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