-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PuurD4eyizo6Gq15ZU6AzcZ+U5p1jMjqgTjnSq+wVOGSs3506Bud3L2o/MD1rYjn D/gqsG0y7kWGKb6J7aZKew== 0001016843-99-000454.txt : 19990430 0001016843-99-000454.hdr.sgml : 19990430 ACCESSION NUMBER: 0001016843-99-000454 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENTAL CARE ALLIANCE INC CENTRAL INDEX KEY: 0001044914 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 650555126 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-23219-29 FILM NUMBER: 99604625 BUSINESS ADDRESS: STREET 1: 1343 MAIN ST STREET 2: 7TH FLOOR CITY: SARASOTA STATE: FL ZIP: 34236 BUSINESS PHONE: 9419553150 MAIL ADDRESS: STREET 1: 1343 MAIN STREET STREET 2: 7TH FLOOR CITY: SARASOTA STATE: FL ZIP: 34236 10-K405/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report pursuant to Sections 13 or 15 (d) of the Securities Exchange Act of 1934 for the year ended December 31, 1998. [ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the period from _______ to _______. Commission File Number 0-23219 DENTAL CARE ALLIANCE, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 65-0555126 - ------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1343 MAIN STREET, SUITE 700, SARASOTA, FLORIDA 34236 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) (941) 955-3150 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $.01 PAR VALUE. ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports,) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in Definitive Proxy or Information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the last sales price of the Common Stock reported on the Nasdaq market on March 12, 1999 was $28,158,000. As of March 11, 1999, the number of shares outstanding of the Registrant's Common Stock, $.01 par value, was 7,031,187. DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I ITEM 1. BUSINESS THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21B OF THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, AMONG OTHERS, THE PACE OF DEVELOPMENT AND ACQUISITION ACTIVITY, THE DEPENDENCE ON MANAGEMENT AGREEMENTS, THE P.A.S AND AFFILIATED DENTISTS, THE REIMBURSEMENT RATES FOR DENTAL SERVICES, AND OTHER RISKS DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS. OTHER RISK FACTORS ARE LISTED IN THE COMPANY'S REGISTRATION STATEMENT NO.333-34429 AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. Dental Care Alliance, Inc. ("DCA") was formed on October 23, 1996 to effect a reorganization among DCA, Golden Care Holdings ("GCH"), the predecessor which was incorporated in 1993, and its majority owned subsidiaries, (collectively, the "Company"). The Company provides management and licensing services to dental practices in Florida, Georgia, Michigan, Indiana and Pennsylvania. As of December 31, 1998, the Company provided management services to 78 Dental Centers ("Managed Dental Centers"). As of December 31, 1997, the Company provided services to 32 Dental Centers, 29 of which were Managed Dental Centers and three of which the Company only provided licensing services ("Licensed Dental Centers"). The Company discontinued providing services to the Licensed Dental Centers in 1998. Management services include financial, accounting, billing, training, efficiency and productivity enhancement, recruiting, team building, marketing, advertising, purchasing, collection and other services, as well as the provision of management and administrative personnel. Licensing services include marketing, advertising and purchasing. See "The Company" and Note 1 to the Consolidated Financial Statements for information relating to the history of the Company. On March 12, 1999, based upon shareholder approval on March 11, 1999, DCA became a wholly-owned subsidiary of InterDent, Inc. as a result of a business combination between DCA and Gentle Dental Service Corporation, a Washington corporation. SERVICES AND OPERATIONS The Company provides management and administrative services to the Managed Dental Centers but does not provide dental care services. The Company provides, supervises or facilitates financial, accounting, billing, training, efficiency and productivity enhancement, recruiting, team building, marketing, advertising, purchasing, collection and other services for the individual dental professional corporations or professional associations (the "P.A.s") and employs the Managed Dental Centers' management and administrative personnel. The P.A.s employ and maintain full control over the general dental and specialty dental practitioners (such as orthodontists, periodontists, endodontists and oral surgeons) working at the Managed Dental Centers ("Affiliated Dentists"), hygienists and other dental professionals and set standards of care in order to promote the provision of high quality dental care. The individual P.A.s are responsible for compliance with state and local regulations of the practice of dentistry and with licensing and certification requirements, and each P.A. is responsible for acquiring and maintaining professional liability insurance. The Company's services can be grouped into three broad categories: personnel services, operational services and financial services. 1 PERSONNEL SERVICES TRAINING AND EDUCATION. The individual P.A.s employ, supervise and train all dentists, dental hygienists and other dental professionals at each Managed Dental Center. The Company, while not engaged in the practice of dentistry, assists the individual P.A.s in training and educating professional personnel by providing analyses that allow the P.A.s to determine training needs. All personnel, other than dentists, dental hygienists and other dental professionals, are supervised and trained by the Company or its subcontractor. The Company also helps to coordinate group meetings and seminars at which the P.A.s provide continuing education to their professionals. In addition, the Company encourages and facilitates team building of the staffs through regularly scheduled staff meetings and social events. Each individual P.A. maintains full control over the practice of dentistry by the dental professionals it employs and sets standards of practice in order to promote quality dental care. RECRUITING. The Company continually assists the P.A.s in recruiting dentists to add to its network as Affiliated Dentists. Such recruiting takes place at dental schools through the Company's contacts at such schools, at regional dental conventions and through advertising in regional and national dental publications. Recruitment of general dentists, specialists and other professionals is the primary responsibility of the Company's Director of Development. HUMAN RESOURCE MANAGEMENT. The Company is responsible for the hiring, retention, salary and bonus determination, job performance-related training and other similar matters affecting Company employees, which include non-dental professionals providing services to the P.A.s. Services provided by the Company include: (i) payroll administration, including recordkeeping, payroll processing, making payroll tax deposits, reporting payroll taxes and related matters; (ii) risk management, including on-site safety inspections and monitoring, training, and workers' compensation claim management and administration; (iii) administering benefit plans; and (iv) the provision of human resource materials, consulting and expertise on other human resource issues. A professional employer organization (the "Co-Employer") assists the Company in providing these services. The Co-Employer arrangements allow the Company to improve productivity and profitability by relieving it of certain burdens associated with employee administration, helping it to better manage certain employment-related risks, improving cash management with respect to payroll-related expenses and enabling it to provide certain benefits on a cost-effective basis. The Company intends to assume the responsibilities of the Co-Employer when it becomes operationally efficient for the Company to do so. See Item 1 "Business-Employees." OPERATIONAL SERVICES MANAGEMENT INFORMATION SYSTEMS. The Company utilizes its information systems to track data related to each Managed Dental Center's operations and financial performance. Billing and collection information is compiled on a daily basis, enabling the Company to monitor financial performance and operational efficiency. The Company generates reports for each Managed Dental Center containing information as to every visit, charge and procedure. These reports are reviewed by either the Company's Chief Financial Officer or Controller and then by the Operations Department which analyzes performance and efficiencies, particularly the ratios of dollars per patient. These reports are also given to the Dental Director who reviews them for inefficiencies and evaluates how performance may be improved. The Company provides an analysis of these results to the P.A.s and recommends specific measures to improve the financial performance of the Managed Dental Centers. The analysis enables a Managed Dental Center to improve its financial performance by making periodic adjustments in marketing and operations. 2 QUALITY ASSURANCE. Prior to the execution of a Management Agreement with a new P.A., the Company evaluates the dental practice to determine in which areas, if any, the proficiency level of the dental professionals employed by the P.A. can be enhanced. The Company also works closely with the Dental Directors to assure that quality dental services are being provided. While supervision of dental services is the responsibility of the Dental Directors, the Company provides Dental Directors with reports that help them evaluate performance. For example, certain dental laboratories monitor the case quality of the Affiliated Dentists in performing particular tasks. Such monitoring allows the Company and the P.A.s to notify the appropriate Dental Director if any procedure is being done inefficiently at a particular Managed Dental Center or by a particular Affiliated Dentist or other dental professional. The Dental Director then works directly with the dental professionals at the Managed Dental Center to identify the reason for the inefficiency and to implement solutions, such as additional training, to improve performance in that area. The Company also performs patient surveys to monitor patient satisfaction, and the Dental Directors periodically audit patient charts and provide advice to the general dentists and dental specialists employed by the PAs. See Item 1 "Business - Services and Operations Management Information Systems" and " - Dental Directors." SCHEDULING. The Company implements patient scheduling systems at each of the Managed Dental Centers. These systems enable the Company to devise daily patient schedules that maximize the efficiency of the dental professionals. Patient visits are scheduled in small time increments based upon the Company's knowledge of the time required for each type of dental procedure. In addition, the office hours of each Managed Dental Center are tailored to meet the needs of its patient population. The Company believes that its scheduling systems result in more efficient patient flow, thereby increasing productivity and patient volume. ADVERTISING AND MARKETING. The Company assists in developing and implementing customized marketing plans tailored to the specific characteristics of each Dental Center's market. Such marketing may include the use of local radio, TV and print advertising, and other marketing promotions. In some instances the Company seeks to promote brand name recognition of its Managed Dental Centers through use of regional brand names owned by the P.A.s. For example, in Florida, several of the Company's Managed Dental Centers use the name "Advanced Dental Care." In some cases, Dental Centers are marketed under the names used by the practices prior to their affiliation with the Company to take advantage of the practices' existing market position. Most states, including Florida and Michigan, place certain restrictions on the ability of corporations such as the Company to provide advertising and marketing services to the professional associations or corporations organized in such states. Many states, prohibit dentists from using, except in limited circumstances, advertising which includes any name other than their own, or from advertising in any manner that is likely to lead a person to believe that a nondentist is engaged in the practice of dentistry. Florida law also requires all advertising to identify the dentist who assumes total responsibility for the advertisement and may not include the name of a person who is neither actually involved in the practice of dentistry at the advertised location nor an owner of the practice being advertised. Similarly, Michigan law requires that the name of each dentist performing services at a location be clearly disclosed by sign or lettering at such location. In addition, Michigan and Florida law imposes additional restrictions on advertisements by specialists. 3 PURCHASING AND DISTRIBUTION. The size of the Company's network enables the Company to purchase dental supplies, laboratory services, equipment, insurance, management information systems, advertising and office furniture at reduced costs. Dental equipment supplies are obtained by the Company as directed by the P.A.s and administrative supplies are purchased by the Company pursuant to high-volume supply contracts with favorable price terms. The Company monitors inventory levels and adjusts distribution to reduce carrying costs on inventory. FINANCIAL SERVICES THIRD-PARTY PAYOR MANAGEMENT. The Company examines various factors to determine which third-party payors' assignments it will recommend at each Managed Dental Center. Factors considered by the Company in making this recommendation include the types of procedures that are generally performed at the Managed Dental Centers, the geographic area served by the particular plan and the demographic characteristics of the typical plan participants. Some element of managed care is present at most Managed Dental Centers, although generally not as the primary source of revenues. The Company assists the Managed Dental Centers in the negotiation of contracts with third-party payors. As a result of its size, the Company is often able to negotiate better terms for its Managed Dental Centers with third- party payors than would be available to solo practitioners or small group dental practices. ACCOUNTING SERVICES. The Company provides Managed Dental Centers with a full range of accounting services, including preparation of financial statements, management of accounts payable, oversight of accounts receivable, verification of purchase orders, payroll administration and tax services. In addition, the Company assists each Managed Dental Center in the preparation of operating and financial budgets. THIRD-PARTY FINANCING. The Company has contracts with multiple non-recourse third-party financing companies that enable the Managed Dental Centers to offer various third-party financing options directly to their patients. The Company is not a party to the financing agreements. At the time a patient receives dental treatment and upon credit approval of the patient by the third-party financing company, the P.A. is paid at varying discounts to the full price of its services, based upon financing terms. The financing company is subsequently responsible for all billing to and collection from the patient and has no recourse for payment against the Company or the Managed Dental Center. 4 DENTAL CENTER LOCATIONS The following table lists the locations of the Company's Managed Dental Centers at December 31, 1998 and the dates on which Management Agreements between the P.A.s that own each Managed Dental Center and the Company were first entered into. DATE OF LOCATION MANAGEMENT AGREEMENT -------- -------------------- Sarasota, Florida November 1993 Largo, Florida November 1993 Port Charlotte, Florida November 1993 Englewood, Florida March 1994 Fort Myers, Florida October 1994 Sarasota, Florida March 1995 Kissimmee, Florida April 1995 Bradenton, Florida July 1995 Orlando, Florida June 1996 Tampa, Florida June 1996 Ocoee, Florida June 1996 Clearwater, Florida June 1996 Tampa, Florida (North) April 1997 Flint, Michigan July 1997 Detroit area, Michigan (4 centers) March 1998 Tallahassee, Florida August 1997 St. Petersburg, Florida September 1997 Lakeland, Florida December 1997 Palma Ceia, Florida December 1997 Rockledge, Florida December 1997 Palm Beach County, Florida (7 centers) December 1997 Bradenton, Florida (2 centers) January 1998 Orlando, Florida (2 centers) February 1998 Mt. Dora, Florida March 1998 Dalton, Georgia March 1998 Detroit area, Michigan (4 centers) March 1998 Atlanta area, Georgia (4 centers) March 1998 Savannah, Georgia May 1998 Orange City, Florida June 1998 Fayetteville, Georgia June 1998 East Point, Georgia June 1998 Tallahassee, Florida August 1998 Gainesville, Florida August 1998 East Chicago, Indiana August 1998 Munster, Indiana August 1998 Merrillville, Indiana August 1998 Ocala, Florida September 1998 Jacksonville, Florida September 1998 Philadelphia area, Pennsylvania (22 locations) November 1998 North Miami Beach, Florida November 1998 5 From December 31, 1998 through March 11, 1999, the Company has entered into Management Agreements involving three Managed Dental Centers in Michigan. MANAGEMENT AGREEMENTS At December 31, 1998, the Company had entered into Management Agreements with 45 P.A.s to manage 78 centers pursuant to which the Company or its assigns are the exclusive business managers, to the extent allowable by law, of the associated Managed Dental Centers. Since December 31, 1998, the Company has entered into Management Agreements with three P.A.s to manage three centers. Additionally, in February 1999, one P.A. elected to exercise its option to terminate its Management Agreement. All but three of the Management Agreements are Standard Management Agreements (described below). The Company plans to continue to use the Standard Management Agreement to the extent possible as it enters into arrangements with additional dental practices. However, the terms of future agreements may differ according to market conditions and the statutory and regulatory requirements of the particular state in which the dental practice is located. The Company had previously entered into three management agreements with respect to six additional dental practices on terms different from those of the Standard Management Agreements. Descriptions of these Management Agreements are set forth below. Under the Standard Management Agreements, the Company provides comprehensive administrative and business services and support to the P.A.s. The Company, among other things, (i) assists in the identification of areas in which the performance of the Managed Dental Centers and their dental professionals can be improved to increase revenues and operating income, (ii) provides, maintains and repairs all offices, equipment and furnishings, (iii) employs all non-professional personnel necessary for the operation of the Managed Dental Centers, (iv) provides payroll services, (v) implements standard business systems and procedures and provides or facilitates systems and efficiencies training, (vi) orders all general business inventory and supplies required by the Managed Dental Centers and handles accounts payable, (vii) establishes and maintains information systems and provides accounting and bookkeeping services, (viii) monitors compliance with rules and regulations applicable to the Managed Dental Center business, (ix) provides marketing assistance and (x) provides assistance in billing and collections, all to the extent permitted by law. The Standard Management Agreements provide that the P.A.s are responsible for, among other things, (i) employing and supervising all Affiliated Dentists and dental hygienists, (ii) complying with all laws, rules and regulations relating to Affiliated Dentists and dental hygienists, (iii) participating in quality assurance/utilization review programs, (iv) maintaining proper dental patient records, (v) obtaining and maintaining professional liability insurance with limits of not less than $300,000 per claim and aggregate policy limits of not less than $1.0 million and (vi) any other requirements to carry out the practice of dentistry. Under the terms of the Standard Management Agreements, the P.A.s are required to indemnify, hold harmless and defend the Company from and against any and all claims from negligent or intentional acts or omissions, including the performance of dental services, by the P.A.s and their employees. The Company is required to indemnify, hold harmless and defend the P.A.s from and against any and all claims resulting from negligent or intentional acts or omissions by the Company. 6 As compensation for its management services under the Standard Management Agreements, the Company earns a management fee equal to 67% - 74% of the Net Collected Revenues earned by the P.A.. The Company pays all of the operating and nonoperating expenses incurred by the P.A.s except for (i) salaries and benefits to the Affiliated Dentists and dental hygienists, (ii) licensing fees paid to the Company, (iii) debt and asset carrying costs related to the acquisition of the dental practice, and (iv) any other direct cost to the P.A. not covered under the Standard Management Agreement. The Standard Management Agreements have 25-year terms, with automatic annual one-year renewals thereafter, and are terminable by either party for cause or upon the insolvency of the other party. In the event of a material default by the P.A. or the P.A. owner, the Company has the option to cause the sale of all of the stock or all of the assets of the P.A. to a licensed dentist designated by the Company. In such an event, the P.A. owner receives the proceeds of the sale, subject in certain cases to preset formulas, less any amounts owed as a result of the default. The P.A. or the P.A. owner may terminate the agreement without cause provided the practice is sold to a dentist acceptable to the Company. The Standard Management Agreements provide that they shall be amended by the parties in the event of any regulatory matters affecting the validity of the Standard Management Agreement in a manner necessary to bring the Standard Management Agreements into compliance. During the terms of the Standard Management Agreements, the Company and the P.A.s agree not to disclose certain confidential and proprietary information regarding the other. The P.A.s are required under the Standard Management Agreements to use their best efforts to enter into and enforce written employment agreements with each of their professional employees containing covenants not to compete with the P.A. in a specified geographic area for a specified period of time, generally from one to three years after termination of the employment agreement. The employment agreements generally provide for injunctive relief in the event of a breach of the covenant not to compete. However, the P.A.s ability to enforce such covenants is uncertain. One P.A. in Florida is party to a Management Agreement substantially in the same form as the Standard Management Agreement, except that (i) the P.A. pays the Company a monthly management fee of 55% of its net profits (defined as total collected revenues on a cash basis less any patient refunds and less practice expenses, including nonprofessional staff expenses), and (ii) this agreement expires in 2003. In addition, the agreement provides that the P.A. has the option, during the period commencing on October 20, 1998 and ending 90 days thereafter, of terminating the agreement by paying to the Company a "termination" fee plus any accrued management fees. The P.A. elected to terminate the Management Agreement effective February 1, 1999. The Company earned management fees from this P.A. of $120,000, $121,900 and $136,000 for the years ending December 31, 1996, 1997 and 1998, respectively. Another P.A. in Florida is party to a Management Agreement substantially in the same form as the Standard Management Agreement, except that (i) the P.A. pays to the Company a monthly management fee of 50% of its net profits (defined as total collected revenues on a cash basis less any patient refunds and less practice expenses, including non-professional staff expenses) and (ii) this agreement expires in 2003. In January 1999, the stockholders of this P.A. sold their shares to another licensed dentist. The new stockholder executed a standard Management Agreement in January, 1999 on behalf of the P.A.. 7 In July 1997, the Company entered into a global Management Agreement to manage four Managed Dental Centers in Michigan substantially in the same form as the Standard Management Agreement, except that it expires in July 2005. The Company subcontracts the day-to-day management functions of the four Michigan Dental Centers subject to this agreement to an affiliate of the owner of the applicable P.A.s. As a result, the Company pays a fee to such subcontractor equal to 80% of the net profits of these Managed Dental Centers (as defined in the Administrative Service Subcontract Agreement with such subcontractor), after certain adjustments. In February 1999, the Company purchased the tangible assets of these Dental Centers and the Management Agreements were converted to Standard Management Agreements with a 25-year term. The Company intends to continue to devote a substantial amount of time and resources to identifying suitable dental practices and to negotiating Management Agreements with such practices. Identifying suitable dental practices and negotiating Management Agreements with such practices can be a lengthy and costly process. There can be no assurance that the Company will be able to identify suitable Managed Dental Center candidates, or that Management Agreements will be entered into with respect to such candidates on terms favorable to and within time frames desired by the Company, or at all. The foregoing factors could have a material adverse effect on the Company's results of operations or financial condition and the Company's ability to continue its expansion strategy. Moreover, in connection with entering into such Management Agreements, the Company may be required to incur indebtedness or assume other liabilities which could have a material adverse effect on the Company's operating results, liquidity and capital resources, or may cause the Company to issue shares of its capital stock which could result in dilution to stockholders. The integration of Managed Dental Centers into the Company's network is a difficult, costly and time consuming process which, among other things, requires the Company to attract and retain competent and experienced management and administrative personnel and to implement and integrate reporting and tracking systems, management information systems and other operating systems. In addition, such integration may require, among other things, the opening of new facilities or the expansion of existing facilities, the expansion of accounting controls and procedures and the elimination of duplicate personnel. There can be no assurance that substantial unanticipated problems, costs or delays associated with such integration efforts or with such Managed Dental Centers will not arise or continue. Any such problems, costs or delays could cause the Company's financial results in the fiscal quarter including and subsequent to the execution of the relevant Management Agreements to be materially lower than financial analysts' expectations, which likely would cause a decline, perhaps substantial, in the market price of the Common Stock. In particular, the Company's expenses related to any new Managed Dental Center and, accordingly, the integration of such Managed Dental Center may have a temporary or sustained negative impact on the Company's results of operations or financial condition. There can be no assurance that the Company will be able to successfully integrate new Managed Dental Centers in a timely manner or at all, or that any new Managed Dental Center will have a positive impact on the Company's results of operations and financial condition. The success of the Company will depend in part on the Company's ability to effectively manage an increasing number of Managed Dental Centers, some of which are expected to be located in markets geographically distant from markets in which the Company presently operates. The addition of Managed Dental Centers may impair the Company's ability to efficiently and successfully provide management services to existing Managed Dental Centers and to manage and supervise adequately the 8 Company's employees. Until 1998, the Company had little experience in managing more than 20 Managed Dental Centers, and the Company's results of operations and financial condition could be materially adversely affected if it is unable to do so effectively. The Company's growth will require that substantial capital investment and adequate financing be available to the Company. Capital is needed for (i) the acquisition by the Company of the non-dental assets of dental practices, (ii) entering into Management Agreements, (iii) the integration of operations of dental practices, (iv) the purchase of additional equipment and technology, and (v) loans to P.A.s to purchase the dental assets of dental practices. The Company believes that the net proceeds from its public offering, cash flow from operations and borrowings available under the Company's existing credit facility will be adequate to meet the Company's anticipated capital needs through 1999, although there can be no assurance to that effect. After 1999, the Company may be required to obtain financing through additional borrowings or the issuance of additional equity or debt securities. There can be no assurance that the Company will be able to obtain such financing or that, if available, such financing will be on terms acceptable to the Company. Any inability of the Company to obtain suitable financing could cause the Company to limit or otherwise modify its expansion strategy, which could have a material adverse effect on the Company's results of operations and financial condition. LICENSE AGREEMENTS As of December 31, 1998, seventy-one of the Managed Dental Centers had entered into short form license agreements and seven Managed Dental Centers entered into long form license agreements with the Company (collectively, the "License Agreements"). The long form license agreements generally have terms of five years, with automatic five-year renewal terms, while the short form license agreements have terms that are coterminous with the related Management Agreements. In consideration for the payment of a monthly license fee, which has generally ranged from $600 to $1,200, the licensee is entitled to identify its Dental Center as a member of the Company's network, participate in marketing programs, utilize the Company's discounted purchasing capabilities, and use one or more of the Company's service marks, logo types and commercial symbols (collectively, the "Licensed Symbols"). The long form license agreements also provide for a monthly advertising fee of $1,000 which, if collected would be used for general marketing, advertising and promotion of the Company's network and the Licensed Symbols. The Company has not collected any such monthly advertising fees and does not intend to do so in the future. The manner in which the licensee intends to use the Licensed Symbols must be approved in advance by the Company. The short form license agreements terminate immediately upon the termination of the related Management Agreement, and termination is governed by the provisions thereof. The Company may terminate the long form license agreements upon cancellation of, or failure to renew, the lease for the premises of the related Dental Center, the bankruptcy of the associated licensee or upon the occurrence of certain other events set forth in the License Agreement. The long form licensees may terminate their license agreements for cause at any time or without cause during the 30-day period commencing on the first anniversary of the execution of the agreement. Any other termination by the long form licensee constitutes a breach of the agreement. 9 DENTAL DIRECTORS The Company divides the geographic areas in which it operates into regions, each of which is under the supervision of an Affiliated Dentist (each, a "Dental Director"). At December 31, 1998, there were seven regions and nine Dental Directors, each employed by, or owners of, the P.A.s within their region. The Company has added two regions and four Dental Directors since December 31, 1998. The Company expects that additional regions and Dental Directors will be added by the P.A.s as the Company enters into Management Agreements with additional P.A.s in new locations. The primary purpose of the Dental Directors is to promote the provision of high quality dental care and to refine operating efficiencies at the Managed Dental Centers. Dental Directors continually monitor and evaluate the performance of the Affiliated Dentists and the Managed Dental Centers within their region by identifying operational inefficiencies and implementing solutions to address these inefficiencies. Each Dental Director performs periodic spot checks in which the performance of each Managed Dental Center is scrutinized in detail. The Dental Directors also assist the P.A.s in their region with the hiring, training and supervision of dental professionals. The Company believes that close relationships among the Dental Directors, the P.A.s they supervise, and the Company allows for the identification of specific inefficiencies, the quick remediation of such inefficiencies and the realization of the benefits produced by the Company's management approach. GOVERNMENTAL REGULATION The dental industry is regulated extensively at both the state and federal levels. Regulatory oversight includes, but is not limited to, considerations of fee-splitting, corporate practice of dentistry, anti-kickback and anti-referral legislation and state insurance regulation. Although we believe that the operations of the Company comply in all material respects with the laws to which they are subject, there can be no assurance that a review of our business relationships by courts or other regulatory authorities would not result in determinations that could prohibit or otherwise adversely affect operations or that the regulatory environment will not change, requiring us to reorganize, change our methods of reporting revenues and other financial results or restrict existing or future operations. Any such change could have a material adverse effect on the new company's business, financial condition and results of operations. NON COMPLIANCE WITH CORPORATE PRACTICE OF DENTISTRY AND FEE SPLITTING LAWS. The laws of many states prohibit dentists from splitting fees with non-dentists and prohibit non-dental entities from engaging in the practice of dentistry or employing dentists to practice dentistry. The laws regarding fee-splitting and the corporate practice of dentistry and their interpretation vary from state to state and are enforced by regulatory authorities with broad discretion. There can be no assurance that the legality of the business or relationships with affiliated dental practices, or the dentists owning or employed by such practices, will not be successfully challenged or that the enforceability of the provisions of any management agreement will not be limited. NONCOMPLIANCE WITH STATE AND FEDERAL FRAUD AND ABUSE, ANTI-KICKBACK AND ANTI-REFERRAL LAWS. The applicability of federal and state laws relating to fraud and abuse, kickbacks and referrals to transactions or arrangements in the health care industry has been the subject of limited judicial interpretations. There can be no assurance that judicial or administrative authorities will not find that 10 such laws prohibit the manner in which the Company currently operates, which could have a material adverse effect on the Company's business, financial condition or results of operations. In particular, there can be no assurance that federal or state laws relating to kickbacks, referrals or fee-splitting will not be construed as prohibiting the compensation of a dental practice manager based on a percentage of a managed practice's income or revenues. Noncompliance with, or violation of, either the anti-kickback provisions or restrictions on referrals can result in exclusion from the Medicare and Medicaid programs as well as civil and criminal penalties. Similar penalties apply for violations of state law. We make every effort to comply with the anti-kickback and anti-referral laws. However, if such laws were construed in a manner that prohibits the operations of the Company or the affiliated practices, the Company's business, financial condition and results of operations could be materially adversely affected. NONCOMPLIANCE WITH STATE INSURANCE LAWS AND REGULATIONS. There are certain regulatory risks associated with negotiating and administering managed care and capitation contracts. The application of state insurance laws to reimbursement arrangements is an unsettled area of law and is subject to interpretation by regulators with broad discretion. As the Company or the affiliated dental practices contract with third-party payors for certain non-fee-for-service arrangements, we may become subject to state insurance laws. In the event that we are determined to be engaged in the business of insurance, we could be required either to seek licensure as an insurance company or to change the form of our relationships with third-party payors and may become subject to regulatory enforcement actions. In such event, the Company's business, financial condition and results of operations may be materially adversely affected. The United States Congress and state legislatures have considered various types of health care reform, including comprehensive revisions to the current health care system. It is uncertain what legislative proposals will be adopted in the future, if any, or what actions federal or state legislatures or third-party payors may take in anticipation of or in response to any health care reform proposals or legislation. Health care reform legislation adopted by Congress or the legislatures of states in which we do business, downward pressure on reimbursement amounts paid by governmental payors, dependence on the appropriations process for payment by such payors, as well as changes in federal and state regulations could have a material adverse effect on our business, financial condition and results of operations. INSURANCE The Company's business entails inherent risk of liability. The Affiliated Dentists and dental hygienists employed by the P.A.s are involved in the delivery of health care services to the public and accordingly, such individuals, the P.A.s and the Company are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in substantial damage awards to the claimants that may exceed the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. The Company is indemnified under the Management Agreements for claims against the Company arising from the performance of medical and dental services provided by the P.A.s. Successful malpractice claims, however, could have an adverse effect on the Company's profitability. The P.A.s and the Affiliated Dentists and other dental professionals they employ maintain professional liability insurance with limits 11 of not less than $300,000 per claim and with aggregate policy limits of not less than $1.0 million per dentist. The Company is a named insured in most cases. The Company does not maintain separate liability insurance. While the Company believes that the foregoing provides adequate liability insurance coverage, there can be no assurance that a future claim or claims will not be successful or, if successful, will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs and on favorable terms. COMPETITION The dental practice management segment of the dental services industry is highly competitive and is expected to become increasingly competitive. The primary bases of competition between dental practice management companies are management expertise and experience, the elements of its operating strategy, the opportunity for career enhancement of potential associated dentists and other dental professionals, the size of the dental care network, the sophistication of management information systems, liquidity, the terms of the management agreements and name recognition. The Company currently competes with other dental practice management companies in its existing markets, including Coast Dental Services, Inc., Monarch Dental, American Dental Partners, and Castle Dental Centers, Inc. There are also a number of dental practice management companies currently operating in other parts of the country which may enter the Company's existing markets in the future. Many of such competitors and potential competitors have substantially greater financial resources than the Company, have established large dental practice networks, or otherwise enjoy competitive advantages which may make it difficult for the Company to compete against them or enter into additional Management Agreements on terms acceptable to the Company. In addition, as the Company seeks to expand its operations into new markets, it is likely to face competition from dental practice management companies which already have established a strong presence in such markets. The business of providing dental services is highly competitive in each of the markets in which the Managed Dental Centers operate or in which operations are contemplated. The primary bases of such competition are quality of care and reputation, marketing exposure, convenience and traffic flow of location, relationships with managed care entities, appearance and usefulness of facilities and equipment, price of services and hours of operation. The Affiliated Dentists compete with other dentists who maintain single or satellite offices, as well as with dentists who maintain group practices, operate in multiple offices or are members of competing dental practice management networks. Many of those dentists have established practices and reputations in their markets. In addition to competing against established practices for patients, the Dental Centers compete with such practices in the retention and recruitment of general dentists, specialists and hygienists to staff the Dental Centers. If the availability of dentists begins to decline in the Company's existing or targeted markets, it may become increasingly difficult to attract and retain the dental professionals to staff the Dental Centers. There can be no assurance that the Dental Centers will be able to compete effectively with such other practices. As a result of the business combination with Gentle Dental Service Corporation, the combined companies represent one of the largest in the industry based upon practices under management. Since the new company will be in different markets, this will result in more local competition than the Company has experienced in the past. 12 SERVICE MARKS The Company has no registered services marks, trademarks, service names, tradenames, or logos. EMPLOYEES The Company has entered into an agreement with an unrelated third party co-employer pursuant to which the majority of the Company's administrative and support staff located in the Managed Dental Centers as well as the Company's corporate office management and staff are co-employed. In certain cases on a temporary basis, the Company will employ the administrative staff directly until the co-employment arrangement is established. At December 31, 1998, the Company employed or co-employed 462 persons, consisting of 228 dental assistants, 196 dental office staff, and 38 executive and administrative staff. In addition, the majority of the P.A.s have entered into an agreement with the co-employer pursuant to which such P.A. and the co-employer co-employ all professional staff (all co-employees of the Company and the P.A.s are referred to hereinafter as the "Co-Employees"). At December 31, 1998, such P.A.s, in the aggregate, employed or co-employed 229 dental professionals, consisting of 140 dentists and 89 dental hygienists. The Company or the P.A.s, as the case may be, are responsible for the hiring, retention, salary and bonus determination, job performance-related training and other similar matters affecting co-employees while the co-employer is responsible for (i) payroll administration, including recordkeeping, payroll processing, making payroll tax deposits, reporting payroll taxes and related matters, (ii) risk management, including on-site safety inspections, monitoring, training and workers' compensation claim management and administration, (iii) administering benefit plans and (iv) human resource consulting and expertise on other human resource issues. The agreements with the co-employer are terminable by either party without cause on 30 days written notice, or for cause on 24 hours written notice. See Item 1 "Business - Services and Operations - Human Resource Management." The Company is not expected to change its co-employee agreement through 1999. ITEM 2. PROPERTIES At December 31, 1998, the P.A.s, or in some cases the Company, leased between 1,200 and 17,000 square feet of office space for each of the Managed Dental Centers. Rental payments for a leased Managed Dental Center range from approximately $18,000 per annum to $169,000 per annum. The Company plans to continue to lease rather than purchase space for the Managed Dental Centers to preserve the Company's available capital. The Company intends to add Managed Dental Centers to its network, which will result in additional office space under lease. See Item 13 "Certain Relationships and Related Transactions." The Company leases approximately 7,000 square feet of office space in Sarasota, Florida for its corporate headquarters at an annual rental of approximately $86,000. This lease expires in April 2002 and the Company believes the facility is adequate for its current needs or it will be able to locate additional space, as necessary, under similar terms. 13 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings involving the Company. Affiliated Dentists and P.A.s are from time to time subject to malpractice claims. To the Company's knowledge, there are no material malpractice claims pending against any Affiliated Dentist or P.A.. Any such proceedings or claims, if successful, could result in damage awards exceedings, perhaps substantially, applicable insurance coverage. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS On March 11, 1999, the Company held a Special Meeting of Stockholders to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Reorganization and Merger, dated as of October 15, 1998, as amended as of February 3, 1999 and February 9, 1999, by and among InterDent, Inc., Wisdom Holdings Corp. I, Inc., Wisdom Holdings Corp. II, Inc., Gentle Dental Service Corporation and the Company, and the consummation of the transactions contemplated by that agreement. The proposal was approved based upon the following votes: Approve 5,812,708 Disapprove 8,850 Abstain 4,125 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED MATTERS The Common Stock of the Company was traded and quoted on the NASDAQ National Market under the symbol DENT through March 12, 1999. The following table sets forth since November 4, 1997, the date the Company's Common Stock commenced trading and until December 31, 1998, the high and low per share price of the Company's Common Stock as reported by NASDAQ. The Company issued 2.0 million shares of Common Stock at $12.00 per share pursuant to its initial public offering in November 1997. Prior to that date, there was no established trading market for the Common Stock. LOW HIGH ------ ----- Fourth Quarter (November 4, 1997 - December 31, 1997) $13.88 $9.00 First Quarter, 1998 $13.13 $8.00 Second Quarter, 1998 $15.75 $11.00 Third Quarter, 1998 $12.38 $8.50 Fourth Quarter, 1998 $12.00 $9.00 The number of stockholders of record of the Company's Common Stock on March 10, 1999 was approximately 66. The Company's authorized capital stock consists of 50,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, $0.01 per share (the "Preferred Stock"). The Company has never declared or paid any cash dividends on its Common Stock. The Company is subject to certain loan covenants containing certain provisions restricting the Company's ability to pay dividends. On March 12, 1999, based upon shareholder approval on March 11, 1999, the Company completed the previously announced merger with Gentle Dental Service Corporation ("GDSC"). In the completed combination, the Company and GDSC, each became a wholle-owned subsidiary of InterDent, Inc. ("InterDent"), a new Delaware corporation. In the merger, each share of the Company's 7,031,187 total shares of outstanding common stock automatically converted into 1.67 shares of common stock of InterDent. Also, the Company filed Report Form 15-12G on March 12, 1999, incorporated herein by reference, to terminate its registration under the Securities Exchange Act of 1934, as amended. 15 No securities that were not registered under the Securities Act have been issued or sold within the past year except as follows:
DATE OF SALE AMOUNT AND TYPE OF SECURITIES OR ENTITLEMENT PURCHASER(S) CONSIDERATION - ----------------------------- -------------- ------------ ------------- 365 Shares of Common Stock April, 1998 Dr. Michael Zerivitz (1) 47,151 Shares of Common Stock August, 1998 Michelle Lavelle (2) 5,850 Shares of Common Stock August, 1998 Thomas Dippel (2) 121 Shares of Common Stock December, 1998 Dr. Michael Zerivitz (1) Options to purchase 265,750 shares of Common Stock various Non-employee Option Plan (3)
- ----------------- (1) Such shares were issued at fair market value in conjunction with consulting services performed. (2) Such shares were issued upon exercise of warrants granted to J. Lavelle. (3) Such shares were issued pursuant to the 1997 Non-qualified Stock Option Plan. The aforementioned issuances and sales were made in reliance upon the exemption from the registration provisions of the 1933 Act afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The purchasers of the securities described above acquired them for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the securities may not be offered, sold or transferred other than pursuant to an effective registration statement under the 1933 Act, or an exemption from such registration requirements. The Company filed a Registration Statement (No. 333-34429) effective October 31, 1997 for its initial public offering. The offering closed on November 4, 1997. The managing underwriters for the offering were Raymond James & Associates, Inc. and William Blair & Company, LLC. Two million shares of the Company's Common Stock were sold by the Company at $12 per share for an aggregate price of $24 million. Underwriter discounts and commissions were $1.68 million. On December 5, 1997, 300,000 shares were sold by selling shareholders shares of the Company's Common Stock were sold by Selling Shareholders for an aggregate price of $3.6 million which was paid to the Selling Shareholders. Selling security holders received net proceeds of $3,348,000 after paying $252,000 in underwriter discounts and commissions. From November 4, 1997 through December 31, 1997 the Company expended an estimated $2,812,700 for costs incurred in connection with the offering, including Underwriter discounts and commissions of $1,680,000, legal of $395,000, accounting of $342,000, printing of $175,000 and miscellaneous expenses. None of these expenses were payable either directly or indirectly to any directors, officers or affiliates. After deducting these costs, net proceeds of the offering to the Company were $21,187,300. From November 4, 1997 through December 31, 1998, the Company expended the remaining net proceeds of the offering as follows: $12,905,000 for entering into Management Agreements with dental practices, $4,756,000 for the purchase of tangible assets and $3,526,300 for advances to P.A.s. No portion of the $21,187,300 was paid to any directors, officers or affiliates. 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The Company commenced operations in November 1993. The following selected consolidated financial data for the year ended December 31, 1994 and at December 31, 1994 are derived from the unaudited Consolidated Financial Statements of the predecessors of Dental Care Alliance, Inc. The following selected consolidated financial data for the years ended December 31, 1995, 1996, 1997 and 1998 and at December 31, 1995, 1996, 1997 and 1998 are derived from the Consolidated Financial Statements of Dental Care Alliance, Inc. and its predecessors which have been audited by PricewaterhouseCoopers LLP, independent accountants. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and other financial information included elsewhere in this Form 10-K. SUMMARY FINANCIAL AND OPERATING DATA
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 1994 1995 1996 1997 1998 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Management Fees .................................... $ 673,304 $ 513,705 $ 1,289,828 $ 7,588,193 $ 28,641,031 Consulting and licensing fees ...................... 42,763 262,769 347,600 290,885 695,361 ------------ ------------ ------------ ------------ ------------ Total revenues ........................... 716,067 776,474 1,637,428 7,879,078 29,336,392 ------------ ------------ ------------ ------------ ------------ Managed dental center expenses (1): Staff salaries and benefits ..................... -- -- 223,657 2,021,497 8,015,757 Dental supplies ................................. -- -- 79,448 650,444 2,039,687 Laboratory fees ................................. -- -- 98,222 971,024 3,101,909 Marketing ....................................... -- -- 38,128 414,519 1,127,906 Occupancy ....................................... -- -- 106,501 998,141 3,310,787 Other ........................................... -- -- 57,182 851,631 1,931,947 ------------ ------------ ------------ ------------ ------------ Total managed dental center expenses .... -- -- 603,138 5,907,256 19,527,993 ------------ ------------ ------------ ------------ ------------ 716,067 776,474 1,034,290 1,971,822 9,808,399 Salaries and benefits .............................. 408,716 400,669 521,683 786,795 1,658,628 General administrative ............................. 204,901 234,577 260,558 600,657 1,814,048 Advisory services (2) .............................. -- 127,768 -- -- -- Corporate restructure and merger costs ............. -- -- -- -- 587,950 Depreciation and amortization ...................... 15,150 22,106 27,654 163,681 1,062,646 ------------ ------------ ------------ ------------ ------------ Operating income (loss) ......................... 87,300 (8,646) 224,395 420,689 4,685,127 Interest income, net ............................... 22,584 6,494 20,781 263,568 639,981 ------------ ------------ ------------ ------------ ------------ Income before income taxes and minority interest ........................... 109,884 (2,152) 245,176 684,257 5,325,108 Provision for income taxes ......................... 19,919 -- 35,500 263,952 2,227,306 Minority interest .................................. 2,440 8,654 7,674 -- -- ------------ ------------ ------------ ------------ ------------ Net income (loss) ...................... $ 87,525 $ (10,806) $ 202,002 $ 420,305 $ 3,097,802 ============ ============ ============ ============ ============ Adjustment to redemption value of common And preferred securities ..................... 39,951 85,709 (191,237) (10,500) -- Cumulative preferred stock dividend ............. -- -- (6,485) (100,000) -- ------------ ------------ ------------ ------------ ------------ Net income applicable to common stock .............. $ 127,476 $ 74,903 $ 4,280 $ 309,805 $ 3,097,802 ============ ============ ============ ============ ============ Net income (loss) per common share: Basic ........................................... $ 0.02 -- $ 0.07 $ 0.44 Diluted ......................................... $ 0.02 -- $ 0.07 $ 0.44 Weighted average common shares outstanding: Basic ........................................... 3,791,610 3,829,029 4,640,331 6,996,842 Diluted ......................................... 3,864,291 3,873,747 4,697,800 7,080,755
17
AT DECEMBER 31, 1994 1995 1996 1997 1998 ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Working capital ............................... $ 113,385 $ 98,676 $ 965,853 $19,756,744 $10,672,085 Total assets .................................. 466,820 524,543 3,122,939 28,554,487 41,589,776 Long-term debt, including current maturities ................................. 209,437 163,745 214,002 1,012,111 8,600,318 Redeemable common and preferred securities ................................. -- -- 1,593,799 -- -- Stockholders' equity .......................... 118,400 296,837 632,385 24,553,825 27,889,842
- ----------- (1) Effective October 1996, the Company revised the terms of all of its 12 then existing Management Agreements such that the Company is responsible for the payment of all non-professional expenses of the Managed Dental Centers. Ten Management Agreements were also revised to change the base for the Company's management fee from a percentage of net profits at each P.A. to a percentage of net patient revenues from each P.A.. Accordingly, prior to these revisions to such 12 Management Agreements, all non-professional expenses of the Managed Dental Centers and related revenues were reflected in each P.A.'s financial statements. (2) Represents non-cash charges for warrants issued in consideration for certain financial advisory services. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dental Care Alliance, Inc. ("DCA") was formed on October 23, 1996 to effect a reorganization among DCA, Golden Care Holdings ("GCH"), the predecessor which was incorporated in 1993, and its majority owned subsidiaries, (collectively, the "Company"). The Company is a dental practice management company providing management and licensing services to dental practices in Florida, Michigan, Georgia, Pennsylvania and Indiana. As of December 31, 1998, the Company provided management and licensing services to 78 Managed Dental Centers, 36 of which are located in Florida, 22 in Pennsylvania, nine in Michigan, eight in Georgia, and three in Indiana. Management services include financial, accounting, billing, training, efficiency and productivity enhancement, recruiting, team building, marketing, advertising, purchasing, collection and other services, as well as the provision of management and administrative personnel. Licensing services include marketing, advertising and purchasing. With respect to management services it provides to dental practices, the Company enters into Management Agreements with P.A.s that own the practices. The Company commenced operations in November 1993 by providing management and licensing services to five dental practices located in Sarasota, Palmetto, Largo, Port Charlotte and Venice, Florida. In 1994, the Company entered into its first Management Agreement for a newly developed practice located in Englewood, Florida and entered into a Management Agreement to manage an additional existing practice in Fort Myers, Florida. In 1995, the Company entered into four new Management Agreements, two of which were with respect to newly developed practices located in Kissimmee and Bradenton, Florida and the remaining two of 18 which were with respect to existing practices located in Sarasota and Port Richey, Florida. The Company entered into four additional Management Agreements in 1996 to manage practices located in Orlando, Tampa, Ocoee and Clearwater, Florida. In addition, the Company terminated its Management Agreements with respect to the Palmetto and Venice Managed Dental Centers in 1995 and with respect to the Port Richey Managed Dental Center in 1996. In 1997, the Company entered into 17 additional Management Agreements to manage five practices in Michigan and 12 in Florida. In 1998, the Company entered into 49 additional Management Agreements to manage 12 in Florida, four in Michigan, eight in Georgia, 22 in Pennsylvania and three in Indiana. Prior to October 1996, the management fee paid to the Company pursuant to the Management Agreements had been equal to a percentage ranging from 50-90% of the net profits of the individual Managed Dental Centers, as defined in the Management Agreements, plus reimbursement to the Company of its non-professional expenses. Effective October 1996, the Company revised all of its 12 then existing Management Agreements. Ten of these agreements were revised such that the Company earns management fees based on 74% of total net patient revenues and payment is based on cash collected minus any patient refunds ("Net Collected Revenue") and the Company assumes responsibility for the payment of the non-professional expenses of the Managed Dental Centers (the "Standard Management Agreements"). Through December 31, 1998, the remaining two Management Agreements continue to have management fee structures based upon 50-55% of the net profit, as defined, of the two Managed Dental Centers. The Company will seek to cause future Management Agreements to be on terms substantially similar to those of the Standard Management Agreements. The method by which the Company manages the revenue and profitability of Managed Dental Centers is fundamentally the same, regardless of whether the Management Agreement with any particular P.A. provides for a management fee based upon net profits or net patient revenue. In the "net profits" type of Management Agreement, both the P.A. owner and the Company share proportionally in the favorable impact of any initiatives. In the "net patient revenues" type of Management Agreement, the cost management benefits resulting from such initiatives accrue to the party responsible for such costs and both parties share proportionally in revenue enhancements. Period to period comparisons of the Company's results of operations set forth below should be considered in light of the significant changes in the Company's growth and in recognition of revenues and expenses resulting from the revisions to the Management Agreements in October 1996. All patient revenues are billed to patients and providers under the authority and identification numbers of the individual P.A.s. Patient revenues and receivables are recorded on the accounts of the P.A.s. Funds are dispersed initially to pay all the professional costs of the P.A.s. Thereafter, funds are disbursed to the Company under the terms of the Management Agreements. Any remaining funds are retained by the P.A. If funds are insufficient to pay the Company under the terms of the relevant Management Agreement, a payable from the P.A. to the Company is recorded on the Company's books. The Company also enters into license agreements with each Dental Center pursuant to which the Company provides licensing and advertising services to the Dental Centers. In return for such services, the Company has collected fees generally ranging from $600 to $1,200 per month from each Managed Dental Center. 19 Historically, in connection with the execution of a Management Agreement, a P.A. has typically acquired both the dental and the non-dental assets of a Managed Dental Center. The Company has either made loans to the acquiring P.A. or has assisted the P.A. in obtaining third-party financing to purchase such assets. Since November 1997, the Company has begun acquiring certain of the non-dental assets of Managed Dental Centers while the P.A.s acquires the dental assets of such Managed Dental Centers. In addition, due to changing market conditions, the Company has begun compensating P.A.s for the execution of Management Agreements. The Company from time to time has made loans to newly formed P.A.s with which it has entered into Management Agreements to purchase the dental assets of the related dental practices. In return the P.A.s execute promissory notes to the Company in the amount of such loans. At December 31, 1998, the total outstanding balance of such loans was $733,694. The notes underlying such loans generally have terms ranging from two to ten years, bear interest at rates ranging between 8.5% and 18.5% and are secured by the assets of the related dental practice. The P.A.s to which such loans are made are newly formed and have no assets other than the assets of the dental practices being acquired and no liabilities other than the liabilities relating to the loans. The Company from time to time makes working capital advances to individual P.A.s, although it is not obligated contractually or otherwise to make such advances. The extension of loans and advances to the P.A.s by the Company is not considered upon entering into Management Agreements with the Company. Extension of any such loans or advances is entirely within the Company's discretion. These advances are due on demand, bear interest at 8 1/2 %, subject to adjustment based on changes in the rates at which the Company may borrow from its lenders. All advances made to P.A.s are guaranteed by the relevant P.A. owner or secured with the stock of the P.A., although there is no independent collateral for these working capital advances. A repayment default under such advances is also a default under the relevant Management Agreement which permits the Company, among other things, to liquidate the assets of the dental practice. At December 31, 1998, the total outstanding balance of such advances was $4.5 million. The P.A.s are current in the payment of their loans or advances and the Company believes that the financial condition of the P.A.s to which it has made loans or advances is satisfactory. Prior to making any loan or advance, the Company analyzes the collectibility of the receivables resulting from such loans or advances based on the projected cash flow of the relevant P.A. and the estimated fair market value of the assets to be owned or owned by such P.A. The Company, through its obligations under the Management Agreements, is able to assess on a periodic basis the collectibility of its receivables since it has access to the billing and collection information relating to the P.A.s' patient receivables and operational cash flow, and evaluate on a periodic basis outstanding receivables versus accounts payable and revenue trends. Accordingly, the Company is in a position to quickly assess the ability of each P.A. to meet its obligations under the notes and advances. As a result, the Company is able to react quickly in the event that there is a material change in the creditworthiness of any of the P.A.s. The Company also analyzes any historical trends of the P.A.s relating to bad debts or the inability of the P.A.s to generate collectible patient receivables. The Company assesses the guaranty of its P.A. owners for financial stability and creditworthiness through periodic reviews which include analysis of credit reports, bank references, personal and business tax returns and personal financial statements. In addition, the reputation of each P.A. owner in the business community and the length and quality of the P.A.s' relationship with the Company are examined by the Company to assess the P.A. 20 owners as guarantors of the loans and advances. The Company may modify the terms of Management Agreements prospectively if the P.A. does not perform at a level sufficient to repay the advances. None of the P.A. owners are officers, directors or employees of the Company. At December 31, 1998, there were nine different P.A. owners none of whom own 5% or more of the Company's Common Stock. The P.A.s are primarily liable for repayment of the notes and advances to the Company with the P.A. owners being secondarily liable for repayment under the notes and advances. The P.A.s and P.A. owners bear the primary risk under the notes and advances. The Company also bears the risk of non-payment to the extent that the assets of P.A.s or P.A. owners are insufficient to pay the outstanding balances under the notes or advances upon any default. The P.A.s take reserves against, and, when appropriate, write-off bad debts on, patient receivables. As of December 31, 1998, reserves for bad debts on patient receivables aggregated to approximately $1.2 million. To date, there have been no defaults under, or write-offs in connection with, notes receivable from or advances to P.A.s, although there can be no assurance that there will be no such defaults or write-offs in the future. Although there has to date been no default or material delinquency under the notes or advances, the Company has established a reserve for such defaults in the amount of $149,000 as of December 31, 1998. The Company will consider establishing reserves against such defaults should future circumstances demonstrate the need for such reserves. The Management Agreements for P.A.s that have acquisition loans from the Company and for most P.A.s with working capital advances provide that the P.A.s must meet their repayment obligations under any outstanding indebtedness, whether owed to the Company or any third party, prior to paying any management fees. A default under any such obligation is by its terms a default under the Management Agreement. In the event of such a default, the Company or its designee is entitled to purchase the assets and liabilities or the capital stock of the relevant P.A. In such event, the Company would evaluate whether, at its option, to have another P.A. owner or other licensed dentist assume control of the practice and continue to generate management fees or to liquidate the assets of such P.A. The Company does not consolidate the balance sheets or the operating results (including revenue and expenses) of the dental practices under the Management Agreements since these revenues and expenses are earned and incurred by the P.A.s, not the Company. The Company has recorded goodwill and other intangible assets in cases where the Company has paid a P.A. in consideration for a modification to an existing Management Agreement or entering into new Management Agreements. Where the Company acquires the assets of another management company, such a transaction constitutes a business combination and the Company recognizes the related goodwill, if any, in accordance with the purchase method of accounting. Prior to October 1996, the majority of the Company's operations were performed through limited liability companies. Except for the period from January through September 1994 with respect to one of the Company's predecessors in interest, the Company's statements of operations prior to October 1996 do not include a provision for income taxes. Included in the Company's tax accruals are amounts related to establishing a deferred tax liability for book/tax differences arising from its reorganization from limited liability corporation to C corporation status. 21 As part of its business combination with Gentle Dental Service Corporation ("GDSC"), the Company has taken certain measures intended to avoid Year 2000 problems. In evaluating the Year 2000 readiness of its information technology systems, the Company has taken certain preventive measures. In November 1997, the Company installed a new back-end (corporate office) information technology system specifically designed to avoid Year 2000 concerns. The Company continues to update and enhance this system with Year 2000 - compliant software. The front-end (dental office) information technology systems vary from office to office, and many of such systems are not Year 2000 compliant. The Company intends to take advantage of GDSC's in-house management information systems staff to resolve these front-end deficiencies. In addition, it is expected that the new company will integrate an entirely new front-end package to deal with these deficiencies. There are also potential Year 2000 problems associated with non-information technology systems of certain entities with whom the Company conducts business-related activities: its banks, a co-employer and entities from whom the Company receives reimbursements, such as insurance companies and state agencies. The banks and the co-employer have indicated that they have taken or will take steps to ensure that their systems are Year 2000 compliant. The Company does not believe that failure of these parties successfully to rectify Year 2000 problems will materially adversely affect its business, except to the extent that third party reimbursements are delayed as a result of the Year 2000 problems. The Company estimates its cost of Year 2000 compliance will aggregate approximately $500,000. The most reasonably likely worst case scenario for the Company resulting from Year 2000 issues are as follows: billing and cash collection will be delayed if the Company is unable to deliver information technology-based billings to patients and receive information technology-based reimbursements from third parties. If Year 2000 problems were to effect the Company's front-end systems, it would be necessary to bill patients based upon manual calculation, which could delay cash flows for up to several months. If this problem were to occur, the Company would attempt to collect payments from patients at the time of service. The Company has outlined a contingency plan to deal with potential Year 2000 problems. First, it has obtained an alternative Year 2000 compliant front-end system, which is now being tested, in the event there are unforeseen problems with installing the front-end system currently utilized by GDSC. In addition, the Company is maintaining some availability under its loan agreement in anticipation of any cash flow shortages resulting from Year 2000 problems. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 MANAGEMENT FEES. Management fees consist of a percentage of the net patient revenue at the majority of the P.A.s and a percentage of the net realizable profits earned by the remaining P.A.s. Management fees increased 277% from $7.6 million for the year ended December 31, 1997, to $28.6 million for the year ended December 31, 1998. Of this increase, $7.8 million is derived from practices 22 managed prior to 1998 and the balance is derived from the addition of 49 Managed Dental Centers during 1998. For the year, same store revenue growth for Managed Dental Centers operational for comparable 1998 and 1997 periods was 14%. CONSULTING AND LICENSING FEES. Consulting and licensing fees consist of fees earned by the Company for licensing and other services to all of the Dental Centers and consulting services to four Managed Dental Centers in Michigan during 1997. Consulting and licensing fees increased 139% from $290,895 for the year ended December 31, 1997, to $695,361 for the year ended December 31, 1998. This increase is primarily attributable to the addition of 49 Managed Dental Centers in 1998. MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses consist of non-professional expenses at the Managed Dental Centers. Managed dental center expenses increased 231% from $5.9 million for the year ended December 31, 1997, to $19.5 million for the year ended December 31, 1998. As a percentage of net patient revenue, managed dental center expenses decreased from 56% to 48%. The decrease is attributable to reduced expenditures in dental supplies (1%), lab (1%), marketing (1%), occupancy (1%) and other (4%). SALARIES AND BENEFITS. Salaries and benefits consist of costs for salaries and benefits for employees at the Company's corporate and regional offices. Salaries and benefits increased 111% from $786,795 for the year ended December 31, 1997, to $1.7 million for the year ended December 31, 1998. As a percentage of net patient revenue, salaries and benefits decreased from 7% to 4%. The increased cost was attributable primarily to the hiring of additional corporate and regional personnel to administer the additional 49 Managed Dental Centers. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses consists of expenses related to the operation of the Company's corporate and regional offices, such as rent, legal, accounting and travel expenses. General and administrative expense increased 202% from $600,657 for the year ended December 31, 1997, to $1.8 million for the year ended December 31, 1998. As a percentage of net patient revenue, general and administrative expense decreased from 6% to 4%. The increased cost was attributable primarily to the establishment of regional offices in Michigan, Georgia and East Florida, increased legal, insurance and other costs required of a public company, and increased costs associated with expanding the Company's corporate office to administer the additional 49 Managed Dental Centers. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense consists of the depreciation expense on capital assets owned by the Company and located at either the corporate offices or at Managed Dental Centers and amortization expense on Management Agreements or other intangible assets. Depreciation and amortization expense increased 549% from $163,681 for the year ended December 31, 1997, to $1.1 million for the year ended December 31, 1998. As a percentage of net patient revenue, depreciation and amortization increased from 2% to 3%. This increase was attributable to the depreciation on the acquired non-dental assets and amortization on the acquired Management CORPORATE RESTRUCTURE AND MERGER COSTS. Corporate restructure and merger costs consists of expenses incurred related to the business combination between the Company and Gentle Dental Service Corporation. These costs, which totaled $587,950, were incurred in 1998. 23 Agreements related to the 49 additional Managed Dental Centers, as well as a full year's depreciation and amortization on assets capitalized in 1997. INTEREST INCOME, NET. Interest income, net increased 143% from $263,568 income for the year ended December 31, 1997, to $639,981 income for the year ended December 31, 1998. This increase was attributable primarily to earnings on cash balances associated with the Company's public offering in November 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 MANAGEMENT FEES. Management fees consist of a percentage of the net realizable patient-related revenue at the majority of the PAs and a percentage of the net realizable profits earned by the remaining PAs. Management fees increased 488% from $1.3 million for the year ended December 31, 1996, to $7.6 million for the year ended December 31, 1997. Of this increase, $3.1 million is derived from the addition of seventeen Managed Dental Centers during the year, while the balance primarily relates to the October 1996 revision to the Management Agreements. Prior to October 1996 the Company was not responsible for any managed dental center expenses. See Note 1 to the Consolidated Financial Statements. CONSULTING AND LICENSING FEES. Consulting and licensing fees consist of fees earned by the Company for licensing services to all of the Dental Centers and consulting services to four Managed Dental Centers in Michigan. Consulting and licensing fees decreased 16.3% from $347,600 for the year ended December 31, 1996, to $290,885 for the year ended December 31, 1997. The decrease is attributable to the cessation of consulting fees on four Michigan practices which were converted effective July 1, 1997 into Managed Dental Centers, as income formerly attributable to these consulting fees are now included in the management fees, offset by the addition of seventeen Managed Dental Centers in 1997. MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses consist of non-professional expenses at the Managed Dental Centers. Managed dental center expenses increased 879% from $603,138 for the year ended December 31, 1996, to $5.9 million for the year ended December 31, 1997. Of this increase, $2.3 million is derived from the addition of seventeen Managed Dental Centers, while the balance relates to the October 1996 revision to the Management Agreements. Prior to October 1996, the Company was not responsible for any managed dental center expenses. SALARIES AND BENEFITS. Salaries and benefits consist of costs for salaries and benefits for employees at the Company's corporate and regional offices. Salaries and benefits increased 50.8% from $521,683 for the year ended December 31, 1996, to $786,795 for the year ended December 31, 1997. This increase was attributable primarily to the hiring of additional personnel in the Company's accounting and business development departments to administer the additional seventeen Managed Dental Centers. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses consists of expenses related to the operation of the Company's corporate and regional offices, such as rent, legal, accounting and travel expenses. General and administrative expense increased 130.5% from $260,558 for the year ended December 31, 1996, to $600,657 for the year ended December 31, 1997. This increase was 24 primarily attributable to the establishment of a regional office in Michigan, increased legal, insurance and other costs required of a public company, and increased costs associated with expanding the Company's corporate office to administer the additional seventeen Managed Dental Centers. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense consists of the depreciation expense on capital assets owned by the Company and located at either the corporate offices or at Managed Dental Centers and amortization expense on Management Agreements or other intangible assets. Depreciation and amortization expense increased 491.9% from $27,654 for the year ended December 31, 1996, to $163,681 for the year ended December 31, 1997. This increase was attributable to the depreciation on the acquired non-dental assets and amortization on the acquired Management Agreements related to the seventeen additional Managed Dental Centers, as well as a full year's amortization on the Management Agreements capitalized in October 1996. INTEREST INCOME, NET. Interest income, net increased 1168.3% from $20,781 income for the year ended December 31, 1996, to $263,568 income for the year ended December 31, 1997. This increase was attributable primarily to earnings on cash balances associated with the Company's public offering in November 1997. SEASONALITY The Company historically has experienced seasonal fluctuations in its quarterly revenue. Specifically, the first and fourth quarters reflect the highest patient volume, while the third quarter has traditionally had the lowest patient volume. The Managed Dental Centers in Florida have traditionally experienced increased patient visits in November through March due to an increase in the population base during these months, while patient visits decrease during the summer. Since July 1997, the Company executed Management Agreements with Managed Dental Centers in Michigan, Georgia, Indiana and Pennsylvania. The Company expects that the seasonality in Florida and Georgia will be offset to some extent by fewer seasonal fluctuations in Michigan, Indiana and Pennsylvania. QUARTERLY FINANCIAL INFORMATION The following table sets forth unaudited quarterly operating results for each of the Company's last four quarters. This information has been prepared on a basis consistent with the Company's audited financial statements and includes all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of the data. These quarterly results are not necessarily indicative of future results of operations. 25
QUARTER ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 --------------------------------------------------------------------------------- Number of managed dental centers at period end ................. 44 49 55 78 Net patient revenue at managed dental centers (1) .................... $ 6,799,853 $ 9,942,993 $11,185,900 $12,919,086 Total revenues ........................... 4,932,971 7,163,745 8,030,406 9,209,270 Managed dental center expenses ........... 3,266,511 4,728,111 5,341,355 6,192,016 Operating income ......................... 909,787 1,195,915 1,446,727 1,132,698 Net income ............................... 700,860 833,815 964,137 598,990 Basic net income per share ............... $ .10 $ .12 $ .14 $ .09 Diluted net income per share ............. $ .10 $ .12 $ .14 $ .08
- ------------------------ (1) Net patient revenue is the total amount of revenue recorded by the P.A. during the period. Revenue is included from and after the date on which the relevant P.A. executed a Management Agreement with the Company. LIQUIDITY AND CAPITAL RESOURCES Since its inception and until the Company's public offering on November 4, 1997, the Company financed its operations primarily through internal cash flow, the sale of equity securities and commercial bank borrowings. Net cash provided by operations for the years ended December 31, 1996, 1997 and 1998 was $270,121, $557,767 and $1.3 million, respectively. Net cash provided by operating activities for the years ended December 31, 1996, 1997 and 1998 consisted primarily of net income, adjusted for non-cash expenses, and increases in accounts payable and accrued liabilities, offset by increases in consulting and license fee receivables and management fees receivable. Cash used in investing activities for the years ended December 31, 1996, 1997 and 1998 was $504,312, $2.5 million and $22.3 million, respectively. For the year ended December 31, 1996, the investing activities were primarily related to organizational costs associated with the formation of the Company in October 1996 through a reorganization of its predecessor entities. For the year ended December 31, 1997, the investing activities included $1.2 million related primarily to the purchase of Management Agreements for the four Michigan Managed Dental Centers and $613,006 related primarily to the purchase of non-dental assets for three additional Managed Dental Centers and certain equipment purchases for the corporate office expansion. For the year ended December 31, 1998, the investing activities include a $3.9 million increase in advances to P.A.s and $18.4 million related to the purchase of Management Agreements and property and equipment for the addition of 49 Managed Dental Centers. Cash provided by financing activities for the years ended December 31, 1996, 1997 and 1998 was $1.4 million, $21.0 million, and $7.7 million, respectively. For the year ended December 31, 1996, the financing activities were primarily related to net proceeds on the Company's issuance of preferred stock. For the year ended December 31, 1997, the Company had $21.2 million in net proceeds on common stock issuances offset by $167,945 in net repayment of debt. For the year ended December 31, 1998, the Company increased its long term debt, net of repayments, by $7.6 million. 26 In August 1997, the Company entered into a revolving line of credit (the "Credit Agreement") which provides for an aggregate of $1.2 million. Under the terms of the Credit Agreement, the Company may use up to $600,000 of the credit line for the purchase of non-dental assets of dental centers provided that each borrowing is repaid within 45 days of its drawdown. The remaining $600,000 may be used for general working capital needs. The revolving line of credit bears interest at 0.75% per annum above the lender's prime rate and is payable on demand. Interest only is payable monthly. Amounts borrowed pursuant to the Credit Agreement are secured by a first security interest in most of the Company's assets, including receivables and equipment. Additionally, any outstanding balances under the working capital line are guaranteed by the Company's Chairman of the Board, President and Chief Executive Officer. On May 14, 1998, the Company executed a $15 million Revolving Note with Nationsbank, N.A. which replaced the Credit Agreement. The Revolving Note is intended to provide funds for the acquisition and affiliation with dental practices and working capital uses in a revolving line of credit facility. The note matures in one year, with annual renewals thereafter. In March 1999, the bank gave written notice of their intention to renew the Revolving Note for one additional year under similar terms. The Company and its subsidiaries have pledged substantially all of their assets as collateral. The note bears interest at 1.75% over the Eurodollar rate, payable monthly. As of December 31, 1998, the Company had $6.3 million outstanding under the note. The Company is required to maintain certain financial covenants during the term of the note and as of December 31, 1998, the Company is in compliance with such covenants. The Company has made loans to various P.A.s in connection with the P.A.s' acquisition of assets of dental practices and has made working capital advances to various P.A.s for their operations. The loans, which are evidenced by interest-bearing notes that are payable upon demand and are personally guaranteed by the P.A. owners. The Company intends to enter into additional Management Agreements with respect to, as well as purchase the non-dental assets of, additional practices. In addition, the Company may acquire other dental practice management companies, expend funds to execute new Management Agreements or lend funds to P.A.s to purchase certain assets. The Company plans to finance these activities through a combination of the net proceeds of its public offering, cash flow from operations, bank financing and issuances of Common Stock. On November 4, 1997, the Company completed the public offering of 2,000,000 shares of Common Stock at $12 per share resulting in proceeds, net of underwriter commissions and offering costs, of approximately $21.2 million. Based upon the Company's anticipated needs for acquisition of non-dental assets of dental practices, working capital and general corporate purposes, management believes that the combination of existing cash, cash flow from operations and available credit lines will be sufficient to meet its capital requirements through 1999. The Company incurred costs of $587,950 in the fourth quarter associated with the business combination with Gentle Dental Service Corporation. Such costs relate primarily to professional costs associated with consummating the transaction. The Company estimates that an additional $1.4 million in expenses will be incurred and paid in the first quarter of 1999. Such expenditures will be funded from operational cashflow and draws against the line of credit. 27 INFLATION Inflation has not had a significant impact on the Company in the past nor is it expected to have a significant impact in the foreseeable future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company is exposed to market risk from changes in interest rates on borrowed funds, which could affect its results of operations and financial condition. At December 31, 1998, the Company has approximately $6.4 million in variable-rate debt outstanding and, as such, the risk is immaterial based upon a 10% increase or decrease in interest rates from their December 31, 1998 levels. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company for each of the fiscal years in the three-year period ended December 31, 1998, together with the report thereon of PricewaterhouseCoopers LLP dated March 25, 1999, are included in this report commencing on page F-1 and are listed under Part IV, Item 14 in this Report. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's directors and executive officers, their ages and positions with the Company are as follows: NAME AGE POSITION - ---- --- -------- Dr. Steven R. Matzkin, DDS 40 Chairman of the Board, Chief Executive Officer, President and Director Mr. Mitchell B. Olan 40 Vice President, Chief Operating Officer and Director Mr. David P. Nichols 41 Chief Financial Officer Dr. Oscar L. Hausdorff, DDS 63 Director of Development Mr. Curtis Lee Smith, Jr. 71 Director Mr. Robert F. Raucci 43 Director DR. STEVEN R. MATZKIN founded the Company's predecessors in 1992 and 1993 and serves full-time as the Company's Chairman of the Board, Chief Executive Officer and President. Dr. Matzkin has over 14 years of experience in the administration and management of dental practices. He practiced dentistry in Michigan for six years, during which time he owned five dental practices and managed over 25 dental practices through an affiliate management company. Dr. Matzkin has also been featured as a guest speaker at regional Practice Management conferences, including the national meeting for the National Association of Dental Plans. Dr. Matzkin earned his BA degree in 1980 from the Indiana School of Biology and his DDS degree in 1984 from Northwestern University. MITCHELL B. OLAN has served as the Company's Vice President, Chief Operating Officer, and as a director since 1994. From 1991 to 1994, Mr. Olan served in various capacities, including area Vice President and Regional Vice President at Optioncare Incorporated, a publicly traded national franchiser of home infusion therapy businesses. From 1980 to 1990, Mr. Olan served in various capacities including sales, sales management, general management and administration with the ORMCO Division of Sybron Corporation. ORMCO is the leading manufacturer and marketer of dental orthodontic appliances, equipment and supplies. Mr. Olan earned a BS degree in Business Administration in 1980 from Indiana University School of Business. DAVID P. NICHOLS has served as the Company's Chief Financial Officer since February 1997. From October 1994 until February 1997, Mr. Nichols served as Chief Financial Officer at Biodynamics International, a publicly traded company in the biotechnology business. From May 1993 until October 1994, Mr. Nichols served as Vice President - Finance of Biodynamics. He was also Managing Director, United States Operations, of Biodynamics from March 1996 until February 1997. From June 1992 until May 1993, Mr. Nichols served as Chief Financial Officer of KiMed Corporation, a medical device company. Prior to joining the Company, Mr. Nichols had over sixteen years experience in the health care field. He served as Chief Financial Officer of the long term care division of Trizec Corporation, 29 Ltd., and was in public accounting with the audit divisions of Price Waterhouse LLP and Deloitte & Touche LLP. Mr. Nichols earned his BS Degree from the University of Florida in 1979 and a masters degree in Accounting from the University of Florida in 1980. He is a Certified Public Accountant and a Certified Management Accountant. DR. OSCAR L. HAUSDORFF an independent contractor, has served as the Company's Director of Development since 1996. From 1988 to 1995, he served as President, Chief Operating Officer and as a director of Princeton Dental Management Corporation, a publicly traded dental practice management company. From 1977 to 1988, Dr. Hausdorff held positions in sales, sales management, training, development and recruiting for various firms in the stock brokerage business. From 1960 to 1977, Dr. Hausdorff practiced General Dentistry and Orthodontics in New York. In addition, he was an instructor in Post-Graduate orthodontics at New York University from 1960 to 1965. Dr. Hausdorff earned a DDS degree from New York University in 1958, and a post graduate degree in Orthodontics from New York University in 1964. CURTIS LEE SMITH, JR. has been a director of the Company since 1996. Beginning in 1986, Mr. Smith served as Chairman of the Board and Chief Executive Officer of Handex Corporation ("Handex"), an environmental consulting and remediation company which became a public company in 1989. Handex acquired New Horizons Computer Learning Centers, a software training company, in 1994. Handex sold its environmental division in 1996 and now operated as New Horizons Worldwide, of which Mr. Smith serves as Chairman of the Board and Chief Executive Officer. ROBERT F. RAUCCI has been a director of the Company since 1996. Mr. Raucci has been a managing member of Newlight Management, LLC, a technology oriented venture capital fund, since July 1997. Mr. Raucci also has served as president of RAM Investment Corporation, a venture capital investment and advisory company, since 1994. Between 1985 and 1994 Mr. Raucci served as a private equity investment manager for Alliance Capital Management Corporation, a global investment management company. 30 The following items of the Company's Form 10-K for the fiscal year ended December 31, 1998 and hereby amended to read in their entirety as follows: ITEM 11. EXECUTIVE COMPENSATION The following table set forth certain information for each person who served as executive officers of the Company in 1998 whose annual income in 1998 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------------ -------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1)($) OPTIONS(#)(2) COMPENSATION($) --------------------------- ---- --------- -------- ------------------ ------------- --------------- Dr. Steven R. Matzkin 1998 200,000 -- -- -- -- Chairman of the Board, 1997 200,000 -- -- 8,000 -- Chief Executive Officer and President (3) Mitchell B. Olan 1998 140,000 -- -- -- -- Vice President, Chief 1997 135,000 -- -- 8,000 -- Operating Officer and Director (3) David P. Nichols 1998 133,000 -- -- -- -- Chief Financial Officer (3) ------------------------ (1) The aggregate amount of perquisites and other personal benefits provided to such Named Executive Officer is less than 10% of the total annual salary and bonus of such officer. (2) All options are exercisable at $12.00 per share. (3) See "Employment Agreements" for information regarding current and future compensation arrangements.
OPTION GRANTS OR EXERCISES There were no options granted to the Named Executive Officers in 1998. EMPLOYMENT AGREEMENTS The Company has entered into Employment Agreements with Dr. Steven R. Matzkin, Chairman of the Board, Chief Executive Officer and President of the Company, Mitchell B. Olan, Vice President and Chief Operating Officer of the Company, and David P. Nichols, Chief Financial Officer of the Company. The Employment Agreements of Messrs. Matzkin and Olan were entered into as of October 25, 1996, and are for terms of five years and four years, respectively. The Employment Agreement of Mr. Nichols was entered into as of January 1997 and is for a term of four years. These agreements provide for annual base salaries to Messrs. Matzkin, Olan and Nichols of $200,000, $120,000 and $120,000, respectively, subject to increase at the Company's discretion. Pursuant to the agreements, Dr. Matzkin and Messrs. Olan and Nichols are entitled to receive 60%, 25% and 15%, respectively, of an 31 annual bonus pool which is equal to 50% of the Company's net income in excess of the Company's budgeted net income for each year. Bonuses paid to Dr. Matzkin, Mr. Olan and Mr. Nichols in any year may not exceed $200,000, $100,000, and $50,000, respectively. Dr. Matzkin's, Mr. Olan's and Mr. Nichols' employment agreements entitle them to participate in any Company stock option plan at a level commensurate with their positions. Mr. Olan's employment agreement entitled him to warrants to purchase 163,080 shares of common stock for an aggregate exercise price of $272,768. These warrants were exercised in February 1997. Upon the Company's constructive discharge of Dr. Matzkin or termination of the employment of Dr. Matzkin without cause, as specified in his employment agreement, Dr. Matzkin shall be entitled to receive his base salary for the period commencing on the effective date of the termination and ending on the later to occur of (x) the second anniversary of the date of termination or (y) the end of the five-year term of the employment agreement. Upon the Company's termination of Mr. Olan without cause, as specified in his employment agreement, Mr. Olan shall be entitled to receive his base salary for the period commencing on the date of termination and ending on the date nine months thereafter. Upon the Company's termination of Mr. Nichols without cause as specified in his employment agreement, Mr. Nichols shall be entitled to receive his base salary for the period commencing on the date of termination and ending on the date six months thereafter. Upon termination with cause or voluntary termination of either Dr. Matzkin, Mr. Olan or Mr. Nichols, such executive shall be entitled to receive his base salary through the effective date of such termination. Dr. Matzkin's employment agreement also provided that upon termination of his employment for any reason, if the Company's securities are then publicly traded, Dr. Matzkin has the right to request that the Company register, as expeditiously as possible, any or all of the Common Stock then owned by Dr. Matzkin, including all shares of Common Stock issuable pursuant to any derivative securities of the Company then held by Dr. Matzkin. In March 1999, in conjunction with its business combination with Gentle Dental Service Corporation and the formation of InterDent, Inc., the Named Executive Officers entered into new employment agreements. Dr. Matzkin will serve as the Co-Chairman, President and Chief Dental Officer of InterDent. Mr. Olan will serve as Senior Vice President - Operations and Mr. Nichols as Senior Vice President - Finance for the Company's East Region. Dr. Matzkin's employment agreement is for three years while Messrs. Olan and Nichols have "at will" agreements. The base salaries for Matzkin, Olan and Nichols are $280,000, $157,000 and $135,000, respectively. Upon the Company's constructive discharge of Dr. Matzkin or termination of the employment of Dr. Matzkin without cause, as specified in his employment agreement, Dr. Matzkin shall be entitled to receive his base salary for a period of thirty-six months following the date of termination. For Messrs. Olan and Nichols, a termination of their respective employment agreements without cause, shall entitle them to receive their base salary for nine months and six months, respectively. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of December 31, 1998 by (i) each person known by the Company to own beneficially more than 5% of its Common Stock, (ii) the Chief Executive Officer and each other Named 32 Executive Officer (as such term is defined under the caption "Executive Compensation," (iii) each director, and (iv) all directors and executive officers of the Company as a group:
PERCENTAGE OF AMOUNT AND NATURE OF OUTSTANDING NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP(2) SHARES OWNED - ---------------------------------------- ----------------------- ------------ Dr. Steven R. Matzkin (3)............................. 1,505,148 21.7% SRM '93 Children's Trus (4)........................... 1,529,148 21.9 Curtis Lee Smith, Jr. (5.............................. 456,973 6.5 Robert F. Raucci (5).................................. 25,452 * Mitchell B. Olan (3).................................. 160,915 2.2 David P. Nichols (6).................................. 57,576 * Crescent International Holding Limited (7)............ 593,119 8.5 All directors and executive officers as a group (6 persons) (8)............................. 2,206,064 31.3 - ---------------------------- * Less than one percent (1) Unless otherwise indicated, the address of each of the beneficial owners identified above is c/o Dental Care Alliance, Inc., 1343 Main Street, 7th Floor, Sarasota, Florida 34236. (2) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of options or warrants. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and that are exercisable within 60 days have been exercised. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. (3) Includes 8,000 shares of Common Stock issuable upon exercise of options to purchase shares of Common Stock, which options became exercisable on March 12, 1999. (4) Theodore L. Koenig is the sole trustee of SRM '93 Children's Trust and has sole voting and investment control with respect to such shares. (5) Includes shares of Common Stock issuable upon exercise of options to purchase Common Stock Plan, which options became exercisable on March 12, 1999. (6) Includes 57,576 shares of Common Stock issuable upon exercise of options to purchase shares of Common Stock, which options became exercisable on March 12, 1999. (7) Camile Saba and John Wolcott are attorneys-in-fact for Crescent International Holdings Limited, a Greek corporation, and have joint voting and investment control with respect to such shares. (8) Includes 83,576 shares of Common Stock issuable upon exercise of options to purchase shares of Common Stock, which options became exercisable on March 12, 1999.
In conjunction with its business combination with Gentle Dental Service Corporation and the formation of InterDent, Inc. on March 12, 1999, all options became fully vested and all options and shares of Dental Care Alliance, Inc. were converted into 1.67 shares of InterDent, Inc. ITEM 13. CERTAIN TRANSACTIONS In 1993, Dr. Matzkin sold four dental practices in Michigan to Dr. David Ross Johnson, a dental director, for a $237,000 note under which payments commenced in May 1997. In connection with that sale Profit Dental Management, Inc., a corporation controlled by Dr. Matzkin, agreed to provide consulting services to these practices for $18,000 per month until May 1997 and $15,000 per month thereafter through May 2005. In July 1997, Dental Care Alliance purchased the right to manage these practices for $846,000 and entered into a global management agreement pursuant to which it will provide management services to these practices until 2005. Dental Care Alliance subcontracted the day-to-day management services to an affiliate of Dr. Johnson, but retains most other management functions 33 for which it retains 20% of net profits of these practices, after certain adjustments, and Dr. Johnson's affiliate is paid 80% of such net profits. Dental Care Alliance also receives $800 per month from each practice as a licensing fee. In July 1997, Dental Care Alliance entered into a management agreement with a professional association in Michigan which was controlled by Dr. Matzkin. As of September 30, 1997, Dr. Matzkin assigned the ownership of the capital stock and all rights relating thereto to Dr. David Ross Johnson in consideration for Dr. Johnson's assumption of all obligations to pay for such capital stock and all obligations relating to such capital stock. Certain of the managed dental centers lease their office facilities from entities controlled by Dr. Matzkin. Such leases terminate at various times between 2000 and 2004. Managed dental centers and Dental Care Alliance paid rent pursuant to the leases in the aggregate amount of $193,900 in 1997 and have paid $144,700 in 1998. Dr. Matzkin also owns certain dental laboratories that perfom laboratory services for the managed dental centers, primarily relating to the making of prostheses. In 1997 the amount paid by the managed dental centers to such laboratories was $133,448 of which $60,000 was advanced by Dental Care Alliance in 1996 and remains outstanding at December 31, 1998, while the amount paid for 1998 was $159,551. Dr. Matzkin owns 33.3% of the capital stock of Equipment Management Services, an equipment leasing company. Certain managed dental centers have entered into capitalized equipment leases with Equipment Management Services. Amounts paid by such managed dental centers to Equipment Management Services pursuant to such leases aggregated approximately $123,000 in 1997 and $94,230 in 1998. Dental Care Alliance believes that such arrangements are no less favorable to such managed dental centers than could have been obtained in arms-length transactions with unrelated third parties. In addition, Dr. Matzkin has personally guaranteed an aggregate of approximately $1.6 million of indebtedness of certain of the managed dental centers. Dental Care Alliance is currently negotiating with the lenders to whom Dr. Matzkin has given such guarantees to release Dr. Matzkin from his obligations thereunder and to cause Dental Care Alliance to guaranty such obligations. Pursuant to a Stockholder's Agreement among Dental Care Alliance and Dr. Matzkin, Mr. Smith, Mr. Raucci, the SRM 1993 Children's Trust and Crescent International Holdings, Inc. initially entered into in connection with the sale of Dental Care Alliance's Series A preferred stock in October 1996, each stockholder a party thereto received each of the following: o "piggyback" registration rights; o a right of first refusal with respect to a greater than 50% share transfer by a stockholder prior to an initial public offering meeting certain conditions; o co-sale rights to participate on a pro rata basis in certain resales of Dental Care Alliance common stock by other stockholders party to the agreement (other than in connection with an initial public offering meeting certain conditions; o participation rights with respect to certain issuances of securities by Dental Care Alliance made prior to an initial public offering meeting certain conditions. 34 In addition, stockholders party to the agreement who are also directors of Dental Care Alliance, other than Dr. Matzkin, also were granted demand registration rights under the Stockholders' Agreement. Mitchell B. Olan has been granted certain "piggyback" registration rights with respect to an aggregate of 163,080 shares of Dental Care Alliance common stock pursuant to an agreement with Dental Care Alliance. Pursuant to Dr. Matzkin's employment agreement, upon termination of his employment for any reason, if Dental Care Alliance's securities are then publicly traded, Dr. Matzkin has the right to request that Dental Care Alliance register any or all of Dental Care Alliance common stock then owned by Dr. Matzkin. Upon consummation of the mergers, each affiliate of InterDent, including the above-mentioned stockholders, will receive, with respect to the shares issued to such affiliates pursuant to the mergers and the shares issuable upon exercise of options and warrants held by such affiliates, (a) "piggyback" registration rights, and (b) one demand registration right per calendar year. InterDent will, however, be obligated to effect no more than one demand registration during any calendar year. Upon a request for a demand registration by any affiliate, all other affiliates will be entitled to participate in such registration with all other affiliates electing to participate pro rata on the basis of the number of registrable shares held by each participating affiliate. Further, the combined company will not be required to cause a registration under the above-described demand registration rights unless the aggregate offering price of all registrable shares to be registered pursuant to such demand registration rights, before deduction of underwriting discounts and commissions exceeds $5,000,000. For information regarding employment agreements with certain executive officers and directors, see "--Employment Agreements." Dental Care Alliance has adopted a policy whereby all transactions between Dental Care Alliance and one or more of its affiliates must be approved in advance by a majority of Dental Care Alliance's disinterested directors. The Company has adopted a policy whereby all transactions between the Company and one or more of its affiliates must be approved in advance by a majority of the Company disinterested directors. 35 PART IV ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) DOCUMENTS FILED AS PART OF THIS REPORT: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENTS PAGE NUMBER(S) --------- Report of Independent Accountants F-1 Consolidated Balance Sheets at December 31, 1998 and 1997 F-2 Consolidated Statements of Operations for the three years ended December 31, 1998 F-3 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1998 F-4 Consolidated Statements of Cash Flows for the three years ended December 31, 1998 F-5 Notes to Consolidated Financial Statements F-6 to F-26 2. FINANCIAL STATEMENT SCHEDULES SCHEDULE NUMBER DESCRIPTION PAGE II Valuation and Qualifying Accounts and Reserves S-1 All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. 3. EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- 3.1 Form of Amended and Restated Articles of Incorporation of the Company. * 3.2 Form of Amended and Restated Bylaws of the Company. * 4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of the Company's Common Stock. * 10.1 Form of Indemnification Agreement between the Company and each of its directors and executive officers. * 10.2 Form of Standard Management Agreement. * 36 10.3 Contribution Agreement among the Company, Dental Care Alliance of Michigan, Inc. and Dental Care Alliance of Florida, Inc. * 10.4 Management Agreement between Dr. Joseph Gaeta and the Company. * 10.5 Administrative Service Subcontract Agreement between the Company and Johnson Dental Development Corporation. * 10.6 Administrative Services Agreement between the Company and Eight Mile Dental, P.C.; Gratiot Avenue Dental, P.C.; Wayne Road Dental, P.C. and Washington Boulevard Dental, P.C. * 10.7 Form of License Agreement. * 10.8 Employment Agreement dated as of October 25, 1996 between the Company and Dr. Steven R. Matzkin, as amended. * 10.9 Employment Agreement dated as of October 25, 1996 between the Company and Mitchell B. Olan. * 10.10 Employment Agreement dated as of January 21, 1997 between the Company and David P. Nichols. * 10.11 Equity Holders Agreement dated as of October 25, 1996 between the Company and Mitchell B. Olan. * 10.12 Equity Holders Agreement dated as of April 30, 1997 between the Company and J. Francis Lavelle. * 10.13 Equity Holders Agreement dated as of April 30, 1997 between the Company and The Nassau Group, Inc. * 10.14 Option Agreement dates as of January 21, 1997 between the Company and David P. Nichols. * 10.15 Form of Warrant between the Company and The Nassau Group, Inc. * 10.16 Form of IPO Warrant between the Company and The Nassau Group, Inc. * 10.17 Lease Agreement dated as of April 9, 1994 between the Company and Charles E. Githler, III, as Managing Agent for Owner, J. Kevin Drake, as Trustee Under Trust Agreement dated April 15, 1991. * 10.18 Stockholders' Agreement dated as of October 25, 1996 among the Company, Steven R. Matzkin, Curtis Lee Smith, Jr., Robert F. Raucci and Crescent International Holdings, Limited, as amended. * 10.19 Omnibus Executive Incentive Compensation Plan. * 10.20 Form of 1997 Non-Qualified Stock Option Plan. * 10.21 Promissory Note in the original principal amount of $147,768 dated as of February 13, 1997 from Mitchell B. Olan to the Company. * 10.22 Agreement for Services dated as of June 1, 1997 between the Company and Modern Employer, Inc. * 10.23 Business Loan Agreement dated August 15, 1997 between the Company and Barnett Bank. * 10.24 Letter Agreement dated August 1997 between Nassau and the Company. * 10.25 Acknowledgement and Option Agreement between Dennis Corona and Andrew D. Levine. * 10.26 Acknowledgement and Option Agreement between Dennis Corona and Jay Walton. * 10.27 Credit facility commitment letter dated March 18, 1998 between the Company and NationsBank.* 10.28 Loan Agreement dated May 14, 1998 between the Company and Nationsbank. * 37 21.1 List of subsidiaries of the Company. * 23.1 Consent of Independent Accountants to incorporation by reference of their report contained in this Report on Form 10-K into the Company's Registration Statement on Form S-8, Registration No. 333-51965 filed with the Securities and Exchange Commission on May 6, 1998. 27.1 Financial Data Schedule * Previously filed with the Securities and Exchange Commission as Exhibits to, and incorporated herein by reference from, the Company's Registration Statement on Form S-1, 10-K or 10-Q. (b) Reports on Form 8-K On March 12, 1999 the Company filed Form 8-K related to the release of its financial numbers for the fourth quarter and year ended December 31, 1998 as well as a Supplemental Pooled Statement of Operations for its combined operations with Gentle Dental Service Corporation. (c) Exhibits See (a) (3) above. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DENTAL CARE ALLIANCE, INC. /s/ STEVEN R. MATZKIN ------------------------------------ Steven R. Matzkin, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report had been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ STEVEN R. MATZKIN Chairman of the Board March 30, 1999 - --------------------------- Chief Executive Officer Steven R. Matzkin President /s/ DAVID P. NICHOLS Chief Financial Officer March 30, 1999 - --------------------------- Principal Financial and Accounting David P. Nichols Officer /s/ MITCHELL B. OLAN Director and Secretary March 30, 1999 - --------------------------- Mitchell B. Olan /s/ CURTIS LEE SMITH Director March 30, 1999 - --------------------------- Curtis Lee Smith /s/ ROBERT RAUCCI Director March 30, 1999 - --------------------------- Robert Raucci 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Dental Care Alliance, Inc. In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14 (A) (1) and (2) on page 32 present fairly, in all material respects, the financial position of Dental Care Alliance, Inc. (the "Company"), successor to Golden Care Holdings, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Houston, Texas March 25, 1999 F-1 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ 1997 1998 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $20,367,722 $ 7,088,504 Consulting and license fees receivable 64,116 61,437 Management fee receivable from P.A.s 914,026 4,331,870 Notes and advances receivable from P.A.s, net 566,943 1,157,190 Other current assets 254,412 760,721 ----------- ----------- Total current assets 22,167,219 13,399,722 Property and equipment, net 1,113,050 5,493,711 Intangible assets, net 4,747,303 17,495,353 Notes and advances receivable from P.A.s 313,940 4,061,701 Other assets 212,975 1,139,289 ----------- ----------- Total assets $28,554,487 $41,589,776 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 638,030 $ 468,315 Accrued payroll and payroll related costs 64,933 257,307 Other accrued liabilities 412,952 1,046,596 Acquisition and affiliation obligations 920,000 -- Income taxes payable 179,367 412,799 Current portion of long-term debt and capital leases 195,193 542,620 ----------- ----------- Total current liabilities 2,410,475 2,727,637 Deferred income taxes 773,269 2,914,599 Long-term debt and capital leases, less current portion 816,918 8,057,698 ----------- ----------- Total liabilities 4,000,662 13,699,934 Commitments and contingencies (Notes 7 and 18) -- -- Stockholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized, 6,977,700 and 7,031,187 issued and outstanding at December 31, 1997 and 1998, respectively 69,777 70,311 Additional paid-in capital, net of $272,768 loan receivable 24,126,009 24,363,690 Retained earnings 358,039 3,455,841 ----------- ----------- Total stockholders' equity 24,553,825 27,889,842 ----------- ----------- Total liabilities and stockholders' equity $28,554,487 $41,589,776 =========== ===========
The accompanying notes are in integral part of these financial statements. F-2 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 1997 1998 ----------- ----------- ----------- Management fees $ 1,289,828 $ 7,588,193 $28,641,031 Consulting and licensing fees 347,600 290,885 695,361 ----------- ----------- ----------- Total revenues 1,637,428 7,879,078 29,336,392 ----------- ----------- ----------- Managed dental center expenses: Staff salaries and benefits 223,657 2,021,497 8,015,757 Dental supplies 79,448 650,444 2,039,687 Laboratory fees 98,222 971,024 3,101,909 Marketing 38,128 414,519 1,127,906 Occupancy 106,501 998,141 3,310,787 Other 57,182 851,631 1,931,947 ----------- ----------- ----------- Total managed dental center expenses 603,138 5,907,256 19,527,993 ----------- ----------- ----------- Gross profit 1,034,290 1,971,822 9,808,399 Salaries and benefits 521,683 786,795 1,658,628 General and administrative 260,558 600,657 1,814,048 Depreciation and amortization 27,654 163,681 1,062,646 Corporate restructure and merger costs -- -- 587,950 ----------- ----------- ----------- Operating income 224,395 420,689 4,685,127 Interest income, net 20,781 263,568 639,981 ----------- ----------- ----------- Income before income taxes and minority interest 245,176 684,257 5,325,108 Provision for income taxes 35,500 263,952 2,227,306 Minority interest 7,674 -- -- ----------- ----------- ----------- Net income 202,002 420,305 3,097,802 Adjustment to redemption value of common and preferred securities (191,237) (10,500) -- Cumulative preferred stock dividend (6,485) (100,000) -- ----------- ----------- ----------- Net income applicable to common stock $ 4,280 $ 309,805 $ 3,097,802 =========== =========== =========== Basic net income per common share -- $ 0.07 $ 0.44 =========== =========== =========== Diluted net income per share -- $ 0.07 $ 0.44 =========== =========== =========== Basic weighted average common shares outstanding 3,829,029 4,610,331 6,996,842 =========== =========== =========== Diluted weighted average common shares outstanding 3,907,492 4,697,809 7,080,755 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL COMMON STOCK PAID-IN RETAINED STOCK ($.01 PAR) CAPITAL EARNINGS TOTAL --------- ------------ ----------- ----------- ----------- Balance, January 1, 1996 3,791,610 $ 37,916 $ 242,202 $ 16,719 $ 296,837 Net Income - January 1 to October 25, 1996 157,783 157,783 Purchase of minority interest 18,768 18,768 Reclassification of members capital upon C-Corporation election (see Note 1) 174,502 (174,502) -- Issuance of common stock 203,850 2,039 310,461 312,500 Common stock - accretion to put value (191,237) (191,237) Accrued dividends on mandatorily redeemable preferred stock (6,485) (6,485) Net income - October 26 to December 31, 1996 -- 44,219 44,219 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1996 3,995,460 39,955 554,696 37,734 632,385 Adjustment to redemption value of preferred stock (10,500) (10,500) Accrued dividends on mandatorily redeemable preferred stock (100,000) (100,000) Issuance of common stock 327,882 3,278 1,089,510 1,092,788 Stock subscription receivable (272,768) (272,768) Conversion of preferred stock 654,358 6,544 1,778,492 10,500 1,795,536 Elimination of put rights on common stock (191,237) (191,237) Net proceeds from issuance of common stock 2,000,000 20,000 21,167,316 -- 21,187,316 Net income 420,305 420,305 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 6,977,700 69,777 24,126,009 358,039 24,553,825 Issuance of common stock 53,487 534 96,201 -- 96,735 Fair value of stock options issued to affiliates -- -- 141,480 -- 141,480 Net income -- -- -- 3,097,802 3,097,802 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 7,031,187 $ 70,311 $ 24,363,690 $ 3,455,841 $ 27,889,842 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-4 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 1997 1998 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 202,002 $ 420,305 $ 3,097,802 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,654 163,681 1,062,646 Minority interest 7,674 -- -- Stock issued for services -- -- 4,376 (Increase) decrease in: Consulting and license fees receivable (147,158) (53,191) 2,679 Management fee receivable from P.A.s (353,790) (516,585) (3,417,844) Other assets (96,147) 90,896 (506,309) Increase (decrease) in: Accounts payable 457,038 86,126 (169,715) Other accrued liabilities 29,503 263,702 633,644 Income taxes payable 35,500 104,867 233,432 Deferred taxes payable -- 57,269 168,932 Accrued payroll and payroll related costs 107,845 (59,303) 192,374 ------------ ------------ ------------ Net cash provided by operating activities 270,121 557,767 1,302,017 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (4,444) (613,006) (4,875,072) Payments received (Advances made) on notes receivable from P.A.s 3,075 (369,957) (336,232) Acquisition and affiliations Obligations payable -- -- (920,000) Increase in intangible and other assets (486,489) (1,032,765) (12,270,202) Advances to P.A.s (16,454) (466,967) (3,860,290) ------------ ------------ ------------ Net cash used in investing activities (504,312) (2,482,695) (22,261,796) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of mandatorily redeemable preferred stock, net 1,395,000 -- -- Proceeds from issuance of common stock, net -- 21,207,336 92,354 Payments of long-term debt (67,257) (494,925) (312,807) Proceeds from issuance of long-term debt 117,514 326,980 7,901,014 ------------ ------------ ------------ Net cash provided by financing activities 1,445,257 21,039,391 7,680,561 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,211,066 19,144,463 (13,279,218) Cash and cash equivalents at beginning of period 42,193 1,253,259 20,367,722 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 1,253,259 $ 20,367,722 $ 7,088,504 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for income taxes $ -- $ 127,065 $ 1,771,546 Cash paid during the year for interest $ 13,955 $ 52,943 $ 186,401 Issuance of common stock for noncash consideration $ 312,500 -- $ -- Assumption of accounts payable and accrued liabilities related to revision of management service agreements $ 438,300 -- $ -- Elimination of minority interest $ 18,768 -- $ -- Elimination of put rights on common stock $ -- $ 191,237 $ -- Conversion of preferred stock $ -- $ 1,795,536 $ -- Intangible assets - noncash portions $ -- $ 3,125,429 $ 1,972,398
The accompanying notes are an integral part of these financial statements. F-5 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND ORGANIZATION Dental Care Alliance, Inc. ("DCA" or the "Company") was formed on October 23, 1996 with a nominal capital contribution, to effect a reorganization (the "Reorganization") among DCA, Golden Care Holdings L.C. ("GCH"), the predecessor entity, and its majority owned subsidiaries Golden Care Network, L.C.("GCN"), and Prophet Management L.C. ("PM"). DCA and GCH completed the Reorganization on October 25, 1996 by transferring substantially all of the assets, liabilities and operations of GCH, GCN and PM to DCA. Concurrently, shares of DCA were issued in exactly the same proportion as the shareholders of GCH. Effective November 4, 1997, the Company completed an Initial public offering of its stock. All per share amounts have been adjusted retroactively to reflect the stock split completed in anticipation of this transaction. The Company and its predecessor provide management, consulting and licensing services to dental practices in Florida, Michigan, Georgia, Indiana and Pennsylvania. The dental practices are owned by separate Professional Associations (the "P.A.s"), and the Company has entered into long-term Administrative Services Agreements ("Management Agreements") with the P.A.s to provide administrative, financial and technical support and expertise to the P.A.s in exchange for management, consulting and licensing fees, as described in Note 3. Each P.A. employs and directs the professional dental staff, including the dentists and hygienists, and provides all of the clinical services to the patients. The Company employs and directs the administrative staff and manages in collaboration with the P.A. owner, all of the remaining administrative, financial, marketing and professional services of the practice. The following represents the number and locations where the Company provided management services as of December 31, 1996 1997 1998 ---- ---- ---- Florida 12 24 36 Michigan -- 5 9 Georgia -- -- 8 Indiana -- -- 3 Pennsylvania -- -- 22 ---- ---- ---- Total 12 29 78 ==== ==== ==== 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION/BASIS OF CONSOLIDATION The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and include only those operations which are under the ownership and financial control of the Company. All intercompany accounts and transactions have been eliminated in consolidation. The Company does not have any ownership in or exercise control over the dentistry activities of the P.A.s and accordingly, the accompanying financial statements do not consolidate the results of the P.A.s. F-6 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) STOCK SPLIT On October 6, 1997 the Company's Board of Directors authorized an 81.54 to 1 stock split. The increase in authorized shares and the stock split have been retroactively reflected in these financial statements. The Company also authorized an increase of its authorized common shares to 50 million. REVENUE RECOGNITION The Company records its revenue in accordance with Management Agreements and other consulting and licensing agreements further described in Note 3. ADVERTISING The costs of advertising, promotion and marketing, aggregating $42,272, $29,502 and $24,085 for the years ended December 31, 1996, 1997 and 1998, respectively, are expensed when incurred and are included in general and administrative expenses. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of amounts reported in the financial statements have been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. The carrying value of all non-current financial instruments are considered to approximate fair value based upon current market rates and instruments with similar risks and maturities. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. CONSULTING AND LICENSING FEES RECEIVABLE Consulting and licensing fees receivable represents amounts owed to the Company from various P.A.s for consulting and licensing fees provided under contracts. The Company reviews the collectibility of its receivables related to consulting and license fees. This review is based upon the cash flow of the P.A.s and the fair market value of the collateral of the assets of the P.A.s. MANAGEMENT FEE RECEIVABLE FROM P.A. Management fee receivable from P.A. consists of amounts owed to the Company related to revenue recorded in accordance with Management Agreement and is recorded based upon the net realizable value of patient accounts receivables of the P.A.s. The Company reviews the collectibility of the patient accounts receivables of the P.A.s and adjusts its management fee receivable accordingly. ADVANCES TO P.A.S Advances to P.A.s consist of receivables from P.A.s in connection with working capital advances made to affiliated practices. The Company reviews the collectibility of its receivables related to advances to P.A.s. This review is based upon the cash flow of the P.A.s, and the fair market value of the collateral of the assets of the P.A.s. Commencing August 1997, under terms of note agreements such advances are repayable under terms calling for interest at 8 1/2 %, adjusted for any changes in the Company's borrowing rate, and are due on demand. All advances and F-7 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) payables between P.A.s under common ownership have a right of offset included in the agreement. The Company has established a reserve for these advances of $86,000 and $149,000 as of December 31, 1997 and 1998, respectively. NOTES RECEIVABLE FROM P.A.S Notes receivable from P.A.s relate to financing of capital additions made by P.A.s covering certain medical and non-medical assets. Notes receivables from P.A.s generally have terms of 2 to 10 years, are interest bearing with rates between 8 1/2 % and 18 1/2 %, and are secured by the assets of the Managed Dental Center and personally guaranteed by the P.A. owners. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expenses as incurred and expenditures for additions and betterments are capitalized. The cost of assets sold or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the statement of operations. Depreciation is computed by using the straight-line method over the estimated useful life of the asset, ranging from 3 to 10 years. Leasehold improvements are amortized over their estimated useful life or the remaining lease period, whichever is less. INTANGIBLE ASSETS Intangible assets includes certain organizational costs associated with the incorporation of the Company and costs related to consideration given to entities in exchange for (i) entering into Management Agreements, (ii) waiver by minority stockholder of any rights to receive management fees under certain Management Agreements, (iii) revised terms to existing Management Agreements and (iv) the purchase of minority stockholder rights in PM. Intangible assets are being amortized over periods of 5-25 years. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DEPENDENCE ON THE P.A.S The Company receives fees for services provided to the P.A.s under Management Agreements, and Consulting and Licensing Agreements, but does not employ dentists or control the practices of the dentists employed by the P.A.s. The Company's revenue is dependent on revenue generated by the P.A.s and, therefore, effective and continued performance of the Managed Dental Centers during the term of the Management Agreements is essential to the Company's long-term success. The Management Agreements are generally for a term of 25 years beginning on the effective date of each individual agreement and renewing each and every year on the anniversary date of the subsequent year for a period of generally 25 years and may be terminated by the P.A., or the Company, under certain events of default "with cause" as defined, including a material default by F-8 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) or bankruptcy of the Company. In the event of a material default by the P.A., or its owner, the P.A. can sell the practice to a third party mutually agreed to or sell its assets to the Company for a preset formula price and assign ownership interest to a P.A. agreeable to all parties. In the event that the proper notification period is given to the Company, the P.A. can terminate the agreement at any time without cause if it sells the practice and assigns the agreement to another party to be approved by the Company. The sales price in such event will be determined through negotiations among the selling P.A. and the buyer. In no event can the Company replace the P.A. at will or for a nominal fee, except in the event of default. Any material loss of revenue by the P.A.s would have a material adverse effect on the Company, including the P.A.s' ability to repay their indebtedness to the Company. IMPAIRMENT OF ASSETS The Company periodically analyzes the value of its long-lived assets including intangibles by comparison of undiscounted cash flows from operations with related carrying value of the assets. At December 31, 1998, the unamortized balance of these assets are not considered to be impaired. INCOME TAXES Upon its incorporation on October 23, 1996, as described in Note 1, the Company terminated its predecessor status as a Limited Liability Corporation and is now subject to federal income taxes. Effective October 25, 1996, the Company accounted for income taxes under the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). 3. REVENUE RECOGNITION MANAGEMENT FEES Management fees represent revenue earned from managed dental practices less amounts retained by the practices for those P.A.s where the Company provides management services. The Company earns management fees from the P.A.s under two types of contracts: net revenue and net profits. Under the net revenue contracts, management fees are equal to 67% - 74% of the patient revenues earned by the P.A. Such contracts also stipulate that the Company must pay certain expenses, as defined by the Management Agreement. Under the net profits contracts, management fees are equal to between 50% and 55% of the practice's net profits, as defined. Net profit is calculated by subtracting practice expenses (which constitutes both dental and non-dental expenses), excluding depreciation and amortization, from net collected practice revenue. Contractual revenues and related expenses have, for purposes of the accompanying financial statements, been reflected on an accrual basis. The amounts contractually retained by the practices under net revenue contracts are intended to cover amounts incurred for (1) salary and benefits to employ the dentists, hygienists and contracted specialists; (2) licensing fees to be paid to the Company; (3) debt and asset carrying costs on the acquisition of the practices; (4) any other direct costs to the P.A. not covered under the Management Agreement. F-9 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. REVENUE RECOGNITION--(CONTINUED) The revised structure of the P.A. contracts is designed to provide the P.A. with the opportunity to achieve profits over the term of the contract, as well as for incentives for the P.A. owners and dental professionals to increase productivity and the number of patient encounters, to improve the documentation of their services so that appropriate billings can be rendered and to increase the opportunity for dental professionals other than dentists to provide services. The P.A. located in Port Charlotte, Florida has the right to terminate its Management Agreement during a 90-day period beginning in October 1998. Such Managed Dental Center contributed approximately 18%, 8% and 3% to the Company's revenue in 1996, 1997 and 1998, respectively. The P.A. elected to terminate its Management Agreement effective February 1, 1999. CONSULTING AND LICENSING FEES As of December 31, 1998, the Company provides separate licensing services to the 78 Managed Dental Centers. The licensing agreements typically call for a 25 year term, in exchange for an annual fee from each practice of approximately $10,000 - $12,000 per year. As part of the licensing agreements, the Company will solicit and negotiate managed care contracts for the practice and provide opportunities for the licensed practice to participate in group purchasing and marketing plans. 4. AFFILIATIONS In April 1997, the Company acquired approximately $200,000 of non-dental assets and executed a 25-year Management Agreement with a dental practice located in Temple Terrace, Florida. Unaudited net practice revenue of the dental practice was approximately $950,000 for the year ended December 31, 1996. The Management Agreement executed is a net revenue contract. In July 1997, the Company executed four Management Agreements for $846,000 wherein it will provide management services through a subcontractor to the P.A.s for 8 years. The Seller financed $546,000 of this amount with terms of monthly principal and interest at 8% per annum for eight years. The P.A.s were previously subject to consulting and licensing agreements. Unaudited net practice revenue of the dental practices was approximately $3.4 million for the period ended December 31, 1996. The Management Agreements executed are net revenue contracts. In July 1997, the Company executed a 25-year Management Agreement with a dental practice located in Flint, Michigan. Unaudited net practice revenue of the dental practice was approximately $4 million for the year ended December 31, 1996. The Management Agreement executed is a net revenue contract. In August 1997, the Company acquired approximately $175,000 of non-dental assets and executed a 25-year Management Agreement with a dental practice located in Tallahassee, Florida. Unaudited net practice revenue of the dental practice was approximately $900,000 for the year ended December 31, 1996. The Management Agreement executed is a net revenue contract. F-10 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. AFFILIATIONS--(CONTINUED) In September 1997, the Company acquired approximately $120,000 of non-dental assets and executed a 25-year Management Agreement with a dental practice located in St. Petersburg, Florida. Unaudited practice revenue of the dental practice was approximately $400,000 for the year ended December 31, 1996. The Management Agreement executed is a net revenue contract. In December 1997, the Company executed a 25-year Management Agreement with a dental practice located in Tampa, Florida and acquired non-dental equipment of $50,000, $20,000 of which is included in acquisition and affiliation obligations payable at December 31, 1997. Unaudited net practice revenue of the dental practice was approximately $600,000 for the year ended December 31, 1997. The Management Agreement executed is a net revenue contract. In December 1997, the Company executed a 25-year Management Agreement with a dental practice in Lakeland, Florida. The total cost to the Company was $420,000 which was allocated to Management Agreement. Unaudited net practice revenue of the dental practice was approximately $800,000 for the year ended December 31, 1997. The Management Agreement executed is a net revenue contract. In December 1997, the Company executed a 25-year Management Agreement with a practice located in Rockledge, Florida. The total cost to the Company was $1,000,000 of which $800,000 is allocated to Management Agreement. At December 31, 1997, $400,000 of the total cost was unpaid and is included in acquisition and affiliation obligations payable at December 31, 1997. Unaudited net practice revenue of the dental practice was approximately $1.6 million for the year ended December 31, 1997. The Management Agreement executed is a net revenue contract. In January 1998, the Company executed 25-year Management Agreements with two practices located in Bradenton, Florida. Unaudited net practice revenue of the dental practices was $1.5 million for the year ended December 31, 1997. The total cost to the Company was approximately $480,000 of which $100,000 is allocated to tangible assets and $380,000 is allocated to Management Agreements. The Management Agreements executed are net revenue contracts. In February 1998, the Company executed 25-year Management Agreements with two practices located in Orlando, Florida. Unaudited net practice revenue of the dental practices was approximately $1.3 million for the year ended December 31, 1997. The total cost to the Company is approximately $500,000 of which $165,000 is allocated to tangible assets and $335,000 is allocated to Management Agreements. The Management Agreements executed are net revenue contracts. In March 1998, the Company executed a 25-year Management Agreement with a practice in Mt. Dora, Florida. Unaudited net practice revenue of the dental practice was approximately $1.0 million. The total cost to the Company is approximately $390,000 of which $185,000 is allocated to tangible assets and $205,000 is allocated to the Management Agreement. The Management Agreement executed is a net revenue contract. In March 1998, the Company executed a 25-year Management Agreement with a practice in Dalton, Georgia. Unaudited net practice revenue of the dental practice was approximately $1.7 F-11 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. AFFILIATIONS--(CONTINUED) million. The total cost to the Company is approximately $572,000 of which $112,000 has been allocated to tangible assets and $460,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. In March 1998, the Company executed 25-year Management Agreements with four dental practices in Detroit, Michigan. Unaudited net practice revenue of the dental practices was approximately $4.4 million. The total cost to the Company is approximately $3.2 million of which $290,000 has been allocated to tangible assets and $2.9 million to the Management Agreements. The Management Agreements executed are net revenue contracts. In May 1998, the Company executed a 25-year Management Agreement with a practice in Savannah, Georgia. Unaudited net practice revenue of the dental practice was approximately $700,000. The total cost to the Company is approximately $182,000 of which $2,000 has been allocated to tangible assets and $180,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. In June 1998, the Company executed a 25-year Management Agreement with a dental practice in Orange City, Florida. Unaudited net practice revenue of the dental practice was approximately $1.1 million. The total cost to the Company is approximately $365,000 of which $77,000 has allocated to tangible assets and $288,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. In June 1998, the Company executed a 25-year Management Agreement with a practice in Tallahassee, Florida. Unaudited net practice revenue of the dental practice was approximately $550,000. The total cost to the Company is approximately $153,000 of which $38,000 is allocated to tangible assets and $115,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. In June 1998, the Company executed 25-year Management Agreements with two dental practices in the Atlanta, Georgia area. Unaudited net practice revenue of the dental practices was approximately $1.5 million. The total cost to the Company is approximately $535,000 of which $105,000 is allocated to tangible assets and $430,000 to the Management Agreement. The Management Agreements executed are net revenue contracts. In August 1998, the Company executed a 25-year Management Agreement with a dental practice in Gainesville, Florida. Unaudited net practice revenue of the dental practice was approximately $241,000. The total cost to the Company is approximately $40,000 of which $21,000 is allocated to tangible assets and $19,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. In August 1998, the Company executed a 25-year Management Agreement with three dental practices in northwest Indiana. Unaudited net practice revenue of the dental practices was approximately $1.5 million. The total cost to the Company is approximately $415,000 of which $135,000 is allocated to tangible assets and $280,000 to the Management Agreement. The Management Agreements executed are net revenue contracts. F-12 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. AFFILIATIONS--(CONTINUED) In September 1998, the Company executed a 25-year Management Agreement with a dental practice in Ocala, Florida. Unaudited net practice revenue of the dental practice was approximately $525,000. The total cost to the Company is approximately $197,000 of which $47,000 is allocated to tangible assets and $150,000 is allocated to the Management Agreement. The Management Agreement executed is a net revenue contract. In September 1998, the Company executed a 25-year Management Agreement with a dental practice in Jacksonville, Florida. Unaudited net practice revenue of the dental practice was approximately $1.2 million. The total cost to the Company is approximately $384,000 of which $54,000 is allocated to tangible assets and $330,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. In November 1998, the Company executed a 25-year Management Agreement with twenty-two dental practices in Philadelphia, Pennsylvania. Unaudited net practice revenue of the dental practices was approximately $8.0 million. The total cost to the company is approximately $2.4 million of which $1.8 million is allocated to tangible assets and $570,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. In November 1998, the Company executed a 25-year Management Agreement with a dental practice in North Miami Beach, Florida. Unaudited net practice revenue of the practice was approximately $1.7 million. The total cost to the Company is approximately $695,000 of which $45,000 has been allocated to the tangible assets and $650,000 to the Management Agreement. The Management Agreement executed is a net revenue contract. 5. BUSINESS COMBINATIONS AND ACQUISITIONS Business Combinations On October 15, 1998, the Company and Gental Dental Service Corporation ("GDSC") signed a definitive agreement to merge in a transaction expected to be accounted for as a pooling-of-interests. The transaction will create one of the largest dental practice management companies in the nation. The new company will be affiliated with dental practices in California, Oregon, Washington, Hawaii, Idaho, Nevada, Florida, Indiana, Georgia, Michigan and Pennsylvania. In the proposed combination, the Company and GDSC, each will become a wholly-owned subsidiary of a new Delaware corporation ("InterDent") to be headquartered in El Segundo, California. The merger was completed on March 12, 1999 based upon shareholder approval of March 11, 1999. See Subsequent Events note 19 for further discussion. In connection with the GDSC merger, the Company recorded direct merger expenses of $587,950 in the fourth quarter of 1998. These expenses consist primarily of accounting, legal and other advisory fees. The Company expects additional merger and restructure charges to be incurred throughout 1999. Acquisitions On December 29, 1997, the Company acquired all of the outstanding capital stock of Marketplace Dental, Inc., a Florida corporation ("Marketplace"), pursuant to the merger (the "Merger"), of Marketplace with and into Dental Care Alliance of Florida, Inc. ("DCA Florida"), a wholly-owned subsidiary of the Company. Marketplace was the practice management company resulting from the reorganization of Children's Dental Arcade, Inc. and Wellington Marketplace Group, P.A. on October 1, 1997. The Merger was consummated pursuant to that certain Agreement and Plan of Merger dated December 29, 1997 (the "Merger Agreement") among the Company, Marketplace, DCA Florida and the Marketplace shareholders. DCA Florida was the surviving corporation in the Merger. Marketplace was a dental practice management company which managed six dental practices in Palm Beach County. Pursuant to the Merger the Company acquired all of the assets of Marketplace. Such assets consisted primarily of non-dental assets (including dental equipment) and management agreements. Pursuant to the Merger, all shares of Marketplace common stock were converted into the right to receive, in the aggregate eighty thousand (80,000) shares of unregistered common stock of the Registrant and an amount in cash of approximately $500,000, which was included in acquisition and affiliation obligations payable at December 31, 1997. In addition, the Merger Agreement calls for the issuance of additional common stock if certain operating results are achieved. F-13 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. ACQUISITIONS--(CONTINUED) As a result of the acquisition, the Company has recorded the following net assets: Current assets $ 146,774 Property and equipment 505,343 Intangible assets 1,760,429 Other assets 21,645 Current liabilities (57,137) Long-term debt (420,054) Deferred tax liability (657,000) ----------- $ 1,300,000 =========== On April 1, 1998, the Company acquired all the outstanding capital stock of Dental One Associates, Inc., a Georgia corporation ("Dental One") pursuant to a Stock Purchase Agreement effective March 20, 1998. Pursuant to the Stock Purchase Agreement, the Company acquired all the assets of Dental One. Such assets consisted primarily of non-dental assets (including dental equipment) and management agreements. Five hundred thousand shares (500,000) of the common stock of Dental One, representing one hundred percent (100%) of the issued and outstanding shares were purchased by the Company in consideration of (a) $2.4 million in cash; (b) a promissory note in the amount of $1,047,510, bearing interest at 8.5% per annum, payable in equal quarterly payments of principal and interest amortized over five years with a three year balloon; and (c) a promissory note in the amount of $1.2 million payable in monthly installments over 120 days. As a result of the acquisition, the Company has recorded the following net assets: Current Assets $ 27,660 Property and Equipment 1,045,655 Intangible Assets 5,078,494 Other Assets 245,893 Long Term Debt (1,610,497) Deferred Tax Liability (1,787,205) ----------- $ 3,000,000 =========== F-14 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. ACQUISITIONS--(CONTINUED) The following unaudited pro forma consolidated results of operations of the Company gives effect to the Marketplace and Dental One acquisitions for 1996, 1997 and 1998, as if the acquisitions had occurred at the beginning of the respective period and the immediately preceeding year.
UNAUDITED UNAUDITED UNAUDITED PRO FORMA PRO FORMA PRO FORMA 1996 1997 1998 ----------- ----------- ---------- Total revenues ............................ $ 2,809,458 $13,748,000 $30,487,886 Net income ................................ $ 33,140 $ 156,000 $ 3,079,802 Net income per common share: Basic ................................ $ 0.01 $ 0.04 $ 0.44 Diluted ................................... $ 0.01 $ 0.04 $ 0.44 Weighted average common shares outstanding: Basic .................................... 3,909,029 4,689,673 6,996,842 Diluted .............................. 3,987,492 4,777,151 7,080,755
6. PROPERTY AND EQUIPMENT Property and equipment consists of the following: DECEMBER 31, 1997 1998 ----------- ----------- Dental and other equipment ........... $ 911,841 $ 4,808,266 Leasehold improvements ............... 296,437 1,255,695 Vehicles ............................. 13,901 21,603 ----------- ----------- 1,222,179 6,085,564 Less accumulated depreciation......... (109,129) (591,853) ----------- ----------- $ 1,113,050 $ 5,493,711 =========== =========== Depreciation expense for the periods ended December 31, 1996, 1997 and 1998 was $15,508, $65,529 and $494,410, respectively. 7. OPERATING LEASES The Company leases office space for its corporate offices, certain Managed Dental centers and, under the terms of certain Management Agreements, certain non-dental assets on behalf of its Managed Dental Centers. F-15 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. OPERATING LEASES--(CONTINUED) Future minimum lease payments under these agreements as of December 31, 1998 are: 1999.................................................... $2,755,772 2000.................................................... 2,415,772 2001.................................................... 2,091,651 2002.................................................... 1,887,739 2003.................................................... 1,274,174 Thereafter.............................................. 2,459,517 ----------- $12,884,625 =========== Operating lease expense for the periods ended December 31, 1996, 1997 and 1998 was $118,000, $856,822 and $2,589,544, respectively. 8. INTANGIBLE ASSETS Intangible assets consists of the following: DECEMBER 31, 1997 1998 ------------ ------------ Management Agreements $ 4,767,897 $ 18,042,648 Other 84,702 119,620 ------------ ------------ 4,852,599 18,162,268 Less accumulated amortization (105,296) (666,915) ------------ ------------ $ 4,747,303 $ 17,495,353 ============ ============ Additions to Management Agreements relate to acquisitions and affiliations during 1998 (See notes 4 and 5). Amortization expense for the periods ended December 31, 1996, 1997 and 1998, was $12,146, $98,152 and $568,236, respectively. 9. OTHER ACCRUED LIABILITIES Other accrued liabilities consists of the following: DECEMBER 31, 1997 1998 ---------- ---------- Subcontract management fee payable $ 118,592 $ 453,890 Accrued accounts payable 166,324 448,762 Other liabilities 128,036 143,944 ---------- ---------- $ 412,952 $1,046,596 ========== ========== F-16 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. DEBT Long-term debt and capital leases consists of the following:
DECEMBER 31, 1997 1998 ---------- ---------- Notepayable to seller, interest rate at 9%, principal And interest payable monthly, maturing in April 2005, unsecured $ 546,067 $ 546,067 Capital lease obligations, secured by equipment and Leasehold improvements at specific dental practices. Various terms ranging from five to six years with Imputed interest rates of 13.6% - 17.2% 348,652 667,503 Note payable to equipment finance company, secured By equipment at specific dental practices, interest at 11.9%, maturing in 2002 117,392 98,532 Note payable to financial institution, secured by a Vehicle used by the Company, interest at 2.65% Maturing in April 2001 -- 15,320 Note payable to seller, interest rate at 8.5%, principal And interest payable quarterly, maturing in March 2003, secured by stock in subsidiary -- 916,754 Revolving Note with financial institution, secured by Substantially all Company assets, interest at 1.75% Over the Eurodollar rate payable monthly. Total Available amount of $15 million -- 6,356,142 ---------- ---------- 1,012,111 8,600,318 Less current portion 195,193 542,620 ---------- ---------- $ 816,918 $8,057,698 ========== ==========
Future debt payments as of December 31, 1998 are: 1999.............................................. $ 542,620 2000.............................................. 6,878,863 2001.............................................. 758,232 2002.............................................. 178,147 2003.............................................. 115,216 Thereafter........................................ 127,240 ------------- $ 8,600,318 ============= In March 1998, the Company executed an agreement for a $15 million line of credit (Revolving Note) with a financial institution. The Revolving Note is subject to a fee for the unused portion of the line of credit of .25%. Certain restrictive covenants, including debt liquidity ratios and interest, liability and liquidity coverage, were included in the agreement and as of December 31, 1998, the Company was in compliance with such covenants. The Revolving Note expires in May 1999 and the financial institution has provided notice of their intention to renew for one additional year under similar terms. As such, these amounts are included in the. long-term portion of debt. F-17 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES As described in Note 1, through October 23 1996, the Company consisted of a group of Limited Liability Corporations ("LLCs") with one subsidiary operating as a C Corporation in 1994. The provision for income tax related to the C Corporation for the period October 23, 1996 through December 31, 1996 and the years ended December 31, 1997 and 1998 consists of the following: 1996 1997 1998 ---------- ---------- ---------- Current expense (benefit): Federal $ 17,000 $ 254,514 $1,797,978 State 2,900 51,253 361,214 Deferred expense (benefit): Federal 13,600 (36,234) 61,938 State 2,000 (5,581) 6,176 ---------- ---------- ---------- Total $ 35,500 $ 263,952 $2,227,306 ========== ========== ========== The reconciliation between the effective income tax rate and the U.S. federal statutory rate is as follows for the period October 23, 1996 through December 31, 1996 and the years ended December 31, 1997 and 1998:
1996 1997 1998 ---------- ---------- ---------- U.S. federal taxes at statutory rate $ 83,360 $ 230,539 $1,810,537 Increase/(decrease): State taxes, net 3,737 23,841 201,780 Flow through entity income (51,597) -- -- Non-deductible transaction costs -- -- 199,903 Amortization of intangibles -- 5,333 5,333 Other nondeductible items -- 4,239 9,753 ---------- ---------- ---------- Income tax provision $ 35,500 $ 263,952 $2,227,306 ========== ========== ==========
F-18 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES--(CONTINUED) Deferred tax assets/(liabilities) are as follows:
DECEMBER 31, 1997 1998 ----------- ----------- Deferred taxes, current: Reserve for bad debts $ 33,529 $ 58,110 ----------- ----------- Deferred tax asset, current 33,529 58,110 ----------- ----------- Deferred taxes, non-current: Depreciation 4,040 (174,606) Amortization of intangibles (10,272) (11,384) Book in excess of tax basis in tangible assets (767,037) (2,728,609) ----------- ----------- Deferred tax liability, non-current (773,269) (2,914,599) ----------- ----------- Net deferred tax liability $ (739,740) $(2,856,489) =========== ===========
A deferred tax liability has been recorded for several intangible assets related to management agreements entered into during 1997 and 1998 for which book basis exceeded tax basis. 12. EMPLOYEE BENEFITS On January 26, 1994 and October 25, 1996, the Company issued to one of its officers warrants to purchase 81,540 shares of stock (at each grant date), with an exercise price at the then fair market value (aggregate value of $147,768 and $125,000 respectively) of the stock, as determined by an independent third party appraisal. The warrants became fully vested in January 1997. All such warrants were exercised in February 1997, and the exercise price was funded by an interest bearing note from the Company. This interest bearing note has been offset against additional paid-in capital in stockholders' equity at December 31, 1997. On January 21, 1997, the Company issued a stock option for 49,576 shares of stock to another officer of the Company which is exercisable, in whole or in part, immediately. Exercise price is fair market value on the grant date ($1.53 per share). In no event shall this option be exercisable after January 21, 2002. In November 1997, the Company adopted the 1997 Executive Incentive Compensation Plan (the "Incentive Plan") which is designed to attract and retain employees, officers and Directors. The Incentive Plan is administered by the Stock Option and Compensation Committee of the Board of Directors and 250,000 shares of Common Stock have been reserved for issuance under the Plan. In May 1998, the Company registered the Plan such that the shares issued to recipients at exercise will not be restricted. F-19 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. EMPLOYEE BENEFITS--(CONTINUED) The following table summarizes the Company's stock option activity under the Incentive Plan: WEIGHTED FAIR VALUE NUMBER OF AVERAGE OF OPTIONS SHARES EXERCISE PRICE GRANTED ------- ------------- -------- Granted during 1996 81,540 $ 1.53 $ 1.36 Exercised during 1996 -- -- Outstanding at December 31, 1996 163,080 $ 1.67 Exercisable at December 31, 1996 122,310 $ 1.67 Granted during 1997 61,500 $ 12.00 $ 2.66 Exercised during 1997 163,080 $ 1.67 Outstanding at December 31, 1997 61,500 $ 12.00 Exercisable at December 31, 1997 -- -- Granted during 1998 104,500 $ 12.12 $ 1.90 Exercised during 1998 -- $ -- Canceled during 1998 28,000 $ 11.76 Outstanding at December 31, 1998 138,000 $ 12.14 Exercisable at December 31, 1998 25,000 $ 12.00 The following table summarizes the stock options outstanding and exercisable under the Incentive Plan at December 31, 1997 and 1998:
OUTSTANDING EXERCISABLE --------------------------- --------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE ---------------- ----------- --------------- --------------- ------------ ------------ December 31, 1997 $12.00 61,500 46 months $ 12.00 -- $ -- December 31, 1998 $9.00 - $13.75 138,000 46 months $ 12.14 25,000 $ 12.00
The Company uses the intrinsic value method of accounting for stock options awarded to employees. Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method. Under this method, the fair value of each option grant is estimated on the date of grant using the fair value method with the following weighted average assumptions: no dividend yield, 6% - 11% expected volatility, risk-free interest rates ranging from 4.57% - 5.80% and average expected lives of three to four years. The Black-Scholes option valuation model was used in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option F-20 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. EMPLOYEE BENEFITS--(CONTINUED) valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and earnings per share were as follows: YEAR ENDED DECEMBER 31, 1996 1997 1998 ------ ----------- ------------- Net Income $4,280 $ 270,036 $ 3,052,001 ------ ----------- ------------- Basic net income per share $ -- $ .06 $ .44 ------ ----------- ------------- Diluted net income per share $ -- $ .06 $ .43 ------ ----------- ------------- For periods prior to the registration of the Company's common stock, independent valuations were utilized to determine the value of the common stock. 13. NON-EMPLOYEE OPTION PLAN AND WARRANTS In November 1997, the Company adopted the 1997 Non-qualified Stock Option Plan ("Non-employee Plan") which is designed to provide additional incentives for the P.A.s with which the Company has entered into Management Agreements to attract and retain qualified dentists, health care specialists and P.A. owners. The Non-employee Plan is administered by the Stock Option and Compensation Committee of the Board of Directors and 425,000 shares of Common Stock have been reserved for the Non-employee Plan. The shares underlying the Non-employee Plan will not be registered. In conjunction with work performed under an exclusive corporate development advisory agreement (Note 14), the Company also granted warrants to advisors. F-21 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. NON-EMPLOYEE OPTION PLAN AND WARRANTS--(CONTINUED) The following table summarizes the Company's stock option activity under the Non-employee Plan:
WEIGHTED FAIR VALUE NUMBER OF AVERAGE OF OPTIONS SHARES EXERCISE PRICE GRANTED ---------- -------------- ---------- Granted during 1996 -- $ -- $ -- Exercised during 1996 -- $ -- Outstanding at December 31, 1996 137,803 $ 1.74 Exercisable at December 31, 1996 84,802 $ 1.74 Granted during 1997 124,000 $ 12.00 $ 2.66 Exercised during 1997 84,802 $ 1.74 Outstanding at December 31, 1997 177,001 $ 8.93 Exercisable at December 31, 1997 53,001 $ 1.74 Granted during 1998 265,250 $ 11.72 $ 0.81 Exercised during 1998 53,001 $ 1.74 Canceled during 1998 36,500 $ 11.40 Outstanding at December 31, 1998 352,750 $ 11.85 Exercisable at December 31, 1998 36,167 $ 12.00
The following table summarizes the stock options outstanding and exercisable at December 31, 1997 and 1998 under the Non-employee Plan:
OUTSTANDING EXERCISABLE --------------------------- --------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE ---------------- ----------- --------------- --------------- ------------ ------------ December 31, 1997 $1.74 - $12.00 177,001 46 months $ 8.93 53,001 $ 1.74 December 31, 1998 $9.00 - $13.75 352,750 50 months $ 11.85 36,167 $ 12.00
The fair value of each option grant is estimated on the date of grant using the fair value method with the following weighted average assumptions: no dividend yield, 6% - 11% expected volatility, risk-free interest rates ranging from 4.57% - 5.80% and average expected lives of three to four years. As the Nonemployee Plan is not registered, the fair market value of the underlying stock has been discounted by 10%. The Black-Scholes option valuation model was used in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's non-employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its non-employee stock F-22 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. NON-EMPLOYEE OPTION PLAN AND WARRANTS--(CONTINUED) options. For purposes of expense recognition, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company issues options to affiliated dentists under the Non-employee Plan on behalf of the respective P.A. Beginning in 1998, consistent with a modification of the associated Management Agreements, the fair value of such options is being charged to the P.A. and is to be reimbursed to the Company. The fair value of options issued to affiliated dentists during 1998 was $139,455. The Company issues options to P.A. owners as a component of the compensation for entering into new Management Agreements. Beginning in 1998, the fair value of such options is included as a component of the purchase price which increases the recorded intangible assets. The fair value of options issued to P.A. owners during 1998 was $2,025. 14. ADVISORY SERVICES The Company entered into an exclusive corporate development advisory agreement (the "Advisory Agreement") in September 1995, as amended on April 25, 1996, under which the Company is committed to the following: o A retainer each quarter equal to the greater of $4,000 or 6 percent of the Company's quarterly income before income tax expenses in excess of $75,000, beginning February 1, 1996 through the date of the initial public offering (November 4, 1997), which is recorded as a component of general and administrative expenses; o Warrants to purchase an ownership interest (84,802 shares) at an exercise price of $20,000 for services rendered in connection with business development and other financial management advisory services. These warrants were exercised in June 1997; o A fee of $105,000 with respect to the issuance of the mandatorily redeemable preferred stock; o A fee of $100,000 and a 5 year warrant to purchase 29,167 shares of common stock at an exercise price equal to $12 per share, upon consummation of its initial public offering on November 7, 1997; and o Warrants to purchase 53,001 shares of common stock at an exercise price of $92,355, which became vested upon the completion of the Company's initial public offering for services rendered in connection with financial, marketing, and administrative support related to the initial public offering. F-23 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. EARNINGS PER SHARE RECONCILIATION The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations for the indicated years:
YEAR ENDED DECEMBER 31, 1996 1997 1998 ---------- ---------- ---------- Basic earnings per share: Numerator $ 4,280 $ 309,805 $3,097,802 ---------- ---------- ---------- Denominator: Common shares outstanding 3,829,029 4,610,331 6,996,842 ---------- ---------- ---------- Basic earnings per share $ -- 0.07 $ 0.44 ========== ========== ========== Diluted earnings per share: Numerator $ 4,280 $ 309,805 $3,097,802 ---------- ---------- ---------- Denominator: Common shares outstanding 3,829,029 4,610,331 6,996,842 Assumed conversion of options 78,463 87,478 83,913 ---------- ---------- ---------- Total shares 3,907,492 4,697,809 7,080,755 ---------- ---------- ---------- Diluted earnings per share $ -- $ 0.07 $ 0.44 ========== ========== ==========
PRO FORMA Upon its incorporation on October 23, 1996, as described in Note 1, the Company terminated its predecessor status as a limited liability corporation and became subject to federal and state income taxes. In addition, since the Company adopted Financial Accounting Standards Board Statement No. 128 "Earnings per Share" in 1997, pro forma adjustments for income taxes as if the Company had been treated as a C corporation and the impact of the preferred stock conversion have not been included in historical earnings per share in the Statement of Operations. Had the Company not restated prior years' earnings per share, the pro forma effect would have been as follows: F-24 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. EARNINGS PER SHARE--(CONTINUED) YEAR ENDED DECEMBER 31, 1996 1997 -------- -------- Income before income taxes and minority interest $245,176 $684,257 Pro forma provision for income tax 94,000 -- Provision for income tax (after Conversion to C corporation) -- 263,952 Minority interest in consolidated subsidiaries 4,739 -------- -------- Pro forma net income $146,437 $420,305 ======== ======== Basic earnings per share $ 0.04 $ 0.09 -------- -------- Diluted earnings per share $ 0.04 $ 0.09 -------- -------- 16. RELATED PARTY TRANSACTIONS The Company's President, Chief Executive Officer and a significant stockholder owns or controls entities which do business with the Company or its Managed Dental Centers. The Company and its Managed Dental Centers incurred rent totaling $108,110, $193,900 and $144,700 for the years ended December 31, 1996, 1997 and 1998, respectively, payable to such entities. The Company also paid for certain laboratory costs of a related party on behalf of the Company's President and controlling stockholder. These amounts totaled $60,700, $133,448 and $159,551 for the years ended December 31, 1996, 1997 and 1998, respectively. The amount of $60,000, which is personally guaranteed by the Company's President, has been reflected in other assets as such amounts have been structured as a demand note. The Managed Dental Centers have also incurred capital lease obligations payable to a related entity owned 33% by the Company's President totaling approximately $108,000, $102,000 and $75,600 as of December 31, 1996, 1997 and 1998, respectively. Interest expense on such obligations was approximately $21,000, $19,000 and $18,630 for the years ended December 31, 1996, 1997 and 1998, respectively. 17. CONCENTRATION OF CREDIT RISK As described in Note 1, a majority of the Managed Dental Centers are owned by P.A.s commonly controlled by two individuals. All P.A.s and the commonly controlled P.A.s are indebted to the Company as follows:
DECEMBER 31, 1997 1998 ---------- ---------- Total All P.A.s: Consulting and license fees receivable $ 64,116 $ 61,437 Management fee receivable from P.A.s 914,026 4,331,870 Notes and advances receivable from P.A.s 880,883 5,218,891 ---------- ---------- $1,859,025 $9,612,198 ========== ========== Amount owed by commonly controlled P.A.s #1: $1,535,384 $5,756,505 ---------- ---------- Amount owed by commonly controlled P.A.s #2: $ -- $2,022,494 ---------- ----------
F-25 DENTAL CARE ALLIANCE, INC. (Successor to Golden Care Holdings, L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. COMMITMENTS AND CONTINGENCIES The Company has entered into employment agreements with three of its officers, one of whom is also the majority stockholder of the Company. The terms of the agreements are from 4 to 5 years and initially expire in 1998 and 2001. The Company has entered into a staff leasing agreement whereby all of the Company's corporate employees and, all of the Managed Dental Center non-medical are leased. In the ordinary course of business, the Company is party to several legal proceedings, the outcome of which, singly or in aggregate, is not expected to be material to the Company's financial position, results of operations or cash flows. The Company has guaranteed a portion of the P.A.s debt. The guarantees relate primarily to debt incurred related to the acquisition of dental practices and is in addition to collateral already provided by the P.A. As of December 31, 1998, the amount P.A. debt guaranteed by the Company is approximately $5.9 million. 19. SUBSEQUENT EVENTS In January 1999, the Company executed a 25-year Management Agreement with a dental practice in Kissimmee. This dental practice had been managed under a net profit contract. The P.A. owners sold their interest to another licensed dentist, who executed the new agreement as a net revenue contract. In February 1999, the Company purchased tangible assets and executed 25-year Management Agreements with seven dental practices in Michigan. Four of the dental practices are Managed Dental Centers whose Management Agreements were to expire in 2005. Unaudited net practice revenue for the year ended December 31, 1998, for the four dental practices was $3.6 million and was $2.2 million for the three additional dental practices. The total purchase price was $4.9 million, of which $600,000 was allocated to tangible assets, $200,000 was allocated to assumed net assets and $4.1 million to Management Agreements. On March 11, 1999, the Company's shareholders approved a transaction whereby the Company became a wholly-owned subsidiary of InterDent, Inc. as a result of a business combination between the Company and Gentle Dental Service Corporation. The business combination will be accounted for as a pooling-of-interest. In accordance with the terms of the transaction the Company's shareholders will receive 1.67 shares of InterDent, Inc. stock for every share of Company stock. F-26 SCHEDULE II BALANCE CHARGED TO BALANCE BEGINNING MANAGEMENT AT END YEAR FEES OF YEAR --------- ---------- ------- Year ended December 31, 1996 Advances to P.A.s, net $ -- $ -- $ -- Year ended December 31, 1997 Advances to P.A.s, net $ -- $ 85,973 $ 85,973 Year ended December 31, 1998 Advances to P.A.s, net $ 85,973 $ 63,027 $149,000 S-1 EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 23.1 Consent of Independent Accountants 27.1 Financial Data Schedule EX-23.1 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-51965) of Dental Care Alliance, Inc. of our report dated March 25, 1999 appearing on page F-1 of this Form 10-K. PricewaterhouseCoopers LLP Houston, Texas March 30, 1999 EX-27 3
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 7,088,504 0 5,550,497 0 0 13,399,722 6,085,564 (591,853) 41,589,776 2,727,637 0 0 0 70,311 24,363,690 41,589,776 29,336,392 29,336,392 19,527,993 19,527,993 5,124,272 0 0 5,325,108 2,227,306 3,097,802 0 0 0 3,097,802 0.44 0.44
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