<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------------
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 10, 1998
MONARCH DENTAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 0-22835 51-0363560
- --------------------------------------------------------------------------------
(State or Other (Commission (IRS Employer
Jurisdiction File Number) Identification No.)
of Incorporation)
4201 Spring Valley Road, Suite 320, Dallas, Texas 75244
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code(972) 702-7446
N/A
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On September 10, 1998, Monarch Dental Corporation (the "Company")
acquired Valley Forge Dental Associates, Inc. ("Valley Forge"), a King of
Prussia, Pennsylvania based dental practice management company, which operates
57 dental offices with 130 dentists. The acquisition was structured as a merger
between a subsidiary of the Company and Valley Forge. The Company intends to
continue to operate Valley Forge as a dental practice management company.
In the acquisition, the Company issued 1,559,111 shares of the
Company's common stock, par value $.01 per share, to the former stockholders of
Valley Forge, and assumed approximately $42 million in debt and other related
costs. The purchase price was determined by negotiations between the parties.
The Company utilized its Credit Facility to repay certain of Valley Forge's
indebtedness at closing.
Item 5. Other Events.
In conjunction with the acquisition of Valley Forge, the Company
renegotiated its Credit Facility with a bank syndicate. Under the new
agreement, the Company's credit line increased to $75 million from $30 million.
The terms and conditions of the Credit Facility remained the same.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Audited Consolidated Financial Statements of Valley Forge
Dental Associates, Inc.
(1) Report of PRICEWATERHOUSECOOPERS LLP, Independent
Accountants.
(2) Consolidated Balance Sheet as of December 31, 1996
and 1997.
(3) Consolidated Statement of Operations for the period
from September 19, 1995 (date of inception) to
December 31, 1995 and the Twelve Month Periods Ended
December 31, 1996 and 1997.
(4) Consolidated Statement of Changes in Stockholders'
(Deficit) Equity for the period from September 19,
1995 (date of inception) to December 31, 1995 and the
Twelve Month Periods Ended December 31, 1996 and 1997.
(5) Consolidated Statement of Cash Flows for the period
from September 19, 1995 (date of inception) to
December 31, 1995 and the Twelve Month Periods Ended
December 31, 1996 and 1997.
(6) Notes to Consolidated Financial Statements.
Unaudited Consolidated Financial Statements of Valley Forge
Dental Associates, Inc.
(1) Consolidated Balance Sheet as of June 30, 1998.
(2) Consolidated Statements of Operations for the Six
Month Periods Ended June 30, 1997 and 1998.
(3) Consolidated Statement of Changes in Stockholders'
(Deficit) Equity for the Six Months Ended June 30,
1998.
(4) Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 1997 and 1998.
(5) Notes to Interim Consolidated Financial Statements.
2
<PAGE> 3
(b) Pro Forma Financial Information.
(1) Monarch Dental Corporation Pro Forma Consolidated
Statement of Income (Unaudited) for the Year Ended
December 31, 1997.
(2) Monarch Dental Corporation Pro Forma Consolidated
Statement of Income (Unaudited) for the Nine Month
Period Ended September 30, 1998.
(3) Notes to Pro Forma Consolidated Statements of Income
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of September
1, 1998, by and among Monarch Dental Corporation,
Valley Forge Dental Associates, Inc., DFV Acquisition
Corp. and certain stockholders of Valley Forge Dental
Associates, Inc. *
2.2 Registration Rights Agreement *
2.3 Employment Agreement for Joseph J. Frank *
2.4 Consent of PRICEWATERHOUSECOOPERS LLP, Independent
Accountants
* Previously filed
3
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Valley Forge Dental Associates, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' (deficit)
equity and of cash flows present fairly, in all material respects, the
financial position of Valley Forge Dental Associates, Inc. and its subsidiaries
(the "Company") at December 31, 1996 and 1997, and the results of their
operations and their cash flows for the period from September 19, 1995 (date of
inception) to December 31, 1995, and for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
April 23, 1998
4
<PAGE> 5
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ......................... $ 567,779 $ 1,298,034
Accounts receivable, net .......................... 1,452,377 4,652,981
Prepaid expenses and other current
assets ........................................... 97,183 465,792
Deferred tax assets ............................... 29,217 490,545
------------ ------------
Total current assets .............................. 2,146,556 6,907,352
Property and equipment, net ........................ 883,556 5,130,880
Excess of cost over fair value of
tangible assets acquired and other
intangible assets, net ............................ 8,704,686 47,509,380
Other assets ....................................... 203,316 1,264,527
------------ ------------
$ 11,938,114 $ 60,812,139
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Current portion of long-term debt,
including amounts due related parties
of $743,653 and $3,426,110
at December 31, 1996 and 1997, respectively .... $ 776,379 $ 3,648,995
Current portion of obligations under
capital lease .................................. 126,692 386,351
Accounts payable ................................. 395,323 3,616,206
Accrued expenses and other current
liabilities .................................... 1,744,442 7,199,120
Other accrued liabilities ........................ 1,270,882 312,409
Income taxes payable ............................. 172,000 133,969
------------ ------------
Total current liabilities ........................ 4,485,718 15,297,050
Long-term debt, including amounts due
related parties of $6,210,859 and $35,063,189
at December 31, 1996 and 1997 respectively ....... 6,286,616 40,182,184
Obligations under capital lease .................... 324,078 677,999
Other long-term liabilities ........................ 167,400 208,333
Deferred income taxes .............................. 327,164 764,829
------------ ------------
Total liabilities ................................ 11,590,976 57,130,395
------------ ------------
Commitments and contingencies (Note 16)
Mandatorily redeemable preferred stock, $.01 par
value, plus accrued dividends of $80,000 and
$144,000 at December 31, 1996 and 1997
respectively; authorized:
1,000,000 shares; issued: 8,000 shares, 8%
cumulative dividends (Note 12).................... 880,000 944,000
Mandatorily redeemable common stock, 199,677
shares issued and outstanding at December 31,
1997 (Note 13) ................................... 1,137,414
Stockholders' (deficit) equity
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,792,500 and 4,463,092 shares
issued and outstanding at December 31, 1996
and 1997, respectively. (Note 11) .............. 37,925 44,631
Capital in excess of par value ................... 540,075 4,103,523
Accumulated deficit .............................. (1,110,862) (2,547,824)
------------ ------------
Total stockholders' (deficit)
equity ....................................... (532,862) 1,600,330
------------ ------------
$ 11,938,114 $ 60,812,139
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 19,
1995
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net patient revenues ....................... $ 989,103 $ 15,448,459 $ 36,817,614
------------ ------------ ------------
Cost of revenues:
Dental compensation ...................... 115,430 3,426,740 8,812,333
Auxiliary compensation ................... 370,044 5,428,996 11,443,271
Laboratory fees and dental supplies ...... 130,181 1,880,792 4,293,309
General and administrative expenses ...... 641,018 4,164,137 9,524,813
Depreciation ............................. 32,889 160,626 494,183
Amortization of intangible assets ........ 26,342 278,904 1,048,774
------------ ------------ ------------
Total cost of revenues ..................... 1,315,904 15,340,195 35,616,683
------------ ------------ ------------
Income (loss) from operations .............. (326,801) 108,264 1,200,931
Interest expense:
Related parties .......................... 28,465 436,442 1,874,235
Other .................................... 12,718 58,567 204,212
------------ ------------ ------------
Loss before taxes .......................... (367,984) (386,745) (877,516)
Income taxes ............................... -- 276,133 13,000
------------ ------------ ------------
Net loss ................................... (367,984) (662,878) (890,516)
Accretion of mandatorily redeemable common
stock (Note 13) .......................... 482,446
Dividends on preferred stock ............... 16,000 64,000 64,000
------------ ------------ ------------
Net loss applicable to common shares ....... $ (383,984) $ (726,878) $ (1,436,962)
============ ============ ============
Historical Information:
Net loss per common share, basic and
diluted .............................. $ (.10) $ (.19) $ (.35)
============ ============ ============
Weighted average shares outstanding, basic
and diluted .......................... 3,760,343 3,791,250 4,130,204
============ ============ ============
Unaudited Pro Forma Information:
Net loss ................................. $ (954,516)
============
Net loss per common share, basic and
diluted .............................. $ (.23)
============
Weighted average shares outstanding, basic
and diluted .......................... 4,130,204
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- CAPITAL IN
PAR EXCESS OF ACCUMULATED
SHARES VALUE PAR VALUE DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Common stock issued September 19, 1995 .... 3,500,000 $ 35,000 $ 315,000 $ 350,000
Common stock issued to officers and
employees ............................. 100,000 1,000 9,000 10,000
Net loss applicable to common shares ...... $ (383,984) (383,984)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 ................ 3,600,000 36,000 324,000 (383,984) (23,984)
Common stock issued to officers and
employees ............................. 180,000 1,800 16,200 18,000
Common stock issued in connection with
acquisitions .......................... 12,500 125 199,875 200,000
Net loss applicable to common shares ...... (726,878) (726,878)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 ................ 3,792,500 37,925 540,075 (1,110,862) (532,862)
Common stock issued in connection with
acquisitions .......................... 670,592 6,706 3,563,448 3,570,154
Net loss applicable to common shares ...... (1,436,962) (1,436,962)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ................ 4,463,092 $ 44,631 $ 4,103,523 ($2,547,824) $ 1,600,330
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 19, 1995 YEAR ENDED YEAR ENDED
(INCEPTION) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $ (367,984) $ (662,878) $ (890,516)
Adjustments to reconcile net loss to net cash provided
Depreciation and amortization .......................... 59,231 439,530 1,542,957
Provision for doubtful accounts ........................ 46,401 369,646 1,077,768
Deferred income taxes .................................. 114,133
Change in assets and liabilities, net of effects from
business acquired:
Accounts receivable .................................... (47,025) (1,246,744) (3,515,445)
Prepaid expenses and other current assets .............. (46,123) (64,237) (718,951)
Other assets ........................................... (96,936) (107,210) (1,061,211)
Accounts payable ....................................... 74,644 206,444 3,129,748
Accrued expenses and other liabilities ................. 259,572 767,604 3,360,080
Income taxes payable ................................... -- 162,000 (38,031)
Other .................................................. -- -- 35,399
------------ ------------ ------------
Net cash provided by (used in) operating activities .... (118,220) (21,712) 2,921,798
------------ ------------ ------------
Cash flows from investing activities:
Payments for purchases of businesses, net of cash
acquired of $70,000 in 1995, $67,000 in 1996 and
$207,000 in 1997 ..................................... (1,686,832) (3,814,574) (27,362,693)
Purchases of property and equipment .................... (5,367) (301,468) (1,762,070)
------------ ------------ ------------
Net cash used in investing activities ................ (1,692,199) (4,116,042) (29,124,763)
------------ ------------ -------------
Cash flows from financing activities:
Issuance of common stock ............................... 360,000 18,000 500
Issuance of preferred stock ............................ 800,000 -- --
Borrowings of long-term debt ........................... 780,000 5,199,236 28,843,366
Principal payments on long-term debt ................... (4,688) (511,445) (1,643,720)
Principal payments on capital lease obligations ........ (24,644) (100,507) (266,926)
------------ ------------ ------------
Net cash provided by financing activities ............ 1,910,668 4,605,284 26,933,220
------------ ------------ ------------
Net increase in cash and cash equivalents .............. 100,249 467,530 730,255
Cash and cash equivalents at beginning of period ....... -- 100,249 567,779
------------ ------------ ------------
Cash and cash equivalents at end of period ............. $ 100,249 $ 567,779 $ 1,298,034
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid .......................................... $ 12,718 $ 136,025 $ 346,718
============ ============ ============
Taxes paid ............................................. $ 51,031
============
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations entered ...................... $ 4,159 $ 179,931 $ 887,852
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND OPERATIONS
Valley Forge Dental Associates, Inc., a Delaware corporation (the
"Company"), was formed to provide practice management services to
multi-specialty dental practices. The Company commenced operations on September
19, 1995 with the acquisition of the assets of MT Associates, a Pennsylvania
general partnership. As of December 31, 1997, after making additional
acquisitions (see Note 4), the Company had fifty-five dental offices in nine
markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in the states in which the Company operates, the
Company does not own dental practices but instead has the contractual right to
designate, in its sole discretion and at any time, the licensed dentist who is
the owner of the capital stock of the professional corporation at a nominal
cost ("Nominee Arrangements"). In addition, the Company enters into exclusive
long-term management services agreements with the professional corporations.
Through the Management Services Agreements, the Company has exclusive authority
over decision making relating to all major ongoing operations of the underlying
professional corporations with the exception of the professional aspects of the
practice of dentistry as required by state law. Under the Management Services
Agreements, the Company establishes annual operating and capital budgets for
the professional corporations and compensation guidelines for the licensed
dental professionals. The Management Services Agreements have initial terms of
forty years. The method of computing the management fees varies by contract.
Management fees are based on either (i) billings of the affiliated practice
less the amounts necessary to pay professional compensation and other
professional expenses or (ii) a license fee per location, reimbursement of
direct costs, reimbursement of marketing costs plus a markup, and a flat
administrative fee. In all cases, these fees are meant to compensate the
Company for expenses incurred in providing covered services plus a profit.
These interests are unilaterally saleable and transferable by the Company and
fluctuate in value based upon the actual performance of the operations of the
professional corporations.
Through the Nominee Arrangements, the Company has a significant long-term
financial interest in the affiliated practices and, therefore, consolidates the
results of the affiliated practices with those of the Company. Because the
Company presents consolidated financial statements, net patient service
revenues are presented in the accompanying statement of operations. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.
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, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and short-term investments with original maturities of 90 days or less.
9
<PAGE> 10
Revenue Recognition
Net patient revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages
for multi-visit procedures are based on historical treatment protocols and
patterns and are updated on a periodic basis.
Under certain managed care contracts, diagnostic and preventive dental
services are provided for a fixed rate per- member per-month capitated fee, and
other dental services as defined in the contracts are performed under an agreed
upon fee schedule to member patients. Capitated revenues are recorded in the
month for which the member is entitled to service (see Note 16).
Dental Compensation Agreements
Dentists are employed by the professional corporations which provide dental
services at the affiliated dental office locations. Dentists are typically
compensated under the two types of arrangements described below.
Under the first type of compensation arrangement, which represents 0%, 42%
and 50% of dental compensation for the periods ended December 31, 1995, 1996
and 1997, respectively, the dentist is paid a variable fee for dental services.
This fee typically represents between 30% and 45% of the dental office's net
revenues or net collections, depending upon the contract with the dentist.
Under the second type of compensation arrangement, which represents 100%, 58%
and 50% of dental compensation for the periods ended December 31, 1995, 1996
and 1997, respectively, the dentist is paid based on a fixed contract amount.
These contract amounts take the form of salary, per diem or hourly wages. In
addition, certain contracts contain bonus provisions. During the periods ended
December 31, 1995, 1996 and 1997, dentists earned bonuses under the terms of
the compensation contracts of approximately $7,000, $350,000 and $700,000,
respectively.
The Company is responsible for the billing and collection of the revenue
related to the services provided at the dental offices as well as for paying
all expenses of the dental offices, including arranging for payment of the
payroll of the professional corporations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the lesser of the Company's incremental borrowing rate, or the
implicit rate of the lease, as appropriate.
Long-Lived and Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. Deferred taxes have been recorded to the extent of differences between
the fair value and the tax basis of the assets acquired and liabilities
assumed. The excess of the purchase price over the fair value of tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
life of the intangible assets which range from three to twenty-five years.
Allocation of intangible assets between identifiable intangibles and goodwill
was performed by Company management with the assistance of independent
appraisers. Intangible assets include patient lists, assembled workforce,
covenants not to compete and goodwill.
The Company reviews the realizability of long-lived assets, certain
intangible assets and goodwill whenever events or circumstances occur which
indicate recorded costs may not be recoverable. In estimating future cash
flows for determining whether an asset is impaired, and in measuring assets
that are impaired, assets are grouped by geographic region. The Company also
reviews the overall recoverability of goodwill based primarily on estimated
future undiscounted cash flows.
10
<PAGE> 11
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit
will be realized.
Other Accrued and Other Long-Term Liabilities
The balances under other accrued and other long-term liabilities represent
amounts due to former owners, consisting of final payments of purchase price
for completed acquisitions, accruals for contingent earnouts, and adjustments
to purchase price related to working capital guarantees as provided in the
agreements.
Fair Value of Financial Instruments
Other than long-term debt, recorded balances of financial instruments at
December 31, 1996 and 1997 approximate estimated fair market values.
The fair value of long-term debt, including current portion, is estimated
based on quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of same maturities.
The estimated fair value of the Company's long-term debt instruments is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Long-term debt
including current portion $ 7,062,995 $ 7,381,146 $43,831,179 $43,766,521
=========== =========== =========== ===========
</TABLE>
Historical Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), which establishes new standards for
computing and presenting earnings per share by replacing the presentations of
weighted shares outstanding, inclusive of common stock equivalents, with a dual
presentation of basic and diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the dilutive effect of all
stock options, shares contingently payable in connection with certain
acquisitions and convertible debentures. All prior period earnings per share
information has been restated in accordance with SFAS 128.
Shares issued for nominal consideration during 1996 (177,500 shares) have
been included in outstanding shares for all periods presented.
Basic and diluted unaudited Pro Forma Net Loss Per Common Share is computed
by dividing net loss applicable to common shares, without consideration to the
accretion of mandatorily redeemable common stock, by the weighted-average
number of shares of common shares outstanding for the period.
Reclassifications
Certain 1995 and 1996 balances have been reclassified to conform with the
1997 presentation.
11
<PAGE> 12
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
----------- -----------
<S> <C> <C>
Accounts receivable, net of contractual allowances .... $ 1,839,261 $ 6,198,652
Less: Allowance for doubtful accounts ................. (386,884) (1,545,671)
----------- -----------
$ 1,452,377 $ 4,652,981
=========== ===========
</TABLE>
Dental services are reimbursed directly by both patients and by third party
payors, including Medicaid, managed care organizations and commercial insurance
companies. There were no Medicaid revenues in 1995. Approximately 9.3% and 3.3%
of net revenues for 1996 and 1997, respectively, were directly billed to a
Medicaid program which is subject to Federal and state regulation. Third party
reimbursements are primarily billed at estimated amounts realizable based upon
contractually determined rates. In instances where "usual, customary and
reasonable" market rates are billed, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectibility.
4. ACQUISITIONS
On September 19, 1995, the Company acquired the assets of MT Associates, a
Pennsylvania general partnership, which owned the assets of five dental offices
located in northern Virginia and Pennsylvania. Since the initial acquisition and
through December 31, 1997, the Company has made twenty acquisitions consisting
of approximately fifty dental offices.
These acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to assets and
liabilities acquired based upon their estimated fair values at the dates of
acquisition. The results of operations of the acquired companies are included in
the consolidated financial statements from the respective dates of acquisition.
Information with respect to businesses acquired in purchase transactions was
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 19, 1995
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------------ ------------ -------------
<S> <C> <C> <C>
Cash paid (net of cash acquired of $70,000 in
1995, $67,000 in 1996 and $207,000 in 1997) ....... $ 1,686,832 $ 3,499,390 $ 26,020,253
Notes issued and amounts payable to former owners .... 1,197,720 588,026 6,389,679
Common and mandatorily redeemable stock issued ....... 200,000 4,146,381
------------ ------------ ------------
2,884,552 4,287,416 36,556,313
Liabilities assumed .............................. 627,651 710,008 3,253,722
------------ ------------ ------------
3,512,203 4,997,424 39,810,035
Fair value of tangible assets acquired ........... (563,586) (511,864) (4,090,935)
------------ ------------ ------------
Excess of cost over fair value of
Tangible assets acquired and other
Intangible assets .............................. $ 2,948,617 $ 4,485,560 $ 35,719,100
============ ============ ============
</TABLE>
The following table summarizes the cash components of acquisition related
activity during the respective periods as follows:
<TABLE>
<CAPTION>
SEPTEMBER 19, 1995 YEAR ENDED YEAR ENDED
(INCEPTION) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1996 1997
------------------ ------------ ------------
<S> <C> <C> <C>
Cash paid for new acquisitions ... $ 1,686,832 $ 3,499,390 $26,020,253
Other cash payments .............. -- 315,184 1,342,440
----------- ----------- -----------
Total ............................ $ 1,686,832 $ 3,814,574 $27,362,693
=========== =========== ===========
</TABLE>
The other cash payments represent additional consideration relating to past
acquisitions in satisfaction of contractual arrangements (see Note 16).
12
<PAGE> 13
Subsequent to December 31, 1997, the Company made two acquisitions,
consisting of two dental offices. Purchase price relating to these acquisitions
aggregated approximately $1,906,000, consisting of cash, notes and shares of the
Company's common stock. Additional consideration could be paid in connection
with these acquisitions if specified financial criteria are attained (see Note
16). If these criteria are attained or exceeded the number of shares which
could be issued and cash which could be paid under agreements executed
subsequent to December 31, 1997, is 12,000 shares and $270,000, respectively.
The following unaudited pro forma consolidated results of operations of
the Company give effect to each of the acquisitions as if they occurred on
January 1, 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net revenues ................ $ 52,832,480 $ 58,865,835
Net loss .................... (2,634,968) (2,160,615)
Net loss per common share ... $ (.70) $ (.52)
</TABLE>
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisition been made as
of January 1, 1996, or the results which may occur in the future.
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
----------- -----------
<S> <C> <C>
Land and buildings ................................... $ 804,080
Dental equipment, including equipment under
capital lease ...................................... $ 726,166 2,785,928
Furniture and fixtures, automobiles and leasehold
improvements ....................................... 119,766 1,006,307
Data processing and office equipment ................. 231,139 1,222,263
----------- -----------
1,077,071 5,818,578
Less: Accumulated depreciation and amortization ...... (193,515) (687,698)
----------- -----------
$ 883,556 $ 5,130,880
=========== ===========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 7), for the period from September 19, 1995
to December 31, 1995, and for the years ended December 31, 1996 and 1997 totaled
$32,889, $160,626 and $494,183, respectively.
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------
USEFUL LIFE 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Excess of cost over fair value of net
assets acquired ................... 25 years $ 7,764,234 $ 42,603,881
Patient lists ....................... 25 years 1,100,000 5,828,218
Assembled workforce ................. 4 years 131,000 288,525
Covenants not to compete ............ 3-5 years 14,698 142,776
------------ ------------
9,009,932 48,863,400
Less: Accumulated amortization ...... (305,246) (1,354,020)
------------ ------------
$ 8,704,686 $ 47,509,380
============ ============
</TABLE>
Amortization of intangible assets for the period from September 19, 1995
to December 31, 1995, and for the years ended December 31, 1996 and 1997 totaled
$26,342, $278,904 and $1,048,774, respectively.
13
<PAGE> 14
7. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from five to seven years.
Equipment under capital leases, at cost and related accumulated amortization
included in property and equipment, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
----------- -----------
<S> <C> <C>
Dental and office equipment under
capital lease ................ $ 542,925 $ 1,314,763
Less: Accumulated amortization ..... (134,214) (334,298)
----------- -----------
$ 408,711 $ 980,465
=========== ===========
</TABLE>
Amortization of equipment under capital leases for the period from September
19, 1995 to December 31, 1995, for the years ended December 31, 1996 and 1997
was $27,204, $107,010 and $200,084, respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1998 ..................................... $ 484,371
1999 ..................................... 390,874
2000 ..................................... 254,913
2001 ..................................... 102,926
2002 ..................................... 12,135
Thereafter ............................... 1,484
-----------
1,246,703
Less: Amount representing interest ....... (182,353)
-----------
Present value of minimum lease payments... 1,064,350
Less: Current portion .................... (386,351)
-----------
$ 677,999
===========
</TABLE>
The Company maintains leases for dental offices and for certain of its
equipment which are accounted for as operating leases. The office lease terms
range from one to ten years, while the equipment terms range from one to four
years.
Future minimum annual rentals due under noncancellable operating leases in
excess of one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 .................... $2,220,219
1999 .................... 2,116,829
2000 .................... 1,795,535
2001 .................... 1,015,008
2002 .................... 644,326
Thereafter .............. 1,755,923
----------
$9,547,840
==========
</TABLE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $48,841, $697,481 and $1,671,611 was incurred during the
period from September 19, 1995 to December 31, 1995, and for the years ended
December 31, 1996 and 1997, respectively, and is included with general and
administrative expenses in the accompanying statement of operations.
14
<PAGE> 15
8. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable and Long-term Debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
------------ ------------
<S> <C> <C>
Discretionary line of credit
agreement, due the earlier of an
initial public offering of the
Company's common stock or April 21,
1999; interest accrues monthly at an
adjustable rate. Average rate
through December 31, 1997- 7.8% .......... $ 5,000,000
Subordinated notes payable to
principal stockholders, due the
earlier of an initial public
offering of the Company's common
stock or September 2005; interest
accrues at 9.0% .......................... $ 4,758,073 28,601,436
6.0% -- 10.0% subordinated and
subordinated convertible notes
issued in connection with
acquisitions, payable through 2003 ....... 2,196,462 9,887,863
8.0% -- 12.2% notes payable, secured
by equipment, payable through 2001 ....... 108,460 341,880
------------ ------------
7,062,995 43,831,179
Less: current portion .................... (776,379) (3,648,995)
------------ ------------
$ 6,286,616 $ 40,182,184
============ ============
</TABLE>
Scheduled maturities of long-term debt outstanding as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 . . . . . . $ 3,648,995
1999 . . . . . . 8,097,875
2000 . . . . . . 2,725,933
2001 . . . . . . 473,275
2002 . . . . . . 262,832
Thereafter . . . 28,622,269
-------------
$ 43,831,179
=============
</TABLE>
The subordinated notes payable to principal stockholders permit the Company
to borrow funds for acquisitions and general corporate purposes up to an
aggregate amount of $38,000,000. As of March 31, 1998, the amount outstanding
under the subordinated notes payable to principal stockholders was approximately
$31,100,000, including accrued interest.
The subordinated convertible notes provide the holders with the right at any
time to convert the outstanding principal of the note into shares of the
Company's $.01 par value common stock at $16.00 per share.
On October 23, 1997, the Company executed a $10,000,000 discretionary line
of credit agreement with a financial institution. The term of the agreement is
through the earlier of April 21, 1999 or the date of closing of an initial
public offering. Interest accrues monthly on outstanding balances based on an
adjustable rate as defined in the agreement. As of March 31, 1998, the amount
outstanding on the line of credit was $5,500,000.
15
<PAGE> 16
9. INCOME TAXES
The components of the income tax expense for the years ended December 31,
1996 and 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Current:
State ........ $162,000 $ 13,000
Deferred:
Federal ...... 82,709 --
State ........ 31,424 --
-------- --------
114,133 --
-------- --------
$276,133 $ 13,000
======== ========
</TABLE>
There was no provision for taxes during the period from September 19, 1995
(inception) to December 31, 1995.
The reconciliation of the Federal statutory income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 19, 1995
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------------ ------------ ------------
<S> <C> <C> <C>
Statutory income tax rate ............... (34)% (34)% (34)%
Amortization not deductible for income
tax purposes .......................... 2 15 18
Losses for which no income tax benefit is
recognized ............................ 32 57 20
Nondeductible business expenses ......... 2
State taxes ............................. 36 (2)
--- --- ---
Effective income tax rate ............... 0% 76% 2%
=== === ===
</TABLE>
The components of net deferred income tax assets and (liabilities) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Start up costs not currently deductible for tax
purposes .......................................... $ 86,572 $ 62,962
Accruals and reserves not currently deductible for
tax purposes ...................................... 195,859 702,196
Deferred revenues .................................... 6,728 149,349
Net operating loss carryforwards ..................... 80,400 109,896
----------- -----------
Gross deferred tax assets ............................ 369,559 1,024,403
Valuation allowance .................................. (340,342) (533,858)
----------- -----------
29,217 490,545
----------- -----------
Intangible assets .................................... (215,987) (586,547)
Other ................................................ (140,394) (178,282)
----------- -----------
Gross deferred tax liabilities ....................... (356,381) (764,829)
----------- -----------
Net deferred tax liabilities ...................... $ (327,164) $ (274,284)
=========== ===========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $265,000. Their use is limited to
future taxable earnings of the Company, and as specified in the Internal Revenue
Code, use of certain of the carryforwards totaling $135,000 is limited as they
were acquired by the Company in the purchase of stock of another company. The
carryforwards expire in varying amounts through 2010. A valuation reserve has
been established against the potential future benefit of the net operating loss
carryforwards and other deferred tax assets.
16
<PAGE> 17
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---------- ----------
<S> <C> <C>
Salaries and payroll taxes .... $ 831,364 $3,056,366
Professional service fees ..... 347,322 469,966
Interest ...................... 387,399 2,119,128
Balances due to patients ...... 710,023
Unearned revenue .............. 83,869 367,149
Other ......................... 94,488 476,488
---------- ----------
$1,744,442 $7,199,120
========== ==========
</TABLE>
11. STOCKHOLDERS' DEFICIT
At formation date, the Company issued an aggregate of 3,500,000 shares of
common stock at $.10 per share to four investment partnerships (the "principal
stockholders"); Foster Management Company is the management company for each of
the partnerships.
During the years ended December 31, 1996 and 1997, the Company issued 12,500
and 670,592 shares, respectively, of common stock in connection with
acquisitions. (See Note 13 for mandatorily redeemable common stock issued.) In
addition, during the year ended December 31, 1997, the Company granted options
to purchase 31,000 shares of common stock to two executive officers (see Note
14).
It is the Company's policy to record common stock at its fair value on the
date of issuance. In 1996, 177,500 shares were issued to employees at less
than fair value. The difference between the fair value and the issue price is
being amortized to compensation expense over the vesting period of the related
shares. Compensation expense in 1996 and 1997 was $4,015 and $4,015,
respectively. Deferred compensation at December 31, 1997 was $12,045.
12. MANDATORILY REDEEMABLE PREFERRED STOCK
The Company's principal stockholders are the sole owners of all of the
outstanding $.01 par value 8% cumulative mandatorily redeemable preferred stock
("Preferred Stock"). The Preferred Stock accumulates dividends at $8.00 per
share on an annual basis, and is mandatorily redeemable for cash at $100 per
share (the price paid at date of issuance) plus accumulated dividends at the
earlier of December 31, 1998 or at any time the common stock of the Company is
sold in a public offering. Accrued dividends at December 31, 1995, 1996, and
1997 totaled $16,000, $80,000 and $144,000, respectively.
13. MANDATORILY REDEEMABLE COMMON STOCK
In connection with certain acquisitions, the Company issued 199,677 shares of
common stock in 1997 pursuant to agreements giving the holders the right to put
the shares to the Company at prices which vary from $11-$16 per share. The
puts are rendered inoperative if the Company executes an initial public
offering of the Company's common stock prior to two to five years from the
dates of the respective acquisitions.
The mandatorily redeemable common stock was recorded at the fair value at the
dates of issuance. The excess of the respective put prices over the carrying
values are being accreted by periodic charges to additional paid-in capital, or
retained earnings as appropriate, over a two to five year period. As of
December 31, 1997, 199,677 shares of mandatorily redeemable common stock are
outstanding. During the year ended December 31, 1997, the Company recorded
$482,446 of accretion to retained earnings.
17
<PAGE> 18
14. EMPLOYEE BENEFITS
401(k) Plan
Effective February 1, 1997, the Company sponsors a 401(k) plan which permits
participants to make contributions by salary reduction pursuant to section
401(k) of the Internal Revenue Code. Employees may contribute up to 15% of
pretax income, subject to statutory limitations; this plan does not provide for
Company matching contributions.
Stock Options
Effective October 1, 1997, the Company approved a stock option plan ("Stock
Option Plan") for key employees and directors. The plan authorizes the grant of
up to 600,000 shares of the Company's common stock in the form of stock
options. Grant prices are determined by the Company and are established at or
above the fair market value of the Company's common stock at the date of grant.
During the year ended December 31, 1997, the Company granted options to
purchase 45,000 shares of common stock under the Stock Option Plan. These
options vest over a five-year period.
During the year ended December 31, 1997, the Company also granted 31,000
options to two executive officers not pursuant to the Company's stock option
plan. These options vest over a five-year period.
The following summarizes stock option activity for the year ended December
31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C> <C>
OPTIONS:
Granted and outstanding at December 31, 1997 76,000
OPTION PRICE PER SHARE RANGES:
Granted and outstanding at December 31, 1997 $3.12 -- $12.00
RANGE OF FAIR VALUES AT GRANT DATE:
Granted and outstanding at December 31, 1997 $0.21 -- $ 4.80
Options exercisable at December 31, 1997 --
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for the plan. The table below sets
forth the pro forma information as if the Company had adopted the compensation
recognition provisions of SFAS 123:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997
----
<S> <C>
Increase to:
Net loss ................... $1,400
Net loss per share ......... --
Assumptions:
Expected life (years) ...... 6.6
Risk-free interest
rate........................ 5.91% -- 6.54%
Volatility ................. 0%
Dividend yield ............. N/A
</TABLE>
The compensation recognition was calculated assuming the estimated fair
market value for the Company's common stock on the date of issuance. The
weighted average fair value of the stock options, calculated using the
Black-Scholes option pricing model, granted during the year ended December 31,
1997 was $0.16.
18
<PAGE> 19
Employee Stock Purchase Plan
On November 19, 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan ("ESPP"), which becomes effective January 1, 1998. The ESPP
allows eligible employees the right to purchase common stock on a semiannual
basis at the lower of 85% of the market price at the beginning or end of each
six-month offering period. The Company has committed up to 350,000 shares to
the Plan, which operates on a calendar basis.
15. RELATED PARTY TRANSACTIONS
The Company paid management fees of $5,000, $40,000 and $40,000 to Foster
Management Company and its affiliates during the period from September 19, 1995
to December 31, 1995, and for the years ended December 31, 1996 and 1997,
respectively. Additionally, the Company reimbursed Foster Management Company
$209,455 in 1995, $72,683 in 1996 and $41,368 in 1997 for outside professional
service and other fees and expenses incurred on its behalf.
Commencing December 1996, the Company leased space from an affiliated entity.
The rent expense under lease is equal to the amount paid by the affiliated
party under the leasehold agreement and was $5,281 for 1996 and $63,382 for
1997. In addition, starting in 1996, the Company entered into various space and
equipment lease agreements with former owners of acquired businesses; such
leases are at fair market value. In 1996, the Company paid $329,223 and
$95,612, respectively, under these agreements. In 1997, the Company paid
$642,398 for space lease agreements and $62,584 for equipment lease agreements.
The Company has agreed to pay Foster Management a fee of $500,000 for its
assistance in effecting the initial public offering (IPO) of the Company's
common stock, contingent upon the completion of such public offering. The
payments relate to services performed by Foster Management Company relating to
this offering, including: (1) financial and strategic planning and advice in
connection with the IPO; (2) assistance in the preparation and drafting of the
registration statement filed by the Company; (3) preparation of material for
the marketing (road show) of the offering; and (4) assistance with establishing
relationships between the Company and the investment banking community,
financial press and related public relations.
16. COMMITMENTS AND CONTINGENCIES
Contingent Consideration in Business Acquisitions
In connection with certain acquisitions (see Note 4), the Company has entered
into contractual arrangements whereby shares of Company stock, notes payable
and cash may be issued to former owners of acquired businesses upon attainment
of specified financial criteria over periods of 1 - 3 years as set forth in the
respective agreements. The amount of the shares, notes and cash to be issued
cannot be fully determined until the periods expire and the attainment of
criteria is established. If the criteria are attained, but not exceeded, the
amount of shares and notes which could be issued and cash which could be paid
under all agreements executed prior to December 31, 1997 is approximately
372,000 shares, $1,980,000, and $4,260,000, respectively. If the maximum
targets were achieved, the amount of shares and notes which could be issued and
cash which could be paid under agreements executed prior to December 31, 1997
is 444,000 shares, $3,010,000 and $4,850,000, respectively. The Company
accounts for this additional consideration, when the specified financial
criteria are achieved and it is probable it will be paid, as additional
purchase price for the related acquisitions.
Contracts
The Company's practices participate in agreements with corporations and
managed care organizations to provide certain dental services under capitation
contracts to members of a group at a fixed rate per-member, per-month,
regardless of the actual services performed, and certain other dental services
as defined in the contract in accordance with an agreed upon fee schedule.
During the period from September 19, 1995 (inception) through December 31,
1995, and the years ended December 31, 1996 and 1997, approximately 30%, 20%,
and 20% respectively, of the Company's net revenues were derived from
capitation contracts. Revenues under these contracts are recorded in the month
fees are earned. The cost of services provided under capitation contracts are
expensed in the month incurred. The scope of the services provided under the
capitation contracts are provided by or within the Company, therefore related
costs are captured within the normal operating cycle of the Company.
19
<PAGE> 20
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations,
notwithstanding possible insurance recoveries.
20
<PAGE> 21
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEET
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
June 30, 1998
(unaudited)
-----------
<S> <C>
Current assets ASSETS
Cash and cash equivalents $ 969
Accounts receivable, net of contractual
allowances of $1,317 and allowance
for doubtful accounts of $2,750 4,573
Prepaid expenses and other current assets 719
Deferred tax assets 491
----------
Total current assets 6,752
Property and equipment, net of accumulated depreciation
of $1,159 5,661
Excess of cost over fair value of
Tangible assets acquired and other Intangible assets,
net of accumulated amortization of $2,381 48,873
Other assets 2,249
----------
$ 63,535
==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Current portion of long-term debt, including amounts
due related parties of $8,798 $ 12,116
Current portion of obligations under capital leases 507
Accounts payable 3,163
Accrued expenses and other current liabilities 7,738
Other accrued liabilities 146
Income taxes payable 153
----------
Total current liabilities 23,823
Long-term debt, including amounts due related
parties of $28,601 34,013
Obligations under capital lease 531
Other long-term liabilities --
Deferred income taxes 764
----------
Total liabilties 59,131
----------
Commitments and contingencies
Mandatorily redeemable preferred stock, $.01 par value, plus
accrued dividends of $176 at June 30, 1998;
authorized: 1,000 shares; issued; 8 shares,
8% cumulative dividends 976
Mandatorily redeemable common stock 1,728
Stockholders' (deficit) equity
Common stock, $.01 par value, 20,000 shares authorized;
4,491 shares issued and outstanding 45
Capital in excess of par value 4,311
Accumulated deficit (2,656)
----------
Total stockholders' equity 1,700
----------
$ 63,535
==========
</TABLE>
21
<PAGE> 22
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1998
(unaudited) (unaudited)
-------------- -------------
<S> <C> <C>
Net patient revenue $ 13,141 $ 30,693
--------- --------
Cost of revenues:
Dental compensation 3,106 7,338
Auxillary compensation 4,307 8,667
Laboratory fees and dental supplies 1,486 3,369
General and administrative expenses 3,324 7,362
Depreciation 153 474
Amortization of intangible assets 317 1,033
--------- --------
Total cost of revenues 12,693 28,243
--------- --------
Income from operations 448 2,450
Interest expense:
Related parties 550 1,604
Other 45 341
--------- --------
Income (loss) before taxes (147) 505
Income taxes -- 253
---------- --------
Net income (loss) (147) 252
Accretion of manditorily redeemable
common stock 153 328
Dividends on preferred stock 32 32
--------- --------
Net loss applicable to common shares $ (332) $ (108)
========= ========
Net loss per common share, basic and
diluted $ (0.08) $ (0.02)
========= ========
Weighted average shares outstanding,
basic and diluted 4,092 4,491
========= ========
</TABLE>
22
<PAGE> 23
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S (DEFICIT) EQUITY
(UNAUDITED)
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Common stock Capital in
--------------------------- excess of Accumulated
Shares Par value par value deficit Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 4,463 $ 45 $ 4,103 $(2,548) $ 1,600
Common stock issued in connection with
acquisitions 28 -- 208 208
Net loss applicable to common shares (108) (108)
----- ------- ------- ------- -------
Balance, June 30, 1998 4,491 $ 45 $ 4,311 $(2,656) $ 1,700
===== ======= ======= ======= =======
</TABLE>
23
<PAGE> 24
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1998
(unaudited) (unaudited)
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (147) $ 252
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 469 1,507
Provision for doubtful accounts 346 993
Deferred income taxes -- --
Change in assets and liabilities, net of effects from
businesses acquired:
Accounts receivable (820) (867)
(Increase) decrease in prepaid expenses and other current
assets (88) (273)
Other assets (671) (985)
Accounts payable 811 (453)
Accrued expenses and other liabilities 469 277
Income taxes payable (28) 19
Other long-term liabilities -- (208)
------- -------
Net cash provided by operating activities 341 262
------- -------
Cash flows from investing activities:
Payments for purchases of businesses, net of cash
acquired (9,218) (1,514)
Purchases of property and equipment (626) (780)
------- -------
Net cash used in investing activities (9,844) (2,294)
Cash flows from financing activities:
Borrowings of long-term debt 11,148 3,499
Principal payments on long-term debt (592) (1,577)
Principal payments on capital lease obligations (84) (219)
------- -------
Net cash provided by financing activities 10,472 1,703
------- -------
Net increase in cash and cash equivalents 969 (329)
Cash and cash equivalents at beginning of period 568 1,298
------- -------
Cash and cash equivalents at end of period $ 1,537 $ 969
======= =======
Supplemental disclosure of cash flow information:
Interest paid $ 129 $ 776
======= =======
Taxes paid $ 27 $ 234
======= =======
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations entered $ 286 $ 70
======= =======
</TABLE>
24
<PAGE> 25
VALLEY FORGE DENTAL ASSOCIATES, INC.
Notes to Interim Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
Valley Forge Dental Associates, Inc., a Delaware corporation (the
"Company"), manages dental group practices in selected markets including
Colorado; Cleveland, Ohio; Northern and Southern Virginia; Florida;
Atlanta, Georgia; Pittsburgh and Philadelphia, Pennsylvania and Northern
New Jersey. As of June 30, 1998, the Company managed 57 dental group
practices in Colorado, Ohio, Virginia, Florida, Georgia, Pennsylvania and
New Jersey.
2. BASIS OF PRESENTATION
The financial statements for the six months ended June 30, 1997 and 1998,
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 six months ended June 30, 1997
and 1998, have been included herein. The results of operations for the
six-month periods are not necessarily indicative of the results for the
full year.
3. SUBSEQUENT EVENT
On September 10, 1998, the Company was acquired by Monarch Dental
Corporation in an asset purchase transaction.
25
<PAGE> 26
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma consolidated statement of income for the year ended
December 31, 1997 gives effect to the 1998 acquisition of Valley Forge as if
such transaction had been completed on January 1, 1997. The pro forma
consolidated statement of income for the nine month period ended September 30,
1998 gives effect to the 1998 acquisition of Valley Forge as if such transaction
had been completed on January 1, 1998. 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. Although such information is
based on preliminary allocation of the purchase price of the acquisition of
Valley Forge the Company does not expect that the final allocation of the
purchase price will be materially different from such preliminary allocation.
The pro forma consolidated financial information has been prepared by
management based on the historical financial statements of the Company and
Valley Forge for the year ended December 31, 1997 and the nine month period
ended September 30, 1998, adjusted where necessary to reflect the acquisition
and related operations as if a management agreement 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 operations or financial condition of the Company for
the period or at the date presented would have been had such transaction been
consummated as of such date and is not indicative of the results that may be
obtained in the future.
26
<PAGE> 27
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
VALLEY ACQUISITION PRO FORMA
HISTORICAL FORGE (a) ADJUSTMENTS AS ADJUSTED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Dental group practices, net $ 68,619 $ 36,818 $ -- $ 105,437
Less - Amounts retained by dental group practices 22,729 8,812 -- 31,541
--------- --------- --------- ---------
Net revenue 45,890 28,006 -- 73,896
Operating expenses 40,809 26,804 (100)(b) 67,513
--------- --------- --------- ---------
Operating income 5,081 1,202 100 6,383
Interest expense, net 1,545 2,080 (1,221)(c) 2,404
Minority interest in combined subsidiaries 46 -- -- 46
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item 3,490 (878) 1,321 3,933
Income taxes 1,355 13 515(d) 1,883
--------- --------- --------- ---------
Income (loss) before extraordinary item 2,135 (891) 806 2,050
Extraordinary loss, net of applicable tax benefit of $167 (264) -- -- (264)
--------- --------- --------- ---------
Net income (loss) $ 1,871 $ (891) $ 806 $ 1,786
========= ========= ========= =========
Net income per common share:
Income before extraordinary item $ 0.34 $ 0.26
Extraordinary item (0.05) (0.03)
--------- ---------
Net income $ 0.29 $ 0.23
========= =========
Net income per common share-assuming dilution:
Income before extraordinary item $ 0.26 $ 0.21
Extraordinary item (0.04) (0.03)
--------- ---------
Net income $ 0.22 $ 0.18
========= =========
Weighted average number of common shares
outstanding 6,369 7,928
========= =========
Weighted average number of common and
common equivalent shares outstanding 8,346 9,905
========= =========
</TABLE>
27
<PAGE> 28
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
VALLEY ACQUISITION PRO FORMA
HISTORICAL FORGE (e) ADJUSTMENTS AS ADJUSTED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Dental group practices, net $84,223 $41,353 $ -- $125,576
Less - Amounts retained by dental group practices 27,061 10,514 -- 37,575
------- ------- ------- --------
Net revenue 57,162 30,839 -- 88,001
Operating expenses 49,322 31,344 (75) (f) 80,591
------- ------- ------- --------
Operating income (loss) 7,840 (505) 75 7,410
Interest expense, net 996 2,655 (916) (g) 2,735
Minority interest in combined subsidiaries 49 -- -- 49
------- ------- ------- --------
Income (loss) before income taxes 6,795 (3,160) 991 4,626
Income taxes 2,651 257 386 (h) 3,294
------- ------- ------- --------
Net income (loss) $ 4,144 $(3,417) $ 605 $ 1,332
======= ======= ======= ========
Net income per common share $ 0.40 $ 0.11
======= =======
Net income per common share - assuming dilution $ 0.39 $ 0.11
======= =======
Weighted average number of common shares
outstanding 10,424 11,810
======= =======
Weighted average number of common and
common equivalent shares outstanding 10,586 11,972
======= =======
</TABLE>
28
<PAGE> 29
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
Dental Group Practices Revenue, Net. Dental group practices revenue,
net represents the revenue of the dental facilities (each, a "Dental Office"
and collectively, 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
statements 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 dental professional corporations
(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
of 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 Statements of Income. The adjustments reflected
in the pro forma consolidated statements of income for the year ended December
31, 1997 and the nine month period ended September 30, 1998 are as follows:
(a) The Valley Forge column presents the historical revenue and
expenses of Valley Forge for the year ended December 31, 1997.
(b) To reflect the impact of (i) adjustments in lease expense to
market rates as if such adjustment had occurred at January 1,
1997 and (ii) increased amortization expense for the
intangible assets based upon the Company's allocation of
purchase price as if the acquisition was completed on January
1, 1997. The incremental intangible assets related to the
Company's acquisition of Valley Forge total approximately $8.1
million at August 31, 1998 and are being amortized over a
period of 25 years.
(c) To reflect (i) the reversal of interest expense at a rate of
9.0% on the $11.0 million in subordinated notes payable to
principal stockholders which were contributed to equity as
part of the Valley Forge transaction and (ii) the reduction in
the interest rate on the remaining subordinated notes payable
from 9.0% to 6.7%. Both of these adjustments were made as if
the changes had occurred on January 1, 1997.
(d) To reflect the estimated income tax effects at an estimated
effective rate of approximately 39%.
(e) The Valley Forge column presents the historical revenue and
expenses of Valley Forge for the eight month period ended
August 31, 1998.
(f) To reflect the impact of (i) adjustments in lease expense to
market rates as if such adjustment had occurred at January 1,
1998 and (ii) increased amortization expense for the
intangible assets based upon the Company's allocation of
purchase price as if the acquisition was completed on January
1, 1998. The incremental intangible assets related to the
Company's acquisition of Valley Forge total approximately $8.1
million at August 31, 1998 and are being amortized over a
period of 25 years.
(g) To reflect (i) the reversal of interest expense at a rate of
9.0% on the $11.0 million in subordinated notes payable to
principal stockholders which were contributed to equity as
part of the Valley Forge transaction and (ii) the reduction in
the interest rate on the remaining subordinated notes payable
from 9.0% to 6.7%. Both of these adjustments were made as if
the changes had occurred on January 1, 1998.
(h) To reflect the estimated income tax effects at an estimated
effective rate of approximately 39%.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Monarch Dental Corporation
(Registrant)
Date: November 24, 1998 By: /s/ Steven G. Peterson
----------------------------------
Name: Steven G. Peterson
Title: Chief Financial Officer
30
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Index Description
- ------------- -------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of September 1, 1998,
by and among Monarch Dental Corporation, Valley Forge Dental
Associates, Inc., DFV Acquisition Corp. and certain
stockholders of Valley Forge Dental Associates, Inc. *
2.2 Registration Rights Agreement *
2.3 Employment Agreement for Joseph J. Frank *
2.4 Consent of PRICEWATERHOUSECOOPERS LLP, Independent Accountants
* Previously filed
</TABLE>
31
<PAGE> 1
EXHIBIT 2.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-35383) of Monarch Dental Corporation of our
report dated April 23, 1998 on the consolidated financial statements of Valley
Forge Dental Associates, Inc. and its subsidiaries as of December 31, 1996 and
1997 and for the period from September 19, 1995 (date of inception) to December
31, 1995 and for each of the two years in the period ended December 31, 1997.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
November 11, 1998
