<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1998
REGISTRATION NO. 333-36391
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE AMENDMENT NO. 2
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.
MARK D. EBEL, ESQ. DAVID C. ROOS
HOLLAND & HART LLP BERLINER ZISSER WALTER & GALLEGOS
P.C.
555 17TH STREET, SUITE 3200
1700 LINCOLN ST. #4700
DENVER, COLORADO 80202
DENVER, COLORADO 80203-4547
(303) 295-8000
(303) 830-1700
----------------
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. [_] Registration No. 333-36391
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 JANUARY 14, 1998
2,100,000 SHARES
LOGO
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COMMON STOCK
Of the 2,100,000 shares of common stock, without par value (the "Common
Stock"), offered hereby (the "Offering"), 1,833,816 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 $7.00 and $8.00 per share. See "Underwriting" for a discussion
of the factors which were considered in determining the initial public offering
price.
The Common Stock has been approved for quotation on the Nasdaq National Mar-
ket 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) Does not include additional compensation to be paid to the Representative
in the form of (i) a 2.75% non-accountable expense allowance, of which
$10,000 has previously been paid and (ii) sale to the Representative for
$100 of an option (the "Representative's Option") to purchase 210,000
shares at a price of $ per share. The Company and the Selling Share-
holders have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. For information concerning indemnification arrangements and other
compensation to the Underwriters, see "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $906,258,
excluding the Representative's non-accountable expense allowance.
(3) The Company and certain Selling Shareholders have granted the Underwriters
a 45-day over-allotment option to purchase up to 125,000 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 Joseph Charles & Associates, Inc.,
Beverly Hills, California, on or about , 1998.
JOSEPH CHARLES & ASSOCIATES, INC.
The date of this Prospectus is , 1998
<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.
With its 30 Offices in Colorado, the Company believes, based on industry knowl-
edge and contacts, that 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
significant competitive advantage. The Company's expansion program involves
certain risks. See "Risk Factors--Risks Associated with Acquisition Strategy"
and "--Risks Associated with De Novo Office Development."
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, and the Company's net income
has increased from losses of ($160,000) and ($335,000) for the years ended De-
cember 31, 1995 and 1996, respectively, to net income of $236,000 for the nine
months ended September 30, 1997. 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 (total net revenue less direct ex-
penses incurred in connection with the operation of the Offices) for the Of-
fices increased from $651,000 to $2.0 million during these respective periods.
A substantial portion of these increases results from practice acquisitions
made by the Company during these periods. With respect to the seven practices
acquired in Colorado in May 1996 (the "Family Dental Acquisition"), during the
six months prior to the Family Dental Acquisition, dental office revenue, net
for the seven practices was $2.3 million, contribution from dental offices was
($185,000) and contribution margin (contribution from dental offices as a per-
centage of dental office revenue, net) was (8.0)%. During the six months imme-
diately 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........................ 1,833,816 shares
By the Selling Shareholders........... 266,184 shares
Common Stock to be outstanding after
the Offering.......................... 6,663,201 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."
Nasdaq National Market symbol.......... BDMS
</TABLE>
- --------
(1) Includes 1,633,142 shares of Common Stock to be issued simultaneously with
the consummation of the Offering in connection with the Conversion of De-
bentures. Excludes (i) 306,513 shares of Common Stock reserved for issuance
upon exercise of options outstanding as of December 31, 1997 under the
Birner Dental Management Services, Inc. 1995 Employee Stock Option Plan
(the "Employee Plan") at a weighted average exercise price of $5.65 per
share, (ii) 149,303 shares of Common Stock reserved for issuance upon exer-
cise of options outstanding as of December 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, (iii) 381,040 shares of Common Stock reserved for issuance upon
exercise of warrants outstanding as of December 31, 1997 at a weighted av-
erage exercise price of $3.81 per share, and (iv) 210,000 shares of Common
Stock issuable upon exercise of the Representative's Option. See "Manage-
ment", "Shares Eligible for Future Sale" and "Underwriting."
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> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Dental office revenue,
net.................... $ 448 $ 7,189 $ 15,833 $ 4,555 $ 10,492 $ 14,961
Less -- amounts retained
by dental offices...... 148 1,882 4,453 1,140 2,647 4,157
-------- -------- -------- -------- -------- --------
Net revenue............. 300 5,307 11,380 3,415 7,845 10,804
Management service fee
revenue................ -- 66 66 -- 739 739
-------- -------- -------- -------- -------- --------
Total 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--
General and administra-
tive.................. 149 722 1,056 611 875 1,227
Acquisition costs...... -- -- -- -- 252 252
Depreciation and amor-
tization.............. 4 58 58 35 71 71
-------- -------- -------- -------- -------- -------- ---
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 6,259 3,425 3,634 7,101
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
-------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 1,323 $ 8,492
Working capital......... 230 8,079
Total assets............ 15,123 21,517
Long-term debt, less
current maturities..... 10,361 335
Total shareholders'
equity................. 1,590 19,156
<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> <C> <C>
SELECTED OPERATING DATA:
Number of dental offices
(6).................... 4 18 34 18 34 34
Number of dentists
(6)(7)................. 6 24 49 24 53 53
Total net revenue per
office................. $ 74,990 $298,513 $336,661 $189,724 $252,455 $339,509(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 $7.50 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 $7.50 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
6
<PAGE>
with such integration efforts or with such acquired practices will not occur.
As the Company pursues its acquisition strategy, there can be no assurance
that the Company will be able successfully 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 results of operations and financial condition.
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
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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. The federal fraud and abuse statute prohibits,
among other things, the payment, offer, solicitation or receipt of any form of
remuneration, directly or indirectly, in cash or in kind to induce or in ex-
change for (i) the referral of a person for services reimbursable by Medicare
or Medicaid, or (ii) the purchasing, leasing, ordering
8
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or arranging for or recommending the purchase, lease or order of any item,
good, facility or service which is reimbursable under Medicare or Medicaid.
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 as-
surance, however, that the P.C.s will not have patients in the future covered
by these laws, or that the scope of these laws will not be expanded in the fu-
ture, and if expanded, such laws or interpretations thereunder could have a
material adverse effect on the Company's business, financial condition and op-
erating 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 the amount the Company may spend
in any calendar year to acquire dental practices. The Company may not be able
to obtain additional required capital on satisfactory terms, if at all. The
failure to raise the funds necessary to finance the expansion of the Company's
operations or the Company's other capital requirements could have a material
and adverse effect on the Company's ability to pursue its strategy and on its
business, financial condition and operating results. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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.
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The loss of the services of one or more members of the Company's senior man-
agement 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."
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
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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.
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 consolidated balance sheet were $8.9
million, representing 59% of the Company's total assets at that date. The Com-
pany expects the amount allocable to intangible assets on its balance sheet to
increase in the future in connection with additional acquisitions, which will
increase the Company's amortization expense. In the event of any sale or liq-
uidation of the Company or a portion of its assets, there can be no assurance
that the value of the Company's intangible assets will be realized. In addi-
tion, the Company continually evaluates whether events and circumstances have
occurred indicating that any portion of the remaining balance of the amount
allocable to the Company's intangible assets may not be recoverable. When fac-
tors indicate that the amount allocable to the Company's intangible 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 assets could
have a material adverse effect on the Company's business, financial condition
and operating results. See "Pro Forma Consolidated Financial Information."
POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY
In recent years, dentists have become subject to an increasing number of
lawsuits alleging malpractice and related legal theories. Some of these law-
suits involve large claims and significant defense costs. Any suits involving
the Company or dentists at the Offices, if successful, could result in sub-
stantial damage awards that may exceed the limits of the Company's insurance
coverage. The Company provides practice management services; it does not en-
gage in the practice of dentistry or control the practice of dentistry by the
dentists or their
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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 pro-
vides 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 governmental agen-
cies, 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 condition
and operating results. See "Business -- Insurance."
POTENTIAL CONFLICTS OF INTEREST OF THE COMPANY'S PRESIDENT RELATING TO THE
P.C.S
The Company's President, Mark Birner, D.D.S., is the sole owner of 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. Permitted covenants not to com-
pete are enforceable in Colorado only to the extent their terms are reasonable
in both duration and geographic scope. New Mexico courts have enforced cove-
nants not to compete if their terms are found to be reasonable. It is thus un-
certain whether a court will enforce a covenant not to compete in those
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<PAGE>
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 cove-
nant 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 de-
pends 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 unenforceable could
have a material adverse impact on the Company. See "Business -- Affiliation
Model -- Employment Agreements." In addition, the Company is a party to vari-
ous 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 -- Affil-
iation 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 $7.7 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. Accordingly,
the Company's management will retain broad discretion as to the allocation of
a substantial portion of the net proceeds from this Offering. See "Use of Pro-
ceeds."
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 31.4% 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 $5.98 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 2,100,000 shares of Common Stock offered hereby, except as
provided below, approximately 4,550,155 shares (including 1,366,958 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 591,040 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 430,199 shares of the Common Stock. An additional 455,816
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. The Representative has required that 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,
enter into a lock-up agreement (each, a "Lock-up Agreement") with the Under-
writers pursuant to which they will agree not to 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 Joseph
Charles & Associates, Inc., on behalf of the Underwriters. In addition, the
Representative has required that the holder of an additional 77,025 shares of
Common Stock agree not to sell, transfer or assign any of his shares for a pe-
riod of 90 days after the date of this Prospectus. 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 1,833,816 shares of
Common Stock offered by the Company hereby are estimated to be $11.4 million
($12.2 million if the Underwriters' over-allotment option is exercised in
full), based on the assumed initial public offering price of $7.50 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 $7.7
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 1,833,816 shares of Common Stock be-
ing offered by the Company hereby at the assumed initial public offering price
of $7.50 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 6,662,993 shares outstanding, pro forma
as adjusted (1).............................. 1,850 8,321 19,721
Accumulated deficit........................... (260) (565) (565)
------- ------- -------
Total shareholders' equity.................. 1,590 7,756 19,156
------- ------- -------
Total capitalization...................... $12,604 $11,990 $19,640
======= ======= =======
</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,
(iii) 381,041 shares of Common Stock reserved for issuance upon exercise
of warrants outstanding as of September 30, 1997, and (iv) 210,000 shares
of Common Stock issuable upon exercise of the Representative's Option. See
"Management," "Shares Eligible for Future Sale" and "Underwriting."
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 ($1.3 mil-
lion), or ($.26) per share. "Pro forma net tangible book value" per share rep-
resents the pro forma tangible net worth (total tangible assets less total li-
abilities, after giving effect to the Conversion of Debentures) of the Company
before giving effect to the sale of the Common Stock offered hereby. After
giving effect to the sale by the Company of the 1,833,816 shares of Common
Stock offered hereby (at the assumed initial public offering price of $7.50
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 approximately $10.1 million or $1.52 per share. This represents an
immediate increase in net tangible book value of $1.78 per share to the exist-
ing shareholders and an immediate reduction in net tangible book value of
$5.98 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 ta-
ble illustrates the dilution described above on a per share basis.
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price........................ $7.50
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.......................................... $ 1.78
------
Pro forma net tangible book value after the Offering......... $1.52
-----
Dilution in net tangible book value to new investors......... $5.98
===== ===
</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 in-
vestors purchasing the shares offered by the Company hereby at the assumed
initial public offering price of $7.50 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 48.0% $ 2,059,264 9.1% $ .64
Conversion of Debentures... 1,633,142 24.5 6,780,000 30.0 4.15
New investors.............. 1,833,816 27.5 13,753,620 60.9 7.50
--------- ----- ----------- ----- -----
Total.................... 6,662,993 100.0% $22,592,884 100.0% $3.39
========= ===== =========== ===== =====
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
(i) any outstanding stock options or warrants after September 30, 1997, (ii)
the Underwriters' over-allotment option, or (iii) the Representative's 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
$7.50 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.................... $10,491,428 $798,001 $3,671,760 $ -- $ -- $ -- $14,961,189
Less -- amounts retained
by dental offices...... 2,647,359 -- -- 1,478,629 (d) -- -- 4,157,266
31,278 (c)
----------- -------- ---------- ---------- -------- -------- -----------
Net revenue............ 7,844,069 798,001 3,671,760 (1,509,907) -- -- 10,803,923
Management service fee
revenue................ 739,390 -- -- -- -- -- 739,390
----------- -------- ---------- ---------- -------- -------- -----------
Total 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......... 874,824 -- -- 352,715(d) -- -- 1,227,539
Acquisition costs..... 252,234 -- -- -- -- -- 252,234
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 7,101,061
</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.... $7,189,300 $1,977,466 $498,238 $2,052,260 $4,115,851 $ -- $ -- $ --
Less -- amounts
retained by
dental offices.. 1,882,005 -- -- -- -- 2,492,763 (d) -- --
77,812 (c)
---------- ---------- -------- ---------- ---------- ----------- -------- --------
Net revenue..... 5,307,295 1,977,466 498,238 2,052,260 4,115,851 (2,570,575) -- --
Management
service fee
revenue......... 65,934 -- -- -- -- -- -- --
---------- ---------- -------- ---------- ---------- ----------- -------- --------
Total 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.... $15,833,115
Less -- amounts
retained by
dental offices.. 4,452,580
------------
Net revenue..... 11,380,535
Management
service fee
revenue......... 65,934
------------
Total 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..... 6,258,871
</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
historical revenue and expenses of the Early 1997 Acquisitions made during
the first nine months of 1997 for that portion of 1997 preceding the
Offices' affiliation with the Company as if these acquisitions had
occurred on January 1, 1996. The 1997 Acquisitions columns also reflect
the historical revenue and expenses of the Late 1997 Acquisitions made in
August 1997, as if these acquisitions had been made on January 1, 1996.
The Gentle Dental Acquisition column reflects the historical revenue and
expenses of this acquisition as if the acquisition had been made on
January 1, 1996.
(b) In the pro forma consolidated statement of income for the year ended
December 31, 1996, the 1996 Acquisitions columns present the historical
revenue and expenses of the 1996 Acquisitions for that portion of 1996
preceding 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) In connection with the acquisition of Offices, existing agreements or
arrangements for management fees, compensation to dentists and, in some
cases, occupancy are cancelled and replaced with new agreements. These new
agreements result in reduced expenses in certain instances and increased
expenses in other instances. The impact and the related adjustments
resulting from the application of the new agreements entered into at the
time of acquisitions, as if all such agreements had been 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 are summarized below.
These changes in expense 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 the elimination
of management fees which were paid
pursuant to a contract that was terminated
on acquisition............................ $ (93,186) $ --
Reduction in occupancy costs due to
execution of new leases with more
favorable terms for office space on
acquisition............................... $(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) $11,400,000 $ 8,491,524
(3,750,000)
Other current assets.... 2,074,628 -- (466,442) 1,608,186
----------- ----------- ----------- -----------
Total current assets.... 3,397,502 (481,350) 7,183,558 10,099,710
----------- ----------- ----------- -----------
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) $ 7,183,558 $21,516,927
=========== =========== =========== ===========
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 14,253,620 22,575,205
(2,853,620) (2,853,620)
Accumulated (deficit)
earnings................ (260,123) (305,100) -- (565,223)
----------- ----------- ----------- -----------
Total shareholders'
equity................. 1,589,536 6,166,826 11,400,000 19,156,362
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity... $15,122,793 $ (789,424) $ 7,183,558 $21,516,927
=========== =========== =========== ===========
</TABLE>
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 1,833,816 shares of
Common Stock in the Offering at an assumed initial public offering price
of $7.50 per share, estimated to be approximately $11,400,000 (after de-
ducting estimated underwriting discount and expenses of $2,353,620 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. Proceeds and offering costs also include $500,000 for the esti-
mated value of the Representative's Option granted in connection with the
Offering.
24
<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 nine months ended
September 30, 1996 and 1997 included elsewhere in this Prospectus. The se-
lected data for 1994 and 1995 for the Company's predecessor have been derived
from financial statements of the predecessor that have been audited by Arthur
Andersen LLP, independent public accountants, which are included elsewhere in
this Prospectus. 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
ENDED
YEAR ENDED JANUARY 1, 1995 INCEPTION TO YEAR 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 $7,189 $4,555 $10,492
Less -- amounts retained
by dental offices...... 163 265 148 1,882 1,140 2,647
---- ------ ------ ------ ------ -------
Net revenue............. 529 757 300 5,307 3,415 7,845
Management service fee
revenue................ -- -- -- 66 -- 739
---- ------ ------ ------ ------ -------
Total 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
</TABLE>
25
<PAGE>
<TABLE>
<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
Total net revenue per office........ $176,405 $252,462 $ 74,990 $298,513 $189,724 $252,455
</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 per share for the nine months ended September 30,
1997 is $.07, giving effect to the portion of the use of proceeds from
375,000 common shares to be used to repay certain debt resulting in re-
duced interest expense of $32,333. For this calculation, weighted average
shares outstanding was 3,684,233 and net income was $267,743.
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
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto of the Company included elsewhere
in this Prospectus. This Prospectus contains forward-looking statements.
Discussions 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
Colorado and New Mexico staffed by 53 dentists. The Company has acquired 31
Offices (three of which were consolidated into existing Offices) and opened
six de novo Offices. Of the 31 acquired Offices, only three (the first three
practices, which were acquired from the Company's President, Mark Birner,
D.D.S.) were acquired from affiliates of the Company. The Company derives all
of its Revenue (as defined below) from its Management Agreements with the
P.C.s. In addition, the Company assumes 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 described 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 application of its dental practice management model
will improve operating performance. 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 (as defined below)
and operating profitability. The Company has achieved these results in Colo-
rado primarily through the development of a dense dental practice network and
the implementation of its dental practice management model. The Company's Rev-
enue increased from $448,000 in 1995 to $7.2 million for the year ended Decem-
ber 31, 1996 and was $10.5 million in the nine months ended September 30,
1997. Contribution from dental 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 $2.0
million for the nine months ended September 30, 1997. Contribution from dental
offices as a percentage of Revenue increased from (1.5)%
27
<PAGE>
for the year ended December 31, 1995 to 10.7% for the year ended December 31,
1996, and to 19.0% for the nine months ended September 30, 1997. Operating in-
come 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
$794,000 for the nine months ended September 30, 1997. The five de novo Of-
fices opened by the Company between January 8, 1996 and July 15, 1996 gener-
ated Revenue of $2.0 million during the nine months ended September 30, 1997,
and had contribution from dental offices of $377,000 during this period, rep-
resenting a contribution margin of 18.5%.
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. Management service fee revenue represents the revenue
earned by the Company for two Offices for which the Company has management
agreements, but does not have control. 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), den-
tal supplies, dental laboratory fees, occupancy costs, advertising and market-
ing, depreciation and amortization and general and administrative (including
office supplies, equipment leases, management information systems and other
expenses related to dental practice operations). The Company also incurs per-
sonnel and administrative expenses in connection with maintaining a corporate
function that provides management, administrative, marketing, development and
professional 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. The Company has made, and in-
tends to make in the future, loans to P.C.s in both Colorado and New Mexico to
fund their acquisition of dental assets from third parties in order to comply
with the laws of such states. Bonuses payable to dentists based on the operat-
ing performance of the P.C.s take into account principal and interest payments
made on the loans, resulting in the dentists sharing with the Company the eco-
nomic benefits or detriments associated with assets acquired by the P.C.s us-
ing such loans. Because the Company consolidates the financial statements of
the P.C.s with its financial statements, these loans are eliminated in consol-
idation.
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
28
<PAGE>
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 ac-
counts, professional courtesies and other activities that do not generate a
collectible fee. The Company's costs include all direct and indirect costs,
overhead and expenses relating to the Company's provision of management serv-
ices at each Office under a Management Agreement, including (i) salaries, bene-
fits and other direct costs of employees of the Company that work at the Of-
fice, including dental assistants, (ii) direct costs of all employees or con-
sultants of the Company who provide services to or in connection with the Of-
fice, (iii) utilities, janitorial, laboratory, supplies, advertising and other
expenses incurred by the Company in carrying out its obligations under the Man-
agement Agreement, (iv) depreciation expense associated with the P.C.'s assets
and the assets of the Company used at the Office, and the amortization of in-
tangible asset value as a result of any acquisition or merger of another dental
practice relating to the Office, (v) interest expense on indebtedness incurred
by the Company to finance any of its obligations under the Management Agree-
ment, (vi) malpractice insurance expenses, lease expenses and dentist recruit-
ment expenses, (vii) personal property and other taxes assessed against the
Company's or the P.C.'s assets used in connection with the operation of the Of-
fice,
(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 con-
sists of Revenue of the P.C.s received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care Revenue consists of Revenue 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 organi-
zation 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 obligated to provide
them. This arrangement shifts the risk of utilization of these services to the
dental group practice providing the dental services. Because the Company as-
sumes responsibility under the Management Agreements for all aspects of the op-
eration of the dental practices (other than the practice of dentistry) and thus
bears all costs of the P.C.s associated with the provision of dental services
at the Office (other than compensation and benefits of dentists and hygien-
ists), 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 proce-
dures. In contrast, under traditional indemnity insurance arrangements, the in-
surance company pays whatever reasonable charges are billed by the dental group
practice for the dental services provided. See "Business -- 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 increase
facility utilization and dentist productivity. From the year ended December 31,
1996 to the nine months ended September 30, 1997, the Company has been able to
expand its fee-for-service business relative to its total Revenue. See "Busi-
ness -- Payor Mix." For the year ended December 31, 1996, fee-for-service Reve-
nue ac-
29
<PAGE>
counted for 51.6% of the Company's Revenue while in the nine months ended Sep-
tember 30, 1997 fee-for-service Revenue increased to 52.2% of Revenue.
The relative percentage of the Company's Revenue derived from fee-for-service
business and capitated managed dental care contracts varies from market to mar-
ket depending on the availability of capitated managed dental care contracts in
any particular market and the Company's ability to negotiate favorable 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 den-
tal 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 compa-
rable to the Company's results in the Colorado market.
30
<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.
Based on preliminary information, the Company believes that Total Net Reve-
nue and net loss will be approximately $3,975,000 and ($250,000), respectively
for the three months ended December 31, 1997. The increased estimated revenue
during the quarter ended December 31, 1997 reflects the revenue from the ac-
quisition of eleven practices, including nine practices acquired in the Gentle
Dental Acquisition on September 8, 1997. The estimated net loss is a result of
increased interest expense and amortization costs related to the eleven prac-
tice acquisitions and the fact that the Company has not implemented its dental
practice management model in these practice acquisitions. See "Business --
Dental Practice Management Model". As of January 1998, the Company has con-
verted the nine practices acquired in the Gentle Dental Acquisition to its
management information system and expects to have its dental practice manage-
ment model fully implemented during the first quarter of 1998. The above esti-
mated Total Net Revenue and net loss are preliminary and subject to adjust-
ments.
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 office revenue, net.. 149.4% 133.8% 133.4% 122.2%
Less -- amounts retained by
dental offices............. 49.4 35.0 33.4 30.8
----- ----- ----- -----
Net revenue................. 100.0 98.8 100.0 91.4
Management service fee
revenue.................... -- 1.2 -- 8.6
----- ----- ----- -----
Total net revenue........... 100.0 100.0 100.0 100.0
Direct expenses:
Clinical salaries and
benefits................. 41.9 32.5 33.3 35.3
Dental supplies........... 14.1 14.5 8.5 8.8
Laboratory fees........... 9.4 9.0 8.7 9.3
Occupancy................. 6.5 5.9 7.2 8.4
Advertising and
marketing................ 11.5 5.2 4.3 3.3
Depreciation and
amortization............. 4.6 6.0 5.8 4.6
General and
administrative........... 14.2 12.5 13.2 7.2
----- ----- ----- -----
102.2 85.6 81.0 76.9
----- ----- ----- -----
Contribution from dental
offices.................... (2.2) 14.4 19.0 23.1
Corporate expenses --
General and
administrative........... 49.6 13.4 17.9 10.2
Acquisition costs......... -- -- -- 2.9
Depreciation and
amortization............. 1.3 1.1 1.0 0.8
----- ----- ----- -----
Operating (loss) income..... (53.1) (0.1) 0.1 9.2
Interest expense, net....... (0.3) (6.1) (4.7) (6.4)
----- ----- ----- -----
(Loss) income before income
taxes...................... (53.4) (6.2) (4.6) 2.8
Income taxes................ 0.0 0.0 -- 0.1
----- ----- ----- -----
Net (loss) income........... (53.4)% (6.2)% (4.6)% 2.7%
===== ===== ===== =====
</TABLE>
- --------
(1) The Company was formed on May 17, 1995, and had no substantial operations
until October 1, 1995.
31
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Dental office revenue, net. Dental office revenue, net increased from $4.6
million for the nine months ended September 30, 1996 to $10.5 million in the
comparable period in 1997, an increase of $5.9 million, or 130.3%. Eleven
practices acquired between May 30, 1996 and May 1, 1997 contributed $3.8 mil-
lion of the increase, including $2.7 million from the Family Dental Acquisi-
tion and $1.1 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 total of $1.2 million of the increase was attrib-
utable to five de novo Offices opened by the Company between January 1996 and
July 1996. These de novo Offices 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 million in 1996 to $2.4 million in 1997.
Amounts retained by dental offices. Amounts retained by dental offices in-
creased from $1.1 million for the first nine months of 1996 to $2.6 million
for the comparable period in 1997, an increase of $1.5 million or 132.2%. This
increase was due to the increased number of Offices and the corresponding ad-
ditional dentists and hygienists. As a percentage of Total Net Revenue,
amounts retained by dental offices decreased from 33.4% in 1996 to 30.8% in
1997 due to better personnel utilization and patient scheduling efficiencies
resulting from the Company's dental practice management model.
Management service fee revenue. Management service fee revenue of $739,390
for the nine months ended September 30, 1997 was attributable to management
agreements for two Offices acquired in the latter part of 1996 and April 1997,
respectively.
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 Total Net Revenue, clinical
salaries and benefits increased from 33.3% in 1996 to 35.3% 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 Total Net
Revenue generated at the Offices. As a percentage of Total Net Revenue, dental
supplies increased marginally from 8.5% in 1996 to 8.8% in 1997. This increase
as a percentage of Total Net Revenue is due to the need for supplies associ-
ated with the initiation of specialty services during the nine months ended
September 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 Total Net Revenue
generated at the Offices. As a percentage of Total Net Revenue, laboratory
fees increased from 8.7% in 1996 to 9.3% in 1997.
Occupancy. Occupancy increased from $245,523 in the first nine months of
1996 to $718,660 in the comparable period in 1997, an increase of $473,137 or
192.7%. 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 Septem-
ber 30, 1996. As a percentage of Total Net Revenue, occupancy expense in-
creased from 7.2% in 1996 to 8.4% 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 Total Net Revenue, advertising and marketing decreased from 4.3%
in 1996 to 3.3% in 1997.
32
<PAGE>
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 Total Net Revenue, depreciation and amortization decreased from 5.8% in
1996 to 4.6% in 1997.
General and administrative. General and administrative, which is attribut-
able to the Offices, increased from $449,497 in the nine months ended Septem-
ber 30, 1996 to $616,389 in the comparable period in 1997, an increase of
$166,892 or 37.1%. 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 Total Net Revenue, general and administrative ex-
penses decreased from 13.2% in 1996 to 7.2% in 1997, and this decrease was due
primarily to necessary high start up costs relative to revenues at the de novo
Offices during 1996, such as office and computer supplies, insurance and the
cost of leased equipment.
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 Total Net Revenue, contribution
from dental offices increased from 19.0% in 1996 to 23.1% 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
Total Net Revenue, corporate expense -- general and administrative decreased
from 17.9% in 1996 to 10.2% in 1997.
Corporate expenses -- acquisition costs. During the nine months ended Sep-
tember 30, 1997, the Company 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.
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 Total Net Revenue, corporate expenses
- -- depreciation and amortization decreased from 1.0% in 1996 to 0.8% in 1997.
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 Total Net Rev-
enue, operating income increased from 0.1% in 1996 to 9.2% 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 9.0% convertible debentures issued in May 1996 and December
1996. As a percentage of Total Net Revenue, interest expense, net increased
from 4.7% in 1996 to 6.4% 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 Total Net Revenue, net (loss) income
increased from a loss of (4.6%) in 1996 to 2.7% in 1997.
33
<PAGE>
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. Dental office revenue, net increased from
$447,995 in 1995 to $7.2 million in 1996, an increase of $6.7 million. The Com-
pany acquired its first three Offices on October 1, 1995 and acquired its
fourth Office on November 17, 1995 and, therefore, had limited operations dur-
ing 1995. These four Offices contributed $2.7 million of Revenue in 1996 and
acquisitions made by the Company during 1996 contributed $3.2 million. A sub-
stantial part of the $3.2 million revenue contribution was from the seven Of-
fices in the Family Dental Acquisition. The Company's five de novo Offices de-
veloped 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 $1.7
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 Total Net Reve-
nue, amounts retained by dental offices decreased from 49.4% in 1995 to 35.0%
in 1996 due to better personnel utilization and patient scheduling efficiencies
resulting from the Company's dental practice management model.
Management service fee revenue. Management service fee revenue of $65,934 for
the year ended December 31, 1996 was attributable to a management agreement
with one Office acquired in the latter part of 1996.
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 Total Net
Revenue, clinical salaries and benefits decreased from 41.9% in 1995 to 32.5%
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 Total Net Revenue gener-
ated at the Offices. As a percentage of Total Net Revenue, dental supplies in-
creased from 14.1% in 1996 to 14.5% in 1997. Dental supplies as a percentage of
Total Net 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 Total
Net Revenue generated at the Offices. As a percentage of Total Net Revenue,
laboratory fees decreased slightly from 9.4% in 1995 to 9.0% 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 Offices
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 Total Net
Revenue, occupancy expense decreased slightly from 6.5% in 1995 to 5.9% 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 conducted
an extensive direct mail marketing campaign during the opening of each of its
de novo Offices in 1996. As a percentage of Total Net Revenue, advertising and
marketing decreased from 11.5% in 1995 to 5.2% in 1996.
34
<PAGE>
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 Total Net Revenue, depreciation and amortization in-
creased from 4.6% in 1995 to 6.0% 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 re-
sult of the full year of operations during 1996 and the increased number of Of-
fices, as well as certain Offices which were only open for part of the year in
1995. Additionally, the Company expanded its corporate infrastructure to manage
the growth and a portion of those costs are passed on to the Offices. As a per-
centage of Total Net Revenue, general and administrative expenses decreased
from 14.2% in 1995 to 12.5% 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 Total Net Revenue, contribution
from dental offices increased from (2.2)% in 1995 to 14.4% 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 dur-
ing 1996 and expansion of the Company's infrastructure to manage growth, pri-
marily through the addition of personnel. As a percentage of Total Net Revenue,
corporate expenses -- general and administrative decreased from 49.6% in 1995
to 13.4% in 1996. During 1995, the Company had certain start-up costs prior to
generating revenue on October 1, 1995 which contributed to the higher corporate
expense -- general and administrative as a percentage of revenue.
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 Total Net Revenue, corpo-
rate expenses -- depreciation and amortization decreased from 1.3% in 1995 to
1.1% 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 Total Net Revenue, operating (loss)
income increased from (53.1)% 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 re-
sult of interest expense and financing costs associated with the Company's $6.8
million principal amount 9.0% convertible debentures issued in May 1996 and De-
cember 1996. As a percentage of Total Net Revenue, interest expense, net in-
creased from 0.3% to 6.1% 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.
35
<PAGE>
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, in-
cluding $70,794 for a de novo Office. These capital expenditures were partially
offset by $200,058 of cash obtained from the acquisition of existing dental of-
fices. In 1996, $3.7 million was utilized for acquisitions and $1.0 million was
invested in the purchase of additional property and equipment, including
$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, partially
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 Septem-
ber 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 Acquisition. 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 common stock. Net cash provided by
financing activities in 1996 totaled $5.7 million. This was comprised of $6.6
million from the private sale of convertible subordinated debentures and
$100,000 in net borrowings from the Credit Facility, partially offset by
$579,285 used for the repayment of long-term debt and $401,716 used for the
payment of subordinated debenture issuance and other financing costs. Net cash
provided by financing activities in 1995 totaled $1.8 million. This was com-
prised of $1.8 million from the private sale of Common Stock, which was par-
tially offset by $19,647 used for the repayment of long-term debt.
Under the Company's Credit Facility, the Company may borrow up to $2.8 mil-
lion, including a line of credit up to $800,000 for working capital needs with
such borrowings based on eligible accounts receivable as defined in the Credit
Facility and including a $2.0 million term loan. At September 30, 1997, the
Company had total outstanding borrowings of $2.4 million under the Credit Fa-
cility. 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 is
secured by a lien on the Company's accounts receivable and its Management
Agreements. Additionally, Fred Birner, Mark Birner, D.D.S. and Dennis Genty
each have provided personal guarantees of the Credit Facility up to an aggre-
gate amount of $600,000. The Company has entered into an amendment to the
Credit Facility, which amendment will be effective upon the satisfaction of
certain conditions including the consummation of the Offering. Pursuant to the
amended Credit Facility, which will have a three-year term, (i) the line of
credit will be increased from $800,000 to $10.0 million, (ii) the personal
guarantees will be eliminated, (iii) advances will bear interest at the lend-
er's base rate or at the applicable LIBOR rate plus 2.25%, at the Company's op-
tion, and (iv) the Company will be obligated to pay an annual facility fee of
.25% of the average unused amount of the line of credit during the previous
full calender quarter. Borrowings are limited to an availability formula based
on the Company's adjusted EBITDA. The Credit Facility prohibits the payment of
dividends and other distributions to shareholders, restricts or prohibits the
Company from incurring indebtedness, incurring liens, disposing of assets, mak-
ing investments or making acquisitions, and requires the Company to maintain
certain financial ratios on an ongoing basis.
The Company currently has outstanding approximately $6.8 million in principal
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 Offer-
ing, in connection with the Conversion of Debentures. The Company also has out-
standing a note in the principal amount of $1.4 million issued in connection
with the Gentle Dental Acquisition,
36
<PAGE>
which bears interest at 8.0%. The Company plans to repay this note from the
proceeds of the Offering. The Company also has outstanding indebtedness of ap-
proximately $400,000 represented by notes issued in connection with various
practice acquisitions, each of which bears interest at 8.0%. The Company's cur-
rent 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 develop-
ments. 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 outstand-
ing indebtedness under the Credit Facility and to repay the $1.4 million note
issued in connection with the Gentle Dental Acquisition. The Company believes
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 ac-
quisitions for at least the next 12 months. In the event the Company is not
able to successfully negotiate a new Credit Facility at the end of its term or
identifies and completes future acquisitions more quickly than it currently an-
ticipates, the Company's current sources of liquidity may not be adequate. In
addition, in order to meet its long-term liquidity needs the Company may issue
additional equity and debt securities, subject to market and other conditions.
There can be no 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 abil-
ity to pursue its strategy and could negatively affect its operations in future
periods. See "Risk Factors -- Need for Additional Capital; Uncertainty of Addi-
tional Financing."
37
<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.
38
<PAGE>
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 and operating performance. With
30 Offices in the Colorado market, the Company has built successful, geographi-
cally 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 experience
with multiple expansion methods allows it to capitalize on the opportunities
presented by a market and represents a significant competitive advantage.
Enhance Operating Performance. The Company enhances the operating performance
of its Offices through the implementation and application of its dental prac-
tice management model. Key components of this model include providing a desig-
nated managing dentist with economic incentives to improve Office operating
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 spe-
cialty services to its patients. This enables the Company to capture revenue
from specialty services that would otherwise be lost to non-affiliated provid-
ers. Specialty services typically are provided on a fee-for-service basis 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 practic-
es. The Company also has developed six de novo Offices. Therefore, the Company
is not dependent on any particular expansion strategy and can capitalize on the
opportunities presented by a market.
39
<PAGE>
The following table sets forth the increase in the number of Offices managed
by the Company from 1995 to the date of this Prospectus, including the number
of de novo Offices and acquired Offices in each such year:
<TABLE>
<CAPTION>
1995 (1) 1996 1997
-------- ---- ----
<S> <C> <C> <C>
Offices at beginning of the period........................... 0 4 18
De novo Offices.............................................. 0 5 1
Acquired Offices (2)......................................... 4 9 15
--- --- ---
Offices at end of the period (3)............................. 4 18 34
=== === ===
</TABLE>
- --------
(1) From October 1, 1995 through December 31, 1995.
(2) For 1996, does not include three practices that were acquired and consoli-
dated with existing Offices.
(3) The number of Offices managed by the Company has not increased between De-
cember 31, 1997 and the date of this Prospectus.
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 employ 13 dentists and gener-
ated $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
40
<PAGE>
pioneer in the negotiation of capitated managed dental care contracts in Colo-
rado. Dr. Abramowitz and his management team developed the Gentle Dental net-
work beginning in 1992, and they have become part of the Company's management
team. With the Gentle Dental Acquisition, the Company has 30 Offices in Colora-
do, 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 Com-
pany has acquired three solo dental practices in Albuquerque, New Mexico. The
Company will seek to increase its density further in this market through acqui-
sitions 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 operations
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 Of-
fices were de novo developments. In addition, in August 1997, the Company
opened a de novo Office in Albuquerque, New Mexico. The Company generally lo-
cates de novo Offices in areas in which there is significant population growth
and/or population turnover. All of the Company's current de novo Offices are
located in supermarket-anchored shopping centers. The Company seeks prime re-
tail locations for its de novo Offices, generally located in high-growth subur-
ban areas of the market. These locations provide high visibility of the
Company's signage and easy walk-in access for its customers. Historically, 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, pay-
roll, accounting, and marketing. This gives the managing dentists the ability
to focus primarily on providing high-quality dental care to their patients. 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 managing dentist de-
termines which personnel, including dental assistants and hygienists, to hire
or terminate, and exercises his or her own clinical judgment in matters of pa-
tient care. In addition, managing dentists are given an economic incentive to
improve the operating performance of their Offices, in the form of a bonus
based upon the operating performance of the Office. Each managing dentist also
has been granted stock options in the Company that typically 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 working with a
managing dentist. Depending on his or her performance and abilities, an associ-
ate dentist may be given the opportunity to become a managing dentist in an-
other of the Offices.
41
<PAGE>
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 ac-
quired 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>
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.
42
<PAGE>
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 patient interaction,
scheduling, use of the computer system, office procedures and protocol, and
third-party payment arrangements. Depending on a new employee's position and
experience, employment with the Company begins with three to five days of for-
mal training. The Company encourages employees to attend continuing
43
<PAGE>
education seminars. In addition, the field representatives have monthly meet-
ings with administrative staff to review pertinent and timely topics and gener-
ate ideas that can be shared with all Offices. Management believes the training
program the Company has established and the on-going monthly meetings with em-
ployees have contributed to the improvement in operating performance of its Of-
fices.
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 per-
sonnel. Staffing at de novo Offices typically consists of one dentist, one den-
tal assistant and one front office person. As the patient base builds at an Of-
fice, 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 Office
operating performance. As part of its acquisition integration process, the Com-
pany intends to convert the Offices acquired in the Gentle Dental Acquisition
to its management information system. The Company has installed a computer sys-
tem which enables it to link its headquarters on-line with each of its Offices.
This system allows the Company to monitor the Offices by obtaining real-time
data relating to patient and insurance information, treatment plans, schedul-
ing, revenues and collections. In addition, various month-end management re-
ports 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 Of-
fices to make periodic operating adjustments which help improve results. In ad-
dition, the Company uses the information system to provide data for case man-
agement.
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 in-
creasing 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 prom-
inently displayed in an attractive sign at each Office. The Company also util-
izes Yellow Pages advertisements, direct mail campaigns and other forms of ad-
vertising to highlight the Office's high-quality dental care and customer-ori-
ented service. The Company's six de novo Offices are all located in supermar-
ket-anchored shopping centers and have consistent design, layout and color.
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
44
<PAGE>
to new patient referrals 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 re-
quire dentists to undergo annual training. The dentists and hygienists practic-
ing at the Offices can obtain some of the required continuing education train-
ing 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 sup-
ply 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 supplies are
obtained by the Company as directed by the Offices, and administrative supplies
are purchased by the Company and distributed on an as-needed basis to each Of-
fice, 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 dental
care business, capitated managed dental care business serves to increase facil-
ity 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 envi-
ronment 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 benefits
provided and plan design.
45
<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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
PAYOR TYPE 1996 1997
- ---------- ------------ -----------------
<S> <C> <C>
Fee for service (1).............................. 51.6% 52.2%
Managed dental care
Capitation..................................... 20.4 20.3
Co-payment..................................... 28.0 27.5
----- -----
Total........................................ 100.0% 100.0%
===== =====
</TABLE>
- --------
(1) Includes revenue from indemnity dental plans, preferred provider plans and
direct payments by patients not covered by any third-party payment ar-
rangements.
During the fiscal year ended December 31, 1996, approximately 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 nine months ended September 30, 1997,
Prudential and PacifiCare were responsible for 12.6% and 10.9%, 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.
46
<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 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 accounting services, and (x) negotiating on behalf of the P.C.s with man-
aged 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 hygien-
ists, (iii) maintaining proper patient records, and (iv) cooperating in the ob-
taining of professional liability insurance. The Company has made, and intends
to make in the future, loans to P.C.s in both Colorado and New Mexico to fund
their acquisition of dental assets from third parties in order to comply with
the laws of such states. Bonuses payable to dentists based on the operating
performance of the P.C.s take into account principal and interest payments made
on the loans, resulting in the dentists sharing with the Company the economic
benefits or detriments associated with assets acquired by the P.C.s using such
loans. Because the Company consolidates the financial statements of the P.C.s
with its financial statements, these loans are eliminated in consolidation.
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 employed
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 uncol-
lectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at the Offices under the Management Agreements, including (i) sala-
ries, benefits and other direct costs of employees of the Company that work at
the Office, including dental assistants, (ii) direct costs of all employees or
consultants of the Company who provide services to or in connection with the
Office, (iii) utilities, janitorial, laboratory, supplies, advertising 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 amortization
of intangible asset value as a result of any acquisition or merger of another
dental practice relating to the Office, (v) interest expense on indebtedness
incurred by the Company to finance any of its obligations under the Management
Agreement, (vi) malpractice insurance expenses, lease expenses and dentist re-
cruitment expenses, (vii) personal property and other taxes assessed against
the Company's or the P.C.'s assets used in connection with the operation 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 ex-
penses 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 serv-
ices 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 expira-
tion 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 Offices
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."
47
<PAGE>
EMPLOYMENT AGREEMENTS
Most dentists practicing at the Offices have entered into employment agree-
ments or independent contractor agreements with the P.C.s, the majority of such
agreements are terminable without cause by either party upon two to seven days'
notice. Some of the employment agreements for managing dentists 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 employ-
ment 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 num-
ber of miles from the relevant Office, and restrict solicitation of patients
and employees of the Offices. Managing dentists receive compensation based upon
a specified amount per hour worked or a percentage of collections attributable
to their work, and a bonus based upon the operating performance of the Office.
Associate dentists are compensated based upon a specified amount per hour
worked, and a potential for bonuses in certain situations. Specialists are com-
pensated 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 competitive.
In this regard, the Company expects that the provision of multi-specialty den-
tal services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are oper-
ating in its markets, including Valley Forge Dental Associates, Inc. Dentalco,
Inc. and Dental Health Clinics of America. Companies with dental practice man-
agement businesses similar to that of the Company which currently operate in
other parts of the country, may begin targeting the Company's existing markets
for expansion. Such competitors may have greater financial resources or other-
wise enjoy competitive advantages which may make it difficult for the Company
to compete against them or to acquire additional Offices on terms acceptable to
the Company. As the Company seeks to expand its operations into new 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 oper-
ates. The Company believes it competes with other providers of dental and spe-
cialty services on the basis of factors such as brand name recognition, conve-
nience, 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 re-
cruitment of general dentists, specialists, hygienists and other personnel. If
the availability of such dentists, specialists, hygienists and other personnel
begins to decline in the Company's markets, it may become more difficult to at-
tract qualified dentists, specialists, hygienists and other personnel 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 regulations
of all states in which the Company operates impact the Company's operations but
do not currently materially restrict the Company's operations in those states.
In addition, state and federal laws regulate health maintenance organizations
and other managed care organizations for which dentists may be providers. In
connection with its operations in existing markets and expansion into new mar-
kets, the Company may become subject to additional laws, regulations and inter-
pretations 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
48
<PAGE>
ability of the Company to operate profitably will depend in part upon the abil-
ity of the Company and the P.C.s to operate in compliance with applicable
healthcare regulations.
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 company or lim-
ited liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services. Under the Management Agreements,
the P.C.s control all clinical aspects of the practice of dentistry and the
provision of dental services at the Offices, including the exercise of indepen-
dent 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 inter-
fere 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 den-
tal 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 ad-
vertisements to be in the name of the dentist. A number of states, including
Colorado, also regulate the content of advertisements of dental services. In
addition, Colorado, New Mexico, and many other states impose limits on the
tasks that may be delegated by dentists to hygienists and dental assistants.
Some states require entities designated as "clinics" to be 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 authori-
ties 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-splitting"
by dentists with any party except other dentists in the same professional cor-
poration 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 re-
ferring a patient or otherwise generating business, and not to prohibit payment
of reasonable compensation for facilities and services (other than the genera-
tion of referrals), even if the payment is based on a percentage of the prac-
tice'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 avail-
able. As the P.C.s contract with third-party payors, on a capitation or other
basis under which the relevant P.C. assumes financial risk, the P.C.s may be-
come 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 in-
surance, 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. 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,
49
<PAGE>
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 patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or inter-
pretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
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 service,
(ii) the furnishing or arranging to furnish items or services, or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable un-
der 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 various govern-
ment 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-re-
ferral legislation known as Stark I (which applied only to clinical laboratory
referrals) by dramatically enlarging the list of services and investment inter-
est 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 immediate
family, from making referrals for certain "designated health services" to enti-
ties in which the physician or dentist has an ownership or investment interest,
or with which the physician or dentist has a compensation arrangement. "Desig-
nated health services" include, among other things, clinical laboratory servic-
es, radiology and other diagnostic services, radiation therapy services, dura-
ble 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 (un-
less such practice satisfies the "group practice" exception) 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 fol-
lowing prohibited referrals. Noncompliance with, or violation of Stark II can
result in exclusion from the Medicare and Medicaid programs and civil and crim-
inal penalties. The Company believes that its operations as presently conducted
do not pose a material risk under Stark II, primarily because the Company does
not provide "designated health services." Nevertheless, there can be no assur-
ance 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 associated
with certain managed care organizations that offer risk-based Medicare or Med-
icaid contracts. These regulations define physician incentive plans to include
any compensation arrangement (such as capitation arrangements, bonuses and
withholds) that may directly or indirectly have the effect of reducing or lim-
iting services furnished to patients covered by the Medicare or Medicaid pro-
grams. Direct monetary compensation which is paid by a managed care plan, den-
tal 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 fed-
eral government or, upon request, to a Medicare beneficiary or Medicaid recipi-
ent 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 pay-
ments made to directly induce the limitation or
50
<PAGE>
reduction of medically necessary 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 den-
tists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.
Federal regulations also allow state licensing boards to revoke or restrict a
dentist's license in the event such dentist defaults in the payment of a gov-
ernment-guaranteed student loan, and further allow the Medicare program to off-
set such overdue loan payments against Medicare income due to the defaulting
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 ben-
eficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain con-
ditions are met, such as acceptance by dentists of assignment of the payor re-
ceivable from patients, reassignment to the Company of the sole right to col-
lect the receivables, and written documentation of the assignment. In addition,
governmental payment programs such as Medicare and Medicaid limit reimbursement
for services provided by dental assistants and other ancillary personnel to
those services which were provided "incident to" a dentist's services. Under
these "incident to" rules, the Company may not be able to receive reimbursement
for services provided by certain members of the Company's Offices' 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 currently derive a significant
portion of its revenue under such programs.
The operations of the Offices are also subject to compliance with regulations
promulgated by the Occupational Safety and Health Administration ("OSHA"), re-
lating to such matters as heat sterilization of dental instruments and the use
of barrier techniques such as masks, goggles and gloves. The Company incurs ex-
penses on an ongoing basis relating to OSHA monitoring and compliance.
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 challenged
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 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 restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its opera-
tions to certain jurisdictions, structural and organizational modifications 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 required to cease
operations.
INSURANCE
The Company maintains general liability insurance for itself and provides for
professional liability insurance covering dentists, hygienists and dental as-
sistants at the Offices.
51
<PAGE>
LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps sub-
stantially, applicable insurance coverage.
TRADEMARK
The Company is the registered owner of the PERFECT TEETH(R) trademark in the
United States.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 208, Denver, Colorado, in approximately 4,685 square feet occupied under
a lease which expires in September 1998, and the Company believes this facility
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 believes the facilities at each of its Offices are adequate
for the current level of business at such Offices. The Company generally antic-
ipates leasing and developing new Offices 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 affili-
ated 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-den-
tal employees.
52
<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>
40 Chairman of the Board, Chief Executive
Frederic W.J. Birner Officer and Director
Mark A. Birner, D.D.S. 38 President and Director
40 Chief Financial Officer, Secretary,
Dennis N. Genty Treasurer and Director
James M. Ciccarelli 45 Director
43 Director (effective upon consummation of the
Steven M. Bathgate 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.
Steven M. Bathgate has been appointed as a director of the Company effective
upon consummation of the Offering. Mr. Bathgate has served as a principal of
Bathgate McColley Capital Corp LLC, an investment banking firm, since its for-
mation in January 1996. Mr. Bathgate held a number of positions from 1985 to
1996 at Cohig & Associates, Inc., an investment banking firm, including Chair-
man and Chief Executive Officer.
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
53
<PAGE>
Colorado Dental Director of the Company in connection with the Gentle Dental
Acquisition. Dr. Abramowitz has served on the Ethics Committee and in other po-
sitions with the Denver Dental Society. Dr. Abramowitz received his D.D.S. de-
gree 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 representative.
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 Septem-
ber 1991 to June 1993, Ms. Carwin was an office manager for a private orthodon-
tic 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
Steven Bathgate) 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 direc-
tor 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 independent
directors. Currently, the full Board of Directors is acting as the Compensation
Committee. The Compensation Committee determines officers' salaries and bonuses
and administers the grant of stock options and other awards pursuant to the Em-
ployee Plan and the Dental Center Plan. See "-- Executive Compensation," "--
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 Steven
Bathgate, 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 meetings. In Oc-
tober 1996, the Company entered into an agreement with James Ciccarelli, a di-
rector 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
54
<PAGE>
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 August 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 resigns as a director of the Com-
pany prior to August 1, 1998, all shares underlying 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 Company prior to August 1, 1998, the
shares of Common Stock underlying the warrant will vest in the ratio of the
number of months or portions of a month in which he served as a director of the
Company compared to a total of 24 months. If a "Change of Control," as such
term is defined in the Employee Plan, occurs while Mr. Ciccarelli is serving as
a member of the Board of Directors, all unvested shares of Common Stock granted
under the warrant will accelerate and become vested and fully exercisable. This
agreement also contains a confidentiality provision relating to proprietary in-
formation 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 compensa-
tion 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 Company.
See "Certain Transactions" for a description of transactions between the Com-
pany and members of the Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
During the fiscal year ended December 31, 1997, the only executive officer of
the Company that was paid a total salary and bonus exceeding $100,000 was Fred
Birner, the Company's Chairman of the Board and Chief Executive Officer (the
"Named Executive Officer"). The following table sets forth the compensation
paid by the Company to the Named Executive Officer for services rendered to the
Company during the fiscal year ended December 31, 1997.
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..... $ 110,185 -- 21,170 (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 12,000 shares of Common Stock granted on October 31, 1997 pur-
suant to the Employee Plan, with an exercise price of $9.90 per share and
(ii) conversion of a warrant to purchase 9,170 shares of Common Stock
awarded on June 30, 1997, with an exercise price of $6.00 per share.
55
<PAGE>
OPTION GRANTS
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to the Named Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(#) (1) FISCAL YEAR (2) ($/SH) (3) DATE 5% 10%
- ---- -------------- --------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Frederic W.J. Birner.... 12,000 7.6% $9.90 10/31/02 $19,038 $55,135
</TABLE>
- --------
(1) Represents an option to purchase shares of Common Stock granted on October
31, 1997, pursuant to the Employee Plan.
(2) Based on an aggregate of 158,000 shares subject to options granted to em-
ployees pursuant to the Employee Plan during the fiscal year ended December
31, 1997.
(3) Options were granted at an exercise price equal to 110% of 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 (five years) and is calculated by assuming that
the stock price on the date of grant as determined by the Board appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its
term for the appreciated price. The 5% and 10% assumed rates of apprecia-
tion are derived from the rules of the Securities and Exchange Commission
and do not represent the Company's estimate or projection of the future
Common Stock price.
OPTION EXERCISES AND HOLDINGS
The following table sets forth for the Named Executive Officer the number and
value of securities underlying unexercised in-the-money options held as of De-
cember 31, 1997. The Named Executive Officer did not exercise any options dur-
ing the fiscal year ended December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997
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, 1997 DECEMBER 31, 1997 (1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Frederic W.J. Birner........ 27,510 -- $181,566 --
</TABLE>
- --------
(1) There was no public trading market for the Common Stock at December 31,
1997. Accordingly, these values have been calculated based on the differ-
ence between the fair market value of the underlying securities at December
31, 1997 of $9.00 per share, as determined by the Company's Board of Direc-
tors, and the exercise price of $2.40 per share.
EMPLOYEE STOCK OPTION PLAN
The Employee Plan was adopted by the Board of Directors effective as of Octo-
ber 30, 1995, and was amended as of September 4, 1997. The Employee Plan has
been ratified and approved by the Company's shareholders. The number of shares
of Common Stock reserved for issuance under the Employee Plan is 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 employ-
ees, directors and consultants of the Company and its subsidiaries, who are re-
sponsible for the conduct and management of the Company's business or who are
involved in endeavors significant to the Company's success. The Employee Plan
provides for the grant of incentive stock options, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), to employ-
56
<PAGE>
ees (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 "Committee"), which determines recipients and
types of options to be granted, including the exercise price, the number of
shares, the grant dates, and the exercisability thereof.
The term of any stock option granted under the Employee Plan may not exceed
10 years. Shares subject to options that have expired or have otherwise termi-
nated without having been exercised in full shall again become available for
the grant of options under the Employee Plan. The exercise price of options
granted under the Employee Plan is determined by the Committee, provided that
the exercise price of a stock option cannot be less than 100% of the fair mar-
ket value of the shares subject to the option on the date of grant. Options
granted under the Employee Plan vest at the rate specified in the option agree-
ments, 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 during the
optionee's lifetime only by the optionee. Options granted to an optionee termi-
nate upon the earlier to occur of (i) the expiration date set forth in the op-
tion agreement, (ii) the termination of employment (or, in the case of direc-
tors or consultants, the termination of service), or (iii) the death or dis-
ability 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 following termina-
tion due to death or disability (unless such options expire sooner by their
terms). Subject to certain limitations, the Committee may extend the termina-
tion date of any stock option granted under the Employee Plan in its sole dis-
cretion.
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 to-
tal combined voting power of the Company or any affiliate of the Company, un-
less 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 option
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 Com-
mon 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 December 31, 1997, 208 shares of Common Stock had been issued upon the
exercise of options granted under the Employee Plan, options to purchase
306,513 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, unless
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 selected
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 Manage-
ment 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 adminis-
tered by the Committee, which determines recipients and types of options to be
granted, including the exercise price, the number of shares, the grant dates
and the exercisability thereof.
The term of any stock option granted under the Dental Center Plan may not ex-
ceed 10 years. Shares subject to options that have expired or have otherwise
terminated without having been exercised in full shall again
57
<PAGE>
become available for future grant under the Dental Center Plan. The exercise
price of options granted under the Dental Center Plan is determined by the Com-
mittee, 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 speci-
fied 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.
Options 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 termi-
nation 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 December 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 compensa-
tion 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 certain
limitations, the 401(k) Plan provides that the Company may, at its discretion,
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 earnings on these
contributions are fully vested at all times. Employee participants 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 ac-
count of long-term disability, (iii) the date employment terminates 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 ac-
count balances, except the balances in the Profit Sharing/Stock Bonus Contribu-
tions Account, in any one or more of the available funds, in percentages per-
mitted 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 until 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 Arti-
cles of 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
58
<PAGE>
violation of law; (iii) acts specified in Section 7-108-403 of the Colorado
Business Corporation Act relating to any unlawful 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 in-
demnification 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 expires in Oc-
tober 2002.
On September 24, 1997, pursuant to authority granted in the Company's Amended
and Restated Bylaws, the Company entered into indemnification agreements (the
"Indemnification Agreements") with its directors and executive officers. Sub-
ject to the terms and conditions of the Indemnification Agreements, the Company
shall indemnify and advance expenses to such directors and executive 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 Matters."
On July 15, 1997, James Ciccarelli, a director and consultant of the Company,
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 consideration
for his services as a director. Pursuant to an agreement dated as of September
1, 1997 between the Company and Mr. Ciccarelli, Mr. Ciccarelli forfeited his
right to acquire 16,506 of the 18,340 shares of Common Stock that he is enti-
tled 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 pur-
chase 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, Secretary and a
director of the Company, a warrant to purchase 9,170 shares of Common Stock.
Each of the warrants has an exercise price of $6.00 per share and expires in
June 2002. These warrants were issued to the above individuals in their capac-
ity as employees of the Company.
On December 16, 1996, the Company issued an aggregate of $1,380,000 principal
amount of 9% Convertible Subordinated Debentures to entities controlled by Mr.
Lee Schlessman, a beneficial holder of in excess of 5% of the Company's Common
Stock. See "Description of Capital Stock -- Debentures."
On November 1, 1996, the Company issued to (i) Fred Birner, the Chairman of
the Board, Chief Executive Officer and a director of the Company, a warrant to
purchase 27,510 shares of Common Stock, (ii) Mark Birner,
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<PAGE>
D.D.S., the President and a director of the Company, a warrant to purchase
27,510 shares of Common Stock, and (iii) Dennis Genty, the Chief Financial Of-
ficer, Treasurer, Secretary and a director of the Company, a warrant to pur-
chase 27,510 shares of Common Stock. Each of the warrants has an exercise price
of $4.36 per share and expires in November 2001. These warrants were issued in
consideration of their personal guarantees of Company bank debt.
On October 17, 1996, the Company entered into an agreement with James
Ciccarelli, a director of the Company, which agreement was terminated effective
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 exercise price of
$3.82 per share, which warrant was dated as of August 1, 1996, expires in Au-
gust 2001, and contains certain vesting provisions. See "Management -- Compen-
sation 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 President
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, Secre-
tary and a director of the Company, an option to purchase 16,930 shares of Com-
mon Stock. Each of the options has an exercise price of $2.40 per share and ex-
pires in February 2003. These options were issued to the above individuals in
their capacity as employees of the Company.
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 founder
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 purchase of these shares was done in con-
nection with the initial capitalization of the Company.
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 dentists
who are not employees of the Company. Dr. Birner has also entered into agree-
ments 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 designated by
the Company for nominal value upon the occurrence of certain events. See "Busi-
ness -- 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 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.
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 December 31, 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 12.3%
Mark A. Birner, D.D.S.
(4).................... 785,466 24.1 -- 785,466 11.7
Dennis N. Genty (5)..... 522,380 16.1 -- 522,380 7.8
James M. Ciccarelli
(6).................... 22,467 * -- 22,467 *
Steven M. Bathgate(7)... -- * -- -- *
James M. Gerken (8)..... 247,259 7.6 -- 247,259 3.7
Lee Schlessman (9)...... 578,516 15.3 42,201 536,315 8.0
Susan M. Duncan (10).... 225,749 6.6 81,198 144,551 2.2
All executive officers
and directors
as a group (5 persons)
(11)................... 2,156,254 63.4 -- 2,156,254 31.4
<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 2.4
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 any other person or entity. Except as indi-
cated by footnote, and subject to community property laws where applica-
ble, 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 3,196,243 shares of Common Stock out-
standing before the Offering and 6,663,201 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.
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<PAGE>
(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 option
is exercised in full, Dr. Birner will sell 70,000 shares of his Common
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 option
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 war-
rant 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 warrant
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 Com-
mon Stock issuable upon exercise of a warrant having an exercise price of
$3.82 per share that will vest more than 60 days after the date of this
Prospectus.
(7) Mr. Bathgate has been elected to the Company's Board effective upon con-
summation of the Offering. In connection with Mr. Bathgate's election to
the Board, the Company has granted to Mr. Bathgate, 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 pub-
lic 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 de-
bentures over which Mr. Schlessman has sole voting power pursuant to cer-
tain powers of attorney, but for which he disclaims beneficial ownership.
The address of Mr. Schlessman is c/o Greeley Gas Company, 1301 Pennsylva-
nia 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 warrants
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 in-
clude 20,632 shares of Common Stock issuable upon exercise of a warrant
that will vest more than 60 days after the date of this Prospectus.
(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.
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<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 6,663,201 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 December 31, 1997, there were approximately 81 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.
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<PAGE>
WARRANTS
As of December 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 of approximately
$3.81 per share. All of such warrants contain provisions for the adjustment of
exercise prices in certain events, including stock dividends, stock splits, re-
organizations, 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. Holders of warrants to pur-
chase 220,199 shares of Common Stock are entitled to certain registration
rights with respect to the Common Stock issued upon exercise thereof. See "--
Registration Rights."
DEBENTURES
As of December 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 Deben-
tures are subordinated unsecured obligations of the Company, bearing interest
at the rate of 9.0% annually. The Debentures were issued under two Indentures
(the "Indentures") between the Company and Colorado National Bank (the "Trust-
ee").
Debentures in the aggregate principal amount of $4,970,000 were issued on May
15, 1996, maturing on May 15, 2001 (the "May Debentures"). Debentures in the
aggregate principal amount of $1,810,000 were issued on December 27, 1996, ma-
turing 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 subordinate
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 Inden-
tures) of the Company. The Indentures will be discharged and canceled upon pay-
ment 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 Com-
mon 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 Com-
mon 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 subscribe
for securities (other than those referred to in (iii) above). No adjustment of
the Conversion Price will be made until cumulative adjustments to the Conver-
sion Price as last adjusted amount to 5.0% or more. No adjustment of the Con-
version Price will be made for cash or dividend distributions paid out of con-
solidated 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 Deben-
tures 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 available, 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 De-
bentures regardless of whether the Debentures have been surrendered for conver-
sion. No interest will accrue on, nor will the Debentures be transferable after
the Conversion Date. Upon mandatory conversion, a payment will be made for ac-
crued interest to the Conversion Date. No fractional shares will be issued upon
conversion but a cash adjustment will be made for any fractional interest. 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, another
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 se-
lect 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 affected
thereby, however, an amendment, supplement or waiver may not (i) reduce the
amount of the Debentures whose holders must consent to an amendment, supplement
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 default 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 pay-
able in money other than that stated in the Debenture. Holders 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 De-
bentures without notice to or consent of any holders of the outstanding Deben-
tures in certain events, such as to comply with the liquidation and merger pro-
vision described in the Indenture, to provide for uncertificated Debentures in
addition to or in place of certificated Debentures, to cure any ambiguity, de-
fect or inconsistency or to make any other change that does not adversely af-
fect 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
65
<PAGE>
Debentures, and giving such holders the ability to sell certain shares of Com-
mon Stock in the Offering. All holders of the Debentures have elected to con-
vert their Debentures effective upon the consummation of the Offering.
REGISTRATION RIGHTS
Holders of warrants to purchase 220,199 shares of Common Stock of the Company
(the "Registrable Securities") are entitled to certain rights with respect to
the registration of such shares under Securities Act of 1933, as amended (the
"Securities Act"). In the event that the Company proposes to register any of
its securities under the Securities Act for its own account or otherwise on a
form which permits the registration of such Registrable Securities (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 pro-
posed 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 limitations include the right of
the managing underwriter of any such offering to exclude some of the Registra-
ble Securities from such registration if it determines that marketing forces
require a limitation on the number of shares to be underwritten. The Company
generally will bear all expenses incurred in connection with the Piggyback Reg-
istration, other than underwriting commissions, transfer taxes and the under-
writer's accountable and nonaccountable expenses or the fees and expenses of
any legal counsel retained by a holder of the Registrable 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 Reg-
istration"). The only cost and expenses to be borne by the Company in connec-
tion with the Demand Registration are the costs and expenses that would have
otherwise been incurred by the Company if the holders of the Registrable Secu-
rities had not requested the Demand Registration.
The Representative's Option to acquire up to 210,000 shares of Common Stock
contains certain registration rights under the Securities Act relating to the
shares of Common Stock issuable upon exercise of the Representative's Option
(the "Representative Shares"). Under the terms of the Representative's Option,
the Company is obligated to register all or part of the Representative Shares
if it receives a request to do so by the holders owning or entitled to purchase
a majority of the Representative Shares, provided that the request is made at
least 12 months after the date of consummation of this Offering. The Represent-
ative's Option provides for one such request at the Company's expense. The de-
mand registration right contained in the Representative's Option will expire
five years from the date of consummation of this Offering. In addition, if the
Company proposes to register any of its securities under the Securities Act for
its own account, holders of the Representative's Option or Representative
Shares are entitled to notice of such registration and the Company is obligated
to use all reasonable efforts to cause the Representative Shares to be includ-
ed, provided that the underwriter of any such offering shall have the right to
limit the number of shares included in the registration. The Company is respon-
sible for all expenses incurred in connection with any such piggyback registra-
tion of the Representative Shares. The piggyback registration rights contained
in the Representative's Option will expire five years from the date of consum-
mation of this Offering. See "Underwriting."
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.
66
<PAGE>
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 expenses
incurred by them in connection with certain claims.
In addition to the indemnification provision in the Company's Amended and Re-
stated Bylaws, the Company has entered into an Indemnification Agreement with
each of its directors and executive officers in the belief that such individu-
als may become unwilling to serve the Company without assurances that adequate
liability insurance, indemnification or a combination thereof is, and will con-
tinue to be, provided to them. See "Management-- Limitation of Liability 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 addi-
tion, directors may not be removed by the shareholders without cause. "Cause"
is defined in the Company's Amended and Restated Articles of Incorporation to
mean (i) conviction of a felony, (ii) declaration of unsound mind by order of
court, (iii) gross dereliction of duty, (iv) commission of any action involving
moral turpitude, or (v) commission of an action which constitutes intentional
misconduct or a knowing violation of law if such action in either event results
both in an improper substantial personal benefit and a material injury to the
Corporation. 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 Articles of Incorporation. These provisions could discour-
age potential takeover attempts, including takeovers which shareholders may
deem to be in their best interests. To the extent takeover attempts are dis-
couraged, temporary fluctuations in the market price of the Company's Common
Stock, which may result from actual or rumored takeover attempts, may be inhib-
ited. These provisions, together 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 di-
rectors or the assumption of control by shareholders, even if such removal or
assumption would be beneficial to shareholders of the Company. These provisions
also could discourage or make more difficult a merger, tender offer or proxy
contest, even if favorable 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 shareholders. 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 Preferred
Stock or rights to acquire such shares to implement a shareholder rights plan.
A shareholder rights plan typically creates voting or other impediments to dis-
courage 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.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have a total of 6,663,201
shares of Common Stock outstanding (6,978,201 shares if the Underwriters' over-
allotment option is exercised in full), of which the 1,833,816 shares offered
hereby by the Company and the 266,184 shares offered hereby by the Selling
Shareholders will be freely tradeable without restriction or registration under
the Securities Act of 1933, as amended, (the "Securities Act"), unless pur-
chased by "affiliates" of the Company as that term is defined under the Securi-
ties Act and the regulations promulgated thereunder. The remaining 4,563,201
shares of Common Stock are "restricted securities" as that term is defined by
Rule 144 promulgated under the Securities Act. Of such shares, except as other-
wise provided below, approximately 4,550,155 shares (including 1,366,958 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 exercise of outstanding
warrants. The Company has granted certain piggyback and demand registration
rights to the holders of warrants to purchase 430,199 shares of the Company's
Common Stock. An additional 455,816 shares are available for issuance upon the
exercise of options which have been granted pursuant to the Employee Plan and
the Dental Center Plan, and an additional 1,102,876 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. The Representative has required
that 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, agree 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 an-
nounce 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 ex-
changeable 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 Joseph Charles & Associ-
ates, Inc., on behalf of the Underwriters (the "Lock-up"). Joseph Charles & As-
sociates, Inc. is expected to have the ability, in its sole discretion, at any
time and without notice, to 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 become eligible for sale subject to the restrictions and
volume limitations of Rule 144. In addition, the Representative has required
that the holder of an additional 77,025 shares of Common Stock agree not to
sell, transfer or assign any of his shares for a period of 90 days after the
date of this Prospectus. Sales of substantial amounts of such shares in the
public market or the availability of such shares for future sale could ad-
versely 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."
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 Securities
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 registered securi-
ties association during the four calendar weeks preceding the date on which no-
tice of the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public informa-
tion 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 beneficially 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 described above.
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<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") for which Joseph Charles &
Associates, Inc. is acting as Representative (the "Representative"), have sev-
erally agreed, subject to the terms and conditions of the Underwriting Agree-
ment, 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>
Joseph Charles & Associates, Inc. ................................
---------
Total........................................................... 2,100,000
=========
</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 Representative, 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 allow
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 ini-
tial public offering, the offering price and the concessions may be changed by
the Representative.
The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable for 45 days from the date of this Prospectus, to purchase
up to 125,000 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 option
solely for the purpose of covering over-allotments incurred in the sale of the
shares of Common Stock offered hereby. To the extent such option is exercised,
each of the Underwriters will be committed, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the preceding table bears
to 2,100,000 shares.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 2.75% of the gross proceeds from the sale of the Common Stock, or
$ , against which $10,000 has heretofore been paid. The Company has
agreed to retain the Representative as a financial consultant for a period of
two years from the date of this Prospectus for a fee of $3,000 per month pay-
able upon the closing of the Offering. The financial consulting services to be
provided by the Representative include assisting in the development of long-
term financial strategies and working with financial analysts. The Company is
also required to pay the costs of qualifying the Common Stock under federal and
state securities laws, together with legal and accounting fees, printing, and
other costs in connection with the Offering.
At the closing of the Offering, the Company will sell and deliver to the Rep-
resentative, for an aggregate purchase price of $100, an option to purchase
210,000 shares of Common Stock at a price of $ per share (the "Represent-
ative's Option"). The Representative's Option will be exercisable during the
four-year period commencing one year after the date of consummation of this Of-
fering. The Representative's Option will be restricted from sale, assignment,
transfer or hypothecation prior to its exercise date except to officers of the
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<PAGE>
Representative and members of the selling group and officers and partners
thereof. The Representative's Option will also contain antidilution provisions
for stock splits, stock dividends, recombinations and reorganizations, a one-
time demand registration provision (at the Company's expense) and piggyback
registration rights. All registration rights will expire five years from the
date of consummation of this Offering.
The Representative has required that all of the directors and executive offi-
cers 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,
agree 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 announce 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 in-
to, or exercisable 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, without the prior written consent of the Representative, on behalf
of the Underwriters. The Representative is expected to have the ability, in its
sole discretion, at any time and without prior notice, to 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 several
Underwriters against or contribute to losses arising out of certain liabili-
ties, including liabilities under the Securities Act.
The Representative has informed the Company that the Underwriters do not in-
tend 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 Representative. Among the fac-
tors that were considered in making such determination were prevailing market
conditions, the Company's financial and operating history and condition, its
prospects and prospects for the industry in general, the management of the Com-
pany and the market prices of securities for companies in businesses similar 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 accordance
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 Un-
derwriters also may create a short position for the account of the Underwriters
by selling more Common Stock in connection with the Offering than they are com-
mitted 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 por-
tion of such short position. The Underwriters may also cover all or a portion
of such short position, up to 315,000 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. The Representative on
behalf of the Underwriters, may impose "penalty bids" under contractual ar-
rangements with the Underwriters whereby it may reclaim from an Underwriter (or
dealer participating in the Offering) for the account of the other Underwrit-
ers, the selling concession with respect to the Common Stock that is distrib-
uted in the Offering but subsequently purchased for the account of the Under-
writers in the open market. Any of the transactions 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 Berliner Zisser
Walter & Gallegos P.C., Denver, Colorado.
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<PAGE>
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 Partnerships
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, appearing in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in ac-
counting and auditing.
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 Statement,
each such Statement being qualified in all respects by such reference. The Reg-
istration Statement, including the exhibits and schedules thereto, may be in-
spected and copied at the public reference facilities maintained by the Commis-
sion 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 obtained
from the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission also maintains a website at:
http://www.sec.gov.
71
<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 nine 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 nine 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 nine 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 NINE 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 $7,189,300 $2,121,537 $6,414,606 $4,555,108 $10,491,428
Less -- amounts retained
by dental offices...... 148,035 1,882,005 588,555 1,555,765 1,140,070 2,647,359
--------- ---------- ---------- ---------- ---------- -----------
Net revenue............. 299,960 5,307,295 1,532,982 4,858,841 3,415,038 7,844,069
Management service
fee revenue ........... -- 65,934 -- 368,428 -- 739,390
--------- ---------- ---------- ---------- ---------- -----------
Total net revenue....... 299,960 5,373,229 1,532,982 5,227,269 3,415,038 8,583,459
DIRECT EXPENSES:
Clinical salaries and
benefits............... 125,371 1,749,985 494,456 1,696,082 1,136,975 3,033,401
Dental supplies......... 42,392 777,769 145,559 512,366 290,617 751,759
Laboratory fees......... 28,262 483,140 142,658 488,203 298,310 793,640
Occupancy............... 19,532 315,423 138,257 431,609 245,523 718,660
Advertising and
marketing.............. 34,533 280,186 41,577 217,130 145,383 285,947
Depreciation and
amortization........... 13,745 323,401 83,551 285,409 197,727 391,891
General and
administrative......... 42,641 672,759 198,066 352,675 449,497 616,389
--------- ---------- ---------- ---------- ---------- -----------
306,476 4,602,663 1,244,124 3,983,474 2,764,032 6,591,687
--------- ---------- ---------- ---------- ---------- -----------
Contribution from dental
offices................ (6,516) 770,566 288,858 1,243,795 651,006 1,991,772
Corporate expenses--
General and
administrative....... 148,825 721,313 312,808 588,071 610,543 874,824
Acquisition costs..... -- -- -- -- -- 252,234
Depreciation and
amortization......... 3,888 57,941 24,698 46,416 35,184 70,532
--------- ---------- ---------- ---------- ---------- -----------
Operating (loss)
income................. (159,229) (8,688) (48,648) 609,308 5,279 794,182
Interest expense, net... (1,026) (326,590) (47,703) (337,757) (161,735) (553,572)
--------- ---------- ---------- ---------- ---------- -----------
(Loss) income before
income taxes........... (160,255) (335,278) (96,351) 271,551 (156,456) 240,610
Income taxes............ -- -- -- 5,200 -- 5,200
--------- ---------- ---------- ---------- ---------- -----------
Net (loss) income....... $(160,255) $ (335,278) $ (96,351) $ 266,351 (156,456) 235,410
========= ========== ========== ========== ========== ===========
Net (loss) income per
share.................. $ (.06) $ (.10) $ (.03) $ .07 $ (.05) $ .06
========= ========== ========== ========== ========== ===========
Weighted average number
of common and common
equivalent shares
outstanding............ 2,786,478 3,425,668 3,423,745 3,621,550 3,424,747 3,634,122
</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 NINE 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 $ (156,456) $ 235,410
Adjustments to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities
Depreciation and
amortization........... 17,633 381,342 108,249 331,825 232,912 462,422
Provision for bad
debts.................. 2,400 23,800 11,900 4,100 17,850 7,136
Amortization of
debenture issuance
costs.................. -- 30,261 -- 40,896 16,808 64,287
Deferred income taxes... -- -- -- 5,200 -- 5,200
Changes in assets and
liabilities, net of
effects from
acquisitions
Accounts receivable..... (16,223) (555,905) (115,331) (115,456) (402,100) (230,629)
Prepaid expenses........ (29,953) (143,924) (42,656) (26,697) (137,647) (120,323)
Accounts payable and
accrued expenses....... 252,570 54,121 102,720 448,827 227,289 1,245,410
Other noncurrent
assets................. (40,469) -- -- -- -- --
---------- ----------- ----------- ----------- ---------- ----------
Net cash provided by
(used in) operating
activities........... 25,703 (545,583) (31,469) 955,046 (201,344) 1,668,913
---------- ----------- ----------- ----------- ---------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Notes receivable --
related parties....... -- (138,551) (138,551) 96,551 (116,365) 98,465
Capital expenditures.... (99,418) (486,379) (278,941) (235,021) (410,609) (550,908)
Development of new
dental offices......... (244,741) (493,009) (445,213) (59,632) (470,215) (70,794)
Cash acquired from
existing dental
offices................ 102,132 -- -- -- -- 200,058
Acquisition of dental
offices................ (106,134) (3,677,469) (3,284,018) (903,210) (3,672,656) (3,413,787)
---------- ----------- ----------- ----------- ---------- ----------
Net cash used in
investing
activities........... (348,161) (4,795,408) (4,146,723) (1,101,312) (4,669,845) (3,736,966)
---------- ----------- ----------- ----------- ---------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from
convertible
subordinated
debentures............. -- 6,555,000 4,970,000 225,000 4,970,000 225,000
Net activity from line
of credit.............. -- 100,000 (530,353) 250,000 (530,353) 250,000
Proceeds from notes
payable................ -- -- -- -- -- 2,000,000
Repayment of long term
debt................... (19,647) (579,285) -- (100,116) (152,193) (179,130)
Payment of debenture
issuance and other
financing costs........ -- (401,716) (250,837) (16,875) (251,321) (16,875)
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) -- (219,178)
---------- ----------- ----------- ----------- ---------- ----------
Net cash provided by
financing
activities........... 1,787,002 5,673,999 4,188,810 138,831 4,036,133 1,593,375
---------- ----------- ----------- ----------- ---------- ----------
NET INCREASE (DECREASE)
IN CASH................ 1,464,544 333,008 10,618 (7,435) (835,056) (474,678)
CASH AND CASH
EQUIVALENTS,
Beginning of period.... -- 1,464,544 1,464,544 1,797,552 1,464,544 1,797,552
---------- ----------- ----------- ----------- ---------- ----------
CASH AND CASH
EQUIVALENTS,
End of period.......... $1,464,544 $ 1,797,552 $ 1,475,162 $ 1,790,117 $ 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 $ 63,321 $ 341,845
---------- ----------- ----------- ----------- ---------- ----------
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 -- 107,457 --
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 1,642,000
Purchase and retirement
of Common Stock....... -- -- -- 110,822 -- 110,822
Liabilities assumed
incurred for
acquisitions --
Notes payable.......... -- 130,000 -- -- 130,000 --
Accounts payable and
accrued liabilities... 89,224 507,320 475,084 -- 507,320 365,263
Accounts receivable
acquired through
acquisitions........... 91,783 238,786 218,786 20,000 238,786 179,920
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
reverse 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.
The Company treats Offices as consolidated subsidiaries where it has a per-
petual and unilateral controlling financial interest over the assets and oper-
ations of the Offices. The Company has obtained control of substantially all
of the Offices via long-term contractual management arrangements. Certain key
features of these arrangements either enable the Company at any time and in
its sole discretion to cause a change in the shareholder of the P.C. (i.e.,
"nominee shareholder") or allow the Company to vote the shares of stock held
by the owner of the P.C. and to elect a majority of the board of directors of
the P.C. Accordingly, the accompanying statements of operations reflect net
amounts billed to patients as adjusted gross revenue and reflect the physi-
cians' and hygienists' compensation as amounts retained by the Offices to ar-
rive 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 per-
sonnel 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.
For two of the Offices for which the Company has management agreements, but
does not have control, the Company has reflected management services fee reve-
nue in the accompanying statements of operations along with the direct ex-
penses associated with the Office operations.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Stan-
dards Board adopted Issue 97-2 on November 20, 1997. EITF Issue 97-2 covers
financial reporting matters relating to the physician practice management in-
dustry, including the consolidation of professional corporation revenue and
expenses, the accounting for business combinations and the treatment of stock
options for physicians as employee options. The Company has adopted the provi-
sions of EITF Issue 97-2.
Basis of Presentation -- Interim Financial Statements
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 nine months
ended September 30, 1996 and 1997 have been included in the accompanying unau-
dited consolidated financial statements.
The Company has included an audited balance sheet at June 30, 1997 along
with audited statements of operations and cash flows for the six months then
ended to provide audited information as of a more recent date than the
Company's fiscal year end of December 31, 1996.
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 and nine months ended June 30, 1997, and Septem-
ber 30, 1997, 20%, 20% and 20.3%, respectively, of the Company's revenue was
derived from capitated managed dental care contracts. Under these contracts
the Offices receive a fixed monthly payment for each covered plan member for a
specific schedule of services regardless of the quantity or cost of services
provided by the Offices. The Offices may 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 and the nine-month period ended September 30, 1997,
Prudential was responsible for 13.4% and 12.6%, respectively of the Company's
gross revenue and PacifiCare was responsible for 11.3% and 10.9%, respective-
ly, 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, $223,942 and $294,284
for the period from inception to December 31, 1995, the year ended December
31, 1996, the six months ended June 30, 1997 and the nine months ended Septem-
ber 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 nine-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 $10 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
nine 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, on November 5,
1997, the Company received a waiver for a period of one year from the bank for
the covenant requirement.
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 nine 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 $325,764 for the period ended De-
cember 31, 1995, the year ended December 31, 1996, the six months ended June
30, 1997 and the nine 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 $119,538 for the period ended December 31, 1995, the
year ended December 31, 1996, the six months ended June 30, 1997 and the nine
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 NINE 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 $235,410
Pro forma............. $(162,295) $(471,383) $205,544 $115,872
Net (loss) income per
share: As reported..... $ (.06) $ (.10) $ .07 $ .06
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, $245,340 and $418,476 for the years ended December
31, 1995 and 1996, the six months ended June 30, 1997 and the nine months
ended September 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 and $74,004 for the nine months ended September 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 and nine
months ended June 30, 1997, and September 30, 1997, respectively, the Company
has applied its estimated effective tax rate of 2% for 1997.
The income tax provision for the six and nine months ended June 30, 1997,
and September 30, 1997, respectively, 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 and nine months ended
June 30, 1997, and September 30, 1997, respectively, 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 September 30, 1997.
Other Company Benefits
The Company provides a health and welfare benefit plan to all regular full-
time employees. The plan includes health and life insurance, and a cafeteria
plan. In addition, regular full-time and regular part-time employees are enti-
tled to certain dental benefits.
(13) Disclosures about the Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," re-
quires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of
those instruments. The fair values of the Company's note payable and capital
lease obligations are based on similar rates currently available to the Compa-
ny. The carrying values and estimated fair values were estimated to be sub-
stantially the same at December 31, 1995 and 1996 and June 30, 1997. The fair
value of the Company's convertible subordinated debentures at June 30, 1997,
is estimated to be approximately $8.9 million.
(14) Subsequent Events
In July, the Company initiated the process of preparing a Registration
Statement with the Securities and Exchange Commission for the Company's ini-
tial public offering ("Offering"). Once effective, the Registration Statement
may permit 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>
<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.............................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 38
Management............................................................... 53
Certain Transactions..................................................... 59
Principal and Selling Shareholders....................................... 61
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 69
Legal Matters............................................................ 70
Experts.................................................................. 71
Additional Information................................................... 71
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1998, 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.
================================================================================
================================================================================
2,100,000 SHARES
[LOGO OF PERFECT TEETH APPEARS HERE]
BIRNER DENTAL
MANAGEMENT SERVICES, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
JOSEPH CHARLES & ASSOCIATES, INC.
, 1998
================================================================================
<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........................................... 32,000
Blue sky qualification fees and expenses......................... 1,000
Representative's non-accountable expense allowance............... 433,125
Printing and engraving expenses.................................. 135,000
Legal fees and expenses.......................................... 340,000
Accounting fees and expenses..................................... 365,000
Transfer agent and registrar fees................................ 5,000
Directors and Officers Insurance................................. 5,000
Miscellaneous.................................................... 12,746
----------
Total.......................................................... $1,339,383
==========
</TABLE>
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.
The Company maintains directors' and officers' liability insurance.
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.
23. In November 1997, an individual exercised options to purchase 208
shares of Common Stock granted pursuant to the Employee Plan at a weighted
average exercise price of $2.09 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.
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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
10.29** Second Amendment to Loan Documents dated November 19, 1997 between the
Registrant and Key Bank of Colorado.
10.30 Form of Financial Consulting Agreement between the Company and Joseph
Charles & Associates, Inc.
10.31 Form of Purchase Option for the Purchase of Shares of Common Stock
granted to Joseph Charles & Associates, Inc.
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 Steven M. Bathgate (person about to become director)
24.1** Power of Attorney (reference is made to page II-6)
27.1** Financial Data Schedule
</TABLE>
- --------
* Replaces Exhibit filed previously.
** Previously filed.
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 Post-Effective Amendment No. 2 to Registra-
tion Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado, on the 14th day of Janu-
ary, 1998.
Birner Dental Management Services,
Inc.
/s/ Frederic W.J. Birner
By: _________________________________
NAME: FREDERIC W.J. BIRNER
TITLE: CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-EFFEC-
TIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
* Chairman of the
- ------------------------------------- Board, Chief January 14,
FREDERIC W.J. BIRNER Executive Officer 1998
and Director
(Principal
Executive Officer)
* President and
- ------------------------------------- Director January 14,
MARK A. BIRNER, D.D.S. 1998
* Chief Financial
- ------------------------------------- Officer, Secretary, January 14,
DENNIS N. GENTY Treasurer and 1998
Director (Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------- January 14,
JAMES M. CICCARELLI 1998
- --------
* By power-of-attorney
/s/ Frederic W.J. Birner
- -------------------------------------
FREDERIC W.J. BIRNER
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT 1.1
2,100,000 SHARES/1/
BIRNER DENTAL MANAGEMENT SERVICES, INC.
COMMON STOCK
____________________
UNDERWRITING AGREEMENT
____________________
JOSEPH CHARLES & ASSOCIATES, INC.
As Representative of the Several
Underwriters Named in Schedule I
hereto
9701 Wilshire Boulevard, Ninth Floor
Beverly Hills, California 90212 February __, 1998
Dear Sirs:
Birner Dental Management Services, Inc., a Colorado corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 1,833,816 shares of common stock, without par
value, of the Company (the "Common Stock"), and the selling shareholders named
in Schedule II hereto (the "Selling Shareholders"), propose, subject to the
terms and conditions stated herein, to sell to the Underwriters an aggregate of
266,184 shares of Common Stock. At the election of the Underwriters, the
Company and certain Selling Shareholders propose, subject to the terms and
conditions stated herein, to sell to the Underwriters an aggregate of 125,000
additional shares and 190,000 additional shares, respectively, as set forth in
Schedule II. The aggregate of 2,100,000 shares to be sold by the Company and
the Selling Shareholders are herein called the "Firm Securities," and the
aggregate of 315,000 additional shares to be sold by the Company and certain
Selling Shareholders are herein called the "Optional Securities." The Firm
Securities and the Optional Securities that the Underwriters elect to purchase
pursuant to Section 2 hereof are collectively called the "Securities."
- --------------------------
/1/Plus an option to purchase up to 125,000 additional shares from the Company
and up to 190,000 additional shares from certain shareholders to cover over-
allotments.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees with, the
Underwriters that:
(i) A registration statement in respect of the Securities on Form S-1
(File No. 333-36391) under the Securities Act of 1933, as amended (the
"Act"), and as a part thereof a preliminary prospectus, in respect of the
Securities has been filed with the Securities and Exchange Commission (the
"Commission") in the form heretofore delivered to you, and, excluding
exhibits thereto, for each of the other Underwriters; such registration
statement, as amended, has been declared effective by the Commission; no
other document with respect to such registration statement has heretofore
been filed with the Commission other than in accordance with Section 5(a)
of this Agreement; and no stop order suspending the effectiveness of such
registration statement has been issued and no proceeding for that purpose
has been instituted or threatened by the Commission (any preliminary
prospectus included in such registration statement or filed with the
Commission pursuant to Rule 424 of the rules and regulations of the
Commission under the Act being hereinafter called a "Preliminary
Prospectus", the various parts of such registration statement, including
all exhibits thereto, and including the information contained in the form
of final prospectus filed with the Commission pursuant to Rule 424(b) under
the Act in accordance with Section 5(a) of this Agreement and deemed by
virtue of Rule 430A under the Act to be part of the registration statement
at the time it was declared effective, together with any related
registration statement filed with the Commission for registration of a
portion of the Securities, which registration statement became effective
pursuant to Rule 462(b) under the Act, each as amended at the time such
part became effective, being herein called collectively the "Registration
Statement," and the final prospectus, in the form first filed pursuant to
Rule 424(b), being hereinafter called the "Prospectus," provided, that if
the Company elects to rely on Rule 434 under the Act, all references to the
Prospectus shall be deemed to include, without limitation, the form of
prospectus and the abbreviated term sheet, taken together, provided to the
Underwriters by the Company in reliance on Rule 434);
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by the Underwriters through
you expressly for use therein or by the Selling Shareholders expressly for
use in the preparation of the answers therein to Item 7 of Form S-1;
-2-
<PAGE>
(iii) The Registration Statement conforms, and the Prospectus
and any amendments or supplements thereto will conform, in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder and do not and will not as of the applicable
effective date as to the Registration Statement and any amendment thereto
and as of the applicable filing date as to the Prospectus and any amendment
or supplement thereto contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by the Underwriters through you expressly for use therein or by any of the
Selling Shareholders expressly for use in the preparation of the answers
therein to Item 7 of Form S-1;
(iv) Subsequent to the date of the latest audited financial statements
included in the Prospectus, and except as described in or contemplated by
the Prospectus (or if the Prospectus is not in existence, the most recent
Preliminary Prospectus): (a) neither the Company nor any of its
subsidiaries, a complete and correct list of which is attached as Schedule
III (the "Subsidiaries"), nor the professional corporations which are
separate legal entities that contract with the Company or the Subsidiaries
to receive management services, a complete list of which is attached as
Schedule IV (collectively, the "P.C.s"), has incurred any liabilities or
obligations (indirect, direct or contingent) or entered into any oral or
written agreements or other transactions not in the ordinary course of
business that, individually or in the aggregate, could reasonably be
expected to be material to the Company and the Subsidiaries or P.C.s
considered as a whole or that could reasonably be expected to result in a
material reduction in the earnings of the Company and the Subsidiaries and
P.C.s considered as a whole; (b) neither the Company nor any of the
Subsidiaries or P.C.s has sustained any loss or interference with its
business or properties from strike, fire, flood, windstorm, accident or
other calamity (whether or not covered by insurance) that, singly or in the
aggregate, could reasonably be expected to be material to the Company and
the Subsidiaries and P.C.s considered as a whole; (c) there has been no
material change in the indebtedness of the Company, no change in the
capital stock of the Company (other than the exercise of stock options or
warrants or conversion of debt or other convertible instruments outstanding
as of such date) and no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock; and (d) there has
not been any material adverse change, nor any development that could,
individually or in the aggregate, result in a material adverse change in
the condition (financial or other), business, prospects or results of
operations of the Company and the Subsidiaries and P.C.s considered as a
whole, whether or not arising in the ordinary course of business;
(v) The Company, each of its Subsidiaries and each of the P.C.s have
good and marketable title in fee simple to all real property and good and
marketable title to all material items of personal property owned by them,
free and clear of all liens,
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<PAGE>
encumbrances and defects except such as are described in the Prospectus, or
such as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company, the Subsidiaries and the P.C.s; and any real
property and buildings held under lease or sublease by the Company, any of
the Subsidiaries or any of the P.C.s are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material
and do not materially interfere with the use made and proposed to be made
of such property and buildings by the Company, such Subsidiaries or the
P.C.s;
(vi) The Company, each of its Subsidiaries and each of the P.C.s have
been duly incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of incorporation,
with corporate power and authority to own or lease their respective
properties and conduct their respective businesses as described in the
Prospectus, and each has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, except where the failure to
so qualify would not result in a material adverse effect on the
consolidated financial position, shareholders' equity or results of
operations of the Company, the Subsidiaries and the P.C.s taken as a whole;
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capitalization"; all of the
issued shares of capital stock of the Company have been duly and validly
authorized and issued, are fully paid and nonassessable, have been issued
in compliance with all applicable federal and state securities laws and
regulations and conform to the description of the capital stock of the
Company contained in the Prospectus; except as described in the Prospectus,
there are no preemptive or other similar rights to subscribe for or to
purchase any securities of the Company; except as described in the
Prospectus, there are no warrants, options or other similar rights to
purchase any securities of the Company;
(viii) All of the issued and outstanding shares of capital stock of each
of the P.C.s have been duly and validly authorized and issued and are fully
paid and nonassessable; and except otherwise set forth in the Prospectus,
all outstanding shares of capital stock of each of the P.C.s are owned by
the respective individuals set forth on Schedule IV free and clear of any
perfected security interest and any other security interests, claims, liens
or encumbrances, except those in favor of the Company pursuant to
agreements between the Company and such individual shareholders;
(ix) The Securities to be sold by the Company pursuant to this Agreement
have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein, will be duly and validly
issued and fully paid and nonassessable and will conform to the description
of the Securities contained in the Prospectus;
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<PAGE>
(x) The issue and sale of the Securities by the Company and the
performance by the Company of this Agreement and the consummation by the
Company of the other transactions herein contemplated will not conflict
with or result in a breach or violation of any terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company, any of the
Subsidiaries or any of the P.C.s is a party or by which the Company, any of
the Subsidiaries or any of the P.C.s is bound or to which any of the
property or assets of the Company, any of the Subsidiaries or any of the
P.C.s is bound or subject, nor will such action result in any violation of
the provisions of the Articles of Incorporation or Bylaws of the Company
(each as amended or restated to date, the "Charter" and "Bylaws",
respectively) or the articles of incorporation or bylaws of any of the
Subsidiaries or any of the P.C.s or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Company, any of the Subsidiaries or any of the P.C.s or any of
their properties or any of the Licenses (as defined below); and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue and
sale of the Securities or the consummation by the Company of the
transactions contemplated by this Agreement, except such as may be required
under the Act and such as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the Securities
by the Underwriters and the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD");
(xi) There are no legal or governmental proceedings pending to which
the Company, any of its Subsidiaries or any of the P.C.s is a party or of
which any property of the Company, any of its Subsidiaries or any of the
P.C.s is the subject other than as set forth or contemplated in the
Prospectus, that, if determined adversely to the Company, any of its
Subsidiaries or any of the P.C.s, would individually or in the aggregate
have a material adverse effect on the financial position, shareholders'
equity or results of operations of the Company or of the Company, the
Subsidiaries and the P.C.s taken as a whole and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or by others;
(xii) Arthur Andersen LLP, who have certified certain financial
statements and related schedules included in the Registration Statement,
are independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder;
(xiii) All employee benefit plans (as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) established, maintained or contributed to by the Company comply
in all material respects with the requirements of ERISA; no employee
pension benefit plan (as defined in Section 3(2) of ERISA) has incurred or
assumed an "accumulated funding deficiency" within the meaning of Section
302 of ERISA or has incurred or assumed any material liability (other than
for the payment of premiums) to the Pension Benefit Guaranty Corporation;
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<PAGE>
and neither the Company nor any of its Subsidiaries have any liability
under Title IV of ERISA, nor does the Company or any of its Subsidiaries
expect that any such liability will be incurred, that if determined
adversely to the Company or any of its Subsidiaries, would individually or
in the aggregate have a material adverse effect on the financial position,
shareholders' equity or results of operations of the Company or of the
Company and the Subsidiaries taken as a whole;
(xiv) The consolidated financial statements of the Company, the
Subsidiaries and the P.C.s, together with related notes, as set forth in
the Registration Statement present fairly the financial position and the
results of operations of the Company, its consolidated Subsidiaries and
P.C.s at the indicated dates and for the indicated periods; such financial
statements have been prepared in accordance with generally accepted
accounting principles, consistently applied throughout the periods
presented except as noted in the notes thereon, and all adjustments
necessary for a fair presentation of results for such periods have been
made; and the selected financial information included in the Prospectus
presents fairly the information shown therein and has been compiled on a
basis consistent with the financial statements presented therein;
(xv) The pro forma consolidated financial data of the Company and its
consolidated subsidiaries and P.C.s and the related notes thereto included
in the Registration Statement and the Prospectus have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein;
(xvi) The Company, each of the Subsidiaries and each of the P.C.s have
filed all federal, state and foreign income, franchise and excise tax
returns required to be filed (or has received an extension with respect
thereto), and have paid, or made adequate reserves for, all taxes indicated
by said returns and all assessments received by them to the extent that
such taxes have become due and are not being contested in good faith; to
the best knowledge of the Company there is no tax deficiency that has been
or might be asserted against the Company that could have a material adverse
effect on the business, properties, business prospects, condition
(financial or otherwise), earnings or results of operations of the Company;
and neither the Company nor any of its Subsidiaries has any liability
(other than contractually assumed liabilities) for taxes imposed on the
P.C.s that could have a material adverse effect on the business,
properties, business prospects, condition (financial or otherwise),
earnings or results of operations of the Company;
(xvii) None of the Company, any of the Subsidiaries or any of the P.C.s
is in violation of any international, federal or state law, regulation, or
treaty relating to the storage, handling, transportation, treatment or
disposal of hazardous substances (as defined in 42 U.S.C. Section 9601) or
hazardous materials (as defined by any international, federal or state law
or regulation) or other waste products, which
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<PAGE>
violation is reasonably likely to result in a material adverse effect on
the financial condition or business operations or properties of the
Company, the Subsidiaries and the P.C.s taken as a whole, and the Company,
each of the Subsidiaries and each of the P.C.s have received all material
permits, licenses or other approvals as may be required of them under
applicable international, federal and state environmental laws and
regulations to conduct their business as described in the Prospectus; and
the Company, each of the Subsidiaries and each of the P.C.s are in
compliance in all material respects with the terms and conditions of any
such permit, license or approval; neither the Company nor any of the
Subsidiaries or any of the P.C.s has received any notices or claims that it
is a responsible party or a potentially responsible party in connection
with any claim or notice asserted pursuant to 42 U.S.C. Section 9601 et
seq. or any state superfund law; and the disposal by the Company or any
Subsidiary or P.C. of any of the Company's, each Subsidiary's and each
P.C.s' hazardous substances, hazardous materials and other waste products
has been lawful in all material respects;
(xviii) No relationship, direct or indirect, exists between or among the
Company, any of the Subsidiaries or any of the P.C.s, on the one hand, and
the directors, officers, shareholders, customers or suppliers of the
Company, any of the Subsidiaries or any of the P.C.s on the other hand,
that is required by the Act, or by the rules and regulations under such Act
to be described in the Registration Statement and the Prospectus that is
not so described;
(xix) Neither the Company nor any of the Subsidiaries or P.C.s has
taken and none of such entities will take, directly or indirectly, any
action that is designed to or that has constituted or that might reasonably
be expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities and the Company has not distributed and will not distribute
any offering material in connection with the offering and sale of the
Shares other than a Preliminary Prospectus filed with the Commission or the
Prospectus or other materials, if any permitted by the Act;
(xx) Each of the Company, the Subsidiaries and the P.C.s owns or
possesses adequate licenses, copyrights, trademarks, service marks and
trade names (collectively, "intellectual property") necessary to carry on
its business as presently operated by it, except where the failure to own
or possess any such intellectual property would not, individually or in the
aggregate, have a material adverse effect on the Company, the Subsidiaries
and the P.C.s taken as a whole, and neither the Company nor any of the
Subsidiaries or the P.C.s has received any notice or has knowledge of any
infringement of or conflict with asserted rights of others with respect to
any intellectual property or of any facts which would render any
intellectual property invalid or inadequate to protect the interest of the
Company, any of the Subsidiaries or any of the P.C.s therein and which
infringement or conflict could have a material adverse effect on the
Company, the Subsidiaries and the P.C.s taken as a whole;
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<PAGE>
(xxi) The Company and its Subsidiaries and P.C.s carry or are
entitled to the benefits of insurance in such amounts and covering such
risks as, to the best of the Company's knowledge after due inquiry, is
generally maintained by or on behalf of companies of established repute
engaged in the same or similar business and as required by the Management
Agreements, and all such insurance is in full force and effect;
(xxii) The Company, each of the Subsidiaries and each of the
P.C.s holds and are operating in compliance, in all material respects, with
all franchises, grants, authorizations, licenses, permits, easements,
consents, certificates and orders of any governmental or self-regulatory
body required for the conduct of their respective businesses as presently
being conducted ("Licenses") and all Licenses are valid and in full force
and effect, and the Company, each of the Subsidiaries and each of the P.C.s
are in compliance, in all material respects, with all laws, regulations,
orders and decrees applicable to them; no event has occurred that allows,
or after notice or lapse of time or both would allow, revocation,
suspension or termination of any such License or a violation of any such
laws or regulations, except where such revocation, suspension, termination
or violation would not, individually or in the aggregate, have a material
adverse effect on the financial position, shareholders' equity or results
of operations of the Company, the Subsidiaries and the P.C.s taken as
whole; neither the Company nor any Subsidiary nor P.C. has received any
notice of proceedings relating to the revocation or modification of any
such License which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
effect on the financial position, shareholders' equity or results of
operations of the Company, the Subsidiaries, and the P.C.s taken as a
whole, except as described in or contemplated by the Prospectus; no such
License contains a material restrictions on the Company or any of its
Subsidiaries or P.C.s that is not adequately disclosed in the Registration
Statement and the Prospectus;
(xxiii) The Securities have been approved for quotation on The Nasdaq
National Market, subject to notice of issuance;
(xxiv) This Agreement has been duly authorized, executed and delivered
by the Company;
(xxv) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (a) transactions are
executed in accordance with management's general or specific authorization;
(b) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (c) access to assets
is permitted only in accordance with management's general or specific
authorization; and (d) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences;
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<PAGE>
(xxvi) There are no statutes, regulations, documents or contracts of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which
is not described or filed as required. All such contracts to which the
Company, a Subsidiary or a P.C. is a party constitute valid and binding
agreements of such party and are in full force and effect, and neither the
Company nor any of its Subsidiaries or P.C.s, nor to the best knowledge of
the Company, any other party is in breach of or default under any such
contracts, except for such defaults or breaches that would not individually
or in the aggregate have a material adverse effect on the Company, the
Subsidiaries and the P.C.s taken as a whole;
(xxvii) No labor dispute with the employees of the Company or any of
the Subsidiaries or P.C.s exists or, to the best of the Company's knowledge
after due inquiry, is imminent;
(xxviii) Except as set forth in the Registration Statement and
Prospectus, no holders of Common Stock or other securities of the Company
have registration rights with respect to securities of the Company; and
neither the filing of the Registration Statement nor the offering or sale
of the Securities as contemplated by this Agreement gives rise to any
rights for or relating to the registration of any securities of the Company
with respect to such filing, offering or sale, other than rights which have
been waived or satisfied or have expired.;
(xxix) The business conducted by the Company and the Subsidiaries and
P.C.s and the contractual relationships between (A) the Company or any of
the Subsidiaries or P.C.s and the health care payors with which they
contract and (B) the Company or any of the Subsidiaries or P.C.s and the
health care providers with which they contract, to the best knowledge of
the Company after due inquiry (including the advice of counsel), do not
violate any federal or state health care laws and regulations, or any
federal or state patient confidentiality laws and regulations or any
federal or state insurance laws and regulations (including but not limited
to those governing health maintenance organizations and preferred provider
organizations) in such jurisdictions in which the Company and any of the
Subsidiaries or P.C.s are operating that are applicable to such business
and such relationships, including those laws governing insurance risk and
risk allocation, corporate practice of medicine or dentistry, medical
practices, professional corporations, fee splitting, fraud and abuse and
self-referral, except for violations that would not have a material adverse
effect on the Company, the Subsidiaries and the P.C.s taken as a whole and
except as disclosed in the Prospectus;
(xxx) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
granted or issued by the Company or any of the Subsidiaries or P.C.s
relating to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of the Company or any of the Subsidiaries or
P.C.s, except as otherwise disclosed in the Registration Statement and the
Prospectus;
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<PAGE>
(xxxi) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to
this Agreement shall be deemed to be a representation and warranty by the
Company to the Underwriters as to the matters covered thereby;
(xxxii) Each officer and director of the Company, each Selling
Shareholder and the holders of certain convertible debentures of the
Company, which debentures will be converted into Common Stock effective
upon the consummation of the offering of the Securities, has agreed in
writing (the "Lock-up Agreements") that such person will not, for a period
of 180 days from the date that the Registration Statement is declared
effective by the Commission (the "Lock-up Period"), offer to sell, contract
to sell, or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to (collectively, a "Disposition") any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "Locked-up Securities") now owned or hereafter acquired
directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (a) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing
to be bound by this restriction, (b) if such person is an individual, to a
member or members of his or her immediate family or to a trust the
beneficiaries of which are exclusively the person and/or a member or
members of his or her immediate family, provided that the transferees
thereof agree in writing to be bound by the terms of this restriction, (c)
with the prior written consent of Joseph Charles & Associates, Inc., or (d)
in the case of James Gerken approximately 77,025 shares of Common Stock
owned by him are not covered by his Lock-up Agreement; the foregoing
restriction has been expressly agreed to preclude the holder of the Locked-
up Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Locked-up Securities during the Lock-up Period, even if such Locked-up
Securities would be disposed of by someone other than such holder; such
prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or
grant of any right (including, without limitation, any put or call option)
with respect to any Locked-up Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to
or derives any significant part of its value from Locked-up Securities;
such person has agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Locked-up Securities held by such person except in compliance with this
restriction; the Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the
number and type of securities held by each securityholder; and the Company
has provided to counsel for the Underwriters true, accurate and complete
copies of all of the Lock-up Agreements presently in effect or effected
hereby; and
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<PAGE>
(xxxiii) Neither the Company nor any of the Subsidiaries employ or
supervises any of the dentists or dental hygienists who provide dental care
to patients through P.C.s.
(b) Each of the Selling Shareholders, severally and not jointly,
represents and warrants to, and agrees with, the Underwriters and the Company,
solely with respect to such Selling Shareholder, that:
(i) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement, the Custody Agreement signed
by or on behalf of such Selling Shareholder and American Securities
Transfer & Trust, Inc., as Custodian, relating to the deposit of the Shares
to be sold by such Selling Shareholder (the "Custody Agreement") or the
Power of Attorney of such Selling Shareholder appointing certain
individuals as such Selling Shareholder's attorneys-in-fact (the
"Attorneys") to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement and the Custody
Agreement (the "Power of Attorney") in connection with the execution and
delivery by or on behalf of such Selling Shareholder of this Agreement, the
Custody Agreement and the Power of Attorney and for the sale and delivery
of the Securities to be sold by such Selling Shareholder hereunder, except
such as may be required under the Act or state securities or Blue Sky laws
in connection with the purchase and distribution of the Securities by the
Underwriters and the clearance of such offering with the NASD; and such
Selling Shareholder has full right, power and authority to enter into this
Agreement, the Custody Agreement and the Power of Attorney and to sell,
assign, transfer and deliver the Securities to be sold by such Selling
Shareholder hereunder;
(ii) The sale of the Securities to be sold by such Selling
Shareholder hereunder and the performance of this Agreement and the
consummation by such Selling Shareholder of the transactions herein
contemplated will not conflict with or result in a breach or violation of
any terms or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, voting trust agreement, shareholders'
agreement, loan agreement, guarantee or other agreement or instrument to
which such Selling Shareholder is a party or by which such Selling
Shareholder is subject, or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over such Selling
Shareholder or the property of such Selling Shareholders;
(iii) Such Selling Shareholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be
sold by the Company or any of the other Selling Shareholders to the
Underwriters pursuant to this Agreement; such Selling Shareholder does not
have, or has waived prior to the date hereof, any registration right or
other similar right to participate in the offering made by the Prospectus,
other than such rights of participation as have been satisfied by the
participation of such Selling
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<PAGE>
Shareholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; such Selling Shareholder does
not own any warrants, options or similar rights to acquire, and does not
have any right or arrangement to acquire, any capital stock, rights,
warrants, options or other securities from the Company, other than those
described in the Registration Statement and the Prospectus; and such
Selling Shareholder is not party to any outstanding option, warrant, right
or other arrangement or arrangements requiring the Selling Shareholder at
any time to transfer any shares to be sold under this Agreement by the
Selling Shareholder, other than those described in the Registration
Statement and the Prospectus;
(iv) At such Delivery Date (as hereinafter defined) such Selling
Shareholder will have good and valid title to the Securities to be sold by
such Selling Shareholder hereunder, free and clear of all liens,
encumbrances, restrictions on transfer, community property rights, equities
or claims (other than those imposed by the Act or under this Agreement);
and, upon delivery of such Securities and payment therefor pursuant hereto,
good and valid title to all of such Securities, free and clear of all
liens, encumbrances, restrictions on transfer, community property rights,
equities or claims, will be transferred to the Underwriters;
(v) Each Selling Shareholder will not, for the Lock-up Period effect
a Disposition of any Locked-up Securities now owned or hereafter acquired
directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (a) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing
to be bound by this restriction, (b) if such person is an individual, to a
member or members of his or her immediate family or to a trust the
beneficiaries of which are exclusively the person and/or a member or
members of his or her immediate family, provided that the transferees
thereof agree in writing to be bound by the terms of this restriction, (c)
with the prior written consent of Joseph Charles & Associates, Inc., or (d)
in the case of James Gerken approximately 77,025 shares of Common Stock
owned by him are not covered by his Lock-up Agreement; the foregoing
restriction has been expressly agreed to preclude the holder of the Locked-
up Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Locked-up Securities during the Lock-up Period, even if such Locked-up
Securities would be disposed of by someone other than such holder; such
prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or
grant of any right (including, without limitation, any put or call option)
with respect to any Locked-up Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to
or derives any significant part of its value from Locked-up Securities;
such person agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the Locked-up
Securities held by such person except in compliance with this restriction;
the Company has provided to counsel for the Underwriters a complete and
accurate list of all securityholders of the Company and the number and type
of securities held by each securityholder; and the Company has provided to
counsel for
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<PAGE>
the Underwriters true, accurate and complete copies of all of the Lock-up
Agreements presently in effect or effected hereby;
(vi) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities;
(vii) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Selling
Shareholder Shares for use in connection with the preparation of the
Registration Statement or set forth in the Registration Statement or the
Prospectus is, and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto
up to and on the Delivery Date was or will be, true, correct and complete,
and does not, and at the time the Registration Statement became or becomes,
as the case may be, effective and at all times subsequent thereto up to and
on the Delivery Date will not, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make such information not misleading; without taking any
action to verify independently the statements made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, and without
assuming responsibility for the accuracy, completeness or fairness of such
statements, the Prospectus and any supplements thereto (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
will not contain any untrue statement of a material fact regarding the
Selling Shareholder or omit to state a material fact regarding the Selling
Shareholder required to be stated therein or necessary in order to make the
statements therein regarding the Selling Shareholder, in light of the
circumstances under which they were made, not misleading; and the Selling
Shareholder is not aware of any material misstatement in or omission from
the Registration Statement or the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) or of any material
adverse information regarding the business or operations of the Company or
its subsidiaries which is not set forth in the Registration Statement and
the Prospectus (or, if the Prospectus is not then in existence, in the most
recent Preliminary Prospectus)
(viii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982, as amended, with respect to the transactions
herein contemplated, such Selling Shareholder agrees to deliver to you
prior to or at the First Delivery Date (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
(ix) Such Selling Shareholder specifically agrees that the
Securities are subject to the interests of the Underwriters hereunder; such
Selling Shareholder agrees that its obligations hereunder shall not be
terminated by operation of law, whether by
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death or incapacity, liquidation or dissolution, or by the occurrence of
any other event that is not by the terms of this Agreement a condition to
such Selling Shareholder's obligations hereunder;
(x) This Agreement has been duly executed and delivered by or on
behalf of each Selling Shareholder;
(xi) The Custody Agreement of such Selling Shareholder has been duly
authorized, executed and delivered by or on behalf of such Selling
Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms and certificates in
negotiable form for all Shares to be sold by such Selling Shareholder under
this Agreement, together with a stock power or powers duly endorsed in
blank by such Selling Shareholder, have been placed in custody with the
Custodian for the purpose of effecting delivery hereunder;
(xii) The Power of Attorney of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding instrument of such Selling Shareholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Shareholder has, among other things, authorized the Attorneys, or
any one of them, to execute and deliver on such Selling Shareholder's
behalf this Agreement, the Custody Agreement and any other document that
they, or any one of them, may deem necessary or desirable in connection
with transactions contemplated hereby and thereby and to deliver the Shares
to be sold by such Selling Shareholder pursuant to this Agreement;
(xiii) Such Selling Shareholder does not believe that any of the
representations and warranties of the Company contained in Section 1(a)
hereof are not true and correct in all material respects;
(xiv) Each certificate signed by or on behalf of such Selling
Shareholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Selling Shareholder to the Underwriters as to the matters covered thereby;
(xv) Any information furnished to Berliner Zisser Walter & Gallegos,
P.C., counsel to the Underwriters, by or on behalf of such Selling
Shareholder in order to obtain the clearance of the Offering with the
National Association of Securities Dealers, Inc. is true, correct and
complete; and
(xvi) Such Selling Shareholder will immediately notify the Attorneys-
in-Fact of the occurrence of any event which shall cause the
representations, warranties and agreements herein contained not to be true
and correct and in full force and effect at the effective date of the
Registration Statement or on a Delivery Date as appropriate.
2. PURCHASE AND SALE.
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Subject to the terms and conditions herein set forth, (a) the Company and
each of the Selling Shareholders, severally and not jointly, agree to sell to
the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and each of the Selling Shareholders, at a
purchase price per share of $_____, the number of Firm Securities to be
purchased by such Underwriter as set forth opposite the name of such Underwriter
in Schedule I hereto and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Securities as
provided below, the Company and certain of the Selling Shareholders agree,
severally and not jointly, as set forth in Schedule II hereto, to sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and certain of the Selling Shareholders,
at the purchase price set forth in clause (a) of this Section 2, that portion of
the number of Optional Securities as to which such election shall have been
exercised (to be adjusted by you so as to eliminate fractional securities)
determined by multiplying such number of Optional Securities by a fraction, the
numerator of which is the maximum number of Optional Securities that such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto, and the denominator of which is the maximum
number of the Optional Securities that all of the Underwriters are entitled to
purchase.
The Company and certain of the Selling Shareholders, as and to the extent
indicated in Schedule II hereto, hereby grants, severally and not jointly, to
the Underwriters an option to purchase at their election an aggregate of up to
315,000 Optional Securities, as more particularly set forth in Schedule II
hereto, at the purchase price per share set forth in the paragraph above, for
the sole purpose of covering over-allotments in the sale of the Firm Securities.
Any such election to purchase Optional Securities shall be made in proportion to
the maximum number of Optional Securities to be sold by the Company and the
Selling Shareholders as set forth in Schedule II hereto. Any such election to
purchase Optional Securities may be exercised no more than once by written
notice from you to the Company and the Selling Shareholders, given within a
period of 45 days after the date of this Agreement, setting forth the aggregate
amount of Optional Securities to be purchased and the date on which such
Optional Securities are to be delivered and payment therefor is to be made, as
determined by you but in no event earlier than the First Delivery Date (as
defined in Section 4 hereof) or, unless you otherwise agree in writing, earlier
than two or later than 10 business days after the date of such notice; provided
that if such notice is delivered after noon, Richmond, Virginia time, the date
for delivery of the Optional Securities and payment therefor shall be no earlier
than three business days after the date of such notice.
3. OFFERING BY THE UNDERWRITERS.
Upon the authorization by you of the release of the Firm Securities, the
several Underwriters propose to offer the Firm Securities for sale upon the
terms and conditions set forth in the Prospectus.
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4. DELIVERY AND PAYMENT.
Certificates in definitive form for the Securities to be purchased by each
Underwriter hereunder, and in such denominations and registered in such names as
Wheat, First Securities, Inc. may request upon at least two business days' prior
notice to the Company or any Selling Shareholder, as applicable, shall be
delivered by or on behalf of the Company or such Selling Shareholder, as
applicable, to Joseph Charles & Associates, Inc., for the account of each
Underwriter, against payment by such Underwriter or on its behalf of the
purchase price therefor. Payment of the purchase price for the Securities shall
be made by wire transfer of immediately available funds to an account designated
by the Company and to an account designated by the Selling Shareholders all at
the offices of Joseph Charles & Associates, Inc., 9701 Wilshire Boulevard, Ninth
Floor, Beverly Hills, California. The time and date of such delivery and payment
shall be, with respect to the Firm Securities, 10:00 a.m., California time, on
______________ or at such other time and date as you and the Company may agree
upon in writing, and, with respect to the Optional Securities, 10:00 a.m.,
California time, on the date specified by you in the written notice given by you
(consistent with Section 2 hereof) of the Underwriters' election to purchase
such Optional Securities, or at such other time and date as you, the Company and
the Selling Shareholders may agree upon in writing. Such time and date for
delivery of the Firm Securities is herein called the "First Delivery Date," such
time and date for delivery of the Optional Securities, if not the First Delivery
Date, is herein called the "Second Delivery Date," and each such time and date
for delivery is herein called a "Delivery Date." Such certificates will be made
available for checking and packaging at least 24 hours prior to each Delivery
Date at the offices of Joseph Charles & Associates, Inc. at the address set
forth above or such other location designated by the Underwriters to the Company
and the Selling Shareholders.
5. AGREEMENTS OF THE COMPANY.
The Company agrees with the Underwriters:
(a) To prepare the Prospectus in a form reasonably approved by you and to
file such Prospectus (or a term sheet as permitted by Rule 434(c)) pursuant to
Rule 424(b) under the Act not later than the Commission's close of business on
the second business day following the execution and delivery of this Agreement
or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under
the Act; to make no amendment or supplement to the Registration Statement or
Prospectus prior to any Delivery Date which shall be reasonably disapproved by
you promptly after reasonable notice thereof; to advise you, promptly after it
receives notice thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, of any request by the Commission for the amending or supplementing of
the Registration Statement or Prospectus or
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for additional information and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification, to use
promptly its reasonable best efforts to obtain its withdrawal;
(b) Promptly from time to time to take such actions as you may
reasonably request to qualify the Securities for offering and sale under
the securities laws of such jurisdictions as you may request and to comply
with such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to complete
the distribution of the Securities, provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) To furnish the Underwriters with copies of the Registration
Statement and the Prospectus in such quantities as you may from time to
time reasonably request during such period following the date hereof that a
prospectus is required to be delivered in connection with offers or sales
of Securities, and, if the delivery of a prospectus is required during this
period and if at such time any event shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during
such period to amend or supplement the Prospectus to comply with the Act,
to notify you and upon your request to file such document and to prepare
and furnish without charge to you and to any dealer in securities as many
copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance;
(d) As soon as practicable, to make generally available to its
shareholders (within the meaning of Rule 158 under the Act) and to deliver
to you, an earnings statement of the Company, conforming with the
requirements of Section 11(a) of the Act and Rule 158 under the Act,
covering a period of at least 12 months beginning after the effective date
of the Registration Statement;
(e) For a period of 180 days from the date of the Prospectus, not
to offer, sell, contract to sell or otherwise dispose of any securities of
the Company without the prior written consent of Joseph Charles &
Associates, Inc. (other than (i) 1,000,000 shares of Common Stock to be
used as consideration in connection with the acquisition of practices if
the recipients of such shares agree to be bound by the provisions of this
Section 5(e) until 180 days after the date hereof, and (ii) the Securities
to be sold by the Company hereunder or pursuant to employee stock option
plans or pursuant to options, warrants or rights outstanding on the date of
this Agreement or granted hereafter pursuant to the Birner Dental
Management Services, Inc. 1995 Employee Stock Option Plan or the Birner
Dental Management Services, Inc. 1995 Stock Option Plan for Managed Dental
Centers so long as such options are not exercisable within 180 days after
the date hereof);
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(f) During a period of five (5) years after the date hereof, to
furnish to you and, upon request, to each of the other several Underwriters
hereunder, (i) copies of all reports or other communications (financial or
other) furnished to shareholders, (ii) as soon as they are available,
copies of any reports and financial statements furnished to or filed with
the Commission, any securities exchange or the NASD, and (iii) such
additional publicly available information concerning the business and
financial condition of the Company, if any, as you may reasonably request;
(g) To apply the net proceeds from the sale of the Securities for
the purposes set forth in the Prospectus; and
(h) To file Form SR in conformity with the requirements of the Act
and the Rules and Regulations.
6. PAYMENT OF EXPENSES.
The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's and the Selling Shareholders'
counsel and accountants in connection with the registration of the Securities
under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
reproducing any Agreement Among Underwriters, this Agreement, the Blue Sky
Survey and any other documents in connection with the offering, purchase, sale
and delivery of the Securities; (iii) all expenses in connection with the
qualification of the Securities for offering and sale under state securities
laws as provided in Section 5(b) hereof; (iv) the filing fees incident to
securing any required review by the NASD of the terms of the sale of the
Securities; (v) the cost of preparing stock certificates; (vi) the costs or
expenses of any transfer agent or registrar; (vii) all road show costs and
expenses; (viii) the cost of advertising the offering in the national edition of
the Wall Street Journal, such costs not to exceed $20,000; and (ix) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section. It is
understood, however, that except as provided in this Section 6, Section 8 and
Section 11 hereof, the Underwriters will pay all their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Securities by them and any advertising expenses connected with any offers
they may make.
In addition to the foregoing expenses, the Company shall at the First
Delivery Date pay to you the balance of a non-accountable expense allowance
equal to 2.75% of the gross proceeds of the offering of the Firm Securities, of
which $10,000 has been paid. In the event all or any portion of the Optional
Securities are purchased, the Company shall pay to you at the Second Delivery
Date and each subsequent Delivery Date an additional amount equal to 2.75% of
the gross proceeds of the offering of the Optional Securities. In the event the
transactions contemplated hereby are not consummated for any reason, the
Company shall be liable for your actual accountable out-of-pocket expenses (with
credit given to the $10,000 paid), in accordance with Section 11 hereof;
provided however, that any portion of the $10,000 paid by the Company that has
not been utilized by you in connection with the offering on an accountable basis
shall be refunded by you to the Company.
7. CONDITIONS TO OBLIGATIONS OF UNDERWRITERS.
The obligations of the Underwriters hereunder, as to the Securities to
be delivered at each Delivery Date, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and each of the Selling Shareholders herein are, at and as of such
Delivery Date, true and correct, the condition that
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the Company and each of the Selling Shareholders shall have performed all of
their respective obligations hereunder theretofore to be performed, and the
following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) under the Act within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 5(a) of this Agreement; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction;
(b) Berliner Zisser Walter & Gallegos, P.C., counsel for the
Underwriters, shall have furnished to you such opinion or opinions, dated
such Delivery Date, with respect to the incorporation of the Company, the
validity of the Securities being issued at such Delivery Date, the
Registration Statement, the Prospectus, and other related matters as you
may reasonably request, and such counsel shall have received such papers
and information as they may reasonably request to enable them to pass upon
such matters;
(c) Holland & Hart LLP, counsel for the Company, shall have furnished to
you their written opinion, dated such Delivery Date, in form reasonably
satisfactory to you, to the effect set forth in Exhibit A attached hereto.
---------
Such opinion may be furnished subject to such stated assumptions,
limitations and qualifications as shall be reasonably acceptable to Alston &
Bird LLP, counsel for the Underwriters.
(d) Jones & Keller, P.C., counsel for the Selling Shareholders, shall have
furnished to you its written opinion, dated such Delivery Date, in form and
substance reasonably satisfactory to you, to the effect set forth in
Exhibit B.
---------
Such opinion may be furnished subject to such stated assumptions,
limitations and qualifications as shall be reasonably acceptable to Alston &
Bird LLP, counsel for the Underwriters.
(e) At 10:00 a.m., California time, on the date of this Agreement and the
effective date of the most recently filed post-effective amendment to the
Registration Statement and also at each Delivery Date, Arthur Andersen LLP
shall have furnished to you a letter or letters, dated the respective date
of delivery thereof, in form and substance reasonably satisfactory to you,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information relating to the
Company and its Subsidiaries contained in the Registration Statement and
the Prospectus;
(f) (i) Neither the Company nor any of the Subsidiaries or the P.C.s
shall have sustained, since the date of the latest audited financial
statements included in the Prospectus,
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any loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as
set forth or contemplated in the Prospectus, and (ii) since the respective
dates as of which information is given in the Prospectus there shall not
have been any change in the outstanding capital stock (other than the
exercise of stock options or warrants or conversion of debt or other
convertible instruments outstanding as of such date) or long-term debt of
the Company or any of the Subsidiaries or the P.C.s or any change, or any
development involving a prospective change, in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operations of the Company or any of the Subsidiaries or the P.C.s otherwise
than as set forth or contemplated in the Prospectus, the effect of which,
in any such case described in clause (i) or (ii) is in your reasonable
judgment so material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the delivery of the Securities being
delivered at such Delivery Date on the terms and in the manner contemplated
by the Prospectus;
(g) There shall not have occurred any of the following: (i) a
suspension or material limitation in trading of any of the securities of
the Company on the Nasdaq National Market; (ii) any United States federal
or state statute, regulation, rule or order of any court, legislative body,
agency or other governmental authority shall have been enacted, published,
decreed or promulgated or any proceeding or investigation shall have been
commenced which, in your reasonable judgment, materially and adversely
affects the business or operations of the Company; (iii) the outbreak or
escalation of hostilities involving the United States or the declaration by
the United States of a national emergency or war, if any such event
specified in this clause (iii) would have such a materially adverse effect,
in your reasonable judgment, as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Securities being
delivered at such Delivery Date on the terms and in the manner contemplated
in the Prospectus; or (v) such a material adverse change in general
economic, political, financial or international conditions affecting
financial markets in the United States having a material adverse impact on
trading prices of securities in general, as, in your reasonable judgment,
makes it inadvisable to proceed with the payment for and delivery of the
Securities;
(h) The Company shall have furnished to you copies of Lock-up
Agreements in form and content reasonably satisfactory to you; and
(i) The Company and each of the Selling Shareholders shall have
furnished or caused to be furnished to you at such Delivery Date
certificates of officers of the Company and each of the Selling
Shareholders reasonably satisfactory to you as to the accuracy of the
respective representations and warranties of the Company and each of the
Selling Shareholders herein at and as of such Delivery Date, as to the
performance by the Company and each of the Selling Shareholders of all of
their obligations hereunder to be performed at or prior to such Delivery
Date, as to the matters set forth in subsections (a) and (f) of this
Section and as to such other matters as you may reasonably request.
(j) The Company shall have executed and delivered to Joseph Charles
& Associates, Inc. a financial consulting agreement (the "Consulting
Agreement") whereby the Company will retain Joseph Charles & Associates,
Inc. as a financial consultant for a period of two years following the
First Delivery Date for a fee of $3,000 per month. Such fees, which in the
aggregate shall total $72,000, shall be paid in full on the First Delivery
Date.
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8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company will indemnify and hold harmless each Underwriter, each of
its officers and directors and affiliates and each person, if any, who controls
such Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will promptly reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating, preparing to defend or defending, or appearing as a third-
party witness in connection with, any such action or claim; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by the Underwriters through you expressly
for use therein; provided, further, that the foregoing indemnity agreement with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Securities, or any person controlling such Underwriter, if
a copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Securities to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such losses, claims, damages or
liabilities.
(b) Subject to subsection (f) of this Section, each of the Selling
Shareholders severally and not jointly will indemnify and hold harmless each
Underwriter, each of its officers and directors and affiliates and each person,
if any, who controls such Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act against any losses, claims, damages or
liabilities, joint or several, to which the Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
promptly reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating, preparing to
defend or defending, or appearing as a third-party witness in connection with,
any such action or claim; provided, however, that a
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Selling Shareholder will only be liable for information furnished in
writing by or on behalf of such Selling Shareholder expressly for use in
any Preliminary Prospectus, the Registration Statement, the Prospectus or
any amendment or supplement thereto; provided, further, that none of the
Selling Shareholders shall be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by the
Underwriters through you expressly for use therein; provided, further, that
the foregoing indemnity agreement with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages or liabilities purchased
Securities, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to
have been delivered, at or prior to the written confirmation of the sale of
the Securities to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities.
(c) Each Underwriter will indemnify and hold harmless the Company,
each of its directors, each of its officers who signed the Registration
Statement, each Selling Shareholder and each person, if any, who controls
the Company or any Selling Shareholder within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act against any losses, claims,
damages or liabilities to which the Company, any such director or officer
of the Company, any Selling Shareholder or any such controlling person of
the Company or such Selling Shareholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse the
Company and any Selling Shareholder for any legal or other expenses
reasonably incurred by the Company and the Selling Shareholder in
connection with investigating, preparing to defend or defending, or
appearing as a third-party witness in connection with, any such action or
claim. The Company and each of the Selling Shareholders acknowledge that
the statements set forth in the last paragraph immediately preceding your
names on the cover page, the last paragraph on the inside front cover page
and the first, second, third, seventh and ninth paragraphs under the
heading "Underwriting" in the Preliminary Prospectus and the Prospectus
constitute the only information furnished in writing by or on behalf of the
several Underwriters
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for inclusion in the Preliminary Prospectus or the Prospectus, and you, as
the Representatives, confirm that such statements are correct.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have been
advised by counsel that representation of such indemnified party and the
indemnifying party may be inappropriate under applicable standards of
professional conduct due to actual or potential differing interests between
them, the indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party
or parties. It is understood that the indemnifying party shall, in
connection with any such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and
expenses of only one separate firm of attorneys together with appropriate
local counsel at any time for all indemnified parties unless such firm of
attorneys shall have reasonably concluded that one or more indemnified
parties has actual differing interests with other indemnified parties. Upon
receipt of notice from the indemnifying party to such indemnified party of
its election so to appoint counsel to defend such action and approval by
the indemnified party of such counsel, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall
have employed separate counsel in accordance with the proviso to the next
preceding sentence, (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party;
and except that, if clause (i) or (iii) is applicable, such liability shall
be only in respect of the counsel referred to in such clause (i) or (iii).
The indemnifying party shall not be liable for any settlement entered into
without its written consent (which consent will not be unreasonably
withheld).
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the
-23-
<PAGE>
relative benefits received by the Company and each of the Selling
Shareholders on the one hand and the Underwriters on the other from the
offering of the Securities. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (d)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and each of the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and each of
the Selling Shareholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (after deducting the total underwriting discount, but before
deducting expenses) received by the Company and each of the Selling
Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or any Selling
Shareholder on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company, each of the
Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were
determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which
does not take into account the equitable considerations referred to above
in this subsection (e). Except in the event that the indemnified party
failed to give the notice required under subsection (d) above, the amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this subsection (e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), no Underwriter shall
be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of damages which
such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations under this subsection (e) are several in proportion to their
respective underwriting obligations and not joint.
(f) The liability of each of the Selling Shareholders under this
Section 8 shall be limited to an amount equal to the initial public
offering price less the underwriting discount of the Securities sold by
such Selling Shareholder to the Underwriters.
-24-
<PAGE>
(g) The obligations of the Company and each of the Selling Shareholders
under this Section 8 shall be in addition to any liability which the Company and
such Selling Shareholder may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and to each person, if any, who controls the
Company within the meaning of the Act.
9. DEFAULT OF UNDERWRITERS.
(a) If any Underwriter shall default in its obligation to purchase the
Securities that it has agreed to purchase hereunder at a Delivery Date, you may
in your discretion arrange for you or another party or other parties to purchase
such Securities on the terms contained herein. If within 36 hours after such
default by any Underwriter you do not arrange for the purchase of such
Securities, then the Company and the Selling Shareholders shall be entitled to a
further period of 36 hours within which to procure another party or other
parties satisfactory to you to purchase such Securities on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Shareholders that you have so arranged for the purchase of such
Securities, or the Company and the Selling Shareholders notify you that they
have so arranged for the purchase of such Securities, you or the Company and the
Selling Shareholders shall have the right to postpone such Delivery Date for a
period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
opinion, exercised in consultation with Alston & Bird LLP, may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall include any
person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Securities.
(b) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Securities that remains unpurchased does not exceed one-eleventh
of the aggregate number of all the Securities to be purchased at such Delivery
Date, then the Company and the Selling Shareholders shall have the right to
require each non-defaulting Underwriter to purchase the number of Securities
that such Underwriter agreed to purchase hereunder at such Delivery Date and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Securities that such Underwriter agreed to
purchase hereunder at such Delivery Date) of the share of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Shareholders
-25-
<PAGE>
as provided in subsection (a) above, the aggregate number of such Securities
that remains unpurchased exceeds one-eleventh of the aggregate number of all the
Securities to be purchased at such Delivery Date, or if the Company and the
Selling Shareholders shall not exercise the right described in subsection (b)
above to require non-defaulting Underwriters to purchase Securities of a
defaulting Underwriter or Underwriters, then this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase and of
the Selling Shareholders to sell the Optional Securities) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriters or
the Company and the Selling Shareholders, except for the expenses to be borne by
the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, each of the Selling Shareholders and the
several Underwriters, as set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation (or any statement as to the results thereof) made by or on behalf
of the Underwriters or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company or each
of the Selling Shareholders, and shall survive delivery of and payment for the
Securities.
11. TERMINATION AND PAYMENT OF EXPENSES.
If this Agreement shall be terminated pursuant to Section 9 hereof, neither
the Company nor any of the Selling Shareholders shall then be under any
liability to any Underwriter except as provided in Section 6 and Section 8
hereof; but if for any other reason any Securities are not delivered by or on
behalf of the Company or any of the Selling Shareholders as provided herein, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses, including fees and disbursements of counsel, reasonably incurred by
the Underwriters in making preparations for the purchase, sale and delivery of
the Securities not so delivered, but neither the Company nor any of the Selling
Shareholders shall then be under further liability to any Underwriter except as
provided in Section 6 and Section 8 hereof.
12. REPRESENTATIVE'S WARRANTS.
On the First Delivery Date, the Company will issue to the Representative,
for consideration of $100.00 and upon the terms and conditions set forth in the
form of Representative's Purchase Option filed as an exhibit to the Registration
Statement, a Representative's Purchase Option, (the "Representative's Purchase
Option") to purchase an aggregate of 210,000 shares of Common Stock. In the
event of conflict in the terms of this Agreement and the Representative's
Purchase Option, the language of the Representative's Purchase Option shall
control.
13. NOTICES.
In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you.
All statements, requests, notices and agreements hereunder shall be in
writing or by telegram if promptly confirmed in writing, and if to the
Underwriters shall be sufficient in all respects if delivered or sent by
reliable courier, first-class mail, telex or facsimile transmission
-26-
<PAGE>
to Joseph Charles & Associates, Inc. at 9701 Wilshire Boulevard, Ninth Floor,
Beverly Hills, California 90212, Attention: Corporate Finance Department
(telecopier number (310) 859-2877); if to any of the Selling Shareholders or the
Company shall be sufficient in all respects if delivered or sent by reliable
courier, first-class mail, telex, or facsimile transmission to the address of
the Company set forth in the Registration Statement, Attention: _____________
(telecopier number ____________, with a copy (which shall not constitute notice)
to Holland & Hart LLP, 555 17th Street, Suite 3200, Denver, Colorado 80202,
Attention: Dennis M. Jackson, Esq. (telecopier number (303) 295-8261); provided,
however, that any notice to any Underwriter pursuant to Section 8 hereof shall
be delivered or sent by reliable courier, first-class mail, telex or facsimile
transmission to such Underwriter at its address set forth in the Underwriters'
Questionnaire, which address will be supplied to the Company or the Selling
Shareholders by you upon request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
14. SUCCESSORS.
This Agreement shall be binding upon, and inure solely to the benefit of,
the Underwriters, each of the Selling Shareholders and the Company and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each of the Selling Shareholders and each person who controls the
Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Securities from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
15. TIME OF THE ESSENCE.
Time shall be of the essence in this Agreement.
16. BUSINESS DAY.
As used herein, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
17. APPLICABLE LAW.
This Agreement shall be construed in accordance with the laws of the State
of New York.
18. CAPTIONS.
The captions included in this Agreement are included solely for convenience
of reference and shall not be deemed to be a part of this Agreement.
-27-
<PAGE>
19. COUNTERPARTS.
This Agreement may be executed by any one or more of the parties in any
number of counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
-28-
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us four counterparts hereof, and upon the acceptance hereof by you,
this letter and such acceptance hereof shall constitute a binding agreement
among each of the Underwriters and the Company. It is understood that your
acceptance of this Agreement on behalf of each of the Underwriters is pursuant
to the authority set forth in a form of Agreement Among Underwriters, the form
of which will be submitted to the Company and each of the Selling Shareholders
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
Very truly yours,
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:_________________________________________________
Frederic W.J. Birner
Chairman of the Board and Chief Executive Officer
SELLING SHAREHOLDERS
By:_________________________________________________
Attorney-in-Fact for the Selling Shareholders
named in Schedule II hereto
Accepted as of the date hereof
at Beverly Hills, California:
JOSEPH CHARLES & ASSOCIATES, INC.
Representative of the Underwriters
By: _____________________________
Name:________________________
Title:_______________________
-29-
<PAGE>
EXHIBIT A
---------
Opinion of Counsel to the Company
---------------------------------
1. The Company, each of its Subsidiaries and each of the P.C.s have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
corporate power and authority to own or lease their respective properties
and conduct their respective businesses as described in the Prospectus;
2. The Company, each of its Subsidiaries and each of the P.C.s have been duly
qualified as foreign corporations for the transaction of business and are
in good standing under the laws of every other jurisdiction in the United
States in which they own or lease properties, or conduct any business, so
as to require such qualification, except where the failure to so qualify
will not result in a material adverse effect on the consolidated financial
position, shareholders' equity or results of operations of the Company, the
Subsidiaries and the P.C.s taken as a whole (such opinion may be based
solely upon certificates of authority or qualification issued in such
jurisdictions to such effect);
3. The Company has an authorized capitalization as set forth in the Prospectus
under the caption "Capitalization," and all of the outstanding shares of
capital stock of the Company have been duly and validly authorized and
issued, are fully paid and nonassessable and conform to the description of
the capital stock contained in the Prospectus; except as described in the
Prospectus, there are no preemptive or other similar rights to subscribe
for or to purchase any securities of the Company pursuant to the Company's
Articles of Incorporation or Bylaws or Colorado law, and to such counsel's
knowledge, the Company has not granted any preemptive or other similar
rights to subscribe for or to purchase any securities of the Company that
have not been waived; except as described in the Prospectus, there are no
warrants, options or similar rights to purchase any securities of the
Company;
4. The Securities have been duly and validly authorized, and the Securities
being issued as of such Delivery Date, when issued and delivered against
payment therefor in accordance with this Agreement, will be duly and
validly issued, and fully paid and nonassessable and will conform to the
description of the Securities contained in the Prospectus as amended or
supplemented;
5. To such counsel's knowledge, there are no legal or governmental proceedings
pending to which the Company or any of the Subsidiaries or any of the P.C.s
is a party or of which any property of the Company or any of the
Subsidiaries or the P.C.s is the subject, other than as set forth or
contemplated in the Prospectus, that, if determined adversely to the
Company or any of its Subsidiaries or the P.C.s, would individually or in
the aggregate have a material adverse effect on the financial position,
shareholders' equity or results of operations of the Company, the
Subsidiaries and P.C.s taken as a whole, and, to such counsel's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
<PAGE>
6. The issue and sale of the Securities being issued at such Delivery Date by
the Company and the performance of this Agreement by the Company and the
consummation by the Company of the other transactions herein contemplated
will not conflict with or result in a breach or violation of any terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement, note, lease or other agreement or instrument
listed on Exhibit A thereto (such list to include only those material
contracts or documents filed as exhibits to the Registration Statement) nor
will such action result in any violation of the provisions of the Charter
or Bylaws of the Company or the articles of incorporation or the bylaws of
any of the Subsidiaries or the P.C.s or of any statute or any order, rule
or regulation known to such counsel of any court or governmental agency or
body having jurisdiction over the Company, any of the Subsidiaries or the
P.C.s or any of their properties; provided, however, that such opinion need
not address state securities or Blue Sky laws or, except to the extent of
matters discussed elsewhere in this opinion, the federal securities laws;
7. No consent, approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body is required for
the issue and sale of the Securities by the Company or the consummation by
the Company of the other transactions contemplated by this Agreement,
except such as have been obtained under the Act and such as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Securities by the Underwriters and the clearance of
such offering with the National Association of Securities Dealers, Inc.;
8. The Registration Statement, as of its effective date, and the Prospectus
and any further amendments and supplements thereto made by the Company
prior to such Delivery Date, as of the date thereof, (other than the
financial statements and notes thereto, related schedules and other
statistical and financial information contained therein, as to which such
counsel need not express any opinion) comply as to form in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder. In addition, while such counsel need not check
the accuracy and completeness of, or otherwise verify or pass upon or
assume any responsibility for the accuracy or completeness of, the
statements contained in the Registration Statement, the Prospectus or any
amendment or supplement thereto, such counsel shall state that (a) in the
course of its review and discussion of the contents of the Registration
Statement and the Prospectus with certain directors, officers and employees
of the Company, representatives of the independent public accountants for
the Company, representatives of the Underwriters and representatives of
counsel for the Underwriters, nothing has come to its attention that has
caused it to believe (i) that the Registration Statement, as of its
effective date, any further amendment to the Registration Statement made by
the Company prior to such Delivery Date, as of the date thereof, the
Prospectus, as of the date thereof, and any further amendment or supplement
to the Prospectus made by the Company prior to such Delivery date, as of
the date thereof (in each case other than the financial statements and
notes thereto, related schedules and other statistical and financial
information contained therein, as to which such counsel did not express any
<PAGE>
opinion), contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading and (ii) that the Registration
Statement and the Prospectus, as amended and supplemented prior to such
Delivery Date, as of such Delivery Date (other than the financial
statements and notes thereto, related schedules and other statistical and
financial information contained therein, as to which such counsel need not
express any opinion), contains an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and (b) such counsel does
not know of any legal or governmental proceedings or of any contracts or
other documents of a character required to be described in the Registration
Statement or the Prospectus required to be filed as an exhibit to the
Registration Statement that are not filed or described as required;
9. The descriptions in the Registration Statement and Prospectus under the
captions "Risk Factors - Government Regulation," "Risk Factors - Risks of
Becoming Subject to Licensure," "Risk Factors - Risks Associated with Non-
Competition Covenants and Other Arrangements with Managing Dentists," "Risk
Factors - Shares Eligible for Future Sale; Fluctuations in Market Price,"
"Business - Government Regulation," "Shares Eligible for Future Sale" and
"Item 14. Indemnification of Officers and Directors" of statutes and
contracts and other documents are accurate and fairly present the
information required to be shown;
10. This Agreement, the Representatives Purchase Option and the Consulting
Agreement have been duly authorized, executed and delivered by the Company;
11. The Registration Statement has become effective under the Act and, to the
best of the knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Act;
12. The Common Stock has been approved for listing on the Nasdaq National
Market;
13. As of the Closing Date, to the best knowledge of such counsel, the business
conducted by the Company (as described in the Prospectus), the Subsidiaries
and the P.C.s and the material contractual relationships between (A) the
Company, any of its Subsidiaries or the P.C.s and the health care payors
with which it contracts and between (B) the Company, any of the
Subsidiaries or the P.C.s and the health care providers with which it
contracts do not violate any federal or state health care laws and
regulations in such jurisdictions in which the Company, any of the
Subsidiaries are doing business that are applicable to such business and
such relationships, including those laws governing insurance risk, risk
allocation, corporate practice of medicine or dentistry, professional
corporations, fee splitting, client confidentiality fraud and abuse and
self-referral except for violations that would not have a material adverse
effect on the Company, the Subsidiaries and the P.C.s taken as a whole;
14. To such counsel's knowledge after due inquiry, the Company, the
Subsidiaries, and the P.C.s possess all certificates, authorizations,
licenses and permits issued by the
<PAGE>
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, except for the certificates,
authorizations, licenses and permits the failure to so possess would not
singly or in the aggregate have a material adverse effect on the financial
position Shareholders' equity or results of operations of the Company, the
Subsidiaries, and the P.C.s taken as a whole and, to such counsel's best
knowledge neither the Company nor any such Subsidiary or P.C. has received
any notice of proceedings relating to the revocation or modification of any
such certificate, authorization, license or permit which, individually or
in the aggregate, if the subject or an unfavorable decision, ruling or
finding, would result in a material adverse effect, except as described in
or contemplated by the Prospectus;
15. The information in the Prospectus under the caption "Description of Capital
Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply
with Colorado law; and
16. To such counsel's knowledge, except as set forth in the Registration
Statement and Prospectus, no holders of Common Stock or other securities of
the Company have registration rights with respect to securities of the
Company; and neither the filing of the Registration Statement nor the
offering or sale of the Securities as contemplated by this Agreement gives
rise to any rights for or relating to the registration of any securities of
the Company with respect to such filing, offering or sale, other than
rights which have been waived or satisfied or have expired.
<PAGE>
EXHIBIT B
---------
Opinion of Counsel to the Selling Shareholders
----------------------------------------------
1. This Agreement has been duly executed and delivered by or on behalf of each
Selling Shareholder;
2. The sale of the Securities to be sold by each Selling Shareholder hereunder
and the performance of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any terms or provisions of, or constitute a default
under, any statute or agreement to which such Selling Shareholder is a
party or by which such Selling Shareholder is bound, or any statute, order,
rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over such Selling Shareholder or such
Selling Shareholder's property; provided, however, that such opinion need
not address state securities or Blue Sky laws or, to the extent of matters
discussed in paragraph 9 of Exhibit A above, the federal securities laws;
3. No consent, approval, authorization or order of any court or governmental
agency or body is required for the sale of securities by the Selling
Shareholders and the consummation by the Selling Shareholders of the
transactions contemplated by this Agreement, except such as have been
obtained under the Act and such as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of such
Securities by the Underwriters and the clearance of such offering with the
National Association of Securities Dealers, Inc.;
4. Upon delivery of and payment for the Securities to be sold by the Selling
Shareholders as contemplated by the Agreement, each of the Underwriters
that has acquired any of such Securities from the Selling Shareholders in
good faith and without notice of any adverse claim within the meaning of
the Colorado Uniform Commercial Code will acquire such Securities on such
Delivery Date free of any adverse claim;
5. Each Selling Shareholder which is not a natural person has full right,
power and authority to enter into and to perform its obligations under the
Power of Attorney and Custody Agreement to be executed and delivered by it
in connection with the transactions contemplated herein; the Power of
Attorney and Custody Agreement of each Selling Shareholder that is not a
natural person has been duly authorized by such Selling Shareholder; the
Power of Attorney and Custody Agreement of each Selling Shareholder has
been duly executed and delivered by or on behalf of such Selling
Shareholder; and the Power of Attorney and Custody Agreement of each
Selling Shareholder constitutes the valid and binding agreement of such
Selling Shareholder, enforceable in accordance with its terms, except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
<PAGE>
6. Each of the Selling Shareholders has full right, power and authority to
enter into and to perform its obligations under this Agreement and to sell,
transfer, assign and deliver the Shares to be sold by such Selling
Shareholder hereunder; and
7. This Agreement has been duly authorized by each Selling Shareholder that is
not a natural person and has been duly executed and delivered by or on
behalf of each Selling Shareholder.
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Optional Securities
to be Purchased if
Firm Securities Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- -------------------
<S> <C> <C>
Joseph Charles & Associates, Inc...........
Total...................
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Optional
Total Number of Securities to be
Firm Securities Sold if Maximum
to be Sold Option Exercised
--------------- ------------------
<S> <C> <C>
The Company.......................
The Selling Shareholders:
Total............
</TABLE>
<PAGE>
SCHEDULE III
SUBSIDIARIES OF BIRNER DENTAL MANAGEMENT SERVICES INC.
------------------------------------------------------
<TABLE>
<CAPTION>
State or Country
NAME OF SUBSIDIARY of Incorporation
------------------ ----------------
<S> <C>
</TABLE>
<PAGE>
SCHEDULE IV
PROFESSIONAL CORPORATIONS
-------------------------
NAME OWNER
---- -----
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF HOLLAND & HART LLP APPEARS HERE]
January 14, 1998
Birner Dental Management Services, Inc.
3801 East Florida Avenue
Suite 208
Denver, Colorado 80210
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
This opinion is delivered in our capacity as counsel to Birner Dental
Management Services, Inc., a Colorado corporation (the "Company") in connection
with the preparation and filing with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, of a Registration Statement on
Form S-1 (the "Registration Statement") relating to 2,415,000 shares of Common
Stock, without par value (the "Registered Shares"), including 1,833,816 shares
which are to be sold by the Company, 266,184 shares which are to be sold by
certain shareholders of the Company and 315,000 shares which the underwriters
have an option to purchase from the Company and certain shareholders solely for
the purpose of covering overallotments. All of the Registered Shares are to be
sold to the several underwriters (the "Underwriters") of which Joseph Charles &
Associates, Inc. is the representative (the "Representative") pursuant to an
Underwriting Agreement (the "Underwriting Agreement") to be entered into between
the Company and the Representatives of the Underwriters.
As counsel for the Company, we have examined the form of the proposed
Underwriting Agreement being filed as an exhibit to the Registration Statement,
the Company's Amended and Restated Articles of Incorporation, and the Company's
Bylaws, each as presently in effect, and such records, certificates and other
documents of the Company as we have deemed necessary or appropriate for the
purposes of this opinion.
Based on the foregoing, we are of the opinion that when the Underwriting
Agreement is completed (including the insertion therein of pricing terms) and
executed
<PAGE>
by the Company and on behalf of the Underwriters, and the Registered Shares are
sold to the Underwriters and paid for pursuant to the terms of the Underwriting
Agreement, the Registered Shares will be duly authorized, legally issued, fully
paid and non-assessable.
We hereby consent to the references to our firm under the caption "Legal
Matters" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ HOLLAND & HART LLP
<PAGE>
EXHIBIT 10.30
FINANCIAL CONSULTING AGREEMENT
This Financial Consulting Agreement (the "Agreement") is made as of
February ___, 1998 by and between, Birner Dental Management Services, Inc., a
Colorado corporation having its business address at 3801 East Florida Avenue,
Suite 208, Denver, Colorado 80210 (hereinafter the "Company"), and Joseph
Charles & Associates, Inc., a Florida corporation having its principal place of
business at 9701 Wilshire Boulevard, Ninth Floor, Beverly Hills, California
90212 (hereinafter "Consultant").
In consideration of the mutual promises contained herein and on the terms
and conditions hereinafter set forth, the Company and Consultant agree as
follows:
1. Provision of Services.
(a) Consultant agrees, to the extent reasonably requested by the President
of the Company and reasonably required in the conduct of the business of the
Company, as determined by the Consultant, to place at the disposal of the
Company its judgment and experience and to provide business development services
to the Company including the following:
(i) assist the Company in its public equity marketing efforts;
(ii) provide access to the Consultant's retail sales force through roadshow
meetings and conference calls;
(iii) provide research coverage from the Consultant's Research Department;
and
(iv) advise with regard to stockholder relations and public relations
matters.
All such services shall at all times be at the request of the Company.
(b) Consultant agrees to use its best efforts at all times in the
furnishing of advice and recommendations, and for this purpose Consultant shall
at all times maintain or keep available for the Company an adequate organization
of personnel or a network of outside professionals for the performance of its
obligations under this Agreement.
2. Compensation. In consideration for services to be rendered under this
Agreement, the Company and Consultant hereby agree that the Company shall pay a
non-refundable fee equal to $3,000 per month covering the twenty-four (24) month
term of this Agreement. All such fees, which are in the aggregate amount of
$72,000, shall be paid upon the parties' execution of this Agreement.
The Company agrees to reimburse Consultant for its expenses incurred by the
Consultant in connection with its services hereunder. All expenses shall be
approved in advance by the Company in writing.
3. Expenses Payment Schedule. Consultant will invoice the Company for its
actual expenses for each month within fifteen (15) days of the end of the month.
Payment of invoices for expenses approved by the Company pursuant to paragraph 2
will be due upon receipt.
4. Liability of Consultant. In furnishing the Company with management
advice and other services as herein provided, neither Consultant nor any
officer, director or agent thereof shall be liable to the Company or its
creditors for errors of judgment or for anything except willful malfeasance, bad
faith or gross negligence in the performance of its duties or reckless disregard
or its obligations and duties under the terms of this Agreement.
<PAGE>
It is further understood and agreed that Consultant may rely upon
information furnished by the Company to Consultant and any other information
Consultant reasonably believes to be accurate and reliable and that, except as
herein provided, Consultant shall not be accountable for any loss suffered by
the Company by reason of the Company's action or non-action on the basis of any
advice, recommendation or approval of Consultant, its partners, employees or
agents.
5. Status of Consultant. Consultant shall be deemed to be an independent
contractor and, except as expressly provided or authorized in this Agreement,
shall have no authority to act for or represent the Company.
6. Other Activities of Consultant. The Company recognizes that Consultant
now renders and may continue to render management and other services to other
companies which may or may not have policies and conduct activities similar to
those of the Company. Consultant shall be free to render such advice and other
services and the Company hereby consents thereto. Consultant shall not be
required to devote its full time and attention to the performance of its duties
under this Agreement, but shall devote only so much of its time and attention as
it deems reasonable or necessary for such purposes.
7. Control. Nothing contained herein shall be deemed to require the
Company to take any action contrary to its Articles of Incorporation or By-
Laws, or any applicable statute or regulation, or to deprive its Board of
Directors of their responsibility for any control of the conduct or the affairs
of the Company.
8. Term. Consultant's retention hereunder shall be for a term of
twenty-four (24) months commencing upon the execution of this Agreement.
9. Miscellaneous. This Agreement sets forth the entire agreement and
understanding between the parties and supersedes all prior discussions,
agreements and understandings of every and any nature between them. This
Agreement shall be construed and interpreted according to the laws of the State
of Colorado.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers or representatives duly authorized the day and year
first above written.
JOSEPH CHARLES & ASSOCIATES, INC.
By:
-----------------------------------------------
Name:
Title:
BIRNER DENTAL MANAGEMENT SERVICES, INC.
By:
----------------------------------------------
Frederic W. J. Birner, Chairman of the Board
and Chief Executive Officer
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<PAGE>
Exhibit 10.31
THE PURCHASE OPTION REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. NEITHER THE PURCHASE OPTION NOR SUCH SECURITIES
CAN BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
STATEMENT, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
THE TRANSFER OF THIS PURCHASE OPTION IS RESTRICTED AS DESCRIBED HEREIN.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
PURCHASE OPTION FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. 1
THIS CERTIFIES that, for receipt in hand of $100.00 and other value
received, JOSEPH CHARLES & ASSOCIATES, INC. (the "Holder") and/or its permitted
assigns, is entitled to subscribe for and purchase from BIRNER DENTAL MANAGEMENT
SERVICES, INC., a Colorado corporation (the "Company"), upon the terms and
conditions set forth herein, at any time or from time to time after February
___, 1999, and before 5:00 p.m. Eastern time on February ___, 2003 (the
"Exercise Period"), 210,000 shares of Common Stock (the "Shares") at a price of
$_______ per Share (the "Exercise Price"). This Purchase Option may not be sold,
transferred, assigned or hypothecated until February ___, 1999 except that it
may be transferred, in whole or in part, to (i) one or more officers or partners
of the Holder (or the officers, directors or partners of any such partner); (ii)
a successor to the Holder, or the officers, directors or partners of such
successor; (iii) a purchaser of substantially all of the assets of the Holder;
or (iv) by operation of law. After February ___, 1999, this Purchase Option may
be sold, transferred, assigned or hypothecated in accordance with applicable
law, including without limitation the restrictions contained in Rule
260.140.21(e) of the California Corporate Securities Law of 1986, as amended.
The term "Holder" as used herein shall include any transferee to whom this
Purchase Option has been transferred in accordance with the above. As used
herein the term "this Purchase Option" shall mean and include this Purchase
Option and any Purchase Option or Options hereafter issued as a consequence of
the exercise or transfer of this Purchase Option in whole or in part, and the
term "Common Stock" shall mean and include the Company's Common Stock with
ordinary voting power, which class at the date hereof is publicly traded.
1. (a) This Purchase Option may be exercised during the Exercise Period as
to the whole or any lesser number of whole Shares by the surrender of this
Purchase Option (with the election attached hereto duly executed) to the Company
at its office at 3801 East Florida Avenue, Suite 208, Denver, Colorado 80210, or
such other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order of the Company in an
amount equal to the Exercise Price multiplied by the number of shares of Common
Stock for which this Purchase Option is being exercised.
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(b) Upon written request of the Holder, and in lieu of payment for the
Shares by check in accordance with paragraph 1(a) hereof, the Holder may
exercise the Purchase Option (or any portion thereof) for and receive the number
of Shares equal to a fraction, the numerator of which equals (i) the amount by
which the average closing bid price of the Common Stock for the ten (10) trading
days preceding the date of exercise (the "Current Market Price" as further
defined in paragraph 5(l) below) exceeds the Exercise Price per share,
multiplied by (ii) the number of Shares to be purchased; and the denominator of
which equals the Current Market Price.
2. Upon each exercise of this Purchase Option, the Holder shall be deemed
to be the holder of record of the Shares issuable upon such exercise,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing such Shares shall not then have been actually
delivered to the Holder. As soon as practicable after each such exercise of
this Purchase Option, the Company shall issue and deliver to the Holder a
certificate or certificates for the Shares issuable upon such exercise,
registered in the name of the Holder or its designee. If this Purchase Option
should be exercised in part only, the Company shall, upon surrender of this
Purchase Option for cancellation, execute and deliver a new Purchase Option
evidencing the right of the Holder to purchase the balance of the Shares (or
portions thereof) subject to purchase hereunder.
3. The Company shall be entitled to treat the registered holder of any
Purchase Option on the records of the Company as the owner in fact thereof for
all purposes and shall not be bound to recognize any equitable or other claim to
or interest in such Purchase Option on the part of any other person. The
Purchase Options shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Purchase Option to the person entitled
thereto. The Purchase Options may be exchanged, at the option of the Holder
thereof, for another Purchase Option, or other Purchase Options of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Shares upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Purchase Options to be transferred on its books to any
person if, in the opinion of counsel to the Company, such transfer does not
comply with the provisions of the Securities Act of 1933 as amended (the "Act"),
or applicable state blue sky laws and the rules and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of this Purchase Option, such number of shares of Common Stock as
shall, from time to time, be sufficient therefor. The Company covenants that
all shares of Common Stock issuable upon exercise of this Purchase Option shall
be validly issued, fully paid, nonassessable, and free of preemptive rights.
5. (a) In case the Company shall sell or issue hereafter either its Common
Stock or any rights, options, warrants or obligations or securities containing
the right to subscribe for or purchase any Common Stock ("Options") or
exchangeable for or convertible into Common Stock ("Convertible Securities"), at
a price per share, as determined pursuant to paragraph (b) of this section, less
than the Exercise Price then in effect on the date of such sale or issuance,
then the number of Shares thereafter purchasable upon exercise of this Purchase
Option shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of this Purchase Option by a fraction, (i) the
numerator of
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<PAGE>
which shall be the number of shares of Common Stock outstanding on the date of
issuance of such Common Stock, Options or Convertible Securities and (ii) the
denominator of which shall be the number of shares of Common Stock outstanding
on the date prior to the date of issuance of such Common Stock or Convertible
Securities plus the number of shares of Common Stock which the aggregate
consideration received by the Company upon such issuance would purchase on such
date at the Exercise Price then in effect.
(b) The following provisions, in addition to other provisions of this
section shall be applicable in determining any adjustment under (a) above:
(i) In case of the issuance or sale of Common Stock part or all of
which shall be for cash, the cash consideration received by the Company
therefor shall be deemed to be the amount of cash proceeds of such sale of
shares less any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or others
performing similar services or any expenses incurred in connection
therewith, plus the amounts, if any, determined as provided in (b)(ii)
below.
(ii) In case of the issuance or sale of Common Stock wholly or partly
for a consideration other than cash, the amount of the consideration other
than cash received by the Company for such Common Stock shall be deemed to
be the fair value of such consideration as determined by a resolution
adopted by the Board of Directors of the Company acting in good faith, less
any compensation paid or incurred by the Company for any underwriting of,
or otherwise in connection with such issuance, provided, however, the
amount of such consideration other than cash shall in no event exceed the
cost thereof as recorded on the books of the Company. In case of the
issuance or sale of Common Stock (otherwise than upon conversion or
exchange) together with other stock or securities or other assets of the
Company for a consideration which is received for both such Common Stock
and other securities or assets, the Board of Directors of the Company
acting in good faith shall determine what part of the consideration so
received is to be deemed to be the consideration for the issuance of such
Common Stock, less any compensation paid or incurred by the Company for any
underwriting of, or otherwise in connection with such issuance, provided,
however, the amount of such consideration other than cash shall in no event
exceed the cost thereof as recorded on the books of the Company. In case
at any time the Company shall declare a dividend or make any other
distribution upon any stock of the Company payable in Common Stock then
such Common Stock issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
(iii) The price per share of any Common Stock sold or issued by the
Company (other than pursuant to Options or Convertible Securities) shall be
equal to a price calculated by dividing (A) the amount of the consideration
received by the Company, as determined pursuant to (b)(i) and (b)(ii)
above, upon such sale or issuance by (B) the number of shares of Common
Stock sold or issued.
(iv) In case the Company shall at any time after the date hereof issue
any Options or Convertible Securities, the following provisions shall apply
in making any adjustment:
(A) The price per share for which Common Stock is issuable upon
the exercise of the Options or upon conversion or exchange of the
Convertible Securities shall be determined by (1) dividing the total
amount, if any, received or receivable by
3
<PAGE>
the Company as consideration for the issuance of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon exercise
of such Options or the conversion or exchange of such Convertible
Securities, by (2) the aggregate maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities.
(B) In determining the price per share for which Common Stock is
issuable upon exercise of the Options or conversion or exchange of the
Convertible Securities as set forth above and in computing any
adjustment pursuant to (a) above: the aggregate maximum number of
shares of Common Stock issuable upon the exercise of such Convertible
Securities shall be considered to be outstanding at the time such
Options or Convertible Securities were issued and to have been issued
for such price per share as determined pursuant to (b)(iv)(A), and the
consideration for the issuance of such Options or Convertible
Securities and the amount of additional consideration payable to the
Company upon exercise of such Options or upon the conversion or
exchange of such Convertible Securities shall be determined in the
same manner as the consideration received upon the issuance or sale of
Common Stock as provided in paragraphs (b)(i) and (b)(ii).
(C) On the expiration of such Options or the termination of any
right to convert or exchange any Convertible Securities, the number of
Shares subject to this Purchase Option shall forthwith be readjusted
to such number of Shares as would have been obtained had the
adjustments made upon the issuance of such Options or Convertible
Securities been made upon the basis of the delivery of only the number
of shares of Common Stock actually delivered upon the exercise of such
Options or upon conversion or exchange of such Convertible Securities.
(D) If the minimum purchase price per share of Common Stock
provided for in any Option, or the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock,
shall change or a different purchase price or rate shall become
effective at any time or from time to time (other than pursuant to any
anti-dilution provisions of such Options or Convertible Securities)
then upon such change becoming effective, the number of Shares subject
to this Purchase Option shall forthwith be increased or decreased to
such number of shares as would have been obtained had the adjustments
made upon the granting or issuance of such Options or Convertible
Securities been made upon the basis of (1) the issuance of the number
of shares of Common Stock theretofore actually delivered upon the
exercise of such Options or upon the conversion or exchange of such
Convertible Securities, and the total consideration received therefor,
and (2) the granting or issuance at the time of such change of any
such Options or Convertible Securities then still outstanding for the
consideration, if any, received by the Company therefor and to be
received on the basis of such changed price or rate of exchange or
conversion.
(v) Except as otherwise specifically provided herein, the date of
issuance or sale of Common Stock shall be deemed to be the date the Company
is legally obligated to issue such Common Stock or the date the Company is
legally obligated to issue any Option or Convertible Security. If the
Company shall take a record date for the purpose of determining holders of
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<PAGE>
Common Stock entitled to (A) receive a dividend or other distribution
payable in Common Stock or in Options or Convertible Securities or (B)
subscribe for or purchase Common Stock, Options or Convertible Securities,
such record date shall be deemed to be the date of issue or sale of the
Common Stock, Options or Convertible Securities.
(vi) The number of shares of Common Stock outstanding at any given
time shall not include treasury shares but the disposition of any such
treasury shares shall be considered an issue or sale of Common Stock for
the purposes of this section.
(vii) Anything hereinabove to the contrary notwithstanding, no
adjustment shall be made pursuant to (a) above to the Exercise Price or to
the number of Shares purchasable upon:
(A) The issuance or sale by the Company of any Common Stock
pursuant to this Purchase Option, any securities offered in a public
offering underwritten by Joseph Charles & Associates, Inc., any
shares, Options or Convertible Securities issued and outstanding at
the effective date of such public offering or at the date of this
Purchase Option, or any shares issuable pursuant to options granted
under the Company's stock option plans currently in effect or pursuant
to other options or warrants, provided the total number of shares
issuable pursuant to options under such plans granted after the date
hereof, or other options or warrants implemented or issued after the
date hereof, does not exceed ________ shares of Common Stock.
(B) The issuance or sale of Common Stock pursuant to the exercise
of Options or conversion or exchange of Convertible Securities
hereinafter issued for which an adjustment has been made (or was not
required to be made) pursuant to the provisions hereof.
(C) The increase in the number of shares of Common Stock subject
to any Option or Convertible Security referred to in subsections (A)
and (B) hereof pursuant to the provisions of such Option or
Convertible Securities designed to protect against dilution.
(c) If the Company shall at any time subdivide its outstanding Common Stock
by recapitalization, reclassification or split-up thereof, the number of Shares
subject to this Purchase Option immediately prior to such subdivision shall be
proportionately increased, and if the Company shall at any time combine the
outstanding Common Stock by recapitalization, reclassification or combination
thereof, the number of Shares subject to this Purchase Option immediately prior
to such combination shall be proportionately decreased. Any corresponding
adjustment to the Exercise Price shall become effective at the close of business
on the record date for such subdivision or combination.
(d) If the Company after the date hereof shall distribute to the holders of
its Common Stock any securities or other assets (other than a distribution of
Common Stock or a cash distribution made as a dividend payable out of earnings
or out of any earned surplus legally available for dividends under the laws of
the jurisdiction of incorporation of the Company), the Board of Directors shall
be required to make such equitable adjustment in the Exercise Price in effect
immediately prior to the record date of such distribution as may be necessary to
preserve the rights substantially proportionate to those enjoyed hereunder by
the Holder immediately prior to the happening of such distribution. Any such
adjustment made in good faith by the Board of Directors shall be final and
binding upon the Holder and shall become effective as of the record date for
such distribution.
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<PAGE>
(e) No adjustment in the number of Shares subject to this Purchase Option
shall be required unless such adjustment would require an increase or decrease
in such number of Shares of at least 1% of the then adjusted number of Shares
issuable upon exercise of this Purchase Option, provided, however, that any
adjustments which by reason of the foregoing are not required at the time to be
made shall be carried forward and taken into account and included in determining
the amount of any subsequent adjustment; and provided further, however, that in
case the Company shall at any time subdivide or combine the outstanding Common
Stock or issue any additional Common Stock as a dividend, said percentage shall
forthwith be proportionately increased in the case of a combination or decreased
in the case of a subdivision or dividend of Common Stock so as to appropriately
reflect the same. If the Company shall make a record of the holders of its
Common Stock for the purpose of entitling them to receive any dividend or
distribution and legally abandon its plan to pay or deliver such dividend or
distribution then no adjustment in the number of shares of Common Stock subject
to the Purchase Option shall be required by reason of the making of such record.
(f) Whenever the number of shares of Common Stock purchasable upon the
exercise of this Purchase Option is adjusted as provided herein, the Exercise
Price shall be adjusted (to the nearest one tenth of a cent) by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Shares purchasable upon the exercise of this
Purchase Option immediately prior to such adjustment, and the denominator of
which shall be the number of Shares purchasable immediately thereafter.
(g) In case of any reclassification of the outstanding Common Stock (other
than a change covered by (c) hereof or which solely affects the par value of
such Common Stock) or in the case of any merger or consolidation of the Company
with or into another corporation (other than a consolidation or merger in which
the Company is the continuing corporation and which does not result in any
reclassification or capital reorganization of the outstanding Common Stock), or
in the case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety in connection with
which the Company is dissolved, the Holder of this Purchase Option shall have
the right thereafter (until the expiration of the right of exercise of this
Purchase Option) to receive upon the exercise hereof, for the same aggregate
Exercise Price payable hereunder immediately prior to such event, the kind and
amount of shares of stock or other securities or property receivable upon such
reclassification, capital reorganization, merger or consolidation, or upon the
dissolution following any sale or other transfer, by a holder of the number of
shares of Common Stock of the Company obtainable upon the exercise of this
Purchase Option immediately prior to such event; and if any reclassification
also results in a change in Common Stock covered by (c) above, then such
adjustment shall be made pursuant to both this paragraph (g) and paragraph (c).
The provisions of this paragraph (g) shall similarly apply to successive re-
classifications, or capital reorganizations, mergers or consolidation, sales or
other transfers.
If the Company after the date hereof shall issue or agree to issue Common
Stock, Options or Convertible Securities at less than the Exercise Price, other
than as described herein, and such issuance or agreement would in the opinion of
the Board of Directors of the Company materially affect the rights of the
Holders of the Purchase Options, the Exercise Price and the number of Shares
purchasable upon exercise of the Purchase Options shall be adjusted in such
manner, if any, and at such time as the Board of Directors of the Company, in
good faith, may determine to be equitable in the circumstances. The minutes or
unanimous consent approving such action shall set forth the Board of Director's
determination as to whether an adjustment is warranted and the manner of such
adjustment. In the absence of such determination, any Holder may request in
writing that the Board of Directors make such determination.
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<PAGE>
Any such determination made in good faith by the Board of Directors shall be
final and binding upon the Holders. If the Board fails, however, to make such
determination within sixty (60) days after such request, such failure shall be
deemed a determination that an adjustment is required.
(h) (i) Upon the occurrence of each event requiring an adjustment of the
Exercise Price and of the number of Shares purchasable upon exercise of
this Purchase Option in accordance with, and as required by, the terms
hereof, the Company shall forthwith employ a firm of certified public
accountants (who may be the regular accountants for the Company) who shall
compute the adjusted Exercise Price and the adjusted number of Shares
purchasable at such adjusted Exercise Price by reason of such event in
accordance herewith. The Company shall give to each Holder of the Purchase
Options a copy of such computation which shall be conclusive and shall be
binding upon such Holders unless contested by Holders by written notice to
the Company within thirty (30) days after receipt thereof.
(ii) In case the Company after the date hereof shall propose (A) to
pay any dividend payable in stock to the holders of its Common Stock or to
make any other distribution (other than cash dividends) to the holders of
its Common Stock or to grant rights to subscribe to or purchase any
additional shares of any class or any other rights or options, or (B) to
effect any reclassification involving merely the subdivision or combination
of outstanding Common Stock or (C) any capital reorganization or any
consolidation or merger, or any sale,transfer or other disposition of its
property, assets and business substantially as an entirely, or the
liquidation, dissolution or winding up of the Company, then in each such
case, the Company shall obtain the computation described above and if an
adjustment to the Exercise Price is required, the Company shall notify the
Holders of the Purchase Options of such proposed action, which shall
specify the record date for any such action or if no record date is
established with respect thereto, the date on which such action shall occur
or commence, or the date of participation therein by the holders of Common
Stock if any such date is to be fixed, and shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the
effect of such action on the Exercise Price and the number, or kind, or
class of shares or other securities or property obtainable upon exercise of
this Purchase Option after giving effect to any adjustment which will be
required as a result of such action. Such notice shall be given at least
twenty (20) days prior to the record date for determining holders of the
Common Stock for purposes of any such action, and in the case of any action
for which a record date is not established then such notice shall be mailed
at least twenty (20) days prior to the taking of such proposed action.
(iii) Failure to file any certificate or notice or to give any
notice, or any defect in any certificate or notice, shall not effect the
legality or validity of the transaction or the adjustment in the Exercise
Price or in the number, or kind, of class or shares or other securities or
property obtainable upon exercise of the Purchase Options or of any
transaction giving rise thereto.
(i) The Company shall not be required to issue fractional Shares upon any
exercise of the Purchase Options. As to any final fraction of a Share which the
Holder of a Purchase Option would otherwise be entitled to purchase upon such
exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the market price of a share
of such stock on the business day preceding the day of exercise. The Holder of
a Purchase Option, expressly waives any right to receive any fractional shares
of stock upon exercise of the Purchase Option.
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(j) Irrespective of any adjustments pursuant to this section in the
Exercise Price or in the number, or kind, or class of shares or other securities
or other property obtainable upon exercise of a Purchase Option, a Purchase
Option Certificate may continue to express the Exercise Price and the number of
Shares obtainable upon exercise at the same price and number of Shares as are
stated herein.
(k) The number of Shares, the Exercise Price and all other terms and
provisions of the Company's agreement with the Holder of this Purchase Option
shall be determined exclusively pursuant to the provisions hereof.
(l) For the purposes of any computation under this Agreement, the "Current
Market Price" at any date shall be the closing bid price of Common Stock on the
business day next preceding the event requiring a calculation of current market
value. If the principal trading market for such securities is an exchange, the
closing bid price shall be the reported last sale price on such exchange on such
day, provided that if trading of such Common Stock is listed on any consolidated
tape, the closing bid price shall be the reported last sale price set forth on
such consolidated tape. If the principal trading market for such securities is
the over-the-counter market, the closing bid price shall be the closing bid
price on such date as set forth by The Nasdaq Stock Market, Inc., or, if the
security is not quoted on such market, the closing bid price as set forth in the
National Quotation Bureau sheet or the Electronic Bulletin Board System for such
day. Notwithstanding the foregoing, if there is no reported last sale price or
closing bid price, as the case may be, on the date prior to the event requiring
a calculation hereunder, then the Current Market Price shall be determined as of
the latest date prior to such day for which such last sale price or closing bid
price is available.
(m) The above provisions of this section 5 shall similarly apply to
successive transactions which require adjustments.
(n) If the Company shall issue any Option or Convertible Securities with
anti-dilution provisions which are more favorable to the Holders than the
provisions of this Section 5 would be, such other anti-dilution provisions shall
apply and will be incorporated by reference herein.
6. The issuance of any Shares or other securities upon the exercise of
this Purchase Option and the delivery of certificates or other instruments
representing such securities shall be made without charge to the Holder for any
tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
7. (a) If, at any time after February ___, 1999, and ending February ___,
2003, the Company shall file a registration statement (other than on Form S-4,
Form S-8, or any successor form) with the Securities and Exchange Commission
(the "Commission") while Shares are available for purchase upon exercise of this
Purchase Option or while any Shares (which have not been so registered) are
outstanding, the Company shall give the Holder and all the then holders of such
Shares at least 30 days prior written notice of the filing of such registration
statement. If requested by the Holder or by any such holder in writing within
20 days after receipt of any such notice, the Company shall, at the Company's
sole expense (other than the fees and disbursements of counsel for the Holder or
such holder and the underwriting discounts or commissions, if any, payable in
respect of the Shares sold by the Holder or
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any such holder), register or qualify the Shares (the "Representative's
Securities") of the Holder or any such holders who shall have made such request
concurrently with the registration of such other securities, all to the extent
requisite to permit the public offering and sale of the Representative's
Securities, and will use its best efforts through its officers, directors,
auditors and counsel to cause such registration statement to become effective as
promptly as practicable. Notwithstanding the foregoing, if the managing
underwriter of any such offering shall advise the Company in writing that, in
its opinion, the distribution of all or a portion of the Representative's
Securities requested to be included in the registration concurrently with the
securities being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then the
Holder or any such holder who shall have requested registration of his or its
Representative's Securities shall delay the offering and sale of such
Representative's Securities (or the portions thereof so designated by such
managing underwriter) for such period, not to exceed 90 days, as the managing
underwriter shall request, provided that no such delay shall be required as to
any Representative's Securities if any securities of the Company are included in
such registration statement for the account of any person other than the Company
and the Holder or any such holder unless the securities included in such
registration statement for such other person shall have been reduced pro rata to
the reduction of the Representative's Securities which were requested to be
included in such registration.
(b) If at any time after February ___, 1999 and before February ___, 2003,
the Company shall receive a written request from holders of Representative's
Securities who, in the aggregate, own (or upon exercise of all Purchase Options
will own) a majority of the total number of Shares issued or issuable upon
exercise of the Purchase Options, the Company shall, as promptly as practicable,
prepare and file with the Commission a registration statement sufficient to
permit the public offering and sale of the Representative's Securities, and will
use its best efforts through its officers, directors, auditors and counsel to
cause such registration statement to become effective as promptly as
practicable; PROVIDED, HOWEVER, that the Company shall only be obligated to file
and obtain effectiveness of one such registration statement for which all
expenses incurred in connection with such registration (other than the fees and
disbursements of counsel for the Holder or such holders and underwriting
discounts, if any, payable in respect of the Representative's Securities sold by
the Holder or any such holder) shall be borne by the Company. Upon receiving a
demand for registration pursuant to this paragraph 7, the Company, at its
option, shall have the right to purchase all outstanding Purchase Options which
have participated in such demand at a price which is equal to the number of
Purchase Options to be repurchased multiplied by the difference between the
exercise price of the Purchase Options and the Current Market Price of the
Common Stock as of the date of the demand.
(c) In the event of a registration pursuant to the provisions of this
paragraph 7, the Company shall use its best efforts to cause the
Representative's Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Holder or
such holders may reasonably request; provided, however, that the Company shall
not be required to qualify to do business in any state by reason of this
paragraph 7(c) in which it is not otherwise required to qualify to do business.
(d) The Company shall keep effective any registration or qualification
contemplated by this paragraph 7 and shall from time to time amend or supplement
each applicable registration statement, preliminary prospectus, final
prospectus, application, document and communication for such period of time as
shall be required to permit the Holder or such holders to complete the offer and
sale of the Representative's Securities covered thereby. The Company shall in
no event be required to keep any such registration or qualification in effect
for a period in excess of nine months from the date on which the
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Holder and such holders are first free to sell such Representative's Securities;
provided, however, that if the Company is required to keep any such registration
or qualification in effect with respect to securities other than the
Representative's Securities beyond such period, the Company shall keep such
registration or qualification in effect as it relates to the Representative's
Securities for so long as such registration or qualification remains or is
required to remain in effect in respect of such other securities.
(e) In the event of a registration pursuant to the provisions of this
paragraph 7, the Company shall furnish to the Holder and to each such holder
such reasonable number of copies of the registration statement and of each
amendment and supplement thereto (in each case, including all exhibits), such
reasonable number of copies of each prospectus contained in such registration
statement and each supplement or amendment thereto (including each preliminary
prospectus), all of which shall conform to the requirements of the Act and the
rules and regulations thereunder, and such other documents, as the Holder or
such holders may reasonably request in order to facilitate the disposition of
the Representative's Securities included in such registration.
(f) In the event of a registration pursuant to the provisions of this
paragraph 7, the Company shall furnish the Holder and each holder of any
Representative's Securities so registered with an opinion of its counsel to the
effect that (i) the registration statement has become effective under the Act
and no order suspending the effectiveness of the registration statement,
preventing or suspending the use of the registration statement, any preliminary
prospectus, any final prospectus, or any amendment or supplement thereto has
been issued, nor to such counsel's actual knowledge has the Securities and
Exchange Commission or any securities or blue sky authority of any jurisdiction
instituted or threatened to institute any proceedings with respect to such an
order and (ii) the registration statement and each prospectus forming a part
thereof (including each preliminary prospectus), and any amendment or supplement
thereto, complies as to form with the Act and the rules and regulations
thereunder. Such counsel shall also provide a Blue Sky Memorandum setting forth
the jurisdictions in which the Representative's Securities have been registered
or qualified for sale pursuant to the provisions of paragraph 7(c).
(g) The Company agrees that until all the Representative's Securities have
been sold under a registration statement or pursuant to Rule 144 under the Act,
it shall keep current in filing all reports, statements and other materials
required to be filed with the Commission to permit holders of the
Representative's Securities to sell such securities under Rule 144.
(h) The Holder and any holders who propose to register their
Representative's Securities under the Act shall execute and deliver to the
Company a selling shareholder questionnaire on a form to be provided by the
Company.
8. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Holder, any holder of any of the
Representative's Securities, their officers, directors, partners, employees,
agents and counsel, and each person, if any, who controls any such person within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), from and against any and all loss,
liability, charge, claim, damage and expense whatsoever (which shall include,
for all purposes of this Section 8, but not be limited to, attorneys' fees and
any and all expense whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), as and when
incurred, arising out of, based upon, or in connection with (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
registration statement, preliminary prospectus or final prospectus (as from time
to time amended and
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supplemented), or any amendment or supplement thereto, or (B) in any application
or other document or communication (in this Section 8 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Representative's Securities under the
securities or blue sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company with respect to
the Holder or any holder of any of the Representative's Securities by or on
behalf of such person expressly for inclusion in any registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of any
representation, warranty, covenant or agreement of the Company contained in this
Purchase Option. The foregoing agreement to indemnify shall be in addition to
any liability the Company may otherwise have, including liabilities arising
under this Purchase Option.
If any action is brought against the Holder or any holder of any of the
Representative's Securities or any of its officers, directors, partners,
employees, agents or counsel, or any controlling persons of such person (an
"indemnified party") in respect of which indemnity may be sought against the
Company pursuant to the foregoing paragraph, such indemnified party or parties
shall promptly notify the Company in writing of the institution of such action
(but the failure so to notify shall not relieve the Company from any liability
it may otherwise have to Holder or any holder of any of the Representative's
Securities) and the Company shall promptly assume the defense of such action,
including the employment of counsel (reasonably satisfactory to such indemnified
party or parties) and payment of expenses. Such indemnified party or parties
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or such indemnified party or parties shall have reasonably
concluded that there may be one or more legal defenses available to it or them
or to other indemnified parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses shall be
borne by the Company and the Company shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties. Anything
in this paragraph to the contrary notwithstanding, the Company shall not be
liable for any settlement of any such claim or action effected without its
written consent.
(b) The Holder and each holder agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Representative's Securities held
by the Holder and each holder and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
the Holder and each holder in paragraph 8(a), but only with respect to
statements or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holder and each holder by or on behalf of the Holder and each holder
expressly for inclusion in any such registration statement, preliminary
prospectus, or final prospectus, or any amendment or supplement thereto, or in
any application, as the case may be. If any action shall be brought against the
Company or any other person so indemnified based on any such registration
statement, preliminary prospectus, or final prospectus, or any amendment
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or supplement thereto, or in any application, and in respect of which indemnity
may be sought against the Holder and each holder pursuant to this paragraph
8(b), the Holder and each holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties give to the indemnified parties, by the provisions of
paragraph 8(a).
(c) To provide for just and equitable contribution, if (i) an indemnified
party makes a claim for indemnification pursuant to paragraph 8(a) or 8(b)
(subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise because the
indemnification provided for in this Section 8 is for any reason held to be
unenforceable by the Company and the Holder and any holder, then the Company
(including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement and any controlling person of the Company), as one
entity, and the Holder and any holder of any of the Representative's Securities
included in such registration in the aggregate (including for this purpose any
contribution by or on behalf of the Holder or any holder), as a second entity,
shall contribute to the losses, liabilities, claims, damages and expenses
whatsoever to which any of them may be subject, on the basis of relevant
equitable considerations such as the relative fault of the Company and the
Holder or any such holder in connection with the facts which resulted in such
losses, liabilities, claims, damages and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission or alleged omission relates to information supplied
by the Company, by the Holder or by any holder of Representative's Securities
included in such registration, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement,
alleged statement, omission or alleged omission. The Company and the Holder
agree that it would be unjust and inequitable if the respective obligations of
the Company and the Holder for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages and
expenses (even if the Holder and the other indemnified parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this paragraph 8(c). No
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this paragraph
8(c), each person, if any, who controls the Holder or any holder of any of the
Representative's Securities within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent and counsel of each such person, shall have the same rights to
contribution as such person and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed any such registration
statement, and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to the provisions of this
paragraph 8(c). Anything in this paragraph 8(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
paragraph 8(c) is intended to supersede any right to contribution under the Act,
the Exchange Act or otherwise.
9. The securities issued upon exercise of any Purchase Option shall be
subject to a stop transfer order and the certificate or certificates evidencing
any such securities shall bear the following legend:
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. HOWEVER, SUCH
SECURITIES CANNOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-
EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT UNDER SUCH ACT, (ii) A
SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT.
10. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Purchase Option (and upon surrender of
any Purchase Option if mutilated), and indemnity satisfactory to the Company and
upon reimbursement of the Company's reasonable incidental expenses, the Company
shall execute and deliver to the Holder thereof a new Purchase Option of like
date, tenor and denomination.
11. The Holder of any Purchase Option shall not have, solely on account of
such status, any rights of a stockholder of the Company, either at law or in
equity, or to any notice of meetings of stockholders or of any other proceedings
of the Company, except as provided in this Purchase Option.
12. This Purchase Option shall be construed in accordance with the laws of
the State of California, without giving effect to conflict of laws.
Dated: February ___, 1998
BIRNER DENTAL MANAGEMENT
SERVICES, INC.
By:
------------------------------------
Frederic W. J. Birner, Chairman of the
Board and Chief Executive Officer
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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,
January 14, 1998.
<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/
Steven M. Bathgate
