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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1997
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MONARCH DENTAL CORPORATION
(Exact name of Registrant as specified in its charter)
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<C> <C> <C>
DELAWARE 8099 51-0363560
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
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4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TEXAS 75244
(972) 702-7446
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
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WARREN F. MELAMED, D.D.S.
Chairman
MONARCH DENTAL CORPORATION
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TEXAS 75244
(972) 702-7446
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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<C> <C> <C>
JOHN R. LECLAIRE, P.C. KENNETH K. BEZOZO, ESQ. CARMELO M. GORDIAN, P.C.
ANDREW F. VILES, ESQ. HAYNES AND BOONE, L.L.P. S. MICHAEL DUNN, P.C.
GOODWIN, PROCTER & HOAR LLP 901 MAIN STREET, SUITE 3100 BROBECK, PHLEGER & HARRISON LLP
EXCHANGE PLACE DALLAS, TEXAS 75202 301 CONGRESS, SUITE 1200
BOSTON, MASSACHUSETTS (214) 651-5000 AUSTIN, TEXAS 78701
02109-2881 (512) 477-5495
(617) 570-1000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ] 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] 333-
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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Common Stock, $.01 par value.......... 2,875,000 Shares $12.00 $34,500,000 $10,455
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(1) Includes 375,000 shares of Common Stock which the underwriters have the
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED APRIL 2, 1997
PROSPECTUS
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SHARES
MONARCH DENTAL CORPORATION
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Company has applied to have the Common
Stock approved for quotation on the Nasdaq National Market under the symbol
MDDS.
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share......................... $ $ $
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Total(3).......................... $ $ $
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
SALOMON BROTHERS INC
, 1997
<PAGE> 3
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered by the Company has been filed with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to herein are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits and schedules thereto. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C. and copies of all or any part thereof may
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, the New York Regional Office located at
Seven World Trade Center, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, upon payment of certain fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's World Wide Web site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by its independent auditors.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto of
Monarch Dental Corporation ("Monarch" or the "Company") appearing elsewhere in
this Prospectus. Monarch is a dental group practice management company. It
manages dental facilities (each, a "Dental Office" and collectively, the "Dental
Offices") at which it provides office space, support personnel, information
systems and management services to general dentists and specialists. Except
where permitted by law, Monarch does not employ dentists to practice dentistry
nor does it otherwise control the practice of dentistry. The Company has entered
into Management Agreements (the "Management Agreements") with dental
professional corporations (the "P.C.s") pursuant to which dentists employed by
(or who contract with) the P.C.s practice dentistry at the Company's Dental
Offices, other than those in Wisconsin where ownership of dental practices by
the Company is permitted. All references to "dentists" providing services at the
Dental Offices refer to dentists employed by (or who contract with) the P.C.s or
by (or with) the Company in states in which such employment or contracting is
permissible. All references herein to industry financial and statistical
information are based on trade articles and industry reports that the Company
believes to be reliable, although there can be no assurance to that effect.
THE COMPANY
The Company manages dental group practices in selected markets, presently
including Dallas-Fort Worth, Houston, Wisconsin and Arkansas. The Company seeks
to build geographically dense networks of dental providers by expanding within
its existing markets and entering new markets through acquisition. At April 1,
1997, the Company managed 66 Dental Offices, of which 15 were internally
developed and 51 were acquired by the Company. The Dental Offices provide
general dentistry services and increasingly offer specialty dental services such
as orthodontics, oral surgery, endodontics, periodontics and pediatric
dentistry. At April 1, 1997, the Dental Offices employed 126 full-time general
dentists and employed or contracted with 11 full-time specialists.
The dental services industry is undergoing rapid change throughout the
United States. The industry historically has been highly fragmented, with dental
care delivered through thousands of providers practicing either independently or
in small groups. Services generally have not been covered by third-party payment
arrangements and consequently have been paid for by individuals on an
out-of-pocket basis. More recently, factors such as increased consumer demand
for dental services and the desire of employers to provide enhanced benefits for
their employees have resulted in an increase in third-party payment arrangements
to finance the purchase of dental services. These third-party payment
arrangements include indemnity insurance, preferred provider plans and capitated
managed dental care plans. In response to current market trends, general and
specialty dental practices increasingly have formed larger group practices. In
these practices a separate professional management team handles practice
management functions such as staffing, billing, information systems, managed
care contracting, leasing, purchasing and marketing, enabling dental
professionals to focus on providing high-quality dental services.
The Company seeks to capitalize on emerging trends in the dental services
industry. The Company's objective is to be a leading dental practice management
company in each of its markets. The Company's business strategy emphasizes (i)
expanding operations within its existing markets, (ii) entering selected new
markets by acquiring group practices which have a significant market presence or
which the Company believes can achieve such a presence in the near term, and
seeking to use these practices as a "pedestal" from which to expand, (iii)
increasing patient volume principally through television, radio and print
advertising, (iv) increasing profitability by focusing on fee-for-service
general and specialty dentistry and supplementing this business with revenue
from contracts with capitated managed dental care plans and (v) adapting and
implementing the best practices identified in its affiliated groups throughout
its provider networks.
The Company has generated growth within existing markets principally by
increasing the overall physical space, patient volume and fees at existing
Dental Offices and by opening Dental Offices on a de novo basis. Revenue from
the Company's Dallas-Fort Worth operations increased $3.6 million, or 38.3%, to
$13.2 million in 1995, and increased $5.1 million , or 38.1%, to $18.3 million
in 1996. Since January 1, 1996, the Company
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<PAGE> 5
has entered three new markets through the acquisitions of MacGregor Dental
Centers in Houston in February 1996, Midwest Dental Care in Wisconsin in August
1996 and Convenient Dental Care, Arkansas Dental Health Associates and United
Dental Care Tom Harris D.D.S. & Associates in Arkansas in November 1996, January
1997 and April 1997, respectively. The collective pro forma revenue of these
acquired companies was $38.3 million for the year ended December 31, 1996.
THE OFFERING
Common Stock offered by the Company..... shares
Common Stock to be outstanding after the
offering................................ shares(1)
Use of proceeds......................... To repay a portion of existing
indebtedness, to redeem all
outstanding shares of redeemable
preferred stock and for general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.................................. MDDS
- ------------------------------
(1) Excludes (i) 2,000,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Option and Incentive Plan, as amended (the "1996
Stock Plan"), of which 65,000 shares are issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $1.56 per
share, (ii) 1,000,000 shares of Common Stock reserved for issuance under the
Company's Equity Acquisition Option Plan (the "Acquisition Plan"), of which
up to 185,000 shares will be subject to options to be granted at an exercise
price equal to the fair market value of the Common Stock at the time of
grant if certain acquired dental practices achieve specified financial
performance goals, and (iii) 500,000 shares of Common Stock reserved for
issuance under the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan"), respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Management -- Employee
Stock and Other Benefit Plans -- 1996 Stock Option and Incentive Plan" and
"-- 1997 Employee Stock Purchase Plan."
------------------------------
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and has been adjusted to
reflect the conversion of all outstanding shares of non-voting Class A Common
Stock, Convertible Participating Preferred Stock and Series A Convertible Junior
Preferred Stock into an equal number of shares of Common Stock upon completion
of this offering. Unless the context otherwise requires, all references to the
"Company" mean Monarch Dental Corporation, its predecessors and all of its
direct and indirect subsidiaries.
4
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------------------------- 1996 PRO FORMA
1992 1993 1994 1995 1996 AS ADJUSTED(1)(2)
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CONSOLIDATED STATEMENT OF INCOME DATA:
Dental group practices revenue, net................ $6,760 $8,028 $9,559 $13,223 $35,980 $
Less: amounts retained by dental group practices... 2,109 2,669 3,070 4,301 11,802
Net revenue........................................ 4,651 5,359 6,489 8,922 24,178
Operating expenses................................. 3,996 4,673 5,401 7,253 21,391
Operating income................................... 655 686 1,088 1,669 2,787
Interest expense, net.............................. 59 56 81 87 1,687
Income before provision for income taxes........... 596 630 1,007 1,669 1,100
Income taxes(3).................................... -- -- -- -- 425
Net income......................................... $ 596 $ 630 $1,007 $ 1,582 $ 675
Pro forma net income(3)............................ 393 416 665 1,044 675
Net income per common share(4)..................... $ 0.05
Weighted average common shares outstanding......... 13,459
OTHER FINANCIAL AND OPERATING DATA:
EBITDA (5)......................................... $ 847 $ 943 $1,340 $ 1,962 $ 4,217
Number of Dental Offices (end of period)........... 8 9 10 12 53
Number of dentists (end of period) (6)............. 11 12 25 33 133
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DECEMBER 31, 1996
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PRO FORMA
ACTUAL AS ADJUSTED(7)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,059 $
Working capital (deficit)................................. (3,995)
Total assets.............................................. 32,906
Long-term debt, less current maturities................... 18,769
Redeemable equity securities.............................. 9,711
Total stockholders' equity (deficit)...................... (5,408)
</TABLE>
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The unaudited pro forma consolidated financial information presented does
not purport to (i) represent what the consolidated results of operations or
financial condition of the Company would actually have been if the transactions
reflected therein had in fact occurred on the assumed dates or (ii) project the
future consolidated results of operations or financial condition of the Company.
(1) Gives effect to the acquisitions of MacGregor Dental Centers, Midwest Dental
Care, Convenient Dental Associates, Arkansas Dental Health Associates and
United Dental Care Tom Harris D.D.S. & Associates as if they had been
completed on January 1, 1996. See "The Company," "Pro Forma Consolidated
Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Gives effect to the sale of shares of Common Stock offered hereby as
if it had been completed at January 1, 1996 at an assumed initial public
offering price of $ per share and the receipt and application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(3) The Company was an S corporation prior to February 6, 1996, and accordingly,
the consolidated statements of income for all periods ending prior to such
date did not include income tax expense. Pro forma net income includes an
adjustment to reflect estimated income tax effects on net income for the
years ended December 31, 1992, 1993, 1994 and 1995 at an assumed effective
tax rate of 34%.
(4) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements of the Company. Due to the effect on the Company's capital
structure of transactions completed in February 1996, per share data for the
periods ended prior to January 1, 1996 are not comparable to subsequent
periods and, therefore, have not been presented. See "Certain Transactions."
(5) EBITDA represents earnings before net interest expense, income taxes and
depreciation and amortization and is not intended to represent an
alternative to net income or any other measure of performance under
generally accepted accounting principles. EBITDA is not intended to suggest
that cash flows are sufficient to meet cash needs. The Company believes that
investors may find this measure useful as an indicator of financial
performance.
(6) Includes full-time general dentists employed by the Company or the P.C.s, as
applicable, and full-time specialists, most of whom are independent
contractors.
(7) Gives effect to the acquisitions of Arkansas Dental Health Associates and
United Dental Care Tom Harris D.D.S. & Associates and to the completion of
this offering at an assumed initial public offering price of $ per
share and the receipt and application of the estimated net proceeds
therefrom as if such transactions had been completed on December 31, 1996.
See "The Company," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Pro Forma Consolidated Financial
Information," "Use of Proceeds" and "Capitalization."
5
<PAGE> 7
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the securities offered hereby. This Prospectus contains
forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in the Prospectus generally. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth below and the matters set forth in this Prospectus generally.
Risks Associated with Acquisition Strategy. The Company has grown
substantially in a relatively short period of time, principally through
acquisitions. The Company has completed six acquisitions resulting in the
addition of 51 Dental Offices since January 1, 1996. The Company has incurred
substantial indebtedness to finance these acquisitions, which in turn has
contributed to a working capital deficit of $4.0 million at December 31, 1996.
Failure of the Company's management to manage and integrate the Company's newly
acquired operations and to improve the operating performance of these acquired
companies could have a material adverse effect on the Company's business,
financial condition and operating results.
The Company's growth strategy emphasizes entering selected new markets by
acquiring group practices which have a significant market presence or which the
Company believes can achieve such a presence in the near term, and seeking to
use the acquired practices as a "pedestal" from which to expand. The Company's
"pedestal" expansion strategy for new markets entered through acquisition is
untested and there can be no assurance that the Company will be able to
implement it successfully.
The Company devotes substantial time and resources to acquisition-related
activities. Identifying appropriate acquisition candidates and negotiating and
consummating acquisitions can be a lengthy and costly process. There can be no
assurance that suitable acquisition candidates will be identified or that
acquisitions will be consummated on terms favorable to the Company, on a timely
basis or at all. In the event the closing of a planned acquisition fails to
occur or is delayed, the Company's quarterly financial results may be materially
lower than analysts' expectations, which likely would cause a decline, perhaps
substantial, in the market price of the Common Stock. In addition, increasing
consolidation in the dental services industry may result in an increase in
purchase prices required to be paid by the Company to acquire dental practices.
In the event the Company is able to identify and consummate acquisitions,
the integration of such acquisitions may be a difficult, costly and
time-consuming process. The Company may encounter substantial unanticipated
costs or other problems associated with such integration. During the period
immediately following an acquisition, the Company's expenditures related to the
integration of the acquired dental practices may exceed the operating cash flow
of such dental practices. Moreover, the Company's operating results in fiscal
quarters immediately following an acquisition may be adversely affected while
the Company attempts to integrate the acquired practices. As a result, there can
be no assurance that future acquisitions will not have a material adverse effect
on the Company's business, financial condition and operating results. See
"Business -- Expansion."
Risks Associated with Expansion within Existing Markets. The Company seeks
to increase revenue and profitability in existing markets by physically
expanding its existing Dental Offices to add more general dentists, specialists
and hygienists, by establishing Dental Offices on a de novo basis and by
improving the efficiency of the Dental Offices. The Company's success will be
dependent, in part, upon increasing the revenue of existing Dental Offices and
successfully establishing de novo Dental Offices. The Company is subject to
risks associated with this growth strategy, including the risk that the Company
will be unable to successfully expand existing Dental Offices or establish de
novo Dental Offices, or increase efficiency through its management of the
existing Dental Offices. Although revenue from the Company's Dallas-Fort Worth
operations increased from $9.6 million in 1994 to $18.3 million in 1996,
representing a compound annual growth rate of 38.1%, there can be no assurance
that the Company's revenue in this market will continue to
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<PAGE> 8
grow at these historic rates or that the Company's operations in other markets
will grow at rates comparable to those experienced in Dallas-Fort Worth. See
"Business -- Expansion -- Expansion Within Existing Markets."
Management of Growth. The Company recently has experienced a period of
rapid growth with a substantial increase in the number of its Dental Offices,
resulting in part from expansion into three new markets. The number of Dental
Offices managed by the Company increased from 12 at January 1, 1996 to 66 at
April 1, 1997. This growth has placed, and will continue to place, strains on
the Company's management, operations and systems. The Company's ability to
compete effectively will depend upon its ability to hire, train and assimilate
additional management and other employees and its ability to expand, improve and
effectively utilize its operating, management, marketing and financial systems
to accommodate its expanded operations. Any failure by the Company's management
to effectively anticipate, implement and manage the changes required to sustain
the Company's growth may have a material adverse effect on the Company's
business, financial condition and operating results.
Limited Capital; Need for Additional Financing. Implementation of the
Company's growth strategy has required and is expected to continue to require
significant capital resources. Such resources will be needed to acquire or
establish additional Dental Offices and for the effective integration, operation
and expansion of the Dental Offices. The Company historically has used a
combination of cash, promissory notes, stock and the assumption of certain
liabilities (including indebtedness) as consideration in acquisitions of dental
practices and intends to continue to do so. The Company expects that its capital
requirements over the next several years will substantially exceed cash flow
generated from operations and borrowings available under the Company's existing
credit facility or any successor credit facility. To finance capital
requirements, the Company anticipates that it will from time to time issue
additional equity securities and incur additional debt. Additional debt or
non-Common Stock equity financings could be required to the extent that the
Company's Common Stock fails to maintain a market value sufficient to warrant
its use for future financing needs. The Company may not be able to obtain
additional required capital on satisfactory terms, if at all. In particular, the
Company's existing credit facility contains certain restrictions on the
Company's ability to acquire additional dental practices. The failure to raise
the funds necessary to finance the expansion of the Company's operations or the
Company's other capital requirements could materially and adversely affect the
Company's ability to pursue its strategy and its operating results in future
periods. If additional funds are raised through the issuance of equity
securities, dilution to the Company's existing stockholders may result. If
additional funds are raised through the incurrence of debt, such debt
instruments will likely contain restrictive financial, maintenance and security
covenants.
At December 31, 1996, the Company had a working capital deficit of $4.0
million, resulting principally from the incurrence of indebtedness in connection
with its acquisitions, and a net deficit of stockholders' equity of $5.4
million. The repayment of $ of indebtedness under the Company's
existing senior credit facility with a portion of the net proceeds from this
offering and the retention of a portion of the net proceeds for general
corporate purposes will significantly reduce the Company's working capital
deficit. There can be no assurance the Company will not have working capital
deficits in the future, particularly if future indebtedness requires current
amortization of principal. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Availability of Dentists. All dentists practicing at the Dental Offices
have entered into employment agreements individually or through their
professional corporations or independent contractor agreements through their
professional corporations. Such agreements typically contain a non-competition
agreement for up to three years following termination of the agreement within a
specified geographic area, usually a specified number of miles from the relevant
Dental Office. The agreements with dentists who have sold their practices to the
Company generally are for a specified initial term of up to five years. Although
the Company will endeavor to renew agreements with affiliated dentists or their
professional corporations, in the event that many of the Company's affiliated
dentists terminate or do not renew their agreements or in the event the non-
competition agreements are determined to be unenforceable or more limited in
scope than their terms, the Company's business, financial condition and
operating results could be materially and adversely affected. See
"Business -- Affiliation Structure." In addition, the Company's expansion
strategy is dependent on the
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<PAGE> 9
availability and successful recruitment of dentists. The Company may not be able
to successfully recruit new dentists for its existing and newly established
Dental Offices, which may have a material adverse effect on the Company's
expansion strategy and its business, financial condition and operating results.
Risks Associated with Payor Mix. The health care industry, including the
dental services market, is experiencing a trend toward cost containment, as
third-party and government payors seek to impose lower reimbursement rates upon
providers. The Company believes that this trend will continue and will
increasingly affect dental services. This may result in a reduction in
per-patient and per-procedure revenue from historic levels. Significant
reductions in payments to dentists or other changes in reimbursement by
third-party payors for dental services may have a material adverse effect on the
Company's business, financial condition and operating results.
Part of the Company's growth strategy involves obtaining capitated managed
dental care contracts. Under a capitated managed dental care contract, the
participating dentist receives a fixed monthly capitation payment for each plan
member regardless of the quantity or cost of services to the participating
dentist, thereby shifting the risk of utilization to the dentist. In contrast,
under traditional indemnity insurance arrangements, the insurance company pays
whatever reasonable charges are billed for the dental services provided.
There can be no assurance that the Company will be able to negotiate future
capitation arrangements on satisfactory terms or at all, or that the fees
offered in current capitation arrangements will not be reduced to levels
unsatisfactory to the Company. Moreover, to the extent that costs incurred by
the Company's affiliated dental practices in providing services to patients
covered by capitated managed dental care contracts exceed the revenue under such
contracts, the Company's business, financial condition and operating results may
be materially and adversely affected.
Approximately 16.4% of the Company's revenue for the year ended December
31, 1996 in the Dallas-Fort Worth and Houston markets, and approximately 29.1%
of the Company's pro forma revenue for the year ended December 31, 1996 in the
Wisconsin market, were derived from contracts with Prudential Dental Maintenance
Organization, Inc. ("Prudential Dental") and Compcare Health Services Insurance
Corporation ("Compcare"), respectively. The Prudential Dental contract is for an
initial two-year term expiring April 1, 1999 and renews automatically for
successive one-year terms thereafter unless either party gives the other nine
months' prior written notice. The Compcare contract continues until terminated
by either party upon 90 days' prior written notice. The material economic terms
of these contracts can therefore be renegotiated periodically. Failure to
negotiate future capitation arrangements on satisfactory terms with Prudential
Dental or Compcare or the termination of the Company's contracts with Prudential
Dental or Compcare may have a material adverse effect on the Company's business,
financial condition and operating results.
Geographic Concentration. The current geographic concentration of the
Company's operations in the Dallas-Fort Worth, Houston, Wisconsin and Arkansas
markets increases the risk to the Company of adverse economic or regulatory
developments or action within these markets. In addition, the Company's growth
strategy is dependent, in part, upon acquiring larger group practices in
selected markets. The Company's strategy of focused expansion within selected
markets increases the risk to the Company that adverse economic or regulatory
developments in one or more of these markets may have a material adverse effect
on the Company's business, financial condition and operating results.
Government Regulation. The dental care industry is extensively regulated at
both the federal and state levels. Federal laws generally regulate reimbursement
and billing practices under Medicare and Medicaid programs and prohibit fraud or
abuse in connection with such practices. Because very little dental care is
currently provided under Medicare and Medicaid, the Company receives very little
revenue from these programs and the impact of these laws on the Company to date
has been negligible. There can be no assurance, however, that the scope of these
laws will not be expanded in the future, and if expanded, such laws could have a
larger impact on the Company's operations and could have a material adverse
effect on the Company's business, financial condition and operating results.
All states have laws requiring the licensing of dental practices and
prohibiting fraud or abuse relating to reimbursements from any insurer. Many
states have laws prohibiting the practice of dentistry by, and
8
<PAGE> 10
regulating the sharing of professional fees with, non-dentists or entities not
owned by dentists. In addition, there are certain insurance regulatory risks
associated with the Company's participation in managed care arrangements, such
as capitated plans, under which the Company assumes the financial risk
associated with over-utilization of dental services. The assumption of such risk
may cause the Company or the P.C.s to become subject to state insurance laws. To
the extent the Company or the P.C.s are determined to be engaged in the business
of insurance, the Company may be required to comply with insurance laws or
change the method of payment from third-party payors. Either development could
have a material adverse effect on the Company's business, financial condition
and operating results. See "Business -- Government Regulation."
Risks Arising From Health Care Reform. There can be no assurance that the
laws and regulations of the states in which the Company operates will not change
or be interpreted in the future either to restrict or adversely affect the
Company's relationships with dentists or the operation of Dental Offices.
Federal and state governments are currently considering various types of health
care initiatives and comprehensive revisions to the health care and health
insurance systems. Some of the proposals under consideration, or others that may
be introduced, could, if adopted, have a material adverse effect on the
Company's business, financial condition and operating results. It is uncertain
what legislative programs, if any, will be adopted in the future, or what
actions Congress or state legislatures may take regarding health care reform
proposals or legislation. In addition, changes in the health care industry, such
as the growth of managed care organizations and provider networks, may result in
lower payments for the services of the Company's affiliated dental practices.
Possible Exposure to Professional Liability. In recent years, dentists have
become subject to an increasing number of lawsuits alleging malpractice and
related legal theories. Some of these lawsuits involve large claims and
significant defense costs. Any suits involving the Company or dentists at the
Dental Offices, if successful, could result in substantial damage awards that
may exceed the limits of the Company's insurance coverage. The Company provides
practice management services; it does not engage in the practice of dentistry or
control the practice of dentistry by the P.C.s or the dentists or their
compliance with regulatory requirements directly applicable to providers (except
in Wisconsin where the ownership of dental practices by the Company is
permitted). Nevertheless, dentists at the Dental Offices have been in the past
involved in malpractice suits and there can be no assurance that the Company
will not become subject to litigation in the future as a result of the dental
services provided at the Dental Offices. The Company maintains professional
malpractice and general liability insurance for itself and maintains
professional liability insurance covering dentists, hygienists and dental
assistants at the Dental Offices. The Company generally is a named insured under
such policies and is named as an additional insured on each individual dentist's
policy, wherever possible. Certain types of risks and liabilities are not
covered by insurance, however, and there can be no assurance that coverage will
continue to be available upon terms satisfactory to the Company or that the
coverage will be adequate to cover losses. Malpractice insurance, moreover, can
be expensive and varies from state to state. Successful malpractice claims
asserted against the dentists, the P.C.s or the Company may have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business -- Insurance."
Competition. The dental practice management segment of the dental services
industry, currently in its formative stage, is highly competitive and is
expected to become increasingly more competitive. In this regard, the Company
expects that the provision of multi-specialty dental services at convenient
locations will become increasingly more common. The Company is aware of several
dental practice management companies that are currently operating in its
existing markets. There are also a number of companies with dental practice
management businesses similar to that of the Company currently operating in
other parts of the country which may enter the Company's existing markets in the
future. Such competitors may be better capitalized or otherwise enjoy
competitive advantages which may make it difficult for the Company to compete
against them or to acquire additional Dental Offices on terms acceptable to the
Company. As the Company seeks to expand its operations into new markets, it is
likely to face competition from dental practice management companies which
already have established a strong business presence in such locations.
The business of providing general dental and specialty dental services is
highly competitive in the markets in which the Company operates. Competition for
providing dental services may include practitioners who have more established
practices and reputations. The Company competes against established practices in
the
9
<PAGE> 11
retention and recruitment of general dentists, specialists and hygienists to
staff the Dental Offices and to accommodate the growth of such sites. If the
availability of dentists begins to decline in the Company's markets, it may
become more difficult to attract qualified dentists to staff the Dental Offices.
The Dental Offices may not be able to compete effectively against other existing
practices or against new single or multi-specialty dental practices that enter
its markets, or to compete against such practices in the recruitment of
qualified dentists. See "Business -- Competition."
Reliance on Certain Personnel. The success of the Company, including its
ability to complete and integrate acquisitions, depends on the continued
services of a relatively limited number of members of the Company's senior
management. Implementation of the Company's business strategy will require the
addition of qualified management personnel. The loss of the services of one or
more members of the Company's senior management or the failure to add qualified
management personnel could have a material adverse effect on the Company's
business, financial condition and operating results. See "Management."
Risks Associated with Intangible Assets. The acquisitions of MacGregor
Dental Centers, Midwest Dental Care, Convenient Dental Care, Arkansas Dental
Health Associates and United Dental Care Tom Harris D.D.S. & Associates ("United
Dental") resulted in significant increases in the Company's intangible assets
relating to the Management Agreements and goodwill. At December 31, 1996,
intangible assets on the Company's balance sheet were $23.0 million,
representing 69.8% of the Company's total assets at that date and an additional
$5.2 million of intangible assets were added in 1997 as a result of the
acquisitions of Arkansas Dental Health Associates and United Dental. The Company
expects the amount allocable to intangible assets on its balance sheet to
increase in the future in connection with additional acquisitions, which will
increase the Company's amortization expense. In the event of any sale or
liquidation of the Company or a portion of its assets, there can be no assurance
that the value of the Company's intangible assets will be realized. In addition,
the Company continually evaluates whether events and circumstances have occurred
indicating that any portion of the remaining balance of the amount allocable to
the Company's intangible assets may not be recoverable. When factors indicate
that the amount allocable to the Company's intangible assets should be evaluated
for possible impairment, the Company may be required to reduce the carrying
value of such assets. Any future determination requiring the write off of a
significant portion of unamortized intangible assets could have a material
adverse effect on the Company's business, financial condition and operating
results.
Dependence on the P.C.s and Their Employee Dentists. Except with respect to
its Wisconsin operations, the Company receives fees for services provided to the
P.C.s under a Management Agreement, but does not employ or contract with
dentists, employ hygienists or control the provision of dental care at the
Dental Offices. The Company's revenue is dependent on the revenue generated by
the P.C.s at the Dental Offices. Therefore, effective and continued performance
of dentists providing services for the P.C.s is essential to the Company's
long-term success. Under each Management Agreement, the Company pays
substantially all of the operating and nonoperating expenses associated with the
provision of dental services except for the salaries and benefits of the
dentists and hygienists. Any material loss of revenue by the P.C.s would have a
material adverse effect on the Company's business, financial condition and
operating results. In the event of a breach of a Management Agreement by a P.C.,
there can be no assurance that the legal remedies available to the Company will
be adequate to compensate the Company for its damages resulting from such
breach. See "Business -- Affiliation Structure."
Potential Conflicts of Interest. The Company's founder, Chairman and Chief
Dental Officer, Dr. Warren F. Melamed, is the sole owner of the P.C. operating
in Texas (the "Texas P.C."). As a result of Dr. Melamed's ownership of the Texas
P.C., potential conflicts of interest may arise in certain matters, including
but not limited to matters relating to the Management Agreement between the
Company and the Texas P.C. Although Dr. Melamed has a fiduciary duty to the
Company and its stockholders, there can be no assurance that the Company will
not be adversely affected by matters in which Dr. Melamed has a potential
conflict of interest. In addition, the Company and Dr. Melamed have entered into
a succession agreement whereby upon any termination of Dr. Melamed's affiliation
with the Company, Dr. Melamed is required to sell his ownership interest in the
Texas P.C. for a nominal amount. The Audit Committee of the Company's Board of
Directors reviews and approves all transactions between the Company and Dr.
Melamed and will do so in
10
<PAGE> 12
the future, including any amendments or modifications to the management
agreement with the Texas P.C. or the related succession agreement. See
"Business -- Affiliation Structure" and "Management."
Material Benefit to Insiders. In February 1996, the Company completed a
series of transactions principally including the repurchase of shares of Common
Stock from Dr. Melamed and the concurrent acquisition of MacGregor Dental
Centers from an entity controlled by Dr. Charles G. Shears, an executive officer
and director of the Company. In connection with these transactions, the Company
incurred $17.4 million of indebtedness under a senior secured credit facility
from a bank; investors principally including investment funds associated with TA
Associates, Inc. purchased from the Company an aggregate of $10.0 million of
Convertible Participating Preferred Stock; the Company redeemed Common Stock
from Dr. Melamed for $6.7 million; Dr. Melamed contributed interests in two
corporations holding ownership interests in the Company's Dallas-Fort Worth
Dental Offices in exchange for an aggregate of 712,480 shares of Common Stock
and a cash payment of $425,000 and the Company repaid outstanding indebtedness
to Dr. Melamed of $446,000; and the Company acquired MacGregor Dental Centers
for consideration consisting of cash in the amount of $14.9 million, the
assumption of indebtedness of approximately $662,000 and other ordinary course
obligations and 1,400,000 shares of Common Stock. Upon the completion of this
offering, the Convertible Participating Preferred Stock will convert into Common
Stock and Redeemable Preferred Stock. As required by the terms of the Redeemable
Preferred Stock, the Company will immediately redeem all of the Redeemable
Preferred Stock upon its issuance for $8.0 million in cash with a portion of the
net proceeds from this offering. See "Certain Transactions."
Effective Control by Principal Stockholders. After giving effect to the
sale of the shares of Common Stock offered hereby, investors principally
including investment funds associated with TA Associates, Inc., Dr. Melamed,
members of his family and trusts for the benefit of members of his family, Dr.
Shears and trusts for the benefit of members of his family and Dr. David L.
Hehli, President of Midwest Dental Care, will beneficially own in the aggregate
approximately %, %, % and %, respectively, of the
outstanding Common Stock. As a result, these stockholders will have the ability
to control or exert significant influence over the outcome of fundamental
corporate transactions requiring stockholder approval, including mergers and
sales of assets and the election of the members of the Company's Board of
Directors. Sales of shares by such stockholders could reduce the level of such
influence. See "Certain Transactions," "Principal Stockholders" and "Shares
Eligible for Future Sale."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the market
price of the Common Stock. In addition to the shares of Common
Stock offered hereby, up to approximately 10,158,438 shares of Common Stock
owned by current stockholders of the Company will be eligible for sale in
accordance with Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act") beginning 90 days after the date of this Prospectus and
2,746,633 shares of Common Stock will be eligible for sale in the public market
under Rule 144 on or after July 2, 1997. An additional 509,479 shares of Common
Stock are subject to vesting provisions and will become eligible for sale in the
public market under Rule 144 at various times as they become vested. However,
holders of substantially all of such shares have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock owned by them (other than
transfers for estate planning purposes) for 180 days from the date of this
Prospectus without the prior written consent of Hambrecht & Quist LLC. The
holders of approximately 5,564,658 shares of Common Stock have the right in
certain circumstances to require the Company to register their shares under the
Securities Act, for resale to the public and holders of approximately 12,754,550
shares have the right to include their shares in a registration statement filed
by the Company. Sales of substantial amounts of the Common Stock (including
shares issued in connection with prior or future acquisitions, which may be
issued with registration rights), or the availability of such shares for sale,
may adversely affect the prevailing market price for the Common Stock and could
impair the Company's ability to obtain additional capital through an offering of
its equity securities. See "Shares Eligible for Future Sale."
Absence of a Public Trading Market; Offering Price; Possible Volatility of
Stock Price. Prior to this offering, there has been no public market for the
Common Stock and there can be no assurance that an active market will develop or
be sustained following the consummation of this offering. Consequently, the
offering
11
<PAGE> 13
price of the Common Stock will be determined by negotiation between the Company
and the representatives of the several Underwriters. See "Underwriting" for a
description of the factors to be considered in determining the initial public
offering price. Following the completion of this offering, the trading price of
the Company's Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in the Company's operating results, material
announcements by the Company or its competitors, governmental regulatory action,
conditions in the health care industry generally or in the dental services
industry specifically, or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has experienced extreme price
and volume fluctuations which have particularly affected the market prices of
many health care services companies and which often have been unrelated to the
operating performance of such companies. The Company's operating results in
future quarters may be below the expectations of securities analysts and
investors. In such event, the price of the Common Stock would likely decline,
perhaps substantially.
Dividend Policy. The Company has not declared or paid cash dividends on its
Common Stock since it became a C corporation in February 1996 and the Company
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The payment of dividends is prohibited under the terms of the Company's
existing senior credit facility and may be prohibited under any future credit
facility which the Company may obtain. See "Dividend Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
Anti-takeover Provisions. Certain provisions of the Company's Restated
Certificate of Incorporation (the "Certificate") and Amended and Restated
By-laws (the "By-laws"), certain sections of the Delaware General Corporation
Law, and the ability of the Board of Directors to issue shares of preferred
stock and to establish the voting rights, preferences and other terms thereof,
may be deemed to have an anti-takeover effect and may discourage takeover
attempts not first approved by the Board of Directors (including takeovers which
stockholders may deem to be in their best interests). Such provisions include,
among other things, a classified Board of Directors serving staggered three-year
terms, the elimination of stockholder voting by written consent, the removal of
directors only for cause, the vesting of exclusive authority in the Board of
Directors to determine the size of the Board of Directors and (subject to
certain limited exceptions) to fill vacancies thereon, the vesting of exclusive
authority in the Board of Directors (except as otherwise required by law) to
call special meetings of stockholders, and certain advance notice requirements
for stockholder proposals and nominations for election to the Board of
Directors. These provisions, and the ability of the Board of Directors to issue
preferred stock without further action by stockholders, could delay or frustrate
the removal of incumbent directors or the assumption of control by stockholders,
even if such removal or assumption of control would be beneficial to
stockholders, and also could discourage or make more difficult a merger, tender
offer or proxy contest, even if such events would be beneficial, in the short
term, to the interests of stockholders. The Company will be subject to Section
203 of the Delaware General Corporation Law which, in general, imposes
restrictions upon certain acquirors (including their affiliates and associates)
of 15% or more of the Company's Common Stock. See "Description of Capital
Stock -- Certain Provisions of Certificate and By-laws" and "-- Statutory
Business Combination Provision."
Immediate and Substantial Dilution. Purchasers of the Common Stock in this
offering will incur immediate and substantial dilution in the net tangible book
value per share of Common Stock. At the assumed initial public offering price of
$ per share, investors in this offering will incur dilution of
$ per share. See "Dilution."
12
<PAGE> 14
THE COMPANY
The Company was founded by Dr. Warren F. Melamed in 1983, commencing
operations as a single location dental practice in Dallas. From its founding in
1983 through the end of 1995, the Company expanded its operations in the
Dallas-Fort Worth area to include a total of 12 Dental Offices staffed by 33
dentists.
In February 1996, the Company completed a series of transactions
principally including the repurchase of shares of Common Stock from Dr. Melamed,
the Company's founder and Chairman, and the concurrent acquisition of the
MacGregor Dental Centers business ("MacGregor") in Houston from an entity
controlled by Dr. Charles G. Shears, an executive officer and director of the
Company (the "1996 Transactions"). In connection with the 1996 Transactions, the
Company incurred $17.4 million of indebtedness under a senior secured credit
facility from a bank (the "Credit Facility"), and investors principally
including investment funds associated with TA Associates, Inc., a private equity
firm based in Boston, Massachusetts (the "TA Investors"), invested $10.0 million
to acquire shares of Convertible Participating Preferred Stock. Upon completion
of this offering, the Convertible Participating Preferred Stock will convert
into 4,800,000 shares of Common Stock, and 3,840,000 shares of Redeemable
Preferred Stock which the Company will immediately redeem from the TA Investors
for $8.0 million using a portion of the net proceeds from the sale of the Common
Stock offered hereby. See "Use of Proceeds" and "Certain Transactions."
The Company's entry into the Houston market through the acquisition of
MacGregor represented the Company's initial expansion beyond the Dallas-Fort
Worth market. This acquisition resulted in the addition of 15 Dental Offices and
42 dentists and approximately doubled the size of the Company's operations.
Since completing the 1996 Transactions, the Company has expanded into two
additional markets, Wisconsin and Arkansas, through acquisitions. In August
1996, the Company acquired Midwest Dental Care ("Midwest") resulting in the
addition of 22 Dental Offices and 35 dentists located throughout Wisconsin. The
Company acquired Convenient Dental Care, Inc. ("Convenient") of Fort Smith,
Arkansas, in November 1996, Arkansas Dental Health Associates, Inc. ("Arkansas
Dental Health") of Little Rock, Arkansas, in January 1997 and United Dental of
Little Rock, Arkansas in April 1997, resulting in the addition of an aggregate
of 13 Dental Offices and 20 dentists. The collective pro forma revenue of
MacGregor, Midwest, Convenient, Arkansas Dental Health and United Dental was
$38.3 million for the year ended December 31, 1996.
The Company was incorporated under the laws of Delaware on December 28,
1994. The Company's principal executive offices are located at 4201 Spring
Valley Road, Suite 320, Dallas, Texas 75244, and its telephone number is (972)
702-7446.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock offered hereby at an assumed initial public offering price of
$ per share are estimated to be $ ($ if the Underwriters'
over-allotment option is exercised in full). The Company will use the net
proceeds as follows: (i) approximately million will be used to repay a
portion of the Company's outstanding indebtedness under the Credit Facility,
including accrued and unpaid interest; (ii) $8.0 million will be used to redeem
all of the outstanding Redeemable Preferred Stock; and (iii) the balance of
approximately $1.0 million will be used for working capital and other general
corporate purposes. Pending such use, the balance of the net proceeds will be
invested in short-term, investment grade, interest-bearing obligations.
The Credit Facility expires on August 29, 1999. Amounts outstanding under
the Credit Facility bear interest at variable rates which are based upon either
the lender's base rate or LIBOR, plus in either case a margin which varies
according to the ratio of the Company's funded debt to Adjusted EBITDA, each as
defined in the Credit Facility. The interest rate on such indebtedness at March
15, 1997 was 8.8% per annum. See "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
since it became a C corporation in February 1996. The Company currently intends
to retain its earnings for future growth and, therefore, does not anticipate
paying cash dividends in the foreseeable future. Payment of future dividends, if
any, will be at the discretion of the Company's Board of Directors after taking
into account various factors, including the Company's financial condition,
operating results and current and anticipated cash needs. In addition, under the
terms of the Credit Facility, the payment of cash dividends is currently
prohibited without the consent of the lenders.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis and (ii) as adjusted to give effect to
the sale by the Company of the shares of Common Stock offered
hereby at an assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1)..................... $ 3,564 $
======= =======
Long-term debt, net of current maturities(1)................ $18,769
Convertible Participating Preferred Stock, $.01 par value,
4,800,000 shares authorized, 4,800,000 shares issued and
outstanding; no shares authorized, issued or outstanding
as adjusted............................................... 9,313
Redeemable Preferred Stock, $.01 par value, 3,840,000 shares
authorized; no shares issued or outstanding; no shares
authorized, issued or outstanding as adjusted(2).......... --
Redeemable Common Stock, $.01 par value, 350,000 shares
issued and outstanding; no shares issued or outstanding as
adjusted(3)............................................... 398
Stockholders' equity (deficit):
Series A Convertible Junior Preferred Stock, $.01 par
value, 1,704,550 shares authorized, 734,645 shares
issued and outstanding; no shares authorized, issued or
outstanding as adjusted................................ 7
Preferred Stock, $.01 par value, no shares authorized,
issued or outstanding; 2,000,000 shares authorized, no
shares issued or outstanding as adjusted............... --
Common Stock, $.01 par value, 19,800,000 shares
authorized; 6,267,500 shares issued and outstanding;
50,000,000 shares authorized, shares
issued and outstanding as adjusted(4).................. 63
Common Stock to be issued, 60,000 shares.................. 75
Additional paid-in capital................................ 1,977
Retained deficit.......................................... (7,530)
------- -------
Total stockholders' equity (deficit).............. (5,408) (5)
------- -------
Total capitalization.............................. $23,072 $
======= =======
</TABLE>
- ------------------------------
(1) See Notes 6 and 8 of Notes to Consolidated Financial Statements of the
Company for information concerning long-term debt and capital lease
obligations.
(2) Upon completion of this offering the Convertible Participating Preferred
Stock will convert into 4,800,000 shares of Common Stock and 3,840,000
shares of Redeemable Preferred Stock and all shares of Redeemable Preferred
Stock will be redeemed for $8.0 million in cash.
(3) Reflects 350,000 shares of Common Stock subject to put rights which
terminate upon completion of this offering.
(4) Excludes (i) 2,000,000 shares of Common Stock reserved for issuance under
the 1996 Stock Plan, of which 50,000 shares were issuable at December 31,
1996 upon the exercise of outstanding stock options at a weighted average
exercise price of $1.50 per share, (ii) 1,000,000 shares of Common Stock
reserved for issuance under the Acquisition Plan, of which at December 31,
1996 up to 170,000 shares will be the subject of options to be granted at an
exercise price equal to the fair market value of the Common Stock at the
time of grant if certain acquired dental practices achieve specified
financial performance goals, and (iii) 500,000 shares of Common Stock
reserved for issuance under the Purchase Plan. See "Management -- Employee
Stock and Other Benefit Plans -- 1996 Stock Option and Incentive Plan" and
"-- 1997 Employee Stock Purchase Plan."
(5) Reflects the anticipated write off of unamortized loan fees of $286,000, net
of the related tax effect.
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<PAGE> 17
DILUTION
As of December 31, 1996, the Company had a net tangible book value of
approximately $(28,380,000) or $(4.53) per share of Common Stock. Net tangible
book value represents the amount of total tangible assets less total liabilities
and redeemable equity securities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in the net tangible
book value after December 31, 1996, other than to give effect to the receipt by
the Company of the net proceeds from the sale of the
shares of Common Stock offered hereby at an assumed initial public offering
price of $ per share, the pro forma net tangible book value of the Company
as of December 31, 1996 would have been approximately $ or $ per share.
This represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share before the
offering.............................................. $(4.53)
Increase per share attributable to new investors.......
------
Pro forma net tangible book value per share after the
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 12,152,145 % $4,230,346 % $0.35
New investors...................
----------- ----- ---------- -----
Total................. % $ %
=========== ===== ========== =====
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options after April 1, 1997 or of the Underwriters'
over-allotment option. As of April 1, 1997, stock options to purchase 65,000
shares of Common Stock were outstanding with a weighted average exercise price
of $1.56 per share. To the extent these options are exercised, there will be
further dilution to new investors. See "Management -- Employee Stock and Other
Benefit Plans -- 1996 Stock Option and Incentive Plan."
16
<PAGE> 18
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma as adjusted consolidated statement of income for the year
ended December 31, 1996, gives effect to (i) the 1996 acquisitions of MacGregor,
Midwest, John H. Davis, D.D.S. ("Davis"), and Convenient (the "1996
Acquisitions") and the 1997 acquisitions of Arkansas Dental Health and United
Dental (the "1997 Acquisitions") and (ii) the receipt and application of the
estimated net proceeds from this offering at an assumed initial public offering
price of $ per share as if such transactions had been completed on
January 1, 1996. The pro forma as adjusted condensed consolidated balance sheet
reflects (i) the 1997 Acquisitions, (ii) the receipt and application of the
estimated net proceeds from this offering and (iii) the conversion of all
outstanding Convertible Participating Preferred Stock of the Company into Common
Stock and Redeemable Preferred Stock, the redemption of all outstanding
Redeemable Preferred Stock for cash and the conversion of all other outstanding
equity securities into Common Stock, in each case concurrently with the closing
of the offering, as if such transactions had occurred on December 31, 1996. The
pro forma consolidated financial information is based on the consolidated
financial statements of the Company, giving effect to the assumptions and
adjustments in the accompanying notes to the pro forma consolidated financial
information.
The pro forma consolidated financial information has been prepared by
management based on the historical financial statements of the Company, Arkansas
Dental Health and United Dental for the year ended December 31, 1996, adjusted
where necessary to reflect these acquisitions and related operations as if the
Management Agreements had been in effect during the entire period presented.
This pro forma consolidated financial information is presented for illustrative
purposes and it does not purport to represent what the consolidated results of
operation or financial condition of the Company for the year ended December 31,
1996 would have been had such transactions been consummated as of such dates and
is not indicative of the results that may be obtained in the future.
17
<PAGE> 19
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 ACQUISITIONS(B) 1996 PRE-ACQUISITIONS (B)
-------------------------------- --------------------------------
CONVENIENT 1996 CONVENIENT
MONARCH(A) MACGREGOR MIDWEST & DAVIS HISTORICAL MACGREGOR MIDWEST & DAVIS
---------- --------- ------- ---------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental group practices revenue,
net.............................. $18,084 $12,129 $5,250 $517 $35,980 $1,095 $10,406 $2,065
Less: amounts retained by dental
group practices.................. 5,809 3,829 1,942 222 11,802 -- -- --
------- ------- ------ ---- ------- ------ ------- ------
Net revenue........................ 12,275 8,300 3,308 295 24,178 1,095 10,406 2,065
Operating expenses:
Clinical salaries and benefits... 3,103 2,034 1,032 90 6,259 288 5,680 1,139
Other salaries and benefits...... 1,681 930 516 0 3,127 219 1,462 128
Dental supplies.................. 1,062 688 442 24 2,216 52 881 112
Laboratory fees.................. 833 753 25 37 1,648 65 5 136
Occupancy........................ 801 766 346 24 1,937 64 723 100
Advertising...................... 872 326 8 4 1,210 36 61 17
Depreciation and amortization.... 517 730 178 5 1,430 38 339 3
General and administrative....... 1,876 1,107 548 33 3,564 206 1,078 176
------- ------- ------ ---- ------- ------ ------- ------
10,745 7,334 3,095 217 21,391 968 10,229 1,811
------- ------- ------ ---- ------- ------ ------- ------
Operating income (loss)............ 1,530 966 213 78 2,787 127 177 254
Interest expense, net.............. 1,707 (32) 10 2 1,687 5 39 20
------- ------- ------ ---- ------- ------ ------- ------
Income (loss) before income
taxes............................ (177) 998 203 76 1,100 122 138 234
------- ------- ------ ---- ------- ------ ------- ------
Income taxes (benefit)............. (9) 339 69 26 425 47 53 91
------- ------- ------ ---- ------- ------ ------- ------
Net income (loss).................. $ (168) $ 659 $ 134 $ 50 $ 675 $ 75 $ 85 $ 143
======= ======= ====== ==== ======= ====== ======= ======
Net income per common share........ $ 0.05
=======
Weighted average common shares
outstanding...................... 13,459
=======
<CAPTION>
1997 ACQUISITIONS(B)
----------------------
ARKANSAS UNITED ACQUISITION PRO FORMA
DENTAL HEALTH DENTAL ADJUSTMENTS OFFERING AS ADJUSTED
------------- ------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Dental group practices revenue,
net.............................. $2,718 $4,122 -- $
Less: amounts retained by dental
group practices.................. -- -- $ 6,231(c)
------ ------ ------- ------ -------
Net revenue........................ 2,718 4,122 (6,231)
Operating expenses:
Clinical salaries and benefits... 998 1,532 (6,728)(c)
Other salaries and benefits...... 803 636
Dental supplies.................. 240 246
Laboratory fees.................. 198 91
Occupancy........................ 112 234
Advertising...................... 47 185 (10)(c)
Depreciation and amortization.... 57 100 248(d)
General and administrative....... 434 299 (165)(c)
------ ------ ------- ------ -------
2,889 3,323 (6,655)
------ ------ ------- ------ -------
Operating income (loss)............ (171) 799 424
Interest expense, net.............. 36 45 (118)(e)
877(f)
------ ------ ------- ------ -------
Income (loss) before income
taxes............................ (207) 754 (335)
------ ------ ------- ------ -------
Income taxes (benefit)............. (80) 292 (130) (g)
------ ------ ------- ------ -------
Net income (loss).................. $ (127) $ 462 $ (205) $ $
====== ====== ======= ====== =======
Net income per common share........
====== =======
Weighted average common shares
outstanding......................
====== =======
</TABLE>
See accompanying notes to pro forma consolidated statement of income.
18
<PAGE> 20
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME
During 1996, the Company acquired four dental groups located in Texas,
Wisconsin and Arkansas (the "1996 Acquisitions"). Since December 31, 1996, the
Company has acquired two dental practice groups in Little Rock, Arkansas (the
"1997 Acquisitions").
Dental Group Practices Revenue, Net. Dental group practices revenue, net
represents the revenue of the Dental Offices reported at the estimated
realizable amounts from third-party payors and patients for services rendered.
Net Revenue. Net revenue in the accompanying pro forma consolidated
statement of income represents revenue from Dental Offices less amounts retained
by the dental group practices. The amounts retained by dental group practices
represent amounts paid by (i) the P.C.s as salary, benefits and other payments
to employed dentists and hygienists and contracted specialists and (ii) the
Company as salary, benefits and other payments to employed dentists and
hygienists and contracted specialists in states in which ownership of dental
practices by the Company is permitted. Under the Management Agreements, the
Company assumes responsibility for the management of all aspects of the dental
group practices' business other than the provision of dental services. The
Company's net revenue is dependent on the revenue of the dental group practices.
Pro Forma Consolidated Statement of Income
The adjustments reflected in the pro forma consolidated statement of income
for the year ended December 31, 1996 are as follows:
(a) The Monarch column includes all of the interest expense related to
indebtedness incurred in connection with the 1996 Acquisitions and all
expenses related to corporate infrastructure.
(b) The 1996 Acquisitions columns present the historical revenue and
expenses of the 1996 Acquisitions for that portion of the year included in
the historical consolidated financial statements of the Company. The 1996
Pre-Acquisitions columns present the historical revenue and expenses of the
1996 Acquisitions for that portion of 1996 preceding the practices'
affiliation with the Company as if the acquisitions had occurred on January
1, 1996. The 1997 Acquisitions columns present the historical revenue and
expenses of the practices as if they had been acquired on January 1, 1996.
(c) To reflect the impact of applying (i) the provisions of the
Management Agreements and (ii) adjustments in compensation expense
principally affecting the owners of the acquired dental group practices
pursuant to the provisions of employment agreements entered into at the
time of acquisition to the historical dental group revenue of each dental
practice, as if the Management Agreements and employment agreements were in
place at January 1, 1996.
(d) To increase amortization expense for intangible assets based upon
the Company's preliminary allocation of purchase price as if the 1996
Acquisitions and 1997 Acquisitions were all completed on January 1, 1996.
The intangible assets related to the 1996 Acquisitions and the 1997
Acquisitions total approximately $28.0 million and are being amortized over
a composite average period of 32 years.
(e) To eliminate interest expense related to liabilities not assumed
in connection with the 1996 Acquisitions and 1997 Acquisitions.
(f) To record interest expense on debt issued in connection with the
1996 Acquisitions and 1997 Acquisitions, assuming such acquisitions were
completed on January 1, 1996.
(g) To reflect the estimated income tax effects at an estimated
effective rate of 38.7%.
19
<PAGE> 21
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
1997 ACQUISITION EQUITY AS
HISTORICAL ACQUISITIONS(a) ADJUSTMENTS CONVERSION(b) OFFERING(c) ADJUSTED
---------- --------------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 1,059 $ 202 $(5,099)(d) $ -- $ $
-- -- 4,455(d)
Other current assets................. 3,623 1,446 (518)(e) --
------- ------ ------- ------- -------- --------
Total current assets......... 4,682 1,648 (1,162) --
Property and equipment, net............ 4,682 557 -- --
Intangible assets, net................. 22,972 179 4,863(e) --
Other assets........................... 570 120 -- --
------- ------ ------- ------- -------- --------
Total assets................. $32,906 $2,504 $ 3,701 $ -- $ $
======= ====== ======= ======= ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Payable to affiliated dental
groups............................ $ 1,083 $ -- $ -- $ -- $ $
Current maturities of notes payable
and capital lease obligations..... 3,564 902 (628)(e) --
Other current liabilities............ 4,030 471 102(e) --
------- ------ ------- ------- -------- --------
Total current liabilities.... 8,677 1,373 (526) --
Notes payable and capital lease
obligations.......................... 18,769 229 (32)(e) --
-- -- (d)
Other liabilities...................... 1,157 127 -- --
------- ------ ------- ------- -------- --------
Total liabilities.................... 28,603 1,729 3,897 --
Convertible Participating Preferred
Stock................................ 9,313 -- -- (9,313)
Redeemable Preferred Stock............. -- -- -- 8,000
Redeemable Common Stock................ 398 -- -- (398)
Stockholders' equity (deficit):
Series A Convertible Junior Preferred
Stock............................. 7 -- -- --
Common Stock......................... 63 55 3(d) 350
(55)(f) 48
Common Stock to be issued............ 75 -- -- --
1,265
Additional paid-in capital........... 1,977 -- 576(d) 48
Retained earnings (deficit).......... (7,530) 720 (720)(f) --
------- ------ ------- ------- -------- --------
Total stockholders' equity
(deficit).................. (5,408) 775 (196) --
------- ------ ------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit).................. $32,906 $2,504 $ 3,701 $ -- $ $
======= ====== ======= ======= ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
20
<PAGE> 22
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The adjustments reflected in the pro forma condensed consolidated balance
sheet are as follows:
(a) To record the assets acquired and liabilities assumed by the
Company in connection with the 1997 Acquisitions. These acquisitions have
been accounted for using the purchase method of accounting and,
accordingly, the purchase prices have been allocated to the assets acquired
and liabilities assumed based on the estimated fair values as of December
31, 1996. In addition to the issuance of Common Stock, the Company paid
approximately $4.3 million in cash.
The following methods and assumptions were used to estimate fair
value:
Cash and cash equivalents -- The historical carrying amount
approximated fair value.
Other current assets -- Other current assets consisted primarily of
accounts receivable. The Company evaluated the estimated recovery value
of accounts receivable and recorded an adjustment to increase the
allowance for doubtful accounts.
Property and equipment, net -- The Company performed an
asset-by-asset review and determined that the historical carrying amount
approximated fair value.
Intangible assets -- In connection with the allocation of the
purchase price to intangible assets, the Company analyzed the nature of
each dental group practice with which a Management Agreement was entered
into, including the number of dentists in each dental group practice,
number of dental offices and ability to recruit additional dentists, the
dental group practice's relative market position, the length of time
each dental group practice had been in existence, and the term and
enforceability of the Management Agreement. The Management Agreements
are for a term of 40 years and cannot be terminated by the relevant P.C.
without cause, consisting primarily of bankruptcy or material default.
The Company believes that there is no material value allocable to
the employment and noncompete agreements entered into between the P.C.s
and the individual dentists, since the primary economic beneficiaries of
these agreements are the P.C.s, which are entities that the Company does
not legally control. The Company believes that the dental group
practices operated by the P.C.s with which it has Management Agreements
are long-lived entities with an indeterminable life and that the
dentists, customer demographics and various contracts will be
continuously replaced. The amounts allocated to the Management
Agreements are being amortized on a straight-line method over 30 years.
The Emerging Issues Task Force of the Financial Accounting
Standards Board is currently evaluating certain matters relating to the
physician practice management industry, which the Company expects to
include a review of the consolidation of professional corporation
revenues and the accounting for business combinations. The Company is
unable to predict the impact, if any, that this review may have on the
Company's acquisition strategy, allocation of purchase price related to
acquisitions and amortization life assigned to intangible assets.
Liabilities assumed -- Given the short-term nature of the
liabilities assumed, the historical carrying amount approximated their
fair value.
(b) To reflect the conversion of the Convertible Participating
Preferred Stock into 4,800,000 shares of Common Stock and 3,840,000 shares
of Redeemable Preferred Stock. The Redeemable Preferred Stock will be
redeemed for $8.0 million in cash at the closing of the offering. To also
reflect the conversion of all other outstanding equity securities into
Common Stock upon the closing of the offering.
(c) To reflect the estimated net proceeds from the sale of
shares of Common Stock in the offering at an assumed initial public
offering price of $ per share, estimated to be approximately $
million (after deducting estimated underwriting discounts and commissions
and offering expenses), and the repayment of $ million of indebtedness
under the Credit Facility.
(d) To record the Common Stock issued and cash paid in exchange for
the assets acquired and liabilities assumed.
(e) To adjust to fair market value the assets acquired and liabilities
assumed and to eliminate assets not acquired and liabilities not assumed by
the Company as defined in the purchase agreement.
(f) To eliminate the owner's equity in connection with the purchase
accounting for the acquisition.
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated statement of income data for the years ended
December 31, 1994, 1995 and 1996 and the selected consolidated balance sheet
data at December 31, 1995 and 1996 have been derived from the audited
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus. The selected consolidated balance sheet data at December 31, 1994
has been derived from the audited consolidated statements of the Company not
included in this Prospectus. The selected consolidated statement of income data
for the years ended December 31, 1992 and 1993 and the selected consolidated
balance sheet data at December 31, 1992 and 1993 have been derived from
unaudited consolidated financial statements of the Company not included in this
Prospectus. The following selected consolidated financial information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Dental group practices revenue, net............ $6,760 $8,028 $9,559 $13,223 $35,980
Less: amounts retained by dental group
practices................................... 2,109 2,669 3,070 4,301 11,802
------ ------ ------ ------- -------
Net revenue.................................... 4,651 5,359 6,489 8,922 24,178
Operating expenses:
Clinical salaries and benefits.............. 1,403 1,399 1,553 2,243 6,259
Other salaries and benefits................. 476 555 688 971 3,127
Dental supplies............................. 376 436 509 833 2,216
Laboratory fees............................. 334 391 430 633 1,648
Occupancy................................... 290 334 392 471 1,937
Advertising................................. 143 479 626 710 1,210
Depreciation and amortization............... 192 257 251 293 1,430
General and administrative.................. 782 822 952 1,099 3,564
------ ------ ------ ------- -------
3,996 4,673 5,401 7,253 21,391
------ ------ ------ ------- -------
Operating income............................... 655 686 1,088 1,669 2,787
Interest expense, net.......................... 59 56 81 87 1,687
------ ------ ------ ------- -------
Income before income taxes..................... 596 630 1,007 1,582 1,100
Income taxes(1)................................ -- -- -- -- 425
------ ------ ------ ------- -------
Net income..................................... $ 596 $ 630 $1,007 $ 1,582 $ 675
====== ====== ====== ======= =======
Pro forma net income(1)........................ 393 416 665 1,044 675
Net income per common share(2)................. $ 0.05
Weighted average common shares outstanding..... 13,459
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 466 $ 426 $ 413 $ 760 $ 1,059
Working capital (deficit)...................... 79 109 22 349 (3,995)
Total assets................................... 1,821 1,929 1,952 3,182 32,906
Long-term debt, less current maturities........ 659 712 688 1,077 18,769
Redeemable equity securities................... -- -- -- -- 9,711
Total stockholders' equity (deficit)........... 276 270 146 623 (5,408)
</TABLE>
- ------------------------------
(1) The Company was an S corporation prior to February 6, 1996, and accordingly
its consolidated statements of income for periods prior to such date did not
include income tax expense. Pro forma net income includes an adjustment to
reflect estimated income tax effects on net income for the years ended
December 31, 1992, 1993, 1994 and 1995 at an assumed effective tax rate of
34%.
(2) Computed on the basis described in Note 1 of Notes to Consolidated Financial
Statements of the Company. Due to the effect of the 1996 Transactions on the
Company's capital structure, per share data for the periods ended prior to
January 1, 1996 are not comparable to subsequent periods and, therefore,
have not been presented.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements.
Discussions containing such forward-looking statements may be found in the
material set forth below and under "Business," as well as in this Prospectus
generally. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including, without limitation, the risk factors set forth under "Risk Factors"
and the matters set forth in this Prospectus generally.
OVERVIEW
The Company manages dental group practices in selected markets, presently
including Dallas-Fort Worth, Houston, Wisconsin and Arkansas. The Dental Offices
provide general dentistry services such as examinations, cleanings, fillings,
bonding, placing crowns and fitting and placing fixed or removable prostheses.
Many of the Dental Offices also provide specialty dental services such as
orthodontics, oral surgery, endodontics, periodontics and pediatric dentistry.
The Company focuses on fee-for-service dentistry, supplementing this business
with revenue from contracts with capitated managed dental care plans.
The Company seeks to build geographically dense networks of dental
providers by expanding within its existing markets. The Company has generated
growth within its existing markets by increasing patient volume and fees in
existing Dental Offices, either on a per-patient or per-procedure basis, by
increasing the physical space of existing Dental Offices and by opening Dental
Offices on a de novo basis. The Company has entered selected new markets by
acquiring dental group practices which have a significant market presence or
which the Company believes can achieve such a presence in the near term. The
Company then seeks to use the acquired dental group practice as a "pedestal"
from which to expand within the newly entered market.
EXISTING MARKET DEVELOPMENT AND ACQUISITION SUMMARY
Existing Market Development. Monarch commenced operations in 1983 with a
single practice in Dallas. From its founding in 1983 through March 15, 1997, the
Company opened 14 additional Dental Offices on a de novo basis in the
Dallas-Fort Worth market. The Company recently completed its first acquisition
of a solo practice in an existing market (Dallas-Fort Worth) and intends to
focus increasingly on the acquisition of solo and smaller group practices within
existing markets. Revenue from the Company's Dallas-Fort Worth operations
increased $3.6 million, or 38.3%, to $13.2 million in 1995, and increased an
additional $5.1 million, or 38.1%, to $18.3 million in 1996.
The average investment by the Company in the two de novo Dental Offices
opened in 1996 was approximately $225,000, which includes the cost of equipment,
leasehold improvements and working capital associated with the initial
operations. These de novo Dental Offices began contributing operating income to
the Company within three months after opening. Future de novo Dental Offices,
however, may require a greater investment by the Company and may not begin
contributing operating income to the Company within that period of time. The
Company expenses operating costs (other than costs related to fixed assets) in
connection with the establishment of a de novo Dental Office as these costs are
incurred rather than capitalizing them.
Acquisitions. Beginning with the acquisition of MacGregor in connection
with the 1996 Transactions in February 1996, the Company has conducted an active
program to identify dental group practices outside of the Dallas-Fort Worth
market as potential acquisition candidates with a view to expanding the
Company's
23
<PAGE> 25
operations into new markets. Since December 31, 1995, the Company has completed
the following acquisitions in new markets:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DATE EFFECTIVE DATE
GROUP PRACTICE/MARKET DENTAL OFFICES DENTISTS FOUNDED OF ACQUISITION
--------------------- -------------- --------- ------- ------------------
<S> <C> <C> <C> <C>
MacGregor, Houston......................... 15 36 1962 February 1, 1996
Midwest, Wisconsin......................... 22 36 1975 September 1, 1996
Convenient, Arkansas....................... 1 3 1982 November 1, 1996
Arkansas Dental Health, Arkansas........... 3 5 1984 January 1, 1997
United Dental, Arkansas.................... 9 11 1990 April 1, 1997
</TABLE>
- ------------------------------
The data presented in this table is as of April 1, 1997.
The aggregate consideration for the completed acquisitions consisted of
approximately $26.2 million in cash, $2.0 million in assumed debt obligations
and 2,422,500 shares of Common Stock. Additional purchase consideration
consisting of options to purchase up to 185,000 shares of Common Stock will be
granted over the five years following the effective dates of certain of the
completed acquisitions if specified financial performance goals are achieved.
Additional purchase consideration of up to $700,000 in cash will be paid if
certain completed acquisitions achieve targeted annual operating results in the
year following the effective date of the acquisition.
COMPONENTS OF REVENUE AND EXPENSES
Dental group practices revenue, net ("Revenue") represents the revenue from
the Dental Offices, reported at estimated realizable amounts, from third-party
payors and patients for dental services rendered. Net revenue represents Revenue
less amounts retained by the dental group practices. The amounts retained by
dental group practices represent amounts paid by (i) the P.C.s as salary,
benefits and other payments to employed dentists and hygienists and contracted
specialists and (ii) the Company as salary, benefits and other payments to
employed dentists and hygienists and contracted specialists in states in which
it operates and in which ownership of dental practices by the Company is
permitted (currently Wisconsin). The Company's net revenue is dependent on the
Revenue of the dental group practices.
Under the Management Agreements, the Company assumes responsibility for the
management of all aspects of the dental group practices' business other than the
provision of dental services. Operating expenses consist of the expenses
incurred by the Company in connection with managing the Dental Offices,
including salaries and benefits for personnel other than dentists and
hygienists, dental supplies, dental laboratory fees, occupancy costs, equipment
leases, management information systems and other expenses related to dental
practice operations. In addition to the expenses discussed above, the Company
also incurs personnel and administrative expenses in connection with maintaining
a corporate function that provides management, administrative, marketing and
development services to the Dental Offices.
24
<PAGE> 26
RESULTS OF OPERATIONS
As a result of the recent rapid expansion of its business through existing
market development and acquisitions and the Company's limited period of
affiliation with these practices, the Company believes that the period-to-period
comparisons set forth below may not be meaningful.
The following table sets forth the percentages of Revenue represented by
certain items reflected in the Company's consolidated statements of income. The
information contained in the table represents the historical results of the
Company and does not include results of the businesses acquired subsequent to
December 31, 1996. The information that follows should be read in conjunction
with the Consolidated Financial Statements and Notes thereto of the Company, as
well as the pro forma consolidated financial information, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Dental group practices revenue, net................. 100.0% 100.0% 100.0% 100.0% 100.0%
Less: amounts retained by dental group practices.... 31.2 33.2 32.1 32.5 32.8
----- ----- ----- ----- -----
Net revenue......................................... 68.8 66.8 67.9 67.5 67.2
Operating expenses:
Clinical salaries and benefits.................... 20.8 17.4 16.2 17.0 17.4
Other salaries and benefits....................... 7.0 6.9 7.2 7.3 8.7
Dental supplies................................... 5.6 5.4 5.3 6.3 6.2
Laboratory fees................................... 4.9 4.9 4.5 4.8 4.6
Occupancy......................................... 4.3 4.2 4.1 3.6 5.4
Advertising....................................... 2.1 6.0 6.5 5.4 3.4
Depreciation and amortization..................... 2.8 3.2 2.6 2.2 4.0
General and administrative........................ 11.6 10.2 10.0 8.3 9.9
----- ----- ----- ----- -----
59.1 58.2 56.4 54.9 59.6
----- ----- ----- ----- -----
Operating income.................................... 9.7 8.6 11.5 12.6 7.6
Interest expense, net............................... 0.9 0.7 0.8 0.7 4.7
----- ----- ----- ----- -----
Income before income taxes.......................... 8.8 7.9 10.7 11.9 2.9
Income taxes........................................ -- -- -- -- 1.2
----- ----- ----- ----- -----
Net income.......................................... 8.8% 7.9% 10.7% 11.9% 1.7%
===== ===== ===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Dental group practices revenue, net. Revenue increased from $13.2 million
for 1995 to $36.0 million for 1996, an increase of $22.8 million, or 172.1%.
This increase resulted primarily from the acquisitions of MacGregor in February
1996 and Midwest in September 1996, which contributed Revenue of $12.1 million
and $5.3 million for the eleven months and four months ended December 31, 1996,
respectively. Dental Offices in the Dallas-Fort Worth market contributed an
additional $5.1 million of the increase in Revenue in 1996 resulting from the
opening of two de novo Dental Offices, the physical expansion of six existing
Dental Offices and the acquisition of a solo practice.
Fee-for-service Revenue (i.e., Revenue derived from indemnity dental plans,
preferred provider plans and direct payments by patients not covered by any
third-party payor) from $9.1 million for 1995 to $21.9 million for 1996, an
increase of $12.8 million, or 141.6%, due to acquisitions in new markets and
growth in existing markets. This increase resulted from the acquisitions of
MacGregor and Midwest, which contributed fee-for-service Revenue of $7.6 million
and $3.2 million for the respective periods following the dates of acquisition.
In the Dallas-Fort Worth market, fee-for-service Revenue increased from $9.1
million for 1995 to $10.7 million for 1996, representing an increase of $1.6
million, or 18.4%. Managed dental care Revenue (i.e., Revenue from capitated
managed dental care plans, including capitation payments and patient
co-payments) increased from $4.2 million for 1995 to $14.1 million for 1996, an
increase of $9.9 million, or 238.4%, due to acquisitions
25
<PAGE> 27
in new markets and growth in existing markets. This increase resulted in part
from the acquisitions of MacGregor and Midwest, which contributed managed dental
care Revenue of $4.5 million and $2.1 million for the respective periods
following the dates of acquisition. In the Dallas-Fort Worth market, managed
dental care Revenue increased $3.3 million, or 80.8%, over 1995. As a percentage
of Revenue, fee-for-service Revenue decreased from 68.4% to 60.8% for 1995 and
1996, respectively, as managed dental care Revenue grew at a higher rate than
fee-for-service Revenue.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $4.3 million for 1995 to $11.8 million for 1996,
an increase of $7.5 million, or 174.4%. The increase was primarily due to the
acquisitions of MacGregor and Midwest which added amounts retained by dental
group practices of $3.8 million and $1.9 million for the respective periods
following the dates of acquisition. In the Dallas-Fort Worth market, amounts
retained by dental group practices increased $1.6 million as dentist and
hygienist compensation generally increased in relation to increased productivity
at the Dental Offices. As a percent of Revenue, amounts retained by dental group
practices increased from 32.5% to 32.8% for 1995 and 1996, respectively.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $2.2 million for 1995 to $6.3 million for 1996, an increase of $4.1
million, or 179.0%. The increased clinical salaries and benefits were due
primarily to the increased number of Dental Offices resulting from the
acquisitions of MacGregor and Midwest which added clinical salaries of $2.0
million and $1.0 million for the respective periods following the dates of
acquisition. As a percent of Revenue, clinical salaries and benefits increased
from 17.0% to 17.4% for 1995 and 1996, respectively, as a result of higher
salary costs in the acquired Dental Offices.
Other salaries and benefits. Other salaries and benefits increased from
$971,000 for 1995 to $3.1 million for 1996, an increase of $2.1 million, or
222.0%. This increase resulted primarily from additional corporate
infrastructure associated with MacGregor and Midwest as well as the building of
additional corporate infrastructure in 1996 to manage growth. As a percent of
Revenue, other salaries and benefits increased from 7.3% to 8.7% for 1995 and
1996, respectively.
Dental supplies. Dental supplies expense increased from $833,000 for 1995
to $2.2 million for 1996, an increase of $1.4 million, or 166.0%. This increase
resulted primarily from the acquisitions of MacGregor and Midwest, which added
$688,000 and $442,000 of dental supplies expense for the respective periods
following the dates of acquisition. As a percent of Revenue, dental supplies
expense remained relatively constant at 6.3% and 6.2% for 1995 and 1996,
respectively.
Laboratory fees. Laboratory fees increased from $633,000 for 1995 to $1.6
million for 1996, an increase of $1.0 million, or 160.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $753,000 and
$25,000 to laboratory fees for the respective periods following the dates of
acquisition. As a percent of Revenue, laboratory fees decreased slightly from
4.8% to 4.6% for 1995 and 1996, respectively.
Occupancy. Occupancy expense increased from $471,000 for 1995 to $1.9
million for 1996, an increase of $1.4 million, or 311.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $766,000 and
$346,000 to occupancy expense for the respective periods following the dates of
acquisition. As a percent of Revenue, occupancy expense increased from 3.6% to
5.4% for 1995 and 1996, respectively, reflecting the assumption of higher-cost
leases in Houston.
Advertising. Advertising expense increased from $710,000 for 1995 to $1.2
million for 1996, an increase of $490,000, or 70.4%. This increase was the
result of advertising in the Houston market at a cost of $326,000 for the eleven
months ended December 31, 1996 and an increase of $162,000 in television and
print advertising in the Dallas-Fort Worth market in 1996. As a percent of
Revenue, advertising expense decreased from 5.4% to 3.4% for 1995 and 1996,
respectively. This decrease resulted from leveraging advertising expense with
greater market penetration and the acquisition of Midwest which has not
conducted television or radio advertising.
Depreciation and amortization. Depreciation and amortization expense
increased from $293,000 for 1995 to $1.4 million for 1996, an increase of $1.1
million, or 388.1%. This increase was primarily the result of the acquisitions
of MacGregor and Midwest, which added depreciation and amortization expense of
$730,000 and
26
<PAGE> 28
$178,000 for the respective periods following the dates of acquisition.
Depreciation and amortization expense for the Dallas-Fort Worth operations
increased $226,000 as two de novo Dental Offices were opened and six Dental
Offices were expanded. As a percent of Revenue, depreciation and amortization
expense increased from 2.2% to 4.0% for 1995 and 1996, respectively.
General and administrative. General and administrative expense increased
from $1.1 million for 1995 to $3.6 million for 1996, an increase of $2.5
million, or 224.3%. This increase resulted primarily from the acquisitions of
MacGregor and Midwest during 1996 and the expansion of the Company's corporate
infrastructure in 1996 to manage growth. As a percent of Revenue, general and
administrative expense increased from 8.3% to 9.9% for 1995 and 1996,
respectively. This increase was due principally to MacGregor and Midwest having
higher general and administrative costs as a percent of Revenue than the
Company's operations in Dallas-Fort Worth.
Operating income. Operating income increased from $1.7 million for 1995 to
$2.8 million for 1996, an increase of $1.1 million, or 67.0%. This increase
resulted from the addition of MacGregor and Midwest which added operating income
of $966,000 and $213,000 for the respective periods following the dates of
acquisition. Income from the Company's Dallas-Fort Worth operations increased
$781,000 in 1996, which was largely offset by increased expenses due to the
development of corporate infrastructure. As a percent of Revenue, operating
income decreased from 12.6% in 1995 to 7.7% in 1996. This decrease was primarily
the result of adding the MacGregor and Midwest acquisitions, which experienced
lower operating margins than the Company's Dallas-Fort Worth operations.
Interest expense, net. Interest expense, net increased from $87,000 for
1995 to $1.7 million for 1996, an increase of $1.6 million, or 1,839.1%. This
increase is attributable to $17.4 million of indebtedness incurred under the
Credit Facility in connection with the 1996 Transactions and an additional $5.0
million of indebtedness incurred under the Credit Facility in connection with
the acquisition of Midwest.
Income taxes. Income taxes for 1996 were $425,000, representing an
effective tax rate of 38.7%. Prior to February 6, 1996, the Company had elected
to be treated as an S corporation for federal income tax purposes and,
therefore, no income tax expense was recorded for the year ended December 31,
1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Dental group practices revenue, net. Revenue increased from $9.6 million
for 1994 to $13.2 million for 1995, an increase of $3.6 million, or 38.3%. This
increase was due to expansion in the Dallas-Fort Worth market, including the
opening of two de novo Dental Offices.
Fee-for-service Revenue increased from $7.5 million for 1994 to $9.1
million for 1995, an increase of $1.6 million, or 21.0%, due to growth in the
Dallas-Fort Worth market. Managed dental care Revenue increased from $2.1
million for 1994 to $4.2 million for 1995, an increase of $2.1 million, or
100.5%, due to growth in the Dallas-Fort Worth market. As a percentage of
Revenue, fee-for-service Revenue decreased from 78.2% to 68.4% for 1995 and
1996, respectively.
Amounts retained by dental group practices. Amounts retained by dental
groups increased from $3.1 million for 1994 to $4.3 million for 1995, an
increase of $1.2 million, or 40.1%. The increase was due primarily to higher
dentist compensation in 1995 compared to 1994, resulting from increased
productivity at the Dental Offices. As a percent of Revenue, amounts retained by
dental group practices increased from 32.1% to 32.5% for 1994 and 1995,
respectively.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $1.6 million for 1994 to $2.2 million for 1995, an increase of $600,000, or
44.4%. The increased clinical salaries and benefits resulted primarily from
higher patient volume which required increased staffing. As a percent of
Revenue, clinical salaries and benefits increased from 16.2% to 17.0% for 1994
and 1995, respectively, principally as a result of two de novo Dental Offices
opened in 1995 being fully staffed although in a start-up phase.
Other salaries and benefits. Other salaries and benefits increased from
$688,000 for 1994 to $971,000 for 1995, an increase of $283,000, or 41.1%. This
increase was principally due to increased executive compensa-
27
<PAGE> 29
tion and staffing levels. As a percent of Revenue, other salaries and benefits
remained relatively constant at 7.2% and 7.3% for 1994 and 1995, respectively.
Dental supplies. Dental supplies expense increased from $509,000 for 1994
to $833,000 for 1995, an increase of $324,000, or 63.7%. As a percent of
Revenue, dental supplies expense increased from 5.3% to 6.3% for 1994 and 1995,
respectively. These increases were due primarily to increased patient volume in
1995 relative to 1994 and to the initial stocking of dental supplies for the two
de novo Dental Offices opened in 1995.
Laboratory fees. Laboratory fees increased from $430,000 for 1994 to
$633,000 for 1995, an increase of $203,000, or 47.2%. As a percent of Revenue,
laboratory fees increased from 4.5% to 4.8% for 1994 and 1995, respectively.
Occupancy. Occupancy expense increased from $392,000 for 1994 to $471,000
for 1995, an increase of $79,000, or 20.2%, due primarily to the opening of two
de novo Dental Offices and the full year effect of occupancy expense in one de
novo Dental Office opened in the fourth quarter of 1994. As a percent of
Revenue, occupancy expense decreased from 4.1% to 3.6% for 1994 and 1995,
respectively.
Advertising. Advertising expense increased from $626,000 for 1994 to
$710,000 for 1995, an increase of $84,000, or 13.4%, due to additional
television and print advertising. As a percent of Revenue, advertising expense
decreased from 6.5% to 5.4% for 1994 and 1995, respectively. This decrease
resulted from leveraging advertising expense with greater market penetration.
Depreciation and amortization. Depreciation and amortization expense
increased from $251,000 for 1994 to $293,000 for 1995, an increase of $42,000,
or 16.7%, due to the opening of two de novo Dental Offices in 1995. As a percent
of Revenue, depreciation and amortization expense decreased from 2.6% to 2.2%
for 1994 and 1995, respectively.
General and administrative. General and administrative expense increased
from $952,000 for 1994 to $1.1 million for 1995, an increase of $148,000, or
15.4%, due to increased corporate expenses incurred in 1995. As a percent of
Revenue, general and administrative expense decreased from 10.0% to 8.3% for
1994 and 1995, respectively.
Operating income. Operating income increased from $1.1 million in 1994 to
$1.7 million in 1995, an increase of $600,000 or 53.4%. As a percent of Revenue,
operating income increased from 11.5% to 12.6%. These increases were the result
of increasing operating efficiencies in the Company's Dallas-Fort Worth
operations.
Interest expense, net. Interest expense, net, increased from $81,000 for
1994 to $87,000 for 1995, an increase of $6,000, or 7.4%.
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth unaudited quarterly consolidated operating
results for each of the Company's last four quarters as well as such data
expressed as a percentage of Revenue for the periods indicated. This information
has been prepared by the Company on a basis consistent with the Company's
audited consolidated financial statements and includes all adjustments
(consisting only of normal recurring adjustments) that management considers
necessary for a fair presentation of the data. These quarterly consolidated
results are not necessarily indicative of future consolidated results of
operations. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
28
<PAGE> 30
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Dental group practices revenue, net................. $6,316 $7,526 $9,178 $12,960
Less: Amounts retained by dental group practices.... 2,060 2,358 2,967 4,417
------ ------ ------ -------
Net revenue......................................... 4,256 5,168 6,211 8,543
Operating expenses:
Clinical salaries and benefits.................... 1,065 1,266 1,608 2,320
Other salaries and benefits....................... 466 684 836 1,141
Dental supplies................................... 327 435 517 937
Laboratory fees................................... 322 416 403 507
Occupancy......................................... 318 393 497 729
Advertising....................................... 225 349 345 291
Depreciation and amortization..................... 248 313 374 495
General and administrative........................ 573 726 960 1,305
------ ------ ------ -------
Operating income.................................... 712 586 671 818
Interest expense, net............................... 259 409 467 552
------ ------ ------ -------
Income before income taxes.......................... 453 177 204 266
Income taxes........................................ 174 71 79 101
------ ------ ------ -------
Net income.......................................... $ 279 $ 106 $ 125 $ 165
====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
---------------------------------------------------
<S> <C> <C> <C> <C>
Dental group practices revenue, net................. 100.0% 100.0% 100.0% 100.0%
Less: Amounts retained by dental group practices.... (32.6) (31.3) (32.3) (34.1)
------ ------ ------ ------
Net revenue......................................... 67.4 68.7 67.7 65.9
Operating expenses:
Clinical salaries and benefits.................... 16.9 16.8 17.5 17.9
Other salaries and benefits....................... 7.4 9.1 9.1 8.8
Dental supplies................................... 5.2 5.8 5.6 7.2
Laboratory fees................................... 5.1 5.5 4.4 3.9
Occupancy......................................... 5.0 5.2 5.4 5.6
Advertising....................................... 3.6 4.7 3.8 2.2
Depreciation and amortization..................... 3.9 4.1 4.1 3.8
General and administrative........................ 9.1 9.6 10.5 10.1
------ ------ ------ ------
Operating income.................................... 11.2 7.9 7.3 6.4
Interest expense, net............................... 4.1 5.4 5.1 4.3
------ ------ ------ ------
Income before income taxes.......................... 7.1 2.5 2.2 2.1
Income taxes........................................ 2.8 0.9 0.9 0.8
------ ------ ------ ------
Net income.......................................... 4.3% 1.6% 1.4% 1.3%
====== ====== ====== ======
</TABLE>
The Company's operating results may vary from quarter-to-quarter. During
1996, for example, factors including the acquisitions of businesses with lower
operating margins, amortization of intangibles recorded as a result of such
acquisitions and the building of corporate infrastructure to accommodate growth
contributed to successive declines in operating income as a percentage of
Revenue for each quarter-to-quarter period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had a $4.0 million working capital
deficit, representing a decrease of $4.3 million from working capital of
$349,000 at December 31, 1995. This working capital deficit included $8.7
million in current liabilities, including $1.1 million in accounts payable,
$753,000 in accrued liabilities, $1.1 million in amounts payable to dental group
practices as consideration for accounts receivable acquired
29
<PAGE> 31
from such group practices and $3.6 million in current maturities of notes
payable and capital lease obligations. These current liabilities were partially
offset by current assets, including $1.1 million in cash and cash equivalents
and $3.4 million in accounts receivable, net of allowances. The Company's
principal sources of liquidity as of December 31, 1996 consisted of cash and
cash equivalents, net accounts receivable and borrowing capacity under the
Credit Facility. The repayment of $ of indebtedness under the Credit
Facility with a portion of the net proceeds from this offering and the retention
of a portion of the net proceeds for general corporate purposes will
significantly reduce or eliminate the Company's working capital deficit. There
can be no assurance the Company will not have working capital deficits in the
future, particularly if additional indebtedness requires current amortization of
principal.
The Company has financed its acquisitions, capital expenditures and working
capital needs through a combination of borrowings under the Credit Facility,
private sales of preferred stock and Common Stock, the issuance of unsecured
promissory notes, the assumption of equipment financing and other indebtedness
and cash from operations.
For 1995 and 1996, cash provided by operations was $1.8 million and $2.3
million, respectively. During 1995 and 1996, the Company's net income was
reduced primarily as a result of non-cash expenses.
Cash used in investing activities was $713,000 in 1995 and $23.5 million in
1996. In 1995, the Company invested in the purchase of additional property and
equipment for its Dallas-Fort Worth operations. In 1996, $22.3 million was
utilized for acquisitions and $1.2 million was invested in the purchase of
additional property and equipment.
Cash used in financing activities for 1995 totaled $780,000. This was
comprised of $1.1 million that was distributed to the Company's then sole
stockholder, partially offset by net borrowings of $325,000. Cash provided by
financing activities was $21.5 million in 1996. This was comprised of $19.3
million in net borrowings and $10.7 million in proceeds from the issuance of
stock, partially offset by $6.7 million utilized to repurchase stock and $1.8
million in distributions to the Company's then sole stockholder.
The Company has a Credit Facility, which expires August 29, 1999, with a
bank. Under the Credit Facility, the Company may borrow up to $30.0 million,
including up to $2.0 million for working capital needs. As of December 31, 1996,
the Company had outstanding borrowings of $21.6 million under the Credit
Facility. Working capital borrowings outstanding may at no time exceed a
specified borrowing base based on a percentage of eligible accounts receivable.
At December 31, 1996, the borrowing base under this formula was $2.2 million.
The amounts outstanding under the Credit Facility bear interest at variable
rates which are based upon either the lender's base rate or LIBOR, plus, in
either case, a margin which varies according to the ratio of the Company's
funded debt to Adjusted EBITDA, each as defined in the Credit Facility. The
Credit Facility prohibits the payment of dividends and other distributions to
stockholders and restricts or prohibits the Company from incurring indebtedness,
incurring liens, disposing of assets, making investments or making acquisitions,
and requires the Company to maintain certain financial ratios on an ongoing
basis. The Credit Facility is secured by pledges of all of the outstanding
capital stock of, or other equity interests in, the Company's subsidiaries, and
a lien on substantially all of the assets of the Company. After completion of
this offering, the Company expects to negotiate a new credit facility, although
there can be no assurance that it will be able to do so.
The Company made capital expenditures of $1.2 million in 1996, principally
for the opening of two de novo Dental Offices and the expansion of six existing
Dental Offices in the Dallas-Fort Worth market. The establishment of additional
de novo Dental Offices and the expansion of existing Dental Offices in the
future will require ongoing capital expenditures.
The net proceeds from this offering will enable the Company to repay a
significant portion of outstanding indebtedness under the Credit Facility and to
redeem all Redeemable Preferred Stock to be issued upon the conversion of the
Company's Convertible Participating Preferred Stock at the completion of this
offering. The Company believes that the remaining net proceeds from this
offering, together with cash generated from operations, will be sufficient to
fund its anticipated working capital needs and capital expenditures (other than
financing necessary to complete future acquisitions) for at least the next 12
months. The Company expects to fund future acquisitions with cash from
operations and borrowings under a new senior credit facility. In the
30
<PAGE> 32
event the Company is not able to successfully negotiate a new senior credit
facility or identifies and completes future acquisitions more quickly than it
currently anticipates, the Company's current sources of liquidity may not be
adequate. In addition, in order to meet its long-term liquidity needs the
Company may issue additional equity and debt securities, subject to market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to the Company. The failure to raise the funds
necessary to finance its future cash requirements could adversely affect the
Company's ability to pursue its strategy and could negatively affect its
operations in future periods. See "Risk Factors -- Limited Capital; Need for
Additional Financing."
31
<PAGE> 33
BUSINESS
The Company manages dental group practices in selected markets, presently
including Dallas-Fort Worth, Houston, Wisconsin and Arkansas. The Dental Offices
provide general dentistry services such as examinations, cleanings, fillings,
bonding, placing crowns and fitting and placing fixed or removable prostheses.
Many of the Dental Offices also provide specialty dental services such as
orthodontics, oral surgery, endodontics, periodontics and pediatric dentistry.
The Company seeks to build geographically dense networks of dental providers by
expanding within its existing markets and entering new markets through
acquisition. At April 1, 1997, the Company managed 66 Dental Offices, of which
15 were internally developed and 51 were acquired by the Company. At April 1,
1997, the Dental Offices employed 126 full-time general dentists and contracted
with 11 full-time specialists.
THE DENTAL SERVICES INDUSTRY
The dental services industry in the United States is highly fragmented.
Dental services typically are offered by local providers, primarily solo
practitioners or small groups of general dentists or specialists, practicing at
a single location. According to an American Dental Association (the "ADA") 1995
Survey of Dental Practice, there were approximately 150,800 active dental
professionals in the United States in 1994, of which nearly 88% practiced either
alone or with one other dentist.
Consumer demand for dental services is increasing. Expenditures in the
dental services market grew at a compound annual rate of approximately 8.1% from
1980 to 1995. The growth in dental expenditures has resulted principally from
the increased availability of various forms of dental insurance, an increase in
the need for dental services as the United States population ages and an
increase in the demand for preventive and cosmetic dentistry. The Health Care
Financing Administration ("HCFA") has estimated that the aggregate domestic
market for dental services in 1996 was $45.9 billion, representing approximately
4.2% of total health care expenditures in the United States. HCFA has projected
that dental expenditures will reach $79.1 billion by the year 2005, representing
a compound annual growth rate of approximately 6.2% through the year 2005.
Although the number of practicing dentists in the United States relative to the
total United States population has increased in recent years, the ADA has
recently projected growth in the number of dentists in private practice from
1995 through 2020 of 11.1%, or less than 0.5% per annum. This rate is below the
projected annual growth rate of 0.8% for the United States population over the
same period.
Historically, most dental patients paid for dental services on an
out-of-pocket basis rather than through third-party payment arrangements. More
recently, the dental services industry has experienced a significant increase in
third-party payment arrangements such as indemnity insurance, preferred provider
payment plans and capitated managed dental care plans, which are often provided
by employers seeking to offer enhanced benefits to their employees. From 1980 to
1995, payments for dental services by private insurance companies in the United
States grew at a compound annual rate of 12.4%, from approximately $3.8 billion
to approximately $22.0 billion. Under an indemnity insurance plan, the patient
or the patient's employer pays insurance premiums and the insurance company
reimburses the dentist for all or a portion of the dentist's usual and customary
fee, with the patient paying the portion not covered by the insurance company.
Under preferred provider plans, dentists agree to provide dental services to
plan members on a discounted fee-for-service basis. Capitated managed dental
care plans typically pay participating dentists a fixed monthly amount for each
plan member covered for a specified schedule of services regardless of the
quantity or cost of services to the participating dentists, thereby shifting the
risk of utilization to the dentists. According to the National Association of
Dental Plans, 117 million or 46.7% of individuals in the United States in 1995
were covered by some form of dental care plan, with 31.4% of individuals covered
by dental indemnity insurance, 9.0% of individuals covered by capitated managed
dental care plans and 6.3% of individuals covered by preferred provider payment
plans. The remaining 139 million or 53.3% of individuals in the United States in
1995 did not have coverage under any third-party payment arrangement.
The increasing number of individuals covered under preferred provider and
capitated managed dental care plans presents opportunities for larger dental
practice management companies. Group practices with comprehensive networks of
dental providers in particular markets can offer these plans the ability to
enter
32
<PAGE> 34
these markets more quickly and to service their plan members more efficiently
than contracting through solo or smaller group practices. As a result, having an
extensive provider network can provide a group practice with advantages in
establishing and maintaining relationships with such plans, including greater
leverage than that of solo or smaller group practices when negotiating provider
agreements.
In recent years, general dental, orthodontic and other specialty practices
increasingly have formed larger group practices, following the consolidation
trend seen elsewhere in the health care industry. In these practices a separate
professional management team handles practice management functions such as
staffing, billing, information systems, managed care contracting, leasing,
purchasing and marketing, thereby enabling the dental professionals to focus on
providing high quality dental services. Several factors have contributed to the
increased formation of larger group practices in the dental services industry.
These include the increasing complexity of managing a dental practice due, in
part, to the shift to third-party reimbursement, the economies of scale
achievable in such areas as administration, purchasing and advertising, the need
for cost-effective management of patient care, the desire to capture revenues
from higher-margin specialty procedures, which would otherwise be referred to
independent specialists, and the growing importance of capital resources to
acquire and maintain state-of-the-art dental equipment, clinical facilities and
management information systems.
BUSINESS STRATEGY
The Company's objective is to be a leading dental practice management
company in each of its markets. The Company's strategy includes the following
key elements:
Expand in Existing Markets. The Company generates growth within its
existing markets by increasing patient volume and fees in existing Dental
Offices, either on a per-patient or per-procedure basis, by increasing the
physical space of existing Dental Offices to accommodate more single-chair
operatories and multi-chair specialty bays, and by opening Dental Offices on a
de novo basis. The Company intends to focus increasingly on acquisitions of solo
and smaller dental group practices within its existing markets as an additional
means of generating growth. Revenue from the Company's Dallas-Fort Worth
operations increased $3.6 million, or 38.3%, to $13.2 million in 1995, and
increased $5.1 million, or 38.1%, to $18.3 million in 1996.
Enter New Markets. The Company enters selected new markets by acquiring
dental group practices which have a significant market presence or which the
Company believes can achieve such a presence in the near term. The Company then
seeks to use the acquired dental group practice as a "pedestal" from which to
expand by executing its existing market growth strategies. In 1996, the Company
acquired practices in three new markets, Houston, Wisconsin and Arkansas.
Advertise and Market Dental Services. The Company seeks to increase patient
volume through television, radio and print advertising and other marketing
techniques. The Company emphasizes regional brand name recognition of its
affiliated Dental Offices, quality of care, comprehensive specialty services,
affordable payment plans for more complex procedures and patient satisfaction.
The Company complements its marketing program with patient call centers to
provide scheduling, informational and patient follow-up services. The Company
also supports its marketing program by offering convenient hours, selecting
favorable locations for its Dental Offices, offering same-day emergency care and
introducing or expanding specialty services at the Dental Offices. The Company's
objective is to leverage its existing advertising programs to generate revenue
as it expands within its markets.
Manage Payor Mix. The Company seeks to increase its profitability by
focusing on fee-for-service business (which includes fees paid by indemnity
insurers, fees from preferred provider plans and direct patient billings). The
Company supplements this business with revenue derived from contracts with
capitated managed dental care plans, thereby increasing dentist productivity and
facility utilization. In 1996, fee-for-service Revenue accounted for
approximately 60.8% of the Company's Revenue, while Revenue from contracts with
capitated managed dental care plans accounted for approximately 39.2%.
Achieve Operational Efficiencies and Build Provider Networks. The Company
seeks to achieve operational efficiencies based on the best practices identified
in its affiliated groups. The Company adapts and
33
<PAGE> 35
implements these practices throughout its provider networks, when appropriate,
to (i) reduce purchasing and administrative expenses, (ii) improve operational
efficiencies in such areas as scheduling, billing and personnel management and
(iii) introduce and standardize patient record keeping, treatment protocols and
technique utilization. The Company establishes and maintains geographically
dense networks of dentists in each of its markets. The Company believes these
networks provide it with advantages in establishing and maintaining
relationships with capitated managed dental care plans and other third-party
payors.
EXPANSION
The Company emphasizes expansion within its existing markets and entry into
selected new markets by acquiring group practices which have a significant
market presence or which the Company believes can achieve such a presence in the
near term. Following each acquisition in a new market, the Company seeks to use
the acquired practice as a "pedestal" from which to expand by executing its
existing market growth strategies.
The following table sets forth the increase in the number of Dental Offices
managed by the Company during each of the years indicated, including the number
of de novo Dental Offices and acquired Dental Offices in each such year.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Offices at beginning of the period............. 8 9 10 12 53
De novo Offices................................ 1 1 2 2 1
Acquired Offices............................... - - - 39 12
-- -- -- -- --
Offices at end of the period................... 9 10 12 53 66
== == == == ==
</TABLE>
- ------------------------------
(1) Through April 1, 1997
Expansion Within Existing Markets. The Company's strategies for growth
within its existing markets include expanding existing Dental Offices, opening
de novo Dental Offices and acquiring solo practices and smaller group practices.
Historically, the Company has expanded its operations in its existing markets
principally through expansion of existing Dental Offices and establishment of de
novo Dental Offices rather than through acquisitions. The Company recently
completed its first acquisition of a solo practice in an existing market
(Dallas-Fort Worth) and intends to focus increasingly on the acquisition of solo
and smaller group practices within existing markets.
Expansion of an existing Dental Office typically involves increasing the
physical space of the Dental Office to accommodate more single-chair operatories
and multi-chair specialty bays. This permits the addition of general dentists,
specialists, hygienists and dental assistants. The Company expanded the physical
space at six Dental Offices in the Dallas-Fort Worth market in 1996.
The Company considers a number of factors when establishing a de novo
Dental Office or acquiring a solo or smaller group practice in an existing
market. The factors considered include location, current geographic coverage by
existing Dental Offices, demographics, expandability, profit potential, the
needs of managed dental care plans and other large payors and the availability
of managed dental care patients, as these patients can provide a new Dental
Office with a reliable source of revenue until the Dental Office can build or
expand its own fee-for-service patient base.
The average investment by the Company in the two de novo Dental Offices
opened in 1996 has been approximately $225,000, which includes the cost of
equipment, leasehold improvements and working capital associated with the
initial operations. These de novo Dental Offices began contributing operating
income to the Company approximately three months after opening. Future de novo
Dental offices, however, may require a greater investment by the Company and may
not begin contributing operating income to the Company within that period of
time. The Company expenses operating costs (other than costs related to fixed
assets) in
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connection with the establishment of a de novo Dental Office as these costs are
incurred rather than capitalizing them.
Expansion to New Markets. Since January 1, 1996, the Company has entered
three new markets through five acquisitions. Prior to entering a new market, the
Company considers the population, demographics, market potential, competitive
environment, supply of available dentists, needs of managed care plans or other
large payors and general economic conditions within the market. The Company
seeks to identify and acquire group practices which have a significant market
presence or which the Company believes can achieve such a presence in the near
term. Factors the Company emphasizes when considering the acquisition of a
dental group practice include strong local reputation, large patient base,
profitability, convenient locations, high patient volume per dentist, low
malpractice claims history, favorable education credentials of the dentists and
strong references. In addition, the existence of a high quality local management
team that will remain actively involved in the business following the
acquisition is important to the Company's acquisition strategy. The Company
identifies potential acquisition candidates through a variety of means,
including selected inquiries of dentists by the Company, direct inquiries by
dentists, referrals from other dentists, participation in professional
conferences and referrals from practice brokers.
DENTAL SERVICES
The Dental Offices provide general dentistry services such as examinations,
cleanings, fillings, bonding, placing crowns and fitting and placing fixed or
removable prostheses. Many of the Dental Offices also provide specialty dental
services such as orthodontics, oral surgery, endodontics, periodontics and
pediatric dentistry. The Company typically offers specialty dental services
through teams which rotate through several Dental Offices in a particular
market. This enables the Company to capture revenue from services that would
otherwise be referred to independent specialists. The Company typically equips
its Dental Offices with state-of-the-art clinical and diagnostic equipment such
as fiber optic handpieces, intraoral video cameras and panoramic and
cephalometric X-ray equipment.
The following table shows the principal areas in which the Company manages
Dental Offices, the number of Dental Offices and dentists in each area at April
1, 1997, the year that each practice was established and the effective date of
each practice's affiliation with the Company:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF YEAR EFFECTIVE DATE
GROUP PRACTICE/MARKET DENTAL OFFICES DENTISTS(1) ESTABLISHED OF ACQUISITION
--------------------- -------------- ------------ ----------- -----------------
<S> <C> <C> <C> <C>
Monarch, Dallas-Fort Worth...... 16 46 1983 N/A
MacGregor, Houston.............. 15 36 1962 February 1, 1996
Midwest, Wisconsin.............. 22 36 1975 September 1, 1996
Convenient, Arkansas............ 1 3 1982 November 1, 1996
Arkansas Dental Health,
Arkansas...................... 3 5 1984 January 1, 1997
United Dental, Arkansas......... 9 11 1990 April 1, 1997
-- ---
Total......................... 66 137
</TABLE>
- ------------------------------
(1) Includes full-time general dentists employed by the Company or the P.C.s, as
applicable, and full-time specialists, most of whom are independent
contractors.
The attributes of the Dental Offices vary from market to market. In urban
and suburban areas a Dental Office may have, for example, 15 or more
single-chair operatories, a multi-chair specialty bay, several full-time general
dentists, several dental hygienists and dental assistants, a business manager
and a receptionist. In more rural markets, a Dental Office may have, for
example, only three or four single chair operatories, one general dentist, one
hygienist or dental assistant and a receptionist. One general dentist,
designated as the Dental Director, oversees professional matters at each Dental
Office.
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ADVERTISING AND MARKETING
The Company seeks to increase patient volume through television, radio and
print advertising and other marketing techniques. The Company has developed
these techniques over the past 14 years in its Dallas-Fort Worth operations and
adapts them for use in its other markets as appropriate. The Company's
advertising emphasizes regional brand name recognition of its affiliated Dental
Offices, quality of care, comprehensive specialty services, affordable payment
plans for more complex procedures and patient satisfaction. The Company operates
as "Monarch(TM) Dental" or under established regional brand names, such as
"MacGregor Dental Centers(SM)" in Houston and "Midwest Dental(SM)" in Wisconsin,
depending on the nature and requirements of the relevant market. The Company
believes the brand name recognition by consumers and managed dental care payors
generated by its advertising programs has contributed to its growth.
The Company complements its advertising and marketing programs in
Dallas-Fort Worth with a regional call center for the Dental Offices located in
that market. See "-- Operations -- Call Centers; Scheduling" below. The
Company's advertising and marketing support activities also include the offering
of convenient office hours, selecting favorable locations for its Dental
Offices, offering same-day emergency care and introducing or expanding
additional, higher-margin specialty services at the Dental Offices. The Company
has been able to leverage its existing advertising program to generate revenue
as it expands within its markets.
PAYOR MIX
Third-party payment arrangements from which the Company derives revenue
include indemnity insurance, preferred provider plans and capitated managed
dental care plans. Under indemnity insurance plans, the patient or the patient's
employer pays insurance premiums and the insurance company reimburses the
dentist for all or a portion of the dentist's usual and customary fee, with the
patient paying the portion not covered by insurance. Under preferred provider
plans, dentists agree to provide dental services to plan members on a discounted
fee-for-service basis. Capitated managed dental care plans typically pay
participating dentists a fixed monthly amount for each plan member covered for a
specified schedule of services regardless of the quantity or cost of services to
the participating dentists, thereby shifting the risk of utilization to the
dentists. In addition, members of capitated managed dental care plans pay the
Company additional amounts as co-payments for more complex procedures. The
relative size of capitation payments and co-payments varies in accordance with
the level of benefits provided and plan design.
The Company seeks to increase its profitability by focusing on
fee-for-service business. The Company's fee-for-service business includes fees
paid by indemnity insurers, fees from preferred provider plans and direct
patient billings.
The Company seeks to supplement its fee-for-service business with revenue
derived from contracts with capitated managed dental care plans. Although only
approximately 9% of individuals in the United States were enrolled in capitated
managed dental care plans in 1995, the Company believes that capitated managed
dental care will play an increasingly important role in the provision of dental
services. The Company's capitated managed dental care relationships enable it to
increase dentist productivity and facility utilization. These relationships also
provide increased co-payment revenue, referrals of additional fee-for-service
patients and opportunities for its dentists to educate patients about the
benefits of elective dental procedures that may not be covered by the patients'
capitated managed dental care plans.
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<PAGE> 38
The following tables set forth information regarding the sources of the
Company's Revenue for the years ended December 31, 1994, 1995 and 1996 and the
sources of the Company's Revenue in each of its markets for the year ended
December 31, 1996, beginning with the respective dates of acquisition for
Houston, Wisconsin and Arkansas:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
REVENUE SOURCE REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
-------------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fee-for-Service (1)..................................... $7,478 78.2% $9,051 68.5% $21,863 60.8%
Managed Dental Care:
Capitation............................................ 773 8.1% 1,642 12.4% 8,142 22.6%
Co-payment............................................ 1,308 13.7% 2,530 19.1% 5,975 16.6%
------ ----- ------- ----- ------- -----
Total........................................... $9,559 100.0% $13,223 100.0% $35,980 100.0%
====== ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
BY MARKET FOR YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------------
DALLAS-FORT WORTH HOUSTON WISCONSIN ARKANSAS
------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
REVENUE SOURCE REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
-------------- ------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fee-for-Service (1)..................... $10,719 58.7% $7,629 62.9% $3,182 60.6% $333 97.7%
Managed Dental Care:
Capitation............................ 3,269 17.9% 3,444 28.4% 1,423 27.1% 6 1.7%
Co-payment............................ 4,272 23.4% 1,056 8.7% 645 12.3% 2 0.6%
------- ----- ------- ----- ------ ----- ---- -----
Total........................... $18,260 100.0% $12,129 100.0% $5,250 100.0% $341 100.0%
======= ===== ======= ===== ====== ===== ==== =====
</TABLE>
- ------------------------------
(1) Constitutes Revenue derived from indemnity dental plans, preferred provider
plans and direct payments by patients not covered by any third-party payor.
OPERATIONS
The Company has achieved operational efficiencies based on the best
practices identified in its affiliated dental groups. The Company adapts and
implements these practices throughout its provider networks, when appropriate,
to (i) reduce purchasing and administrative expenses, (ii) improve operational
efficiencies in such areas as scheduling, billing and personnel management and
(iii) introduce and standardize patient record keeping, treatment protocols and
technique utilization. The Company establishes and maintains geographically
dense networks of dentists in each of its markets. The Company believes that
these provider networks offer preferred provider and capitated managed dental
care plans the ability to enter the markets served by the networks more quickly
and comprehensively and to service their plan members more efficiently than
contracting through solo or smaller group practices. The Company believes these
networks provide it with advantages in establishing and maintaining
relationships with capitated managed dental care plans and other third-party
payors, including greater leverage than that of solo or smaller group practices
when negotiating provider agreements.
Recruiting
Establishing geographically dense networks of providers by effective
recruiting of qualified dentists is an important element of the Company's
business strategy. The ADA has projected that the number of dentists practicing
in the United States will increase at a slower rate than the projected rate of
increase of the overall United States population through 2020. In the Company's
experience, many dentists in the early stages of their careers have incurred
substantial student loans. As a result they face significant financial
constraints to starting their own practices or buying into existing practices,
especially in view of the capital-intensive nature of modern dentistry. The
Company believes that practice in its network of Dental Offices offers both
recently graduated dentists and more experienced dentists without their own
practices advantages over a solo or smaller group practice, including relief
from the burden of administrative and management responsibilities and the
resulting ability to focus almost exclusively on practicing dentistry.
Advantages to dentists may also include,
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<PAGE> 39
depending upon the market involved, compensation which rewards productivity,
employee benefits such as health insurance, paid vacation, continuing education,
payment of professional membership fees and malpractice insurance, and, for
affiliated specialists, the prospect of a steadier stream of referrals than a
specialist practicing independently. In markets in which it is difficult to
recruit and retain dentists, such as certain rural areas, the Company may seek
to establish partnerships in which these dentists retain a portion of the equity
interest in the practice.
The Company believes that hygienists, dental assistants and office staff
are critical to attracting and retaining patients. Accordingly, the Company
actively recruits such staff by offering salaries and benefits which it believes
are generally superior to those offered by many solo or smaller group practices.
Call Centers; Scheduling
The Company maintains a regional call center in Dallas-Fort Worth. The call
center staff fields calls generated by advertising, schedules patient visits,
answers patient questions and initiates contact with patients for follow-up of
ongoing treatment programs. The Company has implemented or is currently
implementing similar call centers that will serve each of its other markets.
The Company utilizes a centralized management information system in the
call centers to schedule patient appointments. The Dental Offices generally
offer extended office hours and Saturday appointments. The Company sends
patients to the Dental Office that is most convenient for the patient in terms
of timing and location. The Company's centralized scheduling systems provide the
Company with better control over patient scheduling, resulting in increased
productivity, as well as the ability to analyze and control its revenue mix by
balancing fee-for-service and capitated managed dental care patients. This also
enables each Dental Office's staff to focus on patient care and customer service
by eliminating a significant number of incoming calls.
Purchasing
The integration of the Dental Offices enables the Company to take advantage
of economies of scale that are generally not available to solo or smaller group
practices. The Company is able to purchase dental supplies, laboratory services,
insurance, office furniture, equipment, information systems and advertising at
reduced costs. The Company also can contract for employee benefits at a lower
cost than solo or smaller group practices typically can obtain for themselves
and their employees.
Management Information Systems
The Company has licensed for use at its Dental Offices a management
information system for dental practice management. Substantially all of the
Dental Offices are currently utilizing this information system. The Company uses
the information system to track data related to each Dental Office's operations
and financial performance. The information system can provide each of the Dental
Offices with data such as patient and practitioner scheduling information,
insurance coverage information, clinical record-keeping and revenue and
collection data (including credit history). Within each market, the Company uses
the information system to manage billing and collections, including electronic
insurance claims processing. In addition, the Company uses the information
system to provide information for case management and outcome related research.
Quality Assurance
The Company requires each of its Dental Offices to develop and implement
clinical management procedures and treatment protocols, as well as uniform
business and administrative standards under which dental services are provided.
These procedures, protocols and standards vary from region to region and are
determined by the Dental Directors in each region in consultation with and under
the guidance of a committee of the Company's Regional Dental Directors. The
protocols include treatment planning, diagnostic screening, radiographic
records, record keeping, specialty referrals and dental hygiene protocols. State
licensing authorities require dentists to undergo annual training. The Company's
dentists and hygienists can obtain
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<PAGE> 40
some of the required continuing education training through the Company's
internal training programs in each regional market, certain of which have been
accredited by the Academy of General Dentistry.
AFFILIATION STRUCTURE
Relationship with P.C.s
In states in which the ownership of dental practices by non-dentists is
prohibited, the Company derives all of its revenue from its Management
Agreements with the P.C.s. Under each of the Management Agreements, the Company
receives a management fee equal to the Company's costs plus the lower of (i) a
fixed percentage of the P.C.'s net revenues or (ii) the P.C.'s net pre-tax
income. The Company's costs include all direct and indirect costs, overhead and
expenses relating to the Company's provision of services to the P.C.s under the
Management Agreements, such that substantially all costs associated with the
provision of dental services at the Dental Offices are borne by the Company,
other than the compensation and benefits of the dentists and hygienists who are
employed by or are independent contractors of the P.C.s. Under the Management
Agreements, the Company provides the P.C.s with, among other things, the
facilities, administrative personnel and supplies, as well as numerous services,
including administrative, accounting, cash management, financial statements and
reports, budgeting, recruiting, insurance, litigation management, billing and
collection services. Each Management Agreement is for a term of forty years,
with automatic renewal thereafter. Further, each Management Agreement generally
may be terminated by the P.C. only for cause, which includes an uncured breach
of the agreement by the Company, or upon the P.C.'s bankruptcy or voluntary
dissolution and may be terminated by the Company as of any anniversary date of
the Management Agreement upon 90 days' prior written notice. In addition to the
Management Agreements, the Company has a contractual right to designate or
approve the licensed dentists who own each P.C.'s capital stock. In states in
which non-dentists are permitted to own dental practices, such as Wisconsin,
there is no need for this structure and the Company's Dental Offices are owned
directly by, and the dentists are employed by, the Company.
Employment Agreements
All dentists practicing at the Dental Offices have entered into employment
agreements or independent contractor agreements through their professional
corporations. Such agreements typically contain a non-competition agreement for
up to three years following their termination within a specified geographic
area, usually a specified number of miles from the relevant Dental Office. The
agreements with dentists who have sold their practices to the Company generally
are for a specified initial term of up to five years. Under each such agreement,
the dentist assigns billing and collection rights to the Company, in the case of
states in which non-dentists are permitted to own dental practices, or to the
P.C. in other states, with the P.C. in turn assigning such rights to the Company
under the terms of the applicable Management Agreement. In return, the dentist
receives either a fixed salary or collections-based compensation, which may have
a minimum guarantee, and a package of benefits which varies from region to
region.
COMPETITION
The dental services industry is highly fragmented, consisting primarily of
solo and smaller group practices. The dental practice management segment of this
industry, currently in its formative stage, is highly competitive and is
expected to become more competitive. In this regard, the Company expects that
the provision of multi-specialty dental services at convenient locations will
become increasingly more common. The Company is aware of several dental practice
management companies that are currently operating in its existing markets.
Companies with dental practice management businesses similar to that of the
Company, which currently operate in other parts of the country, may begin
targeting the Company's existing markets for expansion. Such competitors may be
better capitalized or otherwise enjoy competitive advantages which may make it
difficult for the Company to compete against them or to acquire additional
Dental Offices on terms acceptable to the Company. As the Company seeks to
expand its operations into new markets, it is likely to face competition from
dental practice management companies which already have established a strong
business presence in such locations.
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<PAGE> 41
The business of providing general dental, orthodontic and other specialty
dental services is highly competitive in the markets in which the Company
operates. The Company believes it competes with other providers of dental and
specialty services on the basis of factors such as brand name recognition,
convenience, cost and the quality and range of services provided. Competition
may include practitioners who have more established practices and reputations.
The Company's affiliated dental practices also compete in the retention and
recruitment of general dentists, specialists and clinical staff. If the
availability of dentists begins to decline in the Company's markets, it may
become more difficult to attract qualified dentists to staff the Dental Offices
sufficiently or to expand them. The Dental Offices may not be able to compete
effectively against other existing practices or against new single or
multi-specialty dental practices that enter its markets, or to compete against
such other practices in the recruitment of qualified dentists.
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal
levels. There can be no assurance that the regulatory environment in which the
Company or P.C.s operate will not change significantly in the future. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
general, regulation of health care-related companies is increasing. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The ability of the Company to operate
profitably will depend in part upon the ability of the Company and the P.C.s to
operate in compliance with applicable health care regulations.
State Regulation
Many states in which the Company's Dental Offices presently are located
have fraud and abuse laws which are similar to the federal fraud and abuse law
described below, and which in many cases apply to referrals for items or
services reimbursable by any insurer, not just by Medicare and Medicaid. A
number of states, including each of the states in which Dental Offices are
currently located, also impose significant penalties for submitting false claims
for dental services. Many states, including all of the states in which the
Dental Offices are currently located, either prohibit or require disclosure of
self-referral arrangements and impose penalties for the violation of these laws.
Many states also prohibit dentists from splitting fees with non-dentists.
The laws of many states, including Arkansas and Texas, but excluding
Wisconsin, typically permit a dentist to conduct a dental practice only as an
individual, a member of a partnership or an employee of a professional
corporation, limited liability company or limited liability partnership. These
laws typically prohibit, either by specific provision or as a matter of general
policy, non-dental entities, such as the Company, from practicing dentistry,
from employing dentists and, in certain circumstances, hygienists or dental
assistants, or from otherwise exercising control over the provision of dental
services.
Some states require entities designated as "clinics" to be licensed, and
may define clinics to include dental practices that are owned or controlled in
whole or in part by non-dentists. Many states limit the ability of a person
other than a licensed dentist to own or control equipment or offices used in a
dental practice. Some of these states allow leasing of equipment and office
space to a dental practice, under a bona fide lease, if the equipment and office
remain under the control of the dentist. The laws of some states prohibit the
advertising of dental services under a trade or corporate name and require all
advertisements to be in the name of the dentist. A number of states also
regulate the content of advertisements of dental services and the use of
promotional gift items. In addition, many states impose limits on the tasks that
may be delegated by dentists to hygienists and dental assistants. These laws and
their interpretations vary from state to state and are enforced by the courts
and by regulatory authorities with broad discretion.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. As the Company or the P.C.s contract with third-party
payors, on a capitation or other basis under which the
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<PAGE> 42
Company assumes financial risk, the Company or the P.C.s may become subject to
state insurance laws. Specifically, in some states, regulators may determine
that the Company or the P.C.s are engaged in the business of insurance,
particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. To the extent that the Company or the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's revenue may be materially and adversely affected.
Federal Regulation
Many of the federal laws regulating the provision of dental care apply only
to dental services which are reimbursed under the Medicare or Medicaid programs.
Because very little dental care is currently provided by Medicare and Medicaid,
the Company derives very little revenue from these programs. Therefore, the
current impact of these laws is negligible. However, there can be no assurance
that the reach of these laws will not be expanded in the future to cover
services reimbursable by any payor. If these laws were to be expanded in such a
manner, they could have a material adverse effect upon the Company.
The federal fraud and abuse statute prohibits, subject to certain safe
harbors, the payment, offer, solicitation or receipt of any form of remuneration
in return for, or in order to induce, (i) the referral of a person for service,
(ii) the furnishing or arranging for the furnishing of items or services or
(iii) the purchase, lease or order or the arrangement or recommendation of a
purchase, lease or order of any item or service which is, in each case,
reimbursable under Medicare or Medicaid. The statute reflected the federal
government's policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse related to Medicare and Medicaid costs. Because dental services are
covered under various government programs, including Medicare and Medicaid, this
federal law applies to dentists and the provision of dental services.
Significant prohibitions against dentist self-referrals for services
covered by Medicare and Medicaid programs were enacted, subject to certain
exceptions, by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician and dentist
self-referral legislation known as Stark I (which applied only to clinical
laboratory referrals) by dramatically enlarging the list of services and
investment interests to which the self-referral prohibitions apply. Effective
January 1, 1995, Stark II prohibits a physician or dentist, or a member of his
or her immediate family, from making referrals for certain "designated health
services" to entities in which the physician or dentist has an ownership or
investment interest, or with which the physician or dentist has a compensation
arrangement. "Designated health services" include, among other things, clinical
laboratory services, radiology and other diagnostic services, radiation therapy
services, durable medical equipment, prosthetics, outpatient prescription drugs,
home health services and inpatient and outpatient hospital services. Stark II
prohibitions include referrals within the physician's or dentist's own group
practice (unless such practice satisfies the "group practice" exception) and
referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with, or
violation of, Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Even if the Company were deemed to provide "designated health services," the
Company believes its activities would be protected under the employment and
group practice exceptions to Stark II. Nevertheless, there can be no assurance
that Stark II will not be interpreted or hereafter amended in a manner that has
a material adverse effect on the Company's operations as presently conducted.
Proposed federal regulations also govern physician incentive plans
associated with certain managed care organizations that offer risk-based
Medicare or Medicaid contracts. These regulations define physician incentive
plans to include any compensation arrangement (such as capitation arrangements,
bonuses and withholds) that may directly or indirectly have the effect of
reducing or limiting services furnished to patients covered by the Medicare or
Medicaid programs. Direct monetary compensation which is paid by a managed
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<PAGE> 43
care plan, dental group or intermediary to a dentist for services rendered to
individuals covered by the Medicare or Medicaid programs is subject to these
regulations, if the compensation arrangement places the dentist at substantial
financial risk. When applicable, the regulations generally require disclosure to
the federal government or, upon request, to a Medicare beneficiary or Medicaid
recipient regarding such financial incentives, and require the dentist to obtain
stop-loss insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing agents.
These rules prohibit a billing agent from receiving a fee based on a percentage
of Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.
Federal regulations also allow state licensing boards to revoke or restrict
a dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.
The Company's revenues from all insurers, including governmental insurers,
are subject to significant regulation. Some payors limit the extent to which
dentists may assign their revenues from services rendered to beneficiaries.
Under these "reassignment" rules, the Company may not be able to require
dentists to assign their third-party payor revenues unless certain conditions
are met. In addition, governmental payment programs limit reimbursement for
services provided by dental assistants and other ancillary personnel to those
services which were provided "incident to" a dentist's services. Under these
"incident to" rules, the Company may not be able to receive reimbursement for
services provided by certain Clinical Staff members unless certain conditions
are met.
The operations of the Dental Offices are also subject to compliance with
regulations promulgated by the Occupational Safety and Health Administration
("OSHA"), relating to such matters as heat sterilization of dental instruments
and the usage of barrier techniques such as masks, goggles and gloves. The
Company incurs expenses on an ongoing basis relating to OSHA monitoring and
compliance.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
42
<PAGE> 44
INSURANCE
The Company maintains professional malpractice and general liability
insurance for itself and maintains professional liability insurance covering
dentists, hygienists and dental assistants at the Dental Offices. The Company
generally is a named insured under such policies and is named as an additional
insured on each individual dentist's policy. The Company maintains general
liability and umbrella coverage, including malpractice coverage, of $5 million
per occurrence and $5 million in the aggregate. Certain types of risks and
liabilities are not covered by insurance, however, and there can be no assurance
that coverage will continue to be available upon terms satisfactory to the
Company or that the coverage will be adequate to cover losses. Malpractice
insurance, moreover, can be expensive and varies from state to state. Successful
malpractice claims asserted against the dentists, the P.C.s or the Company may
have a material adverse effect on the Company's business, financial condition
and operating results. While the Company believes its insurance policies are
adequate in amount and coverage for its current operations, there can be no
assurance that the coverage maintained by the Company will be sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. The
dentists employed by the P.C.s or the Company are from time to time subject to
malpractice claims. Such claims, if successful, could result in damage awards
exceeding, perhaps substantially, applicable insurance coverage.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 4201 Spring Valley
Road, Dallas, Texas, in approximately 8,500 square feet occupied under a lease
which expires on December 31, 1999.
The Company also leases real estate at the location of each Dental Office.
Typically, each acquired Dental Office is located at the site used by the
respective selling dentist prior to the Company's acquisition. For the year
ended December 31, 1996, the Company had lease costs of approximately $1.6
million. The Company anticipates that, as it acquires Dental Offices, it will
lease the sites formerly utilized by the selling dentists. See "Certain
Transactions."
As of April 1, 1997, the Company had approximately 641 employees, including
36 dentists and 31 hygienists located at Midwest but excluding the 101 dentists
and 23 hygienists employed by or contracting with the P.C.s. The Company is not
party to any collective bargaining agreement with a labor union and considers
its relations with its employees to be satisfactory.
43
<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of April
1, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Warren F. Melamed, D.D.S. ................... 50 Chairman of the Board, Chief Dental Officer
and Director
Gary W. Cage................................. 52 Chief Executive Officer and Director
Charles G. Shears, D.D.S. ................... 61 Executive Vice President and Director
David L. Hehli, D.D.S........................ 54 President, Midwest
Glenn E. Hemmerle(2)......................... 51 Director
Roger B. Kafker(2)........................... 34 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation and Option Committee.
Warren F. Melamed, D.D.S., founded the Company in 1983 and has served as
its Chairman since then. From 1985 until March 1997, Dr. Melamed served as the
Chief Executive Officer of the Company and since March 1997, has served as the
Chief Dental Officer of the Company.
Gary W. Cage has served as Chief Executive Officer of the Company since
March 1997 and served as Chief Operating Officer of the Company from March 1996
to March 1997. Prior to joining the Company, he served as Chief Financial
Officer, Senior Vice President, Treasurer and Secretary of EmCare Holdings Inc.,
a provider of management services to emergency care physicians, from October
1992 to March 1996; as Chief Financial Officer of Team Bancshares, Inc., a bank
holding company, from 1989 to October 1992; and as Chief Financial Officer of
Texas American Bancshares, Inc., a bank holding company, from 1974 to 1989.
Charles G. Shears, D.D.S., founded MacGregor in 1962 and served as its
President and Chief Executive Officer from then until February 1996, when he
became Executive Vice President and a director of the Company in connection with
the 1996 Transactions.
David L. Hehli, D.D.S., founded Midwest in 1975 and has served as its
President since then, including following the completion of the Company's
acquisition of Midwest.
Glenn E. Hemmerle has served as a director of the Company since August
1996. He has served as President and Chief Executive Officer of The Johnny
Rockets Group, Inc., a restaurant-chain operator, since February 1997. Prior to
February 1997 Mr. Hemmerle served as President and Chief Executive Officer of
Pearl Vision, Inc., a retail eyeglass company, from July 1994 to November 1996;
and as President and Chief Executive Officer of Crown Books Inc., a retail
bookseller, from August 1992 to July 1994.
Roger B. Kafker has served as a director of the Company since February
1996. He has been associated with TA Associates, Inc. or its predecessor since
1989 and became a Principal of that firm in 1994 and a Managing Director in
1995. Mr. Kafker is also a director of ANSYS, Inc., a software company.
BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at five.
Following this offering, the Company's Board of Directors will be divided into
three classes, with the members of each class of directors serving for staggered
three-year terms. The Board of Directors will consist of one Class I Director
(Dr. Shears), two Class II Directors (Dr. Melamed and Mr. Kafker) and two Class
III Directors (Messrs. Cage and Hemmerle), whose initial terms will expire at
the 1998, 1999 and 2000 annual meetings of stockholders, respectively. Within 90
days after the completion of this offering, the Company intends to expand the
Board of Directors and elect an additional Class I director who will not be an
officer or an employee of the Company.
44
<PAGE> 46
The Board of Directors has established an Audit Committee (the "Audit
Committee") and a Compensation and Option Committee (the "Compensation
Committee"). The Audit Committee recommends the firm to be appointed as
independent accountants to audit financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's annual operating results, considers the adequacy of the internal
accounting procedures and considers the effect of such procedures on the
accountants' independence. Within 90 days following the completion of this
offering, the Audit Committee will consist of Mr. Hemmerle and an additional
director who is neither an officer nor an employee of the Company. The
Compensation Committee reviews and recommends the compensation arrangements for
officers and other senior-level employees, reviews general compensation levels
for other employees as a group, determines the options or stock to be granted to
eligible persons under the 1996 Stock Plan and takes such other action as may be
required in connection with the Company's compensation and incentive plans. The
Compensation Committee consists of Messrs. Hemmerle and Kafker.
Non-employee directors other than Mr. Kafker (the "Independent Directors")
receive fees of $2,000 for each meeting of the Board of Directors or committee
they attend, and each director is reimbursed for travel and other expenses
incurred in attending meetings. Each Independent Director acquired 20,000 shares
of restricted Common Stock at the time he joined the Board of Directors. See
"-- Employee Stock and Other Benefit Plans -- Restricted Stock Grants" below.
The Company intends to grant approximately this number of options to Independent
Directors who join the Board of Directors in the future.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the other most highly compensated
executive officers of the Company whose aggregate base salary and bonus exceeded
$100,000 during 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 ANNUAL LONG TERM
COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ------------------------------ --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Warren F. Melamed, D.D.S...................... 275,000 -- -- 10,717(2)
Chairman
Gary W. Cage.................................. 134,615 70,000 50,000 --
Chief Executive Officer
Charles G. Shears, D.D.S...................... 224,657 -- -- 11,000(3)
Executive Vice President
</TABLE>
- ------------------------------
(1) One executive officer, David L. Hehli, D.D.S., joined the Company on
September 1, 1996, and would have appeared in the table above had he been
employed by the Company for a full fiscal year.
(2) Includes $2,000 contributed by the Company to Dr. Melamed's 401(k) account
as a matching contribution and $8,717 paid to Dr. Melamed as a car
allowance.
(3) Constitutes payments to Dr. Shears as a car allowance.
45
<PAGE> 47
Option Grants. The following table sets forth information concerning the
individual grant of options to purchase Common Stock to the Named Executive
Officers during 1996. No stock appreciation rights ("SARs") have been granted.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ------------- -------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gary W. Cage............ 50,000 100% 1.50 10/31/06 47,167 119,530
</TABLE>
- ------------------------------
(1) The options, which were granted under the 1996 Stock Plan, become
exercisable in four equal annual installments, commencing on the first
anniversary of the grant date. All options are subject to the employee's
continued employment and terminate ten years after the grant date, subject
to earlier termination in accordance with the 1996 Stock Plan and the
applicable option agreement. All options were granted at fair market value
as determined by the Compensation Committee on the date of the grant. See
"-- Employee Stock and Other Benefit Plans -- 1996 Stock Option and
Incentive Plan" below.
(2) This column shows the hypothetical gains or "option spreads" of the options
granted based on both the fair market value of the Common Stock for
financial reporting purposes and assumed annual compound stock appreciation
rates of 5% and 10% over the terms of the options. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future Common Stock
prices. The gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the exercise
of the option or the sale of the underlying shares, or reflect
nontransferability, vesting or termination provisions. The actual gains, if
any, on the exercises of stock options will depend on the future performance
of the Common Stock, among other things.
Option Exercises and Holdings. The following table sets forth information
concerning the number and value of unexercised options to purchase Common Stock
held by the Named Executive Officers. None of the Named Executive Officers
exercised any stock options during 1996.
AGGREGATED OPTION EXERCISES IN 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/96 AT 12/31/96($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary W. Cage..................................... -- 50,000 --
</TABLE>
- ------------------------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of $ per share, less the
applicable exercise price.
Executive Bonuses. Executive bonuses are granted at the discretion of the
Compensation Committee.
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
1996 Stock Option and Incentive Plan. The 1996 Stock Option and Incentive
Plan, as amended, was initially adopted by the Board of Directors in February
1996 and was subsequently approved by the Company's stockholders. The 1996 Stock
Plan permits (i) the grant of Incentive Options, (ii) the grant of Non-Qualified
Options, (iii) the issuance or sale of Common Stock with or without vesting or
other restrictions ("Stock
46
<PAGE> 48
Grants") (iv) the issuance or sale of Common Stock without restrictions
("Unrestricted Stock"), (v) the grant of Common Stock upon the attainment of
specified performance goals ("Performance Share Awards"), and (vi) the grant of
the right to receive cash dividends with the holders of the Common Stock as if
the recipient held a specified number of shares of the Common Stock ("Dividend
Equivalent Rights"). These grants may be made to officers and other employees,
directors, advisors, consultants and other key persons of the Company and its
subsidiaries (including dentists who are employed by or independent contractors
of the P.C.s). The 1996 Stock Plan provides for the issuance of 2,000,000 shares
of Common Stock of which 65,000 shares were subject to outstanding options and
687,500 were sold as restricted stock awards and remained outstanding as of
April 1, 1997. On and after the date the 1996 Stock Plan becomes subject to
Section 162(m) of the Code, options with respect to no more than 300,000 shares
of Common Stock may be granted to any one individual in any calendar year.
The 1996 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1996 Stock Plan, the Compensation Committee has full
power to determine from among the persons eligible for grants under the 1996
Stock Plan the individuals to whom grants will be made, the combination of
grants to participants and the specific terms of each grant, including vesting.
Incentive Options may be granted only to officers or other full-time employees
of the Company or its subsidiaries, including members of the Board of Directors
who are also full-time employees of the Company or its subsidiaries.
The option exercise price of options granted under the 1996 Stock Plan is
determined by the Compensation Committee but, in the case of Incentive Options,
may not be less than 100% of the fair market value of the underlying shares on
the date of grant. If any employee of the Company or any subsidiary owns (or is
deemed to own) at the date of grant shares of stock representing in excess of
110% of the combined voting power of all classes of stock of the Company or any
parent or subsidiary, the option exercise price for Incentive Options granted to
such employee may not be less than 110% of the fair market value of the
underlying shares on that date. Non-Qualified Options may be granted at prices
less than the fair market value of the underlying shares on the date granted.
Options typically are subject to vesting schedules, terminate 10 years from the
date of grant and may be exercised for specified periods subsequent to the
termination of the optionee's employment or other business relationship with the
Company. At the discretion of the Compensation Committee, any option may include
a "reload" feature pursuant to which an optionee exercising an option receives
in addition to the number of shares of Common Stock due on the exercise of such
an option an additional option with an exercise price equal to the fair market
value of the Common Stock on the date such additional option is granted. Upon
the exercise of options, the option exercise price must be paid in full either
in cash or by certified or bank check or other instrument acceptable to the
Compensation Committee or, in the sole discretion of the Compensation Committee,
by delivery of shares of Common Stock already owned by the optionee.
The 1996 Stock Plan also permits Stock Grants, Performance Share Awards and
grants of Dividend Equivalent Rights. Stock Grants may be made to persons
eligible under the 1996 Stock Plan, subject to such conditions and restrictions
as the Compensation Committee may determine. Prior to the vesting of shares,
recipients of Stock Grants generally will have all the rights of a stockholder
with respect to the shares, including voting and dividend rights, subject only
to the conditions and restrictions set forth in the 1996 Stock Plan or in any
agreement. The Compensation Committee may also make Stock Grants to persons
eligible under the 1996 Stock Plan in recognition of past services or other
valid consideration, or in lieu of cash compensation. In the case of Performance
Share Awards, the issuance of shares of Common Stock will occur only after the
conditions and restrictions set forth in the grant agreement are satisfied. In
addition, the Compensation Committee may grant Dividend Equivalent Rights in
conjunction with any other grant made pursuant to the 1996 Stock Plan or as a
free-standing grant. Dividend Equivalent Rights may be paid currently or deemed
to be reinvested in additional shares of Common Stock, which may thereafter
accrue further dividends.
The Compensation Committee may, in its sole discretion, accelerate or
extend the date or dates on which all or any particular award or awards granted
under the 1996 Stock Plan may be exercised or vest. To the extent not exercised,
all options granted under the 1996 Stock Plan terminate upon the dissolution,
liquidation
47
<PAGE> 49
or sale of the Company unless assumed by a successor entity, except as the
Compensation Committee otherwise determines.
Restricted Stock Grants. Since adopting the 1996 Stock Plan in connection
with the 1996 Transactions in February 1996, the Company has sold an aggregate
of 687,500 shares of restricted Common Stock to employees and directors of the
Company under the 1996 Stock Plan or separate restricted stock agreements. These
shares generally vest in equal monthly installments (or annually in the case of
the shares sold to Dr. Melamed) over four years beginning with the date of sale,
with unvested shares subject to repurchase at cost upon the termination of the
purchaser's employment or other relationship with the Company. Shares of
restricted Common Stock generally would be treated as fully vested in the event
of a sale of the Company.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan was adopted by the Board of Directors and approved by the
Company's stockholders. Up to 500,000 shares of Common Stock may be issued under
the Purchase Plan. The Purchase Plan is administered by the Compensation
Committee.
The first offering under the Purchase Plan will begin on August 1, 1997 and
end on January 31, 1998, 1998. Subsequent offerings will commence on each
February 1 and August 1 thereafter and will have a duration of six months.
Generally, all employees who are customarily employed for more than 20 hours per
week as of the first day of the applicable offering period are eligible to
participate in the Purchase Plan. Any employee who owns or is deemed to own
shares of stock representing in excess of 5% of the combined voting power of all
classes of stock in the Company may not participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares which may
be purchased by any participating employee during any offering period is limited
to
shares (as adjusted by the Compensation Committee from time to time). Unless the
employee has previously withdrawn from the offering, his or her accumulated
payroll deductions will be used to purchase Common Stock on the last business
day of the period at a price equal to 85% of the fair market value of the Common
Stock on the first or last day of the offering period, whichever is lower. Under
applicable tax rules, an employee may purchase no more than $25,000 worth of
Common Stock in any calendar year. No Common Stock has been issued to date under
the Purchase Plan.
EMPLOYMENT AGREEMENTS
The Company entered into an Employment Agreement with Dr. Melamed in
connection with the 1996 Transactions pursuant to which Dr. Melamed currently
serves as its Chairman of the Board and Chief Dental Officer. The agreement
provides for (i) an annual base salary of $300,000, (ii) an initial employment
term ending on February 5, 2000 with an indefinite term commencing thereafter
terminable by either party and (iii) the continuation of base salary payments
until the later of February 5, 2000 or one year following termination of Dr.
Melamed's employment in the event such employment is terminated by the Company
without cause (as defined) or by Dr. Melamed following a material default of the
agreement by the Company.
In connection with the 1996 Transactions, the Company also entered into
Non-Competition Agreements with Drs. Melamed and Shears. These agreements
provide that Drs. Melamed and Shears will not engage in certain competitive
activities without the Company's consent prior to February 5, 2001 and February
5, 1999, respectively. In the event that either Dr. Melamed's or Dr. Shears'
employment with the Company terminates other than as a result of death or
disability prior to the February 5, 2001 or February 5, 1999, respectively,
these agreements provide that the terminated employee will be engaged as a
consultant to the Company at a rate of $500 per month until such date.
The Company entered into an Employment Agreement with Dr. Hehli in
connection with the acquisition of Midwest pursuant to which Dr. Hehli continues
to serve as President of Midwest. The agreement provides for (i) an annual base
salary of $200,000, subject to annual inflation adjustments beginning in 1997,
(ii) an employment term ending on December 31, 2001 and (iii) the continuation
of base salary payments and other
48
<PAGE> 50
benefits until December 31, 2001 in the event such employment is terminated by
the Company without cause (as defined) or by Dr. Hehli following a material
breach of the agreement by the Company.
The Company has also entered into a Non-Competition Agreement with Dr.
Hehli and certain entities affiliated with Dr. Hehli. The agreement provides
that Dr. Hehli and each such entity will not engage in certain competitive
activities without the Company's consent prior to one year following the later
to occur of the termination of Dr. Hehli's employment with the Company or the
receipt by Dr. Hehli of his last base salary payment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since April 1996, all executive officer compensation decisions have been
made by the Compensation Committee. Between February 1996 and April 1996,
executive officer compensation decisions were made by Dr. Melamed and Mr.
Kafker. Prior to then, Dr. Melamed determined compensation as Chairman and sole
owner of the Company. The Compensation Committee reviews and makes
recommendations to the Board of Directors regarding the compensation for senior
management and key employees of the Company, including salaries and bonuses. The
current members of the Compensation Committee are Messrs. Hemmerle and Kafker,
neither of whom is an executive of the Company.
49
<PAGE> 51
CERTAIN TRANSACTIONS
In February 1996, the Company completed a series of transactions
principally including the repurchase of shares of Common Stock from Dr. Melamed,
its founder and Chairman, and the concurrent acquisition of the MacGregor Dental
Centers business. In connection with these transactions:
(i) the Company incurred $17.4 million of senior secured indebtedness
under the Credit Facility;
(ii) the TA Investors invested $10.0 million to acquire 4,800,000
shares of Convertible Participating Preferred Stock which are convertible
into 4,800,000 shares of Common Stock and 3,840,000 shares of Redeemable
Preferred Stock redeemable upon completion of this offering for an
aggregate cash payment of $8.0 million;
(iii) the Company redeemed shares of Common Stock held by Dr. Melamed
for an aggregate price of $6.7 million (approximately $0.13 per share), Dr.
Melamed contributed to the Company interests in two corporations holding
ownership interests in the Company's Dallas-Fort Worth Dental Offices in
exchange for an aggregate of 712,480 shares of Common Stock and a cash
payment of $425,000 and the Company repaid outstanding indebtedness to Dr.
Melamed of $446,000;
(iv) the Company acquired the MacGregor Dental Centers business from
Shears Vanguard Ltd., an entity controlled by Dr. Charles G. Shears, an
executive officer and director of the Company, in exchange for (1) a cash
payment of $14.9 million plus assumption of indebtedness of approximately
$662,000 and other ordinary course obligations and (2) 1,400,000 shares of
Common Stock;
(v) Dr. Melamed and the Company entered into an employment agreement
and Dr. Melamed purchased 300,000 shares of restricted Common Stock as
described under "Management -- Executive Compensation," "-- Employee Stock
and Other Benefit Plans -- Restricted Stock Grants" and "-- Employment
Agreements"; and
(vi) Dr. Shears and the Company entered into a one-year employment
agreement providing for a base salary of $250,000.
In August 1996, the Company acquired Midwest from Dr. David L. Hehli,
President of Midwest, in exchange for (i) a cash payment of $5.3 million plus
the assumption of ordinary course obligations and (ii) 700,000 shares of Common
Stock. The Company also agreed to grant options to acquire up to 160,000 shares
of Common Stock upon the achievement by Midwest of specified financial
performance goals over the five calendar years following the acquisition. Each
of these options will be granted at an exercise price equal to the fair market
value of the Common Stock on the date of grant. In connection with the Midwest
Acquisition, the Company incurred $5.0 million of additional indebtedness under
the Credit Facility and Dr. Hehli and the Company entered into the employment
agreement described under "Management -- Employment Agreements."
Pursuant to an Amended and Restated Stockholders' Agreement (the
"Stockholders' Agreement") among the Company and the TA Investors, Dr. Melamed
and subsequent transferees of a portion of shares held by him (the "Monarch
Investors"), Dr. Shears and Shears Vanguard, Ltd. and subsequent transferees of
a portion of shares held by them (the "MacGregor Investors"), and Dr. Hehli and
a subsequent transferee of a portion of the shares held by him (the "Hehli
Investors," and together with the TA Investors, the Monarch Investors and the
MacGregor Investors, the "Investors") initially entered into in connection with
the 1996 Transactions and subsequently amended in connection with the
acquisition of Midwest, (i) each Investor received "piggy back" registration
rights, (ii) the TA Investors received demand registration rights, (iii) each
Investor granted to and received from the other Investors rights (the "Co-Sale
Rights") to participate on a pro rata basis in certain resales of Common Stock
and agreed to restrictions on transfers of shares, (iv) each Investor was
granted participation rights with respect to certain future issuances of
securities by the Company, and (v) each Investor agreed to elect one individual
nominated by TA Investors, the Monarch Investors and the MacGregor Investors to
the Board of Directors. Mr. Kafker, a Managing Director of TA Associates, Inc.,
and Drs. Melamed and Shears have been elected as directors of the Company
pursuant to the Stockholders' Agreement, as the respective nominees of the TA
Investors, Monarch Investors and MacGregor Investors to
50
<PAGE> 52
the Board of Directors. Also in connection with the 1996 Transactions, the
Company agreed to indemnify the TA Investors and the controlling persons of the
TA Investors (one of whom is Mr. Kafker, a director of the Company) against
claims and liabilities, including claims and liabilities arising under the
securities laws.
Effective upon and subject to the completion of this offering, provisions
of the Stockholders' Agreement relating to the participation rights, the Co-Sale
Rights, restrictions on transfers of shares and the election of the Board of
Directors will terminate in accordance with their original terms.
In December 1996 and January 1997, pursuant to the pro rata participation
rights contained in the Stockholders' Agreement, the Company sold an aggregate
of 1,704,550 shares of Series A Convertible Junior Preferred Stock to the
Investors for an aggregate purchase price of $3.0 million (or approximately
$1.76 per share).
The Company provides administrative services to Midwest Dental Plan, Ltd.
(the "Midwest Plan"), a capitated managed dental care plan of which Dr. Hehli
owns a majority interest, pursuant to an administrative services and management
agreement. The Company receives a percentage of the gross premiums or other
amounts received by the Midwest Plan under existing contracts with employer
groups. In addition, Midwest is a provider of dental services under the Midwest
Plan in exchange for capitation payments and co-payments from plan members. The
Company received $646,000 under these arrangements during the year ended
December 31, 1996.
The Company leases one facility from Dr. Melamed, 10 facilities from
entities controlled by Dr. Shears and four facilities from Dr. Hehli, in
connection with which the Company made aggregate lease payments of $65,000,
$326,000 and $87,000, respectively, during the year ended December 31, 1996. The
Company believes that these leases are on terms and at rates no less favorable
to the Company than could have been obtained from unaffiliated third parties.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any loans
by the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
51
<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of April 1, 1997 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby of (i) each person
known by the Company to own beneficially five percent or more of the outstanding
shares of Common Stock, (ii) each director and the Named Executive Officers of
the Company and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(1)
SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(2) OWNED OFFERING OFFERING
--------------------------- ------------ -------- --------
<S> <C> <C> <C>
TA Associates Group(3)................................... 5,346,401 39.9%
Warren F. Melamed, D.D.S.(4)............................. 4,031,864 30.1
David L. Hehli, D.D.S.................................... 695,683 5.2
Charles G. Shears, D.D.S.(5)............................. 231,861 1.7
Gary W. Cage(6).......................................... 200,000 1.5
Glenn E. Hemmerle(7)..................................... 20,000 *
Roger B. Kafker(8)....................................... 10,231 *
All executive officers and directors as a group (six
persons)(9)............................................ 5,189,639 38.7
</TABLE>
- ------------------------------
* Less than 1%.
(1) All percentages have been determined as of April 1, 1997 in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). For purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares of Common Stock which
such person has the right to acquire within 60 days after the date of this
Prospectus. For purposes of computing the percentage of outstanding shares
of Common Stock held by each person or group of persons named above, any
security which such person or persons has or have the right to acquire
within 60 days after the date of this Prospectus is deemed to be
outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. As of April 1, 1997,
a total of 13,414,550 shares of Common Stock were issued and outstanding and
no options to acquire Common Stock were exercisable within 60 days of the
estimated effective date of this offering. The applicable percentage of
"beneficial ownership" after this offering is based upon shares of
Common Stock outstanding. The number of shares of Common Stock set forth
herein includes shares of non-voting Class A Common Stock, Convertible
Participating Preferred Stock and Series A Convertible Junior Preferred
Stock which will automatically convert into an equal number of shares of
Common Stock upon completion of this offering.
(2) The address of the TA Associates Group is High Street Tower, Suite 2500, 125
High Street, Boston, MA 02110-2720. The address of Mr. Kafker is c/o TA
Associates, Inc., High Street Tower, Suite 2500, 125 High Street, Boston, MA
02110-2720. The address of all other listed stockholders is c/o Monarch
Dental Corporation, 4201 Spring Valley Road, Suite 320, Dallas, TX 75244.
(3) Includes (i) 3,658,058 shares of Common Stock owned by Advent VII L.P., (ii)
1,262,866 shares of Common Stock owned by Advent Atlantic and Pacific II
L.P., (iii) 365,771 shares of Common Stock owned by Advent New York L.P. and
(iv) 59,706 shares of Common Stock owned by TA Venture Investors Limited
Partnership. Advent VII L.P., Advent Atlantic and Pacific II L.P., Advent
New York L.P. and TA Venture Investors Limited Partnership are part of an
affiliated group of investment partnerships referred to, collectively, as
the TA Associates Group. The general partner of Advent VII L.P. is TA
Associates VII L.P. The general partner of Advent Atlantic and Pacific II
L.P. is TA Associates AAP II Partners L.P. The general partner of Advent New
York L.P. is TA Associates VI L.P. The general partner of each of TA
Associates VII L.P., TA Associates AAP II Partners L.P. and TA Associates VI
L.P. is TA Associates, Inc. In such capacity, TA Associates, Inc. exercises
sole voting and investment power with respect to all of the shares held of
record by the named investment partnerships, with the exception of those
shares held by TA Venture Investors Limited Partnership; individually, no
stockholder, director or officer of TA Associates, Inc. is deemed to have or
share such voting or
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<PAGE> 54
investment power. Principals and employees of TA Associates, Inc. (including
Mr. Kafker, a director of the Company) comprise the general partners of TA
Venture Investors Limited Partnership. In such capacity, Mr. Kafker may be
deemed to share voting and investment power with respect to the 59,706
shares held of record by TA Venture Investors Limited Partnership. Mr.
Kafker disclaims beneficial ownership of such shares, except as to 10,231
shares as to which he holds a pecuniary interest.
(4) Includes 300,000 shares of restricted stock held by Dr. Melamed, 75,000 of
which vested on February 6, 1997, and the remainder of which vest in equal
annual installments of 75,000 shares on each of February 6, 1998, 1999, and
2000 and are subject to repurchase at a price of $.106 per share upon a
termination of Dr. Melamed's employment prior to the relevant vesting date.
Does not include 579,665 shares held by trusts for the benefit of members of
Dr. Melamed's family, as to which shares Dr. Melamed disclaims beneficial
ownership.
(5) All shares are held jointly with Dr. Shears' wife. Does not include
1,391,163 shares held by trusts for the benefit of members of Dr. Shears'
family, as to which shares Dr. Shears disclaims beneficial ownership.
(6) Constitutes 200,000 shares of restricted stock held by Mr. Cage,
approximately 41,666 of which are vested, and the remainder of which will
become vested in equal monthly installments of approximately 4,167 shares
and are subject to repurchase at a price of $.106 per share upon a
termination of Mr. Cage's employment prior to the relevant vesting date.
Excludes unvested options to purchase 50,000 shares.
(7) Constitutes 20,000 shares of restricted stock held by Mr. Hemmerle,
approximately 2,917 shares of which are vested, and the remainder of which
will become vested in equal monthly installments of approximately 417 shares
and are subject to repurchase at a price of $.106 per share upon a
termination of Mr. Hemmerle's service as a director prior to the relevant
vesting date.
(8) Includes 10,231 shares of Common Stock beneficially owned by Mr. Kafker
through TA Venture Investors Limited Partnership, all of which shares are
included in the 5,346,401 shares described in footnote (3) above. Does not
include any shares beneficially owned by Advent VII L.P., Advent Atlantic
and Pacific II L.P. or Advent New York L.P., of which Mr. Kafker disclaims
beneficial ownership.
(9) Includes 520,000 shares of restricted stock held by executive officers and
directors which are subject to repurchase in certain circumstances.
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<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Prior to the completion of this offering, there are 4,800,000 shares of
Convertible Participating Preferred Stock and 1,704,550 shares of Series A
Convertible Junior Preferred Stock outstanding. In connection with and subject
to this offering, each share of Convertible Participating Preferred Stock will
convert into one share of Common Stock and eight-tenths of a share of Redeemable
Preferred Stock, and each share of Series A Convertible Junior Preferred Stock
will convert into one share of Common Stock. Pursuant to the terms of the
Redeemable Preferred Stock, all of the outstanding shares of Redeemable
Preferred Stock will be redeemed by the Company upon completion of this offering
for $8.0 million.
Accordingly, upon completion of this offering, the authorized capital stock
of the Company will consist of 50,000,000 shares of Common Stock, of which
shares will be issued and outstanding, and 2,000,000 shares of
undesignated preferred stock issuable in one or more series by the Board of
Directors ("Preferred Stock"), of which no shares will be issued and
outstanding.
Common Stock. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders and are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred Stock
with a dividend preference over Common Stock could adversely affect the dividend
rights of holders of Common Stock. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the directors then standing
for election, subject to any voting rights of the holders of any then
outstanding Preferred Stock. The holders of Common Stock have no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock. All outstanding shares
of Common Stock, including the shares offered hereby, are, or will be upon
completion of the offering, fully paid and non-assessable.
The Company's Amended and Restated By-laws (the "By-laws"), which will be
effective upon completion of this offering, provide, subject to the rights of
the holders of any Preferred Stock then outstanding, that the number of
directors shall be fixed by the Board of Directors. The directors, other than
those who may be elected by the holders of any Preferred Stock, are divided into
three classes, as nearly equal in number as possible, with each class serving
for a three-year term. Subject to any rights of the holders of any Preferred
Stock to elect directors, and to remove any director whom the holders of any
Preferred Stock had the right to elect, any director of the Company may be
removed from office only with cause and by the affirmative vote of at least
two-thirds of the total votes which would be eligible to be cast by stockholders
in the election of such director.
Undesignated Preferred Stock. Under the Company's Restated Certificate of
Incorporation (the "Certificate") the Board of Directors of the Company is
authorized, without further action of the stockholders, to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the designations,
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereon as set forth in the Company's Certificate. Any such
Preferred Stock issued by the Company may rank prior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding Common
Stock.
CERTAIN PROVISIONS OF CERTIFICATE AND BY-LAWS
A number of provisions of the Certificate and By-laws which will be
effective upon completion of this offering concern matters of corporate
governance and the rights of stockholders. Certain of these provisions, as
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<PAGE> 56
well as the ability of the Board of Directors to issue shares of Preferred Stock
and to set the voting rights, preferences and other terms thereof, may be deemed
to have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors, including takeovers which stockholders may
deem to be in their best interests. To the extent takeover attempts are
discouraged, temporary fluctuations in the market price of the Company's Common
Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with the classified Board of Directors and
the ability of the Board of Directors to issue Preferred Stock without further
stockholder action, also could delay or frustrate the removal of incumbent
directors or the assumption of control by stockholders, even if such removal or
assumption would be beneficial to stockholders of Company. These provisions also
could discourage or make more difficult a merger, tender offer or proxy contest,
even if favorable to the interests of stockholders, and could depress the market
price of the Common Stock. The Board of Directors believes that these provisions
are appropriate to protect the interests of the Company and all of its
stockholders. The Board of Directors has no present plans to adopt any other
measures or devices which may be deemed to have an "anti-takeover effect."
Meetings of Stockholders. The By-laws provide that a special meeting of
stockholders may be called only by the Board of Directors unless otherwise
required by law. The By-laws provide that only those matters set forth in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law. In addition, the By-laws set forth
certain advance notice and informational requirements and time limitations on
any director nomination or any new proposal which a stockholder wishes to make
at an annual meeting of stockholders.
No Stockholder Action by Written Consent. The Certificate provides that any
action required or permitted to be taken by the stockholders of the Company at
an annual or special meeting of stockholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of stockholders in
lieu thereof.
Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence or
gross negligence in business combinations, unless the director has breached his
or her duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or a knowing violation of law, paid a dividend or approved a stock
repurchase in violation of the Delaware General Corporation Law or obtained an
improper personal benefit. This provision does not alter a director's liability
under the federal securities laws and does not affect the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. The Company has also entered into indemnification agreements with each of
its directors reflecting the foregoing and requiring the advancement of expenses
in proceedings involving the directors in most circumstances.
Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and (with
certain exceptions) thereafter approved by a majority (or 80% in the case of any
proposed amendment to the provisions of the Certificate relating to the
composition of the Board of Directors or amendments of the Certificate) of the
total votes eligible to be cast by holders of voting stock with respect to such
amendment.
Amendment of By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an annual
meeting of stockholders or a special meeting called for such purpose unless the
Board of
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<PAGE> 57
Directors recommends that the stockholders approve such amendment or repeal it
at such meeting, in which case such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast by holders
of voting stock with respect to such amendment or repeal.
Ability to Adopt Shareholder Rights Plan. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares to implement a shareholder rights plan. A shareholder rights plan
typically creates voting or other impediments to discourage persons seeking to
gain control of the Company by means of a merger, tender offer, proxy contest or
otherwise if such change in control is not in the best interest of the Company
and its stockholders. The Board of Directors has no present intention of
adopting a shareholder rights plan and is not aware of any attempt to obtain
control of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage, provided that such by-law or
charter amendment shall not become effective until 12 months after the date it
is adopted. Neither the Certificate nor the By-laws contains any such exclusion.
TRANSFER AGENT AND REGISTRAR
The Company has selected Chase Mellon Shareholder Services as the transfer
agent and registrar for the Common Stock.
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<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have a total of
shares of Common Stock outstanding. Of these shares, the
shares of Common Stock offered hereby will be freely tradable
without restriction or registration under the Securities Act by persons other
than "affiliates" of the Company, as defined in the Securities Act, who would be
required to sell such shares under Rule 144 under the Securities Act. The
remaining 13,414,550 shares of Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 (the "Restricted Shares"). The
Restricted Shares were issued and sold by the Company in private transactions in
reliance upon exemptions from registration under the Securities Act.
Of the Restricted Shares, 10,158,438 Restricted Shares will be eligible for
sale in the public market pursuant to Rule 144, certain of which may be sold
under Rule 144 in accordance with Rule 701 under the Securities Act as described
below, beginning 90 days after the date of this Prospectus and 2,746,633
Restricted Shares will be eligible for sale in the public market under Rule 144
on or after July 2, 1997. Substantially all such shares are subject to the
lock-up agreements described below. The remaining 509,479 Restricted Shares are
subject to vesting provisions and will become eligible for sale in the public
market under Rule 144 at various times as they become vested.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year (including the holding period of any prior owner except an
affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Common
Stock then outstanding (approximately shares upon completion of
the offering) or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at the time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), would be
entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to the exercise of outstanding options or the
grant of Common Stock pursuant to written compensation plans or contracts prior
to this offering may be resold by persons other than affiliates beginning 90
days after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its one-year
minimum holding period requirement.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate shares of Common Stock after the
offering, have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire Common Stock beneficially owned by them during the 180-day period
following the date of this Prospectus. In addition, the Company has agreed that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company will not, directly or indirectly, sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock, or enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, during the 180-day period following the date of
this Prospectus, except that the Company may issue, and grant options to
purchase, shares of Common Stock
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under its current stock option and purchase plans and may issue, and grant
options to purchase, shares of Common Stock under its current stock option and
purchase plans and may issue shares of Common Stock in connection with certain
acquisition transactions, provided such shares are subject to the 180-day
lock-up agreement.
As of March 15, 1997, 2,000,000 shares of Common Stock were reserved for
issuance under the 1996 Stock Plan, of which 50,000 shares were issuable upon
the exercise of outstanding stock options, 1,000,000 shares of Common Stock were
reserved for issuance under the Acquisition Plan, of which up to 185,000 shares
will be the subject of options to be granted if certain acquired dental
practices achieve certain financial performance goals, and 500,000 shares of
Common Stock were reserved for issuance under the Purchase Plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management -- Employee Stock and Other Benefit Plans -- 1996 Stock
Option and Incentive Plan" and "-- 1997 Employee Stock Purchase Plan." The
Company intends to file a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock issuable pursuant to the
1996 Stock Plan or the Purchase Plan. The Company expects to file this
registration statement within approximately 90 days following the date of this
Prospectus, and such registration statement will become effective upon filing.
Shares covered by this registration statement will thereupon be eligible for
sale in the public markets, subject to Rule 144 limitations applicable to
affiliates and the lock-up agreements described above.
The holders of approximately 5,564,658 shares of Common Stock have the
right in certain circumstances to require the Company to register their shares
under the Securities Act for resale to the public and holders of approximately
12,754,550 shares have the right to include their shares in a registration
statement filed by the Company under the terms of the Stockholders' Agreement.
See "Certain Transactions."
Prior to this offering, there has been no public market for the Common
Stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors -- Shares Eligible for Future Sale."
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Montgomery Securities and Salomon Brothers Inc, have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
Montgomery Securities.......................................
Salomon Brothers Inc........................................
-------
Total..................................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the Representatives of the Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate shares of Common Stock
after the offering, have agreed that they will not, without the prior written
consent of Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract
to sell, transfer the economic risk of ownership in, make any short sale, pledge
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire Common Stock beneficially owned by them during the 180-day period
following the date of this Prospectus. In addition, the Company has agreed that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company will not, directly or indirectly, sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
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<PAGE> 61
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock, or enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, during the 180-day period following the date of
this Prospectus, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its current stock option and purchase
plans and may issue shares of Common Stock in connection with certain
acquisition transactions, provided such shares are subject to the 180-day
lock-up agreement. Sales of such shares in the future could adversely affect the
market price of the Common Stock. Hambrecht & Quist LLC may, in its sole
discretion, release any of the shares subject to the lock-up agreements at any
time without notice.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts and
by Haynes and Boone, L.L.P., Dallas, Texas. Certain legal matters related to
this offering will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, Austin, Texas. As of the date of this Prospectus, a total of
32,400 and 12,000 shares of Convertible Participating Preferred Stock and 4,151
and 1,912 shares of Series A Convertible Junior Participating Preferred Stock
were beneficially owned by certain partners of Goodwin, Procter & Hoar LLP and a
partner of Haynes and Boone, L.L.P., respectively; such shares will be
convertible into an aggregate of 50,463 shares of Common Stock and 35,520 shares
of Redeemable Preferred Stock upon completion of this offering.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Midwest Dental Care and MacGregor Dental
Centers included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1994, 1995 and 1996... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
MONARCH DENTAL CORPORATION AND SUBSIDIARIES -- ACQUISITIONS
MACGREGOR DENTAL CENTERS, INC. AND SHEARS MANAGEMENT, INC.
(COLLECTIVELY REFERRED TO AS "MACGREGOR DENTAL CENTERS")
Report of Independent Public Accountants.................. F-18
Combined Balance Sheets as of September 30, 1994 and
1995................................................... F-19
Combined Statements of Operations for the Years Ended
September 30, 1994 and 1995............................ F-20
Combined Statements of Stockholder's Equity for the Years
Ended September 30, 1994 and 1995...................... F-21
Combined Statements of Cash Flows for the Years Ended
September 30, 1994 and 1995............................ F-22
Notes to Combined Financial Statements.................... F-23
ADVANCE DENTAL MANAGEMENT, MIDWEST DENTAL CARE -- MONDOVI,
S.C., AND MIDWEST DENTAL CARE -- SHEBOYGAN, S.C.
(COLLECTIVELY REFERRED TO AS "MIDWEST DENTAL CARE")
Report of Independent Public Accountants.................. F-28
Combined Balance Sheets as of December 31, 1994 and
1995................................................... F-29
Combined Statements of Operations for the Years Ended
December 31, 1994 and 1995............................. F-30
Combined Statements of Stockholder's Equity for the Years
Ended December 31, 1994 and 1995....................... F-31
Combined Statements of Cash Flows for the Years Ended
December 31, 1994 and 1995............................. F-32
Notes to Combined Financial Statements.................... F-33
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Monarch Dental Corporation:
We have audited the accompanying consolidated balance sheets of Monarch
Dental Corporation (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of income, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Monarch Dental Corporation
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 28, 1997
F-2
<PAGE> 64
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996
1995 1996 PRO FORMA
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 759,919 $ 1,059,337 $ 1,059,337
Accounts receivable -- net of
allowances of approximately $385,000
and $1,676,000, respectively........ 987,120 3,431,114 3,431,114
Other current assets.................. 21,102 191,922 191,922
---------- ----------- -----------
Total current assets............ 1,768,141 4,682,373 4,682,373
Property and equipment, net of
accumulated depreciation of $1,889,728
and
$2,741,097, respectively.............. 1,296,792 4,681,943 4,681,943
Intangible assets, net of accumulated
amortization of $573,156 in 1996...... -- 22,971,867 22,971,867
Other assets............................ 117,342 569,640 569,640
---------- ----------- -----------
Total assets.................... $3,182,275 $32,905,823 $32,905,823
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 485,877 $ 1,070,035 $ 1,070,035
Accrued payroll....................... 348,317 1,301,723 1,301,723
Accrued liabilities................... 217,762 752,622 752,622
Deferred income taxes................. -- 203,267 203,267
Payable to affiliated dental group
practices........................... 138,430 1,083,339 1,083,339
Deferred purchase price............... -- 545,000 545,000
Unearned revenue...................... -- 157,137 157,137
Current maturities of notes payable
and capital lease obligations....... 228,310 3,563,891 3,563,891
---------- ----------- -----------
Total current liabilities....... 1,418,696 8,677,014 8,677,014
Deferred income taxes................... -- 115,352 115,352
Notes payable........................... 15,752 18,358,829 18,358,829
Notes payable to related party.......... 1,061,155 -- --
Capital lease obligations............... -- 410,252 410,252
Other liabilities....................... 63,980 1,041,619 1,041,619
---------- ----------- -----------
Total liabilities............... 2,559,583 28,603,066 28,603,066
Commitments and contingencies
Convertible Participating Preferred
Stock, $.01 par value, 4,800,000
shares authorized; 4,800,000 shares
issued and outstanding in 1996........ -- 9,313,315 --
Redeemable Preferred Stock, $.01 par
value, 3,840,000 shares authorized; no
shares issued and outstanding......... -- -- 8,000,000
Redeemable Common Stock, $.01 par value,
350,000 shares issued and outstanding
at December 31, 1996.................. -- 397,767 --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value,
2,000,000 shares authorized; no
shares issued or outstanding........ -- -- --
Series A Convertible Junior Preferred
Stock, $.01 par value; 1,704,550
shares authorized; 734,645 shares
issued and outstanding at December
31, 1996............................ -- 7,346 --
Common Stock, $.01 par value;
19,800,000 shares authorized;
56,080,447 and 6,267,500 shares
issued and outstanding in 1995 and
1996, respectively.................. 560,804 62,675 114,175
Common Stock to be issued, 60,000
shares in 1996...................... -- 75,000 75,000
Additional paid-in capital............ -- 1,976,999 3,643,927
Retained earnings (deficit)........... 61,888 (7,530,345) (7,530,345)
---------- ----------- -----------
Total stockholders' equity
(deficit)..................... 622,692 (5,408,325) (3,697,243)
---------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit)..................... $3,182,275 $32,905,823 $32,905,823
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 65
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Dental group practices revenue, net..................... $9,558,757 $13,222,740 $35,980,260
Less -- Amounts retained by dental group practices...... 3,070,179 4,300,351 11,801,862
---------- ----------- -----------
Net revenue............................................. 6,488,578 8,922,389 24,178,398
Operating expenses:
Clinical salaries and benefits........................ 1,553,120 2,243,385 6,259,230
Other salaries and benefits........................... 688,176 971,001 3,127,336
Dental supplies....................................... 509,442 833,160 2,215,405
Laboratory fees....................................... 429,888 633,012 1,648,017
Occupancy............................................. 391,790 470,984 1,937,353
Advertising........................................... 625,980 709,530 1,210,100
Depreciation and amortization......................... 251,500 293,393 1,430,447
General and administrative............................ 950,234 1,098,877 3,563,998
---------- ----------- -----------
5,400,130 7,253,342 21,391,886
---------- ----------- -----------
Operating income........................................ 1,088,448 1,669,047 2,786,512
Interest expense, net................................... 81,328 87,309 1,686,392
---------- ----------- -----------
Income before income taxes.............................. 1,007,120 1,581,738 1,100,120
Income taxes............................................ -- -- 425,466
---------- ----------- -----------
Net income.............................................. 1,007,120 1,581,738 674,654
Pro forma income taxes.................................. 342,421 537,791 --
---------- ----------- -----------
Pro forma net income.................................... $ 664,699 $ 1,043,947 $ 674,654
========== =========== ===========
Net income per common share............................. $ 0.05
===========
Weighted average number of common shares outstanding.... 13,459,117
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 66
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
JUNIOR PREFERRED TOTAL
STOCK COMMON STOCK COMMON ADDITIONAL RETAINED STOCKHOLDERS'
---------------- ----------------------- STOCK TO PAID-IN EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT BE ISSUED CAPITAL (DEFICIT) (DEFICIT)
------- ------ ----------- --------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.... -- $ -- -- $ -- $ -- $ -- $ 269,834 $ 269,834
Net income.................. -- -- -- -- -- -- 1,007,120 1,007,120
Distributions............... -- -- -- -- -- -- (1,134,000) (1,134,000)
Issuance of Common Stock.... -- -- 56,080,447 560,804 -- -- (557,804) 3,000
------- ------ ----------- --------- ------- ---------- ----------- -----------
BALANCE, December 31, 1994.... -- -- 56,080,447 560,804 -- -- (414,850) 145,954
Net income.................. -- -- -- -- -- -- 1,581,738 1,581,738
Distributions............... -- -- -- -- (1,105,000) (1,105,000)
------- ------ ----------- --------- ------- ---------- ----------- -----------
BALANCE, December 31, 1995.... -- -- 56,080,447 560,804 -- -- 61,888 622,692
Net income.................. -- -- -- -- -- -- 674,654 674,654
Accretion on Redeemable
Common Stock.............. -- -- -- -- -- -- (47,767) (47,767)
Reorganization of entities
under common control...... -- -- -- -- -- 56,956 (2,064,953) (2,007,997)
Redemption of Common
Stock..................... -- -- (53,068,927) (530,689) -- -- (6,154,167) (6,684,856)
Issuance of Class A Common
Stock..................... -- -- 707,500 7,075 -- 67,920 -- 74,995
Issuance of Series A Junior
Preferred Stock........... 734,645 7,346 -- -- -- 1,285,629 -- 1,292,975
Issuance of Common Stock.... -- -- 2,548,480 25,485 75,000 566,494 -- 666,979
------- ------ ----------- --------- ------- ---------- ----------- -----------
BALANCE, December 31, 1996.... 734,645 $7,346 6,267,500 $ 62,675 $75,000 $1,976,999 $(7,530,345) $(5,408,325)
======= ====== =========== ========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 67
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 1,007,120 $ 1,581,738 $ 674,654
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization...... 251,500 293,393 1,430,447
Changes in assets and liabilities,
net of effects from
acquisitions --
Accounts receivable, net......... (64,694) (377,629) 166,298
Other current assets............. 68,126 (3,991) 410,096
Other noncurrent assets.......... 18,191 (81,721) 219,902
Accounts payable and accrued
expenses...................... 149,167 281,185 (1,918,083)
Other current liabilities........ -- 138,430 944,909
Other liabilities................ 56,382 7,598 (93,705)
Deferred income taxes............ -- -- 425,666
----------- ----------- ------------
Net cash provided by operating
activities.................. 1,485,792 1,839,003 2,260,184
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment... (310,076) (712,519) (1,204,359)
Cash paid for dental group practices,
including related costs............ -- -- (22,291,515)
----------- ----------- ------------
Net cash used in investing
activities.................. (310,076) (712,519) (23,495,874)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable, net of
issuance costs..................... 247,000 587,000 21,772,750
Payments on notes payable and capital
lease obligations.................. (304,316) (262,028) (2,455,176)
Distributions to stockholders......... (1,134,000) (1,105,000) (1,302,087)
Redemption of Common Stock............ -- -- (6,684,856)
Cash distributions at
Reorganization..................... -- -- (476,808)
Issuance of stock..................... 3,000 -- 10,681,285
----------- ----------- ------------
Net cash provided by (used in)
financing activities........ (1,188,316) (780,028) 21,535,108
----------- ----------- ------------
Net increase (decrease) in cash......... (12,600) 346,456 299,418
Cash and cash equivalents, beginning of
year.................................. 426,063 413,463 759,919
----------- ----------- ------------
Cash and cash equivalents, end of
year.................................. $ 413,463 $ 759,919 $ 1,059,337
=========== =========== ============
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest........................... $ 61,545 $ 29,620 $ 1,529,508
=========== =========== ============
Cash paid for taxes................... $ -- $ -- $ --
=========== =========== ============
Equipment acquired under capital
leases............................. $ -- $ 20,589 $ 526,351
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 68
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. DESCRIPTION OF BUSINESS AND REORGANIZATION:
Monarch Dental Corporation ("Monarch"), a Delaware corporation, and
subsidiaries (collectively, the "Company"), manages dental group practices in
selected markets presently including Dallas-Fort Worth, Houston, Wisconsin and
Arkansas. As of December 31, 1996, the Company managed 53 dental group practices
in Texas, Arkansas and Wisconsin.
The Company has grown substantially in a relatively short period of time,
principally through acquisitions. In 1996, the Company completed four
acquisitions resulting in the addition of 39 Dental Offices. The Company has
incurred substantial indebtedness to finance these acquisitions, which in turn
has contributed to a working capital deficit of approximately $4.0 million at
December 31, 1996. The Company also has a stockholders' deficit of approximately
$5.4 million at December 31, 1996.
Monarch was originally incorporated in Texas on December 28, 1994, and was
wholly-owned by Warren F. Melamed, D.D.S. ("Melamed"). Also on December 28,
1994, Partners Dental Corporation ("Partners") was capitalized by Melamed and
another investor. On December 30, 1994, eight Texas S corporations owned by
Melamed merged with and into Monarch. Also on December 30, 1994, an S
corporation owned by Melamed and the other investor merged with and into
Partners. As a result of these transactions during 1994, Melamed was issued
2,300 shares of Monarch Common Stock. These transactions were accounted for as a
reorganization of entities under common control. Melamed also controls Modern
Dental Professionals, P.C. ("Modern Dental"), a Texas professional corporation.
Modern Dental employs dentists and hygienists and contracts with dental
specialists as independent contractors to provide the clinical component for the
Company's Texas dental offices.
On February 6, 1996, Melamed and the other investor contributed their
respective ownership interests in Partners in exchange for cash and Common Stock
in Monarch. Simultaneously, through a series of transactions, 13 limited
partnership interests were transferred to Partners and Monarch Dental
Management, an existing Texas C corporation wholly-owned by Melamed. Under the
Amended and Restated Certificate of Incorporation of Monarch, Melamed's 2,300
shares were converted into 56,080,447 shares of Common Stock in a transaction
accounted for as a stock split. Under a Stock Redemption Agreement, on February
6, 1996, Monarch redeemed 53,068,927 shares of Common Stock from Melamed for
cash of $6,684,856. In addition, the fair market value of the cash and Common
Stock received by Melamed in excess of the historical cost basis of the various
interests exchanged has been reflected as a distribution in the accompanying
consolidated financial statements. Melamed also purchased 300,000 shares of
Monarch restricted Common Stock at fair market value. These transactions on
February 6, 1996 are collectively referred to as the "Reorganization".
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation/Basis of Consolidation
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting. These financial statements present the
financial position and results of operations of the entities under common
control. All intercompany accounts and transactions have been eliminated in the
consolidation.
In two states the Company accounts for its management activities with the
dental group practices under long-term management agreements (the "Management
Agreements"). In one state, the Company employs the dentists and hygienists. The
Company does not consolidate the operating results and accounts of the dental
group practices under Management Agreements.
The Company has presented dental group practices revenue and amounts
retained by dental group practices (which consists of 25-30% of the dental
groups practices' net revenue, including dental hygienist salaries and
contracted dental specialists and is retained by the affiliated dental group
practices in accordance
F-7
<PAGE> 69
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the Management Agreements), in the accompanying consolidated statements of
income to arrive at the Company's net revenue. The Company believes that a
display presentation combining the revenue of the dental group practices under
Management Agreements with those owned by the Company (collectively referred to
as the "Dental Offices") is more meaningful. See further discussion below.
The Company's consolidated financial statements have been prepared in
anticipation of an initial public offering (the "offering").
Dental Group Practices Revenue, Net
Dental group practices revenue, net represents the revenue of the Dental
Offices reported at the estimated realizable amounts from third-party payors and
patients for services rendered, net of contractual and other adjustments. In
certain states, dental services are billed and collected by the Company in the
name of the Dental Offices. As of December 31, 1996, dental services were
provided by the Company's Dental Offices under two separate Management
Agreements.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. There are no material claims, disputes or other
unsettled matters that exist to management's knowledge concerning third-party
reimbursements.
During 1994, 1995 and 1996, the Company estimates that approximately 45%,
45% and 47%, respectively, of dental group practices revenue, net was received
under agreements with third-party payors. Approximately 26% of the Company's
revenue for the year ended December 31, 1996 was derived from contracts with
Prudential Dental Maintenance Organization, Inc. and Compcare Health Services
Insurance Corporation, respectively. These contracts continue until terminated
by either party upon 60 to 90 days prior written notice, and the material
economic terms can be renegotiated periodically.
Net Revenue
Net revenue represents revenue from Dental Offices less amounts retained by
dental group practices. The amounts retained by dental group practices represent
amounts paid by (i) the professional corporations as salary, benefits and other
payments to employed dentists, hygienists and contracted specialists, and (ii)
the Company as salary, benefits and other payments to employed dentists,
hygienists and contracted specialists in states where it operates and in which
ownership of dental practices by the Company is permitted (currently Wisconsin).
Under the Management Agreements, the Company assumes responsibility for the
management of all aspects of the dental group practices' business other than the
provision of dental services. The Company's net revenue is dependent upon the
revenue of the dental group practices.
Advertising
The costs of advertising, promotion and marketing are charged to operations
in the year incurred.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include money market accounts and all highly liquid investments with
original maturities of three months or less.
Accounts Receivable
Accounts receivable represent receivables from patients and other
third-party payors for dental services provided. Such amounts are recorded net
of contractual allowances and estimated bad debts. Unearned revenue represents
amounts relating to longer term services, such as orthodontics.
F-8
<PAGE> 70
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Dental Offices grant credit without collateral to their patients, most
of whom are local residents and are insured under third-party payor agreements.
Periodically, the Dental Offices transfer the patient receivables to the
Company. Amounts collected on behalf of and payable to the Dental Offices is
reflected as payable to affiliated dental group practices in the accompanying
consolidated balance sheets. The Company does not believe these receivables
represent any concentrated credit risk. Management continually monitors and
periodically adjusts its allowances associated with these receivables.
Property and Equipment
Property and equipment are stated at cost or fair market value at dates of
acquisition, net of accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over the following
useful lives.
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements.................. Remaining life of lease
Furniture and fixtures.................. 5-8
Dental equipment........................ 5
Computer equipment...................... 5
</TABLE>
Equipment held under capital lease obligations is amortized on a
straight-line basis over the shorter of the lease term or estimated life of the
asset.
Intangible Assets
The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the acquired dental group
practices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. Costs of acquisition in excess of the net
estimated fair value of tangible assets acquired and liabilities assumed is
allocated first to identifiable intangibles and then either to the Management
Agreement (in those transactions where the Company has effectively acquired the
right to manage the Dental Office) or goodwill (for acquired Dental Offices).
The Management Agreement represents the Company's right to manage the Dental
Offices during the 40-year term of the agreement. The assigned value of the
Management Agreement is amortized using the straight-line method over its
estimated useful life of 30 years. The Management Agreements cannot be
terminated by the related professional corporation without cause, consisting
primarily of bankruptcy or material default. The value assigned to goodwill is
amortized over 40 years. At December 31, 1996, the weighted average life
assigned to all intangible assets was approximately 32 years.
The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization periods, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate are unfavorable
changes in each Dental Office's relative market share and local market
competitive environment, current period and forecasted operating results, cash
flow levels of the Dental Offices and the impact on the net revenue earned by
the Company, and legal factors governing the practice of dentistry.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of the
consolidation of professional corporation revenues and the accounting for
business combinations. The Company is unable to predict the impact, if any, that
this review may have on the
F-9
<PAGE> 71
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's acquisition strategy, allocation of purchase price related to
acquisitions, and amortization life assigned to intangible assets.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
At the Reorganization, Monarch terminated its status as an S corporation
and is now subject to federal income taxes. As such, the consolidated financial
statements in 1994 and 1995 include a pro forma adjustment for federal income
taxes as if Monarch had not been treated as an S corporation. In 1996, the
Company accounted for income taxes under the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109.
Net Income Per Common Share
The net income per common share is based on the weighted average number of
common shares outstanding adjusted for actual shares issued during the period.
The weighted average number of common shares outstanding includes all shares
issued or contingently issuable since and including the Reorganization as if
those shares were issued on January 1, 1996. Shares of Common Stock issuable
upon conversion of the Convertible Participating Preferred Stock, Redeemable
Common Stock and Series A Convertible Junior Preferred Stock are assumed to be
common stock equivalent shares. Fully diluted pro forma net income per share is
not presented because the effect is not material.
Unaudited Pro Forma Consolidated Balance Sheet at December 31, 1996
Upon completion of the offering, the Company will convert its Convertible
Participating Preferred Stock into 4,800,000 shares of Common Stock and
3,840,000 shares of Redeemable Preferred Stock. In addition, the Company's
Redeemable Common Stock and Series A Junior Preferred Stock will be converted
into 350,000 and 1,704,550 shares, respectively, of Monarch Common Stock. The
unaudited pro forma balance sheet information is presented as if such
conversions had occurred as of December 31, 1996.
3. ACQUISITIONS:
Concurrent with the Reorganization discussed in Note 1, Monarch acquired
certain assets and assumed certain liabilities of MacGregor Dental Centers, Inc.
and Shears Management, Inc. (collectively referred to as "MacGregor"), for cash
and Common Stock in an asset contribution transaction. MacGregor operates and
manages 15 dental offices in the Houston, Texas area. The dentists and
hygienists practicing in MacGregor dental offices are employed by Modern Dental.
This acquisition was accounted for using the purchase method of accounting.
On September 1, 1996, Monarch acquired certain assets and assumed certain
liabilities of Midwest Dental Care -- Sheboygan, SC ("Sheboygan") and Midwest
Dental Care -- Mondovi, SC ("Mondovi") in a stock purchase transaction for cash
and Common Stock. Additionally, Monarch acquired certain assets and liabilities
of Advance Dental Management, a related entity to Sheboygan and Mondovi, for
cash and Common Stock, in an asset purchase transaction. The Company also agreed
to grant to the seller of these three entities (collectively referred to as
"Midwest"), options to acquire up to 160,000 shares of Common Stock upon the
F-10
<PAGE> 72
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
achievement of specified financial performance goals. This acquisition was
accounted for using the purchase method of accounting.
On October 1, 1996, Monarch acquired certain assets and assumed certain
liabilities of the dental practice of an individual dentist in Dallas, Texas,
for cash and Common Stock in an asset purchase transaction. This acquisition was
accounted for using the purchase method of accounting.
On November 7, 1996, Monarch acquired all of the outstanding stock of
Convenient Dental Care, Inc. ("Convenient") in Arkansas, for a promissory note
and Common Stock in a stock purchase transaction. The Common Stock was issued
and the note repaid in January 1997. Additionally, the seller has a right to
receive additional purchase consideration of up to $200,000, contingent upon
meeting specified financial performance goals in 1997.
Obligations related to contingent purchase consideration cannot be
quantified and, accordingly, have not been reflected in the accompanying
consolidated financial statements. Such liability, if any, will be recorded as
additional purchase price in the period in which the outcome of the
contingencies becomes known.
All of the acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed based on the
estimated fair values at the dates of acquisition. The estimated fair values of
assets acquired and liabilities assumed during 1996 are summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 473,632
Accounts receivable, net.................................... 2,610,292
Other assets................................................ 675,866
Property and equipment...................................... 2,511,731
Liabilities assumed......................................... (5,442,942)
Intangible assets........................................... 23,545,023
Less -- Fair value of Common Stock issued and to be
issued.............................................. (941,455)
Deferred purchase price (payable in cash)........... (667,000)
-----------
Cash purchase price......................................... $22,765,147
===========
</TABLE>
The fair value of Common Stock issued and to be issued for each acquisition
is based on a valuation performed by an independent third party. For certain
acquisitions occurring close to or at the end of 1996, the estimated fair values
are preliminary, and therefore are subject to change.
The following unaudited pro forma information reflects the effect of
acquisitions on the consolidated results of operations of the Company had the
acquisitions occurred at January 1, 1995. Future results may differ
substantially from pro forma results and cannot be considered indicative of
future results.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996
------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Dental group practices revenue, net......................... $30,497 $55,990
======= =======
Net income.................................................. $ 972 $ 2,464
======= =======
Net income per common share................................. $ 0.07 $ 0.18
======= =======
</TABLE>
F-11
<PAGE> 73
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Dental equipment.......................................... $ 1,989,110 $ 4,103,901
Furniture and fixtures.................................... 243,460 1,680,788
Leasehold improvements.................................... 660,875 1,280,114
Computer equipment........................................ 293,075 358,237
----------- -----------
3,186,520 7,423,040
Less -- Accumulated depreciation and amortization......... (1,889,728) (2,741,097)
----------- -----------
Property and equipment, net............................... $ 1,296,792 $ 4,681,943
=========== ===========
</TABLE>
5. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZATION PERIOD
-------------------
<S> <C> <C>
Management Agreements 30 years $17,276,138
Goodwill 40 years 6,268,885
Less -- Accumulated amortization (573,156)
-----------
Intangible assets, net $22,971,867
===========
</TABLE>
6. NOTES PAYABLE:
Notes payable consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- -----------
<S> <C> <C>
Borrowings under credit facility............................ $ -- $21,551,686
Other notes payable, with an interest rate of prime plus
0.5%, secured by certain receivables and property......... 74,067 --
-------- -----------
74,067 21,551,686
Less -- Current maturities.................................. (58,315) (3,192,857)
-------- -----------
Notes payable, net.......................................... $ 15,752 $18,358,829
======== ===========
</TABLE>
The maturities of notes payable at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997............................................ $ 3,192,857
1998............................................ 3,192,857
1999............................................ 15,165,972
-----------
Total........................................... $21,551,686
===========
</TABLE>
Effective February 5, 1996, and modified August 29, 1996, the Company
entered into a credit agreement (the "Credit Facility") with a commercial bank.
The Credit Facility provides for a three-year commitment to fund revolving
credit borrowings of up to $30 million. Of this amount, $2 million is available
for general working capital purposes. Under the terms of the Credit Facility,
the Company paid a commitment fee of approximately $577,250, which has been
capitalized in other assets in the accompanying, consolidated balance sheet and
amortized as an adjustment to interest expense using the effective interest
method. The interest rate under the Credit Facility is set at the Company's
option as follows: (i) reserve adjusted LIBOR plus 2.0% to
F-12
<PAGE> 74
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3.25%; or (ii) the bank's base rate plus 1.25% to 1.5%. The Credit Facility
includes certain restrictive covenants including limitations on the payment of
dividends and making acquisitions as well as the maintenance of certain
financial ratios. The Credit Facility is secured by substantially all the assets
of the Company. At December 31, 1996, subject to certain conditions as defined
by the credit agreement, the Company had $8,448,314 of borrowings available. Of
this amount, $2,000,000 is available for working capital purposes.
At December 31, 1995, Melamed had $1,500,000 in notes payable to a
commercial bank which the Company guaranteed. At December 31, 1995, portions of
these borrowings were loaned to the Company from Melamed, at various terms as
follows:
<TABLE>
<S> <C>
Various notes to shareholder, principal and interest payable
monthly ranging from 7.25% to 9%, maturing through
December 2000............................................. $1,210,561
Less -- Current maturities.................................. (149,406)
----------
Total....................................................... $1,061,155
==========
</TABLE>
The notes were repaid to Melamed during 1996 and the Company was released
from its guarantee.
Interest expense on the shareholder notes payable approximated $54,000,
$69,000 and $7,654 for the years ended December 31, 1994, 1995 and 1996,
respectively.
7. STOCKHOLDERS' EQUITY:
The Company has authorized the issuance of 52,000,000 shares of stock,
which (a) 2,000,000 shares, par value $0.01 per share, are to be undesignated
Preferred Stock, and (b) 50,000,000 shares, par value $0.01 per share, are to be
designated Common Stock.
Convertible Participating Preferred Stock
On February 6, 1996, Monarch sold 4,800,000 shares of Convertible
Participating Preferred Stock (the "Preferred Stock") to an unrelated investor
group for approximately $10,000,000. The Preferred Stock has voting and dividend
rights equal to Common Stock, and automatically converts to 4,800,000 shares of
Common Stock plus 3,840,000 shares of Redeemable Preferred Stock upon the
offering. The Redeemable Preferred Stock is automatically redeemed upon the
consummation of an initial public offering for cash of approximately $8,000,000.
Redeemable Common Stock
In connection with the acquisition of Midwest, the seller acquired the
right to put 350,000 shares of Common Stock back to the Company contingent upon
certain events as defined in the Midwest purchase agreement. These shares have
been reflected as Redeemable Common Stock in the accompanying consolidated
balance sheets. The put right expires upon the consummation of an initial public
offering.
Series A Convertible Junior Preferred Stock
During 1996, the Company issued 734,645 shares of Series A Convertible
Junior Preferred Stock (the "Junior Preferred Stock") to the holder of the
Convertible Participating Preferred Stock. Subsequent to December 31, 1996, an
additional 969,905 shares were issued, resulting in a total of 1,704,550 shares
outstanding as of February 28, 1997. Each share of Junior Preferred Stock will
convert to one share of Common Stock upon the offering.
F-13
<PAGE> 75
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock
Of the 6,267,500 shares of Common Stock outstanding, 707,500 shares are
designated as non-voting Class A Common Stock. These shares will be converted to
Common Stock upon the offering.
Common Stock to be Issued
In connection with the acquisition of Convenient in November 1996, 60,000
shares of Common Stock valued at $75,000 were issued in January 1997. The number
of common shares to be issued and the price per share were fixed as of the
consummation date of the acquisition in November 1996.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for fiscal
years beginning after December 15, 1995. Under SFAS No. 123, the Company may
elect to recognize stock-based compensation expense based on the fair value of
the awards or continue to account for stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
disclose in the financial statements the effects of SFAS No. 123 as if the
recognition provisions were adopted. The Company has not adopted the recognition
provisions of SFAS No. 123. The Company has calculated the effects of SFAS No.
123 and determined that the result is immaterial.
The following table summarizes the activity during 1996 under the Company's
1996 Stock Option and Incentive Plan. A total of 2,000,000 shares are reserved
under the plan.
<TABLE>
<CAPTION>
SHARES
------
<S> <C>
Outstanding at beginning of year............................ --
Granted..................................................... 50,000
Exercised................................................... --
Canceled.................................................... --
------
Outstanding at end of year.................................. 50,000
------
Exercisable at end of year.................................. --
Price range................................................. $1.50
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Operating and Capital Lease Obligations
The Company leases all of its facilities, including the Dental Offices and
corporate office, under noncancelable operating leases, extending through 2009.
Rent expense totaled $296,820, $366,864 and $1,592,268 for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-14
<PAGE> 76
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of December
31, 1996:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- ---------
<S> <C> <C>
1997........................................................ $1,867,996 $ 396,913
1998........................................................ 1,671,885 243,716
1999........................................................ 1,306,840 176,607
2000........................................................ 947,174 36,312
2001........................................................ 804,076 11,065
Thereafter.................................................. 2,218,631 --
---------- ---------
Total minimum lease obligation............................ $8,816,602 864,613
==========
Less- Amounts representing interest....................... (83,327)
---------
Present value of minimum lease obligations................ 781,286
Less- Current maturities.................................. (371,034)
---------
Capital lease obligations, net............................ $ 410,252
=========
</TABLE>
Litigation, Claims, and Assessments
The Company is engaged in various legal proceedings incidental to its
business activities. Management does not believe the resolution of such matters
will have a material adverse effect on the Company's financial position, results
of operations or liquidity.
9. INCOME TAXES:
The 1996 income tax provision consisted of the following (in thousands):
<TABLE>
<S> <C>
Current:
Federal................................................... $184
State..................................................... 20
----
204
Deferred.................................................... 221
----
Total....................................................... $425
====
</TABLE>
The Company's effective tax rate of 38.7% is greater than the federal rate
of 34% due to the impact of state income taxes.
Deferred income taxes are recorded for temporary differences between the
basis of assets and liabilities for financial reporting purposes and income tax
purposes. As a result of the Reorganization, the Company recorded a deferred tax
provision of approximately $58,000 relating to its conversion from an S
corporation to a C corporation.
F-15
<PAGE> 77
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences comprising the deferred tax assets and liabilities in
the consolidated balance sheet as of December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C> <C>
Deferred tax asset:
Tax loss carryforwards.................................... $(158)
Cash to accrual and other................................. (76)
-----
$(234)
Deferred tax liability:
Accelerated depreciation.................................. 173
Intangible assets amortization............................ 176
-----
349
-----
Net deferred tax liability................................ $ 115
=====
</TABLE>
The deferred income tax provision of $221,000 in 1996 relates primarily to
the excess of the tax over book amortization of intangible assets.
10. RELATED-PARTY TRANSACTIONS:
The Company leases several of its facilities from affiliated entities.
Total rent expense paid to related parties for the years ended December 31,
1994, 1995 and 1996, was $35,250, $42,300 and $478,160, respectively.
The Management Agreement activity between the Company and the Dental
Offices is reflected as a liability in the consolidated balance sheet. Such
amounts are generally payable within a 30-day period following month-end.
Melamed is the sole owner of the professional corporation operating in
Texas. The Company and Melamed have a successor agreement whereby upon any
termination of Melamed's affiliation with the Company, Melamed is required to
sell his ownership interest for a nominal amount.
11. BENEFIT PLANS:
401(k) Plans
The Company maintains two defined contribution plans which conform to IRS
provisions for 401(k) plans. One plan covers all employees of the Company except
MacGregor and Midwest, referred to as the "Monarch 401(k) Plan." Under this
plan, employees are eligible to participate in the plan provided they have
attained the age of 18, have completed 1,000 hours of service, and have been
employed for at least one year. The Company makes discretionary matching
contributions up to a maximum dollar amount. The second plan, referred to as the
"Midwest 401(k) Plan," covers all employees of the Company's Midwest subsidiary.
Under the Midwest 401(k) Plan, employees are eligible to participate in the plan
provided they have attained the age of 21, have completed 1,000 hours of
service, and have been employed for at least one year. Employer matching
contribution percentages as well as additional contributions are determined
annually. Total contributions by the Company for both plans were $26,778 and
$75,598 for the years ended December 31, 1995 and 1996, respectively. There were
no contributions for the year ended December 31, 1994.
Health and Welfare Benefit Plan
The Company has two self-funded plans to provide these benefits to
full-time employees. The first plan, referred to as the "Monarch Health Plan,"
is a self-funded plan covering all employees of the Company except MacGregor and
Midwest. The Company maintains stop-loss insurance coverage whereby if total
monthly plan claims exceed a defined calculated amount, the excess claims
amounts are covered by the stop-loss policy.
F-16
<PAGE> 78
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Monthly contribution amounts are determined by the plan administrator based on
funding requirements and plan experience.
The second plan covers all employees of Midwest and is also a self-funded
plan which maintains stop-loss insurance coverage. This plan's stop-loss policy
stipulates if total annual plan claims exceed $240,000 or if an individual's
insured claims exceed $20,000 annually, the excess amounts are covered by the
stop-loss policy. Monthly contribution amounts are determined annually by the
plan administrator based on funding requirements and plan experience.
Total contributions by the Company for these plans were $228,365 and
$355,306 for the years ended December 31, 1995 and 1996, respectively. There
were no contributions for the year ended December 31, 1994.
12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's notes payable, capital lease
obligations, and convertible participating preferred stock are based on similar
issues or on current rates available to the Company. The carrying values and
estimated fair values were estimated to be the same at December 31, 1995 and
1996.
13. SUBSEQUENT EVENTS:
Effective January 1, 1997, the Company acquired certain assets and assumed
certain liabilities of and executed a Management Agreement with Arkansas Dental
Health Associates, Inc. for cash and Common Stock in a stock purchase
transaction. This acquisition will be accounted for using the purchase method of
accounting.
Effective April 1, 1997, the Company acquired certain assets and assumed
certain liabilities of United Dental Care Tom Harris D.D.S. & Associates in
Arkansas for cash and Common Stock in an asset purchase transaction. This
acquisition will be accounted for using the purchase method of accounting.
F-17
<PAGE> 79
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
MacGregor Dental Centers:
We have audited the accompanying combined balance sheets of MacGregor
Dental Centers, Inc. and Shears Management, Inc. (collectively referred to as
"MacGregor Dental Centers" -- both Texas corporations) as of September 30, 1994
and 1995, and the related combined statements of operations, stockholder's
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly,
in all material respects, the financial position of MacGregor Dental Centers as
of September 30, 1994 and 1995, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
December 13, 1996
F-18
<PAGE> 80
MACGREGOR DENTAL CENTERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 388,390 $ 549,114
Short-term investments................ 663,361 207,146
Accounts receivable -- net of
allowances of $1,064,344 and
$1,268,824, respectively........... 1,114,360 969,342
Prepaids and other current assets..... 300,324 116,426
---------- ----------
Total current assets.......... 2,466,435 1,842,028
Investments............................. 367,736 --
Property and equipment, net............. 4,042,787 3,870,298
Other assets............................ 278,787 267,516
---------- ----------
Total assets.................. $7,155,745 $5,979,842
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable...................... $ 502,757 $ 504,628
Accrued payroll....................... 376,662 306,649
Accrued liabilities................... 145,716 232,059
Current maturities of notes payable... 319,104 432,836
Current maturities of capital lease
obligations........................ 87,949 95,544
---------- ----------
Total current liabilities..... 1,432,188 1,571,716
Notes payable........................... 528,090 392,006
Capital lease obligations............... 183,193 92,389
---------- ----------
Total liabilities............. 2,143,471 2,056,111
Commitments and contingencies
Stockholder's equity.................... 5,012,274 3,923,731
---------- ----------
Total liabilities and
stockholder's equity........ $7,155,745 $5,979,842
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-19
<PAGE> 81
MACGREGOR DENTAL CENTERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
SEPTEMBER 30, JANUARY 31,
-------------------------- ------------------------
1994 1995 1995 1996
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................ $14,424,399 $13,878,120 $4,380,402 $4,626,040
Operating expenses:
Salaries and benefits................. 6,204,151 6,684,748 1,884,373 2,228,249
Dental supplies....................... 894,270 784,607 206,171 261,535
Laboratory fees....................... 838,779 808,017 258,247 269,339
Occupancy............................. 962,418 887,005 255,584 295,668
Advertising........................... 355,001 378,577 144,063 126,192
Payroll taxes......................... 414,115 427,077 144,709 142,359
Depreciation and amortization......... 347,075 428,336 151,955 142,779
General and administrative............ 3,681,300 2,822,188 825,628 940,729
----------- ----------- ---------- ----------
13,697,109 13,220,555 3,870,730 4,406,850
----------- ----------- ---------- ----------
Operating income.............. 727,290 657,565 509,672 219,190
Other income (expense):
Interest expense, net................. (33,255) (12,156) (19,880) (4,052)
Other income.......................... 29,007 75,851 -- 25,284
Gain (loss) on disposal of assets..... 16,127 (153,402) -- (51,134)
----------- ----------- ---------- ----------
Net income.............................. $ 739,169 $ 567,858 $ 489,792 $ 189,288
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-20
<PAGE> 82
MACGREGOR DENTAL CENTERS
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995
<TABLE>
<S> <C>
BALANCE, September 30, 1993................................. $ 4,282,572
Net income................................................ 739,169
Distributions to stockholder.............................. (9,467)
-----------
BALANCE, September 30, 1994................................. 5,012,274
Net income................................................ 567,858
Distributions to stockholder.............................. (1,656,401)
-----------
BALANCE, September 30, 1995................................. $ 3,923,731
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-21
<PAGE> 83
MACGREGOR DENTAL CENTERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------------
1994 1995
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 739,169 $ 567,858
Adjustments to reconcile net income to net cash provided
by operating activities --
Gain (loss) on disposal of assets...................... 16,127 (153,402)
Depreciation and amortization.......................... 347,075 428,336
Changes in assets and liabilities --
Accounts receivable, net............................. (171,605) 145,018
Other current assets................................. (97,891) 183,898
Other noncurrent assets.............................. (48,791) 11,271
Accounts payable..................................... (15,010) 1,871
Accrued expenses and other current liabilities....... (1,407) 16,330
--------- ----------
Net cash provided by operating activities......... 767,667 1,201,180
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (336,821) (102,080)
Purchases of investments.................................. (491,887) (392,572)
--------- ----------
Net cash used in investing activities............. (828,708) (494,652)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 358,084 454,534
Payments on notes payable................................. (218,598) (623,336)
Payments on capital lease obligations..................... (42,929) (89,771)
Distributions to stockholder.............................. (9,467) (287,231)
--------- ----------
Net cash provided by (used in) financing
activities...................................... 87,090 (545,804)
--------- ----------
NET INCREASE IN CASH........................................ 26,049 160,724
CASH, beginning of period................................... 362,341 388,390
--------- ----------
CASH, end of period......................................... $ 388,390 $ 549,114
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 34,956 $ 77,780
========= ==========
Equipment acquired under capital leases................... $ 24,815 $ 6,362
========= ==========
Noncash distributions paid to stockholder for:
Assumption of stockholder's notes payable, net......... $ -- $ 146,450
Transfer of investments to stockholder................. -- 1,222,720
--------- ----------
$ -- $1,369,170
========= ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-22
<PAGE> 84
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
MacGregor Dental Centers, Inc. and Shears Management, Inc. (collectively
referred to as "MacGregor Dental Centers" or the "Company") are Texas-based
corporations. These corporations are affiliated entities under common control.
Accordingly, their financial position and results of operations have been
combined for financial reporting purposes. All significant intercompany
transactions have been eliminated in the accompanying combined financial
statements.
The combined operations of the Company include management services and
dental services. The Company's operations are located in Houston, Texas, with 15
dental offices throughout the Houston area.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements have been prepared on the
accrual basis of accounting.
Basis of Presentation -- Interim Financial Statements
The financial statements for the four months ended January 31, 1995 and
1996, have been prepared by the Company, without audit, pursuant to Accounting
Principles Board (APB) Opinion No. 28, "Interim Financial Reporting." Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to APB Opinion No. 28; nevertheless,
management of the Company believes that the disclosures herein are adequate to
prevent the information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of its operations for the four months
ended January 31, 1995 and 1996, have been included herein. The results of
operations for the four-month period are not necessarily indicative of the
results for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements.
Management does not believe these receivables represent any concentrated credit
risk. Furthermore, management continually monitors and adjusts its allowances
associated with these receivables.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Maintenance, minor repairs and replacements are charged
directly to expense as incurred. Major renewals and
F-23
<PAGE> 85
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
betterments are capitalized. When property and equipment is sold or otherwise
disposed of, the asset accounts and related accumulated depreciation accounts
are relieved and any gain or loss is included in other income and expense.
Depreciation expense is computed based on the straight-line method using
the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings............................................. 31
Leasehold improvements................................ 10
Machinery and equipment............................... 7
Furniture and fixtures................................ 7
Automobiles........................................... 5
Assets held under capitalized leases.................. 5
</TABLE>
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered, and is recognized as
services are performed for fee-for-service patients. Premiums received from
third-party payors under dental plans are due monthly and are recognized as
revenue during the period in which the services are provided to the members.
S Corporation -- Income Tax Status
The Company, with the consent of its stockholder, has elected to be taxed
as an S corporation under the Internal Revenue Code. In lieu of corporate income
taxes, the stockholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the accompanying combined financial
statements.
3. SHORT-TERM INVESTMENTS:
As of September 30, 1995, the Company held a U.S. Treasury bill that
matured on January 12, 1996, totaling $107,000, with a current market value of
$105,000. This security is reported at the lower of amortized cost or market
value in the accompanying combined financial statements. The amortized cost of
this security was $104,985. This security is classified as hold to maturity. The
Company also had certificates of deposit classified as short-term investments at
September 30, 1995. The balance outstanding at September 30, 1994 was comprised
of certificates of deposit.
F-24
<PAGE> 86
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of September 30:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Land........................................................ $2,536,471 $2,186,253
Buildings................................................... 314,564 208,297
Leasehold improvements...................................... 2,144,255 2,414,242
Machinery and equipment..................................... 1,329,259 1,493,559
Furniture and fixtures...................................... 528,478 528,478
Automobiles................................................. -- 171,083
Property held under capital leases
Equipment................................................. 328,943 335,506
Automobiles............................................... 30,783 30,783
---------- ----------
Total property and equipment...................... 7,212,753 7,368,201
Less -- Accumulated depreciation and amortization........... (3,169,966) (3,497,903)
---------- ----------
Property and equipment, net................................. $4,042,787 $3,870,298
========== ==========
</TABLE>
5. NOTES PAYABLE:
Notes payable consists of the following as of September 30:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
$150,000 line of credit to bank, with interest due monthly
at a rate of 9.25%, due September 13, 1996, secured by
automobiles............................................... $ -- $119,531
$100,000 line of credit to bank, with interest at a rate of
8.25%, due November 14, 1994, unsecured................... 98,090 --
$175,000 line of credit to bank, with monthly interest
payments at a rate of 7.78%, due October 5, 1995, secured
by Stockholder's certificate of deposit................... -- 175,000
$200,000 line of credit to bank, with monthly interest
payments at a rate of 9.25%, due March 14, 1996,
unsecured................................................. -- 160,000
Note payable to bank, with monthly payments of $7,779,
including principal and interest at a rate of 8.15%, due
July 1, 2000, secured by equipment........................ -- 370,311
Notes payable to stockholder................................ 749,104 --
-------- --------
847,194 824,842
Less -- Current maturities.................................. (319,104) (432,836)
-------- --------
Notes payable, net.......................................... $528,090 $392,006
======== ========
</TABLE>
The following are maturities of notes payable as of September 31, 1995 for
each of the next five years, ending September 30:
<TABLE>
<S> <C>
1996............................................... $432,836
1997............................................... 108,461
1998............................................... 120,571
1999............................................... 83,125
2000............................................... 79,849
--------
Total.................................... $824,842
========
</TABLE>
Interest expense charged to operations during the years ended September 30,
1994 and 1995, was $48,995 and $62,920, respectively.
F-25
<PAGE> 87
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
The Company leases office equipment and automobiles under capital leases
expiring in various years through 1997. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset.
The Company has operating leases for all of its facilities, including the
clinics and the business office, extending through 2004. Rent expense totaled
$555,967 and $616,760 for the years ended September 30, 1994 and 1995,
respectively.
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of September
30, 1995:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
1996........................................................ $ 565,992 $105,392
1997........................................................ 502,304 97,930
1998........................................................ 419,037 --
1999........................................................ 163,797 --
2000........................................................ 118,797 --
Thereafter.................................................. 358,494 --
---------- --------
Total minimum lease obligation............................ $2,128,421 203,322
==========
Less -- Amounts representing interest..................... (15,389)
--------
Present value of minimum lease obligations................ 187,933
Less -- Current maturities................................ (95,544)
--------
Capital lease obligations, net............................ $ 92,389
========
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The stockholder has a management agreement with the Company. The Company
paid the stockholder $1,102,204 and $331,495 in management fees under this
arrangement for the years ended September 30, 1994 and 1995, respectively.
The Company purchased $320,000 and $240,331 in equipment and automobiles
from a corporation controlled by the stockholder in 1994 and 1995, respectively.
Marketable securities, with a fair market value of $447,241, were distributed to
the stockholder during the year ended September 30, 1995. This distribution was
recorded at cost, which was $371,602 at the date of the transfer.
The Company made payments of $182,957 and $172,100 for computer services
for the years ended September 30, 1994 and 1995, respectively, to family members
of the stockholder.
The Company leases several of its facilities from affiliated companies who
have owners in common with the Company. Total rent expense to related parties
for the years ended September 30, 1994 and 1995, was $282,840 and $362,137,
respectively.
The Company paid a corporation controlled by the stockholder $102,923 and
$97,253 for the years ended September 30, 1994 and 1995, respectively, for
contract services and fee reimbursements.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments. Carrying amounts for all financial instruments (including
cash and cash equivalents, short-term investments, accounts receivable,
F-26
<PAGE> 88
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
accounts payable and accrued liabilities, notes payable and capital lease
obligations) approximate fair value as of September 30, 1994 and 1995,
respectively.
9. SUBSEQUENT EVENT:
Effective February 1, 1996, the Company was acquired by Monarch Dental
Corporation in an asset purchase transaction.
F-27
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
Midwest Dental Care:
We have audited the accompanying combined balance sheets of Advance Dental
Management, Midwest Dental Care -- Mondovi, S.C., and Midwest Dental
Care -- Sheboygan, S.C. (collectively referred to as "Midwest Dental
Care" -- all Wisconsin corporations) as of December 31, 1994 and 1995, and the
related combined statements of operations, stockholder's equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Midwest Dental Care as of
December 31, 1994 and 1995, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 19, 1996
F-28
<PAGE> 90
MIDWEST DENTAL CARE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 250,137 $ 8,555
Accounts receivable -- net of allowances of $35,000 in
1994 and 1995, respectively............................ 919,473 865,456
Inventories............................................... 250,720 235,015
Employee advances......................................... 18,000 28,350
Deferred income taxes..................................... 28,000 53,000
Prepaids and other current assets......................... 145,087 108,858
---------- ----------
Total current assets.............................. 1,611,417 1,299,234
Note receivable from stockholder............................ 844,472 1,047,130
Property and equipment, net................................. 1,668,841 1,607,689
Other assets................................................ 103,464 96,636
---------- ----------
Total assets...................................... $4,228,194 $4,050,689
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 532,116 $ 528,156
Accrued payroll........................................... 12,748 10,699
Accrued liabilities....................................... 555,582 596,002
Deferred income taxes..................................... 16,000 35,000
Due to affiliates......................................... 246,199 193,910
Unearned revenue.......................................... 17,720 13,352
Current maturities of notes payable....................... 237,789 270,142
Current maturities of capital lease obligations........... 149,904 163,796
---------- ----------
Total current liabilities......................... 1,768,058 1,811,057
Deferred income taxes....................................... 182,000 167,000
Notes payable............................................... 977,353 961,029
Capital lease obligations................................... 266,995 96,288
---------- ----------
Total liabilities................................. 3,194,406 3,035,374
Commitments and contingencies
Stockholder's equity........................................ 1,033,788 1,015,315
---------- ----------
Total liabilities and stockholder's equity........ $4,228,194 $4,050,689
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-29
<PAGE> 91
MIDWEST DENTAL CARE
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, AUGUST 31,
------------------------- ------------------------
1994 1995 1995 1996
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES.............................. $13,652,228 $14,380,157 $9,443,997 $10,405,838
OPERATING EXPENSES:
Salaries and benefits................... 8,698,895 9,094,609 5,980,076 6,640,625
Dental supplies......................... 1,018,666 1,087,011 784,639 881,097
Laboratory fees......................... 62,776 66,852 41,591 55,430
Payroll taxes........................... 558,031 587,053 416,781 451,964
Depreciation and amortization........... 290,563 314,734 192,086 339,275
General and administrative.............. 2,597,410 3,020,759 1,809,465 1,861,381
----------- ----------- ---------- -----------
13,226,341 14,171,018 9,224,638 10,229,772
----------- ----------- ---------- -----------
Operating income................ 425,887 209,139 219,359 176,066
OTHER EXPENSE:
Interest, net........................... 91,545 112,900 42,588 38,316
Other................................... 14,545 7,191 -- --
----------- ----------- ---------- -----------
INCOME BEFORE INCOME TAXES................ 319,797 89,048 176,771 137,750
INCOME TAXES (BENEFIT).................... (43,321) (18,460) 2,200 1,250
----------- ----------- ---------- -----------
NET INCOME................................ $ 363,118 $ 107,508 $ 174,571 $ 136,500
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE> 92
MIDWEST DENTAL CARE
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<S> <C>
BALANCE, December 31, 1993.................................. $ 466,737
Net income................................................ 363,118
Subordinated debt contributed by stockholder.............. 286,933
Dividends paid............................................ (83,000)
----------
BALANCE, December 31, 1994.................................. 1,033,788
Net income................................................ 107,508
Dividends paid............................................ (96,000)
Non-cash dividend paid.................................... (29,981)
----------
BALANCE, December 31, 1995.................................. $1,015,315
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-31
<PAGE> 93
MIDWEST DENTAL CARE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1994 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 363,118 $ 107,508
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 290,563 314,734
Gain on disposal of assets............................. -- 1,798
Changes in assets and liabilities --
Accounts receivable, net............................. (214,473) 54,017
Inventories.......................................... 44,280 15,705
Prepaids and other current assets.................... (74,087) 25,879
Other noncurrent assets.............................. 176,064 (225,811)
Accounts payable..................................... (429,884) (3,960)
Accrued expenses and other current liabilities....... (14,280) 34,003
Due to affiliates.................................... 543,199 (52,289)
Deferred income taxes................................ 5,000 (21,000)
--------- ---------
Net cash provided by operating activities......... 689,500 250,584
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (253,319) (255,380)
--------- ---------
Net cash used in investing activities............. (253,319) (255,380)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 567,065 267,969
Payments on notes payable................................. (559,502) (251,940)
Payments on capital lease obligations..................... (127,607) (156,815)
Distributions to stockholder.............................. (83,000) (96,000)
--------- ---------
Net cash used in financing activities............. (203,044) (236,786)
--------- ---------
NET INCREASE (DECREASE) IN CASH............................. 233,137 (241,582)
CASH AND CASH EQUIVALENTS, beginning of year................ 17,000 250,137
--------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 250,137 $ 8,555
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 132,720 $ 144,357
========= =========
Equipment acquired under capital leases................... $ 305,085 $ --
========= =========
Noncash distributions paid to stockholder for:
Dividend paid to stockholder........................... $ -- $ 29,981
Contribution of subordinated debt by stockholder....... 286,933 --
--------- ---------
$ 286,933 $ 29,981
========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-32
<PAGE> 94
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
Advance Dental Management, Midwest Dental Care -- Mondovi, S.C., and
Midwest Dental Care -- Sheboygan, S.C. (collectively referred to as "Midwest
Dental Care" or the "Company") are Wisconsin corporations. The accompanying
combined financial statements of the Company include Advance Dental Management
(ADM); Midwest Dental Care -- Mondovi, S.C. ("Mondovi"); Midwest Dental Care --
Sheboygan, S.C. ("Sheboygan"); Midwest Dental Care -- Appleton Mall, S.C.
("Appleton"); First Dental, S.C. ("First Dental"); and Damar Dental
Laboratories, Inc. ("Damar"). The entities are affiliated entities under common
control. Accordingly, their financial position and results of operations have
been combined for financial reporting purposes. All significant intercompany
transactions have been eliminated in the accompanying combined financial
statements.
The combined operations of the Company include management services, dental
laboratory operations, and dental services. The Company's operations are located
in the state of Wisconsin.
Effective January 2, 1995, First Dental merged with Mondovi and Appleton
merged with Sheboygan. Because these mergers were a transfer of assets and
liabilities among two entities under common control, the assets and liabilities
transferred were accounted for at historical cost in a manner similar to a
pooling-of-interests.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements have been prepared on the
accrual basis of accounting.
Basis of Presentation -- Interim Financial Statements
The financial statements for the eight months ended August 31, 1995 and
1996, have been prepared by the Company, without audit, pursuant to Accounting
Principles Board (APB) Opinion No. 28, "Interim Financial Reporting." Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the APB Opinion No. 28; nevertheless,
management of the Company believes that the disclosures herein are adequate to
prevent the information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of its operations for the eight months
ended August 31, 1995 and 1996, have been included herein. The results of
operations for the eight-month period are not necessarily indicative of the
results for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include money market accounts, and all highly liquid debt investments with
original maturities of three months or less.
F-33
<PAGE> 95
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----------------------
<S> <C>
Furniture and fixtures................ 10
Equipment............................. 5-10
Leasehold improvements................ Remaining life of lease
</TABLE>
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered, and is recognized as
services are performed for fee-for-service patients. Premiums received from
third party payors under dental plans are due monthly and are recognized as
revenue during the period in which the services are provided to the members.
Concentrations of Credit Risk
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements.
Management does not believe these receivables represent any concentrated credit
risk. Furthermore, management continually monitors and adjusts its allowances
associated with these receivables.
3. NOTE RECEIVABLE FROM STOCKHOLDER:
The Company held a note receivable from its sole stockholder in the amount
of $844,472 and $1,047,130 as of December 31, 1994 and 1995, respectively. The
note bears interest at 7% and is payable in monthly principal payments of
$2,000, with the outstanding balance due and payable on February 2011.
Subsequent to year-end, the note was paid in full in conjunction with the
acquisition (see Note 11).
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Equipment................................................... $3,309,099 $3,733,266
Leasehold improvements...................................... 804,044 739,278
Furniture and fixtures...................................... 212,051 87,489
---------- ----------
Total property and equipment...................... 4,325,194 4,560,033
Less -- Accumulated depreciation and amortization........... (2,656,353) (2,952,344)
---------- ----------
Property and equipment, net................................. $1,668,841 $1,607,689
========== ==========
</TABLE>
F-34
<PAGE> 96
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
5. NOTES PAYABLE:
Notes payable consists of the following as of December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Note payable to bank, due in 1998, payable in monthly
installments, bearing interest at 8.13%, secured by
substantially all assets of the combined group.............. $ 378,243 $ 268,256
Note payable to bank, due in 2000, payable in monthly
installments beginning in 1995, bearing interest at 9.125%,
secured by substantially all assets of the combined
group....................................................... -- 191,593
Note payable to bank, due in 2001, payable in monthly
installments beginning in 1995, bearing interest at 9%,
secured by substantially all assets of the combined
group....................................................... 828,900 712,539
Other notes payable due to various parties, due in 1998
through 1999, bearing interest at rates from 8.0-9.1%,
secured by substantially all assets of the combined
group....................................................... 7,999 58,783
---------- ----------
Total..................................................... 1,215,142 1,231,171
Less -- Current maturities................................ (237,789) (270,142)
---------- ----------
Notes payable, net........................................ $ 977,353 $ 961,029
========== ==========
</TABLE>
The maturities of notes payable at December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996.................................... $ 270,142
1997.................................... 294,735
1998.................................... 251,564
1999.................................... 215,095
2000.................................... 171,576
Thereafter.............................. 28,059
----------
Total......................... $1,231,171
==========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Operating and Capital Leases
The Company has operating leases for all of its facilities including the
clinics and the business office, extending through 2010. Rent expense totaled
$846,613 and $919,344 for the years ended December 31, 1994 and 1995,
respectively.
F-35
<PAGE> 97
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of December
31, 1995:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
1996.................................... $ 514,483 $182,049
1997.................................... 428,810 90,140
1998.................................... 318,008 12,065
1999.................................... 167,806 --
2000.................................... 157,234 --
Thereafter.............................. 1,236,731 --
---------- --------
Total minimum lease obligation........ $2,823,072 284,254
==========
Less- Amounts representing interest... (24,170)
--------
Present value of minimum lease
obligations........................ 260,084
Less- Current maturities.............. (163,796)
--------
Capital lease obligations, net........ $ 96,288
========
</TABLE>
Litigation, Claims, and Assessments
The Company is engaged in various legal proceedings incidental to its
normal business activities. Management does not believe the resolution of such
matters will have a material adverse effect on the Company's financial position,
results of operations or liquidity.
7. INCOME TAXES:
The income tax benefit for the years ended December 31, 1994 and 1995,
consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Current benefit:
Federal............................... $46,321 39,667
State................................. 6,617 5,667
Deferred -- primarily Federal........... (9,617) (26,874)
------- --------
Total benefit................. $43,321 $ 18,460
======= ========
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards
and tax benefits totaling approximately $457,000 and $29,000, respectively, for
income tax purposes. These carryforwards expire in 2008 and 2009.
The effective tax rate differs from the statutory rate primarily because of
the income tax benefit related to the net operating loss carryforward.
Deferred tax assets and liabilities are classified as current and
noncurrent on the basis of the classification of the related asset or liability
for financial reporting purposes. Deferred income taxes are recorded for
temporary differences between the basis of assets and liabilities for financial
reporting purposes and tax purposes.
F-36
<PAGE> 98
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
Temporary differences comprising the deferred tax assets and liabilities on
the combined balance sheets are as follows:
<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
CURRENT:
Prepaids and cash to accrual
adjustment......................... $ -- $ 16,000 $ -- $ 35,000
Allowance for doubtful accounts....... 13,000 -- 14,000 --
Accruals.............................. 15,000 -- 39,000 --
------- --------- ------- ---------
$28,000 $ 16,000 $53,000 $ 35,000
======= ========= ======= =========
NONCURRENT:
Accelerated depreciation.............. $ 323,000 $ 362,000
Tax loss carryforwards................ (191,000) (212,000)
Cash to accrual basis accounting
change............................. 50,000 17,000
--------- ---------
$ 182,000 $ 167,000
========= =========
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
The Company leases several of its facilities from affiliated companies who
have owners in common with the Company. Total rent expense to related parties
for the years ended December 31, 1994 and 1995, was $274,000 and $242,000,
respectively.
Additionally, included in accounts receivable as of December 31, 1994 and
1995, is $72,855 and $499, respectively, which is due from related parties.
Revenues recorded from related parties are approximately $304,529 and $342,590
for the years ended December 31, 1994 and 1995, respectively.
During 1994, the owners contributed their $286,933 subordinated debt to the
Company. This amount has been reflected as a capital contribution in the
accompanying combined financial statements.
9. BENEFIT PLANS:
401(k) Plan
The Company maintains a defined contribution plan which conforms to IRS
provisions for 401(k) plans. Employees are eligible to participate in the plan
provided they have attained the age of 21, have completed 1,000 hours of
service, and have been employed for at least one year. Employer matching
contribution percentages as well as additional contributions are determined
annually by the Company's Board of Directors. Total contributions by the Company
were $38,500 and $47,250 for the years ended December 31, 1994 and 1995,
respectively.
Health and Welfare Benefit Plan
The Company uses a partially self-funded health and welfare benefit plan to
provide these benefits to full-time employees. The plan maintains stop-loss
insurance coverage whereby if total annual plan claims exceed $240,000 or if an
individual's insured claims exceed $20,000 annually, these excess amounts are
covered by the stop-loss policy. Monthly contribution amounts are determined
annually by the plan administrator based on funding requirements and plan
experience. Amounts contributed by the Company are adjusted to reflect employee
contributions which are also subject to revision annually. There were no
contributions for the year ended December 31, 1994. Total contributions by the
Company were $18,100 for the year ended December 31, 1995.
F-37
<PAGE> 99
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
10. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments. Carrying amounts for all financial instruments (including
cash and cash equivalents, accounts receivable, due from officer, accounts
payable, accrued liabilities, notes payable and capital lease obligations)
approximate fair value as of December 31, 1994 and 1995.
11. SUBSEQUENT EVENT:
Effective September 1, 1996, Sheboygan and Mondovi were acquired by Monarch
Dental Corporation in a stock purchase transaction and ADM was acquired in an
asset purchase transaction.
F-38
<PAGE> 100
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
The Company................................ 13
Use of Proceeds............................ 14
Dividend Policy............................ 14
Capitalization............................. 15
Dilution................................... 16
Pro Forma Consolidated Financial
Information........................... 17
Selected Consolidated Financial
Information........................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 23
Business................................... 32
Management................................. 44
Certain Transactions....................... 50
Principal Stockholders..................... 52
Description of Capital Stock............... 54
Shares Eligible for Future Sale............ 57
Underwriting............................... 59
Legal Matters.............................. 60
Experts.................................... 60
Index to Financial Statements.............. F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================
============================================================
SHARES
MONARCH DENTAL
CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
SALOMON BROTHERS INC
, 1997
============================================================
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
The following table sets forth the estimated expenses payable by the
Company in connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- -------
<S> <C>
SEC Registration Fee........................................ $10,455
NASD Filing Fee............................................. 3,950
Nasdaq Listing Fee.......................................... *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Blue Sky Qualification Fees and Expenses.................... *
Transfer Agent's Fee........................................ *
Miscellaneous............................................... *
-------
TOTAL............................................. $ *
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the General Corporation Law of the State
of Delaware, Article VII of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") provides that no director of the Company shall
be personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, the Certificate
provides that if the Delaware General Corporation Law is amended to authorize
the further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Article V of the Company's Amended and Restated By-laws provide for
indemnification by the Company of its officers and certain non-officer employees
under certain circumstances against expenses (including attorneys fees,
judgments, fines and amounts paid in settlement) reasonably incurred in
connection with the defense or settlement of any threatened, pending or
completed legal proceeding in which any such person is involved by reason of the
fact that such person is or was an officer or employee of the Company if such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
criminal actions or proceedings, if such person had no reasonable cause to
believe his or her conduct was unlawful.
The Stock Purchase Agreement, filed as Exhibit 10.5 hereto, provides for
indemnification by the Company of certain of its existing principal stockholders
and the controlling persons of such stockholders (one of whom is a director of
the Company) against claims and liabilities, including claims and liabilities
arising under the securities laws.
The Company has entered into indemnification agreements with each of its
directors reflecting the foregoing provisions of its By-laws and requiring the
advancement of expenses in proceedings involving the directors in most
circumstances.
II-1
<PAGE> 102
Under Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto,
the Underwriters have agreed to indemnify, under certain conditions, the
Company, its directors, certain officers and persons who control the Company
within the meaning of the Securities Act of 1933 against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of Common Stock issued, and the number of options granted, by the
Registrant since its incorporation in 1994. Further included is the
consideration, if any, received by the Registrant for such shares and options,
and information relating to the section of the Securities Act of 1933, as
amended (the "Securities Act"), or rule of the Securities and Exchange
Commission under which exemption from registration was claimed.
(1) In December 1994, the Company sold 56,080,447 shares of the Company's
Common Stock for an aggregate purchase price of $3,000 to Dr. Warren F.
Melamed.
(2) In February 1996, pursuant to a Stock Purchase Agreement, the Company
sold an aggregate of 4,800,000 shares of the Company's Convertible
Participating Preferred Stock for an aggregate purchase price of
$10,000,320 to Advent VII L.P., Advent Atlantic and Pacific II L.P.,
Advent New York L.P., TA Venture Investors Limited Partnership and
eight other accredited investors.
(3) In February 1996, pursuant to an Asset Contribution Agreement, the
Company issued 1,400,000 shares of Common Stock to Shears Vanguard Ltd.
in partial consideration for the MacGregor Dental Centers business.
(4) In February 1996, pursuant to an Asset Contribution Agreement, the
Company issued an aggregate of 788,480 shares of Common Stock to Dr.
Warren F. Melamed and Dr. Roy D. Smith, III in partial consideration of
their interests in dental practices.
(5) In April 1996, pursuant to a Restricted Stock Agreement, the Company
sold 300,000 shares of the Company's Class A Common Stock for a
purchase price of $31,800 to Dr. Warren F. Melamed.
(6) In April 1996, pursuant to Restricted Stock Agreements, the Company
sold an aggregate of 267,500 shares of the Company's Class A Common
Stock for an aggregate purchase price of $28,355 to members of
management and key employees of the Company.
(7) In June 1996, pursuant to Restricted Stock Agreements, the Company sold
an aggregate of 40,000 shares of the Company's Class A Common Stock for
an aggregate purchase price of $4,240 to John W. Fehmer and Philip
Hertik.
(8) In August 1996, pursuant to a Restricted Stock Agreement, the Company
sold 20,000 shares of the Company's Class A Common Stock for a purchase
price of $2,120 to Glenn E. Hemmerle.
(9) In August 1996, pursuant to a Stock Purchase Agreement, the Company
issued 700,000 shares of Common Stock in partial consideration for the
sale of the outstanding voting common stock and outstanding non-voting
common stock of Midwest Dental Care, Mondovi, Inc. and Midwest Dental
Care, Sheboygan, Inc., and agreed to grant options to acquire up to
160,000 shares of Common Stock upon the achievement by Midwest of
specified financial performance goals.
(10) In October 1996, pursuant to Restricted Stock Agreements, the Company
sold an aggregate of (i) 10,000 shares of the Company's Common Stock
and (ii) 80,000 shares of the Company's Class A Common Stock for an
aggregate purchase price of $8,480 to certain key employees of the
Company.
(11) In November 1996 pursuant to a Stock Option Agreement, the Company
granted an option to purchase 50,000 shares of Common Stock to Gary W.
Cage.
(12) In November 1996, pursuant to a Stock Purchase Agreement, the Company
issued an aggregate of 60,000 shares of Common Stock to Dr. Ronald K.
Girlinghouse and Dr. Debra A. Girlinghouse in partial consideration
for the sale of outstanding capital stock of Convenient Dental Care,
Inc. and
II-2
<PAGE> 103
agreed to grant options to acquire up to 10,000 shares of Common Stock
upon the achievement by Convenient of specified financial performance
goals.
(13) In January 1997, pursuant to a Stock Purchase Agreement, the Company
issued an aggregate of 115,000 shares of Common Stock to Dr. Sam L.
Beavers, Dr. W. Gene Howard, Dr. William M. Lee and Dr. Jeffrey M.
Moore in partial consideration for the sale of the outstanding capital
stock of Arkansas Dental Health and agreed to grant options to acquire
up to 15,000 shares of Common Stock upon the achievement by Arkansas
Dental Health of specified financial performance goals.
(14) In December 1996 and January 1997, pursuant to an Amended and Restated
Stockholders' Agreement, the Company sold an aggregate of 1,704,550
shares of the Company's Series A Convertible Junior Preferred Stock
for an aggregate purchase price of $3,000,008 to existing stockholders
of the Company.
(15) In February 1997, under the 1996 Stock Plan, the Company granted
options to purchase an aggregate of 15,000 shares of Common Stock to
William R. Veno and Gail R. Stockrahm.
(16) In April 1997, pursuant to an Asset Purchase Agreement, the Company
issued an aggregate of 137,500 shares of Common Stock to Dr. William
T. Harris III in partial consideration for the sale of substantially
all the assets of United Dental.
The shares of capital stock and securities issued in the above transactions
were offered and sold in reliance upon the exemption from registration under
Section 4(2) of the Securities Act or Regulation D or Rule 701 promulgated under
the Securities Act, relative to sales by an issuer not involving a public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
<C> <S>
*1.1 -- Form of Underwriting Agreement
*3.1 -- Amended and Restated Certificate of Incorporation
*3.2 -- Certificate of Amendment to Amended and Restated
Certificate of Incorporation
*3.3 -- Form of Restated Certificate of Incorporation (to be
filed upon the closing of the offering referred to in the
Registration Statement)
*3.4 -- Amended and Restated By-Laws
*3.5 -- Form of Second Amended and Restated By-laws (to be
effective upon the closing of the offering referred to in
the Registration Statement)
*4.1 -- Specimen certificate for shares of Common Stock, $.01 par
value, of the Registrant
*5.1 -- Opinion of Goodwin, Procter & Hoar LLP as to the validity
of the securities being offered
*10.1 -- Monarch Dental Corporation 1996 Stock Option and
Incentive Plan, as amended
*10.2 -- Monarch Dental Corporation 1997 Employee Stock Purchase
Plan
*10.3 -- Monarch Dental Corporation Equity Acquisition Option Plan
*10.4 -- Stock Redemption Agreement dated as of February 5, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S. (excluding schedules, which the Registrant agrees
to furnish supplementally to the Commission upon request)
*10.5 -- Stock Purchase Agreement dated as of February 5, 1996 by
and among the Registrant and the investors named therein
</TABLE>
II-3
<PAGE> 104
<TABLE>
<CAPTION>
<C> <S>
*10.6 -- Amended and Restated Stockholders' Agreement dated as of
August 29, 1996 by and among the Registrant, the TA
Investors (as defined), the MacGregor Investors (as
defined), the Monarch Investors (as defined) and the
Hehli Investors (as defined)
*10.7 -- Asset Contribution Agreement dated as of January 31, 1996
by and among the Registrant, Shears Vanguard Ltd., Shears
Vanguard Inc., MDC Dental, Inc., Shears Vanguard SMI
Inc., Shears Vanguard General, Inc. and Charles G.
Shears, D.D.S. (excluding schedules, which the Registrant
agrees to furnish supplementally to the Commission upon
request)
*10.8 -- Asset Contribution Agreement dated as of February 5, 1996
by and among the Registrant, Warren F. Melamed, D.D.S.
and Roy D. Smith, III, D.D.S. (excluding schedules, which
the Registrant agrees to furnish supplementally to the
Commission upon request)
*10.9 -- Employment Agreement dated as of February 5, 1996 by and
among the Registrant, Monarch Dental Associates, L.P. and
Warren F. Melamed, D.D.S.
*10.10 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Warren F. Melamed, D.D.S.
*10.11 -- Management Agreement by and among Modern Dental
Professionals, P.C., Monarch Dental Associates, L.P. and
MacGregor Dental Associates, L.P.
*10.12 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Charles G. Shears, D.D.S.
*10.13 -- Restricted Stock Agreement dated as of February 6, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S.
*10.14 -- Stock Purchase Agreement dated as of August 29, 1996 by
and between the Registrant and David L. Hehli, D.D.S.
*10.15 -- Employment Agreement dated as of August 29, 1996 by and
among the Registrant, David L. Hehli, D.D.S. and Midwest
Dental Management, Inc.
*10.16 -- Non-Competition Agreement dated as of August 29, 1996 by
and among the Registrant, David L. Hehli, D.D.S., Advance
Dental Management, Inc. and Midwest Dental Plan, Ltd.
10.17 -- Primary Care Dentist Agreement effective April 1, 1997 by
and between Prudential Dental Maintenance Organization,
Inc. and Modern Dental Professionals, P.C. and Monarch
Dental Associates, L.P.
10.18 -- Dental Service Agreement dated January 1, 1995 by and
between Compcare Health Services Insurance Corporation
and Advance Dental Management, Inc.
*10.19 -- Form of Director Indemnification Agreement
11.1 -- Unaudited net income per common equivalent share
*21.1 -- Subsidiaries of the Registrant
*23.1 -- Consent of Goodwin, Procter & Hoar LLP (included in
Exhibit 5.1 hereto)
23.2 -- Consent of Arthur Andersen LLP
24.1 -- Powers of Attorney (included on page II-6)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment to this Registration Statement.
(b) The following is a list of financial statement schedules furnished:
Schedule II Valuation and qualifying accounts for the years ended
December 31, 1996, 1995 and 1994.
II-4
<PAGE> 105
Schedules not listed above have been omitted because they are not
applicable or because required information is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Dallas, Texas, on April 2, 1997.
MONARCH DENTAL CORPORATION
By: /s/ GARY W. CAGE
----------------------------------
Gary W. Cage
Chief Executive Officer
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints each of Warren F. Melamed and Gary W.
Cage such person's true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that any said attorney-in-fact
and agent, or any substitute or substitutes of any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WARREN F. MELAMED Chairman of the Board and Director April 2, 1997
- -----------------------------------------------------
Warren F. Melamed
/s/ GARY W. CAGE Chief Executive Officer and Director April 2, 1997
- ----------------------------------------------------- (acting principal financial and
Gary W. Cage accounting officer)
/s/ CHARLES G. SHEARS Executive Vice President and Director April 2, 1997
- -----------------------------------------------------
Charles G. Shears
/s/ GLENN E. HEMMERLE Director April 2, 1997
- -----------------------------------------------------
Glenn E. Hemmerle
/s/ ROGER B. KAFKER Director April 2, 1997
- -----------------------------------------------------
Roger B. Kafker
</TABLE>
II-6
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Monarch Dental Corporation and
subsidiaries included in this Form 10-K and have issued our report dated
February 28, 1997.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements and financial statement schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 17, 1997
S-1
<PAGE> 108
SCHEDULE II
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO FROM BALANCE
BEGINNING COSTS AND ACQUIRED AT END
CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS OF PERIOD
-------------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Allowance for Doubtful Accounts........ $385 $1,324 $851 $ (884)(b) $1,676
Accumulated Amortization of Intangible
Assets.............................. -- 573 -- -- 573
---- ------ ---- ------- ------
Total Reserves and
Allowances................... $385 $1,897 $851 $ (884) $2,249
==== ====== ==== ======= ======
December 31, 1995:
Allowance for Doubtful Accounts........ $212 $ 409 $ -- $ (236)(b) $ 385
Accumulated Amortization of Intangible
Assets.............................. -- -- -- -- --
---- ------ ---- ------- ------
Total Reserves and
Allowances................... $212 $ 409 $ -- $ (236) $ 385
==== ====== ==== ======= ======
December 31, 1994:
Allowance for Doubtful Accounts........ $199 $ 219 $ -- $ (206)(b) $ 212
Accumulated Amortization of Intangible
Assets.............................. -- -- -- -- --
---- ------ ---- ------- ------
Total Reserves and
Allowances................... $199 $ 219 $ -- $ (206) $ 212
==== ====== ==== ======= ======
</TABLE>
- ---------------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(b) Write off of uncollectible receivables net of recoveries of bad debt
write-offs.
S-2
<PAGE> 109
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
*1.1 -- Form of Underwriting Agreement
*3.1 -- Amended and Restated Certificate of Incorporation
*3.2 -- Certificate of Amendment to Amended and Restated
Certificate of Incorporation
*3.3 -- Form of Restated Certificate of Incorporation (to be
filed upon the closing of the offering referred to in the
Registration Statement)
*3.4 -- Amended and Restated By-Laws
*3.5 -- Form of Second Amended and Restated By-laws (to be
effective upon the closing of the offering referred to in
the Registration Statement)
*4.1 -- Specimen certificate for shares of Common Stock, $.01 par
value, of the Registrant
*5.1 -- Opinion of Goodwin, Procter & Hoar LLP as to the validity
of the securities being offered
*10.1 -- Monarch Dental Corporation 1996 Stock Option and
Incentive Plan, as amended
*10.2 -- Monarch Dental Corporation 1997 Employee Stock Purchase
Plan
*10.3 -- Monarch Dental Corporation Equity Acquisition Option Plan
*10.4 -- Stock Redemption Agreement dated as of February 5, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S. (excluding schedules, which the Registrant agrees
to furnish supplementally to the Commission upon request)
*10.5 -- Stock Purchase Agreement dated as of February 5, 1996 by
and among the Registrant and the investors named therein
*10.6 -- Amended and Restated Stockholders' Agreement dated as of
August 29, 1996 by and among the Registrant, the TA
Investors (as defined), the MacGregor Investors (as
defined), the Monarch Investors (as defined) and the
Hehli Investors (as defined)
*10.7 -- Asset Contribution Agreement dated as of January 31, 1996
by and among the Registrant, Shears Vanguard Ltd., Shears
Vanguard Inc., MDC Dental, Inc., Shears Vanguard SMI
Inc., Shears Vanguard General, Inc. and Charles G.
Shears, D.D.S. (excluding schedules, which the Registrant
agrees to furnish supplementally to the Commission upon
request)
*10.8 -- Asset Contribution Agreement dated as of February 5, 1996
by and among the Registrant, Warren F. Melamed, D.D.S.
and Roy D. Smith, III, D.D.S. (excluding schedules, which
the Registrant agrees to furnish supplementally to the
Commission upon request)
*10.9 -- Employment Agreement dated as of February 5, 1996 by and
among the Registrant, Monarch Dental Associates, L.P. and
Warren F. Melamed, D.D.S.
*10.10 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Warren F. Melamed, D.D.S.
*10.11 -- Management Agreement by and among Modern Dental
Professionals, P.C., Monarch Dental Associates, L.P. and
MacGregor Dental Associates, L.P.
</TABLE>
<PAGE> 110
<TABLE>
<C> <S>
*10.12 -- Non-Competition Agreement dated as of February 5, 1996 by and between the Registrant
and Charles G. Shears, D.D.S.
*10.13 -- Restricted Stock Agreement dated as of February 6, 1996 by and between the Registrant
and Warren F. Melamed, D.D.S.
*10.14 -- Stock Purchase Agreement dated as of August 29, 1996 by and between the Registrant
and David L. Hehli, D.D.S.
*10.15 -- Employment Agreement dated as of August 29, 1996 by and among the Registrant, David
L. Hehli, D.D.S. and Midwest Dental Management, Inc.
*10.16 -- Non-Competition Agreement dated as of August 29, 1996 by and among the Registrant,
David L. Hehli, D.D.S., Advance Dental Management, Inc. and Midwest Dental Plan, Ltd.
10.17 -- Primary Care Dentist Agreement effective April 1, 1997 by and between Prudential
Dental Maintenance Organization, Inc. and Modern Dental Professionals, P.C. and
Monarch Dental Associates, L.P.
10.18 -- Dental Service Agreement dated January 1, 1995 by and between Compcare Health
Services Insurance Corporation and Advance Dental Management, Inc.
*10.19 -- Form of Director Indemnification Agreement
11.1 -- Unaudited net income per common equivalent share
*21.1 -- Subsidiaries of the Registrant
*23.1 -- Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto)
23.2 -- Consent of Arthur Andersen LLP
24.1 -- Powers of Attorney (included on page II-6)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment to this Registration Statement.
<PAGE> 1
EXHIBIT 10.17
PRIMARY CARE DENTIST AGREEMENT
(hereinafter called "Agreement")
effective: April 1, 1997
between
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION, INC.
(hereinafter called "The Company")
and
Modern Dental Professionals, PC/Monarch Dental Associates, LP
(Contracting Dentist, hereinafter called "You")
Since The Company has established a managed dental care coverage program
(hereinafter referred to as the "DMO Coverage Plan") and wishes to enter into
an agreement whereby You will provide dental care services under said DMO
Coverage Plan; and,
Since You desire to enter into an agreement to provide said dental care
services and become a Primary Care Dentist;
It is mutually agreed as follows:
ARTICLE I - DEFINITIONS
The meaning of the terms used in this Agreement shall be as defined this
Article, except where the context makes it clear that such meaning is not
intended.
A. "Alternate Dental Plan" means any other dental expense benefit
coverage plan offered to Covered Persons by the employer or other group
contractholder concurrently with the DMO Coverage Plan. This does not
include any dental expense plan offered by a different employer/group
contractholder or any dental expense plan underwritten or administered
by and insurer, third party payer or claims services administrator other
than The Prudential Insurance Company of America and its subsidiaries
and affiliates.
B. "Basic Dental Services" means the dental services shown in the
Dental Office Guide as covered services to be provided by the Primary
Care Dentist.
C. "Contracting Dentist" ("You") means a person who is a Dentist or a
person who is a legal representative of a group dental practice or
corporation with the authority to bind such group dental practice or
corporation to the terms of this Agreement.
D. "Covered Person" means any person covered under a DMO Coverage Plan.
E. "Dental Maintenance Organization" means the prepaid group dental care
program established by The Company under which Primary Care and
Specialty Dentists agree to provide or arrange for covered dental
services to Covered Persons pursuant to DMO Coverage Plans.
F. "Dental Office Guide" means a manual given to Primary Care Dentists
which outlines administrative guidelines and procedures in connection
with providing services to Covered Persons. This shall also include
supplementary written communications including, but not limited to,
letters, memoranda and bulletins which add to or modify the
<PAGE> 2
Effective Date: April 1, 1997
procedures and guidelines in the Dental Office Guide. "Dental Office
Guide" may also be referred to as "Personal Dentist Guide."
G. "Dentist" means a person with an unrestricted license to practice
dentistry in the jurisdiction where the services are provided.
H. "DMO Coverage Plan" means a plan of managed dental care benefits which
is provided through the DMO and is described in individual or group
contracts issued by The Company to one or more individuals or employers
(or to other groups).
I. "Primary Care Dentist" means a Dentist who has entered into a Primary
Care Dentist Agreement with The Company to:
1. Provide Basic Dental Services to Covered Persons;
2. Maintain the appropriate continuity of Covered Persons' dental
care; and,
3. Initiate referral of covered Persons to Specialty Dentists
where appropriate.
"Primary Care Dentist" may also be referred to as "Personal Dentist."
J. "Quality Improvement Program" (QIP) means the process designed to
objectively and systematically monitor and evaluate the quality and
appropriateness of dental care, pursue opportunities to improve dental
care and resolve identified differences.
K. "Regional Dental Director" means a Dentist who is employed by The
Company to coordinate and supervise the delivery of dental care services
for Covered Persons through Personal and Specialty Dentists. Where
approval or authorization of the Regional Dental Director is required by
this Agreement, the Regional Dental Director may designate another
person for that purpose.
L. "Specialty Dentist" means a Dentist with a special practice who has
entered into an agreement with The Company to provide Specialty Dental
Services to Covered Persons. For purposes of this coverage, a Primary
Care Dentist may also be considered a Specialty Dentist when approved by
The Company to perform certain Specialty Services.
M. "Specialty Dental Services" means specialty dental care services which
are covered under DMO Coverage Plans and are provided by Specialty
Dentists.
ARTICLE II - OBLIGATIONS AND
RESPONSIBILITIES OF PRIMARY CARE DENTIST
You agree that your obligations and responsibilities as an independent
contractor to The Company are as described below:
A. You agree to provide Basic Dental Services to those Covered Persons who
have chosen You as their Primary Care Dentist. A roster of such Covered
Persons shall be provided to You by The Company and updated monthly. You
shall provide appropriate treatment and appointment availability for
Covered Persons consistent with existing office policy for patients not
covered by a DMO Coverage Plan. You further agree to accept such Covered
Persons as patients and will not close your practice to such Covered
Persons until You have accepted at least 500 Covered Persons as
patients, unless such requirement has been explicitly waived in writing
by the Regional Dental Director. You
2
<PAGE> 3
Effective Date: April 1, 1997
further agree that You shall accept any current patient of
record as a Covered Person at any time regardless of the total
number of Covered Persons accepted as patients.
B. You may provide appropriate dental services which are not
covered under a DMO Coverage Plan. In such cases, You must
inform the Covered Person that such services are not covered,
that he/she is responsible for payment, and the amount due for
such services. You may charge up to your usual fees for such
services.
C. You agree to submit to The Company encounter information on
forms supplied by or acceptable to The Company. The forms shall
show all Basic Dental Services provided to each Covered Person
and the copayment amounts collected from Covered Persons.
Encounter information shall be submitted at least monthly. The
present method of submitting such information is acceptable.
D. The Primary Care Dentist will not provide covered Specialty
Services to Covered Persons without a written agreement with
The Company to provide such services or express written
approval from the Regional Dental Director. You agree that all
referrals to Specialty Dentists or any other Dentist shall be
made in accordance with guidelines established by The Company.
E. You will provide or arrange for 24 hour per day, seven day per
week emergency care coverage. Emergency care coverage is
defined as those Basic Dental Services needed to relieve pain
or to prevent worsening of a condition when that would be
caused by delay. Emergency care will be provided within 24
hours of request.
F. You agree not to subcontract or otherwise delegate any duties
under this Agreement without the express written consent of
The Company. This provision does not apply to:
1. Any services legally performed by a fully licensed
Dentist associate, dental hygienist or dental assistant
employed by You. It is understood that all Dentist
associates providing services to Covered Persons must
be fully credentialed by The Company.
2. Services performed by a covering Dentist. When You are
absent from your office, You will arrange to have a
covering Dentist available and, if necessary, You will
pay the covering Dentist directly for Basic Dental
Services delivered to Covered Persons. If You will be
absent from the office for more than 14 days, The
Company must be notified in advance and must approve
the covering Dentist.
G. If this Agreement is terminated, You agree to complete all
treatment in progress and, upon request, forward copies of all
Covered Persons' records, radiographs and study models at a
nominal fee for copying to Covered Persons or The Company, to
the Covered Persons' new Primary Care Dentists within 30 days
after completion of treatment in progress. While such treatment
is in progress, all terms of this Agreement, including
reimbursement arrangements, will remain as prior to the
termination of the Agreement.
H. You agree to comply with all administrative requirements,
guidelines and procedures described by The Company in the
Dental Office Guide or any successor document, as well as any
supplemental changes issued in writing by The Company.
I. You agree to participate in the DMO Coverage Plan's Quality
Improvement Program, peer review and complaint resolution
programs as described in the Dental Office Guide. You further
agree to abide by the terms, recommendations and decisions of
these programs.
3
<PAGE> 4
Effective Date: April 1, 1997
J. You shall maintain professional liability insurance appropriate to the
professional activities assumed under this Agreement. The amount of such
insurance shall be determined by The Company. You must provide The
Company with evidence of such coverage prior to the effective date of
this Agreement and agree to provide such evidence when and as often as
may be reasonably requested by The Company.
K. You agree to comply with all applicable Federal, State and local laws
and regulations, including, but not limited to, those regarding
employment discrimination.
L. Nothing contained herein shall preclude You from rendering care to
patients who are not Covered Persons, provided that such patients shall
not receive treatment at preferential times or in any other manner
preferential to Covered Persons or in conflict with the terms contained
in this Agreement. You agree not to differentiate or discriminate in the
treatment of Covered Persons as to the quality of services delivered
because of race, sex, age, religion, place of residence or health
status; and to observe, protect and promote the rights of Covered
persons as patients.
ARTICLE III - LEGAL RELATIONSHIP OF THE COMPANY TO PRIMARY CARE DENTISTS
The relationship between You and The Company is that of independent contractor.
None of the provisions of this Agreement are intended to create, or to be
construed as creating, any agency, partnership, joint venture and/or
employee-employer relationships.
As an independent contractor, Primary Care Dentist shall have sole
responsibility for the payment of all self-employment and applicable Federal
and State taxes.
ARTICLE IV - GENERAL PROVISIONS
The following additional conditions and provisions apply:
A. Nothing contained in this Agreement shall be construed to require You
to recommend or perform any procedure or course of treatment which You
deem to be professionally unacceptable.
B. If You are an individual Dentist, You represent and warrant that You are
licensed to practice dentistry in the jurisdiction where services are
provided; that your license to practice dentistry has not been revoked,
suspended or placed on probation during the past five years; that You
shall maintain an unrestricted license to practice dentistry and be
eligible for a Federal Drug Enforcement Agency permit throughout the
term of this Agreement, and that You will notify The Company if your
license has been revoked, suspended, placed on probation, or
surrendered. If You are a legal representative of a group dental
practice or corporation, You represent and warrant for each Dentist in
said group dental practice or corporation who provides Basic Dental
Services to Covered Persons that he/she meets the above requirements.
You further agree to provide evidence of such licensure, your DEA permit
and your Texas Safety Certificate, as well as any other documentation
that may be required by any Federal, State or local law, prior to the
effective date of this Agreement and thereafter when and as often as may
be reasonably requested by The Company. You agree to notify Prudential
immediately of any revocation, suspension, restriction, reprimand or
probationary action taken by any agency or court of competent
jurisdiction.
4
<PAGE> 5
Effective Date: April 1, 1997
C. This Agreement, together with any attachments, supplements, addenda,
amendments or modifications, comprise the complete Primary Care Dentist
Agreement. Neither of the parties has made representations or warranties
other than those set forth in this Agreement and such attachments,
supplements, addenda, amendments or notifications, if any.
D. The Company and its representatives shall have the right to conduct
reviews of your dental office operations and dental records of Covered
Persons. All such reviews will be made during normal working hours or at
such other time that is mutually agreed upon.
E. The Company shall indemnify and hold You harmless from any and all
claims, lawsuits, settlements, and liabilities incurred as a result of
actions taken or not taken by The Company in the administration of the
DMO Coverage Plans.
F. You shall indemnify and hold The Company harmless from any and all
claims, lawsuits, settlements, and liabilities incurred as a result of
professional services provided or not provided by You with respect to
any Covered Person.
G. In the event that any portion of this Agreement is found to be void or
illegal, the validity or enforceability of any other portion shall not
be affected.
H. The waiver by either party of a breach or violation of any provision of
this Agreement shall not operate as, nor be construed as, a waiver of
any subsequent breach thereof.
I. All rights and remedies under this Agreement are cumulative and not
alternative. This Agreement shall be construed and governed by the laws
of the State of Texas.
J. The headings of the various Articles of This Agreement are merely for
convenience and do not, expressly or by implication, limit, define or
extend the terms of the Articles to which they apply.
K. This Agreement may be executed in any number of counterparts which, when
read together, shall comprise one instrument.
ARTICLE V - PRIMARY CARE DENTIST REIMBURSEMENT
Your reimbursement shall be subject to the following conditions:
A. Your reimbursement shall be determined as shown in Attachment A to this
Agreement.
B. In no event, including but not limited to non-payment by The Company,
The Company's insolvency, or a breach of this Agreement, will a Covered
Person be liable for any sums owed by The Company. Further, neither You
nor any dental affiliate providing services pursuant to this Agreement
will bill, charge, collect a deposit or other sum, or seek compensation,
remuneration or reimbursement from, or maintain any action or have any
other recourse against, or make any surcharge upon, a Covered Person or
other person acting on the Covered Person's behalf. If the Company
receives notice of any surcharge upon a Covered Person, it is empowered
to take appropriate action. This item B does not prohibit the collection
of copayments described in item V.D. below.
The obligations set forth in this item B. shall survive the termination
of this Agreement regardless of the cause of such termination and shall
be construed for the benefit of Covered Persons. This item B. shall
supersede any oral or written agreement to the
5
<PAGE> 6
Effective Date: April 1, 1997
contrary now existing or hereafter entered into between You and Covered
Persons or any persons acting on their behalf.
Any modifications, addition, or deletion to the provisions of this
clause shall be effective on a date no earlier than fifteen (15) days
after the Commissioner of Insurance has received written notice of such
proposed changes.
C. You may also be paid additional performance payments based on other
data, including, but not limited to, Covered Persons' satisfaction,
results of annual reviews conducted by The Company or its
representatives, Quality Improvement Program results, and compliance
with administrative practices and guidelines established by The
Company.
D. You shall not demand or receive any form of reimbursement for covered
services from Covered Persons, except for copayment amounts as shown in
the Dental Office Guide and/or an Attachment to this Agreement.
E. You agree that, if a Covered Person who is eligible for benefits under
a DMO Coverage Plan is also eligible for benefits under an Alternate
Dental Plan, either currently or in the future, You shall be reimbursed
under the DMO Coverage Plan of benefits in accordance with the terms of
this Agreement. You further agree that no benefits shall be payable
under the Alternate Dental Plan for any services you render to said
Covered Person, unless The Company has given express written consent to
waive this requirement for that Covered Person.
F. You agree that should You choose not to provide certain Basic Dental
Services to Covered Persons, The Company may, at its option, adjust your
monthly compensation accordingly. You further agree that, if You are
deemed responsible for the cost of any services due to unauthorized
referral to another Dentist and if The Company has paid for such
services, The Company may, at its option, recoup such cost by
adjustment(s) to your monthly compensation.
ARTICLE VI - TERM AND TERMINATION
A. Subject to the conditions set forth in this Article, the term of this
Agreement shall commence on the effective date shown on the first page
of this Agreement and shall continue for a period of 24 months unless
terminated in accordance with the following sections of this Article.
This Agreement will automatically renew for additional 12 month periods
beginning April 1, 1999 unless either party gives written notice of
termination as stated in item C of this Article.
B. Any breach of the provisions of this Agreement by either party may
constitute grounds for immediate termination of the Agreement. Notice of
termination by either party shall be mailed to the last known address of
the other party via prepaid, certified mail, return receipt requested.
C. This Agreement may be unilaterally terminated at the end of any month,
by either party, by giving 9 months written notice mailed to the last
known address of the other party, prepaid, certified mail, return
receipt requested. The earliest this provision C may be exercised is 9
months prior to April 1, 1999.
D. Regardless of any other provisions of this Article, this Agreement may
be immediately terminated by The Company if it determines that such
immediate termination is in the best medical/dental interests of a
Covered Person(s). Notice of such termination shall be mailed
6
<PAGE> 7
Effective Date: April 1, 1997
to the last known address of the Contracting Dentist via prepaid,
certified mail, return receipt requested.
ARTICLE VII - CHANGES IN THIS AGREEMENT
This Agreement, may be modified by The Company by giving thirty (30) days
written notice to the Contracting Dentist. Such modification will take effect
at the end of said 30-day period unless, within that period, You send to The
Company written request for termination of this Agreement.
ARTICLE VIII - NOTICES
Any notices required to be given pursuant to the terms and provisions of this
Agreement shall be in writing and shall be sent to:
Contracting Dentist at: 4201 Spring Valley, Suite 320
Dallas, TX 75244
Prudential Dental Maintenance Organization, Inc. at: One Prudential Circle
Sugar Land, TX 77478
ARTICLE IX - MISCELLANEOUS
A. This Agreement replaces and supersedes all prior written and oral
Agreements including but not limited to the Personal Dentist Agreements
dated August 1, 1994.
B. Modern Dental Associates, PC/Monarch Dental Associates, LP agrees to
give Prudential (4) months written notice of intent before closing any
office location to new enrollees. Closing would be effective at the end
of the month.
C. Modern Dental Associates, PC/Monarch Dental Associates, LP agrees not
to disclose any proprietary information to any other party without the
expressed written permission of Prudential.
Either party may, at any time, designate any other address in place of those
given above by written notice to the other party.
7
<PAGE> 8
Effective Date: April 1, 1997
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CONTRACTING DENTIST:
Name: /s/ WARREN F. MELAMED DDS
-------------------------
Date: 3-19-97 By: /s/ WARREN F. MELAMED DDS
--------- ---------------------------
Group Dental Practice or Corporation Name
Monarch Dental Associates
-------------------------------
TIN#: 75-2632188
-------------------------
Witness: /s/ RUSS VENO
-----------------
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION,
INC.
Date: By:
--------- ----------------------------------
Witness:
--------------------------
8
<PAGE> 9
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT A
The Company will reimburse the Primary Care Dentist for Basic Dental Services
provided to Covered Persons in accordance with the provisions below:
A. The Primary Care Dentist will be paid monthly on a capitation basis not
to exceed the Utilization Maximum. The Utilization Maximum will be based
upon the number of Covered Persons and the group contractholder
utilization pattern for each Covered Person's DMO Coverage Plan. The
group contractholder utilization pattern is determined by The Company
pursuant to its utilization review analysis.
B. Supplemental monthly payments on a capitation basis may be made by The
Company to the Primary Care Dentist if, based on analysis of encounter
information, The Company determines that the payment in item A., above,
is inadequate with regard to the services provided by the Primary Care
Dentist pursuant to this Agreement. The Company will determine whether
supplemental monthly payments will be made and the appropriate amount of
such payments.
C. Monthly compensation payment factor is for the period April 1, 1997
thru March 31, 1998. Monthly compensation payment factor will be
for the period April 1, 1998 thru March 31, 1999.
(Payment includes an allowance for Periodontal Scaling and Root
Planing. Therefore, no additional compensation will be paid by The
Company for Periodontal Scaling and Root Planing procedures.)
D. Supplemental compensation of per encounter will be paid quarterly.
This compensation will be calculated based on the number of encounters
received by the DMO during a specified quarter, limited to one encounter
per patient, per visit.
E. A minimum income guarantee for the following services, subject to plan
provisions:
Partial Denture
Complete Denture
Individual Crowns
Bridges, Per Unit
Therefore, if the patient's applicable co-payment for an eligible crown,
bridge unit, partial or complete denture is less than the amount listed
above, the DMO will supplement your income for the difference on a per
claim basis. These payments will be included in the calculation of your
earnings per hour.
If the patient is covered under Plan Code U10, the total supplemental
guarantee will be considered, less for office visit copayments
collected from two visits. To remain consistent, we will use two visits
as the standard for all supplemental payments.
9
<PAGE> 10
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT B
The Company agrees to compensate the Primary Care Dentist, in addition to any
compensation described in Attachment A of the Primary Care Dentist Agreement, to
perform certain specified Specialty Dental Services -- ORAL SURGERY AND
PERIODONTICS as described in this Attachment B.
1. The Primary Care Dentist agrees that all Specialty Dental Services
shall be performed in accordance with guidelines established by The
Company.
2. Primary Care Dentist will annually submit a fee schedule acceptable to
The Company (on a form as supplied or acceptable to The Company)
listing your current fees, as described for those Specialty Dental
Services requiring a copayment.
3. This Attachment may be terminated, without cause, by the Primary Care
Dentist or The Company by giving sixty (60) days advance written
notice. Any breach of the provisions of this Attachment or of the
Primary Care Dentist Agreement will constitute grounds for immediate
termination of this Attachment by The Company.
4. Primary Care Dentist agrees to submit to The Company encounter
information on forms supplied by or acceptable to The Company. The
forms shall show all Specialty Dental Services provided to each Covered
Person and the copayment amounts collected from Covered Persons.
Encounter information shall be submitted at least monthly.
5. If Primary Care Dentist determines that a service is not eligible for
benefits based on DMO guidelines, the patient should be advised before
proceeding. If Primary Care Dentist and the patient agree to proceed
with an ineligible service, the patient will be responsible for your
fee.
6. If a Specialty Dental Service has a copayment, the Primary Care Dentist
is entitled to collect the copayment from the Covered Person. The
copayment is calculated by applying the Covered Person's copayment
percent to the Primary Care Dentist's usual fee for that Specialty
Dental Service. The Primary Care Dentist will collect the copayment
amount directly from the Covered Person. The copayment amounts are in
addition to reimbursements received by the Primary Care Dentist from The
Company. Office visit copayments may also apply to some plans regardless
of the amount of copayment applicable to specific procedures. The
amount, if any, of office visit copayments are as shown in the Dental
Office Guide.
7. If You determine that a specialty service must be referred to a DMO
specialist for completion, compensation to the specialist shall be
handled by your office. Since you have received compensation for the
service, you will be responsible for the compensation paid to the
referring specialist.
<PAGE> 11
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT B CONTINUED
8. You will be paid of the base and retroactive compensation paid
to You for Basic Dental Services. The compensation would be applicable
for ORAL SURGERY AND PERIODONTICS Specialty Services. The amount will be
calculated on a monthly basis depending on your base and retroactive
compensation for the applicable month.
IN WITNESS WHEREOF, the parties hereto have executed this Attachment. The
Contracting Dentist will return the signed Attachment to the Regional Dental
Director.
CONTRACTING DENTIST:
Name: Warren F. Melamed DDS
Date 3-19-97 By: /s/ WARREN F. MELAMED DDS
--------------------------------
Group Dental Practice or Corporation Name
Monarch Dental Associates
Witness: /s/ Russ Veno
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION, INC.
Date: By:
------------- --------------------------------------------
Witness
----------------------
<PAGE> 12
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT C
The Company agrees to compensate the Primary Care Dentist, in addition to any
compensation described in Attachment A of the Primary Care Dentist Agreement,
to perform certain specified Specialty Dental Services - ENDODONTICS as
described in this Attachment C.
1. Primary Care Dentist agrees that all Specialty Dental Services shall be
performed in accordance with guidelines established by The Company.
2. This Attachment may be terminated, without cause, by the Primary Care
Dentist or The Company by giving sixty (60) days advance written notice.
Any breach of the provisions of this Attachment or of the Primary Care
Dentist Agreement will constitute grounds for immediate termination of
this Attachment by The Company.
3. Upon completion of Specialty Dental Service(s), a form (as supplied or
acceptable to The Company) listing the Specialty Dental Service(s)
provided to Covered Person and the copayment amount(s) collected from
Covered Persons for such Services, if any, is to be submitted to The
Company. Primary Care Dentist shall, upon request, furnish such
additional information as may reasonably be required by The Company,
including, but not limited to, charts, radiographs and study models.
4. If Primary Care Dentist determines that a service is not eligible for
benefits based on DMO guidelines, the patient should be advised before
proceeding. If Primary Care Dentist and the patient agree to proceed
with an ineligible service, the patient will be responsible for your
fee.
5. The Company will reimburse Primary Care Dentist for Specialty Dental
Services provided to Covered Persons in accordance with the provisions
below.
A. If a Specialty Dental Service does not have a copayment,
The Company will reimburse Primary Care Dentist the
Scheduled Benefit Amount for that Specialty Dental
Service shown below. The Primary Care Dentist agrees to
accept the Scheduled Benefit Amount as the maximum
payment for that Specialty Dental Service.
B. If a Specialty Dental Service has a copayment the
Primary Care Dentist is entitled to collect the
copayment from the Covered Person as specified in the
Dental Office Guide. The copayment amounts for the
listed dental procedures shall be determined as either a
fixed dollar amount per specified procedure or as a
percentage of the Scheduled Benefit Amount shown
below. The Company will reimburse the Primary Care
Dentist the difference between the Scheduled Benefit
Amount and the copayment. The Company will inform the
Primary Care Dentist of the applicable copayment
amount for a particular Covered Person.
C. Office visit copayments may also apply to some plans
regardless of the amount of copayment applicable to
specific procedures. The amount, if any, of office visit
copayments are as shown in the Dental Office Guide.
<PAGE> 13
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT C CONTINUED
LIST OF SPECIALTY DENTAL SERVICES
ENDODONTICS
SERVICE DESCRIPTION SCHEDULED BENEFIT AMOUNT
- ------------------- ------------------------
Molar Root Canal Therapy and Retreatment, started
on or after 4/1/97
Other Endodontic Procedures Authorized by Company *
*Scheduled Benefit Amount to be determined by Company on an individual basis.
IN WITNESS WHEREOF, the parties hereto have executed this Primary Care Dentist.
The Contracting Dentist will return the signed Primary Care Dentist to the
Regional Dental Director.
CONTRACTING DENTIST:
Name: Warren F. Melamed DDS
-------------------------
Date 3-19-97 By: /s/ WARREN F. MELAMED DDS
----------------------------
Group Dental Practice or Corporation Name
Monarch Dental Associates
---------------------------
Witness: /s/ Russ Veno
---------------
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION, INC.
Date: By:
------------------ -------------------------
Witness
----------------
<PAGE> 14
Effective Date: April 1, 1997
PRIMARY CARE DENTAL AGREEMENT
ATTACHMENT D
The following offices will provide dental services under this contract.
Monarch Dental Associates - Monarch Dental Associates -
North Dallas Lewisville
6757 Arapaho Road, Suite 777 1288 West Main #123
Dallas, TX 75248 Lewisville, TX 75067
Monarch Dental Associates - Monarch Dental Associates -
Garland Hulen
3325 E. Beltline Road 6261 Granbury Road
Garland, TX 75044 Ft. Worth, TX 76132
Monarch Dental Associates - Monarch Dental Associates -
Mesquite Denton
3501 Towne Crossing Boulevard, 2201 I-35 E. South
Suite 180 Denton, TX 76205
Mesquite, TX 75150
Monarch Dental Associates - Monarch Dental Associates -
Plano N. Richland Hills
3303 N. Central Expressway, Suite 250 6455 Hilltop Drive
Plano, TX 75023 North Richland Hills, TX 76180
Monarch Dental Associates - Monarch Dental Associates -
Irving Lake Highlands
3401 W. Airport Freeway, Suite 206 10505 Church Road
Irving, TX 75062 Dallas, TX 75238
Monarch Dental Associates - Redbird
3235 W. Camp Wisdom Road
Dallas, TX 75237
Monarch Dental Associates - Ridgmar
6909 Green Oaks Road
Ft. Worth, TX 76116
Monarch Dental Associates - Carrollton
2540 Old Denton Road, Suite 188
Carrollton, TX 75006
Monarch Dental Associates - Downtown
723 North Olive Street
Dallas, TX 75201
Monarch Dental Associates - Bedford
1717 Airport Freeway
Bedford, TX 76021
Monarch Dental Associates - West Plano
5068 West Plano Parkway, Suite 122
Plano, TX 75093
<PAGE> 15
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT E
The Company agrees to compensate the Primary Care Dentist, in addition to any
compensation described in Attachment A of the Primary Care Dentist Agreement,
to perform certain specified Specialty Dental Services - ORTHODONTICS as
described in this Attachment D.
1. The Primary Care Dentist agrees that all Specialty Dental Services
shall be performed in accordance with guidelines established by The
Company.
2. This Attachment may be terminated, without cause, by the Primary Care
Dentist or The Company by giving sixty (60) days advance written notice.
Any breach of the provisions of this Attachment or of the Primary Care
Dentist Agreement will constitute grounds for immediate termination of
this Attachment by The Company.
3. If you determine that a service is not eligible for benefits based on
DMO guidelines, the patient should be advised before proceeding. If you
and the patient agree to proceed with an ineligible service, the patient
will be responsible for your fee.
4. The Company will reimburse the Primary Care Dentist for Specialty
Dental Services provided to Covered Persons in accordance with the
provisions below.
A. If a Specialty Dental Service does not have a copayment, The
Company will reimburse the Primary Care Dentist in accordance
with the Scheduled Benefit Amount for that service shown below.
The Primary Care Dentist agrees to accept the Scheduled Benefit
Amount as the maximum payment for that Specialty Dental
Service.
B. If a Specialty Dental Service has a copayment, the Primary
Care Dentist is entitled to collect the copayment from the
Covered Person as specified in the Specialty Dental Office
Guide. The copayment amounts for the listed dental procedures
shall be determined as either a fixed dollar amount per
specified procedure or as a percentage of the Scheduled Benefit
Amount shown below. The Company will reimburse the Primary Care
Dentist the difference between the Scheduled Benefit Amount and
the copayment. The Company will inform the Primary Care Dentist
of the applicable copayment amount for a particular Covered
Person.
C. The Company's portion of the Scheduled Benefit Amount shall be
considered to be incurred by The Company in equal installments
over the duration of treatment. Company will pay two quarterly
installments to Primary Care Dentist upon installation of the
initial orthodontic appliance and will pay the remaining
installments quarterly thereafter providing treatment continues
and the patient remains covered in the Coverage Plan.
<PAGE> 16
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT E (CONTINUED)
LIST OF COVERED SPECIALTY DENTAL SERVICES
ORTHODONTICS
<TABLE>
<CAPTION>
SCHEDULED
DESCRIPTION BENEFIT AMOUNT
- ----------- --------------
<S> <C>
Interceptive Orthodontic Treatment of the $
Primary Dentition*
Interceptive Orthodontic Treatment of the $
Transitional Dentition*
Comprehensive Orthodontic Treatment of the $
Adolescent Dentition*
</TABLE>
[The Comprehensive Orthodontic Treatment case can vary from 18 to 30 months.
Cases that are less than 18 months or more than 30 months will be prorated.]
* Scheduled Benefit Amount includes orthodontic evaluation, treatment plan,
consultation, exam, pre and post treatment records (x-rays, tracings,
photos, models, etc.) and retention.
** The Interceptive Treatment Scheduled Benefit Amount is considered to be
included in the Scheduled Benefit Amount for Comprehensive Treatment unless
a minimum of twelve months has elapsed between the date treatment ends for
interceptive and the date treatment starts for Comprehensive.
IN WITNESS WHEREOF, the parties hereto have executed this Attachment. The
Contracting Dentist will return the signed Attachment to the Regional Dental
Director.
CONTRACTING DENTIST:
Name: /s/ WARREN F. MELAMED MS.
---------------------------------
Date: By: /s/ WARREN F. MELAMED MS.
-------------------------- -----------------------------------
Group Dental Practice or Corporation
Name
MONARCH DENTAL ASSOCIATES
Witness: ---------------------------------------
-----------------------
PRUDENTIAL DENTAL MAINTENANCE
ORGANIZATION, INC.
Date: By:
-------------------------- ------------------------------------
Witness:
-----------------------
<PAGE> 1
EXHIBIT 10.18
DENTACARE
DENTAL SERVICE AGREEMENT
BETWEEN
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
ADVANCE DENTAL MANAGEMENT
This Dental Service Agreement ("AGREEMENT") is made and entered into
this first day of January, 1995, by and between Compcare Health Services
Insurance Corporation, a Wisconsin stock insurance corporation ("COMPCARE") and
Advance Dental Management ("DENTAL GROUP"). Compcare and Dental Group recognize
the desirability and need for finding efficient and economical methods of
delivering quality dental care. Accordingly, this Agreement sets forth the
terms under which Dental Group shall so deliver Dental Services to Participants.
ARTICLE 1. DEFINITIONS. The following terms, when used in this Agreement and
all Amendments hereof and Attachments hereto, are defined as follows.
1.1 "CAPITATION" means the monthly amount to be paid to Dental Group for the
Participants entitled to Dental Services, including the supplemental
advance payments made to the Dental Group. In addition, Capitation shall
include the amount to be paid to Dental Group for the Participants
enrolled at the Midwest Dental - LaCrosse location entitled to Specialty
Services. The amount of Capitation is set forth in Attachment A which is
attached hereto and made a part hereof.
1.2 "DENTAL CARE PLAN" means any dental care plan offered by Compcare, doing
business as Dentacare, which makes available to enrolled Participants a
limited range of dental care services performed by Dentists selected by
Compcare. Additional Dental Care Plans may be added upon thirty (30)
days prior written notice to Dental Group, unless within thirty (30)
days following receipt of the notice, Dental Group notifies Compcare in
writing that it does not wish to participate in the additional Dental
Care Plans.
1.3 "DENTAL GROUP" means the service corporation which is party to this
Agreement identified as Advance Dental Management which has taken full
responsibility of the duties herein for those facilities identified on
Attachment B which is attached hereto and made a part hereof.
1.4 "DENTAL SERVICE" means those services, procedures, supplies and
appliances to which a Participant is entitled under a Subscriber
Contract, excluding those services defined as Specialty Services.
1.5 "DENTIST" means a licensed Doctor of Dental Surgery or a licensed
Doctor of Medical Dentistry.
1.6 "DEPENDENT" means the legal spouse of the Subscriber and their children
who are eligible Dependents as Dependent is defined in the Subscriber
Contract.
1.7 "GROUP" means any employer group, association or other entity which
applies and is accepted for coverage under the Dental Care Plan.
1.8 "GROUP DENTIST" means a Dentist who is contractually associated with or
employed by Dental Group or one of its affiliates or subsidiaries.
1.9 "PARTICIPANT" means the Subscriber or any of Subscriber's Dependents
determined by Compcare to be eligible for Dental Service under this
Agreement.
1.10 "SERVICE AREA" means the area within fifty (50) miles of Dental Group's
facilities set forth in Attachment B hereto.
<PAGE> 2
1.11 "SPECIALTY SERVICE" means those services which are classified as
orthodontics, and have been agreed upon by Dental Group and Compcare as
services which will be referred to a Dentist of Compcare's choosing,
with the exception of those Specialty Services required by a Participant
enrolled at the Midwest Dental - Lacrosse facility which are the
responsibility of the Dental Group pursuant to the terms of this
Agreement
1.12 "SUBSCRIBER" means a member of an enrolled Group whom the Group has
reported to Compcare as eligible for Dental Service under a Group
Subscriber Contract or a person with whom Compcare has entered into an
individual Subscriber Contract.
1.13 "SUBSCRIBER CONTRACT" means a Group or individual contract under
which Subscribers and their eligible Dependents are entitled to receive
Dental Service under the Dental Care Plan.
ARTICLE 2. DENTAL GROUP'S RESPONSIBILITIES.
2.1 Dental Group shall provide Dental Services to those Subscribers and
their Dependents who are enrolled in a Dental Care Plan. Dental Group
shall also adhere to the administrative procedures as outlined in the
Dentacare Office Manager's Manual and any Amendments thereto.
2.2 For those Subscribers and their Dependents who have selected the
Midwest Dental - LaCrosse facility (as identified in Attachment B
hereto) to provide their Dental Services, Dental Group shall provide
said Subscribers and Dependents with Specialty Services.
2.3 Dental Group shall provide for the availability of Dental Service at
such time at such locations and upon such terms and conditions as shall
be agreed upon by Dental Group and Compcare. Dental Group specifically
agrees to schedule appointments for routine examinations, recall, and
preventative therapy within six (6) weeks of the request therefor, and
appointments for emergency treatment within twenty-four (24) hours of
the request therefor. Dental Group agrees to maintain twenty-four (24)
hour telephone answering service or other such mechanism to receive
emergency calls.
2.4 With the exception of existing agreements between Dental Group and its
affiliate service corporations Midwest Dental Care Sheboygan, S.C. and
Midwest Dental Care Mondovi, S.C., Dental Group shall not subcontract or
delegate its duties hereunder unless Compcare shall so approve in
writing. Neither the engagement of consultants by Dental Group to assist
Dental Group in providing Dental Service to a Participant nor the
referral of Participants as provided in the Subscriber Contract shall be
deemed to be subcontracting or delegating of Dental Group's duties
hereunder. Dental Group shall be solely responsible for the payment of
the charges of such consultants and of the Dentists to whom such
referrals are made if such referral is necessary for the Dental Group to
fulfill its responsibilities in providing Dental Services. Under no
circumstances shall Dental Group be entitled to any compensation beyond
that specified in Article 4. In the event Dental Group becomes insolvent
or suffers financial difficulties, the claims of such consultants shall
have priority over claims of Dental Group.
2.5 Dental Group shall refer Participants only to licensed Providers
("REFERRAL PROVIDERS") who have both the requisite skill to deliver
the covered Dental Service and the minimum amount of malpractice
insurance required by Compcare in Article 7.1.; or only to Dentists who
have been identified as the Dentist of Compcare's choosing to provide
Specialty Services.
2.6 Dental Group shall provide prostheses and cast restorations to
Participants and, under Subscriber Contracts wherein laboratory charges
are not a Dental Service, shall charge Participants for dental
prostheses and cast restorations the lesser of the laboratory's actual
charges therefor or such amounts as Compcare determines to be the
prevailing fee for such items. In the event Dental Group performs any
work on such items which would otherwise be performed in a dental
laboratory, the total charge to
2
<PAGE> 3
Participants shall be the lesser of Dental Group's actual charges
therefor or the aforementioned prevailing fee.
2.7 With the singular exception of the Midwest Dental - LaCrosse facility
(pursuant to Article 2.2 herein), Dental Group agrees to refer any
Participant requiring Specialty Services to a Dentist of Compcare's
choosing.
2.8 For those Participants enrolled at the Midwest Dental - LaCrosse
facility, Dental Group agrees that its total copayment charge to a
Participant, or to a Subscriber on behalf of a Participant, for the
course of orthodontic treatment shall not exceed the amount specified
as the Participant's liability in the applicable Subscriber Contract.
2.9 Dental Group agrees that during the term of this Agreement neither it
nor any of its partners, officers, directors, or employees will
directly or indirectly try to persuade any Subscriber or enrolled
Group to terminate their participation in this Dental Care Plan or to
obtain their dental care under or from some other plan, program, or
carrier.
2.10 Dental Group agrees that it, its partners, officers, directors,
employees, agents, or any affiliate, including but not limited to
Midwest Dental Plan, Ltd., Midwest Dental Care Sheboygan, S.C., and
Midwest Dental Care Mondovi, S.C., shall not directly or indirectly use
any records or information supplied by Compcare to the Dental Group to
solicit the sale of insurance or other products or services. Either
upon termination of this Agreement or a request by Compcare, the
Dental Group shall destroy or deliver to Compcare, as per the
instructions of Compcare, any records in the possession of the Dental
Group that contain confidential or proprietary information of Compcare
or the Dental Care Plan.
2.11 Dental Group shall not contract to provide services to any other
prepaid dental organization or any prepaid medical plan, or to provide
services on a prepaid basis to any self-funded dental or medical plan,
if such other contract will affect Dental Group's ability to provide
adequate services to either existing Participants or potential new
Participants. Dental Group shall provide Compcare within thirty (30)
days of Compcare's request therefor a listing of all health maintenance
organizations, limited service health organizations, preferred provider
organizations, self-funded dental or medical plans, and other alternate
delivery systems with which Dental Group has contracted to provide
dental services.
2.12 Dental Group agrees not to extend to any such organization or plan
financial arrangements which are more advantageous to such organization
or plan than those arrangements expressed herein.
2.13 Dental Group acknowledges that Compcare is relying on the Dental
Group's ability to provide the services required under this Agreement.
In order to assure the availability of Dental Services to Participants,
the Dental Group agrees to advise Compcare of any limitations upon the
ability of the Dental Group to provide Dental Services to Compcare
Participants as soon as such limitations become known to the Dental
Group. Compcare reserves the right to indicate such limitations in its
marketing materials and efforts, and to request of the Dental Group a
written plan to cure such limitations.
2.14 Dental Group shall notify Compcare of the Dentists who are affiliated
with the Dental Group, and the type of affiliation the Dentist has with
Dental Group. Furthermore, the Dental Group shall provide timely notice
of any changes to these affiliations, including staffing structure
and/or ownership of specific dental offices or dental practices.
2.15 Dental Group agrees that each Participant who has elected Dental Group
should be allowed to select an available Group Dentist as his or her
personal Dentist for coordinating his or her overall dental care. In
the event there is a breach of a satisfactory patient/Dentist
relationship between a Participant and a Group Dentist, Dental Group
may request that Compcare disenroll the Participant. Dental Group
3
<PAGE> 4
acknowledges that Wisconsin insurance regulations require Compcare to
give the Participant an opportunity to select an alternate Group
Dentist, make a reasonable effort to assist the Participant in
establishing a satisfactory patient/Dentist relationship, and inform the
Participant that he or she may file a grievance on the matter. Dental
Group further acknowledges that Compcare is prohibited from disenrolling
any Participant solely on the grounds that the Participant failed to
follow a prescribed course of treatment or because the Participant
failed to keep a scheduled appointment.
2.16 Dental Group shall provide Compcare with advance written notice of
Dental Group's intention to relocate any facility identified on
Attachment B hereto or establish any new office or facility for the
delivery of Dental Services. Such new location or facility shall not be
a part of the Dental Care Plan covered under this Agreement unless and
until Dental Group applies to Compcare for the inclusion of such
location or facility in the Dental Care Plan and Compcare provides
written approval of such inclusion.
2.17 Dental Group shall comply with the proration and transfer of copayments
as specified in the Dentacare Office Manager's Manual as it applies to
the Midwest Dental - LaCrosse facility. This proration and transfer of
copayments shall take place within thirty (30) days of transfer of a
Participant from one Provider to another Provider or within thirty (30)
days of termination of the Participant's coverage. The obligation to
comply with the proration schedule as outlined in the Dentacare Office
Manager's Manual survives the termination of this Agreement as outlined
in Article 9.
2.18 Dental Group specifically acknowledges that Compcare does not practice
dentistry, and that Dental Group is solely responsible for all clinical
decisions regarding treatment of Participants under Dental Group's care,
notwithstanding receipt by Dental Group of any denial, authorization, or
recommendation issued by Compcare.
2.19 Dental Group warrants that it is able to bind Group Dentists to the
terms and conditions expressed herein, and that it acts as the Group
Dentists' agent in the execution of this Agreement.
ARTICLE 3. COMPCARE'S RESPONSIBILITIES.
3.1 Compcare shall perform its usual administrative, accounting, enrollment
and other functions that are necessary and appropriate for the
administration of this Dental Care Plan and this Agreement.
3.2 Compcare shall furnish Dental Group with a list of the names of all
Participants who are eligible for Dental Services under the Subscriber
Contracts and have elected or been assigned to receive Dental Services
from Dental Group, and shall revise and update such lists on a periodic
basis.
3.3 Compcare shall not intervene in any manner with the rendition of Dental
Services by Dental Group, it being agreed that Dental Group shall have
the sole responsibility in connection therewith, subject to Compcare's
Quality Assurance Program and utilization review practices, and that
nothing herein contained shall interfere with the professional
relationship between a Participant and a Participant's Dentist.
3.4 Compcare shall act as final arbiter in the resolution of any financial
dispute between Providers, which dispute arises from the transfer or
termination of a Participant.
3.5 With the exception of the Midwest Dental - LaCrosse facility, Compcare
shall be responsible for the cost of Specialty Services provided the
following two conditions are satisfied:
3.5.1 the referral of such services is provided with a written
referral to a Dentist of Compcare's choosing; and
3.5.2 the referral is specific to services not within the realm of
Dental Services which are the Dental Group's responsibility to
provide.
4
<PAGE> 5
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
ARTICLE 4. COMPENSATION OF DENTAL GROUP.
4.1 For any of the Dental Services provided pursuant to this Agreement, and
for Specialty Services provided at the Midwest Dental - LaCrosse
facility, Compcare agrees that on or before the 15th day of each month
that this Agreement is in effect or at such other times as Compcare and
Dental Group may agree, Compcare will pay to Dental Group a Capitation
for each Participant who for more than fifteen (15) days of that month
subscribes to the Dental Care Plan and is served by Dental Group.
4.2 With the exception of any copayments, coinsurance, deductibles, or
charges for noncovered services, Dental Group agrees that fees will not
be collected from or charged to Participants for Dental Services. Dental
Group understands that the Capitation payments it receives from Compcare
pursuant to this Article 4 constitute payment in full for Dental
Services, even in the event such payments prove insufficient to cover
all Dental Group's costs or fees of providing such services.
4.3 Compcare retains the exclusive right to assign Participants to Dental
Group for the provision of Dental Services covered by this Agreement and
to transfer Participants assigned to or served by Dental Group to a
different dental group affiliated with the Dental Care Plan. In the
event Compcare assigns or transfers a Participant to or from Dental
Group, Compcare shall adjust the Capitation paid under Article 4.1 to
account for the change in the number of Participants served by Dental
Group.
4.4 Compcare retains the right to retroactively adjust Capitation payments
to reflect additions and deletions in the Participant count caused by
clerical error such as a group's erroneous or untimely reporting of
covered employees. In the event Compcare recovers Capitation amounts
previously paid resulting in Dental Group having provided services to an
ineligible Participant, Dental Group will pursue payment for its usual
and customary charges directly from the Participant. If reasonable
collection efforts prove to be unsuccessful, then Compcare agrees to
reimburse Dental Group at ___ percent (___) of the usual, customary
and reasonable level of payment for such services rendered.
4.5 On an annual basis Compcare and Dental Group will review Capitation and
advance payments contractually agreed upon, and determine the financial
arrangement which will extend the financial terms one additional year
from the period identified in Attachment A of the Agreement. The terms
of Attachment A in effect shall continue in effect until such time as
the parties determine and agree upon the revised financial terms. Any
extension of financial terms shall be identified in an annual amendment
to this Agreement.
4.6 Compcare, at its option, may assume sole responsibility for collecting
coordination of benefits recoveries and shall be allowed to keep any and
all such recoveries. In the event Compcare assumes this responsibility,
Dental Group agrees to cooperate fully with Compcare's collection
efforts, including transferring payments received from other insurers to
Compcare. The foregoing shall not be construed to confer upon Dental
Group any rights to subrogation, workers' compensation, or other third
party claims, it being understood that the rights to all such claims
belong exclusively to Compcare with any resultant recoveries to be
applied towards reduction of future premium.
ARTICLE 5. RECORDS AND REPORTS.
5.1 Compcare shall maintain such records and establish and adhere to such
procedures as shall be reasonably required to ascertain the number and
identity of Participants.
5.2 Compcare and Dental Group shall each maintain in accordance with
standard and accepted accounting practices such financial and accounting
records as shall be necessary, appropriate or convenient for the
determination of the financial experience of each in participating in
this Dental Care Plan.
5
<PAGE> 6
5.3 Dental Group shall provide statistical records to Compcare of
utilization of Dental Services by Participants in such form and detail
as shall be reasonably requested by Compcare. Such utilization records
shall be furnished to Compcare on a timely basis not later than the
month after Dental Services are rendered. Should Dental Group fail to
provide utilization records on a timely basis, Compcare shall have the
right, at Dental Group's expense, to inspect and audit Dental Group's
utilization and dental records at the offices of Dental Group and/or its
Group Dentists.
5.4 Compcare and Dental Group shall each have the right upon request to
inspect at any reasonable time all accounting and administrative books
and records maintained by the other pertaining to this Dental Care Plan
and this Agreement, provided Compcare or Dental Group do not deem such
books and records to be confidential.
5.5 Dental Group shall provide Compcare with financial and accounting
information relating to those aspects of its operation which pertain to
this Dental Care Plan and this Agreement in such form and detail as
Compcare shall reasonably request. Compcare shall at all reasonable
times have access to the books and records in which such financial and
accounting information is recorded.
5.6 Dental Group and Compcare agree that all Participants' dental records
shall be treated as confidential to such extent as to comply with all
State and Federal laws regarding the confidentiality of patient's
records. Subject to the foregoing sentence, Compcare shall have the
right, upon request, to inspect at all reasonable times any dental
records pertaining to Participants.
5.7 To the extent permitted by State and Federal laws and regulations
regarding confidentiality, upon termination of this Agreement, at the
express written request of the Participant and at the expense of the
Participant and Compcare, copies of all patient records in the
possession of Dental Group shall be transferred in accordance with the
directions in the written request. Expenses associated with copying of
patient records shall be limited to the actual costs incurred by Dental
Group. However, in the event this Agreement is terminated by Dental
Group all expenses associated with the copying and transferring of
patient records shall be the responsibility of Dental Group.
ARTICLE 6. NON-PARTICIPANT PATIENTS.
6.1 Dental Group reserves the right to the extent compatible with the
rendition of Dental Service to Participants to provide its services to
persons who are not Participants.
ARTICLE 7. INSURANCE.
7.1 Dental Group shall, at its sole cost and expense, procure and maintain
policies of insurance, including general risk insurance, from an
insurance company approved by Compcare and in amounts adequate and
necessary to perform Dental Group's responsibilities under this
Agreement. Furthermore, Dental Group shall, at its own cost and expense,
procure and maintain malpractice insurance in an amount not less than
$1,000,000 for injury to or death of any one person in any one year, and
in an amount not less than $3,000,000 for injury to or death of more
than one person in any one year. Insurance described in this Article 7
must provide coverage to Dental Group, its Group Dentists, their staff,
agents and employees, as appropriate. Evidence of all such insurance
shall be provided to Compcare upon request. Dental Group shall
immediately notify Compcare of any restrictions, changes, cancellations
or terminations of any of the insurance described in this Article 7.
7.2 Upon request, Dental Group shall provide Compcare a written summary of
how Dental Group is assured that all Group Dentists, their staff, agents
and employees will acquire and maintain adequate liability insurance,
including malpractice insurance and general liability insurance. Dental
Group shall immediately notify Compcare of any restrictions, changes,
cancellations or terminations of such insurance.
6
<PAGE> 7
7.3 Compcare shall, at its own cost and expense, maintain policies of
general liability and other insurance in amounts adequate and necessary
to perform Compcare's responsibilities under this Agreement. Evidence of
such insurance will be provided to Dental Group upon request.
ARTICLE 8. QUALITY ASSURANCE.
8.1 Compcare will establish a Quality Assurance Program for review of the
nature and extent of Dental Services provided by Dental Group to
Participants. Dental Group agrees to comply with reasonable procedures
and recommendations set forth as a result of the Quality Assurance
Program and its associated Quality Assurance Reviews, if any. Dental
Group shall be furnished copies of the findings resulting from such
reviews and shall be entitled to meet with the person or persons who
make such findings. Dental Group consents to the use of any data or
information obtained by virtue of Article 5 as it pertains to this
Dental Care Plan for the purposes of such review.
8.2 Dental Group shall immediately provide Compcare with a copy of any
written complaint or description of any grievance received from a
Participant. Any complaints or grievances received by Compcare with
respect to the provision of Dental Service by Dental Group will be
recorded and resolved in accordance with Compcare's regular grievance
procedures.
8.3 During the term of this Agreement, each Group Dentist and any other
employee, staff member or agent of the Dental Group shall maintain any
licensure required by any state(s) law(s) necessary for performance of
his or her duties under this Agreement, and shall remain in good
standing with any appropriate regulatory agency. Dental Group shall
provide information requested by Compcare pertaining to any Dental Group
member's educational background, clinical experience, satisfaction of
continuing dental education requirements, licensure, and board
qualifications or certification(s).
ARTICLE 9. TERMS OF AGREEMENT.
9.1 This Agreement shall be in effect on January 1, 1995, and shall continue
in effect until either of the parties terminates this Agreement in
accordance with this Article 9.1. Either party may terminate this
Agreement by giving the other party at least ninety (90) days prior
written notice. Notwithstanding the foregoing, Compcare reserves the
right to terminate this Agreement, or prevent the participation of a
specific facility identified on Attachment B in any Dental Care Plan, at
any time upon thirty (30) days prior written notice should Dental Group
or any specific facility identified on Attachment B fail to follow
Compcare's Quality Assurance Program.
9.2 During the period following the delivery of any notice as provided in
this Article 9, and until the time when this Agreement is to terminate
pursuant to such notice, all terms and conditions of this Agreement and
any Amendments hereof or Attachments hereto shall continue in full force
and effect and be binding upon the parties hereto just as if no notice
of termination had been given.
9.3 This Agreement shall terminate in the event of the termination of all
of the Subscriber Contracts assigned to the Dental Group.
9.4 Dental Group shall have no obligation to any Participant after the
termination of this Agreement provided, however, that Dental Group shall
complete any specific Dental Service, such as crowns, endodontics,
and/or prosthodontics, commenced prior to, but incomplete at such
termination. It is further agreed that Dental Group shall continue to
provide Dental Service, including Specialty Services provided at the
Midwest Dental - LaCrosse facility, to Participants covered under
Subscriber Contracts existing on the termination date until the
expiration or renewal of such contracts, as well as for any period of
time the Dental Care Plan is required by state or federal law to provide
an extension of insurance coverage.
7
<PAGE> 8
Compcare shall reimburse Dental Group for Dental Services provided
during such periods of extension at the capitation rate in effect just
prior to the termination of this Agreement.
9.5 The termination of this Agreement shall be survived by all rights,
duties, responsibilities and obligations contained herein relating to
any occurrence prior to termination of this Agreement.
ARTICLE 10. MISCELLANEOUS.
10.1 Dental Group will indemnify and hold harmless Compcare and its
Affiliates and their directors, officers, and employees from any and all
claims, liabilities, damages or other costs in any way resulting from,
incident to, or arising out of acts or omissions of Dental Group
constituting criminal conduct, negligence or willful misconduct. This
indemnification shall survive the termination of this Agreement.
10.2 Compcare will indemnify and hold harmless Dental Group from any and all
claims, liabilities, damages or other costs in any way resulting from,
incident to, or arising out of acts or omissions of Compcare
constituting criminal conduct, negligence or willful misconduct. This
indemnification shall survive the termination of this Agreement.
10.3 This Agreement shall in no way be construed in a manner which shall
provide any rights to Participants or to increase the duties or
responsibilities of the parties hereto beyond the requirements
established by Subscriber Contracts, it being agreed that the sole
purpose of this Agreement is to establish the respective rights and
duties of the parties hereto, each to the other, and that the rights of
each Participant are derived solely from the respective Participant's
Subscriber Contract.
10.4 No provision of this Agreement is intended to create nor shall be deemed
or construed to create any relationship between the parties to this
Agreement other than that of independent contractors contracting with
each other hereunder solely for the purpose of effecting the provisions
of the Agreement and to implement the success of this Dental Care Plan.
10.5 Neither of the parties hereto nor any of their respective employees
shall be construed to be the agent, employee or representative of the
other.
10.6 Dental Group agrees that Compcare may use in Compcare's promotional
advertising and marketing material Dental Group's name, address and
telephone number and the name, address, telephone number and description
of areas of dental practice of Dental Group's Group Dentists. Dental
Group may use Compcare's and/or Dentacare's name(s) and logo(s) provided
Dental Group obtains Compcare's prior written approval as to the
specific use.
10.7 Dental Group shall not assign this Agreement without the prior written
consent of Compcare. This includes, but is not limited to:
10.7.1 an assignment which is part of the sale by the Dental Group of
any of its facilities and/or practice;
10.7.2 an assignment due to operational changes or restructuring of
the Dental Group; and
10.7.3 the sale or transfer of fifty-one percent (51%) or more of
Dental Group's capital stock by any of Dental Group's
shareholders.
An attempted assignment without the prior written consent of Compcare
shall be void.
10.8 All notices which are or may be required to be given by one party to the
other in connection with this Agreement and the transactions
contemplated thereby shall be in writing and shall be deemed to have
been properly given if and when delivered personally or sent by
certified mail, return receipt requested, addressed, if to Compcare, to:
8
<PAGE> 9
President
Compcare Health Services Insurance Compensation
401 West Michigan Street
Milwaukee, Wisconsin 53203
and if to Dental Group, to:
President
Advance Dental Management
680 Hehli Way
Mondovi, WI 54755
10.9 Dental Group shall not commence any action at law against Compcare to
recover on any claim arising out of this Agreement more than two (2)
years after the events which gave rise to such claim occurred.
10.10 This Agreement constitutes the entire agreement between the parties
hereto pertaining to the subject matter hereof and supersedes all prior
and contemporaneous agreements, understandings, negotiations, and
discussions, oral or written, between the parties pertaining to the
subject matter hereof. There are no other warranties, representations or
agreements except as specifically set forth herein.
10.11 The failure of any of the parties to insist upon strict performance of
any of the terms of this Agreement shall not be deemed a waiver of any
of their respective rights or remedies and shall not be deemed a waiver
of any subsequent breach of, or default in, any of the terms contained
in this Agreement.
10.12 This Agreement shall be interpreted under the laws of the State of
Wisconsin. If any clause, phrase, paragraph, section or Article of this
Agreement shall be held to be invalid by any court of competent
jurisdiction, the remaining portions of this Agreement not affected
thereby shall remain in full force and effect so long as the material
rights and obligations of the parties are not adversely affected.
10.13 Neither party shall be liable for any failure or delay in its
performance under this Agreement, which is due in whole or in part to
any cause beyond its control.
10.14 The parties shall keep the terms of the Agreement confidential.
Furthermore, neither party shall disclose or release any data,
information or material obtained in connection with this Agreement to
any other person, natural or corporate, without the prior written
consent of the other party.
10.15 This Agreement may be amended only by a writing signed by the parties
hereto, except that additional Dental Care Plans may be added pursuant
to Article 1.2.
10.16 Any capitalized heading preceding the text of the Articles hereto are
inserted solely for the convenience of reference and shall not
constitute a part of this Agreement or affect its meaning, construction
or effect.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the date specified on the first page herein:
COMPCARE HEALTH SERVICES
INSURANCE CORPORATION ADVANCE DENTAL MANAGEMENT
By: /s/ ROGER A. FORMISANO By: [ILLEGIBLE]
----------------------- ----------------------
Roger A. Formisano
President
Title: President
Date: 10-12-95 Date: 9-27-95
10
<PAGE> 11
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
ATTACHMENT A
TO THE
DENTACARE DENTAL SERVICE AGREEMENT
BETWEEN
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
ADVANCE DENTAL MANAGEMENT
Set forth herein are the financial terms for the Agreement between
Compcare and the Dental Group to be effective January 1, 1995.
I. The Capitation to be paid to the Dental Group in each month for each
Participant according to the Dental Care Plan in which such Participant
is enrolled is as follows:
<TABLE>
<CAPTION>
Effective Effective Effective
January 1 January 1 January 1
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
A. Dentacare
1. Dentacare 100 $ $ $
(Contract Codes 408,
411, 414, 415, 441,
444, 446, 447, 448,
453, 499, 4DN)
2. Dentacare 180 $ $ $
(Contract Code 479)
B. Smile Plus
1. Smile Plus $ $ $
(Contract Codes 494,
497, 4DG, 4DJ)
2. Smile Plus II $ $ $
(Contract Codes 404,
498, 4DH)
C. Dentacare Classic
(Contract Code 4DF) $ $ $
D. HMO Dental Supplement
(Contract Code 450) $ $ $
</TABLE>
11
<PAGE> 12
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
II. In addition to the Capitation paid as identified in Section I, the
Dental Group shall be paid a supplemental rate for Specialty Services
each month for each Participant according to the Dental Care Plan in
which such Participant is enrolled at the Midwest Dental - LaCrosse
facility as follows:
<TABLE>
<CAPTION>
Effective Effective Effective
January 1 January 1 January 1
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
A. DENTACARE
1. Dentacare 100 $ $ $
$ /$ Ortho Copay
(Contract Codes 411,
414, 415, 446, 448,
453)
2. Dentacare 100 $ $ $
$ /$ Ortho Copay
(Contract Codes 408,
441, 444, 447, 499,
4DB, 4DN)
3. Dentacare 180 $ $ $
$ Ortho Copay
(Contract Code 479,
4DC)
B. SMILE PLUS/HMO DENTAL SUPPLEMENT
$ Max Ben. $ $ $
(Contract Codes 404,
450, 494, 497, 498,
4DG, 4DH, and 4DJ)
</TABLE>
III. The Dental Group shall be responsible out of the Capitation for
reimbursement of the following Dental Services subject to the terms and
conditions set forth in this Agreement and the Subscriber Contract:
A. Dental Services provided to a Participant by the Dental Group;
B. Dental Services provided to a Participant by a Dentist to whom
the Participant was referred by a member of the Dental Group;
C. The first $ ___ of fees under a Subscriber Contract when such
fees are for emergency Dental Services provided to a Participant
by a Dentist located outside the Service Area; and
Reimbursement for Specialty Services provided for Participants enrolled
at the Midwest Dental - LaCrosse facility shall also be the
responsibility of the Dental Group out of the Capitation.
12
<PAGE> 13
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
IV. In the event this Agreement is terminated by either party or should any
facility set forth in Attachment B discontinue the provision of Dental
Services, Compcare retains the right to withhold ___ percent (__%) of
the Dental Group's Capitation payment applicable to the last month
Dental Services are provided by the terms of this Agreement. This amount
shall be held in reserve for six (6) months to account for any
retroactivity in enrollment. Should adjustments to Capitation be less
than the amount held in reserve or result in a reserve exceeding the
original withhold of ___ percent (__%), Compcare shall pay Dental Group
the amount of the reserve within thirty (30) days of the end of the six
(6) month period. Should the adjustments to Capitation exhaust the
aforementioned reserve and result in a balance due to Compcare, Dental
Group shall reimburse Compcare this amount within thirty (30) days of
the end of the six (6) month period. The rights, duties,
responsibilities, and obligations contained in this Section IV. of
Attachment A shall survive termination of this Agreement.
V. Within ten days of the start of 1995, Compcare shall pay to the Dental
Group the sum of $_______. Within ten days of the start of 1996,
Compcare shall pay to the Dental Group the sum of $_______. Within ten
days of the start of 1997, Compcare shall pay to the Dental Group the
sum of $_______. Such payments are based on the volume of participants
enrolled with the Dental Group, and reflect the discounted capitation
rates set forth in Section I and Section II above.
VI. Should the provision of Dental Services, by Dental Group or any
facility(s) set forth in Attachment B to the Agreement, discontinue for
any reason, Dental Group shall pay to Compcare a penalty. Such penalty
shall be calculated as follows. Compcare shall first calculate the
period of time to be applicable to such a penalty. This period shall be
defined by the initial month when Dental Group or any facility(s) set
forth in Attachment B discontinue(s) the provision of Dental Services,
through the month of December, 1997. Compcare shall then calculate the
total dollar penalty attributable to the number of months in such period
multiplied by $______. The resulting total shall then be multiplied by
the percentage that the number of Participants who were enrolled at the
affected facility(s) bears to the total number of Participants enrolled
with the Dental Group during the last month Dental Services were
provided at the facility(s) to arrive at the actual penalty to be paid
by the Dental Group. Dental Group must pay such penalty within thirty
(30) days of notification by Compcare of the amount of the penalty.
Compcare reserves the right to recover such penalty by way of an offset
against the Dental Group's future Capitation payments.
VII. On or before May 1, 1995, Compcare shall evaluate January 1995 through
March 1995 enrollment levels at the Dental Group's four (4) facilities
located in Madison, Wisconsin for the following groups: Meriter
Hospital, St. Mary's Hospital, and U.W. Board of Regents. These
enrollment levels will be compared to an evaluation of January 1994
through March 1994 enrollment levels of the same facilities and employer
groups to determine a ratio. This ratio will be multiplied by $______ to
determine an amount to be paid to the Dental Group before May 1, 1995.
To illustrate this calculation, if such ratio is equivalent to one
(1.00), Compcare shall pay to the Dental Group $_______($______ x 1.00 =
$______); if such ratio is equivalent to .75, Compcare shall pay to the
Dental Group $_______($______ x .75 = $______); and if such ratio is
1.50, Compcare shall pay to the Dental Group $______($_______ x 1.50 =
$______).
VIII. On or before August 15, 1995, Compcare shall evaluate the weighted
average member satisfaction levels specifically for appointment
availability for all facilities of the Dental Group based on the
Dentacare member satisfaction surveys issued during 1995. The weighting
of the average shall be dependant on enrollment levels at each facility
during the month surveys are mailed to Members. If the weighted average
satisfaction level meets or exceeds an _____ level, Compcare shall pay a
bonus to the Dental Group on or before August 15, 1995, as follows:
Less than ..........
............
13
<PAGE> 14
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
............ $
............ $
and above .......... $
IX. On or before August 15, 1996, Compcare shall evaluate the weighted
average member satisfaction levels specifically for appointment
availability for all facilities of the Dental Group based on the
Dentacare member satisfaction surveys issued during 1996. The weighting
of the average shall be dependent on enrollment levels at each facility
during the month surveys are mailed to Members. If the weighted average
satisfaction level meets or exceeds an level, Compcare shall pay
a bonus to the Dental Group on or before August 15, 1996, as follows:
..........
........... $
........... $
........... $
.......... $
X. On or before August 15, 1997, Compcare shall evaluate the weighted
average member satisfaction levels specifically for appointment
availability for all facilities of the Dental Group based on the
Dentacare member satisfaction surveys issued during 1997. The
weighting of the average shall be dependent on enrollment levels at
each facility during the month surveys are mailed to Members. If the
weighted average satisfaction level meets or exceeds an level,
Compcare shall pay a bonus to the Dental Group on or before August 15,
1997 as follows:
..........
..........
..........
..........
..........
XI. The financial arrangements set forth in this Attachment A shall extend
to and be binding upon the successors and assignees of the respective
parties hereto, however, Dental Group may only assign its rights,
responsibilities or obligations under this Agreement in accordance
with Article 10.7 of the Agreement.
14
<PAGE> 15
ATTACHMENT B
TO THE
DENTACARE DENTAL SERVICE AGREEMENT
BETWEEN
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
ADVANCE DENTAL MANAGEMENT
Midwest Dental - Appleton
418 College Avenue
Appleton, WI 54916
Midwest Dental - Eau Claire (South)
2115 East Clairmont Avenue
Eau Claire, WI 54701
Midwest Dental - Eau Claire North
3300 Birch Street
Eau Claire, WI 54701
Midwest Dental - Fond du Lac
885 Western Avenue, Suite 300
Fond du Lac, WI 54935
Midwest Dental - Fox River Mall
4301 West Wisconsin Avenue
Appleton, WI 54915
Midwest Dental - Green Bay (West)
844 Willard Drive
Green Bay, WI 54304
Midwest Dental - Green Bay East
1825 South Webster Avenue
Green Bay, WI 54301
Midwest Dental - Kiel
603 Fremont Street
Kiel, WI 53042
Midwest Dental - LaCrosse
1210 Horton Street
LaCrosse, WI 54601
Midwest Dental - Madison East
4793 Hayes Road
Madison, WI 53704
Midwest Dental - Madison West
648 South Gammon Road
Madison, WI 53719
15
<PAGE> 16
Midwest Dental - Manitowoc
1010 Maritime Drive
Manitowoc, WI 54220
Midwest Dental - Menomonie
700 Wolske Bay Road, Suite 150
Menomonie, WI 54751
Midwest Dental - Merrill
2402 East Main Street
Merrill, WI 54452
Midwest Dental - Mondovi
680 Hehli Way
Mondovi, WI 54755
Midwest Dental - Neenah
852 Fox Point Plaza
Neenah, WI 54956
Midwest Dental - Oshkosh
1050 South Koeller Street
Oshkosh, WI 54901
Midwest Dental - Plymouth
1415 Eastern Avenue
Plymouth, WI 53073
Midwest Dental - Sheboygan
3709 Kohler Memorial Drive
Sheboygan, WI 53081
Midwest Dental - Stevens Point
2740A Stanley Street
Stevens Point, WI 54481
Midwest Dental - Wausau
605 24th Avenue South
Suite 10
Wausau, WI 54401
First Dental - Madison
4200 University Avenue, Suite 2010
Madison, WI 53705
16
<PAGE> 1
EXHIBIT 11.1
MONARCH DENTAL CORPORATION, INC. AND SUBSIDIARIES
UNAUDITED NET INCOME PER COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Primary and fully diluted earnings per share
Net income.................................................. $ 674,654
==========
Shares:
Weighted average common shares issued..................... 8,614,550
Assuming exercise of options, reduced by the number of
common shares which could have been purchased with the
proceeds from exercised of such options................ 44,567
Assuming conversion of Convertible Participating Preferred
Stock.................................................. 4,800,000
Assuming conversion of Series A preferred stocks.......... --
----------
Weighted average number of common shares outstanding as
adjusted............................................... 13,459,117
==========
Net income per common share................................. $ .0501
==========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
April 2, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,059,337
<SECURITIES> 0
<RECEIVABLES> 5,107,114
<ALLOWANCES> 1,676,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,682,373
<PP&E> 7,423,040
<DEPRECIATION> 2,741,097
<TOTAL-ASSETS> 32,905,823
<CURRENT-LIABILITIES> 8,677,014
<BONDS> 0
9,313,315
0
<COMMON> 62,675
<OTHER-SE> (5,471,000)
<TOTAL-LIABILITY-AND-EQUITY> 32,905,823
<SALES> 0
<TOTAL-REVENUES> 35,980,260
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,391,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,686,392
<INCOME-PRETAX> 1,100,120
<INCOME-TAX> 425,466
<INCOME-CONTINUING> 674,654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 674,654
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
