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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: DECEMBER 31, 1996. Commission File No. 0-28680
DENTLCARE MANAGEMENT, INC.
(Name of Small Business Issuer in its charter)
NEVADA 88-0301637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2360 HASSELL RD., SUITE F, HOFFMAN ESTATES, ILLINOIS 60195
(Address of principal executive offices)(Zip Code)
8118 E. 63RD ST., TULSA, OKLAHOMA 74133
(Former address of principal executive offices)(Zip Code)
Issuer's telephone number: (847) 839-0891
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK ($.001 PAR VALUE PER SHARE)
(Title of each class)
NONE
(Name of each exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ; No X .
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $4,708,151.
As of September 30, 1997, the registrant had outstanding 14,934,867
shares of its Common Stock, par value of $0.001, its only class of voting
securities. The aggregate market value of the shares of common stock of the
registrant held by non-affiliates on September 30, 1997 was approximately
$7,708,000 based upon the average over the counter sales price on such date (See
Item 5).
DOCUMENTS INCORPORATED BY REFERENCE - No documents are incorporated by
reference into this Report except those Exhibits so incorporated as set forth in
the Exhibit Index.
Transitional Small Business Disclosure Format (Check one):
Yes ; No X .
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ITEM 1. DESCRIPTION OF BUSINESS
The "Subsequent Events" section contained in this Item reflects activities of
the Company through September 30, 1997. Additionally, effective March 4, 1998,
the Company had a 5:1 reverse split of the Common Stock. Calculations and share
amounts contained in this 10-KSB do not reflect this reverse split.
DEVELOPMENT OF THE COMPANY
General
DentlCare Management, Inc. (the "Company" or "DCMI") was originally
incorporated in the State of Nevada on June 7, 1993 under the name
Sports/Gaming/Racing Publications, Inc. On November 8, 1995, pursuant to a Stock
Purchase Agreement dated October 12, 1995, the Company purchased one hundred
percent (100%) of the issued and outstanding shares of Dental Management
Systems, Inc., an Oklahoma corporation ("DMSI") formed on September 27, 1994,
from Messrs. John C. Edwards, Gary A. Radford and J. Kenneth Hurst, in exchange
for 3,225,000 of the issued and outstanding shares of the Company. In addition,
the name of the Company was changed to DentlCare Management, Inc. As a result of
the above transactions, DMSI became a wholly-owned subsidiary of the Company.
Because the Company had no significant assets, liabilities or business
activities prior to its purchase of DMSI, whose primary asset was its
wholly-owned operating subsidiary DentureCare Services, Inc. ("DCSI"), the
discussion below is focused on the business and operations of DMSI, which
continues to be in business and has been in business since 1994, together with
the Company's other operating subsidiaries.
The Company acquired the assets and business activities of HPS-Nevada
("HPS-Nevada"), a Nevada corporation, in February 1996 and the assets and
business activities of Hippocratic Preservation Society, Inc. ("HPS-Illinois"),
an Illinois corporation, in June 1996. HPS-Nevada and HPS-Illinois manage dental
practices in Nevada and Illinois respectively, whereas the Company's other
subsidiary, DMSI, manages dental practices in Tulsa, Oklahoma.
The Tulsa operations commenced in early 1991 with a two treatment room
facility contracting one dentist and employing one technician and one assistant.
The operation now has two locations with 22 treatment chairs, five dentists and
13 assistants and technicians. This discounted fee for service operation
concentrates on reconstructive dentistry (dental implants, dentures, crowns and
bridges). The Las Vegas operations began in early 1993 in the managed care
segment of general dentistry. During 1996, this operation had three locations
with a total capacity of 63 dental chairs, eight dentists, and 32 dental
assistants and technicians. The Chicago operations commenced in 1993 and are
also in the managed care market. During 1996, this operation had 11 dentists in
five locations, one mobile dental team, and a dental laboratory.
The Company was founded for the purpose of providing practice
management services to dental practices nationwide. The dental practices under
management provide a wide range of services and products to the dental
marketplace at affordable rates. These services include: endodontics,
prosthodontics, oral surgery, implants, periodontal treatment, and orthodontics,
as well as all basic dental services. The Company concentrates on business and
practice management, allowing its dentists to concentrate on the delivery of the
highest quality of dental care possible. By relieving the dentists of
administrative tasks, the dentist's are able to increase their efficiency,
productivity, and clinical ability. A patient is scheduled with the dentist
whose professional strength best matches the needs of the patient. This allows
for "semi-specialization" within the same office. The Company's commitment of
providing continuing education and equipping the office with the latest
technology also maximizes production and quality of care.
Bankruptcy Proceedings
On March 23, 1995, the Company's wholly owned subsidiary, DCSI, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Northern District of Oklahoma
(the "Bankruptcy Case".) The plan of reorganization (the "Plan") was approved by
the Bankruptcy Court during 1996. The Plan calls for the satisfaction of certain
debts through the issuance and sale of 2,400,000 shares of DCMI's common stock.
Substantially all assets of DCSI are encumbered by liens which, in the event of
failure of Plan performance, would entitle the lienholders to proceed against
DCSI and its assets.
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Advances from DCMI and DMSI to DCSI which occurred prior to the
voluntary petition are to be treated as unsecured claims while pre-petition and
post-petition advances to DCSI from DCMI and DMSI, which represent advances for
administrative purposes, are to be treated as priority claims. The portion of
these intercompany advances which were unpaid at the audit report date is
presented as a reduction in stockholders' equity while the amount received
between the balance sheet date and the audit report date is presented as an
asset.
As of December 31, 1996, the Plan Trustee had sold 349,800 shares of
DCMI's common stock for $623,129 which was utilized to pay professional fees
associated with the bankruptcy and reimburse DCMI and DMSI for post-petition
administration advances. Proceeds from the remaining 2,050,200 shares are to be
utilized to reimburse DCMI and DMSI for additional pre-petition and
post-petition advances of $1,573,131 and the payment of pre-petition liabilities
to creditors and taxing authorities of $2,097,953. In the opinion of bankruptcy
legal counsel for DCSI, it is reasonably possible that the following may occur
and have an unfavorable outcome in that DCSI may face certain loss
contingencies:
- In the event of a failure of performance of the terms of the
Plan. Such loss contingencies encompass all the claims asserted in the
Bankruptcy Case covered by the Plan terms and such post-confirmation claims as
have or may arise within that Bankruptcy Case proceeding, including professional
fees and costs.
- In the event of failure of performance of ongoing
obligations in the Bankruptcy Case proceedings, including but not limited to the
payment of U.S. Trustee fees and other post-confirmation claims, including those
of post-confirmation trade creditors and professionals employed by DCSI.
- In the event of failure to fulfill its ongoing obligations
to appoint and participate as a member of the Plan Trust Committee established
in the Plan, including failure to require the conduct of Plan Committee meetings
and the presentation of reports by the Plan Trustee.
- In the event that DCSI has been involved in procuring or has
received distributions from the Plan Trust before payments to creditors having
payment priority, in contravention of the order of distribution set forth under
the Plan terms.
- In the event that DCSI is charged with a breach of fiduciary
obligations imposed on DCSI in the Bankruptcy Case, including such obligations
arising from its status as debtor in possession, as reorganized debtor under the
Plan and as Plan Committee member.
As of the audit report date, it is not possible to estimate the
possible losses or range of losses if any or all of the above events occur.
BUSINESS OF THE COMPANY
The Company provides managerial, administrative, billing and collection
services, non-dental personnel and fully equipped facilities on a "turn-key"
basis to dental practices. The dental practices under management by the Company
provide a variety of quality dental services that replace, repair and restore
teeth, along with several of the more specialized dental procedures. The
procedures described below represent the Company's discounted fee-for-service
core business, the demand for which is growing rapidly as more people invest in
improving their appearance and in extending the life of their natural teeth.
Tooth Replacement: Implants, Dentures and Bridges
Dental implants are considered by many to be a revolutionary approach
in the replacement of missing teeth. A dental implant is a small cylinder
surgically implanted in the jawbone and is designed to work like a natural tooth
root. Implants can be used to anchor a single tooth, one or both ends of a
bridge, or a full denture. Once the implants are placed and secured, the teeth
are attached to the implants and become fully functioning permanent teeth that
look and feel like natural teeth. Implants normally require one or two
outpatient or office surgeries and take from three to nine months to complete.
For the patient, the implant procedure is less traumatic than having a tooth
extracted and the results are far superior to that of regular dentures.
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Dentures are sets of artificial teeth set into plastic frameworks that
rest directly on the gums. Partial dentures are used for people with several
missing teeth and whose teeth aren't strong enough to support a bridge. Complete
dentures are used for those who have lost all of their upper or lower teeth.
Three to five visits are required to obtain gum impressions and fit the dentures
properly. After receiving the dentures, patients may require more visits to make
minor adjustments.
Bridges are tooth replacements that are attached to adjoining natural
teeth. Fixed bridges and bonded bridges are the two most common kinds. Bridges
work best for people who have only a few missing teeth. Both fixed and bonded
bridges require that the adjoining teeth be healthy and have adequate gum and
root support. Usually two or three visits are required to obtain impressions and
to fix or bond the bridge to the anchor teeth.
Tooth Repair: Crowns, Root Canals and Fillings
Crowns, sometimes referred to as caps, are used to cover teeth that
have been weakened by decay around fillings or that are severely damaged. Crowns
may also be required after a root canal or when a tooth cracks or breaks. The
most common materials used for crowns are metal (gold), porcelain, or porcelain
fused to metal. Two visits are usually required, one to remove the decay and
shape the tooth into a base for the crown, and the other to cement the
custom-made crown to the tooth.
Root Canal treatment is often the only way to save teeth and repair
damage when the tooth's pulp, which contains nerves and blood vessels, becomes
infected or damaged because of decay or injury. After the tooth is numbed, the
dentist makes an opening to reach the pulp chamber. The infected nerve is
removed and the chamber and the root(s) are cleaned then filled with a
rubber-like material and the tooth is then filled. One to three visits may be
required, depending on the pulp's condition.
Fillings are needed when decay-causing acids create a cavity. The
dentist drills out the decay and shapes the tooth to hold the filling. The hole
is usually filled with a durable material, most often a composite (a
tooth-colored material), a metal alloy called amalgam, or gold. This procedure
normally requires only one office visit.
Tooth Restoration: Bonding, Bleaching and Porcelain Veneers
Bonding restores teeth that are chipped, cracked, misaligned or
discolored. A plastic resin somewhat like putty is used to rebuild the teeth and
make them look natural. One visit is usually required, although more complex
cases may require several visits.
Bleaching lightens surface stains caused by coffee, tea, food, and age.
With bleaching, a solution is applied to the stained teeth and activated with
heat or a combination of heat and light. The solution is then rinsed off,
revealing lighter-colored teeth. Six to eight teeth can be bleached during one
visit, but teeth may need to be bleached several times to achieve maximum
results. The patient may also be a candidate for doctor-prescribed,
patient-applied home bleaching.
Porcelain veneers are thin ceramic shells adhered onto the surface of
teeth in much the same way that false fingernails are applied. Veneers correct
or camouflage severe discoloration, damage, misalignment, or teeth that are
poorly shaped. Two visits are generally required; one to prepare the teeth and
make an impression, and the other to apply and finish the veneer.
Governmental Approval and Regulation
Various state statutes specifically define the practice of dentistry
and permit only licensed dentists to practice dentistry. The licensing boards of
states in which the Company operates could classify the management services that
the Company provides to dentists as the practice of dentistry. As a result, the
licensing boards could impose sanctions which likely could curtail the
operations of the Company's business. In addition, the state licensing boards
could suspend or cancel the license of the dental practice to which the Company
provides management services.
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In each state in which the Company operates, a state board regulates
the practice of dentistry. The Company, which offers management and
administrative support to dentists must operate within this regulatory
environment. Various governmental agencies such as the Occupational Safety and
Health Administration and state and county health departments regulate the
workplace of the Company. A governmental agency could suspend a permit or
license, or administer punishment due to a regulatory violation which could
curtail the Company's business operations.
DENTAL HEALTHCARE OVERVIEW
From time to time, the Company may publish forward-looking statements
relating to certain matters, including anticipated financial performance,
business prospects, product development, and other similar matters. All
statements other than statements of historical fact contained in this Form
10-KSB or in any other report of the Company are forward-looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of that safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements. In
addition, the Company disclaims any intent or obligation to update those
forward-looking statements.
Introduction
Dental health is undergoing a reconfiguration of its systems for
delivering services in keeping with trends in the health care industry. The
traditional individual practice of medicine is giving way to clinics, health
maintenance organizations ("HMO's") and preferred provider organizations
("PPO's") which offer a full range of medical specialties. Practice groups
organized on a "for profit" basis under professional management are being
established throughout the U.S.
Management believes that managed care is changing the dental
marketplace. It has increased its scope, diversity and impact on the profession
and dentistry overall. The available figures provided by the 1995 National
Association of Dental Plans (National Dental HMO Profile) states that in 1995,
18.4 million people were covered by managed care dental plans. This number
increased from 7.8 million in 1990. The Company's target market is the estimated
60% of the U.S. population that does not seek regular dental care. These
individuals only go to a dentist if they are in pain. As badly as they need
regular dental care, they avoid it because they are afraid of pain, expense, and
humiliation.
Current Position of the Industry
There are currently more than 150,000 active dentists in the United
States, approximately 90% of whom are in private practice. About 79% of all
dentists practice general dentistry; the remainder practice a dental specialty.
At the beginning of 1992, there were approximately 31,000 dental specialists,
49% of whom were orthodontists or oral and maxillofacial surgeons. According to
a September 1994 Gallup Poll, dentistry is the third most trusted profession in
the United States; dentists were rated higher in terms of honesty and ethical
standards than physicians and lawyers. Approximately 85% of dental care in the
U.S. is delivered on a fee-for-service basis, i.e. payment is made by either the
patient or his insurer according to procedures as they are performed. The
HMO/PPO format, where a patient or his or her employer pays an annual fee for
service, accounts for the other 15% and is growing.
Management believes that the demand for dental services will continue
to grow. Due to the success of preventive dentistry in reducing the incidence of
oral disease, the growing older population will retain their teeth longer, and
will be even more aware of the importance of regular dental care. Demand for the
newer services provided by dentists, such as cosmetic dentistry, also will
contribute to this growth. Notwithstanding, the number of first-year places in
dental schools has decreased from a high of 6,301 in 1978 to 4,121 in 1994.
Marketing and Competition
The nature of health care in the U.S. is changing. Individual private
practice doctors, that treat a wide variety of medical ailments are rapidly
disappearing. These doctors are being replaced by large clinics, HMOs and PPOs,
where patients go to be treated by multiple doctors, each specializing within a
narrow field. The private practice of medicine is being replaced with private
enterprise - the medical corporation. These corporations are
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operated as businesses, not as medical practices. They are organized to maximize
profits through adept purchasing, personnel recruiting and training, contract
negotiation, and above all - marketing.
The dental branch of health care however, is lagging far behind this
trend. Most dentists work as individual practitioners for a group of patients
that remains virtually unchanged after the first five or six years of practice.
In fact, some dentists refuse to accept new patients, having what they refer to
as a "limited practice". They do not market or advertise. In fact, they resent
those who do advertise, and for many years the industry prohibited dental
advertising.
Management believes that the Company has recognized that the dental
industry must face the challenges of today's economy by adopting the same
general philosophies as the medical profession. Managed care has increased its
scope, diversity and impact on the profession and dentistry overall. There are
currently 100 million people in the U.S. with some type of dental benefit. The
available figures provided by the 1995 National Association of Dental Plans
(National Dental HMO Profile) states that in 1995, 18.4 million people were
covered by managed care dental plans. This number increased from 7.8 million in
1990. From 1990 to 1995 the growth rate of managed care dental plans has been
approximately twenty percent (20%) per year.
The business of providing dental services is highly competitive in each
of the markets that the Company operates. Each of the dental practices under
management by the Company competes with dentists who maintain single or multiple
offices as well as dentists who maintain group practices. There are a number of
other companies currently developing and managing dental practices on a national
and regional basis. These companies generally have similar objectives as the
Company with substantially greater financial resources and may enter the
Company's markets and compete with the Company.
Dental Benefits Plans
Employers and other plan sponsors offer dental benefits to help
individuals by paying a portion of the cost of their dental care. Almost all
dental benefit plans are the result of a contract between the plan sponsor
(usually an employer or a union) and the third party (usually an insurance
company). Some employers now offer more than one dental plan to their employees.
The individual features of plans may differ somewhat, the most common designs
can be grouped into the following categories:
Direct Reimbursement programs reimburse patients a percentage of the
dollar amount spent on dental care, regardless of treatment category. This
method typically does not exclude coverage based on the type of treatment needed
and allows the patients to go to the dentist of their choice.
"Usual, Customary and Reasonable" (UCR) programs usually allow patients
to go to the dentist of their choice. These plans pay a set percentage of the
dentist's fee or the plan administrator's "reasonable" or "customary" fee limit,
whichever is less. These limits are the result of a contract between the plan
purchaser and the third-party payer. Although these limits are called
"customary," they may or may not accurately reflect the fees that area dentist's
charge. There is wide fluctuation and lack of government regulation on how a
plan determines the "customary" fee level.
Table or Schedule of Allowance programs determine a list of covered
services with an assigned dollar amount. That dollar amount represents just how
much the plan will pay for those services that are covered. Most often, it does
not represent the dentist's full charge for those services. The patient pays the
difference.
PPO programs are plans under which contracting dentists agree to
discount their fees as a financial incentive for patients to select their
practices. If the patient's dentist of choice does not participate in the plan,
the patient will have a reduction or complete loss of benefits.
Capitation programs pay contracted dentists a fixed amount (usually on
a monthly basis) per enrolled family or patient. In return, the dentists agree
to provide specific types of treatment to the patients at no charge (for some
treatments there may be a patient copayment). The capitation premium that is
paid may differ greatly from the actual cost of the dental care provided to the
patient.
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Managed Care Programs
Managed Care Programs are predicted to gain market share as dental
expenditures sustain growth. Dental expenditures in the U.S. grew at 7% compound
annual rate between 1980 and 1994 to over $43 billion. Dental care accounts for
5-6% of total personal health care expenditures in the U.S. Management believes
that this growth should continue at around 7% per annum because of the growing
demand for preventive and cosmetic dentistry. There is increasing concern over
infection control and sterilization, growing demand for certain advanced
procedures, and an increased proportion of the population using some form of
dental insurance or managed dental care.
Managed dental care membership has grown at a 25% compound rate since
1990. By the end of 1995, more than 23 million people were purchasing dental
coverage through a managed care program. Managed care is expected to grow due to
employers and employees becoming more inclined to join managed dental groups
following several years of experience with managed medical groups; the price
advantage of managed care over indemnity coverage becomes more apparent (nearly
20% less); marketing by CompDent* and other managed dental companies succeeds in
attracting private payers and individuals currently not visiting a dentist
(currently over 60% of the U.S. population between 18-64 do not visit a dentist
on a regular basis); and dentists become better educated about the benefit of
being a managed care participant.
Dentists can benefit from managed care in the following ways: patient
volume - managed care programs provide steady patient volume; reduced
administration; advance collections - dentists receive capitation payments
despite the fact that many members fail to visit them; attractive incremental
margins; a product which can gain brand name recognition with dentists,
employers and prospective members; a product which can expand into new markets
without high incremental fixed costs; the ability to leverage an investment in
proprietary management information systems; very attractive incremental margins
on adding new members whether through internal growth or acquisition.
EMPLOYMENT
As of September 30, 1997, the Company had 85 full time employees and 19
part time employees.
SUBSEQUENT EVENTS
On January 31, 1997, HPS-Illinois acquired the net assets of RES, Inc.,
a dental care related service provider in Chicago, Illinois, for a purchase
price of $250,000 which consisted of $125,000 in cash, 8,333 shares of DCMI's
common stock valued at $3.00 per share and a $100,000 promissory note. The
promissory note given in the exchange is payable in 48 consecutive monthly
installments of $2,536 commencing on March 1, 1997 with the final installment
due February 1, 2001. In connection with the acquisition of the net assets of
RES, Inc., HPS-Illinois entered into an employment agreement with the sole
stockholder of RES, Inc. The employment agreement states that the employee shall
serve as operations consultant on a half-time basis, 20 hours per week, at a
rate of $20 per hour through December 31, 2000. Subsequent to the acquisition of
the net assets of RES, Inc., HPS-Illinois defaulted on the related promissory
note. Upon the default, RES, Inc. filed suit against HPS-Illinois alleging
breach of obligations owed to RES, Inc. DCMI and RES, Inc. settled the lawsuit
by DCMI agreeing to pay the $90,000 balance owed as follows: $25,000 on or
before September 23, 1997, with the remaining sum of $65,000 to be paid with
interest at 10% in 12 equal monthly installments of $5,715 commencing October 1,
1997, with the final installment due on September 1, 1998.
On August 26, 1997, DCMI entered into a restructuring agreement (the
"Restructuring Agreement) with certain former officers of the Company (the
"Shareholder Group"), a creditor ("Bridge Bank") and the following investment
entities and advisors: Capital International Holdings, Inc. ("CIH"), Capital
International Securities Group, Inc. ("CISG"), Motivo Investments Limited
("Motivo"), James Goldberg ("Goldberg"), JLG Trading, Inc. ("JLG"), Hudson
Riverview Consulting, Inc. ("Hudson") and James Neifeld ("Neifeld") whereby DCMI
is to satisfy its indebtedness to Bridge Bank with the proceeds received from
the issuance of shares of DCMI's common stock which are to be sold with the
assistance of CISG through two private placement common stock offerings. The
terms of the Restructuring Agreement are as follows:
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The Shareholder Group is to deposit 3,698,218 shares of DCMI common
stock into escrow to be released 2/3 to Motivo, 1/6 to Hudson and 1/6
to Neifeld upon the following terms and conditions. Upon receipt by
DCMI of the minimum amount under the first offering, the shares in
escrow shall be transferred into a voting trust to be voted by the
trustee per the instruction of Motivo, Hudson and Neifeld. Upon the
receipt by DCMI of the maximum amount under the first offering,
1,849,109 shares shall be transferred from the voting trust to Motivo,
Hudson and Neifeld. Upon receipt by DCMI of the minimum amount under
the second offering, the remaining 1,849,109 shares shall be
transferred from the voting trust to Motivo, Hudson and Neifeld.
The first offering is to consist of the sale of from 4,000,000 to
10,000,000 newly issued shares of the Company's common stock for $.25
per share prior to September 30, 1997, of which the net proceeds are to
be applied to the satisfaction of the indebtedness to Bridge Bank,
other liabilities, working capital and future acquisition costs. The
second offering is to consist of the sale of from 400,000 to 1,800,000
newly issued shares of the Company's common stock for $2.50 per share
prior to April 1, 1998 of which the net proceeds are to be applied to
future acquisition costs. (In May 1998, there was a reverse split of
the Company's outstanding common stock whereby the common stock holders
were issued one (1) share of common stock for each five (5) shares
held).
Additional terms of the restructuring agreement state that (1) upon
receipt by DCMI of the minimum amount under the first offering, Motivo shall
have the authority to elect up to five additional directors of the Company; (2)
upon receipt by DCMI of the maximum amount under the first offering, DCMI shall
grant to CIH 2,500,000 warrants to purchase 2,500,000 shares of the Company's
common stock an exercise price of $1.00 per share; and (3) upon receipt by DCMI
of the minimum amount under the second offering, DCMI shall grant to CIH
5,000,000 warrants to purchase 5,000,000 shares of the common stock of DCMI at
an exercise price of $1.20 per share.
Pursuant to the terms of the restructuring Agreement, DCMI initiated a
private placement of its common stock under which a minimum of 4,000,000 shares
and a maximum of 10,000,000 shares were to be sold at $.25 per share. DCMI sold
10,000,000 shares under the offering and received net proceeds of $2,500,000.
The net proceeds received by DCMI were applied to the satisfaction of certain
liabilities, for working capital and future acquisition costs.
On August 28, 1997 in connection with the acquisition of HPS-Illinois,
the Company entered into employment agreements with each of the two co-managers
of its Illinois operations whereby those employees are to serve in that capacity
through August 31, 2000. As compensation for their services, the employees are
to receive a salary of $72,000 per year with 6% annual increases and options to
purchase 200,000 shares of the Company's common stock at its market value on
September 1, 1997. On August 28, 1997, the Company entered into an employment
agreement with one of the co-managers of its Nevada operations whereby that
employee is to serve in that capacity through August 31, 2000. As compensation
for his services, the employee is to receive a salary of $72,000 per year with
6% annual increases and options to purchase 150,000 shares of the Company's
common stock at its market value as of September 1, 1997.
On August 28, 1997, the Company entered into an employment agreement
with Dr. Charles Mitchell whereby Dr. Mitchell agreed to serve as DCMI's
president and chief operations officer through December 31, 2002. As
compensation for his services, Dr. Mitchell is to receive a salary of $96,000
per year with 6% annual increases, 100,000 shares of the Company's common stock,
an annual cash bonus equal to 3% of DCMI's annual net pre-tax earnings and
options to purchase up to 3,100,000 shares of the Company's common stock
exercisable upon the achievement of certain earnings by the Company.
As additional terms and conditions of Dr. Mitchell's employment
agreement, Dr. Mitchell agreed to cause the sale of the operating assets of
three dental practices to DCMI in exchange for $200,000, $1,000,000 shares of
preferred stock of DCMI which is convertible into 2,000,000 shares of DCMI's
common stock. Subsequent to the sale, DCMI will assume the management of the
dental practices. The shares of common stock to be issued in connection with the
purchase of the operating assets of the dental practices are subject to
reduction to the extent that the first six months of pre-tax profits of the
dental practices to be managed do not equal $125,000. On November 1, 1997, DCMI
acquired three dental practices, controlled by Dr. Mitchell, in a business
combination accounted for as
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a purchase. The acquisition was completed through the payment of $200,000 and
2,000,000 shares of the Company's common stock in exchange for the net assets of
the dental practices.
The Company had not paid any of the dividends payable to the holders of
the Series A preferred stock. The Series A preferred stock dividends in arrears
at September 30, 1997 totaled $100,000 ($.04 per share). Under their agreement
with the Company, the holders of the Series A preferred stock have the right to
appoint members to the Board of Directors with voting power equal to 50%, if the
dividends are not paid when due.
9
<PAGE> 10
ITEM 2. DESCRIPTION OF PROPERTY
This Item reflects activities of the Company through September 30,
1997.
Since September 30, 1997, the Company has occupied space for its
headquarters at 2360 Hassell Rd, Suite F, Hoffman Estates, Illinois 60195. Prior
to September 30, 1997, the Company's headquarters was located at 8118 E. 63rd
St., Tulsa, Oklahoma 74133.
The Company leases, through wholly-owned subsidiaries, two facilities
in Tulsa, Oklahoma, four facilities in the Las Vegas, Nevada area and five
facilities in the Chicago, Illinois area as of September 30, 1997.
ITEM 3. LEGAL PROCEEDINGS.
This Item reflects activities of the Company through September 30,
1997.
On January 31, 1997, HPS-Illinois acquired the net assets of RES, Inc.,
a dental care related service provider in Chicago, Illinois, for a purchase
price of $250,000 which consisted of $125,000 in cash, 8,333 shares of DCMI's
common stock valued at $3.00 per share and a $100,000 promissory note. The
promissory note given in the exchange was payable in 48 consecutive monthly
installments of $2,536 commencing on March 1, 1997 with the final installment
due February 1, 2001. In connection with the acquisition of the net assets of
RES, Inc., HPS-Illinois entered into an employment agreement with the sole
stockholder of RES, Inc. The employment agreement provided that the employee
serve as operations consultant on a half-time basis, 20 hours per week, at a
rate of $20 per hour through December 31, 2000. Subsequent to the acquisition of
the net assets of RES, Inc., HPS-Illinois defaulted on the related promissory
note. Upon the default, RES, Inc. filed suit against HPS-Illinois alleging
breach of obligations owed to RES, Inc. DCMI and RES, Inc. settled the lawsuit
whereby DCMI agreed to pay the $90,000 balance owed as follows: $25,000 on or
before September 23, 1997, with the remaining sum of $65,000 to be paid with
interest at 10% in 12 equal monthly installments of $5,715 commencing October 1,
1997 with the final installment due on September 1, 1998.
The following items are contingent liabilities of the Company due to
provisions included in the corporate bylaws and to indemnification agreements
entered into by the Company with certain former officers of the Company:
On July 1, 1997, the District Court in and for Tulsa County, State of
Oklahoma granted joint and several money judgment against certain
former officers of the Company in the amount of $347,762 plus interest
to a bank due to failure to pay in accordance with guarantees of debt
made by those former officers. The related debt is scheduled to be paid
under DCSI's bankruptcy plan of reorganization; however, if it is not
paid, the Company may be liable under an indemnification agreement.
On July 17, 1997, the Internal Revenue Service issued its final notice
of intent to levy civil penalties totaling $195,709 assessed against
two former officers of the Company relating to previous payroll tax
liabilities of the Company. Although the related debt is scheduled to
be paid under DCSI's bankruptcy plan of reorganization, if it is not
paid, the Company may be liable under an indemnification agreement. The
Internal Revenue Service has verbally agreed to postpone any attempt to
levy as long as the Company is current in its withholding and payment
of payroll taxes.
On June 16, 1997, a lawsuit was filed against DCMI by a company for
$125,000. On September 19, 1997, the Court entered a default judgment against
DCMI, which was subsequently set aside. DCMI's management believes that the
lawsuit will be settled for less than $125,000.
On July 24, 1997, a lawsuit was filed against DCMI by an individual for
$175,000 alleging breach of contract and violation of certain securities laws.
The case was subsequently settled for $100,000 and 50,000 shares of the
Company's common stock.
10
<PAGE> 11
On August 12, 1997, a lawsuit was filed by an individual who had sold a
dental practice to DCMI against certain members of DCMI's management who had
previously entered into an agreement whereby they would purchase 42,717 shares
of DCMI's common stock from the plaintiff on July 31, 1997 for $3.50 per share.
The suit, which claims that the terms of that agreement had been breached, was
filed for damages of $175,000. This suit was settled for $120,000 with payment
by DCMI to be made over a 3-year period.
On August 27, 1997, certain former officers of the Company who had
previously entered into an agreement to purchase 17,932 shares of DCMI's common
stock from an individual who had sold a dental practice to DCMI and is a current
employee of HPS-Illinois on July 31, 1997 for $3.50 per share, entered into a
Forbearance and Revised Agreement for Repurchase of Shares with that employee
and DCMI. Under the new agreement, the employee has agreed to extend the date on
which the shares must be purchased to September 30, 1997 for one-half of the
shares and December 31, 1997 for the balance of the shares. DCMI is currently in
default of the Revised Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
This Item reflects activities of the Company through September 30,
1997.
On August 4, 1997, the Company filed an amendment to its articles of
incorporation, increasing its authorized common stock, par value $.001 per share
to 200,000,000 shares and increasing its authorized shares of preferred stock,
no par value to 200,000 shares.
11
<PAGE> 12
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
Market Information
The Company's common stock is presently traded on the over-the-counter
market under the symbol "DCMI". The following table shows the quarterly high and
low bid and ask prices of the stock for the time period ending June 30, 1998:
COMMON STOCK
<TABLE>
<CAPTION>
BID PRICES ASK PRICES
---------------- ----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1996
First Quarter $ 5.50 $ 1.00 $ 5.50 $ 1.00
Second Quarter 4.13 2.75 4.13 2.75
Third Quarter 4.38 3.06 4.38 3.06
Fourth Quarter 3.50 1.38 3.50 1.38
1997
First Quarter 3.44 1.44 3.44 1.44
Second Quarter 1.69 0.44 1.69 0.44
Third Quarter 1.75 0.19 1.75 0.19
Fourth Quarter 1.50 0.44 1.50 0.44
1998
First Quarter 1.44 0.56 1.44 0.56
Second Quarter 1.44 0.75 1.44 0.75
</TABLE>
The bid prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. In May 1998,
there was a reverse split of the Company's outstanding common stock whereby the
common stock holders were issued one (1) share of common stock for each five (5)
shares held. The above prices of the Company's common stock do not take into
account this reverse stock split.
HOLDERS
The number of record holders of the Company's Common Stock as of
September 30, 1997 was approximately 500.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and
intends to utilize current resources to expand its operations. Therefore, it is
not anticipated that cash dividends will be paid on the Company's common stock
for the foreseeable future. The Company has not authorized or paid the dividends
payable to the holders of the Series A preferred stock. The Series A preferred
stock dividends in arrears as of September 30, 1997 totaled $100,000 ($.04 per
share). Under their agreement with the Company, the holders of the Series A
preferred stock have the right to appoint members to the Board of Directors with
voting power equal to 50% if the dividends are not paid when due.
12
<PAGE> 13
PRIVATE PLACEMENT
See the "Subsequent Events" section of Item 1 for a discussion of a
private placement in the amount $2,500,000 which the Company undertook under a
restructuring agreement with certain former officers and a creditor of the
Company and certain investment entities and advisors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Item reflects activities of the Company through September 30,
1997.
From time to time, the Company may publish forward-looking statements
relating to certain matters, including anticipated financial performance,
business prospects, product development, and other similar matters. All
statements other than statements of historical fact contained in this Form
10-KSB or in any other report of the Company are forward-looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of that safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements. In
addition, the Company disclaims any intent or obligation to update those
forward-looking statements.
The following discussion should be read in conjunction with
the Company's Consolidated Financial Statements at Item 7 herein.
RESULTS OF OPERATIONS
During the year ended December 31, 1996, the Company's dental
management revenues increased to $4,708,151 from the year earlier amount of
$1,618,063, an increase of 191%. The increase consists of increases at the
Company's Tulsa operations in the amount of 13%, the addition of the Las Vegas
operations, which represented 135% of the increase and the addition of the
Chicago operations, which represented the remaining increase of 43%. The Las
Vegas and Chicago operations are included since their acquisition dates during
1996, ten months and six months, respectively.
During 1996, 39% of the Company's management revenues came from the
Tulsa operations, 46% came from the Las Vegas operations and 15% came from the
Chicago operations. If the Las Vegas and Chicago operations were annualized and
assumed to be in operation for the full year during 1996, the Company's
management revenues would have amounted to $6,115,000, of which the Las Vegas
operations would have accounted for 45%, the Tulsa operations would have
accounted for 31% and the Chicago operations would have accounted for 24%.
TULSA OPERATIONS
In January 1996, the Company opened a fourth office in Tulsa, Oklahoma.
In addition, one the Tulsa offices was closed at the end of the third quarter of
1996. In total, patient service revenues increased $349,018 or 17% in 1996 as
compared to 1995. The components of the net patient service revenue increase
included an increase in the two offices which operated for the full year in both
1996 and 1995 of $143,000 (7%), a decrease of $168,000 (8%) in the office which
was closed at the end of the third quarter of 1996 and an increase of $374,000
(18%) in the office which was opened during January of 1996.
During 1996, the Tulsa operations experienced an increase in dental
office expenses, including professional compensation, in the amount of $416,293
as compared to the 1995 period. While a number of factors contributed to the
increase in dental office expenses, i.e. starting up a new office, shut-down of
an existing office, the more significant cost components included higher
advertising costs in the amount of $156,664, higher supplies and laboratory
costs in the amount of $139,598 and higher facilities and equipment costs of
$77,839.
The Company increased its advertising costs during 1996 in an effort to
expand its existing revenue base. While the Company was successful in increasing
revenues, management determined that a large portion of the
13
<PAGE> 14
expanded advertising was having only limited benefit in terms of revenue
increases. Accordingly, during the last quarter of 1996, management began
reducing and eliminating advertising expenditures. The higher laboratory costs
and supply costs were primarily the result of opening a full service laboratory
at the new office. The second laboratory was closed during 1997. The higher
facility and equipment costs are primarily due to the opening of the new office
during January of 1996.
LAS VEGAS OPERATIONS
The Company acquired HPS-Nevada effective March 1, 1996 and the
financial statements include their operations since that date. On a pro forma
combined basis, the Las Vegas operations would have generated gross management
income of $2,475,366 and $931,712 for the twelve months ended December 31, 1996
and December 31, 1995, respectively. Net income before income taxes would have
been $361,753 and $96,384 for the twelve months ended December 31, 1996 and
December 31, 1995, respectively.
The gross management income increase of $1,543,654 (166%) along with
the increase in net income of $265,369 (275%) were principally the result of
increasing the volume at the 'Dental Hospital', the operation of their Medicaid
facility for the full year during 1996, the opening of a new location during the
fourth quarter of 1996 and the cost benefits of consolidating certain
administrative functions. The Company has a fourth facility under lease which it
is not currently operating.
CHICAGO OPERATIONS
The Company acquired HPS-Illinois effective July 1, 1996 and the
financial statements include their operations since that date. On a pro forma
combined basis, the Chicago operations would have generated gross management
income of $1,425,414 and $1,313,413 for the twelve months ended December 31,
1996 and December 31, 1995, respectively. Net income (loss) before income taxes
would have been $10,285 and ($59,497) for the twelve months ended December 31,
1996 and December 31, 1995, respectively.
The gross management income increase of $112,001 (9%) included
increases in all revenue areas, capitation plans - 39%, orthodontics - 28% and
general dentistry and other - 33%. Patient services increased $279,800 (16%),
however, professional compensation increased $167,799 (37%), resulting in the
management income increase of $112,001.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had a working capital deficit of
$1,181,814, as compared to a working capital deficit of $1,928,095 at December
31, 1995, an improvement of $746,281. The more significant components of the
working capital improvement are as follows. The confirmation of the plan of
reorganization for DCSI resulted in a reduction in short-term liabilities in the
amount of $2,097,953 together with a current receivable from the trustee of the
bankruptcy trust in the amount of $449,375, a total working capital improvement
of $2,547,328. This amount was offset by an increase in the reserve on barter
currency combined with a reclassification of a larger amount of the balance to
non-current asset aggregating $1,069,286, an increase in current liabilities of
$1,139,461 and an increase in trade accounts receivable of $356,241, resulting
in a net reduction in the amount of $1,852,506.
During the year ended December 31, 1996, the Company had a number of
common stock transactions which increased stockholders' equity in the total
amount of $4,380,157, and which are discussed in the notes to the financial
statements. The net result of the increases in stockholders' equity coupled with
the loss for the year resulted in a net decrease in stockholders' equity in the
amount of $944,317 to a balance of $506,747.
The Company's survival is contingent upon two principal factors,
profitable operations and raising sufficient debt and equity capital to allow
the Company to implement its business plan. In this regard , on August 26, 1997,
the Company entered into an agreement with its investment banker and one of its
lenders to undertake on a best efforts basis the private placement of up to
19,000,000 shares of its common stock for up to $7,500,000 (See Item 5). The
first phase of the private placement has been completed with the sale of
10,000,000 shares of common stock for $2,500,000.
14
<PAGE> 15
TRENDS
The Company has continued to grow, primarily through its acquisitions
of HPS-Nevada and HPS-Illinois. The significant growth during 1996 and the lack
of working capital has delayed implementation of certain operational plans,
however, the Company did improve its gross profit from dental centers to 1% from
a 12% loss during 1995.
During the fourth quarter of 1996, the Company determined that its
operations did not support maintaining any valuation for goodwill. Accordingly,
this amount was written off and is included in write-downs of assets on the
statement of operations. In addition, the Company reduced the carrying value of
its barter currency, increasing its reserve from 15% to 60%. This revision was
primarily the result of the Company determining it would require several more
years to utilize the barter currency than originally anticipated. This reserve
increase makes up the balance of the write-down of assets. These two actions
will have a positive impact on future operating results. The amortization of
goodwill which was approximately $12,000 per month will be eliminated. In
addition, goods and services the Company acquires through use of its barter
currency will be recorded at the valuation amount instead of the face amount.
The Company continues to evaluate potential affiliations with dental
practices and intends to affiliate with additional dental practices, the funding
for which, is expected to be some form of equity.
SEASONALITY
There are no seasonal factors affecting the Company's business.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of DentlCare Management, Inc. and
Subsidiaries, together with the reports thereon of Guest & Company, P.C. dated
November 3, 1997 is set forth on pages F-1 through F-26 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
15
<PAGE> 16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
This Item reflects certain activities of the Company through June 30,
1998.
The following table sets forth the names, ages and current positions
with the Company held by directors, and current and former executive officers,
together with the year such positions were assumed. There is no immediate family
relationship between or among any of the directors and current and former
executive officers, and the Company is not aware of any arrangement or
understanding between any director or current or former executive officer and
any other person pursuant to which he was elected to his current position.
<TABLE>
<CAPTION>
Position
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
Dr. Charles Mitchell 60 President and Director 1997
(since 10/8/97)
John C. Edwards 55 President (until 10/8/97) 1995
and Director (until 3/1/98)
Robert W. Donovan 74 Director-Chairman (until 1996
3/18/97)
J. Kenneth Hurst 51 Chief Financial Officer 1995
(until 10/8/97) and Director
(until 3/1/98)
Ron Stoeppelwerth 50 Director and Chief Financial 1997
Officer (since 10/8/97)
</TABLE>
The business experience for the last five years and other information
relating to each director and executive officer is as follows:
DR. CHARLES R. MITCHELL, DDS was appointed President and Chief
Operations Officer of the Company in August 1997 and elected a Director in
October 1997. Dr. Mitchell is a 1961 graduate of Marquette University Dental
School. He has written and lectured extensively throughout the United States and
Canada on practice management and alternate dental delivery systems. Dr.
Mitchell served as president of the Grove Dental Associates of Illinois, a group
practice with over 150 employees. After retiring from Grove Dental, he became
president and CEO of Stratum Five International, a company that developed,
managed, and implemented alternate delivery dental plans. That company was sold
to a consortium of Blue Cross and Blue Shield companies. Dr. Mitchell has served
as an officer and director of numerous health and financial organizations. Dr.
Mitchell is currently a consultant to Unicare, Inc., which is a nationwide
dental network comprised of over 18,000 providing dentists.
JOHN C. EDWARDS was elected a Director of the Company in 1995 and
resigned from the Board in March 1998. Mr. Edwards was a principal owner of
Struthers Industries, Inc. (previously Struthers Oil and Gas Corp.), a publicly
held oil and gas concern which he purchased in 1984. Mr. Edwards is a Certified
Public Accountant and former partner with Touche, Ross and Company. He is a
graduate of the University of Notre Dame.
ROBERT W. DONOVAN, D.D.S., M.S.D., Ph.D. was elected a Director in 1996
and resigned from the Board in March 1997. He received his D.D.S. from Marquette
University and his M.S.D.-Orthodontics and Ph.D.-Orthodontics from Northwestern
University. Dr. Donovan has served as an assistant professor at Northwestern
University and has served as Director of Orthodontic Seminars for U.S. Dental
Institute, Kimberly Churchill and the Donovan Academy. Dr. Donovan was a General
Partner in East Coast Prosthetic Clinics, was one of the Founders of
H.P.S-Illinois and was the Founder of H.P.S.-Nevada.
16
<PAGE> 17
J. KENNETH HURST was elected a Director of the Company in 1995 and
resigned from the Board in March 1998. Prior to his employment with the Company,
Mr. Hurst was a consultant for seven years to corporate and individual clients..
Previously he was assistant controller of a New York Stock Exchange corporation.
Mr. Hurst is a Certified Public Accountant and has a BSBA in Accounting and
Finance from the University of Arkansas.
RON STOEPPELWERTH was elected a Director of the Company in 1997. Mr.
Stoeppelwerth is a graduate of the University of Florida and has a Masters
Degree in taxation from Florida International University. Mr. Stoeppelwerth is a
Certified Public Accountant specializing in financial, management and tax
consulting. He has had articles published in the Financial Executive and
Accounting Today. Mr. Stoeppelwerth has had a distinguished executive career
directing global corporate finance and tax organizations to achieve excellent
operating performance and has delivered millions of dollars in cost savings
throughout his career. He was vice president at Aetna Life & Casualty, has
worked with Anderson Consulting and is currently employed by Capital
International Securities Group.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During 1996, the following persons failed to timely file with the
Commission the reports indicated that are required by Section 16(a) of the
Exchange Act:
John C. Edwards, former President and Director, failed to file a Form 3
after the Company's stock became subject to the reporting requirements
of Section 16(a).
Robert W. Donovan, former Director, failed to file a Form 3 after the
Company's stock became subject to the reporting requirements of Section
16(a).
J. Kenneth Hurst, former Chief Financial Officer and Director, failed
to file a Form 3 after the Company's stock became subject to the
reporting requirements of Section 16(a).
17
<PAGE> 18
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's chief
executive officer and each officer whose total cash compensation exceeded
$100,000 for the three fiscal years ended December 31, 1996. The Company has no
current long term compensation plans.
<TABLE>
<CAPTION>
NAME AND ANNUAL COMPENSATION
-------------------
PRINCIPAL POSITION YEAR SALARY BONUS OTHER
- ------------------ ---- ------ ----- -----
<S> <C> <C> <C> <C>
John C. Edwards 1996 $ 120,000 $ - $ -
President (until 10/8/97) 1995 $ 120,000 $ - $ -
and Director (until 3/1/98) 1994 $ 30,000 $ - $ -
Robert W. Donovan 1996 $ - $ - $ 100,000
Chairman of Board & Director 1995 N/A N/A N/A
(until 3/18/97) 1994 N/A N/A N/A
J. Kenneth Hurst 1996 $ 90,000 $ - $ -
Chief Financial Officer (until 10/8/97) 1995 $ 90,000 $ - $ -
and Director (until 3/1/98) 1994 $ 22,500 $ - $ -
</TABLE>
In addition, the Company makes available certain non-monetary benefits.
The Company considers such benefits to be ordinary and incidental business costs
and expenses. The value of such benefits did not exceed, in the case of any
named individual, 10% of the cash compensation of the individual.
On January 10, 1996, the directors of the Company established the
1996-1997 Nonstatutory Stock Option Plan ("the Plan") under which options to
purchase shares of the Company's common stock are granted at prices generally
paid by investors. The number of shares of common stock which may be issued
under the Plan shall not exceed 3,000,000 and no option shall be granted under
the Plan after December 31, 1997. During January 1996, options to acquire
2,350,000 shares of the Company's common stock were granted at option prices
ranging from $2.00 to $2.50. During 1996, management options for 1,725,000
shares were canceled, leaving a balance at December 31, 1996 of options to
acquire 625,000 shares of the Company's common stock at an option price of $2.00
per share, exercisable until January 1998. No options have been exercised under
the Plan.
During July 1996, warrants to acquire 25,000 shares of the Company's
common stock at $1.00 per share and 1,545,000 shares at $2.00 per share were
issued. Warrants to acquire 50,000 shares were exercised, 25,000 shares at $1.00
per share and 25,000 shares at $2.00 per share, leaving a balance at December
31, 1996 of warrants to acquire 1,520,000 shares at $2.00 per share, exercisable
until July 1998.
INDIVIDUAL OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the year ended December 31, 1996, there were no individual
option or SAR grants.
AGGREGATE OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
During the year ended December 31, 1996, there were no option or SAR
exercises and no unexercised options or SAR's outstanding as of December 31,
1996.
18
<PAGE> 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This Item reflects certain activities of the Company through September
30, 1997.
The following table sets forth information, as of September 30, 1997,
concerning shares of Common Stock of the Company owned by any person who is
known to the Company to be beneficial owner of more than five percent of the
Company's outstanding common stock and by each director and executive officer
and by all directors and executive officers as a group. Unless expressly
indicated otherwise, each of the below named individuals exercises sole voting
and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------- ------------------ --------
<S> <C> <C>
Dr. Charles Mitchell *100,000 0.7%
2360 Hassell Rd., Ste F
Hoffman Estates, IL 60195
John C. Edwards 266,400 1.8%
6823 East 108th Street
Tulsa, Oklahoma 74133
Robert W. Donovan 1,244,783 8.3%
Puerto Rico
J. Kenneth Hurst 1,814,850 12.2%
4505 South Ocean Boulevard
Highland Beach, Florida 33487
Bridge Bank 2,800,000 18.7%
P.O. Box N
7788 West Bay St.
Nassau, Bahamas
Ron Stoeppelwerth - -
2360 Hassell Rd., Ste F
Hoffman Estates, IL 60195
All officers and directors *2,181,250 14.6%
as a group (four persons)
</TABLE>
The number of outstanding shares of common stock used to calculate the
percentage was 14,934,867.
* Includes 100,000 shares that were issued to Dr. Mitchell as a part of
his employment agreement with the Company. In addition, Dr. Mitchell has options
to purchase 3,100,000 shares of the Company's common stock exercisable upon the
achievement of certain earnings by the Company.
CHANGES IN CONTROL
As discussed in Item 5, on August 26, 1997 the Company and certain
former officers and the principal shareholders of the Company entered into a
transaction with the Company's investment banker and a lender to sell up to
19,000,000 shares of the Company's common stock in two private placements for up
to $7,500,000. As a part of this transaction, voting rights to shares owned by
the former officers and other shareholders who were parties to the agreement, a
total of 3,698,218 shares, were transferred to a Voting Trust controlled by an
affiliate of the lender. The first private placement was completed in December
1997, and the Company received $2,500,000, which includes $700,000 in debt held
by the lender, which was exchanged for 2,800,000 shares of the Company's common
stock. Additionally, the Trustee of the Voting Trust has the right to appoint up
to five new directors to the Company's
19
<PAGE> 20
Board. As such, the lender and its affiliate now have effective control of the
Company. Prior to the transaction, the former officers together owned or
controlled 3,326,033 shares of common stock representing 30.4% of the Company's
outstanding common stock and thereby had effective control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth information regarding transactions between the
Company and directors, officers and persons who own in excess of 5% of the
Company's common stock:
The Company has a 10% note payable in the amount of $496,684 at
December 31, 1996 and $491,132 at December 31, 1995, to an entity owned by the
former President of DCMI, which resulted from the assumption of debt and net
advances.
The Company leases its former corporate offices on a month-to-month
basis from an affiliated entity owned by the Company's former President. Lease
expense pursuant to this agreement amounted to $23,550 and $16,500 during 1996
and 1995, respectively.
During 1996, the Company paid $315,169 for services provided by a
company controlled by the former Chairman of the Board of Directors.
During 1996, the Company acquired supplies in the amount of $15,294
from an entity owned by the president of HPS-Illinois. In addition, in 1996, the
Company acquired services in the amount of $23,360 from an entity jointly owned
by the president and vice president of HPS-Illinois.
20
<PAGE> 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits See Exhibit Index at page 22.
(b) Reports on Form 8-K The Company filed a report on Form 8-K dated
September 2, 1997, regarding a change in control of the Company. See
Item 5. No financial statements were filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DENTLCARE MANAGEMENT, INC.
Date: July 21, 1998 By: /s/ Dr. Charles R. Mitchell
------------------------------------
Dr. Charles R. Mitchell, President
Date July 21, 1998 By: /s/ Ron Stoeppelwerth
------------------------------------
Ron Stoeppelwerth, Chief
Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
Date: July 21, 1998 By: /s/ Dr. Charles R. Mitchell
------------------------------------
Dr. Charles R. Mitchell, Director
Date: July 21, 1998 By: /s/ Ron Stoeppelwerth
------------------------------------
Ron Stoeppelwerth, Director
21
<PAGE> 22
[GUEST & COMPANY LOGO]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
DentlCare Management, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of DentlCare
Management, Inc. and subsidiaries as of December 31, 1996 and the consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
DentlCare Management, Inc. and subsidiaries at December 31, 1996 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses since inception. In addition, the Company has used substantial
amounts of working capital in its operations. Further at December 31, 1996,
current liabilities exceed current assets by $1,181,814. In view of these
matters, realization of a major portion of the assets in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to meet its financing requirements
and the success of its future operations. Management believes that actions
presently being taken to revise the Company's operating and financial
requirements provide the opportunity for the Company to continue as a going
concern.
/s/ Guest & Company, P.C.
November 3, 1997
Tulsa, Oklahoma
F-1
<PAGE> 23
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996
<TABLE>
ASSETS
<S> <C>
Cash $ 42,113
Barter currency, current portion (net of reserve of $142,032) 94,688
Accounts receivable, less allowance for doubtful receivables
of $423,939 582,525
Due from employees 10,589
Due from officers/stockholders 8,453
Due from trustee of subsidiary's bankruptcy trust (note 10) 449,375
Supplies inventory 72,303
Prepaid expenses 18,151
----------
Total current assets 1,278,197
----------
Property and equipment (notes 3 and 7):
Buildings 65,000
Dental equipment 1,046,249
Furniture and fixtures 34,112
Computer equipment 54,611
Automobiles 44,680
Leasehold improvements 295,767
----------
1,540,419
Less accumulated depreciation and amortization 197,576
----------
Net property and equipment 1,342,843
Barter currency, less current portion (net of reserve of $1,278,288) 852,194
Deposits 28,314
----------
$3,501,548
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 24
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheet, Continued
December 31, 1996
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable to affiliate (note 2) $ 496,684
Current installments of long-term debt (note 3) 172,957
Current installments of obligations under capital leases (note 7) 35,245
Accounts payable 1,053,068
Accrued expenses 497,041
Due to officers/stockholders 205,016
-----------
Total current liabilities 2,460,011
-----------
Long-term debt, excluding current installments (note 3) 349,089
Obligations under capital leases, excluding current
installments (note 7) 163,239
Deferred revenue 22,462
-----------
Total liabilities 2,994,801
-----------
Stockholders' equity (notes 3, 4, 9, 10, 12, 13 and 14):
Series A cumulative, convertible preferred stock, $100 par value
Authorized 50,000 shares; issued and outstanding 25,000 shares 2,500,000
Common stock, $.001 par value. Authorized 25,000,000 shares;
issued and outstanding 10,851,700 shares 10,852
Additional paid-in capital 5,854,172
Deficit (6,734,521)
Due from trustee of subsidiary's bankruptcy trust (note 10) (1,123,756)
-----------
506,747
Commitments and contingencies (notes 7, 10 and 14)
-----------
$ 3,501,548
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 25
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net revenue $ 4,708,151 1,618,063
Costs of dental services:
Clinical and operating compensation 1,963,789 764,515
Dental supplies and laboratory costs 1,150,739 380,895
Facility and equipment costs 606,866 167,894
Depreciation and amortization 212,627 178,693
Advertising 348,077 190,634
Other costs 383,966 127,331
----------- -----------
4,666,064 1,809,962
----------- -----------
Gross profit (loss) 42,087 (191,899)
----------- -----------
General and administrative expenses 2,241,306 859,514
Depreciation and amortization 11,566 8,700
----------- -----------
Operating loss (2,210,785) (1,060,113)
----------- -----------
Other income (deductions):
Interest expense (97,373) (90,745)
Loss on disposal of assets (4,120) --
Write down of assets (note 5) (3,034,645) --
Other 1,701 1,289
----------- -----------
(3,134,437) (89,456)
----------- -----------
Net loss before income taxes (5,345,222) (1,149,569)
Income tax benefit (expense) (note 6) 20,748 (7,137)
----------- -----------
Net loss $(5,324,474) (1,156,706)
=========== ===========
Net loss per common share $ (.59) (.32)
=========== ===========
Weighted average common shares 9,085,658 3,634,200
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 26
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 -- $ -- 3,225,000 $ 3,225 $ 96,775
Debt converted to capital -- -- -- -- 400,000
Issuance of common stock to stockholders -- -- 409,200 409 (409)
Preferred stock issued for barter currency (note 4) 25,000 2,500,000 -- -- (138,889)
Net loss for the period -- -- -- -- --
------ ----------- ---------- ----------- -----------
Balances at December 31, 1995 25,000 2,500,000 3,634,200 3,634 357,477
Issuance of common stock for cash under
Regulation D Rule 504 stock offering (note 12) -- -- 2,000,000 2,000 995,000
Exercise of common stock warrants for cash -- -- 50,000 50 74,950
Issuance of common stock under subsidiary's plan
of reorganization (note 10) -- -- 2,400,000 2,400 4,291,813
Collection of amounts due from trustee prior to
balance sheet date (note 10) -- -- -- -- --
Collection of amounts due from trustee subsequent
to balance sheet date - classified as an asset for
financial reporting purposes (note 10) -- -- -- -- --
Issuance of common stock for subsidiaries (note 9) -- -- 2,700,000 2,700 --
Issuance of common stock for services -- -- 67,500 68 134,932
Net loss for the period -- -- -- -- --
Net loss for the period -- -- -- -- --
------ ----------- ---------- ----------- -----------
Balances at December 31, 1996 25,000 $ 2,500,000 10,851,700 $ 10,852 $ 5,854,172
====== =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
STOCK-
DUE FROM HOLDERS'
TRUSTEE OF EQUITY
SUBSIDIARY'S (NOTES 3, 4,
BANKRUPTCY 9, 10, 12,
DEFICIT TRUST 13 AND 14)
----------- ------------ ------------
<S> <C> <C> <C>
Balances at December 31, 1994 $ (253,341) $ -- (153,341)
Debt converted to capital -- -- 400,000
Issuance of common stock to stockholders -- --
Preferred stock issued for barter currency (note 4) -- -- 2,361,111
Net loss for the period (1,156,706) -- (1,156,706)
----------- ----------- -----------
Balances at December 31, 1995 (1,410,047) -- 1,451,064
Issuance of common stock for cash under
Regulation D Rule 504 stock offering (note 12) -- -- 997,000
Exercise of common stock warrants for cash -- -- 75,000
Issuance of common stock under subsidiary's plan
of reorganization (note 10) -- (2,196,260) 2,097,953
Collection of amounts due from trustee prior to
balance sheet date (note 10) -- 623,129 623,129
Collection of amounts due from trustee subsequent
to balance sheet date - classified as an asset for
financial reporting purposes (note 10) -- 449,375 449,375
Issuance of common stock for subsidiaries (note 9) -- -- 2,700
Issuance of common stock for services -- -- 135,000
Net loss for the period (5,324,474) -- (5,324,474)
Net loss for the period (5,324,474) -- (5,324,474)
----------- ----------- -----------
Balances at December 31, 1996 $(6,734,521) $(1,123,756) $ 506,747
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 27
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
INCREASE IN CASH
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 5,356,833 1,413,232
Cash paid to suppliers and employees (6,452,805) (1,742,102)
Interest paid (97,373) (90,745)
----------- -----------
Net cash used in operating activities (1,193,345) (419,615)
----------- -----------
Cash flows from investing activities:
Net advances to employees (3,177) (4,091)
Net advances to officers/stockholders (9,453) --
Capital expenditures (176,210) (44,480)
Cash acquired in acquisitions 7,578 --
----------- -----------
Net cash used in investing activities (181,262) (48,571)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (46,258) --
Proceeds from notes payable -- 550,204
Repayments of notes payable (233,000) (77,282)
Proceeds from notes payable - affiliates 5,552 --
Repayments of capital lease obligations (21,771) --
Net advances from officers/stockholders 11,941 --
Proceeds from common stock offering 997,000 --
Proceeds from exercise of common stock warrants 75,000 --
Proceeds from bankruptcy trustee 623,129 --
----------- -----------
Net cash provided by financing activities 1,411,593 472,922
----------- -----------
Net increase in cash 36,986 4,736
Cash, beginning of period 5,127 391
----------- -----------
Cash, end of period $ 42,113 5,127
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 28
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES 1996 1995
---- ----
<S> <C> <C>
Net loss $(5,324,474) (1,156,706)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred tax expense (benefit) (20,748) 7,137
Depreciation of property and equipment 224,193 61,728
Amortization of goodwill -- 125,665
Write down of assets 3,039,765 --
Goods and services purchased with stock 135,000 --
Net barter currency operating activity 200,717 40,210
Increase in accounts receivable (170,560) (146,265)
Decrease in inventory 6,760 --
Increase in prepaids (9,603) (8,548)
Increase in other assets (13,848) (2,435)
Increase in accounts payable and accrued liabilities 716,991 659,599
Increase in deferred revenues 22,462 --
----------- ----------
Net cash used in operating activities $(1,193,345) (419,615)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 29
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES 1996 1995
---- ----
<S> <C> <C>
Acquisitions of HPS-NV and HPS-IL:
Increase in accounts receivable $ 185,681 --
Increase in property and equipment 515,020 --
Increase in other assets 3,206 --
Increase in goodwill 64,294 --
Increase in accounts payable 456,373 --
Increase in long-term debt 316,706 --
Increase in common stock 2,700 --
Confirmation of Plan of Reorganization:
Increase in due from trustee of subsidiary's
bankruptcy trust 2,196,260 --
Decrease in notes payable - bank 773,571 --
Decrease in accounts payable 655,362 --
Decrease in accrued expenses 669,020 --
Increase in common stock 2,400 --
Increase in additional paid in capital 4,291,813 --
Other Noncash Transactions:
Dental equipment acquired through capital leases 220,255 --
Assets of dental practice acquired for debt 225,000 --
Debt converted to capital -- 400,000
Preferred stock issued in exchange for barter currency -- 2,500,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 30
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
DentlCare Management, Inc. and its wholly-owned subsidiaries, Dental
Management Systems, Inc., DentureCare Services, Inc., HPS-Nevada and
Hippocratic Preservation Society, Inc. (collectively referred to as
the "Company"). All material intercompany accounts and transactions
have been eliminated.
(b) ORGANIZATION
Dental Management Systems, Inc. (DMSI) was incorporated in the State
of Oklahoma on September 27, 1994 and its wholly-owned subsidiary,
DentureCare Services, Inc. (DCSI), was incorporated in the State of
Oklahoma on September 30, 1994.
In October 1995, DMSI was acquired by DentlCare Management,
Inc.(DCMI), a publicly traded company, incorporated in the State of
Nevada. The transaction has been treated as a reverse acquisition
and recapitalization of DMSI.
In February 1996, DCMI acquired HPS-Nevada (HPS-NV), a Nevada
corporation, in a business combination accounted for as a purchase.
In June 1996, DCMI acquired Hippocratic Preservation Society, Inc.
(HPS-IL), an Illinois corporation in a business combination
accounted for as a purchase.
(c) NATURE OF BUSINESS
The Company provides business and practice management services to
dentists through contractual agreements whereby the Company manages
the administrative activities of its clients allowing those clients
to devote all of their efforts toward providing high quality,
affordable dental care.
F-9
<PAGE> 31
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(d) BARTER CURRENCY
Barter currency consists of BX International (the exchange
organization) "dollars" which can be spent and collected in exchange
for goods and services between members of the exchange organization.
Members are charged a 10% usage fee, based on monthly purchases
using the barter currency. The Company has established a reserve
equal to 10% of its barter currency in anticipation of the usage
fees. The Company has also established a 50% reserve against its
barter currency balance based on the time value of money. These
reserves are adjusted as barter currency is used for purchases and
received for services rendered.
(e) INVENTORIES
Inventories consist primarily of small tools and supplies consumed
in the performance of dental services. Inventories are recorded at
the lower of cost or market using the first-in, first-out (FIFO)
method.
(f) PROPERTY AND EQUIPMENT
Owned property and equipment are stated at cost. Property and
equipment under capital leases are stated at the present value of
minimum lease payments at the inception of the lease. Owned property
and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets. Property and equipment
under capital leases and leasehold improvements are amortized using
the straight-line method over the estimated useful life of the
asset.
(g) GOODWILL
Goodwill represents the excess of the cost of companies acquired
over the fair value of their tangible net assets at dates of
acquisition. Goodwill is evaluated annually to determine the
remaining estimated useful life over which the balance is amortized
using the straight-line method.
(h) INCOME TAXES
Deferred income taxes are recognized for income and expense items
that are reported for financial reporting purposes in different
years than for income tax purposes.
F-10
<PAGE> 32
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(i) NET EARNINGS/LOSS PER COMMON SHARE
Net earnings/loss per common share amounts are computed using the
weighted average number of common shares outstanding during the
period. Fully diluted earnings/loss per common share is presented if
the assumed conversion of common stock equivalents results in
material dilution.
(j) USE OF ESTIMATES
The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily relate
to unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
(k) FAIR VALUE DETERMINATION
Financial instruments consist of cash, accounts receivable, accounts
payable, accrued liabilities, notes payable, long-term debt and
capital lease obligations. The carrying amount of these financial
instruments approximates fair value due to their short-term nature
or the current rates which the Company could borrow funds with
similar remaining maturities.
(2) NOTES PAYABLE
Note payable to affiliate consists of cash advances, accrued interest and
accrued rent payable to an affiliated entity. The balance of the unsecured
demand note accrues interest at the rate of 10%.
(3) LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Note payable to an individual; $50,000 payable in six
monthly installments of $8,333 beginning February
1997. In addition, $175,000 payable in the form of
DCMI common stock at a fixed price of $3.00 per share
over a period of 70 months for a total of 58,334
shares; collateralized by equipment $ 225,000
</TABLE>
F-11
<PAGE> 33
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) LONG-TERM DEBT, CONTINUED
<TABLE>
<S> <C>
Note payable to an individual with interest at 10%,
payable in monthly installments of $5,644 with the
final payment due March 2000; collateralized by
equipment and inventory $ 191,275
Note payable to a mortgage company with interest at
9.5%, payable in monthly installments of $597 with
the final payment due February 2016; collateralized
by real estate 62,495
Note payable to an individual with interest at 9%,
payable in monthly installments of $1,038 with the
final payment due March 1998; collateralized by real
estate 13,764
Note payable to a bank with interest at 10.75%;
payable in monthly installments of $851 with the
final payment due February 1999 or upon demand by the
bank; collateralized by an automobile 20,506
Note payable to an individual with interest at 8%,
payable in monthly installments of $783 with the
final payment due December 1997; unsecured 9,006
---------
Total long-term debt 522,046
Less current installments 172,957
---------
Long-term debt, excluding current installments $ 349,089
=========
</TABLE>
Maturities of long-term debt are as follows: 1997, $172,957; 1998, $91,117;
1999, $94,115; 2000, $48,208; 2001, $31,788; thereafter, $83,861.
F-12
<PAGE> 34
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) PREFERRED STOCK
Series A preferred stock is convertible to common stock at the rate of 40
shares of common stock for each share of Series A preferred stock at the
option of the holder. The Company has the option to redeem Series A
preferred stock at its face value upon 30 days prior written notice to the
holders thereof. Holders of Series A preferred stock shall have no voting
rights, except as required by Nevada law and as a separate class to
appoint directors discussed below.
Dividends at rates ranging from 4% to 10% per annum are payable quarterly
beginning January 31, 1997. In the event that dividends accrued are unpaid
for a period of 60 days after such payment is due, the holders of Series A
preferred stock shall be entitled to appoint members to the board of
directors with voting power equal to 50%.
In connection with the issuance of preferred stock in exchange for barter
currency, the Company has agreed that as long as BX International is the
holder of 25,000 shares of Series A preferred stock, no shares of common
stock shall be issued or options to purchase common stock shall be granted
to certain officers of the Company at a price less than $2.50 per share
without the written agreement of the holders of two-thirds of the
outstanding shares of Series A preferred stock.
(5) WRITE DOWN OF ASSETS
Write down of assets in 1996 consists of a $1,861,343 write down of
goodwill acquired in certain acquisitions, a $1,123,302 write down of
barter currency deemed to be impaired due to the time value of money over
the expected utilization period and a $50,000 acquisition deposit
forfeited.
F-13
<PAGE> 35
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) INCOME TAXES
Income tax (benefit) expense for the years ended December 31, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
1996:
Federal $ -- (17,636) (17,636)
State -- (3,112) (3,112)
-------- -------- --------
$ -- (20,748) (20,748)
======== ======== ========
1995:
Federal -- 6,067 6,067
State -- 1,070 1,070
-------- -------- --------
$ -- 7,137 7,137
======== ======== ========
</TABLE>
Income taxes amounted to a benefit of $20,748 and an expense of $7,137 for
the years ended December 31, 1996 and 1995, respectively. Actual income
taxes differ from the "expected" income taxes as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(1,817,375) (390,853)
Increase (reduction) in income taxes
resulting from:
Nondeductible bad debt expense -- 20,351
Nondeductible penalties 22,573 --
Nondeductible meals and entertainment 6,369 1,461
Net operating loss carryforwards not
utilized 1,767,685 376,178
----------- --------
$ (20,748) 7,137
=========== ========
</TABLE>
F-14
<PAGE> 36
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) INCOME TAXES, CONTINUED
Net deferred taxes at December 31, 1996 are comprised of the following:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
----------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts
receivable $ 165,025 --
Barter currency reserve 56,812 511,315
Officer compensation accrual 34,000 --
Book/tax depreciation difference -- 3,530
Goodwill -- 718,261
Net operating loss carryforwards -- 1,449,080
----------- ----------
255,837 2,682,186
Less valuation allowance (255,837) (2,682,186)
----------- ----------
Deferred tax assets -- --
----------- -----------
Deferred tax liabilities - none -- --
----------- ----------
Net deferred taxes $ -- --
=========== ==========
</TABLE>
At December 31, 1996, the Company has available unused net operating loss
carryforwards of approximately $3,225,000 which may be applied against
future taxable income through the year 2011.
(7) LEASES
The Company leases buildings and equipment under noncancellable operating
leases that expire over the next four years. Rental expense under these
operating leases was approximately $200,500 and $137,600 for the years
ended December 31, 1996 and 1995, respectively.
F-15
<PAGE> 37
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) LEASES, CONTINUED
Included in property and equipment are the following amounts applicable to
capital leases at December 31, 1996:
<TABLE>
<S> <C>
Dental equipment $ 220,255
Less accumulated amortization (11,970)
---------
$ 208,285
=========
</TABLE>
Future minimum lease payments under noncancellable operating leases and
the present value of future minimum capital lease payments as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ended December 31,
1997 $ 62,381 215,413
1998 62,381 183,178
1999 62,381 122,159
2000 59,277 67,789
2001 24,250 --
-------- --------
Total minimum lease payments 270,670 588,539
========
Less amount representing interest (at
rates varying from 14.4% to 16.4%) 72,186
--------
Present value of net minimum capital
lease payments 198,484
Less current installments of obligations
under capital leases 35,245
--------
Obligations under capital leases, excluding
current installments $163,239
========
</TABLE>
F-16
<PAGE> 38
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) LEASES, CONTINUED
The Company also leases office space under a month-to-month lease
agreement with an affiliated entity at a monthly rate of $3,350.
(8) RELATED PARTY TRANSACTIONS
Related party transactions are included in the financial statements as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable resulting from assumption of debt
and net advances from an affiliated entity
owned by the president of DCMI $ 496,684 491,132
Rent expense incurred to an affiliated entity
owned by the president of DCMI 23,550 16,500
Purchases of services from an affiliated
entity owned by a member of the Board of
Directors 315,169 --
Purchases of supplies from an affiliated
entity owned by the president of HPS-IL 15,294 --
Purchases of services from an affiliated
entity jointly owned by the president and
the vice-president of HPS-IL 23,360 --
</TABLE>
(9) ACQUISITIONS
On February 28, 1996, DCMI acquired HPS-NV, a Nevada corporation engaged
in dental practice management, in a business combination accounted for as
a purchase. The operations of HPS-NV are included in the Company's
consolidated financial statements since the date of acquisition. The
acquisition was completed through the issuance of 1,350,000 shares of
DCMI's common stock in exchange for all the outstanding common stock of
HPS-NV. Goodwill of $64,294 which was recognized in connection with this
acquisition was written off prior to December 31, 1996 based on expected
consolidated future cash flows.
F-17
<PAGE> 39
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) ACQUISITIONS, CONTINUED
On June 30, 1996, DCMI acquired HPS-IL, an Illinois corporation engaged in
dental practice management, in a business combination accounted for as a
purchase. The operations of HPS-IL are included in the Company's
consolidated financial statements since the date of acquisition. The
acquisition was completed through the issuance of 1,350,000 shares of
DCMI's common stock in exchange for all the outstanding common stock of
HPS-IL.
The following summarized pro forma (UNAUDITED) information assumes the
above acquisitions had occurred at the beginning of each of the periods
presented:
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 6,114,928 3,863,188
============ ==========
Net loss $ (5,074,521) (1,119,819)
============ ==========
Net loss per share $ (.52) (.18)
============ ==========
</TABLE>
The above summarized pro forma (UNAUDITED) amounts reflect adjustments to
net loss for amortization of goodwill and depreciation on revalued
property and equipment and adjustments to the number of shares
outstanding.
(10) BANKRUPTCY PROCEEDINGS AND CONTINGENCIES
On March 23, 1995, the Company's wholly-owned subsidiary DCSI, filed a
voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code. The filing was made in the United States Bankruptcy Court
for the Northern District of Oklahoma. The plan of reorganization (the
Plan) was approved by the Bankruptcy Court during 1996. The Plan calls for
the satisfaction of certain debt through the issuance and sale of
2,400,000 shares of DCMI's common stock. Substantially all assets of DCSI
are encumbered by liens which, in the event of failure of Plan
performance, would entitle the lienholders to proceed against DCSI and its
assets.
F-18
<PAGE> 40
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) BANKRUPTCY PROCEEDINGS AND CONTINGENCIES, CONTINUED
Advances from DCMI and DMSI to DCSI which occurred prior to the voluntary
petition are to be treated as unsecured claims while post-petition
advances to DCSI from DCMI and DMSI, which represent advances for
administrative purposes, are to be treated as priority claims. The portion
of these intercompany advances which was unpaid at the audit report date
is presented as a reduction in stockholders' equity while the amount
received between the balance sheet date and the audit report date is
presented as an asset.
As of December 31, 1996, the Plan Trustee has sold 349,800 shares of
DCMI's common stock for $623,129 which was utilized to pay professional
fees associated with the bankruptcy and reimburse DCMI and DMSI for
post-petition administration advances. Proceeds from the remaining
2,050,200 shares are to be utilized to reimburse DCMI and DMSI for
additional pre-petition and post-petition advances of $1,573,131 and the
payment of pre-petition liabilities to creditors and taxing authorities of
$2,097,953.
In the opinion of bankruptcy legal counsel for DCSI it is reasonably
possible that the following may occur and have an unfavorable outcome:
DCSI may face certain loss contingencies in the event of a failure
of performance of the terms of the Plan. Such loss contingencies
encompass all the claims asserted in the Bankruptcy Case, covered by
the Plan terms and such post-confirmation claims as have or may
arise within that Bankruptcy Case proceeding, including professional
fees and costs.
DCSI may face certain loss contingencies in the event of failure of
performance of ongoing obligations in the Bankruptcy Case
proceedings, including but not limited to the payment of U.S.
Trustee fees and other post-confirmation claims, including those of
post-confirmation trade creditors and professionals employed by
DCSI.
DCSI may face certain loss contingencies in the event of failure to
fulfill its ongoing obligations to appoint and participate as a
member of the Plan Trust Committee established in the Plan,
including failure to require the conduct of Plan Committee meetings
and the presentation of reports by the Plan Trustee.
F-19
<PAGE> 41
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) BANKRUPTCY PROCEEDINGS AND CONTINGENCIES, CONTINUED
DCSI may face certain loss contingencies in the event that DCSI has
been involved in procuring or has received distributions from the
Plan Trust before payments to creditors having payment priority, in
contravention of the order of distribution set forth under the Plan
terms.
DCSI may face certain loss contingencies in the event that DCSI is
charged with a breach of fiduciary obligations imposed on DCSI in
the Bankruptcy Case, including such obligations arising from its
status as debtor in possession, as reorganized debtor under the Plan
and as Plan Committee member.
As of the audit report date, it is not possible to estimate the possible
loss or range of loss if any or all of the above events occur.
(11) CONCENTRATION
As of December 31, 1996, the Company's management fee income is derived
from management contracts with three dental practices which have locations
in Tulsa, Oklahoma; Las Vegas, Nevada and Chicago, Illinois.
(12) STOCK OFFERING
On January 3, 1996, the Company initiated a Reg. D, Rule 504 offering of
the Company's common stock whereby it obtained $997,000 in capital through
the sale of 2,000,000 shares of common stock.
(13) RIGHTS TO PURCHASE STOCK
On January 10, 1996, the directors of the Company established the
1996-1997 Nonstatutory Stock Option Plan (the Plan) under which options to
purchase shares of the Company's common stock are granted at prices
generally paid by investors. The purpose of the Plan is to provide a
special incentive to directors, officers, key employees and consultants of
the Company and its subsidiaries to promote the Company's business. The
number of shares of common stock which may be issued under the Plan shall
not exceed 3,000,000 and no option shall be granted under the Plan after
December 31, 1997.
F-20
<PAGE> 42
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) RIGHTS TO PURCHASE STOCK, CONTINUED
During January 1996, options to acquire 2,350,000 shares of the Company's
common stock were granted at option prices ranging from $2.00 to $2.50.
During 1996, management options for 1,725,000 shares were canceled,
leaving a balance at December 31, 1996 of options to acquire 625,000
shares of the Company's common stock at an option price of $2.00 per
share, exercisable until January 1998.
During July 1996, warrants to acquire 25,000 shares at $1.00 per share and
1,545,000 shares at $2.00 per share were issued. Warrants to acquire
50,000 shares were exercised, 25,000 shares at $1.00 per share and 25,000
shares at $2.00 per share, leaving a balance at December 31, 1996 of
warrants to acquire 1,520,000 shares at $2.00 per share, exercisable until
July 1998.
(14) SUBSEQUENT EVENTS
On January 31, 1997, HPS-IL acquired the net assets of RES, Inc., a dental
care related service provider in Chicago, Illinois, for a purchase price
of $250,000 which consisted of $125,000 in cash, 8,333 shares of DCMI's
common stock valued at $3.00 per share and a $100,000 promissory note. The
promissory note given in the exchange is payable in 48 consecutive monthly
installments of $2,536 commencing on March 1, 1997 with the final
installment due February 1, 2001.
In connection with the acquisition of the net assets of RES, Inc., HPS-IL
entered into an employment agreement with the sole stockholder of RES,
Inc. The employment agreement states that the employee shall serve as
operations consultant on a half-time basis, 20 hours per week, at a rate
of $20 per hour through December 31, 2000.
Subsequent to the acquisition of the net assets of RES, Inc., HPS-IL
defaulted on the related promissory note. Upon that default, RES, Inc.
filed suit against HPS-IL in the Circuit Court of Cook County, Illinois,
Municipal Department, Second District alleging breach of obligations owed
to RES, Inc. DCMI and RES, Inc. settled the lawsuit by DCMI agreeing to
pay the $90,000 balance owed as follows: $25,000 on or before September
23, 1997, with the remaining sum of $65,000 to be paid with interest at
10% in 12 equal monthly installments of $5,715 commencing October 1, 1997
with the final installment due on September 1, 1998. DCMI is current in
this obligation.
F-21
<PAGE> 43
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) SUBSEQUENT EVENTS, CONTINUED
The following items are contingent liabilities of the Company due to
provisions included in the corporate bylaws and due to indemnification
agreements entered into by the Company with certain members of its
management:
On July 1, 1997, the District Court in and for Tulsa County, State
of Oklahoma granted joint and several money judgment against certain
members of the Company's management in the amount of $347,762 plus
interest for failure to pay bank debt in accordance with guarantees
of debt made by those members of management. The related debt is
scheduled to be paid under DCSI's bankruptcy plan of reorganization;
however, if it or a part thereof is not paid, the Company may be
liable under an indemnification agreement.
On July 17, 1997, the Internal Revenue Service issued its final
notice of intent to levy civil penalties totaling $195,709 assessed
against two members of DCMI's management relating to previous
payroll tax liabilities of the DCMI. Although the underlying debt is
scheduled to be paid under DCSI's bankruptcy plan of reorganization,
if it or a part thereof is not paid, the Company may be liable under
an indemnification agreement. The Internal Revenue Service has
verbally agreed to postpone any attempt to levy as long as DCMI is
current in its withholding and payment of payroll taxes.
On June 16, 1997, a lawsuit was filed against DCMI by a company for
$125,000 in the District Court, Clark County, Nevada. On September 19,
1997, the Court entered a default judgment against DCMI, which was
subsequently set aside. DCMI's management believes that the lawsuit will
be settled for less than $125,000.
On July 24, 1997, a lawsuit was filed against DCMI by an individual in the
U.S. District Court for the Western District of Texas for $175,000
alleging breach of contract and violation of certain securities laws. The
case was subsequently settled for $100,000 and 50,000 shares of common
stock.
F-22
<PAGE> 44
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) SUBSEQUENT EVENTS, CONTINUED
On August 12, 1997, a lawsuit was filed by an individual who had sold a
dental practice to DCMI against certain members of DCMI's management who
had previously entered into an agreement whereby they would purchase
42,717 shares of DCMI's common stock from the plaintiff on July 31, 1997
for $3.50 per share. The suit, which claims that the terms of that
agreement had been breached, was filed for damages of $175,000 in the U.S.
District Court for the Northern District of Illinois, Eastern Division.
This suit was settled for $120,000 with payment by DCMI to be made over a
3-year period.
On August 27, 1997, certain members of DCMI's management who had
previously entered into an agreement to purchase 17,932 shares of DCMI's
common stock from an individual who had sold a dental practice to DCMI and
a current employee of DCMI on July 31, 1997 for $3.50 per share, entered
into a Forbearance and Revised Agreement for Repurchase of Shares with
that employee and DCMI. Under the new agreement, the employee has agreed
to extend the date at which the shares must be purchased to September 30,
1997 for 1/2 of the shares and December 31, 1997 for the balance of the
shares. As of the audit report date, DCMI is in default under the Revised
Agreement.
On August 26, 1997, DCMI entered into a restructuring agreement (the
restructuring agreement) with certain members of its management (the
shareholder group), a creditor (Bridge Bank) and the following investment
entities and advisors: Capital International Holdings, Inc. (CIH), Capital
International Securities Group, Inc. (CISG), Motivo Investments Limited
(Motivo), James Goldberg (Goldberg), JLG Trading, Inc. (JLG), Hudson
Riverview Consulting, Inc. (Hudson) and James Neifeld (Neifeld) whereby
DCMI is to satisfy its indebtedness to Bridge Bank with the proceeds
received from the issuance of shares of DCMI's common stock which are to
be sold with the assistance of CISG through two private placement stock
offerings. The terms of the restructuring agreement are as follows:
F-23
<PAGE> 45
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) SUBSEQUENT EVENTS, CONTINUED
The shareholder group is to deposit 3,698,218 of its shares of DCMI
common stock into escrow to be released 2/3 to Motivo, 1/6 to Hudson
and 1/6 to Neifeld upon the following terms and conditions. Upon
receipt by DCMI of the minimum amount under the first offering, the
shares in escrow shall be transferred into a voting trust to be
voted by the trustee per the instruction of Motivo, Hudson and
Neifeld. Upon the receipt by DCMI of the maximum amount under the
first offering, 1,849,109 shares shall be transferred from the
voting trust to Motivo, Hudson and Neifeld. Upon receipt by DCMI of
the minimum amount under the second offering, the remaining
1,849,109 shares shall be transferred from the voting trust to
Motivo, Hudson and Neifeld.
The first offering is to consist of the sale of from 4,000,000 to
10,000,000 newly issued shares of common stock for $.25 per share
prior to September 30, 1997 of which the net proceeds are to be
applied to the satisfaction of the indebtedness to Bridge Bank,
other liabilities, working capital and future acquisition costs. The
second offering is to consist of the sale of from 400,000 to
1,800,000 newly issued shares of common stock for $2.50 per share
prior to April 1, 1998 of which the net proceeds are to be applied
to future acquisition costs.
Additional terms of the restructuring agreement state that (1) upon
receipt by DCMI of the minimum amount under the first offering,
Motivo shall have the authority to elect up to five additional
directors of DCMI; (2) upon receipt by DCMI of the maximum amount
under the first offering, DCMI shall grant to CIH 2,500,000 warrants
to purchase 2,500,000 shares of the common stock of DCMI at an
exercise price of $1.00 per share; and (3) upon receipt by DCMI of
the minimum amount under the second offering, DCMI shall grant to
CIH 5,000,000 warrants to purchase 5,000,000 shares of the common
stock of DCMI at an exercise price of $1.20 per share.
F-24
<PAGE> 46
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) SUBSEQUENT EVENTS, CONTINUED
Pursuant to the terms of the August 26, 1997 restructuring agreement, on
August 27, 1997, DCMI initiated a private placement of its common stock
under which a minimum of 4,000,000 shares and a maximum of 10,000,000
shares were to be sold at $.25 per share. The offering was made on "best
efforts" and "mini-maxi" bases for the period from August 27, 1997 to
September 30, 1997. Subscriptions were accepted under the offering for a
minimum of 200,000 shares and were payable on or before September 30,
1997. The net proceeds received by DCMI were to be applied to the
satisfaction of certain liabilities of the company, working capital and
future acquisition costs. DCMI sold 10,000,000 shares under the offering
and received net proceeds of $2,500,000, which were utilized as stated
above.
On August 28, 1997 in connection with the acquisition of HPS-IL, the
Company entered into employment agreements with each of the two
co-managers of its Illinois operations whereby those employees are to
serve in that capacity through August 31, 2000. As compensation for their
services, the employees are to receive a salary of $72,000 per year with
6% annual increases and options to purchase 200,000 shares of the common
stock of DCMI at its market value as of September 1, 1997.
On August 28, 1997, the Company entered into an employment agreement with
one of the co-managers of its Nevada operations whereby that employee is
to serve in that capacity through August 31, 2000. As compensation for his
services, the employee is to receive a salary of $72,000 per year with 6%
annual increases and options to purchase 150,000 shares of the common
stock of DCMI at its market value as of September 1, 1997.
On August 28, 1997, the Company entered into an employment agreement with
an individual whereby that individual shall serve as DCMI's president and
chief operations officer through December 31, 2002. As compensation for
his services, the employee is to receive a salary of $96,000 per year with
6% annual increases, 100,000 shares of DCMI's common stock, an annual cash
bonus equal to 3% of DCMI's annual net pre-tax earnings and options to
purchase up to 3,100,000 shares of DCMI's common stock exercisable upon
the achievement of certain earnings by the Company.
F-25
<PAGE> 47
DENTLCARE MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) SUBSEQUENT EVENTS, CONTINUED
As additional terms and conditions of the employment agreement with DCMI's
president and chief operations officer, the employee has agreed to cause
the sale of the operating assets of several dental operations to DCMI in
exchange for $1,000,000 of preferred stock of DCMI which is convertible
into 2,000,000 shares of DCMI's common stock. Subsequent to the sale, DCMI
will assume the management of the dental practices. The shares to be
issued under this agreement shall be decreased proportionally to the
extent that the first six months pre-tax profits of the operations to be
managed do not equal $125,000.
On October 31, 1997, DCMI acquired a dental practice in a business
combination accounted for as a purchase. The acquisition was completed
through the payment of $517,000 in exchange for the net assets of the
Nevada Corporation. The results of operations of the Nevada Corporation
will be included with the results of the Company beginning October 31,
1997.
On November 1, 1997, DCMI acquired 3 dental practices, controlled by
DCMI's president, in a business combination accounted for as a purchase.
The acquisition was completed through the payment of $200,000 and
2,000,000 shares of common stock of DCMI in exchange for the net assets of
the Illinois Corporations. The results of operations of the Illinois
Corporations will be included with the results of the Company beginning
November 1, 1997.
As of the date of the independent auditor's report, the Company had not
paid any of the dividends payable to the holders of the Series A preferred
stock. The Series A preferred stock dividends in arrears at that date
totaled $100,000 ($.04 per share). Under their agreement with the Company,
the holders of the Series A preferred stock have the right to appoint
members to the Board of Directors with voting power equal to 50% if the
dividends are not paid when due.
F-26
<PAGE> 48
EXHIBITS HAVE BEEN OMITTED FROM THIS COPY. COPIES OF EXHIBITS MAY BE OBTAINED
FROM DENTLCARE MANAGEMENT, INC. ("THE COMPANY") UPON REQUEST AND PAYMENT OF THE
COMPANY'S COSTS IN FURNISHING SUCH COPIES. COPIES MAY ALSO BE OBTAINED FROM THE
SECURITIES AND EXCHANGE COMMISSION FOR A SLIGHT CHARGE.
(The foregoing is not applicable to the original(s) hereof.)
SECURITIES
AND EXCHANGE
COMMISSION PAGE
EXHIBIT NO. TYPE OF EXHIBIT NUMBER
- ------------ --------------- ------
2. Plan of Purchase, Sale, Reorganization, Liquidation or
Succession N/A
3.1 Articles of Incorporation of the Company and amendments
thereto and incorporated herein by reference thereto N/A
3.2 By-Laws of the Company and incorporated herein by
reference thereto N/A
4. Instruments defining the rights of security holders,
including indentures N/A
9. Voting Trust Agreement N/A
10. Material Contracts N/A
11. Statement regarding Computation of Per Share Earnings N/A
16. Letter on Change in Certifying Accountants N/A
18. Letter regarding Change in Accounting Principles N/A
21. Subsidiaries of the Registrant - Included in Item I(a) N/A
22. Published Report Regarding Matters Submitted to
Vote of Security Holders N/A
23. Consents of Experts and Counsel N/A
24. Power of Attorney N/A
27. Financial Data Schedule 23
28. Information from reports furnished to state insurance
regulatory authorities N/A
99. Additional Exhibits N/A
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 42,113
<SECURITIES> 0
<RECEIVABLES> 1,006,464
<ALLOWANCES> 423,939
<INVENTORY> 72,303
<CURRENT-ASSETS> 1,278,197
<PP&E> 1,540,419
<DEPRECIATION> 197,576
<TOTAL-ASSETS> 3,501,548
<CURRENT-LIABILITIES> 2,460,011
<BONDS> 0
0
2,500,000
<COMMON> 10,852
<OTHER-SE> (2,004,105)
<TOTAL-LIABILITY-AND-EQUITY> 3,501,548
<SALES> 4,708,151
<TOTAL-REVENUES> 4,708,151
<CGS> 4,666,064
<TOTAL-COSTS> 4,666,064
<OTHER-EXPENSES> 2,252,872
<LOSS-PROVISION> 3,034,645
<INTEREST-EXPENSE> 97,373
<INCOME-PRETAX> (5,345,222)
<INCOME-TAX> (20,748)
<INCOME-CONTINUING> (5,324,474)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,324,474)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
