Pursuant to Rule 424(B)(3)
Registration No. 333-128241
Union Dental Holdings, Inc.
49,123,282 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up to
49,123,282 shares of our common stock. The selling stockholders may sell common
stock from time to time in the principal market on which the stock is traded at
the prevailing market price or in negotiated transactions.
The total number of shares sold herewith includes the following shares owned by
or to be issued to Dutchess Private Equities Fund II, LP ("Dutchess"): (i) up to
8,857,396 shares issuable upon conversion of convertible debentures, (ii)
1,304,348 shares issuable upon exercise of warrants, and (ii) up to 38,461,538
shares of common stock issuable pursuant to a "put right" under the Investment
Agreement, also referred to as an Equity Line of Credit with Dutchess Private
Equities Fund II, LP. We are not selling any shares of common stock in this
offering and therefore will not receive any proceeds from this offering. We
will, however, receive proceeds from the sale of the 38,461,538 shares of common
stock under the Investment Agreement with Dutchess Private Equities, LLP and the
exercise of warrants issued to Dutchess and Hawk Associates to purchase an
aggregate of 1,804,348 shares of common stock. All costs associated with this
registration will be borne by us.
A "put right" permits us to require Dutchess to buy shares of our common stock
pursuant to the terms of the Investment Agreement. That Investment Agreement
permits us to "put" up to $5,000,000 in shares of our common stock to Dutchess.
Dutchess will pay us 95% of the lowest closing Best Bid price (highest posted
bid price) of our common stock during the five trading day period immediately
following the date of our notice to them of our election to put shares pursuant
to the Equity Line of Credit.
Our common stock currently trades on the Over the Counter Bulletin Board ("OTC
Bulletin Board") under the symbol "UDHI.OB."
On September 8, 2005, the last reported sale price for our common stock on the
OTC Bulletin Board was $.20 per share.
The securities offered in this prospectus involve a high degree of risk. See
"Risk Factors" beginning on page ___ of this prospectus to read about factors
you should consider before buying shares of our common stock.
With the exception of Dutchess, which is an "underwriter" within the meaning of
the Securities Act of 1933, no other underwriter or person has been engaged to
facilitate the sale of shares of common stock in this offering.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by Union
Dental Holdings, Inc. with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
The date of this Prospectus is September 15, 2005
1
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 3
Risk Factors............................................................... 6
Forward Looking Statements................................................. 11
Use of Proceeds............................................................ 11
Management's Discussion and Analysis or Plan of Operation.................. 16
Business................................................................... 19
Description of Property.................................................... 23
Legal Proceedings.......................................................... 23
Directors and Executive Officers........................................... 23
Executive Compensation..................................................... 24
Security Ownership of Certain Beneficial Owners
and Management............................................................. 26
Market for Common Equity and Related
Stockholder Matters........................................................ 27
Selling Shareholders....................................................... 28
Certain Relationships and Related Transactions............................. 29
Description of Securities.................................................. 30
Plan of Distribution....................................................... 30
Legal Matters.............................................................. 32
Experts.................................................................... 32
Where You Can Find More Information........................................ 32
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities............................................. 32
Index to Financial Statements.............................................. F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common stock. Union Dental
Holdings, Inc. is referred to throughout this prospectus as "Union Dental," "we"
or "us."
General
We are operating two business lines: (1) a network of duly licensed dental
providers to a network of union members through Direct Dental Services, Inc. and
(2) management of two dental practices through Union Dental Corp.
Direct Dental Services, Inc.
Direct Dental Services, Inc. is a Florida corporation that operates a network of
duly licensed dental providers who provide dental services to union members in
accordance with arrangements between Direct Dental and various labor unions.
Direct Dental is not limited as to the type of labor union which Direct Dental
may solicit. Direct Dental charges an annual management services fee to the
participating dentists to practice in an "area of exclusivity" for union
members. Direct Dental currently has exclusive contracts with local unions, such
as Communications Workers of America, International Brotherhood of Electrical
Workers and General Electric's International Union of Electronic, Electrical,
Salaried, Machine and Furniture Workers - Communications Workers of America.
Members of the Dental Network are assigned "areas of exclusivity" established by
Direct Dental which grants the Dental Network provider primary responsibility to
provide for the general dentistry and specialist services required by covered
union members. Direct Dental 's Network dentists accept as payment in full for
covered services the scheduled amount payable by the applicable union sponsored
dental benefit plan together with a relatively small co-payment from the covered
union member. The co-payment to be paid by the union member is generally
substantially lower than the scheduled copayment set forth in the applicable
dental benefit plan, resulting in significant savings to the union member.
Union Dental Corp.
Union Dental Corp., is a Florida corporation which acquired the assets
(excluding the client list) of Dr. George D. Green, P.A. effective October 15,
2004. During our last fiscal quarter we acquired substantially all of the assets
of a dental practice (excluding the client list), Dental Visions, located in
Coral Springs, Florida for a purchase price of $283,241 consisting of the
assumption of $169,486 in debt and the issuance of 733,901 shares of our common
stock with an agreed value of $.155 per share.
Union Dental utilizes the services of 29 individuals pursuant to a management
agreement with George D. Green, DDS, P.A. The Coral Springs office is comprised
of two licensed dentists, a licensed associate dentist, two hygienists, four
nurses, two office managers, a union dental insurance specialist and a union
dental administrative director.
Recent Transactions
Investment Agreement
On August 17, 2005, we entered into an Investment Agreement with Dutchess.
Pursuant to this Agreement, Dutchess will commit to purchase up to $5,000,000
(the "Line") of our Common Stock over the course of 36 months ("Line Period"),
after a registration statement has been declared effective by the SEC (the
"Effective Date"). The amount that we shall be entitled to request from each of
the purchase "Puts", shall be equal to either (1) $100,000 or (2) 200% of the
averaged daily volume (U.S market only) ("ADV") of our Common Stock for the 20
Trading days prior to the "Put" notice, multiplied by the average of the 3 daily
closing prices immediately preceding the Put Date. The Pricing Period shall be
the five (5) consecutive trading days immediately after the Put Date. The Market
Price shall be the lowest closing bid price of the Common Stock during the
Pricing Period. The Purchase Price shall be set at 95% of the Market Price. The
Put Date shall be the date that the Investor receives a Put Notice of draw down
by us of a portion of the Line. There are put restrictions applied on days
between the Put Date and the Closing Date with respect to that Put. During this
time, we shall not be entitled to deliver another Put Notice. We shall
automatically withdraw that portion of the put notice amount, if the Market
Price with respect to that Put does not meet the Minimum Acceptable Price. The
Minimum Acceptable Price is defined as 75% of the lowest closing bid price of
the common stock for the ten (10) trading day period prior to the Put Date.
Debenture Agreement
Also on August 17, 2005, we sold $600,000 in principal amount of our five year
convertible debentures to Dutchess Private Equities Fund II, L.P. These
debentures bear interest at 10% per annum (payable in cash or stock at Dutchess'
option). The first $300,000 (less expenses) has been funded, with an additional
$300,000 to be funded immediately upon filing of this Registration Statement
with the Securities and Exchange Commission ("SEC"). Our obligation to repay
Dutchess is secured pursuant to the terms of a security agreement, which we have
entered into with Dutchess. We hae pledged all of our assets to insure repayment
of the Debenture. Dutchess' security interest in our assets will be subject to
any claims by our bank, which provides us with a line of credit. The conversion
price of the debenture shall be $.092 per share or; the lowest closing bid price
of the common stock during the fifteen trading days prior to the filing of this
Registration Statement with the SEC covering the shares issuable on the
underlying debt. We also issued Dutchess a warrant to purchase 1,304,348 shares
of common stock with a strike price of $.092 per share. The warrant may be
exercised for a period of five years.
3
If this Registration Statement is not declared effective within 90 days of
closing, we will incur significant liquidated damages and interest expense.
Our principal executive office is located at 1700 University Drive, Suite 200,
Coral Springs, FL 33071and our telephone number at that location is (954)
575-2252.
4
THIS OFFERING
Shares offered by Selling
Stockholders............................. Up to 49,123,282 shares, including
8,857,396 shares issuable upon
conversion of a debenture; up to
38,461,538 shares issuable under the
Investment Agreement; and an
aggregate of 1,504,348 shares
issuable upon exercise of warrants*
Common Stock to be outstanding
after the offering....................... 80,280,778
Use of Proceeds.......................... We will not receive any proceeds
from the sale of the common stock
hereunder. We will, however, receive
proceeds from the sale of our common
stock pursuant to the Investment
Agreement and the exercise of
warrants to purchase shares of our
common stock. See "Use of Proceeds"
for a complete description.
Risk Factors............................. The purchase of our common stock
involves a high degree of risk. You
should carefully review and consider
"Risk Factors" beginning on page 3.
OTC Bulletin Board
Trading Symbol........................... UDHI.OB
* Based on the current issued and outstanding number of shares of 31,157,496 as
of September 9, 2005, and assuming issuance of all shares registered herewith,
the number of shares offered herewith represents approximately 161% of the total
issued and outstanding shares of common stock.
5
RISK FACTORS
An investment in our shares involves a high degree of risk. Before making an
investment decision, you should carefully consider all of the risks described in
this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. If this were to happen, the price of our
shares could decline significantly and you may lose all or a part of your
investment. The risk factors described below are not the only ones that may
affect us. Our forward-looking statements in this prospectus are subject to the
following risks and uncertainties. Our actual results could differ materially
from those anticipated by our forward-looking statements as a result of the risk
factors below. See "Forward-Looking Statements."
Risks Related to Our Business
We have a limited operating history and may need to raise additional capital
which may not be available on acceptable terms or at all.
We have a limited operating history in connection with our network provider
business, Direct Dental, upon which an evaluation of our future success or
failure can be made. Our ability to achieve and maintain profitability and
positive cash flow over time will be dependent upon, among other things, our
ability to (i) identify and execute exclusive contracts with the unions and (ii)
raise the necessary capital to operate during this period. At this stage in our
development, it cannot be predicted how much financing will be required to
accomplish our objectives.
We have entered into an Investment Agreement that provides for the investment by
Dutchess Private Equities Fund, LP of up to $5,000,000 in our common stock over
a period of 36 months after the effectiveness of the registration of which this
prospectus is a part. In the future, we may be required to raise additional
funds, particularly if we exhaust the funds advanced under that agreement and
are unable to generate positive cash flow as a result of our operations. There
can be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain additional capital may
reduce our ability to continue to conduct business operations. If we are unable
to obtain additional financing, we will not be able to acquire dental practices
and to expand our network provider businesses. Any additional equity financing
may involve substantial dilution to our then existing shareholders.
Our success is dependent upon a limited number of people.
The ability to implement our business plan is dependent upon the efforts of our
President, Dr. George D. Green. The loss of Dr. Green's services could have a
material adverse affect on us. Our business will be harmed if we are unable to
manage growth. If we lose the services of Dr. Green or are unable to attract or
retain qualified personnel, our business could suffer.
Our business may experience periods of rapid growth that will place significant
demands on our managerial, operational and financial resources
Our business may experience periods of rapid growth that will place significant
demands on our managerial, operational and financial resources. In order to
manage this possible growth, we must continue to improve and expand our
management, operational and financial systems and controls. We will need to
expand, train and manage our employee base. No assurances can be given that we
will be able to timely and effectively meet such demands. The issuance of shares
through our stock compensation and incentive plans may dilute the value of
existing shareholders.
We have used and anticipate continuing to use stock options, stock grants and
other equity-based incentives, to provide motivation and compensation to our
officers, employees and key independent consultants. The award of any such
incentives will result in an immediate and potentially substantial dilution to
our existing shareholders and could result in a decline in the value of our
stock price.
We have not voluntarily implemented various corporate governance measures in the
absence of which, shareholders may have more limited protections against
interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has
resulted in the adoption of various corporate governance measures designed to
promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. While our board of directors has adopted a
Code of Ethics and Business Conduct, we have not yet adopted any of these other
corporate governance measures and, since our securities are not yet listed on a
national securities exchange or Nasdaq, we are not required to do so. It is
possible that if we were to adopt some or all of these corporate governance
measures, shareholders would benefit from somewhat greater assurances that
internal corporate decisions were being made by disinterested directors and that
policies had been implemented to define responsible conduct. For example, in the
absence of audit, nominating and compensation committees comprised of at least a
majority of independent directors, decisions concerning matters such as
compensation packages to our senior officers and recommendations for director
nominees may be made by a majority of directors who have an interest in the
outcome of the matters being decided. Prospective investors should bear in mind
our current lack of corporate governance measures in formulating their
investment decisions.
6
Provisions of our Articles of Incorporation and Bylaws may delay or prevent
take-over, which may not be in the best interest of our stockholders.
Provisions of our articles of incorporation and bylaws may be deemed to have
anti-takeover effects, which include when and by whom special meetings of our
stockholders may be called, and which may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Florida Statutes also may be
deemed to have certain anti-takeover effects , which include that control of
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless these voting rights are approved by a majority of a
corporation's disinterested stockholders. In addition, our articles of
incorporation authorize the issuance of up to 25,000,000 shares of preferred
stock with such rights and preferences as may be determined from time to time by
our board of directors, of which 1,000,000 shares of Class A Preferred Stock are
issued and outstanding as of April 13, 2005. Each share of Class A Preferred
shall have 15 votes per share. Our board of directors may, without stockholder
approval, issue preferred stock with dividends, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
the holders of our common stock.
We may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the company's internal controls over financial
reporting in their annual reports, including Form 10-KSB. In addition, the
independent registered public accounting firm auditing a company's financial
statements must also attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting as
well as the operating effectiveness of the company's internal controls. We were
not subject to these requirements for the fiscal year ended December 31, 2004.
We are evaluating our internal control systems in order to allow our management
to report on, and our independent auditors to attest to, our internal controls,
as a required part of our Annual Report on Form 10-KSB beginning with our report
for the fiscal year ended December 31, 2007.
While we expect to expend significant resources in developing the necessary
documentation and testing procedures required by SOX 404, there is a risk that
we will not comply with all of the requirements imposed thereby. At present,
there is no precedent available with which to measure compliance adequacy.
Accordingly, there can be no positive assurance that we will receive an
unqualified opinion from our independent auditors. In the event we identify
significant deficiencies or material weaknesses in our internal controls that we
cannot remediate in a timely manner or we are unable to receive an unqualified
opinion from our independent auditors with respect to our internal controls,
investors and others may lose confidence in the reliability of our financial
statements and our ability to obtain equity or debt financing could suffer.
Risks Related to the Company's Common Stock
We do not expect to pay dividends in the foreseeable future.
We have never paid cash dividends on our common stock and have no plans to do so
in the foreseeable future. We intend to retain earnings, if any, to develop and
expand our business.
"Penny stock" rules may make buying or selling the common stock difficult and
severely limit their market and liquidity.
Trading in our common stock is subject to certain regulations adopted by the SEC
commonly known as the "Penny Stock Rules". Our common stock qualifies as penny
stock and is covered by Section 15(g) of the Securities and Exchange Act of
1934, as amended (the "1934 Act"), which imposes additional sales practice
requirements on broker/dealers who sell our common stock in the market. The
"Penny Stock" rules govern how broker/dealers can deal with their clients and
"penny stock". For sales of our common stock, the broker/dealer must make a
special suitability determination and receive from clients a written agreement
prior to making a sale. The additional burdens imposed upon broker/dealers by
the "penny stock" rules may discourage broker/dealers from effecting
transactions in our common stock, which could severely limit its market price
and liquidity. This could prevent investors from reselling our common stock and
may cause the price of our common stock to decline.
Although publicly traded, our common stock has substantially less liquidity than
the average trading market for a stock quoted on other national exchanges, and
our price may fluctuate dramatically in the future.
Although our common stock is listed for trading on the Over-the-Counter
Electronic Bulletin Board, the trading market in the common stock has
substantially less liquidity than the average trading market for companies
quoted on other national stock exchanges. A public trading market having the
desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of our common stock at
any given time. This presence depends on the individual decisions of investors
and general economic and market conditions over which we have no control. Due to
limited trading volume, the market price of our common stock may fluctuate
significantly in the future, and these fluctuations may be unrelated to the
Company's performance. General market price declines or overall market
volatility in the future could adversely affect the price of our common stock,
and the current market price may not be indicative of future market prices.
7
Our stock price may be volatile
The market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o additions or departures of key personnel;
o sales of our common stock
o our ability to integrate operations, technology, products and
services;
o our ability to execute our business plan;
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we have a limited operating history with our Direct Dental Services,
business, you may consider any one of these factors to be material. Our stock
price may fluctuate widely as a result of any of the above listed factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
Risks relating to the Debenture Agreement:
Dutchess, the holder of a Convertible Debenture issued by us on August 16, 2005
has the option of converting the Debenture into shares of our common stock.
Dutchess may also exercise their common stock purchase warrants. If the
Debenture is converted or the warrants exercised, there will be dilution of your
shares of our common stock.
The issuance of shares of our common stock upon conversion of the Debenture will
result in the dilution to the interests of other holders of our common stock,
since Dutchess may sell all of the resulting shares into the public market.
The principal amount of the Debenture plus accrued interest may be converted at
the option of the Dutchess into shares of our common stock at a conversion price
equal to the lesser of (i) the lowest closing bid price during the fifteen (15)
days of full trading prior to the filing date or (ii) $.092.
The following table sets forth the number and percentage of our common stock
that would be issuable if the entire principal amount of the Debenture is
converted at the current conversion price of $.092.
Number of Percentage of
Shares (1) Class (2)(3)
---------- ------------
Debenture in the principal
amount of $600,000 at a price
of $.092. 6,521,739 17.31%
1) Represents the number of shares issuable if all of the outstanding
principal under the Debenture were converted at the indicated conversion
price. For ease of reference, any shares of common stock that may be
issued upon conversion of interest under the Debenture have been excluded.
The outstanding principal under the Debenture bears interest at the rate
of 10% per annum, calculated on the basis of a 360-day year.
8
(2) Based on 31,157,496 common shares issued and outstanding on September 9,
2005.
(3) Percentage of the total outstanding common stock represented by the shares
issuable on conversion of Debenture without regard to any contractual or
other restriction on the number of securities the selling stockholders may
own at any point in time.
If we fail to timely deliver certificates evidencing the number of shares which
Dutchess requests conversion, we are required to pay liquidated damages to
Dutchess.
In the event that we fail to deliver certificates for the number of shares into
which Dutchess has requested conversion, for any reason other than the
unavailability of the authorized but unissiued shares of our common stock, we
are required to pay to Dutchess 3 % of the dollar value of the Debentures being
converted, compounded daily, per each day after the 3rd business day following
the conversion date that the common stock is not delivered to Dutchess. There is
no guarantee that we will have cash readily available to make such payments in
the event of our failure to timely deliver certificates in accordance with a
conversion request by Dutchess. In addition, such payments may leave us with
little or no capital in our business. This would have an adverse effect on our
continuing operations.
Sales of a substantial number of shares of our common stock into the public
market by the holder of our Convertible Debenture may result in significant
downward pressure on the price of our common stock and could affect the ability
of our stockholders to realize the current trading price of our stock.
If Dutchess converts the Convertible Debenture and any accrued interest,
Dutchess may acquire and resell up to 8,857,396 shares of our common stock. The
issuance of the shares of our common stock upon conversion of the convertible
Debenture will result in dilution to the interests of the other holders of our
common stock. The resale of our common stock will increase the number of
publicly traded shares which could depress the market price of our common stock
and thereby affect the ability of our shareholders to realize the current price
of our common stock. In addition, as all of the shares we issue to Dutchess will
be available for resale, he mere prospect of our sales to them could depress the
market price of our common stock.
Risks relating to the Investment Agreement:
There are a large number of shares underlying our periodic equity investment
agreement that are being registered in this prospectus and the sale of these
shares may depress the market price of our common stock.
The issuance and sale of shares upon delivery of an advance by Dutchess Private
Equities Fund II, LP ("Dutchess") pursuant to the Investment Agreement in the
amount up to $5,000,000 and the conversion of the Debenture and exercise of
warrants by Dutchess are likely to result in substantial dilution to the
interests of other stockholders. As of September 9, 2005, we had 31,157,486
shares of common stock issued and outstanding. We are registering 49,123,282
shares of common stock pursuant to this registration statement, of which up to
38,461,538 are reserved for issuance pursuant to the Investment Agreement with
Dutchess Private Equities Fund II, LP.
Assuming the issuance of 38,461,538 shares under the Investment Agreement,
existing shareholders will experience substantial dilution of our shares of
Common Stock.
Our Investment Agreement with Dutchess contemplates the potential future
issuance and sales of up to $5,000,000 of our Common Stock to Dutchess subject
to certain restrictions and obligations. Given out current capital needs and the
market price of our common stock, we presently have no intention of drawing down
the entire amount available to us unless the market price of our common stock
increases.
The following is an example of the shares of our common stock that are issuable
upon the entire drawdown of $5,000,000 on our equity line based on a price of
$.13 and prices at 25%, 50% and 75% below $.13.
---------------------------------------------------------------------------------------------------------------------------------
% Below price Price per share Number of shares issuable Shares outstanding (2) % of Outstanding stock(3)
(1)
---------------------------------------------------------------------------------------------------------------------------------
Purchase price (4) $ .13 38,461,538 69,619,034 55.25%
---------------------------------------------------------------------------------------------------------------------------------
25% $.0325 153,846,154 185,003,650 83.16%
---------------------------------------------------------------------------------------------------------------------------------
50% $ .065 76,923,077 108,080,573 71.17%
---------------------------------------------------------------------------------------------------------------------------------
75% $.0975 51,282,051 82,439,547 62.21%
---------------------------------------------------------------------------------------------------------------------------------
1) Represents the number of shares issuable if all the entire $5,000,000
under the equity line of credit, was drawn down at the indicated price.
(2) Based on 31,157,496 common shares issued and outstanding on September 9,
2005.
(3) Percentage of the total outstanding common stock represented by the shares
issuable on draw down on the equity line of credit without regard to any
contractual or other restriction on the number of securities the selling
stockholders may own at any point in time.
(4) Based on a price of $.13 which is 95% of the lowest closing price of our
common stock during the five day period commencing August 18, 2005 through
August 25, 2005.
9
The large number of shares issuable under the Investment Agreement may result in
a change of control
If we were to request the maximum of $5,000,000 pursuant to the Investment
Agreement, assuming a conversion price of $.13 which represents 95% of the
lowest closing price of our common stock during the five day period commencing
August 18, 2005 through August 25, 2005, this would result in the issuance of
38,461,538 shares which will result in Dutchess controlling us. Dutchess may be
able to exert substantial influence over all matters submitted to a vote of the
shareholders, including the election and removal of directors, amendments to our
articles of incorporation and by-laws, and the approval of a merger,
consolidation or sale of all or substantially all of our assets. In addition,
this concentration of ownership could inhibit the management of our business and
affairs and have the effect of delaying, deferring or preventing a change in
control or impeding a merger, consolidation, takeover or other business
combination which our shareholder, may view favorably.
The lower the stock price, the greater the number of shares issuable under the
Investment Agreement.
The number of shares that Dutchess will receive under its agreement with us is
calculated based upon the market price of our common stock prevailing at the
time of each "put". The lower the market price, the greater the number of shares
issuable under the agreement. Upon issuance of the shares, to the extent that
Dutchess will attempt to sell the shares into the market, these sales may
further reduce the market price of our common stock. This in turn will increase
the number of shares issuable under the agreement. This may lead to an
escalation of lower market prices and ever greater numbers of shares to be
issued. A larger number of shares issuable at a discount to a continuously
declining stock price will expose our shareholders to greater dilution and a
reduction of the value of their investment.
The sale of our stock under the Dutchess agreement could encourage short sales
by third parties, which could contribute to the future decline of our stock
price and materially dilute existing stockholders' equity and voting rights.
Neither the Investment Agreement or the Debenture Agreement contain restrictions
on short selling. Accordingly, any significant downward pressure on the price of
our common stock can encourage short sales by them or others, subject to
applicable securities laws. This is particularly the case if the shares being
placed into the market exceed the market's ability to absorb the increased
number of shares of stock or if we have not performed in such a manner to show
that the equity funds raised will be used by us to grow. Such an event could
place further downward pressure on the price of our common stock. Even if we use
the proceeds under the agreement to grow our revenues and profits or invest in
assets, which are materially beneficial to us, the opportunity exists for short
sellers and others to contribute to the future decline of our stock price. If
there are significant short sales of our stock, the price decline that would
result from this activity will cause the share price to decline more so, which,
in turn, may cause long holders of the stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for the stock, our stock price will decline. If this
occurs, the number of shares of our common stock that is issuable pursuant to
the Investment Agreement will increase, which will materially dilute existing
stockholders' equity and voting rights.
10
FORWARD-LOOKING STATEMENTS
Our representatives and we may from time to time make written or oral statements
that are "forward-looking," including statements contained in this prospectus
and other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements within the
meaning of the Act. In addition, other written or oral statements which
constitute forward-looking statements may be made by us or on our behalf. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Important
factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital or
to obtaining the financing needed to implement its business plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
(i) insufficient revenues to cover operating costs.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the Selling Stockholders. We will receive proceeds
from the sale of shares of our common stock to Dutchess under the Investment
Agreement. The purchase price of the shares purchased under that agreement will
be equal to 95% of the lowest closing Best Bid (highest posted bid price of our
common stock) for the five trading days following the day that we submit a Put
Notice to Dutchess that we intend to sell shares to it. We may also receive
proceeds from the exercise of the warrants issued to Dutchess.
For illustrative purposes, we have set forth below our intended use of proceeds
for the range of net proceeds indicated below to be received under the
Investment Agreement assuming a sale of 10%, 25%, 50% and 100% of the shares
issuable under that agreement. We have the ability to draw down the full
$5,000,000 pursuant to the agreement, however we may draw down less than that
amount. The table assumes estimated offering expenses and fees of $36,098.55
(includes (a) estimated legal fees and expenses of $25,000, (b) estimated
accounting fees and expense of $10,000 and (c) SEC filing fees of $1,098.55).
10% 25% 50% 100%
------------- ------------- ------------- -------------
Gross Proceeds $ 500,000 $ 1,250,000 $ 2,500,000 $ 5,000,000
Net Proceeds after offering
expenses and fees $ 463,901.45 $1,213,901.45 $2,463,901.45 $4,963,901.45
Use of proceeds:
General Working Capital $ 463,901.45 $1,213,901.45 $2,463,901.45 $4,963,901.45
============= ============= ============= =============
11
Investment Agreement
On August 17, 2005, we entered into an Investment Agreement with Dutchess
Private Equities Fund II, LP, ("Dutchess") a Delaware limited partnership, for
the future issuance and purchase of shares of our common stock. This Investment
Agreement establishes what is sometimes termed an equity line of credit or an
equity drawdown facility.
In general, the drawdown facility operates as follows: Dutchess, has committed
to provide us up to $5,000,000 as we request it over a 36 month period, in
return for common stock we issue to Dutchess. We, in our sole discretion, may
during the Open Period deliver a "put notice" (the "Put Notice") to Duchess
which states the dollar amount which we intend to sell to Dutchess on the
Closing Date. The Open Period is the period beginning on the trading after this
Registration Statement is declared effective (the "Effective Date") and which
ends on the earlier to occur of 36 months from the Effective Date or termination
of the Investment Agreement in accordance with its terms. The Closing Date shall
mean no more than 7 trading days following the Put Notice Date. The Put Notice
Date shall mean the Trading Day immediately following the day on which Dutchess
receives a Put Notice, however a Put Notice shall be deemed delivered on (a) the
Trading Day it is received by facsimile or otherwise by Dutchess if such notice
is received prior to 9:00 am EST, or (b) the immediately succeeding Trading Day
if it is received by facsimile or otherwise after 9:00 am EST on a Trading Day.
The amount that we shall be entitled to Put to Dutchess shall be equal to, at
our election, either: (A) Two Hundred percent (200%) of the average daily volume
(U.S. market only) of the Common Stock for the twenty (20) Trading Days prior to
the applicable Put Notice Date, multiplied by the average of the three (3) daily
closing bid prices immediately preceding the Put Date, or (B) One Hundred
Thousand dollars ($100,000). During the Open Period, we shall not be entitled to
submit a Put Notice until after the previous Closing has been completed. The
Purchase Price for the Common Stock identified in the Put Notice shall be equal
to ninety-five percent (95)% of the lowest closing Best Bid price of the Common
Stock during the Pricing Period. The Pricing Period is the period beginning on
the Put Notice Date and ending on and including the date that is 5 trading days
after such Put Notice Date.
Dutchess' Obligation to Purchase Shares
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess shall
be required to purchase from us, during the period beginning on the Put Notice
Date and ending on and including the date that is 5 Trading days after such Put
Notice, that number of shares having an aggregate purchase price equal to the
lesser of (a) the Put Amount set forth in the Put Notice and (b) 20% of the
aggregate trading volume of our common stock during the applicable Pricing
Period times (x) the lowest closing bid price of our common stock during the
specified Pricing period, but only if such said shares bear no restrictive
legend and are not subject to stop transfer instructions, prior to the
applicable Closing Date.
Conditions to Dutchess' obligation to purchase shares
We shall not be entitled to deliver a Put Notice and Dutchess shall not be
obligated to purchase any shares at a closing unless each of the following
conditions are satisfied:
A. a Registration Statement shall have been declared effective and shall
remain effective and available at all times until the Closing with respect to
the subject Put Notice for the resale of all the common stock issuable pursuant
to the Investment Agreement,;
B. at all times during the period beginning on the related Put Notice Date
and ending on and including the related Closing Date, the Common Stock shall
have been listed on the Principal Market and shall not have been suspended from
trading thereon for a period of two (2) consecutive Trading Days during the Open
Period and we shall not have been notified of any pending or threatened
proceeding or other action to suspend the trading of our Common Stock;
C. we have complied with our obligations and are otherwise not in breach
of a material provision of, or in default under, the Investment Agreement and
the Registration Rights Agreement or any other agreement executed in connection
with the Investment Agreement, which has not been corrected prior to delivery of
the Put Notice Date;
D. no injunction shall have been issued and remain in force, or action
commenced by a governmental authority which has not been stayed or abandoned,
prohibiting the purchase or the issuance of the Securities; and
C. the issuance of the Securities will not violate any shareholder
approval requirements of the Principal Market.
If any of the foregoing events occurs during a Pricing Period, then Dutchess
shall have no obligation to purchase the Put Amount of Common Stock set forth in
the applicable Put Notice.
Mechanics of Purchase of shares by Dutchess
The closing of the purchase by Dutchess of Shares (a "Closing") shall occur on
the date which is no later than seven (7) Trading Days following the applicable
Put Notice Date (each a "Closing Date"). Prior to each Closing Date, (I) we
shall be required to deliver to Dutchess pursuant to the Investment Agreement,
certificates representing the Shares to be issued to Dutchess on such date and
registered in the name of Dutchess; and (II) Dutchess shall deliver to us the
purchase price to be paid for such Shares.
12
As compensation to Dutchess for a delay in issuance of the Shares beyond the
Closing Date, we have agreed to pay late payments to Dutchess for late issuance
of the Shares (delivery of the Shares after the applicable Closing Date) in
accordance with the following schedule (where "No. of Days Late" is defined as
the number of trading days beyond the Closing Date. The Amounts are
cumulative.):
LATE PAYMENT FOR EACH
NO. OF DAYS LATE $10,000 OF COMMON STOCK
---------------- -----------------------
1 $ 100
2 $ 200
3 $ 300
4 $ 400
5 $ 500
6 $ 600
7 $ 700
8 $ 800
9 $ 900
10 $1,000
Over 10 $1,000 + $200 for each Business Day late beyond 10 days
We shall pay any late payments in immediately available funds upon demand by
Dutchess.
Overall Limit on Common Stock Issuable.
If during the Open Period we become listed on an exchange that limits the number
of shares of our common stock that may be issued without shareholder approval,
then the number of Shares issuable by us and purchasable by Dutchess, including
the shares of Common Stock issuable to Dutchess, shall not exceed that number of
the shares of Common Stock that may be issuable without shareholder approval,
subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalization affecting the Common Stock (the
"Maximum Common Stock Issuance"), in excess of the Maximum Common Stock Issuance
shall first be approved by our shareholders in accordance with applicable law
and our By-laws and Amended and Restated Certificate of Incorporation, if such
issuance of shares of Common Stock could cause a delisting on the Principal
Market. Our failure to seek or obtain such shareholder approval shall in no way
adversely affect the validity and due authorization of the issuance and sale of
Securities or Dutchess' obligation in accordance with the terms and conditions
of the Investment Agreement to purchase a number of Shares in the aggregate up
to the Maximum Common Stock Issuance limitation, and that such approval pertains
only to the applicability of the Maximum Common Stock Issuance limitation.
Term
The Investment Agreement shall expire (a) when Dutchess has purchased an
aggregate of $5,000,000 of our Common Stock or (b) 36 months after the Effective
Date of the registration statement of which this prospectus forms a part,
whichever occurs earlier.
Suspension
The Investment Agreement shall be suspended upon any of the following events and
shall remain suspended until such event has been rectified:
A. the trading of our Common Stock is suspended by the SEC, the Principal
Market or the NASD for a period of two (2) consecutive Trading Days during the
Open Period; or,
B. Our Common Stock ceases to be registered under the 1934 Act or listed
or traded on the Principal Market.
Upon the occurrence of one of the above-described events, the Company shall send
written notice of such event to the Investor.
Sample Calculation of Stock Purchases
The following is an example of the calculation of the drawdown amount and the
number of shares we would issue to Dutchess in connection with that drawdown
based on the assumptions noted in the discussion below.
Sample Put Amount Calculation
The Put amount may at our election be either (a) $100,000 or (b) 200% of the
average daily volume (U.S. market only) of the Common Stock for the twenty (20)
Trading Days prior to the applicable Put Notice Date, multiplied by the average
of the three (3) daily closing bid prices immediately preceding the Put Date.
13
The calculation below is based upon average daily volume of our common stock
prior to a Put Notice Date of August 19, 2005
Set forth below is a trading summary of our Common Stock for the period from
July 22 through August 29, 2005.
Adj.
Date Open High Low Close Volume Close
--------- ---- ---- ---- ---- ------ ----
29-Aug-05 0.22 0.22 0.2 0.2 217,100 0.2
26-Aug-05 0.2 0.22 0.19 0.22 293,600 0.22
25-Aug-05 0.18 0.2 0.18 0.18 132,700 0.18
24-Aug-05 0.17 0.21 0.16 0.17 484,200 0.17
23-Aug-05 0.17 0.17 0.16 0.17 94,300 0.17
22-Aug-05 0.17 0.17 0.16 0.17 203,900 0.17
19-Aug-05 0.17 0.17 0.15 0.17 293,500 0.17
18-Aug-05 0.14 0.16 0.13 0.14 271,600 0.14
17-Aug-05 0.12 0.13 0.12 0.13 153,100 0.13
16-Aug-05 0.14 0.16 0.09 0.12 539,500 0.12
15-Aug-05 0.18 0.18 0.16 0.16 80,300 0.16
12-Aug-05 0.19 0.19 0.17 0.18 217,600 0.18
11-Aug-05 0.15 0.2 0.14 0.16 968,900 0.16
10-Aug-05 0.13 0.14 0.12 0.14 288,200 0.14
9-Aug-05 0.12 0.12 0.11 0.11 66,400 0.11
8-Aug-05 0.12 0.12 0.11 0.11 155,00 0.11
5-Aug-05 0.12 0.12 0.11 0.11 63,000 0.11
4-Aug-05 0.12 0.12 0.11 0.11 10,200 0.11
3-Aug-05 0.14 0.14 0.11 0.11 97,200 0.11
2-Aug-05 0.12 0.12 0.11 0.11 8,600 0.11
1-Aug-05 0.14 0.14 0.12 0.13 14,500 0.13
29-Jul-05 0.12 0.14 0.12 0.14 60,900 0.14
28-Jul-05 0.13 0.13 0.12 0.12 74,900 0.12
27-Jul-05 0.12 0.12 0.11 0.12 115,000 0.12
26-Jul-05 0.11 0.11 0.11 0.11 1,000 0.11
25-Jul-05 0.14 0.14 0.12 0.12 17,000 0.12
22-Jul-05 0.12 0.13 0.12 0.12 21,500 0.12
The Average Daily volume for the 20 trading days prior to August 19, 2005 based
upon the foregoing table is 154,245. 200 % of the average daily volume is
308,490.
The Average of the 3 daily closing bid prices immediately preceding the Put Date
of August 19, 2005 ($.14 + $.13 + $.12 divided by 3) is $.13. The total Put
Amount based upon the assumptions set forth above is $60,155.55. (200% of the
average daily volume of the Common Stock for the twenty (20) Trading Days prior
to the applicable Put Notice Date (308,490), multiplied by the average of the
three (3) daily closing bid prices immediately preceding the Put Date ($.13)).
Sample Calculation of Purchase Price
The Purchase Price shall be equal to ninety-five percent (95%) of the lowest
closing Best Bid price of the Common Stock during the Pricing Period. The
Pricing Period is the period beginning on the Put Notice Date and ending on and
including the date that is five (5) Trading Days after such Put Notice Date.
Using the same hypothetical set forth above, the pricing period is August 15,
2005 through August 19, 2005. The lowest closing Best Bid Price of the Common
Stock during this period is $.12. The Purchase Price per share is $.11 (95 % of
the lowest Best Bid Price of $.12). Therefore and based upon the foregoing,
Dutchess shall be required to purchase 182,291 shares at a price of $.11 and
shall pay to us $20,052.
14
Debenture Agreement
On August 16, 2005 we issued a Debenture to Dutchess in the principal amount of
$600,000 with a maturity date of August 16, 2010.
Interest and Payments
We will pay 10% annual coupon on the unpaid face amount of the Debenture. We are
required to make payments as set forth on the table below.
Convertible
Amount Interest Rate Redemption
------ ------------- ----------
$600,000.00 10% 120%
Amount with
Accrued Interest Applied to Applied to Applied to
Amount Due for Period Payment Principal Interest Redemptions
----------- ----------- ----------- ----------- ----------- -----------
8/1/2005 $600,000.00 $604,951.15 $ 4,951.15 $ 0.00 $ 4,951.15 $ 0.00
9/1/2005 $600,000.00 $604,951.15 $ 4,951.15 $ 0.00 $ 4,951.15 $ 0.00
10/1/2005 $600,000.00 $604,951.14 $ 4,951.15 $ 0.00 $ 4,951.15 $ 0.00
11/1/2005 $599,999.99 $604,951.14 $ 62,715.56 $ 48,137.01 $ 4,951.15 $ 9,627.40
12/1/2005 $551,862.98 $556,416.91 $ 62,715.56 $ 48,468.03 $ 4,553.93 $ 9,693.61
1/1/2006 $503,394.95 $507,548.92 $ 62,715.56 $ 48,801.33 $ 4,153.97 $ 9,760.27
2/1/2006 $454,593.63 $458,344.89 $ 62,715.56 $ 49,136.91 $ 3,751.27 $ 9,827.38
3/1/2006 $405,456.71 $408,802.51 $ 62,715.56 $ 49,474.81 $ 3,345.79 $ 9,894.96
4/1/2006 $355,981.91 $358,919.44 $ 62,715.56 $ 49,815.03 $ 2,937.53 $ 9,963.01
5/1/2006 $306,166.88 $308,693.34 $ 62,715.56 $ 50,157.58 $ 2,526.46 $ 10,031.52
6/1/2006 $256,009.30 $258,121.86 $ 62,715.56 $ 50,502.50 $ 2,112.57 $ 10,100.50
7/1/2006 $205,506.80 $207,202.63 $ 62,715.56 $ 50,849.78 $ 1,695.82 $ 10,169.96
8/1/2006 $154,657.02 $155,933.24 $ 62,715.56 $ 51,199.46 $ 1,276.22 $ 10,239.89
9/1/2006 $103,457.56 $104,311.29 $ 62,715.56 $ 51,551.53 $ 853.72 $ 10,310.31
10/1/2006 $ 51,906.03 $ 52,334.36 $ 62,715.56 $ 51,906.03 $ 428.32 $ 10,381.21
TOTALS $ 0.00 $ 0.00 $767,440.20 $600,000.00 $ 47,440.20 $120,000.00
Subsequent to the Effective Date, Dutchess can either request a payment as set
forth in the table above to elect to convert a portion of the Debenture in an
amount equal to the payment amount.
Conversion
Dutchess may convert the face amount of the Debenture, plus accrued interest, in
whole or in part by giving us written notice. The conversion price shall be
equal to the lesser of (i) the lowest closing bid price during the 15 full days
of trading prior to the filing date or (ii) $.092. No fractional or scrip shares
will be issued on conversion. In addition, in the event that any portion of the
Debenture remains outstanding on the Maturity Date, such outstanding amount
shall be automatically converted into shares of our common stock. In the event
that we do not make delivery of the common stock as instructed by Dutchess, we
shall be obligated to pay to Dutchess 3% in cash of the dollar value of the
Debentures being converted, compounded daily, per each day after the 3rd
business day following the conversion date that the Common Stock is not
delivered to Dutchess.
The number of shares included in this Registration Statement with respect to the
Debenture is 8,857,396. This is based upon a conversion price of $.092. This
also includes interest calculated at 10% per annum for a period of 5 years
($47,440.20).
Events of Default
We will be considered in default if any of the following events occurs:
(a) we do not make a Payment of the principal of the Debenture by
conversion into Common Stock within five (5) business days of the Maturity Date,
upon redemption or otherwise;
(b) we do not make a payment, other than a payment of principal, for a
period of three (3) business days thereafter;
(c) any of our representations or warranties contained in the Subscription
Agreement (executed in connection with the Debenture Agreement) or the Debenture
were false when made or we fail to comply with any of our the agreements
executed in connection with Debenture and such failure continues for a period of
five (5) business days, and such default in not cured within five (5) business
days after the receipt of notice from Dutchess;
15
(d) we, pursuant to or within the meaning of any Bankruptcy Law; (i)
commences a voluntary case; (ii) consents to the entry of an order for relief
against us in an involuntary case; (iii) consents to the appointment of a
Custodian on our behalf or for all or substantially all of our property or (iv)
makes a general assignment for the benefit of our creditors or (v) a court of
competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against us in an involuntary case; (B) appoints a Custodian on
our behalf or for all or substantially all of our property or (C) orders our
liquidation, and the order or decree remains unstayed and in effect for sixty
(60) calendar days;
(e) our Common Stock is suspended or no longer listed on any recognized
exchange including electronic over-the-counter bulletin board for in excess of
five (5) consecutive Trading Days;
(e) we violate any terms and conditions of the Registration Rights
Agreement executed by us in connection with the Debenture Agreement;
(f) the Registration Statement, of which this Prospectus forms a part,
underlying the Debenture is not declared effective by the SEC within twelve (12)
months of the Issuance Date.
In the Event of Default, Dutchess may among other things:
(a) elect to secure a portion of our assets not to exceed 200% of the Face
Amount of the Note, in Pledged Collateral;
(b) elect to garnish Revenue from us in an amount that will repay the
Holder on the payment schedule set forth above;
(c) exercise its right to increase the Face Amount of the Debenture by ten
percent (10%) as an initial penalty and for each Event of Default under the
Debenture;
(d) elect to increase the Face Amount by two and one-half percent (2.5%)
per month (pro-rata for partial periods) paid as a penalty for liquated damages
which will be compounded daily;
If the Registration Statement, of which this Prospectus forms a part, underlying
the Debenture is not declared effective by the SEC within twelve (12) months of
the Issuance Date. Dutchess may elect to switch the Conversion Price to such
amount as shall be equal to the lesser of a) $.092 or b) seventy percent (70%)
of the lowest closing bid price of the Common Stock during the fifteen (15)
trading days prior to conversion.
Limitation on Amount of Conversion and Ownership
The Debenture provides that Dutchess shall not be entitled to convert that
amount of Debenture into common stock, which when added with the sum of the
number of shares beneficially owned by Dutchess would exceed 4.99% of the number
of shares of our common stock outstanding on the conversion date.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our condensed
financial statements and notes to those statements. In addition to historical
information, the following discussion and other parts of this quarterly report
contain forward-looking information that involves risks and uncertainties.
Overview
Plan of Operations
We operate our business through our two wholly owned subsidiaries, Direct Dental
Services, Inc. and Union Dental Corp. Direct Dental operates a network of duly
licensed dental providers. Members of the dental network pay an annual
management service fee for the right to be a member of the dental network. Union
Dental operates two dental practices in Coral Springs, Florida. We plan on
expanding our line of business by acquiring dental practices and recruiting new
dental practitioners to join our dental network servicing the union contracts.
We may also expand and offer participating unions other professional services
such as chiropractic services and optical services.
Management's current focus is the expansion of our network of dental providers
by adding union contracts in states where we currently do not have union
contracts and by developing additional contracts with other unions, who will
provide their services to the union members. We also intend to expand our dental
practice segment in existing markets primarily by enhancing the operating
performance of our existing offices and, by acquiring other dental practices. In
furtherance of these objectives, during our last fiscal quarter we acquired
substantially all of the assets of a dental practice (excluding the patient
list) located in Coral Springs, Florida ("Dental Visions") for a purchase price
of $283,241 consisting of the assumption of $169,486 in debt and the issuance of
733,901 shares of our common stock with an agreed value of $.155 per share. We
successfully integrated the operations of Dental Visions into Union Dental. At
this time it is not possible to project what income or expenses will result from
the expansion of these services.
16
Comparison of Operating Results for the Quarter Ended June 30, 2005 to the
Quarter Ended June 30, 2004
Revenues
Revenues for the three months ended June 30, 2005 as compared to June 30, 2004
were $610,924 as compared to $405,622, an increase of approximately 50%.
Revenues for the six months ended June 30, 2005 were $1,124,561 as compared to
$1,091,861 for the six months ended June 30, 2004, an increase of approximately
3%. The increase in revenues, especially during the second quarter of 2005 is
attributable to two factors: Increased revenues as a result of the acquisition
and integration of the assets of Dental Visions into Union Dental and
management's ability to focus on expanding the operations of the business.
Operating Expenses
Operating expenses for the three months ended June 30, 2005 as compared to the
three months ended June 30, 2004 increased by $126,271, increasing from $551,068
and $424,797, an increase of approximately 77%. The increase in our operating
expenses is a result of increased general and administrative expenses and
salaries. Many of the additional general and administrative expenses were the
result of increased marketing expenses for Direct Dental, consulting and
professional fees incurred as a result of the filing of our annual report during
the first quarter of 2005 and increased costs associated with the purchase of
the assets and assumption of liabilities of Dental Vision. The increase in
salaries relates to adding additional personnel and normal wage increases.
Operating expenses for the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004 increased by $252,196 from $723,949 and $976,145, an
increase of approximately 70%. This increase is attributable to increased
general and administrative expenses and increased salaries which the Company has
incurred as it expands its operations.
Interest Expense
Interest expense for the three and six months ended June 30, 2005, was $24,746
and $37,628 as compared to $11,447 and $25,809 for the three and six months
ended June 30, 2004. The increase is primarily attributable to increased
borrowing costs associated with an increase in our bank line of credit.
Net Income
Our net income for the three months ended June 30, 2005 was $23,560 as compared
to a net loss of $30,622 for the three months ended June 30, 2004. The reversal
of the loss is primarily attributable to increased revenues.
Our net income for the six months ended June 30, 2005 was $74,338 as compared to
net income of $342,103 for the six months ended June 30, 2004, a decline of
$267,765. The overall decline in our net income over this period is primarily
attributable to an increase in general and administrative expenses and an
increase in salaries despite an increase in revenues for the six month period
from $1,091,861 to $1,124,561.
We recorded zero (-0-) in income per share for both the three and six months
ended June 30, 2005 as compared to a loss per share of $(30.62) for the three
months ended June 30, 2004 and net income per share of $342.10 for the six
months ended June 30, 2004.
Income Tax Consequences
Prior to their acquisition by Union Dental Holdings, both Union Dental Corp. and
George D. Green, DDS, P.A. were operated as S corporations and any income tax
payable were paid by their shareholders. With the subsequent acquisition by
Union Dental Holdings, we are required to pay income tax on the net income we
generate.
Liquidity and Capital Resources
We use available finances to fund ongoing operations. Funds will be used for
general and administrative expenses, website maintenance and development,
marketing and expenses related to the filing and preparation of our SEC filings.
We intend to seek additional financing to fully implement our business plan.
Additional financing will enable us to expand our dental network and acquire
additional dental practices. Additional working capital may be available through
third party financing sources. There can be no assurance that we will be
successful in securing any type of debt or equity financing.
If we are successful in securing additional financing, we believe that our
business model can be expanded into other professional fields. We believe that a
niche market exists in both the chiropractic and optometry fields. If we
determine that we can successfully market these services to unions together with
our dental program, we will attempt to secure a network of chiropractors and
optometrists.
On August 17, 2005, we entered into an Investment Agreement with Dutchess.
Pursuant to this Agreement, Dutchess will commit to purchase up to $5,000,000 of
our Common Stock over the course of 36 months, after a registration statement
has been declared effective by the SEC. Under the agreement, we may sell to
Dutchess on each occasion, either (1) $100,000 in shares of our common stock or
(2) 200% of the averaged daily volume (U.S market only) of our Common Stock for
the 20 trading days prior to our "Put" notice, multiplied by the average of the
3 daily closing prices immediately preceding the Put Date. As a result of this
variable price feature, the number of shares issuable pursuant to the agreement
will increase if the market price of our stock decreases. In addition there is
no upper limited on the number of shares issuable pursuant to the agreement.
Therefore our shareholders may be subject to significant dilution and face the
prospect that Dutchess, which may own 95% or more of our common stock upon
drawdown of the maximum of $5,000,000, may control us.
17
Also, in connection with the Dutchess transaction, we sold $600,000 in principal
amount of our five-year convertible debentures to Dutchess These debentures bear
interest at 10% per annum (payable in cash or stock at Dutchess' option). The
first $300,000 (less expenses) has been funded, with an additional $300,000 to
be funded immediately upon filing of this Registration Statement with the SEC.
We believe that the funds received and to be received from Dutchess will be
sufficient to fund and expand our business over the next twelve months. If for
some reason we are not able to draw down the entire $5,000,000, we may have to
obtain additional operating capital from other sources to enable us to execute
our business plan. We anticipate that we will obtain any additional required
working capital through the private placement of Common Stock to domestic
accredited investors pursuant to Regulation D of the Securities Act of 1933, as
amended. There is no assurance that we will obtain the additional working
capital that we need through the private placement of Common Stock. In addition,
such financing may not be available in sufficient amounts or on terms acceptable
to us.
Assets and Liabilities
Our total assets were $777,191 as of June 30, 2005 as compared to $446,924 as of
December 31, 2004. respectively. Our assets as of June 30, 2005 consisted
primarily of our accounts receivable, net of allowance of $361,213 furniture,
fixtures and equipment of $327,788 (net of depreciation), inventory of $25,185
and cash of $48,627. As of December 31, 2004, accounts receivable, net of
allowance was $317,077, furniture, fixtures and equipment was $49,476 (net of
depreciation) inventory was $24,055 and cash of $42,294.
Accounts receivable increased by approximately $44,000 while our property and
equipment increased by $278,312. The increase in both our accounts receivable
and the value of our property and equipment is primarily attributable to our
acquisition of Dental Visions.
Total Current Liabilities as of June 30, 2005 were $712,381 consisting primarily
of $326,514 in unearned membership interests, $269,513 representing the current
portion of a note payable, $36,450 in income taxes payable and $32,961 in
customer deposits. Total current liabilities as of December 31, 2004 were
$871,959 consisting primarily of $326,326 in unearned memberships, $299,435
representing the current portion of a note payable, $110,839 due a related party
and $47,813 from our line of credit.
Our long-term liabilities increased from $972,000 as of December 31, 2004 to
$1,117,933, an increase of approximately 15%. This increase was primarily
attributable to refinancing our loan with the bank to enable us to finance
additional acquisitions.
As of June 30, 2005, we have a stockholders deficit of $(1,053,123). This
compares to a stockholders deficit of $(1,397,035) as of December 31, 2004. The
reduction of our stockholders deficit is due to three factors; net income of
approximately $74,000, a net change of $96,000 relating to a loan received from
a principal stockholder, less any notes receivable from the same principal
shareholder, plus stock issued for $60,000.
No trends have been identified which would materially increase or decrease our
results of operations or liquidity.
The only significant cash transaction other than that generated and used in
operations has been that during June 2005, the Company issued 70,000 shares of
restricted common stock in exchange for $35,000 in cash, or $0.50 per share.
Year ended December 31, 2004 compared to year ended December 31, 2003
Revenues
For the year ended December 31, 2004 as compared to December 31, 2003 we
generated revenue of $1,931,570 as compared to $2,016,408. The decrease in
revenues was as a result of management focusing its attention on negotiating,
structuring and implementing the reverse merger with National Business Holdings,
Inc.
Net Income
Our net income for 2004 was $4,989 as compared to $762,168 in the prior year.
The significant decrease in net income is primarily attributable to an increase
in general and administrative expenses from $624,723 to $1,100,490, an interest
expense of $40,587 and an increase in advertising from $35,506 to $68,588. Many
of the additional general and administrative were the result of increased
marketing expenses for Direct Dental and consulting and professional fees
incurred as a result of the Reorganization during the fourth quarter of 2004. We
also incurred non-cash expenditures of approximately $111,763, which includes
$71,800 for shares issued for services rendered and $39,963 for stock issued in
lieu of payment of an interest expense. We recorded $0.00 in income per share
for 2004 as compared to $762.17 per share in 2003. The significant decline in
income per share is due to the increased number of outstanding shares (from
1,000 to 29,473,585), which is primarily attributable to the Reorganization.
18
Compensation
During the year ended December 31, 2004 and 2003, the Company incurred $692,099
and $587,411, respectively, for salaries. The increase in salaries relates to
adding additional personnel and normal wage increases.
General and Administrative expenses
During the year ended December 31, 2004 and 2003, we incurred $1,100,490 and
$624,723, respectively in general and administrative expenses, and $9,880 and
$7,530 in depreciation expense, respectively. A substantial portion, of the
increase in general and administrative expenses were marketing expenses for
Direct Dental and consulting and professional fees incurred as a result of the
Reorganization during the fourth quarter of 2004.
Liquidity and Capital Resources
We use available finances to fund ongoing operations. Funds will be used for
general and administrative expenses, website maintenance and development,
marketing and expenses related to the filing and preparation of our SEC filings.
We will require additional financing to fully implement our business plan,
expanding our dental network and acquiring additional dental practices. We will
also need additional financing if we intend to create a network of chiropractic
physicians and offer their services to various unions. Additional working
capital may be available through third party financing sources. There can be no
assurance that we will be successful in securing any type of debt or equity
financing.
At December 31, 2004 and 2003, we had cash and accounts receivable totaling
$359,371 and $289,429 respectively. We had total current assets of $386,935 as
compared to $327,293 and our total assets as of December 31, 2004 were $446,924
as compared to $654,700. Our total current liabilities were $871,959 as compared
to $363,712. The significant increase in our total current liabilities is as a
result of the increase in the current portion of our notes payable from $40,434
to $299,435 and the increase in unearned memberships from $264,663 to $326,326.
We have a working capital deficit as of December 31, 2004 of $485,024 as
compared to a working capital deficit of $36,419 as of December 31, 2003.
Our long-term liabilities increased from $53,938 to $972,000 of which $339,821
is due Dr. Green and the remaining $972,000 is pursuant to our bank loan. The
Company agreed to assume this bank loan from Dr. Green which was utilized to
purchase 50% of Direct Dental from its founder and former owner and the
remaining balance was due and owing as a result of the acquisition of the
initial 50% interest in Direct Dental.
In 2004 we incurred a charge to stockholders' equity in the amount of
$1,539,129. This charge was a result of three related party transactions. First,
Union Dental issued a $1 million note payable to Dr. Green, our controlling
shareholder, as consideration for the purchase of the assets (minus the client
list) of his dental practice, Dr. George D. Green, DDS, P.A. The Second
transaction related to Direct Dental executed a note payable to a bank in the
amount of $1,215,000 to satisfy an outstanding liability of Dr. Green to
purchase shares of Direct Dental prior to the Reorganization. These amounts are
offset by $675,871, representing a note receivable from Dr. Green resulting from
the above transactions, net of other payables.
As a result of the foregoing accounting treatment of the various transactions,
Dr. Green will be required to repay a portion of these sums to the Company. As
of the date hereof, no repayment schedule has been established. To the extent
that any sums are due as a result of any reclassification of goodwill, no
payments will be made by Dr. Green.
BUSINESS
Overview
Business Development. National Business Holdings, Inc., a Florida corporation,
was incorporated on November 26, 1996 as Stirus Research & Development, Inc. We
were originally in the business of development and sales distribution of medical
devices. We later changed our name to Mecaserto, Inc. on November 9, 1998, when
we acquired a French subsidiary, Mecaserto, S.A., whose business was the
manufacture and sale of a medical imaging device.
On or about May 1, 2002, Pieter Durand, our former officer and director, loaned
us $25,000 to support our working capital requirements. This indebtedness was
evidenced by a Convertible Note, convertible into our Common Stock at the
election of the holder. Pursuant to the December 27, 2004 Reorganization
Agreement, this debt has been canceled.
On or about May 5, 2003, our French subsidiary faced liquidation in a French
court and we relinquished our ownership interest in this subsidiary to our
French shareholders in exchange for such holders' agreement to assume the debts
and liabilities of the French subsidiary. Since the conclusion of this
transaction and prior to our reorganization with Union Dental Corp and Direct
Dental Services on December 27, 2004, we had no assets, liabilities or business
operations except our Convertible Note indebtedness and miscellaneous payables.
19
On or about February 2, 2004, we accepted a subscription from Gala Enterprises
Ltd. for 10,000,000 shares of our restricted, unregistered common stock for cash
proceeds of $25,000 in order to support our short-term working capital
requirements. We relied upon Section 4(2) of the Securities Act of 1933, as
amended ("Securities Act"), and Rule 506 of Regulation D promulgated thereunder.
This transaction did not involve a public offering and was exempt from
registration under the Securities Act. No underwriters were used in connection
with this transaction.
On February 2, 2004, Pieter Durand, the principal of Gala Enterprises Ltd., was
appointed to serve as a member of our Board of Directors until the next meeting
of the shareholders in which directors are elected. Subsequently, on February 6,
2004, Dennis Rault, our former sole officer and director, tendered his
resignation, leaving Mr. Durand as our sole officer and director.
On May 4, 2004, our Board of Directors ratified and accepted and the majority
shareholders approved by written consent an Amended and Restated Articles of
Amendment to the Articles of Incorporation, filed with the State of Florida on
May 11, 2004, changing our name from Mecaserto, Inc. to National Business
Holdings, Inc. Our Restated Articles of Incorporation allow us to issue up to
300,000,000 shares of common stock, par value of $.001, of which 29,510,585
shares are issued and outstanding at the present time. The Restated Articles of
Incorporation also allow us to issue up to 25,000,000 shares, $0.0001 par value,
of preferred stock with the specific terms, conditions, limitations and
preferences to be determined by the Board of Directors without shareholder
approval, of which 1,000,000 shares are issued and outstanding at the present
time.
On May 10, 2004, our Board of Directors ratified and accepted and a majority of
shareholders approved by written consent a subdivision of the issued and
outstanding common stock of the Company (a reverse split) at a ratio of one (1)
share for each forty (40) shares of common stock issued and outstanding,
effective May 24, 2004.
On May 28, 2004, we entered into a Share Exchange Agreement with Shava, Inc.
("Shava"), whereby we acquired one hundred percent (100%) of all the outstanding
shares of common stock ("Shava Common Stock") of Shava from Roger E. Pawson,
Shava's sole officer, director and shareholder, in exchange for 3,100,000
post-reverse split shares of our common stock in order to effect a reverse
acquisition of Shava. As a part of the transaction, the Company changed its
fiscal year end from December 31 to May 31. We filed a Form 10-KSB for the
transition period from January 1, 2004 to May 31, 2004 in accordance with the
Securities Exchange Act of 1934.
After the May 28, 2004 change in control, we decided to initiate a new business
plan of lending and investing. In June 2004, we formed a new wholly owned
subsidiary in Florida, National Business Investors, Inc. with headquarters in
Falls Church, Virginia and San Diego, California. This subsidiary has not
conducted any business to date.
On December 27, 2004, we entered into a Share Exchange and Reorganization
Agreement ("Reorganization") with both Union Dental Corp, a Florida corporation
and Direct Dental Services, Inc., a Florida corporation whereby Union Dental and
Direct Dental became wholly-owned subsidiaries of us in exchange for an
aggregate of 17,500,000 shares of our common stock and 1,000,000 shares of our
preferred stock with each share of preferred stock providing voting rights equal
to 15 shares of our common stock. In addition, we agreed to recognize the
3,452,250 issued and outstanding options to purchase Union Dental common stock
as options to purchase our common stock. Pursuant to the Reorganization
Agreement, 22,287,977 shares of our common stock were canceled.
Effective October 15, 2004, Union Dental acquired substantially all of the
assets (except the patient list) of George D. Green D.D.S., P.A. in Coral
Springs, Florida. Pursuant to this Asset Purchase Agreement, the aggregate
purchase price payable by Union Dental for these assets was One Million Dollars
($ 1,000,000.00), payable pursuant to a Promissory Note (the "PA Note") in the
amount of One Million Dollars ($1,000,000.00) with interest thereon of five
percent (5%) per annum, and which note shall be payable in ten (10) equal yearly
installments.
Direct Dental operates a network of duly licensed dental providers who provide
dental services through the network to union members in accordance with
arrangements between Direct Dental and various unions. Pursuant to the Stock
Purchase Agreement, on August 14, 2000, Dr. Green acquired two hundred fifty
(250) shares of common stock of Direct Dental from Melvyn Greenstein, Direct
Dental and Irene Greenstein, the initial shareholders and Sellers (collectively
the "Greensteins"), for the purchase price of One Million Eight Hundred Fifty
Thousand Dollars ($1,850,000.00) (1st DDS Purchase Price"). The 1st DDS Purchase
Price was payable as follows: One Million Four Hundred Fifty Thousand Dollars
($1,450,000.00) at closing and a promissory note of Four Hundred Thousand
Dollars ($400,000.00). On December 31, 2003, Dr. Green acquired the remaining
two hundred fifty (250) shares of common stock of Direct Dental from the
Greensteins for the purchase price of Eight Hundred Fifty Thousand Dollars
($850,000.00) (2nd DDS Purchase Price"). As a result of the 1st DDS Purchase
Price and the 2nd DDS Purchase Price, Dr. Green owned of record and beneficially
all of the issued and outstanding common stock of DDS, consisting of five
hundred (500) shares of Direct Dental.
On January 11, 2005, we amended our Articles of Incorporation to change our name
from National Business Holdings, Inc. to Union Dental Holdings, Inc. On February
8, 2005, we further amended our Articles of Incorporation to issue 1,000,000
shares of preferred stock with each share of preferred stock providing voting
rights equal to 15 shares of our common stock to Dr. Green.
Unless the context indicates otherwise, references hereinafter to the "Company",
"we", "us" or "Union" include both Union Dental Holdings, Inc., a Florida
corporation and our wholly owned subsidiaries, Union Dental Corp., a Florida
corporation, Direct Dental Services, Inc., a Florida corporation. Our principal
place of business is 1700 University Drive, Suite 200, Coral Springs, Florida
33071, and our telephone number at that address is (954) 575-2252.
20
Business of the Company
During the fiscal year ended December 31, 2004, we operated two business lines:
operating a network of duly licensed dental providers to a network of union
members through Direct Dental and managing a dental practice through Union
Dental.
Direct Dental Services, Inc.
Direct Dental Services, Inc. is a Florida corporation that operates a network of
duly licensed dental providers, the Dental Referral, who provide dental services
through the network to union members in accordance with arrangements between
Direct Dental and various labor unions. Direct Dental is not limited as to the
type of labor union which Direct Dental may solicit. Direct Dental charges an
annual management services fee to the participating dentists to practice in an
"area of exclusivity" for union members. Direct Dental currently has exclusive
contracts with local unions, such as Communications Workers of America,
International Brotherhood of Electrical Workers and General Electric's
International Union of Electronic, Electrical, Salaried, Machine and Furniture
Workers - Communications Workers of America.
Members of the Dental Network are assigned "areas of exclusivity" established by
Direct Dental which grants the Dental Network provider primary responsibility to
provide for the general dentistry and specialist services required by covered
union members. Direct Dental 's Network dentists accept as payment in full for
covered services the scheduled amount payable by the applicable union sponsored
dental benefit plan together with a relatively small co-payment from the covered
union member. The copayment to be paid by the union member is generally
substantially lower than the scheduled copayment set forth in the applicable
dental benefit plan, resulting in significant savings to the union member.
Exclusive Agreements
Direct Dental selects certain dentists in selected geographical areas to
represent Direct Dental. The dentist enters into an exclusive agreement with
Direct Dental for an annual management services fee, which ranges from $3,000 to
$6,000, which is based on each specialty the dentist provides to the patients on
a per office basis. Direct Dental receives a yearly membership fee from each
dentist in order for him/her to maintain the exclusive area of each specialty
that the dentist provides. Currently, areas of specialties include: (1) General
Dentistry (2) Orthodontics (3) Periodontics (4) Pedodontics (5) Endodontics (6)
Prosthodontics (7) Oral & Maxillofacial Surgery, (8) Implants and (9) TMJ.
Direct Dental enters into contracts with labor unions to be the exclusive
provider of dental services to its memberships under existing dental benefit
plans. Presently, Direct Dental has a contract with the CWA covering its members
in 19 states, including employees of AT&T, Lucent, Verizon, Bell South,
Cingular, Verizon, Qwest and SBC/Pactell. We also entered into agreements with
the International Brotherhood of Electrical Workers Local #824 in Tampa, Florida
and Local # 728 in Ft. Lauderdale, FL and General Electric's International Union
of Electronic, Electrical, Salaried, Machine and Furniture Workers -
Communications Workers of America Local 761 in Louisville, Kentucky. We intend
to pursue other labor unions as part of our expansion program.
Dental Network
The Dental Network currently consists of approximately 300 licensed dentists
located in 13 states. The territory served by the Dental Network is divided into
geographic areas using a predetermined formula that allocated approximately one
general dentist to approximately 500-1,000 insured union employees which
includes their immediate family members. Exclusive areas for specialists were
allocated approximately 1,000-3,000 insured union employees, which include their
immediate family members, per specialist. Each member of the Dental Network
enters into an annual network provider agreement with Direct Dental for his or
her respective Exclusive Area. Consideration paid by the Dental Network member
is determined based upon the size of the Exclusive Area and the number of
specialties covered under the respective member's contract.
Union Dental Corp.
Union Dental Corp., is a Florida corporation that acquired the assets (excluding
the client list) of Dr. George D. Green, P.A. effective October 15, 2004.
During our last fiscal quarter we acquired substantially all of the assets of a
dental practice located in Coral Springs, Florida ("Dental Visions") for a
purchase price of $283,241 consisting of the assumption of $169,486 in debt and
the issuance of 733,901 shares of our common stock with an agreed value of $.155
per share.
Union Dental utilizes the services of 29 individuals pursuant to a management
agreement with George D. Green, DDS, P.A. The Coral Springs office is comprised
of two licensed dentists, a licensed associate dentist, two hygienists, four
nurses, two office managers, a union dental insurance specialist and a union
dental administrative director.
Acquisition Of Additional Practices
We intend to acquire existing dental practices in selected geographical areas
throughout the United States to further expand our base of operations by
providing additional locations for the benefit of union members. This expansion
will be accomplished by having the licensed dentist train at the corporate
headquarters prior to being placed into the newly acquired dental practices.
After a period of time the dentist will be evaluated in his/her management
skills and operating procedures. At that time, we intend to allow these dentists
to purchase the existing dental practice from us, after the completion of a
transition period. We intend to finance the acquired business when it is sold to
the new dentist. We believe this will allow us to expand our network of
exclusive areas in a timely manner.
21
MARKETING AND SALES
Brochures And Posters
The union itself is a viable component of our marketing strategy. We anticipate
that the respective unions will be extremely helpful with promoting the dental
benefits provided to their members. Currently, although we pay all the costs
associated with the printing, distribution and mailing of the brochures, the
individual unions are responsible for mailing all pamphlets and other literature
designed and produced by us. We will also design and distribute poster boards to
be placed in heavily frequented areas within the employer's offices, factories
or lunchrooms. These poster boards contain brochures which provide information
about the union's dental coverage and list the Dental Network members in their
respective geographical area. We pay for the printing and mailing of the
brochures and poster boards.
Seminars
We intend to hold seminars where prospective Network members can learn about us
and the benefits of Dental Network membership. Prospective members will have the
opportunity to meet with current network members and other prospective members.
Web Site Development
We developed a website for use in the expansion of our Dental Network. Our
website will be used as an informative site, and dental directory, for union
patients who are in need of the services offered by the dentists in the network
and to locate a network dentist. The website provides patients with information
about each member of the Dental Network to better inform the patient of the
doctor's professional credentials. The web site will also be used to establish a
direct link between the patient and the doctor. We believe this approach will
enhance the dentist-patient relationship, improve patient loyalty, and increase
utilization of dental services. We have two websites located at
www.uniondental.com and www.uniondentalcorp.com respectively. To date, several
unions have hyperlinked their website to our website in order to avail their
members more access to the dental benefits offered to them and current
information of dental providers in the network.
We presently derive our sales from the following: (1) sales of the "Areas of
Exclusivity" in the selected geographical areas to dentists who provide dental
services to the union employees in those specific areas; and (2) operating two
dental practices located in Coral Springs, Florida.
Subsequent Events. Pursuant to the December 28, 2004 reorganization transaction,
on March 30, 2005, our Board of Directors elected to change our fiscal year-end
from May 31 to December 31. See 8-K filed on March 30, 2005.
Competitive Business Conditions
The fields of dental practice and dental network participation with unions are
highly competitive. We compete with a number of businesses that provide the same
or similar services. Many of these competitors have a longer operating history,
greater financial resources, and provide other services to insurance companies
that we do not provide. Principal competitors include national firms, as well as
many regional firms. We believe that quality of service, high caliber dental
services, proper pricing and range of services offered are the principal factors
that will enable us to compete effectively.
Government Regulations
As a participant in the health care industry, our operations are subject to
extensive and increasing regulation by a number of governmental entities at the
federal, state and local levels. We also are subject to laws and regulations
relating to business corporations in general. We believe our operations are in
material compliance with applicable laws and will be able to maintain compliant
in an ever increasing regulatory environment.
Costs and Effects of Compliance with Environmental Laws.
Some of the services provided by the Company will produce byproducts or waste,
the disposal of which is regulated by Federal or State guidelines. The Company
is aware of the requirements of these regulating agencies and has taken steps to
ensure compliance with the legal requirements.
Employees
As of September 9, 2005, the Company does not have any employees. However, the
Company utilizes the services of 17 individuals that are employed through Union
Dental, as a management company, to Dr. George D. Green, DDS, P.A. We anticipate
hiring either directly or through the management company additional employees
over the next twelve months if we are successful in implementing our plan of
operations.
22
DESCRIPTION OF PROPERTY
As a result of the Reorganization, our offices are located at 1700 University
Drive, Suite 200, Coral Springs, Florida 33071. We have entered into a
month-to-month lease for suite 304 and have been in suite 200 since 1997 and
this lease expires in May 2007. We have entered into a lease for suite 202,
which expires in June 2010. Suite 304 consists of approximately 1,100 square
feet of office space, suite 200 and suite 202 consists of approximately 2,200
square feet and 1,500 square feet, respectively, of professional dental practice
space. Our rent for suites 304, 200 and 202 are $1,550, $2,167 and $2,150 per
month respectively, which rates will remain the same throughout the remainder of
the Lease. We believe that the foregoing space is adequate to meet our current
and planned operations.
LEGAL PROCEEDINGS
During the second quarter of 2005, Direct Dental was sued by a former member of
our network. The suit alleges that the company breached the exclusivity
provisions of its agreement with Direct Dental by selling the territory to
another dentist. The lawsuit was filed in Dade County, Florida (Case No.
05-08811 CA 2). Management believes that it has a meritorious defense to this
action in that the territory was only sold after the plaintiff failed to make
the required payments due under the management agreement to remain part of our
network.
During the second quarter of 2005 we were sued by another dentist who was
previously a Direct Dental member. The suit was filed in Dade County, Florida
(Case No. 05-0077-99) and alleges tortuous interference with a business
relationship and libel. Management believes that it has meritorious defenses in
that this action was brought in response to a lawsuit filed by the company
against the same dentist for breach of contract, slander, tortuous interference
with a business relationship and injunctive relief (Case No. 04-12109 CA 10). We
filed this action when the dentist failed to pay the required fee to remain a
member of the Direct Dental network and attempted to create his own network
ofservice providers.
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following table sets forth current information regarding our executive
officer and director:
Name Age Position(s) with Company Election Date
--------------- --- ----------------------------------- --------------
Dr.George D. Green 47 Chief Executive Officer, President, December 2004
Secretary and Director(1)
Dr.George D. Green, is Chairman of the Board of Directors, President and Chief
Executive Officer of Union Dental Corp. He currently serves as our sole
Executive Officer of Union Dental Corp. He currently serves as our sole officer
and director. He graduated from the University of Miami in 1983. He attended
Georgetown University School of Dentistry where he graduated in 1985 with his
Doctor of Dental Surgery (DDS) degree. Dr. Green started his general dentistry
practice in Florida in 1986 and currently maintains that office. He has been
President of the Coral Springs Business Club from 1993-96 and President of the
Coral Springs/Parkland Rotary Club from 1996-97. He is the Founder of Union
Dental Corp., and has held the management positions of the Company since
inception. Dr. Green has been a Dental Network participant since 1992 in General
Dentistry, Endodontics and Periodontics. In August 2000, he purchased 50%
ownership of Direct Dental and on December 31, 2003, he purchased the remaining
50% of Direct Dental.
Committees of the Board of Directors
We presently do not have an audit committee, compensation committee, nominating
committee, an executive committee of our board of directors, stock plan
committee or any other committees.
Compensation of Directors
Our directors do not receive cash compensation for their services as directors
or members of committees of the board, but are reimbursed for their reasonable
expenses incurred in attending board or committee meetings.
23
Terms of Office
There are no family relationships among our directors and/or officers. Our
directors are appointed for one-year terms to hold office until the next annual
general meeting of the holders of our Common Stock or until removed from office
in accordance with our by-laws. Our officers are appointed by our board of
directors and hold office until removed by our board of directors.
Code of Ethics
On December 28, 2004, we adopted a Code of Ethics that meets the requirements of
Section 406 of the Sarbanes-Oxley Act of 2002. We will provide to any person
without charge, upon request, a copy of such Code of Ethics. Persons wishing to
make such a request should contact George D. Green, Chief Executive Officer,
1700 University Drive, Suite 200, Coral Springs, Florida 33071.
EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by us, as well as
certain other compensation paid or accrued, during the fiscal years ended
December 31, 2004, 2003 and 2002 to the Company's President and highest paid
executive officers. No restricted stock awards, long-term incentive plan payouts
or other types of compensation, other than the compensation identified in the
chart below, were paid to these executive officers during these fiscal years.
Long Term Compensation
----------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------------------------------------
Other Restricted Securities LTIP All Other
Name and Annual Stock Underlying Payouts Compensation
Principal Year Salary ($) Bonus ($) Compensation Award(s) Options/
Position ($) ($) SARs
----------------------------------------------------------------------------------------------------------------
George D. Green, 2004 118,000
CEO & President 2003 505,587(1)
2002 542,572(2)
Dr. Melvyn
Greenstein 2004
Former 2003 $270,259(3) 0 0
Director (a) 2002 $263,647(4) 0 0
In March 2004, we entered into employment agreements with Dr. Green and Robert
Gene Smith. Mr. Smith serves a Director of Union Dental. No other interim
officer or director during the last three years received any compensation from
us for serving as an officer or directors.
(a) On January 5, 2004, Dr. Melvyn Greenstein resigned from Direct Dental as a
director, president and registered agent. He was succeeded as president
and registered agent by Dr. George D. Green.
(1) In 2003 Dr. George Green received from Direct Dental $235,464.00 and
$270,123.00 from George D. Green, DDS, PA.
(2) In 2002 Dr. George Green received from Direct Dental $243,647.00 and
$298,925.00 from George D. Green, DDS, PA.
(3) In 2003 Dr. Melvyn Greenstein received from Direct Dental $38,321.00 and
his management company (Gopher International) received $231,938.00 from
Direct Dental.
(4) In 2002 Dr. Melvyn Greenstein received from Direct Dental $15,647.00 and
his management company (Gopher International) received $248,000.00 from
Direct Dental.
Bonuses and Deferred Compensation
We do not have any bonus, deferred compensation or retirement plan. Such plans
may be adopted by us at such time as deemed reasonable by our board of
directors. We do not have a compensation committee, all decisions regarding
compensation are determined by our board of directors.
Stock Option Plan.
On October 15, 2004, the Board of Directors adopted the 2004 Stock Option Plan
(the "2004 Plan"). The 2004 Plan permits the granting of an aggregate of
5,000,000 Shares. At April 13, 2005, 2004, 1,547,750 options were available for
grant under the 2004 Plan. Under the 2004 Plan, either incentive stock options
or nonstatutory options may be granted as an incentive to key employees
(including directors and officers who are key employees), non-employee
directors, independent contractors and consultants of the Company and to offer
an additional inducement in obtaining the services of such individuals. The Plan
also permits the award of common stock to qualified recipients.
24
The exercise price of the Shares under each option is determined by a committee
appointed by the Board of Directors; provided, however, that the exercise price
shall not be less than the fair market value of the Shares on the date of the
grant for statutory options. The term of each option granted pursuant to the
2004 Plan is established by the committee appointed by the Board of Directors,
in its sole discretion, provided that the term shall not exceed ten years from
the date of the grant. To date, the Company has granted options to purchase a
total of 3,273,000 as follows: 783,000 Shares at an exercise price of $.50 per
Share, 750,000 Shares at an exercise price of $0.60 per Share and 1,740,000
Shares upon our meeting certain revenue projections under the 2004 Plan to the
our executive officers, employees and consultants.
Our Stock Option Plan provides that the number of Shares subject thereto and the
outstanding options and their exercise prices are to be appropriately adjusted
for mergers, consolidations, recapitalizations, stock dividends, stock splits or
combinations of shares.
Option Grants in Last Fiscal Year
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Expiration
Name Granted (#) in Fiscal Year ($/sh) Date
---------------- ----------- -------------- --------- ----------
George D. Green 750,000* 23% $0.60 2009
George D. Green 997,500 30% ** 2009
----------------------------
* These options vest as follows: three hundred seventy five thousand options
shall be vested immediately and the balance of three hundred seventy five
thousand options shall be vested at the end of Dr. Green's two year term as a
Member of the Board of Directors.
** These options vest at the market value calculated as of the date the
following revenue milestones are met: 332,500 shares upon the Company reaching
$3,000,000 in revenue, 332,500 shares upon the Company reaching $4,000,000 in
revenue, and 332,500 shares upon the Company reaching $5,000,000 in revenue.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
The following table summarizes the number and dollar value of unexercised stock
options at September 9, 2005 for the Named Executive Officers:
Shares Value Number of Securities Value of Unexercised
Acquired Realized Underlying Unexercised In-the-Money Options
Name on Exercise (#) ($) Options at FY-End (#) at FY-End ($)(1)
----------------- -------------- ---------- ------------------------- -------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
George D. Green -- -- 375,000 1,372,500 $ -0- -0-*
(1) The closing price of our common stock on April 30, 2005 as reported by OTC
Bulletin Board was $0.195 per Share.
* The value of the exercisable and unexercisable options shall be determined
upon the date of issuance.
Termination of Employment and Change of Control Arrangement There are no
compensatory plans or arrangements, including payments to be received from us,
with respect to any person named in cash compensation set out above which would
in any way result in payments to any such person because of his resignation,
retirement, or other termination of such person's employment with us or our
subsidiaries, or any change in control of us, or a change in the person's
responsibilities following a changing in control.
25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 9, 2005 information with respect
to the beneficial ownership of our common stock by (i) persons known by us to
beneficially own more than five percent of the outstanding shares, (ii) each
director, (iii) each executive officer and (iv) all directors and executive
officers as a group. As of September 9, 2005, there were issued and outstanding
31,157,496 shares of Common Stock and 1,033,000 Shares of Common Stock issuable
upon the exercise of presently exercisable stock options.
Common Stock
Beneficially Owned
Before Offering
Title of ----------------------------
Name and Address Class Number Percent (3)
-------------------------------------------------------------------------------
George D. Green Common 17,875,000(1)(2) 57.4%
1700 University Drive
Coral Springs, FL 33071
Millennium Capital Corp. Common 2,000,000 6.8%
500 Australian Ave. S
Suite 619
West Palm Beach, Fl 33401
All Executive Officers and
Directors as a Group Common 17,875,000(1)(2) 57.4%
(One (1) person)
-------------------------------------------------------------------------------
(1) Includes a total of 75,000 and 50,000 shares which Dr. Green transferred
to his children, Jaclyn and Joshua. However, Dr. Green has disclaimed
beneficial ownership of these transferred shares.
(2) Includes options to purchase 375,000 shares which are either currently
exercisable or which become exercisable within 60 days of the date of
September 9, 2005. Dr. Green holds 1,000,000 shares of our preferred stock
that provides for 15 to 1 voting rights.
(3) Under Rule 13d-3, a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares: (i) voting power,
which includes the power to vote, or to direct the voting of shares; and
(ii) investment power, which includes the power to dispose or direct the
disposition of shares. Certain shares may be deemed to be beneficially
owned by more than one person (if, for example, persons share the power to
vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60
days of the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a result,
the percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership or voting power
with respect to the number of shares of common stock actually outstanding
on September 9, 2005. As of September 9, 2005, there were 31,157,496
shares of our common stock issued and outstanding.
Securities Authorized for Issuance Under Equity Compensation Plans
We are authorized to issue up to 5 million shares of our common stock under our
2004 Stock Option Plan. To date, we have granted options to purchase a total of
3,273,000 Shares at an exercise price ranging from $.50 per Share to $0.60 per
Share.
26
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) Market Information. Our common stock began trading on the
Over-the-Counter Bulletin Board (the "OTCBB") on October 6, 2004. Prior thereto,
our stock was traded on the Pink Sheets. Our current stock symbol is "UDHI.OB".
The following table sets forth, for the periods indicated, the range of high and
low bid quotations for our common stock as quoted on the OTCBB. The reported bid
quotations reflect inter-dealer prices without retail markup, markdown or
commissions, and may not necessarily represent actual transactions. Prices set
forth below have been adjusted to give effect to the one for forty reverse stock
split which was approved by the stockholders on May 10, 2004.
Year 2003- There was no market for our common stock.
Year 2004 High Low
------------------- ------ -----
First Quarter $.0 $.0
Second Quarter .01 .01
Third Quarter .02 .01
Fourth Quarter .55 .02
Year 2005 High Low
------------------- ------ -----
First Quarter $.74 $.17
Second Quarter $.21 $.06
Third Quarter $.22 $.01
(through August 30,2005)
Transfer Agent
Our transfer agent is Interwest Transfer Co., Inc., 1981 East Murray Holiday
Road, Suite 100, Salt Lake City, UT 84117. Their telephone number is (801)
272-9294.
(b) Holders. As of September 9, 2005, there were 424 shareholders of
record of our common stock.
(c) Dividend Policy. We have not declared or paid cash dividends or made
distributions in the past, and we do not anticipate that we will pay cash
dividends or make distributions in the foreseeable future. We currently intend
to retain and reinvest future earnings, if any, to finance our operations.
27
SELLING SHAREHOLDERS
The following table presents information regarding the selling shareholders.
------------------------------------------------------------------------------------------------------------------------------------
Common Shares Percentage of Common Shares Issuable Shares Beneficial Ownership
Name of Selling Shareholder Beneficially Owned Outstanding upon Exercise of Registered in after this Offering (2)
by Selling Shares Securities forming this Offering
Shareholder Before Beneficially part of this Offering
Offering (1) owned Before
Offering
------------------------------------------------------------------------------------------------------------------------------------
Number of Percent (3)
Shares
------------------------------------------------------------------------------------------------------------------------------------
Dutchess Private Equities 1,304,348 4.19% 49,123,282 (5) 49,123,282 None 0.0%
Fund II, LLP (4)
312 Stuart Street
Boston, MA 02116
------------------------------------------------------------------------------------------------------------------------------------
Hawk Associates, Inc. (6) 500,000 1.60% 500,000 (7) 500,000 None 0.0%
227 Atlantic Blvd
Key Largo, FL 33037
------------------------------------------------------------------------------------------------------------------------------------
(1) Ownership as of September 9, 2005, for the selling stockholders based on
information provided by the selling stockholders or known to us.
(2) Because the selling stockholders may offer all or only some portion of the
shares of common stock to be registered, no estimate can be given as to
the amount or percentage of these shares of common stock that will be held
by the selling shareholder upon termination of the offering. Accordingly,
it is assumed that all of the shares of common stock offered pursuant to
this prospectus will be sold, although the selling stockholders are under
no obligation known to us to sell any shares of common stock at this time.
(3) A total of 31,157,496 shares of common stock were issued and outstanding
as of September 9, 2005.
(4) Michael Novielli and Douglas Leighton, the managing members of Dutchess
Capital Management, LLC, the general partner of Dutchess Private Equities
Fund II, LLP share dispositive and voting power with respect to shares
held by Dutchess Private Equities Fund II, LLP.
(5) Represents (i) all of the common stock that potentially may be issued upon
the draw down of $5,000,000 on our equity line at $0.13 per share in an
aggregate amount of 38,461,538 shares, (ii) all of the common stock that
potentially may be issued upon the conversion of $600,000 convertible
debenture at a conversion price of $0.11 per share in an aggregate of
8,857,396 shares, and (iii) all of the common stock that potentially may
be issued upon the exercise of 1,304,348 common share purchase warrants
issued to the named selling stockholder. The Debenture Agreement contains
contractual restrictions on beneficial share ownership limiting Dutchess'
beneficial ownership to 4.99%.
(6) Represents shares issuable to Hawk Associates upon exercise of warrants.
(7) Frank Hawkins and Julie Marshall share dispositive and voting power with
respect to shares held by Hawk Associates.
The following is a description of the selling shareholders relationship to us
and how each the selling shareholder acquired the shares to be sold in this
offering:
(A) On August 17, 2005, we entered into an Investment Agreement with
Dutchess Private Equities Fund II, LLP ("Dutchess") providing for the sale of up
to $5,000,000 of our common stock over a period of up to 36 months after the
effective of the registration statement of which this prospectus forms a part.
Under the agreement, Dutchess is required to purchase "Puts" which shall be
equal to either (a) $100,000 or (b) 200% of the averaged daily volume (U.S
market only) of our Common Stock for the 20 Trading days prior to the "Put"
notice, multiplied by the average of the 3 daily closing prices immediately
preceding the Put Date.
US EURO Securities, Inc. a registered broker-dealer, will act as the exclusive
placement agent for the shares to be issued under the Investment Agreement.
In connection with the Investment Agreement we entered into a Debenture
Agreement providing for the sale of $600,000 in principal amount of our five
year convertible debentures to Dutchess. These debentures bear interest at 10%
per annum (payable in cash or stock at Dutchess' option). The first $300,000
(less expenses) has been funded, with an additional $300,000 to be funded
immediately upon filing of the registration statement of which this prospectus
forms a part. Our obligation to repay Dutchess is secured by a security
agreement, which we have entered into with Dutchess. We have pledged all of our
assets to insure repayment of this obligation. Dutchess' security interest in
our assets will be subject to any claims by our bank, which provides us with a
line of credit. Subject to adjustment as more fully set forth in the Debenture
Agreement, the fixed conversion price of the debenture shall be $.092 per share
or; the lowest closing bid price of the common stock during the fifteen days
trading days prior to the filing with the SEC of the registration statement of
which this prospectus forms a part covering the shares issuable on the
underlying debt.
28
We also issued to Dutchess a warrant to purchase 1,304,348 shares of common
stock with a strike price of $.092 per share. The warrant may be exercised for a
period of five years and the strike price is subject to adjustment if certain
conditions are not met.
(B) On August 18, 2005, we entered into an Agreement with Hawk Associates,
Inc. to provide us with consulting and advisory services, including, but not
limited to, company identity, investor relations, financial media relations and
other consulting and advisory services. Pursuant to the terms of the Agreement
we agreed to issue to Hawk Associates, warrants to purchase 500,000 shares of
our common stock at an exercise price of $.20. We have agreed to register the
shares underlying the warrants in this registration statement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described below, none of the following persons has any direct or
indirect material interest in any transaction to which we are a party during the
past two years, or in any proposed transaction to which the Company is proposed
to be a party:
(A) any director or officer;
(B) any proposed nominee for election as a director;
(C) any person who beneficially owns, directly or indirectly, shares
carrying more than 5% of the voting rights attached to our common stock; or
(D) any relative or spouse of any of the foregoing persons, or any
relative of such spouse, who has the same house as such person or who is a
director or officer of any parent or subsidiary.
Union Dental entered into a Management Services Agreement and a Business
Associate Agreement with Dr. George D. Green, DDS, P.A. ("Green PA") on October
15, 2004. Pursuant to these agreements, Union Dental shall manage the operations
of Green PA for a management fee pursuant to the agreements.
On March 20, 2004, Union Dental, a wholly owned subsidiary of the Company,
entered into an employment agreement with Dr. Green, the sole officer of Union
Dental and our chief executive officer, for a term of seven years. The agreement
provides for a base salary to Dr. Green of $225,000 in year one, $125,000 in
year two, $185,000 in year three, $196,630 in year four, $208,427 in year five,
$220,932 in year six and $234,187 in year seven. The agreement also provides for
the issuance of options to Dr. Green upon signing, 750,000 options with an
exercise price of $0.60 per share, half vested immediately and half vesting
after two years, having an exercise life of five years. The agreement also
provides for the issuance of options to Dr. Green as well, if certain revenue
milestones are reached: If we achieve gross revenues of $3,000,000 in for any
calendar year, Dr. Green will be issued 332,500 options with an exercise price
at the market price of the underlying common stock at issue date. Additional
options pursuant to the same terms and conditions will be issued if the Company
achieves $4,000,000 and again at $5,000,000 in gross revenue for any calendar
year.
On October 15, 2004, Dr. Green sold his interest in his dental practice to Union
Dental, an entity that he previously controlled, for $1,000,000, which amount
was recorded by the Company as a shareholder loan. Specifically, in the
financial statement presentation, the amount of the purchase price that exceeded
the net book value of the dental practice assets acquired has been treated as a
shareholder loan. This amount was deducted from the Company's stockholder's
equity because the transaction was with a related party and such amount is not
reflective of any funds due from Dr. Green.
In 2004 we incurred a charge to stockholders' equity in the amount of
$1,539,129. This charge was a result of three related party transactions. First,
Union Dental issued a $1 million note payable to Dr. Green, our controlling
shareholder, as consideration for the purchase of the assets (minus the client
list) of his dental practice, Dr. George D. Green, DDS, P.A. The Second
transaction related to Direct Dental executed a note payable to a bank in the
amount of $1,215,000 to satisfy an outstanding liability of Dr. Green to
purchase shares of Direct Dental prior to the Reorganization. These amounts are
offset by $675,871, representing a note receivable from Dr. Green resulting from
the above transactions, net of other payables.
Union Dental entered into an employment agreement with Robert Gene Smith on
February 15, 2004, pursuant to which Mr. Smith became a member of the Board of
Directors of Union Dental. The current term of the agreement expires February
15, 2006 and thereafter shall be voted on by Union Dental's shareholders at the
annual meeting and renewed for two-year periods unless either party gives the
other party written notice of its intent not to renew at least 90 days prior to
the end of the term. Mr. Smith has been receiving an annual stipend of $24,000.
Additionally, the Company granted Mr. Smith 250,000 options to purchase shares
of common stock at $0.50 per share and an additional 247,500 options dependent
upon the achievement of certain revenue milestones as discussed in Item 10
above.
29
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue up to 300,000,000 shares of common stock, par value
$.0001. As of September 9, 2005, there were 31,157,486 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
Preferred Stock
We are authorized to issue 25,000,000 shares of preferred stock, par value
$.0001. As of September 9, 2005 there were 1,000,000 shares of preferred stock
outstanding. Holders of the preferred stock are entitled to 15 votes per share
on all matters to be voted upon by the stockholders. The Preferred stock has no
conversion rights.
Warrants
We have issued to Dutchess Private Equities Fund II, LLP, warrants to purchase
1,304,348 shares of our common stock at an exercise price of $.092 per share
which are exercisable for a period of five years. The warrants were issued in
connection with the Investment Agreement dated August 17, 2005.
We have issued warrants to Hawk Associates, Inc., to purchase 500,000 shares of
our common stock at an exercise price of $.20. The warrants were issued in
connection with a Consulting Agreement dated August 18, 2005 pursuant to which
Hawk Associates will provide consulting and advisory services, including, but
not limited to, company identity, investor relations, financial media relations
and other consulting and advisory services.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Interwest Transfer Co.,
Inc., 1981 East Murray Holiday Road, Suite 100, Salt Lake City, UT 84117. Their
telephone number is (801) 272-9294.
PLAN OF DISTRIBUTION
The selling stockholder, or its pledgees, donees, transferees, or any of its
successors in interest selling shares received from the named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be a selling
stockholder) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. The selling stockholder may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt
to sell the common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling stockholder
to its partners, members or stockholders;
o By pledge to secure debts of other obligations;
o In connection with the writing of non-traded and exchange-traded
call options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
30
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which the same
broker acts as an agent on both sides of the trade. The selling stockholders may
also transfer the common stock by gift. We do not know of any arrangements by
the selling stockholders for the sale of any of the common stock.
The selling stockholders may engage brokers and dealers, and any brokers or
dealers may arrange for other brokers or dealers to participate in effecting
sales of the common stock. These brokers or dealers may act as principals, or as
an agent of a selling stockholder. Broker-dealers may agree with a selling
stockholder to sell a specified number of the stocks at a stipulated price per
share. If the broker-dealer is unable to sell common stock acting as agent for a
selling stockholder, it may purchase as principal any unsold shares at the
stipulated price. Broker-dealers who acquire common stock as principals may
thereafter resell the shares from time to time in transactions in any stock
exchange or automated interdealer quotation system on which the common stock is
then listed, at prices and on terms then prevailing at the time of sale, at
prices related to the then-current market price or in negotiated transactions.
Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling stockholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
In order to comply with the securities laws of some states, if applicable, the
shares of common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers.
From time to time, one or more of the selling stockholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling stockholders. The number of a selling stockholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling stockholder's shares will otherwise remain
unchanged. In addition, a selling stockholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount of selling
stockholders' shares being offered and the terms of the offering, the names of
any agents, brokers, dealers or underwriters, any applicable commission and
other material facts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling stockholder and/or purchasers of
selling stockholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling stockholder can presently estimate the
amount of any such compensation.
The selling stockholders and any underwriters, brokers, dealers or agents that
participate in the distribution of the common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the securities sold by them may be deemed to be underwriting discounts and
commissions. If a selling stockholder is deemed to be an underwriter, the
selling stockholder may be subject to certain statutory liabilities including,
but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. Selling stockholders who are deemed underwriters within
the meaning of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The SEC staff is of a view that selling
stockholders who are registered broker-dealers or affiliates of registered
broker-dealers may be underwriters under the Securities Act. We will not pay any
compensation or give any discounts or commissions to any underwriter in
connection with the securities being offered by this prospectus.
A selling stockholder may enter into hedging transactions with broker-dealers
and the broker-dealers may engage in short sales of the common stock in the
course of hedging the positions they assume with that selling stockholder,
including, without limitation, in connection with distributions of the common
stock by those broker-dealers. A selling stockholder may enter into option or
other transactions with broker-dealers, who may then resell or otherwise
transfer those common stock. A selling stockholder may also loan or pledge the
common stock offered hereby to a broker-dealer and the broker-dealer may sell
the common stock offered by this prospectus so loaned or upon a default may sell
or otherwise transfer the pledged common stock offered by this prospectus.
The selling stockholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling stockholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling stockholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We have agreed to indemnify the selling stockholder and any brokers, dealers and
agents who may be deemed to be underwriters, if any, of the common stock offered
by this prospectus, against specified liabilities, including liabilities under
the Securities Act. The selling stockholder has agreed to indemnify us against
specified liabilities.
31
The issued and outstanding common stock, as well as the common stock to be
issued offered by this prospectus was originally, or will be, issued to the
selling stockholders pursuant to an exemption from the registration requirements
of the Securities Act, as amended. We agreed to register the common stock issued
or to be issued to the selling stockholders under the Securities Act, and to
keep the registration statement of which this prospectus is a part effective
until all of the securities registered under this registration statement have
been sold. We have agreed to pay all expenses incident to the registration of
the common stock held by the selling stockholders in connection with this
offering, but all selling expenses related to the securities registered shall be
borne by the individual holders of such securities pro rata on the basis of the
number of shares of securities so registered on their behalf.
We cannot assure you that the selling stockholders will sell all or any portion
of the common stock offered by this prospectus. In addition, we cannot assure
you that a selling stockholder will not transfer the shares of our common stock
by other means not described in this prospectus.
We engaged U.S. Euro Securities, Inc. ("U.S. Euro") as our placement agent with
respect to the securities to be issued under the Equity Line of Credit. To our
knowledge, U.S. Euro has no affiliation or business relationship with Dutchess
Private Equities Fund II, LP. U.S. Euro will be our exclusive placement agent in
connection with the Investment Agreement and shall render consulting services to
us and will be available for consultation in connection with the advances to be
requested by us, pursuant to the Investment Agreement. Dutchess shall not be
obligated to sell any securities and this Offering by U.S. Euro shall be solely
on a "best efforts basis. We agreed to pay to U.S. Euro a maximum fee of $10,000
for drawing down of the equity line of credit, $2,000 of which was paid upon
execution of the Placement Agreement. The Placement Agent agreement terminates
when our Investment Agreement with Dutchess Private Equities Fund II, LP
terminates pursuant to the terms of that Investment Agreement. U.S. Euro is a
registered broker-dealer.
LEGAL MATTERS
The validity of the common stock has been passed upon by Sichenzia Ross Friedman
Ference LLP, New York, New York.
EXPERTS
Union Dental's financial statements for the fiscal year ended December 2004,
included in the Prospectus have been audited by DeMeo, Young, McGrath,
independent registered public accountants, as stated in their report appearing
herein and are so included herein in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form SB-2 under the Securities
Act for the common stock to be sold in this offering. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedules that were filed with the registration statement. For further
information with respect to the common stock and us, we refer you to the
registration statement and the exhibits and schedules that were filed with the
registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies of all or
any part of the registration statement may be obtained from the SEC upon payment
of the prescribed fee. Information regarding the operation of the public
reference rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The address of the site is http://www.sec.gov.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 607.0850 of the Florida Business Corporation Act authorizes a
corporation to provide indemnification to a director, officer, employee or agent
of the corporation against expenses reasonably incurred by him in connection
with a proceeding to which he or she is a party by reason of the fact that he or
she was or is a director, officer, employee or agent of the corporation, if such
party acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful, except that with respect to any action which results in a
judgment against the person and in favor of the corporation or with respect to
an action in which it is determined that the person derived an improper personal
benefit, the corporation may not indemnify unless a court determines that the
person is fairly and reasonably entitled to the indemnification. Section
607.0850 of the Florida Business Corporation Act further provides that
indemnification shall be provided if the party in question is successful on the
merits.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers, employees or agents of
the Company pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Company of
expenses incurred or paid by a director, officer, employee or agent of the
Company in the successful defense of any proceeding) is asserted by such
director, officer, employee or agent in connection with the securities being
registered, The Company 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.
32
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm......................F-2
Balance Sheet................................................................F-3
Statement of Operations......................................................F-4
Statement of Stockholders' Equity (Deficit)..................................F-5
Statement of Cash Flows......................................................F-6
Notes to Financial Statement..............................................F-7-11
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Union Dental Holdings, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of Union Dental
Holdings, Inc , as of December 31, 2004 and combined balance sheet of Union
Dental Corp. and Direct Dental Services, Inc., as of December 31, 2003 and the
related consolidated and combined statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the period ended December
31, 2004. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the financial position of Union
Dental Holdings, Inc. and Union Dental Corp. and Direct Dental Services, Inc. as
of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
/s/DeMeo, Young , McGrath
DeMeo, Young , McGrath
Ft. Lauderdale, Florida
March 22, 2005
F-2
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Consolidated and Combined Balance Sheet
December 31,
Consolidated Combined
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 42,294 $ 16,656
Accounts receivable, net of allowance of $7,200 and $0 317,077 272,773
Inventory 24,055 24,055
Prepaid expenses 3,509 13,809
----------- -----------
Total current assets 386,935 327,293
----------- -----------
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 237,730 225,127
Accumulated depreciation (188,254) (178,374)
----------- -----------
Total property and equipment 49,476 46,753
----------- -----------
OTHER ASSETS
Other assets 10,513 0
Due from officer 0 280,654
----------- -----------
Total other assets 10,513 280,654
----------- -----------
Total Assets $ 446,924 $ 654,700
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 56,744 $ 32,002
Accounts payable - related party 110,839 0
Notes payable - current portion 299,435 40,434
Line of credit 47,813 0
Customer deposits 30,802 26,613
Unearned memberships 326,326 264,663
----------- -----------
Total current liabilities 871,959 363,712
----------- -----------
LONG-TERM LIABILITIES
Note payable -bank 972,000 53,938
----------- -----------
Total long-term liabilities 972,000 53,938
----------- -----------
Total Liabilities 1,843,959 417,650
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 and n/a par value, authorized 25,000,000 and n/a
shares; 1,000,000 and n/a issued and outstanding, respectively 100 --
Common stock, $0.0001 and $1 par value, authorized 300,000,000 and 7,500
shares; 28,519,939 and 1,000 issued and outstanding, respectively 2,852 1,000
Additional paid-in capital 519,067 0
Accumulated (deficit) earnings (379,925) 236,050
----------- -----------
Subtotal stockholders' equity before shareholder transactions 142,094 237,050
Shareholder transactions (1,539,129) 0
----------- -----------
Total stockholders' equity (deficit) (1,397,035) 237,050
----------- -----------
Total Liabilities and Stockholders' Equity $ 446,924 $ 654,700
=========== ===========
The accompanying notes are an integral part of the financial statements
F-3
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Consolidated and Combined Statement of Operations Year Ended December 31,
Consolidated Combined
2004 2003
------------ ------------
REVENUES $ 1,931,570 $ 2,016,408
OPERATING EXPENSES
Salaries 692,099 587,411
General and administrative expenses 1,100,490 624,723
Advertising 68,588 35,506
Depreciation 9,880 7,530
------------ ------------
Total expenses 1,871,057 1,255,170
------------ ------------
Income from operations 60,513 761,238
OTHER INCOME (EXPENSE)
Interest income 13 930
Interest expense (40,587) 0
Reserve for bad debt (7,200) 0
Write-off goodwill (7,750) 0
------------ ------------
Total other income (expense) (55,524) 930
------------ ------------
Income tax 0 0
------------ ------------
Net income $ 4,989 $ 762,168
============ ============
Income per weighted average common shares - basic $ 0.00 $ 762.17
============ ============
Income per weighted average common shares - fully diluted $ 0.00 $ 762.17
============ ============
Number of weighted average common shares outstanding - basic 27,511,177 1,000
============ ============
Number of weighted average common shares outstanding - 28,261,112 1,000
============ ============
The accompanying notes are an integral part of the financial statements
F-4
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Consolidated and Combined Statement of Stockholders' Equity (Deficit)
Number Common Total
Number of of Stock Preferred Additional Retained Stockholders
Shares Shares Par Stock Paid-In Earnings Shareholder Equity
Common Preferred Value Par Value Capital (Deficit) Transactions (Deficit)
----------- ----------- -------- ---------- ----------- ------------ -------------- --------------
BEGINNING BALANCE,
December 31, 2002 1,000 0 $ 1,000 $ 0 $ 0 $ 237,935 $ 0 $ 238,935
Net income 0 0 0 0 0 762,168 0 762,168
Net income distributed 0 0 0 0 0 (764,053) 0 (764,053)
----------- ----------- ------- --------- ---------- ----------- ------------- -------------
BALANCE, December 31, 2003 1,000 0 1,000 0 0 236,050 0 237,050
Net income distributed 0 0 0 0 0 (384,914) 0 (384,914)
Reorganization 27,499,000 1,000,000 1,750 100 9,295 (236,050) (1,539,129) (1,764,034)
Conversion of notes
- $0.50/sh. 913,939 0 91 0 456,783 0 0 456,874
Stock issued for
services - $0.50/sh 106,000 0 11 0 52,989 0 0 53,000
Net income 0 0 0 0 0 4,989 0 4,989
----------- ----------- ------- --------- ---------- ----------- ------------- -------------
ENDING BALANCE,
December 31, 2004 28,519,939 1,000,000 $ 2,852 $ 100 $ 519,067 $ (379,925) $ (1,539,129) $ (1,397,035)
=========== =========== ======= ========= ========== =========== ============= =============
The accompanying notes are an integral part of the financial statements
F-5
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Consolidated and Combined Statement of Cash Flows Year Ended December 31,
Consolidated Combined
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,989 $ 762,168
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation 9,880 7,530
Stock issued for services 71,800 0
Stock issued for interest expense 39,963 0
Reserve for bad debt 7,200 0
Goodwill write-off 7,750 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (51,504) 51,377
(Increase) decrease in inventory 0 4,158
(Increase) decrease in prepaid expenses 10,300 (13,175)
(Increase) decrease in other assets (10,513) 0
(Increase) decrease in due from officer (279,525) (4,431)
Increase (decrease) in accounts payable 136,205 8,110
Increase (decrease) in customer deposits 4,189 (3,964)
Increase (decrease) in unearned memberships 61,663 (16,330)
--------- ---------
Net cash provided by operating activities 12,397 795,443
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (12,603) (3,738)
--------- ---------
Net cash used by investment activities (12,603) (3,738)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 417,006 0
Proceeds from line of credit 47,813 0
Net income distributed (384,914) (764,053)
Cash acquired in reorganization 2,000 0
Payments on notes payable (56,061) (28,201)
Proceeds from loan from officer/shareholder 0 12,000
--------- ---------
Net cash provided (used) by financing activities 25,844 (780,254)
--------- ---------
Net increase (decrease) in cash 25,638 11,451
--------- ---------
CASH, beginning of period 16,656 5,205
--------- ---------
CASH, end of period $ 42,294 $ 16,656
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 624 $ 45,057
========= =========
Non-Cash Financing Activities:
Issuance of common stock to convert short-term debt $ 417,006 $ 0
========= =========
Issuance of common stock to effectuate reorganization $ 9,200 $ 0
========= =========
Stockholder loan offset in stockholder transactions $ 560,179 $ 0
========= =========
The accompanying notes are an integral part of the financial statements
F-6
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(1) Summary of Significant Accounting Principles The Company Union Dental
Holdings, Inc., (f/k/a National Business Holdings, Inc.), (the Company) is a
Florida chartered corporation which conducts business from its headquarters in
Ft. Lauderdale, Florida. The Company was incorporated on November 26, 1996 and
has elected December 31as its fiscal year end. The Company has two distinct
lines of business. Union Dental Corp., (UDC), acquired the assets of G.D. Green,
DDS, P.A. and manages the operation of that general dental practice. Direct
Dental Services, Inc., (DDS), negotiates contracts with labor union locals for
the provision of dental services to union members in seventeen states, through
network member dentists.
The following summarize the more significant accounting and reporting policies
and practices of the Company:
a) Use of estimates The financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
statements of financial condition and revenues and expenses for the period then
ended. Actual results may differ significantly from those estimates.
b) Net income per share Basic income per weighted average common share is
computed by dividing the net income by the weighted average number of common
shares outstanding during the period. Fully diluted per weighted average common
share is computed by dividing the net income by the weighted average number of
common shares outstanding during the period had the outstanding options been
exercised at the beginning of the period.
c) Stock compensation for services rendered The Company issues shares of
common stock in exchange for services rendered. The costs of the services are
valued according to generally accepted accounting principles and have been
charged to operations.
d) Significant acquisition In December 2004, the Company entered into an
agreement to acquire Union Dental Corp. and Direct Dental Services, Inc., both
Florida corporations, in a reverse merger, which was accounted for as a
reorganization of UDC and DDS, in exchange for 17,500,000 restricted common
shares and 1,000,000 restricted preferred shares.
e) Principles of consolidation and combination The consolidated financial
statements include the accounts of Union Dental Holdings, Inc. and its wholly
owned subsidiaries. Inter-company balances and transactions have been
eliminated. The financial statements of UDC and DDS for 2003 are presented as
combined pursuant to Accounting Research Bulletin, (ARB), No. 51, since they are
separate entities under common control.
F-7
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(1) Summary of Significant Accounting Principles (Continued)
f) Revenue recognition The Company's revenues are generated through
provision of dental services and the sales of exclusive areas of dental service
provision to labor unions through various contracts with the labor unions. The
Company records revenue when dental services are provided and the dentist member
fees are amortized over the term of the contract.
g) Cash and equivalents The company considers investments with an initial
maturity of three months or less as cash equivalents.
h) Property and equipment All property and equipment are recorded at cost
and depreciated over their estimated useful lives, using the straight-line
method. Upon sale or retirement, the costs and related accumulated depreciation
are eliminated from their respective accounts, and the resulting gain or loss is
included in the results of operations. Repairs and maintenance charges which do
not increase the useful lives of the assets are charged to operations as
incurred. Depreciation expense was $9,880 and $7,530 for the years ended
December 31, 2004 and 2003, respectively.
i) Inventory The Company values inventory of dental supplies at the lower
of cost or market, using the specific unit cost method.
j) Segment information The Company has two distinct related lines of
operations, the management of a general dental practice through UDC and
maintaining a network of dental practices providing services through provider
contracts with labor union locals negotiated by DDS. DDS represents
approximately 28% of total assets, 31% of revenues and 100% of net income. UDC
represents approximately 72% of total assets, 69% of revenues and (10%) of net
loss.
k) Bad debt reserve The Company reviews its accounts receivable regularly,
(at least quarterly), to evaluate the need to modify its reserve for
uncollectible accounts receivable. At December 31, 2004, the Company has
established a reserve for bad debt in the amount of $7,200. The Company does not
believe that this amount will become a significant amount, as its receivables
are from numerous individual patients, several insurance companies and numerous
dentists in its network, each of which is relatively small in individual amount.
l) Unearned memberships Dentists enroll and renew their contracts for one
or one and one-half year terms at various times throughout the year. Most of the
membership fees are paid at the signing of the contract and renewal. The fees
are amortized over the term of the related contract.
m) Advertising Advertising costs are expensed when incurred.
F-8
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(2) Stockholders' Equity The Company has authorized 300,000,000 shares of
$0.0001 par value common stock, and 25,000,000 shares of $0.0001 par value
preferred stock. Rights and privileges of the preferred stock are to be
determined by the Board of Directors prior to issuance. The Company had
28,519,939 shares of common stock issued and outstanding at December 31, 2004.
The Company had issued 1,000,000 of its shares of preferred stock at December
31, 2004. These preferred shares carry super voting rights equal to 15,000,000
common shares.
In November 1996, the Company issued 1,000,000 shares of common stock to its
founders for services rendered in connection with the organization of the
Company, valued at $0.001 or $900. In May 1997, the Company issued 8,900,000
shares of common stock for $89,000 in cash, or $0.01 per share. In January 1998,
the Company issued 275,000 shares of common stock for $400,000 in cash, or $1.45
per share. In February 1998, the Company issued 50,000 shares of common stock
for $72,727 in cash, or $1.45 per share. In September 1998, 3,900,000 shares
that had been purchased for $39,000 were contributed back to the Company. In
October 1998 the Company retired 6,938,796 shares as a result of a 1 for 20
reverse split of the stock. In December 1998, the Company issued 5,000,000
shares of common stock for $1,000,000 in cash, or $0.20 per share.
In February 2004, the Company issued 10,000,000 shares of common stock for
$25,000 in cash, or $0.0025 per share. In May 2004, the Company retired
15,001,373 shares as a result of a 1 for 40 reverse split of the stock. In May
2004, the Company issued 3,100,000 shares to acquire 100% of the issued and
outstanding shares of Shava, Inc. This transaction was valued at $7,750, or
$0.0025 per share. In October 2004, the Company issued 18,800,000 shares to its
then sole officer and director in exchange for services valued at $18,800. In
October 2004, the Company issued 10,000,000 shares for the conversion of
convertible notes payable in the amount of $27,500. At the time of the reverse
merger the Company had 32,284,831 shares issued and outstanding. In December
2004, the Company issued 17,500,000 shares of restricted common stock and
1,000,000 restricted preferred stock to acquire Union Dental Corp. And Direct
Dental Services, Inc. At the same time, as part of the merger agreement, a
stockholder contributed 22,284,831 shares to the Company. In December 2004, the
Company issued 783,140 restricted common shares in exchange for $417,006 in
convertible short-term debt and accrued interest and 106,000 shares in exchange
for services valued at $53,000, or $0.50 per share.
(3) Income Taxes Deferred income taxes (benefits) are provided for certain
income and expenses which are recognized in different periods for tax and
financial reporting purposes. The operating entities had elected Sub-chapter S
status under the IRC Code and therefore were not subject to taxation at the
corporate level. Distributions were made each year to the
F-9
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(3) Income Taxes (Continued) stockholder/s of the companies to allow for the
payment of income taxes on a personal level. Sub-chapter S status is revoked
automatically under the IRS Code as of the day the companies became wholly-owned
subsidiaries of a publicly traded entity. At December 31, 2004, the Company has
a book-tax timing difference. This is the result of accounting for customer
deposits, ($30,802), and unearned memberships, ($326,326), as deferred revenue
for book purposes and as income on the cash basis income tax returns. As such,
this $357,128, will not be taxed on the Company's 2005 income tax return and
will reduce the Company's 2005 tax liability in an amount ranging from
approximately $53,500 (15% rate) to $135,700 (38%) on the Company's federal
return and approximately $19,600 on the Company's Florida return. These savings
are entirely dependent on the Company's tax rate inclusive of this income for
2005. The Company has established a deferred tax asset in the amount of $74,000,
utilizing the lowest possible income tax rates. However, the Company has
established a 100% valuation allowance against this asset as there is no
assurance that the Company will be able to utilize this benefit in 2005., which
is the only year it is available. This is due to multiple factors: 1 - this is a
newly reorganized company and is publicly traded for the first time, as such
there are significant additional expenditures expected related to this status
and 2 - the Company is expecting to expand its business and expects significant
expenditures related to this expansion.
(4) Long-term debt In December 2004, DDS agreed to assume the debt obligation of
the principal stockholder for the bank loan utilized to purchase 50% of DDS from
its founder and former owner and the remaining balance owed on the original 50%
acquisition. The interest rate of this debt is LIBOR plus 2.55% and requires
payments of $20,250 plus accrued interest monthly, or $243,000 plus accrued
interest annually. This loan matures on December 31, 2009. The loan is
collateralized with 100% of the assets of DDS, UDC and the principal
stockholder, tangible and intangible. The principal stockholder and UDC are also
guarantors of this loan. In addition, the Company, on a consolidated basis, must
maintain a minimum Global Debt Service Ratio, as defined by the bank, which is
calculated annually, based on the Company's year end financial statements. The
Company must also maintain property and casualty insurance on the business as
well as a minimum of $700,000 of life insurance on the principal stockholder,
assigned to the bank.
(5) Long-term debt to stockholder A portion of the purchase price of the assets
of G.D. Green, DDS, PA is a note payable to the principal stockholder in the
amount of $1,000,000. This note carries a 5% interest rate and is payable
$100,000 plus accrued interest annually for ten years. At the closing of the
reverse merger the principal stockholder agreed to a set-off between this
payable to him and the then existing balance he owed the combined companies of
approximately $560,000.
(6) Commitments and contingencies The Company leases its office facility under a
five year lease that expires May 2007. The monthly lease payments are $2,300 per
month or $27,600 per year.
F-10
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(7) Related party transactions On March 20, 2004, UDC, a wholly owned subsidiary
of the Company, entered into an employment agreement with the principal
stockholder , the sole officer of UDC, with a term of 7 years. This contract
provides for a base salary to the principal stockholder of $225,000 in year 1,
$125,000 in year 2, $185,500 in year 3, $196,630 in year 4, $208,427 in year 5,
$220,932 in year 6 and $234,187 in year 7. This contract also provides for the
issuance of options to the principal stockholder upon signing , 750,000 options,
(1 share per option), with an exercise price of $0.60 per share, half vested
immediately and half vesting after two years , having an exercise life of five
years. This contract also provides for the issuance of options to the principal
stockholder as well, if certain revenue milestones are reached: at $3,000,000 in
gross revenue for any calendar year he receives 332,500 options, (1 share per
option), with an exercise price at the market price of the underlying common
stock at issue date and the same again at $4,000,000 and $5,000,000 in gross
revenue for a calendar year.
As a private company, DDS and UDC have, at various times loaned the sole
stockholder money, which has been repaid in part. These advances and repayments
have the characteristics of a line of credit. At December 31, 2004 and 2003, the
now principal stockholder of the consolidated company owed DDS and UDC combined
$0 and $280,654, respectively.
Shareholder transactions in the net amount of $1,539,129 are the result of the
following: a) UDHI acquiring UDC for a note payable to the principal stockholder
in the amount of $1,000,000; b) DDS entered into a note payable in the amount of
$1,215,000 to the bank replacing an existing note payable from the principal
stockholder and c) these items are reduced by a note receivable from the same
principal stockholder in the amount of $675,871.
(8) Short-term debt From April through December 2004, the Company raised
$417,006 in short-term debt, via a Regulation D Rule 506 offering. At the
closing of the reorganization on December 27, 2004, this short-term debt was
converted at $0.50 per share into 913,939 shares of restricted under Rule 144
common stock
(9) Stock option plan In October 2004, UDC adopted a Stock Option Plan that
allows for both incentive based options as well as non-qualified options. As
part and parcel to the reorganization on December 27, 2004, UDHI adopted this
Plan. Under the terms of the Plan, the Plan Committee will set the option term
and the exercise price. The Plan limits the ability to exercise incentive
options for a first time holder in any one calendar year to $100,000 aggregate
fair market value, based on grant date. The Plan also allows for the issuance of
Stock Appreciation Rights to allow for cash-less exercise of underlying issued
options. The Company issued 793,000 options, with an exercise price of $0.50 per
share, under this plan as of December 31, 2004, in addition to those discussed
in Note 7 above.
The Company accounts for outstanding options in accordance with Accounting
Principles Board, (APB), Opinion 25. Financial Accounting Standards Board,
(FASB), SFAS No. 148 requires footnote disclosure of the effects on the
financial statements if the Company had accounted for the options under the fair
value method , (Black-Scholes), in accordance with SFAS No. 123. Using the
Black-Scholes model, the Company would have recorded $0 expense for these
options, therefore there would have been no effects on the financial statements
as published.
F-11
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................................F-13
Consolidated/Combined Statements of Operations..............................F-14
Consolidated Statement of Stockholders' Equity (Deficit)....................F-15
Consolidated/Combined Statements of Cash Flows..............................F-16
Notes to Consolidated/Combined Financial Statements......................F-17-21
F-12
UNION DENTAL HOLDINGS INC.
Consolidated Balance Sheets
June 30, December 31,
2005 2004
----------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 48,627 $ 42,294
Accounts receivable, net of allowance of $7,200 and $7,200 361,213 317,077
Inventory 25,185 24,055
Prepaid expenses 4,865 3,509
----------- -----------
Total current assets 439,890 386,935
----------- -----------
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 521,647 237,730
Accumulated depreciation (193,859) (188,254)
----------- -----------
Total property and equipment 327,788 49,476
----------- -----------
OTHER ASSETS
Other assets 9,513 10,513
----------- -----------
Total other assets 9,513 10,513
----------- -----------
Total Assets $ 777,191 $ 446,924
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 19,832 $ 56,744
Accounts payable - related party 0 110,839
Accrued expenses 9,448 0
Income taxes payable 36,450 0
Notes payable - current portion 269,513 299,435
Line of credit 17,663 47,813
Customer deposits 32,961 30,802
Unearned memberships 326,514 326,326
----------- -----------
Total current liabilities 712,381 871,959
----------- -----------
LONG-TERM LIABILITIES
Note payable -bank 1,117,933 972,000
----------- -----------
Total long-term liabilities 1,117,933 972,000
----------- -----------
Total Liabilities 1,830,314 1,843,959
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, authorized 25,000,000 shares; 1,000,000
issued and outstanding, respectively 100 100
Common stock, $0.0001 and $1 par value, authorized 300,000,000 shares;
29,373,840 and 28,519,939 issued and outstanding, respectively 2,937 2,852
Additional paid-in capital 692,737 519,067
Accumulated (deficit) earnings (305,588) (379,925)
----------- -----------
Subtotal stockholders' equity before shareholder transactions 390,186 142,094
Shareholder transactions (1,443,309) (1,539,129)
----------- -----------
Total stockholders' equity (deficit) (1,053,123) (1,397,035)
----------- -----------
Total Liabilities and Stockholders' Equity $ 777,191 $ 446,924
=========== ===========
The accompanying notes are an integral part of the financial statements
F-13
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Consolidated and Combined Statements of Operations
Three and Six Months Ended June 30,
(UNAUDITED)
Consolidated Combined Consolidated Combined
Three months Three months Six months Six months
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUES $ 610,924 $ 405,622 $ 1,124,561 $ 1,091,861
OPERATING EXPENSES
Salaries 160,335 115,750 329,055 231,768
General and administrative expenses 367,379 306,914 619,715 485,158
Advertising 20,552 1,833 21,770 6,275
Depreciation 2,802 300 5,605 748
------------ ------------ ------------ ------------
Total expenses 551,068 424,797 976,145 723,949
------------ ------------ ------------ ------------
Income from operations 59,856 (19,175) 148,416 367,912
OTHER INCOME (EXPENSE)
Interest income 0 0 0 13
Interest expense (24,746) (11,447) (37,628) (25,822)
Reserve for bad debt 0 0 0 0
------------ ------------ ------------ ------------
Total other income (expense) (24,746) (11,447) (37,628) (25,809)
------------ ------------ ------------ ------------
Income tax expense (11,550) 0 (36,450) 0
------------ ------------ ------------ ------------
Net income $ 23,560 $ (30,622) $ 74,338 $ 342,103
============ ============ ============ ============
Income per weighted average common shares
- basic $ 0.00 $ (30.62) $ 0.00 $ 342.10
============ ============ ============ ============
Income per weighted average common shares
- fully diluted $ 0.00 $ (30.62) $ 0.00 $ 342.10
============ ============ ============ ============
Number of weighted average common shares
outstanding - basic 28,964,023 1,000 28,763,650 1,000
============ ============ ============ ============
Number of weighted average common shares
outstanding -fully diluted 29,714,023 1,000 29,513,650 1,000
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements
F-14
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Consolidated and Combined Statement of Stockholders' Equity (Deficit)
Number Common Total
Number of of Stock Preferred Additional Retained Stockholders
Shares Shares Par Stock Paid-In Earnings Shareholder Equity
Common Preferred Value Par Value Capital (Deficit) Transactions (Deficit)
----------- --------- ------- --------- ----------- --------- ------------ -----------
BEGINNING BALANCE,
December 31, 2002 1,000 0 $ 1,000 $ 0 $ 0 $ 237,935 $ 0 $ 238,935
Net income 0 0 0 0 0 762,168 0 762,168
Net income distributed 0 0 0 0 0 (764,053) 0 (764,053)
----------- --------- ------- --------- ----------- --------- ------------ -----------
BALANCE, December 31, 2003 1,000 0 1,000 0 0 236,050 0 237,050
Net income distributed 0 0 0 0 0 (384,914) 0 (384,914)
Reorganization 27,499,000 1,000,000 1,750 100 9,295 (236,050) (1,539,129) (1,764,034)
Conversion of notes - $0.50/sh. 913,939 0 91 0 456,783 0 0 456,874
Stock issued for services -
$0.50/sh 106,000 0 11 0 52,989 0 0 53,000
Net income 0 0 0 0 0 4,989 0 4,989
----------- --------- ------- --------- ----------- --------- ------------ -----------
BALANCE, December 31,2004 28,519,939 1,000,000 2,852 100 519,067 (379,925) (1,539,129) (1,397,035)
Stock issued for cash 120,000 0 12 0 59,988 0 0 60,000
Stock issued for assets 733,901 0 73 0 113,682 0 0 113,755
Stockholder loan to Company 0 0 0 0 0 0 95,820 95,820
Net income 0 0 0 0 0 74,337 0 74,337
----------- --------- ------- --------- ----------- --------- ------------ -----------
Ending Balance, June 30, 2005
(unaudited) 29,373,840 1,000,000 $ 2,937 100 $ 692,737 $(305,588) $ (1,443,309) $(1,053,123)
=========== ========= ======= ========= =========== ========= ============ ===========
The accompanying notes are an integral part of the financial statements
F-15
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Consolidated and Combined Statements of Cash Flows Six Months Ended June 30,
(unaudited)
Consolidated Combined
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,337 $ 342,103
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation 5,605 748
Stock issued for services 0 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (51,336) (64,529)
(Increase) decrease in inventory (1,130) 0
(Increase) decrease in prepaid expenses (1,356) (10,000)
(Increase) decrease in other assets 1,000 0
Increase (decrease) in accounts payable (147,753) (14,821)
Increase (decrease) in accrued expenses 9,448 7,323
Increase (decrease) in income tax payable 36,450 0
Increase (decrease) in customer deposits 2,159 177
Increase (decrease) in unearned memberships 188 (27,334)
--------- ---------
Net cash provided by operating activities (72,388) 233,667
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (170,162) (12,426)
--------- ---------
Net cash used by investment activities (170,162) (12,426)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 0 175,000
Proceeds from long-term debt 250,000 0
Payments on line of credit (30,150) 0
Net income distributed 0 (283,677)
Payments on notes payable (126,787) (82,372)
Common stock sold for cash 60,000 0
Proceeds from loan from officer/shareholder 95,820 0
--------- ---------
Net cash provided (used) by financing activities 248,883 (191,049)
--------- ---------
Net increase (decrease) in cash 6,333 30,192
--------- ---------
CASH, beginning of period 42,294 16,656
--------- ---------
CASH, end of period $ 48,627 $ 46,848
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 37,628 $ 14,375
========= =========
Non-Cash Financing Activities:
Issuance of common stock to acquire assets $ 113,755 $ 0
========= =========
Stockholder loan offset in stockholder transactions $ 95,820 $ 0
========= =========
The accompanying notes are an integral part of the financial statements
F-16
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(Information with regard to the six months ended June 30, 2005
and 2004 is unaudited)
(1) Summary of Significant Accounting Principles The Company Union Dental
Holdings, Inc., (f/k/a National Business Holdings, Inc.), (the Company) is a
Florida chartered corporation which conducts business from its headquarters in
Ft. Lauderdale, Florida. The Company was incorporated on November 26, 1996 and
has elected December 31as its fiscal year end. The Company has two distinct
lines of business. Union Dental Corp., (UDC), acquired the assets of G.D. Green,
DDS, P.A. and manages the operation of that general dental practice. Direct
Dental Services, Inc., (DDS), negotiates contracts with labor union locals for
the provision of dental services to union members in seventeen states, through
network member dentists.
The following summarize the more significant accounting and reporting policies
and practices of the Company:
a) Use of estimates The financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
statements of financial condition and revenues and expenses for the period then
ended. Actual results may differ significantly from those estimates.
b) Net income per share Basic income per weighted average common share is
computed by dividing the net income by the weighted average number of common
shares outstanding during the period. Diluted per weighted average common share
is computed by dividing the net income by the weighted average number of common
shares outstanding during the period had the outstanding options been exercised
at the beginning of the period.
c) Stock compensation for services rendered The Company occasionally
issues shares of common stock in exchange for services rendered. The costs of
the services are valued according to generally accepted accounting principles
and are charged to operations.
d) Significant acquisition In December 2004, the Company entered into an
agreement to acquire Union Dental Corp. and Direct Dental Services, Inc., both
Florida corporations, in a reverse merger, which was accounted for as a
reorganization of UDC and DDS, in exchange for 17,500,000 restricted common
shares and 1,000,000 restricted preferred shares. In May 2005, the Company
acquired certain assets of Dental Visions, Inc., (DVI), in exchange for 733,901
shares of common stock valued at $113,755 and payment of DVI debt in the amount
of $169,486, for a total valuation of $283,241.
e) Principles of consolidation and combination The consolidated financial
statements include the accounts of Union Dental Holdings, Inc. and its wholly
owned subsidiaries. Inter-company balances and transactions have been
eliminated. The financial statements of UDC and DDS for 2004 are presented as
combined pursuant to Accounting Research Bulletin, (ARB), No. 51, since they
were separate entities under common control.
f) Revenue recognition The Company's revenues are generated through
provision of dental services and the sale of the right to provide dental
services to labor union members in an exclusive geographic area through various
contracts with the labor unions. The Company records revenue when dental
services are provided and the dentist member fees are amortized over the term of
the contract.
F-17
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(1) Summary of Significant Accounting Principles
g) Cash and equivalents The company considers investments with an initial
maturity of three months or less as cash equivalents.
h) Property and equipment All property and equipment are recorded at cost
and depreciated over their estimated useful lives, using the straight-line
method. Upon sale or retirement, the costs and related accumulated depreciation
are eliminated from their respective accounts, and the resulting gain or loss is
included in the results.
Repairs and maintenance charges which do not increase the useful lives of
the assets are charged to operations as incurred. Depreciation expense was
$2,802, $300, $5,605 and $748 for the three and six months ended June 30, 2005
and 2004, respectively.
i) Inventory The Company values inventory of dental supplies at the lower
of cost or market, using the specific unit cost method.
j) Segment information The Company has two distinct related lines of
operations, the management of a general dental practice through UDC and
maintaining a network of dental practices providing services through provider
contracts with labor union locals negotiated by DDS. At June 30, 2005, DDS
represents approximately 17% of total assets, 27% of revenues and 40% of net
income. UDC represents approximately 46% of total assets, 73% of revenues and
60% of net income.
k) Bad debt reserve The Company reviews its accounts receivable regularly,
(at least quarterly), to evaluate the need to modify its reserve for
uncollectible accounts receivable. At December 31, 2004, the Company has
established a reserve for bad debt in the amount of $7,200, and remains
unchanged at June 30, 2005. The Company does not believe that this amount will
become a significant amount, as its receivables are from numerous individual
patients, several insurance companies and numerous dentists in its network, each
of which is relatively small in individual amount.
l) Unearned memberships Dentists enroll and renew their contracts for one
or one and one-half year terms at various times throughout the year. Most of the
membership fees are paid at the signing of the contract and renewal. The fees
are amortized over the term of the related contract.
m) Advertising Advertising costs are expensed when incurred.
F-18
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(1) Summary of Significant Accounting Principles
n) Interim financial information The financial statements for the three
and six months ended June 30, 2005 and 2004, are unaudited and include all
adjustments which in the opinion of management are necessary for fair
presentation, and such adjustments are of a normal and recurring nature. The
results for the six months are not indicative of a full year results.
(2) Stockholders' Equity The Company has authorized 300,000,000 shares of
$0.0001 par value common stock, and 25,000,000 shares of $0.0001 par value
preferred stock. Rights and privileges of the preferred stock are to be
determined by the Board of Directors prior to issuance. The Company had
29,373,840 shares of common stock issued and outstanding at June 30, 2005. The
Company had issued 1,000,000 of its shares of preferred stock at June 30, 2005.
These preferred shares carry super voting rights equal to 15,000,000 common
shares.
In November 1996, the Company issued 1,000,000 shares of common stock to its
founders for services rendered in connection with the organization of the
Company, valued at $0.001 or $900. In May 1997, the Company issued 8,900,000
shares of common stock for $89,000 in cash, or $0.01 per share. In January 1998,
the Company issued 275,000 shares of common stock for $400,000 in cash, or $1.45
per share. In February 1998, the Company issued 50,000 shares of common stock
for $72,727 in cash, or $1.45 per share. In September 1998, 3,900,000 shares
that had been purchased for $39,000 were contributed back to the Company. In
October 1998 the Company retired 6,938,796 shares as a result of a 1 for 20
reverse split of the stock. In December 1998, the Company issued 5,000,000
shares of common stock for $1,000,000 in cash, or $0.20 per share.
In February 2004, the Company issued 10,000,000 shares of common stock for
$25,000 in cash, or $0.0025 per share. In May 2004, the Company retired
15,001,373 shares as a result of a 1 for 40 reverse split of the stock. In May
2004, the Company issued 3,100,000 shares to acquire 100% of the issued and
outstanding shares of Shava, Inc. This transaction was valued at $7,750, or
$0.0025 per share. In October 2004, the Company issued 18,800,000 shares to its
then sole officer and director in exchange for services valued at $18,800. In
October 2004, the Company issued 10,000,000 shares for the conversion of
convertible notes payable in the amount of $27,500. At the time of the reverse
merger the Company had 32,284,831 shares issued and outstanding. In December
2004, the Company issued 17,500,000 shares of restricted common stock and
1,000,000 restricted preferred stock to acquire Union Dental Corp. and Direct
Dental Services, Inc. At the same time, as part of the merger agreement, a
stockholder contributed 22,284,831 shares to the Company. In December 2004, the
Company issued 783,140 restricted common shares in exchange for $417,006 in
convertible short-term debt and accrued interest and 106,000 shares in exchange
for services valued at $53,000, or $0.50 per share.
F-19
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(2) Stockholders' Equity, continued.
In the first and second quarter 2005, the Company issued 120,000 shares of
restricted common stock in exchange for $60,000 in cash, or $0.50 per share. In
the second quarter the Company issued 733,901 shares of restricted common stock
in exchange for assets valued at $113,755, or $0.155 per share, (see note 1d).
(3) Income Taxes Deferred income taxes (benefits) are provided for certain
income and expenses which are recognized in different periods for tax and
financial reporting purposes. The operating entities had elected Sub-chapter S
status under the IRC Code and therefore were not subject to taxation at the
corporate level. Distributions were made each year to the stockholder's of the
companies to allow for the payment of income taxes on a personal level.
Sub-chapter S status is revoked automatically under the IRS Code as of the day
the companies became wholly-owned subsidiaries of a publicly traded entity.
At December 31, 2004, the Company has a book-tax timing difference. This is the
result of accounting for customer deposits, ($30,802), and unearned memberships,
($326,326), as deferred revenue for book purposes and as income on the cash
basis income tax returns. As such, this $357,128, will not be taxed on the
Company's 2005 income tax return and will reduce the Company's 2005 tax
liability in an amount ranging from approximately $53,500 (15% rate) to $135,700
(38%) on the Company's federal return and approximately $19,600 on the Company's
Florida return. These savings are entirely dependent on the Company's tax rate
inclusive of this income for 2005. The Company has established a deferred tax
asset in the amount of $74,000, utilizing the lowest possible income tax rates.
However, the Company has established a 100% valuation allowance against this
asset as there is no assurance that the Company will be able to utilize this
benefit in 2005., which is the only year it is available. This is due to
multiple factors: 1 - this is a newly reorganized company and is publicly traded
for the first time, as such there are significant additional expenditures
expected related to this status and 2 - the Company is expecting to expand its
business and expects significant expenditures related to this expansion. The
Company has established a deferred income tax liability for the change in
unearned membership fee income. This change was $200 for the first half-year
2005. The tax liability was calculated at 15%, or $30.
(4) Long-term debt In December 2004, DDS agreed to assume the debt obligation of
the principal stockholder for the bank loan utilized to purchase 50% of DDS from
its founder and former owner and the remaining balance owed on the original 50%
acquisition. The interest rate of this debt is LIBOR plus 2.55% and requires
payments of $20,250 plus accrued interest monthly, or $243,000 plus accrued
interest annually. This loan matures on December 31, 2009. The loan is
collateralized with 100% of the assets of DDS, UDC and the principal
stockholder, tangible and intangible. The principal stockholder and UDC are also
guarantors of this loan. In addition, the Company, on a consolidated basis, must
maintain a minimum Global Debt Service Ratio, as defined by the bank, which is
calculated annually, based on the Company's year end financial statements. The
Company must also maintain property and casualty insurance on the business as
well as a minimum of $700,000 of life insurance on the principal stockholder ,
assigned to the bank. In the second quarter of 2005, this loan was increased
$250,000 as part of the acquisition of $283,241 of fixed assets.
F-20
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(5) Long-term debt to stockholder A portion of the purchase price of the assets
of G.D. Green, DDS, PA is a note payable to the principal stockholder in the
amount of $1,000,000. This note carries a 5% interest rate and is payable
$100,000 plus accrued interest annually for ten years. At the closing of the
reverse merger the principal stockholder agreed to a set-off between this
payable to him and the then existing balance he owed the combined companies of
approximately $560,000.
(6) Commitments and contingencies The Company leases its office facility under a
five year lease that expires May 2007. The monthly lease payments are $2,300 per
month or $27,600 per year. In May 2005, the Company assumed a lease for
additional space as part of the DVI asset acquisition. This lease also has five
years remaining, expiring May 2010, and the monthly payment is $2,175, or
$26,100 per year, for a total of $53,700 per year.
(7) Related party transactions On March 20, 2004, UDC, a wholly owned subsidiary
of the Company, entered into an employment agreement with the principal
stockholder , the sole officer of UDC, with a term of 7 years. This contract
provides for a base salary to the principal stockholder of $225,000 in year 1,
$125,000 in year 2, $185,500 in year 3, $196,630 in year 4, $208,427 in year 5,
$220,932 in year 6 and $234,187 in year 7. This contract also provides for the
issuance of options to the principal stockholder upon signing , 750,000 options,
(1 share per option), with an exercise price of $0.60 per share, half vested
immediately and half vesting after two years , having an exercise life of five
years. This contract also provides for the issuance of options to the principal
stockholder as well, if certain revenue milestones are reached: at $3,000,000 in
gross revenue for any calendar year he receives 332,500 options, (1 share per
option), with an exercise price at the market price of the underlying common
stock at issue date and the same again at $4,000,000 and $5,000,000 in gross
revenue for a calendar year.
As a private company, DDS and UDC have, at various times loaned the sole
stockholder money, which has been repaid in part. These advances and repayments
have the characteristics of a line of credit. At December 31, 2004 and 2003, the
now principal stockholder of the consolidated company owed DDS and UDC combined
$0 and $280,654, respectively. Shareholder transactions in the net amount of
$1,539,129 are the result of the following: a) UDHI acquiring UDC for a note
payable to the principal stockholder in the amount of $1,000,000; b) DDS entered
into a note payable in the amount of $1,215,000 to the bank replacing an
existing note payable from the principal stockholder and c) these items are
reduced by a note receivable from the same principal stockholder in the amount
of $675,871. In the first half-year 2005, this net amount is further reduced by
a loan from the stockholder in the amount of $95,800.
F-21
UNION DENTAL HOLDINGS INC.
(UNION DENTAL CORP. and DIRECT DENTAL SERVICES, INC.)
Notes to Consolidated and Combined Financial Statements
(8) Short-term debt From April through December 2004, the Company raised
$417,006 in short-term debt, via a Regulation D Rule 506 offering. At the
closing of the reorganization on December 27, 2004, this short-term debt was
converted at $0.50 per share into 913,939 shares of restricted under Rule 144
common stock
(9) Stock option plan In October 2004, UDC adopted a Stock Option Plan that
allows for both incentive based options as well as non-qualified options. As
part and parcel to the reorganization on December 27, 2004, UDHI adopted this
Plan. Under the terms of the Plan, the Plan Committee will set the option term
and the exercise price. The Plan limits the ability to exercise incentive
options for a first time holder in any one calendar year to $100,000 aggregate
fair market value, based on grant date. The Plan also allows for the issuance of
Stock Appreciation Rights to allow for cash-less exercise of underlying issued
options. The Company issued 793,000 options, with an exercise price of $0.50 per
share, under this plan as of December 31, 2004, in addition to those discussed
in Note 7 above.
The Company accounts for outstanding options in accordance with Accounting
Principles Board, (APB), Opinion 25. Financial Accounting Standards Board,
(FASB), SFAS No. 148 requires footnote disclosure of the effects on the
financial statements if the Company had accounted for the options under the fair
value method , (Black- Scholes), in accordance with SFAS No. 123. Using the
Black-Scholes model, the Company would have recorded $0 expense for these
options, therefore there would have been no effects on the financial statements
as published.
(10) Subsequent events
a) Stockholders' equity In July 2005, the Company issued 325,000 shares
under the Form S-8 and 5,000 shares of restricted under Rule 144 common stock to
two and one persons, respectively, in exchange for services rendered. These
shares were valued at $48,750 and $375 in total, or $0.15 and $0.075 per share,
respectively.
On July 1, 2005, the Company filed a Form S-8 to register up to 5,000,000 shares
to be issued under its Stock Option Plan. Except for the 325,000 shares of
common stock described above, no shares or options have been issued pursuant to
this Plan.
F-22