan Year beginning prior to January 1, 1989, and shall not
include Matching Contributions and Employer Nonelective Contributions
which are 100% Nonforfeitable at all times and which are subject to
the Distribution Restrictions, or any earnings on such contributions,
irrespective of when credited. A distribution described in clauses
(3), (4) or (5), if made after March 31, 1988, shall be a lump sum
distribution, as required under Code (S) 401(k)(10).
(d) ELECTIVE DEFERRALS shall mean the Employer contributions to a
qualified plan at the election of a Participant, pursuant to a Cash or
Deferred Arrangement. Elective Deferrals shall not include amounts
which have become currently available to the Participant prior to the
election nor amounts designated as nondeductible Employee
contributions at the time of deferral or contribution. Elective
Deferrals which constitute an Excess Amount and which are returned
under Section 4.10 shall not be treated as Elective Deferrals for
purposes of the ADP test under Section 4.12.
(e) EMPLOYER NONELECTIVE CONTRIBUTIONS shall mean contributions made by
the Employer which are not Elective Deferrals, which are not Matching
Contributions, and which are not Profit Sharing Contributions.
Employer Nonelective Contributions shall be 100% Nonforfeitable at all
times and shall be subject to the Distribution Restrictions. Employer
Nonelective Contributions shall not be considered to be 100%
Nonforfeitable at all times if the Participant has a 100%
Nonforfeitable interest only because of Years of Service taken into
account under a vesting schedule.
(f) EXCESS AGGREGATE CONTRIBUTIONS shall mean the amount of Aggregate
Contributions made by the Highly Compensated Employees which causes
the Plan to fail to satisfy the ACP test.
32
<PAGE>
(g) EXCESS CONTRIBUTIONS shall mean the amount of Elective Deferrals made
by the Highly Compensated Employees which causes the Plan to fail to
satisfy the ADP test.
(h) EXCESS DEFERRALS shall mean Elective Deferrals in excess of the $7,000
Limitation, or Elective Deferrals designated by the Participant as
Excess Deferrals.
(i) HIGHLY COMPENSATED GROUP shall mean the group of Participants who are
Highly Compensated Employees for the Plan Year.
(j) MATCHING CONTRIBUTIONS shall mean contributions made by the Employer
on account of Elective Deferrals or on account of voluntary
nondeductible Employee contributions. Matching Contributions shall
also include Participant forfeitures allocated on account of such
Elective Deferrals or Employee contributions.
(k) NONHIGHLY COMPENSATED GROUP shall mean the group of Participants who
are Nonhighly Compensated Employees for the Plan Year.
(l) PARTICIPANT shall mean a Participant who is eligible to make voluntary
nondeductible Employee contributions or who is eligible to receive an
allocation of Matching Contributions if the Participant makes Elective
Deferrals, irrespective of whether the Participant actually makes
voluntary nondeductible Employee contributions or Elective Deferrals.
A Participant continues to be a Participant during a period the Plan
suspends the Participant's right to make voluntary nondeductible
Employee contributions or Elective Deferrals following a hardship
distribution.
(m) PROFIT SHARING CONTRIBUTIONS shall mean the Employer contributions
made under the Plan without regard to a Cash or Deferred Arrangement.
(n) TESTING COMPENSATION shall have the meaning assigned to it by Section
1.71, as modified by the Employer's election in Adoption Agreement
Section 4.14(n).
* * * END OF ARTICLE 4 * * *
33
<PAGE>
ARTICLE V
PARTICIPANT VESTING
5.01 VESTING UPON RETIREMENT. Upon attainment of the Normal Retirement
-----------------------
Date, a Participant shall be 100% vested in his or her Accrued Benefit.
5.02 VESTING UPON DISABILITY. The Employer shall specify in its Adoption
-----------------------
Agreement the Nonforfeitable percentage of a Participant's Employer
Contributions Account in the event of the disability of the Participant. The
Plan shall consider a Participant disabled on the date the Plan Administrator
determines that the Participant, because of a physical or mental disability, is
unable to engage in any substantial gainful activity and that the disability can
be expected to result in death or which has lasted or can be expected to last
for a continuous period of not less than 12 months. The Plan Administrator may
require a Participant to submit to a physical examination in order to confirm
disability. The Plan Administrator shall apply the provisions of this Section
in a nondiscriminatory, consistent and uniform manner.
5.03 VESTING UPON DEATH. The Employer shall specify in its Adoption
------------------
Agreement the Nonforfeitable percentage of a Participant's Employer
Contributions Account in the event of the death of the Participant.
5.04 EMPLOYEE CONTRIBUTION - FORFEITABILITY. A Participant's Employee
--------------------------------------
Contributions Account shall be, at all times, 100% Nonforfeitable.
5.05 VESTING SCHEDULE. Upon separation from service for reasons other than
----------------
attainment of the Normal Retirement Date, Disability, or Death, the
Nonforfeitable percentage of a Participant's Employer Contributions Account
shall equal the Participant's Employer Contributions Account multiplied by the
percentage corresponding to the Participant's Years of Service with the Employer
under the vesting schedule elected by the Employer in the Adoption Agreement,
such vesting schedule to be effective with respect to a Participant who earns
one Hour of Service in a Plan Year beginning after December 31, 1988. When the
Plan Administrator determines this Plan is a Top Heavy Plan, the Plan
Administrator shall calculate a Participant's vesting percentage in accordance
with the top heavy vesting schedule elected by the Employer in the Adoption
Agreement for the Plan Years specified in the Adoption Agreement.
5.06 YEAR OF SERVICE - VESTING. The Plan Administrator shall determine a
-------------------------
Participant's Years of Service for purposes of vesting in accordance with
Section 5.06 of the Adoption Agreement unless the Employer elected the elapsed
time method under Adoption Agreement Section 1.37. If the Employer elected the
elapsed time method, the Plan Administrator shall credit an Employee's Years of
Service for purposes of vesting in accordance with the elapsed time provisions
of Section 2.02.
For the sole purpose of determining the Nonforfeitable percentage of a
Participant's Employer Contributions Account which accrued for the Participant's
benefit prior to a Forfeiture Break in Service, the Plan Administrator shall
disregard any Year of Service after the Participant first incurs a Forfeiture
Break in Service. The Plan Administrator shall exclude Plan Years prior to a
Break in Service (as defined in Section 5.07) if the number of consecutive
Breaks in Service equals or exceeds the greater of five or the aggregate number
of the Years of Service prior to the Break provided the Participant is 0% vested
in his or her Accrued Benefit derived from Employer contributions at the time
the Participant has a Break in Service. The aggregate number of Years of
Service before a Break in Service does not include any
34
<PAGE>
Years of Service not required to be taken into account under this exception by
reason of any prior Break in Service.
5.07 BREAK IN SERVICE - VESTING. For purposes of determining Years of
--------------------------
Service under this Article, a Participant incurs a "Break in Service" if during
any Plan Year the Participant does not complete more than 500 Hours of Service
with the Employer.
5.08 AMENDMENT TO VESTING SCHEDULE. Though the Employer reserves the right
-----------------------------
to amend the vesting schedule at any time, the Plan Administrator shall not
apply the amended vesting schedule to reduce the Nonforfeitable percentage of
any Participant's Employer Contributions Account (determined as of the later of
the date the Employer adopts the amendment, or the date the amendment becomes
effective) to a percentage less than the Nonforfeitable percentage computed
under the Plan without regard to the amendment.
If the Employer makes a permissible amendment to the vesting schedule, each
Participant who has performed at least one Hour of Service in any Plan Year
beginning after December 31, 1988 and who has at least three Years of Service
with the Employer may elect to have the Nonforfeitable percentage of his or her
Employer Contributions Account computed under the Plan without regard to the
vesting schedule amendment. For Participants who do not have at least one Hour
of Service in any Plan Year beginning after December 31, 1988, the election
described in the preceding sentence applies only to Participants having at least
five Years of Service with the Employer. The Participant shall file the
election with the Plan Administrator within 60 days after the latest of the
following three dates: (a) the date the Employer adopts the amendment; (b) the
date the amendment is effective; or (c) the date the Participant receives
written notice of the amendment. The Plan Administrator, as soon as
administratively feasible, shall forward a copy of any amendment to the vesting
schedule to each affected Participant, together with an explanation of the
effect of the amendment, the appropriate form upon which the Participant may
make an election to remain under the vesting schedule provided under the Plan
prior to the amendment and notice of the time within which the Participant shall
make an election to remain under the prior vesting schedule. For purposes of
this Section, an amendment to the vesting schedule includes any Plan amendment
which directly or indirectly affects the computation of the Nonforfeitable
percentage of a Participant's Employer Contributions Account.
5.09 DISTRIBUTIONS TO PARTIALLY VESTED PARTICIPANTS. A partially vested
----------------------------------------------
Participant is a Participant whose Nonforfeitable percentage determined under
this Article is less than 100%. If a partially vested Participant receives a
distribution of his or her entire Nonforfeitable Accrued Benefit before
incurring a Forfeiture Break in Service, the distribution shall be considered to
be a "cash-out distribution" which shall result in a forfeiture of the nonvested
portion of the Participant's Employer Contributions Account in accordance with
Section 5.11.
5.10 DEEMED DISTRIBUTIONS TO 0% VESTED PARTICIPANTS. A 0% vested
----------------------------------------------
Participant is a Participant whose Employer Contributions Account is entirely
forfeitable at the time of his or her separation from Service. The Plan
Administrator shall treat the 0% vested Participant as having received a
distribution on the date of the Participant's separation from Service or, if the
Participant's Employer Contributions Account will receive an allocation of
Employer contributions for the Plan Year in which the Participant separates from
Service, on the last day of that Plan Year.
5.11 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his or her
-----------------
Employer Contributions Account occurs under the Plan on the earlier of:
35
<PAGE>
(a) The last day of the Plan Year in which the Participant first incurs a
Forfeiture Break in Service; or
(b) The date the Participant receives a cash-out distribution.
The Plan Administrator shall determine the percentage of a Participant's
forfeiture, if any, under this Section solely by reference to the vesting
schedule of Section 5.05. A Participant shall not forfeit any portion of his or
her Accrued Benefit for any other reason or cause except as provided under
Section 8.06 (unclaimed Account procedure). No forfeiture shall occur solely as
a result of a Participant's withdrawal of voluntary Employee contributions.
5.12 RESTORATION OF FORFEITED ACCRUED BENEFIT. A partially vested
----------------------------------------
Participant who is reemployed by the Employer after receiving a cash-out
distribution may repay the Trustee the amount of the cash-out distribution
attributable to Employer contributions, unless the Participant no longer has a
right to make restoration. If a partially vested Participant makes the
repayment, the Plan Administrator shall restore such Participant's Employer
Contributions Account to the same dollar amount in such Account on the Valuation
Date immediately preceding the date of the cash-out distribution, unadjusted for
any gains or losses occurring subsequent to that Valuation Date. Restoration of
the Participant's Employer Contributions Account includes restoration of all
Code (S) 411(d)(6) protected benefits with respect to that restored Employer
Contributions Account in accordance with applicable Treasury regulations. The
Plan Administrator shall not restore a reemployed Participant's Employer
Contributions Account under this paragraph if:
(a) five years have elapsed since the Participant's first Reemployment
Date following the cash-out distribution; or
(b) the Participant has incurred a Forfeiture Break in Service. This
condition also applies if the Participant makes repayment within the
Plan Year in which his or her Forfeiture Break in Service occurs and
that Forfeiture Break in Service would result in a complete forfeiture
of the amount the Plan Administrator otherwise would restore.
For purposes of applying the restoration provisions of this Section, the Plan
Administrator shall treat the 0% vested Participant as repaying his or her
"cash-out distribution" on the first date of reemployment with the Employer.
5.13 TIME AND METHOD OF RESTORATION. If neither of the two conditions
------------------------------
preventing restoration of the Participant's Employer Contributions Account
applies under Section 5.12, the Plan Administrator shall restore the
Participant's Employer Contributions Account as of the Plan Year Accounting Date
coincident with or immediately following the repayment. If a Participant or
Beneficiary who has incurred a forfeiture of his or her Accrued Benefit under
the provisions of Section 8.06 (unclaimed Account procedure) makes a claim at
any time for his or her forfeited Accrued Benefit, the Plan Administrator shall
restore the Participant's or Beneficiary's forfeited Accrued Benefit to the same
dollar amount as the dollar amount of the Accrued Benefit forfeited, unadjusted
for any gains or losses occurring subsequent to the date of the forfeiture. The
Plan Administrator shall make the restoration during the Plan Year in which the
Participant or Beneficiary makes the claim. To restore the Participant's or
Beneficiary's Employer Contributions Account or Accrued Benefit, the Plan
Administrator shall allocate to the Participant's Accounts from the following
sources:
(a) first, the amount, if any, of Participant forfeitures arising during
the Plan Year;
36
<PAGE>
(b) second, the amount, if any, of the Trust Fund net income or gain for
the Plan Year; and
(c) third, the Employer contribution for the Plan Year to the extent made
under a discretionary formula.
To the extent the above amounts are insufficient to enable the Plan
Administrator to make the required restoration, the Employer shall contribute,
without regard to any requirement or condition of Section 3.01, the additional
amount necessary to enable the Plan Administrator to make the required
restoration. The Plan Administrator shall not take into account the allocation
under this Section in applying the Code (S) 415 limitations on allocations under
Article IV.
* * * END OF ARTICLE 5 * * *
37
<PAGE>
ARTICLE VI
DISTRIBUTIONS
6.01 DISTRIBUTIONS NOT EXCEEDING $3,500. The Plan Administrator shall
----------------------------------
direct the Trustee to distribute the Participant's Accrued Benefit in the form
of a lump sum, not later than 60 days after the close of the Plan Year in which
the Participant's employment terminates for any reason, including death,
disability, or attainment of the Normal Retirement Date, if the Participant's
Nonforfeitable Accrued Benefit (at the time of the distribution) does not exceed
$3,500. If the Participant's Nonforfeitable Accrued Benefit, at the time of any
distribution, exceeds $3,500, the Plan Administrator shall treat a distribution
as exceeding $3,500 for purposes of all subsequent Plan distributions to the
Participant.
6.02 DISTRIBUTIONS EXCEEDING $3,500. The Trustee shall distribute the
------------------------------
Participant's Accrued Benefit in the form and at the time elected by the
Participant, pursuant to Section 6.07. If the Participant or the Beneficiary
does not elect in writing to a time or method of payment in accordance with
Section 6.07, the Plan Administrator shall direct the Trustee to commence
distribution of a Participant's Nonforfeitable Accrued Benefit (after reduction
for any security interest the Plan has against that Nonforfeitable Accrued
Benefit by reason of an outstanding Participant loan) in accordance with this
Section, not later than 60 days after the close of the Plan Year in which the
Participant's employment terminates for any reason, including death, disability,
or attainment of the Normal Retirement Date. Notwithstanding the immediately
preceding sentence, a Participant (or the Participant's Beneficiary, if the
Participant is deceased) shall consent, in writing, within the 90 day period
ending on the annuity starting date (see Section 6.07), to any distribution if
the Participant's Nonforfeitable Accrued Benefit, at the time of the
distribution exceeds $3,500, and the Participant has not attained the later of
Normal Retirement Date or age 62. Furthermore, the Participant's spouse also
shall consent, in writing, to any distribution for which Section 6.08 requires
the spouse's consent. The failure of a Participant to consent to a distribution
of any part of his or her Nonforfeitable Accrued Benefit which could be
distributed under the Plan before attaining the later of Normal Retirement Date
or age 62 shall be deemed to be an election to defer distribution of the
Participant's Nonforfeitable Accrued Benefit until the time for distribution
specified in the immediately following paragraph.
Unless the participant elects otherwise, the Plan Administrator shall
direct the Trustee to distribute the Participant's Nonforfeitable Accrued
Benefit in a lump sum (or the annuity form of distribution, if required under
Section 6.08) not later than the 60th day after the close of the Plan Year in
which occurs the latest of the following events:
(a) the Participant attains age 65 (or Normal Retirement Date, if
earlier);
(b) the 10th anniversary of the first day of the Plan Year in which the
Participant commenced participation in the plan; or,
(c) the Participant terminates service with the Employer.
Notwithstanding the preceding provisions of this Section, the Plan Administrator
shall direct the Trustee to distribute any amount required to be distributed
under Section 6.03 (or under Code (S) 415) prior to the time described in this
Section.
Distributions Upon Death Which Exceed $3,500. Upon the death of the
--------------------------------------------
Participant, the Plan Administrator shall direct the Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit
38
<PAGE>
remaining in the Trust at the time of the Participant's death to the
Participant's Beneficiary in the form and at the time elected by the Beneficiary
in accordance with Section 6.07. The Beneficiary's election is subject to any
restrictions designated in writing by the Participant and not revoked as of the
date of the Participant's death. In the absence of an election by the
Beneficiary, the Plan Administrator shall direct the Trustee to distribute the
Participant's Accrued Benefit in a lump sum (or the annuity form of
distribution, if required under Section 6.08), as soon as administratively
practicable following the Participant's death (or the date on which the Plan
Administrator receives notification of, or otherwise confirms the Participant's
death), but not later than 60 days after the close of the Plan Year in which the
Participant's death or notification occurred.
6.03 DISTRIBUTIONS ON ACCOUNT OF ATTAINING AGE 70 1/2. The provisions in
------------------------------------------------
this Section take precedence over all other provisions in this Article. The
Plan Administrator shall direct the Trustee to distribute under this Section not
later than the Participant's Required Beginning Date. Notwithstanding the
immediately preceding sentence, the Plan Administrator shall direct the Trustee
to distribute a Participant's Nonforfeitable Accrued Benefit in accordance with
a properly executed transitional election (as provided in the last paragraph of
this Section).
Required Beginning Date. Required Beginning Date shall mean the April 1
-----------------------
following the close of the calendar year in which the Participant attains age 70
1/2. However, if the Participant, prior to separating from Service, attained
age 70 1/2 before January 1, 1988, and, for the five Plan Year period ending in
the calendar year in which the Participant attained age 70 1/2 and for all
subsequent years, the Participant did not own more than 5% of the Employer, the
Required Beginning Date shall be the April 1 following the close of the calendar
year in which the Participant separates from Service or, if earlier, the April 1
following the close of the calendar year in which the Participant owns more than
5% of the Employer. Furthermore, if a Participant who did not own more than 5%
of the Employer attained age 70 1/2 during 1988 and did not separate from
Service prior to January 1, 1989, the Participant's Required Beginning Date
shall be April 1, 1990. A mandatory distribution at the Participant's Required
Beginning Date shall be in lump sum (or the annuity form of distribution, if
required under Section 6.08) unless the Participant makes a valid election to
receive an alternative form of distribution.
Minimum Distribution Requirements for Participants. The Trustee shall not
--------------------------------------------------
distribute the Participant's Nonforfeitable Accrued Benefit under a method of
distribution which, as of the Required Beginning Date, does not satisfy the
minimum distribution requirements under Code (S) 401(a)(9) and the applicable
Treasury regulations. The minimum distribution for a calendar year equals the
participant's Nonforfeitable Accrued Benefit as of the Valuation Date preceding
the beginning of the calendar year divided by the Participant's life expectancy
or, if applicable, the joint and last survivor expectancy of the Participant and
his or her designated Beneficiary (as determined under Article VIII, subject to
the requirements of the Code (S) 401(a)(9) regulations). The Plan Administrator
shall increase the Participant's Accrued Benefit, as determined on the Valuation
Date, for contributions or forfeitures allocated after the Valuation Date and by
the December 31 of the calendar year in which the Valuation Date falls, and
shall decrease the Participant's Accrued Benefit by distributions made after the
Valuation Date and by the December 31 of the calendar year in which the
Valuation Date falls.
In computing a minimum distribution, the Plan Administrator shall use the
unisex life expectancy multiples under Treas. Reg. (S) 1.72-9. Unless otherwise
requested by the Participant, the Plan Administrator shall compute minimum
distributions subsequent to the first required minimum distribution without
recalculating the applicable life expectancy, reducing by one for each calendar
year which has elapsed since the date life expectancy was calculated. Upon the
Participant's written request, the Plan Administrator shall compute minimum
distributions subsequent to the first required minimum distribution by
redetermining the applicable life expectancy of the Participant and a spouse
beneficiary. However, the
39
<PAGE>
Plan Administrator may not redetermine the joint life and last survivor
expectancy of the Participant and a nonspouse designated Beneficiary in a manner
which takes into account any adjustment to a life expectancy other than the
Participant's life expectancy.
If the Participant's spouse is not the Participant's sole designated
Beneficiary, a method of distribution to the Participant shall not provide more
than incidental benefits to the Beneficiary. For Plan Years beginning after
December 31, 1988, the Plan shall satisfy the minimum distribution incidental
benefit ("MDIB") requirement in accordance with the Treasury regulations issued
under Code (S) 401(a)(9) for distributions made on or after the Participant's
Required Beginning Date and before the Participant's death. To satisfy the MDIB
requirement, the Plan Administrator shall compute the minimum distribution
required by this Section by substituting the applicable MDIB divisor for the
applicable life expectancy factor, if the MDIB divisor is a lesser number.
Following the Participant's death, the Plan Administrator shall compute the
minimum distribution required by this Section solely on the basis of the
applicable life expectancy factor and shall disregard the MDIB factor. For Plan
Years beginning prior to January 1, 1989, the Plan satisfies the incidental
benefits requirement if the distributions to the Participant satisfied the MDIB
requirement, or if the present value of the retirement benefits distributable
solely to the Participant is greater than 50% of the present value of the total
benefits distributable to the Participant and his or her Beneficiaries. The
Plan Administrator shall determine whether benefits to the Beneficiary are
incidental as of the date the Trustee is to commence payment of the retirement
benefits to the Participant, or as of any date the Trustee redetermines the
distribution period to the Participant.
The first minimum distribution is due by the Participant's Required
Beginning Date. The minimum distribution for each subsequent distribution
calendar year, including the calendar year in which the participant's Required
Beginning Date falls, is due by December 31 of that year. If the Participant
receives a distribution in the form of a Nontransferable Annuity Contract, the
distribution satisfies this Section if the contract complies with the
requirements of Code (S) 401(a)(9) and the applicable Treasury regulations.
Minimum Distribution Requirements for Beneficiaries. The method of
---------------------------------------------------
distribution to the Participant's Beneficiary shall satisfy Code (S) 401(a)(9)
and the applicable Treasury regulations. If the Participant's death occurs
after his or her Required Beginning Date (or if earlier, the date an irrevocable
annuity commences to the Participant), the distribution period to the
Beneficiary shall not exceed the distribution period which had commenced for the
Participant. If the Participant's death occurs prior to his or her Required
Beginning Date (or the commencement of an irrevocable annuity), the method of
distribution to the Beneficiary shall provide for distribution to the
Beneficiary over a period not exceeding:
(a) 5 years after the date of the Participant's death; or
(b) the designated Beneficiary's life expectancy, if the Beneficiary is a
designated Beneficiary.
The Plan Administrator shall not direct distribution of the Participant's
Nonforfeitable Accrued Benefit over a period described in clause (b) unless the
Trustee shall commence distribution to the designated Beneficiary not later than
the December 31 following the close of the calendar year in which the
Participant's death occurred. If the designated Beneficiary is the
Participant's surviving spouse, the Trustee may delay distribution until the
December 31 of the calendar year in which the Participant would have attained
age 70 1/2, if later. If the surviving spouse dies after the Participant but
before distributions commence to the surviving spouse, the provisions of this
Section (other than the immediately preceding sentence) shall be applied as if
the surviving spouse were the Participant. If the Trustee distributes in
accordance with clause (b), the minimum distribution for a calendar year equals
the Participant's Nonforfeitable Accrued Benefit as of the latest Valuation Date
preceding the beginning of the calendar
40
<PAGE>
year divided by the designated Beneficiary's life expectancy. The Plan
Administrator shall use the unisex life expectancy multiples under Treas. Reg.
(S) 1.72-9 for purposes of applying this paragraph. Upon the written request of
the Participant or of the Participant's surviving spouse, the Plan Administrator
shall recalculate the life expectancy of the Participant's surviving spouse not
more frequently than annually but shall not recalculate the life expectancy of a
nonspouse designated Beneficiary. The Plan Administrator shall apply this
paragraph by treating any amount paid to the Participant's child, which becomes
distributable to the Participant's surviving spouse upon the child's attaining
the age of majority, as paid to the Participant's surviving spouse. Upon the
Beneficiary's written request, the Plan Administrator shall direct the Trustee
to accelerate distribution of all, or any portion, of the Participant's unpaid
Accrued Benefit, as soon as administratively practicable following the request.
Transitional Elections. If the Participant (or Beneficiary) signed a
----------------------
written distribution designation prior to January 1, 1984, the Plan
Administrator shall distribute the Participant's Nonforfeitable Accrued Benefit
in accordance with that designation, subject however, to the requirements, if
applicable, of Section 6.08. The Plan Administrator shall not comply with a
pre-1984 distribution designation if any of the following applies: (a) the
method of distribution would have disqualified the Plan under Code (S) 401(a)(9)
as in effect on December 31, 1983; (b) the Participant did not have an Accrued
Benefit as of December 31, 1983; (c) the distribution designation does not
specify the timing and form of the distribution and the death Beneficiaries (in
order of priority); (d) the substitution of a Beneficiary modifies the
distribution period; or (e) the Participant (or Beneficiary) modifies or revokes
the distribution designation. In the event of a revocation, the Plan shall
distribute, not later than December 31 of the calendar year following the year
of revocation, the amount which the Participant would have received under this
Section if the election had not been in effect or, if the Beneficiary revokes
the election, the amount which the Beneficiary would have received under this
Section if the election had not been in effect. The Plan Administrator shall
apply this Section to rollovers and transfers in accordance with the Code (S)
401(a)(9) regulations.
6.04 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained in
---------------------------------------------
this Plan shall prevent the Trustee, in accordance with the direction of the
Plan Administrator, from complying with the provisions of a qualified domestic
relations order (as defined in Code (S) 414(p)). The Employer shall specify in
the Adoption Agreement whether the Plan permits distribution to an alternate
payee under a qualified domestic relations order at any time, irrespective of
whether the Participant has attained the earliest retirement age (as defined
under Code (S) 414(p)) under the Plan. A distribution to an alternate payee
prior to the Participant's attainment of the earliest retirement age is
available only if (a) the order specifies distribution at that time or permits
an agreement between the Plan and the alternate payee to authorize an earlier
distribution; and (b) if the present value of the alternate payee's benefits
under the Plan exceeds $3,500 and the order requires, the alternate payee
consents to any distribution occurring prior to the Participant's attainment of
the earliest retirement age. Nothing in this Section shall be construed to
permit a Participant to receive a distribution at a time otherwise not permitted
under the Plan, nor does it permit the alternate payee to receive a form of
distribution not permitted under the Plan.
The Plan Administrator shall establish reasonable procedures to determine
the qualified status of a domestic relations order. Upon receiving a domestic
relations order, the Plan Administrator promptly shall notify the Participant
and any alternate payee named in the order, in writing, of the receipt of the
order and the Plan's procedures for determining the qualified status of the
order. Within a reasonable period of time after receiving the domestic
relations order, the Plan Administrator shall determine the qualified status of
the order and shall notify the Participant and each alternate payee, in writing,
of its determination. The Plan Administrator shall provide notice under this
paragraph by mailing to the individual's address specified in the domestic
relations order, or in a manner consistent with Department of Labor regulations.
41
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If any portion of the participant's Nonforfeitable Accrued Benefit is
distributable during the period the Plan Administrator is making its
determination of the qualified status of the domestic relations order, the Plan
Administrator shall make a separate accounting of the amounts distributable. If
the Plan Administrator determines the order is a qualified domestic relations
order within 18 months following receipt of the order, the Plan Administrator
shall direct the Trustee to distribute the distributable amounts in accordance
with the order. If the Plan Administrator does not make its determination of
the qualified status of the order within the 18 months following receipt of the
order, the Plan Administrator shall direct the Trustee to distribute the
distributable amounts in the manner the Plan would distribute if the order did
not exist and shall apply the order prospectively if the Plan Administrator
later determines the order is a qualified domestic relations order.
If not prohibited by the provisions of the qualified domestic relations
order, the Plan Administrator may direct the Trustee to invest any partitioned
amount in a segregated Account and to invest the account in federally insured,
interest-bearing savings accounts or time deposits (or a combination of both),
or in other fixed income investments. The Trustee shall make any distributions
required under this Section by separate benefit checks or other separate
distribution to the alternate payees.
6.05 IN-SERVICE DISTRIBUTIONS. The Employer shall specify in the Adoption
------------------------
Agreement the extent to which a Participant may receive a distribution prior to
termination of employment with the Employer. A Participant shall make an
election under this Section on a form prescribed by the Plan Administrator at
any time during the Plan Year for which the election is to be effective. In the
written election, the Participant shall specify the dollar amount desired to be
distributed. The Trustee shall distribute to a Participant in accordance with
such an election under this Section within the 90 day period (or as soon as
administratively practicable) after the Participant files the written election
with the Trustee.
Hardship. Prior to the Participant's termination of employment, the
--------
Participant may request a distribution from his or her Nonforfeitable Accrued
Benefit in an amount necessary to satisfy a hardship if the Plan is a profit
sharing plan. If the Plan is a profit sharing plan with a Cash or Deferred
Arrangement, a Participant may only withdraw his or her Elective Deferrals and
earnings accrued prior to December 31, 1988 on Elective Deferrals if (1) the
distribution is made on account of an immediate and heavy financial need of the
Participant and (2) the distribution is necessary to satisfy the financial need.
A distribution shall be considered necessary to satisfy the immediate and
heavy financial need of the Participant only if the distribution is made on
account of any of the following:
(a) medical expenses;
(b) the purchase (excluding mortgage payments) of the Participant's
principal residence;
(c) post-secondary education tuition and related expenses for the next 12
months of the Participant or of the Participant's spouse, children, or
dependents;
(d) to prevent the eviction of the Participant from his or her principal
residence or the foreclosure on the mortgage of the Participant's
principal residence;
(e) funeral expenses of the Participant's family member;
(f) the Participant's disability; or
42
<PAGE>
(g) other event the Commissioner of the Internal Revenue Service
determines is a hardship.
The distribution shall be considered necessary to satisfy the financial
need if the Participant first satisfies the need from other resources that are
reasonably available to the Participant. A distribution shall be considered
necessary to satisfy the need if the Employer reasonably relies upon the
Participant's representation that he cannot satisfy the financial need (a) with
reimbursement or compensation from insurance which covers the event giving rise
to the hardship, (b) with assets which the Participant could liquidate, (c) by
ceasing all contributions to the Plan, (d) with distributions or nontaxable
loans from any other plan in which he or she participates, and (e) by borrowing
from commercial sources on reasonable commercial terms. The amount of hardship
distribution permitted under this section may include amounts necessary to pay
any federal, state, or local income taxes or penalties reasonably anticipated to
result from the distribution. A need cannot reasonably be relieved by one of
the actions listed is the fourth paragraph of this Section if the effect would
be to increase the amount of the need within the meaning of the final Code (S)
401(k) Treasury regulations.
If the Employer elects the safe harbor hardship provisions in the Adoption
Agreement, any hardship distribution from the Plan shall be deemed to meet the
requirement that the distribution be necessary to satisfy the financial need,
and the following requirements shall apply:
(a) the distribution shall not exceed the amount of the immediate and
heavy financial need of the Participant;
(b) the Participant shall obtain all distributions (other than the
hardship distribution) and all nontaxable loans available under all
qualified plans of the Employer before receiving a hardship
distribution;
(c) the Participant's Elective Deferrals and any Employee contributions to
all plans of the Employer shall be suspended for 12 months after the
Participant receives the hardship distribution; and
(d) the Participant's Elective Deferrals for the calendar year immediately
following the calendar year of the hardship distribution shall equal
the $7,000 Limitation less the amount of the Participant's Elective
Deferrals for the calendar year in which the Participant received the
hardship distribution.
The Plan Administrator shall direct the Trustee to make the hardship
distribution as soon as administratively practicable after the Participant makes
a valid request for the hardship distribution. If the Plan Administrator denies
the request for a hardship distribution, such denial shall be subject to the
provisions of Section 8.11.
6.06 DISTRIBUTION OF VOLUNTARY EMPLOYEE CONTRIBUTIONS. Upon written
------------------------------------------------
request from the Participant, the Trustee shall distribute all or part of the
value of the Participant's Accrued Benefit derived from voluntary Employee
contributions (deductible or nondeductible) described in Article III. A
distribution of voluntary Employee contributions (deductible or nondeductible)
shall comply with the annuity distribution requirements described in this
Article if those requirements are applicable to the Plan. A Participant may not
exercise the right to a distribution of voluntary Employee contributions more
than once during any Plan Year.
6.07 DISTRIBUTION METHODS, CONSENTS, AND ELECTION. Subject to the annuity
--------------------------------------------
distribution requirements, if any, prescribed by Section 6.08 and any
restrictions prescribed by Section 6.03, a
43
<PAGE>
Participant or Beneficiary may elect distribution in accordance with the methods
elected by the Employer in its Adoption Agreement commencing within a reasonable
period of time on or after 60 days following the end of the Plan Year in which
the Participant terminated employment with the Employer. The distribution
options permitted under this Section are available only if the present value of
the Participant Nonforfeitable Accrued Benefit, at the time of the distribution
to the Participant, exceeds $3,500.
To facilitate distributions under this Article VI, the Plan Administrator
may direct the Trustee to segregate all or any part of the Participant's Accrued
Benefit in a segregated investment Account. The Trustee shall invest the
Participant's segregated investment Account in Federally insured interest
bearing savings accounts or time deposits (or a combination of both), or in
other fixed income investments. The Participant or Beneficiary, at any time,
may elect to accelerate the distribution of all, or any portion, of the
Participant's unpaid Nonforfeitable Accrued Benefit, subject to the requirements
of Section 6.08.
Not earlier than 90 and not later than 30 days before the Participant's
annuity starting date, the Plan Administrator shall provide a benefit notice to
a Participant who is eligible to make an election or required to consent under
this Article. For purposes of this Article, the term "annuity starting date"
means the first day of the first period for which the Plan pays an amount as an
annuity or in any other form. The benefit notice shall explain the optional
methods of distribution from the Plan, including the material features and
relative values of those methods, and the Participant's right to defer
distribution until he attains age 70 1/2. If a distribution is one to which
Code (S)(S) 401(a)(11) and 417 do not apply, such distribution may commence less
than 30 days after the notice required under Treas. Reg. (S) 1.411(a)-11(c) is
given, provided that:
(a) the Plan Administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution
option), and
(b) the Participant, after receiving the notice, affirmatively elects a
distribution.
If a Participant or Beneficiary makes an election under this Section, the
Plan Administrator shall direct the Trustee to distribute the Participant's
Nonforfeitable Accrued Benefit in accordance with that election. The
Participant or Beneficiary shall make an election under this Section by filing
his election form with the Plan Administrator at any time before the Trustee
otherwise would distribute a Participant's Accrued Benefit in accordance with
the requirements of this Article.
6.08 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The
-----------------------------------------------------------
annuity distribution provisions of Sections 6.09, 6.10, 6.11, 6.12, and 6.13
shall apply to all Participants other than Participants in a profit sharing plan
(or a profit sharing plan with a Cash or Deferred Arrangement) to which the
exception in the immediately following paragraph applies, Participants whose
Nonforfeitable Accrued Benefit does not exceed $3,500, and Participants who have
not been credited with at least one Hour of Service after August 23, 1984. A
Participant's Nonforfeitable Accrued Benefit which does not exceed $3,500 shall
be distributed in accordance with Section 6.01. For purposes of applying the
annuity distribution provisions of this Article, the Plan Administrator shall
treat a former spouse as the Participant's spouse or surviving spouse to the
extent provided under a qualified domestic relations order described in Section
6.04. The annuity distribution provisions shall apply separately to the portion
of the Participant's Nonforfeitable Accrued Benefit subject to the qualified
domestic relations order and to the portion of the Participant's Nonforfeitable
Accrued Benefit not subject to that order.
Profit Sharing Plan Exception. If the Plan is a profit sharing plan (or a
-----------------------------
profit sharing plan with a Cash or Deferred Arrangement), and the Employer
elects in the Adoption Agreement not to have the
44
<PAGE>
annuity distribution provisions apply, Sections 6.09, 6.10, 6.11, 6.12, and 6.13
shall not apply to any Participant in the Plan except to:
(a) a Participant with respect to whom the Plan is a direct or indirect
transferee from a plan subject to the Code (S) 417 requirements, and
the Plan received the transfer after December 31, 1984, unless the
transfer is an elective transfer;
(b) a Participant who elects a life annuity distribution; and
(c) a Participant whose benefits under a defined benefit plan maintained
by the Employer are offset by benefits provided under this Plan.
Waiver. If the Participant has elected to waive the qualified joint and
------
survivor annuity or the preretirement survivor annuity in accordance with
Section 6.12 or Section 6.13, the Plan Administrator shall direct the Trustee to
distribute the Participant's Nonforfeitable Accrued Benefit in accordance with
Section 6.02.
6.09 JOINT AND SURVIVOR ANNUITY. The Plan Administrator shall direct the
--------------------------
Trustee to distribute a married or unmarried Participant's Nonforfeitable
Accrued Benefit in the form of a qualified joint and survivor annuity, unless
the Participant makes a valid waiver election (as described in Section 6.12)
within the 90 day period ending on the annuity starting date. If, as of the
annuity starting date, the Participant is married, a qualified joint and
survivor annuity shall mean an immediate annuity which is purchasable with the
Participant's Nonforfeitable Accrued Benefit and which provides a life annuity
for the Participant and a survivor annuity payable for the remaining life of the
Participant's surviving spouse equal to 50% of the amount of the annuity payable
during the life of the Participant. If, as of the annuity starting date, the
Participant is not married, a qualified joint and survivor annuity shall mean an
immediate life annuity for the Participant which is purchasable with the
Participant's Nonforfeitable Accrued Benefit.
6.10 PRERETIREMENT SURVIVOR ANNUITY. If a married Participant dies prior
------------------------------
to the annuity starting date, the Plan Administrator shall direct the Trustee to
distribute a portion of the Participant's Nonforfeitable Accrued Benefit to the
Participant's surviving spouse in the form of a preretirement survivor annuity,
unless the Participant has a valid waiver election (as described in Section
6.13) in effect, or unless the Participant and the spouse were not married
throughout the one year period ending on the date of the Participant's death. A
preretirement survivor annuity shall mean an annuity which is purchasable with
50% of the Participant's Nonforfeitable Accrued Benefit (determined as of the
date of the Participant's death) and which is payable for the life of the
Participant's surviving spouse. The value of the preretirement survivor annuity
shall be attributable to Employer contributions and to Employee contributions in
the same proportion as the Participant's Nonforfeitable Accrued Benefit shall be
attributable to those contributions. The portion of the Participant's
Nonforfeitable Accrued Benefit not payable under this paragraph shall be payable
to the Participant's Beneficiary in accordance with the other provisions of this
Article VI. If the present value of the preretirement survivor annuity does not
exceed $3,500, the Plan Administrator, on or before the annuity starting date,
shall direct the Trustee to make a lump sum distribution to the Participant's
surviving spouse, in lieu of a preretirement survivor annuity, in accordance
with Section 6.01.
6.11 SURVIVING SPOUSE ELECTIONS. If the present value of the preretirement
--------------------------
survivor annuity exceeds $3,500, the Participant's surviving spouse shall be
entitled to elect to have the Trustee commence distribution of the preretirement
survivor annuity at any time following the date of the Participant's death, but
not later than the mandatory distribution periods. The surviving spouse shall
be entitled to elect any distribution method allowed under Section 6.07 of the
Employer's Adoption Agreement in lieu of the
45
<PAGE>
preretirement survivor annuity. In the absence of an election by the surviving
spouse, the Plan Administrator shall direct the Trustee to distribute the
preretirement survivor annuity 60 days following the close of the Plan Year in
accordance with Section 6.02.
6.12 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY. Not earlier
------------------------------------------------------
than 90 and not later than 30 days before the Participant's annuity starting
date, the Plan Administrator shall provide the Participant a written explanation
of the terms and conditions of the qualified joint and survivor annuity; the
Participant's right to make, and the effect of, an election to waive the joint
and survivor form of benefit; the rights of the Participant's spouse regarding
the waiver election; and the Participant's right to make, and the effect of, a
revocation of a waiver election. A Participant shall be entitled to revoke a
waiver of the qualified joint and survivor annuity or to make a new waiver an
unlimited number of times during the election period.
A married participant's waiver election is not valid unless:
(a) the Participant's spouse (to whom the survivor annuity is payable
under the qualified joint and survivor annuity) has consented in
writing to the waiver election, the spouse's consent acknowledges the
effect of the election, and a notary public or the Plan Administrator
(or the Plan Administrator's representative) witnesses the spouse's
consent;
(b) the spouse consents to the alternate form of distribution designated
by the Participant or to any change in that designated form of
distribution; and
(c) unless the spouse is the Participant's sole primary Beneficiary, the
spouse consents to the Participant's Beneficiary designation or to any
change in the Participant's Beneficiary designation.
The spouse's consent to a waiver of the qualified joint and survivor annuity is
irrevocable, unless the Participant revokes the waiver election. The spouse may
execute a blanket consent to any form of distribution designation or to any
Beneficiary designation made by the Participant, if the spouse acknowledges the
right to limit that consent to a specific designation but, in writing, waives
that right. The consent requirements of this Section shall apply to a former
spouse of the Participant, to the extent required under a qualified domestic
relations order described in Section 6.04.
The Plan Administrator shall accept as valid a waiver election which does
not satisfy the spousal consent requirements if the Plan Administrator
establishes the Participant does not have a spouse, the Plan Administrator is
not able to locate the Participant's spouse, the Participant is legally
separated or has been abandoned (within the meaning of State law) and the
Participant has a court order to that effect, or other circumstances exist under
which the Secretary of the Treasury shall excuse the consent requirement. If
the Participant's spouse is legally incompetent to give consent, the spouse's
legal guardian (even if the guardian is the Participant) may give consent on
behalf of the spouse.
6.13 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY. The Plan
------------------------------------------------
Administrator shall provide a written explanation of the preretirement survivor
annuity to each married Participant, within the period of the following periods
which ends last:
(a) the period beginning on the first day of the Plan Year in which the
Participant attains age 32 and ending on the last day of the Plan Year
in which the Participant attains age 34;
(b) a reasonable period after an Employee becomes a Participant;
(c) a reasonable period after the annuity distribution provisions become
applicable to the Participant; or
46
<PAGE>
(d) a reasonable period after a fully subsidized preretirement survivor
annuity no longer satisfies the requirements for a fully subsidized
benefit. The Plan fully subsidizes the costs of a benefit if no
increase in cost or decrease in benefits to the Participant may result
from the Participant's failure to elect another benefit.
A reasonable period is the period beginning one year before and ending one year
after the applicable event. If the Participant separates from Service before
attaining age 35, the Plan Administrator shall provide the written explanation
within the period beginning one year before and ending one year after the
separation from Service. The written explanation shall describe, in a manner
consistent with Treasury regulations, the terms and conditions of the
preretirement survivor annuity comparable to the explanation of the qualified
joint and survivor annuity required under Section 6.12. The Participant shall
be entitled to revoke a waiver of the preretirement survivor annuity or to make
a new waiver an unlimited number of times during the election period.
A Participant's waiver election of the preretirement survivor annuity is
not valid unless:
(a) the Participant makes the waiver election not earlier than the first
day of the Plan Year in which he or she attains age 35; and
(b) the Participant's spouse (to whom the preretirement survivor annuity
is payable) satisfies the consent requirements described in Section
6.12, except the spouse need not consent to the form of benefit
payable to the designated Beneficiary.
The spouse's consent to the waiver of the preretirement survivor annuity is
irrevocable, unless the Participant revokes the waiver election. If the
Participant separates from Service prior to the first day of the Plan Year in
which he or she attains age 35, the Plan Administrator shall accept a waiver
election with respect to the Participant's Accrued Benefit attributable to
Service prior to the separation from Service. Furthermore, if a Participant who
has not separated from Service makes a valid waiver election, except that it
does not meet the timing requirement of clause (a) of this paragraph, the Plan
Administrator shall accept that election as valid, but only until the first day
of the Plan Year in which the Participant attains age 35.
6.14 DIRECT ROLLOVER/TRANSFER PROVISIONS. This Section applies to
-----------------------------------
distributions made on or after January 1, 1993. Notwithstanding any provision
of the Plan to the contrary that would otherwise limit a Distributee's election
under this Section, a Distributee may elect, at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an Eligible
Rollover Distribution paid directly to an Eligible Retirement Plan specified by
the Distributee in a Direct Rollover. The following definitions shall apply for
purposes of this Section:
(a) ELIGIBLE ROLLOVER DISTRIBUTION: An Eligible Rollover Distribution is
any distribution of all or any portion of the balance to the credit of
the Distributee, except that an Eligible Rollover Distribution does
not include:
(1) any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee and the
Distributee's designated Beneficiary, for a specified period of
ten years or more;
(2) any distribution to the extent the distribution is required under
Code (S) 401(a)(9); and
47
<PAGE>
(3) the portion of any distribution that is not includable in gross
income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(b) ELIGIBLE RETIREMENT PLAN: An Eligible Retirement Plan is an
individual retirement account described in Code (S) 408(a); an
individual retirement annuity described in Code (S) 408(b); an annuity
plan described in Code (S) 403(a); or a qualified trust described in
Code (S) 401(a), that accepts the Distributee's Eligible Rollover
Distribution. However, in the case of an Eligible Rollover
Distribution to the surviving spouse, an Eligible Retirement Plan is
an individual retirement account or individual retirement annuity.
(c) DISTRIBUTEE: A Distributee includes an Employee or former Employee.
In addition, the Employee's or former Employee's surviving spouse and
the Employee's or former Employee's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined
in Code (S) 414(p), are Distributees with regard to the interest of
the spouse or former spouse.
(d) DIRECT ROLLOVER: A Direct Rollover is a payment by the Plan to the
Eligible Retirement Plan specified by the Distributee.
* * * END OF ARTICLE 6 * * *
48
<PAGE>
ARTICLE VII
PLAN LOANS
7.01 AVAILABILITY OF PARTICIPANT LOANS. If the Employer elects in its
---------------------------------
Adoption Agreement to apply the provisions of this Article, Participant loans
shall be permitted under the Plan in accordance with the provisions of this
Article.
7.02 REQUIREMENTS. To comply with the plan loan provisions of Code (S)
------------
4975(d)(1), the Employer's Participant loan program shall meet the following
requirements:
(a) Loans shall be made available to all Participants and Beneficiaries on
a reasonably equivalent basis.
(b) Loans shall not be made available to Highly Compensated Employees in
an amount greater than the amount made available to other Employees.
(c) Loans shall be adequately secured and bear a reasonable rate of
interest.
(d) No Loan shall exceed the present value of the Participant's vested
Accrued Benefit.
(e) A Participant shall obtain the consent of his or her spouse, if any,
to use the Participant's Accrued Benefit as security for the loan,
unless the annuity distribution requirements of Article VI do not
apply to the Participant's Accrued Benefit. Spousal consent shall be
obtained not earlier than the beginning of the 90 day period that ends
on the date on which the loan is to be secured. The consent shall be
in writing, shall acknowledge the effect of the loan, and shall be
witnessed by a plan representative or notary public. Such consent
shall thereafter be binding with respect to the consenting spouse or
any subsequent spouse with respect to that loan. A new consent shall
be required if the account balance is used for renegotiation,
extension, renewal, or other revision of the loan.
If a valid spousal consent has been obtained in accordance with the
procedures of Article VI, then, notwithstanding any other provision of
this Plan, the portion of the Participant's Nonforfeitable Accrued
Benefit used as a security interest held by the Plan by reason of the
loan outstanding to the Participant shall be reduced by the
outstanding loan amount for purposes of determining the amount of the
Nonforfeitable Accrued Benefit distributable at the time of death or
distribution, but only if the reduction is used as repayment of the
loan. If less than 100% of the Participant's Nonforfeitable Accrued
Benefit (determined without regard to the preceding sentence) is
distributable to the surviving spouse, then the Participant's
Nonforfeitable Accrued Benefit shall be adjusted first by reducing the
Nonforfeitable Accrued Benefit by the amount of the security used as
repayment of the loan, and then by determining the benefit payable to
the surviving spouse.
(f) In the event of default, foreclosure on the note and attachment of
security shall not occur until a distributable event occurs under the
Plan.
(g) No loans shall be made to any Shareholder-Employee or Owner-Employee.
49
<PAGE>
7.03 LOAN APPLICATION. Any Participant may apply for a loan from the Plan.
----------------
If the Participant is deceased, the Beneficiary may apply for a loan in the same
manner as a Participant. A Participant shall apply for each loan in writing
with an application which specifies the amount of the loan desired, the
requested duration of the loan, and the source of security for the loan. The
Plan Administrator shall not approve any loan if a Participant is not
creditworthy. In order to be creditworthy, the Participant must have
established in the community, a reputation which would entitle the Participant
to a similar loan from a commercial or business lender. In applying for the
loan from the Plan, each Participant shall give full authority to the Plan
Administrator to investigate his or her credit-worthiness.
7.04 LIMITATION ON LOAN AMOUNT. The Plan Administrator shall not approve
-------------------------
any loan to a Participant in an amount which exceeds the greater of $10,000 or
50% of the Participant's Nonforfeitable Accrued Benefit, as reflected by the
books and records of the Plan. Effective for Plan Years beginning after
December 31, 1986, the maximum aggregate dollar amount of loans outstanding to
any Participant shall not exceed $50,000, reduced by the excess of the
Participant's highest outstanding loan balance during the 12 month period ending
on the date of the loan over the Participant's current outstanding loan balance
on the date of the loan.
7.05 EVIDENCE OF LOAN. The Plan Administrator shall document every loan in
----------------
the form of a promissory note signed by the Participant for the face amount of
the loan, together with interest not to exceed two percentage points above the
prime interest rate of the Employer's bank in effect on the date the Plan
Administrator approves the Participant's loan, payable at least quarterly under
a level amortization schedule.
The Plan Administrator shall fix the term of, or repayment of, any loan;
however, in no instance shall the term of repayment be greater than five years,
unless the loan qualifies as a home loan. The Plan Administrator may fix the
term for repayment of a home loan. A "home loan" shall mean a loan used to
acquire a dwelling unit which, within a reasonable time, the Participant uses as
the Participant's principal residence.
7.06 SECURITY FOR LOAN. A Participant shall secure each loan with an
-----------------
irrevocable pledge and assignment of the nonforfeitable amount of the borrowing
Participant's Accrued Benefit under the Plan or other security the Plan
Administrator accepts and finds to be adequate, or both the Participant's
Accrued Benefit and other security. The Plan Administrator may request the
borrowing Participant to secure each loan with other assets acceptable to the
Plan Administrator. If the Participant secures the loan wholly or partly with
his or her Accrued Benefit, the pledge and assignment of such Accrued Benefit
shall be in the form provided by the Plan Administrator.
7.07 LOAN TREATED AS DIRECTED INVESTMENT. The Plan Administrator shall
-----------------------------------
treat a loan made to a Participant in accordance with this Article VII as a
Participant direction of investment of the borrowing Participant's Account. The
loan shall remain a part of the Trust, but, to the extent of the loan
outstanding at any time, the borrowing Participant's Account alone shall share
in any interest paid on the loan, and it alone shall bear any expense or loss it
incurs in connection with the loan. The Trustee may retain any principal or
interest paid on the borrowing Participant's loan in an interest bearing
segregated investment Account on behalf of the borrowing Participant until the
Trustee deems it appropriate to add the amount paid to the Participant's
Accounts under the Plan.
7.08 LOAN POLICY. The Plan Administrator may adopt additional guidelines
-----------
for administering its Participant loan program in the form of a loan policy.
* * * END OF ARTICLE 7 * * *
50
<PAGE>
ARTICLE VIII
ADMINISTRATIVE PROVISIONS
8.01 PLAN ADMINISTRATOR. If the Employer does not appoint a Plan
------------------
Administrator, the Employer shall be the Plan Administrator. The Employer may
appoint one or more persons as Plan Administrator to administer the Plan. The
persons appointed as Plan Administrator shall serve without compensation for
services as such, but the Employer shall pay or reimburse all expenses properly
and actually incurred in the performance of Plan duties of the Plan
Administrator and any fiduciary, including the expense for any bond required
under ERISA.
8.02 TERM. Each person appointed as Plan Administrator shall serve until
----
the appointment of a successor.
8.03 PLAN ADMINISTRATOR'S POWERS AND DUTIES. Not in limitation, but in
--------------------------------------
amplification of the powers and duties specified herein, the Plan Administrator
shall have the power to:
(a) determine the eligibility of an Employee to participate in the Plan,
the value of a Participant's Accrued Benefit and the Nonforfeitable
percentage of each Participant's Accrued Benefit;
(b) adopt rules of procedure and regulations necessary for the proper and
efficient administration of the Plan to the extent that the rules are
not inconsistent with the terms of this Agreement;
(c) enforce the terms of the Plan and the rules and regulations it adopts;
(d) direct the Trustee in the allocations to the Accounts and
distributions from the Trust;
(e) review and render decisions with respect to a claim for (or denial of
a claim for) a benefit under the Plan;
(f) interpret and construe the terms of the Plan;
(g) determine all questions arising in the administration of the Plan,
including, but not limited to, questions regarding the entitlement of
Participants and Beneficiaries to benefits provided under the Plan;
(h) make all determinations of fact necessary to the exercise of all other
powers and duties specified herein;
(i) furnish the Employer with information which the Employer may require
for tax or other purposes;
(j) engage the services of agents to assist it with the performance of its
duties;
(k) engage the services of an Investment Manager or Managers (as defined
in ERISA (S) 3(38)), each of whom shall have full power and authority
to manage, acquire, or dispose (or direct the Trustee with respect to
acquisition or disposition) of any Plan asset under its control;
51
<PAGE>
(l) establish a nondiscriminatory policy which shall be observed in making
loans, if any, to Participants;
(m) establish and maintain a funding standard account, if required, and to
make credits and charges to the account to the extent required by and
in accordance with the provisions of the Code; and
(n) have full responsibility for compliance with the reporting and
disclosure rules under ERISA for this Plan.
The Plan Administrator shall exercise all of its powers and duties under the
Plan in its good faith discretion and in a uniform and nondiscriminatory manner.
8.04 FUNDING POLICY. The Plan Administrator shall review, not less often
--------------
than annually, all pertinent Employee information and Plan data in order to
establish the funding policy of the Plan and to determine the appropriate
methods of carrying out the Plan's objectives. The Plan Administrator shall
communicate periodically, as it deems appropriate, to the Trustee and to any
Plan Investment Manager, the Plan's short-term and long-term financial needs so
investment policy can be coordinated with Plan financial requirements.
8.05 MANNER OF ACTION. The decision of a majority of the persons appointed
----------------
and qualified as Plan Administrator controls. Action by the Plan Administrator
may be taken at a meeting or in writing without a meeting. The Plan
Administrator may authorize any one of the persons appointed as Plan
Administrator to sign on its behalf any notices, directions, applications,
certificates, consents, approvals, waivers, letters, or other documents. The
Plan Administrator shall evidence this authority by an instrument signed by all
members and filed with the Trustee. No person appointed as Plan Administrator
may decide or determine any matter concerning the distribution, nature, or
method of settlement of his or her own benefits under the Plan - except in
exercising an election available in his or her capacity as a Participant -
unless the Participant is acting alone in the capacity of Plan Administrator.
8.06 UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require either the
---------------------------
Trustee or the Plan Administrator to search for, or ascertain the whereabouts
of, any Participant or Beneficiary. At the time the Participant's or
Beneficiary's benefit becomes distributable under Article VI, the Plan
Administrator, by certified or registered mail addressed to the Participant's or
Beneficiary's last known address of record with the Plan Administrator or the
Employer, shall notify any Participant, or Beneficiary, that the Participant or
Beneficiary is entitled to a distribution under this Plan. The notice shall
quote the provisions of this Section and otherwise shall comply with the notice
requirements of Article VI. If the Participant, or Beneficiary, fails to claim
his or her distributive share or make his or her whereabouts known in writing to
the Plan Administrator within six months after the date of mailing of the
notice, the Plan Administrator shall treat the Participant's or Beneficiary's
unclaimed payable Accrued Benefit as forfeited and shall reallocate the
unclaimed payable Accrued Benefit in accordance with Section 4.02.
If a Participant or Beneficiary whose account was forfeited under this
Section makes a claim at any time for his or her forfeited Accrued Benefit, the
Plan Administrator shall direct the Trustee to distribute the Participant's or
Beneficiary's restored Accrued Benefit not later than 60 days after the close of
the Plan Year in which the Plan Administrator restores the forfeited Accrued
Benefit in accordance with Section 5.13.
At the time the Plan terminates, the Plan Administrator shall restore any
Participant's Nonforfeitable Accrued Benefit forfeited in accordance with this
Section (if the Nonforfeitable Accrued
52
<PAGE>
Benefit at the time of forfeiture exceeded $3,500) in accordance with Section
5.13. However, the Plan Administrator shall not restore the Accrued Benefit of
any Participant if the Accrued Benefit would have been lost under the state
escheat law at the time of the Plan termination. Any Accrued Benefit restored
under this paragraph shall be protected by establishing an IRA for the lost
Participant, by purchasing an annuity for the lost Participant, or by
transferring the account to an ongoing plan of the Employer.
8.07 BENEFICIARY DESIGNATION. Any Participant may designate, in writing,
-----------------------
any person or persons, contingently or successively, to whom the Trustee shall
pay the Participant's Accrued Benefit (including any life insurance proceeds
payable to the Participant's Account) in the event of the Participant's death,
and the Participant may designate the form and method of payment. The Plan
Administrator shall prescribe the form for the written designation of
Beneficiary, and upon the Participant's filing the form with the Plan
Administrator, the form effectively revokes all designations filed prior to that
date by the same Participant.
Coordination with Survivor Requirements. If the joint and survivor
---------------------------------------
requirements of Article VI apply to the Participant, this Section shall not be
construed to impose any special spousal consent requirements on the
Participant's Beneficiary designation. However, in the absence of spousal
consent (as required by Article VI) to the Participant's Beneficiary designation
(a) any waiver of the joint and survivor annuity or of the preretirement
survivor annuity is not valid; and (b) if the Participant dies prior to the
annuity starting date, the Participant's Beneficiary designation shall apply
only to the portion of the death benefit which is not payable as a preretirement
survivor annuity. Regarding clause (b), if the Participant's surviving spouse
is a primary Beneficiary under the Participant's Beneficiary designation, the
Trustee shall satisfy the spouse's interest in the Participant's death benefit
first from the portion which is payable as a preretirement survivor annuity.
Profit Sharing Plan Exception. If, pursuant to Section 6.08, the joint and
-----------------------------
survivor requirements do not apply to a married Participant, that Participant's
Beneficiary designation is not valid unless the Participant's spouse consents
(in accordance with the following paragraph) to the Beneficiary designation. The
spousal consent requirement in this paragraph does not apply if the Participant
and his or her spouse are not married throughout the one year period ending on
the date of the Participant's death, or if the Participant's spouse is the
Participant's sole primary Beneficiary.
Any designation by a married Participant of a person other than the
Participant's spouse shall be effective only with the consent of the spouse and
only if the consent is in writing, acknowledges the effect of the consent, is
witnessed by a Plan representative or a notary public, and meets one of the
following three requirements:
(a) the consent shall designate a specific Beneficiary or a specific form
of benefit that cannot be changed without the additional consent of
the spouse in a form meeting the requirements of this Section;
(b) the consent shall specifically provide that the Participant may change
the designation of a Beneficiary or a form of benefit without any
further consent by the spouse, and the spouse shall acknowledge in the
consent that he or she is giving up the right to limit his or her
consent to a specific Beneficiary or a specific form of benefit; or
(c) the consent shall meet the requirements of clause (b) of this
sentence, except that the Participant's right to change a Beneficiary
or a form of benefit without any further consent by the Spouse may be
limited to a change among certain beneficiaries or certain forms of
benefits.
53
<PAGE>
A spouse's consent shall not be required if it is established to the
satisfaction of the Plan Administrator that the required consent cannot be
obtained because there is no spouse, because the spouse cannot be located, or
because of other circumstances that may be prescribed in Treasury regulations.
An election made by the Participant and consented to by the Participant's spouse
may be revoked by the Participant in writing without the consent of the spouse.
Any new election shall comply with the requirements of this Section. A consent
by a former spouse shall not be applicable to a new spouse.
8.08 NO BENEFICIARY DESIGNATION. If a Participant fails to name a
--------------------------
Beneficiary or if the Beneficiary named by a Participant predeceases the
Participant or dies before complete distribution of the Participant's Accrued
Benefit as prescribed by the Participant's Beneficiary form, then the Trustee
shall pay the Participant's Accrued Benefit in accordance with Article VI in the
following order of priority (unless modified by the Adoption Agreement) to:
(a) the Participant's surviving spouse;
(b) the Participant's surviving issue, per stirpes;
--- -------
(c) the Participant's surviving parents, in equal shares; or
(d) the estate of the Participant.
The Plan Administrator shall direct the Trustee as to the method and to whom the
Trustee shall make payment under this Section.
8.09 INFORMATION TO PLAN ADMINISTRATOR. Each Participant and each
---------------------------------
Beneficiary of a deceased Participant shall furnish to the Plan Administrator
such evidence, data, or information as the Plan Administrator considers
necessary or desirable for the purpose of administering the Plan. The Employer
shall supply current information to the Plan Administrator regarding the name,
date of birth, date of employment, annual compensation, leaves of absence, Years
of Service, and date of termination of employment of each Employee who is or who
may be eligible to become a Participant under the Plan, together with any other
information which the Plan Administrator considers necessary. Each Participant
and each Beneficiary of a deceased Participant shall file with the Plan
Administrator in writing, his or her address and any change of address. Any
communication, statement, or notice addressed to a Participant, or Beneficiary,
at his or her last address filed with the Plan Administrator, or as shown on the
records of the Employer, shall bind the Participant, or Beneficiary, for all
purposes of this Plan.
8.10 INFORMATION TO PARTICIPANTS AND BENEFICIARIES. Any Participant in the
---------------------------------------------
Plan or any Beneficiary may examine copies of the Plan description, latest
annual report, any bargaining agreement, this Plan and Trust, and any contract
or other instrument under which the Plan was established or is operated. The
Plan Administrator shall maintain all of the items listed in this Section in the
Plan Administrator's office, or in such other place or places as the Plan
Administrator may designate from time to time, for examination during reasonable
business hours. A Beneficiary's right to (and the Plan Administrator's or the
Trustee's duty to provide to the Beneficiary) information or data concerning the
Plan shall not arise until the Beneficiary first becomes entitled to receive a
benefit under the Plan. Upon the written request of a Participant or
Beneficiary the Plan Administrator shall furnish a copy of any item listed in
this Section. The Plan Administrator may make a reasonable charge to the
requesting person for the copy so furnished. As soon as practicable after the
Accounting Date of each Plan Year, but within the time prescribed by ERISA and
the regulations under ERISA, the Plan Administrator shall deliver to each
Participant (and to each Beneficiary of a deceased Participant) a statement of
his or her Accrued Benefit in the Trust as of that date and such other
information that ERISA requires to be furnished to the
54
<PAGE>
Participant or Beneficiary. No Participant, other than a Participant acting as
Plan Administrator, has the right to inspect the records reflecting the Account
of any other Participant. The Plan Administrator, within the time prescribed by
ERISA and the applicable regulations, shall furnish to all Participants and
Beneficiaries a summary description of any material amendment to the Plan, a
notice of discontinuance of the Plan, and all other information required by
ERISA to be furnished without charge.
8.11 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. The Plan Administrator shall
---------------------------------------
provide adequate notice in writing to any Participant or to any Beneficiary
whose claim for benefits under the Plan has been denied. The plan
Administrator's notice shall set forth:
(a) the specific reason for the denial;
(b) specific references to pertinent Plan provisions on which the denial
is based;
(c) a description of any additional material and information needed for
the Participant or Beneficiary to perfect the claim and an explanation
of why the material or information is needed;
(d) a statement that any appeal the Participant or Beneficiary wishes to
make of the adverse determination shall be made in writing and be
received by the Plan Administrator within 75 days after the appealing
Participant or Beneficiary received the denial of benefits notice that
failure to appeal the action in writing within the 75 day period shall
render the adverse determination final, binding, and conclusive; and
(e) the name and address where the Participant or Beneficiary may send an
appeal.
A Participant or Beneficiary appealing a denial of benefits (or the
authorized representative of the Participant or Beneficiary) shall be entitled
to submit in writing any issues and comments relating to the denial. The
Participant or Beneficiary or the duly authorized representative shall be
entitled to review pertinent Plan documents. The Plan Administrator shall
reexamine all facts related to the appeal and make a final determination as to
whether the denial of benefits is justified under the circumstances. The Plan
Administrator shall advise the Participant (or Beneficiary) of its decision
within 60 days after the written request for review, unless special
circumstances (such as a hearing) would make the rendering of a decision within
the 60 day limit unfeasible, but in no event may the Plan Administrator render a
decision on a denial for a claim for benefits later than 120 days after its
receipt of a request for review.
8.12 LIABILITY AND INDEMNIFICATION. The Employer shall assume no
-----------------------------
obligation or responsibility to any of its Employees, Participants, or
Beneficiaries for any act of, or failure to act, on the part of the Trustee or
the Plan Administrator (unless the Employer is the Plan Administrator). The
Employer shall indemnify and hold harmless every person acting in the capacity
of the Plan Administrator from and against any and all loss resulting from
liability to which the Plan Administrator may be subjected by reason of any act
or conduct (except willful misconduct or gross negligence) in its official
capacities in the administration of this Trust and Plan, including all expenses
reasonably incurred in its defense, in case the Employer fails to provide such
defense. The indemnification provisions of this Section shall not relieve the
Plan Administrator from any liability it may have under ERISA for breach of a
fiduciary duty. Furthermore, the Plan Administrator and the Employer may execute
an agreement further delineating the indemnification agreement of this Section
if the agreement is consistent with and does not violate ERISA. The
indemnification provisions of this Section extend to the Trustee solely to the
extent provided by an agreement executed by the Trustee and the Employer.
* * * END OF ARTICLE 8 * * *
55
<PAGE>
ARTICLE IX
AMENDMENT, MERGER AND TERMINATION
9.01 AMENDMENT BY EMPLOYER.
---------------------
(a) The Employer shall have the right at any time:
(1) to amend this Agreement in any manner it deems necessary or
advisable in order to qualify (or maintain qualification of) this
Plan and Trust under the appropriate provisions of Code (S)
401(a); and
(2) to amend this Agreement in any other manner.
The Employer shall be entitled to change the choice of options in the
Adoption Agreement and may add overriding language in the Adoption
Agreement when such language is necessary to satisfy Code (S)(S) 415
or 416 because of the required aggregation of multiple plans. No
amendment may authorize or permit any of the Trust Fund (other than
the part which is required to pay taxes and administration expenses)
to be used for or diverted to purposes other than for the exclusive
benefit of the Participants or their Beneficiaries or estates. No
amendment may cause or permit any portion of the Trust Fund to revert
to or become a property of the Employer. The Employer shall not make
any amendment which affects the rights, duties, or responsibilities of
the Trustee or the Plan Administrator without the written consent of
the affected Trustee or Plan Administrator.
(b) Code (S) 411(d)(6) Protected Benefits. An amendment (including the
-------------------------------------
adoption of this Plan as a restatement of an existing plan) may not
decrease a Participant's Accrued Benefit, except to the extent
permitted under Code (S) 412(c)(8), and may not reduce or eliminate
Code (S) 411(d)(6) protected benefits determined immediately prior to
the adoption date (or, if later, the effective date) of the amendment.
An amendment reduces or eliminates Code (S) 411(d)(6) protected
benefits if the amendment has the effect of either (1) eliminating or
reducing an early retirement benefit or a retirement-type subsidy (as
defined in Treasury regulations), or (2) except as provided by
Treasury regulations, eliminating an optional form of benefit. The
Plan Administrator shall disregard an amendment to the extent
application of the amendment would fail to satisfy the requirements of
this paragraph (b). If the Plan Administrator disregards an amendment
because the amendment would violate clause (1) or clause (2) of this
paragraph (b), the Plan Administrator shall maintain a schedule of the
early retirement option or other optional forms of benefit the Plan
must continue for the affected Participants.
(c) The Employer shall make all amendments in writing. Each amendment
shall state the date to which it is either retroactively or
prospectively effective.
9.02 MERGER/DIRECT TRANSFER. The Trustee may not consent to, or be a party
----------------------
to, any merger or consolidation with another plan, or to a transfer of assets or
liabilities to another plan, unless immediately after the merger, consolidation,
or transfer, the surviving plan provides each Participant with a benefit equal
to or greater than the benefit each Participant would have received had the Plan
terminated immediately before the merger, consolidation, or transfer. The
Trustee possesses the specific authority
56
<PAGE>
to enter into merger agreements or direct transfer of assets agreements with the
trustees of plans described in Code (S) 401(a), including an elective transfer,
and to accept the direct transfer of plan assets, or to transfer plan assets, as
a party to any such agreement.
The Trustee may accept a direct transfer of plan assets on behalf of an
Employee prior to the date the Employee becomes a Participant in accordance with
the requirements of Section 2.01. If the Trustee accepts a direct transfer of
plan assets, the Plan Administrator and Trustee shall treat the Employee as a
Participant for all purposes of the Plan except for purposes of sharing in
Employer contributions or forfeitures under the Plan until the Employee actually
becomes a Participant in accordance with the requirements of Section 2.01.
Code (S) 401(k) Transfer Rules. If the Plan receives a direct transfer (by
------------------------------
merger or otherwise) of elective contributions (or amounts treated as elective
contributions) from a plan with a cash or deferred arrangement, the distribution
restrictions of Code (S)(S) 401(k)(2) and (10) shall continue to apply to those
transferred elective contributions.
9.03 TERMINATION.
-----------
(a) The Employer shall have the right, at any time, to suspend or
discontinue its contributions under the Plan, and to terminate, at any
time, this Plan and the Trust created under this Agreement. The Plan
shall terminate upon the first to occur of the following:
(1) the date terminated by action of the Employer;
(2) the date the Employer is judicially declared bankrupt or
insolvent, unless the proceeding authorized continued maintenance
of the Plan; or
(3) the dissolution, merger, consolidation, or reorganization of the
Employer or the sale by the Employer of all or substantially all
of its assets, unless the successor or purchaser makes provision
to continue the Plan, in which event the successor or purchaser
shall become the Employer under this Plan.
(b) Full Vesting on Termination. Upon either full or partial termination
---------------------------
of the Plan, or, if applicable, upon complete discontinuance of profit
sharing plan contributions to the Plan, an affected Participant's
right to his or her Accrued Benefit is 100% Nonforfeitable,
irrespective of the Nonforfeitable percentage which otherwise would
apply under Article V.
(c) Distributions Upon Termination. Upon termination of the Plan, the
------------------------------
distribution provisions of Article VI shall remain operative, with the
following exceptions:
(1) if the present value of the Participant's Nonforfeitable Accrued
Benefit does not exceed $3,500, the Plan Administrator shall
direct the Trustee to distribute the Participant's Nonforfeitable
Accrued Benefit in a lump sum as soon as administratively
practicable after the Plan terminates; and
(2) if the present value of the Participant's Nonforfeitable Accrued
Benefit exceeds $3,500, the Participant or the Beneficiary, in
addition to the elections provided in connection with the
distribution events permitted under Article VI, may elect
57
<PAGE>
to have the Trustee commence distribution of his or her
Nonforfeitable Accrued Benefit as soon as administratively
practicable after the Plan terminates.
To liquidate the Trust, the Plan Administrator shall purchase a
deferred annuity contract for each Participant which protects the
Participant's distribution rights under the Plan, if the Participant's
Nonforfeitable Accrued Benefit exceeds $3,500 and the Participant does
not elect an immediate distribution pursuant to clause (2) of this
paragraph (c). The Trust shall continue until the Trustee in
accordance with the direction of the Plan Administrator has
distributed all of the benefits under the Plan.
(d) On each Valuation Date, the Plan Administrator shall credit any part
of a Participant's Accrued Benefit retained in the Trust with its
proportionate share of the Trust's income, expenses, gains, and
losses, both realized and unrealized. Upon termination of the Plan,
the amount, if any, in a suspense account under Article IV shall
revert to the Employer, subject to the conditions of the Treasury
regulations permitting such a reversion. A resolution or amendment to
freeze all future benefit accruals but otherwise to continue
maintenance of this Plan, is not a termination for purposes of this
Section.
* * * END OF ARTICLE 9 * * *
58
<PAGE>
ARTICLE X
MISCELLANEOUS
10.01 EXCLUSIVE BENEFIT. Except as provided under Articles III and IX, the
-----------------
Employer has no beneficial interest in any asset of the Trust and no part of any
asset in the Trust may ever revert to or be repaid to an Employer, either
directly or indirectly; nor, prior to the satisfaction of all liabilities with
respect to the Participants and their Beneficiaries under the Plan, may any part
of the corpus or income of the Trust Fund, or any asset of the Trust, be used
for, or diverted to, purposes other than the exclusive benefit of the
Participants or their Beneficiaries. However, if the Commissioner of Internal
Revenue, upon the Employer's request for initial approval of this Plan,
determines that the Trust created under the Plan is not a qualified trust exempt
from federal income tax, then (and only then) the Trustee, upon written notice
from the Employer, shall return the Employer's contributions (and any earnings
attributable to the contributions) to the Employer. The Trustee shall make the
return of the Employer contribution under this Section within one year of the
final disposition by the Internal Revenue Service of the Employer's request for
initial approval of the Plan. The Plan and Trust shall terminate upon the
Trustee's return of the Employer's contributions.
10.02 NO RESPONSIBILITY FOR EMPLOYER ACTION. Neither the Trustee nor the
-------------------------------------
Plan Administrator shall have any obligation or responsibility with respect to
any action required by the Plan to be taken by the Employer, any Participant, or
any Employee, or for the failure of any of such persons to act or make any
payment or contribution, or to otherwise provide any benefit contemplated under
this Plan. Furthermore, neither the Trustee nor the Plan Administrator shall be
required to collect any contribution required under the Plan, or to determine
the correctness of the amount of any Employer contribution. Neither the Trustee
nor the Plan Administrator shall have any obligation to inquire into or be
responsible for any action or failure to act on the part of the others. Any
action required of a corporate Employer shall be taken by its board of directors
or its designate.
10.03 FIDUCIARIES NOT INSURERS. The Trustee, the Plan Administrator, and
------------------------
the Employer in no way guarantee the Trust Fund from loss or depreciation. The
Employer does not guarantee the payment of any money which may be due or becomes
due to any person from the Trust Fund. The liability of the Plan Administrator
and the Trustee to make any payment from the Trust Fund at any time and all
times shall be limited to the then available assets of the Trust.
10.04 WAIVER OF NOTICE. Any person entitled to notice under the Plan may
----------------
waive the notice.
10.05 WORD USAGE. Words used in the masculine also apply to the feminine
----------
where applicable, and wherever the context of the Plan dictates, the plural
includes the singular and the singular includes the plural.
10.06 STATE LAW. The Employer shall specify in its Adoption Agreement the
---------
state law which shall determine all questions arising with respect to the
provisions of this Agreement except to the extent federal statute supersedes the
state law.
10.07 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with
-------------------------
respect to the establishment of the Trust, or any modification or amendment to
the Plan or Trust, or in the creation of any Account, or the payment of any
benefit, shall give any Employee, Participant, or Beneficiary any right to
continue employment, any legal or equitable right against the Employer, or
Employee of the Employer,
59
<PAGE>
or against the Trustee, its agents or employees, or against the Plan
Administrator, except as expressly provided by the Plan and Trust, by ERISA, or
by a separate agreement.
10.08 ASSIGNMENT OR ALIENATION. Subject to Code (S) 414(p) (relating to
------------------------
qualified domestic relations orders), neither a Participant nor a Beneficiary
may voluntarily or involuntarily anticipate, assign, or alienate (either at law
or in equity) any benefit provided under the Plan, and the Trustee shall not
recognize any such anticipation, assignment, or alienation. Furthermore, a
benefit under the Plan shall not be subject to attachment, garnishment, levy,
execution, or other legal or equitable process.
* * * END OF ARTICLE 10 * * *
60
<PAGE>
ARTICLE XI
LIFE INSURANCE PROVISIONS
11.01 INSURANCE BENEFIT. The Employer may elect to provide incidental life
-----------------
insurance benefits for insurable Participants who consent to life insurance
benefits by signing the appropriate insurance company application form;
provided, however, that the aggregate of life insurance premiums paid for the
benefit of a Participant, at all times, shall not exceed the following
percentages of the aggregate of the Employer's contributions allocated to any
Participant's Account: (a) 49% in the case of the purchase of ordinary life
insurance contracts; or (b) 25% in the case of the purchase of term life
insurance contracts. Furthermore, if the Trustee purchases a combination of
ordinary life insurance contracts and term life insurance contracts, then the
sum of 50% of the premiums paid for the ordinary life insurance contracts and
the premiums paid for the term life insurance contracts shall not exceed 25% of
the Employer contributions allocated to any Participant's Account. The Trustee
shall not purchase any incidental life insurance benefit for any Participant
prior to the Accounting Date as of which the Plan Administrator first makes an
Employer contribution allocation to the Participant's Employer Contributions
Account. At an insured Participant's written direction, the Trustee shall use
all or any portion of the Participant's Voluntary Nondeductible Employee
Contributions Account, if any, to pay insurance premiums covering the
Participant's life. No part of the Voluntary Deductible Employee Contributions
Accounts, if any, shall be used to purchase life insurance.
The Employer shall direct the Trustee as to the insurance company and
insurance agent through which the Trustee is to purchase the insurance
contracts, the amount of the coverage, and the applicable dividend plan. Each
application for a policy, and the policies themselves, shall designate the
Trustee as sole owner and named beneficiary with the right reserved to the
Trustee to exercise any right or option contained in the policies, subject to
the terms and provisions of this Agreement. Proceeds of insurance contracts
paid to the Participant's Account under this Article XI shall be subject to the
distribution requirements of Article VI. The Trustee shall not retain any such
proceeds for the benefit of the Trust.
The Trustee shall charge all amounts paid by it pursuant to an Employer's
election under this Section for the premiums on any incidental benefit insurance
contracts covering the life of a Participant to the Account of the Participant.
The Trustee shall hold all incidental benefit insurance contracts issued under
the Plan as assets of the Trust created under the Plan.
11.02 LIMITATION ON LIFE INSURANCE PROTECTION. The Trustee shall not
---------------------------------------
continue any life insurance protection for any Participant beyond the latest of
such Participant's termination of employment, his or her Normal Retirement Date,
or notification from the Plan Administrator of such Participant's termination of
employment. If the Trustee holds any incidental benefit insurance contracts on
the life of a Participant when the Participant terminates employment (other than
by reason of death), the Trustee shall proceed as follows:
(a) if the entire cash value of the contracts is vested in the terminating
Participant, or if the contracts have no cash value at the end of the
policy year in which termination of employment occurs, the Trustee
shall transfer the contracts to the Participant endorsed so as to vest
in the transferee all right, title, and interest to the contracts,
free and clear of the Trust; subject, however, to restrictions
regarding surrender or payment of benefits as the issuing insurance
company may permit and as the Plan Administrator shall direct;
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<PAGE>
(b) if only part of the cash value of the contracts is vested in the
terminating Participant, the Trustee, to the extent the Participant's
interest in the cash value of the contracts is not vested, may adjust
the Participant's interest in the value of his or her Account
attributable to Trust assets other than incidental benefit insurance
contracts and proceed as in clause (a) of this Section, or the Trustee
shall effect a loan from the issuing insurance company on the sole
security of the contracts for an amount equal to the difference
between the cash value of the contracts at the end of the policy year
in which termination of employment occurs and the amount of the cash
value that is vested in the terminating Participant, and the Trustee
shall transfer the contracts endorsed so as to vest in the transferee
all right, title, and interest to the contracts, free and clear of the
Trust; subject, however, to the restrictions as to surrender or
payment of benefits as the issuing insurance company may permit and
the Plan Administrator shall direct; or
(c) if no part of the cash value of the contracts is vested in the
terminating Participant, the Trustee shall surrender the contracts for
cash proceeds as may be available.
In accordance with the written direction of the Plan Administrator the
Trustee shall make any transfer of contracts under this Section not later than
60 days after the later of the close of the Plan Year in which the Participant
terminates employment or the close of the Plan Year in which the Participant
attains Normal Retirement Date.
The Trustee shall not transfer any contract under this Section if the
contract contains a method of payment not specifically authorized by Article VI
or fails to comply with the joint and survivor annuity requirements, if
applicable, of Article VI. In this regard, the Trustee either shall convert
such a contract to cash and distribute the cash instead of the contract, or
before making the transfer, shall require the issuing company to delete the
unauthorized method of payment option from the contract.
11.03 DEFINITIONS. For purposes of this Article XI:
-----------
(a) CONTRACT or CONTRACTS shall mean a policy of insurance. In the event
of any conflict between the provisions of this Plan and the terms of
any contract or policy of insurance issued in accordance with this
Article XI, the provisions of the Plan shall control.
(b) INSURABLE PARTICIPANT shall mean a Participant to whom an insurance
company, upon an application being submitted in accordance with the
Plan, would be willing to issue insurance coverage, either as a
standard risk or as a risk in an extra mortality classification.
(c) INSURANCE AGE shall mean the age of a person as determined by the
issuing company to accomplish the purposes of the Plan.
(d) ISSUING COMPANY shall mean any life insurance company which has issued
a policy upon application by the Trustee under the terms of this
Agreement.
(e) POLICY shall mean an ordinary life insurance contract or a term life
insurance contract issued by an insurer on the life of a Participant.
(f) TERM LIFE INSURANCE CONTRACT shall mean a term life insurance
contract, a universal life insurance contract, or any other life
insurance contract which is not an ordinary life insurance contract.
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<PAGE>
11.04 DIVIDEND PLAN. The dividend plan shall be premium reduction unless
-------------
the Plan Administrator directs the Trustee to the contrary. The Trustee shall
use all premiums for a contract to purchase insurance benefits or additional
insurance benefits for the Participant on whose life the insurance company has
issued the contract. Furthermore, the Trustee shall arrange, where possible,
that all policies issued on the lives of Participants under the Plan shall have
the same premium due date and all ordinary life insurance contracts shall
contain guaranteed cash values with as uniform basic options as are possible to
obtain. The term "dividends" includes policy dividends, refunds of premiums,
and other credits.
11.05 INSURANCE COMPANY DUTIES AND OBLIGATIONS. No insurance company shall
----------------------------------------
be considered to be a party to this Agreement nor shall any insurance company be
responsible for its validity. No insurance company shall be required to examine
the terms of this Agreement nor be responsible for any action taken by the
Trustee. For the purpose of making application to an insurance company and in
the exercise of any right or option contained in any policy, the insurance
company shall be entitled to rely upon the signature of the Trustee and shall be
held harmless and completely discharged in acting at the direction and
authorization of the Trustee. An insurance company shall be discharged from all
liability for any amount paid to the Trustee or paid in accordance with the
direction of the Trustee, and it shall not be obliged to see to the distribution
or further application of any moneys it so pays.
Each insurance company shall keep such records; make such identification of
contracts, funds, and accounts within funds; and supply such information as may
be necessary for the proper administration of the Plan under which it is
carrying insurance benefits.
* * * END OF ARTICLE 11 * * *
63
<PAGE>
ARTICLE XII
TRUST AGREEMENT
12.01 ACCEPTANCE. This Trust Agreement, incorporated as Article XII under
----------
the Holland & Hart Defined Contribution Basic Plan Document and Trust Agreement,
is made by and between the Employer and the Trustee. The Trustee accepts the
Trust created under the Plan and agrees to perform the obligations imposed by
the Trust. All right, title, and interest in and to the Trust Fund shall at all
times be vested exclusively in the Trustee. The Trustee shall accept its
appointment by executing the Adoption Agreement executed by the Employer, or by
executing a written acceptance of the office of Trustee. If more than two
Trustees are appointed by the Employer, the decision of a majority of the
Trustees shall control with respect to any decision regarding the administration
or investment of the Trust Fund.
12.02 BOND. The Trustee shall provide bond for the faithful performance of
----
its duties under the Trust to the extent required by ERISA.
12.03 RECEIPT OF CONTRIBUTION. The Trustee shall hold in the Trust Fund
-----------------------
all amounts received by the Trustee and designated in writing as contributions
to the Trust Fund. All contributions so received together with any income or
other increment realized by the Trust Fund shall be invested and administered by
the Trustee in accordance with the terms of this Article XII. The Trustee shall
have no responsibility or power with respect to the calculation or collection of
any contributions to the Plan for the Employer.
12.04 PAYMENTS FROM THE TRUST FUND. Payments from the Trust Fund shall be
----------------------------
made by the Trustee to such persons, in such manner, at such times, and in such
amounts as the Plan Administrator shall specify in written instructions to the
Trustee. The Plan Administrator shall have the sole authority to direct the
Trustee to make payments from the Trust Fund. The Plan Administrator shall act
in its good faith discretion pursuant to the powers and duties described in
Section 8.03. The Trustee shall have no obligation to inquire whether any payee
or distributee is entitled to any payment, whether the distribution is proper or
within the terms of the Plan, or as to the manner of making any payment or
distribution.
The Trustee may make distribution under the Plan in cash or property, or
partly in each, at its fair market value as determined by the Trustee. The term
"property" shall include a Nontransferable Annuity which satisfies the
distribution requirements under Article VI. If the Trustee distributes an
annuity contract, the contract shall be a Nontransferable Annuity.
If any check in payment of a benefit under the Plan which had been mailed
by regular U.S. Mail to the last address of the payee as furnished to the
Trustee by the Plan Administrator is returned unclaimed, the Trustee shall so
notify the Plan Administrator and shall discontinue further payments to such
payee until it receives further instructions from the Plan Administrator.
12.05 EXCLUSIVE BENEFIT. Except as the Plan permits the return of Employer
-----------------
contributions under circumstances specified in Articles III and IX, it shall be
impossible at any time prior to the satisfaction of all liabilities with respect
to Participants and their Beneficiaries, for any part of the Trust Fund to be
used for, or diverted to, purposes other than the exclusive benefit of Plan
Participants and their Beneficiaries, except that payment of taxes and
administrative expenses may be made from the Trust Fund. The Trustee shall
discharge its duties under this Article XII solely in the interest of the
Participants of the Plan and their Beneficiaries and for the exclusive purpose
of providing benefits to Participants and their Beneficiaries and defraying
reasonable expenses of administering the Plan, with the care, skill, prudence,
and diligence under the circumstances then prevailing that a prudent man acting
in a like capacity and
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<PAGE>
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims, all in accordance with the provisions of this
Article XII insofar as they are consistent with the provisions of ERISA.
12.06 TRUSTEE INVESTMENT POWERS. The Trustee shall have full discretion
-------------------------
and authority with regard to the investment and management of the Trust Fund,
except with respect to a Plan asset under the control or direction of an
Investment Manager properly appointed in accordance with Section 12.08 or with
respect to a Plan asset subject to Employer or Participant direction of
investment. The Trustee shall coordinate its investment policy with Plan
financial needs as communicated to it by the Plan Administrator. The Trustee is
authorized and empowered, without previous application to, or subsequent
ratification of, any court, tribunal, or commission, or any federal or state
governmental agency, but not by way of limitation:
(a) to invest any part or all of the Trust Fund in any common or preferred
stocks or other securities, open-end or closed-end mutual funds
(including the investment of up to 100% of the Trust Fund in
qualifying Employer securities as defined in ERISA (S) 407), United
States retirement plan bonds, corporate bonds, notes, debentures,
convertible debentures, commercial paper, U.S. Treasury bills, U.S.
Treasury notes, other direct or indirect obligations of the United
States Government or its agencies, certificates of deposits or savings
accounts in a bank or other savings institution supervised by the
United States or a state, improved or unimproved real estate or
interests in real estate situated in the United States, limited
partnerships, insurance contracts of any type, annuities, endowment
contracts, mortgages, notes, or other property of any kind, real or
personal, including shares or certificates of participation issued by
regulated investment companies or regulated investment trusts, shares
or units of participation in qualified common trust funds, in
qualified pooled funds, or in pooled investment funds of an insurance
company qualified to do business in the state, and to buy or sell
options on common stock on a nationally recognized exchange with or
without holding the underlying common stock, as a prudent man would do
under like circumstances with due regard for the purposes of this Plan
and any investment made or retained by the Trustee in good faith shall
be proper but shall be of a kind constituting a diversification
considered by law suitable for trust investments;
(b) to retain in cash so much of the Trust Fund as it may deem advisable
to satisfy liquidity needs of the Plan and to deposit any cash held in
the Trust Fund in a bank account at reasonable interest, including, if
a bank is acting as Trustee, specific authority to invest in any type
of deposit of the Trustee at a reasonable rate of interest or in a
common trust fund (the provisions of which govern the investment of
such assets and which the Plan incorporates by this reference) as
described in Code (S) 584 which the Trustee (or an affiliate of the
Trustee, as defined in Code (S) 1504) maintains exclusively for the
collective investment of money contributed by the bank (or the
affiliate) in its capacity as Trustee and which conforms to the rules
of the Comptroller of the Currency; and
(c) to invest in loans, if the Employer authorizes such investment in its
Adoption Agreement, on a nondiscriminatory basis to a Participant
(other than an Owner-Employee or a Shareholder-Employee) in accordance
with Article VII and any loan policy established by the Plan
Administrator, if the loan is adequately secured, bears a reasonable
rate of interest, provides for repayment within a specified time,
prohibits offset of the Participant's Nonforfeitable Accrued Benefit
for loan default prior to the time the Trustee otherwise would
distribute the Participant's Nonforfeitable Accrued Benefit, does not
65
<PAGE>
exceed (at the time the Plan extends the loan) the present value of
the Participant's Nonforfeitable Accrued Benefit, otherwise conforms
to the exemption provided by Code (S) 4975(d)(1), and, if the
Participant's Nonforfeitable Accrued Benefit is subject to the joint
and survivor annuity requirements of Code (S) 417, the Participant's
spouse, if any, consents to the use of any portion of the
Participant's Accrued Benefit as security, or (by separate consent) an
increase in the amount of security, for a loan, within the 90 day
period ending on the date the Participant pledges any portion of his
or her Accrued Benefit for a loan.
12.07 TRUSTEE POWERS, RIGHTS AND DUTIES. Except as otherwise required by
---------------------------------
law, no party dealing with the Trustee shall have any obligation to inquire into
the authority of the Trustee or into the application by the Trustee of any funds
or other property transferred to the Trustee. The decisions of the Trustee in
the exercise of any of its powers or the carrying out of any of its
responsibilities shall be final and conclusive as to all persons for all
purposes, to the extent permitted by law. The Trustee shall have all the powers
necessary or advisable to carry out the provisions of the Trust and all
inherent, implied, and statutory powers now or subsequently provided by law,
including, but not by way of limitation, the power and right to:
(a) cause any securities or other property to be registered and held in
its name as Trustee, or in the name of one or more of its nominees,
without disclosing the fiduciary capacity, or to keep the same in
unregistered form payable to bearer;
(b) manage, sell, contract to sell, grant options to purchase, convey,
exchange, pledge, transfer, abandon, improve, repair, insure, lease
for any term even though commencing in the future or extending beyond
the term of the Trust, encumber, mortgage, deed in trust, or use any
other form of hypothecation, or otherwise deal with the whole or any
part of the Trust Fund on such terms and for such property or cash, or
part cash and credit, as it may deem best; to retain, hold, maintain,
or continue any securities or investments that it may hold as part of
the Trust Fund for such length of time as it may deem advisable; and
generally, in all respects, to do all things and exercise each and
every right, power, and privilege in connection with and in relation
to the Trust Fund as could be done, exercised, or executed by an
individual holding and owning such property in absolute and
unconditional ownership;
(c) abandon, compromise, contest, and arbitrate claims and demands; to
institute, compromise, and defend actions at law (but without
obligation to do so unless indemnified to the Trustee's satisfaction);
(d) vote in person or by proxy any shares of stock held in the Trust Fund;
to participate in or to exchange securities or other property in
reorganization, liquidation, or dissolution of any corporation, the
securities of which are held in the Trust Fund;
(e) borrow money and to pay any amount due on any loan or advance made to
the Trust Fund, to charge against and pay from the Trust Fund all
taxes of any nature levied, assessed, or imposed upon the Trust Fund;
(f) execute the application for any insurance contract to be applied for
under the Plan; to pay from the Trust Fund premiums, assessments,
dues, charges, and interest to acquire or maintain any insurance
contracts held in the Trust Fund; to collect and receive all dividends
or payments of any kind payable under any insurance contracts held in
the
66
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Trust Fund or to leave the same with the issuing insurance company;
and to exercise any other power or take any other action permitted
under any insurance contract held in the Trust Fund;
(g) lease for oil, gas, and other mineral purposes and to create mineral
severances by grant or reservation; to pool or unitize interests in
oil, gas, and other minerals; and to enter into operating agreements
and to execute division and transfer orders;
(h) perform any and all other acts in its judgment necessary or
appropriate for the proper and advantageous management, investment,
and distribution of the Trust; and
(i) retain any funds or property subject to any dispute without liability
for the payment of interest, and to decline to make payment or
delivery of the funds or property until final adjudication is made by
a court of competent jurisdiction.
12.08 INVESTMENT MANAGER. The Employer may appoint an Investment Manager
------------------
to manage the investment of all or a portion of the Trust Fund. The Investment
Manager shall be a fiduciary other than the Trustee:
(a) who has the power to manage, acquire, or dispose of any assets of the
Plan;
(b) who is (1) registered as an investment adviser under the Investment
Advisers Act of 1940; (2) a bank, as defined in the Investment
Advisors Act of 1940; or (3) an insurance company qualified to perform
services described in paragraph (a) under the laws of more than one
state; and
(c) who has acknowledged in writing that as Investment Manager, the person
is a fiduciary with respect to the Plan.
If the Employer appoints an Investment Manager, the Investment Manager
shall have the exclusive responsibility for directing the investment and
management of the assets of the Trust Fund to which its appointment applies. If
more than one Investment Manager is appointed, each Investment Manager shall
have exclusive responsibility for directing the investment and management of a
specified portion of the assets of the Trust Fund as the Employer shall
determine. The Trustee shall not be liable for the acts or omissions of any
Investment Manager appointed by the Employer, nor shall the Trustee be under any
obligation to invest or otherwise manage any asset of the Plan which is subject
to the management of a properly appointed Investment Manager. The Trustee shall
have no obligation to question any written investment direction by a properly
appointed Investment Manager. The Trustee shall comply as promptly as possible
with any investment direction given by an Investment Manager.
12.09 INVESTMENT OF THE TRUST FUND. Investments of the Trust Fund shall be
----------------------------
diversified to minimize the risk of large losses unless under the circumstances
it is clearly prudent not to do so. The Trustee or Investment Manager shall act
with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and with
like aims.
12.10 EMPLOYER DIRECTION OF INVESTMENT. The Employer has the right to
--------------------------------
direct the Trustee with respect to the investment and re-investment of assets
comprising the Trust Fund only if the Trustee consents in writing to permit such
direction. If the Trustee consents to Employer direction of investment, the
Trustee and the Employer shall execute an agreement as a part of this Plan
containing such conditions,
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<PAGE>
limitations, and other provisions they deem appropriate before the Trustee shall
follow any Employer direction as respects the investment or reinvestment of any
part of the Trust Fund.
12.11 PARTICIPANT DIRECTION OF INVESTMENT. A Participant has the right to
-----------------------------------
direct the Trustee with respect to the investment or reinvestment of the
Participant's Accounts only if the Employer authorizes such Participant
direction of investment in its Adoption Agreement. The Trustee shall follow any
written Participant direction with respect to the investment of any part of the
Participant's Accounts. Participant Accounts which are subject to Participant
direction shall be treated as segregated investment Accounts (see Section 4.08).
The Trustee shall not be liable for any loss or for any breach resulting from a
Participant's direction of the investment of any part of the Participant's
Accounts. The Plan Administrator and the Trustee shall treat any investment by
Participant directed Accounts in collectibles (as defined by Code (S) 408(m)) as
a distribution under the Plan to the Participant.
12.12 RECORDS AND ACCOUNTS. The Trustee shall keep all such records and
--------------------
accounts which may be necessary in the administration and conduct of this Trust.
Upon written request from the Trustee, the Employer or Plan Administrator shall
furnish the Trustee in writing with information specified in any such request
and necessary or appropriate in connection with any of the Trustee's
responsibilities or powers (including, without limitation, the names, addresses,
and specimen signatures of all parties authorized to furnish instructions or
notices to the Trustee). The Trustee's records and accounts shall be open to
inspection by the Employer and the Plan Administrator at all reasonable times
during business hours, and may be audited from time to time by any person or
persons as the Employer or Plan Administrator may specify in writing. After the
close of each Plan Year, the Trustee shall provide the Plan Administrator a
statement of assets and liabilities of the Trust Fund for such year. The
Trustee shall furnish the Plan Administrator any additional information relating
to the Trust Fund that the Plan Administrator requests.
All income, profits, recoveries, contributions, forfeitures, and any and
all moneys, securities, and properties of any kind at any time received or held
by the Trustee shall be held for investment purposes as a commingled Trust Fund.
Separate accounts or records may be maintained for operational or accounting
purposes, but no such account or record shall be considered as segregating any
funds or property from any other funds or property contained in the commingled
fund, unless specifically designated as a segregated investment Account.
12.13 VALUATION OF THE TRUST FUND. The Trustee shall value the Trust Fund
---------------------------
as of each Accounting Date to determine the current fair market value of the
Trust Fund assets. The Trustee shall value the Trust Fund on such other dates
as directed by the Plan Administrator.
12.14 TAX RETURNS. The Trustee shall file all tax returns required of the
-----------
Trustee.
12.15 FEES AND EXPENSES. A Trustee shall be entitled to receive reasonable
-----------------
compensation for services rendered or for the reimbursement of expenses properly
and actually incurred in the performance of its duties under the Trust.
However, no Trustee who already receives fulltime pay from the Employer shall
receive compensation from the Plan, except for reimbursement of expenses
properly and actually incurred. All compensation and expenses shall be paid by
the Plan, unless the Employer, in its discretion, elects to pay all or any part
of Trustee compensation or recurring administrative or overhead expenses. The
Plan Administrator shall not treat any fee or expense properly paid, directly or
indirectly, by the Employer as an Employer contribution.
12.16 CHANGE OF TRUSTEE. A Trustee may be removed by the Employer at any
-----------------
time upon 30 days' written notice to the Trustee, or on such shorter notice as
may be agreed to by the Employer and
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the Trustee. A Trustee may resign at any time upon 30 days' written notice to
the Employer, or on such shorter notice as may be agreed to by the Employer and
the Trustee.
Upon such removal or resignation, the Employer shall appoint a successor
Trustee and the successor Trustee shall have the same powers and duties as those
conferred upon the predecessor Trustee. If the Employer fails to appoint a
successor Trustee within 60 days of removal or resignation of the Trustee, the
Employer shall be treated as having appointed itself as Trustee and as having
executed its acceptance of appointment. Each successor Trustee shall succeed to
the title of the Trust Fund vested in its predecessor upon the successor
Trustee's written acceptance of the office of Trustee. The resigning or removed
Trustee, upon receipt of acceptance in writing by the successor Trustee, shall
execute all documents and do all acts necessary to vest the title of record in
the successor Trustee. No successor Trustee shall be liable for the acts or
omissions of any prior Trustee which occurred prior to the successor Trustee's
acceptance of office, or be obliged to examine the accounts, records, or acts of
any prior Trustee.
In the event that any corporate Trustee hereunder shall be converted into,
shall merge or consolidate with, or shall sell or transfer substantially all of
its assets and business to another corporation, state or federal, the
corporation resulting from such conversion, merger, or consolidation, or the
corporation to which such sale or transfer shall be made, shall thereupon become
and be the Trustee under this Article XII with the same effect as though
originally so named.
* * * END OF ARTICLE 12 * * *
69
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
SAVINGS PLAN
AND
TRUST AGREEMENT
Holland & Hart LLP
Suite 3200
555 17th Street
Denver, Colorado 80202
(303) 295-8000
<PAGE>
BIRNER DENTAL MANAGEMENT SERVICES, INC.
ADOPTION AGREEMENT
PROFIT SHARING PLAN WITH CASH OR DEFERRED ARRANGEMENT
AND STOCK BONUS PLAN
By executing this Adoption Agreement, the Employer elects to adopt the Holland
& Hart Defined Contribution Basic Plan Document and Trust Agreement in full as
if the Employer were a signatory to that Agreement. The Employer makes the
following elections granted under the provisions of the Plan.
The name of the Plan as adopted by the Employer shall be the Birner Dental
-----------------
Management Services, Inc. Savings Plan. The Employer is adopting this Plan:
- --------------------------------------
(X) as the original document establishing the Plan and Trust.
( ) in substitution for, and as an amendment of, an existing retirement
plan, the original plan being established as of ________________
________________________________________________________________.
ARTICLE I
DEFINITIONS
1.11 COMPENSATION. Compensation shall have the meaning specified in Section
------------
1.11 of the Plan which is actually paid during the Plan Year, except
Compensation shall not include:
( ) overtime. [This option may only be selected if the Plan does not
utilize a Permitted Disparity Level.]
( ) bonuses. [This option may only be selected if the Plan does not
utilize a Permitted Disparity Level.]
Compensation:
(X) shall include
( ) shall not include
Employer contributions which are not includable in the gross income of the
Participant under Code (S)(S) 125, 402(a)(8), 402(h), or 403(b).
1.19 EFFECTIVE DATE. The Effective Date of this Plan shall be April
-------------- -----
1, 1997. The Effective Date of the Cash or Deferred Arrangement shall be the
- -------
later of the first day the Cash or Deferred Arrangement is adopted or the
Effective Date. [Date selected shall be the first Plan Year beginning after
December 31, 1988.]
1
<PAGE>
1.22 ELIGIBLE EMPLOYEE. Eligible Employee shall specifically include all
-----------------
Employees, except:
( ) Leased Employees.
(X) Members of a collective bargaining unit. An Employee is a member of a
collective bargaining unit if the Employee is included in a unit of
Employees covered by an agreement which the Secretary of Labor finds to
be a collective bargaining agreement between employee representatives
and one or more employers if there is evidence that retirement benefits
were the subject of good faith bargaining between such employee
representatives and such employer or employers.
( ) Commission salesmen who the Employer compensates for Services either
solely or primarily on a commission basis.
( ) Hourly Employees.
( ) Salaried Employees.
(X) Nonresident aliens within the meaning of Code (S) 7701(b)(1)(B).
---------------------------------------------------------------
[This option may only be selected if the Plan satisfies on a continuing
basis the coverage tests of Code (S) 410(b), the anti-discrimination
tests of Code (S) 401(a)(4) and the participation test of Code (S)
401(a)(26) taking into account the exclusion described.]
1.37 HOUR OF SERVICE. The Plan Administrator shall credit Hours of Service on
---------------
the basis of the method selected below:
( ) On the basis of actual hours worked determined from records of hours
worked, hours for which the Employer makes payment, or hours for which
payment is due from the Employer.
( ) On the basis of days worked. The Plan Administrator shall credit an
Employee with 10 Hours of Service if under Section 1.37 the Employee
would be credited with at least one Hour of Service during the day.
(X) On the basis of weeks worked. The Plan Administrator shall credit an
Employee with 45 Hours of Service if under Section 1.37 the Employee
would be credited with at least one Hour of Service during the week.
( ) On the basis of semi-monthly payroll periods. The Plan Administrator
shall credit an Employee with 95 Hours of Service if under Section 1.37
the Employee would be credited with at least one Hour of Service during
the semi-monthly payroll period.
( ) On the basis of months worked. The Plan Administrator shall credit an
Employee with 190 Hours of Service if under Section 1.37 the Employee
would be credited with at least one Hour of Service during the month.
( ) On the basis of elapsed time, as provided in Section 2.02.
2
<PAGE>
1.40 LIMITATION YEAR. The Limitation Year shall be:
---------------
(X) the Plan Year.
( ) the 12 consecutive month period ending every ______________________.
1.49 NORMAL RETIREMENT DATE. Normal Retirement Date under the Plan shall mean:
----------------------
(X) the date the Participant attains age 65. [The age selected shall not
--
exceed age 65.]
( ) the later of the date the Participant attains age ____________ or the
____________ anniversary of the first day of the first Plan Year in
which the Participant entered the Plan. [The age selected shall not
exceed age 65 and the anniversary selected shall not exceed the 5th
anniversary.]
1.58 PLAN ENTRY DATE. Plan Entry Date shall mean the Effective Date and every
---------------
January 1, April 1, July 1 and October 1 of every Plan Year.
- ----------------------------------------
1.59 PLAN YEAR. Plan Year shall mean:
---------
(X) the short period beginning on April 1 and ending on December 31 for the
-----------------------------------------
first Plan Year and the 12 consecutive month period corresponding to
---------------
the Employer's taxable year, ending every December 31 for each Plan
-------------------------
Year thereafter.
---------------
( ) the 12 consecutive month period ending every ________________________.
( ) the short period beginning _________________________________ and
ending ______________________.
1.69 SERVICE FOR PREDECESSOR EMPLOYER. In accordance with Section 1.69 of the
--------------------------------
Plan, the Plan shall take into account service with a predecessor employer:
(X) only to the extent required by law.
( ) as service with the Employer for purposes of:
( ) participation under Article II.
( ) vesting under Article V.
Predecessor employer shall mean __________________________________________
________________________________________________________________.
1.71 TESTING COMPENSATION. Testing Compensation shall be determined in
--------------------
accordance with the following definition in Section 1.71:
( ) Code (S) 415(c)(3) Compensation.
(X) W-2 Compensation.
Testing Compensation:
(X) shall include
( ) shall not include
Employer contributions which are not includable in the gross income of the
Employee under Code (S)(S) 125, 402(a)(8), 402(h), or 403(b).
3
<PAGE>
1.72 TOP HEAVY PLAN. The Plan Administrator shall determine the present value
--------------
of Accrued Benefits and any other amounts necessary under Defined Benefit Plans
included in the Top Heavy Plan calculation:
(X) in accordance with the terms of those plans.
( ) by discounting for mortality and interest based on the following:
Interest rate: %
----------
Mortality table: ________________________________________________.
ARTICLE II
EMPLOYEES ENTITLED TO PARTICIPATE
2.01 ELIGIBILITY. Each Eligible Employee shall become a Participant in the
-----------
Plan and shall be eligible to make elections under a Cash or Deferred
Arrangement on the Plan Entry Date (if employed on that date) coincident with or
immediately:
( ) preceding
(X) following
the date the Eligible Employee satisfies the following eligibility conditions.
The Eligible Employee shall satisfy the eligibility conditions on:
( ) the later of the date on which the Eligible Employee completes one
Year of Service or attains age 21.
( ) the later of the date on which the Eligible Employee completes
______________ Year of Service and attains age _____________________.
[The number of years selected shall not exceed 1 Year of Service and
the age selected shall not exceed age 21.]
(X) the date on which the Eligible Employee completes 6 months
--------
of Service. [The number of years selected shall not exceed 1 Year of
Service.]
( ) the Eligible Employee's Employment Commencement Date.
(X) The eligibility conditions of this Adoption Agreement Section shall
apply solely to an Eligible Employee employed by the Employer after
April 1, 1997. Each Eligible Employee employed by the Employer
-------------
on or before April 1, 1997 shall become a Participant in the Plan on
-------------
the later of the Effective Date of the Plan or the Employee's
Employment Commencement Date.
4
<PAGE>
Each Participant shall be eligible to receive Matching Contributions, Employer
Nonelective Contributions, and Profit Sharing Contributions beginning with the
Plan Entry Date coincident with or immediately:
( ) preceding
(X) following
the date the Participant satisfies the following specified conditions:
( ) the later of the date on which the Eligible Employee completes one
Year of Service or attains age 21.
( ) the later of the date on which the Eligible Employee completes
______________ Years of Service and attains age ____________________.
[The number of years selected shall not exceed 2. If more than 1 Year
of Service is selected, the Plan shall require 100% immediate vesting.
The age selected shall not exceed age 21.]
(X) the date on which the Eligible Employee completes 6 months
--------
of Service. [The number of years selected shall not exceed 2. If more
than 1 Year of Service is selected, the Plan shall require 100%
immediate vesting.]
( ) the later of the date on which the Eligible Employee completes two
Years of Service without an intervening Break in Service (as defined
by Section 2.03 of the Plan), or attains age 21. [If this option is
selected, the Plan shall require 100% immediate vesting.]
(X) The eligibility conditions of this Adoption Agreement Section shall
apply solely to an Eligible Employee employed by the Employer after
April 1, 1997. Each Eligible Employee employed by the Employer
-------------
on or before April 1, 1997 shall become a Participant in the Plan on
-------------
the later of the Effective Date of the Plan or the Employee's
Employment Commencement Date.
2.02 YEARS OF SERVICE - PARTICIPATION. For purposes of determining Years of
--------------------------------
Service and Breaks in Service under Article II, the Plan shall:
(X) measure succeeding 12 consecutive month periods by reference to:
( ) each anniversary of the Employee's Employment Commencement Date.
(X) each anniversary of the first day of the Plan Year which includes
the first anniversary of the Employee's Employment Commencement
Date, regardless of whether the Employee is entitled to be
credited with 1,000 Hours of Service during the 12 consecutive
month period which commenced with the Employee's Employment
Commencement Date. An Employee who receives credit for 1,000 Hours
of Service during the 12 consecutive month period which commenced
with the Employee's Employment Commencement Date and during the
Plan Year which includes the first anniversary of the Employee's
Employment Commencement Date shall receive credit for two Years of
Service for purposes of eligibility to participate in the Plan.
( ) credit Years of Service in accordance with the elapsed time
provisions of Section 2.02.
5
<PAGE>
2.06 ELECTION NOT TO PARTICIPATE. An Eligible Employee:
---------------------------
(X) shall not be permitted to elect not to participate except to the extent
the Eligible Employee declines to participate in a Cash or Deferred
Arrangement.
( ) shall be permitted to irrevocably elect not to participate prior to
or at the time the Eligible Employee has first met the requirements of
Section 2.01 or of any other plan of the Employer meeting the
requirements of Code (S) 401.
ARTICLE III
CONTRIBUTIONS
3.01 AMOUNT. Although the Employer may contribute to this Plan irrespective of
------
whether it has net profits, the Employer intends this Plan to be a profit
sharing plan for all purposes under the Code. With respect to the portion of
the Plan that is invested in Employer Securities, the Employer intends that
portion of the Plan to be a stock bonus plan. The amount of the Employer's
annual contribution to the Trust shall equal the sum of the Elective Deferrals,
the Matching Contributions, the Employer Nonelective Contributions, and the
Profit Sharing Contributions.
Elective Deferrals. The Employer shall contribute:
------------------
( ) the amount the Participants elect to have contributed to the Plan
instead of receiving in cash after the Effective Date of the Cash or
Deferred Arrangement. A Participant shall make the election on the form
provided by the Plan Administrator on or before the Accounting Date of
the Plan Year to which the election privilege relates. If the
Participant fails to file a written election with the Plan
Administrator before the Accounting Date of the Plan Year, the
Participant's right to a cash election shall lapse for that Plan Year.
(X) the amount of Salary Reduction Contributions for the Plan Year. Salary
Reduction Contributions shall mean the amount by which the Participants
have elected to reduce their Testing Compensation for the Plan Year
after the Effective Date of the Cash or Deferred Arrangement. A
Participant shall make the election on the form provided by the Plan
Administrator.
(X) A Participant shall have the right to elect to reduce his or her
Testing Compensation by a percentage up to 15%. The percentage
--
specified shall not be less than 1% and not greater than
-
15%. The Employer shall not apply the salary reduction percentage
--
to a bonus unless the Participant specifies its application to
bonuses. The Participant shall have the right to elect a different
percentage applicable to bonuses.
( ) A Participant shall have the right to elect to reduce his or her
Testing Compensation by a specified dollar amount. The dollar
amount for the Plan Year shall not exceed ____________% of the
Participant's Testing Compensation.
6
<PAGE>
An Employee shall have the right to revoke a salary reduction
agreement:
(X) on or before the 1st day of every payroll period.
---
( ) on or before the _____ day of every _____ month of the Plan Year.
( ) on or before the _____ day of every Plan Year.
An Employee shall have the right to execute a new salary reduction
agreement:
( ) on or before the _____ day of every month.
(X) once in any calendar quarter, effective for the first day of the
next payroll period.
( ) on or before the _____ day of every Plan Year.
An Employee shall have the right to modify an existing salary reduction
agreement:
( ) on or before the _____ day of every month.
(X) once in any calendar quarter, effective for the first day of the
next payroll period.
( ) on or before the _____ day of every Plan Year.
Matching Contributions.
----------------------
( ) The Employer shall not contribute any Matching Contributions to the
Plan.
( ) The Employer shall contribute on behalf of each Participant an amount
equal to _____% of the Participant's Elective Deferrals.
( ) The Employer shall contribute on behalf of each Participant an amount
equal to the first $_____ of the Participant's Elective Deferrals.
( ) The Employer shall contribute on behalf of each Participant an amount
equal to _____% of the Participant's Elective Deferrals up to a
maximum of:
( ) _____% of the Participant's Testing Compensation.
( ) _____% of the Participant's Elective Deferrals.
( ) $ _____.
( ) ________________________________________________________________.
(X) The Employer shall contribute the percentage the Employer from time to
time may deem advisable of:
(X) each Participant's Elective Deferrals up to 2% of the
-
Participant's Testing Compensation.
( ) the first $ _____ of each Participant's Elective Deferrals up
_____% of the Participant's Testing Compensation.
7
<PAGE>
The Employer shall determine its Matching Contributions by taking into
account only Participants who are eligible under Adoption Agreement Section
2.01 for Matching Contributions, and by not taking into account a
Participant's Excess Deferrals or Excess Contributions.
Employer Nonelective Contributions. The Employer shall contribute the
----------------------------------
amount the Employer from time to time may deem advisable.
Profit Sharing Contributions. The Employer shall contribute:
----------------------------
(X) the amount the Employer may from time to time deem advisable. At the
Employer's discretion, the Profit Sharing Contribution may be made in
Employer Securities in accordance with the provisions of Article XIII.
( ) _____% of Current Earnings & Profits. Current Earnings and Profits
shall mean the Employer's net income for any taxable year determined by
the Employer upon the basis of its books of account in accordance with
generally accepted accounting practices consistently applied without
any deductions for federal and state income taxes or for contributions
made by the Employer under this Plan, but the Employer shall not carry
forward operating losses, if any, during prior taxable years in
determining Current Earnings & Profits. Current Earnings and Profits
shall specifically include dividends, interest, rents, capital gains
and losses, and gain or loss from the sale of any property described in
Code (S) 1231(b).
( ) _____% of each Participant's Compensation and
( ) _____%
( ) the maximum percentage permitted under the Permitted Disparity
Level table
of each Participant's Compensation in excess of the Permitted Disparity
Level.
[The percentage applied to each Participant's Compensation in excess of
the Permitted Disparity Level shall not exceed the lesser of (a) the
percentage applied to each Participant's Compensation or (b) 5.7%, if
the Permitted Disparity Level selected equals 100% of the taxable wage
base. If the Permitted Disparity Level is less than the taxable wage
base, replace the 5.7% limitation with the percentage determined in
accordance with the following table:
<TABLE>
<CAPTION>
Permitted Disparity Level Percentage
------------------------- ----------
<S> <C>
More than $0, but not more than the greater of $10,000 or
20% of the taxable wage base 5.7%
More than the greater of $10,000 or 20% of the taxable
wage base, but not more than 80% of the taxable wage base 4.3%
More than 80% of the taxable wage base, but less than
100% of the taxable wage base 5.4%]
</TABLE>
The Permitted Disparity Level shall be:
( ) $ _____. [This option may only be selected if the percentage of
each Participant's Compensation in excess of the Permitted
Disparity Level is determined by reference to the Permitted
Disparity Level table each Plan Year.]
( ) _____% of the taxable wage base as determined under Section 230 of
the Social Security Act in effect on the first day of the Plan
Year.
8
<PAGE>
3.02 MINIMUM EMPLOYER CONTRIBUTION. The Employer:
-----------------------------
(X) shall provide the top heavy minimum contribution under the Plan in
accordance with Section 3.02.
( ) shall not provide the top heavy minimum contribution. The Employer
provides the top heavy minimum contribution in the __________________
the Employer maintains. However, the Employer shall contribute an
additional amount for the Account of any Participant who is entitled
under this Section to a top heavy minimum allocation but who is not a
Participant in the __________________________________________________
(or does not receive the full top heavy minimum contribution in the
_____________________________________________________________________
____________________________) if that Participant's contribution for
the Plan Year is less than the top heavy minimum contribution. The
additional amount shall be the amount necessary to increase the
Participant's contribution to equal the top heavy minimum contribution.
( ) shall provide a top heavy minimum contribution equal to _____% of the
Non-Key Employee's Testing Compensation for the Plan Year.
( ) ______________________________________________________________________
______________________________________________________________________
______________________________________________________________________.
3.05 ROLLOVER CONTRIBUTIONS. An Eligible Employee:
----------------------
(X) shall be permitted to make rollover contributions under the Plan.
( ) shall not be permitted to make rollover contributions under the Plan.
3.06 VOLUNTARY NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS. An Eligible Employee:
----------------------------------------------
( ) shall be permitted to make voluntary nondeductible Employee
contributions.
(X) shall not be permitted to make voluntary nondeductible Employee
contributions. The Plan shall not accept voluntary nondeductible
Employee contributions or matching contributions for Plan Years
beginning after the Plan Year in which this Plan is adopted by the
Employer. Voluntary nondeductible Employee contributions and any
matching contributions with respect to voluntary nondeductible Employee
contributions for Plan Years beginning after December 31, 1986 shall be
limited in accordance with Section 4.13.
9
<PAGE>
ARTICLE IV
ALLOCATIONS TO ACCOUNTS
4.02 ALLOCATION OF CONTRIBUTIONS AND FORFEITURES. Subject to the conditions of
-------------------------------------------
Section 4.05 and any restoration under Section 5.13, the Plan Administrator
shall allocate and credit the following contributions as follows:
Elective Deferrals. The Plan Administrator shall allocate each Participant's
------------------
Elective Deferrals to the Participant's Elective Deferrals Account.
Notwithstanding Section 4.02 of the Holland & Hart Defined Contribution Basic
Plan Document and Trust Agreement, Accounting Date shall mean the date the
Trustee receives the Elective Deferrals for purposes of allocating net income,
gain, or loss under Section 4.08 to the Participants' Elective Deferrals
Accounts.
Matching Contributions. The Plan Administrator shall allocate the annual
----------------------
Matching Contributions and forfeitures, if any, made on behalf of a
Participant to the Participant's Matching Contribution Account.
Notwithstanding Section 4.02 of the Holland & Hart Defined Contribution Basic
Plan Document and Trust Agreement, Accounting Date shall mean the date the
Trustee receives the Matching Contributions for purposes of allocating net
income, gain, or loss under Section 4.08 to the Participants' Matching
Contribution Accounts.
Employer Nonelective Contributions. The Plan Administrator shall allocate and
----------------------------------
credit the contribution, if any, the Employer designates as an Employer
Nonelective Contribution to the Elective Deferrals Account of each Participant
in the same ratio that each Participant's Testing Compensation for the Plan
Year bears to the total Testing Compensation of all Participants for the Plan
Year. The Plan Administrator may include an Employer Nonelective Contribution
in the ADP test described in Section 4.12 or in the ACP test described in
Section 4.13, to the extent necessary to satisfy either test, but the Plan
Administrator shall not use the same Employer Nonelective Contribution
allocated to a Participant's Account for purposes of satisfying both tests.
For purposes of allocating the Employer Nonelective Contribution,
"Participant" shall mean Participants who are not Highly Compensated
Employees. Notwithstanding Section 4.02 of the Holland & Hart Defined
Contribution Basic Plan Document and Trust Agreement, Accounting Date shall
mean the date the Trustee receives the Employer Nonelective Contribution for
purposes of allocating net income, gain, or loss under Section 4.08 to the
Participants' Elective Deferrals Accounts.
Profit Sharing Contributions. The Plan Administrator shall allocate and credit
----------------------------
each Profit Sharing Contribution and forfeitures, if any, to the Profit
Sharing Contributions Account of each Participant:
(X) in the same ratio that each Participant's Compensation for the Plan
Year bears to the total Compensation of all Participants for the Plan
Year. If the Profit Sharing Contribution is made in the form of
Employer Securities, the Plan Administrator shall allocate and credit
the shares of Employer Securities in the same ratio that each
Participant's Compensation for the Plan Year bears to the total
Compensation of all Participants for the Plan Year. Notwithstanding
Section 4.02 of the Holland & Hart Defined Contribution Basic Plan
Document and Trust Agreement, Accounting Date shall mean the date the
Trustee receives the Profit Sharing Contribution for purposes of
allocating net income, gain, or loss under Section 4.08 to the
Participants' Profit Sharing Contributions Accounts.
( ) (a) first, in an amount equal to an identical percentage:
10
<PAGE>
( ) not exceeding 5.7%
( ) not exceeding 5.4%
( ) not exceeding 4.3%
( ) not exceeding the percentage determined in accordance with the
Permitted Disparity Level table
of each Participant's Compensation and of each Participant's
Compensation which exceeds the Permitted Disparity Level, and
(b) second, in the same ratio that each Participant's Compensation for
the Plan Year bears to the total Compensation of all Participants
for the Plan Year.
(c) The Permitted Disparity Level shall be:
( ) $ ______. [This option may only be selected if the
identical percentage in (a) is determined by reference to the
Permitted Disparity Level table each Plan Year.]
( ) _____% of the taxable wage base as determined under Section
230 of the Social Security Act in effect on the first day of
the Plan Year.
[If the Permitted Disparity Level selected is equal to 100% of the
taxable wage base, the identical percentage selected in (a) of this
option shall not exceed 5.7%. If the Permitted Disparity Level
selected is less than the taxable wage base, the identical percentage
selected in (a) of this option shall not exceed the percentage
determined in accordance with the following table:
<TABLE>
<CAPTION>
Permitted Disparity Level Percentage
------------------------- ----------
<S> <C>
More than $0, but not more than the greater of $10,000
or 20% of the taxable wage base 5.7%
More than the greater of $10,000 or 20% of the taxable
wage base, but not more than 80% of the taxable wage
base 4.3%
More than 80% of the taxable wage base, but less than
100% of the taxable wage base 5.4%]
</TABLE>
( ) equal to the amount of the annual Employer contribution made to the
Trust for the Participant's benefit. The Plan Administrator shall make
this allocation in accordance with and in the same manner as the
contribution formula adopted by the Employer under Adoption Agreement
Section 3.01.
( ) (a) first, in the same ratio that the Testing Compensation for the Plan
Year of each Non-Key Employee eligible for a minimum contribution and
of each Participant bears to the total Testing Compensation of all
Participants and such Non-Key Employees for the Plan Year, but not
exceeding 3% of Testing Compensation of each Participant and such
Non-Key Employee.
(b) second, in the same ratio that the Participant's Compensation in
excess of the Permitted Disparity Level for the Plan Year bears to
the Compensation in excess of the Permitted Disparity Level of all
Participants for the Plan Year, but not exceeding 3% of the
Permitted Disparity Level.
11
<PAGE>
(c) third, in an amount equal to an identical percentage,
( ) not exceeding 2.7%
( ) not exceeding 2.4%
( ) not exceeding 1.3%
( ) not exceeding the percentage determined in accordance with the
Permitted Disparity Level table
of each Participant's Compensation and of each Participant's
Compensation which exceeds the Permitted Disparity Level, and
(d) fourth, in the same ratio that each Participant's Compensation for
the Plan Year bears to the total Compensation of all Participants
for the Plan Year.
(e) The Permitted Disparity Level shall be:
( ) $ _____. [This option may only be selected if the
identical percentage in (c) is determined by reference to the
Permitted Disparity Level table each Plan Year.]
( ) _____% of the taxable wage base as determined
under Section 230 of the Social Security Act in effect on the
first day of the Plan Year.
[If the Permitted Disparity Level selected is equal to 100% of the
taxable wage base, the identical percentage selected in (c) of this
option shall not exceed 2.7%. If the Permitted Disparity Level
selected is less than the taxable wage base, the identical percentage
selected in (c) of this option shall not exceed the percentage
determined in accordance with the following table:
<TABLE>
<CAPTION>
Permitted Disparity Level Percentage
------------------------- ----------
<S> <C>
More than $0, but not more than the greater of $10,000
or 20% of the taxable wage base 2.7%
More than the greater of $10,000 or 20% of the taxable
wage base, but not more than 80% of the taxable wage
base 1.3%
More than 80% of the taxable wage base, but less than
100% of the taxable wage base 2.4%]
</TABLE>
4.04 FORFEITURES. Subject to any restoration under Section 5.13, the Plan
-----------
Administrator shall treat the amount of a Participant's Accrued Benefit
forfeited under the Plan:
( ) as an additional amount to be allocated as part of and in the same
manner as the Profit Sharing Contributions.
( ) as an additional amount to be allocated as part of and in the same
manner as the Matching Contributions.
12
<PAGE>
(X) with respect to a Participant's Accrued Benefit attributable to
Matching Contributions, as a reduction of the Matching Contributions.
(X) with respect to a Participant's Accrued Benefit attributable to Profit
Sharing Contributions, as a reduction of the Profit Sharing
Contributions. With respect to forfeitures of Employer Securities, as a
reduction of the number of shares to be contributed.
Forfeitures shall be allocated or applied:
( ) to the Plan Year in which the forfeiture occurs.
(X) to the Plan Year following the Plan Year in which the forfeiture
occurs.
4.05 ELIGIBILITY TO RECEIVE ALLOCATION OF EMPLOYER CONTRIBUTION AND
--------------------------------------------------------------
FORFEITURES. In allocating the Profit Sharing Contributions and forfeitures, if
- -----------
any, for a Plan Year, the Plan Administrator shall take into account
Compensation paid to the Participant:
(X) for that part of the Plan Year the Employee is a Participant in the
Plan.
( ) for the entire Plan Year.
( ) in accordance with the elapsed time method.
Minimum Number of Hours of Service. The minimum number of Hours of Service a
----------------------------------
Participant shall be required to complete during a Plan Year in order to
receive an allocation of the Profit Sharing Contributions and forfeitures (if
allocated in the same manner as Profit Sharing Contributions under Adoption
Agreement Section 4.04) for the Plan Year is:
(X) 1,000 Hours of Service.
( ) _____ Hours of Service. [The number of Hours of Service selected shall
not exceed 1,000.]
( ) not applicable under the elapsed time method.
The minimum number of Hours of Service a Participant shall be required to
complete during a Plan Year in order to receive an allocation of the Matching
Contributions and forfeitures (if allocated in the same manner as Matching
Contributions under Adoption Agreement Section 4.04) for the Plan Year is:
(X) 1,000 Hours of Service
( ) _____ Hours of Service. [The number of Hours of Service selected shall
not exceed 1,000.]
( ) not applicable under the elapsed time method.
The Participant shall be eligible to make Elective Deferrals and to receive an
allocation of the Employer Nonelective Contribution without regard to an Hour
of Service requirement.
13
<PAGE>
If the Participant terminates employment during the Plan Year because of
death, disability, or attaining the Normal Retirement Date:
(X) there shall be no Hour of Service requirement nor last day of the year
employment requirement in order to receive an allocation of the Profit
Sharing Contributions and the Matching Contributions, if any.
( ) the applicable Hour of Service requirement shall apply.
( ) the Participant shall receive an allocation of the Profit Sharing
Contributions and the Matching Contributions, if any, in accordance
with the elapsed time method under Section 4.05.
Employment on the Last Day of the Plan Year. A Participant who, during a
-------------------------------------------
particular Plan Year, completes the Hour of Service requirement:
( ) shall share in the allocation of Matching Contributions, Profit
Sharing Contributions, Employer Nonelective Contributions, and
Participant forfeitures, if any, for that Plan Year without regard to
whether the Participant is employed on the Accounting Date of that Plan
Year.
(X) shall share in the allocation of Matching Contributions, Profit Sharing
Contributions, and Participant forfeitures, if any, for that Plan Year
only if the Participant is employed on the Accounting Date of that Plan
Year. The Participant shall share in the allocation of Employer
Nonelective Contributions, if otherwise eligible, without regard to
whether the Participant is employed on the Accounting Date of that Plan
Year.
( ) shall share in the allocation of the Matching Contributions, Profit
Sharing Contributions, Employer Nonelective Contributions, and
Participant forfeitures, if any, for that Plan Year in accordance with
the elapsed time method of Section 4.05.
4.08 ALLOCATION AND DISTRIBUTION OF NET INCOME, GAIN, OR LOSS. As of each
--------------------------------------------------------
Valuation Date the Plan Administrator shall allocate net income, gain, or loss
attributable to Elective Deferrals during the Plan Year:
(X) in accordance with the provisions of Section 4.08(a).
( ) in accordance with the provisions of Section 4.08(b). The Plan
Administrator shall establish a segregated investment Account for the
Elective Deferrals of each Participant. The Plan Administrator shall
allocate the Elective Deferrals made during the Plan Year at the time
the Employer makes the contribution to the Plan. As of the Accounting
Date of each Plan Year, the Plan Administrator shall withdraw the funds
in the Participant's segregated investment Account and direct the
Trustee to invest the funds as part of the Trust Fund.
( ) in accordance with the provisions of Section 4.08(a), except that the
Plan Administrator shall treat Elective Deferrals contributed:
14
<PAGE>
( ) at any time prior to the Accounting Date of the Plan Year
( ) at any time prior to the first day of the seventh month of the
Plan Year
as part of the Participant's Elective Deferrals Account at the
beginning of the Plan Year.
( ) ______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
The Plan Administrator shall apply the provisions of Section 4.08(a)
separately to each investment options, taking into account only the portion
of each Participant's Account which is invested in the particular
investment option.
4.10 LIMITATION ON ALLOCATIONS TO PARTICIPANT'S ACCOUNTS.
---------------------------------------------------
More Than One Plan. If the Employer maintains more than one plan, the Plan
------------------
Administrator shall attribute:
(X) the total Excess Amount allocated as of the Accounting Date to this
Plan.
( ) the total Excess Amount allocated as of the Accounting Date to the
_______________________________________________________________________
the Employer maintains.
( ) to this Plan an amount equal to the product of:
(a) the total Excess Amount allocated as of the Accounting Date
(including any amount which the Plan Administrator would have
allocated but for the limitations of Code (S) 415); times
(b) the ratio of (1) the amount allocated to the Participant's Accounts
as of the Accounting Date under this Plan to (2) the total amount
allocated as of the Accounting Date under all qualified Defined
Contribution Plans (determined without regard to the limitations of
Code (S) 415).
( ) ______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Defined Benefit Plan Limitation.
-------------------------------
(X) The Employer does not maintain and never has maintained a Defined
Benefit Plan covering any Participant in this Plan. Accordingly, no
special Defined Benefit Plan limitation applies under this Plan.
( ) If the Participant presently participates, or has ever participated
under a Defined Benefit Plan maintained by the Employer, then the sum
of the Defined Benefit Plan Fraction and the Defined Contribution Plan
Fraction for the Participant for that Limitation Year shall not exceed
1.0. To the extent necessary to satisfy the limitation under this
Section, the Employer shall reduce:
( ) the Participant's projected annual benefit under the Defined
Benefit Plan under which the Participant participates.
15
<PAGE>
( ) its contribution or allocation on behalf of the Participant to the
Defined Contribution Plan under which the Participant participates
and then, if necessary, the Participant's projected annual benefit
under the Defined Benefit Plan under which the Participant
participates.
( ) _______________________________________________________________________
_______________________________________________________________________
4.12 CONTRIBUTIONS UNDER A CASH OR DEFERRED ARRANGEMENT.
--------------------------------------------------
Determination of Allocable Income or Loss. The Plan Administrator shall
-----------------------------------------
adjust Excess Deferrals, Excess Contributions, and Excess Aggregate
Contributions for any income or loss:
( ) up to the date of distribution.
(X) up to the last day of the calendar year with respect to Excess
Deferrals and up to the last day of the Plan Year with respect to
Excess Contributions and Excess Aggregate Contributions.
4.14 DEFINITIONS. For purposes of Section 4.14(n), the Plan:
-----------
(X) shall limit Testing Compensation taken into account to Testing
Compensation received only for the portion of the Plan Year in which
the Employee was a Participant and only for the portion of the Plan
Year in which the Plan was in effect.
( ) shall include Testing Compensation for the entire Plan Year,
irrespective of whether the Plan was in effect for the entire Plan Year
or whether the Employee begins, resumes or ceases to be a Participant
during the Plan Year.
ARTICLE V
PARTICIPANT VESTING
5.02 VESTING UPON DISABILITY. Upon the disability of a Participant, the
-----------------------
Participant's Nonforfeitable percentage in his or her Profit Sharing
Contributions Account and Matching Contributions Account:
(X) shall be 100%.
( ) shall be determined under the vesting schedule applicable to the
Participant's Profit Sharing Contributions Account and Matching
Contributions Account under Article V.
5.03 VESTING UPON DEATH. Upon the death of a Participant, the deceased
------------------
Participant's Nonforfeitable percentage in his or her Profit Sharing
Contributions Account and Matching Contributions Account:
(X) shall be 100%.
( ) shall be determined under the vesting schedule applicable to the
Participant's Profit Sharing Contributions Account and Matching
Contributions Account under Article V.
16
<PAGE>
( ) shall be 0% and the Profit Sharing Contributions Account and Matching
Contributions Account shall be forfeited (to the extent permitted
under the annuity distribution rules) and reallocated in accordance
with Section 4.04.
5.05 VESTING SCHEDULE. A Participant's Elective Deferrals Account shall be
----------------
100% Nonforfeitable at all times. Subject to Section 8.06 (unclaimed Account
procedure) of the Plan, the Participant's Nonforfeitable percentage in his or
her Profit Sharing Contributions Account and Matching Contributions Account:
( ) shall be 100% at all times.
(X) shall be determined under the following vesting schedule:
Years of Service Nonforfeitable [5 Year 3 to 7 Year
With the Employer Percentage Cliff Graded
----------------- -------------- ------- -----------
Less than 1......................0% 0% 0%
1.........................0% 0% 0%
2........................33% 0% 0%
3........................67% 0% 20%
4.......................100% 0% 40%
5.......................100% 100% 60%
6.......................100% 100% 80%
7 or more...............100% 100% 100%]
[The Employer shall select either the 5 year cliff vesting schedule or
the 3 to 7 year graded vesting schedule and complete the blanks in the
vesting schedule with percentages equal to or greater than the
percentages in the vesting schedule selected. If the vesting schedule
selected is not a top heavy vesting schedule, the Employer shall
select a top heavy vesting schedule under the following option.]
( ) In lieu of the preceding vesting schedule, the following top heavy
vesting schedule shall apply:
( ) in the first Plan Year in which the Plan is a Top Heavy Plan and
in all subsequent Plan Years.
( ) only in Plan Years in which the Plan is a Top Heavy Plan.
Years of Service Nonforfeitable [3 Year 2 to 6 Year
With the Employer Percentage Cliff Graded
----------------- -------------- ------- -----------
Less than 1.....................__% 0% 0%
1........................__% 0% 0%
2........................__% 0% 20%
3........................__% 100% 40%
4........................__% 100% 60%
5........................__% 100% 80%
6 or more...............100% 100% 100%]
[The Employer shall select either the 3 year cliff vesting schedule or
the 2 to 6 year graded vesting schedule and complete the blanks in the
vesting schedule with percentages equal to or greater than the
percentages in the vesting schedule selected.]
17
<PAGE>
The Plan Administrator shall apply the top heavy vesting schedule to
Participants who earn at least one Hour of Service after the top heavy
vesting schedule becomes effective. A shift between vesting schedules under
this Section is an amendment to the vesting schedule. A shift to a new
vesting schedule under this Section is effective on the first day of the
Plan Year for which the Top Heavy Plan status of the Plan changes.
The Plan Administrator shall treat the Participant's interest in life
insurance contracts purchased on the Participant's behalf under Article XI:
(X) as part of the Participant's Profit Sharing Contributions Account
subject to the applicable vesting schedule.
( ) as 100% Nonforfeitable at all times.
5.06 YEAR OF SERVICE - VESTING. For purposes of determining Years of Service
-------------------------
under Section 5.05 (unless the Employer elected the elapsed time method under
Section 1.36 of the Adoption Agreement), the Plan shall include all Plan Years
during which an Employee completes not less than 1,000 Hours of Service with the
Employer and the Related Group:
(X) including Plan Years in which the Employer did not maintain this Plan
or a predecessor plan.
( ) excluding Plan Years in which the Employer did not maintain this Plan
or a predecessor plan.
(X) excluding Plan Years prior to the Plan Year in which the Participant
attained age 18.
ARTICLE VI
DISTRIBUTIONS
6.04 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. An alternate payee under a
---------------------------------------------
qualified domestic relations order:
(X) shall be entitled to a distribution at any time, irrespective of
whether the Participant has attained the earliest retirement age (as
defined under Code (S) 414(p)) under the Plan.
( ) shall not be entitled to a distribution prior to the time the
Participant attains the earliest retirement age (as defined under Code
(S) 414(p)) under the Plan.
6.05 IN-SERVICE DISTRIBUTIONS. Prior to terminating employment with the
------------------------
Employer:
(X) A Participant, after attaining the Normal Retirement Date, shall have
the right to elect to receive all or any portion of the Participant's:
( ) Profit Sharing Contributions Account.
(X) Matching Contributions Account.
(X) Elective Deferrals Account.
(X) Rollover Contributions Account.
18
<PAGE>
(X) A Participant shall have the right to request a distribution from the
Participant's Elective Deferrals Account in an amount necessary to
satisfy a hardship in accordance with the safe harbor hardship
distribution provisions of Section 6.05.
( ) A Participant shall have the right to receive a distribution from the
Participant's Profit Sharing Contribution Account, Matching
Contributions Account, Elective Deferrals Account and Rollover
Contributions Account after attaining age 59 1/2.
( ) A Participant shall not have any right to receive a distribution of any
portion of the Participant's Profit Sharing Contribution Account,
Matching Contributions Account, Elective Deferrals Account and Rollover
Contributions Account prior to termination of Service with the Employer
(except as mandated by Article VI).
6.07 DISTRIBUTION METHODS. Subject to the annuity distribution requirements of
--------------------
Section 6.08, if applicable to this Plan, and the minimum distribution
requirements of Section 6.03, a Participant or Beneficiary shall have the right
to elect distribution under one or any combination of the following methods:
(X) lump sum distribution in cash to the extent the Participant's Account
is not invested in Employer Securities and in Employer Securities only
to the extent the Participant's Account is invested in Employer
Securities. With respect to Employer Securities distributed in
accordance with the provisions of Article XIII, the Participant shall
receive the lump sum distribution in whole shares of Employer
Securities and cash for any fractional share.
( ) monthly installments over a fixed period of time not exceeding the life
expectancy of the Participant or the joint life and last survivor
expectancy of the Participant and the Participant's Beneficiary.
( ) quarterly installments over a fixed period of time not exceeding the
life expectancy of the Participant or the joint life and last survivor
expectancy of the Participant and the Participant's Beneficiary.
( ) annual installments over a fixed period of time not exceeding the life
expectancy of the Participant or the joint life and last survivor
expectancy of the Participant and the Participant's Beneficiary.
( ) joint and ____% survivor annuity.
( )
_______________________________________________________________________
______________________________________________________________________.
[A distribution method selected under this option may not permit
distribution over a period of time which exceeds the life expectancy of
the Participant or the joint life and last survivor expectancy of the
Participant and the Participant's Beneficiary.]
19
<PAGE>
6.08 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. Section 6.08
-----------------------------------------------------------
of the Plan shall apply:
(X) to Participants only to the extent required by law.
( ) to all Participants.
ARTICLE VII
PLAN LOANS
7.01 AVAILABILITY OF PARTICIPANT LOANS. Participant loans:
---------------------------------
( ) shall be permitted under the Plan in accordance with Article VII.
(X) shall not be permitted.
ARTICLE VIII
ADMINISTRATIVE PROVISIONS
8.08 NO BENEFICIARY DESIGNATION.
--------------------------
(X) The distribution priority of Section 8.08 of the Plan shall apply.
( )
______________________________________________________________________
______________________________________________________________________
_____________________________________________________________________.
ARTICLE X
MISCELLANEOUS
10.06 STATE LAW. This agreement shall be interpreted under the law of
---------
Colorado.
- --------
ARTICLE XII
TRUST AGREEMENT
12.06 TRUSTEE INVESTMENT POWERS. Notwithstanding Section 12.06 of the Holland
-------------------------
& Hart Defined Contribution Basic Plan Document and Trust Agreement, the Trustee
is hereby authorized to retain any Employer Securities contributed to the Plan
in the form of Employer Securities and shall have no obligation to dispose of
such Employer Securities except as directed by the Plan Administrator.
12.09 INVESTMENT OF THE TRUST FUND. Notwithstanding Section 12.06 of the
----------------------------
Holland & Hart Defined Contribution Basic Plan Document and Trust Agreement, the
Trustee shall not be required to diversify investments in Employer Securities.
12.11 PARTICIPANT DIRECTION OF INVESTMENT. A Participant:
-----------------------------------
(X) shall have the right to direct the Trustee with respect to the
investment of the Participant's Elective Deferrals Account, Matching
Contributions Account and Rollover Contributions
20
<PAGE>
Account but shall not have the right to direct the Trustee with respect
to the investment of the Participation's Profit Sharing Contributions
Account.
( ) shall not have the right to direct the Trustee with respect to the
investment of the Participant's Accounts (other than a Participant loan
treated as a Participant direction of investment under Article VII).
ARTICLE XIII
EMPLOYER SECURITIES PROVISIONS
13.01 PURPOSE OF PLAN. This plan is intended to be a stock bonus plan with
---------------
respect to the portion of the Plan invested in Employer Securities. As such,
one purpose of this Plan is to benefit Participants and Beneficiaries by
obtaining and retaining for them, individually and collectively, a position of
equity ownership in the Employer by making Profit Sharing Contributions in the
form of Employer Securities.
13.02 INVESTMENT OF CASH CONTRIBUTIONS. All Employer Profit Sharing
--------------------------------
Contributions made in the form of cash shall be paid over to the Trustee and
invested by the Trustee in its discretion. Employer contributions made in the
form of Employer Securities shall be held by the Trustee. The Employer shall
contribute Employer Securities to the Trust out of authorized but unissued or
treasury shares of the Employer.
13.03 ACCOUNTING FOR EMPLOYER SECURITIES. All Employer Securities held by the
----------------------------------
Trustee shall be allocated to Accounts and distributed according to the number
of shares held in a particular Account, not according to the value of the
shares.
13.04 ALLOCATION OF STOCK DIVIDENDS. Any securities received by the Trustees
-----------------------------
as a stock split or dividend or as a result of reorganization or other
recapitalization shall be allocated as of each Valuation Date in the same
proportion as the Employer Securities are held in the Participants' Accounts.
In the event any rights, warrants or options are issued on common shares or
other securities held in the Trust, the Trustees shall exercise them for the
acquisition of additional investments to the extent that cash is then available
and the investment is deemed prudent.
13.05 CASH DIVIDENDS ON EMPLOYER SECURITIES. Any cash dividend declared by
-------------------------------------
the Employer with respect to Employer Securities in the Plan shall be paid to
the Trustee and shall be allocated to each Participant's Profit Sharing
Contributions Account based on the number of shares held in that Participant's
Account. The dividend shall be invested by the Trustee in its discretion.
13.06 VOTING OF EMPLOYER SECURITIES. Every Participant shall have the right
-----------------------------
to direct the Trustee with respect to the voting of the Employer Securities
allocated to his Employer Contribution Account with respect to any corporate
matter which, by law or by corporate charter, requires more than a majority
vote.
At the time of the mailing to stockholders of the notice of any stockholders'
meeting of the Employer, the Employer shall cause to be prepared and delivered
to each Participant a notice of the stockholders' meeting with a descriptive
statement of the items upon which the Participant has the right to exercise his
right to vote. Neither the Trustee nor the Plan Administrator shall have the
right to vote any Employer Securities which a Participant fails to vote as
authorized by this Section.
13.07 DISTRIBUTION IN EMPLOYER SECURITIES. Notwithstanding the provisions of
-----------------------------------
Article VI of the Holland & Hart Defined Contribution Basic Plan Document and
Trust Agreement, benefits shall be
21
<PAGE>
payable in the form of Employer Securities to the extent that the distributions
are in whole shares of Employer Securities. If a distribution includes a
fractional share, a distribution of only the fractional share portion may be
made in cash.
13.08 PUT OPTION. The Employer will issue a put option to each Participant
----------
receiving a distribution of Employer Securities from the Trust. The put option
will permit the Participant to sell the Employer Securities to the Employer, at
any time during either one of two put option periods, at the current Fair Market
Value. The first put option period runs during the 60 day period beginning on
the date the Employer Securities are first distributed by the Plan. The second
put option runs during the 60 day period that (1) occurs during the calendar
year that begins immediately following the date of distribution and (2)
immediately follows the date on which the Employer receives the valuation of the
Employer Securities for the last day of the previous Plan Year. The period
during which the put option may be exercised shall not include any time when a
holder is unable to exercise the put option because the Employer is prohibited
from honoring the put option by federal or state law. If a Participant (or
Beneficiary) exercises his or her put option, the Employer must purchase the
Employer Securities at Fair Market Value in accordance with the terms provided
under Section 13.11. Following the expiration of the second put option period,
a Participant shall have no right to require the Employer to purchase the
Employer Securities distributed by the Plan.
13.09 RESTRICTION ON EMPLOYER SECURITIES. Except upon prior written consent
----------------------------------
of the Employer, no Participant (or Beneficiary) may sell, assign, give,
pledge, encumber, transfer or otherwise dispose of any Employer Securities now
owned or subsequently acquired by him or her without complying with the terms of
this Article. If a Participant (or Beneficiary) pledges or encumbers any
Employer Securities without the prior written consent, any security holder's
rights with respect to such Employer Securities are subordinate and subject to
the rights of the Employer.
13.10 LIFETIME TRANSFER/RIGHT OF FIRST REFUSAL. If any Participant (or
----------------------------------------
Beneficiary) who receives Employer Securities under this Plan desires to dispose
of any of his Employer Securities for any reason during his or her lifetime
(whether by sale, assignment, gift, or any other method of transfer), he or she
first must offer the Employer Securities for sale to the Employer. The Employer
may require a Participant (or Beneficiary) entitled to a distribution of
Employer Securities to execute an appropriate stock restriction agreement
(evidencing the right of first refusal) prior to receiving a certificate for
Employer Securities.
In the case of an offer by an independent third party, the offer to the
Employer is subject to all the terms and conditions set forth in Section 13.11,
based on a price equal to the Fair Market Value per share and payable in
accordance with the terms of Section 13.11; however, if the selling price and
terms offered to the Participant by the third party are more favorable to the
Participant than the selling price and terms of Section 13.11, the selling price
and terms of the offer of the third party shall apply. The Employer must give
written notice to the offering Participant of its acceptance of the
Participant's offer within 14 days after the Participant has given written
notice to the Employer or the Employer's rights under this Section will lapse.
The Employer may grant the Trust the option to assume the Employer's rights and
obligations with respect to all or any part of the Employer Securities offered
to the Employer under this Section.
13.11 PAYMENT OF PURCHASE PRICE. When the Employer exercises an option to
-------------------------
purchase a Participant's Employer Securities pursuant to an offer given under
Section 13.10 or when a Participant notifies the Employer in writing that a put
option is being exercised pursuant to Section 13.08, the Employer must make
payment in lump sum or, if the distribution to the Participant (or his or her
Beneficiary) constitutes a Total Distribution, in substantially equal
installments over a period not exceeding
22
<PAGE>
5 years. A Total Distribution to a Participant (or to a Beneficiary) is the
distribution, within one taxable year of the recipient, of the entire balance to
the Participant's credit under the Plan. In the case of a distribution which is
not a Total Distribution or which is a Total Distribution with respect to which
the Employer will make payment in lump sum, the Employer must pay the
Participant (or Beneficiary) the Fair Market Value of the Employer Securities
repurchased no later than 30 days after the date the Participant (or
Beneficiary) exercises the put option. In the case of a Total Distribution with
respect to which the Employer will make installment payments, 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 purchaser must evidence
the balance of the purchase price by executing a promissory note, delivered to
the selling Participant at the Closing. The note delivered at Closing must bear
a reasonable rate of interest, determined as of the Closing Date, and the
Employer must provide adequate security. The note must provide for equal annual
installments with interest payable with each installment, the first installment
being due and payable one year after the Closing Date. The note further must
provide for acceleration in the event of 30 days' default of the payment on
interest or principal and must grant to the maker of the note the right to
prepay the note in whole or in part at any time or times without penalty;
however, the Employer may not have the right to make any prepayment during the
calendar year or fiscal year of the Participant (Beneficiary) in which the
Closing Date occurs.
13.12 VALUATIONS. The Trust shall be valued by the Trustee at Fair Market
----------
Value annually as of the close of business on the last day of the Plan Year. A
similar valuation of the Trust may occur at the end of any calendar month upon
direction of the Plan Administrator.
13.13 TERMS AND DEFINITIONS. For purposes of this Article:
---------------------
(a) EMPLOYER SECURITIES means any security issued by the Employer which
constitutes an Employer Security within the meaning of ERISA (S)
407(d)(5).
(b) FAIR MARKET VALUE means the value of the Employer Securities (1)
determined as of the date of the exercise of an option if the exercise is
by a Disqualified Person, or (2) in all other cases, determined as of the
most recent Accounting Date. If the Employer Securities are 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,
unless another method of valuation is required by the standards applicable
to prudent fiduciaries. If the Employer Securities cannot be valued on the
basis of its closing price in recent public trading, its fair market value
will be determined by an independent appraisal by a person who customarily
makes such appraisals. The Employer shall comply with the requirements
under Code (S) 401(a)(28)(C) in selecting an independent appraiser. In
performing an appraisal, the independent appraiser selected shall comply
with all requirements under Code (S) 401(a)(28)(C), under ERISA (S) 3(18),
and under regulations promulgated under either of these two statutory
provisions. In the case of a transaction between the Plan and an Employer
or another party in interest, the fair market value of the Employer
Securities must be determined as of the date of the transaction rather
than as of some other Valuation Date occurring before or after the
transaction. In other cases, the fair market value of the Employer
Securities will be determined as of the most recent Valuation Date. The
determination of fair market value of Employer Securities by such an
appraisal shall be binding on all parties interested in the Plan and may
be relied upon by the Trustee.
23
<PAGE>
(c) NOTICE means any offer, acceptance of an offer, payment or any other
communication. A person has given Notice permitted or required under this
Article when the person deposits the Notice in the United States mail,
first class, postage prepaid, addressed to the person entitled to the
Notice at the address, currently listed for him or her in the records of
the Employer. Any person affected by this Section has the obligation of
notifying the Employer of any change of address.
(d) BENEFICIARY includes the legal representative of a deceased Participant.
(e) CLOSING means the place, date and time (Closing Date) to which the selling
Participant (or his or her Beneficiary) and purchaser may agree for
purposes of a sale and purchase under this Section; however, Closing must
take place not later than 30 days after the exercise of an offer under
Section 13.08.
(f) DISQUALIFIED PERSON has the meaning ascribed to that term under Code (S)
4975(e)(2).
13.14 BINDING EFFECT. The provisions of this Article shall bind the Employer,
--------------
any Participant or Beneficiary who receives Employer Securities under this Plan
and their respective successors and assigns.
Holland & Hart may amend any part of this Plan. Holland & Hart will inform the
Employer of any amendments made to, or the discontinuance or abandonment of, the
Holland & Hart Defined Contribution Basic Plan Document and Trust Agreement or
the Adoption Agreement executed by the Employer. The Adopting Employer may not
rely on the notification letter issued by the Internal Revenue Service to
Holland & Hart as evidence that the Plan is qualified under Code (S) 401. In
order to obtain reliance with respect to Plan qualification, the Employer must
apply to the appropriate key district office for a determination letter.
The Employer may change the choice of options in the Adoption Agreement, add
overriding language to Adoption Agreement Sections 4.10 and 3.02 to satisfy Code
(S)(S) 415 and 416, and add certain model amendments published by the Internal
Revenue Service which specifically provide that their adoption will not cause
the Plan to become an individually designed plan. If the Employer amends the
plan for any other reason, including a waiver of the minimum funding requirement
under Code (S) 412(d), the Employer will no longer participate in this Regional
Prototype Plan and the Plan will become an individually designed plan. If the
Plan fails to attain or retain qualification, the Plan will no longer
participate in this Regional Prototype Plan and will become an individually
designed plan.
The Trustee, in accepting its position as Trustee, agrees to all of the
obligations, responsibilities and duties imposed upon the Trustee under the Plan
and Trust.
24
<PAGE>
The Employer hereby agrees to the provisions of this Plan and Trust, and in
witness of its agreement, the Employer by its duly authorized officers has
executed this Adoption Agreement, and the Trustee has signified its acceptance
as Trustee under this Prototype Plan and Trust, on the date written below.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
EMPLOYER
By:
------------------------------------
Title:
---------------------------------
Date:
----------------------------------
Attest:
- ---------------------------
NORWEST BANK
TRUSTEE
By:
------------------------------------
Title:
---------------------------------
Date:
----------------------------------
25
<PAGE>
Exhibit 10.26
STOCK TRANSFER AND PLEDGE AGREEMENT
This Agreement is made as of ____________, 1997 by and between Mark A.
Birner ("Dentist"), an individual licensed to practice dentistry in the State of
Colorado, whose mailing address is 3801 East Florida Avenue, Suite 208, Denver,
CO 80210 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/___________________ ("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 ____________ 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 events specified in subparagraphs a. through j. occurs (which events,
together with any determination made by Secured Party to the effect provided for
in subparagraph k. constitute "Events of Transfer"). Upon the occurrence of an
Event of Transfer, Dentist 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. Events of Transfer
consist of the following:
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;
j. This Agreement is breached by Dentist; or
2
<PAGE>
k. A determination by Secured Party in its sole discretion that it is
in the best interests of Secured Party to have the Collateral transferred by
Dentist to a party designated by Secured Party.
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.
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
3
<PAGE>
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 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.
4
<PAGE>
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.
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
5
<PAGE>
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.
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.
6
<PAGE>
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:
------------------------------
7
<PAGE>
Exhibit 10.27
STOCK PURCHASE, PLEDGE AND SECURITY AGREEMENT
---------------------------------------------
DATE OF AGREEMENT: October 27, 1995
PARTIES: Birner Dental Management Services, Inc.
Suite 208
3801 E. Florida Avenue
Denver, Colorado 80210 ("BDMS")
William Bolton, D.D.S.
Unit No. D
390 South Wilcox Street
Castle Rock, Colorado 80104 ("Dentist")
RECITALS:
A. BDMS desires to sell and Dentist desires to purchase 100 shares of the
outstanding capital stock of Perfect Teeth/Castle Rock P.C., a Colorado
professional corporation (the "Company"), which has been formed to conduct the
authorized professional services that may be performed by a doctor of dentistry,
duly licensed under the laws of the state of Colorado.
B. The Company and BDMS are currently parties to that certain Birner
Dental Management Services, Inc. Management Agreement (the "Management
Agreement"), pursuant to which BDMS has agreed to provide long term management
and other services to the Company and services in connection with the
development of a dental health care provider network.
C. The Company has entered into an employment agreement with Dentist (the
"Employment Agreement"), to engage in the general practice of dentistry at the
Company's PERFECT TEETH Dental Center.
D. Dentist has agreed to pledge to, and grant a security interest in, the
shares purchased by Dentist to BDMS to secure certain obligations hereunder.
<PAGE>
AGREEMENT:
In consideration of the above recitals and for other good and valuable
consideration, the receipt and adequacy are hereby acknowledged, the parties
agree as follows:
1. Purchase of Shares. BDMS hereby sells and Dentist hereby purchases
--------------------
100 shares of the capital stock of the Company without par value (the "Shares"),
for the aggregate price of Four Hundred Dollars ($400), which purchase price
Dentist has this day paid in cash to BDMS.
2. Guaranty of Fixed Management Fee. Dentist has executed a Guaranty
----------------------------------
in the form attached as Exhibit A (the "Guaranty") of payment of the Fixed
Management Fee provided for in Section 3.5 of the Management Agreement.
3. Pledge of Shares and Grant of Security Interest. Dentist hereby
-------------------------------------------------
pledges to, and grants a security interest in, the Shares to BDMS to secure the
following:
a. performance of Dentist's obligations under the Guaranty and
this Agreement;
b. performance of Dentist's obligations under the Employment
Agreement with the Company.
In connection with such pledge and grant of a security interest, the
certificate for the Shares ("Certificate") has been delivered to BDMS, having
been first endorsed by Dentist to BDMS. Dentist hereby authorizes BDMS to keep
and preserve the Certificate in its possession until performance in full of
Dentist's obligations under this Agreement and the Guaranty and the expiration
of this Agreement and the Employment Agreement according to their terms; or to
cause the sale of or to effect the redemption of the Shares by the Company
according to the other provisions of this Agreement. So long as Dentist is not
in default of Dentist's obligations under the Employment Agreement or this
Agreement, Dentist shall be entitled to receive and retain dividends or other
distributions on the Shares.
4. Grant of Irrevocable Proxy. Dentist has granted to BDMS or its
---------------------------
designee an Irrevocable Proxy in the form attached hereto as Exhibit B (the
"Irrevocable Proxy ").
5. Covenants of Dentist. Dentist hereby covenants and agrees that,
--------------------
during the term of the Employment Agreement:
a. there shall at all times be three persons appointed as members
of the Board of Directors of the Company, including Dentist and two other
persons nominated by BDMS, pursuant to the Irrevocable Proxy granted by
Dentist to BDMS or its designee;
<PAGE>
b. the Bylaws of the Company shall not be amended without the
written consent of BDMS and directors of the Company nominated by BDMS shall
not be replaced or discharged without the consent of BDMS;
c. in the event of his or her breach of this Agreement or the
Employment Agreement or the termination of the Employment Agreement for any
reason, Dentist shall no longer have the power to exercise any voting rights
in the Company by virtue of ownership of the Shares;
d. Dentist will not sell, pledge or otherwise encumber any of the
assets of the Company without the express written consent of BDMS;
e. in the event of the redemption by the Company of the Shares
owned by Dentist, as provided in the Employment Agreement, or an assignment
of the Shares to BDMS as provided in Section 7 below, Dentist shall
cooperate in the transfer of control of the Company to BDMS or its designee
and shall not interfere with the Company's operations, agreements,
relationships or accounts;
f. Dentist will not revoke or attempt to revoke the Irrevocable
Proxy.
6. Events of Default. Dentist shall be in default under this Agreement if:
a. Dentist fails to perform any covenant or agreement in the
Guaranty or this Agreement;
b. Dentist fails to perform any of Dentist's obligations under
the Employment Agreement;
c. Dentist ceases to be employed by the Company for any reason;
d. Dentist causes the Company to breach its obligations to BDMS
under the Management Agreement;
e. Dentist dies, becomes insolvent or a proceeding under any
bankruptcy or insolvency law is commenced by or against Dentist.
.
7. Remedies. In addition to any other remedies provided by law or in
--------
the Guaranty, if an Event of Default occurs, BDMS shall have the following
rights and remedies:
a. if Dentist defaults in the performance of any of his or her
covenants and obligations under this Agreement, the Guaranty, or the
Employment Agreement, or Dentist ceases to be in the employ of the Company,
Dentist authorizes the Shares at the election of BDMS, to be sold or
otherwise disposed of by it at
<PAGE>
public auction or private sale in order to satisfy any damages incurred by
BDMS as a result of any said default;
b. any notice of any sale, lease, other disposition, or other
intended action by BDMS shall be deemed reasonable if it is in writing and
deposited in the United States mail, first class postage prepaid, ten (10)
days in advance of the intended disposition or other intended action,
addressed to Dentist at his or her last known address;
c. waiver by BDMS or the Company of any breach by Dentist under
the Guaranty, this Agreement or the Employment Agreement, or any right of
BDMS hereunder, shall not constitute a waiver of any event of default or
other breach or right, nor of the same event of default or breach or right
on a future occasion;
d. if Dentist shall cease to be in the employ of the Company, if
Dentist shall cause the Company to breach its contractual obligations to
BDMS, or if Dentist shall default in the performance of his or her
obligations hereunder, Dentist agrees that BDMS may cause the Company to
exercise its option under the Employment Agreement to redeem the Shares.
8. Termination of Employment Agreement During Trial Period. If
-------------------------------------------------------
Dentist shall cease to be in the employ of the Company during the one-year trial
period of the Employment Agreement, Dentist or Dentist's legal representatives
shall be entitled, upon the delivery to BDMS of an absolute assignment (with a
warranty that Dentist owns the Shares free and clear of any lien or adverse
claim) conveying to BDMS the Shares, to receive payment for such Shares of $400
in cash and a release of the Guaranty, and thereafter BDMS shall be the absolute
owner of the Shares.
9. Survival. The terms and conditions of this Agreement shall survive
----------
the expiration or termination of this Agreement to the full extent necessary for
their enforcement and for the protection of the party in whose favor they
operate.
10. Merger; Amendments. This Agreement, together with the exhibits
--------------------
(which are hereby incorporated by this reference) 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 all parties hereto.
11. No Assignment: Binding Agreement. 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.
<PAGE>
12. Severability. The invalidity or unenforceability of any
------------
Section or any part of any Section of this Agreement will not affect the
validity or enforceability of any other part of this Agreement.
13. Governing Law.This Agreement will be governed by, construed and
-------------
enforced in accordance with the laws of the State of Colorado.
14. 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.
IN WITNESS WHEREOF, the parties have executed this Stock Purchase, Pledge
and Security Agreement as of the date first above written.
BDMS:
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By: /s/ Frederic W. J. Birner
----------------------------------
Chief Executive Officer
DENTIST:
/s/ William Bolton, D.D.S
----------------------------------
William Bolton, D.D.S.
<PAGE>
EXHIBIT 10.28
STOCK PURCHASE, PLEDGE AND SECURITY AGREEMENT
----------------------------------------------
DATE OF AGREEMENT: October 30, 1995
PARTIES: Birner Dental Management Services, Inc.
Suite 208
3801 E. Florida Avenue
Denver, Colorado 80210 ("BDMS")
Scott Kissinger, D.D.S.
Suite G-2
5151 South Federal Boulevard
Littleton, Colorado 80123 ("Dentist")
RECITALS:
A. BDMS desires to sell and Dentist desires to purchase 100 shares of the
outstanding capital stock of Perfect Teeth/BowMar P.C., a Colorado professional
corporation (the "Company"), which has been formed to conduct the authorized
professional services that may be performed by a doctor of dentistry, duly
licensed under the laws of the state of Colorado.
B. The Company and BDMS are currently parties to that certain Birner
Dental Management Services, Inc. Management Agreement (the "Management
Agreement"), pursuant to which BDMS has agreed to provide long term management
and other services to the Company and services in connection with the
development of a dental health care provider network.
C. The Company has entered into an employment agreement with Dentist (the
"Employment Agreement"), to engage in the general practice of dentistry at the
Company's PERFECT TEETH Dental Center.
<PAGE>
D. Dentist has agreed to pledge to, and grant a security interest in,
the shares purchased by Dentist to BDMS to secure certain obligations hereunder.
AGREEMENT:
In consideration of the above recitals and for other good and valuable
consideration, the receipt and adequacy are hereby acknowledged, the parties
agree as follows:
1. Purchase of Shares. BDMS hereby sells and Dentist hereby purchases
-----------------
100 shares of the capital stock of the Company without par value (the "Shares"),
for the aggregate price of One Thousand Dollars ($1,000), which purchase price
Dentist has this day paid in cash to BDMS.
2. Guaranty of Fixed Management Fee. Dentist has executed a Guaranty
--------------------------------
in the form attached as Exhibit A (the "Guaranty") of payment of the Fixed
Management Fee provided for in Section 3.5 of the Management Agreement.
3. Pledge of Shares and Grant of Security Interest. Dentist hereby
-----------------------------------------------
pledges to, and grants a security interest in, the Shares to BDMS to secure the
following:
a. performance of Dentist's obligations under the Guaranty and
this Agreement;
b. performance of Dentist's obligations under the Employment
Agreement with the Company.
In connection with such pledge and grant of a security interest, the
certificate for the Shares ("Certificate") has been delivered to BDMS, having
been first endorsed by Dentist to BDMS. Dentist hereby authorizes BDMS to keep
and preserve the Certificate in its possession until performance in full of
Dentist's obligations under this Agreement and the Guaranty and the expiration
of this Agreement and the Employment Agreement according to their terms; or to
cause the sale of or to effect the redemption of the Shares by the Company
according to the other provisions of this Agreement. So long as Dentist is not
in default of Dentist's obligations under the Employment Agreement or this
Agreement, Dentist shall be entitled to receive and retain dividends or other
distributions on the Shares.
4. Grant of Irrevocable Proxy. Dentist has granted to BDMS or its
--------------------------
designee an Irrevocable Proxy in the form attached hereto as Exhibit B (the
"Irrevocable Proxy").
5. Covenants of Dentist. Dentist hereby covenants and agrees that,
--------------------
during the term of the Employment Agreement:
a. there shall at all times be three persons appointed as members
of the Board of Directors of the Company, including Dentist and two other
persons
<PAGE>
nominated by BDMS, pursuant to the Irrevocable Proxy granted by Dentist to
BDMS or its designee;
b. the Bylaws of the Company shall not be amended without the
written consent of BDMS and directors of the Company nominated by BDMS
shall not be replaced or discharged without the consent of BDMS;
c. in the event of his or her breach of this Agreement or the
Employment Agreement or the termination of the Employment Agreement for any
reason, Dentist shall no longer have the power to exercise any voting
rights in the Company by virtue of ownership of the Shares;
d. Dentist will not sell, pledge or otherwise encumber any of the
assets of the Company without the express written consent of BDMS;
e. in the event of the redemption by the Company of the Shares
owned by Dentist, as provided in the Employment Agreement, or an assignment
of the Shares to BDMS as provided in Section 7 below, Dentist shall
cooperate in the transfer of control of the Company to BDMS or its designee
and shall not interfere with the Company's operations, agreements,
relationships or accounts;
f. Dentist will not revoke or attempt to revoke the Irrevocable
Proxy.
6. Events of Default. Dentist shall be in default under this Agreement
-----------------
if:
a. Dentist fails to perform any covenant or agreement in the
Guaranty or this Agreement;
b. Dentist fails to perform any of Dentist's obligations under
the Employment Agreement;
c. Dentist ceases to be employed by the Company for any reason;
d. Dentist causes the Company to breach its obligations to BDMS
under the Management Agreement;
e. Dentist dies, becomes insolvent or a proceeding under any
bankruptcy or insolvency law is commenced by or against Dentist.
7. Remedies. In addition to any other remedies provided by law or in the
--------
Guaranty, if an Event of Default occurs, BDMS shall have the following rights
and remedies:
<PAGE>
a. if Dentist defaults in the performance of any of his or her
covenants and obligations under this Agreement, the Guaranty, or the
Employment Agreement, or Dentist ceases to be in the employ of the Company,
Dentist authorizes the Shares at the election of BDMS, to be sold or
otherwise disposed of by it at public auction or private sale in order to
satisfy any damages incurred by BDMS as a result of any said default;
b. any notice of any sale, lease, other disposition, or other
intended action by BDMS shall be deemed reasonable if it is in writing and
deposited in the United States mail, first class postage prepaid, ten (10)
days in advance of the intended disposition or other intended action,
addressed to Dentist at his or her last known address;
c. waiver by BDMS or the Company of any breach by Dentist under the
Guaranty, this Agreement or the Employment Agreement, or any right of BDMS
hereunder, shall not constitute a waiver of any event of default or other
breach or right, nor of the same event of default or breach or right on a
future occasion;
d. if Dentist shall cease to be in the employ of the Company, if
Dentist shall cause the Company to breach its contractual obligations to
BDMS, or if Dentist shall default in the performance of his or her
obligations hereunder, Dentist agrees that BDMS may cause the Company to
exercise its option under the Employment Agreement to redeem the Shares.
8. Termination of Employment Agreement During Trial Period. If
-------------------------------------------------------
Dentist shall cease to be in the employ of the Company during the one-year trial
period of the Employment Agreement, Dentist or Dentist's legal representatives
shall be entitled, upon the delivery to BDMS of an absolute assignment (with a
warranty that Dentist owns the Shares free and clear of any lien or adverse
claim) conveying to BDMS the Shares, to receive payment for such Shares of
$1,000 in cash and a release of the Guaranty, and thereafter BDMS shall be the
absolute owner of the Shares.
9. Survival. The terms and conditions of this Agreement shall survive
--------
the expiration or termination of this Agreement to the full extent necessary for
their enforcement and for the protection of the party in whose favor they
operate.
10. Merger; Amendments. This Agreement, together with the exhibits
------------------
(which are hereby incorporated by this reference) 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 all parties hereto.
<PAGE>
11. No Assignment; Binding Agreement. 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.
12. Severability. The invalidity or unenforceability of any Section
------------
or any part of any Section of this Agreement will not affect the validity or
enforceability of any other part of this Agreement.
13. Governing Law. This Agreement will be governed by, construed and
-------------
enforced in accordance with the laws of the State of Colorado.
14. 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.
IN WITNESS WHEREOF, the parties have executed this Stock Purchase, Pledge
and Security Agreement as of the date first above written
BDMS:
BIRNER DENTAL MANAGEMENT SERVICES, INC
By: /s/ Frederic W. J. Birner
-------------------------------------
Chief Executive Officer
DENTIST:
/s/ Scott Kissinger, D.D.S.
-----------------------------------------
Scott Kissinger, D.D.S.
<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,
November 7, 1997.
<PAGE>
Exhibit 23.3
CONSENT OF PERSON ABOUT TO BECOME DIRECTOR
As a person who has not signed this registration statement but who is named
herein as about to become a director, I hereby consent to the inclusion of such
information and my name in this registration statement.
/s/
Joseph D. Sansone
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Birner Dental Management Services, Inc. and
Subsidiaries as of December 31, 1996 and the year then ended and as of September
30, 1997 (unaudited) and the three months then ended (unaudited).
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JUN-30-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 1,797,552 1,322,874
<SECURITIES> 0 0
<RECEIVABLES> 905,247 1,316,045
<ALLOWANCES> 26,200 33,400
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,856,326 3,397,502
<PP&E> 2,086,746 2,936,739
<DEPRECIATION> 276,971 571,255
<TOTAL-ASSETS> 9,552,818 15,122,793
<CURRENT-LIABILITIES> 1,039,520 3,167,199
<BONDS> 6,829,172 10,360,858
0 0
0 0
<COMMON> 2,179,659 1,849,659
<OTHER-SE> (495,533) (260,123)
<TOTAL-LIABILITY-AND-EQUITY> 9,552,818 15,122,793
<SALES> 7,283,978 4,526,179
<TOTAL-REVENUES> 7,283,978 4,526,179
<CGS> 6,513,412 3,778,202
<TOTAL-COSTS> 6,513,412 3,778,202
<OTHER-EXPENSES> 779,254 563,103
<LOSS-PROVISION> 23,800 3,036
<INTEREST-EXPENSE> 326,590 215,815
<INCOME-PRETAX> (335,278) (30,941)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (335,278) (30,941)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (335,278) (30,941)
<EPS-PRIMARY> (.10) (.01)
<EPS-DILUTED> (.10) (.01)
</TABLE>
