UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report pursuant to Sections 13 or 15 (d) of the Securities Exchange
Act of 1934 for the year ended December 31, 1997.
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the period from _______ to ________________.
Commission File Number 0-23219
DENTAL CARE ALLIANCE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0555126
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1343 MAIN STREET, SUITE 700, SARASOTA, FLORIDA 34236
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(Address of principal executive offices) (Zip Code)
(941) 955-3150
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.01 PAR VALUE.
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports,) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in Definitive Proxy or Information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the last sales price of the Common Stock reported on the
Nasdaq market on March 26, 1998 was $33,761,812.
As of March 26, 1998, the number of shares outstanding of the Registrant's
Common Stock, $.01 par value, was 6,977,700.
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file its Definition Proxy Statement for its 1998 annual
meeting of shareholders with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this Form 10-K
pursuant to Rule G (3) of the General Instructions for Form 10-K. Information
from such Definition Proxy Statement will be incorporated by reference into Part
III, Items 11-13 hereof.
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PART I
ITEM 1. BUSINESS
THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21B OF THE
SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, AMONG OTHERS, THE PACE OF
DEVELOPMENT AND ACQUISITION ACTIVITY, THE DEPENDENCE ON MANAGEMENT AGREEMENTS,
THE PAS AND AFFILIATED DENTISTS, THE REIMBURSEMENT RATES FOR DENTAL SERVICES,
AND OTHER RISKS DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION
FILINGS. OTHER RISK FACTORS ARE LISTED IN THE COMPANY'S REGISTRATION STATEMENT
NO.333-34429 AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION.
Dental Care Alliance, Inc. ("DCA") was formed on October 23, 1996 to effect
reorganization among DCA, Golden Care Holdings ("GCH"), the predecessor which
was incorporated in 1993, and its majority owned subsidiaries, (collectively the
"Company"). The Company provides management and licensing services to dental
practices in Florida and Michigan. As of December 31, 1997, the Company provided
services to 32 Dental Centers, 29 to which the Company provided management
services ("Managed Dental Centers"), and three to which the Company only
provided licensing services ("Licensed Dental Centers"). Management services
include financial, accounting, billing, training, efficiency and productivity
enhancement, recruiting, team building, marketing, advertising, purchasing,
collection and other services, as well as the provision of management and
administrative personnel. Licensing services include marketing, advertising and
purchasing. The Company is currently expanding in Florida, Georgia and Michigan
and intends to selectively expand into new markets. See "The Company" and Note 1
to the Consolidated Financial Statements for information relating to the history
of the Company.
SERVICES AND OPERATIONS
The Company provides management and administrative services to the Managed
Dental Centers but does not provide dental care services. The Company provides,
supervises or facilitates financial, accounting, billing, training, efficiency
and productivity enhancement, recruiting, team building, marketing, advertising,
purchasing, collection and other services for the individual dental professional
corporations or professional associations (the "PAs") and employs the Managed
Dental Centers' management and administrative personnel. The PAs employ and
maintain full control over the general dental and specialty dental practitioners
(such as orthodontists, periodontists, endodontists and oral surgeons) working
at the Managed Dental Centers ("Affiliated Dentists"), hygienists and other
dental professionals and set standards of care in order to promote the provision
of high quality dental care. The individual PAs are responsible for compliance
with state and local regulations of the practice of dentistry and with licensing
and certification requirements, and each PA is responsible for acquiring and
maintaining professional liability insurance. The Company's services can be
grouped into three broad categories: personnel services, operational services
and financial services.
PERSONNEL SERVICES
TRAINING AND EDUCATION. The individual PAs employ, supervise and train all
dentists, dental hygienists and other dental professionals at each Managed
Dental Center. The Company, while not
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engaged in the practice of dentistry, assists the individual PAs in training and
educating professional personnel by providing analyses that allow the PAs to
determine training needs. All personnel, other than dentists, dental hygienists
and other dental professionals, are supervised and trained by the Company or its
subcontractor. The Company also helps to coordinate group meetings and seminars
at which the PAs provide continuing education to their professionals. In
addition, the Company encourages and facilitates team building of the staff
through regularly scheduled staff meetings and social events. Each individual PA
maintains full control over the practice of dentistry by the dental
professionals it employs and sets standards of practice in order to promote
quality dental care.
RECRUITING. The Company continually assists the PAs in recruiting dentists
to add to its network as Affiliated Dentists. Such recruiting takes place at
dental schools through the Company's contacts at such schools, at regional
dental conventions and through advertising in regional and national dental
publications. Recruitment of general dentists, specialists and other
professionals is the primary responsibility of the Company's Director of
Development.
HUMAN RESOURCE MANAGEMENT. The Company is responsible for the hiring,
retention, salary and bonus determination, job performance-related training and
other similar matters affecting Company employees, which include non-dental
professionals providing services to the PAs. Services provided by the Company
include: (i) payroll administration, including recordkeeping, payroll
processing, making payroll tax deposits, reporting payroll, taxes and related
matters; (ii) risk management, including on-site safety inspections and
monitoring, training, and workers' compensation claim management and
administration; (iii) administering benefit plans; and (iv) the provision of
human resource materials, consulting and expertise on other human resource
issues. In Florida, a professional employer organization (the "Co-Employer")
assists the Company in providing these services. The Co-Employer arrangements
allow the Company to improve productivity and profitability by relieving it of
certain burdens associated with employee administration, helping it to better
manage certain employment-related risks, improving cash management with respect
to payroll-related expenses and enabling it to provide certain benefits on a
cost-effective basis. The Company intends to assume the responsibilities of the
Co-Employer when it becomes operationally efficient for the Company to do so.
See Item 1 "Business-Employees."
OPERATIONAL SERVICES
MANAGEMENT INFORMATION SYSTEMS. The Company utilizes its information
systems to track data related to each Managed Dental Center's operations and
financial performance. Billing and collection information is compiled on a daily
basis, enabling the Company to monitor financial performance and operational
efficiency. The Company generates reports for each Managed Dental Center
containing information as to every visit, charge and procedure. These reports
are reviewed first by the Company's Chief Financial Officer and then by the
Operations Department which analyzes performance and efficiencies, particularly
the ratio of dollars per patient. These reports are also given to the Dental
Director who reviews them for inefficiencies and evaluates how performance may
be improved. The Company provides an analysis of these results to the PAs and
recommends specific measures to improve the financial performance of the Managed
Dental Centers. The analysis enables a Managed Dental Center to improve its
financial performance by making periodic adjustments in marketing and
operations.
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QUALITY ASSURANCE. Prior to the execution of a Management Agreement with a
new PA, the Company evaluates the dental practice to determine in which areas,
if any, the proficiency level of the dental professionals employed by the PA can
be enhanced. The Company also works closely with the Dental Directors to assure
that quality dental services are being provided. While supervision of dental
services is the responsibility of the Dental Directors, the Company provides
Dental Directors with reports that help them evaluate performance. For example,
certain dental laboratories monitor the case quality of the Affiliated Dentists
in performing particular tasks. Such monitoring allows the Company and the PAs
to notify the appropriate Dental Director if any procedure is being done
inefficiently at a particular Managed Dental Center or by a particular
Affiliated Dentist or other dental professional. The Dental Director then works
directly with the dental professionals at the Managed Dental Center to identify
the reason for the inefficiency and to implement solutions, such as additional
training, to improve performance in that area. The Company also performs patient
surveys to monitor patient satisfaction, and the Dental Directors periodically
audit patient charts and provide advice to the general dentists and dental
specialists employed by the PAs. See Item 1 "Business - Services and Operations
- - Management Information Systems" and " - Dental Directors."
SCHEDULING. The Company implements patient scheduling systems at each of
the Managed Dental Centers. These systems enable the Company to devise daily
patient schedules that maximize the efficiency of the dental professionals.
Patient visits are scheduled in small time increments based upon the Company's
knowledge of the time required for each type of dental procedure. In addition,
the office hours of each Managed Dental Center are tailored to meet the needs of
its patient population. The Company believes that its scheduling systems result
in more efficient patient flow, thereby increasing productivity and patient
volume.
ADVERTISING AND MARKETING. The Company assists in developing and
implementing customized marketing plans tailored to the specific characteristics
of each Dental Center's market. Such marketing may include the use of local
radio, TV and print advertising, and other marketing promotions. In some
instances the Company seeks to promote brand name recognition of its Managed
Dental Centers through use of regional brand names owned by the PAs. For
example, in Florida, several of the Company's Managed Dental Centers use the
name "Advanced Dental Care." In some cases, Dental Centers are marketed under
the names used by the practices prior to their affiliation with the Company to
take advantage of the practices' existing market position. Most states,
including Florida and Michigan, place certain restrictions on the ability of
corporations such as the Company to provide advertising and marketing services
to the professional associations or corporations organized in such states. Many
states, prohibit dentists from using, except in limited circumstances,
advertising which includes any name other than their own, or from advertising in
any manner that is likely to lead a person to believe that a nondentist is
engaged in the practice of dentistry. Florida law also requires all advertising
to identify the dentist who assumes total responsibility for the advertisement
and may not include the name of a person who is neither actually involved in the
practice of dentistry at the advertised location nor an owner of the practice
being advertised. Similarly, Michigan law requires that the name of each dentist
performing services at a location be clearly disclosed by sign or lettering at
such location. In addition, Michigan and Florida law impose additional
restrictions on advertisements by specialists.
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PURCHASING AND DISTRIBUTION. The size of the Company's network enables the
Company to purchase dental supplies, laboratory services, equipment, insurance,
management information systems, advertising and office furniture at reduced
costs. Dental equipment supplies are obtained by the Company as directed by the
PAs and administrative supplies are purchased by the Company pursuant to
high-volume supply contracts with favorable price terms. The Company monitors
inventory levels and adjusts distribution to reduce carrying costs on inventory.
FINANCIAL SERVICES
THIRD-PARTY PAYOR MANAGEMENT. The Company examines various factors to
determine which third-party payors' assignments it will recommend at each
Managed Dental Center. Factors considered by the Company in making this
recommendation include the types of procedures that are generally performed at
the Managed Dental Centers, the geographic area served by the particular plan
and the demographic characteristics of the typical plan participants. Some
element of managed care is present at most Managed Dental Centers, although
generally not as the primary source of revenues. The Company assists the Managed
Dental Centers in the negotiation of contracts with third-party payors. As a
result of its size, the Company is often able to negotiate better terms for its
Managed Dental Centers with-third party payors than would be available to solo
practitioners or small group dental practices.
ACCOUNTING SERVICES. The Company provides Managed Dental Centers with a
full range of accounting services, including preparation of financial
statements, management of accounts payable, oversight of accounts receivable,
verification of purchase orders, payroll administration and tax services. In
addition, the Company assists each Managed Dental Center in the preparation of
operating and financial budgets.
THIRD-PARTY FINANCING. The Company has contracts with multiple non-recourse
third-party financing companies that enable the Managed Dental Centers to offer
various third-party financing options directly to their patients. The Company is
not a party to the financing agreements. At the time a patient receives dental
treatment and upon credit approval of the patient by the third-party financing
company, the PA is paid at varying discounts to the full price of its services,
based upon financing terms. The financing company is subsequently responsible
for all billing to and collection from the patient and has no recourse for
payment against the Company or the Managed Dental Center.
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DENTAL CENTER LOCATIONS
The following table lists the locations of the Company's Managed Dental
Centers at December 31, 1997 and the dates on which Management Agreements
between the PAs that own each Managed Dental Center and the Company were first
entered into.
DATE OF
LOCATION MANAGEMENT AGREEMENT
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Sarasota, Florida November 1993
Largo, Florida November 1993
Port Charlotte, Florida November 1993
Englewood, Florida March 1994
Fort Myers, Florida October 1994
Sarasota, Florida March 1995
Kissimmee, Florida April 1995
Bradenton, Florida July 1995
Orlando, Florida June 1996
Tampa, Florida June 1996
Ocoee, Florida June 1996
Clearwater, Florida June 1996
Tampa, Florida (North) April 1997
Flint, Michigan July 1997
Detroit area, Michigan (4 centers) July 1997
Tallahassee, Florida August 1997
St. Petersburg, Florida September 1997
Lakeland, Florida December 1997
Palma Ceia, Florida December 1997
Rockledge, Florida December 1997
Palm Beach County, Florida (6 centers) December 1997
From December 31, 1997 through March 14, 1998, the Company has entered
into Management Agreements involving ten Managed Dental Centers.
The following table lists the locations of the Company's Licensed Dental
Centers at December 31, 1997 and the dates on which License Agreements between
the PAs that own each Licensed Dental Center and the Company were first entered
into.
DATE OF
LOCATION LICENSE AGREEMENT
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Orlando, Florida September 1994
Deltona, Florida September 1994
Winter Springs, Florida October 1996
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MANAGEMENT AGREEMENTS
At December 31, 1997, the Company had entered into Management Agreements
with 24 PAs to manage 29 centers pursuant to which the Company or its assigns
are the exclusive business managers, to the extent allowable by law, of the
associated Managed Dental Centers. Since December 31, 1997, the Company has
entered into Management Agreements with 5 PAs to manage 10 centers. Of the total
39 Management Agreements, 36 are Standard Management Agreements (described
below.) The Company plans to continue to use the Standard Management Agreement
to the extent possible as it enters into arrangements with additional dental
practices. However, the terms of future agreements may differ according to
market conditions and the statutory and regulatory requirements of the
particular state in which the dental practice is located. The Company has
entered into three management agreements with respect to six additional dental
practices on terms different from those of the Standard Management Agreements.
Descriptions of these Management Agreements are set forth below.
Under the Standard Management Agreements, the Company provides
comprehensive administrative and business services and support to the PAs. The
Company, among other things, (i) assists in the identification of areas in which
the performance of the Managed Dental Centers and their dental professionals can
be improved to increase revenues and operating income, (ii) provides, maintains
and repairs all offices, equipment and furnishings, (iii) employs all
non-professional personnel necessary for the operation of the Managed Dental
Centers, (iv) provides payroll services, (v) implements standard business
systems and procedures and provides or facilitates systems and efficiencies
training, (vi) orders all general business inventory and supplies required by
the Managed Dental Centers and handles accounts payable, (vii) establishes and
maintains information systems and provides accounting and bookkeeping services,
(viii) monitors compliance with rules and regulations applicable to the Managed
Dental Center business, (ix) provides marketing assistance and (x) provides
assistance in billing and collections, all to the extent permitted by law.
The Standard Management Agreements provide that the PAs are responsible
for, among other things, (i) employing and supervising all Affiliated Dentists
and dental hygienists, (ii) complying with all laws, rules and regulations
relating to Affiliated Dentists and dental hygienists, (iii) participating in
quality assurance/utilization review programs, (iv) maintaining proper dental
patient records, (v) obtaining and maintaining professional liability insurance
with limits of not less than $300,000 per claim and aggregate policy limits of
not less than $1.0 million and (vi) any other requirements to carry out the
practice of dentistry.
Under the terms of the Standard Management Agreements, the PAs are required
to indemnify, hold harmless and defend the Company from and against any and all
claims from negligent or intentional acts or omissions, including the
performance of dental services, by the PAs and their employees. The Company is
required to indemnify, hold harmless and defend the PAs from and against any and
all claims resulting from negligent or intentional acts or omissions by the
Company.
As compensation for its management services under the Standard Management
Agreements, the Company earns a management fee equal to 70% - 74% of the Net
Collected Revenues earned by the PA. The Company pays all of the operating and
nonoperating expenses incurred by the PAs except for (i) salaries and benefits
to the Affiliated Dentists and dental hygienists, (ii) licensing fees paid to
the
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Company, (iii) debt and asset carrying costs related to the acquisition of
the dental practice, and (iv) any other direct cost to the PA not covered under
the Standard Management Agreement.
The Standard Management Agreements have 25 year terms, with automatic
annual one year renewals thereafter, and are terminable by either party for
cause or upon the insolvency of the other party. In the event of a material
default by the PA or the PA owner, the Company has the option to cause the sale
of all of the stock or all of the assets of the PA to a licensed dentist
designated by the Company. In such an event, the PA owner receives the proceeds
of the sale, subject in certain cases to preset formulas, less any amounts owed
as a result of the default. The PA or the PA owner may terminate the agreement
without cause provided the practice is sold to a dentist acceptable to the
Company. The Standard Management Agreements provide that they shall be amended
by the parties in the event of any regulatory matters affecting the validity of
the Standard Management Agreement in a manner necessary to bring the Standard
Management Agreements into compliance.
During the terms of the Standard Management Agreements, the Company and the
PAs agree not to disclose certain confidential and proprietary information
regarding the other. The PAs are required under the Standard Management
Agreements to use their best efforts to enter into and enforce written
employment agreements with each of their professional employees containing
covenants not to compete with the PA in a specified geographic area for a
specified period of time, generally from one to three years after termination of
the employment agreement. The employment agreements generally provide for
injunctive relief in the event of a breach of the covenant not to compete.
However, the PAs ability to enforce such covenants is uncertain.
One PA in Florida is party to a Management Agreement substantially in the
same form as the Standard Management Agreement, except that (i) the PA pays the
Company a monthly management fee of 55% of its net profits (defined as total
collected revenues on a cash basis less any patient refunds and less practice
expenses, including nonprofessional staff expenses), and (ii) this agreement
expires in 2003. In addition, the agreement provides that the PA may, during the
period commencing on October 20, 1998 and ending 90 days thereafter, terminate
the agreement by paying to the Company an amount equal to $185,460 less the
amount by which the aggregate fees paid to the Company pursuant to such
Management Agreement during either or both of the successive one year periods
following October 20, 1996 exceeds $100,000, and satisfying other conditions set
forth therein. The Company earned fees of $121,900 for the year ended December
31, 1997.
Another PA in Florida is party to a Management Agreement substantially in
the same form as the Standard Management Agreement, except that (i) the PA pays
to the Company a monthly management fee of 50% of its net profits (defined as
total collected revenues on a cash basis less any patient refunds and less
practice expenses, including non-professional staff expenses) and (ii) this
agreement expires in 2003.
In addition, in July 1997, the Company entered into a global Management
Agreement to manage four Managed Dental Centers in Michigan substantially in the
same form as the Standard Management Agreement, except that it expires in July
2005. The Company subcontracts the day-to-day management functions of the four
Michigan Dental Centers subject to this agreement to an affiliate of the owner
of the applicable PAs. As a result, the Company pays a fee to such subcontractor
equal to 80% of the net
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profits of these Managed Dental Centers (as defined in
the Administrative Service Subcontract Agreement with such subcontractor), after
certain adjustments.
The Company intends to continue to devote a substantial amount of time and
resources to identifying suitable dental practices and to negotiating Management
Agreements with such practices. Identifying suitable dental practices and
negotiating Management Agreements with such practices can be a lengthy and
costly process. There can be no assurance that the Company will be able to
identify suitable Managed Dental Center candidates, or that Management
Agreements will be entered into with respect to such candidates on terms
favorable to and within time frames desired by the Company, or at all. In the
event that the execution of a planned Management Agreement fails to occur or is
delayed, the Company's quarterly financial results may be materially lower than
financial analyst's expectations, which like would cause a decline, perhaps
substantial, in the market price of the Common Stock. The foregoing factors
could have a material adverse effect on the Company's results of operations or
financial condition and the Company's ability to continue its expansion
strategy. Moreover, in connection with entering into such Management Agreements,
the Company may be required to incur indebtedness or assume other liabilities
which could have a material adverse effect on the Company's operating results,
liquidity and capital resources, or may cause the Company to issue shares of its
capital stock which could result in dilution to stockholders.
The integration of Managed Dental Centers into the Company's network is a
difficult, costly and time consuming process which, among other things, requires
the Company to attract and retain competent and experienced management and
administrative personnel and to implement and integrate reporting and tracking
systems, management information systems and other operating systems. In
addition, such integration may require, among other things, the opening of new
facilities or the expansion of existing facilities, the expansion of accounting
controls and procedures and the elimination of duplicate personnel. There can be
no assurance that substantial unanticipated problems, costs or delays associated
with such integration efforts or with such Managed Dental Centers will not arise
or continue. Any such problems, costs or delays could cause the Company's
financial results in the fiscal quarter including and subsequent to the
execution of the relevant Management Agreements to be materially lower than
financial analysts' expectations, which likely would cause a decline, perhaps
substantial, in the market price of the Common Stock. In particular, the
Company's expenses related to any new Managed Dental Center and, accordingly,
the integration of such Managed Dental Center may have a temporary or sustained
negative impact on the Company's results of operations or financial condition.
There can be no assurance that the Company will be able to successfully
integrate new Managed Dental Centers in a timely manner or at all, or that any
new Managed Dental Center will have a positive impact on the Company's results
of operations and financial condition.
The success of the Company will depend in part on the Company's ability to
effectively manage an increasing number of Managed Dental Centers, some of which
are expected to be located in markets geographically distant from markets in
which the Company presently operates. The addition of Managed Dental Centers may
impair the Company's ability to efficiently and successfully provide management
services to existing Managed Dental Centers and to manage and supervise
adequately the Company's employees. The Company has little experience in
managing more than 20 Managed Dental Centers, and the Company's results of
operations and financial condition could be materially adversely affected if it
is unable to do so effectively.
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The Company's growth will require that substantial capital investment and
adequate financing be available to the Company. Capital is needed for (i) the
acquisition by the Company of the non-dental assets of dental practices, (ii)
entering into Management Agreements, (iii) the integration of operations of
dental practices, (iv) the purchase of additional equipment and technology, and
(v) loans to PAs to purchase the dental assets of dental practices. The Company
believes that the net proceeds from its public offering, cash flow from
operations and borrowings available under the Company's existing credit facility
will be adequate to meet the Company's anticipated capital needs through 1998,
although there can be no assurance to that effect. After 1998, the Company may
be required to obtain financing through additional borrowings or the issuance of
additional equity or debt securities. There can be no assurance that the Company
will be able to obtain such financing or that, if available, such financing will
be on terms acceptable to the Company. Any inability of the Company to obtain
suitable financing could cause the Company to limit or otherwise modify its
expansion strategy, which could have a material adverse effect on the Company's
results of operations and financial condition.
LICENSE AGREEMENTS
As of December 31, 1997, twenty-two of the Managed Dental Centers had
entered into short form license agreements and seven Managed Dental Centers and
each of the PAs which own the three Licensed Dental Centers had entered into
long form license agreements with the Company (collectively, the "License
Agreements"). The long form license agreements generally have terms of five
years, with automatic five year renewal terms, while the short form license
agreements have terms that are coterminous with the related Management
Agreements. In consideration for the payment of a monthly license fee, which has
generally ranged from $600 to $1,200, the licensee is entitled to identify its
Dental Center as a member of the Company's network, participate in marketing
programs, utilize the Company's discounted purchasing capabilities, and use one
or more of the Company's service marks, logo types and commercial symbols
(collectively, the "Licensed Symbols"). The long form license agreements also
provide for a monthly advertising fee of $1,000 which, if collected would be
used for general marketing, advertising and promotion of the Company's network
and the Licensed Symbols. The Company has not collected any such monthly
advertising fees and does not intend to do so in the future. The manner in which
the licensee intends to use the Licensed Symbols must be approved in advance by
the Company.
The short form license agreements terminate immediately upon the
termination of the related Management Agreement, and termination is governed by
the provisions thereof. The Company may terminate the long form license
agreements upon cancellation of, or failure to renew, the lease for the premises
of the related Dental Center, the bankruptcy of the associated licensee or upon
the occurrence of certain other events set forth in the License Agreement. The
long form licensees may terminate their license agreements for cause at any time
or without cause during the 30-day period commencing on the first anniversary of
the execution of the agreement. Any other termination by the long form licensee
constitutes a breach of the agreement.
DENTAL DIRECTORS
The Company divides the geographic areas in which it operates into regions,
each of which is under the supervision of an Affiliated Dentist (each, a "Dental
Director"). At December 31, 1997, there were five regions and five Dental
Directors, each employed by, or owners of, the PAs within their
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region. The Company has added one region and one Dental Director since December
31, 1997. The Company expects that additional regions and Dental Directors will
be added by the PAs as the Company enters into Management Agreements with
additional PAs in new locations.
The primary purpose of the Dental Directors is to promote the provision of
high quality dental care and to refine operating efficiencies at the Managed
Dental Centers. Dental Directors continually monitor and evaluate the
performance of the Affiliated Dentists and the Managed Dental Centers within
their region by identifying operational inefficiencies and implementing
solutions to address these inefficiencies. Each Dental Director performs
periodic spot checks in which the performance of each Managed Dental Center is
scrutinized in detail. The Dental Directors also assist the PAs in their region
with the hiring, training and supervision of dental professionals. The Company
believes that close relationships among the Dental Directors, the PAs they
supervise, and the Company allows for the identification of specific
inefficiencies, the quick remediation of such inefficiencies and the realization
of the benefits produced by the Company's management approach.
GOVERNMENTAL REGULATION
GENERAL OVERVIEW. The Company's operations and relationships are subject to
a variety of governmental and regulatory requirements relating to the conduct of
its business. The Company is also subject to laws and regulations which relate
to business corporations in general. The Company believes that it exercises care
in an effort to structure its practices and arrangements with Dental Centers to
comply with relevant federal and state law and believes that such arrangements
and practices comply in all material respects with all applicable statutes and
regulations. The health care industry and dental practices are highly regulated,
and there can be no assurance that the regulatory environment in which the
Company operates will not change significantly and adversely in the future. In
general, regulation of health care providers and companies is increasing.
There can be no assurance that the laws and regulations of the states in
which the Company operates or may desire to operate in the future will not
change or be interpreted in the future to restrict or adversely effect the
Company's relationships with Affiliated Dentists or the operation of Managed
Dental Centers. Proposals that may be introduced, could, if adopted, have a
material adverse effect on the Company's financial condition and results of
operations. 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.
Every state imposes licensing requirements on dentists and on their
facilities and services. In addition, many states require regulatory approval,
including certificates of need, before establishing certain types of health care
facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities or programs. The
execution of a Management Agreement with a dental practice does not in most
states require any health care regulatory approval on the part of the management
company or the dental practice. However, in connection with the expansion of
existing operations and the entry into new markets, the Company and Dental
Centers may become subject to additional and more restrictive regulation.
11
<PAGE>
HEALTH CARE REGULATIONS AFFECTING THE COMPANY. Business arrangements
between dentists and business corporations that provide dental practice
management services are regulated extensively at the state and federal levels,
including regulation in the following areas:
CORPORATE PRACTICE OF DENTISTRY. The laws of many states prohibit
corporations that are not owned entirely by dentists from employing
dentists (and in some states, dental hygienists and dental assistants),
having control over clinical decision-making, or engaging in other
activities that are deemed to constitute the practice of dentistry.
Florida law specifically prohibits non-professional for-profit
corporations from employing dentists and dental hygienists, exercising
control over patient records, and making decisions relating to clinical
matters, office personnel, hours of practice, pricing, credit, refunds,
warranties and advertising. Michigan law imposes similar restrictions on
the practice of dentistry by non-professional for-profit corporations.
Most states, including Florida and Michigan, also prohibit
non-professional corporations from owning, maintaining or operating an
office for the practice of dentistry. These laws have generally been
construed to permit arrangements under which the dentists are not
employed by or otherwise controlled as to clinical matters by the party
supplying facilities and non-professional services. Both Florida and
Michigan law require that dentists or their professional corporations
maintain complete care, custody and control of all equipment and
materials used in the practice of dentistry. Management Agreements
provide that the Company shall not exercise control over any matters
that would violate the requirements of Florida or Michigan law, as
applicable. However, if the Company is deemed to interfere with the
practice of dentistry at the PAs or the care, control and custody of the
materials and equipment used in such practice, the Company could be
materially adversely affected.
FEE-SPLITTING AND ANTI-KICKBACK LAWS. Many states also prohibit
"fee-splitting" by dentists with any party except other dentists in the
same professional corporation or practice entity. In most cases, these
laws have been construed as applying to the practice of paying a portion
of a fee to another person for referring a patient or otherwise
generating business, and not to prohibit payment of reasonable
compensation for facilities and services (other than the generation of
referrals), even if the payment is based on a percentage of the
practice's revenues. The Florida and Michigan fee-splitting laws
prohibit paying or receiving any commission, bonus, kickback, or rebate,
or engaging in any split-fee arrangement in any form with a dentist for
patient referrals to dentists or other providers of health care goods
and services. In addition, Florida regulations specifically require that
fees paid to entities providing management services to dental practices
be at fair market value rates. The Florida and Michigan courts have not
considered whether the Florida and Michigan fee-splitting statutes
prohibit the payment by a dental practice of a management fee that is
based on a percentage of net income or whether such a fee arrangement
represents the fair market value of services rendered. However, in
considering a fee-splitting statute applicable to chiropractors, a
Florida court of appeals held that such statute does not prohibit the
payment of a management fee that is based on a percentage of the gross
income of the professional practice if the managing entity does not make
referrals to the chiropractic practice.
The Florida Board of Medicine recently considered the issue of
whether a physician practice is permitted to enter into a management
agreement pursuant to which the managing
12
<PAGE>
entity earns a management fee which includes a percentage of the
practice's net income as consideration for providing certain management
and operational services, including developing relationships with other
physicians, hospitals and third party payors. The Florida Board of
Medicine issued an opinion indicating that such a management agreement
is prohibited by applicable fee-splitting statutes. However, such order
has been stayed pending its appeal to the Florida courts. Although the
Florida Board of Medicine's decision, if upheld, will not apply to
dental practices, a person may be more likely to petition the Board of
Dentistry seeking a determination as to the application of fee-splitting
restrictions to dentists in the event that the Board of Medicine's order
is upheld. In addition, the court considering the appeal of the Board of
Medicine's order could reach conclusions or make statements that affect
the application of fee-splitting provisions applicable to dental
management agreements. Pursuant to the terms of the Management
Agreements, in the event such a Management Agreement were determined to
be in violation of applicable law, the agreement would have to be
amended in a manner that complies with applicable law and preserves, to
the greatest extent possible, the economic interests of the parties
thereto.
In addition, most states have laws prohibiting paying or
receiving any remuneration, direct or indirect, that is intended to
induce referrals for health care items or services, including dental
items and services. Federal law also prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for the
referral of patients covered by federally funded health care programs
such as Medicaid, or in return for purchasing, leasing, ordering or
arranging for the purchase, lease or order of any item or service that
is covered by a federal program. Percentage-based management agreements
are not within regulatory fraud and abuse safe harbors relating to items
and services furnished under governmental health care programs. The fact
that an arrangement is not within a safe harbor does not mean that it
violates the anti-kickback provisions applicable to services provided
under governmental health care programs. Rather, such arrangements are
subject to scrutiny based on the totality of circumstances relating to
such arrangements. As a result, it is possible that the arrangements
between the Company and PAs would be challenged by governmental
enforcement authorities. Because the Management Agreements provide that
the Company will not engage in direct marketing to potential sources of
business, but will only assist the individual PAs in these endeavors by
providing training, marketing materials and technical assistance, the
Company believes that its services under the Management Agreements
comply with applicable anti-kickback laws. Such laws would be violated
and the Company could be materially adversely affected if it were
determined that the Affiliated Dentists make referrals to entities that
are related or affiliated to the Company or its owners for the purpose
of securing, directly or indirectly, payments or other remuneration.
ADVERTISING RESTRICTIONS. Many states, including Florida and
Michigan, prohibit dentists from using advertising which includes any
name other than their own, or from advertising in any manner that is
likely to lead a person to believe that a non-dentist is engaged in the
practice of dentistry. Florida law also requires all advertising to
identify the dentist who assumes total responsibility for the
advertisement and may not include the name of a person who is neither
actually involved in the practice of dentistry at the advertised
location nor an owner of the practice being advertised. In addition,
Michigan and Florida law impose additional restrictions on
advertisements by specialists.
13
<PAGE>
LIMITATIONS ON DELEGATION. Most states, including Florida and
Michigan, regulate the manner in which dentists delegate certain tasks
to non-dentists.
ANTI-FRAUD LAWS. State and federal laws prohibit any person from
knowingly and willfully making any false statement or misrepresentation
of a material fact in seeking payment for items or services. In
addition, federal laws impose civil monetary penalties for filing claims
that the filing party "should know" are not appropriate under rules
applicable to governmentally funded health care programs.
SELF-REFERRAL LAWS. Many states, subject to certain exceptions,
prohibit referrals for certain health services if the referring dentist
has an ownership interest in, and/or a compensation arrangement with,
the entity receiving the referral. Many states require the dentist to
disclose such interests to patients.
Federal law, subject to certain exceptions, prohibits certain
Medicare and Medicaid referrals to entities in which a dentist has an
ownership interest or with which the dentist has a compensation
arrangement. Significant prohibition against dentist self-referrals for
services covered by the Medicaid program was 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
satisfied the "group practice" exception) and referrals in connection
with the physician's or dentist's employment arrangements with the PA
(unless the arrangement satisfies the employment exception). Stark II
also prohibits billing the Medicaid program for services rendered
following prohibited referrals. Noncompliance with, or violation of,
Stark II can result in exclusion from the Medicaid program and civil and
criminal penalties. The Company believes that its and the PAs'
operations as presently conducted do not pose a material risk under
Stark II, primarily because the Company and PAs do not provide
"designated health services." Even if the Company or the PAs were
determined to provide "designated health services," the Company believes
its and/or the PAs' 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.
Stark II and most state self-referral laws have exceptions for
in-office services provided under the direct supervision of the dentist.
In addition, third-party payor contracts may require
14
<PAGE>
dentists to provide an even greater degree of supervision over certain
in-office ancillary services in order to permit the applicable PA to
bill for such services. The Company believes that its arrangements with
Affiliated Dentists comply with these laws and third-party payor
agreements. There is no assurance that changes in these laws or their
interpretation will not affect the Company's current or future
activities.
Michigan's self-referral law is not limited to certain designated
health services and it recognizes no statutory safe harbors or
exceptions. Michigan prohibits directing or requiring an individual to
purchase or secure a drug, device, treatment, procedure or service from
another person, place, facility or business in which the referring party
has a financial interest. Although such law does not provide for
criminal sanctions, failure to comply with such law by a dentist could
result in revocation of the dentist's license. The Michigan
self-referral law has been subject to little interpretation. Currently,
several different amendments to this law have been proposed, which if
adopted, may in the future provide additional interpretative guidelines
as to the application of Michigan's self-referral prohibition. To date,
however, the term "financial interest" has only been interpreted to mean
a direct "ownership interest" and has not been interpreted to mean a
"compensation interest," such as an employment or personal services
agreement. The legality of the Company's operations under Michigan's
self-referral law is dependent upon whether the interrelationships among
the entities are such that they are considered to have "financial
interest" in each other, and whether the services performed by the
entities for each other are considered to have been directed or required
by the referrer. Should Michigan law in the future be interpreted and
applied in such a way, it would have a material adverse effect on the
Company.
REGULATORY COMPLIANCE. The Company believes that health care
regulations will continue to change, and as a result, regularly monitors
developments in health care law. The Company expects to modify its
agreements and operations from time to time as the business and
regulatory environment change. However, there can be no assurance that
any such change will not adversely affect the ability of the Company to
operate as it does currently or to remain profitable in doing so.
The laws described above provide for civil and criminal penalties for their
violation. These laws have been subject to limited judicial and regulatory
interpretation. They are enforced by regulatory agencies that are vested with
broad discretion in interpreting their meaning. The Company's agreements and
activities have not been examined by federal or state authorities under these
laws and regulations. For these reasons, there can be no assurance that a review
of the Company's business arrangements or the operation of the Managed Dental
Centers will not result in determinations that adversely affect the Company's
operation or that the long-term Management Agreements or certain of their
provisions will be held valid and enforceable. Further, the Company does not
maintain a compliance plan. Compliance plans, which have been adopted by many
health care entities, help such entities prevent, discover and correct
violations or potential violations of law. In addition, the penalties assessed
against an entity that violates applicable laws are likely to be reduced if such
entity maintains and adheres to a compliance plan.
In addition, these laws and their interpretation vary from state to state.
The laws and regulations of certain states into which the Company seeks to
expand may require the Company to change the form
15
<PAGE>
of relationships entered into with dental professional associations or
corporations in a manner that restricts the Company's operations in those
states.
INSURANCE
The Company's business entails inherent risk of liability. The Affiliated
Dentists and dental hygienists employed by the PAs are involved in the delivery
of health care services to the public and accordingly, such individuals, the PAs
and the Company are exposed to the risk of professional liability claims. Claims
of this nature, if successful, could result in substantial damage awards to the
claimants that may exceed the limits of any applicable insurance coverage.
Insurance against losses related to claims of this type can be expensive and
varies widely from state to state. The Company is indemnified under the
Management Agreements for claims against the Company arising from the
performance of medical and dental services provided by the PAs. Successful
malpractice claims, however, could have an adverse effect on the Company's
profitability. The PAs and the Affiliated Dentists and other dental
professionals they employ maintain professional liability insurance with limits
of not less than $300,000 per claim and with aggregate policy limits of not less
than $1 million per dentist. The Company is a named insured in most cases. The
Company does not maintain separate liability insurance. While the Company
believes that the foregoing provides adequate liability insurance coverage,
there can be no assurance that a future claim or claims will not be successful
or, if successful, will not exceed the limits of available insurance coverage or
that such coverage will continue to be available at acceptable costs and on
favorable terms.
COMPETITION
The dental practice management segment of the dental services industry is
highly competitive and is expected to become increasingly competitive. The
primary bases of competition between dental practice management companies are
management expertise and experience, the elements of its operating strategy, the
opportunity for career enhancement of potential associated dentists and other
dental professionals, the size of the dental care network, the sophistication of
management information systems, liquidity, the terms of the management
agreements and name recognition. The Company currently competes with other
dental practice management companies in its existing markets, including Coast
Dental Services, Inc. and Castle Dental Centers, Inc. in Florida. There are also
a number of dental practice management companies currently operating in other
parts of the country which may enter the Company's existing markets in the
future. Many of such competitors and potential competitors have substantially
greater financial resources than the Company, have established large dental
practice networks, or otherwise enjoy competitive advantages which may make it
difficult for the Company to compete against them or enter into additional
Management Agreements on terms acceptable to the Company. In addition, as the
Company seeks to expand its operations into new markets, it is likely to face
competition from dental practice management companies which already have
established a strong presence in such markets.
The business of providing dental services is highly competitive in each of
the markets in which the Managed Dental Centers operate or in which operations
are contemplated. The primary bases of such competition are quality of care and
reputation, marketing exposure, convenience and traffic flow of location,
relationships with managed care entities, appearance and usefulness of
facilities and equipment, price of services and hours of operation. The
Affiliated Dentists compete with other dentists
16
<PAGE>
who maintain single or satellite offices, as well as with dentists who maintain
group practices, operate in multiple offices or are members of competing dental
practice management networks. Many of those dentists have established practices
and reputations in their markets. In addition to competing against established
practices for patients, the Dental Centers compete with such practices in the
retention and recruitment of general dentists, specialists and hygienists to
staff the Dental Centers. If the availability of dentists begins to decline in
the Company's existing or targeted markets, it may become increasingly difficult
to attract and retain the dental professionals to staff the Dental Centers.
There can be no assurance that the Dental Centers will be able to compete
effectively with such other practices.
SERVICE MARKS
The Company has no registered service marks, trademarks, service names,
tradenames, or logo.
EMPLOYEES
The Company has entered into an agreement with an unrelated third party
co-employer pursuant to which the majority all of the Company's administrative
and support staff located in each Florida Managed Dental Center as well as the
Company's corporate office management and staff are co-employed. In certain
cases, on a temporary basis, the Company will employ the administrative staff
directly until the co-employment arrangement is established. At December 31,
1997, the Company employed or co-employed 84 persons, consisting of 36 dental
assistants, 32 dental office staff, and 16 executive and administrative staff.
In addition, each of the Florida PAs has entered into an agreement with the
co-employer pursuant to which such PA and the co-employer co-employ all
professional staff (all co-employees of the Company and the PAs are referred to
hereinafter as the "Co-Employees"). At December 31, 1997, such PAs, in the
aggregate, employed or co-employed 36 dental professionals, consisting of 20
dentists and 16 dental hygienists. The Company or the PAs, as the case may be,
are responsible for the hiring, retention, salary and bonus determination, job
performance-related training and other similar matters affecting co-employees
while the co-employer is responsible for (i) payroll administration, including
recordkeeping, payroll processing, making payroll tax deposits, reporting
payroll, taxes and related matters, (ii) risk management, including on-site
safety inspections, monitoring, training and workers' compensation claim
management and administration, (iii) administering benefit plans and (iv) human
resource consulting and expertise on other human resource issues. The agreements
with the co-employer are terminable by either party without cause on 30 days
written notice, or for cause on 24 hours written notice. At December 31, 1997,
the Company employed 28 non-professional staff in Michigan and the Company's
subcontractor employed 29 non-professional staff in the Detroit area Managed
Dental Centers. At December 31, 1997, the Michigan PAs employed 31 dental
professionals, consisting of 17 dentists and 14 dental hygienists. See Item 1
"Business - Services and Operations - Human Resource Management."
17
<PAGE>
ITEM 2. PROPERTIES
At December 31, 1997, the PAs, or in some cases the Company, leased between
1,200 and 10,000 square feet of office space for each of the Managed Dental
Centers. Rental payments for a leased Managed Dental Center range from
approximately $18,000 per annum to $144,000 per annum. The Company plans to
continue to lease rather than purchase space for the Managed Dental Centers to
preserve the Company's available capital. The Company intends to add Managed
Dental Centers to its network, which will result in additional office space
under lease. See Item 13 "Certain Relationships and Related Transactions."
The Company leases approximately 7,000 square feet of office space in
Sarasota, Florida for its corporate headquarters at an annual rental of
approximately $75,000. This lease expires in April 2002 and the Company believes
the facility is adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings involving the Company.
Affiliated Dentists and PAs are from time to time subject to malpractice claims.
To the Company's knowledge, there are no material malpractice claims pending
against any Affiliated Dentist or PA. Any such proceedings or claims, if
successful, could result in damage awards exceeding, perhaps substantially,
applicable insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED MATTERS
The Common Stock of the Company is traded and quoted on the NASDAQ National
Market under the symbol DENT. The following table sets forth since November 4,
1997, the date the Company's Common Stock commenced trading, the high and low
per share price of the Company's Common Stock as reported by NASDAQ. The Company
issued 2.0 million shares of Common Stock at $12.00 per share pursuant to its
initial public offering in November 1997. Prior to that date, there was no
established trading market for the Common Stock.
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
Fourth Quarter (November 4, 1997 - $ 13.88 $ 9.00
December 31, 1997)
The number of stockholders of record of the Company's Common Stock on March 26,
1998 was approximately 54.
The Company's authorized capital stock consists of 50,000,000 shares of common
stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, $0.01
per share (the "Preferred Stock").
The Company has never declared or paid any cash dividends on its Common Stock.
The Company anticipates that all future earnings will be retained by the Company
for the development of its business. Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The Company is subject to certain loan covenants containing certain provisions
restricting the Company's ability to pay dividends.
19
<PAGE>
No securities that were not registered under the Securities Act have been
issued or sold within the past year except as follows:
<TABLE>
<CAPTION>
DATE OF SALE
AMOUNT AND TYPE OF SECURITIES OR ENTITLEMENT PURCHASER(S) CONSIDERATION
<S> <C> <C> <C>
Option to purchase 49,576 shares of January 1997 David P. Nichols (1)
Common Stock
163,080 shares of Common Stock February 1997 Mitchell Olan (2)
Option to purchase 6,833 shares of
Common Stock April 1997 Dennis Corona, DDS, P.C. (3)
42,401 shares of Common Stock June 1997 The Nassau Group, Inc. $10,000(4)
42,401 shares of Common Stock June 1997 JF Lavelle $10,000(5)
Option to purchase 10,938 shares of
Common Stock August 1997 Dennis Corona, DDS, P.C. (3)
Option to purchase 61,500 shares of
Common Stock November 1997 Employee Option Plan (6)
Option to purchase 124,000 shares of
Common Stock November 1997 Non-Employee Option Plan (7)
80,000 shares of Common Stock December 1997 Marketplace Shareholders (8)
<FN>
- ----------------------
(1) Such options were granted pursuant to Mr. Nichols' employment agreement with
an exercise price of $1.53 per share.
(2) Such shares were issued pursuant to warrants to purchase 81,540 shares of
Common Stock granted to Mr. Olan on January 26, 1994 and warrants to to
purchase 81,540 shares of Common Stock granted to Mr. Olan on October 25,
1996, respectively. Mr. Olan issued promissory notes to the Company in the
amounts of $147,768 and $125,000, respectively in payment of such shares.
(3) Granted in connection with this PA's purchase of a dental practice and
exercisable.
(4) Such shares were issued pursuant to warrants to purchase 42,401 shares of
Common Stock granted to the Nassau Group, Inc. in September 1995.
(5) Such shares were issued pursuant to warrants to purchase 42,401 shares of
Common Stock granted to Mr. Lavelle in September 1995.
(6) Such shares were issued pursuant to the 1997 Executive Incentive
Compensation Plan with exercise prices of $12.00 per share. Company
expects to register these shares in 1998.
(7) Such shares were issued pursuant to the 1997 Non-qualified Stock Option Plan
with exercise prices of $12.00 per share.
(8) Such shares were issued in conjunction with acquisition of Marketplace
Dental, Inc.
</FN>
</TABLE>
The aforementioned issuances and sales were made in reliance upon the exemption
from the registration provisions of the 1933 Act afforded by Section 4(2)
thereof and/or Regulation D promulgated thereunder, as transactions by an issuer
not involving a public offering. The purchasers of the securities described
above acquired them for their own account and not with a view to any
distribution thereof to the public. The certificates evidencing the securities
bear legends stating that the securities may not be offered, sold or transferred
other than pursuant to an effective registration statement under the 1933 Act,
or an exemption from such registration requirements.
The Company filed a Registration Statement (No. 333-34429) effective October 31,
1997 for its initial public offering. The offering closed on November 4, 1997.
The managing underwriters for the offering were Raymond James & Associates, Inc.
and William Blair & Company, LLC. Two million shares of the Company's Common
Stock were sold by the Company at $12 per share for an aggregate price of $24
million. Underwriter discounts and commissions were $1.68 million. On December
5, 1997, 300,000 shares of Common Stock were sold by Selling Shareholders for an
aggregate price of $3.6 million which was paid to the Selling Shareholders.
Selling security holders received net proceeds of $3,348,000 after paying
$252,000 in underwriter discount and commissions.
From November 4, 1997 through December 31, 1997 the Company expended an
estimated $2,812,700 for costs incurred in connection with the offering,
including Underwriter discounts and commissions ($1,680,000), legal ($395,000),
accounting ($342,000), printing ($175,000) and miscellaneous expenses. None of
these expenses were payable either directly or indirectly to any directors,
officers or affiliates. After deducting these costs, net proceeds of the
offering to the Company were $21,187,300.
20
<PAGE>
From November 4, 1997 through December 31, 1997, the Company expended an
estimated $950,000 for the purchase of tangible and intangible non-dental assets
and the entering into Management Agreements with dental practices. No portion of
the $950,000 was paid to any directors, officers or affiliates. The balance of
the proceeds remain invested in short-term cash and cash equivalents.
21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The Company commenced operations in November 1993. The following selected
consolidated financial data for the year ended December 31, 1993 and at December
31, 1993 are derived from the unaudited Consolidated Financial Statements of the
predecessors of Dental Care Alliance, Inc. The following selected consolidated
financial data for the years ended December 31, 1994, 1995, 1996 and 1997 and at
December 31, 1994, 1995, 1996, and 1997 are derived from the Consolidated
Financial Statements of Dental Care Alliance, Inc. and its predecessors which
have been audited by Price Waterhouse LLP, independent certified public
accountants. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and other financial
information included elsewhere in this Form 10-K.
22
<PAGE>
<TABLE>
<CAPTION>
Summary Financial and Operating Data
YEARS ENDED DECEMBER 31,
1993 1994 1995 1996 1997
-------- -------- ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Management fees $ 83,700 $673,304 $ 513,705 $ 1,289,828 $ 7,588,193
Consulting and licensing fees -- 42,763 262,769 347,600 290,885
-------- -------- ----------- ----------- -----------
Total revenues 83,700 716,067 776,474 1,637,428 7,879,078
-------- -------- ----------- ----------- -----------
Managed dental center expenses (1):
Staff salaries and benefits -- -- -- 223,657 2,021,497
Dental supplies -- -- -- 79,448 650,444
Laboratory fees -- -- -- 98,222 971,024
Marketing -- -- -- 38,128 414,519
Occupancy -- -- -- 106,501 998,141
Other -- -- -- 57,182 851,631
-------- -------- ----------- ----------- -----------
Total managed dental center expenses -- -- -- 603,138 5,907,256
-------- -------- ----------- ----------- -----------
83,700 716,067 776,474 1,034,290 1,971,822
Salaries and benefits 8,339 408,716 400,669 521,683 786,795
General administrative 16,064 204,901 234,577 260,558 600,657
Advisory services (2) -- -- 127,768 -- --
Depreciation and amortization -- 15,150 22,106 27,654 163,681
-------- -------- ----------- ----------- -----------
Operating income (loss) 59,297 87,300 (8,646) 224,395 420,689
Interest income, net 22,584 6,494 20,781 263,568
-------- -------- ----------- ----------- -----------
Income before income taxes
and minority interest 59,297 109,884 (2,152) 245,176 684,257
Provision for income taxes -- 19,919 -- 35,500 263,952
Minority interest -- 2,440 8,654 7,674 --
-------- -------- ----------- ----------- -----------
Net income (loss) $ 59,297 $ 87,525 $ (10,806) $ 202,002 $ 420,305
======== ======== =========== =========== ===========
Adjustment to redemption value of common
and preferred securities -- 39,951 85,709 (191,237) (10,500)
Cumulative preferred stock dividend -- -- -- (6,485) (100,000)
-------- -------- ----------- ----------- -----------
Net income applicable to common stock $ 59,297 $127,476 $ 74,903 $ 4,280 $ 309,805
======== ======== =========== =========== ===========
Net income (loss) per common share:
Basic $ 0.02 $ -- $ 0.07
Diluted $ 0.02 $ -- $ 0.07
Weighted average common shares outstanding:
Basic 3,791,610 3,829,029 4,610,331
Diluted 3,864,291 3,873,747 4,697,80
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1993 1994 1995 1996 1997
------------- ------------ ------------ -------------- --------------
(UNAUDITED)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital $ 144,497 $113,385 $ 98,676 $ 965,853 $19,756,744
Total assets 187,203 466,820 524,543 3,122,939 28,554,487
Long-term debt, including current maturities 22,100 209,437 163,745 214,002 1,012,111
Redeemable common and preferred securities - - - 1,593,799 -
Stockholders' equity 47,845 118,400 296,837 632,385 24,553,825
<FN>
- ----------------------
(1) Effective October 1996, the Company revised the terms of all of its 12
then existing Management Agreements such that the Company is responsible
for the payment of all non-professional expenses of the Managed Dental
Centers. Ten Management Agreements were also revised to change the base
for the Company's management fee from a percentage of net profits at each
PA to a percentage of net patient revenues from each PA. Accordingly,
prior to these revisions to such 12 Management Agreements, all
non-professional expenses of the Managed Dental Centers and related
revenues were reflected in each PA's financial statements. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(2) Represents non-cash charges for warrants issued in consideration for
certain financial advisory services.
</FN>
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Dental Care Alliance, Inc. ("DCA") was formed on October 23, 1996 to effect
a reorganization among DCA, Golden Care Holdings ("GCH"), the predecessor which
was incorporated in 1993, and its majority owned subsidiaries, (collectively the
"Company"). The Company is a dental practice management company providing
management and licensing services to dental practices in Florida and Michigan.
As of December 31, 1997 the Company provided management and licensing services
to 29 Managed Dental Centers, 24 of which are located in Florida and 5 of which
are located in Michigan. Additionally, at such date, the Company provided
licensing services to 3 Licensed Dental Centers in Florida. Management services
include financial, accounting, billing, training, efficiency and productivity
enhancement, recruiting, team building, marketing, advertising, purchasing,
collection and other services, as well as the provision of management and
administrative personnel. Licensing services include marketing, advertising and
purchasing.
With respect to management services it provides to dental practices, the
Company enters into Management Agreements with PAs that own the practices. The
Company commenced operations in November 1993 by providing management and
licensing services to five dental practices located in Sarasota, Palmetto,
Largo, Port Charlotte and Venice, Florida. In 1994, the Company entered into its
first Management Agreement for a newly developed practice located in Englewood,
Florida and entered into a Management Agreement to manage an additional existing
practice in Fort Myers, Florida. In 1995, the Company entered into four new
Management Agreements, two of which were with respect to newly developed
practices located in Kissimmee and Bradenton, Florida and the remaining two of
which were with respect to existing practices located in Sarasota and Port
Richey, Florida. The Company entered into four additional Management Agreements
in 1996 to manage practices located in Orlando, Tampa, Ocoee and Clearwater,
Florida. In addition, the Company terminated its Management Agreements with
respect to the Palmetto and Venice Managed Dental Centers in 1995 and with
respect to the Port Richey Managed Dental Center in 1996. In 1997, the Company
entered into seventeen additional Management Agreements to manage five practices
in Michigan and twelve in Florida.
Prior to October 1996, the management fee paid to the Company pursuant to
the Management Agreements had been equal to a percentage ranging from 50-90% of
the net profits of the individual Managed Dental Centers, as defined in the
Management Agreements, plus reimbursement to the Company of its non-professional
expenses. Effective October 1996, the Company revised all of its 12 then
existing Management Agreements. Ten of these agreements were revised such that
the Company earns management fees based on 74% of total net patient revenues and
payment is based on cash collected minus any patient refunds ("Net Collected
Revenue") and the Company assumes responsibility for the payment of the
non-professional expenses of the Managed Dental Centers (the "Standard
Management Agreements"). The remaining two Management Agreements continue to
have management fee structures based upon 50-55% of the net profit, as defined,
of the two Managed Dental Centers.
The Company will seek to cause future Management Agreements to be on terms
substantially similar to those of the Standard Management Agreements. The method
by which the Company manages the revenue and profitability of Managed Dental
Centers is fundamentally the same, regardless of whether the Management
Agreement with any particular PA provides for a management fee based upon net
profits or net patient revenue. In the "net profits" type of Management
Agreement, both the
25
<PAGE>
PA owner and the Company share proportionally in the favorable impact of any
initiatives. In the "net patient revenues" type of Management Agreement, the
cost management benefits resulting from such initiatives accrue to the party
responsible for such costs and both parties share proportionally in revenue
enhancements. Period to period comparisons of the Company's results of
operations set forth below should be considered in light of the significant
changes in the Company's growth and in recognition of revenues and expenses
resulting from the revisions to the Management Agreements in October 1996.
The Company believes that certain of the Management Agreements are material
to the Company as a whole. The Managed Dental Center in Flint, Michigan,
contributed approximately 14% of the Company's aggregate revenue in 1997 and may
contribute in excess of 10% of the Company's aggregate revenue in 1998. Further,
the PA located in Port Charlotte, Florida contributed approximately 18% and 9%
to the Company's revenues in 1996 and 1997. The Flint Management Agreement has a
term of 25 years and provides for a management fee equal to 74% of the Net
Collected Revenues earned by the associated PA. The Port Charlotte Management
Agreement expires in 2003 and provides for a management fee of 55% of the net
profits of the associated PA. In addition, the Port Charlotte Management
Agreement provides that the PA may, during the period commencing on October 20,
1998 and ending 90 days thereafter, terminate the agreement by paying the
Company an amount equal to $185,460 less the amount by which the aggregate fees
paid to the Company pursuant to such Management Agreement during either or both
of the successive one year periods following October 20, 1996 exceeds $100,000,
and satisfying other conditions set forth therein. The Company earned fees of
$121,900 for the year ended December 31, 1997.
All patient revenues are billed to patients and providers under the
authority and identification numbers of the individual PAs. Patient revenues and
receivables are recorded on the accounts of the PAs. Funds are dispersed
initially to pay all the professional costs of the PAs. Thereafter, funds are
disbursed to the Company under the terms of the Management Agreements. Any
remaining funds are retained by the PA. If funds are insufficient to pay the
Company under the terms of the relevant Management Agreement, a payable from the
PA to the Company is recorded on the Company's books.
The Company also enters into license agreements with each Dental Center
pursuant to which the Company provides licensing and advertising services to the
Dental Centers. In return for such services, the Company has collected fees
generally ranging from $800 to $1,000 per month from each Managed Dental Center
and $600 from each Licensed Dental Center.
Historically, in connection with the execution of a Management Agreement, a
PA has typically acquired both the dental and the non-dental assets of a Managed
Dental Center. The Company has either made loans to the acquiring PA or has
assisted the PA in obtaining third-party financing to purchase such assets.
Recently, the Company has begun acquiring certain of the non-dental assets of
Managed Dental Centers while the PAs acquire the dental assets of such Managed
Dental Centers. In addition, due to changing market conditions, the Company has
begun compensating PAs for the execution of Management Agreements.
The Company from time to time has made loans to newly formed PAs with which
it has entered into Management Agreements to purchase the dental assets of the
related dental practices. In return the PAs execute promissory notes to the
Company in the amount of such loans. At December 31, 1997, the
26
<PAGE>
total outstanding balance of such loans was $397,462. The notes underlying such
loans generally have terms ranging from two to ten years, bear interest at
rates ranging between 8.5% and 18.5% and are secured by the assets of the
related dental practice. The PAs to which such loans are made are newly formed
and have no assets other than the assets of the dental practices being acquired
and no liabilities other than the liabilities relating to the loans. In
addition, the Company from time to time makes working capital advances to
individual PAs, although it is not obligated contractually or otherwise to make
such advances. The extension of loans and advances to the PAs by the Company is
not considered upon entering into Management Agreements with the Company.
Extension of any such loans or advances is entirely within the Company's
discretion. These advances are due within 12 months of issuance, bear interest
at 8-1/2%, subject to adjustment based on changes in the rates at which the
Company may borrow from its lenders. All advances made to PAs are guaranteed by
the relevant PA owner, although there is no independent collateral for these
working capital advances. A repayment default under such advances is also a
default under the relevant Management Agreement which permits the Company, among
other things, to liquidate the assets of the dental practice. At December 31,
1997, the total outstanding balance of such advances was $483,421. There have
been no revisions to the terms of any such loans or advances. The PAs are
current in the payment of their loans or advances and the Company believes that
the financial condition of the PAs to which it has made loans or advances is
satisfactory. Prior to making any loan or advance, the Company analyzes the
collectibility of the receivables resulting from such loans or advances based on
the projected cash flow of the relevant PA and the estimated fair market value
of the assets to be owned or owned by such PA. The Company, through its
obligations under the Management Agreements, is able to assess on a periodic
basis the collectibility of its receivables since it has access to the billing
and collection information relating to the PAs' patient receivables and
operational cash flow, and evaluate on a periodic basis outstanding receivables
versus accounts payable and revenue trends. Accordingly, the Company is in a
position to quickly assess the ability of each PA to meet its obligations under
the notes and advances. As a result, the Company is able to react quickly in the
event that there is a material change in the creditworthiness of any of the PAs.
The Company also analyzes any historical trends of the PAs relating to bad debts
or the inability of the PAs to generate collectible patient receivables. The
Company assesses the guaranty of its PA owners for financial stability and
creditworthiness through periodic reviews which include analysis of credit
reports, bank references, personal and business tax returns and personal
financial statements. In addition, the reputation of each PA owner in the
business community and the length and quality of the PAs' relationship with the
Company are examined by the Company to assess the PA owners as guarantors of the
loans and advances. The Company may modify the terms of Management Agreements
prospectively if the PA does not perform at a level sufficient to repay the
advances.
None of the PA owners are officers, directors or employees of the Company.
Dr. Dennis A. Corona, the owner of PAs operating a majority of the Managed
Dental Centers, owns 1% of the Company's Common Stock. In addition, five Managed
Dental Centers in Michigan are owned by PAs commonly controlled by Dr. Ross
Johnson. See Note 13 to the Consolidated Financial Statements.
The PAs are primarily liable for repayment of the notes and advances to the
Company with the PA owners being secondarily liable for repayment under the
notes and advances. The PAs and PA owners bear the primary risk under the notes
and advances. The Company also bears the risk of non-payment to the extent that
the assets of PAs or PA owners are insufficient to pay the outstanding balances
under the notes or advances upon any default.
27
<PAGE>
The PAs take reserves against, and, when appropriate, write-off bad debts on,
patient receivables. For the year ended December 31, 1997, reserves for bad
debts on patient receivables aggregated to approximately $268,000 on net patient
revenues of $10,588,000. To date, there have been no defaults under, or
write-offs in connection with, notes receivable from or advances to PAs,
although there can be no assurance that there will be no such defaults or
write-offs in the future. Although there has to date been no default or material
delinquency under the notes or advances, the Company has established a reserve
for such defaults in the amount of $86,000 as of December 31, 1997. The Company
will consider establishing reserves against such defaults should future
circumstances demonstrate the need for such reserves.
The Management Agreements for PAs that have acquisition loans from the
Company and for most PAs with working capital advances provide that the PAs must
meet their repayment obligations under any outstanding indebtedness, whether
owed to the Company or any third party, prior to paying any management fees. A
default under any such obligation is by its terms a default under the Management
Agreement. In the event of such a default, the Company or its designee is
entitled to purchase the assets and liabilities or the capital stock of the
relevant PA at a price equal to 60% of the annualized gross revenues of such PA
owner over the previous 24 months, minus any liabilities, including outstanding
indebtedness, if any, to the Company of the PA at the date of purchase. In such
event, the Company would evaluate whether, at its option, to have another PA
owner or other licensed dentist assume control of the practice and continue to
generate management fees or to liquidate the assets of such PA.
The Company does not consolidate the balance sheets or the operating
results (including revenue and expenses) of the dental practices under the
Management Agreements since these revenues and expenses are earned and incurred
by the PAs, not the Company. The Company has recorded goodwill and other
intangible assets in cases where the Company has paid a PA in consideration for
a modification to an existing Management Agreement or entering into new
Management Agreements. Where the Company acquires the assets of another
management company, such a transaction constitutes a business combination and
the Company recognizes the related goodwill, if any, in accordance with the
purchase method of accounting.
Prior to October 1996, the majority of the Company's operations were
performed through limited liability companies. Except for the period from
January through September 1994 with respect to one of the Company's predecessors
in interest, the Company's statements of operations prior to October 1996 do not
include a provision for income taxes. Included in the Company's tax accruals are
amounts related to establishing a deferred tax liability for book/tax
differences arising from its reorganization from limited liability corporation
to C corporation status.
In October, 1997, the Company expanded its Management Information System
hardware and software in the corporate office. In 1998, the Company has begun
testing of new dental practice management software in several of its Managed
Dental Centers. It is anticipated that all of the dental practices currently
under management will have installed the new software and, where necessary,
upgraded its hardware requirements. The Company believes that the cost for the
hardware and software will not be in excess of $250,000. The new software
installed at several of the Managed Dental Centers and the
28
<PAGE>
corporate offices have addressed the Year 2000 issues for those systems under
the Company's control. The Company has not determined the level of preparedness
of third parties with which it deals nor the implications that a failure on
their part could have on the Company. The Company is in the process of making
that determination. In analyzing potential new affiliations, the Company will
consider the cost and timing of a practice's ability to meet the Year 2000 issue
before executing an agreement.
ACQUISITION
On December 29, 1997, the Company acquired all of the outstanding capital
stock of Marketplace Dental, Inc. ("Marketplace") pursuant to the merger of
Marketplace with and into Dental Care Alliance of Florida, Inc. , a wholly-owned
subsidiary of the Company. This transaction has been recorded under the purchase
method of accounting.
Pursuant to the merger, the Company acquired all of the assets of
Marketplace. All shares of Marketplace common stock were converted into the
right to receive, in the aggregate, eighty thousand (80,000) shares of common
stock of the Company and an amount in cash of approximately $500,000. In
addition, the Merger Agreement calls for the issuance of additional common stock
if certain operating results are achieved. Marketplace is a dental practice
management company which manages six dental practices in Palm Beach County,
Florida. The assets consisted primarily of non-dental assets (including dental
equipment) and management agreements.
The effective date specified in the merger agreement is December 1, 1997,
based upon the assumption of defined net assets per the final November 30, 1997
balance sheet. Since the Articles of Merger were not executed and accepted by
the State of Florida until December 29, 1997, the Company's statement of
operations excludes the revenue and expenses of Marketplace for the period from
December 1, 1997 until December 29, 1997. Had the effective date been December
1, 1997 as specified in the merger agreement, the Company's revenues and Managed
Dental Center expenses for the year ended December 31, 1997 would have been as
follows:
Total revenue $ 7,970,228
Total Managed Dental Center expenses 5,970,939
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Management fees. Management fees consist of a percentage of the net
realizable patient-related revenue at the majority of the PAs and a percentage
of the net realizable profits earned by the remaining PAs. Management fees
increased 488% from $1.3 million for the year ended December 31, 1996, to $7.6
million for the year ended December 31, 1997. Of this increase, $3.1 million is
derived from the addition of seventeen Managed Dental Centers during the year,
while the balance primarily relates to the
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<PAGE>
October 1996 revision to the Management Agreements. Prior to October 1996 the
Company was not responsible for any managed dental center expenses. See Note 1
to the Consolidated Financial Statements.
CONSULTING AND LICENSING FEES. Consulting and licensing fees consist of
fees earned by the Company for licensing services to all of the Dental Centers
and consulting services to four Managed Dental Centers in Michigan. Consulting
and licensing fees decreased 16.3% from $347,600 for the year ended December 31,
1996, to $290,885 for the year ended December 31, 1997. The decrease is
attributable to the cessation of consulting fees on four Michigan practices
which were converted effective July 1, 1997 into Managed Dental Centers, as
income formerly attributable to these consulting fees are now included in the
management fees, offset by the addition of seventeen Managed Dental Centers in
1997.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses consist of
non-professional expenses at the Managed Dental Centers. Managed dental center
expenses increased 879% from $603,138 for the year ended December 31, 1996, to
$5.9 million for the year ended December 31, 1997. Of this increase, $2.3
million is derived from the addition of seventeen Managed Dental Centers, while
the balance relates to the October 1996 revision to the Management Agreements.
Prior to October 1996, the Company was not responsible for any managed dental
center expenses.
SALARIES AND BENEFITS. Salaries and benefits consist of costs for salaries
and benefits for employees at the Company's corporate and regional offices.
Salaries and benefits increased 50.8% from $521,683 for the year ended December
31, 1996, to $786,795 for the year ended December 31, 1997. This increase was
attributable primarily to the hiring of additional personnel in the Company's
accounting and business development departments to administer the additional
seventeen Managed Dental Centers.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
consists of expenses related to the operation of the Company's corporate and
regional offices, such as rent, legal, accounting and travel expenses. General
and administrative expense increased 130.5% from $260,558 for the year ended
December 31, 1996, to $600,657 for the year ended December 31, 1997. This
increase was primarily attributable to the establishment of a regional office in
Michigan, increased legal, insurance and other costs required of a public
company, and increased costs associated with expanding the Company's corporate
office to administer the additional seventeen Managed Dental Centers.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of the depreciation expense on capital assets owned by the Company and
located at either the corporate offices or at Managed Dental Centers and
amortization expense on Management Agreements or other intangible assets.
Depreciation and amortization expense increased 491.9% from $27,654 for the year
ended December 31, 1996, to $163,681 for the year ended December 31, 1997. This
increase was attributable to the depreciation on the acquired non-dental assets
and amortization on the acquired Management Agreements related to the seventeen
additional Managed Dental Centers, as well as a full year's amortization on the
Management Agreements capitalized in October 1996.
INTEREST INCOME, NET. Interest income, net increased 1168.3% from $20,781
income for the year ended December 31, 1996, to $263,568 income for the year
ended December 31, 1997. This increase
30
<PAGE>
was attributable primarily to earnings on cash balances associated with the
Company's public offering in November 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
MANAGEMENT FEES. Management fees increased 151.1% from $513,705 in 1995 to
$1.3 million in 1996. This increase resulted primarily from the October 1996
revision to the Management Agreements and, to a significantly lesser extent, the
execution of four new Management Agreements. See Note 3 to the Consolidated
Financial Statements.
CONSULTING AND LICENSING FEES. Consulting and licensing fees increased
32.3% from $262,769 in 1995 to $347,600 in 1996. This increase was attributable
primarily to an increase in the consulting fees earned from the Michigan
practices, additional license fees earned from four new Managed Dental Centers
and a full year of license fees from four Managed Dental Centers acquired in
1995.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses increased
from $0 in 1995 to $603,138 in 1996. This increase was attributable to the
revisions to the Management Agreements in October 1996. Prior to 1996, the
Company was not responsible for any managed dental center expenses.
SALARIES AND BENEFITS. Salaries and benefits increased 30.2% from $400,669
in 1995 to $521,683 in 1996. This increase was attributable primarily to the
hiring of additional staff at four new Managed Dental Centers.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
11.1% from $234,577 in 1995 to $260,558 in 1996. This increase was attributable
to increased expense associated with the revised Management Agreements and the
cost of incorporating and recapitalizing the Company.
ADVISORY SERVICES. Advisory services expense relates to non-cash charges
for warrants issued in consideration of certain advisory services rendered to
the Company by a third party. Advisory services expense decreased from $127,768
in 1995 to $0 in 1996 as a result of a one time recognition in 1995 of such
expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 25.1% from $22,106 in 1995 to $27,654 in 1996. This increase was
attributable to depreciation of additional equipment, amortization of
incorporation costs and amortization of Management Agreements capitalized in
October 1996 in connection with the revision of the Management Agreements.
INTEREST INCOME, NET. Interest income, net increased 220.0% from $6,494 in
1995 to $20,781 in 1996. This increase was attributable primarily to earnings on
increased cash balances and earnings on notes receivable from Managed Dental
Centers.
SEASONALITY
The Company historically has experienced seasonal fluctuations in its
quarterly revenue. Specifically, the first and fourth quarters reflect the
highest patient volume, while the third quarter has traditionally had the lowest
patient volume. The Managed Dental Centers in Florida have traditionally
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<PAGE>
experienced increased patient visits in November through March due to an
increase in the population base during these months, while patient visits
decrease during the summer. Beginning in July 1997, the Company executed
Management Agreements with Managed Dental Centers in Michigan. The Company
expects that the seasonality in Florida will be offset to some extent by fewer
seasonal fluctuations in Michigan.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited quarterly operating results for
each of the Company's last four quarters. This information has been prepared on
a basis consistent with the Company's audited financial statements and includes
all adjustments (consisting only of normal recurring adjustments) that
management considers necessary for a fair presentation of the data. These
quarterly results are not necessarily indicative of future results of
operations. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the Company's Prospectus
dated November 4, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of Managed Dental Centers (1) 12 13 20 29
Net patient revenue at Managed Dental
Dental Centers (2) .............. $ 1,668,166 $ 1,861,076 $ 3,190,620 $ 3,868,333
Total revenues ...................... 1,204,681 1,428,963 2,275,396 2,970,038
Managed dental center expenses ...... 921,142 1,102,791 1,753,070 2,130,256
Operating income .................... 28,707 30,440 115,246 246,296
Net income .......................... 26,622 32,989 75,648 285,046
<FN>
- ----------------------
(1) Presented as of the end of the period.
(2) Net patient revenue is the total amount of revenue recorded by the PAs
during the period. Revenue is included from and after the date on which
the relevant PA executed a Management Agreement with the Company.
</FN>
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception and until the Company's public offering on November 4,
1997, the Company has financed its operations primarily through internal cash
flow, the sale of equity securities and commercial bank borrowings. Net cash
provided by operations for the years ended December 31, 1995, 1996 and 1997 was
$75,873, $270,121 and $557,767, respectively. Net cash provided by operating
activities for the years ended December 31, 1995, 1996 and 1997 consisted
primarily of net income, adjusted for non-cash expenses, and increases in
accounts payable and accrued liabilities, offset by increases in consulting and
license fee receivables and management fees receivable.
Cash used in investing activities for the years ended December 31, 1995,
1996 and 1997 was ($5,649), ($487,858) and ($2.0 million), respectively. For the
year ended December 31, 1995, payments on notes receivable offset a $20,000
increase in other assets. For the year ended December 31, 1996, the
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<PAGE>
investing activities were primarily related to organizational costs associated
with the formation of the Company in October 1996 through a reorganization of
its predecessor entities. For the year ended December 31, 1997, the investing
activities included $1.0 million related primarily to the purchase of Management
Agreements for the four Michigan Managed Dental Centers and $613,006 related
primarily to the purchase of non-dental assets for three additional Managed
Dental Centers and certain equipment purchases for the Corporate office
expansion.
Cash (used in) provided by financing activities for the years ended
December 31, 1995, 1996 and 1997 was ($69,926), $1,428,803 and $20,572,424,
respectively. In the year ended December 31, 1995, the financing activities
included $45,692 in debt repayments and $40,000 in dividends on Preferred Stock.
For the year ended December 31, 1996, the financing activities were primarily
related to net proceeds on the Company's issuance of preferred stock. For the
year ended December 31, 1997, the Company had $21.2 million in net proceeds on
common stock issuances offset by $466,967 in advances to PAs and $167,945 in net
repayment of debt.
In August 1997, the Company entered into a revolving line of credit (the
"Credit Agreement") which provides for an aggregate of $1.2 million. Under the
terms of the Credit Agreement, the Company may use up to $600,000 of the credit
line for the purchase of non-dental assets of dental centers provided that each
borrowing is repaid within 45 days of its drawdown. The remaining $600,000 may
be used for general working capital needs. The revolving line of credit bears
interest at 0.75% per annum above the lender's prime rate and is payable on
demand. Interest only is payable monthly. Amounts borrowed pursuant to the
Credit Agreement are secured by a first security interest in most of the
Company's assets, including receivables and equipment. Additionally, any
outstanding balances under the working capital line are guaranteed by the
Company's Chairman of the Board, President and Chief Executive Officer. As of
December 31, 1997, the Company had no outstanding amounts under its line of
credit. In March 1998, the Company executed a non-binding commitment letter for
a new credit facility in the amount of $15 million ("Credit Facility"). The
Credit Facility will provide for an interest rate at 1.75% over LIBOR and will
be collateralized by a majority of the Company's assets.
The Company has made loans to various PAs in connection with the PAs'
acquisition of assets of dental practices and has made working capital advances
to various PAs for their operations. The loans, which are evidenced by
interest-bearing notes that are payable upon demand and are personally
guaranteed by the PA owners.
The Company intends to enter into additional Management Agreements with
respect to, as well as purchase the non-dental assets of, additional practices.
In addition, the Company may acquire other dental practice management companies,
expend funds to execute new Management Agreements or lend funds to PAs to
purchase certain assets. The Company plans to finance these activities through a
combination of the net proceeds of its public offering, cash flow from
operations, bank financing and issuances of Common Stock.
On November 4, 1997, the Company completed the public offering of 2,000,000
shares of Common Stock at $12 per share resulting in proceeds, net of
underwriter commissions and offering costs, of approximately $21.2 million.
Based upon the Company's anticipated needs for acquisition of non-dental assets
of dental practices, working capital and general corporate purposes, management
33
<PAGE>
believes that the combination of existing cash, cash flow from operations and
available credit lines will be sufficient to meet its capital requirements
through 1998.
INFLATION
Inflation has not had a significant impact on the Company in the past nor
is it expected to have a significant impact in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants................. 36
Consolidated Balance Sheets ....................................... 37
Consolidated Statements of Operations ............................ 38
Consolidated Statements of Stockholders' Equity .................. 39
Consolidated Statements of Cash Flows ............................ 40
Notes to Consolidated Financial Statements ....................... 41
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Dental Care Alliance, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Dental Care
Alliance, Inc. (the "Company") successor to Golden Care Holdings, Inc. and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three 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.
36
Price Waterhouse LLP
Tampa, Florida
March 30, 1998
<PAGE>
<TABLE>
<CAPTION>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1996 1997
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $1,253,259 $20,367,722
Consulting and license fees receivable 59,000 64,116
Management fee receivable from PAs 397,441 914,026
Advances to PAs, net 16,454 483,421
Other current assets 27,644 254,412
Current portion of long-term notes receivable from PAs 68,460 83,522
---------- -----------
Total current assets 1,822,258 22,167,219
Property and equipment, net 40,230 1,113,050
Intangible assets, net 803,753 4,747,303
Long-term notes receivable from PAs, less current portion 129,935 313,940
Consulting and license fees receivable, noncurrent 251,925 --
Other assets 74,838 212,975
---------- -----------
Total assets $3,122,939 $28,554,487
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 491,509 $ 638,030
Accrued payroll and payroll related costs 124,236 64,933
Other accrued liabilities 31,508 412,952
Acquisition and affiliation obligations payable -- 920,000
Income taxes payable 35,500 179,367
Current portion of long-term debt and capital leases 173,652 195,193
---------- -----------
Total current liabilities 856,405 2,410,475
Deferred income taxes -- 773,269
Long-term debt and capital leases, less current portion 40,350 816,918
---------- -----------
Total liabilities 896,755 4,000,662
---------- -----------
Commitments and contingencies (Notes 7 and 18) -- --
Mandatorily redeemable preferred stock, $.01 par value, 15,000 shares
authorized, issued and outstanding 1,402,562 --
Put rights associated with common stock 191,237 --
---------- -----------
1,593,799 --
---------- -----------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 3,995,460
and 6,977,700 issued and outstanding at December 31, 1996
and 1997, respectively 39,955 69,777
Additional paid-in capital, net of $272,268 loan receivable at December 31, 1997 554,696 24,126,009
Retained earnings 37,734 358,039
---------- -----------
Total stockholders' equity 632,385 24,553,825
---------- -----------
Total liabilities and stockholders' equity $3,122,939 $28,554,487
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
<TABLE>
<CAPTION>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Management fees $ 513,705 $ 1,289,828 $ 7,588,193
Consulting and licensing fees 262,769 347,600 290,885
----------- ----------- -----------
Total revenues 776,474 1,637,428 7,879,078
----------- ----------- -----------
Managed dental center expenses:
Staff salaries and benefits -- 223,657 2,021,497
Dental supplies -- 79,448 650,444
Laboratory fees -- 98,222 971,024
Marketing -- 38,128 414,519
Occupancy -- 106,501 998,141
Other -- 57,182 851,631
----------- ----------- -----------
Total managed dental center expenses -- 603,138 5,907,256
----------- ----------- -----------
Gross profit 776,474 1,034,290 1,971,822
Salaries and benefits 400,669 521,683 786,795
General and administrative 234,577 260,558 600,657
Advisory services 127,768 -- --
Depreciation and amortization 22,106 27,654 163,681
----------- ----------- -----------
Operating income (loss) (8,646) 224,395 420,689
Interest income, net 6,494 20,781 263,568
----------- ----------- -----------
Income (loss) before income taxes and
minority interest (2,152) 245,176 684,257
Provision for income taxes -- 35,500 263,952
Minority interest 8,654 7,674 --
----------- ----------- -----------
Net income (loss) (10,806) 202,002 420,305
Adjustment to redemption value of
common and preferred securities 85,709 (191,237) (10,500)
Cummulative preferred stock dividend -- (6,485) (100,000)
----------- ----------- -----------
Net income applicable to common
stock $ 74,903 $ 4,280 $ 309,805
=========== =========== ===========
Basic net income per common share $ 0.02 -- $ 0.07
=========== =========== ===========
Diluted net income per common share $ 0.02 -- $ 0.07
=========== =========== ===========
Basic weighted average common shares outstanding 3,791,610 3,829,029 4,610,331
=========== =========== ===========
Diluted weighted average common shares outstanding 3,864,291 3,907,492 4,697,809
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL
COMMON STOCK PAID-IN RETAINED
STOCK ($.01 PAR) CAPITAL EARNINGS TOTAL
------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 3,791,610 $ 37,916 $ 12,959 $ 67,525 $ 118,400
Net loss (10,806) (10,806)
Cash contribution from shareholder 15,766 15,766
Common stock - accretion to put value 85,709 85,709
Issuance of warrants 127,768 127,768
Dividends (40,000) (40,000)
---------- --------- ------------ --------- ------------
Balance, December 31, 1995 3,791,610 37,916 242,202 16,719 296,837
Net Income - January 1 to October 25, 1996 157,783 157,783
Purchase of minority interest 18,768 18,768
Reclassification of members capital upon
C-Corporation election (see Note 1) 174,502 (174,502) --
Issuance of common stock 203,850 2,039 310,461 312,500
Common stock - accretion to put value (191,237) (191,237)
Accrued dividends on mandatorily redeemable (6,485) (6,485)
preferred stock
Net income - October 26 to December 31, 1996 -- 44,219 44,219
---------- --------- ------------ --------- ------------
Balance, December 31, 1996 3,995,460 39,955 554,696 37,734 632,385
Adjustment to redemption value of preferred stock (10,500) (10,500)
Accrued dividends on mandatorily
redeemable preferred stock (100,000) (100,000)
Issuance of common stock 163,080 1,630 271,158 272,788
Issuance of common stock for marketplace
acquisition 80,000 800 799,200 800,000
Exercise of warrants under advisory agreement 84,802 848 19,152 20,000
Stock subscription receivable (272,768) (272,768)
Conversion of preferred stock 654,358 6,544 1,778,492 10,500 1,795,536
Elimination of put rights on common stock (191,237) (191,237)
Net proceeds from initial public offering 2,000,000 20,000 21,167,316 -- 21,187,316
Net Income 420,305 420,305
---------- --------- ------------ --------- ------------
Balance, December 31, 1997 6,977,700 $ 69,777 $ 24,126,009 $ 358,039 $ 24,553,825
---------- --------- ------------ --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
<TABLE>
<CAPTION>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1995 1996 1997
--------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (10,806) $ 202,002 $ 420,305
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 22,106 27,654 163,681
Issuance of warrants for advisory services 127,768 -- --
Minority interest 8,654 7,674 --
(Increase) decrease in:
Consulting and license fees receivable (72,765) (147,158) (53,191)
Management fee receivable from P.A.s 2,463 (353,790) (516,585)
Other current assets (3,580) (96,147) 90,896
Increase (decrease) in:
Accounts payable 13,324 457,038 86,126
Other accrued liabilities 1,868 29,503 263,702
Income taxes payable -- 35,500 104,867
Deferred income taxes -- -- 57,269
Accrued payroll and payroll related costs (13,159) 107,845 (59,303)
--------- ----------- ------------
Net cash provided by operating activities 75,873 270,121 557,767
--------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (4,703) (4,444) (613,006)
(Advances made) payments received on long-term notes receivable
from P.A.s 19,054 3,075 (369,957)
Purchase of intangible and other assets (Notes 4, 5 and 8) (20,000) (486,489) (1,032,765)
--------- ----------- ------------
Net cash used in investing activities (5,649) (487,858) (2,015,728)
--------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from stockholder 15,766 -- --
Proceeds from issuance of mandatorily redeemable
preferred stock, net -- 1,395,000 --
Proceeds from issuance of common stock, net -- -- 21,207,336
Payments of long-term debt (45,692) (67,257) (494,925)
Proceeds from issuance of long-term debt -- 117,514 326,980
Advances to P.A.s -- (16,454) (466,967)
Dividends (40,000) -- --
--------- ----------- ------------
Net cash (used in) provided by financing activities (69,926) 1,428,803 20,572,424
--------- ----------- ------------
Net increase in cash and cash equivalents 298 1,211,066 19,114,463
Cash and cash equivalents at beginning of period 41,895 42,193 1,253,259
--------- ----------- ------------
Cash and cash equivalents at end of period $ 42,193 $ 1,253,259 $ 20,367,722
--------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 23,903 -- $ 127,065
Cash paid during the year for interest $ 19,282 $ 13,955 $ 52,943
Issuance of common stock for noncash consideration -- $ 312,500 --
Assumption of accounts payable and accrued liabilities
related to revision of management service agreements -- $ 438,300 --
Elimination of minority interest -- $ 18,768
Elimination of put rights on common stock -- -- $ 191,237
Conversion of preferred stock -- -- $ 1,795,536
Intangible assets - noncash portion (Notes 4, 5 and 8) -- -- $ 3,125,429
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND ORGANIZATION
Dental Care Alliance, Inc. ("DCA" or the "Company") was formed on October
23, 1996 with a nominal capital contribution, to effect a reorganization
(the "Reorganization") among DCA, Golden Care Holdings L.C. ("GCH"), the
predecessor entity, and its majority owned subsidiaries Golden Care
Network, L.C.("GCN"), and Prophet Management L.C. ("PM"). DCA and GCH
completed the Reorganization on October 25, 1996 by transferring
substantially all of the assets, liabilities and operations of GCH, GCN and
PM to DCA. Concurrently, shares of DCA were issued in exactly the same
proportion as the shareholders of GCH. Effective November 4, 1997, the
Company completed an Initial public offering of its stock. All per share
amounts have been adjusted retroactively to reflect the stock split
completed in anticipation of this transaction.
As the shareholders of DCA and GCH, and their related ownership
percentages, were identical at the time of the Reorganization, the
Reorganization has been accounted for in a manner similar to a pooling of
interests. The effects of the Reorganization, resulting in the recording of
deferred income taxes upon conversion to C corporation status, have been
reflected in these financial statements.
GCH was incorporated in 1993 as a Florida Limited Liability Corporation
which held 99% of GCN and 90% of PM. Concurrent with the Reorganization,
the 10% minority shareholder interest of PM transferred his ownership
interest in the assets of PM in exchange for 81,540 shares of the stock of
DCA. These shares were issued to the minority shareholder at fair market
value of $1.53 per share as determined by an independent third party
appraisal of the common stock of the Company as of this date. As a result
of this transaction, $125,000 was capitalized and is reflected as a
component of intangible assets in the underlying financial statements and
is being amortized over fifteen years. No step up in basis for the 1%
minority share of GCH has been reflected, as the stockholders and
stockholders' percentages of DCA and GCH were exactly the same on the date
of the Reorganization, and the fair value of the 1% ownership interest is
not material.
The Company and its predecessor provide management, consulting and
licensing services to dental practices in Florida, Michigan and, effective
in March 1998, Georgia. The dental practices are owned by separate
Professional Associations (the "PAs"), and the Company has entered into
long-term Administrative Services Agreements ("Management Agreements") with
the P.A.s to provide administrative, financial and technical support and
expertise to the P.A.s in exchange for management, consulting and licensing
fees, as described in Note 3.
Each P.A. employs and directs the professional dental staff, including the
dentists and hygienists, and provides all of the clinical services to the
patients. The Company employs and directs the administrative staff and
manages in collaboration with the PA owner, all of the remaining
administrative, financial, marketing and professional services of the
practice. As of December 31, 1997, the Company provided these management
services to 29 Managed Dental Centers, 24 located in Florida and 5 in
Michigan. As of December 31, 1995, 1996 and 1997, of the 9, 12 and 29
Managed Dental Centers, 6, 10 and 16 centers were owned and controlled by
41
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND ORGANIZATIONS - (Continued)
the same individual and resulted in $288,000, $1,022,000 and $4,508,000,
for each of the years then ended, of the Company's management fees,
respectively. As further described in Note 3, in 1996, the 10 Management
Agreements were modified concurrent with the Reorganization, in exchange
for 81,540 shares of the Company's common stock and assumption of the
existing working capital liabilities of the PAs of $438,300. The fair
value of these shares ($125,000) and the working capital liabilities
assumed have been recorded as an intangible asset and are being amortized
over the 25 year life of the agreements.
The Company also provides consulting services to other PAs, under
contracts in which the P.A. employs the administrative staff. Under such
agreements, the Company reviews and consults on the financial and
operational efficiencies of the practices. These consulting agreements were
originally held by an entity which is approximately 80% controlled by the
Company's President and controlling stockholder. The 20% minority
stockholder assigned his interest in these agreements to the Company on
October 25, 1996 in exchange for 40,770 shares of the Company's common
stock which was valued at $1.53 per share, as determined by an independent
third party appraisal. As a result of this transaction, $62,500 was
capitalized and is reflected as a component of intangible assets in the
underlying financial statements and is being amortized over the eight year
remaining life of these agreements. As of December 31, 1996, the Company
provided these consulting services to four Managed Dental Centers, all
located in Michigan.
In July 1997, the Company acquired the Management Agreements for these four
Managed Dental Centers for $846,000, including a credit related to
outstanding receivables for consulting services of $300,000 (which is
forgiven ratably over the term of the associated Management Agreements),
wherein it provides management services to the related practices for eight
years. The acquired Management Agreements are executed under the net
revenue contract (see Note 3). Unaudited net practice revenue of the dental
practice was approximately $3.4 million for the period ended December 31,
1996. The Company had previously recognized revenue of $160,000 in 1996 and
$53,000 for six months ended June 30, 1997, for consulting and licensing
services. The Company has agreed to subcontract the day to day management
of these four practices for eighty percent of the net profits of the PA,
subject to certain adjustments to a Michigan based company owned by the
PA owner resulting, in effect, in the acquisition of a twenty percent
interest. Costs associated with this subcontract are included in General
and Administrative. The Company will continue to receive license fees of
$40,000 per year.
42
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION/BASIS OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting and include only those operations which are
under the ownership and financial control of the Company. All intercompany
accounts and transactions have been eliminated in consolidation. The
Company's predecessor subsidiaries were consolidated for the year ended
1995. The Company does not have any ownership in or exercise control over
the dentistry activities of the P.A.s and accordingly, the accompanying
financial statements do not consolidate the results of the PAs.
STOCK SPLIT
On October 6, 1997 the Company's Board of Directors authorized a 81.54 to 1
stock split. The increase in authorized shares and the stock split have
been retroactively reflected in these financial statements. The Company
also authorized an increase of its authorized common shares to 50 million.
REVENUE RECOGNITION
The Company records its revenue in accordance with Management Agreements
and other consulting and licensing agreements further described in Note 3.
ADVERTISING
The costs of advertising, promotion and marketing, aggregating $14,437,
$42,272 and $29,502 for the years ended December 31, 1995, 1996 and 1997,
respectively, are expensed when incurred and are included in general and
administrative expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of amounts reported in the financial statements
have been determined by using available market information and appropriate
valuation methodologies. The carrying value of all current assets and
current liabilities approximates fair value because of their short-term
nature. The carrying value of all non-current financial instruments are
considered to approximate fair value based upon current market rates and
instruments with similar risks and maturities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
CONSULTING AND LICENSE FEES RECEIVABLE
Consulting and license fees receivable represents amounts owed to the
Company from various PAs for consulting and license fees provided under
contracts. The Company reviews the collectibility of its receivables
related to consulting and license fees. This review is based upon the cash
flow of the PAs and the fair market value of the collateral of the assets
of the PAs.
MANAGEMENT FEE RECEIVABLE FROM PA
Management fee receivable from PA consists of amounts owed to the Company
43
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
related to revenue recorded in accordance with Management Agreements and is
recorded based upon the net realizable value of patient accounts
receivable of the PAs. The Company reviews the collectibility of the
patient accounts receivable of the PAs and adjusts its management fee
receivable accordingly.
ADVANCES TO PAS
Advances to PAs consist of receivables from PAs in connection with working
capital advances made to affiliated practices. The Company reviews the
collectibility of its receivables related to advances to PAs. This review
is based upon the cash flow of the PAs, and the fair market value of the
collateral of the assets of the PAs. Commencing August 1997, under terms of
note agreements such advances are repayable under terms calling for
interest at 8 1/2 %, adjusted for any changes in the Company's borrowing
rate, and are due within 12 months of issuance. All advances and payables
between PAs under common ownership have a right of offset included in the
agreement. The Company has established a reserve for these advances of
$86,000 as of December 31, 1997.
NOTES RECEIVABLE FROM PAS
Notes receivable from PAs relate to financing of capital additions made
by PAs covering certain medical and non-medical assets. Notes receivable
from PAs generally have terms of 2 to 10 years, are interest bearing with
rates between 8 1/2 % and 18 1/2 %, and are secured by the assets of the
Managed Dental Center and personally guaranteed by the PA owners.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expenses as incurred and expenditures for additions
and betterments are capitalized. The cost of assets sold or otherwise
disposed of and the related accumulated depreciation are eliminated from
the accounts and any resulting gain or loss is reflected in the statement
of operations.
Depreciation is computed by using the straight-line method over the
estimated useful life of the asset, ranging from 3 to 10 years. Leasehold
improvements are amortized over their estimated useful life or the
remaining lease period, whichever is less.
INTANGIBLE ASSETS
Intangible assets includes certain organizational costs associated with the
incorporation of the Company and costs related to consideration given to
entities in exchange for (i) entering into Management Agreements, (ii)
waiver by minority stockholder of any rights to receive management fees
under certain Management Agreements, (iii) revised terms to existing
Management Agreements and (iv) the purchase of minority stockholder rights
in PM. Intangible assets are being amortized over periods of 5 to 25 years.
44
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
STOCK BASED COMPENSATION
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), 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 ("APB No. 25") and disclose in the financial statements the
effects of SFAS No. 123 as if the recognition provisions were adopted. The
Company has elected to continue to account for its stock based compensation
for employees under APB No. 25 and adopt the disclosure only requirements
of SFAS No. 123. The Company has adopted a stock based compensation plan
for certain non-employees which are accounted for under SFAS No. 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
DEPENDENCE ON THE PAS
The Company receives fees for services provided to the PAs under
Management Agreements, and Consulting and Licensing Agreements, but does
not employ dentists or control the practices of the dentists employed by
the PAs. The Company's revenue is dependent on revenue generated by the
PAs and, therefore, effective and continued performance of the Managed
Dental Centers during the term of the Management Agreements is essential to
the Company's long-term success.
The Management Agreements are generally for a term of 25 years beginning on
the effective date of each individual agreement and renewing each and every
year on the anniversary date of the subsequent year for a period of
generally 25 years and may be terminated by the PA, or the Company, under
certain events of default "with cause" as defined, including a material
default by or bankruptcy of the Company. In the event of a material default
by the PA, or its owner, the PA can sell the practice to a third party
mutually agreed to or sell its assets to the Company for a preset formula
price and assign ownership interest to a PA agreeable to all parties. In
the event that the proper notification period is given to the Company, the
PA can terminate the agreement at any time without cause if it sells the
practice and assigns the agreement to another party to be approved by the
Company. The sales price in such event will be determined through
negotiations among the selling PA and the buyer. In no event can the
Company replace the PA at will or for a nominal fee, except in the event
of default. Any material loss of revenue by the PAs would have a material
adverse effect on the Company, including the PAs' ability to repay their
indebtedness to the Company.
45
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
IMPAIRMENT OF ASSETS
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of
("SFAS No. 121"), was implemented by the Company in fiscal 1996. SFAS No.
121 states that if the carrying value of a long-lived asset, including
associated intangibles, exceeds the sum of the estimated undiscounted cash
flows from the operation of the asset, an impairment loss should be
recognized for the difference between the asset's estimated fair value and
carrying value. The Company periodically analyzes its financial position
with regards to the provisions of SFAS No. 121. The Company evaluates
whether events and circumstances have occurred that indicate the carrying
amount of these long-lived assets may be impaired, by comparison of
undiscounted cash flows from operations with related carrying value of the
assets. At December 31, 1997, the unamortized balance of these assets are
not considered to be impaired.
ADOPTION OF NEW ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS No. 128"), which requires
companies to change in fiscal 1997 the way that they calculate and present
earnings per share. In accordance with those requirements, the Company now
presents "basic" earnings per share, which is net income divided by
weighted average shares outstanding during the period, and "diluted"
earnings per share, which considers the impact of common stock equivalents.
The Company's common stock equivalents consist of employee and director
stock options and warrants to purchase common stock. Earnings per share
presented for prior periods have been restated in accordance with SFAS 128.
In June 1997, the FASB adopted two standards: SFAS Nos. 130 and 131,
Reporting Comprehensive Income and Disclosures about Segments of an
Enterprise and Related Information, respectively. Both of these new
standards relate to the presentation of financial information and do not
impact the computation of net income of earnings per share. Both will be
effective for the Company beginning with its 1998 annual financial
statements. SFAS 130 requires that companies display "comprehensive
income", which in addition to the current definition of net income includes
certain amounts currently recorded directly in equity. SFAS 131 mandates
the management approach to identifying business segments. Under the
management approach, segments are defined as the organizational units that
have been established for internal performance evaluation purposes.
Management does not believe that the new standard will impact its current
presentation.
INCOME TAXES
Upon its incorporation on October 23, 1996, as described in Note 1, the
Company terminated its predecessor status as a Limited Liability
Corporation and is now subject to federal income taxes. Effective October
25, 1996, the Company accounted for income taxes under the liability method
in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109").
46
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REVENUE RECOGNITION
MANAGEMENT FEES
Management fees represent revenue earned from managed dental practices less
amounts retained by the practices for those PAs where the Company
provides management services.
The Company earns management fees from the PAs under two types of
contracts: net revenue and net profits. Under the net revenue contracts,
management fees are equal to 70% - 74% of the patient revenues earned by
the PA Such contracts also stipulate that the Company must pay certain
expenses, as defined by the Management Agreement. Under the net profits
contracts, management fees are equal to between 50% and 55% of the
practice's net profits, as defined. Net profit is calculated by subtracting
practice expenses (which constitutes both dental and non-dental expenses),
excluding depreciation and amortization, from net collected practice
revenue. Contractual revenues and related expenses have, for purposes of
the accompanying financial statements, been reflected on an accrual basis.
The amounts contractually retained by the practices under net revenue
contracts are intended to cover amounts incurred for (1) salary and
benefits to employ the dentists, hygienists and contracted specialists; (2)
licensing fees to be paid to the Company; (3) debt and asset carrying costs
on the acquisition of the practices; and (4) any other direct costs to the
PA not covered under the Management Agreement.
The revised structure of the PA contracts is designed to provide the PA
with the opportunity to achieve profits over the term of the contract, as
well as for incentives for the PA owners and dental professionals to
increase productivity and the number of patient encounters, to improve the
documentation of their services so that appropriate billings can be
rendered and to increase the opportunity for dental professionals other
than dentists to provide services.
Effective October 1996, the Company revised the terms of all of its 12 then
existing Management Agreements such that the Company is responsible for the
payment of all non-professional expenses of the Managed Dental Centers. Ten
Management Agreements were also revised to base the Company's management
fee from a percentage of net profits at each PA to a percentage of net
revenue from each PA and two Management Agreements were modified to assign
additional responsibilities to the Company. Accordingly, prior to the
revision of these 12 Management Agreements, all non-professional expenses
of the Managed Dental Centers and related revenues were reflected in each
PAs financial statements. The Company expects to primarily utilize net
revenue contracts in the future.
The PA located in Port Charlotte, Florida, has the right to terminate its
Management Agreement during a 90-day period beginning in October 1998. Such
Managed Dental Center contributed approximately 8% and 18% to the Company's
revenue in 1997 and 1996, respectively. The Management Agreement expires in
2003.
47
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REVENUE RECOGNITION - (Continued)
The following table sets forth the gross practice revenue earned and
amounts retained by the PAs, and the management fees earned by the
Company for the periods ended:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
COMMONLY CONTROLLED PAS - GROUP 1 - NET REVENUE
CONTRACTS (10/26/96-12/31/97) (NON-TERMINATED):
Net practice revenue $ -- $ 725,215 $ 6,098,141
Amounts contractually retained by the PAs -- 188,554 1,589,760
---------- ---------- -----------
Management fees $ -- $ 536,661 $ 4,508,381
========== ========== ===========
COMMONLY CONTROLLED PAS - GROUP 1 - NET PROFIT
CONTRACTS (1/1/94-10/25/96) (NON-TERMINATED):
Net practice revenue $1,115,011 $3,290,171 $ --
Amounts contractually retained by the PAs 983,864 2,820,871 --
---------- ---------- -----------
Management fees $ 131,147 $ 469,300 $ --
========== ========== ===========
COMMONLY CONTROLLED PAS - GROUP 2 - NET REVENUE
CONTRACTS
Net practice revenue $ -- $ -- $ 2,928,739
Amounts contractually retained by PAs -- -- 758,950
---------- ---------- -----------
Management fees $ -- $ -- $ 2,169,789
========== ========== ===========
ALL OTHER PAS (ALL UNDER NET PROFIT CONTRACTS)
(NON-TERMINATED):
Net practice revenue $2,454,859 $1,459,121 $ 1,561,314
Amounts contractually retained by the PAs 2,169,545 1,178,370 651,291
---------- ---------- -----------
Management fees $ 285,314 $ 280,751 $ 910,023
========== ========== ===========
TERMINATED CONTRACTS (ALL UNDER NET
PROFIT CONTRACTS):
Net practice revenue $ 945,149 $ 101,552 $ --
Amounts contractually retained by the PAs 847,905 98,436 --
---------- ---------- -----------
Management fees $ 97,244 $ 3,116 $ --
========== ========== ===========
ALL PAS COMBINED:
Net practice revenue $4,515,019 $5,576,059 $10,588,194
Amounts contractually retained by the PAs 4,001,314 4,286,231 3,000,001
---------- ---------- -----------
Management fees $ 513,705 $1,289,828 $ 7,588,193
========== ========== ===========
Managed dental center expenses -- 603,138 5,907,286
---------- ---------- -----------
Net management fees $ 513,705 $ 686,690 $ 1,680,937
========== ========== ===========
</TABLE>
48
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. REVENUE RECOGNITION - (Continued)
Had the net profits method been in effect for all of fiscal 1996,
management fees would have been $708,336. Had the contracts been in effect
for all of fiscal 1996, management fees would have been as follows:
Management fees $4,270,410
Managed dental center expenses 3,303,710
----------
Net management fees $ 966,700
==========
CONSULTING AND LICENSING FEES
Consulting fees related to training of personnel and other administrative
services were performed by the Company for four managed dental centers
which were not serviced under the Management Agreements through June 30,
1997. Subsequent to June 30, 1997, the Company and the PA owner executed
8-year Management Agreements for these four managed dental centers. The
Management Agreements executed are net revenue contracts.
As of December 31, 1997, the Company also provides separate licensing
services to the 32 Managed Dental Centers. The licensing agreements
typically call for a 25 year term, in exchange for an annual fee from each
practice of approximately $10,000 - $12,000 per year. As part of the
licensing agreements, the Company will solicit and negotiate managed care
contracts for the practice and provide opportunities for the licensed
practice to participate in group purchasing and marketing plans.
4. AFFILIATIONS
In April 1997, the Company acquired approximately $200,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Temple Terrace, Florida. Unaudited net practice revenue of the
dental practice was approximately $950,000 for the year ended December 31,
1996. The Management Agreement executed is a net revenue contract.
In July 1997, the Company executed four Management Agreements for $846,000
wherein it will provide management services through a subcontractor to the
PAs for 8 years. The Seller financed $546,000 of this amount with terms of
monthly principal and interest at 8% per annum for 8 years. The PAs were
previously subject to consulting and licensing agreements. Unaudited net
practice revenue of the dental practices was approximately $3.4 million for
the period ended December 31, 1996. The Management Agreements executed are
net revenue contracts.
In July 1997, the Company executed a 25-year Management Agreement with a
dental practice located in Flint, Michigan. Unaudited net practice revenue
of the dental practice was approximately $4 million for the year ended
December 31, 1996. The Management Agreement executed is a net revenue
contract.
In August 1997, the Company acquired approximately $175,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Tallahassee, Florida. Unaudited net practice revenue of the
dental practice was approximately $900,000 for the year ended December 31,
1996. The Management Agreement executed is a net revenue contract.
49
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In September 1997, the Company acquired approximately $120,000 of
non-dental assets and executed a 25-year Management Agreement with a dental
practice located in St. Petersburg, Florida. Unaudited practice revenue of
the dental practice was approximately $400,000 for the year ended December
31, 1996. The Management Agreement executed is a net revenue contract.
In December 1997, the Company executed a 25-year Management Agreement with
a dental practice located in Tampa, Florida, and acquired non-dental
equipment of $50,000, $20,000 of which is included in acquisition and
affiliated obligations payable. Unaudited net practice revenue of the
dental practice was approximately $600,000 for the year ended December 31,
1997. The Management Agreement executed is a net revenue contract.
In December 1997, the Company executed a 25-year Management Agreement with
a dental practice in Lakeland, Florida. The total cost to the Company was
$420,000 which was allocated to Management Agreement. Unaudited net
practice revenue of the dental practice was approximately $800,000 for the
year ended December 31, 1997. The Management Agreement executed is a net
revenue contract.
In December 1997, the Company executed a 25-year Management Agreement with
a practice located in Rockledge, Florida. The total cost to the Company was
$1,000,000, of which $800,000 was allocated to Management Agreement and
$400,000 of which is included in acquisition and affiliation obligations
payable. Unaudited net practice revenue of the dental practice was
approximately $1.6 million for the year ended December 31, 1997. The
Management Agreement executed is a net revenue contract.
5. ACQUISITIONS
On December 29, 1997, the Company acquired all of the outstanding capital
stock of Marketplace Dental, Inc., a Florida corporation ("Marketplace"),
pursuant to the merger ("Merger"), of Marketplace with and into Dental Care
Alliance of Florida, Inc. ("DCA Florida"), a wholly-owned subsidiary of the
Company. Marketplace was the practice management company resulting from the
reorganization of Childrens Dental Arcade, Inc. and Wellington Marketplace
Group, PA, on October 1, 1997. The Merger was consummated pursuant to that
certain Agreement and Plan of Merger dated December 29, 1997 ("Merger
Agreement") among the Company, Marketplace, DCA Florida and the Marketplace
shareholders.
50
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. ACQUISITIONS - (Continued)
DCA Florida was the surviving corporation in the Merger. Marketplace was a
dental practice management company which managed six dental practices in
Palm Beach County. Pursuant to the Merger the Company acquired all of the
assets and assumed certain liabilities of Marketplace. Such assets
consisted primarily of non-dental assets (including dental equipment) and
management agreements. Pursuant to the Merger, all shares of Marketplace
common stock were converted into the right to receive, in the aggregate
80,000 shares of unregistered common stock of the Company and an amount in
cash of approximately $500,000, which is included in acquisition and
affiliation obligations payable. In addition, the Merger Agreement calls
for the issuance of additional common stock if certain operating results
are achieved.
As a result of the acquisition, the Company has recorded the following net
assets:
Current assets $ 146,774
Property and equipment 505,343
Intangible assets 1,760,429
Other assets 21,645
Current liabilities (57,137)
Long-term debt (420,054)
Deferred tax liability (657,000)
------------
$ 1,300,000
============
The following unaudited pro forma consolidated results of operations of the
Company give effect to the Marketplace acquisition for 1996 and 1997 as if
the acquisition had occurred at the beginning of each respective period.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1996 1997
---------- ----------
<S> <C> <C>
Total revenues $2,809,458 $9,083,727
Net income $ 33,140 $ 262,633
Net income per common share:
Basic $ 0.01 $ 0.06
Diluted $ 0.01 $ 0.06
Weighted average common shares outstanding:
Basic 3,909,029 4,689,673
Diluted 3,987,492 4,777,151
</TABLE>
51
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1996 1997
----------- -----------
Dental and other equipment $ 24,900 $ 911,841
Leasehold improvements 45,027 296,437
Vehicles 13,901 13,901
----------- -----------
83,828 1,222,179
Less accumulated depreciation (43,598) (109,129)
----------- -----------
$ 40,230 $ 1,113,050
=========== ===========
Depreciation expense for the periods ended December 31, 1995, 1996 and 1997
was $17,939, $15,508 and $65,529, respectively.
7. OPERATING LEASES
The Company leases office space for its corporate offices and, under the
terms of certain Management Agreements, office space and certain non-dental
assets on behalf of its Managed Dental Centers.
Future minimum lease payments under these agreements as of December 31,
1997 are:
1998 $ 1,365,240
1999 1,224,496
2000 949,237
2001 838,026
2002 685,097
Thereafter 2,871,081
---------------
$ 7,933,177
===============
Operating lease expense for the periods ended December 31, 1995, 1996 and
1997 was $48,079, $118,000 and $856,822, respectively.
8. INTANGIBLE ASSETS
Intangible assets consists of the following:
1996 1997
-------- ----------
Organizational costs $ 60,097 $ 74,963
Deferred financing costs -- 9,739
Management Agreements 750,802 4,767,897
-------- ----------
810,899 4,852,599
(7,146) (105,296)
-------- ----------
$803,753 $4,747,303
======== ==========
Amortization expense for the periods ended December 31, 1995, 1996 and 1997
was $4,167, $12,146 and $98,152, respectively.
52
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. DEBT
Long-term debt and capital leases consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ------------
<S> <C> <C>
Note payable to seller, interest rate at 9%, principal
and interest payable monthly, maturing in
April 2005, unsecured $ - $ 546,067
Capital lease obligations, secured by equipment and leasehold
improvements at specific dental practices. Various terms ranging
from five to six years with imputed interest rates of 13.6% - 17.2% - 348,652
Note payable to equipment finance company, secured
by equipment at specific dental practices, interest at
11.9%, maturing in 2002 - 117,392
Note payable to financial institution, interest at prime plus 1%
(9.5% and 9.25% at December 31, 1995 and 1996, respectively),
principal and interest payable monthly, maturing in October 1999,
secured by dental equipment and the other business assets of the Company 57,805 -
Note payable to financial institution, interest at prime plus 1%
(9.5% and 9.25% at December 31, 1995 and 1996, respectively),
principal and interest payable monthly, maturing in August 1999, unsecured 53,017 -
$60,000 line of credit to financial institution, secured principal
payable due on demand, interest paid quarterly at 9.25% per year
until first change date then rate will be prime plus 1%,
guaranteed by the Company's President and Chief Executive
Officer 57,260 -
$40,000 line of credit to financial institution maturing March 26,
1997, secured by a money market account of the Company's President
and Chief Executive Officer, principal due on demand, interest
paid quarterly at 7.25% per year until first change
date then rate will be prime plus 1% 39,899 -
Other 6,021 -
---------- ----------
214,002 1,012,111
Less current portion 173,652 195,193
---------- -----------
$ 40,350 $ 816,918
========== ===========
</TABLE>
53
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. DEBT - (Continued)
Future debt payments as of December 31, 1997 are:
1998 $ 195,193
1999 192,392
2000 205,366
2001 108,499
2002 102,854
Thereafter 207,807
-----------
$1,012,111
===========
The Company has two revolving lines of credit with a financial institution
which provides for an aggregate of $1.2 million. The Company may use up to
$600,000 for the purchase of non-dental assets of dental centers provided
each borrowing is repaid within 45 days of draw down. The $600,000 may be
used for general working capital needs. The revolving lines of credit bear
interest at prime plus .75% and are payable on June 1, 1998, and contain
limitations on acquisition activity without prior approval. The entire $1.2
million under the lines were available at December 31, 1997.
10. INCOME TAXES
As described in Note 1, through October 23, 1996, the Company consisted of
a group of Limited Liability Corporations ("LLCs") with one subsidiary
operating as a C Corporation in 1994.
The provision for income tax related to the C Corporation for the period
October 23, 1996 through December 31, 1996 and the year ended December 31,
1997 consists of the following:
1996 1997
---------- --------
Current expense (benefit):
Federal $ 17,000 $254,514
State 2,900 51,253
Deferred expense (benefit):
Federal 13,600 (36,594)
State 2,000 (5,581)
---------- --------
Total $ 35,500 $263,952
---------- --------
54
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES - (Continued)
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
-------- ----------
U.S. federal taxes at statutory rate $ 83,360 $ 230,539
Increase (decrease)
State taxes, net 3,737 23,841
Flow through entity income (51,597)
Amortization of intangibles 5,333
Nondeductible items 4,239
-------- ----------
Income tax provision $ 35,500 $ 263,952
======== ==========
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred taxes, current:
Reserve for bad debts $ -- $ 33,529
--------- ---------
Net deferred tax asset current -- 33,529
--------- ---------
Deferred taxes, non-current:
Depreciation (15,600) 4,040
Amortization of intangibles (10,272)
Book in excess of tax basis in
tangible assets (767,037)
--------- ---------
Net deferred tax (liability), non-current (15,600) (773,269)
--------- ---------
Net deferred tax (liability) $ (15,600) $(739,740)
========= =========
</TABLE>
A deferred tax liability has been recorded for several intangible
assets related to management agreements entered into during 1997 for
which book basis exceeded tax basis.
11. MANDATORILY REDEEMABLE PREFERRED STOCK AND COMMON STOCK
MANDATORILY REDEEMABLE PREFERERED STOCK
On October 25, 1996, the Company executed a subscription agreement
which provided for the issuance of $1.5 million (15,000 shares at
$100/share) in mandatorily redeemable preferred stock. Under the terms
of that agreement, $500,000 of preferred stock was issued on October
25, 1996 and $1,000,000 was issued on December 31, 1996. Proceeds of
this issuance are reflected net of $105,000 of related offering costs
paid under the Advisory Agreement described in Note 14.
55
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. MANDATORILY REDEEMABLE PREFERRED STOCK AND COMMON STOCK (Continued)
The Company had authorized 15,000 shares of Series A Convertible
Preferred Stock with a par value of $0.01 per share. The preferred
stock accrued cumulative dividends at $8/share, had voting and
preemptive rights, adjustments for dilutive effects and liquidation
preferences equal to $100/share plus accrued unpaid dividends.
Dividends were payable in cash or, at holders' option, one-half in cash
and one-half in common stock. Upon consummation of the Company's
initial public offering on November 4, 1997, the preferred stock was
converted into common stock.
COMMON STOCK WITH PUT RIGHTS
In January 1994, GCH sold to a third party an owners interest
equivalent to 13%. In connection with the sale of this owners interest,
the owner became a director of the Company and the Company attached
certain put rights which are exercisable after January 1, 2001, if the
Company had not completed a public offering of its common stock by that
date. The per share price applicable to the "put rights" is 6 times
pre-tax net income for the calendar year immediately preceding the
exercise of the put times the ownership percentage that will be put
back to the Company.
Concurrent with the Reorganization, this ownership interest was
converted to 530,010 shares of common stock of the Company with put
rights which are equivalent to those described above. As of December
31, 1996, the redemption value of these put rights has been
reclassified to temporary equity, from permanent equity on the
Company's balance sheet. Upon consummation of the Company's initial
public offering on November 4, 1997, the put rights provisions were
eliminated.
12. EMPLOYEE BENEFITS
On January 26, 1994 and October 25, 1996, the Company issued to one of
its officers warrants to purchase 81,540 shares of stock (at each grant
date), with an exercise price at the then fair market value (aggregate
value of $147,768 and $125,000 respectively) of the stock, as
determined by an independent third party appraisal. The warrants became
fully vested in January 1997. All such warrants were exercised in
February 1997, and the exercise price was funded by an interest bearing
note from the Company. This interest bearing note has been offset
against additional paid-in capital in stockholders' equity at December
31, 1997.
On January 21, 1997, the Company issued a stock option for 49,576
shares of stock to another officer of the Company which are
exercisable, in whole or in part, immediately. Exercise price is fair
market value on the grant date ($1.53 per share). In no event shall
this option be exercisable after January 21, 2002.
In November 1997, the Company adopted the 1997 Executive Incentive
Compensation Plan (the "Incentive Plan") which is designed to attract
and retain employees, officers and Directors. The Incentive Plan is
administered by the Stock Option and Compensation Committee of the
Board of Directors and 250,000 shares of common stock have been
reserved for the Incentive Plan.
Concurrent with the adoption of the Incentive Plan, the Company issued
stock options for 61,500 shares to its employees. The options vest over
a period of 3 to 5 years and must be exercised by February 2003.
Exercise price is fair market value on grant debt ($12.00 per share).
Currently any shares issued upon exercise would be unregistered. The
Company expects to register the shares underlying the Incentive Plan
before the shares issued in November, 1997 become exercisable.
56
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. EMPLOYEE BENEFITS - (Continued)
The following table summarizes the Company's stock option activity
under the Incentive Plan:
<TABLE>
<CAPTION>
WEIGHTED FAIR
AVERAGE VALUE
NUMBER EXERCISE OF OPTIONS
OF SHARES PRICE GRANTED
--------- --------- ----------
<S> <C> <C> <C>
Granted during 1995 -- $ -- $ --
Exercised during 1995 -- $ -- $ --
Outstanding at December 31, 1995 81,540 $ 1.81
Exercisable at December 31, 1995 40,770 $ 1.81 $ 1.61
Granted during 1996 81,540 $ 1.53 $ 1.36
Exercised during 1996 -- $ -- --
Outstanding at December 31, 1996 163,080 $ 1.67 --
Exercisable at December 31, 1996 122,310 $ 1.67 --
Granted during 1997 61,500 $ 12.00 $ 2.66
Exercised during 1997 163,080 $ 1.67 --
Outstanding at December 31, 1997 61,500 $ 12.00 --
Exercisable at December 31, 1997 -- $ -- --
The following table summarizes the stock options outstanding and
exercisable under the Incentive Plan at December 31, 1996 and 1997:
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE
PRICE OPTIONS LIFE PRICE OPTIONS PRICE
----------------- ---------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 $1.53 - $1.81 163,080 2 months $ 1.67 122,310 $ 1.67
December 31, 1997 $12.00 61,500 46 months $ 12.00 -- $ --
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS No. 123. The fair value of each option grant is estimated on the
date of grant using the fair value method with the following weighted
average assumptions: no dividend yield, 11% expected volatility,
risk-free interest rates ranging from 5.80% and average expected lives
of four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
57
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. EMPLOYEE BENEFITS - (Continued)
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting
period. The Company's pro forma net earnings as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ------ -----------
Net income $ 74,903 $4,280 $ 270,036
========== ====== ===========
Basic net income per share $ .02 $ -- $ .06
========== ====== ===========
Diluted net income per share $ .02 $ -- $ .06
========== ====== ===========
Because the SFAS No. 123 provides for pro forma amounts for options
granted beginning in 1995, the pro forma expense will likely increase
in future years as the new option grants become subject to the pricing
model.
For periods prior to the registration of the Company's common stock,
independent valuations were utilized to determine the value of the
common stock.
13. NON-EMPLOYEE OPTION PLAN AND WARRANTS
In November 1997, the Company adopted the 1997 Non-qualified Stock
Option Plan ("Non-employee Plan") which is designed to provide
additional incentives for the PAs with which the Company has entered
into management agreements to attract and retain qualified dentists,
health care specialists and PA owners. The Non-employee Plan is
administered by the Stock Option and Compensation Committee of the
Board of Directors and 425,000 shares of Common Stock have been
reserved for the Non-employee Plan.
Concurrent with the adoption of the Non-employee Plan, the Company
issued stock options for 124,000 shares. The options vest over a period
of 3 to 5 years and must be exercised by February 2003. Exercise price
is fair market value on the grant date ($12.00 per share). Currently
any shares issued would be unregistered. The Company has not yet
determined whether the shares underlying the Non-employee Plan will be
registered.
In conjunction with work performed under the Advisory Agreement (Note
14), the Company also granted warrants to advisors.
58
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. NON-EMPLOYEE OPTION PLAN AND WARRANTS - (Continued)
The following table summarizes the Company's stock option activity
under the Non-employee Plan:
<TABLE>
<CAPTION>
WEIGHTED FAIR
AVERAGE VALUE
NUMBER EXERCISE OF OPTIONS
OF SHARES PRICE GRANTED
--------- --------- ----------
<S> <C> <C> <C>
Granted during 1995 137,803 $ 1.74 $ --
Exercised during 1995 -- $ -- $ --
Outstanding at December 31, 1995 137,803 $ 1.74
Exercisable at December 31, 1995 84,802 $ 1.74 $ 1.55
Granted during 1996 -- $ -- $ --
Exercised during 1996 -- $ -- $ --
Outstanding at December 31, 1996 137,803 $ 1.74
Exercisable at December 31, 1996 84,802 $ 1.74
Granted during 1997 124,000 $ 12.00 $ 2.66
Exercised during 1997 84,802 $ 1.74
Outstanding at December 31, 1997 177,001 $ 8.93
Exercisable at December 31, 1997 53,001 $ 1.74
</TABLE>
The following table summarizes the stock options outstanding and
exercisable at December 31, 1996 and 1997 under the Non-employee Plan:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE
PRICE OPTIONS LIFE PRICE OPTIONS PRICE
--------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 $0.24 - $1.74 137,803 6 months $ 1.74 84,802 $ 1.74
December 31, 1997 $1.74 - $12.00 177,001 46 months $ 8.93 53,001 $ 1.74
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the fair value method with the following weighted average
assumptions: no dividend yield, 11% expected volatility, risk-free
interest rates ranging from 5.80% and average expected lives of four
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's non-employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its non-employee stock
options. For purposes of expense recognition, the estimated fair value
of the options is amortized to expense over the options' vesting
period.
59
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. NON-EMPLOYEE OPTION PLAN AND WARRANTS - (Continued)
The Company recorded expense associated with the grant of options and
warrants totaling $15,993, $0, and $39,769, for the years ending
December 31, 1995, 1996, and 1997, respectively.
14. ADVISORY SERVICES
The Company entered into an exclusive corporate development advisory
agreement ("Advisory Agreement") in September 1995, as amended on
April 25, 1996, under which the Company is committed to the following:
/bullet/ A retainer each quarter equal to the greater of $4,000 or 6 percent of
the Company's quarterly income before income tax expenses in excess of
$75,000 beginning February 1, 1996, through the date of the initial
public offering (November 4, 1997), which is recorded as a component of
general and administrative expenses;
/bullet/ Warrants to purchase an ownership interest (84,802 shares) at an
exercise price of $20,000 for services rendered in connection with
business development and other financial management advisory services.
These warrants were exercised in June 1997;
/bullet/ A fee of $105,000 with respect to the issuance of the mandatorily
redeemable preferred stock described in Note 11;
/bullet/ A fee of $100,000 and a 5 year warrant to purchase 29,167 shares of
common stock at an exercise price equal to $12 per share, upon
consummation of its initial public offering on November 4, 1997; and
/bullet/ Warrants to purchase 53,001 shares of common stock at an exercise price
of $92,355, which became vested upon the completion of the Company's
initial public offering for services rendered in connection with
financial, marketing and administrative support related to the
initial public offering on November 4, 1997.
60
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. EARNINGS PER SHARE
RECONCILIATION
The following is a reconciliation of the numerator and denominator of
the basic and diluted earnings per share computations for the indicated
years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
------------- --------------- -------------
<S> <C> <C> <C>
Basic earnings per share:
Numerator $ 74,903 $ 4,280 $ 309,805
------------- --------------- -------------
Denominator:
Common shares outstanding 3,791,610 3,829,029 4,610,331
------------- --------------- -------------
Basic earnings per share $ 0.02 $ - $ 0.07
============= =============== =============
Diluted earnings per share:
Numerator $ 74,903 $ 4,280 $ 309,805
------------- --------------- -------------
Denominator:
Common shares outstanding 3,791,610 3,829,029 4,610,331
Assumed conversion of options 72,681 78,463 87,478
------------- --------------- -------------
Total shares 3,864,291 3,907,492 4,697,809
------------- --------------- -------------
Diluted earnings per share $ 0.02 $ - $ 0.07
============= =============== =============
</TABLE>
Options to purchase 81,540 shares of Common Stock at $1.81 per share,
which were outstanding since October 1994 were not included in the
computation of diluted earnings per share for 1995 or 1996 because the
options' exercise price was greater than the average market price of
the common shares. These options were exercised in 1997.
PRO FORMA
Upon its incorporation on October 23, 1996, as described in Note 1, the
Company terminated its predecessor status as a limited liability
corporation and became subject to federal and state income taxes. In
addition, due to the conversion of the preferred stock into common
stock and the termination of the common stock put rights concurrent
with the closing of the initial public offering, pro forma net income
per share is computed using the pro forma net income of the Company
before deductions for the adjustment in redemption value of the common
and preferred securities and preferred stock dividends. Since the
Company has adopted Financial Accounting Standards Board Statement No.
128 "Earnings per Share" in 1997, pro forma adjustments for income
taxes as if the Company had been treated as a C corporation and the
impact of the preferred stock comversion have not been included in
historical earnings per share in the Statement of Operations. Had the
Company not restated prior years' earnings per share, the pro forma
effect would have been as follows:
61
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. EARNINGS PER SHARE - (Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes
and minority interest $ (2,152) $ 245,176 $ 684,257
Pro forma provision for income tax -- 94,000 --
Provision for income tax (after
conversion to C corporation) 263,952
Minority interest in consolidated
subsidiaries 5,343 4,739 --
--------- --------- -----------
Pro forma net income (loss) $ (7,495) $ 146,437 $ 420,305
========= ========= ===========
Basic earnings per share $ -- $ 0.04 $ 0.09
--------- --------- -----------
Diluted earnings per share $ -- $ 0.04 $ 0.09
--------- --------- -----------
</TABLE>
16. RELATED PARTY TRANSACTIONS
The Company's President, Chief Executive Officer and majority
stockholder owns or controls entities which do business with the
Company or its Managed Dental Centers. The Company and its Managed
Dental Centers incurred rent totaling $87,756, $108,110 and $193,900
for the years ending December 31, 1995, 1996 and 1997, respectively,
payable to such entities. The Company also paid for certain laboratory
costs of a related party on behalf of the Company's President and
controlling stockholder. These amounts totaled $60,700 and $133,448 for
the years ending December 31, 1996 and 1997, respectively. The amount
of $60,000, which is personally guaranteed by the Company's President,
has been reflected in other assets as such amounts have been structured
as a demand note. The Managed Dental Centers have also incurred capital
lease obligations payable to a related entity owned 33% by the
Company's President totaling approximately $119,000, $108,000 and
$102,000 as of December 31, 1995, 1996 and 1997, respectively. Interest
expense on such obligations was approximately $16,000, $21,000 and
$19,000 for the years ending December 31, 1995, 1996 and 1997,
respectively.
62
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. SIGNIFICANT CUSTOMERS
As described in Note 1, a majority of the Managed Dental Centers are
owned by PAs commonly controlled by the same individual. All PAs and
the commonly controlled PAs are indebted to the Company as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
TOTAL ALL PAs:
Consulting and license fees receivable $ 59,000 $ 64,116
Management fee receivable from PAs 397,441 914,026
Advances to PAs 16,454 483,421
Current portion of long-term notes receivable 68,460 83,522
Long-term notes receivable from PAs, less
current portion 129,935 313,940
Consulting and license fees receivable, non current 251,925 --
---------- ----------
$ 923,215 $1,859,025
========== ==========
AMOUNT OWED BY THE COMMONLY CONTROLLED PAs: $ 647,251 $1,535,384
---------- ----------
</TABLE>
This individual has personally guaranteed this indebtedness in the
event the receivable cannot be paid by the PAs has pledged the
ownership interest rights of PAs subordinate to acquisition debt. This
represents a concentration of credit risk and exposes the Company to
risk of loss for these amounts should the PAs and the individual be
unable to pay its debts. Relevant financial data on this PA's practices
and the Company's commitments on behalf of other PAs for each period
end are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net practice revenues $1,115,011 $4,116,938 $6,098,141
Amounts contractually retained by the P.A.s 983,864 3,107,861 1,589,760
---------- ---------- ----------
Management fees $ 131,147 $1,009,077 $4,508,381
---------- ---------- ----------
</TABLE>
18. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with three of its
officers, one of whom is also the majority stockholder of the Company.
The terms of the agreements are from 4 to 5 years and initially expire
in 1998 and 2001.
The Company has entered into a staff leasing agreement whereby all of
the Company's corporate employees and, all of the Managed Dental Center
non-medical employees are leased.
In the ordinary course of business, the Company is party to several
legal proceedings, the outcome of which, individually or in the
aggregate, is not expected to be material to the Company's financial
position, results of operations or cash flows.
63
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
19. SUBSEQUENT EVENTS
In January, 1998, the Company executed a 25-year Management Agreement
with two practices located in Bradenton, Florida. Unaudited net
practice revenue of the dental practices was $1.5 million for the year
ended December 31, 1997. The total cost to the Company was
approximately $480,000 of which $225,000 is allocated to tangible
assets and $255,000 is allocated to Management Agreements. The
Management Agreements executed are net revenue contracts.
In February, 1998, the Company executed 25-year Management Agreements
with two practices located in Orlando, Florida. Unaudited net practice
revenue of the dental practices was approximately $1.3 million for the
year ended December 31, 1997. The total cost to the Company is
approximately $500,000 of which $195,000 is allocated to tangible
assets and $305,000 is allocated to Management Agreements. The
Management Agreements executed are net revenue contracts.
In March, 1998, the Company executed a 25-year Management Agreement
with a practice in Mt. Dora, Florida. Unaudited net practice revenue of
the dental practice was approximately $1.0 million. The total cost to
the Company is approximately $349,000 of which $75,000 is allocated to
tangible assets and $274,000 is allocated to the Management Agreement.
The Management Agreement executed is a net revenue contract.
In March, 1998, the Company executed a 25-year Management Agreement
with a practice in Dalton, Georgia. Unaudited net practice revenue of
the dental practice was approximately $1.7 million. The total cost to
the Company is approximately $572,000 of which $100,000 has been
allocated to tangible assets and $472,000 to the Management Agreement.
The Management Agreement executed is a net revenue contract.
In March, 1998, the Company executed 25-year Management Agreements with
four dental practices in Detroit, Michigan. Unaudited net practice
revenue of the dental practices was approximately $4.4 million. The
total cost to the Company is approximately $2.6 million of which
$400,000 has been allocated to tangible assets and $2.2 million to the
Management Agreements. The Management Agreements executed are net
revenue contracts.
64
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's directors and executive officers, their ages and
positions with the Company are as follows:
NAME AGE POSITION
---- --- --------
Dr. Steven R. Matzkin, DDS 39 Chairman of the Board, Chief Executive
Officer, President and Director
Mr. Mitchell B. Olan 39 Vice President, Chief Operating Officer and
Director
Mr. David P. Nichols 39 Chief Financial Officer
Dr. Oscar L. Hausdorff, DDS 62 Director of Development
Mr. Curtis Lee Smith, Jr. 70 Director
Mr. Robert F. Raucci 42 Director
DR. STEVEN R. MATZKIN founded the Company's predecessors in 1992 and
1993 and serves full-time as the Company's Chairman of the Board, Chief
Executive Officer and President. Dr. Matzkin has over 14 years of experience in
the administration and management of dental practices. He practiced dentistry in
Michigan for six years, during which time he owned five dental practices and
managed over 25 dental practices through an affiliate management company. Dr.
Matzkin has also been featured as a guest speaker at regional Practice
Management conferences, including the national meeting for the National
Association of Dental Plans. Dr. Matzkin earned his BA degree in 1980 from the
Indiana School of Biology and his DDS degree in 1984 from Northwestern
University.
MITCHELL B. OLAN has served as the Company's Vice President, Chief
Operating Officer, and as a director since 1994. From 1991 to 1994, Mr. Olan
served in various capacities, including area Vice President and Regional Vice
President at Optioncare Incorporated, a publicly traded national franchiser of
home infusion therapy businesses. From 1980 to 1990, Mr. Olan served in various
capacities including sales, sales management, general management and
administration with the ORMCO Division of Sybron Corporation. ORMCO is the
leading manufacturer and marketer of dental orthodontic appliances, equipment
and supplies. Mr. Olan earned a BS degree in Business Administration in 1980
from Indiana University School of Business.
DAVID P. NICHOLS has served as the Company's Chief Financial Officer
since February 1997. From October 1994 until February 1997, Mr. Nichols served
as Chief Financial Officer at Biodynamics International, a publicly traded
company in the biotechnology business. From May 1993 until October 1994, Mr.
Nichols served as Vice President - Finance of Biodynamics. He was also Managing
Director, United States Operations, of Biodynamics from March 1996 until
February 1997. From June 1992 until
65
<PAGE>
May 1993, Mr. Nichols served as Chief Financial Officer of KiMed Corporation, a
medical device company. Prior to joining the Company, Mr. Nichols had over
sixteen years experience in the health care field. He served as Chief Financial
Officer of the long term care division of Trizec Corporation, Ltd., and was in
public accounting with the audit divisions of Price Waterhouse LLP and Deloitte
& Touche LLP. Mr. Nichols earned his BS Degree from the University of Florida in
1979 and a masters degree in Accounting from the University of Florida in 1980.
He is a Certified Public Accountant and a Certified Management Accountant.
DR. OSCAR L. HAUSDORFF as and independent contractor, has served as the
Company's Director of Development since 1996. From 1988 to 1995, he served as
President, Chief Operating Officer and as a director of Princeton Dental
Management Corporation, a publicly traded dental practice management company.
From 1977 to 1988, Dr. Hausdorff held positions in sales, sales management,
training, development and recruiting for various firms in the stock brokerage
business. From 1960 to 1977, Dr. Hausdorff practiced General Dentistry and
Orthodontics in New York. In addition, he was an instructor in Post-Graduate
orthodontics at New York University from 1960 to 1965. Dr. Hausdorff earned a
DDS degree from New York University in 1958, and a post graduate degree in
Orthodontics from New York University in 1964.
CURTIS LEE SMITH, JR. has been a director of the Company since 1996.
Beginning in 1986, Mr. Smith served as Chairman of the Board and Chief Executive
Officer of Handex Corporation ("Handex"), an environmental consulting and
remediation company which became a public company in 1989. Handex acquired New
Horizons Computer Learning Centers, a software training company, in 1994. Handex
sold its environmental division in 1996 and now operated as New Horizons
Worldwide, of which Mr. Smith serves as Chairman of the Board and Chief
Executive Officer.
ROBERT F. RAUCCI has been a director of the Company since 1996. Mr.
Raucci has been a managing member of Newlight Management, LLC, a technology
oriented venture capital fund, since July 1997. Mr. Raucci also has served as
president of RAM Investment Corporation, a venture capital investment and
advisory company, since 1994. Between 1985 and 1994 Mr. Raucci served as a
private equity investment manager for Alliance Capital Management Corporation, a
global investment management company.
66
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is
incorporated by reference to the Company's Proxy Statement to
be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this report. The information included
in the proxy statement pursuant to Rule 402(i), (k) and (l) is
not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required in response to this item is
incorporated by reference to the Company's Proxy Statement to
be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is
incorporated by reference to the Company's Proxy Statement to
be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this report.
67
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
(1) and (2) See "Index to Consolidated Financial Statements" at Item 8 of
this annual report on Form 10-K
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<S> <C>
3.1 Form of Amended and Restated Articles of Incorporation of the Company. *
3.2 Form of Amended and Restated Bylaws of the Company. *
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Company's Common Stock. *
10.1 Form of Indemnification Agreement between the Company and each of its directors and
executive officers. *
10.2 Form of Standard Management Agreement. *
10.3 Contribution Agreement among the Company, Dental Care Alliance of Michigan, Inc. and
Dental Care Alliance of Florida, Inc. *
10.4 Management Agreement between Dr. Joseph Gaeta and the Company. *
10.5 Administrative Service Subcontract Agreement between the Company and Johnson Dental
Development Corporation. *
10.6 Administrative Services Agreement between the Company and Eight Mile Dental, P.C.;
Gratiot Avenue Dental, P.C.; Wayne Road Dental, P.C. and Washington Boulevard Dental,
P.C. *
10.7 Form of License Agreement. *
10.8 Employment Agreement dated as of October 25, 1996 between the Company and Dr. Steven
R. Matzkin, as amended. *
10.9 Employment Agreement dated as of October 25, 1996 between the Company and Mitchell B.
Olan. *
10.10 Employment Agreement dated as of January 21, 1997 between the Company and David P.
Nichols. *
10.11 Equity Holders Agreement dated as of October 25, 1996 between the Company and Mitchell
B. Olan. *
10.12 Equity Holders Agreement dated as of April 30, 1997 between the Company and J. Francis
Lavelle. *
10.13 Equity Holders Agreement dated as of April 30, 1997 between the Company and The Nassau
Group, Inc. *
10.14 Option Agreement dates as of January 21, 1997 between the Company and David P.
Nichols. *
10.15 Form of Warrant between the Company and The Nassau Group, Inc. *
10.16 Form of IPO Warrant between the Company and The Nassau Group, Inc. *
68
<PAGE>
10.17 Lease Agreement dated as of April 9, 1994 between the Company and Charles E. Githler,
III, as Managing Agent for Owner, J. Kevin Drake, as Trustee Under Trust Agreement
dated April 15, 1991. *
10.18 Stockholders' Agreement dated as of October 25, 1996 among the Company, Steven R.
Matzkin, Curtis Lee Smith, Jr., Robert F. Raucci and Crescent International Holdings,
Limited, as amended. *
10.19 Omnibus Executive Incentive Compensation Plan. *
10.20 Form of 1997 Non-Qualified Stock Option Plan. *
10.21 Promissory Note in the original principal amount of $147,768 dated as of February 13,
1997 from Mitchell B. Olan to the Company. *
10.22 Agreement for Services dated as of June 1, 1997 between the Company and Modern
Employer, Inc. *
10.23 Business Loan Agreement dated August 15, 1997 between the Company and Barnett Bank. *
10.24 Letter Agreement dated August 1997 between Nassau and the Company. *
10.25 Acknowledgement and Option Agreement between Dennis Corona and Andrew D. Levine. *
10.26 Acknowledgement and Option Agreement between Dennis Corona and Jay Walton. *
10.27 Credit facility commitment letter dated March 18, 1998 between the Company and
NationsBank.
21.1 List of subsidiaries of the Company. *
27.1 Financial Data Schedule
</TABLE>
* Previously filed with the Securities and Exchange Commission as Exhibits to,
and incorporated herein by reference from the Company's Registration Statement
on Form S-1.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on January 13, 1998 disclosing
the acquisition of all the outstanding capital stock of Marketplace Dental, Inc.
on December 29, 1997 pursuant to the merger of Marketplace Dental, Inc. with and
into Dental Care Alliance of Florida, Inc., a wholly-owned subsidiary of the
Company.
The Company filed a report on Form 8-K on March 16, 1998, as an
amendment to Form 8-K filed on January 13, 1998, to include the financial
statements of Marketplace Dental, Inc. and Pro Forma Financial Statements of the
Company.
The Company filed a report on Form 8-K on March 20, 1998, as a second
amendment to Form 8-K filed on January 13, 1998, to include the audited
financial statements of Marketplace Dental, Inc. and certain changes to the Pro
Forma Financial Statements of the Company.
(c) Exhibits
See (a) (3) above.
69
<PAGE>
(d) Financial Statement Schedule
See "Index to Consolidated Financial Statements" at Item 8 of this Form
10-K. Schedules not included herein are omitted because they are not applicable
or the required information appears in the Consolidated Financial Statements or
Notes thereto.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DENTAL CARE ALLIANCE, INC.
/s/ STEVEN R. MATZKIN
---------------------
Steven R. Matzkin, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
had been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE
DATE
/s/ STEVEN R. MATZKIN Chairman of the Board
- --------------------------- Chief Executive Officer
March 31, 1997 President
Steven R. Matzkin
/s/ DAVID P. NICHOLS Chief Financial Officer
- --------------------------- Principal Financial and Accounting
March 31, 1997 Officer
David P. Nichols
/s/ MITCHELL B. OLAN Director and Secretary
- ---------------------------
March 31, 1997
Mitchell B. Olan
/s/ CURTIS LEE SMITH Director
- ---------------------------
March 31, 1997
Curtis Lee Smith
/s/ ROBERT RAUCCI Director
- ---------------------------
March 31, 1997
Robert Raucci
71
<PAGE>
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.27 Credit facility commitment letter dated March 18, 1998
between the Company and Nationsbank.
27.1 Financial Data Schedule
72
EXHIBIT 10.27
NATIONSBANK [LETTERHEAD]
March 18, 1998
Dr. Steven R. Matzkin, President and CEO
Mr. David Nichols
Dental Care Alliance, Inc.
1343 Main Street, Suite 700
Sarasota, Florida 34236
CONFIDENTIAL
Dear Dr. Matzkin and Mr. Nichols:
We are pleased to inform you that NationsBank has committed to provide the
credit facility discussed below. This commitment letter is confidential and is
provided for review by the borrower and his advisers. Its contents are not to be
disclosed beyond those individuals for whom it is intended.
BORROWER: Dental Care Alliance, Incorporated
GUARANTORS: All future and current subsidiaries
LOAN AMOUNT: This loan amount will be a total of $15,000,000
PURPOSE: To provide funds for the acquisition of dental
practices and working capital uses in a revolving line
of credit facility.
MATURITY: The loan will be for one year, at which time it may
be renewed on an annual basis.
SECURITY: Pledge of all assets of Borrower and Subsidiaries.
Pledge of all management services agreements, common
and preferred stock or partnership interests of
subsidiaries of
1
<PAGE>
Borrower, current and hereafter acquired. To be
specifically agreed upon between borrower and bank in
the closing documents
INTEREST RATE: The borrower shall have NationsBank floating LIBOR
rate + 175 basis point spread, which rate will be
calculated on a daily basis. Interest will be paid on
a monthly basis.
FEES: 1) A one time origination fee of 1/4 of 1% of the
loan amount will be paid by the borrower at the time
of loan closing.
2) An unused fee of 1/4 of 1% will be paid quarterly
on amounts not drawn on the line.
REPAYMENT: The loan amount will be on a revolving basis, allowing
the borrower to draw on the line of credit, and
repay on the line throughout the life of the loan. The
principal portion of the loan is due at maturity,
which is one year from closing.
FINANCIAL COVENANTS: All financial covenants are tested Quarterly on a
rolling four quarter basis:
FIXED CHARGE COVERAGE: At all times during the loan
period, Borrower will maintain a minimum Fixed Charge
Coverage ratio of 1.50 to 1.00. The coverage will be
defined as EBITDA + Operating Lease Expense - Actual
Capital Expenditures, all divided by Interest Expense
+ Operating Lease Expense + CMLTD based on actual
CMLTD + CMLTD based on imputed amortization of 7
years on this facility.
Capital Expenditures for the purpose of the
calculation are defined as those capital expenditures
incurred during the normal course of operating the
business, and do not include amounts incurred in the
purchase of contracts related to the service
agreements with the P.A.s.
TOTAL LIABILITIES TO EBITDA: Total Liabilities /
EBITDA at all times will not exceed 2.0. The ratio
will be measured on a historical rolling four
quarters + verifiable proforma acquisition EBITDA for
the trailing four quarters, adjusted
2
<PAGE>
to show current contracts, less those amounts counted
twice.
TOTAL LIABILITIES TO TANGIBLE NET WORTH: At all times
during the loan period, Borrower will maintain the
ratio at a maximum of 1.00 times.
LIQUIDITY MINIMUM: At all times during the loan
period, Borrower will maintain liquidity in an amount
greater than $2,500,000.
LINE USAGE: At all times during the loan period, the
Borrower must receive prior approval from the bank for
funding of acquisitions on the line of credit in
excess of $2,500,000 at any one time, and in excess
of $5,000,000 in any one quarter.
A proforma compliance certificate demonstrating
compliance with all loan covenants discussed herein is
to be delivered prior to funding for acquisitions.
REPORTING: Company Annual Unqualified Audits, 10-K, and
Quarterly, 10-Q, reports shall be submitted to Lender
within 120 days from year end (10-K), and 45 days
from each quarter end (10-Q).
EXPENSES: The borrower shall be responsible and liable for all
costs and expenses incurred in connection with the
Loan, pre- and post-closing, including but not
limited to loan fees, documentary stamp, and
intangible taxes. Borrower shall reimburse NationsBank
for all such costs and expenses.
OTHER TERMS AND
CONDITIONS: Going forward, results for newly purchased practices
may be annualized using the respective purchase date
as a starting point once the practices have been
owned and/or operated by Dental Care Alliance for a
full quarter.
No additional direct or indirect debt will be incurred
or assumed except during the ordinary course of
business, and will not exceed $500M in aggregate.
Seller financing notes will be exempt from this
condition.
Other, non-financial covenants will be included in
the loan agreement which will include, but are not
limited to:
3
<PAGE>
1) Bank review of 1997 Unqualified Audit
2) Bank review of any outstanding loans inclusive of
existing and future debt in conjunction with
acquisitions. Said debt would be cross defaulted with
Bank debt, where deemed material, as negotiated in
in closing documents.
CONDITIONS PRECEDENT: Negotiation of Closing Documents
THE TERMS CONTAINED IN THE TERM SHEET DO NOT PURPORT TO BE THE COMPLETE TERMS
AND PROVISIONS OF ANY LOAN AGREEMENT WHICH IS FURTHER SUBJECT TO COMPLETION OF
LENDERS DUE DILIGENCE AND CREDIT APPROVAL.
We thank you for your business, and are looking forward to continuing to build
our mutually beneficial relationship.
Sincerely,
/s/ J. DOUGLAS DIVIRGILIO
----------------------------
J. Douglas DiVirgilio
Senior Vice President
4
<PAGE>
APPROVAL AND ACCEPTANCE
The undersigned Borrower and Individuals hereby acknowledges receipt of the
foregoing commitment and by execution hereof accepted such proposal and agree to
the terms and conditions set forth therein. Borrower's and Individuals'
acceptance of this Commitment constitutes their unconditional agreement to pay
all fees, commissions, costs, charges, taxes and other expenses incurred by Bank
in connection with the commitment and the making of the Loan, whether or not
the Loan closes.
Approval and accepted this 18th day of March, 1998.
DENTAL CARE ALLIANCE, INCORPORATED
a Delaware Corporation
By: /s/ DR. STEVEN R. MATZKIN 03/18/98
---------------------------- ------------
Dr. Steven R. Matzkin, Date
It's President and
Chief Executive Officer
By: /s/ DAVID NICHOLS 03/18/98
---------------------------- ------------
Mr. David Nichols Date
It's Chief Financial
Officer
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 20,367,722
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<PP&E> 1,222,179
<DEPRECIATION> (109,129)
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0
0
<COMMON> 69,777
<OTHER-SE> 24,484,048
<TOTAL-LIABILITY-AND-EQUITY> 28,554,487
<SALES> 7,879,078
<TOTAL-REVENUES> 7,879,078
<CGS> 0
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<INCOME-TAX> 263,952
<INCOME-CONTINUING> 263,952
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</TABLE>
