<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1997.
REGISTRATION NO. 333-38731
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VALLEY FORGE DENTAL ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8099 23-2817565
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1018 WEST NINTH AVENUE
KING OF PRUSSIA, PENNSYLVANIA 19406
(610) 992-3319
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOSEPH J. FRANK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VALLEY FORGE DENTAL ASSOCIATES, INC.
1018 WEST NINTH AVENUE
KING OF PRUSSIA, PENNSYLVANIA 19406
(610) 992-3319
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT A. OUIMETTE, ESQ. FREDERICK W. KANNER, ESQ.
HAYTHE & CURLEY DEWEY BALLANTINE LLP
237 PARK AVENUE 1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10019
(212) 880-6000 (212) 259-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 18, 1997
SHARES
[VALLEY FORGE LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Valley
Forge Dental Associates, Inc. (the "Company").
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting"
for information related to the factors to be considered in determining the
initial public offering price. Application has been made for inclusion of the
Common Stock for quotation on the Nasdaq National Market under the symbol
"VFDA."
SEE "RISK FACTORS" ON PAGES 8 TO 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
========================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ $ $
Total(3)....................... $ $ $
========================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $3,700,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise the option in full,
Price to Public will total $ , Underwriting Discount will total
$ and Proceeds to Company will total $ . See
"Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the office of
NationsBanc Montgomery Securities, Inc. on or about , 1998.
------------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
BEAR, STEARNS & CO. INC.
, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN ACTIVITIES
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. THESE TRANSACTIONS MAY BE EFFECTED ON
NASDAQ OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited consolidated financial statements.
------------------
[A TWO-COLORED MAP OF THE UNITED STATES DEPICTING, BY SEPARATE COLOR, THE STATES
WHERE THE MARKETS OF THE COMPANY'S AFFILIATED DENTAL OFFICES ARE LOCATED AND
INDICATING WITHIN EACH STATE THE LOCATIONS OF THE AFFILIATED DENTAL PRACTICES.]
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Valley Forge Dental Associates, Inc.
(the "Company") is a dental practice management company. The Company seeks to
affiliate with prominent dental practices in each of the Company's nine existing
markets and in other markets which offer opportunities to establish dental
networks. When affiliating with dental practices, the Company generally acquires
substantially all of the practice's assets and enters into long-term management
services agreements (the "Management Services Agreements") with dental
professional corporations to manage the non-clinical aspects of the dental
operations. Pursuant to the Management Services Agreements, the Company provides
a broad range of services to its affiliated dental practices such as support
personnel, management information systems, budgeting and financial reporting,
marketing, assistance with recruiting, hiring and training staff, and (except
where restricted by state law) equipment procurement and office space. The
professional corporations employ the dentists, hygienists and other clinical
personnel of the affiliated practices. The Company does not employ dentists to
practice dentistry nor does it otherwise control the practice of dentistry at
its affiliated dental practices. The Company receives fees pursuant to the
Management Services Agreements for the provision of management services to the
affiliated dental practices. The Company's fees are based on either (i) the
billings of the affiliated dental practice less the amounts necessary to pay
professional compensation and other professional expenses or (ii) a license fee
per location, reimbursement of the Company's direct costs allocated to the
affiliated dental practice, reimbursement of costs and a fee for marketing
services and an administrative fee per location. See "Business -- Management
Services Agreements." This Prospectus contains forward-looking statements that
are based on management's estimates, assumptions and projections. Important
factors that could cause results to differ materially from those expected by
management include the inability of the Company to carry out its growth strategy
and the other factors discussed under "Risk Factors." See "Risk Factors" for a
discussion of certain factors to be considered by prospective investors.
THE COMPANY
Valley Forge Dental Associates, Inc. (the "Company") is a leading provider
of practice management services to multi-specialty dental practices in selected
markets in Colorado, Florida, Georgia, Maryland, New Jersey, Ohio, Pennsylvania
and Virginia. The Company seeks to achieve significant local market share by
entering into long-term Management Services Agreements with prominent dental
practices, developing networks of affiliated dental practices and pursuing
growth through the introduction to the networks of professional management,
operational enhancements and acquisitions. The Company provides its networks
with operational assistance in staffing and scheduling, purchasing, advertising
and marketing, recruiting, quality assurance and managed care contracting. By
maintaining a strong focus on professional development and clinical excellence,
the Company seeks to create a network of affiliated practices which are the
preferred choice of patients and the favored partner for dentists in each market
it serves. In addition to general dentistry, the affiliated dental practices
provide specialty dental services including orthodontics, oral surgery,
endodontics, periodontics and pediatric dentistry. At December 1, 1997, the
Company had 22 affiliated practices with 408 dental chairs and 173 dentists at
55 locations in nine markets.
The Health Care Financing Administration estimates that the annual
aggregate domestic market for dental services was approximately $45.9 billion
for 1996, representing 4.2% of total health care expenditures in the United
States and has grown at a compound annual growth rate of approximately 8.6% from
1980 to 1995. The size of the dental services industry is projected to reach
$79.1 billion by 2005. The Company believes that the anticipated growth in the
dental industry will be driven by several factors including: (i) an increase in
the availability and types of dental insurance; (ii) an increasing demand for
dental services from an aging population; (iii) the evolution of technology
which makes dental care less traumatic and, therefore, more attractive to
patients; (iv) an increased focus on preventive and cosmetic dentistry; and (v)
the growth of managed care organizations that offer dental coverage to their
members. According to the American Dental Association 1995 Survey of Dental
Practice, there were approximately 151,000 actively practicing dental
professionals in the United States, 88.1% of whom practiced either alone or with
one other dentist. In addition,
3
<PAGE> 5
there were approximately 4,700 dental groups of three or more practitioners.
According to the National Association of Dental Plans, an estimated 117 million
people were covered by dental benefits in 1995.
The Company's business strategy is to be the leading dental practice
management company in each of its markets. Key elements of the Company's
strategy for its networks of affiliated practices include: (i) providing local
market responsive dental services; (ii) focusing on the provision of quality
patient care; (iii) achieving leading market share by developing comprehensive
networks of leading clinical professionals; (iv) immediately integrating newly
affiliated practices to achieve administrative and financial control and to
align professional and operational incentives; (v) pursuing longer-term
clinical, operational and financial enhancements to affiliated dental practices;
and (vi) capitalizing on managed care opportunities. The Company's ability to
successfully implement its strategy is subject to a number of risks and
uncertainties. See "Risk Factors -- Possible Inability to Implement Acquisition
Strategy, Risks Associated with Integrating Acquisitions."
The Company commenced operations in September 1995 with the acquisition of
the assets of two dental practices and the establishment of long-term Management
Services Agreements with the practices. Between January 1996 and October 1997
the Company acquired the assets of and affiliated with 20 additional practices.
The Company's 22 affiliated practices have an average operating history of 16
years and aggregate pro forma net patient revenues of $42.3 million for the nine
months ended September 30, 1997. See "Business -- The Practices" and "Unaudited
Pro Forma Financial Information." Since January 1, 1997, the Company has entered
five new markets. The Company has generated growth within existing markets
principally by enhancing the affiliated practice's ability to optimize the
productivity of individual dentists, increase patient volume at existing dental
offices, provide a more complete range of specialty dental services and by
opening dental offices on a de novo (start-up) basis.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered................... shares(1)
Common Stock outstanding after the
offering................................... shares(1)(2)
Use of proceeds.............................. To repay certain indebtedness ($ )
and to redeem preferred stock
($ )(3).
Proposed Nasdaq National Market Symbol....... VFDA
</TABLE>
- ---------------
(1) Excludes up to shares of Common Stock that may be sold pursuant to
the Underwriters' over-allotment option. See "Underwriting."
(2) Based on the number of shares outstanding as of December 1, 1997. Excludes
76,000 shares issuable upon exercise of stock options outstanding as of
December 1, 1997 at a weighted average exercise price of $8.58 per share and
213,992 shares issuable at a conversion price of $16.00 per share upon
conversion of currently convertible subordinated notes issued in connection
with an acquisition. In connection with certain acquisitions, assuming an
initial offering price of $ , the Company is obligated to issue
additional shares of Common Stock. See "Dilution," "Business -- Overview"
and "Management -- Stock Option Plan" and Notes 8 and 14 of Notes to the
Company's Consolidated Financial Statements.
(3) The holders of $ of such indebtedness and of the 8% cumulative
preferred stock (the "mandatorily redeemable preferred stock") are Abbingdon
Venture Partners Limited Partnership, Abbingdon Venture Partners Limited
Partnership -- II, Abbingdon Venture Partners Limited Partnership -- III and
Business Capital Limited Partnership -- III, which are investment
partnerships, of some or all of which Stephen F. Nagy, Chairman of the Board
and a director of the Company, Timothy E. Foster, a director of the Company,
and Douglas P. Gill, a Vice President and a director of the Company, are
general partners of the general partner, and which are principal
stockholders of the Company. See "Risk Factors -- Substantial Portion of
Proceeds to be Used for Payments to Principal Stockholders" and "Certain
Transactions."
------------------------
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' option to purchase from the Company up to
shares of Common Stock to cover over-allotments, if any.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------ YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 19, 1995 DECEMBER 31, 1996 ----------------------------------------
(INCEPTION) TO -------------------------- 1997
DECEMBER 31, 1995 PRO FORMA 1996 1997 PRO FORMA
ACTUAL ACTUAL AS ADJUSTED(1) ACTUAL ACTUAL AS ADJUSTED(1)
------------------ --------- -------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues....... $ 989 $ 15,448 $ $ 11,061 $ 22,630 $
----- ------- ------- ------ ------- -------
Network expenses:
Dental network
expenses............... 748 13,211 9,452 19,153
Depreciation............. 33 155 130 257
----- ------- ------- ------ ------- -------
Total network expenses..... 781 13,366 9,582 19,410
----- ------- ------- ------ ------- -------
Network operating
income............... 208 2,082 1,479 3,220
Corporate general and
administrative
expenses................. 509 1,554 1,087 1,924
Amortization of intangible
assets................... 26 196 139 501
----- ------- ------- ------ ------- -------
Income (loss) from
operations........... (327) 332 253 795
Interest expense........... 41 495 341 1,096
----- ------- ------- ------ ------- -------
Income (loss) before
taxes................ (368) (163) (88) (301)
Income taxes............... -- 276 203 --
----- ------- ------- ------ ------- -------
Net income (loss)...... (368) (439) (291) (301)
----- ------- ------- ------ ------- -------
Accretion of mandatorily
redeemable common
stock.................... -- -- -- 307 --
----- ------- ------- ------ ------- -------
Dividends on preferred
stock.................... 16 64 48 48 --
----- ------- ------- ------ ------- -------
Net income (loss)
applicable to common
shares................... $ (384) $ (503) $ $ (339) $ (656) $
===== ======= ======= ====== ======= =======
Net income (loss) per
common share(2).......... $ $ $ $ $ $
===== ======= ======= ====== ======= =======
Unaudited pro forma net
income (loss) applicable
to common shares....... $ $ $ $ $ $
===== ======= ======= ====== ======= =======
Unaudited pro forma
weighted average number
of shares(2).............
===== ======= ======= ====== ======= =======
SELECTED STATISTICAL DATA
(AT END OF PERIOD):
Number of practices........ 2 4 22 4 19
Number of dentists......... 14 53 173 57 122
Number of offices.......... 6 16 55 16 46
Number of markets.......... 2 4 9 4 8
Number of states........... 3 5 8 5 7
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------
(UNAUDITED)
PRO FORMA
BALANCE SHEET DATA: ACTUAL PRO FORMA(3) AS ADJUSTED(4)
-------------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 2,138 $ 2,138 $
Working capital.......................................... (4,935) (5,355)
Total assets(5).......................................... 36,687 55,312
Long-term debt........................................... 23,807 35,951
Mandatorily redeemable preferred stock................... 928 928
Stockholders' (deficit) equity........................... (535) 2,291
</TABLE>
6
<PAGE> 8
- ---------------
(1) Adjusted on a pro forma basis to give effect to acquisitions which occurred
during 1996 and 1997 as if such acquisitions had occurred as of the
beginning of the respective periods. These adjustments also include
adjustments to further give effect to the reduction in interest expense and
dividends on the Company's mandatorily redeemable preferred stock resulting
from the assumed use, as of the beginning of the respective periods, of the
estimated net proceeds of the offering being made hereby, to retire
outstanding debt and redeem the mandatorily redeemable preferred stock as
described under "Use of Proceeds." The pro forma statement of operations
data do not purport to represent what the Company's results of operations
would have been if such acquisitions had occurred as of the beginning of the
respective periods or to project the Company's results of operations for any
future period. See "Unaudited Pro Forma Financial Information."
(2) For information concerning the number of shares used in the computation of
net income (loss) per common share, see Note (g) of Notes to the "Unaudited
Pro Forma Combined Statement of Operations" included under "Unaudited Pro
Forma Financial Information" and Note 2 of Notes to the Company's
Consolidated Financial Statements.
(3) Adjusted on a pro forma basis to give effect to acquisitions which occurred
subsequent to September 30, 1997 as if they had occurred as of September 30,
1997.
(4) Adjustments on a pro forma as adjusted basis include all pro forma
adjustments and further give effect to the sale of shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds." See "Unaudited Pro Forma Financial
Information."
(5) Includes $27.7 million on an actual and $43.6 million on a pro forma and pro
forma as adjusted basis of excess of cost over fair value of net assets
acquired and other intangible assets at September 30, 1997.
7
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing the Common Stock offered hereby. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below as well as those discussed
elsewhere in this Prospectus.
SHORT OPERATING HISTORY; HISTORICAL LOSSES AND ACCUMULATED DEFICIT; NO ASSURANCE
OF PROFITABLE OPERATIONS
Although certain of the Company's affiliated dental practices have long
operating histories, the Company commenced operations in September 1995 with the
acquisition from MT Associates of the assets of the Northern Virginia Dental
Group and Penn Dental practices. Prior to that acquisition, the Company
conducted no significant operations. The Company has a limited operating history
and is subject to various uncertainties and risks characteristic of development
stage companies. For the period from September 19, 1995 (inception) to December
31, 1995, the Company incurred a net loss of $368,000, for the year ended
December 31, 1996, the Company incurred a net loss of $439,000, and for the nine
months ended September 30, 1997, the Company incurred a net loss of $301,000. At
September 30, 1997, the Company had an accumulated deficit of $1.5 million. In
addition, there can be no assurance that the Company will be able to
successfully integrate its recently completed and future acquisitions. The
Company's success will depend, to a large degree, upon the successful
implementation of its business strategy. There can be no assurance that this
strategy will yield profitable operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
POSSIBLE INABILITY TO IMPLEMENT ACQUISITION STRATEGY; RISKS ASSOCIATED WITH
INTEGRATING ACQUISITIONS
An important element of the Company's business strategy is the acquisition
of assets of additional dental practices and the establishment of long-term
management services relationships with those practices. The Company made its
first acquisition of the assets of two practices in September 1995 and has since
affiliated with 20 more practices. The Company's strategy calls for the Company
to make a substantial number of additional acquisitions in 1998 and subsequent
years. The Company's ability to make acquisitions is dependent upon, among other
things, its successfully identifying suitable acquisition candidates and its
obtaining additional financing. The Company expects that it will compete for
acquisitions with other dental practice management companies. However, there can
be no assurance that suitable acquisition candidates will be identified by the
Company in the future, that suitable financing for any such acquisition
candidates can be obtained by the Company or that any such acquisitions will
occur.
The Company's future success is dependent upon its ability to integrate
acquired assets and newly affiliated practices into the Company, to manage those
acquisitions effectively, including the ability to implement management systems
that take advantage of marketing and cost savings opportunities, and to attract
and retain additional management personnel. Moreover, the practice management
systems of newly affiliated dental practices will have to be integrated with the
Company's existing practice management systems. The financial performance of the
Company is and will be subject to various risks associated with the acquisition
of businesses and long-term management services relationships with dental
practices, including the financial impact of expenses associated with the
integration of such businesses. There can be no assurance that past or future
acquisitions will not have an adverse impact on the business operations or
potential profitability of the Company. See "Business -- Strategy."
SUBSTANTIAL CAPITAL REQUIREMENTS RELATED TO GROWTH STRATEGY; NEED FOR ADDITIONAL
FINANCING
To take advantage of the consolidation trend in the dental industry and to
expand the geographic area in which it operates, the Company's strategy includes
growth through acquisitions. This strategy requires significant capital
resources. Capital is needed not only for acquisitions, but also for the
effective integration and expansion of such businesses. There can be no
assurance that acceptable financing for future acquisitions
8
<PAGE> 10
or for the integration and expansion of existing businesses can be obtained. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SUBSTANTIAL PORTION OF PROCEEDS TO BE USED FOR PAYMENTS TO PRINCIPAL
STOCKHOLDERS
The Company intends to apply approximately $ of the estimated net
proceeds from this offering for retirement of debt and the redemption of the
mandatorily redeemable preferred stock held by investment partnerships which are
principal stockholders of the Company, all or some of which Stephen F. Nagy,
Chairman of the Board and a director of the Company, Timothy E. Foster, a
director of the Company, and Douglas P. Gill, a Vice President and a director of
the Company, are general partners of the general partner. Accordingly, the net
proceeds will not be available for future acquisitions or to finance internal
growth. Additionally, the Company has agreed to pay Foster Management Company a
fee of $750,000 for its assistance in effectuating this offering. Stephen F.
Nagy, Chairman of the Board and a director of the Company, is Managing Partner,
Timothy E. Foster, a director of the Company, is Managing Partner, and Douglas
P. Gill, a Vice President and a director of the Company, is General Partner, of
Foster Management Company. See Notes 8 and 12 of Notes to the Company's
Consolidated Financial Statements, "Use of Proceeds," "Capitalization,"
"Management -- Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions."
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
A substantial portion of the Company's assets consists of intangible assets
including goodwill (excess of cost over fair value of net assets acquired)
relating to the acquisition of businesses. As of September 30, 1997, the
Company's total pro forma as adjusted assets were approximately $ , of
which approximately $43.6 million, or %, were intangible assets. In the
event of any sale or liquidation of the Company or poor operating results, there
can be no assurance that the value of such intangible assets will be realized.
The Company evaluates on a regular basis whether events and circumstances have
occurred that indicate that the carrying amount of the intangible assets may
warrant revision or may not be recoverable. Any such future determination
requiring the write-off of a significant portion of unamortized intangible
assets could adversely affect the Company's financial position and results of
operations for the period in which any such write-offs occur.
DEPENDENCE ON KEY MANAGEMENT AND CLINICAL PERSONNEL; POSSIBLE INABILITY TO
ENFORCE NON-COMPETITION COVENANTS
The Company is highly dependent on the services of current management. The
loss of key management personnel or an inability to attract and retain
sufficient numbers of qualified management personnel could adversely affect the
Company's operations. See "Management."
In addition, as service providers, the Company's dental practices' main
revenue-generating resource is their clinical personnel. The key members of the
clinical treatment team are the dentists and dental assistants and hygienists.
Although the Company believes that there is an adequate supply of these
clinicians, there is no assurance that the affiliated dental practices will be
able to recruit and retain qualified clinicians. See "Business." The affiliated
dentists or the affiliated dental practices are the contracting parties for
managed care contracts, preferred provider arrangements and other negotiated
price agreements, and the Company is dependent on affiliated dentists and other
specialists for the success of such relationships. Accordingly, the
profitability of such payor relationships as well as the performance of dentists
or other specialists employed by the Company's dental practices affects the
Company's profitability.
Further, certain dentists have entered into employment agreements with the
affiliated dental practices that contain covenants not to compete with the
Company and the dental practices under certain circumstances, including
termination of employment with the affiliated dental practices. In most states,
a covenant not to compete will be enforced only to the extent it is necessary to
protect a legitimate business interest of the party seeking enforcement, does
not unreasonably restrain the party against whom enforcement is sought, and is
not contrary to the public interest. This determination is made based on all the
facts and circumstances of the particular case at the time enforcement is
sought. For this reason, it cannot be determined in advance
9
<PAGE> 11
whether particular noncompetition covenants will be upheld in state courts.
Failure by the Company to be able to enforce such covenants could have a
significant adverse impact on the Company. See "Business."
COMPETITION
The dental services industry is highly competitive and subject to continual
change in the manner in which services are delivered and providers are selected.
The Company is under competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional dental practices.
Certain national companies in the dental industry, some of whom may have greater
resources than the Company, are developing multi-regional networks of dental
facilities in markets which include the Company's markets. With respect to
competition for patients, the Company believes that the primary competitive
factors are patient satisfaction, quality of care, cost effectiveness and
convenience. The primary competitors of the affiliated dental practices in most
markets are individual practitioners or small, regional multi-site practices.
There can be no assurance that the Company or the affiliated dental practices
will be able to compete effectively with such competitors, that additional
competitors will not enter the market or that competition will not make it more
difficult to acquire assets of, and provide management services to, dental
practices on terms beneficial to the Company. See "Business -- Competition."
SUBSTANTIAL AND IMMEDIATE DILUTION
Investors in this offering will experience substantial and immediate
dilution in net negative tangible book value per share of Common Stock. Based
upon an assumed offering price of $ per share, dilution to investors in
this offering will be $ (or %) per share and the net negative
tangible book value of the shares held by existing stockholders will increase on
a pro forma basis by $ per share. See "Dilution."
SUBSTANTIAL UNPAID CONTINGENT ACQUISITION CONSIDERATION
In connection with certain acquisitions, the Company is obligated to pay
additional consideration in the form of cash, notes and shares of Common Stock
to sellers of businesses contingent upon achievement of certain net revenues and
pre-tax earnings goals over periods of one to three years from the dates of
acquisitions (the "Contingent Payments"). The amounts of the Contingent Payments
cannot be determined until such periods terminate. If the criteria for the
Contingent Payments with respect to each of the Company's acquisitions to date
are achieved, but not exceeded, the Company will be obligated to make cash
payments of approximately $4.2 million and issue notes in an aggregate principal
amount of approximately $2.0 million and approximately 372,000 shares of Common
Stock over the next three years. A lesser amount of cash would be paid and a
lesser principal amount of notes and number of shares of Common Stock would be
issued under certain acquisition agreements if the financial criteria are not
met and a greater amount of cash would be paid and a greater number of shares of
Common Stock would be issued under certain acquisition agreements if the
financial criteria are exceeded. Assuming, in the case of one acquisition that
does not provide for a limit on the maximum contingent payment that may be
payable with respect to the first year, that the target financial criteria for
the first year were to be exceeded by 20% and, in the case of all other
acquisitions the maximum Contingent Payments were to be payable, the Company
would be obligated to make cash payments of approximately $4.8 million and issue
notes in an aggregate principal amount of approximately $3.0 million and
approximately 460,000 shares of Common Stock over three years. The Company
expects to continue to enter into acquisition agreements providing for future
contingent payment arrangements based on the achievement of financial criteria.
See "Business -- Network Development -- Acquisition Criteria and Process." The
Company believes that it will be able to make such cash payments from cash on
hand and, if necessary, proceeds of future borrowings. In connection with
certain acquisitions, assuming an initial public offering price of $ ,
the Company is obligated to issue additional shares of Common Stock.
The number of shares to be issued will decrease if the offering price with
respect to the Common Stock is greater than $ and will increase if the
offering price is less than $ . See "Dilution." However, there can be no
assurance that the Company will generate sufficient cash or obtain debt
financing to fund such payments or that future acquisitions will not adversely
affect cash generated from operations.
10
<PAGE> 12
CONTROL BY EXISTING STOCKHOLDERS
Upon consummation of this offering, Stephen F. Nagy, Chairman of the Board
and a director of the Company, Timothy E. Foster, a director of the Company,
Douglas P. Gill, a Vice President and director of the Company, and their
affiliates, will have voting control of approximately % of the voting stock
of the Company and the executive officers and directors of the Company, as a
group, will have voting control of approximately % of the voting stock of
the Company and will, in effect, have the power to elect all the directors of
the Company and to control the Company's policies. See "Principal Stockholders."
GOVERNMENT REGULATION
General
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. See "Business -- Government
Regulation."
Fee-Splitting; Corporate Practice of Dentistry
The laws of many states (including Colorado, New Jersey, Pennsylvania and
Ohio, states in which the Company currently operates) prohibit dentists from
splitting fees with non-dentists. Many states (including all of the states in
which the Company currently operates) prohibit non-dental entities such as the
Company from engaging in the practice of dentistry or employing dentists to
practice dentistry. The specific restrictions against the corporate practice of
dentistry as well as the interpretation of those restrictions by state
regulatory authorities vary from state to state. The restrictions are generally
designed to prohibit a non-dental entity from controlling the professional
practice of a dentist, employing dentists to practice dentistry (or, in certain
states, employing dental hygienists or dental assistants), controlling the
content of a dentist's advertising or sharing professional fees. A number of
states (including Colorado and New Jersey) limit the ability of a person other
than a licensed dentist to own equipment or offices used in a dental practice.
Some states which limit ownership of dental equipment and offices (including New
Jersey) allow leasing of equipment and office space to a dental practice under a
bona fide lease. The laws of many states (including Florida, New Jersey and
Ohio) also prohibit dental practitioners from paying any portion of fees
received for dental services in consideration for the referral of a patient. In
addition, many states (including all of the states in which the Company
operates) impose limits on the tasks that may be delegated by dentists to dental
assistants.
State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; and
licensed dentists have control over the manner in which dental care is provided
and all decisions affecting the provision of dental care. In general, the state
dental practice acts do not address or provide any restrictions concerning the
manner in which companies account for revenues from a dental practice subject to
the above-noted restrictions relating to control over the professional
activities of the dental practice, ownership of the professional assets of a
dental practice and payments for management services.
There can be no assurance that a review of the Company's business
relationships by courts or other regulatory authorities would not result in
determinations that could prohibit or otherwise adversely affect the operations
of the Company or that the regulatory environment will not change, requiring the
Company to reorganize or restrict its existing or future operations. Any such
change could have a material adverse effect on the business and results of
operations of the Company. 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 Company's business or its relationships with
dentists or dental practices will not be successfully challenged or that the
enforceability of the provisions of any management services agreement will not
be limited.
11
<PAGE> 13
Anti-Kickback and Anti-Referral Legislation
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce (i) the referral of a
person for services; (ii) the furnishing or arranging for the furnishing of
items or services; or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item, in each case,
reimbursable under Medicare, Medicaid or other federal and state health care
programs. These provisions apply to dental services covered under the Medicaid
program in which the Company participates. The federal government has increased
scrutiny of joint ventures and other transactions among health care providers in
an effort to reduce potential fraud and abuse related to Medicare and Medicaid
costs. Many states have similar anti-kickback laws, and in many cases these laws
apply to all types of patients, not just Medicare and Medicaid beneficiaries.
The applicability of these federal and state laws to transactions in the
health care industry such as those to which the Company is or may be a party has
not been the subject of judicial interpretation. There can be no assurance that
judicial or administrative authorities will not find these provisions applicable
to the Company's operations, which could have a material adverse effect on the
Company's business. Under current federal law, a physician or dentist or member
of his or her immediate family is prohibited from referring Medicare or Medicaid
patients to any entity providing "designated health services" in which the
physician or dentist has an ownership or investment interest, including the
physician's or dentist's own group practice, unless such practice satisfies the
"group practice" exception. The designated health services include the provision
of clinical laboratory services, radiology and other diagnostic services
(including ultrasound services), radiation therapy services, physical and
occupational therapy services, durable medical equipment, parenteral and enteral
nutrients, certain equipment and supplies, prosthetics, orthotics, outpatient
prescription drugs, home health services and inpatient and outpatient hospital
services. A number of states also have laws that prohibit referrals for certain
services such as x-rays by dentists if the dentist has certain enumerated
financial relationships with the entity receiving the referral, unless an
exception applies. Any future expansion of these prohibitions to other health
services could restrict the Company's ability to integrate dental practices and
carry out its dental network development.
For the nine months ended September 30, 1997, the Company's revenues from
the Medicaid program were approximately 3% of net patient revenues on a pro
forma basis to give effect to acquisitions during 1997 as if such acquisitions
had occurred as of the beginning of the period. The Company currently has no
revenues under the Medicare program. 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. While the
Company makes every effort to comply with the anti-kickback and anti-referral
laws, a determination of violation under these laws by the Company or its
affiliated dental practices could have a material adverse effect on the business
and results of operations of the Company.
Risks Associated with State Insurance Licensure Requirements
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service 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,
including self-insured plans, for certain non-fee-for-service arrangements, the
Company or the affiliated dental practices may become subject to state insurance
laws. In the event that the Company or the dental practices are determined to be
engaged in the business of insurance, the Company or the affected practice could
be required either to seek licensure as an insurance company or to change the
form of their relationships with third-party payors and may become subject to
regulatory enforcement actions. In such event, the Company's revenues may be
adversely affected.
12
<PAGE> 14
Risks Associated with Health Care Reform Proposals
The United States Congress has 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 could have a
material adverse effect on the operations of the Company, and changes in the
health care industry, such as the growth of managed care organizations and
provider networks, may result in lower payment levels for the services of dental
practitioners affiliated with dental practices managed by the Company, and lower
profitability for affiliated practices. See "Business -- Government Regulation."
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS; CAPITATED FEE REVENUE
The Company believes that its success will be dependent, in part, on its
ability to negotiate contracts with managed care organizations, insurance
companies, self insurance plans and other private third-party payors pursuant to
which services will be provided on some type of fee-for-service or capitated
basis by some or all of the affiliated dental practices. Under capitated
contracts, the health care provider generally accepts a predetermined amount per
patient per month as its sole payment in exchange for providing certain
necessary covered services to enrollees. These contracts shift much of the risk
of providing health care from the payor to the provider. To the extent that the
Company's dental practices enter into these types of arrangements, they are
exposed to the risk that the cost of providing dental care required by these
contracts will exceed the amount that the dental practice receives for providing
such dental care. Most of these contracts are terminable by either party on 30
to 90 days notice. To the extent the Company's dental practices enter into
additional managed care contracts, the dental practices may expect greater
predictability of revenues, but are subject to greater unpredictability of
expenses due to the fluctuating costs of the services provided. The dental
practices, and consequently the Company, are at risk for additional costs which
would reduce or eliminate any earnings for the practices under these contracts.
Any such reduction would have an adverse effect on the results of operations of
the Company. There can be no assurance that the dental practices or the Company,
on their behalf, will be able to negotiate satisfactory arrangements on a
capitated basis, regardless of the amount of risk-sharing. During the period
from September 19, 1995 (inception) through December 31, 1995, the year ended
December 31, 1996 and for the period from January 1, 1997 to September 30, 1997,
approximately 30%, 20% and 20%, respectively, of the Company's net patient
revenues were derived from capitated contracts.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly operating results may vary significantly, depending
on factors such as the timing of the consummation of acquisitions, the
successful integration of acquisitions and inclement weather. Accordingly, the
results of operations for any quarter are not necessarily indicative of the
results of operations for a full year or otherwise. There can be no assurance
that the Company will be able to achieve or maintain profitability on an annual
or quarterly basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY AND INSURANCE
Due to the nature of its business, the Company from time to time is
involved as a defendant in medical malpractice lawsuits brought against
affiliated dental practices or dentists employed by such practices. In addition,
the Company could be involved in litigation in which it is alleged that the
Company has been negligent in performing its duties under management services
agreements. The Company maintains professional and general liability insurance
and umbrella coverage in amounts deemed appropriate by the Company based upon
its assessment of historical claims and the nature and risks of its business.
There can be no assurance, however, that any existing or future claim or claims
will not exceed the limits of available insurance coverage, that any insurer
will remain solvent and able to meet its obligations to provide coverage for any
such claim or claims or that such coverage will continue to be available or
available with sufficient limits and at a reasonable cost to insure adequately
and economically the Company's operations in the future. A judgment
13
<PAGE> 15
against the Company in excess of such coverage could have a material adverse
effect on the Company. See "Business -- Insurance" and "Business -- Legal
Proceedings."
ABSENCE OF PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained upon the completion of the offering, or that the market
price of the Common Stock will not decline below the initial offering price. The
initial public offering price of the Company's Common Stock offered hereby will
be determined by negotiations between the Company and the Underwriters. See
"Underwriting." The market price for shares of the Company's Common Stock could
be subject to significant fluctuations in response to a number of factors, such
as news announcements of the Company related to quarterly operating results or
other matters, general trends in the Company's industry, changes in general
market conditions and other factors. In recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations, as well
as general economic, political and market conditions, may materially adversely
affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
this offering could adversely affect the market price of the Common Stock. The
shares sold in the offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
except to the extent acquired by affiliates of the Company. The Company and the
holders of approximately % of the Company's Common Stock, including all of
the Company's directors and executive officers, have agreed that, for a period
of 180 days after the date of this Prospectus (the "Lock-up Period"), they will
not, without the prior written consent of NationsBanc Montgomery Securities,
Inc., offer, sell, contract to sell or otherwise dispose of any Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or grant any options or warrants to purchase Common Stock, except in certain
limited circumstances. Upon expiration of the Lock-up Period, at least 4,010,819
shares of Common Stock will be eligible for sale pursuant to Rule 144 under the
Securities Act, including 89,655 shares which would be freely tradeable under
paragraph (k) of Rule 144 and 3,924,831 shares subject to compliance with Rule
144 volume limitations, of which 3,730,000 are held by officers, directors and
affiliates of the Company. In addition, the Company has granted options to
purchase 45,000 shares of Common Stock under the Valley Forge Dental Associates,
Inc. 1997 Stock Option Plan (the "Stock Option Plan") and options to purchase
31,000 shares of Common Stock to two executive officers (the "Officers'
Options") not pursuant to the Stock Option Plan. The Company intends to register
the shares issuable pursuant to the Stock Option Plan and the shares issuable
upon exercise of the Officers' Options. Upon expiration of the Lock-up period,
shares so registered may be freely sold without restriction, except for shares
held by officers, directors and other affiliates of the Company.
In addition, 13 holders of 157,750 currently outstanding shares of the
Company's Common Stock acquired in connection with an acquisition have
registration rights obligating the Company to register such holders' shares of
Common Stock on a pro rata basis if the Company registers shares of Common Stock
for any other holder of Common Stock after the offering. Sales of a substantial
amount of the shares could have a significant adverse effect on the market price
of the Common Stock. See "Shares Eligible for Future Sale."
14
<PAGE> 16
THE COMPANY
The Company is a Delaware corporation incorporated in August 1995 with
executive offices at 1018 West Ninth Avenue, King of Prussia, Pennsylvania
19406, and its telephone number at that address is (610) 992-3319. The Company
transacts business directly and through its subsidiaries. Unless the context
otherwise requires, all references in this Prospectus to the Company include its
subsidiaries.
The Company does not engage in the practice of dentistry but rather enters
into long-term Management Services Agreements with professional corporations
which operate the affiliated dental practices. These agreements obligate the
Company to provide management and administrative services to the professional
corporations in return for fees. See "Business -- Network
Development -- Management Services Agreements."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby, assuming an offering price of $ per share,
are estimated to be $ (approximately $ if the Underwriters'
over-allotment option is exercised in full) after deduction of estimated
underwriting discounts and commissions and offering expenses.
The Company intends to use approximately $ of the net proceeds of
the offering to retire certain indebtedness of the Company and to redeem the
mandatorily redeemable preferred stock of the Company as follows: (i)
approximately $ to repay the entire outstanding amount of the Company's
9% notes due September 18, 2005, which is approximately $28.6 million (as of
December 1, 1997), plus accrued interest of approximately $1.7 million (as of
December 1, 1997); (ii) approximately $ to repay a portion of the amount due
to PNC Bank, National Association ("PNC Bank"), which is approximately $5.0
million (as of December 1, 1997), pursuant to a secured demand line of credit
(which bears interest at the Company's option at (a) the greater of (x) PNC
Bank's prime rate which at December 1, 1997 was 8.5% or (y) the federal funds
rate plus 0.5% or (b) the EuroDollar rate plus 2%, which at December 1, 1997 was
7.9%, including accrued interest of approximately $25,000 (as of December 1,
1997) and (iii) approximately $939,000 to redeem 8,000 shares of mandatorily
redeemable preferred stock of the Company, consisting of an $800,000 redemption
amount plus accrued and accumulated but unpaid dividends of approximately
$139,000 at December 1, 1997. The holders of all such indebtedness and the
mandatorily redeemable preferred stock are Abbingdon Venture Partners Limited
Partnership, Abbingdon Venture Partners Limited Partnership-II, Abbingdon
Venture Partners Limited Partnership-III and Business Development Capital
Limited Partnership-III, which are investment partnerships, of some or all of
which Stephen F. Nagy, Chairman of the Board and a director of the Company,
Timothy E. Foster, a director of the Company, and Douglas P. Gill, a Vice
President and a director of the Company, are general partners of the general
partner, and which are principal stockholders of the Company. The indebtedness
incurred from December 1, 1996 through November 30, 1997 not used for working
capital purposes was used to fund the cash portions and note payments which are
part of the purchase prices for acquisitions (approximately $27.8 million of
indebtedness was incurred during the twelve-month period ended November 30, 1997
for acquisitions and acquisition related costs). See Notes 8 and 12 of Notes to
the Company's Consolidated Financial Statements, "Capitalization" and "Certain
Transactions" for further information concerning such indebtedness.
The Company plans to augment its internal growth by acquiring the assets of
dental practices and entering into management or administrative services
agreements with dental practices. However, no portion of the proceeds of this
offering has been allocated for any specific acquisitions, nor has the Company
entered into any agreements or letters of intent with respect to any future
acquisitions.
15
<PAGE> 17
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The payment of cash
dividends in the future will depend on the Company's earnings, financial
condition and capital needs, restrictions imposed by financing arrangements and
on other factors deemed pertinent by the Company's Board of Directors. It is the
current policy of the Company's Board of Directors to retain earnings to finance
the operations and expansion of the Company's business.
16
<PAGE> 18
DILUTION
On a pro forma basis to reflect acquisitions and issuances of shares of
Common Stock by the Company after September 30, 1997, the pro forma net negative
tangible book value of the Company as of September 30, 1997, was approximately
$41,273,000 or $(8.85) per share of Common Stock. The pro forma net negative
tangible book value per share represents total tangible assets of the Company
less total liabilities and redeemable equity securities, divided by the total
number of shares of Common Stock outstanding. Without taking into account any
changes in such pro forma net negative tangible book value after September 30,
1997, other than to give effect to the receipt by the Company of the estimated
net proceeds from the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, the pro forma net negative tangible book value of the Company
as of September 30, 1997 would have been $ or $ per share.
This represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution of
$ per share to new investors in the Common Stock offered hereby. See "Use of
Proceeds." The following table illustrates the resulting dilution with respect
to the shares of Common Stock offered hereby:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $
Pro forma net negative tangible book value per share at
September 30, 1997...................................... $ (8.85)
Increase attributable to the offering......................
--------
Pro forma net tangible book value per share after the
offering...................................................
--------
Dilution per share to new investors.......................... $
========
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the differences between existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company, the
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Investors................... 4,662,769 % $4,334,553 % $ 0.93
New Investors........................
----- ----- -------- -----
Total...................... 100.0% $ 100.0%
===== ===== ======== =====
</TABLE>
As of December 1, 1997, there were 76,000 shares issuable upon the exercise
of stock options having a weighted average exercise price of $8.58 per share. To
the extent options are exercised, there will be further dilution. In addition,
in connection with certain acquisitions, assuming an initial public offering
price of $ , the Company is obligated to issue additional
shares of Common Stock.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short- and
long-term debt and the capitalization of the Company at September 30, 1997 on an
actual basis and on a pro forma as adjusted basis to reflect acquisitions by the
Company and issuances of Common Stock after September 30, 1997 and to reflect
the sale of the shares of Common Stock offered hereby at an assumed
initial public offering price of $ per share and after deducting
underwriting discounts and commissions and estimated offering expenses and the
application of the net proceeds therefrom as described under "Use of Proceeds."
This table should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents......................................... $ 2,138 $
======= ========
Short-term debt(1)................................................ $ 3,266 $
Long-term debt (including capital lease obligations)(2)........... 23,807
Mandatorily redeemable preferred stock, $.01 par value per share;
1,000,000 shares authorized, 8,000 issued and outstanding actual
and pro forma; no shares issued and outstanding pro forma as
adjusted(3)..................................................... 928
Mandatorily redeemable common stock(4)............................ 812
Stockholders' deficit:
Common Stock, $.01 par value per share, 20,000,000 shares
authorized; 3,836,142 shares issued and outstanding actual;
shares issued and outstanding pro forma as
adjusted(5).................................................. 39
Capital in excess of par value.................................. 969
Accumulated deficit............................................. (1,543)
------- --------
Total stockholders' equity (deficit)............................ (535)
------- --------
Total capitalization......................................... $28,278 $
======= ========
</TABLE>
- ---------------
(1) Includes current portion of long-term debt.
(2) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Notes 7 and 8 of Notes to the Company's Consolidated
Financial Statements for information concerning the Company's capital leases
and long-term debt.
(3) See "Certain Transactions," "Description of Capital Stock" and Note 12 of
Notes to the Company's Consolidated Financial Statements for information
concerning the mandatorily redeemable preferred stock.
(4) Represents shares of Common Stock issued to former sellers in connection
with acquisitions where the Company is required to repurchase shares of
Common Stock if the Company's initial public offering does not occur by
certain dates. See Note 13 of Notes to the Company's Consolidated Financial
Statements.
(5) Does not include 600,000 shares reserved for issuance under the Company's
Stock Option Plan, 350,000 shares reserved for issuance under the Company's
1997 Employee Stock Purchase Plan (the "Stock Purchase Plan") and 213,992
shares of Common Stock reserved for issuance upon conversion of currently
convertible subordinated notes issued in connection with an acquisition. In
connection with certain acquisitions, assuming an initial public offering
price of $ , the Company is obligated to issue additional
shares of Common Stock. See "Management -- Stock Option Plan,"
"Management -- Stock Purchase Plan," "Dilution" and Notes 8 and 14 of Notes
to the Company's Consolidated Financial Statements.
18
<PAGE> 20
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1996 and the nine months ended September 30, 1997 and
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997 are based on
the historical consolidated financial statements of the Company, adjusted to
give effect, as described below, to the acquisitions of the affiliated
practices:
Horizon Group International, Inc. (including Horizon Dental Group, Inc. -- R.W.
Aros, D.D.S.)
Western Dental (including Western Dental Group of Fort Collins, Academy
Boulevard, Cascade Avenue, Denver and Leopoldo Rodriguez, D.D.S.)
The Dentistry
ENW, Inc. (d/b/a Dental Care Center, Family Dentistry -- Roswell and Virginia
Avenue Dentistry)
Century Dental Center
Comprehensive Family Dentistry, Inc.
Bernard B. Baros, D.D.S. and Bernard B. Baros, D.D.S., P.C.
Maurice E. Smith, D.D.S. and Maurice E. Smith, P.C.
Gentle Dental of Ocala, Sarasota, Clearwater, Manatee, Gentle Dental
Orthodontics, P.C. and John M. Borchers, D.D.S.
Douglass A. Quinn, D.D.S. and Douglass A. Quinn, D.D.S., P.A.
Kenneth E. Copeland, D.D.S., Inc.
Delbert B. Williamson, D.D.S.
Miller and Powell, D.M.D. d/b/a Soft Touch Dentistry
Felix W. Sibley, Jr., D.D.S. d/b/a Garden Walk Dental Associates
Kenneth Bradley Reynolds, D.D.S.
David B. Wells, D.D.S.
ProDent, Inc. (including George E. Frattali, D.D.S. & Associates Ltd., George
Frattali, D.D.S. & Associates, P.A. and Village at Newtown Dentists, P.C.)
Cross Keys Dental Associates
Poller Dental Group, P.A., including Poller Dental Group of Union, P.A. and
Dental Centers of America, P.A. (f/k/a American Dental Centers, P.A.)
The Unaudited Pro Forma Combined Statement of Operations has been prepared
assuming the above acquisitions occurred as of the beginning of the respective
periods presented below. The Unaudited Pro Forma Combined Balance Sheet has been
prepared assuming that acquisitions which occurred subsequent to September 30,
1997, and the offering, had occurred on September 30, 1997. The acquisitions and
the related adjustments are described in the Notes thereto.
The Unaudited Pro Forma Combined Statement of Operations also gives effect
to the reduction in interest costs and dividends on the mandatorily redeemable
preferred stock resulting from the assumed use, as of the beginning of the
respective periods, of the estimated net proceeds of the offering to retire
outstanding debt, together with accrued interest, and to redeem the mandatorily
redeemable preferred stock of the Company as described under "Use of Proceeds."
The Unaudited Pro Forma Financial Information does not purport to represent
what the Company's results of operations or financial position would have been
had the acquisitions occurred as of the beginning of the respective periods, or
to project the Company's results of operations or financial position for any
future period or date, nor does it give effect to any matters other than those
described in the Notes thereto.
The Unaudited Pro Forma Financial Information should be read in conjunction
with the Company's Consolidated Financial Statements and the financial
statements of certain of the above acquired affiliated practices appearing
elsewhere in this Prospectus.
19
<PAGE> 21
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
VALLEY FORGE ACQUISITION OFFERING
DENTAL ASSOCIATES ACQUIRED PRO FORMA PRO FORMA PRO FORMA
AND SUBSIDIARIES PRACTICES(a) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
----------------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues............ $15,448 $ 35,374 $ -- $50,822 $ $
------- ------- ------- ------- ------- -------
Network expenses:
Dental network expenses....... 13,211 33,732 (1,355)(b) 45,588
Depreciation.................. 155 792 53(c) 1,000
------- ------- ------- ------- ------- -------
Total network expenses.......... 13,366 34,524 (1,302) 46,588
------- ------- ------- ------- ------- -------
Network operating
income............... 2,082 850 1,302 4,234
Corporate general and
administrative expenses....... 1,554 -- -- 1,554
Amortization of intangible
assets........................ 196 -- 1,008(d) 1,204
------- ------- ------- ------- ------- -------
Income (loss) from
operations........... 332 850 294 1,476
Interest expense................ 495 472 2,812(e) 3,779 (f)
------- ------- ------- ------- ------- -------
Income (loss)
before taxes......... (163) 378 (2,518) (2,303)
Income taxes (benefit).......... 276 (12) (1,007) (743)
------- ------- ------- ------- ------- -------
Net income (loss)...... $ (439) $ 390 $(1,511) $(1,560) $ $
------- ------- ------- ------- ------- -------
Accretion of mandatorily
redeemable common stock....... $ -- $ -- $ 687(g) $ 687 $ $
Dividends on preferred stock.... 64 -- -- 64
------- ------- ------- ------- ------- -------
Net income (loss)
applicable to common
shares............... $ (503) $ 390 $(2,198) $(2,311) $ $
======= ======= ======= ======= ======= =======
Net income (loss) per
common share(h)...... $ $ $ $ $ $
======= ======= ======= ======= ======= =======
Pro forma net income
(loss) applicable to
common shares........ $ $ $
======= ======= =======
Pro forma weighted
average number of
shares(h)............
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statement of Operations.
20
<PAGE> 22
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
VALLEY FORGE ACQUISITION OFFERING
DENTAL ASSOCIATES ACQUIRED PRO FORMA PRO FORMA PRO FORMA
AND SUBSIDIARIES PRACTICES(a) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
----------------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues............ $22,630 $ 19,634 $ -- $42,264 $ $
------- ------- ------- ------- ------- -------
Network expenses:
Dental network expenses....... 19,153 18,157 (424)(b) 36,886
Depreciation.................. 257 574 40(c) 871
------- ------- ------- ------- ------- -------
Total network expenses.......... 19,410 18,731 (384) 37,757
------- ------- ------- ------- ------- -------
Network operating
income............... 3,220 903 384 4,507
Corporate general and
administrative expenses....... 1,924 -- -- 1,924
Amortization of intangible
assets........................ 501 -- 601(d) 1,102
------- ------- ------- ------- ------- -------
Income (loss) from
operations........... 795 903 (217) 1,481
Interest expense................ 1,096 275 1,549(e) 2,920 (f)
------- ------- ------- ------- ------- -------
Income (loss) before
taxes................ (301) 628 (1,766) (1,439)
Income taxes (benefit).......... -- 74 (706) (632)
------- ------- ------- ------- ------- -------
Net income (loss)...... $ (301) $ 554 $(1,060) $ (807)
------- ------- ------- ------- ------- -------
Accretion of mandatorily
redeemable common stock....... $ 307 $ -- $ 208(g) $ 515 $ $
------- ------- ------- ------- ------- -------
Dividends on preferred stock.... 48 -- -- 48
------- ------- ------- ------- ------- -------
Net income (loss)
applicable to common
shares............... $ (656) $ 554 $(1,268) $(1,370) $ $
======= ======= ======= ======= ======= =======
Net income (loss) per
common share(h)...... $ $ $ $ $ $
======= ======= ======= ======= ======= =======
Pro forma net income
(loss) applicable to
common shares........ $ $ $
======= ======= =======
Pro forma weighted
average number of
shares(h)............
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statement of Operations.
21
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The adjustments reflected in the Unaudited Pro Forma Combined Statement of
Operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 are as follows:
(a) The historical statement of operations data for the affiliated practices for
the year ended December 31, 1996 represent the results of operations of such
practices from January 1, 1996 to the earlier of the respective dates of
acquisition of such practices or December 31, 1996 (the "1996
Acquisitions"). The historical statement of operations data for the
affiliated practices for the nine months ended September 30, 1997 represent
the results of operations for such practices from January 1, 1997 to the
earlier of the respective dates of acquisition of such practices or
September 30, 1997 (the "1997 Acquisitions"). Each of the acquisitions has
been accounted for under the purchase method of accounting. Accordingly, the
results of operations of each such affiliated practice is included in the
results of operations of the Company from the date of acquisition. See the
Company's Consolidated Financial Statements and the financial statements of
certain of the affiliated practices appearing elsewhere in this Prospectus.
The table below presents a summary of the historical results of operations
for each of the Company's affiliated practices from the beginning of the
respective periods to the earlier of the date of acquisition by the Company
or the end of period.
<TABLE>
<CAPTION>
(IN THOUSANDS)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, 1996 1997
----------------------------------- -----------------------------------
NET NETWORK NET NET NETWORK NET
AFFILIATED PRACTICE REVENUE EXPENSE INCOME (LOSS) REVENUE EXPENSE INCOME (LOSS)
- ------------------------------- ------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Horizon Group International,
Inc. ........................ $ 1,188 $ 1,290 $(108) $ -- $ -- $ --
Western Dental................. 2,691 2,507 161 -- -- --
ENW, Inc. ..................... 2,217 2,168 (2) 234 250 (21)
The Dentistry.................. 3,486 3,414 (8) 910 893 (42)
Comprehensive Family
Dentistry, Inc. ............. 1,304 1,293 (62) 529 855 (360)
Century Dental Center.......... 985 988 11 323 332 4
Bernard B. Baros, D.D.S. ...... 556 505 39 245 225 9
Maurice E. Smith, D.D.S. ...... 843 715 117 362 323 34
Gentle Dental.................. 2,727 2,631 (54) 1,651 1,604 (45)
Douglass A. Quinn, D.D.S. ..... 690 635 43 474 442 22
Delbert B. Williamson,
D.D.S. ...................... 396 186 233 233 82 153
Kenneth E. Copeland, D.D.S.
Inc. ........................ 845 880 (37) 485 484 (1)
David B. Wells, D.D.S.......... 519 299 220 468 300 168
Kenneth Bradley
Reynolds, D.D.S. ............ 977 680 219 625 453 127
Miller & Powell, D.M.D. ....... 1,179 1,118 62 726 715 12
Felix W. Sibley, Jr.,
D.D.S. ...................... 1,265 1,223 25 1,242 1,220 13
ProDent, Inc. ................. 5,418 5,547 (89) 4,634 4,495 86
Cross Keys Dental Associates... 1,051 1,064 16 781 790 13
Poller Dental Group, P.A. ..... 7,037 7,381 (396) 5,712 5,268 382
------- ------- ----- ------- ------- -----
Total.......................... $35,374 $34,524 $ 390 $19,634 $18,731 $ 554
======= ======= ===== ======= ======= =====
</TABLE>
(b) The adjustment to dental network expenses reflects the following:
(i) The impact of applying contractual provisions of employment agreements
to compensation expense. The adjustments affect former owners'
compensation to reflect new employment agreements executed in
connection with the transactions.
22
<PAGE> 24
(ii) The impact of applying contractual provisions of new lease agreements
executed in connection with the transactions. These new lease
agreements primarily relate to facility leases. A summary of those
adjustments is presented below.
<TABLE>
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996 NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------- ---------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dental Compensation....... $ 10,471 $ (1,122) $ 9,349 $ 5,053 $ (270) $ 4,783
Operating Leases.......... 2,910 (233) 2,677 1,341 (154) 1,187
Other Dental Network
Expense................. 33,562 -- 33,562 30,916 -- 30,916
------- ------- ------- -------- ------- --------
$ 46,943 $ (1,355) $45,588 $ 37,310 $ (424) $36,886
======= ======= ======= ======== ======= ========
</TABLE>
(c) The adjustment to depreciation reflects additional depreciation based upon
the Company's allocation of purchase price for acquired companies as if the
1996 Acquisitions and the 1997 Acquisitions were completed at the beginning
of the respective periods. The principal reason for the adjustment relates
to the effect of depreciation of a building acquired in connection with the
purchase of ProDent, with a fair market value of $800,000.
(d) The adjustment to amortization of intangible assets reflects additional
amortization based upon the Company's allocation of purchase price for
acquired companies as if the 1996 Acquisitions and the 1997 Acquisitions
were completed at the beginning of the respective periods. The pro forma
intangible assets related to the 1996 Acquisitions and the 1997 Acquisitions
total approximately $35.3 million at September 30, 1997 and are allocated as
follows:
- $29.6 million to goodwill
- $4.4 million to patient lists
- $0.9 million to workforce in place
- $0.4 million to noncompete agreements
(e) The adjustment to interest expense reflects the additional interest expense
that would have been incurred had the consideration in the form of cash and
notes for the acquisitions been paid at the beginning of the respective
periods. The aggregate amount of borrowings and debt issued in connection
with the acquisitions was approximately $42.8 million. Such borrowings bear
interest at annual rates of 6.0% to 10.0%.
(f) The adjustment to interest expense reflects elimination of interest expense
reflecting the retirement of certain outstanding debt of the Company and
elimination of accrued dividends reflecting the redemption of the
mandatorily redeemable preferred stock by applying a portion of the
estimated net proceeds of the offering as more fully described under "Use
of Proceeds," as if the offering had occurred at the beginning of the
respective periods. The outstanding debt, which is to be retired by
applying a portion of the estimated net proceeds, bears interest at an
annual rate of 9.0%.
(g) The adjustment for the accretion of mandatorily redeemable common stock
reflects, for certain acquisitions, the change in value of those shares
issued with a put option as if all shares were issued on January 1, 1996.
The value of these shares is accreted from book value to their respective
put exercise prices ratably as they approach the date of mandatory
redemption.
(h) Historical and pro forma net income (loss) per common share is computed,
using the treasury stock method, by dividing net income (loss) applicable to
common shares by the number of shares of Common Stock outstanding as of
December 1, 1997 since all such shares issued on or prior to that date were
issued at prices significantly below the offering price. The shares used in
the computation of net income (loss) per common share on a pro forma as
adjusted basis include only that portion of the shares being sold pursuant
to the offering as would be necessary to pay the estimated expenses of the
offering and to retire debt, including accrued interest, and redeem the
mandatorily redeemable preferred stock, as more fully described under "Use
of Proceeds."
23
<PAGE> 25
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------
VALLEY FORGE ACQUISITION
DENTAL ACQUIRED PRO FORMA OFFERING PRO FORMA
ASSOCIATES, INC. PRACTICES(a) ADJUSTMENTS PRO FORMA ADJUSTMENTS(e) AS ADJUSTED
---------------- ------------ ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 2,138 $ 597 $ (597)(b) $ 2,138 $ $
Accounts receivable, net..... 2,407 1,627 -- 4,034
Prepaid expenses and other
current assets............ 238 65 (65)(b) 238
------- ------ ------- ------- ------- -------
Total current assets...... 4,783 2,289 (662) 6,410
Property and equipment, net.... 3,288 743 427(c) 4,458
Excess of cost over fair value
of net assets acquired and
other intangible assets,
net.......................... 27,730 2,423 13,405(b)(d) 43,558
Other assets................... 886 40 (40)(b) 886
------- ------ ------- ------- ------- -------
Total assets.............. $ 36,687 $5,495 $13,130 $55,312 $ $
======= ====== ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt and obligations under
capital leases............ $ 3,266 $ 891 $ (891)(b) $ 3,266 $ $
Accounts payable............. 1,747 715 (194)(b) 2,268
Accrued expenses and other
current liabilities....... 3,195 45 (45)(b) 3,195
Other accrued liabilities.... 1,367 -- 1,526(d) 2,893
Income taxes payable......... 143 141 (141)(b) 143
------- ------ ------- ------- ------- -------
Total current
liabilities............. 9,718 1,792 255 11,765
Long-term debt, including
obligations under capital
leases....................... 23,807 2,589 9,555(b)(d) 35,951
Other long-term liabilities.... 1,785 -- 1,608(d) 3,393
Deferred income taxes.......... 172 19 (19)(b) 172
Commitments and
contingencies................ -- 3 (3)(b) --
Mandatorily redeemable
preferred stock.............. 928 -- -- 928
Mandatorily redeemable common
stock........................ 812 -- -- 812
Stockholders' deficit
Common stock................. 39 29 (24)(b)(d) 44
Capital in excess of par
value..................... 969 842 1,979(b)(d) 3,790
Retained earnings
(accumulated deficit)..... (1,543) 221 (221)(b)(d) (1,543)
------- ------ ------- ------- ------- -------
Total stockholders' equity
(deficit)................. (535) 1,092 1,734 2,291
------- ------ ------- ------- ------- -------
Total liabilities and
stockholders' equity...... $ 36,687 $5,495 $13,130 $55,312 $ $
======= ====== ======= ======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
24
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) The historical balance sheet data for the acquired practices as of September
30, 1997 represent the combined September 30, 1997 balance sheets for
practices acquired subsequent to September 30, 1997. See the table below
which summarizes the historical balance sheets for the applicable affiliated
practice.
<TABLE>
<CAPTION>
HISTORICAL
CROSS KEYS HISTORICAL
HISTORICAL DENTAL POLLER DENTAL
(IN THOUSANDS) PRODENT, INC. ASSOCIATES GROUP INC. TOTAL
------------- ---------- ------------- ------
<S> <C> <C> <C> <C>
ASSETS
Current assets................................. $ 717 $ -- $ 1,572 $2,289
Total assets..................................... 1,068 63 4,364 5,495
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities............................ 595 76 1,121 1,792
Long-term debt, including obligations under
capital leases................................. 39 37 2,513 2,589
Stockholder's equity (deficit)................... 412 (50) 730 1,092
Total liabilities and stockholder's equity
(deficit)...................................... $ 1,068 $ 63 $ 4,364 $5,495
</TABLE>
(b) These are acquisition pro forma adjustments reflecting the elimination of
certain historical assets and liabilities of the acquired affiliated
practices not purchased.
(c) This adjustment reflects the net increase in fair market value (FMV) of
property and equipment of acquired affiliated practices.
(d) These adjustments represent the allocation of the purchase price for the
acquisitions occurring subsequent to September 30, 1997. See below for a
summary of the total purchase price and applicable allocation thereof for
these acquisitions.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
ALLOCATION OF PURCHASE PRICE
Total purchase price........................................... $ 18,106
Less: Assets acquired.......................................... (2,797)
Plus: Liabilities assumed...................................... 519
--------------
Excess of purchase price over fair value of tangible assets
acquired..................................................... 15,828
Less: Purchase accounting adjustments (b)...................... (2,423)
--------------
Net adjustment to excess of cost over fair value of tangible
assets acquired.............................................. $ 13,405
===========
</TABLE>
(e) The adjustments to cash, other assets, current portion of long-term debt,
accrued interest, long term debt, mandatorily redeemable common and
preferred stock and stockholders' equity reflects the reclassification of
certain deferred offering costs to stockholders' equity, the retirement of
certain debt together with accrued interest, and the redemption of
mandatorily redeemable common and preferred stock of the Company by applying
the estimated net proceeds of the offering as described under "Use of
Proceeds," as if the offering had occurred on September 30, 1997.
25
<PAGE> 27
SELECTED FINANCIAL DATA
The selected actual financial data as of December 31, 1995, and December
31, 1996, and for the period from September 19, 1995 (inception) to December 31,
1995 and for the year ended December 31, 1996, have been derived from the
Company's Consolidated Financial Statements audited by Price Waterhouse LLP,
independent accountants. These Consolidated Financial Statements and the Notes
thereto appear elsewhere in this Prospectus. The selected actual financial data
as of September 30, 1996 and 1997 and for the nine-month periods then ended,
have been derived from unaudited interim consolidated financial statements also
appearing herein and which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of the results for the unaudited interim periods.
The selected pro forma as adjusted financial data have been derived from
the Unaudited Pro Forma Financial Information appearing elsewhere in this
Prospectus and give effect to 22 affiliated practices acquired through December
1, 1997. The pro forma statement of operations data do not purport to represent
what the Company's results of operations would have been if such acquisitions
had occurred as of the beginning of the respective periods or to project the
Company's results of operations for any future period.
The following selected financial data of the Company should be read in
conjunction with the Company's Consolidated Financial Statements and Unaudited
Pro Forma Financial Information and related Notes appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 19, 1995 DECEMBER 31, 1996 --------------------------------------
(INCEPTION) TO ------------------------- 1997
DECEMBER 31, 1995 PRO FORMA 1996 1997 PRO FORMA
ACTUAL ACTUAL AS ADJUSTED(1) ACTUAL ACTUAL AS ADJUSTED(1)
------------------ -------- -------------- ----------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues.......... $ 989 $ 15,448 $ $11,061 $22,630 $
---- ------- ------- ------- ------- -------
Network expenses:
Dental network expenses..... 748 13,211 9,452 19,153
Depreciation................ 33 155 130 257
---- ------- ------- ------- ------- -------
Total network expenses........ 781 13,366 9,582 19,410
Network operating
income.................. 208 2,082 1,479 3,220
Corporate general and
administrative expenses..... 509 1,554 1,087 1,924
Amortization of intangible
assets...................... 26 196 139 501
---- ------- ------- ------- ------- -------
Income (loss) from
operations.............. (327) 332 253 795
Interest expense.............. 41 495 341 1,096
---- ------- ------- ------- ------- -------
Income (loss) before
taxes................... (368) (163) (88) (301)
Income taxes.................. -- 276 203 --
---- ------- ------- ------- ------- -------
Net income (loss)......... (368) (439) (291) (301)
---- ------- ------- ------- ------- -------
Accretion of mandatorily
redeemable common stock..... -- -- -- 307
---- ------- ------- ------- ------- -------
Dividends on preferred
stock....................... 16 64 48 48
---- ------- ------- ------- ------- -------
Net income (loss)
applicable to common
shares.................. $ (384) $ (503) $ $ (339) $ (656) $
==== ======= ======= ======= ======= =======
Net income (loss) per
common share(2)......... $ $ $ $ $ $
==== ======= ======= ======= ======= =======
Pro forma net income
(loss) applicable to
common shares........... $ $ $ $ $ $
==== ======= ======= ======= ======= =======
Pro forma weighted average
number of shares(2).....
==== ======= ======= ======= ======= =======
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, ----------------------------------------
------------------- PRO PRO FORMA
(IN THOUSANDS) 1995 1996 ACTUAL FORMA(3) AS ADJUSTED(4)
------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 100 $ 568 $ 2,138 $ 2,138 $
Working capital............................. (607) (2,339) (4,935) (5,355)
Total assets(5)............................. 3,805 12,162 36,687 55,312
Long-term debt.............................. 1,741 6,611 23,807 35,951
Mandatorily redeemable preferred stock...... 816 880 928 928
Stockholders' (deficit) equity.............. (24) (309) (535) 2,291
</TABLE>
- ---------------
(1) Adjusted on a pro forma basis to give effect to acquisitions which occurred
during 1996 and 1997 as if such acquisitions had occurred as of the
beginning of the respective periods. These adjustments also include
adjustments to further give effect to the reduction in interest expense and
dividends on the mandatorily redeemable preferred stock resulting from the
assumed use, as of the beginning of the respective periods, of the estimated
net proceeds of the offering to retire outstanding debt and redeem the
mandatorily redeemable preferred stock as described under "Use of Proceeds."
The pro forma statement of operations data do not purport to represent what
the Company's results of operations would have been if such acquisitions had
occurred as of the beginning of the respective periods or to project the
Company's results of operations for any future period. See "Unaudited Pro
Forma Financial Information."
(2) For information concerning the number of shares used in the computation of
net income (loss) per common share, see Note (g) of Notes to the "Unaudited
Pro Forma Combined Statement of Operations" included under "Unaudited Pro
Forma Financial Information" and Note 2 of Notes to the Company's
Consolidated Financial Statements.
(3) Adjusted on a pro forma basis to give effect to acquisitions which occurred
subsequent to September 30, 1997 as if they had occurred as of September 30,
1997.
(4) Adjustments on a pro forma as adjusted basis include all pro forma
adjustments and further give effect to the sale of shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds." See "Unaudited Pro Forma Financial
Information."
(5) Includes $27.7 million on an actual and $ million on a pro forma and
pro forma as adjusted basis of excess of cost over fair value of net assets
acquired and other intangible assets at September 30, 1997.
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus.
OVERVIEW
The Company is a leading provider of practice management services to
multi-specialty dental practices in the United States. The Company seeks to
develop networks of locally prominent dental practices in each of its markets by
acquiring the assets of a large group dental practice (pedestal acquisition),
entering into long-term Management Services Agreements with the practice and
then densifying around it by acquiring the assets of smaller practices
(densification acquisitions), adding additional dentists to its affiliated
dental practices, assisting its affiliated dental practices in the acquisition
of patient records and relationships of retiring dentists and opening de novo
(start-up) offices.
The Company commenced operations and made its first acquisition in
September 1995. Since its inception, the Company has affiliated with 22
practices with an operating history averaging 16 years, and has opened four de
novo offices. As of December 1, 1997, the Company had 55 affiliated locations in
nine markets with 408 dental chairs and 173 dentists.
The Company has made acquisitions of assets of pedestal dental practices
and entered into long-term Management Services Agreements with such practices in
nine markets and has begun to densify in six of those markets by acquiring the
assets of and establishing long-term relationships with smaller practices, and
opening de novo offices. See "Business -- The Practices" for a list of the
affiliated dental practices.
The Consolidated Financial Statements include the accounts of the Company
and all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in the states in which the Company operates, the
Company does not own dental practices but instead enters into exclusive
long-term management services agreements with professional corporations which
operate the dental practices. Through the Management Service Agreements, the
Company has exclusive authority over decision making relating to all major
ongoing operations of the underlying professional corporations with the
exception of the professional aspects of dentistry practice as required by state
law. Under the Management Services Agreements, the Company establishes annual
operating and capital budgets for the professional corporations and compensation
guidelines for the licensed dental professionals. In addition, the Company has
the contractual right to designate at any time, in its sole discretion, the
licensed dentist who is the owner of the capital stock of the professional
corporation at a nominal cost ("nominee arrangements"). Through the Management
Services Agreements and the nominee arrangements, the Company has significant
long-term financial interests in the professional corporations, which interests
are unilaterally saleable and transferable by the Company and fluctuate based
upon the actual performance of the operations of the professional corporations.
All significant intercompany accounts and transactions have been eliminated.
Because of the significant long-term financial interests in the affiliated
dental practices described above, the Company presents its financial results on
a consolidated basis with the dental practices. Therefore, the Company records
net patient revenues unlike other practice management companies which record
management fee revenues. Company net patient revenues represent amounts billed
by the affiliated dental practices to patients and third-party payors for dental
services rendered. Such amounts also include monthly capitation payments
received from third-party payors pursuant to managed care contracts.
Capitated managed dental care contracts are established between dental
benefits organizations and the Company's affiliated dental practices. Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental group practice obligated to provide them. This arrangement
shifts the risk of utilization of these services to the affiliated dental
practice providing the dental
28
<PAGE> 30
services. Because the Company assumes responsibility under the Management
Services Agreements for all aspects of the operation of the affiliated dental
practices (other than the practice of dentistry) and thus bears all costs of the
Company's affiliated dental practices associated with the provision of dental
services (other than professional compensation), the risk of over-utilization of
dental services at the affiliated dental practices under capitated managed
dental care plans is effectively shifted to the Company. Revenues under these
contracts are recorded in the month fees are earned with expenses recorded as
incurred. During the period from September 19, 1995 (inception) through December
31, 1995, the year ended December 31, 1996 and for the period from January 1,
1997 to September 30, 1997, approximately 30%, 20% and 20% respectively, of the
Company's net revenues were derived from capitated contracts.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services the affiliated dental practices will be required to provide under the
terms of the contracts. However, there is no guarantee that visitations and
costs incurred to service capitated contract members will not periodically
exceed the revenue received. Generally, either party to these contracts may
terminate the contract without cause at any time with thirty to ninety days
written notice.
Managed care arrangements with third party payors including the revenues
under capitated contracts referred to above accounted for approximately 37% of
the Company's net patient revenues during the nine-month period ended September
30, 1997. The relative percentage of the Company's net revenues derived from
fee-for-service business and managed dental care contracts varies from market to
market depending on the availability of managed dental care contracts in any
particular market and the Company's ability to negotiate favorable terms in such
contracts. In addition, the profitability of managed dental care revenue varies
from market to market depending on the level of capitation payments and
co-payments in proportion to the level of benefits required to be provided.
Variations in the relative penetration and popularity of capitated managed
dental care from market to market across the country, however, make it difficult
to determine whether the Company's experience in new markets will be consistent
with its current experiences. The Company expects that the level of
profitability of its operations in new markets entered through acquisition will
vary depending in part on these factors.
Each of the Company's Networks incurs expenses including dental network
expenses, depreciation and network general and administrative expenses. Dental
network expenses consist of expenses incurred by the professional corporations
and the affiliated dental practices including (i) dental compensation paid to
dentists, including performance incentives that reward dentists for increasing
production and operating margins, and which are designed to have a positive
impact on the Company's net patient revenues and pre-tax operating profits; (ii)
auxiliary compensation, which includes compensation paid to hygienists, dental
assistants and administrative personnel at the dental office and network
administrative level; (iii) dental laboratory and supply expenses; and (iv)
other general and administrative expenses including employment taxes and
benefits, occupancy costs, insurance costs and expenses, payments under
equipment leases, advertising costs, costs of management information systems,
and other costs at both the dental office and the network administrative level
in connection with maintaining local network functions that provide management,
administrative and development services to the dental practices.
Corporate general and administrative expenses primarily consist of
personnel and other administrative expenses incurred by the Company in
maintaining corporate oversight and certain Company-wide administrative
functions that provide management, financial and development expertise to the
networks and practices.
The Company's results of operations reflect its practice of reporting net
patient revenues on a consolidated basis, rather than management fee income.
Certain other dental practice management companies report their results using
management fee income. Management fee income generally approximates the
operating income of the professional corporation, as defined in the management
service agreements. Management fee income typically is calculated by deducting
third-party payor adjustments, allowances and settlements, as well as amounts
retained by dental professionals, from gross patient revenue. The Company
believes that the amounts retained by dental professionals typically include
expenses such as salary, benefits
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and other payments to employed dentists and hygienists and contracted
specialists, which expenses are recorded by the Company as part of dental
network expenses.
The Company believes that to analyze operating profitability in comparison
to historical performance or other dental practice management companies, network
operating income (loss), excluding any allocated corporate general and
administrative expense, provides a useful measurement of the network operating
performance. This measurement focuses on the core operations, without giving
effect to the cost of financing and amortization of intangible assets, which may
reflect differing accounting treatment throughout the industry.
RESULTS OF OPERATIONS
As a result of the recent expansion of the Company's business through
existing market development and acquisitions, and its limited period of
affiliation with certain practices, the Company believes that the period-
to-period comparisons set forth below may not be meaningful.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
Net Patient Revenues
Net patient revenues increased from $11.1 million for the nine months ended
September 30, 1996 to $22.6 million for the nine months ended September 30,
1997, an increase of $11.5 million or 103.6%. Approximately $10.2 million of
this increase was due to the effect of acquisitions which were closed during
1997 and the effect of acquisitions which were included in the 1997 results for
a different number of months than in 1996 (the "1997 Acquisition Effect"). The
remaining $1.3 million resulted from internal growth, $856,000 of which arose
from de novo offices in the Metro Washington, D.C. network.
Dental Compensation
Dental compensation expenses increased from $2.3 million for the nine
months ended September 30, 1996 to $5.3 million for the nine months ended
September 30, 1997, an increase of $3 million or 130.4%. The 1997 Acquisition
Effect accounted for $2.6 million of this increase. The remaining increase
resulted from increased compensation costs from the Company's 1996 base
operations and from the Metro Washington, D.C. network's de novo offices. As a
percentage of net patient revenues, dentist compensation increased from 21% to
23.6% for the nine months ended September 30, 1996 and 1997, respectively. The
primary reason for the increase in dental compensation as a percentage of net
patient revenues results from higher compensation rates being paid to dentists
who have joined the affiliated practices during 1997.
Auxiliary Compensation
Auxiliary compensation expenses increased from $3.6 million for the nine
months ended September 30, 1996 to $6.5 million for the nine months ended
September 30, 1997, an increase of $2.9 million or 80.6%. The 1997 Acquisition
Effect accounted for $2.7 million of the increase with the remaining increase
resulting from additional auxiliary compensation resulting from network
infrastructure expansion and from the Metro Washington, D.C. network's de novo
offices. As a percentage of net patient revenues, auxiliary compensation
decreased from 33% to 28.5% for the nine months ended September 30, 1996 and
1997, respectively. The primary reason for the decrease in auxiliary
compensation as a percentage of net patient revenues is due to the continued
economies being realized as the affiliated practices are able to generate more
revenues over a fixed base of auxiliary compensation. Auxiliary compensation
usually consists of a defined salary or hourly compensation structure. As
economies are realized, the percentage of auxiliary compensation is expected to
decline.
Laboratory Fees and Dental Supplies
Laboratory fees and dental supplies increased from $1.4 million for the
nine months ended September 30, 1996 to $2.6 million for the nine months ended
September 30, 1997, an increase of $1.2 million or 85.7%. The
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1997 Acquisition Effect accounted for $1.1 million of this increase with the
remaining increase resulting primarily from the Metro Washington, D.C. network's
de novo offices. As a percentage of net patient revenues, laboratory fees and
dental supply costs decreased from 12.5% to 11.6% for the nine months ended
September 30, 1996 and 1997, respectively.
Other General and Administrative Expenses
Other general and administrative expenses increased from $2.1 million for
the nine months ended September 30, 1996 to $4.7 million for the nine months
ended September 30, 1997, an increase of $2.6 million or 124%. The 1997
Acquisition Effect accounted for $2.1 million of this increase. The remaining
increase resulted from costs which arose from the Company's 1996 base
operations, including infrastructure expenses incurred in developing the Metro
Washington, D.C. network's regional billing office, and operating costs of
approximately $157,000 arising from the Metro Washington, D.C. de novo offices
in 1997. As a percentage of net patient revenues, other general and
administrative expenses increased from 19% to 20.9% for the nine months ended
September 30, 1996 and 1997, respectively.
Depreciation Expenses
Depreciation expense increased from $130,000 for the nine months ended
September 30, 1996 to $257,000 for the nine months ended September 30, 1997, an
increase of $127,000 or 97.7%. Ninety-four thousand dollars of this increase
arose from the 1997 Acquisition Effect. The remaining increase results from
increased depreciation throughout the Company's 1996 base operations. As a
percentage of net patient revenues, depreciation expense decreased slightly from
1.2% to 1.1% for the nine months ended September 30, 1996 and 1997,
respectively.
Corporate General and Administrative Expenses
Corporate general and administrative expenses increased from $1.1 million
for the nine months ended September 30, 1996 to $1.9 million for the nine months
ended September 30, 1997, an increase of $800,000 or 72.7%. This increase
resulted from the expansion of the Company's corporate infrastructure to manage
the current and expected growth of the Company's businesses. The Company
believes that this infrastructure will need to be further expanded in the future
to sustain the Company's growth plans. As a percentage of net patient revenues,
however, corporate general and administrative expenses decreased from 9.9% to
8.5% for the nine months ended September 30, 1996 and 1997, respectively. This
decline occurred because the Company was able to leverage its infrastructure
investment over an increased revenue base.
Amortization of Intangible Assets
Amortization of intangible assets increased from $139,000 for the nine
months ended September 30, 1996 to $501,000 for the nine months ended September
30, 1997, an increase of $362,000 or 260.4%. This increase resulted from the
1997 Acquisition Effect. As a percentage of net patient revenues, amortization
of intangible assets increased from 1.3% to 2.2% for the nine months ended
September 30, 1996 and 1997, respectively.
Interest Expense
Interest expense increased from $341,000 for the nine months ended
September 30, 1996 to $1.1 million for the nine months ended September 30, 1997,
an increase of $759,000 or 222.6%. Increased borrowings related primarily to
acquisitions completed in 1997, accounted for the majority of this increase in
interest expense. During this same time period, interest payable also increased
significantly, primarily due to the increased interest expense payable under the
notes issued to the Company's major stockholders.
Income Taxes
The Company's effective tax rate is higher than the statutory federal rate
primarily due to non-deductible amortization of excess cost of net assets
acquired and state income taxes. There was no tax expense recorded for the nine
months ended September 30, 1997 as a result of losses for which the Company has
recorded no tax benefits.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO PERIOD ENDED DECEMBER 31, 1995
(SEPTEMBER 19, 1995 TO DECEMBER 31, 1995)
Net Patient Revenues
Net patient revenues increased from $1.0 million for the period ended
December 31, 1995 to $15.5 million for the year ended December 31, 1996, an
increase of $14.5 million. Approximately $13.8 million of this increase was due
to acquisitions completed in 1996 (the "1996 Acquisitions") and the inclusion of
a full year of results for the Company's 1995 acquisitions in the 1996 financial
results (the "1996 Acquisition Effect"). The remaining $700,000 increase
resulted from revenue contributions from the Metro Washington, D.C. network's de
novo offices.
Dental Compensation
Dental compensation expenses increased from $115,000 for the period ended
December 31, 1995 to $3.4 million for the year ended December 31, 1996, an
increase of $3.3 million. The 1996 Acquisition Effect accounted for $3.2 million
of this increase, while the Metro Washington, D.C. network's de novo offices
accounted for the remaining $100,000 increase. As a percentage of net patient
revenues, dental compensation increased from 11.6% to 22.2% for the periods
ending December 31, 1995 and 1996, respectively. This increase results primarily
from the fact that the practices affiliated with the Company initially in 1995
paid their dentists a relatively lower fixed compensation rate that did not
significantly vary with the amount of revenues. The volume of dental
compensation based on revenues increased during 1996 to be in line with the
traditional approach of compensating dentists based on a percentage of revenue
produced or collected.
Auxiliary Compensation
Auxiliary compensation expenses increased from $310,000 for the period
ended December 31, 1995 to $4.9 million for the year ended December 31, 1996, an
increase of $4.6 million. The 1996 Acquisition Effect accounted for $4.3 million
of this increase, while the Metro Washington, D.C. network's de novo offices
accounted for the remaining $300,000 increase. As a percentage of net patient
revenues, auxiliary compensation increased from 31.3% to 31.7% for the periods
ending December 31, 1995 and 1996, respectively. Auxiliary compensation as a
percentage of net patient revenues increased only slightly due to the increased
auxiliary staff in the Metro Cleveland area offset by the increased efficiencies
realized by the remainder of the affiliated practices during the first nine
months of 1997.
Laboratory Fees and Dental Supplies
Laboratory fees and dental supplies increased from $130,000 for the period
ended December 31, 1995 to $1.9 million for the year ended December 31, 1996, an
increase of approximately $1.8 million. The 1996 Acquisition Effect accounted
for approximately $1.6 million of this increase, while the Metro Washington,
D.C. network's de novo offices accounted for the remaining $200,000 increase. As
a percentage of net patient revenues, laboratory fees and dental supply costs
decreased from 13.2% to 12.2% for the periods ending December 31, 1995 and 1996,
respectively.
Other General and Administrative Expenses
Other general and administrative expenses increased from $193,000 for the
period ended December 31, 1995 to $3.0 million for the year ended December 31,
1996, an increase of approximately $2.8 million. This increase resulted entirely
from the 1996 Acquisition Effect. As a percentage of net patient revenues, other
general and administrative expenses remained constant at 19.5% for the periods
ending December 31, 1995 and 1996, respectively.
Depreciation Expense
Depreciation expense increased from $33,000 for the period ended December
31, 1995 to $155,000 for the year ended December 31, 1996, an increase of
$122,000. The 1996 Acquisition Effect accounted for $102,000 of this increase,
with the remaining $20,000 resulting from depreciation expense on additional
expenditures in the Metro Washington, D.C. de novo offices. As a percentage of
net patient revenues, depreciation expense decreased from 3.3% to 1.0% for the
periods ending December 31, 1995 and 1996, respectively.
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Corporate General and Administrative Expenses
Corporate general and administrative expenses increased from $509,000 for
the period ended December 31, 1995 to $1.6 million for the year ended December
31, 1996, an increase of approximately $1.1 million or 216.5%. After
consideration of one time non-recurring start-up expenses in 1995 of $287,000,
this increase resulted from (i) additional infrastructure investment of
approximately $300,000 to support the Company's growth and (ii) the inclusion of
additional expenses in 1996 relating to twelve full months of reporting.
Amortization of Intangible Assets
Amortization of intangible assets increased from $26,000 for the period
ended December 31, 1995 to $196,000 for the year ended December 31, 1996, an
increase of $170,000. This increase resulted from the 1996 Acquisition Effect.
Amortization of intangible assets decreased as a percentage of net patient
revenues from 2.6% to 1.3% for the periods ending December 31, 1995 and 1996,
respectively.
Interest Expense
Interest expense increased from $41,000 for the period ending December 31,
1995 to $495,000 for the year ended December 31, 1996, an increase of $454,000.
This increase was due primarily to interest on debt associated with the 1996
Acquisition Effect. As a percentage of net patient revenues, interest expense
decreased from 4.2% to 3.2% for the periods ending December 31, 1995 and 1996,
respectively.
Income Taxes
As a result of a reported loss before taxes, there was no provision for
taxes recorded in 1995. The 1996 provision for income taxes was $276,000 or 1.8%
of net patient revenues. The Company's effective tax rate is higher than the
federal statutory rate due primarily to non-deductible amortization of excess
cost of net assets acquired and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's operations and its 22 acquisitions have been
financed primarily through internally generated cash and borrowings from the
Company's major stockholders. The Company has outstanding borrowings of
approximately $28.6 million under subordinated note agreements with its major
stockholders which provide for maximum borrowings of $38.0 million. In addition,
the Company has borrowed $5.0 million of a $10.0 million secured demand credit
facility with PNC Bank, secured by all the assets of the Company. Payment of the
demand promissory note under the demand credit facility with PNC Bank is
guaranteed by certain of the Company's major stockholders. Borrowings under the
subordinated notes payable to the major stockholders will be repaid using the
net proceeds of the offering and will be terminated effective upon consummation
of the offering. The Company is negotiating to obtain a new $30.0 million
secured credit facility effective with the consummation of the offering. The
remaining net proceeds of the offering will be used to repay a portion of the
borrowings under the secured demand credit facility. Any amounts remaining
outstanding under the demand facility will be paid out of the proceeds of a new
credit facility, which the Company expects to have in place by the offering
effective date. The Company has not received any commitments with respect to
establishment of such a facility and there can be no assurance that such a
facility will be established.
At December 31, 1995, December 31, 1996 and September 30, 1997, the Company
had a working capital deficit of approximately $607,000, $2.3 million and $5.0
million, respectively, and cash and cash equivalents, of approximately $100,000,
$568,000 and $2.1 million, respectively.
During the initial period of operations in 1995, cash used in operations
was $118,000, primarily to fund initial start-up activity. For the year ended
December 31, 1996 and the nine months ended September 30, 1997, cash provided by
operations was $116,000 and $669,000, respectively.
Cash used in investing activities was $13.9 million for the nine months
ended September 30, 1997. During this period, $12.9 million was utilized for
acquisitions and $1.0 million was used to purchase additional property and
equipment. Cash used in investing activities was $1.7 million in 1995 and $4.2
million in 1996. In 1995, primarily all of this cash was used to finance the
Company's initial acquisition. During 1996, $3.9 million was utilized for
acquisitions and $300,000 was used to purchase additional property and
equipment.
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The Company expects that for the foreseeable future its principal uses of
funds will be in connection with acquisitions, payments to be made pursuant to
contingent payment arrangements for acquisitions, debt repayments and purchases
of property and equipment. See "Unaudited Pro Forma Financial Information" for
additional information concerning the effects on the financial condition of the
Company of the application of the estimated net proceeds of the offering. The
Company expects that cash generated from operations will be adequate to fund the
Company's working capital requirements. The Company is currently negotiating to
obtain a $30.0 million credit facility. The Company's requirements for
acquisitions, Contingent Payment arrangements, debt repayments and purchases of
property and equipment for the next year will be dependent on the availability
of a new credit facility or other outside financing, the availability of which
cannot be assured.
The Company has paid cash and issued notes and shares of Common Stock to
sellers in connection with acquisitions of practices by the Company to date. The
Company is obligated to pay additional consideration to sellers of businesses
contingent upon achievement of certain net revenues and pre-tax earnings goals
over periods of one to three years from the dates of acquisition. Although the
amount of additional consideration to be issued cannot be determined until the
Contingent Payment periods terminate, the Company expects that the additional
consideration issued to sellers pursuant to these arrangements, will constitute
a substantial portion of the total consideration for such acquisitions. Payment
under these Contingent Payment arrangements will be accounted for as adjustments
to the purchase price of the acquired companies. If the criteria for the
Contingent Payments with respect to each of the Company's acquisitions to date
are achieved, but not exceeded, the Company will be obligated to make additional
cash payments of approximately $4.3 million. In the event that financial
criteria are not met, no cash or a lesser amount of cash would be paid. Greater
amounts of cash would be paid if the financial criteria are exceeded. Assuming,
in the case of one acquisition that does not provide for a limit on the maximum
contingent payment that may be payable with respect to the first year, that the
target financial criteria for the first year were to be exceeded by 20% and, in
the case of all other acquisitions the maximum Contingent Payments were to be
payable, the Company would be obligated to make additional cash payments of $4.8
million. If, in each case, the Contingent Payment goals are met, the acquired
company will generate net patient revenues and pre-tax earnings significantly in
excess of any Contingent Payments. However, there can be no assurances that the
Company will generate sufficient cash to fund such obligations or that future
acquisitions will not adversely affect cash generated from operations. See "Risk
Factors -- Substantial Unpaid Contingent Acquisition Consideration."
The Company's strategy is to continue to grow its operations both through
acquisitions and internal growth. See "Business -- Strategy." Management
anticipates that the rate of acquisitions in the foreseeable future may be at
least the rate experienced during the period from January 1997 through September
1997. Management anticipates that the terms of payment in connection with future
acquisitions will continue to be a combination of cash, notes and shares of
Common Stock with a portion of the purchase price to be paid at closing and a
portion contingent upon achievement of Contingent Payment criteria.
Based on the obligations arising in connection with current affiliated
practices through the date of this Prospectus, the Company anticipates that its
twelve-month cash requirements (other than cash requirements for normal
recurring operations) will be as follows: cash requirements from investing
activities of $20.3 million, including acquisition financing and capital
expenditures, cash requirements from financing activities of $7.0 million,
including principal repayments and accrued interest. It should be noted that the
above obligations do not reflect the impact of all operational and other cash
requirements that will arise from the Company's future acquisitions. It is
anticipated that funds required for the above obligations will be provided
substantially from the proceeds of future borrowings, the availability of which
cannot be assured, and from internally generated cash. There can be no assurance
that suitable acquisition candidates will be identified by the Company in the
future, that suitable financing can be obtained by the Company or that any such
acquisitions will occur. See "Risk Factors -- Possible Inability to Implement
Acquisition Strategy; Risks Associated with Integrating Acquisitions; and
Substantial Capital Requirements Related to Growth Strategy; Need for Additional
Financing."
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BUSINESS
OVERVIEW
The Company is a leading provider of practice management services to
multi-specialty dental practices in selected markets in Colorado, Florida,
Georgia, Maryland, New Jersey, Ohio, Pennsylvania and Virginia. The Company
seeks to achieve significant local market share by entering into long-term
Management Services Agreements with prominent dental practices, developing
networks of affiliated dental practices and pursuing growth through the
introduction to those networks of professional management, operational
enhancements and acquisitions. The Company provides its networks with
operational assistance in staffing and scheduling, purchasing, advertising and
marketing, recruiting, quality assurance and managed care contracting. While the
Company maintains a multi-regional geographic focus, it recognizes that the
delivery of dental care, like other areas of health care, is inherently local in
nature, and, therefore, through its affiliated dental practices, implements a
flexible care delivery model which responds to local market needs and
preferences. Additionally, by maintaining a strong focus on professional
development and clinical excellence, the Company seeks to create a network of
affiliated dental practices which are the preferred choice of patients and the
favored partner for dentists in each market it serves. In addition to general
dentistry, the Company's dental practices provide specialty dental services
including orthodontics, oral surgery, endodontics, periodontics and pediatric
dentistry. At December 1, 1997, the Company had 22 affiliated practices with 408
dental chairs and 173 dentists at 55 locations in nine markets.
In order to accelerate its growth and take advantage of a growing trend
toward consolidation among dental providers, the Company seeks to affiliate with
prominent practices in targeted markets and to build networks around those
practices to achieve economies of scale. To effectively develop its networks,
the Company pursues both an immediate and longer-term integration strategy.
Immediately after acquisition of the assets of a dental practice, the Company
seeks to integrate each practice into its networks by converting the practice's
financial reporting, operating, human resources, compliance and other practices
and procedures to those of its own. On a longer-term basis, the Company, in
consultation with its affiliated practices, strives to achieve strategic
enhancements in all clinical, operational and financial areas of the practices.
The Company commenced operations in September 1995 with the acquisition
from MT Associates of the assets of the Northern Virginia Dental Group and Penn
Dental practices. The assets of MT Associates consisted of the assets of four
dental practices in Northern Virginia and the assets of one dental practice in
Philadelphia, Pennsylvania. In connection with the acquisition, the Company
entered into Management Services Agreements with professional corporations
operating the dental practices in Virginia and Pennsylvania. The consideration
for this acquisition consisted of $1,600,000 in cash, an $800,000 convertible
promissory note (convertible into shares of Common Stock at any time by the
holder at a price of $16.00 per share), promissory notes in the aggregate
principal amount of $502,804 and Contingent Payments payable over a period of
three years contingent upon the achievement of certain net revenue and pre-tax
earnings goals. To date, the Company has paid to MT Associates, as part of the
Contingent Payments, $846,000 in cash and has issued two convertible promissory
notes (convertible into shares of Common Stock at any time by the holder at a
price of $16.00 per share) in the aggregate principal amount of $3,397,200. If
certain net revenue and pre-tax earnings targets are met, the Company will be
obligated to pay $660,000 in cash and issue a convertible promissory note
(convertible into shares of Common Stock at any time by the holder at a price of
$16.00 per share) in the principal amount of $1,980,000. MT Associates is a
Pennsylvania general partnership, one of whose general partners is Robert K.
Mehlman, D.D.S., who became Senior Vice President of Business Development for
the Company. See "Certain Transactions."
Since the acquisition of the assets of the Northern Virginia Dental Group
and Penn Dental practices, the Company has acquired the assets of and affiliated
with 20 other practices. During 1996, the Company completed two acquisitions
(the "1996 Acquisitions") and paid $2,895,000 in cash, issued promissory notes
in the aggregate principal amount of $588,026 and issued 12,500 shares of Common
Stock at the closing of such acquisitions. During 1997, the Company completed 18
acquisitions (the "1997 Acquisitions") and paid $21,841,156 in cash, issued
promissory notes in the aggregate principal amount of $3,946,844 and issued
648,367 shares of Common Stock at the closings of such acquisitions. Under
certain of the acquisition
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agreements for the 1996 and the 1997 Acquisitions, the Company is obligated to
make additional payments over three years contingent upon the achievement of
certain net revenues and pre-tax earnings goals.
In connection with the 1996 Acquisitions, the Company has paid Contingent
Payments consisting of $125,950 in cash and 18,387 shares of Common Stock. Over
the next two years in connection with the 1996 Acquisitions, the maximum
Contingent Payments the Company will be obligated to make are $275,000 and
44,688 shares of Common Stock if certain net revenue and pre-tax earnings
criteria are achieved. In addition, in connection with one of the 1996
Acquisitions, if the offering price of the shares offered hereby is other than
$16.00 per share, the number of shares of Common Stock deliverable as part of
the purchase price for such acquisition is subject to adjustment such that the
value of shares is equal to $294,192. Assuming an offering price of $ per
share, the Company would be required to issue an additional shares of
Common Stock.
In connection with the 1997 Acquisitions, the Company has not paid any
Contingent Payments to date. Over the next three years in connection with 15 of
the 1997 Acquisitions, the Company will be obligated to make Contingent Payments
in a maximum amount of $3,903,701 in cash, promissory notes in the aggregate
principal amount of $1,030,400 and 415,289 shares of Common Stock if certain net
revenue and pre-tax earnings criteria are achieved by the 1997 Acquisitions
(assuming in the case of the first year Contingent Payment for one acquisition
that does not provide for a limit on the maximum contingent payment for the
first year that the financial criteria for the first year were to be exceeded by
20%). In addition, in connection with three of the 1997 Acquisitions, the
Company is required to issue additional shares of Common Stock if the offering
price of the shares offered hereby is less than $16.00 per share. The maximum
number of shares which the Company would be required to issue is 137,545 shares
of Common Stock if the offering price per share is $12.00 or less.
INDUSTRY
The Health Care Financing Administration estimates that the annual
aggregate domestic market for dental services was approximately $45.9 billion
for 1996, representing 4.2% of total health care expenditures in the United
States and has grown at a compound annual growth rate of approximately 8.6% from
1980 to 1995. The size of the dental services industry is projected to reach
$79.1 billion by 2005. The Company believes that the anticipated growth in the
dental industry will be driven by several factors including: (i) an increase in
the availability and types of dental insurance; (ii) an increasing demand for
dental services from an aging population; (iii) the evolution of technology
which makes dental care less traumatic and, therefore, more attractive to
patients; (iv) an increased focus on preventive and cosmetic dentistry; and (v)
the growth of managed care organizations that offer dental coverage to their
members.
The market for dental services in the United States consists of both
general and specialty dentistry services. General dentistry services include
preventive and diagnostic procedures such as cleanings, examinations and x-rays
and restorative treatments such as fillings of cavities, gum therapy and crowns.
Specialty dentistry services include orthodontics (the straightening of teeth
and remedying of occlusion), periodontics (gum care), endodontics (treatments
for diseases of tooth pulp, such as root canal therapy), oral surgery (tooth
extraction) and pedodontics (care of children's teeth). Dental care services in
the United States are generally delivered through a fragmented system of local
providers, primarily solo or duo practices. According to the American Dental
Association 1995 Survey of Dental Practice there were approximately 151,000
actively practicing dental professionals in the United States, 88.1% of whom
practiced either alone or with one other dentist. In addition, there were
approximately 4,700 dental groups of three or more practitioners.
According to the National Association of Dental Plans, approximately 30% of
the estimated 117 million people covered by dental benefits in 1995 were
enrolled in managed care programs. Enrollment in dental health maintenance
organizations ("HMOs"), according to the National Association of Dental Plans,
is estimated to have grown from 7.8 million in 1990 to 23.8 million in 1996.
The Company believes that the trend toward consolidation in the dental
services industry will continue and dentists will seek to affiliate with group
practices such as the Company's networks of affiliated practices due to (i) a
desire on the part of dentists to focus on the clinical aspects of practicing
dentistry and to be
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relieved of the growing administrative and regulatory burdens of practice; (ii)
the changing demographic make-up of dental school graduates who are seeking more
flexible working hours; (iii) increasing patient demands for more flexible
evening and weekend hours; (iv) increasing demand by managed care for
competitively priced, high quality dental care at multiple locations; and (v)
reduced demand for solo and duo practices due to recent graduates' higher levels
of dental school indebtedness and illiquidity.
BUSINESS STRATEGY
The Company's business strategy is to be the leading dental practice
management company in each of its markets. Key elements of the Company's
strategy for its networks of affiliated practices include: (i) providing local
market responsive dental services through its affiliated dental practices; (ii)
focusing on the provision of quality patient care; (iii) achieving leading
market share by developing comprehensive networks; (iv) immediately integrating
newly affiliated practices to achieve administrative and financial control and
to align professional and operational incentives; (v) pursuing longer-term
clinical, operational and financial enhancements to affiliated dental practices;
and (vi) capitalizing on managed care opportunities. The Company's ability to
successfully implement its strategy is subject to a number of risks and
uncertainties. See "Risk Factors -- Possible Inability to Implement Acquisition
Strategy; Risks Associated with Integrating Acquisitions." The Company has
formulated its business strategy to comply with applicable state regulations on
the practice of dentistry, including state corporate practice of dentistry laws.
The Company does not employ dentists to practice dentistry nor does it otherwise
control the practice of dentistry at its affiliated dental practices.
- Provide Local Market Responsive Dental Services. The Company recognizes
that the delivery of dental care, like other areas of health care, is
inherently local in nature, and, therefore, the Company strives to adapt
its model to the needs of local markets. The Company believes that
different regions of the United States vary in the use of advertising,
the penetration of managed care and other aspects of dental care.
Accordingly, the Company assists the affiliated practices to tailor their
services to the tastes, practices and traditions of providing dental care
in each of its markets.
- Focus on Quality Patient Care. To further strengthen the reputation of
the Company and its affiliated practices with patients and dentists, the
Company, through its affiliated practices, is in the process of
establishing various protocols and building clinical infrastructure to
ensure a high level of patient care. The Company has formed a Clinical
Advisory Board composed of dentists employed by the affiliated practices,
which is responsible for setting policy on such matters as quality
assurance, outcomes measurements and monitoring, continuing education and
training for dental professionals, evaluating new techniques and
technologies and credentialing. The Company believes that such oversight
and the resulting dialogue it will create will involve all constituents
of the Company (including patients, dentists, dental assistants,
hygienists and others) in the pursuit of clinical excellence.
- Achieve Leading Market Share Through Developing Comprehensive
Networks. The Company's strategy is to develop a comprehensive dental
network in each of its markets. The Company believes that the economies
associated with a leading market position will enable it to maintain
programs in support of its other strategic objectives. To achieve this
end, the Company seeks to align itself with clinical leaders and become,
through its affiliated practices, the "employer of choice" for dental
practitioners, provide a comprehensive service mix encompassing multiple
dental specialties and achieve market density.
Align with Clinical Leaders. The Company seeks to align itself with
dentists who are considered to be clinical leaders and who have
reputations for giving the highest level of care in their respective
markets. The Company believes that dentists focus on the clinical
reputation of the affiliated dental professionals when evaluating and
aligning with dental practice management companies. By establishing
clinical leadership, the Company believes it will become the dental
practice management company of choice. With this identity, the Company
believes it will be best positioned to achieve its objectives with
respect to patient care, professional development and corporate growth
and profitability.
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Become "Employer of Choice." While the Company does not employ
dentists, it seeks to have its affiliated practices become the
employers of choice for dentists in each of its markets. To achieve
this, the Company's practices offer dentists more flexible working
hours and programs such as an employee benefit package including a
401(k) savings plan, continuing education, management opportunities and
an ability to relocate, all of which the Company believes is beyond the
level of benefits generally available to practitioners in solo and duo
practices. In addition, the Company offers the benefit of national
networking of dental professionals which, through formal and informal
sharing of resources, experience and expertise, is intended to ensure
that the affiliated practices develop and employ leading dental
practitioners. In so doing, the Company expects to further attract
acquisition candidates and minimize staffing dislocations for the
practices.
Provide Multi-Specialty Dental Services. The Company intends to
provide a comprehensive service mix within its networks encompassing
multiple dental specialties. In doing so, the Company believes that it
will be able to better control the service quality and patient
scheduling of all dental care services. Further, the Company believes
it can retain a significant number of specialist referrals which are
not captured by typical solo, duo or small group practices.
Achieve Market Density. The Company believes that it is important not
only to provide a comprehensive service mix, but also to provide such
services throughout a defined market. The Company believes that
location and convenience are important selection factors when choosing
dental care. On a market by market basis, the Company's strategy
includes acquiring a large group dental practice (pedestal acquisition)
and then densifying around it by either acquiring smaller practices
(densification acquisitions), adding additional dentists to its
affiliated dental practices, encouraging its affiliated dental
practices to acquire patient records and relationships of retiring
dentists and opening de novo offices, where appropriate.
- Immediately Integrate Newly Affiliated Practices. The Company seeks to
integrate newly affiliated practices into its networks immediately after
acquisition by converting cash management, billing, receivables and
payables to common procedures; bringing dentists and practice employees
into a uniform human resource and benefits program; and installing
Company-wide financial and clinical information systems. Upon the closing
of an acquisition, the Company and the affiliated practice jointly
formulate a plan of integration and corresponding time schedule,
specifically designating the responsibilities and resources needed to
ensure a rapid and seamless transition.
- Pursue Longer-Term Network Enhancements. The Company believes that
significant opportunities exist to realize clinical and operational
enhancements at its affiliated practices over time. These enhancements
are implemented to reduce the amount of time dentists are required to
spend on administrative matters and to enable them to dedicate their time
and efforts toward clinical excellence, patient satisfaction and the
growth of their practices.
Clinical Enhancements. The Company facilitates the achievement of
clinical enhancements by bringing together the experiences of the
dentists and other professionals at the Company's affiliated practices
to ensure the best possible care to patients and to achieve the
Company's goal of being the dental industry's clinical leader. Clinical
enhancements include the development in cooperation with dentists for
their use subject to exercise of their individual professional
judgments of treatment protocols, and the institution of quality
assurance and utilization review, professional development and
mentoring programs.
Operational Enhancements. The Company seeks to realize operational
enhancements to augment the integration measures implemented
immediately after the closing of an acquisition. These enhancements
include the centralization of administrative functions to free dentists
from tasks that distract them from their primary responsibility of
caring for patients. Enhancements also include optimizing scheduling
and patient flow and adding specialists where appropriate to capture
specialty revenue which had previously been referred outside the
practice. The Company also seeks to realize significant network
economies of scale in such areas as purchasing, marketing and
advertising and office staffing levels and facility usage.
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Leverage Integration Experience. Members of the Company's management
team and its Board of Directors have had extensive experience in the
development of companies in fragmented health care services industries,
including the development and implementation of acquisition and
integration strategies and programs and the management of rapid
internal growth in a health care services setting. The Company believes
that its clinically oriented value system is beneficial in aligning the
activities, interests and motivations of the dental professionals and
employees of the individual practices with the strategic goals of the
local network and the overall Company.
- Capitalize on Managed Care Opportunities. The Company markets the
services provided by its dental care networks to payors, with a focus on
the managed care community. The Company believes that its marketing
resources and contracting capabilities will allow its affiliated dental
practices to participate in certain contractual managed care
relationships in which they would not otherwise have been able to
participate. The Company believes that the financial and clinical data
generated by the Company's management information systems should enable
the Company to negotiate managed care arrangements under terms favorable
to the Company and its affiliated dental practices. The Company believes
that contracting with managed care entities will facilitate entry into
new markets and the expansion of existing networks.
THE PRACTICES
The Company's affiliated practices provide a full range of dental care
services. General dental care services provided include examinations, dental
prophylaxis (cleanings), fillings, bonding, cosmetic treatment (i.e. whitening),
placing crowns, and fitting and placing fixed or removable prostheses. Specialty
dental care services provided include orthodontics, oral surgery, endodontics,
periodontics and pediatric dentistry.
As of December 1, 1997, the Company had 22 affiliated practices with 408
dental chairs and 173 dentists at 55 locations in nine markets. The following
table sets forth the markets in which the Company operates:
<TABLE>
<CAPTION>
YEAR NUMBER OF NUMBER OF DATE
PRACTICE NAME FOUNDED OFFICES DENTISTS(1) AFFILIATED
- ------------------------------------------------- ------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Metro Atlanta, Georgia
Eugene Witkin, D.D.S., ("ENW, Inc.") d/b/a
Dental Care Center, Family Dentistry and
Virginia Avenue Dentistry................... 1985 4 13 February 1997
Maurice E. Smith, D.D.S. ...................... 1987 1 2 July 1997
Douglass A. Quinn, D.D.S. ..................... 1981 2 3 August 1997
Felix W. Sibley, Jr., D.D.S., d/b/a Garden Walk
Dental Associates........................... 1963 1 3 September 1997
Miller & Powell, D.M.D., d/b/a Soft Touch
Dentistry................................... 1988 1 2 September 1997
David B. Wells, D.D.S. ........................ 1993 1 2 September 1997
Metro Cleveland, Ohio
Horizon Dental................................. 1976 4 25 March 1996
Metro Denver, Colorado
Western Dental................................. 1963 5 9 January 1997
Bernard B. Baros, D.D.S. ...................... 1977 1 1 July 1997
Delbert B. Williamson, D.D.S. ................. 1996 1 2 September 1997
Central Florida
United Dental Group............................ 1963 4 10 January 1996
Gentle Dental.................................. 1985 4 9 August 1997
Metro Philadelphia, Pennsylvania
Penn Dental.................................... 1982 1 3 September 1995
Century Dental................................. 1981 1 2 May 1997
ProDent........................................ 1981 4 18 October 1997
</TABLE>
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<TABLE>
<CAPTION>
YEAR NUMBER OF NUMBER OF DATE
PRACTICE NAME FOUNDED OFFICES DENTISTS(1) AFFILIATED
- ------------------------------------------------- ------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Metro Pittsburgh, Pennsylvania
The Dentistry.................................. 1981 3 7 April 1997
Northern New Jersey
Poller Dental Group............................ 1985 4 30 October 1997
Southern Virginia-Richmond
Comprehensive Family Dentistry(2).............. 1993 2 8 May 1997
Kenneth E. Copeland, D.D.S. ................... 1965 1 1 September 1997
Kenneth Bradley Reynolds, D.D.S. .............. 1993 2 4 September 1997
Metro Washington, D.C.
Northern Virginia Dental Group(3).............. 1993 7 15 September 1995
Cross Keys Dental Associates................... 1968 1 4 October 1997
</TABLE>
- ---------------
(1) Includes 45 part-time dentists and 37 independent contractors.
(2) Represents the two dental offices of the practice of Kenneth Tralongo,
D.D.S.
(3) Consists of office locations operating as Hallmark Dental Group, Stafford
Dental Associates, Gallows Dental Group and Alexandria Dental Centre.
NETWORK DEVELOPMENT
Acquisition Criteria and Process
The Company enters new markets and pursues its densification strategy by
acquiring the assets of dental practices (other than those assets which the
Company is prohibited from acquiring by state law prohibition) and entering into
long-term Management Services Agreements with those practices. The Company's
initial evaluation of acquisition candidates is based on its ranking of markets
across the United States. This ranking weighs such factors as general population
demographics, demographics of dental professionals, general economic factors and
other considerations. Within a given market, the Company evaluates the
attractiveness of an acquisition candidate based on its professional standing
and reputation in the community, its financial condition and profitability, its
growth and efficiency potential and its ability to contribute to the clinical
and operational objectives of the Company's network of practitioners and offices
within the market. The Company structures acquisition consideration to promote
the alignment of the practices' clinical, operational and economic objectives
with those of the local network and the overall Company.
The Company actively seeks to identify potential acquisition candidates
through the efforts of its own personnel and by using its contacts, contacts of
existing affiliated dentists and by using outside consultants to target
practices. Once a decision is made to enter a market, the Company typically
establishes a pedestal position in the market through the acquisition of a
high-quality group practice with a history of efficient operations. The Company
then densifies the market around the pedestal through complementary acquisitions
of smaller practices sharing many of the qualities of the pedestal. After the
Company has acquired a practice in a particular market, it seeks to integrate
the practice into its network immediately after the acquisition by converting
cash management, billing, receivables and payables to common procedures.
As part of the Company's network development, affiliated practices provide,
in some instances, incentive compensation arrangements to certain dentists who
have sold practice assets to the Company and who have continued to provide
dental services to the affiliated practices. These incentives are designed to
align the interests of the dentists with the Company's and the networks'
business strategy. These arrangements may include stock option grants and other
bonus arrangements payable in cash based on practice performance.
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The following table sets forth for each of the periods indicated the number
of (i) offices managed by the Company, (ii) de novo offices opened, (iii)
offices acquired, and (iv) chairs at the Company's practices:
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 1, 1996 PERIOD FROM
SEPTEMBER 19, 1995 TO TO JANUARY 1, 1997 TO
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 1, 1997
--------------------- ----------------- ------------------
<S> <C> <C> <C>
Offices at beginning of the period.......... 0 6 15
De novo offices opened...................... 1 2 1
Acquired offices............................ 5 7 39
Offices at the end of the period............ 6 15 55
Chairs at the end of period................. 30 126 408
</TABLE>
Management Services Agreements
Because of state corporate practice of medicine laws, the Company does not
own the affiliated dental practices but instead enters into a Management
Services Agreement with each of the professional corporations which operate the
affiliated practices. The professional corporations are owned by licensed
dentists. Pursuant to the Management Services Agreements, the Company is the
exclusive manager of all operations of the practice, except for matters related
to the professional aspects of dental practice. The Company anticipates that it
will have a similar agreement with each new affiliated dental practice.
Pursuant to the Management Services Agreements, the Company has assumed
financial and other responsibility for the following (subject to limitations
imposed by applicable state law): the provision of facilities, equipment and
supplies; advertising in consultation with the dentists, marketing and sales;
training and development of support staff; operations management, such as
improving scheduling; provision of support services; risk management services in
connection with managed care and capitated contracts; application and
maintenance of applicable local licenses and permits; negotiation of contracts
between the affiliated dental practices and third parties, including third-party
payors, alternative delivery systems and purchasers of group health care
services; establishing and maintaining billing and collection policies and
procedures; fiscal matters, such as annual operating and capital budgeting,
maintaining financial and accounting records, and arranging for the preparation
of tax returns; and maintaining insurance. The Company does not assume any
authority, responsibility, supervision or control over the provision of dental
services to patients for diagnosis, treatment, procedure or other health care
services, or the administration of any drugs used in connection with any dental
practice. See "Business -- Network Enhancements" for additional information
concerning the services provided under the Management Services Agreement.
The Company's typical Management Services Agreement is for an initial term
of 40 years, and thereafter continues in effect unless terminated upon one year
prior notice by either the Company or the affiliated dental practice.
Additionally, the Management Services Agreements may be terminated by the
Company or the affiliated dental practice in the event of the bankruptcy,
criminal or unethical acts, any violation of laws or material default resulting
from gross negligence or fraud in the performance of the material duties of the
nonterminating party. The stockholder of the professional corporation which
operates an affiliated dental practice is a licensed dentist and is often the
leading dentist in the network. In all cases, the Company has a contractual
right to designate another licensed dentist to own the capital stock of the
professional corporations.
The fees received by the Company for the provision of the services pursuant
to the Management Services Agreements vary depending upon applicable state law.
The Company is paid for the services it provides based on one of the following
compensation arrangements: (i) the majority of the agreements provide for a fee
equal to the billings of the affiliated practice (including all capitation
payments) less the amounts necessary to pay professional compensation and other
professional expenses and (ii) others provide for a fee equal to the sum of a
license fee per location, reimbursement of all of the Company's direct costs
allocated to the affiliated dental practice, reimbursement of all of the
Company's direct costs incurred in acquiring or leasing facilities, providing
purchasing services and maintaining furniture, fixtures and equipment provided
to the practice, reimbursement of all of the Company's direct costs incurred in
providing marketing services with a 10% markup on the cost of providing
marketing services for overhead and a 15% markup on the cost of providing
marketing services to allow for a reasonable profit and a flat administrative
fee per location intended to
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compensate the Company for its unallocated overhead and a reasonable profit. The
license fees and administrative fees vary among the Management Services
Agreements. The fees are structured to comply with state laws.
Employment Agreements
All dentists are employed by affiliated practices. In connection with
acquisitions, the Company requires the affiliated dental practices to enter into
employment agreements with the selling dentists. These employment agreements are
typically for periods ranging from three to five years and include
noncompetition provisions for up to two years following termination within a
specified geographic area. The agreements typically provide the dentist with
compensation based upon a percentage of such dentist's billings actually
collected. When a dentist performs management duties in addition to chairside
services, the dentist is typically paid a fixed salary for the performance of
such non-dental services plus incentive compensation.
NETWORK ENHANCEMENTS
In parallel with certain steps taken immediately after an acquisition, the
Company, as part of the services provided under the Management Services
Agreements, introduces an array of clinical and operational enhancements that
address practice fundamentals and that are intended to enable dentists to
achieve higher levels of effectiveness as clinicians.
Staffing and Scheduling
The Company believes that solo, duo and small group practices often are not
very effective in optimizing their staffing ratios and patient scheduling. The
Company has established targets for the optimal number of general dentists,
specialist dentists, dental assistants and hygienists so as to provide high
levels of quality care and patient confidence while practicing within the
Company's standards of efficiency. In addition, the Company assists practices in
adjusting their scheduling procedures based on the dental procedure in order to
maximize revenue per dental chair, provide immediate treatment for emergencies
and minimize the number of days for the "first available appointment." This may
involve expanding office hours, optimizing the flow of patients through the
offices and assisting dentists in the more efficient use of dental assistants
and hygienists.
Retention of Specialist Referrals
The Company believes that a significant number of specialist referrals are
not captured by typical solo, duo or small group practices. To address any voids
within a network's service mix, the Company will attempt to affiliate with
specialists such as orthodontists, periodontists, endodontists, oral surgeons
and pedodontists. If a network does not have sufficient patient volume to
support a particular specialist, the Company will arrange for a contract with a
specialist to provide services on a part-time basis. When sufficient patient
volume is achieved, the Company's network specialist, working as a member of the
network's professional staff, either rotates among offices or provides services
out of a single office. The Company is actively pursuing the concept of
specialty centers as part of the network's affiliated practices.
Purchasing
The integration of dental practices into networks within markets enables
the Company to take advantage of economies of scale that are generally not
available to solo or duo practices. The Company is able to purchase dental
supplies, laboratory services, insurance, office furniture, equipment,
information systems and advertising at reduced costs. The Company also can
obtain employee benefits at a lower cost than solo, duo or smaller group
practices typically can obtain for themselves and their employees.
Advertising and Marketing
The Company assists the affiliated dental practices in developing and
implementing targeted advertising and marketing programs. The Company's primary
marketing programs, which include patient newsletters and patient recall
programs, are focused on the retention and reactivation of existing patients.
The Company also
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uses external marketing programs such as direct mailing and yellow page
advertising that are designed to identify the convenience of individual
locations, payment plans and service hours, and the high standards of care at
the practices in an attempt to generate new patients. Although to date the
practices have retained the names of the practices used prior to acquisition,
the Company is considering, on a market by market basis, the use of regional
brand names to increase the efficiency of advertising and marketing, the
awareness by the public of the network dental offices in the region, and the
identification of patients with the group practice rather than with individual
dentists.
Recruiting
The Company recruits dentists to both grow the affiliated practices and to
ensure that the operating lives of the affiliated practices extend beyond the
tenure of the individual dentists. The Company believes many dentists in the
early stages of their careers, being burdened by increasing levels of
educational debt, face significant financial constraints to starting their own
practices or buying into existing practices. Further, the Company believes that
the practice of dentistry in its network of affiliated dental practices offers
dentists relief from the burden of administrative and management
responsibilities and the opportunity to focus almost exclusively on practicing
dentistry. An affiliation with one of the Company's affiliated practices offers
dentists the additional advantages of flexible working hours and employee
benefits such as health insurance, continuing education and payment of
professional membership fees. For a specialist, the Company's networks offer the
prospect of a steadier stream of referrals than he or she may have practicing
independently.
Quality Assurance
The Company requires the dentists and hygienists at each of the affiliated
practices to develop and implement clinical management procedures and treatment
protocols, as well as uniform business and administrative standards under which
dental services are provided. These procedures, protocols and standards vary
from region to region and are determined by the dental directors in each region
in consultation with and under the guidance of the Clinical Advisory Board which
is comprised of dentists employed by the affiliated practices. They include
treatment planning, diagnostic screening, radiographic records, record keeping,
specialty referrals and dental hygiene protocols. State licensing authorities
require dentists to undergo annual training. As part of its clinical
enhancement, the Company institutes quality assurance and utilization review
programs. The development of treatment protocols and the provision of
professional development and mentoring programs creates an enhanced clinical
environment for the practices to provide the best possible patient care.
Capitalize on Managed Care Opportunities
The Company believes that contracting with managed care payors provides it
with an opportunity to better utilize the capacity of the existing practices and
to build new practice locations more rapidly with increased patient flow and
revenues. The Company critically evaluates every managed care contract and
relationship to ensure consistency with the Company's clinical, operational and
financial objectives.
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes a leading commercially available management
information system package for dental practice management at 25 of its offices,
and plans to use the system at the other existing dental offices and at offices
the Company intends to acquire. The Company utilizes this system to track data
related to each office's operation and financial and clinical performance. Full
implementation typically takes two to three months at a newly acquired office.
The system provides patient and practitioner scheduling, clinical record-
keeping, and revenue and collection data on a year-to-date basis. The Company
uses the system to manage billing and collections, including electronic
insurance claims processing. In addition, the Company uses the system to provide
information for case management and treatment planning.
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REIMBURSEMENT
One of the differentiating factors between dentistry and general medicine
is in the nature of the various forms of reimbursement. In general medicine,
reimbursement represents true insurance coverage, where actuarial based
calculations form the basis for setting premiums to cover costs and provide a
fair return to the insurer. In general medical coverage, the practice is to have
the patient first cover his or her deductible above which the insurer goes at
risk for the costs of care. The insurer is therefore at risk for the high costs
of emergency care, hospital in-patient treatment and specialist fees. In an
environment with rapidly escalating costs, the insurer attempts to reduce its
risk by increasing premiums to keep the actuarial calculation balanced in its
favor.
In dentistry, reimbursement takes the form of payment assistance and does
not attempt to provide the insured a "stop-loss" guarantee. The practice in
dental plans is to have the insurer pay for basic procedures such as diagnostic
and preventive services or for services up to a total dollar limit in a given
time period, beyond which the patient bears the cost. Thus, in general medicine
the patient pays the first dollars and the insurer bears the risk of the more
costly procedures, whereas in dentistry the insurer pays the first dollars and
the patient bears the risk of the more costly procedures. Although the dentist
must intelligently analyze the demographics of the population of a plan to
protect against exposure to adverse selection, just as is done in general
medicine, the risks of incurring substantial cost faced by insurers and
employers in general medicine is minimal in dentistry.
While there are many hybrid sources of payment, the basic options in the
market fall into four categories: indemnity insurance and "out-of-pocket", both
of which are found in a fee-for-service ("FFS") environment, preferred provider
organizations ("PPO"), health maintenance organizations ("HMO") and capitation
(the latter three commonly referred to as "managed care"). In an FFS
environment, the payor usually reimburses for usual, customary and reasonable
charges ("UCR") for preventive care and in a lesser amount of UCR for other
procedures (the patient incurs the difference as a co-payment). In such a
setting, the patient may choose any dental provider.
PPOs offer plans that cover the cost of preventive care at fees that are
discounted from FFS levels. Under these plans, patients make no co-payment for
preventive care but pay substantially higher co-payments for more advanced
procedures than FFS patients. If patients choose "out-of-network" dentists, they
are required to pay a premium to the discounted FFS schedule of charges.
HMOs negotiate a set fee per member per month for all services with
dentists and prepay monthly amounts, based on this per member per month fee, to
the participating dentist for a fixed pool of patients. Typically, the per
member per month fee is based on an actuarial analysis (assessment of risk
associated with the particular demographic profile of the patient pool) and is
adjusted for changes in the profile of the patient population over time. HMO
patients generally are not required to pay co-payments for diagnostic and
preventive procedures but, may be required to pay a substantially higher
co-payment for the more advanced procedures than PPO patients. HMO patients must
visit dentists in the HMO network to obtain benefits.
Capitation plans are similar to HMOs in that there is a negotiated,
pre-paid per member per month fee paid to the participating dentist but differ
in that the dentist assumes all the risk. Under capitation plans, patients have
no deductibles. As with HMOs, patients must visit dentists on the panel to
obtain benefits. Capitated managed dental care contracts are established between
dental benefits organizations and the Company's affiliated dental practices.
Under the Management Services Agreements, the Company negotiates and administers
these contracts on behalf of the affiliated dental practices. Under a capitated
managed dental care contract, the dental group practice provides dental services
to the members of the dental benefits organization and receives a fixed monthly
capitation payment for each plan member covered for a specific schedule of
services regardless of the quantity or cost of services to the participating
dental group practice obligated to provide them. This arrangement shifts the
risk of utilization of these services to the affiliated dental practice
providing the dental services. Because the Company assumes responsibility under
the Management Services Agreements for all aspects of the operation of the
affiliated dental practices (other than the practice of dentistry) and thus
bears all costs of the Company's affiliated dental practices associated with the
provision of dental services (other than professional compensation), the risk of
over-utilization of dental
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services at the affiliated dental practices under capitated managed dental care
plans is effectively shifted to the Company.
COMPETITION
The dental services industry is highly competitive and subject to continual
change in the manner in which services are delivered and providers are selected.
The Company is under competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional dental practices.
Certain national companies in the dental industry, some of which may have
greater resources than the Company, are developing multi-regional networks of
dental facilities in markets which include the Company's markets. As the Company
seeks to expand its operations into new markets it is likely to face competition
from dental practice management companies which already have established a
strong business presence in such locations. With respect to competition for
patients, the Company believes that the primary competitive factors are patient
satisfaction, quality of care, cost effectiveness and convenience. The primary
competitors of the affiliated dental practices in most markets are individual
practitioners or small, regional multi-site practices.
GOVERNMENT REGULATION
General
The practice of dentistry is regulated extensively at both 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.
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. Required licenses and certifications include
licenses for dentists and dental professionals, controlled substance
registrations, registration of radiation-producing machines and, in some states,
including Florida, permits related to the disposal of biomedical waste. In
addition, federal and state laws regulate HMOs and other managed care
organizations for which dentists may be providers. In connection with its
operations in existing markets and expansion into new markets, the Company may
become subject to compliance with additional laws, regulations and
interpretations or enforcements thereof. The ability of the Company to operate
profitably will depend in part upon the Company and its affiliated dental
practices obtaining and maintaining all necessary licenses, certifications and
other approvals and operating in compliance with applicable health care
regulations.
Dental practices must meet federal, state and local regulatory standards in
the areas of safety and health. Historically, those standards have not had any
material adverse effect on the operations of the dental practices managed by the
Company. Based on its familiarity with the operations of the dental practices
managed by the Company, management believes that it, and the practices it
manages, are in compliance in all material respects with all applicable federal,
state and local laws and regulations relating to safety and health.
Fee-Splitting; Corporate Practice of Dentistry
The laws of many states (including Colorado, Florida, New Jersey and Ohio,
states in which the Company operates) prohibit dentists from splitting fees with
non-dentists. Many states (including all of the states in which the Company
operates) prohibit non-dental entities such as the Company from engaging in the
practice of dentistry or employing dentists to practice dentistry. The specific
restrictions against the corporate practice of dentistry as well as the
interpretation of those restrictions by state regulatory authorities vary from
state to state. The restrictions are generally designed to prohibit a non-dental
entity from controlling the professional practice of a dentist, employing
dentists to practice dentistry (or, in certain states, employing dental
hygienists or dental assistants), controlling the content of a dentist's
advertising or sharing professional fees. A number of states (including Colorado
and New Jersey) limit the ability of a person other than a licensed dentist to
own equipment or offices used in a dental practice. Some states which limit
ownership of dental equipment and offices (including New Jersey) allow leasing
of equipment and office space to a dental practice under a bona fide lease. The
laws of many states (including Florida, New Jersey and Ohio) also prohibit
dental practitioners from paying any portion of fees received for dental
services in consideration for
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<PAGE> 47
the referral of a patient. In addition, many states (including all of the states
in which the Company operates) impose limits on the tasks that may be delegated
by dentists to dental assistants.
State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; and
licensed dentists have control over the manner in which dental care is provided
and all decisions affecting the provision of dental care. In general, the state
dental practice acts do not address or provide any restrictions concerning the
manner in which companies account for revenues from a dental practice subject to
the above-noted restrictions relating to control over the professional
activities of the dental practice, ownership of the professional assets of a
dental practice and payments for management services.
The Company does not control the clinical aspects of the practice of
dentistry or employ dentists to practice dentistry. Moreover, in states in which
it is prohibited, the Company does not employ dental hygienists or dental
assistants. The Company provides management and administrative services to
dental practices, and believes that the fees the Company charges for those
services are consistent with the laws and regulations of the jurisdictions in
which it operates. Although the Company believes that its operations comply in
all material respects with the above-described laws to which it is subject,
there can be no assurance that a review of the Company's business relationships
by courts or other regulatory authorities would not result in determinations
that could prohibit or otherwise adversely affect the operations of the Company
or that the regulatory environment will not change, requiring the Company to
reorganize or restrict its existing or future operations.
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 Company's business or its relationships with dentists or dental practices
will not be successfully challenged or that the enforceability of the provisions
of any management services agreement will not be limited. The laws and
regulations of certain states in which the Company may seek to expand may
require the Company to change the form of relationships entered into with dental
practices in a manner which may restrict the Company's operations or how
providers may be paid in those states or may prevent the Company from acquiring
the non-dental assets of such practices or managing dental practices in those
states. Similarly, there can be no assurance that the laws and regulations of
the states in which the Company presently maintains operations will not change
or be interpreted in the future either to restrict or adversely affect the
Company's existing or future relationships with dental practitioners in those
states. Any change in the Company's relationships with its affiliated dental
practices resulting from the interpretation of corporate practice of dentistry
and fee-splitting statutes and regulations could have a material adverse effect
on the Company's business and results of operations.
Anti-Kickback and Anti-Referral Legislation
Federal and many state laws prohibits the offer, payment, solicitation or
receipt of any form of remuneration in return for, or in order to induce (i) the
referral of a person for services; (ii) the furnishing or arranging for the
furnishing of items or services; or (iii) the purchase, lease or order or
arranging or recommending purchasing, leasing or ordering of any item, in each
case, reimbursable under Medicare, Medicaid or other federal and state health
care programs. These provisions apply to dental services covered under the
Medicaid program in which the Company participates. The federal government has
increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Many states have similar anti-kickback laws, and in many
cases these laws apply to all types of patients, not just Medicare and Medicaid
beneficiaries.
The applicability of these federal and state laws to transactions in the
health care industry such as those to which the Company is or may be a party has
not been the subject of judicial interpretation. There can be no assurance that
judicial or administrative authorities will not find these provisions applicable
to the Company's
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<PAGE> 48
operations, which could have a material adverse effect on the Company's
business. Under current federal law, a physician or dentist or member of his or
her immediate family is prohibited from referring Medicare or Medicaid patients
to any entity providing "designated health services" in which the physician or
dentist has an ownership or investment interest, including the physician's or
dentist's own group practice, unless such practice satisfies the "group
practice" exception. The designated health services include the provision of
clinical laboratory services, radiology and other diagnostic services (including
ultrasound services), radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
certain equipment and supplies, prosthesis, orthotics, outpatient prescription
drugs, home health services and inpatient and outpatient hospital services. A
number of states also have laws that prohibit referrals for certain services
such as x-rays by dentists if the dentist has certain enumerated financial
relationships with the entity receiving the referral, unless an exception
applies. Any future expansion of these prohibitions to other health services
could restrict the Company's ability to integrate dental practices and carry out
the dental network development.
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. While the Company makes every effort to comply with the
anti-kickback and anti-referral laws a determination of violation of these laws
by the Company or its affiliated dental practices could have a material adverse
effect on the business and results of operations of the Company.
State Insurance Regulation
Federal and state laws regulate insurance companies and certain managed
care organizations. Many states also regulate the sharing of risk through
capitation. In most states, including the states in which the Company operates,
these laws do not apply to discounted fee-for-service arrangements.
Nevertheless, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care and capitation contracts,
particularly if such arrangements are with entities, such as self-insured plans,
which are not licensed to engage in the business of insurance. The application
of state insurance laws to reimbursement arrangements, other than various types
of fee-for-service arrangements, is an unsettled area of law and is subject to
interpretation by regulators with broad discretion. Many states, including
Colorado, Georgia, Maryland, New Jersey, Ohio, Pennsylvania and Virginia, have
enacted laws or regulations or have advised that if a health care provider, such
as a dentist, enters into capitated or other risk arrangement with any entity
(including self-insured plans), other than a licensed health maintenance
organization or other licensed insurer, the health care provider is engaged in
the business of insurance and thus must be licensed. Florida does not impose
insurance regulation on providers (including dentists,) providing health care
services pursuant to a capitated contract with a licensed entity or a
self-insured plan.
The Company believes that the current activities of the Company and the
affiliated practices do not constitute the provision of insurance in any state
in which the Company operates. However, there can be no assurance that these
laws will not be changed or that interpretations of these laws by the regulatory
authorities in those states, or in the states in which the Company expands, will
not require licensure or a restructuring of some or all of the Company's or the
affiliated practices' operations. If the Company or the affiliated practices are
determined to be engaged in the business of insurance, they could be required
either to seek licensure as an insurance company or to change the form of their
relationships with third party payors. In the event that the Company or any
affiliated practice is required to become licensed under state insurance law,
the licensure process could be lengthy and time consuming and, unless the
regulatory authority permits the Company or the affiliated practices to continue
to operate while the licensure process is progressing, the Company's revenues
could be adversely affected. In addition, many of the licensing requirements
mandate strict financial and other requirements which the Company or the
affiliated practices may not immediately be able to meet. Further, once
licensed, the Company or the affiliated practices would be subject to continuing
oversight and reporting to the respective regulatory agencies. The insurance
regulatory framework of certain jurisdictions may limit the Company's expansion
into, or ability to continue operations within, such jurisdictions if the
Company is unable to modify its operational structure to conform with such
regulatory framework. Any limitation on the
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<PAGE> 49
Company's ability to expand could have a material adverse effect on the business
and results of operations of the Company.
Health Care Reform Proposals
The United States Congress has 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 could have a
material adverse effect on the operations of the Company, and changes in the
health care industry, such as the growth of managed care organizations and
provider networks, may result in lower payment levels for the services of dental
practitioners affiliated with dental practices managed by the Company and lower
profitability for affiliated practices and the Company.
Regulatory Compliance
The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations or marketing from time to time in response to changes in the
business, statutory and regulatory environments. The Company plans to structure
all of its agreements, operations and marketing in accordance with applicable
law, although there can be no assurance that its arrangements will not be
successfully challenged or that required changes may not have a material adverse
effect on operations or profitability.
EMPLOYEES
At December 1, 1997, the Company had 348 employees. Of these, 6 are
corporate management, 74 are field management, 253 are administrative and
clerical and 15 are laboratory personnel. At December 1, 1997, the Company's
dental practices had 499 employees. Of these, 136 are dentists and 363 are other
clinical personnel. In addition, the dental practices have independent
contractor relationships with 37 dentists. None of the Company's employees is
represented by a labor union and the Company is not aware of any current
activity to organize any of its employees. Management considers relations
between the Company and its employees to be good.
PROPERTIES
The Company's principal executive offices are located at 1018 West Ninth
Avenue, King of Prussia, Pennsylvania in approximately 4,000 square feet
occupied under a lease which expires on February 28, 2003. In addition, the
Company and the affiliated dental practices lease office space at the locations
of each dental office. The Company owns the location of one dental office,
subject to a mortgage, in Voorhees, New Jersey. See Note 5 of the Company's
Consolidated Financial Statements for information concerning the Company's
leases for its facilities. The Company does not anticipate that it will
experience any difficulty in renewing any such leases upon their expiration or
obtaining different space on comparable terms if such leases are not renewed.
The Company believes the facilities of the affiliated dental practices are of
adequate size for present needs and planned expansion in the near future.
INSURANCE
The provision of dental services entails an inherent risk of professional
malpractice and other similar claims. Although the Company does not practice
dentistry, the Company could be involved as a defendant in malpractice claims.
The Company believes that it and the affiliated dental practices maintain the
types and amounts of insurance customary in the dental services industry. The
Company maintains professional malpractice and general liability insurance for
itself, and it or the affiliated practices maintain professional liability
insurance covering dentists, hygienists and dental assistants at the dental
offices. The Company maintains general liability coverage of $1 million per
occurrence and $2 million (or $1 million in the case of one Central Florida
practice and the Metro Pittsburgh practice) in the aggregate, malpractice
coverage of $1
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million per claim and $3 million (or $1 million in the Metro Pittsburgh area) in
the aggregate and umbrella coverage of $2 million per occurrence and $4 million
in the aggregate in all areas (except Metro Cleveland where umbrella coverage is
$5 million in the aggregate and Metro Pittsburgh where the coverage is $1
million per occurrence and in the aggregate). Certain types of risk and
liabilities are not covered by insurance, however, and there can be no assurance
that coverage will continue to be available upon terms satisfactory to the
Company or that the coverage will be adequate to cover losses. Malpractice
insurance, moreover, can be expensive and varies from state to state. Successful
malpractice claims asserted against the dentists, the practices or the Company
may have a material adverse effect on the Company's business, financial
condition and operating results. While the Company believes its insurance
policies are adequate in amount and coverage for its current operations, there
can be no assurance that the coverage maintained by the Company will be
sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost.
LEGAL PROCEEDINGS
From time to time, the Company and the Company's dental practices are
parties to certain claims, suits and complaints which arise in the ordinary
course of business. Currently, there are no such claims, suits or complaints
which, in the opinion of management, would have a material adverse effect on the
financial position, liquidity or results of operations of the Company or the
affiliated dental practices, as the case may be. The dentists employed by the
affiliated practices are from time to time subject to malpractice claims, which,
if successful, could result in damage awards exceeding, perhaps substantially,
applicable insurance coverage. Any adverse outcome with respect to any claim,
suit or complaint resulting in damage awards substantially exceeding applicable
insurance coverage could have a material adverse effect on the Company's results
of operations or liquidity.
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MANAGEMENT
Members of the Company's management team and its Board of Directors have
had extensive experience in the strategic development of companies in fragmented
health care services industries, including development and implementation of
acquisition and integration strategies and programs and management of rapid
internal growth in a health care services setting.
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
Stephen F. Nagy(1)................. 53 Chairman of the Board and Director
Joseph J. Frank(1)(2).............. 44 President, Chief Executive Officer and Director
Robert K. Mehlman, D.D.S........... 51 Senior Vice President -- Business Development
Douglas P. Gill(1)(2).............. 48 Vice President, Secretary and Director
W. Gary Liddick.................... 43 Vice President and Chief Financial Officer
Keith Libou, D.M.D................. 39 Vice President -- Operations
Jeanne Marie Welsko................ 42 Vice President -- Human Resources
Stathis Andris(1)(3)............... 58 Director
Colin C. Blaydon(2)................ 57 Director
Timothy E. Foster(3)............... 46 Director
Stephen E. O'Neil(2)(3)............ 65 Director
</TABLE>
- ---------------
(1) Member of the Acquisition Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
The following is a brief summary of the business experience of each of the
directors and executive officers of the Company:
STEPHEN F. NAGY has been Chairman of the Board and a director of the
Company since January 1996. He also served as Chief Executive Officer of the
Company from January 1996 to October 1997. Mr. Nagy has been Chairman of the
Board and a director of CulturalAccessWorldwide, Inc., a leading outsource
marketing service company, since December 1996. He was Chairman of the Board of
The Pet Practice, Inc. ("Pet Practice"), a leading national provider of
veterinary services, from March 1995 until July 1996 and a director and officer
of Pet Practice from October 1993 until July 1996 when Pet Practice was acquired
by Veterinary Centers of America, Inc. Mr. Nagy has been Managing Partner and
Executive Vice President of Foster Management Company, an investment advisor,
and general partner of investment funds managed by it since 1989. He was
President of Foster Medical Corporation from 1982 to 1984 and Executive Vice
President of Avon Products, Inc. from 1984 to 1986, after Avon's acquisition of
Foster Medical Corporation. From 1971 to 1980, Mr. Nagy was with Booz, Allen and
Hamilton, Inc., serving as a Vice President from 1976 to 1980.
JOSEPH J. FRANK has been President and Chief Executive Officer of the
Company since October 1997. He served as President and Chief Operating Officer
of the Company from June 1996 to October 1997. Mr. Frank has been a director of
the Company since June 1996. Mr. Frank was Senior Vice President of Surgical
Care Affiliates ("SCA"), an operator of free standing surgical centers from 1990
until January 1996 when SCA was acquired by HealthSouth Corp. Mr. Frank was
responsible for development and acquisitions nationally for SCA. Mr. Frank
served as a Vice President of Operations of SCA from 1984 to 1990.
ROBERT K. MEHLMAN has been Senior Vice President -- Business Development of
the Company since September 1995. From September 1995 to December 1996, he
served as Vice President of Operations of the Company. Dr. Mehlman was in
private dental practice in Northern Virginia from April 1994 until he joined
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the Company in September 1995. Dr. Mehlman was the National Dental Director of
Aetna from 1990 until March 1994. Dr. Mehlman graduated from the University of
Southern California Dental School.
DOUGLAS P. GILL has been a director of the Company since August 1995. He
was President of the Company from August 1995 through June 1996, and has been a
Vice President of the Company since June 1996. Mr. Gill has been General Partner
and Vice President of Foster Management Company since April 1994. From June 1984
to April 1994, Mr. Gill was a First Vice President and an investment banker with
Janney Montgomery Scott, Inc.
W. GARY LIDDICK has been Vice President of Finance of the Company since
August 1995 and Chief Financial Officer of the Company since August 1997. Mr.
Liddick also served as the Controller of the Company from August 1995 until May
1997. Mr. Liddick served as Vice President of Finance and Chief Financial
Officer of Hearing Health Services, Inc. from August 1993 to October 1996. From
1991 to August 1993, Mr. Liddick was the Vice President of Operations of
Rosenbluth International, a national travel agency. Mr. Liddick earned a degree
in accounting from Lehigh University and is a Certified Public Accountant.
KEITH LIBOU, D.M.D. has been the Vice President -- Operations of the
Company since June 1997. From November 1992 to June 1997, Dr. Libou was employed
by CIGNA Corporation in a variety of positions. He most recently served as
Dental Director for the Eastern United States from January 1995 to June 1997.
JEANNE MARIE WELSKO has been the Vice President -- Human Resources of the
Company since October 1996. Prior to joining the Company, Ms. Welsko was
employed by Apria Healthcare Group, Inc., a home health care provider, as
Director of Human Resources from September 1995 until October 1996. Ms. Welsko
worked for The Mellon Bank Corporation from 1987 until September 1995 in a
variety of human resources positions.
STATHIS ANDRIS has been a director of the Company since June 1996. Mr.
Andris worked for American Express Company from 1981 to 1993 in a number of
management positions. In 1993, Mr. Andris founded Venture Investment Associates,
a family of private equity funds.
COLIN C. BLAYDON has been a director of the Company since June 1996. Mr.
Blaydon is the William and Josephine Buchanan Professor of Management at the
Amos Tuck School of Business Administration of Dartmouth College. He was the
interim Dean of the Amos Tuck School of Business Administration from 1994 until
July 1995 and has been on the faculty since August 1983. Mr. Blaydon has also
served as Senior Advisor to Putnam, Hayes & Bartlett, Inc., an economic and
management consulting firm, since May 1981. He served as Chairman of ITP,
Systems, Inc., a systems integration and software developer, from February 1992
to August 1993. Mr. Blaydon serves on the Board of Directors of Mercantile
Trust, N.A., ITP, Systems, Inc., The LTV Corporation and Tom's of Maine, Inc. He
is also on the Board of Trustees of the Lowell Whiteman School and the Public
Utility Policy Institute.
TIMOTHY E. FOSTER has been a director of the Company since June 1996. He
has been Chief Executive Officer of NovaCare, Inc. since May 1997. Between
October 1994 and May 1997, he was President and Chief Operating Officer of
NovaCare, Inc. He has been a director of NovaCare, Inc. since December 1984.
Prior to becoming President of NovaCare, Inc., he served in a variety of finance
and administrative roles at NovaCare, Inc. beginning in 1984. Since February
1993, he has also been a director of Apogee, Inc., a national provider of mental
health services. Mr. Foster has been Managing Partner of Foster Management
Company since June 1997.
STEPHEN E. O'NEIL has been a director of the Company since June 1996. Mr.
O'Neil has been a principal of The O'Neil Group, a private investment firm,
since 1981. He is a director of NovaCare, Inc., Brown-Forman Corporation, Castle
Convertible Fund, Inc., Spectra Fund, Inc., The Alger Fund, Inc. and The Alger
American Funds.
COMMITTEES OF THE BOARD
The Board has a Compensation Committee, an Audit Committee and an
Acquisition Committee. The members of the Compensation Committee are Colin C.
Blaydon, Joseph J. Frank, Douglas P. Gill and
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<PAGE> 53
Stephen E. O'Neil. The Compensation Committee makes recommendations to the full
Board as to the compensation of senior management. The Stock Option Committee of
the Compensation Committee administers the Company's Stock Option Plan and
determines the persons who are to receive options and the number of shares
subject to each option. The members of the Stock Option Committee are Stephen E.
O'Neil and Colin C. Blaydon.
The members of the Audit Committee are Stathis Andris, Timothy E. Foster
and Stephen E. O'Neil. The Audit Committee acts as a liaison between the Board
and the independent accountants and annually recommends to the Board the
appointment of the independent accountants. The Audit Committee reviews with the
independent accountants the planning and scope of the audits of the financial
statements, the results of those audits and the adequacy of internal accounting
controls and monitors other corporate and financial policies.
The members of the Acquisition Committee are Stathis Andris, Joseph J.
Frank, Douglas P. Gill and Stephen F. Nagy. The Acquisition Committee is
authorized to approve acquisitions of businesses having an aggregate purchase
price of less than $5 million.
The Board of Directors does not have a Nominating Committee.
DIRECTOR COMPENSATION
Directors of the Company do not receive fees for service as directors but
are reimbursed for out-of-pocket expenses.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or awarded to the Chief Executive Officer and each of the other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
during fiscal 1996.
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<PAGE> 54
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ALL OTHER COMPENSATION(1)
- --------------------------------------- ------- --------- -------- -------------------------
<S> <C> <C> <C> <C>
Stephen F. Nagy........................ 1996 $40,000(3) 0 0
Chairman of the Board(2)
Joseph J. Frank........................ 1996 72,115 22,500(4) 0
President and Chief
Executive Officer(5)
Robert K. Mehlman, D.D.S............... 1996 143,577 54,000 0
Senior Vice President --
Business Development(6)
</TABLE>
- ---------------
(1) The aggregate value of perquisites and other personal benefits received by
each of the named executive officers was less than the lesser of $50,000 or
10% of his total annual salary and bonus and, accordingly, has been omitted.
(2) Mr. Nagy served as Chief Executive Officer of the Company during 1996 and
until October 1997.
(3) Represents a management fee of $3,333.33 per month paid in 1996 to Foster
Management Company, of which Mr. Nagy is Managing Partner. The agreement to
pay a monthly management fee will terminate upon the consummation of the
offering. See "Certain Transactions." Mr. Nagy and the other directors of
the Company receive reimbursement for out-of-pocket expenses incurred in
connection with their service to the Company.
(4) Represents bonus accrued in 1996 and paid on January 17, 1997.
(5) Mr. Frank served as President and Chief Operating Officer during 1996 and
until October 1997 when he became President and Chief Executive Officer of
the Company.
(6) Dr. Mehlman served as Vice President -- Operations of the Company from
September 1995 to December 1996.
In May, 1996, the Company entered into an employment agreement with Mr.
Frank which provides that Mr. Frank will serve as President and Chief Operating
Officer. The agreement sets forth a base salary of $150,000 per year through the
date of this offering and a base salary subject to review of the Company's Board
of Directors thereafter. The agreement provides for a potential bonus equal to
30% of the base salary based upon Mr. Frank's achievement of certain mutually
agreed upon goals. The agreement provides for certain severance payments, the
amount of which depends upon Mr. Frank's length of service in the event Mr.
Frank is terminated by the Company without cause, as defined in the agreement.
Mr. Frank is currently eligible to receive severance payments equal to four
months of his current base salary. The maximum amount of severance payments
which Mr. Frank is entitled to receive, pursuant to his agreement, is six months
of his then current base salary if he has been employed by the Company for more
than three years at the time of his termination of employment by the Company
without cause. Mr. Frank is also eligible to participate in the standard Company
benefit package in place for senior executives, and entitled to three weeks
vacation in the first three years of employment under the agreement and four
weeks in subsequent years, and is allotted a car allowance of $600 per month. In
addition, pursuant to the agreement, the Company agreed to sell Mr. Frank
150,000 shares of Common Stock at $.10 per share, such shares to vest ratably in
20% increments over a period of five years contingent on Mr. Frank's continued
employment with the Company. "See Certain Transactions." The agreement includes
a noncompete covenant for the benefit of the Company where Mr. Frank will not be
able to serve as a consultant, employee, officer, director or investor of any
group dental practice or any entity engaged in the consolidation of dental
providers for a period of two years after his termination of employment from the
Company.
In addition, the Company has entered into agreements, which are terminable
at will, with each of W. Gary Liddick, Keith Libou, D.M.D. and Jeanne Marie
Welsko which set forth, among other things, the base salary, bonus, equity
participation and other employee benefit arrangements for each of them.
See "Certain Transactions" for a description of the employment agreement
between the Company and Dr. Mehlman.
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<PAGE> 55
STOCK OPTION PLAN
Effective October 1, 1997, the Board of Directors and stockholders adopted
the Valley Forge Dental Associates, Inc. Stock Option Plan (the "Stock Option
Plan") to attract and retain key personnel.
The following discussion of the material features of the Stock Option Plan
is qualified by reference to the text of the Stock Option Plan filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
Under the Stock Option Plan, options to purchase up to an aggregate of
600,000 shares of Common Stock may be granted to key employees of the Company or
its subsidiaries or any affiliate of the Company, and to officers, directors,
consultants and other individuals providing services to the Company.
The Stock Option Committee of the Board of Directors administers the Stock
Option Plan and determines the persons who are to receive options and the number
of shares to be subject to each option. In selecting individuals for options and
determining the terms thereof, the Stock Option Committee may consider any
factors it deems relevant, including present and potential contributions to the
success of the Company. Options granted under the Stock Option Plan must be
exercised within a period fixed by the Stock Option Committee, which may not
exceed ten years from the date of the option or, in the case of incentive stock
options granted to any holder on the date of grant of more than ten percent of
the total combined voting power of all classes of stock of the Company, five
years from the date of grant of the option. Options may be made exercisable in
whole or in installments, as determined by the Stock Option Committee.
Options may not be transferred other than by will or the laws of descent
and distribution and, during the lifetime of an optionee, may be exercised only
by the optionee, except for transfers approved by the Stock Option Committee to
certain permitted transferees (such as immediate family members and charitable
institutions). The exercise price may not be less than the market value of the
Common Stock on the date of grant of the option. In the case of incentive stock
options granted to any holders on the date of grant of more than ten percent of
the total combined voting power of all classes of stock of the Company and its
subsidiaries, the exercise price may not be less than 110% of the market value
per share of the Common Stock on the date of grant. The value of Common Stock
(determined at the time of grant) that may be subject to incentive stock options
that become exercisable in by any one employee in any one year is limited by the
Internal Revenue Code of 1986, as amended (the "Code"), to $100,000. Unless
designated as "incentive stock options" intended to qualify under Section 422 of
the Code, options which are granted under the Stock Option Plan are intended to
be "nonstatutory stock options." The exercise price may be paid in cash, shares
of Common Stock owned by the optionee, or in a combination of cash and shares.
The Stock Option Plan provides that, in the event of changes in the
corporate structure of the Company or certain events affecting the Common Stock,
the Stock Option Committee may, in its discretion, make adjustments with respect
to the number of shares which may be issued under the Stock Option Plan or which
are covered by outstanding options, in the exercise price per share, or both.
The Stock Option Committee may in its discretion provide that, in connection
with any merger or consolidation which results in the holders of the outstanding
voting securities of the Company (determined immediately prior to such merger or
consolidation) owning less than a majority of the outstanding securities of the
surviving corporation (determined immediately following such merger or
consolidation) or any sale or transfer by the Company of all or substantially
all its assets or any tender offer or exchange offer for or the acquisition,
directly or indirectly, by any person or group of all or a majority of the then
outstanding voting securities of the Company, outstanding options under the
Stock Option Plan will become exercisable in full or in part, notwithstanding
any other provision of the Stock Option Plan or of any outstanding options
granted thereunder, on and after (i) 15 days prior to the effective date of such
merger, consolidation, sale, transfer or acquisition or (ii) the date of
commencement of such tender offer or exchange offer, as the case may be.
As of the date hereof, the Company has granted options to purchase 45,000
shares of Common Stock at an exercise price of $12.00 per share.
The grant of a stock option under the Stock Option Plan will not generally
result in taxable income for the optionee, nor in a deductible compensation
expense for the Company, at the time of grant. The optionee will
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<PAGE> 56
have no taxable income upon exercising an incentive stock option (except that
the alternative minimum tax may apply), and the Company will receive no
deduction when an incentive stock option is exercised. Upon exercising an
nonstatutory stock option, the optionee will recognize ordinary income in the
amount by which the fair market value of the Common Stock on the date of
exercise exceeds the exercise price, and the Company will generally be entitled
to a corresponding deduction. The treatment of an optionee's disposition of
shares of Common Stock acquired upon the exercise of an option is dependent upon
the length of time the shares have been held and on whether such shares were
acquired by exercising an incentive stock option or a nonstatutory stock option.
Generally, there will be no tax consequence to the Company in connection with
the disposition of shares acquired under an option except that the Company may
be entitled to a deduction in the case of a disposition of shares acquired upon
exercise of an incentive stock option before the applicable incentive stock
option holding period has been satisfied.
EMPLOYEE STOCK PURCHASE PLAN
Effective November 19, 1997, the Board of Directors and stockholders
adopted the Valley Forge Dental Associates, Inc. 1997 Employee Stock Purchase
Plan (the "Employee Stock Purchase Plan").
The following discussion of the material features of the Employee Stock
Purchase Plan is qualified by reference to the text of the Employee Stock
Purchase Plan filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
Under the Employee Stock Purchase Plan, an aggregate of 350,000 shares of
Common Stock will be made available for purchase by eligible employees of the
Company, including employees who are directors and officers, through payroll
deductions over successive six-month offering periods; provided, however, that
the first offering period shall commence on a date to be determined by the Stock
Option Committee of the Board of Directors and shall terminate on June 30, 1998.
The Stock Option Committee administers the Employee Stock Purchase Plan.
All employees of the Company (as of the first day of an offering period) are
eligible to participate in the Employee Stock Purchase Plan except employees who
have been employed by the Company for less than one year or whose customary
employment is not more than 20 hours per week and/or five months per year, or
who are holders of five percent or more of the total combined voting power or
value of all classes of stock of the Company.
The Employee Stock Purchase Plan is intended to qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Code. The purchase
price of the Common Stock under the Employee Stock Purchase Plan will be 85% of
the fair market value per share of the Common Stock on either the first or last
day of each six-month offering period, whichever is less. Rights to purchase
shares of Common Stock under the Employee Stock Purchase Plan are exercisable
only by a participating employee during his lifetime and are not transferable.
The Employee Stock Purchase Plan provides that, upon the occurrence of
certain events affecting the Common Stock, the Stock Option Committee shall make
appropriate adjustments in the aggregate number of shares of Common Stock
reserved for purchase under the Employee Stock Purchase Plan, the maximum number
of shares of Common Stock which a participating employee may purchase in any
offering period and the purchase price per share for shares of Common Stock
purchased during the offering period in which such event occurs.
Participating employees may authorize the Company to withhold up to five
percent of their compensation for the purpose of purchasing shares of Common
Stock under the Employee Stock Purchase Plan, subject to the limitation that no
employee may purchase more than 1,000 shares of Common Stock under the Employee
Stock Purchase Plan in any offering period, have more than $10,000 withheld from
his compensation in any 12-month period or acquire rights under the Employee
Stock Purchase Plan which would permit such person's rights to purchase shares
of Common Stock, when aggregated with rights held by such person under other
such plans maintained by the Company or any subsidiary, to accrue at a rate
which exceeds $25,000 in fair market value of such stock (as determined at the
time of grant) during each calendar year in which such rights are exercisable.
55
<PAGE> 57
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors of the
Company for fiscal 1996 were Colin C. Blaydon, Joseph J. Frank, Douglas P. Gill
and Stephen E. O'Neil. The members of the Stock Option Committee for fiscal 1996
were Stephen E. O'Neil and Colin C. Blaydon.
Mr. Frank is the President and Chief Executive Officer of the Company and
Douglas P. Gill is a Vice President of the Company. Mr. Frank was the President
of the Company and Mr. Gill was a Vice President of the Company during fiscal
1996.
As discussed below under "Certain Transactions," the Company has engaged in
a variety of transactions with the limited partnerships of which Stephen F.
Nagy, Timothy E. Foster and Douglas P. Gill are general partners of the general
partner and Foster Management Company, an investment advisor of which Mr. Nagy
is Managing Partner, Mr. Foster is Managing Partner and Douglas P. Gill is
General Partner. For a more detailed description of such relationships and
transactions, see "Certain Transactions."
56
<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock (i) as of December 1, 1997 and (ii) as
adjusted to reflect the sale of the shares of Common Stock offered by the
Company in the offering by (a) each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, (b) each director of
the Company who beneficially owns Common Stock, (c) each of the persons named in
the Summary Compensation Table and (d) all executive officers and directors of
the Company as a group. Except as indicated in the footnotes to the table, all
of such shares of Common Stock are owned with sole voting and investment power.
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
COMMON STOCK ---------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING(1) OFFERING(2)
- ------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Business Development Capital
Limited Partnership-III.......................... 175,000 % %
1018 West Ninth Avenue
King of Prussia, PA 19406
Abbingdon Venture
Partners Limited Partnership..................... 472,500 % %
1018 West Ninth Avenue
King of Prussia, PA 19406
Abbingdon Venture
Partners Limited Partnership-II.................. 1,732,500 % %
1018 West Ninth Avenue
King of Prussia, PA 19406
Abbingdon Venture
Partners Limited Partnership-III................. 1,120,000 % %
1018 West Ninth Avenue
King of Prussia, PA 19406
Stephen F. Nagy.................................. 3,500,000(3) % %
Foster Management Company
1018 West Ninth Avenue
King of Prussia, PA 19406
Joseph J. Frank.................................. 150,000 % %
Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, PA 19406
Robert K. Mehlman, D.D.S......................... 263,992(4) % %
Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, PA 19406
Stathis Andris................................... 5,000 * *
Venture Investment Associates, L.P.
1300 Mt. Kemble Avenue
Morristown, NJ 07962
Colin C. Blaydon................................. 5,000 * *
Amos Tuck School of
Business Administration
Dartmouth College
Hanover, NH 03755
Timothy E. Foster................................ 3,500,000(3) % %
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, PA 19406
John H. Foster................................... 3,500,000(3) % %
Foster Management Company
1018 West Ninth Avenue
King of Prussia, PA 19406
</TABLE>
57
<PAGE> 59
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
COMMON STOCK ---------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING(1) OFFERING(2)
- ------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Douglas P. Gill.................................. 2,852,500(5) % %
Foster Management Company
1018 West Ninth Avenue
King of Prussia, PA 19406
Stephen E. O'Neil................................ 5,000 * *
805 Third Avenue
10th Floor
New York, NY 10022
Directors and Executive Officers as a group (11
persons)....................................... 3,948,992(1)(2) % %
(3)(4)
(5)
</TABLE>
- ---------------
(*) Less than one percent (1%).
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as
to which the individual has sole or shared voting power or investment power
and also any shares which the individual has the right to acquire within 60
days after December 1, 1997 through the exercise of any stock option,
warrant or other right. The inclusion herein of such shares, however, does
not constitute an admission that the named stockholder is a direct or
indirect beneficial owner of such shares. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment
power (or shares such power with his or her spouse) with respect to all
shares of capital stock listed as owned by such person or entity.
(2) Percentage of ownership is based on 4,662,769 shares of Common Stock
outstanding before the offering and shares of Common Stock outstanding
after the offering.
(3) Represents shares of Common Stock owned by Business Development Capital
Limited Partnership-III ("BDC-III"), Abbingdon Venture Partners Limited
Partnership ("Abbingdon"), Abbingdon Venture Partners Limited Partnership-II
("Abbingdon-II"), and Abbingdon Venture Partners Limited Partnership-III
("Abbingdon-III"), limited partnerships of which Stephen F. Nagy, Timothy E.
Foster and John H. Foster are general partners of the general partner.
(4) Includes 213,992 shares issuable to MT Associates, a Pennsylvania
partnership, of which Dr. Mehlman is a general partner, upon conversion of
currently convertible subordinated notes.
(5) Represents shares of Common Stock owned by Abbingdon-II and Abbingdon-III,
limited partnerships of which Douglas P. Gill is a general partner of the
general partner.
58
<PAGE> 60
CERTAIN TRANSACTIONS
In connection with the Company's initial capitalization, BDC-III,
Abbingdon, Abbingdon-II and Abbingdon-III (together, the "Partnerships"),
investment partnerships operated by Foster Management Company (an investment
advisor of which Stephen F. Nagy is Managing Partner, Timothy E. Foster is
Managing Partner, and Douglas P. Gill is General Partner), purchased 3,500,000
shares of Common Stock for $350,000, and 8,000 shares of mandatorily redeemable
preferred stock for $800,000.
In connection with the Company's initial capitalization in September 1995,
the Company entered into agreements with the Partnerships whereby the
Partnerships agreed to lend the Company $1,600,000 pursuant to 9% Subordinated
Promissory Notes due September 18, 2005 (the "Original Notes"). In December
1995, the Company entered into further agreements with the Partnerships whereby
the Partnerships have agreed to lend the Company up to an additional $8,400,000
pursuant to 9% Subordinated Promissory Notes due September 18, 2005 (the "9%
Notes"). In December 1995, the Company entered into further agreements with the
Partnerships whereby the Partnerships have agreed to lend the Company up to an
additional $20,000,000 pursuant to 9% Subordinated Promissory Notes due
September 18, 2005 (the "1995 Notes"). In October 1997, the Company entered into
further agreements with the Partnerships whereby the Partnerships have agreed to
lend the Company up to an additional $8,000,000 pursuant to 9% Subordinated
Promissory Notes due September 18, 2005 (the "1997 Notes"). As of December 1,
1997, the Company had outstanding borrowings of approximately $28.6 million
pursuant to the Original Notes, the 9% Notes, the 1995 Notes and the 1997 Notes.
The Company intends to apply the net proceeds from the offering to repay in full
the Original Notes, the 9% Notes, the 1995 Notes and the 1997 Notes and to
redeem the shares of mandatorily redeemable preferred stock held by the
Partnerships. After the offering, the Company's loan agreements with the
Partnerships will be terminated. See "Use of Proceeds."
The following table sets forth the respective interest of the Partnerships
in the Original Notes, the 9% Notes, the 1995 Notes and the 1997 Notes:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF ORIGINAL PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
NAME OF PARTNERSHIP NOTES OF 9% NOTES OF 1995 NOTES OF 1997 NOTES
- ----------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BDC-III...................... $ 80,000 $ 420,000 $1,000,000 $ 400,000
Abbingdon.................... 216,000 1,134,000 2,700,000 1,080,000
Abbingdon-II................. 792,000 4,158,000 9,000,000 3,960,000
Abbingdon-III................ 512,000 2,688,000 6,400,000 2,560,000
</TABLE>
The Company sold to each of the directors and executive officers of the
Company the following shares of Common Stock in the following months for $.10
per share, which shares of Common Stock vest over a five-year period contingent
upon continued service: in September 1995, 50,000 shares of Common Stock to
Robert K. Mehlman, D.D.S., Senior Vice President -- Business Development of the
Company; in December 1995, 2,500 shares of Common Stock to W. Gary Liddick, Vice
President of Finance and Chief Financial Officer of the Company; in November
1996, 5,000 shares of Common Stock each to Stathis Andris, Colin C. Blaydon and
Stephen E. O'Neil, directors of the Company; in December 1996, 150,000 shares of
Common Stock to Joseph J. Frank, President and Chief Executive Officer and a
director of the Company, 7,500 shares to Jeanne Marie Welsko, Vice
President -- Human Resources of the Company, and 5,000 shares of Common Stock to
W. Gary Liddick. The Company entered into stock purchase agreements with each of
these directors and executive officers (the "Stock Purchase Agreements")
pursuant to which such individuals purchased their respective shares of Common
Stock. The Stock Purchase Agreements provide for restrictions on the sale of
such shares and further provide that the Company has the option to repurchase
such shares at $.10 per share upon the occurrence of certain conditions
contained therein.
Pursuant to an arrangement between the Company and Foster Management
Company, the Company pays a management fee of $3,333.33 per month for services
to the Company including identifying and negotiating with acquisition
candidates, assisting in the recruitment of corporate management, facilitating
and arranging financing for the Company and general strategic business planning.
During 1996, the Company paid Foster Management Company an aggregate of $40,000
in management fees plus reimbursement of out-of-
59
<PAGE> 61
pocket expenses of approximately $72,683 representing travel and communication
costs. This arrangement will terminate upon the consummation of this offering.
The Company has agreed to pay Foster Management Company a fee of $750,000 for
its assistance in effectuating this offering.
Dr. Mehlman was a partner of MT Associates, a Pennsylvania general
partnership, from which the Company acquired the assets of the Northern Virginia
Dental Group and the Penn Dental Associates dental practices in September 1995.
The assets of MT Associates consisted of the assets of the four dental practices
of the Northern Virginia Dental Group and the dental practice of Penn Dental
Associate. In consideration therefor, the Company agreed to pay MT Associates
$1,600,000 in cash, a three-year 6% subordinated promissory note of the Company
in the principal amount of $135,000, and a three-year 6% convertible promissory
note of the Company in the principal amount of $800,000 (the "First Convertible
Note"), plus certain additional Contingent Payments payable in cash and
convertible promissory notes over a three-year period upon achievement of
certain financial goals. In October 1996, as part of the restructuring of
certain obligations of the practices, the Company issued to Dr. Mehlman, as
additional purchase price, a 6.67% promissory note in the principal amount of
$137,926.48 and, in satisfaction of the Company's obligation to make contingent
payments with respect to the prior year, the Company issued to MT Associates, a
three-year 6% convertible promissory note in the principal amount of $720,000
(the "Second Convertible Note"). In October 1997, in satisfaction of the
Company's obligation to make contingent payments with respect to the prior year,
the Company issued to MT Associates a three-year 6% convertible promissory note
of the Company in the principal amount of $2,677,200 (the "Third Convertible
Note"). The First Convertible Note, the Second Convertible Note and the Third
Convertible Note are convertible at any time by MT Associates into shares of
Common Stock at a conversion price of $16.00 per share of Common Stock. The
remaining Contingent Payments due for the third year in connection with the MT
Associates acquisition, will be payable, if earned, within ninety days of
September 30, 1998. If the net revenue and pre-tax earnings goals are met, the
Company will be obligated to pay to MT Associates $660,000 in cash and a three
year 6% convertible subordinated promissory note in the principal amount of
$1,980,000. If the business fails to achieve the targets, no Contingent Payments
will be payable.
In connection with the acquisition of the assets of MT Associates in
September 1995, Dr. Mehlman entered into a five-year employment agreement with
the Company. The agreement provided for Dr. Mehlman to receive an annual base
salary of $150,000, subject to merit increases as determined by the Board of
Directors of the Company, and, to earn bonuses of up to 30% of his base salary
each year. In September 1996, the Company and Dr. Mehlman agreed to amend the
employment agreement to provide for an annual base salary of $120,000.
On October 23, 1997, the Company executed a demand secured promissory note
payable to PNC Bank in the principal amount of the lesser of the amount borrowed
or $10,000,000, with an interest rate, at the Company's option, equal to (a) the
greater of (i) PNC Bank's prime rate, which at October 23, 1997 was 8.5% or (ii)
the federal funds rate plus 0.5% or (b) the Eurodollar rate plus 2.0%. Certain
of the Partnerships guaranteed the payment of the Company's obligations to PNC
Bank under such note. All of the Partnerships have pledged their shares of
Common Stock and mandatorily redeemable preferred stock as security for
repayment of such note. As of December 15, 1997, the Company had borrowed
approximately $5.0 million under the line of credit. See "Use of Proceeds." Upon
such repayment, the demand credit facility with PNC Bank and the guaranties by
the Partnerships will terminate.
The Company leases its executive offices from NovaCare, Inc. The lease
agreement with NovaCare, Inc. is for a term of ten years and provides for a
current monthly rental amount of $5,281. Timothy E. Foster, a director of the
Company, is the Chief Executive Officer of NovaCare, Inc.
60
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred stock,
par value $.01 per share, issuable in series (the "Preferred Stock"). At
December 1, 1997, there were 4,662,769 shares of Common Stock and 8,000 shares
of mandatorily redeemable preferred stock issued and outstanding.
The following description of certain matters relating to the capital stock
of the Company is a summary and is qualified in its entirety by the provisions
of the Company's Certificate of Incorporation and By-Laws, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus
forms a part.
COMMON STOCK
At December 1, 1997, approximately 59 persons were holders of record of the
4,662,769 shares of Common Stock outstanding. Each holder of record of Common
Stock is entitled to one vote for each outstanding share of Common Stock owned
by such holder, is not entitled to cumulate his votes for the election of
directors and does not have preemptive rights. The issued and outstanding shares
of Common Stock are, and all shares of Common Stock to be issued and to be sold
in the offering will be, validly issued, fully paid and nonassessable. All
shares of Common Stock have equal rights and, subject to the rights of the
holders of the Preferred Stock, are entitled to receive ratably such dividends,
if any, as the Board of Directors may declare from time to time out of funds
legally available therefor. Upon liquidation of the Company, after payment or
provision for payment of all of the Company's debts and obligations and
liquidation payments to holders of outstanding shares of Preferred Stock, the
holders of the Common Stock will share ratably in the net assets, if any,
available for distribution to holders of Common Stock upon liquidation.
PREFERRED STOCK
The Company has issued an initial series of its Preferred Stock designated
the 8% Cumulative Preferred Stock. The 8% Cumulative Preferred Stock is referred
to herein and elsewhere in this Prospectus and in the Company's Consolidated
Financial Statements and the Notes thereto as the mandatorily redeemable
preferred stock. At December 1, 1997, the Company had issued and outstanding
8,000 shares of the mandatorily redeemable preferred stock, all of which are
owned by the Partnerships. See "Certain Transactions." A portion of the proceeds
of the offering will be used to redeem such shares. See "Use of Proceeds."
Holders of the mandatorily redeemable preferred stock are entitled to receive
dividends out of any net profits or net assets of the Company legally available
for dividends at the rate of $8.00 per share per annum, payable quarterly on
March 31, June 30, September 30 and December 31. Dividends upon the mandatorily
redeemable preferred stock are cumulative, so that if dividends upon the
outstanding mandatorily redeemable preferred stock from the date on which such
dividends commence to accrue to the end of the then current quarterly dividend
period for such stock shall not have been declared and paid, the amount of the
deficiency shall be paid, but without interest, before the Company shall
declare, pay or set aside funds for any dividends or other distributions (other
than dividends payable in shares of Common Stock to all holders of Common Stock)
in respect of Common Stock or any Common Stock shall be purchased by the
Company. In the event of the liquidation of the Company, the holders of the
mandatorily redeemable preferred stock are entitled to receive payment of a
preferential amount of $100 per share plus all accrued and accumulated but
unpaid dividends before any distribution is made to holders of Common Stock. The
mandatorily redeemable preferred stock does not have any voting rights and is
not convertible. The mandatorily redeemable preferred stock may be redeemed at
any time by the Company, at its option, for $100 per share plus an amount equal
to all accrued and accumulated but unpaid dividends and is required to be
redeemed upon the earlier of the consummation of the offering or December 31,
1998.
The Company's Board of Directors may without further action by the
Company's stockholders, from time to time, direct the issuance of additional
shares of Preferred Stock in series and may, at the time of issuance, determine
the rights, preferences and limitations of each series. The rights of any such
series may include voting and conversion rights which would adversely affect the
voting power of the holders of Common Stock.
61
<PAGE> 63
Satisfaction of any dividend preferences of outstanding Preferred Stock would
reduce the amount of funds available, if any, for the payment of dividends on
Common Stock. See "Dividend Policy." Also, the holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is made
to the holders of the Common Stock. The Company does not have any present plans
to issue any additional series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change in control attempts. To the extent that this
ability has this effect, removal of the Company's incumbent Board of Directors
and management may be rendered more difficult. Further, this may have an adverse
impact on the ability of stockholders of the Company to participate in a tender
or exchange offer for the Common Stock and in so doing diminish the market value
of the Common Stock. The Company is not aware of any proposed takeover attempt
or any proposed attempt to acquire a large block of Common Stock.
LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY
Article Sixth of the Certificate of Incorporation of the Company provides
that the Company shall indemnify and hold harmless any director, officer,
employee or agent of the Company from and against any and all expenses and
liabilities that may be imposed upon or incurred by him in connection with, or
as a result of, any proceeding in which he may become involved, as a party or
otherwise, by reason of the fact that he is or was such a director, officer,
employee or agent of the Company, whether or not he continues to be such at the
time such expenses and liabilities shall have been imposed or incurred, to the
extent permitted by the laws of the State of Delaware, as they may be amended
from time to time.
Article Eleventh of the Certificate of Incorporation of the Company
contains a provision which eliminates the personal liability of a director of
the Company to the Company or to any of its stockholders for monetary damages
for a breach of his fiduciary duty as a director, except in the case in which
the director breached his duty of loyalty, failed to act in good faith, engaged
in intentional misconduct or knowingly violated a law, authorized the payment of
a dividend or approved a stock repurchase in violation of the Delaware General
Corporation Law, or obtained an improper personal benefit.
STATUTORY PROVISIONS
The Company, in its Certificate of Incorporation, has elected not to be
governed by Section 203 of the Delaware General Corporation Law, which is
considered to be an anti-takeover provision in that it imposes certain
restrictions on a publicly-held Delaware corporation engaging in business
combinations with greater than 15% stockholders of such corporation.
TRANSFER AGENT
The transfer agent for the Common Stock will be American Stock Transfer &
Trust Company.
62
<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have shares of
Common Stock outstanding, of which shares (approximately % of the
shares to be outstanding) will be held by persons who acquired such shares in
transactions in which such shares were not registered under the Securities Act.
These shares may not be sold unless registered under the Securities Act or sold
pursuant to an applicable exemption from registration, such as Rule 144 under
the Securities Act ("Rule 144"). Rule 144, as currently in effect and subject to
its provisions and other applicable federal and state securities laws, permits a
person (or persons whose shares are aggregated) who has beneficially owned his
or her shares for at least one year to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the total number of
outstanding shares of Common Stock or the average weekly trading volume during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information concerning the Company. Rule 144 also
permits, under certain circumstances, such sale of shares without any quantity
limitation or current public information described above by a person who is not
an affiliate of the Company and who has satisfied a two-year holding period.
The Company and the holders of approximately % of the Company's Common
Stock, including all of the Company's directors and executive officers, have
agreed that, for a period of 180 days after the date of this Prospectus (the
"Lock-up Period") they will not, without the prior written consent of
NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or
otherwise dispose of any Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or grant any options or warrants to
purchase Common Stock except in certain limited circumstances. See
"Underwriting." Upon expiration of the Lock-up Period, at least 4,010,819 of the
shares to be outstanding (approximately of such shares) will be eligible
for sale under Rule 144, including 89,655 shares which would be freely tradeable
under paragraph (k) of Rule 144 and 3,924,831 shares subject to compliance with
Rule 144 volume limitations, of which 3,730,000 are held by officers, directors
and affiliates of the Company. In addition, 13 holders of 157,750 currently
outstanding shares of the Company's Common Stock acquired in connection with an
acquisition have registration rights obligating the Company to register such
holder's shares of Common Stock on a pro rata basis if the Company registers
shares of Common Stock for any other holder of Common Stock after the offering.
The Company cannot predict the number of shares of Common Stock which may
be sold in the future pursuant to Rule 144 since such sales will depend upon the
market price of the Common Stock, the individual circumstances of holders
thereof and other factors. Any sales of a substantial number of shares of Common
Stock in the public market could have a significant adverse effect on the market
price of the Common Stock.
In addition, the Company has granted options to purchase 45,000 shares of
Common Stock under the Stock Option Plan and options to purchase 31,000 shares
of Common Stock to two executive officers (the "Officers' Options") not pursuant
to the Stock Option Plan. The Company intends to file registration statements on
Form S-8 under the Securities Act to register the 600,000 shares of Common Stock
authorized and reserved for issuance pursuant to the Stock Option Plan, the
350,000 shares of Common Stock authorized and reserved for issuance pursuant to
the Stock Purchase Plan and the shares issuable upon exercise of the Officers'
Options. Upon the filing of such registration statements on Form S-8 and
expiration of the Lock-up Period, outstanding shares of Common Stock so
registered may be freely sold without restriction, except for shares held by
officers, directors and other affiliates of the Company. See
"Management -- Stock Option Plan," and "Management -- Employee Stock Purchase
Plan."
63
<PAGE> 65
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, represented by NationsBanc Montgomery Securities, Inc.
and Bear, Stearns & Co. Inc. (the "Representatives") have severally agreed to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions precedent, and that the Underwriters are committed to purchase all of
such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------- ----------
<S> <C>
NationsBanc Montgomery Securities, Inc. .................................
Bear, Stearns & Co. Inc. ................................................
Total..........................................................
==========
</TABLE>
The Representatives have advised the Company that the Underwriters may
allow to select dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the offering, the price,
concessions and reallowances to dealers may be changed by the Representatives.
The Common Stock is offered subject to receipt and acceptance by the
Underwriters and to certain other conditions, including the right to reject
orders in whole or in part.
The Company has granted an option to the Underwriters exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table.
The Representatives have advised the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The holders of approximately % of the shares of the Company's Common
Stock, including all of the Company's directors and executive officers, have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of NationsBanc Montgomery
Securities, Inc., directly or indirectly, sell, offer to sell or otherwise
dispose of any shares of Common Stock or any options owned directly by such
holders or with respect to which they have the power of disposition. The Company
has agreed not to sell, offer to sell, contract to sell, grant any options to
purchase or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for shares of Common Stock or
any rights to acquire Common Stock for a period of 180 days after the date of
this Prospectus, except, in the case of the Company, in certain limited
circumstances. The lock-up agreements may be released at any time as to all or
any portion of the shares subject to such agreements at the discretion of
NationsBanc Montgomery Securities, Inc.
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
negotiated between the Company and the Representatives. Among the factors
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, are the Company's historical
performance, estimates of the business
64
<PAGE> 66
potential and earnings prospects of the Company, an assessment of the Company's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the Common Stock originally sold by such syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transaction and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Haythe & Curley, 237 Park Avenue, New York, New York 10017,
and for the Underwriters by Dewey Ballantine LLP, 1301 Avenue of the Americas,
New York, New York 10019.
EXPERTS
The financial statements of Valley Forge Dental Associates, Inc. as of
December 31, 1995, 1996 and June 30, 1997 and for the period from September 19,
1995 (date of inception) to December 31, 1995, the year ended December 31, 1996
and the period from January 1, 1997 to June 30, 1997 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The combined financial statements of Penn Dental Associates, P.C., Stafford
Dental Associates, Gallows Dental Group, Hallmark Dental Group and Alexandria
Dental Center; the combined financial statements of Donald L. Kane, D.D.S., P.A.
and UDG, Melbourne, P.A.; the consolidated financial statements of Western
Dental Group; the consolidated financial statements of Horizon Group
International, Inc.; the combined financial statements of ENW, Inc.; the
financial statements of The Dentistry; the financial statements of Comprehensive
Family Dentistry, Inc.; the financial statements of Bernard B. Baros, D.D.S.,
P.C.; the financial statements of Maurice E. Smith, D.D.S., the combined
financial statements of Douglas A. Quinn, D.D.S. and Douglas A. Quinn, D.D.S.,
P.A.; the combined financial statements of Gentle Dental of Ocala, Sarasota,
Clearwater, Manatee and Gentle Dental Orthodontics, P.C.; the financial
statements of Felix W. Sibley, Jr., d/b/a/ Garden Walk Dental Associates; the
financial statements of Dr. Kenneth Bradley Reynolds, D.D.S.; the financial
statements of Miller & Powell, D.M.D. d/b/a/ Soft Touch Dentistry; the financial
statements of Dr. Kenneth E. Copeland, D.D.S., Inc., and the financial
statements of Dr. David B. Wells, D.D.S. have been so included in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The combined financial statements of ProDent, Inc. and Affiliates as of
December 31, 1995, 1996 and September 30, 1997 and for the three years ended
December 31, 1996 and for the period from January 1, 1997 to September 30, 1997
included in this Prospectus have been so included in reliance on the report of
Kelly, Welde & Co., independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The combined financial statements of Poller Dental Group, P.A., Poller
Dental Group of Union, P.A. and Dental Centers of America, P.A. as of December
31, 1995, December 31, 1996 and September 30, 1997 and for the three years ended
December 31, 1996 and for the period from January 1, 1997 to September 30, 1997
and the financial statements of American Dental Centers, P.A. (n/k/a Dental
Centers of America, P.A.) as
65
<PAGE> 67
of December 31, 1995, December 31, 1996 and August 11, 1997 and for the three
years ended December 31, 1996 and for the period from January 1, 1997 to August
11, 1997, included in this Prospectus have been so included in reliance on the
report of Sidney Glassel, C.P.A., independent accountants, given on the
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. (the "Commission"), a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered hereby
(the "Registration Statement"). This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus
concerning the provision of any documents filed with the Registration Statement
as exhibits are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed as an exhibit to the Registration Statement. For further information about
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and to the financial statements, schedules and exhibits
filed as a part thereof.
Upon completion of the offering, the Company will be subject to the
information requirements of the Exchange Act and, in accordance therewith will
file reports and other information with the Commission. The Registration
Statement, the exhibits and schedules forming a part thereof and the reports and
other information filed by the Company with the Commission in accordance with
the Exchange Act may be inspected without charge at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at its New York Regional Office
located at Seven World Trade Center, New York, New York 10048 and its Chicago
Regional Office located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, copies of such documents can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the prescribed rates. In addition, the Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy
information statements and other information regarding registrants that file
electronically with the Commission through the Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR"). The Registration Statement has been
filed electronically through EDGAR and may be retrieved through the Commission's
Web site on the Internet. The statements contained in this Prospectus concerning
any contract or document are not necessarily complete; where such contract or
other document is an exhibit to the Registration Statement, each such statement
is qualified in all respects by the provisions of such exhibit.
66
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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<S> <C>
VALLEY FORGE DENTAL ASSOCIATES, INC.
Report of Independent Accountants.................................................. F-6
Consolidated Balance Sheet as of December 31, 1995, 1996 and June 30, 1997, and
September 30, 1997 (unaudited).................................................. F-7
Consolidated Statement of Operations for the Period from September 19, 1995
(inception) to December 31, 1995, for the Year Ended December 31, 1996 and for
the Period from January 1, 1997 to June 30, 1997 and for the Periods from
January 1, 1996 to September 30, 1996 (unaudited) and January 1, 1997 to
September 30, 1997 (unaudited).................................................. F-8
Consolidated Statement of Changes in Stockholders' Deficit for the Period from
September 19, 1995 (inception) to December 31, 1995, for the Year Ended December
31, 1996 and for the Period from January 1, 1997 to June 30, 1997 and for the
Period from July 1, 1997 to September 30, 1997 (unaudited)...................... F-9
Consolidated Statement of Cash Flows for the Period from September 19, 1995
(inception) to December 31, 1995, for the Year Ended December 31, 1996 and for
the Period from January 1, 1997 to June 30, 1997 and for the Periods from
January 1, 1996 to September 30, 1996 (unaudited) and January 1, 1997 to
September 30, 1997 (unaudited).................................................. F-10
Notes to Consolidated Financial Statements......................................... F-11
PENN DENTAL ASSOCIATES, P.C., STAFFORD DENTAL ASSOCIATES, GALLOWS DENTAL GROUP,
HALLMARK DENTAL GROUP AND ALEXANDRIA DENTAL CENTRE.
Report of Independent Accountants.................................................. F-24
Combined Balance Sheet as of December 31, 1994 and September 19, 1995.............. F-25
Combined Statement of Operations and Changes in Owners' Equity for the Year Ended
December 31, 1994 and the Period from January 1, 1995 to September 19, 1995..... F-26
Combined Statement of Cash Flows for the Year Ended December 31, 1994 and for the
Period from January 1, 1995 to September 19, 1995............................... F-27
Notes to Combined Financial Statements............................................. F-28
DONALD L. KANE, D.D.S., P.A. AND UDG, MELBORNE, P.A.
Report of Independent Accountants.................................................. F-34
Combined Balance Sheet as of December 31, 1994 and 1995............................ F-35
Combined Statement of Operations and Changes in Stockholders' (Deficit) Equity for
the Years Ended December 31, 1994 and 1995...................................... F-36
Combined Statement of Cash Flows for the Years Ended December 31, 1994 and 1995.... F-37
Notes to Consolidated Financial Statements......................................... F-38
WESTERN DENTAL GROUP
Report of Independent Accountants.................................................. F-43
Consolidated Balance Sheet as of December 31, 1995 and 1996........................ F-44
Consolidated Statement of Operations for the Years Ended December 31, 1994, 1995
and 1996........................................................................ F-45
Statement of Changes in Stockholders' (Deficit) Equity for the Years Ended December
31, 1994, 1995 and 1996......................................................... F-46
Consolidated Statement of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996........................................................................ F-47
Notes to Consolidated Financial Statements......................................... F-48
</TABLE>
F-1
<PAGE> 69
<TABLE>
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HORIZON GROUP INTERNATIONAL, INC.
Report of Independent Accountants.................................................. F-53
Consolidated Balance Sheet as of December 31, 1994 and 1995 and February 29,
1996............................................................................ F-54
Consolidated Statement of Operations for the Years Ended December 31, 1994 and 1995
and for the Period from January 1, 1996 to February 29, 1996.................... F-55
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended
December 31, 1994 and 1995 and for the Period from January 1, 1996 to February
29, 1996........................................................................ F-56
Consolidated Statement of Cash Flows for the Years Ended December 31, 1994 and 1995
and for the Period from January 1, 1996 to February 29, 1996.................... F-57
Notes to Consolidated Financial Statements......................................... F-58
ENW, INC.
Report of Independent Accountants.................................................. F-63
Combined Balance Sheet as of December 31, 1995, 1996 and January 31, 1997.......... F-64
Combined Statement of Operations for the Years Ended December 31, 1995 and 1996 and
for the Period from January 1, 1997 to January 31, 1997......................... F-65
Combined Statement of Cash Flows for the Years Ended December 31, 1995 and 1996 and
for the Period from January 1, 1997 to January 31, 1997......................... F-66
Notes to Combined Financial Statements............................................. F-67
THE DENTISTRY
Report of Independent Accountants.................................................. F-74
Balance Sheet as of December 31, 1995, 1996 and March 31, 1997..................... F-75
Statement of Operations for the Years Ended December 31, 1994, 1995, and 1996 and
for the Period from January 1, 1997 to March 31, 1997........................... F-76
Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1994,
1995 and 1996 and for the Period from January 1, 1997 to March 31, 1997......... F-77
Statement of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and
for the Period from January 1, 1997 to March 31, 1997........................... F-78
Notes to Financial Statements...................................................... F-79
COMPREHENSIVE FAMILY DENTISTRY, INC.
Report of Independent Accountants.................................................. F-83
Balance Sheet as of December 31, 1995, 1996 and April 30, 1997..................... F-84
Statement of Operations for the Years Ended December 31, 1994, 1995 and 1996 and
for the Period from January 1, 1997 to April 30, 1997........................... F-85
Statement of Changes in Stockholders' Equity (Deficit) for the Years Ended December
31, 1994, 1995, and 1996 and for the Period from January 1, 1997 to April 30,
1997............................................................................ F-86
Statement of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and
for the Period from January 1, 1997 to April 30, 1997........................... F-87
Notes to Financial Statements...................................................... F-88
BERNARD B. BAROS, D.D.S., P.C.
Report of Independent Accountants.................................................. F-94
Balance Sheet as of December 31, 1995, 1996 and June 30, 1997...................... F-95
Statement of Operations for the Years Ended December 31, 1995 and 1996 and for the
Period from January 1, 1997 to June 30, 1997.................................... F-96
</TABLE>
F-2
<PAGE> 70
<TABLE>
<CAPTION>
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<S> <C>
Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1995
and 1996 and for the Period from January 1, 1997 to June 30, 1997............... F-97
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996 and for the
Period from January 1, 1997 to June 30, 1997.................................... F-98
Notes to Financial Statements...................................................... F-99
MAURICE E. SMITH, D.D.S.
Report of Independent Accountants.................................................. F-104
Balance Sheet as of December 31, 1996 and June 30, 1997............................ F-105
Statement of Operations for the Year Ended December 31, 1996 and for the Period
from January 1, 1997 to June 30, 1997........................................... F-106
Statement of Changes in Owner's (Deficit) Equity for the Year Ended December 31,
1996 and for the Period from January 1, 1997 to June 30, 1997................... F-107
Statement of Cash Flows for the Year Ended December 31, 1996 and for the Period
from January 1, 1997 to June 30, 1997........................................... F-108
Notes to Financial Statements...................................................... F-109
DOUGLASS A. QUINN, D.D.S., P.C. AND DOUGLASS A. QUINN, D.D.S.
Report of Independent Accountants.................................................. F-113
Combined Balance Sheet as of December 31, 1995, 1996 and July 31, 1997............. F-114
Combined Statement of Operations and Changes in Owners' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and for the Period from January 1, 1997 to July
31, 1997........................................................................ F-115
Combined Statement of Cash Flows for the Year Ended December 31, 1996 and for the
Period from January 1, 1997 to July 31, 1997.................................... F-116
Notes to Combined Financial Statements............................................. F-117
GENTLE DENTAL OF OCALA, P.C., GENTLE DENTAL OF SARASOTA, P.C., GENTLE DENTAL OF
CLEARWATER, P.C., GENTLE DENTAL OF MANATEE, P.C., AND GENTLE DENTAL ORTHODONTICS,
P.C.
Report of Independent Accountants.................................................. F-122
Combined Balance Sheet as of December 31, 1995, 1996 and July 31, 1997............. F-123
Combined Statement of Operations and Changes in Owner's Equity for the Years Ended
December 31, 1994, 1995 and 1996 and the Period from January 1, 1997 to July 31,
1997............................................................................ F-124
Combined Statement of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 and for the Period from January 1, 1997 to July 31, 1997................... F-125
Notes to Combined Financial Statements............................................. F-126
FELIX W. SIBLEY, JR., D.D.S. D/B/A/ GARDEN WALK DENTAL ASSOCIATES
Report of Independent Accountants.................................................. F-131
Balance Sheet as of December 31, 1995, 1996 and August 31, 1997.................... F-132
Statement of Operations for the Years Ended December 31, 1994, 1995 and 1996 and
for the Period from January 1, 1997 to August 31, 1997.......................... F-133
Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1994,
1995 and 1996 and for the Period from January 1, 1997 to August 31, 1997........ F-134
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996 and for the
Period from January 1, 1997 to August 31, 1997.................................. F-135
Notes to Financial Statements...................................................... F-136
</TABLE>
F-3
<PAGE> 71
<TABLE>
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<S> <C>
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
Report of Independent Accountants.................................................. F-138
Balance Sheet as of December 31, 1996 and August 31, 1997.......................... F-139
Statement of Operations for the Year Ended December 31, 1996 and for the Period
from January 1, 1997 to August 31, 1997......................................... F-140
Statement of Changes in Owner's Equity for the Year Ended December 31, 1996 and for
the Period from January 1, 1997 to August 31, 1997.............................. F-141
Statement of Cash Flows for the Year Ended December 31, 1996 and for the Period
from January 1, 1997 to August 31, 1997......................................... F-142
Notes to Financial Statements...................................................... F-143
MILLER & POWELL, DMD, P.C.
Report of Independent Accountants.................................................. F-148
Balance Sheet as of December 31, 1996 and August 31, 1997.......................... F-149
Statement of Operations for the Year Ended December 31, 1996 and for the Period
from January 1, 1997 to August 31, 1997......................................... F-150
Statement of Changes in Stockholders' (Deficit) Equity for the Year Ended December
31, 1996 and for the Period from January 1, 1997 to August 31, 1997............. F-151
Statement of Cash Flows for the Year Ended December 31, 1996 and for the Period
from January 1, 1997 to August 31, 1997......................................... F-152
Notes to Financial Statements...................................................... F-153
PRODENT, INC. AND AFFILIATES
Report of Independent Accountants.................................................. F-156
Combined Balance Sheet as of December 31, 1995, 1996 and September 30, 1997........ F-157
Combined Statement of Operations for the Years Ended December 31, 1994, 1995 and
1996 and for the Period from January 1, 1997 to September 30, 1997.............. F-158
Combined Statement of Changes in Stockholders' Equity for the Years Ended December
31, 1994, 1995 and 1996 and for the Period from January 1, 1997 to September 30,
1997............................................................................ F-159
Combined Statement of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 and for the Period from January 1, 1997 to September 30, 1997.............. F-160
Notes to Combined Financial Statements............................................. F-161
POLLER DENTAL GROUP, P.A., POLLER DENTAL GROUP OF UNION, P.A. AND DENTAL CENTERS OF
AMERICA, P.A.
Report of Independent Accountants.................................................. F-167
Combined Balance Sheet as of December 31, 1995, 1996 and September 30, 1997........ F-168
Combined Statement of Operations for the Years Ended December 31, 1994, 1995 and
1996 and for the Period from January 1, 1997 to September 30, 1997.............. F-169
Combined Statement of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 and for the Period from January 1, 1997 to September 30, 1997.............. F-170
Notes to Combined Financial Statements............................................. F-171
AMERICAN DENTAL CENTERS, P.A. (F/K/A DENTAL CENTERS OF AMERICA, P.A.)
Report of Independent Accountants.................................................. F-177
Balance Sheet as of December 31, 1995, 1996 and August 11, 1997.................... F-178
Statement of Operations for the Years Ended December 31, 1994, 1995 and 1996 and
for the Period from January 1, 1997 to August 11, 1997.......................... F-179
Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1994,
1995 and 1996 and for the Period from January 1, 1997 to August 11, 1997........ F-180
</TABLE>
F-4
<PAGE> 72
<TABLE>
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<S> <C>
Statement of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and
for the Period from January 1, 1997 to August 11, 1997.......................... F-181
Notes to Financial Statements...................................................... F-182
DR. KENNETH E. COPELAND, D.D.S., INC.
Report of Independent Accountants.................................................. F-185
Balance Sheet as of December 31, 1996 and August 31, 1997.......................... F-186
Statement of Operations and Stockholder's Equity for the Year Ended December 31,
1996 and for the Period from January 1, 1997 to August 31, 1997................. F-187
Statement of Cash Flows for the Year Ended December 31, 1996 and for the Period
from January 1, 1997 to August 31, 1997......................................... F-188
Notes to Financial Statements...................................................... F-189
DR. DAVID B. WELLS, D.D.S.
Report of Independent Accountants.................................................. F-192
Balance Sheet as of December 31, 1995, 1996 and August 31, 1997.................... F-193
Statement of Operations for the Years Ended December 31, 1995 and 1996 and for the
Period from January 1, 1997 to August 31, 1997.................................. F-194
Statement of Changes in Owners' Equity for the Years Ended December 31, 1995 and
1996 and for the Period from January 1, 1997 to August 31, 1997................. F-195
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996 and for the
Period from January 1, 1997 to August 31, 1997.................................. F-196
Notes to Financial Statements...................................................... F-197
</TABLE>
F-5
<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Valley Forge Dental Associates, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' deficit and
of cash flows present fairly, in all material respects, the financial position
of Valley Forge Dental Associates, Inc. and its subsidiaries ("the Company") at
December 31, 1995, and 1996 and at June 30, 1997 and the results of their
operations and their cash flows for the period from September 19, 1995 (date of
inception) to December 31, 1995, for the year ended December 31, 1996 and for
the period from January 1, 1997 to June 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
December 17, 1997
F-6
<PAGE> 74
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1997
---------- ----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............. $ 100,249 $ 567,779 $ 1,536,643 $ 2,137,688 $ 2,137,688
Accounts receivable, net............... 181,316 1,452,377 2,204,295 2,406,763 2,406,763
Prepaid expenses and other current
assets............................... 62,163 126,400 214,200 238,787 238,787
---------- ----------- ----------- ----------- -----------
Total current assets............ 343,728 2,146,556 3,955,138 4,783,238 4,783,238
Property and equipment, net.............. 443,253 883,556 2,197,925 3,288,082 3,288,082
Excess of cost over fair value of
tangible assets acquired and other
intangible assets, net................. 2,922,275 8,928,680 22,368,280 27,729,869 27,729,869
Other assets............................. 96,106 203,316 874,323 885,869 885,869
---------- ----------- ----------- ----------- -----------
$3,805,362 $12,162,108 $29,395,666 $36,687,058 $36,687,058
========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Current portion of long-term debt,
including amounts due related parties
of $311,667, $743,653 and $1,240,654
at December 31, 1995 and 1996 and at
June 30, 1997, respectively.......... $ 331,271 $ 776,379 $ 1,391,834 $ 2,953,844 $ 2,953,844
Current portion of obligations under
capital lease........................ 86,466 126,692 198,729 312,360 312,360
Accounts payable....................... 104,323 395,323 1,206,111 1,746,988 1,746,988
Accrued expenses and other current
liabilities.......................... 330,728 1,744,442 3,358,118 3,194,986 3,194,986
Other accrued liabilities.............. 98,520 1,270,882 1,396,580 1,366,344 1,366,344
Income taxes payable................... -- 172,000 143,350 143,348 143,348
---------- ----------- ----------- ----------- -----------
Total current liabilities....... 951,308 4,485,718 7,694,722 9,717,870 9,717,870
Long-term debt, including amounts due
related parties of $1,403,333,
$6,210,859 and $18,029,231 at December
31, 1995, 1996 and at June 30, 1997,
respectively........................... 1,455,907 6,286,616 18,113,127 23,094,121 23,094,121
Obligations under capital lease.......... 284,880 324,078 453,787 713,116 713,116
Other long-term liabilities.............. 164,200 167,400 1,785,200 1,785,200 1,785,200
Deferred income taxes.................... 157,051 327,164 188,834 171,547 171,547
---------- ----------- ----------- ----------- -----------
Total liabilities............... 3,013,346 11,590,976 28,235,670 35,481,854 35,481,854
Commitments and contingencies
Mandatorily redeemable preferred stock,
$.01 par value, plus accrued dividends
of $16,000, $80,000 and $112,000 at
December 31, 1995 and 1996 and at June
30, 1997, respectively; authorized:
1,000,000 shares; issued: 8,000 shares,
8% cumulative dividends................ 816,000 880,000 912,000 928,000 928,000
Mandatorily redeemable common stock (Note
13).................................... -- -- 658,509 812,201 --
Stockholders' (deficit) equity
Common stock, $.01 par value,
20,000,000 shares authorized;
3,600,000, 3,792,500 and 3,836,142
shares issued and outstanding at
December 31, 1995 and 1996 and at
June 30, 1997, respectively. (Note
11).................................. 36,000 37,925 38,362 38,988 40,735
Capital in excess of par value......... 324,000 540,075 730,229 968,878 1,779,332
Accumulated deficit.................... (383,984) (886,868) (1,179,104) (1,542,863) (1,542,863)
---------- ----------- ----------- ----------- -----------
Total stockholders' (deficit)
equity........................ (23,984) (308,868) (410,513) (534,997) 277,204
---------- ----------- ----------- ----------- -----------
$3,805,362 $12,162,108 $29,395,666 $36,687,058 $36,687,058
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
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VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 19,
1995 SIX MONTHS NINE MONTHS
(INCEPTION) TO YEAR ENDED ENDED ENDED SEPTEMBER 30
DECEMBER 31, DECEMBER 31, JUNE 30, -----------------------------
1995 1996 1997 1996 1997
-------------- ------------ ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net patient revenues................... $ 989,103 $15,448,459 $13,141,093 $11,061,266 $22,630,660
---------- ----------- ----------- ----------- -----------
Network expenses:
Dental compensation................ 115,430 3,426,740 3,106,351 2,325,745 5,349,622
Auxiliary compensation............. 309,730 4,893,183 3,828,040 3,645,001 6,460,113
Laboratory fees and dental
supplies......................... 130,181 1,880,792 1,485,982 1,377,227 2,614,149
Other general and administrative
expenses......................... 192,551 3,009,866 2,658,636 2,104,297 4,728,755
Depreciation......................... 32,889 155,625 140,470 130,257 257,302
---------- ----------- ----------- ----------- -----------
Total network expenses................. 780,781 13,366,206 11,219,479 9,582,527 19,409,941
---------- ----------- ----------- ----------- -----------
Network operating income............... 208,322 2,082,253 1,921,614 1,478,739 3,220,719
Corporate general and administrative
expenses............................. 508,781 1,554,110 1,155,388 1,087,387 1,924,438
Amortization of intangible assets...... 26,342 195,885 278,316 138,867 501,139
---------- ----------- ----------- ----------- -----------
Income (loss) from operations.......... (326,801) 332,258 487,910 252,485 795,142
Interest expense:
Related parties...................... 28,465 436,442 549,555 300,242 1,026,351
Other................................ 12,718 58,567 45,050 40,589 69,553
---------- ----------- ----------- ----------- -----------
Loss before taxes...................... (367,984) (162,751) (106,695) (88,346) (300,762)
Income taxes........................... -- 276,133 -- 202,749 --
---------- ----------- ----------- ----------- -----------
Net loss............................... (367,984) (438,884) (106,695) (291,095) (300,762)
Accretion of mandatorily redeemable
common stock (Note 13)............... 153,541 -- 307,233
Dividends on preferred stock........... 16,000 64,000 32,000 48,000 48,000
---------- ----------- ----------- ----------- -----------
Net loss applicable to common shares... $ (383,984) $ (502,884) $ (292,236) $ (339,095) $ (655,995)
========== =========== =========== =========== ===========
Historical Information:
Net loss per common share............ $ (.09) $ (.12) $ (.07)
========== =========== =========== =========== ===========
Weighted average shares
outstanding........................ 4,360,910 4,360,910 4,360,910
---------- ----------- ----------- ----------- -----------
Unaudited Pro Forma Information:
Net loss............................. $ -- $ -- $ (138,695) $ -- $ (348,762)
Net loss per common share............ $ -- $ -- $ (.03) $ -- $ --
========== =========== =========== =========== ===========
Weighted average shares
outstanding........................ -- -- 4,360,910 -- --
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 76
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CAPITAL
IN
COMMON STOCK EXCESS
--------------------- OF
PAR PAR ACCUMULATED
SHARES VALUE VALUE DEFICIT TOTAL
--------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Common stock issued September 19,
1995........................... 3,500,000 $35,000 $315,000 $ 350,000
Common stock issued to officers
and employees.................. 100,000 1,000 9,000 10,000
Net loss applicable to common
shares......................... $ (383,984) (383,984)
--------- ------- ---------- ----------- ---------
Balance, December 31, 1995....... 3,600,000 36,000 324,000 (383,984) (23,984)
Common stock issued to officers
and employees.................. 180,000 1,800 16,200 18,000
Common stock issued in connection
with acquisitions.............. 12,500 125 199,875 200,000
Net loss applicable to common
shares......................... (502,884) (502,884)
--------- ------- ---------- ----------- ---------
Balance, December 31, 1996....... 3,792,500 37,925 540,075 (886,868) (308,868)
Common stock issued in connection
with acquisitions.............. 43,642 437 190,154 190,591
Net loss applicable to common
shares......................... (292,236) (292,236)
--------- ------- ---------- ----------- ---------
Balance, June 30, 1997........... 3,836,142 38,362 730,229 (1,179,104) (410,513)
Common stock issued in connection
with acquisitions
(unaudited).................... 62,617 626 238,649 239,275
Net loss applicable to common
shares (unaudited)............. (363,759) (363,759)
--------- ------- ---------- ----------- ---------
Balance, September 30, 1997
(unaudited).................... 3,898,759 $38,988 $968,878 $(1,542,863) $(534,997)
========= ======= ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 77
VALLEY FORGE DENTAL ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 19,
1995
(INCEPTION) SIX MONTHS NINE MONTHS
TO YEAR ENDED ENDED ENDED SEPTEMBER 30
DECEMBER 31, DECEMBER 31, JUNE 30, ---------------------------
1995 1996 1997 1996 1997
------------- ------------ ------------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (367,984) $ (438,884) $ (106,695) $ (291,095) $ (300,762)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............. 59,231 353,462 428,999 270,212 780,802
Provision for doubtful accounts........... 46,401 369,646 346,126 243,474 718,825
Deferred income taxes..................... -- 114,133 -- 83,736 --
Change in assets and liabilities, net of
effects from businesses acquired:
Increase in accounts receivable........... (47,025) (1,246,744) (820,044) (1,088,247) (1,286,961)
(Increase) decrease in prepaid expenses
and other current assets................ (46,123) (64,237) (87,800) (28,991) (93,387)
(Increase) decrease in other assets....... (96,936) (107,210) (671,007) 59,893 (682,553)
Increase in accounts payable.............. 74,644 206,444 810,788 206,073 1,331,887
Increase in accrued expenses and other
liabilities............................. 259,572 767,604 469,144 654,875 210,952
Increase (decease) in income taxes
payable................................. -- 162,000 (28,650) 119,013 (28,652)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................ (118,220) 116,214 340,861 228,943 650,151
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Payments for purchases of businesses, net of
cash acquired of $70,000 in 1995, $67,000
in 1996 and $0 in 1997.................... (1,686,832) (3,952,500) (9,217,774) (2,997,142) (12,904,786)
Purchases of property and equipment......... (5,367) (301,468) (626,276) (254,932) (1,017,693)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.......................... (1,692,199) (4,253,968) (9,844,050) (3,252,074) (13,922,479)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock.................... 360,000 18,000 500 1,500 500
Issuance of preferred stock................. 800,000 -- -- -- --
Borrowings of long-term debt................ 780,000 5,199,236 11,148,160 3,627,614 15,949,658
Principal payments on long-term debt........ (4,688) (511,445) (592,387) (352,685) (912,873)
Principal payments on capital lease
obligations............................... (24,644) (100,507) (84,220) (72,461) (195,348)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.......................... 1,910,668 4,605,284 10,472,053 3,203,968 14,482,237
----------- ----------- ----------- ----------- -----------
Net increase in cash and cash equivalents... 100,249 467,530 968,864 180,837 1,569,909
Cash and cash equivalents at beginning of
period.................................... -- 100,249 567,779 100,249 567,779
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ 100,249 $ 567,779 $ 1,536,643 $ 281,086 $ 2,137,688
----------- ----------- ----------- ----------- -----------
Supplemental disclosure of cash flow
information:
Interest paid............................... $ 12,718 $ 136,025 $ 129,184 $ 99,733 $ 190,241
=========== =========== =========== =========== ===========
Taxes paid.................................. -- -- $ 28,650 $ -- $ 28,652
=========== =========== =========== =========== ===========
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations entered......... $ 4,159 $ 179,931 $ 285,966 $ 179,931 $ 770,054
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 78
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
1. ORGANIZATION AND OPERATIONS
Valley Forge Dental Associates, Inc., a Delaware corporation (the
"Company"), was formed to provide practice management services to
multi-specialty dental practices. The Company commenced operations on September
19, 1995 with the acquisition of the assets of MT Associates, a Pennsylvania
general partnership. As of June 30, 1997, after making additional acquisitions
(see Note 4), the Company had 30 dental offices in nine markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in the states in which the Company operates, the
Company does not own dental practices but instead enters into exclusive
long-term management services agreements with professional corporations which
operate the dental practices. In addition, the Company has the contractual right
to designate, in its sole discretion and at any time the licensed dentist who is
the owner of the capital stock of the professional corporation at a nominal cost
("nominee arrangements").Through the Management Services Agreements, the Company
has exclusive authority over decision making relating to all major ongoing
operations of the underlying professional corporations with the exception of the
professional aspects of dentistry practice as required by state law. Under the
Management Services Agreements, the Company establishes annual operating and
capital budgets for the professional corporations and compensation guidelines
for the licensed dental professionals. The Management Services Agreements have
initial terms of forty years. The method of computing the management fees varies
by contract. Some management fees are based on either (i) billings of the
affiliated practice less the amounts necessary to pay professional compensation
and other professional expenses or (ii) a license fee per location,
reimbursement of direct costs, reimbursement of marketing costs plus a markup,
and a flat administrative fee. In all cases, these fees are meant to compensate
the Company for expenses incurred in providing covered services plus a profit.
These interests are unilaterally saleable and transferable by the Company and
fluctuate based upon the actual performance of the operations of the
professional corporations.
Through the Management Services Agreements and the nominee arrangement, the
Company has a significant long-term financial interest in the affiliated
practices and therefore, according to Emerging Issues Task Force Issue No. 97-2
"Application of FASB Statement No. 94, Consolidation of All Majority-Owned
Subsidiaries, and APB Opinion No. 16, Business Combinations, to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements", must consolidate the results of the affiliated
practices with those of the Company. Because the Company must present
consolidated financial statements, net patient service revenues are presented in
the accompanying statement of operations. All significant intercompany accounts
and transactions, including management fees, have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
F-11
<PAGE> 79
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Net patient revenues are reported when earned at the estimated amounts to
be realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts, diagnostic and preventive dental
services are provided for a fixed rate per-member per-month capitated fee, and
other dental services as defined in the contracts are performed under an agreed
upon fee schedule to member patients. Capitated revenues are recorded in the
month for which the member is entitled to service (see Note 16).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the lesser of the Company's incremental borrowing rate, or the
implicit rate of the lease, as appropriate.
Long-Lived and Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. Deferred taxes have been recorded to the extent of differences between
the fair value and the tax basis of the assets acquired and liabilities assumed.
The excess of the purchase price over the fair value of tangible net assets
acquired is amortized on a straight-line basis over the estimated useful life of
the intangible assets which range from three to forty years. Allocation of
intangible assets between identifiable intangibles and goodwill was performed by
Company management with the assistance of independent appraisers. Intangible
assets include patient lists, assembled workforce, covenants not to compete and
goodwill.
In 1995, the Company implemented Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Accordingly, the carrying value of long-lived assets and certain identifiable
intangible assets are evaluated whenever changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. In performing such
review for recoverability, the Company compares the expected future undiscounted
cash flows to the carrying value of long-lived assets and identifiable
intangibles, including the related excess of cost over fair value of net assets
acquired. To date, no such change in circumstances has been noted.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a periodic
evaluation using these guidelines.
F-12
<PAGE> 80
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
Other Accrued and Other Long-Term Liabilities
The balances under other accrued and other long-term liabilities represent
amounts due to former owners, consisting of final payments of purchase price for
completed acquisitions, accruals for contingent earnouts, and adjustments to
purchase price related to working capital guarantees as provided in the
agreements.
Fair Value of Financial Instruments
Other than long-term debt, recorded balances of financial instruments at
December 31, 1995, 1996 and at June 30, 1997 approximate estimated fair market
values.
The fair value of long-term debt, including current portion, is estimated
based on quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of same maturities.
The estimated fair value of the Company's long-term debt instruments is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------- -------------------------
1995 1996 1997
----------------------- ----------------------- -------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Long-term debt
including
current
portion....... $1,787,178 1,787,178 $7,062,995 $7,381,146 $19,504,961 $19,354,403
</TABLE>
Historical Net Loss Per Common Share
Net loss per share has been computed in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 83 ("SAB 83"). SAB 83 requires
that common shares issued by the Company in the twelve months immediately
preceding a proposed public offering plus the number of common equivalent shares
which became issuable during the same period pursuant to the grant of stock
options at prices substantially less than the initial public offering price be
included in the calculation of common stock and common stock equivalent shares,
as if they were outstanding for all periods presented, using the treasury stock
method.
Historical Net Loss Per Common Share is computed by dividing net loss
applicable to common shares by the number of shares of common stock and common
stock equivalents outstanding at October 23, 1997, the last date on which any
common stock or common stock equivalent was issued.
Unaudited Pro Forma Net Loss Per Common Share is computed by dividing net
loss applicable to common shares, without consideration to the accretion of
mandatorily redeemable common stock, by the number of shares of common stock and
common stock equivalents outstanding as of October 23, 1997.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
which the Company is required to adopt in its financial statements for the
quarter ended December 31, 1997. SFAS 128 establishes standards for computing
F-13
<PAGE> 81
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and presenting earnings per share by replacing the presentations of weighted
shares outstanding, inclusive of common stock equivalents, with a dual
presentation of basic earnings per share which excludes dilution ("earnings per
share") and diluted earnings per share ("earnings per share-assuming dilution")
which includes the dilutive effect of all potentially exercisable or convertible
stock. Once adopted, SFAS 128 requires restatement of all prior period earnings
per share data.
Reclassifications
Certain 1995 and 1996 balances have been reclassified to conform with the
June 30, 1997 presentation.
Unaudited Financial Information
The September 30, 1996 and 1997 interim financial data is unaudited;
however in the opinion of the Company, the interim unaudited data includes all
adjustments, consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for the fair statement of the results for the
interim period.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Accounts receivable, net of contractual
allowances of $23,165, $115,759, $358,530 at
December 31, 1995 and 1996 and at June 30,
1997, respectively............................ $260,956 $1,839,261 $3,166,922
Less: Allowance for doubtful accounts........... (79,640) (386,884) (962,627)
-------- ---------- ----------
$181,316 $1,452,377 $2,204,295
======== ========== ==========
</TABLE>
Dental services are reimbursed directly by both patients and by third party
payors, including Medicaid, managed care organizations and commercial insurance
companies. There was no Medicaid revenues in 1995. Approximately 9.3% and 4.8%
of net revenues for 1996 and for the period ending June 30, 1997 were directly
billed to a Medicaid program which is subject to Federal and state regulation.
Third party reimbursements are primarily billed at estimated amounts realizable
based upon contractually determined rates. In instances where "usual, customary
and reasonable" market rates are billed, gross billings are adjusted for
contractual allowances to reflect estimated amounts realizable from third party
payors. The allowance for doubtful accounts is estimated based on an ongoing
review of collectibility.
4. ACQUISITIONS
On September 19, 1995, the Company acquired the assets of MT Associates, a
Pennsylvania general partnership, which owned the assets of five dental offices
located in northern Virginia and Pennsylvania. Since the initial acquisition and
through June 30, 1997, the Company has made seven acquisitions consisting of
over twenty dental offices.
These acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to assets and
liabilities acquired based upon their estimated fair values at the dates of
acquisition. The results of operations of the acquired companies are included in
the consolidated financial statements from the respective dates of acquisition.
F-14
<PAGE> 82
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with respect to businesses acquired in purchase transactions
was as follows (the allocation of purchase price for acquisitions for the period
from January 1, 1997 to June 30, 1997 is preliminary):
<TABLE>
<CAPTION>
SEPTEMBER 19, 1995 PERIOD FROM
(INCEPTION) TO YEAR ENDED JANUARY 1,
DECEMBER 31, DECEMBER 31, TO JUNE 30,
1995 1996 1997
------------------ ------------ -----------
<S> <C> <C> <C>
Cash paid (net of cash acquired of
$70,000 in 1995, $67,000 in 1996 and $0
in 1997)............................... $1,686,832 $3,499,390 $ 9,104,959
Notes issued and amounts payable to
former owners.......................... 1,197,720 588,026 1,731,364
Common and mandatorily redeemable common
stock issued........................... -- 200,000 567,488
--------- ---------- -----------
2,884,552 4,287,416 11,403,811
Liabilities assumed...................... 627,651 710,008 804,372
--------- ---------- -----------
3,512,203 4,997,424 12,208,183
Fair value of tangible assets acquired... (563,586) (511,864) (1,509,955)
--------- ---------- -----------
Excess of cost over fair value of
tangible assets acquired and other
intangible assets...................... $2,948,617 $4,485,560 $10,698,228
========= ========== ===========
</TABLE>
The following table summarizes the cash components of acquisition related
activity during the respective periods as follows:
<TABLE>
<CAPTION>
SEPTEMBER 19,
1995 YEAR ENDED
(INCEPTION) TO DECEMBER 31, JANUARY 1, 1997
DECEMBER 31, 1995 1996 TO JUNE 30, 1997
----------------- ------------ ----------------
<S> <C> <C> <C>
Cash paid for new acquisitions.......... $ 1,686,832 $3,499,390 $9,104,959
Other cash payments..................... 453,110 112,815
---------- ---------- ----------
Total cash activity..................... $ 1,686,832 $3,952,500 $9,217,774
========== ========== ==========
</TABLE>
The other cash payments represent additional consideration relating to past
acquisitions in satisfaction of contractual arrangements (see Note 16).
Subsequent to June 30, 1997, the Company made 13 acquisitions, consisting
of 25 dental offices. Purchase price relating to these acquisitions aggregated
approximately $23,240,000, consisting of cash, notes and shares of the Company's
common stock. Additional consideration could be paid in connection with these
acquisitions if specified financial criteria are attained (see Note 16). If
these criteria are attained, but not exceeded, the number of shares which could
be issued, and cash which could be paid under agreements executed to June 30,
1997 is 211,051 shares, and $2,399,000, respectively. If maximum criteria are
achieved, the number of shares and notes which could be issued and cash which
could be paid is 296,917 shares, $1,030,400 and $2,988,700, respectively.
The unaudited pro forma consolidated results of operations of the Company
give effect to each of the acquisitions as if they occurred at the beginning of
the respective periods:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Revenues...................... $50,822,129 $ 37,765,343 $ 42,264,387
Net income (loss)............. $(2,310,426) $ (1,846,372) $ (1,370,132)
Net loss per common share..... $ $ $
</TABLE>
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions been made as
of the beginning of the respective periods noted above, or the results that may
occur in the future.
F-15
<PAGE> 83
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Dental equipment, including equipment
under capital lease................... $447,050 $ 726,166 $1,331,273
Furniture and fixtures, automobiles and
leasehold improvements................ 24,435 119,766 437,070
Data processing and office equipment.... 4,657 231,139 775,769
-------- ---------- ----------
476,142 1,077,071 2,544,112
Less: Accumulated depreciation and
amortization.......................... (32,889) (193,515) (346,187)
-------- ---------- ----------
$443,253 $ 883,556 $2,197,925
======== ========== ==========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 7), for the period from September 19, 1995
to December 31, 1995, for the year ended December 31, 1996 and for the period
from January 1, 1997 to June 30, 1997 totaled $32,889, $160,626 and $152,672,
respectively.
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
---------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Excess of cost over fair value
of net assets acquired........ $2,331,017 $7,731,160 $19,299,412 $ 23,996,437
Patient lists................... 560,000 1,100,000 2,901,509 3,616,932
Assembled workforce............. 53,000 302,000 624,651 776,723
Covenants not to compete........ 4,600 14,698 38,213 55,320
---------- ---------- ----------- -----------
2,948,617 9,147,858 22,863,785 28,445,412
Less: Accumulated
amortization.................. (26,342) (219,178) (495,505) (715,543)
---------- ---------- ----------- -----------
$2,922,275 $8,928,680 $22,368,280 $ 27,729,869
========== ========== =========== ===========
</TABLE>
Amortization of intangible assets for the period from September 19, 1995 to
December 31, 1995, for the year ended December 31, 1996 and for the period from
January 1, 1997 to June 30, 1997 totaled $26,342, $192,836 and $276,327,
respectively.
F-16
<PAGE> 84
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from five to seven years.
Equipment under capital leases, at cost and related accumulated amortization
included in property and equipment, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Dental and office equipment...................... $362,994 $ 542,925 $ 776,047
Less: Accumulated amortization................... (27,204) (134,214) (206,637)
-------- --------- ---------
Equipment under capital leases................... $335,790 $ 408,711 $ 569,410
======== ========= =========
</TABLE>
Amortization of equipment under capital leases for the period from
September 19, 1995 to December 31, 1995, for the year ended December 31, 1996
and for the period from January 1, 1997 to June 30, 1997 was $27,204, $107,010
and $72,423, respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1997 (Six months)................................................ $ 132,612
1998............................................................. 251,540
1999............................................................. 197,787
2000............................................................. 141,013
2001............................................................. 61,187
---------
784,139
Less: Amount representing interest............................... (131,623)
---------
Present value of minimum lease payments.......................... 652,516
Less: Current portion............................................ (198,729)
---------
$ 453,787
=========
</TABLE>
The Company maintains leases for dental offices and for certain of its
equipment which are accounted for as operating leases. The office lease terms
range from one to ten years, while the equipment terms range from one to four
years.
Future minimum annual rentals due under noncancellable operating leases in
excess of one year as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
1997 (Six months)................................................ $ 659,625
1998............................................................. 1,276,571
1999............................................................. 1,242,948
2000............................................................. 911,344
2001............................................................. 362,608
Thereafter....................................................... 1,012,640
----------
$5,465,736
=========
</TABLE>
F-17
<PAGE> 85
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $48,841, $697,481 and $624,296, was incurred during the
period from September 19, 1995 to December 31, 1995, for the year ended December
31, 1996, and for the period from January 1, 1997 to June 30, 1997,
respectively.
8. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
---------- ---------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Subordinated notes payable to
principal stockholders, due
the earlier of an initial
public offering of the
Company's common stock or
September 2005; interest
accrues at 9.0%.............. $ 780,000 $4,758,073 $ 15,904,225 $ 20,706,725
6.0% -- 8.5% subordinated and
subordinated convertible
notes issued in connection
with acquisitions, payable
through 2002................. 935,000 2,196,462 3,365,660 5,039,972
10.5% -- 12.2% notes payable,
secured by equipment, payable
through 2001................. 72,178 108,460 235,076 301,268
---------- ---------- ----------- -----------
1,787,178 7,062,995 19,504,961 26,047,965
Less: Current portion.......... (331,271) (776,379) (1,391,834) (2,953,844)
---------- ---------- ----------- -----------
$1,455,907 $6,286,616 $ 18,113,127 $ 23,094,121
========== ========== =========== ===========
</TABLE>
Scheduled maturities of long-term debt outstanding as of June 30, 1997 are
as follows:
<TABLE>
<S> <C>
1997 (Six months)............................................... $ 466,088
1998............................................................ 1,438,586
1999............................................................ 899,127
2000............................................................ 575,014
2001............................................................ 169,160
Thereafter...................................................... 15,956,986
-----------
$19,504,961
===========
</TABLE>
F-18
<PAGE> 86
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The subordinated notes payable to principal stockholders permit the Company
to borrow funds for acquisitions and general corporate purposes up to an
aggregate amount of $38,000,000. As of October 23, 1997, the amount outstanding
under the subordinated notes payable to principal stockholders was approximately
$34,300,000, including accrued interest.
The subordinated convertible notes provide the holders with the right at
any time to convert the outstanding principal of the note into shares of the
Company's $.01 par value common stock at $16.00 per share.
On October 23, 1997, the Company executed a $10,000,000 discretionary line
of credit agreement with a financial institution. The term of the agreement is
through the earlier of April 21, 1998 or the date of closing of an initial
public offering. Interest accrues monthly on outstanding balances based on an
adjustable rate as defined in the agreement.
9. INCOME TAXES
The components of the income tax expense (benefit) for the period from
September 19, 1995 to December 31, 1995, for the year ended December 31, 1996
and for the period from January 1, 1997 to June 30, 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Current:
State............................................................... $162,000
Deferred:
Federal............................................................. 82,709
State............................................................... 31,424
--------
114,133
--------
$276,133
--------
</TABLE>
There was no provision for taxes during the period from September 19, 1995
(inception) to December 31, 1995 or during the period from January 1, 1997 to
June 30, 1997.
The reconciliation of the Federal statutory income tax rate to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 19, 1995
(INCEPTION) TO YEAR ENDED JANUARY 1, 1997
DECEMBER 31, DECEMBER 31, TO JUNE 30,
1995 1996 1997
------------------ ------------ ----------------
<S> <C> <C> <C>
Statutory income tax rate.............. (34)% (34)% (34)%
Amortization not deductible for income
tax purposes......................... 2 22 44
Losses for which no income tax benefit
is recognized........................ 32 98 (9)
Nondeductible business expenses
nondeductible........................ -- 4 4
State taxes............................ -- 80 (5)
---- ---- ----
Effective income tax rate.............. 0% 170% 0%
==== ==== ====
</TABLE>
F-19
<PAGE> 87
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net deferred income tax assets and (liabilities) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Start up costs not currently deductible for tax
purposes...................................... $ 118,052 $ 86,572 $ 74,767
Accruals and reserves not currently deductible
for tax purposes.............................. 3,724 195,859 462,640
Deferred revenues............................... 10,686 6,728 74,854
Net operating loss carryforwards................ 24,400 80,400 53,068
--------- --------- ---------
Gross deferred tax assets....................... 156,862 369,559 665,329
Valuation allowance............................. (154,400) (340,342) (332,137)
--------- --------- ---------
2,462 29,217 333,192
--------- --------- ---------
Intangible assets............................... (149,513) (215,987) (371,965)
Other........................................... (10,000) (140,394) (150,061)
--------- --------- ---------
Gross deferred tax liabilities.................. (159,513) (356,381) (522,026)
--------- --------- ---------
Net deferred tax liabilities.......... $(157,051) $ (327,164) $(188,834)
========= ========= =========
</TABLE>
At June 30, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $130,000. Their use is limited to
future taxable earnings of the Company. The carryforwards expire in 2010. A
valuation allowance has been established against the benefit of the net
operating loss carryforwards and other deferred tax assets which the Company
does not believe are more likely than not to be realized.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Salaries and payroll taxes...................... $104,652 $ 831,364 $1,383,531
Professional service fees....................... 169,532 347,322 801,932
Interest........................................ 28,465 387,399 852,820
Other........................................... 28,079 178,357 319,835
--------- --------- ---------
$330,728 $1,744,442 $3,358,118
========= ========= =========
</TABLE>
11. STOCKHOLDERS' DEFICIT
At formation date, the Company issued an aggregate of 3,500,000 shares of
common stock at $.10 per share to four investment partnerships (the "principal
stockholders"); Foster Management Company is the management company for each of
the partnerships.
During the year ended December 31, 1996 and for the period from January 1,
1997 to June 30, 1997, the Company issued 12,500 and 43,642 shares respectively
of common stock in connection with acquisitions. (See Note 13 for mandatorily
redeemable common stock issued.)
Subsequent to June 30, 1997, 651,950 shares of the Company's common stock
were issued with a fair value of $3,060,994 in connection with business
acquisitions, and 45,000 options were granted under the Company's stock option
plan which became effective October 1, 1997 (see Note 14).
F-20
<PAGE> 88
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
It is the Company's policy to record common stock at its fair value on the
date of issuance. Fair value is determined by management with the assistance of
consulting independent appraisers. In 1996, 177,500 shares were issued to
employees at less than fair value. The difference between the fair value and the
issue price is being amortized to compensation expense over the vesting period
of the related shares.
12. MANDATORILY REDEEMABLE PREFERRED STOCK
The Company's principal stockholders are the sole owners of all of the
outstanding $.01 par value 8% cumulative mandatorily redeemable preferred stock
("Preferred Stock").
The Preferred Stock accumulates dividends at $8.00 per share on an annual
basis, and is mandatorily redeemable for cash at $100 per share (the price paid
at date of issuance) plus accumulated dividends at the earlier of December 31,
1998 or at any time the common stock of the Company is sold in a public
offering. Accrued dividends at December 31, 1995, 1996, and at June 30, 1997
totaled $16,000, $80,000 and $112,000, respectively.
13. MANDATORILY REDEEMABLE COMMON STOCK
In connection with certain acquisitions, the Company issued 174,677 shares
of common stock in 1997 pursuant to agreements giving the holders the right to
put the shares to the Company at prices which vary from $11-$16 per share. The
puts are rendered inoperative if the Company executes an initial public offering
of the Company's common stock prior to two to five years from the dates of the
respective acquisitions.
The mandatorily redeemable common stock was recorded at the fair value as
determined by management with the assistance of an independent appraiser at the
dates of issuance. The excess of the respective put prices over the carrying
values are being accreted by periodic charges to additional paid-in capital, or
retained earnings as appropriate, over a two to five year period. As of June 30,
1997, 174,677 shares of mandatorily redeemable common stock are outstanding.
During the period from January 1, 1997 to June 30, 1997, the Company recorded
$153,541 of accretion to additional paid-in capital.
14. EMPLOYEE BENEFITS
401(k) Plan
Effective February 1, 1997, the Company sponsors a 401(k) plan which
permits participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. Employees may contribute up to 15%
of pretax income, subject to statutory limitations; this plan does not provide
for Company matching contributions.
Stock Option Plan
Effective October 1, 1997, the Company approved a stock option plan for key
employees and directors. The plan authorizes the grant of up to 600,000 shares
of the Company's common stock in the form of stock options. Grant prices are
determined by the Company and are established at or above the fair market value
of the Company's common stock at the date of grant.
On November 19, 1997, the Board of Directors approved the 1997 Employee
Stock Purchase Plan ("ESPP"), which becomes effective January 1, 1998. The ESPP
allows eligible employees the right to purchase common stock on a semiannual
basis at the lower of 85% of the market price at the beginning or end of each
six-month offering period. The Company has committed up to 350,000 shares to the
Plan, which operates on a calendar basis.
15. RELATED PARTY TRANSACTIONS
The Company paid management fees of $5,000, $40,000 and $20,000 to Foster
Management Company and its affiliates during the period from September 19, 1995
to December 31, 1995, for the year ended December 31, 1996, and the period from
January 1, 1997 to June 30, 1997, respectively. Additionally, the Company
reimbursed Foster Management Company $209,455 in 1995, $72,683 in 1996 and
$21,599 for the
F-21
<PAGE> 89
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period from January 1, 1997 to June 30, 1997 for outside professional service
and other fees and expenses incurred on its behalf.
Commencing December 1996, the Company leased space from an affiliated
entity. The rent expense under lease is equal to the amount paid by the
affiliated party under the leasehold agreement and was $5,281 for 1996 and
$31,686 for the period from January 1, 1997 to June 30, 1997. In addition,
starting in 1996, the Company entered into various space and equipment lease
agreements with former owners of acquired businesses; such leases are at fair
market value. In 1996, the Company paid $329,223 and $95,612, respectively,
under these agreements. For the period from January 1, 1997 to June 30, 1997,
the Company paid $223,080 for space lease agreements and $34,488 for equipment
lease agreements.
The Company has agreed to pay Foster Management a fee of $750,000 for its
assistance in effecting the initial public offering of the Company's common
stock, contingent upon the completion of such public offering. The payments
relate to services performed by Foster Management Company relating to this
offering, including: (1) financial and strategic planning and advice; (2)
assistance in the preparation and drafting of the registration statement filed
by the Company; (3) preparation of material for the marketing (road show) of the
offering; and (4) assistance with establishing relationships between the Company
and the investment banking community, financial press and related public
relations.
16. COMMITMENTS AND CONTINGENCIES
Contingent Consideration in Business Acquisitions
In connection with certain acquisitions (see Note 4), the Company has
entered into contractual arrangements whereby shares of Company stock, notes
payable and cash may be issued to former owners of acquired businesses upon
attainment of specified financial criteria over periods of 1 - 3 years as set
forth in the respective agreements. The amount of the shares, notes and cash to
be issued cannot be fully determined until the periods expire and the attainment
of criteria is established. If the criteria are attained, but not exceeded, the
amount of shares and notes which could be issued and cash which could be paid
under all agreements executed prior to June 30, 1997 is 160,559 shares,
$1,980,000, and $1,850,021, respectively. If the maximum targets were achieved,
the amount of shares and notes which could be issued and cash which could be
paid under agreements executed prior to June 30, 1997 is 163,059 shares,
$1,980,000 and $1,850,021, respectively. The Company accounts for this
additional consideration, when the specified financial criteria are achieved and
it is probable it will be paid, as additional purchase price for the related
acquisitions.
Contracts
The Company's practices participate in agreements with corporations and
managed care organizations to provide certain dental services under capitation
contracts to members of a group at a fixed rate per-member, per-month,
regardless of the actual services performed, and certain other dental services
as defined in the contract in accordance with an agreed upon fee schedule.
During the period from September 19, 1995 (inception) through December 31, 1995,
the year ended December 31, 1996 and for the period from January 1, 1997 to June
30, 1997, approximately 30%, 20%, and 22% respectively, of the Company's net
revenues were derived from capitation contracts. Revenues under these contracts
are recorded in the month fees are earned. The cost of services provided under
capitation contracts are expensed in the month incurred. The scope of the
services provided under the capitation contracts are provided by or within the
Company, therefore related costs are captured within the normal operating cycle
of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
F-22
<PAGE> 90
VALLEY FORGE DENTAL ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
17. PRO FORMA BALANCE SHEET (UNAUDITED)
The pro forma balance sheet as of September 30, 1997 represents the pro
forma effect of the conversion of the Company's mandatorily redeemable common
stock into 174,667 shares of common stock as of that date. As disclosed in Note
13, the mandatorily redeemable common stock is automatically convertible in the
event of an initial public offering of the Company's common stock.
18. SUBSEQUENT EVENTS
The Company plans to file a registration statement with the Securities and
Exchange Commission to register the sale of shares of its common stock. The
Company intends to use a portion of the net proceeds of the offering to retire
certain indebtedness of the Company and to redeem preferred stock of the
Company. Any remaining net proceeds will be used to finance future acquisitions
and internal growth.
F-23
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To Owners of Penn Dental Associates, P.C.,
Stafford Dental Associates,
Gallows Dental Group,
Hallmark Dental Group
and Alexandria Dental Centre
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and changes in owners' equity and of cash
flows present fairly, in all material respects, the financial position of Penn
Dental Associates, P.C., Stafford Dental Associates, Gallows Dental Group,
Hallmark Dental Group and Alexandria Dental Centre (collectively "MT Associates"
or the "Company") at December 31, 1994 and September 19, 1995 and the results of
their operations and their cash flows for the year ended December 31, 1994 and
for the period from January 1, 1995 to September 19, 1995, 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.
PRICE WATERHOUSE LLP
Philadelphia, PA
October 14, 1997
F-24
<PAGE> 92
MT ASSOCIATES
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................ $ 47,509 $ 139,133
Accounts receivable, net......................................... 268,376 186,691
Prepaid expenses and other current assets........................ 4,605 5,377
-------- --------
Total current assets..................................... 320,490 331,201
Equipment and leasehold improvements, net.......................... 432,085 412,019
-------- --------
$752,575 $ 743,220
======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Current portion of long-term debt................................ $ 17,273 $ 18,962
Current portion of obligations under capital lease............... 71,635 73,349
Accounts payable................................................. 41,051 29,679
Accrued expenses and other current liabilities................... 156,256 197,967
-------- --------
Total current liabilities................................ 286,215 319,957
Long-term debt..................................................... 69,011 54,571
Obligations under capital lease.................................... 239,767 225,670
-------- --------
Total liabilities........................................ 594,993 600,198
-------- --------
Owners' equity..................................................... 157,582 143,022
-------- --------
$752,575 $ 743,220
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 93
MT ASSOCIATES
COMBINED STATEMENT OF OPERATIONS AND CHANGES IN OWNERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED JANUARY 1 TO
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ --------------
<S> <C> <C>
Net revenues...................................................... $1,878,124 $2,050,782
Cost of revenues.................................................. 1,261,085 1,514,930
Selling and administrative expenses............................... 470,123 412,548
Depreciation and amortization..................................... 46,899 77,571
---------- ----------
Income from operations............................................ 100,017 45,733
Non-operating expenses:
Interest expense................................................ (24,753) (32,491)
---------- ----------
Income before income taxes........................................ 75,264 13,242
Income taxes...................................................... (9,945) (5,220)
---------- ----------
Net income.............................................. 65,319 8,022
Owners' equity, beginning of period............................... 104,723 157,582
Distribution to owners............................................ (12,460) (22,582)
---------- ----------
Owners' equity, end of period..................................... $ 157,582 $ 143,022
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 94
MT ASSOCIATES
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED JANUARY 1 TO
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 65,319 $ 8,022
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 46,899 77,571
Provision for doubtful accounts............................... 34,961 5,387
Change in assets and liabilities
Accounts receivable........................................... (116,209) 76,298
Prepaid expenses and other current assets..................... 18,666 (771)
Accounts payable.............................................. 9,868 (11,372)
Accrued expenses and other current liabilities................ 53,811 41,711
--------- --------
Net cash provided by operating activities................ 113,315 196,846
--------- --------
Cash flows from investing activities:
Equipment and leasehold improvements............................. (138,502) (24,356)
--------- --------
Net cash used in investing activities.................... (138,502) (24,356)
--------- --------
Cash flows from financing activities:
Borrowings of long-term debt..................................... 100,337 --
Principal payments on capital leases............................. (21,829) (45,533)
Principal payments on long-term debt............................. (14,053) (12,751)
Distributions to owners.......................................... (12,460) (22,582)
--------- --------
Net cash provided by (used in) financing activities...... 51,995 (80,866)
--------- --------
Net increase in cash and cash equivalents........................ 26,808 91,624
Cash and cash equivalents at beginning of period................. 20,701 47,509
--------- --------
Cash and cash equivalents at end of period....................... $ 47,509 $139,133
========= ========
Supplemental disclosure of cash flow information:
Interest paid.................................................... $ 24,753 $ 32,491
========= ========
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligations entered............................. $ 321,384 $ 33,150
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 95
MT ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND SEPTEMBER 19, 1995
1. ORGANIZATION AND OPERATIONS
MT Associates (the "Company") provides general dental care and related
services in the Philadelphia, Pennsylvania and Northern Virginia areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements
These financial statements represent the combined financial statements of
the following affiliated companies:
Penn Dental Associates, P.C. ("Penn Dental"),
Stafford Dental Associates,
Gallows Dental Group,
Hallmark Dental Group, and
Alexandria Dental Centre (collectively, the "Virginia Practices")
Because the affiliated companies were acquired as a group by Valley Forge
Dental Associates, Inc. (see Note 13), and the acquisition of each company was
conditioned upon the acquisition of all the companies, the financial statements
of the affiliated companies have been presented on a combined basis. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 12).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
F-28
<PAGE> 96
MT ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived and Intangible Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, the
carrying value of long-lived assets and certain identifiable intangible assets
are evaluated whenever changes in circumstances indicate the carrying amount of
such assets may not be recoverable. In performing such review for
recoverability, the Company compares the expected future undiscounted cash flows
to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
practice office.
Income Taxes
Penn Dental accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
Fair Value of Financial Instruments
Recorded balances of financial instruments at December 31, 1994 and
September 19, 1995 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ -------------
<S> <C> <C>
Accounts receivable, net of contractual allowances of
$16,148 and $13,112 at December 31, 1994, and September
19, 1995, respectively................................... $297,290 $ 210,812
Less: Allowance for doubtful accounts...................... (28,914) (24,121)
-------- --------
$268,376 $ 186,691
======== ========
</TABLE>
The Company's services are reimbursed directly by both patients and by
third party payors, including managed care organizations and commercial
insurance companies. Third party reimbursements are primarily billed at
estimated amounts realizable based upon contractually determined rates. In
instances where "usual, customary and reasonable" market rates are billed, gross
billings are adjusted for contractual allowances to reflect estimated amounts
realizable from third party payors. The allowance for doubtful accounts is
estimated based on an ongoing review of collectibility.
F-29
<PAGE> 97
MT ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ -------------
<S> <C> <C>
Dental and office equipment, furniture and
fixtures......................................... $487,758 $ 540,913
Leasehold improvements............................. -- 4,350
Less: Accumulated depreciation and amortization.... (55,673) (133,244)
-------- --------
$432,085 $ 412,019
======== ========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 5), for the year ended December 31, 1994 and
for the period from September 1, 1995 to September 19, 1995 totaled $46,899 and
$77,571, respectively.
5. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from 3 to 5 years.
Equipment under capital leases at cost and related accumulated amortization
included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ -------------
<S> <C> <C>
Dental and office equipment........................ $333,381 $ 366,531
Less: Accumulated amortization..................... (28,265) (90,981)
-------- --------
Equipment under capital leases..................... $305,116 $ 275,550
======== ========
</TABLE>
Amortization of equipment under capital leases for the year ended December
31, 1994 and for the period from September 1, 1995 to September 19, 1995 totaled
$28,100 and $62,716, respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1995 (September 20 through December 31)........................... $ 28,619
1996.............................................................. 98,573
1997.............................................................. 98,573
1998.............................................................. 91,264
1999.............................................................. 50,348
--------
367,377
Less: Amount representing interest................................ (68,358)
--------
Present value of minimum lease payments........................... 299,019
Less: Current portion............................................. (73,349)
--------
$225,670
========
</TABLE>
The Company maintains leases for all of its dental offices and for certain
of its equipment which are accounted for as operating leases. The office lease
terms range from one to ten years, while the equipment terms range from one to
four years.
F-30
<PAGE> 98
MT ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1995 (September 20 through December 31).......................... $ 35,180
1996............................................................. 129,207
1997............................................................. 134,151
1998............................................................. 139,288
1999............................................................. 144,626
Thereafter....................................................... 667,404
----------
$1,249,856
==========
</TABLE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $82,863 and $88,190, was incurred during the year ended
December 31, 1994 and for the period from September 1, 1995 to September 19,
1995, respectively.
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ -------------
<S> <C> <C>
11% notes payable, secured by equipment, payable
through 1999..................................... $ 86,284 $ 73,533
Less: Current portion.............................. (17,273) (18,962)
------- -------
$ 69,011 $ 54,571
======= =======
</TABLE>
Scheduled maturities of long-term debt, other than related party debt,
outstanding as of September 19, 1995 are as follows:
<TABLE>
<S> <C>
1995 (September 20 through December 31)............................ $ 4,522
1996............................................................... 19,560
1997............................................................... 22,150
1998............................................................... 25,084
1999............................................................... 2,217
Thereafter......................................................... --
-------
$73,533
=======
</TABLE>
F-31
<PAGE> 99
MT ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the income tax expense for the year ended December 31,
1994 and the period ended September 19, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1995 TO
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ ------------------
<S> <C> <C>
Current:
Federal......................................... $7,754 $4,070
State........................................... 2,191 1,150
Deferred:
Federal......................................... -- --
State........................................... -- --
------ ------
$9,945 $5,220
====== ======
</TABLE>
The reconciliation of the Federal statutory income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1995
DECEMBER 31, 1994 TO SEPTEMBER 19, 1995
----------------- ---------------------
<S> <C> <C>
Statutory income tax rate.................................. (34)% (34)%
Income attributable to companies not subject to Federal and
state taxes.............................................. 24 35
State taxes................................................ (3) (14)
--- ---
(13)% (13)%
=== ===
</TABLE>
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 19,
1994 1995
------------ -------------
<S> <C> <C>
Accrued profit sharing contributions............... $ 32,504 $ 29,947
Salaries and payroll taxes......................... 29,733 71,420
Professional service fees.......................... 21,168 27,130
Interest........................................... 15,620 14,980
Income taxes....................................... 9,945 5,220
Other.............................................. 47,286 49,270
-------- --------
$156,256 $ 197,967
======== ========
</TABLE>
9. OWNERS' EQUITY
As stated in Note 2, these financial statements reflect the combined
financial statements of several practices. A summary of the ownership
characteristics of these practices follow:
Penn Dental Associates has 1,000 shares of $1 Par common stock authorized,
issued and outstanding, and capital in excess of Par is $10,793 for all periods
presented. Retained earnings are $21,955 at December 31, 1994, $19,594 at
September 19, 1995, respectively.
Stafford Dental Associates, Gallows Dental Group, Hallmark Dental Group and
Alexandria Dental Centre have a combined owners equity of $123,834 at December
31, 1994 and $111,635 at September 30, 1995, respectively.
F-32
<PAGE> 100
MT ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Virginia practices paid management fees of $83,959 and $215,915 to Star
Management Company, owned by one of the shareholders of the practices, for the
year ended December 31, 1994 and for the period from January 1, 1995 to
September 19, 1995, respectively.
11. EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a profit sharing plan for employees of the Penn
Dental practice intended to qualify for tax-exempt status under Section 401(a)
of the Internal Revenue Code. Substantially all full-time employees of the Penn
Dental practice over 21 years of age with two years of service who are employed
on the last day of the Plan year are eligible for participation in the Plan.
Contributions by the Company are discretionary and subject to profitability
requirements. Charges to operations for contributions to the Plan were $32,504
and $29,947 in 1994 and for the period from January 1, 1995 to September 19,
1995, respectively.
12. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1994 and for the period from January 1, 1995
to September 19, 1995, approximately 20% and 23%, respectively, of the Company's
net revenues were derived from fixed rate per-member per-month contracts.
Revenues under these contracts are recorded in the month fees are earned. The
cost of services provided under capitation contracts are expensed in the month
incurred. The scope of the services provided under the capitation contracts are
provided by or within the Company, therefore related costs are captured within
the normal operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
13. SUBSEQUENT EVENTS
Effective September 19, 1995, the Company was acquired by Valley Forge
Dental Associates, Inc., a Delaware Corporation.
F-33
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Donald L. Kane, D.D.S., P.A. and UDG, Melborne, P.A.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and of changes in stockholders' (deficit)
equity and of cash flows present fairly, in all material respects, the financial
position of Donald L. Kane, D.D.S., P.A. and UDG, Melborne, P.A. (collectively,
"United Dental Group" or the "Company") at December 31, 1994 and 1995 and the
results of operations and their cash flows for the years then ended, 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.
PRICE WATERHOUSE LLP
Philadelphia, PA
June 23, 1997
F-34
<PAGE> 102
UNITED DENTAL GROUP
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................... $102,238 $ 53,732
Accounts receivable, net........................................... 242,161 283,645
Prepaid expenses and other current assets.......................... 5,587 5,587
-------- --------
Total current assets....................................... 349,986 342,964
Property and equipment, net.......................................... 208,463 246,334
Due from stockholder................................................. -- 123,261
-------- --------
$558,449 $712,559
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Current portion of long-term debt, including amounts due
related parties of $143,306 and $110,572 at December 31, 1994
and 1995 respectively........................................... $164,965 $141,052
Current portion of obligations under capital lease................. 46,304 54,167
Accounts payable................................................... 69,526 70,621
Accrued expenses and other current liabilities..................... 213,238 245,973
-------- --------
Total current liabilities.................................. 494,033 511,813
Long-term debt....................................................... -- 109,748
Obligations under capital lease...................................... 85,513 42,540
-------- --------
Total liabilities.......................................... 85,513 152,288
-------- --------
Stockholders' (deficit) equity....................................... (21,097) 48,458
-------- --------
Total liabilities and stockholders' (deficit) equity....... $558,449 $712,559
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 103
UNITED DENTAL GROUP
COMBINED STATEMENT OF OPERATIONS AND CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1994 1995
---------- ----------
<S> <C> <C>
Net revenues...................................................... $3,087,104 $3,685,374
Cost of revenues.................................................. 2,607,202 2,972,657
Selling and administrative expenses............................... 398,944 563,806
Depreciation and amortization..................................... 73,119 86,129
-------- --------
Income from operations............................................ 7,839 62,782
Non-operating expenses:
Interest expense................................................ 30,840 32,354
-------- --------
Net (loss) income................................................. (23,001) 30,428
-------- --------
Receipt of stock subscription..................................... 51,056 39,127
Stockholders' (deficit) equity, beginning of year................. (49,152) (21,097)
-------- --------
Stockholders' (deficit) equity, end of year....................... $ (21,097) $ 48,458
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 104
UNITED DENTAL GROUP
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1994 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................................... $(23,001) $ 30,428
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization.................................... 73,119 86,129
Provision for doubtful accounts.................................. 18,290 27,211
Change in assets and liabilities:
Accounts receivable.............................................. 19,864 (68,695)
Prepaid expenses and other assets................................ -- (123,261)
Accounts payable................................................. 817 1,095
Accrued expenses and other current liabilities................... 34,741 32,735
-------- ---------
Net cash provided by (used in) operating activities......... 123,830 (14,358)
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment................................. (33,418) (68,352)
-------- ---------
Net cash used in investing activities....................... (33,418) (68,352)
-------- ---------
Cash flows from financing activities:
Borrowings of long-term debt........................................ -- 149,274
Principal payments on long-term debt................................ (76,229) (106,939)
Principal payments on capital lease obligations..................... (40,042) (47,258)
Receipt of stock subscription receivable............................ 51,056 39,127
-------- ---------
Net cash (used in) provided by financing activities......... (65,215) 34,204
-------- ---------
Net increase (decrease) in cash and cash equivalents................ 25,197 (48,506)
Cash and cash equivalents at beginning of period.................... 77,041 102,238
-------- ---------
Cash and cash equivalents at end of period.......................... $102,238 $ 53,732
======== =========
Supplemental disclosure of cash flow information:
Interest paid....................................................... $ 30,840 $ 32,254
======== =========
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations entered................................ $ 70,281 $ 12,148
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 105
UNITED DENTAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND OPERATIONS
United Dental Group (the "Company") provides general dental care and
related services in the Orlando, Florida area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements
These financial statements represent the combined financial statements of
the following affiliated companies:
Donald L. Kane, D.D.S., P.A.
UDG, Melborne, P.A.
Because the affiliated companies were acquired as a group by Valley Forge
Dental Associates, Inc. (see Note 12), and the acquisition of each company was
conditioned upon the acquisition of all the companies, the financial statements
of the affiliated companies have been presented on a combined basis. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 11).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
F-38
<PAGE> 106
UNITED DENTAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, the
carrying value of long-lived assets are evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such review for recoverability, the Company compares
the expected future undiscounted cash flows to the carrying value of long-lived
assets.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
office.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. As such, all income or loss of the Company accrues directly to its
stockholders. Accordingly, no provision for income taxes has been made in these
financial statements.
Fair Value of Financial Instruments
Recorded balances of financial instruments at December 31, 1994 and 1995
approximate estimated fair values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Accounts receivable, net of contractual allowances of $33,000
and $36,699 at December 31, 1994 and 1995, respectively.... $ 361,508 $ 406,445
Less: Allowance for doubtful accounts........................ (119,347) (122,800)
-------- --------
$ 242,161 $ 283,645
======== ========
</TABLE>
The Company's services are reimbursed directly by both patients and by
third party payors, including managed care organizations and commercial
insurance companies. Third party reimbursements are primarily billed at
estimated amounts realizable based upon contractually determined rates. In
instances where "usual, customary and reasonable" market rates are billed, gross
billings are adjusted for contractual allowances to reflect estimated amounts
realizable from third party payors. The allowance for doubtful accounts is
estimated based on an ongoing review of collectibility.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Office furniture and dental equipment, including equipment
under capital lease of $214,984 in 1994 and $226,984 in
1995....................................................... $ 416,362 $ 529,857
Leasehold improvements....................................... 43,414 53,919
Less: Accumulated depreciation and amortization.............. (251,313) (337,442)
--------- ---------
$ 208,463 $ 246,334
========= =========
</TABLE>
F-39
<PAGE> 107
UNITED DENTAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense for the years ended December 31, 1994
and 1995, including amounts related to equipment under capital lease, totaled
$73,119 and $86,129, respectively.
5. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from 5 to 7 years.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
-------- ---------
<S> <C> <C>
Dental and office equipment................................... $214,984 $ 226,984
Less: Accumulated amortization................................ (93,535) (142,794)
-------- --------
Equipment under capital leases................................ $121,449 $ 84,190
======== ========
</TABLE>
Amortization of equipment under capital leases for the years ended December
31, 1994 and 1995 totaled $41,735 and $49,259, respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 66,459
1997.............................................................. 24,476
1998.............................................................. 20,339
1999.............................................................. 9,019
--------
120,293
Less: Amount representing interest................................ (23,586)
--------
Present value of minimum lease payments........................... 96,707
Less: Current portion............................................. (54,167)
--------
$ 42,540
========
</TABLE>
The Company leases all of its dental office space from an affiliated
entity; these leases are considered to be at fair market value and are accounted
for as operating leases. The office leases do not have stated terms.
During the years ended December 31, 1994 and 1995, rent expense of $117,600
and $121,200, respectively, was incurred.
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Notes payable to related party................................. $125,806 $110,572
Notes payable to principal stockholder......................... 17,500 --
8.00% - 12.25% notes payable, collateralized by equipment,
payable through 2000......................................... 6,827 127,124
Borrowings under $25,000 line of credit unsecured; interest
accrues at prime plus 3%..................................... 14,832 13,104
-------- --------
164,965 250,800
Less: Current portion.......................................... -- (141,052)
-------- --------
$164,965 $109,748
======== ========
</TABLE>
F-40
<PAGE> 108
UNITED DENTAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The note payable to principal stockholder and the related party note
payable relate to funds borrowed for operational and general corporate purposes.
The loans do not have stated repayment terms, interest rates, or maturity dates.
Scheduled maturities of long-term debt outstanding as of December 31, 1995
are as follows:
<TABLE>
<S> <C>
Debt with no scheduled repayment terms............................ $110,572
1996.............................................................. 30,480
1997.............................................................. 30,720
1998.............................................................. 31,080
1999.............................................................. 31,560
2000.............................................................. 16,388
--------
$250,800
========
</TABLE>
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Salaries and payroll taxes............................. $114,486 $135,769
Balances due to patients............................... 47,000 51,000
Unearned revenue....................................... 18,920 17,880
Other.................................................. 32,832 41,324
-------- --------
$213,238 $245,973
======== ========
</TABLE>
8. STOCKHOLDERS (DEFICIT) EQUITY
Donald L. Kane, D.D.S., P.A. and UDG, Melbourne, P.A., combined, have
10,000 shares of $1 Common Stock authorized, issued and outstanding and paid-in
capital in excess of par of $107,218 for all periods presented. Stock
Subscriptions received were $51,056 in 1994 and $39,127 in 1995. Accumulated
deficit is $99,188 at December 31, 1994 and $68,760 at December 31, 1993.
9. RELATED PARTY TRANSACTIONS
One of the Company's practices contracts with a dental lab owned by an
affiliated party. During 1994 and 1995, the Company paid $303,044, and $338,707
to the affiliated party for dental lab fees.
From time to time, the stockholder borrows funds from the Company interest
free. The balance owed by the stockholder at December 31, 1995 is $123,261 and
is included in the accompanying balance sheet.
10. EMPLOYEE BENEFITS
Retirement Plan
On January 1, 1995, the Company established a defined contribution 401(k)
plan covering substantially all of its employees. In general, eligible employees
may contribute up to 15% of their compensation to this plan. Employee
contributions are matched at a rate of 50% up to 4% of an employee's
compensation, and Company matching contributions were $18,285 in 1995.
F-41
<PAGE> 109
UNITED DENTAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1994 and 1995, approximately 21% and 24%,
respectively, of the Company's net revenues were derived from fixed rate
per-member per-month contracts. Revenues under these contracts are recorded in
the month fees are earned. The cost of services provided under capitation
contracts are expensed in the month incurred. The scope of the services provided
under the capitation contracts are provided by or within the Company, therefore
related costs are captured within the normal operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
12. SUBSEQUENT EVENTS
Effective January 1, 1996, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-42
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Western Dental Group
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholder's (deficit)
equity and of cash flows present fairly, in all material respects, the financial
position of Western Dental Group (the "Company") at December 31, 1995 and 1996
and the results of its operations and its cash flows for the three years in the
period ended December 31, 1996 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.
PRICE WATERHOUSE LLP
Philadelphia, PA
September 17, 1997
F-43
<PAGE> 111
WESTERN DENTAL GROUP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................... $ 23,688 $ 17,113
Accounts receivable, net........................................... 191,985 256,468
Prepaid expenses and other current assets, including due from
related party of $22,657 and $6,856 at December 31, 1995 and
1996, respectively.............................................. 29,473 13,674
-------- --------
Total current assets....................................... 245,146 287,255
Property and equipment, net.......................................... 176,667 192,627
Other assets......................................................... 34,800 33,600
-------- --------
$456,613 $513,482
======== ========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities
Current portion of long-term debt.................................. $ 93,114 $121,017
Current portion of obligations under capital lease................. 18,755 24,924
Accounts payable................................................... 57,111 154,313
Accrued expenses and other current liabilities..................... 148,958 146,283
-------- --------
Total current liabilities.................................. 317,938 446,537
Long-term debt....................................................... 104,970 79,901
Obligations under capital lease...................................... 33,311 24,458
-------- --------
Total liabilities.......................................... 456,219 550,896
-------- --------
Stockholder's (deficit) equity
Common stock, no par value 200,000 shares authorized, 40,000 shares
issued and outstanding at December 31, 1995 and 1996............ 5,265 5,265
Accumulated deficit................................................ (4,871) (42,679)
-------- --------
Total stockholder's (deficit) equity............................... 394 (37,414)
-------- --------
$456,613 $513,482
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 112
WESTERN DENTAL GROUP
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues........................................... $2,362,369 $2,499,030 $2,690,534
Cost of revenues....................................... 1,529,069 1,659,422 1,814,842
Selling and administrative expenses.................... 419,693 415,705 657,522
Depreciation and amortization.......................... 33,583 48,560 34,995
---------- ---------- ----------
Income from operations................................. 380,024 375,343 183,175
Non-operating expenses:
Interest expense -- related parties.................. (12,348) (11,534) (10,482)
Interest expense -- other............................ (18,524) (12,264) (11,294)
---------- ---------- ----------
Net income............................................. $ 349,152 $ 351,545 $ 161,399
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 113
WESTERN DENTAL GROUP
STATEMENT OF CHANGES IN STOCKHOLDER'S (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1994......................... 40,000 $5,265 $ 33,738 $ 39,003
Net income....................................... 349,152 349,152
Distributions to owner........................... (449,707) (449,707)
------ ------ --------- ---------
Balance, December 31, 1994....................... 40,000 5,265 (66,817) (61,552)
Net income....................................... 351,545 351,545
Distributions to owner........................... (289,599) (289,599)
------ ------ --------- ---------
Balance, December 31, 1995....................... 40,000 5,265 (4,871) 394
Net income....................................... 161,399 161,399
Distributions to owner........................... (199,207) (199,207)
------ ------ --------- ---------
Balance, December 31, 1996....................... 40,000 $5,265 $ (42,679) $ (37,414)
====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 114
WESTERN DENTAL GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 349,152 $ 351,545 $ 161,399
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization...................... 33,583 48,560 34,995
Provision for doubtful accounts.................... 50,245 46,520 40,125
Change in assets and liabilities:
Accounts receivable................................ (101,941) (56,551) (104,608)
Prepaid expenses and other assets.................. (24,235) 743 16,999
Accounts payable................................... (27,087) 10,879 97,202
Accrued expenses and other current liabilities..... 44,618 (10,403) (2,675)
--------- --------- ---------
Net cash provided by operating activities..... 324,335 391,293 243,437
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment................... (50,197) (44,887) (36,079)
--------- --------- ---------
Net cash used in investing activities......... (50,197) (44,887) (36,079)
--------- --------- ---------
Cash flows from financing activities:
Borrowings of long-term debt.......................... 206,440 38,636 31,946
Principal payments on long-term debt.................. (25,240) (57,726) (29,112)
Principal payments on capital leases.................. (15,500) (19,157) (17,560)
Distributions to owner................................ (449,707) (289,599) (199,207)
--------- --------- ---------
Net cash used in financing activities......... (284,007) (327,846) (213,933)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents........................................ (9,869) 18,560 (6,575)
Cash and cash equivalents at beginning of period...... 14,997 5,128 23,688
--------- --------- ---------
Cash and cash equivalents at end of period............ $ 5,128 $ 23,688 $ 17,113
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid......................................... $ 30,872 $ 23,798 $ 11,294
========= ========= =========
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations entered............. $ 7,690 $ 2,154 $ 14,876
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 115
WESTERN DENTAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. ORGANIZATION AND OPERATIONS
Western Dental Group (the "Company") provides general dental care and
related services in the Denver, Colorado area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 9).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived and Intangible Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ". Accordingly,
the carrying value of long-lived assets are evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such review for recoverability, the Company compares
the expected future undiscounted cash flows to the carrying value of long-lived
assets.
F-48
<PAGE> 116
WESTERN DENTAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
office.
Income Taxes
The Company has elected S corporation status with the Internal Revenue
Service. As such, all income or loss of the Company accrues directly to its
stockholder. Accordingly, no provision for income taxes has been made in these
financial statements.
Fair Value of Financial Instruments
Recorded balances of financial instruments at December 31, 1994, 1995 and
1996 approximate estimated fair values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
-------- --------
<S> <C> <C>
Accounts receivable, net of contractual allowances of $43,771
and $54,922 at December 31, 1995 and 1996, respectively...... $242,223 $323,027
Less: Allowance for doubtful accounts.......................... (50,238) (66,559)
-------- --------
$191,985 $256,468
======== ========
</TABLE>
The Company's services are reimbursed directly by both patients and by
third party payors, including managed care organizations and commercial
insurance companies. Patriot services are billed to third party payors at
estimated amounts realizable based upon contractually determined rates. In
instances where "usual, customary and reasonable" market rates differ from
contractually determined rates, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on historical experience and
an ongoing review of collectibility.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
--------- ---------
<S> <C> <C>
Equipment, furniture and fixtures and automobiles, including
equipment under capital lease.............................. $ 489,009 $ 566,312
Leasehold improvements....................................... 76,181 49,833
Less: Accumulated depreciation and amortization.............. (388,523) (423,518)
--------- ---------
$ 176,667 $ 192,627
========= =========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 5), for the years ended December 31, 1994,
1995 and 1996 totaled $33,583, $48,560 and $34,995, respectively.
F-49
<PAGE> 117
WESTERN DENTAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from 5 to 7 years.
Equipment under capital leases at cost and related accumulated amortization
included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
------- -------
<S> <C> <C>
Dental and office equipment....................................... $85,389 $93,474
Less: Accumulated amortization.................................... (49,308) (63,468)
------- -------
Equipment under capital leases.................................... $36,081 $30,006
======= =======
</TABLE>
Amortization of equipment under capital leases for the years ended December
31, 1994, 1995 and 1996 totaled $15,003, $16,778 and $14,160, respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1997............................................................... $27,828
1998............................................................... 22,047
1999............................................................... 3,977
2000............................................................... 1,394
2001............................................................... --
-------
55,246
Less: Amount representing interest................................. (5,864)
-------
Present value of minimum lease payments............................ 49,382
Less: Current portion.............................................. (24,924)
-------
$24,458
=======
</TABLE>
The Company maintains leases for office space and for certain of its
equipment which are accounted for as operating leases. The office lease terms
range from three to six years, while the equipment terms range from one to five
years.
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1997.............................................................. $122,737
1998.............................................................. 123,001
1999.............................................................. 100,911
2000.............................................................. 40,676
2001.............................................................. 17,571
Thereafter........................................................ 18,251
--------
$423,147
========
</TABLE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $110,094, $134,982, and $147,071, including related party
rents, respectively, was incurred during years ended December 31, 1994, 1995 and
1996, respectively. See Note 8 for related party lease arrangements.
F-50
<PAGE> 118
WESTERN DENTAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
-------- ---------
<S> <C> <C>
Borrowings under $50,000 line of credit, collateralized by all
assets of the Company; interest accrues at prime plus 2%...... $ 41,421 $ 50,000
Notes payable to related party, interest accrues at prime (8.5%
at December 31, 1994 and 1995 and 8.25% at December 31,
1996)......................................................... 130,335 133,207
6.4% - 11.75% notes payable, collateralized by equipment, paid
through 2000.................................................. 26,328 17,711
-------- --------
198,084 200,918
Less: Current portion........................................... (93,114) (121,017)
-------- --------
$104,970 $ 79,901
======== ========
</TABLE>
Scheduled maturities of long-term debt outstanding as of December 31, 1996
are as follows:
<TABLE>
<S> <C>
1997.............................................................. $121,017
1998.............................................................. 37,688
1999.............................................................. 27,343
2000.............................................................. 14,870
--------
$200,918
========
</TABLE>
The related party notes payable relate to payments to former owners in
connection with previously acquired businesses, and funds borrowed for
operational and general corporate purposes.
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
-------- --------
<S> <C> <C>
Balances due to patients....................................... $ 34,800 $ 47,437
Salaries and payroll taxes..................................... 22,014 31,730
Deferred revenues.............................................. 26,968 28,729
Other.......................................................... 65,176 38,387
-------- --------
$148,958 $146,283
======== ========
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company established a management company, Western Dental Management,
effective January 1, 1996. Western Dental Management is owned by the Company's
sole shareholder. For the year ended December 31, 1996, the Company paid
management fees of $173,917 to Western Dental Management which were recorded as
general and administrative expense.
The Company leases space from affiliated entities. The rent expense under
these leases is considered to be at fair market value and was $36,490, $43,896
and $59,721 for 1994, 1995 and 1996. Prior to January 1, 1996, no rent was
charged for one of the offices, which is owned by the Company's sole
shareholder.
The Company's contracts with a dental lab owned by the Company's sole
shareholder. During 1994, 1995 and 1996, the Company paid $39,286, $22,485 and
$115,162 for related party dental lab fees.
F-51
<PAGE> 119
WESTERN DENTAL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1994, 1995 and 1996, approximately 28%, 30%
and 28%, respectively, of the Company's net revenues were derived from fixed
rate per-member per-month contracts. Revenues under these contracts are recorded
in the month fees are earned. The cost of services provided under capitation
contracts are expensed in the month incurred. The scope of the services provided
under the capitation contracts are provided by or within the Company, therefore
related costs are captured within the normal operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
10. SUBSEQUENT EVENTS
Effective January 1, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-52
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Horizon Group International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Horizon Group International, Inc. and its subsidiary (the "Company") at December
31, 1994 and 1995 and at February 29, 1996 and the results of their operations
and their cash flows for the years ended December 31, 1994 and 1995 and for the
period from January 1, 1996 to February 29, 1996, 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.
PRICE WATERHOUSE LLP
Philadelphia, PA
September 23, 1997
F-53
<PAGE> 121
HORIZON GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,267 $ 10,821 $ 85,398
Accounts receivable, net.................................. 837,035 925,826 875,782
Prepaid expenses and other current assets................. 119,485 21,815 --
---------- ---------- ----------
Total current assets.............................. 957,787 958,462 961,180
Equipment and leasehold improvement, net.................... 244,793 320,283 307,389
Other assets................................................ 4,074 12,098 3,496
---------- ---------- ----------
$1,206,654 $1,290,843 $ 1,272,065
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt......................... $ 34,770 $ 33,853 $ 24,908
Accounts payable.......................................... 57,226 39,532 40,875
Income tax payable........................................ 33,709 8,009 1,000
Accrued expenses and other current liabilities............ 564,058 625,834 731,461
---------- ---------- ----------
Total current liabilities......................... 689,763 707,228 798,244
Long-term debt.............................................. 11,102 103,402 97,402
Deferred income taxes....................................... 4,155 8,310 12,465
---------- ---------- ----------
Total liabilities................................. 705,020 818,940 908,111
---------- ---------- ----------
Stockholders' equity
Preferred stock, $10,000 par value, 85 shares authorized;
81 shares issued....................................... 810,000 810,000 810,000
Common stock, no par value, 665 shares authorized; 562
shares issued.......................................... 39,850 39,850 39,850
Treasury stock, 442 shares at cost........................ (124,907) (124,907) (124,907)
Accumulated deficit....................................... (223,309) (253,040) (360,989)
---------- ---------- ----------
Total stockholders' equity........................ 501,634 471,903 363,954
---------- ---------- ----------
$1,206,654 $1,290,843 $ 1,272,065
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 122
HORIZON GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 1, 1996
DECEMBER 31, TO FEBRUARY 29,
1994 1995 1996
---------- ---------- ---------------
<S> <C> <C> <C>
Net revenues............................................ $5,455,732 $6,002,233 $ 1,187,984
Cost of revenues........................................ 3,283,111 3,797,228 759,130
Selling and administrative expenses..................... 2,003,703 2,141,080 517,669
Depreciation and amortization........................... 73,596 77,772 12,894
---------- ---------- ----------
Income (loss) from operations........................... 95,322 (13,847) (101,709)
Non-operating expenses:
Interest expense...................................... (8,273) (3,721) (1,086)
---------- ---------- ----------
Income (loss) before income taxes....................... 87,049 (17,568) (102,795)
Income tax expense...................................... (37,863) (12,163) (5,154)
---------- ---------- ----------
Net income (loss)............................. $ 49,186 $ (29,731) $ (107,949)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 123
HORIZON GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
PAR PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES VALUE SHARES VALUE SHARES VALUE DEFICIT TOTAL
------ ------- ------ -------- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994.... 120 $39,850 81 $810,000 442 $(124,907) $(272,495) $ 452,448
Net income.................. 49,186 49,186
--- ------- --- -------- --- --------- --------- --------
Balance, December 31,
1994...................... 120 39,850 81 810,000 442 (124,907) (223,309) 501,634
Net loss.................... (29,731) (29,731)
--- ------- --- -------- --- --------- --------- --------
Balance, December 31,
1995...................... 120 39,850 81 810,000 442 (124,907) (253,040) 471,903
Net loss.................... (107,949) (107,949)
--- ------- --- -------- --- --------- --------- --------
Balance, February 29,
1996...................... 120 $39,850 81 $810,000 442 $(124,907) $(360,989) $ 363,954
=== ======= === ======== === ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 124
HORIZON GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
JANUARY
FOR THE YEARS 1, 1996
ENDED DECEMBER 31, TO
---------------------- FEBRUARY
1994 1995 29, 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 49,186 $ (29,731) $(107,949)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................ 73,596 77,772 12,894
Provision for doubtful accounts...................... 177,274 207,634 16,824
Loss on disposal of assets........................... 12,724 -- --
Deferred income taxes................................ 4,155 4,155 4,155
Increase (decrease) in accounts receivable........... (301,936) (296,425) 33,220
Decrease in prepaid expenses and other current
assets............................................. 17,133 89,646 30,417
(Decrease) increase in accounts payable.............. (9,547) (17,694) 1,343
Increase in accrued expenses and other current
liabilities........................................ 79,378 61,776 105,627
Increase in income taxes payable..................... (5,936) (25,700) (7,009)
--------- --------- ---------
Net cash provided by operating activities....... 96,027 71,433 89,522
--------- --------- ---------
Cash flows from investing activities:
Purchases of equipment.................................. (2,337) (153,262) --
--------- --------- ---------
Net cash used in investing activities........... (2,337) (153,262) --
--------- --------- ---------
Cash flows from financing activities:
Borrowings of long-term debt............................ -- 140,000 --
Principal payments on long-term debt.................... (93,279) (48,617) (14,945)
--------- --------- ---------
Net cash (used in) provided by financing
activities.................................... (93,279) 91,383 (14,945)
--------- --------- ---------
Net increase in cash and cash equivalents............... 411 9,554 74,577
Cash and cash equivalents at beginning of period........ 856 1,267 10,821
--------- --------- ---------
Cash and cash equivalents at end of period.............. $ 1,267 $ 10,821 $ 85,398
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 8,273 $ 3,721 $ 1,086
========= ========= =========
Income taxes paid....................................... $ -- $ 33,709 $ 8,008
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 125
HORIZON GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND FEBRUARY 29, 1996
1. ORGANIZATION AND OPERATIONS
Horizon Group International, Inc. (the "Company") provides general dental
care and related services in the Cleveland, Ohio area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the Company after
elimination of material intercompany balances and transactions including those
pertaining to Precise Dental Lab, a wholly-owned dental laboratory which
performs the majority of the Company's laboratory services.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 11).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Leasehold improvements are amortized
over the lesser of the lease term or the asset's estimated useful life.
Long-Lived Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, the
carrying value of long-lived assets are evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such review for recoverability, the Company compares
the expected future undiscounted cash flows to the carrying value of long-lived
assets.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their
F-58
<PAGE> 126
HORIZON GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated fair value. In estimating future cash flows for determining whether an
asset is impaired, and in measuring assets that are impaired, assets are grouped
by office.
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
Fair Value of Financial Instruments
Recorded balances of financial instruments at December 31, 1994 and 1995
and February 29, 1996 approximate estimated fair values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Accounts receivable, net of contractual
allowances of $279,012, $320,478 and
$307,875, at December 31, 1994 and 1995 and
February 29, 1996, respectively.............. $1,271,053 $1,459,956 $ 1,388,907
Less: Allowance for doubtful accounts.......... (434,018) (534,130) (513,125)
---------- ---------- ----------
$ 837,035 $ 925,826 $ 875,782
========== ========== ==========
</TABLE>
The Company's services are reimbursed directly by both patients and by
third party payors, including Medicaid, managed care organizations and
commercial insurance companies. Approximately 16%, 15% and 18% of the Company's
net revenues for the years ended December 31, 1994 and 1995 and for the period
from January 1, 1996 to February 29, 1996 were directly billed to the Medicaid
program which is subject to Federal and state regulation. Third party
reimbursements are primarily billed at estimated amounts realizable based upon
contractually determined rates. In instances where "usual, customary and
reasonable" market rates are billed, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectibility.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Dental equipment............................ $ 592,799 $ 602,472 $ 602,472
Furniture and fixtures, automobiles and
leasehold improvements.................... 737,310 748,711 746,697
Data processing and office equipment........ 258,714 165,266 165,266
----------- ----------- -----------
1,588,823 1,516,449 1,514,435
Less: Accumulated depreciation and
amortization.............................. (1,344,030) (1,196,166) (1,207,046)
----------- ----------- -----------
$ 244,793 $ 320,283 $ 307,389
=========== =========== ===========
</TABLE>
Depreciation and amortization expense, for the years ended December 31,
1994 and 1995 and for the period from January 1, 1996 to February 29, 1996
totaled $73,596, $77,772 and $12,894, respectively.
F-59
<PAGE> 127
HORIZON GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
7.50% - 9.0% notes payable, collateralized by
equipment and accounts receivable, payable
through 2000.................................... $ 21,648 $126,153 $122,310
Other notes payable, interest rates and due dates
vary............................................ 24,224 11,102 --
-------- -------- --------
45,872 137,255 122,310
Less: current portion............................. (34,770) (33,853) (24,908)
-------- -------- --------
$ 11,102 $103,402 $ 97,402
======== ======== ========
</TABLE>
Scheduled maturities of long-term debt, outstanding as of February 29, 1996
are as follows:
<TABLE>
<S> <C>
1996 (10 months).................................................. $ 18,908
1997.............................................................. 26,181
1998.............................................................. 28,625
1999.............................................................. 31,442
2000.............................................................. 17,154
--------
$122,310
========
</TABLE>
6. INCOME TAXES
The components of the income tax expense for the years ended December 31,
1994 and 1995 and for the period from January 1, 1996 to February 29, 1996 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1996
DECEMBER 31, TO FEBRUARY 29,
1994 1995 1996
------- ------- ---------------
<S> <C> <C> <C>
Current:
State........................................... $33,709 $ 8,009 $ 1,000
Deferred:
Federal......................................... 3,011 3,011 3,011
State........................................... 1,143 1,143 1,143
------- ------- ------
$37,863 $12,163 $ 5,154
======= ======= ======
</TABLE>
At December 31, 1994, a receivable of $119,485 related to a 1993 net
operating loss carryback was included in other current assets on the balance
sheet. This amount was received in 1995.
The reconciliation of the federal statutory income tax rate to the
effective income tax rate for the years ended December 31, 1994 and 1995 and for
the period from January 1, 1996 to February 29, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1996
DECEMBER 31, TO FEBRUARY 29,
1994 1995 1996
---- ---- ---------------
<S> <C> <C> <C>
Statutory income tax rate............................... 34% (34)% (34)%
Losses for which no income tax benefit is recognized.... -- 108 45
Nondeductible business expenses......................... 2 2 1
State taxes, net of Federal tax benefit................. 7 (7) (7)
--- --- ---
43% 69% 5%
=== === ===
</TABLE>
F-60
<PAGE> 128
HORIZON GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net deferred income tax assets and (liabilities) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1994 1995 1996
--------- --------- ------------
<S> <C> <C> <C>
Accruals and reserves not currently deductible for tax
purposes.............................................. $ 211,074 $ 222,143 $ 222,259
Net operating loss carryforwards........................ -- 6,522 53,154
-------- -------- --------
Gross deferred tax assets............................... 211,074 228,665 275,413
Valuation allowance..................................... (211,074) (228,665) (275,413)
-------- -------- --------
-- -- --
Gross deferred tax liabilities.......................... (4,155) (8,310) (12,465)
-------- -------- --------
Net deferred tax liabilities............................ $ (4,155) $ (8,310) $ (12,465)
======== ======== ========
</TABLE>
At February 29, 1996, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $128,000. Their use is limited to
future taxable earnings of the Company. The carryforwards expire in 2010. A
valuation allowance has been established against the benefit of the net
operating loss carryforwards and other deferred tax assets which the Company
does not believe are more likely than not to be realized.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
Balances due to patients.................................. $305,952 $368,278 $385,697
Salaries, payroll taxes and benefits...................... 215,795 216,937 108,202
Professional services fees................................ 23,320 22,242 162,875
Other..................................................... 18,991 18,377 74,687
-------- -------- --------
$564,058 $625,834 $731,461
======== ======== ========
</TABLE>
8. OPERATING LEASES
The Company has entered into various leases for office space accounted for
as operating leases. The office lease terms range from three to five years.
Future minimum annual rentals due under noncancelable operating leases in excess
of one year are as follows:
<TABLE>
<S> <C>
1996 (ten months)................................................. $ 38,590
1997.............................................................. 49,802
1998.............................................................. 52,375
1999.............................................................. 53,182
2000.............................................................. 34,944
Thereafter........................................................ 24,208
--------
$253,101
========
</TABLE>
The leases contain renewal options and escalation clauses which require
payments of additional rent to the extent of increases in related operating
costs.
Rent expense to unrelated parties of $46,564, $46,304 and $7,718,
respectively, was incurred during the years ended December 31, 1994 and 1995 and
for the period from January 1, 1996 to February 29, 1996, respectively. See Note
9 for related party lease arrangements.
F-61
<PAGE> 129
HORIZON GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company leases space from an affiliated entity at rates which
management believes approximate fair market value. Rent expense under these
leases was $213,996, $214,000 and $35,666 for 1994 and 1995 and for the period
from January 1, 1996 to February 29, 1996, respectively.
10. EMPLOYEE BENEFITS
The Company maintains a profit sharing plan intended to qualify for
tax-exempt status under Section 401(a) of the Internal Revenue Code.
Substantially all employees over 21 years of age with two years of service are
eligible for participation in the Plan. Contributions by the Company are
discretionary and subject to profitability requirements. Charges to operations
for contributions to the Plan were $20,000, in both 1994 and 1995. No
contributions were made to the plan during the period from January 1, 1996 to
February 29, 1996.
11. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During the years ended 1994 and 1995, and for the
period from January 1, 1996 to February 29, 1996, approximately 14.4%, 14.0% and
13.7%, respectively, of the Company's net revenues were derived from fixed rate
per-member per-month contracts. Revenues under these contracts are recorded in
the month fees are earned. The cost of services provided under capitation
contracts are expensed in the month incurred. The scope of the services provided
under the capitation contracts are provided by or within the Company, therefore
related costs are captured within the normal operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
12. SUBSEQUENT EVENTS
Effective March 1, 1996, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-62
<PAGE> 130
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors, Stockholders and Owners of
ENW, Inc., Dental Care Center and Virginia Avenue Dental Associates
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of changes in owners' equity and of cash
flows present fairly, in all material respects, the combined financial position
of ENW, Inc., Dental Care Center and Virginia Avenue Dental Associates
(collectively referred to as "ENW, Inc." or "the Company") at December 31, 1995
and 1996 and January 31, 1997 and the results of their operations and their cash
flows for the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to January 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
October 10, 1997
F-63
<PAGE> 131
ENW, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1995 1996 1997
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $ 6,173 $ 10,828 $ 37,450
Accounts receivable, net................................. 63,080 90,320 93,832
Prepaid expenses and other current assets................ -- 4,322 4,322
-------- -------- --------
Total current assets............................. 69,253 105,470 135,604
Equipment, net............................................. 367,165 443,255 436,589
Excess of cost over fair value of net assets acquired and
other intangible assets, net............................. 280,720 271,121 270,473
-------- -------- --------
$717,138 $819,846 $ 842,666
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Current portion of long-term debt including balances due
related parties -- See Note 8......................... $356,607 $270,974 $ 266,280
Current portion of obligations under capital lease....... 1,659 39,452 47,601
Accounts payable......................................... 26,723 10,446 40,447
Accrued expenses and other current liabilities........... 11,458 11,251 103,540
Book overdrafts.......................................... 47,785 92,349 10,314
-------- -------- --------
Total current liabilities........................ 444,232 424,472 468,182
Long-term debt including balances due related
parties -- See Note 8.................................... 91,116 117,680 111,166
Obligations under capital lease............................ 6,485 152,137 143,354
-------- -------- --------
Total liabilities................................ 541,833 694,289 722,702
Owners' equity............................................. 175,305 125,557 119,964
-------- -------- --------
$717,138 $819,846 $ 842,666
======== ======== ========
</TABLE>
The accompanying notes are an integral part of theses financial statements.
F-64
<PAGE> 132
ENW, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEARS ENDED JANUARY 1, 1997
DECEMBER 31, TO JANUARY 31,
1995 1996 1997
---------- ---------- ---------------
<S> <C> <C> <C>
Net revenues......................................... $1,821,619 $2,217,376 $ 233,566
Cost of revenues..................................... 1,166,043 1,479,973 153,959
Selling and administrative expenses.................. 361,189 480,726 89,077
Depreciation and amortization........................ 65,683 91,776 7,315
Loss on disposal of dental and office equipment (note
5)................................................. -- 115,524 --
---------- ---------- --------
Income (loss) from operations........................ 228,704 49,377 (16,785)
Non-operating expenses:
Interest expense................................... (8,728) (51,723) (4,132)
---------- ---------- --------
Net income (loss).................................... $ 219,976 $ (2,346) $ (20,917)
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 133
ENW, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
JANUARY 1, 1997
FOR THE YEARS ENDED TO
DECEMBER 31, JANUARY 31,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 219,976 $ (2,346) $ (20,917)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 65,683 91,776 7,315
Provision for doubtful accounts.................. 36,125 74,867 7,525
Loss on disposal of assets....................... -- 115,524 --
Change in assets and liabilities, net of effects
from businesses acquired:
Increase in accounts receivable.................. (40,814) (102,107) (11,037)
Decrease (increase) in prepaid expenses and other
current assets................................. 21,841 (4,322) --
Increase (decrease) in accounts payable.......... 4,663 (16,277) 30,001
Increase (decrease) in book overdrafts........... 17,260 44,564 (82,035)
Increase (decrease) in expenses and other current
liabilities.................................... 760 (207) 92,289
--------- --------- --------
Net cash provided by operating activities... 325,494 201,472 23,141
--------- --------- --------
Cash flows from investing activities:
Purchases of equipment.............................. (114,332) (72,245) --
Payment for purchase of business acquired........... (25,000) -- --
--------- --------- --------
Net cash used in investing activities....... (139,332) (72,245) --
--------- --------- --------
Cash flows from financing activities:
Borrowings of long-term debt........................ 268,247 135,253 --
Principal payments on long-term debt................ (321,537) (194,321) (11,209)
Distributions to owners............................. (192,191) (177,368) --
Contributions from owners........................... 62,825 129,966 15,324
Principal payments on capital lease obligations..... (1,994) (18,102) (634)
--------- --------- --------
Net cash (used in) provided by financing
activities................................ (184,650) (124,572) 3,481
--------- --------- --------
Net increase in cash and cash equivalents........... 1,512 4,655 26,622
Cash and cash equivalents at beginning of period.... 4,661 6,173 10,828
--------- --------- --------
Cash and cash equivalents at end of period.......... $ 6,173 $ 10,828 $ 37,450
========= ========= ========
Supplemental disclosure of cash flow information:
Interest paid....................................... $ 8,728 $ 51,723 $ 4,132
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE> 134
ENW, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JANUARY 31, 1997
1. ORGANIZATION AND OPERATIONS
The Company provides general dental care and related services in the
Atlanta, Georgia area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements
These financial statements represent the combined financial statements of
the following affiliated companies (collectively referred to as the "Company"):
ENW, Inc.
Family Dentistry, a sole proprietorship
Virginia Avenue Dental, a sole proprietorship
Because the affiliated companies were acquired as a group by Valley Forge
Dental Associates, Inc. (see Note 14), and the acquisition of each company was
conditioned upon the acquisition of all the companies, the financial statements
of the affiliated companies have been presented on a combined basis. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts, the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 13).
Equipment
Equipment is stated at cost. Depreciation is provided on a straight-line
basis over the estimated useful lives of the assets, which principally range
from five to seven years. Assets under capital leases and leasehold improvements
are amortized over the lesser of the lease term or the asset's estimated useful
life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at
F-67
<PAGE> 135
ENW, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the net present value of future minimum lease payments, excluding executory
costs, discounted using the Company's incremental borrowing rate.
Long-Lived and Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
life of the intangible assets which range from five to forty years. Segregation
of intangible assets between identifiable intangibles and goodwill was performed
by Company management with the assistance of independent appraisers. Intangible
assets include patient lists, covenants not to compete and goodwill (see Note
6).
In 1995, the Company implemented Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Accordingly, the carrying value of long-lived assets and certain identifiable
intangible assets are evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. In performing such review
for recoverability, the Company compares the expected future undiscounted cash
flows to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
Income Taxes
The combined financial statements include the accounts of a corporation
which has elected S corporation status with the Internal Revenue Service and two
sole proprietorships and, as such, all taxable income or loss of the Company
accrues directly to its stockholders or proprietor. Accordingly, no provision
for income taxes has been made in the accompanying financial statements.
Fair Value of Financial Instruments
Other than long-term debt, recorded balances of financial instruments at
December 31, 1995 and 1996 and January 31, 1997 approximate estimated fair
market values.
The estimated fair value of the Company's long-term debt instruments is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 JANUARY 31, 1997
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt including
current portion.......... $447,723 $447,723 $388,654 $388,654 $377,446 $377,446
</TABLE>
The fair value of long-term debt, including current portion, is estimated
based on current rates offered to the Company for debt of same maturities.
F-68
<PAGE> 136
ENW, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
Accounts receivable................................. $ 271,329 $ 340,134 $ 355,005
Less: Allowance for doubtful accounts............... (208,249) (249,814) (261,173)
--------- --------- ---------
$ 63,080 $ 90,320 $ 93,832
========= ========= =========
</TABLE>
The Company's services are reimbursed directly by both patients and third
party payors, including managed care organizations and commercial insurance
companies. Third party reimbursements are primarily billed at estimated amounts
realizable based upon contractually determined rates. The allowance for doubtful
accounts is estimated based on an ongoing review of collectibility.
4. BUSINESS ACQUISITION
On November 15, 1995, the Company acquired certain assets of a dental
practice for $204,000. This acquisition has been accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
assets acquired based upon their estimated fair values at the date of
acquisition. The results of the acquired business are included in the combined
financial statements from the date of acquisition.
Information with respect to this acquisition is as follows:
<TABLE>
<S> <C>
Cash paid......................................................... $ 25,000
Notes issued and amounts payable to former owners................. 179,130
--------
204,130
Fair value of tangible assets acquired............................ (52,843)
--------
Excess of cost over fair value of net liabilities assumed and
other intangible assets......................................... $151,287
========
</TABLE>
5. EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Dental equipment, including equipment under
capital lease................................. $ 356,904 $ 411,641 $ 411,642
Furniture and fixtures, automobiles and
leasehold improvements........................ 36,836 54,805 54,805
Data processing and office equipment, including
equipment under capital lease................. 36,330 65,557 65,557
Leasehold improvements.......................... 107,292 107,292 107,292
--------- --------- ---------
537,362 639,295 639,296
Less: Accumulated depreciation and
amortization.................................. (170,197) (196,040) (202,707)
--------- --------- ---------
$ 367,165 $ 443,255 $ 436,589
========= ========= =========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 7), for the years ended December 31, 1995
and 1996 and the period ended January 31, 1997 totaled $59,561, 82,177 and
$6,667, respectively.
F-69
<PAGE> 137
ENW, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1995 1996 1997
-------- -------- -----------
<S> <C> <C> <C>
Excess of cost over fair value of net assets
acquired......................................... $247,850 $247,850 $ 247,850
Patient lists and other............................ 47,280 47,280 47,280
-------- -------- --------
295,130 295,130 295,130
Less: Accumulated amortization..................... (14,410) (24,009) (24,657)
-------- -------- --------
$280,720 $271,121 $ 270,473
======== ======== ========
</TABLE>
Amortization expense of intangible assets for the years ended December 31,
1995 and 1996 and the period ended January 31, 1997 totaled $6,122, $9,598 and
$648, respectively.
7. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms range from 3 to 7 years.
Equipment under capital leases at cost and related accumulated amortization
included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1995 1996 1997
------- -------- -----------
<S> <C> <C> <C>
Dental and office equipment......................... $10,992 $212,539 $ 212,539
Less: Accumulated amortization...................... (3,297) (29,610) (33,239)
------- -------- --------
Equipment under capital leases...................... $ 7,695 $182,929 $ 179,300
======= ======== ========
</TABLE>
Amortization of equipment under capital leases for the years ended December
31, 1995 and 1996 and the period ended January 31, 1997 totaled $2,198, $6,355
and $1,156, respectively.
Future minimum lease payments due under capital leases are as follows at
January 31, 1997:
<TABLE>
<S> <C>
1997............................................ $ 49,497
1998............................................ 56,931
1999............................................ 56,067
2000............................................ 56,335
2001............................................ 25,283
--------
244,113
Less: Amounts representing interest............. (53,158)
--------
Present value of minimum lease payments......... 190,955
Less: Current portion........................... (47,601)
--------
$143,354
========
</TABLE>
The Company maintains leases for three office buildings which are accounted
for as operating leases. Two of these operating leases are under month to month
with a partnership owned by the Company's principal shareholder/proprietor (Note
11).
F-70
<PAGE> 138
ENW, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments due under an operating lease with an
unrelated party are as follows at January 31, 1997:
<TABLE>
<S> <C>
1997............................................. $16,519
1998............................................. 18,562
1999............................................. 19,118
-------
$54,199
=======
</TABLE>
Rent expense of $94,809, $112,454 and $9,255, respectively, was incurred
during years ended December 31, 1995 and 1996 and for the period ended January
31, 1997, respectively.
8. DEBT
<TABLE>
<CAPTION>
JANUARY
DECEMBER 31, 31,
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Borrowings under $150,000 bank line of credit,
collateralized by equipment, accounts receivable and
inventory; interest payable monthly at 10%; principal
balance due June 1999................................. $ 136,297 $ 112,798 $ 109,756
Borrowings under $100,000 bank line of credit, secured
by equipment, accounts receivable and inventory;
interest payable monthly at 10%; principal balance due
June 1996............................................. 72,200 -- --
Borrowings under $70,000 bank line of credit, secured by
equipment, accounts receivable and inventory; interest
payable monthly at 9.75%; principal balance due
February 1997......................................... -- 44,635 44,635
Notes payable to former owner of acquired practice;
payable in 60 monthly installments of principal and
interest at 8%; beginning December 1995 and final
maturity in November 2000............................. 120,000 100,331 98,551
Non-interest bearing notes payable to former owner of
acquired practice; no interest; due January 1996...... 59,130 -- --
Notes payable to bank; payable in 36 monthly
installments of principal and interest at 10%,
beginning June 1996 and final maturity in May 1999.... -- 51,833 51,833
Other................................................... 60,096 79,057 72,671
--------- --------- ---------
447,723 388,654 377,446
Less: Current portion................................... (356,607) (270,974) (266,280)
--------- --------- ---------
$ 91,116 $ 117,680 $ 111,166
========= ========= =========
</TABLE>
Scheduled maturities of long-term debt as of January 31, 1997 are as
follows:
<TABLE>
<S> <C>
1997.............................................. $266,280
1998.............................................. 48,985
1999.............................................. 38,969
2000.............................................. 23,212
--------
$377,446
========
</TABLE>
F-71
<PAGE> 139
ENW, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1995 1996 1997
------- ------- -----------
<S> <C> <C> <C>
Salaries and payroll taxes................... $ 1,908 $ 1,908 $ 91,109
Unearned revenue............................. 9,550 9,343 12,431
------- ------- --------
$11,458 $11,251 $ 103,540
======= ======= ========
</TABLE>
10. OWNERS' EQUITY
ENW, Inc. has 500 shares of $1 par value authorized issued and outstanding
for all periods presented. Contributions from owners on a combined basis, were
$62,825 in 1995, $129,966 in 1996 and $15,324 in 1997. Distributions to owners
on a combined basis were $192,191 in 1995, $177,368 in 1996 and $0 in 1997.
Retained earnings on a combined basis were $174,804 at December 31, 1995,
$125,057 at December 31, 1996 and $119,464 at January 31, 1997.
11. RELATED PARTY TRANSACTIONS
As described in Note 7, the Company leases space from partnership owned by
its principal shareholder/owner. Rent expense under this lease was $54,000,
$82,800 and $9,225 for 1995 and 1996 and the period ended January 31, 1997,
respectively.
12. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering substantially
all of its employees. In general, eligible employees may contribute up to 20% of
their compensation to this plan. The Company pays certain administrative
expenses of the plan and does not match employee contributions.
13. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1995 and 1996, and for the period from
January 1 to January 31, 1997, approximately 41%, 44% and 43%, respectively, of
the Company's net revenues were derived from fixed rate per-member per-month
contracts. Revenues under these contracts are recorded in the month fees are
earned. The cost of services provided under capitation contracts are expensed in
the month incurred. The scope of the services provided under the capitation
contracts are provided by or within the Company, therefore related costs are
captured within the normal operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company may become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. At January 31, 1997, management is
not
F-72
<PAGE> 140
ENW, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
aware of any claims, suits or complaints that could have a material adverse
effect on the Company's financial position, liquidity or results of operations.
14. SUBSEQUENT EVENTS
Effective February 1, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-73
<PAGE> 141
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Dentistry
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of The Dentistry, Inc.
(the "Company") at December 31, 1995 and 1996 and March 31, 1997 and the results
of its operations and its cash flows for the years ended December 31, 1994, 1995
and 1996 and for the period from January 1, 1997 to March 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, PA
September 18, 1997
F-74
<PAGE> 142
THE DENTISTRY
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH
DECEMBER 31, 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $225,786 $283,312 $279,283
Accounts receivable, net................................. 353,978 350,012 353,111
Prepaid expenses and other current assets................ 2,633 3,883 11,224
-------- -------- --------
Total current assets............................. 582,397 637,207 643,618
Equipment and leasehold improvements, net.................. 208,845 215,321 208,412
-------- -------- --------
$791,242 $852,528 $852,030
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt........................ $ 31,713 $ 7,617 $ 16,154
Accounts payable......................................... 38,155 58,888 72,085
Accrued expenses and other current liabilities........... 312,379 362,582 398,825
-------- -------- --------
Total current liabilities........................ 382,247 429,087 487,064
Long-term debt, net of current portion..................... 40,456 62,839 46,685
-------- -------- --------
Stockholders' equity
Common stock, $1 par value, 1,100 shares authorized,
issued and outstanding at December 31, 1995 and 1996
and March 31, 1997.................................... 1,100 1,100 1,100
Retained earnings........................................ 367,439 359,502 317,181
-------- -------- --------
Total stockholders' equity....................... 368,539 360,602 318,281
-------- -------- --------
$791,242 $852,528 $852,030
======== ======== ========
</TABLE>
F-75
<PAGE> 143
THE DENTISTRY
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY
1, 1997
TO MARCH
YEARS ENDED DECEMBER 31, 31,
1994 1995 1996 1997
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Net revenues............................... $3,023,577 $3,294,052 $3,486,106 $909,712
Cost of revenues........................... 3,050,295 3,228,109 3,385,433 885,451
Depreciation expense....................... 49,188 25,646 28,387 6,909
---------- ---------- ---------- --------
(Loss) income from operations.............. (75,906) 40,297 72,286 17,352
Non-operating income (expenses), net....... 3,909 8,921 (80,223) (59,673)
---------- ---------- ---------- --------
Net (loss) income.......................... $ (71,997) $ 49,218 $ (7,937) $(42,321)
========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE> 144
THE DENTISTRY
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------
PAR RETAINED
SHARES VALUE EARNINGS TOTAL
------ ------ -------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1994................................... 1,100 $1,100 $390,218 $391,318
Net loss................................................... (71,997) (71,997)
----- ------ -------- --------
Balance, December 31, 1994................................. 1,100 1,100 318,221 319,321
Net income................................................. 49,218 49,218
----- ------ -------- --------
Balance, December 31, 1995................................. 1,100 1,100 367,439 368,539
Net loss................................................... (7,937) (7,937)
----- ------ -------- --------
Balance, December 31, 1996................................. 1,100 1,100 359,502 360,602
Net loss................................................... (42,321) (42,321)
----- ------ -------- --------
Balance, March 31, 1997.................................... 1,100 $1,100 $317,181 $318,281
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE> 145
THE DENTISTRY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997
YEARS ENDED DECEMBER 31, TO MARCH 31,
1994 1995 1996 1997
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................... $(71,997) $ 49,218 $ (7,937) $ (42,321)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization................ 49,188 25,646 28,387 6,909
Change in assets and liabilities:
Accounts receivable, net..................... (44,259) (38,842) 3,966 (3,099)
Prepaid expenses and other current assets.... -- -- (1,250) (7,341)
Accounts payable............................. (2,753) 2,886 20,733 13,197
Accrued expenses and other current
liabilities................................ 112,629 (26,778) 50,202 36,244
-------- -------- -------- --------
Net cash provided by operating
activities............................ 42,808 12,130 94,101 3,589
-------- -------- -------- --------
Cash flows from investing activities:
Purchases of equipment and leasehold
improvements................................. (16,333) (68,920) (34,862) --
-------- -------- -------- --------
Net cash used in investing activities... (16,333) (68,920) (34,862) --
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings of debt.............................. 10,000 41,163 30,000 --
Principal payments on debt...................... (15,171) (12,337) (31,713) (7,618)
-------- -------- -------- --------
Net cash (used in) provided by financing
activities............................ (5,171) 28,826 (1,713) (7,618)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 21,304 (27,964) 57,526 (4,029)
Cash and cash equivalents at beginning of
period....................................... 232,446 253,750 225,786 283,312
-------- -------- -------- --------
Cash and cash equivalents at end of period...... $253,750 $225,786 $283,312 $ 279,283
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid................................... $ 3,909 $ 8,921 $ 4,710 $ 621
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE> 146
THE DENTISTRY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
1. ORGANIZATION AND OPERATIONS
The Dentistry, Inc. (the "Company") provides general dental care and
related services in the Pittsburgh, Pennsylvania area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service. The cost of
services provided under capitation contracts are expensed in the month incurred.
The scope of the services provided under the capitation contracts are provided
by or within the Company, therefore related costs are captured within the normal
operating cycle of the Company.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Long-Lived and Intangible Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Accordingly, the
carrying value of long-lived assets and certain identifiable intangible assets
are evaluated whenever changes in circumstances indicate the carrying amount of
such assets may not be recoverable. In performing such review for
recoverability, the Company compares the expected future undiscounted cash flows
to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their
F-79
<PAGE> 147
THE DENTISTRY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
estimated fair value. In estimating future cash flows for determining whether an
asset is impaired, and in measuring assets that are impaired, assets are grouped
by geographic region.
Income Taxes
The Company has elected S corporation status with the Internal Revenue
Service. As such, all income or loss of the Company accrues directly to its
stockholders. Accordingly, no provision for income taxes has been made in these
financial statements.
Fair Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1995 and
1996 and March 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Accounts receivable................................. $ 532,384 $ 548,278 $ 543,247
Less: Allowance for doubtful accounts............... (178,406) (198,266) (190,136)
--------- --------- ---------
$ 353,978 $ 350,012 $ 353,111
========= ========= =========
</TABLE>
The Company's services are reimbursed directly by both patients and by
third party payors, managed care organizations and commercial insurance
companies. Third party reimbursements are primarily billed at estimated amounts
realizable based upon contractually determined rates. In instances where "usual,
customary and reasonable" market rates are billed, gross billings are adjusted
for contractual allowances to reflect estimated amounts realizable from third
party payors. The allowance for doubtful accounts is estimated based on an
ongoing review of collectibility.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Office furniture and dental equipment............... $ 468,983 $ 496,477 $ 496,477
Leasehold improvements.............................. 323,126 319,690 319,690
--------- --------- ---------
792,109 816,167 816,167
Less: Accumulated depreciation and amortization..... (583,264) (600,846) (607,755)
--------- --------- ---------
$ 208,845 $ 215,321 $ 208,412
========= ========= =========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1994, 1995 and 1996 and the period ended March 31, 1997 totaled $49,188,
$25,646, $28,387 and $6,909, respectively.
5. LEASES
The Company maintains leases for all of its dental offices and for certain
of its equipment which are accounted for as operating leases. The office lease
terms range from one to ten years, while the equipment terms range from five to
ten years.
F-80
<PAGE> 148
THE DENTISTRY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 76,509
1998.............................................. 60,566
1999.............................................. 49,461
2000.............................................. 51,603
2001.............................................. 52,578
Thereafter........................................ 191,697
--------
$482,414
========
</TABLE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $58,448, $57,048, $70,251 and $16,346, respectively, was
incurred during years ended December 31, 1994, 1995, 1996 and for the period
ended March 31, 1997, respectively.
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
-------- ------- ---------
<S> <C> <C> <C>
Notes payable to principal stockholder.............. $ 41,783 $41,783 $ 41,783
Notes payable to related party...................... 25,019 28,673 21,056
Notes payable....................................... 5,367 -- --
-------- ------- --------
72,169 70,456 62,839
Less: Current portion............................... (31,713) (7,617) (16,154)
-------- ------- --------
$ 40,456 $62,839 $ 46,685
======== ======= ========
</TABLE>
The note payable to the principal stockholder and the related party note
payable relate to funds borrowed for operational and general corporate purposes.
The loans do not have stated repayment terms, interest rates, or maturity dates.
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Payroll and Payroll related expenses............... $193,784 $239,581 $ 345,718
Profit Sharing Plan................................ 90,000 90,000 --
Accrued time off and other expenses................ 6,000 7,823 27,021
Deferred revenue................................... 22,595 25,178 26,086
-------- -------- --------
$312,379 $362,582 $ 398,825
======== ======== ========
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company leases space from an affiliated entity. The rent expense under
this lease is considered to be at fair market value and was $21,753 and $6,134
for 1996 and the period ended March 31, 1997, respectively.
F-81
<PAGE> 149
THE DENTISTRY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a defined contribution or profit sharing plan
intended to qualify for tax-exempt status under Section 401(a) of the Internal
Revenue Code. Substantially all employees over 21 years of age who have worked
at least two years and are employed on the last day of the Plan year are
eligible for participation in the Plan. Contributions by the Company are
discretionary and subject to profitability requirements. Charges to operations
for contributions to the Plan were $90,000, $90,000, and $90,000 in 1994, 1995
and 1996, respectively. The Plan was terminated effective January 1, 1997.
10. LITIGATION
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
11. SUBSEQUENT EVENTS
Effective April 1, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-82
<PAGE> 150
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Comprehensive Family Dentistry, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of
Comprehensive Family Dentistry (the "Company") at December 31, 1995 and 1996 and
April 30, 1997 and the results of its operations and its cash flows for the
three years in the period ended December 31, 1996 and for the period from
January 1, 1997 to April 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
September 23, 1997
F-83
<PAGE> 151
COMPREHENSIVE FAMILY DENTISTRY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- APRIL 30,
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................... $180,562 $ 4,821 $ 28,684
Accounts receivable, net................................ 104,964 124,091 185,961
Deferred income taxes................................... 3,484 6,970 18,347
-------- -------- ----------
Total current assets............................ 289,010 135,882 232,992
Equipment and leasehold improvements, net................. 249,645 251,738 336,637
Excess of cost over fair value of net assets acquired and
other intangible assets, net............................ 309,287 433,278 1,160,232
Note receivable, related party............................ 84,406 90,413 90,413
-------- -------- ----------
$932,348 $911,311 $1,820,274
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt, including amounts due
related parties of $40,223, $20,699 and $117,711 at
December 31, 1995 and 1996 and April 30, 1997,
respectively......................................... $ 83,452 $ 31,200 $ 363,393
Obligations under capital lease......................... 26,609 28,597 20,593
Accounts payable........................................ 90,127 5,847 247,685
Accrued expenses and other current liabilities.......... 20,299 34,429 83,506
Deferred income taxes................................... 3,484 6,970 18,347
-------- -------- ----------
Total current liabilities....................... 223,971 107,043 733,524
Long-term debt including amounts due to related parties of
$325,703, $474,925 and $1,001,690 at December 31, 1995
and 1996 and April 30, 1997, respectively............... 593,498 732,220 1,371,135
Facility leases payable................................... -- 18,899 22,083
-------- -------- ----------
Total liabilities............................... 817,469 858,162 2,126,742
-------- -------- ----------
Stockholders' equity (deficit)
Common stock, $1 par value, 5,000 shares authorized;
1,000 shares issued and outstanding at December 31,
1995 and 1996 and April 30, 1997..................... 1,000 1,000 1,000
Retained earnings (accumulated deficit)................. 113,879 52,149 (307,468)
-------- -------- ----------
Total stockholders' equity (deficit)............ 114,879 53,149 (306,468)
-------- -------- ----------
$932,348 $911,311 $1,820,274
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE> 152
COMPREHENSIVE FAMILY DENTISTRY, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEARS ENDED DECEMBER 31, 1997 TO
------------------------------------ APRIL 30,
1994 1995 1996 1997
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues................................. $630,395 $796,302 $1,304,044 $ 528,687
Cost of revenues............................. 396,951 562,646 936,699 466,396
Selling and administrative expenses.......... 103,476 111,088 201,972 338,486
Depreciation and amortization................ 62,168 70,194 109,112 50,013
Loss on disposal of fixed assets............. -- 12,000 45,631 --
-------- -------- ---------- ---------
Income (loss) from operations................ 67,800 40,374 10,630 (326,208)
Non-operating expenses:
Interest expense -- related parties........ (37,508) (33,551) (44,618) (19,662)
Interest expense -- other.................. -- (3,042) (27,742) (13,747)
-------- -------- ---------- ---------
Income (loss) before income taxes............ 30,292 3,781 (61,730) (359,617)
Income taxes............................... -- -- -- --
-------- -------- ---------- ---------
Net income (loss)............................ $ 30,292 $ 3,781 $ (61,730) $ (359,617)
======== ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE> 153
COMPREHENSIVE FAMILY DENTISTRY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------- EARNINGS
PAR (ACCUMULATED
SHARES VALUE DEFICIT) TOTAL
------ ------ ------------ ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1994......................... 1,000 $1,000 $ 79,806 $ 80,806
Net income..................................... 30,292 30,292
----- ------ --------- ---------
Balance, January 1, 1995......................... 1,000 1,000 110,098 111,098
Net income..................................... 3,781 3,781
----- ------ --------- ---------
Balance, December 31, 1995....................... 1,000 1,000 113,879 114,879
Net loss....................................... (61,730) (61,730)
----- ------ --------- ---------
Balance, December 31, 1996....................... 1,000 1,000 52,149 53,149
Net loss....................................... (359,617) (359,617)
----- ------ --------- ---------
Balance, April 30, 1997.......................... 1,000 $1,000 $ (307,468) $(306,468)
===== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE> 154
COMPREHENSIVE FAMILY DENTISTRY, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEARS ENDED DECEMBER 31, 1997 TO
------------------------------------ APRIL 30,
1994 1995 1996 1997
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 30,292 $ 3,781 $ (61,730) $ (359,617)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization........... 62,168 70,194 109,112 50,013
Loss on disposal of equipment........... -- 12,000 45,631 --
Provision for doubtful accounts......... 9,710 25,075 41,060 17,383
Change in assets and liabilities, net of
effects from businesses acquired:
Increase in accounts receivable......... (27,249) (65,309) (60,187) (79,253)
Increase in other assets................ (56,844) (18,266) (6,007) --
Increase (decrease) in accounts
payable............................... 3,107 83,585 (84,280) 241,838
Increase (decrease) in accrued expenses
and other current liabilities......... 6,789 8,310 33,029 52,261
-------- --------- --------- ----------
Net cash provided by (used in)
operating activities............. 27,973 119,370 16,628 (77,375)
-------- --------- --------- ----------
Cash flows from investing activities:
Payments for purchases of businesses....... -- (16,000) (44,000) (92,500)
Purchases of equipment..................... -- (148,537) (50,419) --
-------- --------- --------- ----------
Net cash used in investing
activities....................... -- (164,537) (94,419) (92,500)
-------- --------- --------- ----------
Cash flows from financing activities:
Borrowings of long-term debt............... -- 282,031 -- 295,272
Principal payments on long-term debt and
capital leases.......................... (42,317) (58,304) (97,950) (101,534)
-------- --------- --------- ----------
Net cash (used in) provided by
financing activities............. (42,317) 223,727 (97,950) 193,738
-------- --------- --------- ----------
Net (decrease) increase in cash and cash
equivalents............................. (14,344) 178,560 (175,741) 23,863
Cash and cash equivalents at beginning of
period.................................. 16,346 2,002 180,562 4,821
-------- --------- --------- ----------
Cash and cash equivalents at end of
period.................................. $ 2,002 $ 180,562 $ 4,821 $ 28,684
======== ========= ========= ==========
Supplemental disclosure of cash flow
information:
Interest paid.............................. $ 37,508 $ 36,593 $ 72,360 $ 33,409
======== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 155
COMPREHENSIVE FAMILY DENTISTRY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND APRIL 30, 1997
1. ORGANIZATION AND OPERATIONS
Comprehensive Family Dentistry, Inc. (the "Company") provides general
dental care and related services in the Central Virginia area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived and Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
life of the intangible assets which range from three to forty years. Segregation
of intangible assets between identifiable intangibles and goodwill was based on
estimates derived from appraisals performed with the assistance of independent
appraiser. Intangible assets include patient lists, covenants not to compete and
goodwill.
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ". Accordingly,
the carrying value of long-lived assets and certain identifiable intangible
assets are evaluated whenever changes in circumstances indicate the carrying
amount of such assets may not be recoverable. In performing such review for
recoverability, the Company compares the expected future
F-88
<PAGE> 156
COMPREHENSIVE FAMILY DENTISTRY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
undiscounted cash flows to the carrying value of long-lived assets and
identifiable intangibles, including the related excess of cost over fair value
of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
Fair Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1995 and
1996 and April 30, 1997 approximate estimated fair market values.
3. BUSINESS ACQUISITIONS
During each of the years ended December 31, 1995 and 1996 and the period
ended April 30, 1997 the Company made one acquisition. These acquisitions were
accounted for as purchases and the results of the acquired companies are
included in the accompanying financial statements from the date of acquisition.
Information with respect to these acquisitions is presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, PERIOD ENDED
--------------------- APRIL 30,
1995 1996 1997
-------- -------- ------------
<S> <C> <C> <C>
Cash paid........................................ $ 16,000 $ 44,000 $ 92,500
Notes payable.................................... 64,000 180,000 753,000
-------- -------- --------
80,000 224,000 845,500
Fair value of tangible assets acquired........... (13,000) (50,600) (95,900)
-------- -------- --------
Excess of cost over fair value of net liabilities
assumed and other intangible assets............ $ 67,000 $173,400 $749,600
======== ======== ========
</TABLE>
4. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- APRIL 30,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Accounts receivable, net of contractual allowances
of $24,683 and $35,405 and $54,596, at December
31,
1995 and 1996, and April 30, 1997,
respectively..................................... $123,476 $150,646 $ 209,360
Less: Allowance for doubtful accounts.............. (18,512) (26,555) (23,399)
-------- -------- --------
$104,964 $124,091 $ 185,961
======== ======== ========
</TABLE>
F-89
<PAGE> 157
COMPREHENSIVE FAMILY DENTISTRY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's services are reimbursed directly by both patients and by
third party payors, including commercial insurance companies. Third party
reimbursements are primarily billed at estimated amounts realizable based upon
contractually determined rates. In instances where "usual, customary and
reasonable" market rates are billed, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectability.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- APRIL 30,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Dental equipment...................................... $126,438 $129,420 $ 245,212
Furniture and fixtures, automobiles and leasehold
improvements........................................ 163,978 215,523 205,733
--------- --------- ---------
290,416 344,943 450,945
--------- --------- ---------
Less: Accumulated depreciation and amortization....... (40,771) (93,205) (114,308)
--------- --------- ---------
$249,645 $251,738 $ 336,637
========= ========= =========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 7), for the years ended December 31, 1995
and 1996 and the period ended April 30, 1997 totaled $26,224, $59,703 and
$27,367, respectively.
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- APRIL 30,
1995 1996 1997
-------- --------- ----------
<S> <C> <C> <C>
Excess of cost over fair value of net assets
acquired........................................... $ 62,000 $ 224,200 $ 773,800
Patient lists........................................ 164,100 175,300 175,300
Covenant not to compete.............................. 171,300 171,300 371,300
--------- --------- ---------
397,400 570,800 1,320,400
Less: Accumulated amortization....................... (88,113) (137,522) (160,168)
--------- --------- ---------
$309,287 $ 433,278 $1,160,232
========= ========= =========
</TABLE>
Amortization expense of intangible assets for the years ended December 31,
1995 and 1996 and the period ended April 30, 1997 totaled $43,970, $49,409 and
$22,646, respectively.
7. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from 5 to 7 years.
Equipment under capital leases at cost and related accumulated amortization
included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ APRIL 30,
1995 1996 1997
------- -------- ---------
<S> <C> <C> <C>
Dental and office equipment.............................. $37,369 $ 49,763 $ 24,454
Less: Accumulated amortization........................... (9,447) (17,733) (2,214)
------- ------- -------
Equipment under capital leases........................... $27,922 $ 32,030 $ 22,240
======= ======= =======
</TABLE>
F-90
<PAGE> 158
COMPREHENSIVE FAMILY DENTISTRY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amortization of equipment under capital leases for the years ended December
31, 1995 and 1996 and the period ended April 30, 1997 totaled $9,447, $17,733
and $2,214, respectively. Future lease obligations under capital leases
aggregated $20,503 at April 30, 1997.
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1997............................................. $ 42,805
1998............................................. 115,088
1999............................................. 90,896
2000............................................. 92,365
2001............................................. 93,867
Thereafter....................................... 840,139
----------
$1,275,160
==========
</TABLE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $20,022, $69,859 and $27,334, respectively, was incurred
during years ended December 31, 1995 and 1996 and for the period ended April 30,
1997, respectively.
8. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- APRIL 30,
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Notes payable to related party 9% -- 10% notes
payable through 2011............................ $676,950 $495,624 $1,119,401
Other notes payable 8% -- 10% payable through
2007............................................ -- 267,796 615,127
-------- -------- ----------
676,950 763,420 1,734,528
Less: Current portion............................. (83,452) (31,200) (363,393)
-------- -------- ----------
$593,498 $732,220 $1,371,135
======== ======== ==========
</TABLE>
Scheduled maturities of long-term debt, outstanding as of April 30, 1997
are as follows:
<TABLE>
<S> <C>
1997............................................. $ 363,393
1998............................................. 173,215
1999............................................. 188,254
2000............................................. 189,643
2001............................................. 205,268
Thereafter....................................... 614,755
----------
$1,734,528
==========
</TABLE>
The related party notes payable relate to the acquisition of practices.
F-91
<PAGE> 159
COMPREHENSIVE FAMILY DENTISTRY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The reconciliation of the federal statutory income tax rate to the
effective income tax rate for the years ended December 31, 1994, 1995 and 1996
and the period ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- APRIL 30,
1994 1995 1996 1997
---- ---- ---- ---------
<S> <C> <C> <C> <C>
Statutory income tax rate........................... (34)% (34)% (34)% (34)%
State taxes, less federal related tax benefit....... (7) (7) (8) (7)
Losses for which no tax benefit was recognized...... 39 40 -- --
Nondeductible amortization of excess costs of net
assets acquired................................... -- -- 40 41
Other............................................... 2 1 2 --
--- --- --- ---
Effective income tax rate........................... --% --% --% --%
=== === === ===
</TABLE>
The components of net deferred income tax assets and (liabilities) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- APRIL 30,
1995 1996 1997
------- -------- ---------
<S> <C> <C> <C>
Net operating carryforwards........................ $ -- $ -- $ 153,860
Start up costs not currently deductible for tax
purposes......................................... 7,692 36,617 38,002
------- -------- ---------
Gross deferred tax assets.......................... 7,692 36,617 191,862
Valuation allowance................................ (4,208) (29,647) (173,515)
------- -------- ---------
Total deferred tax asset........................... 3,484 6,970 18,347
------- -------- ---------
Intangible assets and other........................ (3,484) (6,970) (18,347)
------- -------- ---------
Gross deferred tax liability....................... (3,484) (6,970) (18,347)
------- -------- ---------
Net deferred tax liabilities....................... $ -- $ -- $ --
======= ======== =========
</TABLE>
At April 30, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $370,000. Their use is limited to
future taxable earnings of the Company. The carryforwards expire through 2012. A
valuation allowance has been established against the benefit of the net
operating loss carryforwards and other deferred tax assets which the Company
does not believe are more likely than not to be realized.
10. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, APRIL
------------------- 30,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Salaries and payroll taxes............................ $13,067 $22,351 $47,254
Unearned revenue...................................... 6,859 10,485 18,911
Other................................................. 373 1,593 17,341
------- ------- -------
$20,299 $34,429 $83,506
======= ======= =======
</TABLE>
F-92
<PAGE> 160
COMPREHENSIVE FAMILY DENTISTRY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
12. SUBSEQUENT EVENTS
On May 21, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-93
<PAGE> 161
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Bernard B. Baros, D.D.S., P.C.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Bernard B. Baros,
D.D.S., P.C. ("the Company") at December 31, 1995 and 1996 and June 30, 1997 and
the results of its operations and its cash flows for the year ended December 31,
1995 and 1996 and for the period from January 1, 1997 to June 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Philadelphia, PA
October 8, 1997
F-94
<PAGE> 162
BERNARD B. BAROS, D.D.S., P.C.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $ -- $ 15,360 $ 41,703
Accounts receivable, net................................. 49,824 57,267 53,248
-------- -------- --------
Total current assets............................. 49,824 72,627 94,951
Equipment and Leasehold improvements, net.................. 118,638 86,188 77,216
-------- -------- --------
$168,462 $158,815 $172,167
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt, including amounts due
related parties of $33,517, $15,009 and $1,869 at
December 31, 1995 and 1996 and June 30, 1997,
respectively.......................................... $ 33,517 $ 21,125 $ 7,985
Current portion of obligations under capital lease....... 21,880 18,688 22,703
Accounts payable......................................... 11,206 11,250 28,642
Accrued expenses and other current liabilities........... 24,048 5,206 6,642
Income taxes payable..................................... -- 4,794 5,721
-------- -------- --------
Total current liabilities........................ 90,651 61,063 71,693
Obligations under capital lease............................ 49,704 31,016 25,177
-------- -------- --------
Total liabilities................................ 140,355 92,079 96,870
-------- -------- --------
Stockholders' equity
Common stock, $1 par value, 50,000 shares authorized;
10,000 shares issued and outstanding at December 31,
1995 and 1996 and June 30, 1997, respectively......... 10,000 10,000 10,000
Retained earnings........................................ 18,107 56,736 65,297
-------- -------- --------
Total stockholders' equity....................... 28,107 66,736 75,297
-------- -------- --------
$168,462.. $158,815 $172,167
======== ======== ========
</TABLE>
F-95
<PAGE> 163
BERNARD B. BAROS, D.D.S., P.C.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1997 TO
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
<S> <C> <C> <C>
Net revenues.............................................. $589,671 $556,361 $ 244,796
Cost of revenues.......................................... 377,543 299,927 100,569
Selling and administrative expenses....................... 183,007 172,461 108,528
Depreciation and amortization............................. 34,541 32,450 16,413
-------- -------- --------
(Loss) income from operations............................. (5,420) 51,523 19,286
Non-operating expenses:
Interest expense........................................ (25,724) (8,100) (5,004)
-------- -------- --------
(Loss) income before taxes................................ (31,144) 43,423 14,282
Income tax expense........................................ -- (4,794) (5,721)
-------- -------- --------
Net (loss) income......................................... $(31,144) $ 38,629 $ 8,561
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE> 164
BERNARD B. BAROS, D.D.S., P.C.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------
PAR RETAINED
SHARES VALUE EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1995........................... 10,000 $10,000 $ 49,251 $ 59,251
Net loss........................................... (31,144) (31,144)
------ ------- -------- --------
Balance, December 31, 1995......................... 10,000 $10,000 $ 18,107 $ 28,107
Net income......................................... 38,629 38,629
------ ------- -------- --------
Balance, December 31, 1996......................... 10,000 $10,000 56,736 66,736
Net income......................................... 8,561 8,561
------ ------- -------- --------
Balance, June 30, 1997............................. 10,000 $10,000 $ 65,297 $ 75,297
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE> 165
BERNARD B. BAROS, D.D.S., P.C.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1997 TO
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................... $(31,144) $ 38,629 $ 8,561
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................ 34,541 32,450 16,413
Provision for doubtful accounts...................... 9,558 16,673 7,610
Increase in accounts receivable...................... (13,077) (24,116) (3,591)
Increase in accounts payable......................... 5,799 44 17,392
(Decrease) increase in accrued expenses and other
current liabilities................................ (12,570) (18,842) 1,436
Increase in income taxes payable..................... -- 4,794 927
-------- -------- --------
Net cash (used in) provided by operating
activities.................................... (6,893) 49,632 48,748
-------- -------- --------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements....... (11,450) -- --
-------- -------- --------
Net cash used in investing activities........... (11,450) -- --
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) amounts due to stockholder.......... 6,070 (12,392) (13,140)
Principal payments on long-term debt and capital
leases............................................... (19,078) (21,880) (9,265)
-------- -------- --------
Net cash used in financing activities........... (13,008) (34,272) (22,405)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents.... (31,351) 15,360 26,343
Cash and cash equivalents at beginning of period........ 31,351 -- 15,360
-------- -------- --------
Cash and cash equivalents at end of period.............. $ -- $ 15,360 $ 41,703
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 25,724 $ 8,100 $ 5,004
======== ======== ========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
<TABLE>
<S> <C> <C> <C>
Capital lease obligations entered....................... $ -- $ -- $ 7,441
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE> 166
BERNARD B. BAROS, D.D.S., P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
1. ORGANIZATION AND OPERATIONS
Bernard B. Baros, D.D.S., P.C. (the "Company") provides general dental care
and related services in the Colorado Springs, Colorado area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the activity of Bernard B. Baros, D.D.S.,
P.C.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived and Intangible Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Accordingly, the
carrying value of long-lived assets are evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such review for recoverability, the Company compares
the expected future undiscounted cash flows to the carrying value of long-lived
assets.
F-99
<PAGE> 167
BERNARD B. BAROS, D.D.S., P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
Amounts Due to Stockholder
The amounts due to the principal stockholder relate to funds borrowed for
operational and general corporate purposes. The advances do not have stated
repayment terms, interest rates, or maturity dates.
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
Fair Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1996 and
August 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Accounts receivable, net of contractual
allowances of $8,202 and $8,924 and $8,022, at
December 31, 1995 and 1996 and June 30, 1997,
respectively................................... $ 56,591 $ 63,960 $ 60,123
Less: Allowance for doubtful accounts............ (6,767) (6,693) (6,875)
------- ------- -------
$ 49,824 $ 57,267 $ 53,248
======= ======= =======
</TABLE>
The Company's services are reimbursed directly by both patients and by
third party payors, including commercial insurance companies. Third party
reimbursements are primarily billed at estimated amounts realizable based upon
contractually determined rates. In instances where "usual, customary and
reasonable" market rates are billed, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectibility.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Dental equipment............................... $ 239,430 $ 239,430 $ 239,430
Furniture and fixtures, automobiles and
leasehold improvements....................... 151,219 151,219 151,219
Data processing and office equipment........... 29,122 29,122 36,563
--------- --------- ---------
419,771 419,771 427,212
Less: Accumulated depreciation and
amortization................................. (301,133) (333,583) (349,996)
--------- --------- ---------
$ 118,638 $ 86,188 $ 77,216
========= ========= =========
</TABLE>
F-100
<PAGE> 168
BERNARD B. BAROS, D.D.S., P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 5), for the years ended December 31, 1995
and 1996 and the period ended June 30, 1997 totaled $34,541, $32,450 and
$16,413, respectively.
5. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from 5 to 7 years.
Equipment under capital leases at cost and related accumulated amortization
included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Dental and office equipment..................... $ 94,188 $ 94,188 $ 94,188
Less: Accumulated amortization.................. (25,930) (39,386) (46,113)
-------- -------- --------
Equipment under capital leases.................. $ 68,258 $ 54,802 $ 48,075
======== ======== ========
</TABLE>
Amortization of equipment under capital leases for the years ended December
31, 1995, 1996 and the period ended June 30, 1997 totaled $13,456, $13,456, and
$6,728, respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 14,017
1998.............................................. 19,657
1999.............................................. 13,387
2000.............................................. 7,155
2001.............................................. --
--------
54,216
Less: Amount representing interest................ (6,336)
--------
Present value of minimum lease payments........... 47,880
Less: Current portion............................. (22,703)
--------
$ 25,177
========
</TABLE>
The Company maintains leases for its dental offices from a company owned by
the principal shareholder. The office lease terms are from month to month. Rent
expense of $72,000, $74,000 and $42,000, respectively, was incurred during years
ended December 31, 1995 and 1996 and for the period ended June 30, 1997,
respectively. The rent expense under this lease is considered to be at market
value.
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Note payable to principal stockholder................ $ 33,517 $ 15,009 $ 1,869
Other debt........................................... -- 6,116 6,116
-------- -------- -------
33,517 21,125 7,985
Less: Current portion................................ (33,517) (21,125) (7,985)
-------- -------- -------
$ -- $ -- $ --
======== ======== =======
</TABLE>
F-101
<PAGE> 169
BERNARD B. BAROS, D.D.S., P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the income tax expense (benefit) for the years ended
December 31, 1995 and 1996 and the period ended June 30, 1997 are as follows:
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1,
YEARS ENDED 1997 TO
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Current:
Federal........................................... $ -- $3,818 $4,556
State............................................. -- 976 1,165
Deferred:
Federal........................................... -- -- --
State............................................. -- -- --
--- ------ ------
$ -- $4,794 $5,721
=== ====== ======
</TABLE>
In 1996, the company utilized net operating loss carry forwards generated
in 1995 to reduce taxable income in 1996.
8. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Salaries and payroll taxes........................... $ 10,840 $2,143 $3,162
Bank overdraft....................................... 8,195 -- --
Other................................................ 5,013 3,063 3,480
------- ------ ------
$ 24,048 $5,206 $6,642
======= ====== ======
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company leases space from the principal shareholder. The rent expense
under this lease is considered to be at fair market value and was $72,000,
$74,000 and $42,000 for 1995, 1996 and the period ended June 30, 1997.
10. EMPLOYEE BENEFITS
Retirement Plan
The Company has a defined contribution plan covering substantially all of
its employees. In general, eligible employees may contribute up to 15% of their
compensation to this plan. Employee contributions are matched at a rate of 5% at
the discretion of management. There were no matching contributions for the year
ended December 31, 1996 and the period ended June 30, 1997.
11. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of
F-102
<PAGE> 170
BERNARD B. BAROS, D.D.S., P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
12. SUBSEQUENT EVENTS
On July 1, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-103
<PAGE> 171
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owner of
Maurice E. Smith, D.D.S.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in owner's (deficit) equity and of cash flows present
fairly, in all material respects, the financial position of Maurice E. Smith,
D.D.S., (the "Company") at December 31, 1996 and June 30, 1997 and the results
of its operations and its cash flows for the years ended December 31, 1996 and
for the period from January 1, 1997 to June 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
October 17, 1997
F-104
<PAGE> 172
MAURICE E. SMITH, D.D.S.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................... $ 2,883 $ 5,062
Accounts receivable, net........................................... 57,489 30,402
------------ --------
Total current assets....................................... 60,372 35,464
Property and equipment, net.......................................... 120,187 111,283
------------ --------
$180,559 $146,747
========== ========
LIABILITIES AND OWNER'S EQUITY
Current liabilities
Current portion of obligations under capital lease................. $ 32,996 $ 14,783
Accounts payable................................................... 21,080 13,303
Accrued expenses and other current liabilities..................... 33,863 24,400
------------ --------
Total current liabilities.................................. 87,939 52,486
Obligations under capital lease...................................... 67,657 68,228
------------ --------
Total liabilities.......................................... 155,596 120,714
------------ --------
Owner's equity....................................................... 24,963 26,033
------------ --------
$180,559 $146,747
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE> 173
MAURICE E. SMITH, D.D.S.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, TO JUNE 30,
1996 1997
------------ ---------------
<S> <C> <C>
Net revenues..................................................... $842,531 $ 362,413
Cost of revenues................................................. 693,607 310,231
Depreciation..................................................... 21,361 12,501
-------- --------
Income from operations........................................... 127,563 39,681
Interest expense................................................. (10,955) (5,400)
-------- --------
Net income....................................................... $116,608 $ 34,281
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE> 174
MAURICE E. SMITH, D.D.S.
STATEMENT OF CHANGES IN OWNER'S (DEFICIT) EQUITY
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
Balance, January 1, 1996.......................................................... $(49,972)
Owner distribution.............................................................. (41,673)
Net income...................................................................... 116,608
--------
Balance, December 31, 1996........................................................ 24,963
Owner distributions............................................................. (33,211)
Net income...................................................................... 34,281
--------
Balance, June 30, 1997............................................................ $ 26,033
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE> 175
MAURICE E. SMITH, D.D.S.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, TO JUNE 30,
1996 1997
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $116,608 $ 34,281
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................ 21,361 12,501
Provision for doubtful accounts............................. 23,001 9,055
(Increase) decrease in accounts receivable.................. (39,078) 18,032
Decrease in accounts payable................................ (894) (7,777)
Decrease in accrued expenses and other current
liabilities................................................ (40,555) (9,463)
-------- --------
Net cash provided by operating activities.............. 80,443 56,629
-------- --------
Cash flows from investing activities:
Purchases of property and equipment............................ (7,023) (3,597)
-------- --------
Net cash used in investing activities.................. (7,023) (3,597)
-------- --------
Cash flows from financing activities:
Owner distributions............................................ (41,673) (33,211)
Repayments of capital lease obligations........................ (28,864) (17,642)
-------- --------
Net cash used in financing activities.................. (70,537) (50,853)
-------- --------
Net increase in cash and cash equivalents...................... 2,883 2,179
Cash and cash equivalents at beginning of period............... -- 2,883
-------- --------
Cash and cash equivalents at end of period..................... $ 2,883 $ 5,062
======== ========
Supplemental disclosure of cash flow information:
Interest paid.................................................. $ 10,955 $ 5,400
======== ========
Supplemental disclosure of noncash items:
Assets acquired under capital lease............................ $ 54,320 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE> 176
MAURICE E. SMITH, D.D.S.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997
1. ORGANIZATION AND OPERATIONS
Dr. Maurice E. Smith, D.D.S. (the "Company") provides general dental care
and related services in the Roswell, Georgia area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 7).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived and Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
life of the intangible assets which range from five to forty years. Segregation
of intangible assets between identifiable intangibles and goodwill was based on
estimates derived from appraisals performed with the assistance of independent
appraiser. Intangible assets include patient lists, covenants not to compete and
goodwill.
F-109
<PAGE> 177
MAURICE E. SMITH, D.D.S.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ". Accordingly,
the carrying value of long-lived assets and certain identifiable intangible
assets are evaluated whenever changes in circumstances indicate the carrying
amount of such assets may not be recoverable. In performing such review for
recoverability, the Company compares the expected future undiscounted cash flows
to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
Income Taxes
The Company is the sole proprietorship of Dr. Maurice E. Smith, D.D.S., and
as such, all income or loss of the Company accrues directly to him. Accordingly,
no provision for income taxes has been made in these financial statements.
Fair Value of Financial Instrument
The recorded balances of financial instruments at December 31, 1996 and
August 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Accounts receivable, net of contractual allowances of
$57,489 and $30,402 at December 31, 1996 and June
30, 1997, respectively............................. $127,784 $ 99,070
Less: Allowance for doubtful accounts................ (70,295) (68,668)
-------- --------
$ 57,489 $ 30,402
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Dental equipment..................................... $167,326 $170,923
Furniture and fixtures, automobiles and leasehold
improvements....................................... 588 588
-------- --------
167,914 171,511
Less: Accumulated depreciation and amortization...... (47,727) (60,228)
-------- --------
$120,187 $111,283
======== ========
</TABLE>
F-110
<PAGE> 178
MAURICE E. SMITH, D.D.S.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 5), for the years ended December 31, 1996
and the period ended June 30, 1997 totaled $21,361 and $12,501, respectively.
5. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from 2 to 5 years.
Equipment under capital leases at cost and related accumulated amortization
included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Dental and office equipment.......................... $160,890 $160,890
Less: Accumulated amortization....................... (47,165) (58,985)
-------- --------
Equipment under capital leases....................... $113,725 $101,905
======== ========
</TABLE>
Amortization of equipment under capital leases for the years ended December
31, 1996 and the period ended June 30, 1997 totaled $20,799 and $11,820,
respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1997............................................ $ 22,898
1998............................................ 32,783
1999............................................ 23,323
2000............................................ 9,430
2001............................................ --
--------
88,434
Less: Amount representing interest.............. (5,423)
--------
Present value of minimum lease payments......... 83,011
Less: Current portion........................... (14,783)
--------
$ 68,228
========
</TABLE>
The Company maintains leases for all of its dental offices on a month to
month basis from an entity owned by Dr. Maurice E. Smith. Rent expense under
this lease was $32,818 for the year ended December 31, 1996 and $15,372 for the
six month period ended June 30, 1997.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 30,
1996 1997
------------ -------
<S> <C> <C>
Salaries and payroll taxes............................ $ 29,543 $19,999
Other................................................. 4,320 4,401
------- -------
$ 33,863 $24,400
======= =======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1996 and through June 30, 1997,
approximately 35% and 42%, respectively, of the
F-111
<PAGE> 179
MAURICE E. SMITH, D.D.S.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's net revenues were derived from fixed rate per-member per-month
contracts. Revenues under these contracts are recorded in the month fees are
earned. The cost of services provided under capitation contracts are expensed in
the month incurred. The scope of the services provided under the capitation
contracts are provided by or within the Company, therefore related costs are
captured within the normal operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
8. SUBSEQUENT EVENTS
Effective on July 1, 1997 the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-112
<PAGE> 180
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE OWNER OF DOUGLASS A. QUINN, D.D.S., P.C.
AND DOUGLASS A. QUINN, D.D.S.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and changes in owner's equity and of cash
flows present fairly, in all material respects, the financial position of
Douglass A. Quinn D.D.S., P.C. and Douglass A. Quinn, D.D.S. (on a combined
basis, the "Company") at December 31, 1995, December 31, 1996 and July 31, 1997
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 and for the period from January 1,
1997 to July 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, PA
November 21, 1997
F-113
<PAGE> 181
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN, D.D.S.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................. $ 18,939 $ 55,862 $ 72,734
Accounts receivable, net.............................. 25,817 50,219 42,015
-------- -------- --------
Total current assets.......................... 44,756 106,081 114,749
Property and equipment, net............................. 65,454 56,737 47,576
-------- -------- --------
$110,210 $162,818 $162,325
======== ======== ========
LIABILITIES AND OWNER'S EQUITY
Current liabilities
Current portion of long-term debt..................... $ 20,944 $ 22,258
Accounts payable...................................... $ 8,206 17,073 8,724
Accrued expenses and other current liabilities........ 766 477 539
Unearned revenue...................................... 5,278 5,929 5,412
-------- -------- --------
Total current liabilities..................... 14,250 44,423 36,933
Long-term debt.......................................... 98,799 77,855 63,222
-------- -------- --------
Total liabilities............................. 113,049 122,278 100,155
-------- -------- --------
Owner's equity.......................................... (2,839) 40,540 62,170
-------- -------- --------
$110,210 $162,818 $162,325
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-114
<PAGE> 182
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN, D.D.S.
COMBINED STATEMENT OF OPERATIONS AND CHANGES IN OWNER'S EQUITY
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 1, 1997
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO JULY 31,
1994 1995 1996 1997
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Net revenues................................. $626,167 $575,861 $689,898 $ 473,954
Cost of revenues............................. 607,979 637,309 617,458 432,372
Depreciation and amortization................ 13,864 19,051 17,766 9,161
-------- -------- -------- --------
Income from operations....................... 4,324 (80,499) 54,674 32,421
Non-operating expenses:
Interest expense........................... (2,341) (11,436) (11,295) (10,791)
-------- -------- -------- --------
Income before income taxes................... 1,983 (91,935) 43,379 21,630
Income tax expense........................... -- -- -- --
-------- -------- -------- --------
Net income (loss).......................... 1,983 (91,935) 43,379 21,630
Owner's equity, beginning of period.......... 87,113 89,096 (2,839) 40,540
-------- -------- -------- --------
Owner's equity, end of period................ $ 89,096 $ (2,839) $ 40,540 $ 62,170
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-115
<PAGE> 183
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN, D.D.S
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 1, 1997
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO JULY 31,
1994 1995 1996 1997
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 1,983 $(91,935) $ 43,379 $ 21,630
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Loss on disposal of assets........ -- 7,970 -- --
Depreciation and amortization..... 13,864 19,051 17,766 9,161
(Increase) decrease in accounts
receivable...................... (1,573) 5,903 (24,402) 8,204
Increase (decrease) in accounts
payable, accrued expenses and
deferred revenue................ 12,482 (8,203) 9,229 (8,804)
-------- -------- ---------- ---------
Net cash provided by
operating activities....... 26,756 (67,214) 45,972 30,191
-------- -------- ---------- ---------
Cash flows from financing activities:
Borrowings of long-term debt......... 77,105 21,694 -- --
Principal payments on long-term
debt.............................. -- -- (13,319)
-------- -------- ---------- ---------
Net cash provided by (used
in) financing activities... 77,105 21,694 -- (13,319)
-------- -------- ---------- ---------
Cash flows from investing activities:
Investment in property, plant &
equipment......................... (80,166) -- (9,049) --
-------- -------- ---------- ---------
Net cash provided by
investing activities....... (80,166) -- (9,049) --
-------- -------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents.................. 23,695 (45,520) 36,923 16,872
Cash and cash equivalents at
beginning of period............... 40,764 64,459 18,939 55,862
-------- -------- ---------- ---------
Cash and cash equivalents at end of
period............................ $ 64,459 $ 18,939 $ 55,862 $ 72,734
======== ======== ========== =========
Supplemental disclosure of cash flow
information:
Interest paid........................ $ 2,341 $ 11,436 $ 11,295 $ 10,791
======== ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE> 184
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN D.D.S.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JULY 31, 1997
1. ORGANIZATION AND OPERATIONS
The "Company," which includes Douglass A. Quinn, D.D.S., P.C. and Douglass
A. Quinn, D.D.S., provides general dental care and related services in the
Atlanta, Georgia area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements
These financial statements represent the combined financial statements of
the following affiliated companies:
Douglass A. Quinn, D.D.S. PC
Douglass A. Quinn, D.D.S.
Because the affiliated companies were acquired as a group by Valley Forge
Dental Associates, Inc. (see Note 10), and the acquisition of each company was
conditioned upon the acquisition of all the companies, the financial statements
of the affiliated companies have been presented on a combined basis. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 9).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
F-117
<PAGE> 185
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN D.D.S.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Douglass A. Quinn DDS is a sole proprietorship. As such, all income or loss
of the sole proprietorship accrues directly to its owner. Accordingly, no
provision for income taxes has been made in these financial statements for that
entity.
Fair Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1995, 1996
and July 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Accounts receivable....................... $ 38,554 $ 65,150 $ 53,020
Less: Allowance for doubtful accounts..... (12,737) (14,931) (11,005)
-------- -------- --------
$ 25,817 $ 50,219 $ 42,015
======== ======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Dental and office equipment, furniture and fixtures.... $ 45,941 $ 45,941 $ 45,941
Furniture and fixtures and leasehold improvements...... 105,602 114,651 114,651
-------- --------- ---------
151,543 160,592 160,592
Less: Accumulated depreciation and amortization........ (86,089) (103,855) (113,016)
-------- --------- ---------
$ 65,454 $ 56,737 $ 47,576
======== ========= =========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1994, 1995, 1996 and the period ended July 31, 1997 totaled $13,864, $19,051,
$17,766 and $9,161, respectively.
The Company maintains leases for all of its dental offices and for certain
of its equipment which are accounted for as operating leases. The office lease
terms range from one to ten years, while the equipment terms range from one to
four years.
F-118
<PAGE> 186
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN D.D.S.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 20,025
1998.............................................. 49,687
1999.............................................. 51,391
2000.............................................. 53,181
2001.............................................. 51,772
Thereafter........................................ 62,400
--------
$288,456
========
</TABLE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $25,162, $30,688, $46,506 and $27,468, respectively, was
incurred during years ended December 31, 1994, 1995, 1996 and for the period
ended July 31, 1997, respectively.
5. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
9.8% - 10% Notes payable to financial
institutions, collateralized by equipment,
payable through 2001...................... $ 98,799 $ 98,799 $ 85,480
Less: Current portion....................... -- (20,944) (22,258)
------- -------- --------
$ 98,799 $ 77,855 $ 63,222
======= ======== ========
</TABLE>
Scheduled maturities of long-term debt outstanding as of July 31, 1997 are
as follows:
<TABLE>
<S> <C>
1997............................................... $22,258
1998............................................... 23,283
1999............................................... 25,692
2000............................................... 14,247
-------
$85,480
=======
</TABLE>
The recorded balances for notes payable approximates the fair value.
6. INCOME TAXES
Income tax expense relates solely to one of the combined entities, Douglass
A. Quinn D.D.S., P.C. For all periods presented, temporary differences between
book and tax income were immaterial.
F-119
<PAGE> 187
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN D.D.S.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the Federal statutory income tax rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1997 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1994 1995 1996 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Statutory income tax rate...................... (34)% (34)% (34)% (34)%
Income attributable to company not subject to
Federal and state taxes...................... 39 -- 15% 20%
Losses for which no tax benefit was
recognized................................... -- 39% -- --
Utilization of net operating loss
carryforwards................................ -- -- 24% 19%
=== ===
State taxes.................................... (5)% (5)% (5)% 5%
--- --- --- ---
--% --% --% --%
=== === === ===
</TABLE>
The Components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
---------------- --------
1995 1996 1997
------- ------ --------
<S> <C> <C> <C>
Net operating loss carryforwards.................... $15,000 $5,000 $ --
Valuation allowance................................. (15,000) (5,000) --
------- ------ ------
Net................................................. $ -- $ -- $ --
======= ====== ======
</TABLE>
Net operating loss carryforwards at July 31, 1997 are immaterial.
7. OWNER'S EQUITY
Douglas A. Quinn, D.D.S., P.C. has 500 shares of $1 par Common Stock
authorized issued and outstanding for all periods presented. Combined retained
earnings for Douglas A. Quinn, D.D.S., P.C. and Douglas A. Quinn, D.D.S. is
$20,928 at December 31, 1995, $37,191 at December 31, 1996 and $51,879 at July
31, 1997.
8. RELATED PARTY TRANSACTIONS
The Company leases space from an affiliated entity. The rent expense under
this agreement was considered to be at fair market value and was $25,162,
$30,688, $46,506 and $27,468 for the year ended December 31, 1994, 1995 and 1996
and the period ended July 31, 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1995, 1996, and through July 31, 1997
approximately 2%, 14% and 11%, respectively, of the Company's net revenues were
derived from fixed rate per-member per-month contracts. Revenues under these
contracts are recorded in the month fees are earned. Revenue earned under
capitated contracts in 1994 was immaterial. The cost of services provided under
capitation contracts are expensed in the month incurred. The scope of the
services provided under the capitation contracts are provided by or within the
Company, therefore related costs are captured within the normal operating cycle
of the Company.
F-120
<PAGE> 188
DOUGLASS A. QUINN D.D.S., P.C. AND DOUGLASS A. QUINN D.D.S.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
10. SUBSEQUENT EVENTS
Effective August 1, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-121
<PAGE> 189
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
GENTLE DENTAL OF OCALA, P.C., GENTLE DENTAL OF SARASOTA, P.C., GENTLE DENTAL OF
CLEARWATER, P.C., GENTLE DENTAL OF MANATEE, P.C. AND GENTLE DENTAL ORTHODONTICS,
P.C.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and changes in owner's equity and of cash
flows present fairly, in all material respects, the financial position of Gentle
Dental of Ocala, P.C., Gentle Dental of Sarasota, P.C., Gentle Dental of
Clearwater, P.C., Gentle Dental of Manatee, P.C., and Gentle Dental
Orthodontics, P.C., (collectively referred to as the "Company" or "Gentle
Dental") at December 31, 1995 and 1996 and July 31, 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 and for the period from January 1, 1997 to July 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, PA
November 21, 1997
F-122
<PAGE> 190
GENTLE DENTAL
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................ $ 25,720 $ 9,312 $ 76,551
Accounts receivable, net............................. 108,142 114,883 114,801
Prepaid expenses and other current assets............ 11,485 5,279 5,303
---------- ---------- ----------
Total current assets......................... 145,347 129,474 196,655
Property and equipment, net............................ 1,526,669 1,540,351 1,416,488
---------- ---------- ----------
$1,672,016 $1,669,825 $1,613,143
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt.................... $ 85,936 $ 80,879 $ 114,990
Current portion of obligations under capital lease... 95,213 94,603 130,168
Accounts payable..................................... 87,474 87,405 183,609
Accrued payroll and payroll related liabilities...... 14,286 20,583 36,395
---------- ---------- ----------
Total current liabilities.................... 282,909 283,470 465,162
Long-term debt, net of current portion................. 1,093,506 1,095,698 1,013,667
Obligations under capital lease........................ 350,771 399,775 288,780
---------- ---------- ----------
Total liabilities............................ 1,727,186 1,778,943 1,767,609
---------- ---------- ----------
Stockholders' deficit.................................. (55,170) (109,118) (154,466)
---------- ---------- ----------
$1,672,016 $1,669,825 $1,613,143
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-123
<PAGE> 191
GENTLE DENTAL
COMBINED STATEMENT OF OPERATIONS AND CHANGES IN OWNER'S EQUITY
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997
TO
YEARS ENDED DECEMBER 31, JULY 31,
1994 1995 1996 1997
---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Net revenues............................ $2,709,240 $2,714,525 $2,727,371 $ 1,651,478
Cost of revenues........................ 2,142,360 1,984,374 1,945,695 1,091,524
Selling and administrative expenses..... 502,957 479,721 502,143 388,360
Depreciation and amortization........... 88,028 163,171 183,620 123,863
---------- ---------- ---------- ----------
Income (loss) from operations........... (24,105) 87,259 95,913 47,731
Interest expense........................ (54,850) (136,796) (149,861) (93,079)
---------- ---------- ---------- ----------
Net loss................................ (78,955) (49,537) (53,948) (45,348)
---------- ---------- ---------- ----------
Owner's equity, beginning of period..... 73,322 (5,633) (55,170) (109,118)
---------- ---------- ---------- ----------
Owner's equity, end of period........... $ (5,633) $ (55,170) $ (109,118) $ (154,466)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-124
<PAGE> 192
GENTLE DENTAL
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997
TO
YEARS ENDED DECEMBER 31, JULY 31,
1994 1995 1996 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $ (78,955) $ (49,537) $ (53,948) $ (45,348)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization....... 88,028 163,171 183,620 123,863
(Increase) decrease in accounts
receivable........................ 17,261 (44,354) (6,741) 82
(Increase) decrease in prepaid
expenses and other current
assets............................ 23,783 (6,655) 6,206 (24)
Increase in accounts payable and
accrued payroll................... 48,360 8,424 6,228 112,016
--------- --------- --------- ---------
Net cash provided by operating
activities................... 98,477 71,049 135,365 190,589
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of equipment................. (168,171) (766,975) (13,097) --
--------- --------- --------- ---------
Net cash used in investing
activities................... (168,171) (766,975) (13,097) --
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings of long-term debt........... 78,691 997,519 153,036 --
Principal payments on long-term debt... -- (201,014) (155,901) (47,920)
Payments on long-term capital leases... -- (84,356) (135,811) (75,430)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities......... 78,691 712,149 (138,676) (123,350)
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents.................... 8,997 16,223 (16,408) 67,239
Cash and cash equivalents at beginning
of period........................... 500 9,497 25,720 9,312
--------- --------- --------- ---------
Cash and cash equivalents at end of
period.............................. $ 9,497 $ 25,720 $ 9,312 $ 76,551
========= ========= ========= =========
Supplemental disclosure of cash flow
information:
Interest paid.......................... $ 54,850 $ 136,796 $ 149,861 $ 93,079
========= ========= ========= =========
</TABLE>
Supplemental Disclosure of noncash investing and financing activity:
To acquire equipment aggregating $407,027, $123,313 and $184,205,
respectively, in 1994, 1995 and 1996 the Company executed capital leases.
The accompanying notes are an integral part of these financial statements.
F-125
<PAGE> 193
GENTLE DENTAL
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Gentle Dental (the "Company") provides general dental care and related
services in the Florida area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements
These financial statements represent the combined financial statements of
the following affiliated companies:
Gentle Dental of Ocala, P.C.
Gentle Dental of Sarasota, P.C.
Gentle Dental of Clearwater, P.C.
Gentle Dental of Manatee, P.C.
Gentle Orthodontics, P.C.
Because the affiliated companies were acquired as a group by Valley
Forge Dental Associates, Inc. (see Note 10), and the acquisition of
each company was conditioned upon the acquisition of all the companies, the
financial statements of the affiliated companies have been presented on a
combined basis. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 9).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which range
from five to thirty years. Assets under capital leases and leasehold
improvements are amortized over the lesser of the lease term or the asset's
estimated useful life.
F-126
<PAGE> 194
GENTLE DENTAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Accordingly, the
carrying value of long-lived assets and certain identifiable intangible assets
are evaluated whenever changes in circumstances indicate the carrying amount of
such assets may not be recoverable. In performing such review for
recoverability, the Company compares the expected future undiscounted cash flows
to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
Income Taxes
The Companies have elected S corporation status with the Internal Revenue
Service. As such, all income or loss of the Company accrues directly to its
stockholders. Accordingly, no provision for income taxes has been made in these
financial statements.
Fair Value of Financial Instruments
Recorded balances of financial instruments at December 31, 1995 and 1996
and July 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable................................ $205,945 $201,829 $196,636
Less: Allowance for doubtful accounts.............. (97,803) (86,946) (81,835)
-------- -------- --------
$108,142 $114,883 $114,801
======== ======== ========
</TABLE>
Third party reimbursements are primarily billed at estimated amounts
realizable based upon contractually determined rates. In instances where "usual,
customary and reasonable" market rates are billed, gross billings are adjusted
for contractual allowances to reflect estimated amounts realizable from third
party payors. The allowance for doubtful accounts is estimated based on an
ongoing review of collectibility.
F-127
<PAGE> 195
GENTLE DENTAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
4. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Dental equipment............................... $ 644,518 $ 842,709 $ 842,709
Furniture and fixtures, automobiles and
leasehold improvements....................... 575,776 574,887 574,887
Land........................................... 153,667 153,667 153,667
Property and building.......................... 538,352 538,352 538,352
---------- ---------- ----------
1,912,313 2,109,615 2,109,615
Less: Accumulated depreciation and
amortization................................. (385,644) (569,264) (693,127)
---------- ---------- ----------
$1,526,669 $1,540,351 $1,416,488
========== ========== ==========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 5), for the years ended December 31, 1995
and 1996 and the period ended July 31, 1997 totaled $163,171, $183,620 and
$123,863, respectively.
5. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms are from 3 to 7 years.
Equipment under capital leases at cost and related accumulated amortization
included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Dental and office equipment...................... $535,516 $ 690,160 $ 690,160
Less: Accumulated amortization................... (92,784) (186,095) (245,145)
-------- --------- ---------
Equipment under capital leases................... $442,732 $ 504,065 $ 445,015
======== ========= =========
</TABLE>
Amortization of equipment under capital leases for the years ended December
31, 1995 and 1996 and the period ended July 31, 1997 totaled $56,395, $93,311
and $59,050, respectively.
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1997............................................. $ 68,921
1998............................................. 158,285
1999............................................. 133,314
2000............................................. 76,582
Thereafter....................................... 36,095
---------
473,197
Less: Amount representing interest............... (54,249)
---------
Present value of minimum lease payments.......... 418,948
Less: Current portion............................ (130,168)
---------
$ 288,780
=========
</TABLE>
The Company maintains leases for all of its dental offices and for certain
of its equipment which are accounted for as operating leases. The office lease
terms range from one to ten years, while the equipment terms range from one to
four years.
F-128
<PAGE> 196
GENTLE DENTAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 39,160
1998.............................................. 40,335
1999.............................................. 41,545
2000.............................................. 42,791
2001.............................................. 44,075
Thereafter........................................ --
---------
$ 207,906
========
</TABLE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs.
Rent expense of $151,187, $81,970, $89,283 and $61,583, respectively, was
incurred during years ended December 31, 1994, 1995 and 1996 and for the period
ended July 31, 1997, respectively.
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JULY 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Notes payable, with interest ranging from 8.00% to
11.75% collateralized by various business assets
maturing from June 1998 to August 2019............... $ 893,298 $ 852,860 $ 835,749
Other notes payable, interest rates and due dates
vary................................................. 245,544 294,396 270,507
Notes payable to related parties, interest rates range
from 8% to 10%, maturing............................. 40,600 29,321 22,401
---------- ---------- ----------
1,179,442 1,176,577 1,128,657
Less: current portion.................................. (85,936) (80,879) (114,990)
---------- ---------- ----------
$1,093,506 $1,095,698 $1,013,667
========= ========= =========
</TABLE>
Scheduled maturities on a calendar year basis of long-term debt, other than
related party debt, outstanding as of July 31, 1997 are as follows:
<TABLE>
<S> <C>
1997............................................. $ 114,990
1998............................................. 84,355
1999............................................. 56,242
2000............................................. 59,475
Thereafter....................................... 813,595
----------
$1,128,657
==========
</TABLE>
The note payable to the principal stockholder and the related party note
payable relate to funds borrowed for operational and general corporate purposes.
The loans do not have stated repayment terms, interest rates, or maturity dates.
F-129
<PAGE> 197
GENTLE DENTAL
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
7. STOCKHOLDER'S DEFICIT
The table below summarizes stockholder's deficit at December 31, 1995, 1996
and July 31, 1997:
<TABLE>
<CAPTION>
FOR ALL PERIODS PRESENTED
---------------------------------------------
SHARES ISSUED PAR ADDITIONAL
AND OUTSTANDING VALUE PAID-IN CAPITAL TOTAL
--------------- ----- --------------- -------
<S> <C> <C> <C> <C>
Gentle Dental of Ocala, P.C. ................ 50 $ .50 $ 99.50 $100.00
Gentle Dental of Sarasota, P.C. ............. 50 .50 99.50 $100.00
Gentle Dental of Clearwater, P.C. ........... 50 .50 99.50 $100.00
Gentle Dental of Manatee, P.C. .............. 50 .50 99.50 $100.00
Gentle Orthodontics, P.C. ................... 50 .50 99.50 $100.00
--- ----- ------- -----
250 $2.50 $497.50 $500.00
=== ===== ======= =====
</TABLE>
The combined stockholder's deficit of the aforementioned companies is
$55,170, $109,118 and $154,466 at December 31, 1995, 1996 and July 31, 1997,
respectively.
8. RELATED PARTY TRANSACTIONS
The Company paid management fees of $142,540, $160,240, $130,400 and
$86,388 to Dr. Borchers for the years ended December 31, 1994, 1995 and 1996 and
the period ended July 31, 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1995 and 1996, and through July 31, 1997
approximately 40%, 37% and 39%, respectively, of the Company's net revenues were
derived from fixed rate per-member per-month contracts. Revenues under these
contracts are recorded in the month fees are earned. The cost of services
provided under capitation contracts are expensed in the month incurred. The
scope of the services provided under the capitation contracts are provided by or
within the Company, therefore related costs are captured within the normal
operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company may become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Additionally, as part of its ongoing
operations, the Company is periodically reviewed by various governmental
regulatory authorities. Management is not aware of any claims, suits, complaints
or regulatory review that will have a material adverse effect on the Company's
financial position, liquidity or results of operations.
10. SUBSEQUENT EVENTS
Effective August 1, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-130
<PAGE> 198
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
FELIX W. SIBLEY, JR. D.D.S. D/B/A GARDEN WALK DENTAL
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of Felix W. Sibley,
Jr., D.D.S. d/b/a Garden Walk Dental Associates (the "Company" or "Garden Walk
Dental Associates") at December 31, 1995 and 1996 and August 31, 1997 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 and for the period from January 1, 1997 to August
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, PA
November 25, 1997
F-131
<PAGE> 199
GARDEN WALK DENTAL ASSOCIATES
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
ASSETS
Current assets
Accounts receivable, net.............................. $165,322 $191,428 $ 153,138
Prepaid expenses and other current assets............. 5,364 3,332 --
-------- -------- --------
$170,686 $194,760 $ 153,138
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable...................................... $ 31,728 $ 75,941 $ 62,594
Accrued payroll taxes................................. 10,057 4,016 24,228
Income taxes payable.................................. 6,669 16,893 8,678
-------- -------- --------
Total current liabilities..................... 48,454 96,850 95,500
-------- -------- --------
Stockholder's equity
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding at December 31, 1995, 1996
and August 31, 1997, respectively.................. 1,000 1,000 1,000
Retained earnings..................................... 121,232 96,910 56,638
-------- -------- --------
Total stockholder's equity.................... 122,232 97,910 57,638
-------- -------- --------
$170,686 $194,760 $ 153,138
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-132
<PAGE> 200
GARDEN WALK DENTAL ASSOCIATES
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 1 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues............................. $690,160 $1,066,232 $1,264,911 $ 1,241,979
Cost of revenues......................... 680,084 1,049,893 1,222,968 1,219,945
-------- ---------- ---------- ----------
Income before taxes...................... 10,076 16,339 41,943 22,034
Income tax expense....................... 4,085 6,669 16,893 8,678
-------- ---------- ---------- ----------
Net income............................... $ 5,991 $ 9,670 $ 25,050 $ 13,356
======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-133
<PAGE> 201
GARDEN WALK DENTAL ASSOCIATES
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
PAR RETAINED
SHARES VALUE EARNINGS TOTAL
------ ------ -------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1994............................. 1,000 $1,000 $245,324 $246,324
Distribution to stockholders......................... (72,466) (72,466)
Net income........................................... 5,991 5,991
----- ------ -------- --------
Balance, December 31, 1994........................... 1,000 1,000 178,849 179,849
Distribution to stockholders......................... (67,287) (67,287)
Net income........................................... 9,670 9,670
----- ------ -------- --------
Balance, December 31, 1995........................... 1,000 1,000 121,232 122,232
Distribution to stockholders......................... (49,372) (49,372)
Net income........................................... 25,050 25,050
----- ------ -------- --------
Balance, December 31, 1996........................... 1,000 1,000 96,910 97,910
Distribution to stockholders......................... (53,628) (53,628)
Net income........................................... 13,356 13,356
----- ------ -------- --------
Balance, August 31, 1997............................. 1,000 $1,000 $ 56,638 $ 57,638
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-134
<PAGE> 202
GARDEN WALK DENTAL ASSOCIATES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED FOR THE PERIOD FROM
DECEMBER 31, DECEMBER 31, DECEMBER 31, JANUARY 1, 1997
1994 1995 1996 TO AUGUST 31, 1997
------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ 5,991 $ 9,670 $ 25,050 $ 13,356
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Provision for doubtful
accounts..................... 29,368 76,306 37,240 17,203
Change in assets and liabilities,
net of effects from businesses
acquired:
(Increase) decrease in accounts
receivable................... 17,973 (27,468) (64,145) 21,087
(Increase) decrease in prepaid
expenses and other current... -- -- (3,332) 3,332
Increase (decrease) in accounts
payable...................... 9,406 2,506 28,900 (13,347)
Increase in accrued expenses
and other current
liabilities.................. 5,643 3,689 8,766 20,212
Increase (decrease) in income
taxes payable................ 4,085 2,584 16,893 (8,215)
-------- -------- -------- --------
Net cash provided by
operating activities.... 72,466 67,287 49,372 53,628
-------- -------- -------- --------
Cash flows from financing
activities:
Distributions to stockholders..... (72,466) (67,287) (49,372) (53,628)
-------- -------- -------- --------
Net cash used in financing
activities.............. (72,466) (67,287) (49,372) (53,628)
-------- -------- -------- --------
Net increase in cash and cash
equivalents.................... -- -- -- --
Cash and cash equivalents at
beginning of period............ -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents at end
of period...................... $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-135
<PAGE> 203
GARDEN WALK DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, 1996 AND AUGUST 31, 1997
1. ORGANIZATION AND OPERATIONS
Garden Walk Dental Associates (the "Company") provides general dental care
and related services in the Atlanta, Georgia area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service (see Note 6).
Fair Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1994, 1995,
1996 and August 31, 1997 approximate estimated fair market values.
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Accounts receivable.................... $ 356,736 $ 377,210 $ 314,215
Less: Allowance for doubtful
accounts............................. (191,414) (185,782) (161,077)
--------- --------- ---------
$ 165,322 $ 191,428 $ 153,138
========= ========= =========
</TABLE>
F-136
<PAGE> 204
4. INCOME TAXES
The components of the income tax expense for the year ended December 31,
1996 and the period ended August 31, 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
1994 1995 1996 1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Current:
Federal................. $3,087 $1,687 $ 12,390 $6,365
State................... 998 4,982 4,503 2,313
------ ------ ------- ------
$4,085 $6,669 $ 16,893 $8,678
====== ====== ======= ======
</TABLE>
The reconciliation of the federal statutory income tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
1994 1995 1996 1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Statutory income tax
rate.................... 34% 34% 34% 34%
State taxes............... 7% 7% 6% 6%
-- -- -- --
41% 41% 40% 40%
== == == ==
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company leases space from an entity owned by the sole shareholder of
the Company. The rent expense under this lease is considered to be at fair
market value and was $33,972, $80,249, $102,000 and $59,500 for the years ended
December 31, 1994, 1995 and 1996 and for the period ended August 31, 1997,
respectively.
6. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed,
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1996 and through August 31, 1997,
approximately 7% and 9%, respectively, of the Company's net revenues were
derived from fixed rate per-member per-month contracts. There were no capitation
revenues during 1994 or 1995. Revenues under these contracts are recorded in the
month fees are earned. The cost of services provided under capitation contracts
are expensed in the month incurred. The scope of the services provided under the
capitation contracts are provided by or within the Company, therefore related
costs are captured within the normal operation cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
7. SUBSEQUENT EVENTS
Effective September 1, 1997, the Company was acquired by Valley Forge
Dental Associates, Inc., a Delaware Corporation.
F-137
<PAGE> 205
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owner of
Dr. Kenneth Bradley Reynolds, D.D.S.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in owner's equity and of cash flows present fairly, in
all material respects, the financial position of Dr. Kenneth Bradley Reynolds,
D.D.S. (the "Company") at December 31, 1996 and August 31, 1997 and the results
of its operations and its cash flows for the year ended December 31, 1996 and
for the period from January 1, 1997 to August 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
October 15, 1997
F-138
<PAGE> 206
DR. KENNETH BRADLEY REYNOLDS D.D.S.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 9,103 $ 6,428
Accounts receivable, net............................................. 56,616 75,147
-------- --------
Total current assets......................................... 65,719 81,575
Property and equipment, net............................................ 342,254 293,558
Excess of cost over fair value of net assets acquired and other
intangible assets, net............................................... 315,621 282,695
-------- --------
$723,594 $ 657,828
======== ========
LIABILITIES AND OWNER'S EQUITY
Current liabilities
Current portion of long-term debt.................................... $ 63,309 $ 64,949
Current portion of obligations under capital lease................... 68,790 77,230
Accounts payable..................................................... 6,863 22,031
Accrued expenses and other current liabilities....................... 9,981 16,140
-------- --------
Total current liabilities.................................... 148,943 180,350
Long-term debt......................................................... 269,521 226,713
Obligations under capital lease........................................ 147,512 94,551
-------- --------
Total liabilities............................................ 565,976 501,614
-------- --------
Owner's equity......................................................... 157,618 156,214
-------- --------
$723,594 $ 657,828
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE> 207
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 1,
YEAR ENDED 1997 TO
DECEMBER 31, AUGUST 31,
1996 1997
------------ --------------
<S> <C> <C>
Net revenues...................................................... $977,257 $624,840
Cost of revenues.................................................. 557,604 371,021
Depreciation and amortization..................................... 122,434 81,623
-------- --------
Income from operations............................................ 297,219 172,196
Non-operating expenses:
Interest expense.................................................. (78,366) (44,896)
-------- --------
Net income........................................................ $218,853 $127,300
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-140
<PAGE> 208
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
STATEMENT OF CHANGES IN OWNER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
Balance, January 1, 1996......................................................... $ 103,025
Distribution to owner.......................................................... (164,260)
Net income..................................................................... 218,853
---------
Balance, December 31, 1996....................................................... 157,618
Distribution to owner.......................................................... (128,704)
Net income..................................................................... 127,300
---------
Balance, August 31, 1997......................................................... $ 156,214
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-141
<PAGE> 209
DR. KENNETH BRADLEY REYNOLDS, D.D.S
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 1,
YEAR ENDED 1997 TO
DECEMBER 31, AUGUST 31,
1996 1997
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 218,853 $ 127,300
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................ 122,434 81,623
Provision for doubtful accounts.............................. 22,948 24,040
Change in assets and liabilities, net of effects from businesses
acquired:
Increase in accounts receivable.............................. (3,115) (42,572)
Increase in accounts payable................................. 2,378 15,168
Increase in accrued expenses and other current liabilities... 421 6,159
--------- ---------
Net cash provided by operating activities............... 363,919 211,718
--------- ---------
Cash flows from investing activities:
Payments for purchase of a business............................. (28,000) --
--------- ---------
Net cash used in investing activities................... (28,000) --
--------- ---------
Cash flows from financing activities:
Payments on capital lease obligations........................... (57,838) (44,521)
Principal payments on long-term debt............................ (116,773) (41,168)
Distributions to owner.......................................... (164,260) (128,704)
--------- ---------
Net cash used in financing activities................... (338,871) (214,393)
--------- ---------
Net decrease in cash and cash equivalents....................... (2,952) (2,675)
Cash and cash equivalents at beginning of period................ 12,055 9,103
--------- ---------
Cash and cash equivalents at end of period...................... $ 9,103 $ 6,428
========= =========
Supplemental disclosure of cash flow information:
Interest paid................................................... $ 78,366 $ 44,896
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-142
<PAGE> 210
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND AUGUST 31, 1997
1. ORGANIZATION AND OPERATIONS
Dr. Kenneth Bradley Reynolds, D.D.S., (the "Company") provides general
dental care and related services in the Norfolk, Virginia area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived and Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
life of the intangible assets which range from five to forty years. Segregation
of intangible assets between identifiable intangibles and goodwill was based on
estimates derived from appraisals performed with the assistance of an
independent appraiser. Intangible assets include patient lists, covenants not to
compete and goodwill (See Note 6).
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ". Accordingly,
the carrying value of long-lived assets and certain identifiable intangible
assets
F-143
<PAGE> 211
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
NOTES TO FINANCIAL STATEMENTS
are evaluated whenever changes in circumstances indicate the carrying amount of
such assets may not be recoverable. In performing such review for
recoverability, the Company compares the expected future undiscounted cash flows
to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
Income Taxes
The Company is the sole proprietorship of Dr. Kenneth Bradley Reynolds,
D.D.S. and as such, all income or loss of the Company accrues directly to him.
Accordingly, no provision for income taxes has been made in these financial
statements.
Fair Market Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1996 and
August 31, 1997 approximate estimated fair market values.
3. BUSINESS ACQUISITIONS
In April 1996, the Company acquired certain assets of the Bane practice.
The acquisition has been accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to assets and liabilities acquired
based upon their estimated fair values at the date of acquisition. The results
of the acquired business are included in the financial statements from the date
of acquisition.
Information with respect to this acquisition is presented below:
<TABLE>
<S> <C>
Cash Paid....................................................... $ 28,000
Note issued..................................................... 33,750
--------
61,750
Fair value of tangible assets acquired.......................... (47,000)
--------
Excess of cost over fair value of assets acquired and other
intangible assets, net........................................ $ 14,750
========
</TABLE>
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Accounts receivable, net of contractual allowances
of $20,479 and $25,415 at December 31, 1996 and
August 31, 1997, respectively...................... $ 68,644 $ 90,073
Less: Allowance for doubtful accounts................ (12,028) (14,926)
-------- --------
$ 56,616 $ 75,147
======== ========
</TABLE>
F-144
<PAGE> 212
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
NOTES TO FINANCIAL STATEMENTS
The Company's services are reimbursed directly by both patients and by
third party payors, including commercial insurance companies. Third party
reimbursements are primarily billed at estimated amounts realizable based upon
contractually determined rates. In instances where "usual, customary and
reasonable" market rates are billed, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectibility.
5. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Dental and office equipment......................... $ 503,088 $ 503,088
Furniture and fixtures and leasehold improvements... 68,514 68,514
--------- ---------
571,602 571,602
Less: Accumulated depreciation and amortization..... (229,348) (278,044)
--------- ---------
$ 342,254 $ 293,558
========= =========
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 7), for the year ended December 31, 1996 and
the period ended August 1, 1997 totaled $73,045 and $48,697, respectively.
6. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS, NET
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Excess of cost over fair value of net assets
acquired........................................... $ 210,550 $ 210,550
Patient lists........................................ 10,700 10,700
Covenant not to compete.............................. 219,500 219,500
--------- --------
440,750 440,750
Less: Accumulated amortization....................... (125,129) (158,055)
--------- --------
$ 315,621 $ 282,695
========= ========
</TABLE>
Amortization expense of other assets for the year ended December 31, 1996
and the period ended August 31, 1997 totaled $49,389 and $32,926, respectively.
7. LEASES
The Company has entered into various leases for office and dental equipment
accounted for as capital leases. The lease terms expire at various dates during
the years 1998 to 2000. Equipment under capital leases at cost and related
accumulated amortization included in property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Dental and office equipment......................... $324,795 $ 324,795
Less: Accumulated amortization...................... (98,878) (130,811)
-------- ---------
Equipment under capital leases...................... $225,917 $ 193,984
======== =========
</TABLE>
Amortization of equipment under capital leases for the year ended December
31, 1996 and the period ended August 31, 1997 totaled $46,400 and $31,933,
respectively.
F-145
<PAGE> 213
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
NOTES TO FINANCIAL STATEMENTS
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 33,972
1998.............................................. 92,787
1999.............................................. 65,647
2000.............................................. 18,924
2001.............................................. --
--------
211,330
Less: Amount representing interest................ (39,549)
--------
Present value of minimum lease payments........... 171,781
Less: Current portion............................. (77,230)
--------
$ 94,551
========
</TABLE>
The Company maintains leases for all of its dental offices which are
accounted for as operating leases. The office lease terms expire at various
dates in 1997 and 1998.
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1997............................................... $20,612
1998............................................... 9,274
-------
$29,886
=======
</TABLE>
Rent expense of $83,800 and $62,800, respectively, was incurred during year
ended December 31, 1996 and for the period ended August 31, 1997, respectively.
8. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Notes payable to prior owners, 10.0%-11.50% interest
payable, secured by practice assets through 2005... $250,474 $ 224,976
Notes payable to Princess Anne Bank, 9.5%-10.0%
interest payable, secured by equipment through
2000............................................... 82,356 66,686
-------- --------
332,830 291,662
Less: Current portion................................ (63,309) (64,949)
-------- --------
$269,521 $ 226,713
======== ========
</TABLE>
Scheduled maturities of long-term debt outstanding as of August 31, 1997
are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 21,779
1998.............................................. 64,831
1999.............................................. 50,887
2000.............................................. 41,142
2001.............................................. 23,253
Thereafter........................................ 89,770
--------
$291,662
========
</TABLE>
F-146
<PAGE> 214
DR. KENNETH BRADLEY REYNOLDS, D.D.S.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
10. SUBSEQUENT EVENTS
Effective September 1, 1997, the Company was acquired by Valley Forge
Dental Associates, Inc., a Delaware Corporation.
F-147
<PAGE> 215
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Miller & Powell, DMD, P.C.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Miller &
Powell, DMD, P.C. ("the Company") at December 31, 1996 and August 31, 1997 and
the results of its operations and its cash flows for the year ended December 31,
1996 and for the period from January 1, 1997 to August 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
October 16, 1997
F-148
<PAGE> 216
MILLER & POWELL, DMD, P.C.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................... $ 51,375 $ 53,545
Accounts receivable, net........................................... 94,825 76,070
-------- --------
Total current assets....................................... 146,200 129,615
Property and equipment, net.......................................... 1,151 844
-------- --------
$147,351 $ 130,459
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses.............................. $ 78,435 $ 49,755
Deferred revenues.................................................. 8,993 8,326
-------- --------
Total current liabilities.................................. 87,428 58,081
Stockholders' equity
Common stock, $1 par value, 9,335 shares authorized, issued and
outstanding..................................................... 9,335 9,335
Retained earnings.................................................. 50,588 63,043
-------- --------
Total stockholders' equity................................. 59,923 72,378
-------- --------
$147,351 $ 130,459
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-149
<PAGE> 217
MILLER & POWELL, DMD, P.C.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED 1997 TO
DECEMBER 31, AUGUST 31,
1996 1997
------------ --------------
<S> <C> <C>
Net revenues........................................................ $1,179,457 $725,864
Cost of revenues.................................................... 967,121 639,459
Selling and administrative expenses................................. 150,726 74,844
Depreciation and amortization....................................... 460 307
---------- --------
Income from operations.............................................. 61,150 11,254
Non-operating income:
Interest income................................................... 947 1,201
---------- --------
Net income.......................................................... $ 62,097 $ 12,455
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-150
<PAGE> 218
MILLER & POWELL, DMD, P.C.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------
PAR RETAINED
SHARES VALUE EARNINGS (DEFICIT) TOTAL
------ ------ ------------------ -------
<S> <C> <C> <C> <C>
Balance, January 1, 1996.............................. 9,335 $9,335 $(11,509) $(2,174)
Net income............................................ 62,097 62,097
----- ------ ------- -------
Balance, December 31, 1996............................ 9,335 9,335 50,588 59,923
Net income............................................ 12,455 12,455
----- ------ ------- -------
Balance, August 31, 1997.............................. 9,335 $9,335 $ 63,043 $72,378
===== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-151
<PAGE> 219
MILLER & POWELL, DMD, P.C.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEAR JANUARY 1,
ENDED 1997 TO
DECEMBER 31, AUGUST 31,
1996 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 62,097 $ 12,455
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.................................... 460 307
(Increase) decrease in accounts receivable....................... (25,643) 18,755
Decrease in accounts payable..................................... (2,727) (28,680)
Increase (decrease) in deferred revenue.......................... 1,604 (667)
-------- --------
Net cash provided by operating activities................... 35,791 2,170
-------- --------
Net increase in cash and cash equivalents........................... 35,791 2,170
Cash and cash equivalents at beginning of period.................... 15,584 51,375
-------- --------
Cash and cash equivalents at end of period.......................... $ 51,375 $ 53,545
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-152
<PAGE> 220
MILLER & POWELL, DMD, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND AUGUST 31, 1997
1. ORGANIZATION AND OPERATIONS
Miller & Powell, DMD, P.C. (the "Company") provides general dental care and
related services in the Atlanta area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Long-Lived Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
life of the intangible assets which range from five to forty years. Segregation
of intangible assets between identifiable intangibles and goodwill was based on
estimates derived from appraisals performed with the assistance of independent
appraiser. Intangible assets include patient lists, covenants not to compete and
goodwill.
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, the
carrying value of long-lived assets and certain identifiable intangible assets
are evaluated whenever changes in circumstances indicate the carrying amount of
such assets may not be
F-153
<PAGE> 221
MILLER & POWELL, DMD, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recoverable. In performing such review for recoverability, the Company compares
the expected future undiscounted cash flows to the carrying value of long-lived
assets and identifiable intangibles, including the related excess of cost over
fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
Income Taxes
The Company has elected S corporation status with the Internal Revenue
Service. As such, all income or loss of the Company accrues directly to its
stockholders. Accordingly, no provision for income taxes has been made in these
financial statements.
Fair Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1996 and
August 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Accounts receivable.................................... $131,934 $ 121,853
Less: Allowance for doubtful accounts.................. (37,109) (45,783)
--------- ---------
$ 94,825 $ 76,070
========= =========
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Dental and office equipment, furniture and fixtures.... $ 19,799 $ 19,799
Leasehold improvements................................. 22,502 22,502
-------- --------
42,301 42,301
Less: Accumulated depreciation and amortization........ (41,150) (41,457)
-------- --------
$ 1,151 $ 844
======== ========
</TABLE>
Depreciation and amortization expense for the year ended December 31, 1996
and the period ended August 31, 1997 totaled $460 and $307, respectively.
F-154
<PAGE> 222
MILLER & POWELL, DMD, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Accounts Payable....................................... $ 78,435 $ 17,912
Salaries and payroll taxes............................. -- 31,843
------- -------
$ 78,435 $ 49,755
======= =======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company leases office space under a month to month arrangement from an
affiliated entity. The rent expense under this lease arrangement was considered
to be at fair market value and was $46,877 and $27,345 for 1996 and the period
ended August 31, 1997, respectively.
The Company leases dental equipment under a month to month arrangement from
an affiliated entity. The rent expense under this agreement was considered to be
at fair market value and was $56,621 and $37,351 for 1996 and the period ended
August 31, 1997, respectively.
7. EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a defined contribution or profit sharing plan
intended to qualify for tax-exempt status under Section 401(a) of the Internal
Revenue Code. Substantially all employees over 21 years of age working in excess
of 1,000 hours per plan year and who is employed on the last day of the Plan
year are eligible for participation in the Plan. Contributions by the Company
are discretionary and subject to profitability requirements. Charges to
operations for contributions to the Plan were $50,000 in 1996. No contribution
was made to the Plan for the period from January 1, 1997 to August 31, 1997,
respectively.
8. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services performed by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
9. SUBSEQUENT EVENTS
Effective September 1, 1997, the Company was acquired by Valley Forge
Dental Associates, Inc., a Delaware Corporation.
F-155
<PAGE> 223
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
ProDent, Inc. and Affiliates
Bensalem, Pennsylvania
We have audited the accompanying combined balance sheets of Pro Dent, Inc.
and Affiliates (the "Company"), as of December 31, 1995, 1996 and September 30,
1997 and the related combined statements of income, combined changes in
stockholders' equity, and combined cash flows for the years ended December 31,
1994, 1995, 1996 and the period from January 1 to September 30, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Pro Dent, Inc. and
Affiliates as of December 31, 1995, 1996 and September 30, 1997, and the results
of their operations and their cash flows for the years ended December 31, 1994,
1995, 1996 and the period from January 1 to September 30, 1997 in conformity
with generally accepted accounting principles.
Kelly, Welde & Co.
Broomall, PA
October 16, 1997
F-156
<PAGE> 224
PRODENT, INC. AND AFFILIATES
COMBINED BALANCE SHEET
DECEMBER 31, 1995, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
ASSETS ---------- --------- ----------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents............................ $ 29,711 $ 46,460 $ 179,978
Accounts receivable (net)............................ 421,628 428,151 481,572
Prepaid expenses and other current assets............ 184,680 90,430 60,711
---------- --------- ----------
Total current assets......................... 636,019 565,041 722,261
Equipment and leasehold improvements (net)............. 355,458 369,081 306,779
Notes receivable -- stockholders....................... 118,694 -- --
Other assets........................................... 50,123 47,292 39,453
---------- --------- ----------
Total assets................................. $1,160,294 $ 981,414 $1,068,493
========== ========= ==========
CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable -- bank -- demand....................... $ 130,000 $ 245,552 $ 205,552
Current portion of long-term debt.................... 44,170 21,442 2,779
Current portion of obligations under capital lease... 20,360 34,791 36,903
Accounts payable and accrued expenses................ 128,352 162,523 207,879
Deferred income taxes................................ 173,224 123,901 132,167
Corporate income taxes payable....................... -- -- 9,664
---------- --------- ----------
Total current liabilities.................... 496,106 588,209 594,944
---------- --------- ----------
Long-term liabilities
Long-term debt net of current portion above............ 21,443 -- --
Obligations under capital lease...................... 39,983 67,109 39,194
Deferred income taxes................................ -- -- 22,201
---------- --------- ----------
Total long-term liabilities.................. 61,426 67,109 61,395
---------- --------- ----------
Total liabilities............................ 557,532 655,318 656,339
---------- --------- ----------
Stockholders' equity
Capital stock.......................................... 2,899 2,899 2,774
Capital in excess of par value....................... 300,071 300,071 112,696
Retained earnings.................................... 299,792 210,626 296,684
Less: Cost of 12,500 shares held in treasury......... -- (187,500) --
---------- --------- ----------
Total stockholders' equity................... 602,762 326,096 412,154
---------- --------- ----------
Total liabilities and stockholders' equity... $1,160,294 $ 981,414 $1,068,493
========== ========= ==========
</TABLE>
See accompanying notes and accountants' report.
F-157
<PAGE> 225
PRODENT, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND
THE PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1994 1995 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues.............................. $4,809,992 $5,140,930 $5,417,616 $4,633,740
---------- ---------- ---------- ----------
Costs of revenues......................... 3,297,200 3,558,729 3,824,632 3,123,236
Selling and administrative expenses....... 1,414,750 1,521,867 1,664,883 1,328,383
Depreciation and amortization............. 87,977 60,366 57,943 43,403
---------- ---------- ---------- ----------
Total expenses............................ 4,799,927 5,140,962 5,547,458 4,495,022
---------- ---------- ---------- ----------
Income before provision for income
taxes................................... 10,065 (32) (129,842) 138,718
Income tax expense (benefits)............. 8,426 (11,739) (40,676) 52,660
---------- ---------- ---------- ----------
Net income (loss)......................... $ 1,639 $ 11,707 $ ( 89,166) $ 86,058
========== ========== ========== ==========
</TABLE>
See accompanying notes and accountants' report.
F-158
<PAGE> 226
PRODENT, INC. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND
THE PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1994 1995 1996 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Common stock
Balance at beginning of year................ $ 2,899 $ 2,899 $ 2,899 $ 2,899
Retirement of Treasury Stock................ -- -- -- (125)
-------- -------- --------- ---------
Balance at end of year.............. $ 2,899 $ 2,899 $ 2,899 $ 2,774
======== ======== ========= =========
Capital in excess of par
Balance at beginning of year................ $300,071 $300,071 $ 300,071 $ 300,071
Retirement of Treasury Stock................ -- -- -- (187,375)
-------- -------- --------- ---------
Balance at end of year.............. $300,071 $300,071 $ 300,071 $ 112,696
======== ======== ========= =========
Treasury stock
Balance at beginning of year................ $ -- $ -- $ -- $(187,500)
Purchase of Treasury Stock.................. -- -- (187,500) --
Retirement of Treasury Stock................ -- -- -- 187,500
-------- -------- --------- ---------
Balance at end of year.............. $ -- $ -- $(187,500) $ --
======== ======== ========= =========
Retained earnings
Balance at beginning of year................ $286,446 $288,085 $ 299,792 $ 210,626
Net income (loss)........................... 1,639 11,707 (89,166) 86,058
-------- -------- --------- ---------
Balance at end of year.............. $288,085 $299,792 $ 210,626 $ 296,684
======== ======== ========= =========
</TABLE>
See accompanying notes and accountants' report.
F-159
<PAGE> 227
PRODENT, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND
THE PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 1,639 $ 11,707 $ (89,166) $ 86,058
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for doubtful accounts.................. 48,258 40,601 66,604 34,759
Depreciation and amortization.................... 87,977 60,366 57,943 43,403
Loss on sale of equipment........................ -- -- -- 18,800
Change in assets and liabilities:
Decrease (Increase) in accounts receivable....... 11,510 (69,911) (73,127) (88,180)
Decrease (Increase) in prepaid expenses and other
current assets................................. 2,056 (54,059) 94,250 29,719
Increase (Decrease) in accounts payable and
accrued expenses............................... 14,205 (45,517) 34,171 45,356
(Increase) Decrease in other assets.............. -- (7,748) (7,294) (3,728)
Increase (Decrease) in deferred income taxes..... 225 (13,553) (41,798) 40,896
Increase in corporate income taxes payable....... -- -- -- 9,664
--------- --------- --------- --------
Net cash provided by (used in) operating
activities................................ 165,870 (78,114) 41,583 216,747
--------- --------- --------- --------
Cash flow from investing activities:
(Increase) Decrease in note receivable.............. (5,894) (5,894) 118,694 --
Purchases of equipment and leasehold improvements... -- (84,575) -- --
Proceeds from sale of equipment..................... -- -- -- 100
--------- --------- --------- --------
Net cash provided by (used in) investing
activities................................ (5,894) (90,469) 118,694 100
--------- --------- --------- --------
Cash flow from financing activities:
Purchase of Treasury Stock.......................... -- -- (187,500) --
Principal payments on long-term debt................ (98,405) (228,130) (41,571) (17,526)
Borrowings -- Note payable -- bank -- demand........ -- 130,000 245,552 --
Repayments -- Note payable -- bank -- demand........ -- -- (130,000) (40,000)
Repayments of capital lease obligations............. (55,359) (32,708) (30,009) (25,803)
--------- --------- --------- --------
Net cash provided by (used in) financing
activities................................ (153,764) (130,838) (143,528) (83,329)
--------- --------- --------- --------
Net change in cash and cash equivalents............... 6,212 (299,421) 16,749 133,518
Cash and cash equivalents -- beginning of period...... 322,920 329,132 29,711 46,460
--------- --------- --------- --------
Cash and cash equivalents -- end of period............ $ 329,132 $ 29,711 $ 46,460 $179,978
========= ========= ========= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest......................................... $ 41,087 $ 20,311 $ 23,682 $ 21,805
========= ========= ========= ========
Income taxes..................................... $ 15,175 $ 201 $ 2,363 $ 429
========= ========= ========= ========
Supplemental Schedule of Noncash Investing
Transactions:
Property and equipment acquired through capital
lease obligation................................. $ -- $ -- $ 71,566 $ --
Retirement of Treasury Stock........................ $ -- $ -- $ -- $187,375
</TABLE>
See accompanying notes and accountants' report.
F-160
<PAGE> 228
PRODENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Pro Dent, Inc. and Affiliates (collectively as the "Company") operate
dental centers in four locations in the suburbs of Philadelphia, Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The financial statements represent the combined financial position of the
following affiliated Companies:
George E. Frattali, D.D.S. and Assoc., Ltd.
George Frattali, D.D.S. and Assoc., PA
Village of Newtown Dentists, Inc.
Pro Dent, Inc.
Because the affiliated companies were acquired as a group by Valley Forge
Dental Associates, Inc. (see Note 13), and the acquisition of each company was
conditioned upon the acquisition of all the companies, the financial statements
of the affiliated companies have been presented on a combined basis. All
significant intercompany balances and transactions have been eliminated.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Equipment and Leasehold Improvements
Capital additions are stated at cost. Maintenance, repairs and minor
renewals are charged to operations as incurred. Depreciation and amortization is
provided over the estimated useful lives of the assets using the straight-line
method. The estimated useful lives of the assets range from 5 to 12 years.
Capital Leases
The Company has entered into various leases for office and dental equipment
which are accounted for as capital leases. At inception of the lease, the
equipment under lease and the related obligations are recorded at the net
present value of future minimum lease payments, excluding executory costs,
discounted using the Company's incremental borrowing rate.
Income Taxes
The Company provides for federal and state income taxes currently payable
and for deferred income taxes which result from the difference in reporting
certain income and expense items for financial statement and income tax purposes
according to Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
Disclosure of Cash Flows Information
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
F-161
<PAGE> 229
PRODENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Fair Value of Financial Instruments
The recorded balances of all assets and liabilities which represent
financial instruments at December 31, 1995, 1996 and September 30, 1997
approximate estimated fair market values.
Reclassifications
Certain prior years' balances have been reclassified to conform with the
current period's presentation.
Property and Equipment
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Vehicles........................................... $ 45,573 $ 45,573 $ --
Leasehold improvements............................. 300,880 300,880 300,880
Equipment.......................................... 498,646 570,211 570,211
Furniture and fixtures............................. 274,457 274,457 274,457
---------- ---------- ----------
1,119,556 1,191,121 1,145,548
Less: Accumulated depreciation and amortization.... (764,098) (822,040) (838,769)
---------- ---------- ----------
Total.................................... $ 355,458 $ 369,081 $ 306,779
========== ========== ==========
</TABLE>
3. LEASE COMMITMENTS
Operating Leases
The Company has entered into various leases for dental center space. The
lease terms are from 6 to 15 years.
Minimum annual rental commitments under noncancelable leases are as
follows:
<TABLE>
<S> <C>
1998............................................. $ 222,490
1999............................................. 226,510
2000............................................. 230,530
2001............................................. 235,021
2002............................................. 181,528
Thereafter.................................. 922,816
----------
$2,018,895
==========
</TABLE>
Capital Leases
The Company has entered into various leases for equipment accounted for as
capital leases.
F-162
<PAGE> 230
PRODENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of property held under capital lease included in
property and equipment on the balance sheet:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Equipment.......................................... $104,666 $176,232 $176,232
Less: Accumulated depreciation..................... (15,700) (29,745) (42,961)
-------- -------- --------
$ 88,966 $146,487 $133,271
======== ======== ========
</TABLE>
Depreciation of assets under capital leases included in depreciation
expense for the years ended December 31, 1994, 1995, 1996 and the period January
1 to September 30, 1997 was $12,671, $5,233, $14,045 and $13,216, respectively.
Future minimum lease payments under capital lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1998.............................................................. $ 42,785
1999.............................................................. 18,144
2000.............................................................. 18,143
2001.............................................................. 7,560
2002.............................................................. --
-------
Net minimum lease payments........................................ 86,632
Less: Amount representing interest................................ (10,535)
-------
Present value of net minimum lease payments....................... 76,097
Less: Current portion............................................. (36,903)
-------
Long-term portion................................................. $ 39,194
=======
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Notes Payable -- Bank
First National Bank of West Chester Various term
loans payable in monthly installments Interest
rate -- range from 8.8315% to 11.91% Balance...... $ 65,613 $ 21,442 $ 2,779
These notes are guaranteed by substantially all of
the assets of the Company.
------- ------- ------
Total............................................. $ 65,613 $ 21,442 $ 2,779
Less: Current Portion............................. (44,170) (21,442) (2,779)
------- ------- ------
Long Term Portion................................. $ 21,443 $ -- $ --
======= ======= ======
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998................................................ $2,779
1999................................................ --
2000................................................ --
2001................................................ --
2002................................................ --
Thereafter.....................................
------
$2,779
======
</TABLE>
F-163
<PAGE> 231
PRODENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Deferred income taxes arise from timing differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. The principal sources of timing differences are different
accounting methods for recognition of income and expenses, depreciation expense
and net operating losses for financial accounting and tax purposes.
The components of income tax expense are:
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ -------- -------- --------
<S> <C> <C> <C> <C>
Currently payable................................. $7,036 $ 2,233 $ 1,122 $ 83,501
Deferred taxes due to timing differences.......... 1,390 (13,553) (41,798) 40,897
Current benefit of net operating loss carryover... -- (419) -- (71,738)
------ ------- ------- -------
$8,426 $(11,739) $(40,676) $ 52,660
====== ======= ======= =======
</TABLE>
The Company has unused Federal net operating losses of $154,496 which will
expire in the years 2006 through 2011 and state net operating losses of $138,193
which will expire in 1997 and 1999.
The reconciliation of the federal statutory income tax rate to the
effective income tax rate for the years ended December 31, 1994, 1995, 1996 and
for the period from January 1, 1997 to September 30, 1997 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997
---- ------- ---- ----
<S> <C> <C> <C> <C>
Statutory income tax rate..................................... 15% 15% 15% 15%
Accruals and Reserves not currently deductible for tax
purposes.................................................... 52 (68,691) 29 11
Losses for which no income tax benefit is recognized.......... -- 39,806 (6) --
Non-deductible business expenses.............................. -- (3,362) (1) --
State taxes, net of Federal Tax Benefit....................... 17 68,916 (6) 12
--- -------
-- - -- -
84% 36,684%
31% 38%
=== =======
=== ===
</TABLE>
The components of net deferred tax liabilities at December 31, 1995, 1996
and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Net operating loss carryforwards.......................... $(59,730) $(41,042) $ --
-------- -------- ---------
Gross deferred tax assets................................. (59,730) (41,042) --
Valuation allowance....................................... -- --
-------- -------- ---------
(59,730) (41,042) --
Gross deferred tax liabilities............................ 214,999 154,513 154,368
-------- -------- ---------
Net deferred tax liabilities.............................. $155,269 $113,471 $ 154,368
======== ======== =========
Balance Sheet Classifications:
Other assets............................................ $(17,955) $(10,430) $ --
Deferred income taxes -- current........................ 173,224 123,901 132,167
Deferred income taxes -- long-term...................... -- -- 22,201
-------- -------- ---------
$155,269 $113,471 $ 154,368
======== ======== =========
</TABLE>
F-164
<PAGE> 232
PRODENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL STOCK
<TABLE>
<CAPTION>
VILLAGE OF GEORGE E. GEORGE
PRO DENT, NEWTOWN FRATTALI DDS FRATTALI DDS
INC. DENTISTS & ASSOC. LTD & ASSOC. PA TOTAL
--------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Common Stock Par Value per share........ $ .01 $ 1.00 $ .01 $ .01
Authorized shares....................... 1,000,000 100 1,000,000 1,000
Shares issued........................... 265,975 100 1,000 400
Par Value of shares issued.............. $ 2,660 $ 100 $ 10 $ 4 $ 2,774
Additional paid-in capital.............. $111,310 $ -- $990 $396 $112,696
</TABLE>
As of September 30, 1997, Pro Dent, Inc. permanently retired 125 shares of
its treasury stock which was originally purchased during 1996.
7. INTEREST EXPENSE
The amount of interest expense incurred, all of which was charged to
operations for the years ended December 31, 1994, 1995, 1996 and the period
January 1 to September 30, 1997, was $41,088, $20,311, $23,682 and $21,805,
respectively.
8. CONTINGENCIES
Guarantees
The Corporation has guaranteed loans from financial institutions for
purchases of stock by shareholders of Pro Dent, Inc. The loan balances at
September 30, 1997 approximate $250,000 of which 75% is guaranteed by Pro Dent,
Inc.
Litigation
In the normal course of operations, the Company and/or its affiliates have
become party to claims, suits and complaints relating to general and
professional services provided by the Company. The Company has purchased general
and professional liability insurance to cover claims which may arise. Management
does not believe that any of these claims, suits or complaints will have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
9. RELATED PARTY TRANSACTIONS
Pro Dent, Inc. leases equipment and leasehold improvements to the dental
centers and provides management of these centers. The centers were charged the
following:
<TABLE>
<CAPTION>
EQUIPMENT RENTAL
-----------------------------------------
1994 1995 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
George E. Frattali, DDS & Assoc., Ltd.
Exton....................................... $ 52,871 $ 52,871 $ 52,871 $ 39,653
Neshaminy................................... 51,304 51,304 51,304 38,478
George Frattali, DDS & Assoc., PA
Voorhees.................................... 57,607 57,607 57,607 43,205
Village of Newtown Dentists................... 41,145 41,145 41,145 30,859
-------- -------- -------- --------
$202,927 $202,927 $202,927 $152,195
======== ======== ======== ========
</TABLE>
F-165
<PAGE> 233
PRODENT, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MANAGEMENT FEES
-----------------------------------------
1994 1995 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
George E. Frattali, DDS & Assoc., Ltd.
Exton....................................... $104,097 $ -- $120,679 $142,819
Neshaminy................................... 72,127 34,787 184,962 153,918
George Frattali, DDS & Assoc., PA
Voorhees.................................... 126,201 267,129 161,526 195,770
Village of Newtown Dentists................... -- -- -- 82,605
-------- -------- -------- --------
$302,425 $301,916 $467,167 $575,112
======== ======== ======== ========
</TABLE>
These intercompany charges were eliminated in the combined statement of
income.
10. NOTE PAYABLE -- DEMAND -- BANK
The Company has a $500,000 line of credit with a bank with interest accrued
on outstanding balances at prime (8.5% at September 30, 1997) and is payable
monthly. The note is collateralized by the Company. The outstanding balance as
of September 30, 1997 was $205,552.
11. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable.................................... $427,228 $433,751 $487,172
Less: Allowance for doubtful accounts.................. (5,600) (5,600) (5,600)
-------- -------- --------
$421,628 $428,151 $481,572
======== ======== ========
</TABLE>
12. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Commissions.......................................... $ 65,664 $21,048 $27,932
Insurance............................................ 55,273 57,330 18,799
Postage.............................................. 1,615 1,058 2,011
Miscellaneous receivables............................ 55,752 10,224 11,969
Corporate taxes...................................... 6,376 770 --
-------- ------- -------
$184,680 $90,430 $60,711
======== ======= =======
</TABLE>
13. SUBSEQUENT EVENTS
On October 1, 1997, 80% of the Company's stock was acquired by Valley Forge
Dental Associates, Inc., a Delaware Corporation.
F-166
<PAGE> 234
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Poller Dental Group, P.A., Poller
Dental Group of Union, P.A. and Dental Centers of America, P.A.
In my opinion, the accompanying combined balance sheet and the related
combined statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Poller Dental Group, P.A., Poller Dental Group of Union, P.A. and Dental Centers
of America, P.A. at December 31, 1995, 1996 and September 30, 1997 and the
results of their operations and their cash flows for the years ended December
31, 1994, 1995 and 1996 and for the period from January 1, 1997 to September 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; my
responsibility is to express an opinion on these financial statements based on
my audits. I conducted my audits of these statements in accordance with
generally accepted auditing standards which requires that I 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. I
believe that my audits provide a reasonable basis for the opinion expressed
above.
Sidney Glassel, C.P.A.
Woodbridge, New Jersey
October 24, 1997
F-167
<PAGE> 235
POLLER DENTAL GROUP, P.A., POLLER DENTAL GROUP OF UNION, P.A.
AND DENTAL CENTERS OF AMERICA, P.A.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash....................................................... $230,711 $ 77,031 $ 435,935
Accounts receivable, net................................... 441,647 545,578 1,136,116
-------- -------- ----------
Total current assets............................... 672,358 622,609 1,572,051
Property and equipment, net.................................. 119,000 124,435 369,618
Excess of cost over fair value of net assets acquired and
other intangible assets, net............................... 2,422,778
Other assets -- Due from affiliates.......................... 63,632 72,268
-------- -------- ----------
$854,990 $819,312 $ 4,364,447
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.......................... 39,153 27,789 284,633
Due to officers............................................ 289,300 124,764 282,890
Accounts payable........................................... 42,688 71,174 508,994
Accrued expenses and other current liabilities............. 26,017 8,367 44,787
-------- -------- ----------
Total current liabilities.......................... 397,158 232,094 1,121,304
-------- -------- ----------
Long-term debt............................................... 55,555 27,778 2,513,255
Owner's equity............................................... 402,277 559,440 729,888
-------- -------- ----------
$854,990 $819,312 $ 4,364,447
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-168
<PAGE> 236
POLLER DENTAL GROUP, P.A., POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTERS OF AMERICA, P.A.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1,
1997
TO
YEARS ENDED DECEMBER 31, SEPTEMBER
---------------------------------------- 30,
1994 1995 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues.............................. $2,954,985 $3,438,381 $3,829,802 $3,720,010
Operating expenses........................ 2,846,587 3,392,869 3,636,092 3,468,720
Depreciation and amortization............. 28,756 32,996 29,700 68,184
---------- ---------- ---------- ----------
Income from operations.................... 79,642 12,516 164,010 183,106
Non-operating expenses:
Interest expense -- other............... 8,903 10,907 6,847 29,658
---------- ---------- ---------- ----------
Net income................................ 70,739 1,609 157,163 153,448
Owners equity at beginning of period...... 329,929 400,668 402,277 559,440
Issuance of common stock.................. -- -- -- 17,000
---------- ---------- ---------- ----------
Owners equity at end of period............ $ 400,668 $ 402,277 $ 559,440 $ 729,888
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-169
<PAGE> 237
POLLER DENTAL GROUP, P.A., POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTER OF AMERICA, P.A.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1997
----------------------------------- TO SEPTEMBER 30,
1994 1995 1996 1997
-------- -------- --------- ----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 70,739 $ 1,609 $ 157,163 $153,448
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 28,756 32,996 29,700 68,184
Changes in assets and liabilities, net
of effects from business acquired:
(Increase) Decrease in accounts
receivable....................... (44,860) (61,649) (103,931) (90,538)
(Increase) Decrease in prepaid
expenses and other current
assets........................... (50) 25
(Increase) Decrease in other
assets........................... (53,000) (8,375) (8,636) 72,268
Increase (Decrease) in accounts
payable.......................... 16,686 1,253 28,486 337,820
Increase (Decrease) in accrued
expenses and other current
liabilities...................... (14,908) 13,154 (17,650) 36,420
-------- -------- --------- --------
Net cash provided by (used in)
operating activities........... 3,363 (20,987) 85,132 577,602
-------- -------- --------- --------
Cash flows from investing activities:
Payment for purchases of businesses ..... -- -- -- (300,000)
Purchases of property and equipment...... (128,546) -- (35,135) (36,145)
-------- -------- --------- --------
Net cash used in investing
activities..................... (128,546) -- (35,135) (336,145)
-------- -------- --------- --------
Cash flows from financing activities:
Issuance of common stock................. -- -- -- 17,000
Borrowings of long-term debt............. 110,937 -- -- --
Principal payments on long-term debt..... -- (15,486) (39,141) (57,679)
Increase (Decrease) loan from officers... (60,674) 141,236 (164,536) 158,126
-------- -------- --------- --------
Net cash provided (used) by
financing activities........... 50,263 125,750 (203,677) 117,447
-------- -------- --------- --------
Net increase (Decrease) in cash.......... (74,920) 104,763 (153,680) 358,904
Cash at beginning of period.............. 200,868 125,948 230,711 77,031
-------- -------- --------- --------
Cash at end of period.................... $125,948 $230,711 $ 77,031 $435,935
======== ======== ========= ========
Supplemental disclosure of cash flow
information:
Interest paid............................ $ 8,903 $ 10,907 $ 6,847 $ 29,658
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-170
<PAGE> 238
POLLER DENTAL GROUP, P.A. POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTERS OF AMERICA, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, 1996 AND SEPTEMBER 30, 1997
1. ORGANIZATION AND OPERATIONS
Poller Dental Group provides general dental care and related services in
the State of New Jersey area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements
These financial statements represent combined financial statements of the
following affiliated companies:
Poller Dental Group, P.A.
Poller Dental Group of Union, P.A.
Dental Centers of America, P.A.
Because the affiliated companies were acquired as a group by Valley Forge
Dental Associates, Inc. (see Note 13), and the acquisition of each company was
conditioned upon the acquisition of all the companies, the financial statements
of the affiliated companies have been presented on a combined basis. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities revenues and
expenses. Actual results could differ from those estimates.
Cash
For purposes of reporting cash flows, cash includes cash on hand and cash
funds available for use.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third-party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a pro
rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member, per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service .
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized for the lesser of the lease term or the
asset's estimated useful life.
Long-Lived and Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
life of the
F-171
<PAGE> 239
POLLER DENTAL GROUP, P.A. POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTERS OF AMERICA, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
intangible assets which range from five to forty years. Segregation of
intangible assets between identifiable intangibles and goodwill was based on
estimates derived from appraisals. Intangible assets include patient lists,
covenants not to compete, assembled work force and goodwill (see Notes 3 and 6).
In 1995, the Company implemented Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Accordingly, the carrying value of long-lived assets and certain identifiable
intangible assets are evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. In performing such review
for recoverability, the Company compares the expected future undiscounted cash
flows to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
Income Taxes
The Company has elected S corporation status with the Internal Revenue
Service. As such, all income or loss of the Company accrues directly to its
stockholders. Accordingly, no provision for income taxes has been made in these
financial statements.
3. BUSINESS ACQUISITIONS
On August 11, 1997, the Company acquired certain assets of American Dental
Centers of America, P.A. for $3,200,000. This acquisition has been accounted for
using the purchase method of accounting. Accordingly, the purchase price
allocated to assets acquired is based upon their estimated fair values at the
date of acquisition. The results of acquired business are included in the
combined Financial Statements from the date of acquisition.
Information with respect to this acquisition is as follows:
<TABLE>
<S> <C>
Cash paid........................................................ $ 300,000
Notes payable to former owner.................................... 2,200,000
Notes payable to financial institutions.......................... 600,000
Accounts payable................................................. 100,000
----------
3,200,000
Fair value of tangible assets acquired........................... (250,000)
Fair value of accounts receivable................................ (500,000)
----------
Excess of cost over fair value of net liabilities assumed and
other intangible assets........................................ $2,450,000
==========
</TABLE>
F-172
<PAGE> 240
POLLER DENTAL GROUP, P.A. POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTERS OF AMERICA, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Accounts receivable.......................... $517,433 $634,201 $ 1,237,539
Less: Allowance for doubtful accounts........ (75,786) (88,623) (101,423)
-------- -------- ----------
$441,647 $545,578 $ 1,136,116
======== ======== ==========
</TABLE>
The Company's services are reimbursed directly by both patients and by
third-party payors, including Medicaid, managed care organizations and
commercial insurance companies. Third-party reimbursements are primarily billed
at estimated amounts realizable based upon contractually determined rates. In
instances where "usual customary and reasonable" market rates are billed, gross
billings are adjusted for contractual allowances to reflect estimated amounts
realizable from third-party payors. The allowance for doubtful accounts is
estimated based on an ongoing review of collectibility.
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Dental equipment............................. $400,261 $434,936 $ 665,138
Furniture and fixtures and leasehold
improvements............................... 148,867 149,327 205,270
-------- -------- --------
549,128 584,263 870,408
Less: Accumulated depreciation............... (430,128) (459,828) (500,790)
-------- -------- --------
Net property & equipment..................... $119,000 $124,435 $ 369,618
======== ======== ========
</TABLE>
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Excess of cost over fair value of net assets
acquired................................... -- -- $ 1,955,000
Patient lists................................ -- -- 325,000
Covenant not to compete...................... -- -- 100,000
Assembled workforce.......................... -- -- 70,000
---- ---- ----------
-- -- 2,450,000
Less: Accumulated amortization............... -- -- (27,222)
---- ---- ----------
Net intangible assets........................ $ -- $ -- $ 2,422,778
==== ==== ==========
</TABLE>
Amortization expense of intangible assets for the years ended December 31,
1994, 1995, 1996 and the period ended September 30, 1997 totaled $0, $0, $0 and
$27,222, respectively.
7. LEASES
The Company maintains leases for all of its dental offices and for certain
of its equipment which are accounted for as operating leases. The office lease
terms range from one to ten years.
F-173
<PAGE> 241
POLLER DENTAL GROUP, P.A. POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTERS OF AMERICA, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1998............................................. $ 248,748
1999............................................. 252,792
2000............................................. 257,304
2001............................................. 262,116
Thereafter....................................... 459,492
----------
$1,480,452
==========
</TABLE>
8. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Notes payable to Summit Bank
8.50% - 9.26% payable through 2002......................... $94,708 $55,567 $ 608,939
Notes payable to Gilbert Glass, DDS
9.50% payable through 2007................................. 2,188,949
------- ------- ----------
94,708 55,567 2,797,888
Less: Current portion...................................... 39,153 27,789 284,633
------- ------- ----------
$55,555 $27,778 $ 2,513,255
======= ======= ==========
</TABLE>
Scheduled maturities of short and long-term debt outstanding as of
September 30, 1997 are as follows:
<TABLE>
<S> <C>
1997 (three months).............................. $ 61,537
1998............................................. 254,407
1999............................................. 268,597
2000............................................. 284,196
2001............................................. 301,343
Thereafter....................................... 1,627,808
----------
$2,797,888
==========
</TABLE>
F-174
<PAGE> 242
POLLER DENTAL GROUP, P.A. POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTERS OF AMERICA, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. OWNERS EQUITY
Owners Equity consists of common stock and retained earnings of all the
companies as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Poller Dental Group P.A.
Common Stock................................... 1,000 1,000 1,000
Retained Earnings.............................. 373,119 438,010 505,989
-------- -------- --------
374,119 439,010 506,989
-------- -------- --------
Poller Dental Group of Union, P.A.
Common Stock................................... 110 110 110
Retained Earnings.............................. 28,048 120,320 175,165
-------- -------- --------
28,158 120,430 175,275
-------- -------- --------
Dental Centers of America, P.A.
Common Stock................................... -- -- 17,000
Retained Earnings.............................. -- -- 30,624
-------- -------- --------
-- -- 47,624
-------- -------- --------
Total Owners Equity.............................. $402,277 $559,440 $ 729,888
======== ======== ========
</TABLE>
Poller Dental Group, P.A. has 100 shares of common stock, no par value
authorized, issued and outstanding on December 31, 1995, 1996 and September 30,
1997. Poller Dental Group of Union, P.A. has 100 shares of common stock, no par
value authorized, issued and outstanding on December 31, 1995, 1996 and
September 30, 1997. Dental Centers of America, P.A. has 1,000 shares of common
stock, no par value authorized and 800 shares of common stock, no par value
issued and outstanding on September 30, 1997.
10. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------ -------------
<S> <C> <C> <C>
Salaries and payroll taxes...................... $26,017 $8,017 $35,171
Other........................................... -- 350 9,616
------- ------ -------
$26,017 $8,367 $44,787
======= ====== =======
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Company leases space from an affiliated entity. The rent expense under
this lease is considered to be at fair market value and was $48,000, $48,000,
$48,000, and $36,000, for 1994, 1995, 1996 and the period ended September 30,
1997.
12. COMMITMENTS AND CONTINGENCIES
Contracts
The Company participates in agreements with corporations and managed care
organizations to provide certain dental services to members of a group at a
fixed rate per-member, per-month, regardless of the actual services performed
and certain other dental services as defined in the contract in accordance with
an agreed upon fee schedule. During 1994, 1995, 1996, and through September 30,
1997 approximately 10%, 15%, 20%,
F-175
<PAGE> 243
POLLER DENTAL GROUP, P.A. POLLER DENTAL GROUP OF UNION, P.A. AND
DENTAL CENTERS OF AMERICA, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and 22%, respectively of the Company's net revenues were derived from fixed rate
per-member, per-month contracts. Revenues under these contracts are recorded in
the month fees are earned. The cost of services provided under capitation
contracts are expensed in the month incurred. The scope of the services provided
under the capitation contracts are provided by or within the Company, therefore
related costs are captured within the normal operating cycle of the Company.
The Company estimates the costs of providing services under these contracts
by using historical experience and anticipated utilization rates. The Company
believes the future revenues under these contracts will exceed the costs of
services it will be required to provide under the terms of the contracts.
Generally, either party to these contracts may terminate the contract without
cause at any time with thirty to ninety days written notice.
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
13. SUBSEQUENT EVENTS
On October 23, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware corporation.
F-176
<PAGE> 244
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of American Dental Centers, P.A.
In my opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of American Dental Centers,
P.A. at December 31, 1995, 1996 and August 11, 1997 and the results of its
operations and its cash flows for the years ended December 31, 1994, 1995 and
1996 and for the period from January 1, 1997 to August 11, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; my responsibility is to express
an opinion on these financial statements based on my audits. I conducted my
audits of these statements in accordance with generally accepted auditing
standards which requires that I 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. I believe that my
audits provide a reasonable basis for the opinion expressed above.
Sidney Glassel, C.P.A.
Woodbridge, New Jersey
October 24, 1997
F-177
<PAGE> 245
AMERICAN DENTAL CENTERS, P.A.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- AUGUST 11,
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash..................................................... $210,770 $ 14,587 $ 31,752
Accounts receivable, net................................. 538,910 560,995 591,167
-------- -------- --------
Total current assets............................. 749,680 575,582 622,919
Property and equipment, net................................ 151,280 122,692 73,410
Other assets -- loan receivable -- officers................ 64,118 128,582 294,365
-------- -------- --------
$965,078 $826,856 $ 990,694
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt........................ 12,000 12,000 112,000
-------- -------- --------
Total current liabilities........................ 12,000 12,000 112,000
-------- -------- --------
Long-term debt............................................. 235,000 649,289 484,289
Stockholders' equity
Common stock, no par value, 100 shares authorized, issued
and outstanding December 31, 1994, December 31, 1995,
December 31, 1996 and August 11, 1997
respectively. ........................................ 30,000 30,000 30,000
Accumulated retained earnings............................ 688,078 135,567 364,405
-------- -------- --------
Total stockholders' equity....................... 718,078 165,567 394,405
-------- -------- --------
$965,078 $826,856 $ 990,694
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-178
<PAGE> 246
AMERICAN DENTAL CENTERS, P.A.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY, 1997
---------------------------------------- TO AUGUST 11,
1994 1995 1996 1997
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Net revenues............................. $3,333,669 $3,036,046 $3,206,827 $ 1,992,288
Operating expenses....................... 3,047,149 3,060,343 3,685,839 1,681,750
Depreciation and amortization............ 29,135 32,543 28,588 49,282
---------- ---------- ---------- ----------
Income (Loss) from operations............ 257,385 (56,840) (507,600) 261,256
Non-operating expenses:
Interest expense -- other.............. 17,349 19,943 44,911 32,418
---------- ---------- ---------- ----------
Net income (Loss)........................ $ 240,036 $ (76,783) $ (552,511) $ 228,838
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-179
<PAGE> 247
AMERICAN DENTAL CENTERS, P.A.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE PERIOD FROM
JANUARY 1, 1997 TO AUGUST 11, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ CAPITAL IN
NO PAR EXCESS OF RETAINED
SHARES VALUE PAR VALUE EARNINGS TOTAL
------ ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994............... 100 $30,000 $-0- $ 524,825 $ 554,825
Net Income............................. 240,036 240,036
--- ------- ---- --------- ---------
Balance December 31, 1994.............. 100 30,000 -0- 764,861 794,861
Net Loss............................... (76,783) (76,783)
--- ------- ---- --------- ---------
Balance December 31, 1995.............. 100 30,000 -0- 688,078 718,078
Net Loss............................... (552,511) (552,511)
--- ------- ---- --------- ---------
Balance December 31, 1996.............. 100 30,000 -0- 135,567 165,567
Net Income............................. 228,838 228,838
--- ------- ---- --------- ---------
Balance August 11, 1997................ 100 $30,000 $-0- $ 364,405 $ 394,405
=== ======= ==== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-180
<PAGE> 248
AMERICAN DENTAL CENTERS, P.A.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1997
----------------------------------- TO AUGUST 11,
1994 1995 1996 1997
-------- -------- --------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (Loss)........................ $240,036 $(76,783) $(552,511) $ 228,838
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 29,135 32,543 28,588 49,282
Changes in assets and liabilities, net
of effects from business acquired:
(Increase) Decrease in accounts
receivable....................... (50,163) 16,013 (22,085) (30,172)
(Increase) Decrease in other
assets -- officers loan.......... (26,631) -- (64,464) (165,783)
-------- -------- --------- --------
Net cash provided by (used in)
operating activities........... 192,377 (28,227) (610,472) 82,165
-------- -------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment...... (76,198)
-------- -------- --------- --------
Net cash used in investing
activities..................... (76,198)
-------- -------- --------- --------
Cash flows from financing activities:
Borrowings of long-term debt............. -- 95,000 500,000 --
Principal payments on long-term debt..... (43,430) (39,111) (85,711) (65,000)
-------- -------- --------- --------
Net cash provided (used) by
financing activities........... (43,430) 55,889 414,289 (65,000)
-------- -------- --------- --------
Net increase (Decrease) in cash and cash
equivalents........................... 148,947 (48,536) (196,183) 17,165
Cash and cash equivalents at beginning of
period................................ 110,359 259,306 210,770 14,587
-------- -------- --------- --------
Cash and cash equivalents at end of
period................................ $259,306 $210,770 $ 14,587 $ 31,752
======== ======== ========= ========
Supplemental disclosure of cash flow
information:
Interest paid............................ $ 17,349 $ 19,943 $ 44,911 $ 32,418
======== ======== ========= ========
Taxes paid............................... $ -0- $ -0- $ -0- $ -0-
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-181
<PAGE> 249
AMERICAN DENTAL CENTERS, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, 1996 AND AUGUST 11, 1997
1. ORGANIZATION AND OPERATIONS
American Dental Centers, P.A. provides general dental care and related
services in the State of New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities revenues and
expenses. Actual results could differ from those estimates.
Cash
For purposes of reporting cash flows, cash includes cash on hand and cash
funds available for use.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third-party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Under certain managed care contracts the Company provides diagnostic and
preventative dental services for a fixed rate per-member, per-month fee, and
other dental services as defined in the contracts under an agreed upon fee
schedule to member patients. Revenues from the per-member, per-month fees are
recorded in the month for which the member is entitled to service. The cost of
services provided under capitation contracts are expensed in the month incurred.
The scope of the services performed under the capitation contracts are provided
by or within the affiliated practices of the Company. Therefore, the related
costs of those services are captured within the normal operating cycle of the
Company.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized for the lesser of the lease term or the
asset's estimated useful life.
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
F-182
<PAGE> 250
AMERICAN DENTAL CENTERS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- AUGUST 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Accounts receivable, net of contractual.... $1,077,820 $1,121,990 $1,182,333
Less: Allowance for doubtful accounts...... (538,910) (560,995) (591,166)
---------- ---------- ----------
$ 538,910 $ 560,995 $ 591,167
========== ========== ==========
</TABLE>
The Company's services are reimbursed directly by both patients and by
third-party payors, including Medicaid, managed care organizations and
commercial insurance companies. Third-party reimbursements are primarily billed
at estimated amounts realizable based upon contractually determined rates. In
instances where "usual customary and reasonable" market rates are billed, gross
billings are adjusted for contractual allowances to reflect estimated amounts
realizable from third-party payors. The allowance for doubtful accounts is
estimated based on an ongoing review of collectibility.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- AUGUST 11,
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Dental equipment, furniture & fixtures
leasehold improvements, data processing
and office equipment...................... $ 580,564 $ 580,564 $ 580,564
Less: Accumulated depreciation and
amortization.............................. (429,284) (457,872) (507,154)
-------- -------- --------
$ 151,280 $ 122,692 $ 73,410
======== ======== ========
</TABLE>
5. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- AUGUST 11,
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Notes payable to Summit Bank
8.5% -- 9.25% payable through 2002.................... $247,000 $661,289 $ 596,289
Less: Current portion................................. 12,000 12,000 112,000
-------- -------- --------
$235,000 $649,289 $ 484,289
======== ======== ========
</TABLE>
Scheduled maturities of short and long-term debt, outstanding as of 1997
are as follows:
<TABLE>
<S> <C>
1997.............................................. $112,000
1998.............................................. 111,432
1999.............................................. 111,432
2000.............................................. 111,432
2001.............................................. 111,432
Thereafter........................................ 38,561
--------
$596,289
========
</TABLE>
F-183
<PAGE> 251
AMERICAN DENTAL CENTERS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The reconciliation of the federal statutory income tax rate to the
effective income tax rate for the years ended December 31, 1994, 1995 and 1996
and the period ended August 11, 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- AUGUST 11,
1994 1995 1996 1997
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Statutory income tax rate.................... (35)% (35)% (35)% (35)%
State taxes, less federal related tax
benefit.................................... (9) (9) (9) (9)
Losses for which no tax benefit was
recognized................................. 44 44 44 44
--- --- --- ---
Effective income tax rate.................... -- % -- % -- % --%
--- --- --- ---
</TABLE>
At December 31, 1993, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $213,687. At December 31, 1994, the
Company had a net operating profit of approximately $240,036. At December 31,
1995, the Company had a net operating loss of approximately $76,783. At December
31, 1996, the Company had a net operating loss of $552,511. At July 31, 1997,
the Company had a net operating profit of $228,838. At July 31, 1997, the
Company had a net operating loss carryforward of $374,107. No provision has been
made for Federal income tax.
7. SETTLEMENT
In the year 1996, the Company was involved in a lawsuit with a third party
payor involving the noncollection of co-payments by the Company. The settlement
cost the Company $775,000 which is included in operating expenses in the
accompanying 1996 statement of operations. Management is not aware of further
instances involving this practice.
8. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
9. SUBSEQUENT EVENTS
On August 11, 1997, the Company was acquired by Dental Centers of America,
P.A., a New Jersey corporation. On October 23, 1997, Dental Centers of America,
P.A. was acquired by Valley Forge Dental Associates, Inc., a Delaware
corporation.
F-184
<PAGE> 252
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Dr. Kenneth E. Copeland, D.D.S., Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations and stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Dr. Kenneth E. Copeland, D.D.S.,
Inc. (the "Company") at December 31, 1996 and August 31, 1997 and the results of
its operations and its cash flows for the year ended December 31, 1996 and for
the period from January 1, 1997 to August 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
PHILADELPHIA, PA
NOVEMBER 24, 1997
F-185
<PAGE> 253
DR. KENNETH E. COPELAND, D.D.S., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
ASSETS ------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 17,200 $ 11,954
Accounts receivable, net........................................... 40,616 30,855
Prepaid expenses................................................... 945 945
------------ ----------
Total current assets....................................... 58,761 43,754
Property and equipment, net.......................................... 40,742 33,686
------------ ----------
Total assets............................................... $ 99,503 $ 77,440
========== ========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.................................. $ 13,390 $ 7,626
Accounts payable................................................... 22,990 17,209
Accrued expenses and other current liabilities..................... 24,652 20,308
------------ ----------
Total current liabilities.................................. 61,032 45,143
Long-term debt....................................................... 8,764 3,136
------------ ----------
Total liabilities.......................................... 69,796 48,279
------------ ----------
Stockholder's equity:
Common stock, $100 par value, 500 shares authorized; 25 shares
issued and outstanding at December 31, 1996 and August 31, 1997,
respectively.................................................... 2,500 2,500
Retained earnings.................................................. 27,207 26,661
------------ ----------
Total stockholder's equity................................. 29,707 29,161
------------ ----------
Total liabilities and stockholder's equity................. $ 99,503 $ 77,440
========== ========
</TABLE>
F-186
<PAGE> 254
DR. KENNETH E. COPELAND, D.D.S., INC.
STATEMENT OF OPERATIONS AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JANUARY 1,
ENDED 1997 TO
DECEMBER 31, AUGUST 31,
1996 1997
-------------- --------------
<S> <C> <C>
Net revenues..................................................... $845,085 $484,770
Cost of revenues................................................. 652,671 366,109
Selling and administrative expenses.............................. 217,233 111,114
Depreciation and amortization.................................... 10,516 7,056
-------------- --------------
Income (loss) from operations.................................... (35,335) 491
-------------- --------------
Non-operating expenses:
Interest expense............................................... (1,689) (1,037)
-------------- --------------
Net loss.................................................... (37,024) (546)
Stockholder's equity, beginning of period........................ 66,731 29,707
-------------- --------------
Stockholder's equity, end of period.............................. $ 29,707 $ 29,161
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-187
<PAGE> 255
DR. KENNETH E. COPELAND, D.D.S., INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JANUARY 1,
ENDED 1997 TO
DECEMBER 31, AUGUST 31,
1996 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $(37,024) $ (546)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................... 10,516 7,056
Provision for doubtful accounts............................. 33,597 19,165
Change in assets and liabilities:
Increase in accounts receivable............................. (21,046) (9,404)
Decrease in notes receivable................................ 18,245 --
Decrease in accounts payable................................ (2,242) (5,782)
Increase (decrease) in accrued expenses and other current
liabilities............................................... 4,326 (4,344)
-------- --------
Net cash provided by operating activities.............. 6,372 6,145
-------- --------
Cash flows from investing activities:
Fixed asset purchases.......................................... (13,980) --
Net cash used in investing activities.................. (13,980) --
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt........................... (8,820) (11,391)
-------- --------
Net cash used in financing activities.................. (8,820) (11,391)
-------- --------
Net decrease in cash and cash equivalents........................ (16,428) (5,246)
Cash and cash equivalents at beginning of period................. 33,628 17,200
-------- --------
Cash and cash equivalents at end of period....................... $ 17,200 $ 11,954
======== ========
Supplemental disclosure of cash flow information:
Interest paid.................................................. $ 1,689 $ 1,037
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-188
<PAGE> 256
DR. KENNETH E. COPELAND, D.D.S., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND AUGUST 31, 1997
1. ORGANIZATION AND OPERATIONS
Dr. Kenneth E. Copeland, D.D.S., Inc., (the "Company") provides general
dental care and related services in the Virginia Beach, Virginia area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Income Taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and Income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
Fair Market Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1996 and
August 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Accounts receivable.................................. $ 49,344 $ 36,986
Less: Allowance for doubtful accounts................ $ (8,728) $ (6,131)
------- -------
$ 40,616 $ 30,855
======= =======
</TABLE>
F-189
<PAGE> 257
DR. KENNETH E. COPELAND, D.D.S., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's services are reimbursed directly by both patients and by
third party payors, including commercial insurance companies. Third party
reimbursements are primarily billed at estimated amounts realizable based upon
contractually determined rates. In instances where "usual, customary and
reasonable" market rates are billed, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectibility.
4. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Dental and office equipment......................... $ 79,702 $ 79,702
Furniture and fixtures and leasehold improvements... 57,087 57,087
------- -------
136,789 136,789
Less: Accumulated depreciation and amortization..... (96,047) (103,103)
------- -------
$ 40,742 $ 33,686
======= =======
</TABLE>
Depreciation and amortization expense, including amounts related to
equipment under capital lease (Note 5), for the year ended December 31, 1996 and
the period ended August 31, 1997, totaled $10,516 and $7,056, respectively.
5. LEASES
Future minimum annual rentals due under noncancellable operating leases in
excess of one year are as follows:
<TABLE>
<S> <C>
1997............................................................... $14,000
1998............................................................... 41,000
-------
$55,000
=======
</TABLE>
The Company maintains leases for all of its dental office from a company
owned by the shareholder. The office lease terms are from month to month. Rent
expense of $44,000 and $32,000 respectively, was incurred during year ended
December 31, 1996 and for the period ended August 31, 1997, respectively. The
rent expense under this lease is considered to be at market value.
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Notes payable to Patterson Dental Co. 12.0% interest
payable, secured by equipment through August
2005............................................... $ 9,740 $ 7,208
Notes payable to Central Fidelity Bank, 9.0% interest
payable, secured by practice assets through 2000... 3,942 1,556
Other payables....................................... 8,472 1,998
------- -------
22,154 10,762
Less: Current portion................................ (13,390) (7,626)
------- -------
$ 8,764 $ 3,136
======= =======
</TABLE>
F-190
<PAGE> 258
DR. KENNETH E. COPELAND, D.D.S., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of long-term debt outstanding as of August 31, 1997
are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 2,636
1998............................................................... 6,390
1999............................................................... 1,736
-------
$10,762
=======
</TABLE>
7. INCOME TAXES
The reconciliation of the federal statutory income tax rate to the
effective income tax rate for the year ended December 31, 1996 and the period
ended August 31, 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Statutory income tax rate............................ (34)% (34)%
State taxes, less federal related tax benefit........ (7) (7)
Losses for which no tax benefit was recognized....... 41 41
---- ----
Effective income tax rate............................ --% --%
==== ====
</TABLE>
The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Net operating loss carryforwards..................... $ 14,500 14,750
Valuation allowance.................................. (14,500) (14,750)
---- ----
$ -- $ --
==== ====
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
9. SUBSEQUENT EVENTS
On September 1, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-191
<PAGE> 259
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owner of
Dr. David B. Wells, D.D.S.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in owner's equity and of cash flows present fairly, in
all material respects, the financial position of Dr. David B. Wells, D.D.S. (the
"Company") at December 31, 1995 and 1996 and August 31, 1997 and the results of
its operations and its cash flows for the years ended December 31, 1995 and 1996
and for the period from January 1, 1997 to August 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
November 25, 1997
F-192
<PAGE> 260
DR. DAVID B. WELLS, D.D.S.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- AUGUST 31,
1995 1996 1997
------- -------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 3,029 $ 4,166
Accounts receivable, net.................................. 31,053 29,588 35,079
-------- -------- --------
Total current assets.............................. 31,053 32,617 39,245
Property and equipment, net................................. 58,935 119,141 150,375
-------- -------- --------
Total assets...................................... $89,988 $151,758 $ 189,620
======== ======== ========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 4,197 $ -- $ 13,796
Accounts payable.......................................... 4,720 6,887 4,356
Accrued expenses and other current liabilities............ 6,135 7,708 13,631
-------- -------- --------
Total current liabilities......................... 15,051 14,595 31,783
Long-term debt.............................................. -- -- 21,536
-------- -------- --------
Total liabilities................................. 15,051 14,595 53,319
-------- -------- --------
Owner's equity.............................................. 74,936 137,163 136,301
-------- -------- --------
Total liabilities and owner's equity.............. $89,988 $151,758 $ 189,620
======== ======== ========
</TABLE>
F-193
<PAGE> 261
DR. DAVID B. WELLS, D.D.S.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 1,
DECEMBER 31, 1997 TO
--------------------- AUGUST 31,
1995 1996 1997
-------- -------- --------------
<S> <C> <C> <C>
Net revenues............................................. $403,597 $518,817 $467,646
Cost of revenues......................................... 223,924 279,245 274,576
Depreciation and amortization............................ 13,239 19,818 25,128
-------- -------- --------
Net Income..................................... $166,434 $219,754 $167,942
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-194
<PAGE> 262
DR. DAVID B. WELLS, D.D.S.
STATEMENT OF CHANGES IN OWNER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
Balance, January 1, 1995......................................................... $ 75,366
Distribution to owner.......................................................... (166,863)
Net income..................................................................... 166,434
---------
Balance, January 1, 1996......................................................... 74,937
Distribution to owner.......................................................... (157,528)
Net income..................................................................... 219,754
---------
Balance, December 31, 1996....................................................... 137,163
Distribution to owner.......................................................... (168,804)
Net income..................................................................... 167,942
---------
Balance, August 31, 1997......................................................... $ 136,301
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-195
<PAGE> 263
DR. DAVID B. WELLS, D.D.S.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 1,
DECEMBER 31, 1997 TO
----------------------- AUGUST 31,
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 166,434 $ 219,754 $ 167,942
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization...................... 13,239 19,818 25,128
Provision for doubtful accounts.................... 6,817 7,412 7,048
Change in assets and liabilities:
(Increase) decrease in accounts receivable......... (14,683) (5,947) (12,539)
(Decrease) increase in accounts payable............ (164) 2,168 (2,531)
Increase in accrued expenses and other current
liabilities...................................... 1,783 1,573 5,923
--------- --------- ---------
Net cash provided by operating activities..... 173,426 244,778 190,971
--------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets.............................. -- (80,024) (56,362)
--------- --------- ---------
Net cash used in investing activities......... -- (80,024) (56,362)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt.................. (8,102) (4,197) 35,332
Distributions to owner................................ (166,863) (157,528) (168,804)
--------- --------- ---------
Net cash used in financing activities......... (174,965) (161,725) (133,472)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (1,539) 3,029 1,137
Cash and cash equivalents at beginning of period........ 1,539 -- 3,029
--------- --------- ---------
Cash and cash equivalents at end of period.............. $ -- $ 3,029 $ 4,166
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid......................................... $ (642) $ -- $ (2,428)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-196
<PAGE> 264
DR. DAVID B. WELLS, D.D.S.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND AUGUST 31, 1997
1. ORGANIZATION AND OPERATIONS
Dr. David B. Wells, D.D.S., (the "Company") provides general dental care
and related services in Snellville, Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90 days or
less.
Revenue Recognition
Net revenues are reported when earned at the estimated amounts to be
realized through payments from patients, third party payors and others for
services rendered. Revenue from multi-visit procedures is recognized on a
pro-rata basis over the course of the treatment term. Completion percentages for
multi-visit procedures are based on historical treatment protocols and patterns
and are updated on a periodic basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which
principally range from five to seven years. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Long-Lived and Intangible Assets
The Company applies Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Accordingly, the
carrying value of long-lived assets and certain identifiable intangible assets
are evaluated whenever changes in circumstances indicate the carrying amount of
such assets may not be recoverable. In performing such review for
recoverability, the Company compares the expected future undiscounted cash flows
to the carrying value of long-lived assets and identifiable intangibles,
including the related excess of cost over fair value of net assets acquired.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
In addition, the carrying value of the excess of cost over fair value of
net assets acquired and other intangible assets is subject to a separate annual
evaluation using these guidelines.
F-197
<PAGE> 265
DR. DAVID B. WELLS, D.D.S.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company is the sole proprietorship of Dr. David B. Wells, D.D.S. and as
such, all income or loss of the Company accrues directly to him. Accordingly, no
provision for income taxes has been made in these financial statements.
Fair Market Value of Financial Instruments
The recorded balances of financial instruments at December 31, 1995 and
1996 and August 31, 1997 approximate estimated fair market values.
3. ACCOUNTS RECEIVABLE AND THIRD PARTY REIMBURSEMENTS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Accounts receivable..................... $ 56,485 $ 54,085 $ 68,254
Less: Allowance for doubtful accounts... (25,432) (24,497) (33,175)
-------- ------- -------
$ 31,053 $ 29,588 $ 35,079
======== ======= =======
</TABLE>
The Company's services are reimbursed directly by both patients and by
third party payors, including commercial insurance companies. Third party
reimbursements are primarily billed at estimated amounts realizable based upon
contractually determined rates. In instances where "usual, customary and
reasonable" market rates are billed, gross billings are adjusted for contractual
allowances to reflect estimated amounts realizable from third party payors. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectibility.
4. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Dental and office equipment............. $ 57,609 $106,888 $ 117,090
Furniture and fixtures and leasehold
improvements.......................... 36,752 67,497 113,657
------- -------- --------
94,361 174,385 230,747
Less: Accumulated depreciation and
amortization.......................... (35,426) (55,244) (80,372)
------- -------- --------
$ 58,935 $119,141 $ 150,375
======= ======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995
and 1996 and the period ended August 31, 1997 totaled $13,239, $19,818 and
$25,128, respectively.
F-198
<PAGE> 266
DR. DAVID B. WELLS, D.D.S.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES
The Company currently has no capital leases outstanding. The Company
maintains a rental lease for its dental office which is accounted for as an
operating lease. Future minimum annual rentals due under noncancellable
operating leases in excess of one year are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 8,320
1998............................................................... 24,960
1999............................................................... 24,960
-------
$58,240
=======
</TABLE>
Rent expense of $16,690, $16,800 and $19,743 was incurred for the years
ended December 31, 1995 and 1996 and for the period ended August 31, 1997,
respectively.
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- AUGUST 31,
1995 1996 1997
------- ------- ----------
<S> <C> <C> <C>
Notes payable to Suntrust Bank, 9.246%
interest payable, collateralized by
equipment through 1999..................... $ 4,197 $ -- $ 35,332
------- ------- -------
Notes payable, Other......................... 4,197 -- 35,332
Less: Current portion........................ (4,197) -- (13,796)
------- ------- -------
$ -- $ -- $ 21,536
======= ======= =======
</TABLE>
Scheduled maturities of long-term debt outstanding as of August 31, 1997
are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 5,745
1998............................................................... 17,234
1999............................................................... 12,353
-------
$35,332
=======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of operations, the Company has become party to claims,
suits and complaints relating to general and professional services provided by
the Company. The Company has purchased general and professional liability
insurance to cover claims which may arise. Management does not believe that any
of these claims, suits or complaints will have a material adverse effect on the
Company's financial position, liquidity or results of operations.
8. SUBSEQUENT EVENTS
On September 22, 1997, the Company was acquired by Valley Forge Dental
Associates, Inc., a Delaware Corporation.
F-199
<PAGE> 267
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby to any person in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sales
made hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 15
Use of Proceeds....................... 15
Dividend Policy....................... 16
Dilution.............................. 17
Capitalization........................ 18
Unaudited Pro Forma Financial
Information......................... 19
Selected Financial Data............... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Business.............................. 35
Management............................ 50
Principal Stockholders................ 57
Certain Transactions.................. 59
Description of Capital Stock.......... 61
Shares Eligible for Future Sale....... 63
Underwriting.......................... 64
Legal Matters......................... 65
Experts............................... 65
Additional Information................ 66
Index to Financial Statements......... F-1
</TABLE>
----------------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
SHARES
[VALLEY FORGE LOGO]
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
NATIONSBANC MONTGOMERY
SECURITIES, INC.
BEAR, STEARNS & CO. INC.
, 1998
======================================================
<PAGE> 268
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses in connection with the
distribution of the securities being registered hereunder, other than
underwriting discounts and commissions.
<TABLE>
<S> <C>
S.E.C. registration fee*................................................ $ 19,515.15
NASD filing fee*........................................................ 6,940.00
Fee to Foster Management Company*....................................... 750,000.00
NASDAQ application fee.................................................. **
Accounting fees and expenses............................................ **
Legal fees and expenses................................................. **
Printing and engraving expenses......................................... **
Blue sky fees and expenses.............................................. **
Transfer agent fees..................................................... **
Miscellaneous expenses.................................................. **
-----------
Total......................................................... $ **
===========
</TABLE>
- ---------------
* Actual fee.
** To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Sixth of the Certificate of Incorporation of the Company provides
that the Company shall indemnify and hold harmless any director, officer,
employee or agent of the Company from and against any and all expenses and
liabilities that may be imposed upon or incurred by him in connection with, or
as a result of, any proceeding in which he may become involved, as a party or
otherwise, by reason of the fact that he is or was such as director, officer,
employee or agent of the Company, whether or not he continues to be such at the
time such expenses and liabilities shall have been imposed or incurred, to the
extent permitted by the laws of the State of Delaware, as they may be amended
from time to time.
Article Eleventh of the Certificate of Incorporation of the Company
contains a provision which eliminates the personal liability of a director of
the Company to the Company or to any of its stockholders for monetary damages
for a breach of his fiduciary duty as a director, except in the case in which
the director breached his duty of loyalty, failed to act in good faith, engaged
in intentional misconduct or knowingly violated a law, authorized the payment of
a dividend or approved a stock repurchase in violation of the Delaware General
Corporation Law, or obtained an improper personal benefit.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and its controlling persons on the one hand and the Underwriters and
their respective controlling persons on the other hand against certain
liabilities in connection with this offering, including liabilities under the
Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On August 11, 1995, in connection with the Registrant's initial
capitalization, the Registrant issued 175,000 shares of Common Stock to Business
Development Capital Limited Partnership-III ("BDC-III"), 472,500 shares of
Common Stock to Abbingdon Venture Partners Limited Partnership ("Abbingdon-I"),
1,732,500 shares of Common Stock to Abbingdon Venture Partners Limited
Partnership-II ("Abbingdon-II) and 1,120,000 shares of Common Stock to Abbingdon
Venture Partners Limited Partnership-III ("Abbingdon-III, together with BDC-III,
Abbingdon-I and Abbingdon-II, the "Partnerships") for an aggregate
II-1
<PAGE> 269
purchase price of $350,000 and 400 shares of Preferred Stock to BDC-III, 1,080
shares of Preferred Stock to Abbingdon-I, 3,960 shares of Preferred Stock to
Abbingdon-II and 2,560 shares of Preferred Stock to Abbingdon-III for an
aggregate purchase price of $800,000.
On December 31, 1995, the Registrant sold 2,500 shares of Common Stock to
W. Gary Liddick, the Chief Financial Officer of the Registrant for $250.
On November 25, 1996, the Registrant sold 5,000 shares of Common Stock to
each of Stathis Andris, Stephen E. O'Neil and Colin C. Blaydon, directors of the
Registrant for an aggregate purchase price of $1,500.
On December 17, 1996, the Registrant sold 150,000 shares of Common Stock to
Joseph J. Frank, the Chief Executive Officer and President of the Registrant for
a purchase price of $15,000, 7,500 shares of Common Stock to Jeanne Marie
Welsko, the Vice President -- Human Resources and 5,000 shares of Common Stock
to W. Gary Liddick, the Chief Financial Officer of the Registrant for a purchase
price of $500.
On January 15, 1997, the Registrant sold 5,000 shares of Common Stock to
Allan M. Dworkin, a consultant to the Registrant for a purchase price of $500.
Information concerning the sale or issuance of the Registrant's securities
in connection with acquisitions is set forth below:
On September 19, 1995, the Registrant issued a 6% subordinated convertible
promissory in the aggregate principal amount of $800,000 (the "Convertible
Note") to the order of MT Associates, a Pennsylvania general partnership ("MT
Associates"), in connection with the acquisition of certain assets of MT
Associates. The Convertible Note is convertible into shares of Common Stock at a
price of $16.00 per share. As of October 23, 1997, the outstanding principal
amount was $266,666.67. In addition to the issuance of the Convertible Note, the
Registrant issued an aggregate of 100,000 shares of Common Stock to Bruce L.
Talus, D.M.D. and Robert K. Mehlman, D.D.S. for $10,000 in connection with their
employment by the Registrant. On October 1, 1996, the Registrant issued an
additional 6% subordinated convertible promissory note in the principal amount
of $720,000 to MT Associates as deferred purchase price on the same terms as the
Convertible Note. On October 1, 1997, the Registrant issued an additional 6%
Subordinated Convertible Promissory Note in the principal amount of $2,667, 200
to MT Associates as deferred purchase price on the same terms as the Convertible
Note.
On January 31, 1996, the Registrant issued an aggregate of 12,500 shares of
Common Stock to Donald L. Kane, D.D.S. ("Kane"), a nonaccredited investor in
connection with the purchase of the assets of United Dental Group ("UDG
Acquisition"). Subsequently, on May 14, 1997, the Registrant issued an
additional 5,887 shares of Common Stock to Kane as deferred purchase price in
connection with the UDG Acquisition.
On January 29, 1997, the Registrant issued an aggregate of 4,688 shares of
Common Stock to Western Dental Group of Fort Collins, P.C., Western Dental Group
of Cascade Avenue, P.C., Western Dental Group of Academy Boulevard, P.C. and
Western Dental Group of Denver, P.C. (collectively "Western") in connection with
the acquisition of certain assets of Western.
On February 19, 1997, the Registrant issued an aggregate of 62,500 shares
to Eugene N. Witkin, D.D.S. and ENW, Inc. in connection with purchase of certain
assets of ENW, Inc.
On April 18, 1997, the Registrant issued an aggregate of 90,909 shares to
John E. Tiano, D.D.S., Lawrence P. Rudolph, D.M.D. and Timothy J. Runco, D.M.D.
in connection with the acquisition of 100% of the issued and outstanding capital
stock of John E. Tiano, D.D.S. and Lawrence P. Rudolph, D.M.D., P.C. n/k/a VFD
of Pittsburgh, Inc.
On May 21, 1997, the Registrant issued an aggregate of 28,067 shares of
Common Stock to Kenneth Tralongo, D.D.S., Frederick W. Meyer, Jr., D.D.S. and
Harvey C. Lloyd, D.D.S. in connection with the acquisition of certain assets of
Comprehensive Family Dentistry, Inc.
II-2
<PAGE> 270
On June 11, 1997, the Registrant issued an aggregate of 21,268 shares of
Common Stock to Richard W. Aros, D.D.S. and Roberta K. Aros as part of the
deferred purchase price in connection with the acquisition of 100% of the issued
and outstanding capital stock of Horizon Group International, Inc.
On July 2, 1997, the Registrant issued 3,667 shares of Common Stock to
Maurice E. Smith, D.D.S. ("Dr. M. Smith") in connection with the acquisition of
certain assets of the dental practice of Dr. M. Smith.
On July 28, 1997, the Registrant issued 3,333 shares of Common Stock to
Bernard B. Baros, D.D.S. ("Dr. Baros") in connection with the acquisition of
certain assets of the dental practice owned by Dr. Baros.
On August 15, 1997, the Registrant issued 15,000 shares of Common Stock to
Douglass A. Quinn, D.D.S. in connection with the acquisition of certain assets
of Douglass A. Quinn, D.D.S., P.A.
On September 8, 1997, the Registrant issued 2,667 shares of Common Stock to
Delbert B. Williamson, D.D.S. ("Dr. Williamson") in connection with the
acquisition of certain assets of the dental practice owned by Dr. Williamson.
On September 17, 1997, the Registrant issued 10,833 shares of Common Stock
to David B. Wells, D.D.S. ("Dr. Wells") in connection with the acquisition of
certain assets of the dental practice owned by Dr. Wells.
On September 22, 1997, the Registrant issued 13,333 shares of Common Stock
to Kenneth E. Copeland, D.D.S. ("Dr. Copeland") in connection with the
acquisition of certain assets of the dental practice owned by Dr. Copeland.
On September 30, 1997, the Registrant issued 2,917 shares of Common Stock
to Felix W. Sibley, D.D.S. ("Dr. Sibley") in connection with the acquisition of
certain assets of the dental practice owned by Dr. Sibley.
On September 30 1997, the Registrant issued an aggregate of 5,334 shares of
Common Stock to Larry J. Miller, D.M.D. and James H. Powell D.D.S. ("Drs. Miller
and Powell") in connection with the acquisition of certain assets of the dental
practice owned by Drs. Miller and Powell.
On September 30, 1997, the Registrant issued 4,200 shares of Common Stock
to Kenneth Bradley Reynolds, D.D.S. ("Dr. Reynolds") in connection with the
acquisition of certain assets of the dental practice owned by Dr. Reynolds.
On September 30, 1997, the Registrant issued 1,333 shares of Common Stock
to Charles L. Smith, D.D.S. ("Dr. C. Smith") in connection with the acquisition
of certain assets of the dental practice owned by Dr. C. Smith.
On October 1, 1997, the Registrant issued an aggregate of 157,750 shares of
Common Stock to Mark Perecman, D.M.D., George E. Frattali, D.D.S., Gary W. Mink,
Norman Kurtzman, D.D.S., Kevin O'Meara, D.D.S., Jeffrey Leiss, D.D.S., James
Dyen, D.M.D., Michael Pavel, D.M.D., Richard Valenci, D.M.D., Eleanore Meredith,
Mark Carleton, D.M.D., Edward Balling, D.M.D. and Cemil Yesiloy, D.M.D. in
connection with the acquisition of 80% of the issued and outstanding capital
stock of ProDent, Inc.
On October 23, 1997, the Registrant issued an aggregate of 18,750 shares of
Common Stock to Allan M. Dworkin, D.D.S. and Douglas K. Clemens, D.M.D. ("Drs.
Dworkin and Clemens") in connection with the acquisition of certain assets of
the dental practice owned by Drs. Dworkin and Clemens.
On October 23, 1997, the Registrant issued an aggregate of 412,833 shares
of Common Stock to Union Marketing Associates, Inc., James A. Russo, Robert
Perri, Richard Poller and Craig Abromowitz in connection with the acquisition of
certain assets of the dental practice owned by Poller Group of Union, P.A. and
Dental Center of America P.A.
Registration under the Securities Act of the securities issued in the
transactions described in this Item was not required because such securities
were issued in transactions not involving any "public offering" within the
meaning of Section 4(2) of said Act, in reliance of Rule 506 under said Act. In
connection therewith, the Registrant has obtained representations from all such
acquirors except one to the effect that they are "accredited investors" as
defined in Rule 501(a) under said Act. In addition, there was no general
solicitation
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<PAGE> 271
or general advertising in connection with such issuances. With respect to the
sale to the one nonaccredited investor, the Registrant provided the information
required under Rule 502 of said Act to the nonaccredited investor.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The Exhibits required to be filed as part of this Registration Statement
are listed in the attached Index to Exhibits.
(b) Financial Statement Schedules:
The Financial Statement Schedule (VIII -- Valuation and Qualifying
Accounts) required to be filed as part of this Registration Statement is
included as page S-1. All other schedules have been omitted because they are
inapplicable or the information is provided in the Company's Consolidated
Financial Statements, including the Notes thereto, included in the Prospectus.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes with respect to shares allocated to cover
over-allotments by the Underwriters to deregister any shares remaining unsold
upon the completion of the offering by means of a post-effective amendment to
the Registration Statement.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of its
Certificate of Incorporation or By-laws or the laws of the State of Delaware, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 272
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of King of
Prussia. Commonwealth of Pennsylvania, on the 18th day of December, 1997.
VALLEY FORGE DENTAL ASSOCIATES, INC.
By /s/ JOSEPH J. FRANK
------------------------------------
(Joseph J. Frank, President
and Chief Executive Officer)
Each person whose signature appears below constitutes and appoints Joseph
J. Frank, Stephen F. Nagy and Douglas P. Gill, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them for him and in his name, place and stead, and in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement (or any other Registration Statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------------------ -----------------
<C> <S> <C>
/s/ STEPHEN F. NAGY Chairman of the Board and Director December 18, 1997
- -----------------------------------
(Stephen F.Nagy)
/s/ JOSEPH J. FRANK President and Chief Executive December 18, 1997
- ----------------------------------- Officer and Director (principal
(Joseph J. Frank) executive officer)
/s/ W. GARY LIDDICK Vice President of Finance and Chief December 18, 1997
- ----------------------------------- Financial Officer (principal
(W. Gary Liddick) financial and accounting officer)
/s/ STATHIS ANDRIS Director December 18, 1997
- -----------------------------------
(Stathis Andris)
/s/ COLIN C. BLAYDON Director December 18, 1997
- -----------------------------------
(Colin C. Blaydon)
/s/ TIMOTHY E. FOSTER Director December 18, 1997
- -----------------------------------
(Timothy E. Foster)
</TABLE>
II-5
<PAGE> 273
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------------------ -----------------
<C> <S> <C>
/s/ DOUGLAS P. GILL Director December 18, 1997
- -----------------------------------
(Douglas P. Gill)
/s/ STEPHEN E. O'NEIL Director December 18, 1997
- -----------------------------------
(Stephen E. O'Neil)
</TABLE>
II-6
<PAGE> 274
CONSENT OF COUNSEL
The consent of Haythe & Curley is contained in its opinion filed as Exhibit
5 to the Registration Statement.
II-7
<PAGE> 275
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports as of the dates and relating
to the financial statements of the companies listed below, which appear in such
Prospectus:
<TABLE>
<CAPTION>
COMPANY DATE OF REPORT
- ------------------------------------------------------------------------- ------------------
<S> <C>
Valley Forge Dental Associates, Inc. December 17, 1997
Penn Dental Associates, P.C., Stafford Dental Associates, Gallows Dental
Group, Hallmark Dental Group, Alexandria Dental Centre October 14, 1997
Dr. Donald L. Kane, D.D.S., P.A. and UDG, Melborne, P.A. June 23, 1997
Horizon Group International, Inc., September 23, 1997
Western Dental Group, Dental Care Center and Virginia Avenue
Dental Associates September 17, 1997
ENW, Inc. October 10, 1997
The Dentistry, Inc. September 18, 1997
Comprehensive Family Dentistry, Inc. September 23, 1997
Bernard B. Baros, D.D.S., P.C. October 8, 1997
Dr. Maurice Smith, D.D.S. October 17, 1997
Douglas A. Quinn, D.D.S., P.C. and Dr. Douglas A. Quinn, D.D.S. November 21, 1997
Gentle Dental of Ocala, P.C., Gentle Dental of Sarasota, P.C. Gentle
Dental of Clearwater, P.C. Gentle Dental of Manatee, P.C. and Gentle
Dental Orthodontics, P.C. November 21, 1997
Felix W. Sibley, Jr., D.D.S. d/b/a Garden Walk Dental Associates November 25, 1997
Dr. Kenneth Bradley Reynolds, D.D.S. October 15, 1997
Miller & Powell, D.M.D., P.C. October 16, 1997
Kenneth E. Copeland, D.D.S., Inc. November 24, 1997
Dr. David B. Wells, D.D.S. November 25, 1997
</TABLE>
We also consent to the references to us under the headings "Experts" and
"Selected Consolidated Financial Data" in such Prospectus. However, it should be
noted that Price Waterhouse LLP has not prepared or certified such "Selected
Financial Data."
PRICE WATERHOUSE LLP
Philadelphia, PA
December 17, 1997
II-8
<PAGE> 276
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 16, 1997 relating
to the financial statements of ProDent, Inc. and Affiliates which appear in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
Kelly, Welde & Co.
Broomall, PA
December 16, 1997
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<PAGE> 277
CONSENT OF INDEPENDENT ACCOUNTANTS
I hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-1 of my report dated October 24, 1997 relating
to the combined financial statements of Poller Dental Group, P.A., Poller Dental
Group of Union, P.A., and Dental Centers of American, P.A. which appear in such
Prospectus. I also consent to the reference to me under the heading Experts in
such Prospectus.
Sidney Glassel, C.P.A.
Woodbridge, New Jersey
December 16, 1997
II-10
<PAGE> 278
CONSENT OF INDEPENDENT ACCOUNTANTS
I hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-1 of my report dated October 24, 1997 relating
to the financial statements of American Dental Centers, P.A. which appear in
such Prospectus. I also consent to the reference to me under the heading Experts
in such Prospectus.
Sidney Glassel, C.P.A.
Woodbridge, New Jersey
December 16, 1997
II-11
<PAGE> 279
SCHEDULE VIII
VALLEY FORGE DENTAL ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND AT JUNE 30, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
- -------------------------------------- ---------- ---------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Allowance for uncollectible
accounts......................... 46,401 34,767(1) (1,528) 79,640
Allowance for contractual
allowances....................... 27,189(2) (4,024) 23,165
Year Ended December 31, 1996
Allowance for uncollectible
accounts......................... 79,640 369,646 51,066(1) (113,468) 386,884
Allowance for contractual
allowances....................... 23,165 210,537(2) (117,943) 115,759
Period ended June 30, 1997
Allowance for uncollectible
accounts......................... 386,884 346,126 337,671(1) (108,054) 962,627
Allowance for contractual
allowances....................... 115,759 608,964(2) (366,193) 358,530
</TABLE>
- ---------------
(1) Allowances for doubtful accounts related to acquired receivables.
(2) Charged against net revenues.
S-1
<PAGE> 280
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------
<S> <C> <C>
1 Form of Underwriting Agreement.............................................. *
2(a) Agreement of Purchase and Sale dated as of September 1, 1995 (the "MT
Associates Purchase Agreement") by and among the Company, MT Associates,
Bruce L. Talus, D.M.D. and Robert K. Mehlman, D.D.S. ("Mehlman") (the
exhibits to the MT Associates Purchase Agreement are not filed as part of
this Registration Statement on Form S-1. A list briefly identifying the
contents of the omitted exhibits appears in the table of contents to the
agreement. The Registrant undertakes to furnish supplementally a copy of any
omitted exhibit or schedule to the Commission upon request) ................ **
2(b) Amendment No. 1 to the MT Associates Purchase Agreement..................... **
2(c) Amendment No. 2 to MT Associates Purchase Agreement ........................ ***
3(a) Certificate of Incorporation of the Company, as amended to date. ........... **
3(b) By-Laws of the Company. .................................................... **
4(a) Valley Forge Dental Associates, Inc. 1997 Stock Option Plan. ............... **
4(b) Stock Option Certificate dated February 6, 1997 issued by the Company to W.
Gary Liddick for options on 15,000 shares of Common Stock. ................. **
4(c) Stock Option Certificate dated May 21, 1997 issued by the Company to Keith
Libou, D.M.D. for options on 16,000 shares of Common Stock. ................ **
4(d) Shareholders Agreement dated October 1, 1997 by and between the Company and
the shareholders of ProDent, Inc. .......................................... **
4(e) Valley Forge Dental Associates, Inc. 1997 Employee Stock Purchase Plan...... ***
5 Opinion of Haythe & Curley, counsel to the Company, as to the legality of
the Securities being offered ............................................... *
10(a) 9% Subordinated Promissory Note of the Company dated September 18, 1995
payable to Abbingdon Venture Partners Limited Partnership ("Abbingdon") in
the aggregate principal amount of $216,000. ................................ **
10(b) 9% Subordinated Promissory Note of the Company dated September 18, 1995
payable to Abbingdon Venture Partners Limited Partnership-II (Abbingdon-II)
in the aggregate principal amount of $792,000. ............................. **
10(c) 9% Subordinated Promissory Note of the Company dated September 18, 1995
payable to Abbingdon Venture Partners Limited Partnership-III
(Abbingdon-III) in the aggregate principal amount of $512,000. ............. **
10(d) 9% Subordinated Promissory Note of the Company dated September 18, 1995
payable to Business Development Capital Limited Partnership-III (BDC-III) in
the aggregate principal amount of $80,000. ................................. **
10(e) 9% Subordinated Promissory Note of the Company and Riverhearst, Inc., a
Delaware corporation wholly owned by the Company ("Riverhearst"), dated
December 12, 1995 payable to Abbingdon in the aggregate principal amount of
$1,134,000. ................................................................ **
10(f) 9% Subordinated Promissory Note of the Company and Riverhearst dated
December 12, 1995 payable to Abbingdon-II in the aggregate principal amount
of $4,158,000. ............................................................. **
10(g) 9% Subordinated Promissory Note of the Company and Riverhearst dated
December 12, 1995 payable to Abbingdon-III in the aggregate principal amount
of $2,688,000. ............................................................. **
10(h) 9% Subordinated Promissory Note of the Company and Riverhearst dated
December 12, 1995 payable to BDC-III in the aggregate principal amount of
$420,000. .................................................................. **
</TABLE>
<PAGE> 281
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------
<S> <C> <C>
10(i) 9% Subordinated Promissory Note of the Company and Riverhearst dated
December 31, 1995 payable to Abbingdon in the aggregate principal amount of
$2,700,000. ................................................................ **
10(j) 9% Subordinated Promissory Note of the Company and Riverhearst dated
December 31, 1995 payable to Abbingdon-II in the aggregate principal amount
of $9,900,000. ............................................................. **
10(k) 9% Subordinated Promissory Note of the Company and Riverhearst dated
December 31, 1995 payable to Abbingdon-III in the aggregate principal amount
of $6,400,000. ............................................................. **
10(l) 9% Subordinated Promissory Note of the Company and Riverhearst dated
December 31, 1995 payable to BDC-III in the aggregate principal amount of
$1,000,000. ................................................................ **
10(m) 9% Subordinated Promissory Note of the Company and Riverhearst dated October
20, 1997 payable to Abbingdon in the aggregate principal amount of
$1,080,000. ................................................................ **
10(n) 9% Subordinated Promissory Note of the Company and Riverhearst dated October
20, 1997 payable to Abbingdon-II in the aggregate principal amount of
$3,960,000. ................................................................ **
10(o) 9% Subordinated Promissory Note of the Company and Riverhearst dated October
20, 1997 in the aggregate principal amount of $2,560,000. .................. **
10(p) 9% Subordinated Promissory Note of the Company and Riverhearst dated October
20, 1997 in the aggregate principal amount of $400,000. .................... **
10(q) Stock Purchase Agreement dated September 19, 1995 between the Company and
Robert K. Mehlman, D.D.S. .................................................. **
10(r) Stock Purchase Agreement dated September 19, 1995 between the Company and
Bruce C. Talus, D.M.D. ..................................................... **
10(s) Stock Purchase Agreement dated December 31, 1995 between the Company and W.
Gary Liddick. .............................................................. **
10(t) Stock Purchase Agreement dated November 25, 1996 between the Company and
Stephen O'Neil. ............................................................ **
10(u) Stock Purchase Agreement dated November 25, 1996 between the Company and
Stathis Andris. ............................................................ **
10(v) Stock Purchase Agreement dated November 25, 1996 between the Company and
Colin C. Blaydon. .......................................................... **
10(w) Stock Purchase Agreement dated December 17, 1996 between the Company and W.
Gary Liddick. .............................................................. **
10(x) Stock Purchase Agreement dated December 17, 1996 between the Company and
Jeanne Marie Welsko. ....................................................... **
10(y) Stock Purchase Agreement dated December 17, 1996 between the Company and
Joseph J. Frank. ........................................................... **
10(z) Stock Purchase Agreement dated January 15, 1997 between the Company and
Allan M. Dworkin, D.D.S. ................................................... **
10(aa) Convertible Promissory Note of the Company payable to MT Associates in the
principal amount of $800,000. .............................................. **
10(bb) Promissory Note of the Company payable to MT Associates in the principal
amount of $135,000. ........................................................ **
10(cc) Convertible Promissory Note of the Company payable to MT Associates in the
principal amount of $720,000. .............................................. **
10(dd) Promissory Note of the Company payable to Mehlman in the principal amount of
$137,926.48. ............................................................... **
</TABLE>
<PAGE> 282
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------
<S> <C> <C>
10(ee) Convertible Promissory Note of the Company payable to MT Associates in the **
principal amount of $2,677,200. ............................................
10(ff) Discretionary Line of Credit Letter Agreement dated October 21, 1997 by and **
among the Company, BDC-III, Abbingdon, Abbingdon II, Abbingdon-III, certain
subsidiaries of the Company and PNC Bank, National Association ("PNC"). ....
10(gg) Demand Note of the Company dated October 21, 1997 payable to PNC in the **
principal amount of $10,000,000. ...........................................
10(hh) Guaranty and Suretyship Agreement dated October 21, 1997 made by certain of **
the Company's subsidiaries in favor of PNC. ................................
10(ii) Guaranty and Suretyship Agreement dated October 21, 1997 made by the **
partnerships in favor of PNC. ..............................................
10(jj) Pledge Agreement dated October 21, 1997 made by certain of the Company's **
subsidiaries and the partnerships in favor of PNC. .........................
10(kk) Security Agreement dated October 21, 1997 by the Company and certain of the **
Company's subsidiaries in favor of PNC (the exhibits to the Security
Agreement are not filed as part of this Registration Statement on Form S-1.
The Registrant undertakes to furnish supplementally a copy of any omitted
exhibit or schedule to the Commission upon request). .......................
10(ll) Employment Letter dated May 28, 1996 between the Company and Joseph J. **
Frank. .....................................................................
10(mm) Employment Letter dated November 16, 1995 between the Company and W. Gary **
Liddick. ...................................................................
10(nn) Employment Letter dated October 7, 1997 between the Company and **
Jeanne Marie Welsko. .......................................................
10(oo) Employment Letter dated July 31, 1997 between the Company and Keith **
Libou. .....................................................................
10(pp) Employment Agreement dated September 19, 1995 between the Company and **
Mehlman (the "Mehlman Employment Agreement"). ..............................
10(qq) Amendment No. 1 dated October 1, 1996 to Mehlman Employment Agreement. ..... **
10(rr) Form of management/administrative services agreement. ...................... **
10(ss) Form of management/administrative services agreement. ...................... **
10(tt) Form of option letter. ..................................................... **
10(uu) Management Agreement dated as of September 19, 1995 between VFD ***
of Pennsylvania, Inc., a Delaware corporation ("VFDP"), and
Bruce L. Talus, D.M.D., P.C. ...............................................
10(vv) Management Agreement dated as of October 10, 1995 between VFDP and ***
Nancy J. Magone, P.C. ......................................................
10(ww) Management Agreement dated as of September 19, 1995 between VFDP and ***
Bruce L. Talus, D.M.D. and Associates, P.C. ................................
10(xx)+ Administrative Services Agreement dated as of January 31, 1996 between VFDP ***
and Valley Forge Dental of Florida, P.A., a Florida professional
corporation ("VFDF")........................................................
10(yy)+ Administrative and Management Services Agreement dated as of February 29, ***
1996 between Horizon Group International, Inc. and Horizon Dental Group
International, Inc. -- R.W. Aros, D.D.S. ...................................
10(zz) Administrative Services Agreement dated as of January 29, 1997 between VFDP ***
and Western Dental Associates, P.C. ........................................
</TABLE>
<PAGE> 283
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------
<S> <C> <C>
10(aaa) Administrative Services Agreement dated as of February 19, 1997 between ***
VFD of Georgia, Inc. and Witkin Dentistry, P.C. ............................
10(bbb)+ Administrative Services Agreement dated as of October 1, 1997 between ***
ProDent, Inc., a Pennsylvania corporation ("ProDent"), and George Frattali,
D.D.S. & Associates, P.A. ..................................................
10(ccc) Administrative Services Agreement dated as of October 1, 1997 between ***
ProDent and George E. Frattali, D.D.S. & Associates, LTD. ..................
10(ddd) Administrative Services Agreement dated as of October 1, 1997 between ***
ProDent and Village at Newtown Dentists, P.C. ..............................
10(eee) Management Agreement dated as of October 23, 1997 between VFDP and Dworkin ***
and Clemens, D.D.S., P.A. ..................................................
10(fff)+ Administrative Services Agreement dated as of August 5, 1997 between VFDP ***
and VFDF. ..................................................................
10(ggg)+ Administrative Services Agreement dated as of October 22, 1997 between VFDP ***
and Poller Dental Centers, P.A. ............................................
11 Statement re computation of per share earnings. ............................ **
21 Subsidiaries of the Company. ............................................... **
23(a) Consent of Price Waterhouse LLP (see "Consent of Independent Accountants" in ***
the Registration Statement). ...............................................
23(b) Consent of Kelly, Welde & Co. (see "Consent of Independent Accountants" in ***
the Registration Statement). ...............................................
23(c) Consent of Sidney Glassel, C.P.A. (see "Consent of Independent Accountants" ***
in the Registration Statement). ............................................
23(d) Consent of Sidney Glassel, C.P.A. (see "Consent of Independent Accountants" ***
in the Registration Statement) .............................................
23(e) Consent of Haythe & Curley (included in Exhibit 5). ........................ *
24 Power of Attorney (see "Power of Attorney" in the Registration ***
Statement). ................................................................
27(a) Financial Data Schedule. ................................................... ***
27(b) Financial Data Schedule. ................................................... ***
27(c) Financial Data Schedule. ................................................... ***
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.
+ Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
<PAGE> 1
EXHIBIT 2(c)
AMENDMENT NO. 2 TO PURCHASE AGREEMENT
AMENDMENT AGREEMENT effective as of September 1, 1995 by and among
MT ASSOCIATES, a Pennsylvania general partnership (the "Partnership"), Robert K.
Mehlman, D.D.S. ("Mehlman"), Bruce L. Talus, D.M.D. ("Talus"), and Valley Forge
Dental Associates, Inc., a Delaware corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Partnership, Mehlman, Talus and the Purchaser entered
into an Agreement of Purchase and Sale (the "Original Purchase Agreement") dated
as of September 1, 1995, which provided, among other things, for the purchase by
the Purchaser of certain of the assets of the Partnership;
WHEREAS, the parties amended the Original Purchase Agreement by an
amendment dated as of October 1, 1996 (the "First amendment" and together with
the Original Purchase Agreement, the "Purchase Agreement"; and
WHEREAS, the parties hereto desire to further amend the Purchase
Agreement to accurately reflect the original intention of the parties, as
hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties
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hereto, intending to be legally bound, hereby agree as follows:
1. Defined Terms. All capitalized terms used but not otherwise
defined herein shall have the respective meanings ascribed thereto in the
Purchase Agreement.
2. Amendments to Purchase Agreement.
(a) Section I(D) and Section I(E) of the Purchase Agreement are
hereby amended by deleting Section I(D) and Section I(E) in their entirety and
substituting therefor the following new Section I(D) and Section I(E):
"D. Contingent Payments. Each of the Partnership, Mehlman,
Talus and the Purchaser acknowledges and agrees that because many of the
locations of the Business have short operating histories, the full value
of the Shares and the Virginia Business on the date of the Closing is
difficult to ascertain with any degree of certainty on the date of
Closing. Accordingly, the parties to this Agreement agree that it is
appropriate to provide for the Contingent Payments set forth in this
Section I(D) to reflect more accurately the full value of the Shares and
the Virginia Business on the date of Closing. Subject to the conditions
set forth herein and in Schedule III hereto, within ninety (90) days after
September 30, 1996, September 30, 1997 and September 30, 1998, the
Purchaser shall deliver to the Partnership, the Contingent Payments, if
any, payable with respect to the twelve-month periods ending September 30,
1996, September 30, 1997 and September 30, 1998, respectively. The amount
of the Contingent Payments payable to the Partnership with respect to
twelve-month period ending September 30, 1996 (the "1996 Contingent
Period") (i) shall be based upon the achievement by the Business of
targeted "net revenues" (as hereinafter defined) during such Contingent
Period and the achievement by the Business of targeted "pre-tax earnings"
(as hereinafter defined) as a percentage of net revenues of the Business
during such Contingent Period and (ii) shall be determined in accordance
with the provisions hereof, Schedule III hereto and the terms of the
contingent payment matrix
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set forth in Schedule IV hereto (the "1996 Contingent Payment Matrix").
The amount of the Contingent Payments payable to the Partnership with
respect to each of the twelve-month periods ending September 30, 1997 (the
"1997 Contingent Period") and September 30, 1998 (the "1998 Contingent
Period", and together with the 1997 Contingent Period and the 1996
Contingent Period, the "Contingent Periods") (i) shall be based upon the
achievement by the Business of targeted "net revenues" during such
Contingent Period and the achievement by the Business of targeted "pre-tax
earnings" as a percentage of net revenues of the Business during such
Contingent Period and (ii) shall be determined in accordance with the
provisions hereof and Schedule III hereto. Each of the Contingent
Payments, if earned, shall be made by delivery to the Partnership of (i)
certified or official bank checks payable to the order of the Partnership
or by means of a wire transfer in immediately available funds to an
account designated by the Partnership and (ii) three-year convertible
subordinated promissory notes of the Purchaser in the form of Exhibit A-3
hereto (the "Contingent Notes"; and together with the Closing Notes, the
"Notes"), in each case, in such amounts of cash and such principal amounts
as are determined in accordance with Schedule III hereto and Schedule IV
hereto, as applicable. The Purchaser agrees to pay the Partnership
interest at the rate of eleven percent (11%) per annum on any undisputed
cash Contingent Payments which are not paid within ninety (90) days of
September 30, 1996, September 30, 1997 and September 30, 1998, as the case
may be. Such interest shall accrue from the date which is ninety (90) days
after the applicable September 30 until the date payment is received.
E. Computation of Net Revenues and Pre-Tax Earnings; Certain
Adjustments. The Purchaser shall, within ninety (90) days after the end of
each of the Contingent Periods, compute the amount of the net revenues and
pre-tax earnings of the Business for such Contingent Period. For purposes
of calculating net revenues and pre-tax earnings, the Business shall be
accounted for as a separate business enterprise with separate financial
books and accounting records, notwithstanding that the Business is owned
or operated by one or more legal entities. The amount so computed shall be
the net revenues and pre-tax earnings for purposes of determining whether
or not Contingent Payments for a Contingent Period shall be due and
payable. Notwithstanding the determination of net
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revenues and pre-tax earnings for any applicable period by the Purchaser,
the Partnership shall receive within each such ninety (90) day period the
information upon which such determination was made, and shall, in the
event of a dispute as to the amount or method of calculation of such net
revenues and pre-tax earnings have the right, together with its
representatives, to review and make appropriate copies of all applicable
books, records and work papers relating to the determination of net
revenues and pre-tax earnings. For purposes of this Agreement, (i) "net
revenues" of the Business shall mean gross charges billed for all services
provided by the Business (or, in the event that all or substantially all
of the assets and business of the Business shall have been transferred to
another entity or entities, the allocable portion of the gross charges of
such other entity or entities attributable to the Business) during a
Contingent Period less any necessary adjustments to reflect patient
refunds and amounts which are determined to be uncollectible at the time
of billing (contractual allowances) or in the future (billing errors) as
determined in accordance with generally accepted accounting principles
consistent with the Purchaser's accounting practices; and (ii) "pre-tax
earnings" shall mean the earnings before income taxes of the Business (or,
in the event that all or substantially all the assets and business of the
Business shall have been transferred to another entity or entities, the
allocable portion of the pre-tax earnings of such other entity or
entities) for a Contingent Period as determined in accordance with
generally accepted accounting principles consistent with the Purchaser's
accounting practices; provided, however, that all revenues and earnings of
the Business received from the Medicare or Medicaid programs or from the
Office of Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") programs shall be excluded from "net revenues" and "pre-tax
earnings" for the purposes of this Agreement. The Purchaser agrees that
the Purchaser will provide the Business with working capital at a level
and take such other actions which, in the Purchaser's reasonable judgment,
will permit the Business to maximize its net revenues and pre-tax
earnings, subject at all times to the Purchaser's obligations to its
shareholders and any applicable statutory or regulatory requirements.
Operating expenses will include all charges directly related to the daily
operations of the Business and will include the following:
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- Clinical salaries and benefits.
- Administrative salaries and benefits.
- Amounts paid to independent contractors.
- Expenses for office supplies consumed.
- Telephone expenses.
- Depreciation costs related to specific assets used in
connection with the operation of the Business.
- Insurance costs directly related to the worker's
compensation, professional and general liability or
property insurance associated with the Business.
- Testing supplies consumed by the Business.
- Travel and entertainment expenses incurred, except for
those expenses required to attend any of the Purchaser's
corporate or regional meetings.
- Expenses for the lease or rental of any equipment used
in the office or directly by employees or independent
contractors.
- Rents and other charges for facilities used in the
operation of the Business.
- Charges incurred for the processing of payroll.
- Advertising expenses in local newspapers and
publications.
- Amounts related to the write-off or reserving of bad
debts.
- Expenses related to the collection of bad debts and the
income therefrom.
- Expenses relating to clinical supervision.
- Talus's salary and bonus up to $85,000.
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- All principal and interest payments on the Talus Note.
For purposes of calculating pre-tax earnings, operating expenses will not
include the following charges:
- Corporate overhead allocations.
- Acquisition-related interest expense.
- Legal and accounting fees.
- Amortization of goodwill or other intangibles arising in
connection with the transactions contemplated by this
Agreement.
- Mehlman's salary, bonus and expenses.
- Talus's expenses and his salary and bonus in excess of
the aggregate of $85,000.
- Management fees.
- Any expenses incurred in connection with the operations
of the Start-Up Business (as hereinafter defined).
- All principal and interest payments on the Mehlman Note.
For purposes of determining the net revenues and pre-tax earnings of
the Business for any Contingent Period pursuant to this Section I(E), the
Business shall not include any net revenues, pre-tax earnings or expenses
in connection with the operation of the two (2) facilities in Sterling and
Fredricksburg, Virginia and the one (1) facility in Fredrick, Maryland by
Mid Atlantic MSO, LLC (collectively, the "Start-Up Business")."
(b) The Purchase Agreement is hereby further amended by substituting
Schedule III and Schedule IV in their entirety and replacing them with a new
Schedule III and Schedule IV in the form of Schedule III and Schedule IV
attached to this Amendment Agreement.
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3. Miscellaneous.
(a) The parties hereto further agree that all notices, requests or
instructions under this Amendment Agreement or any other agreement made between
the parties hereto in connection with the Purchase Agreement shall be in writing
and delivered personally, sent by telecopy or sent by registered or certified
mail, postage prepaid, to the addresses set forth in Section XIV(A) of the
Purchase Agreement.
(b) Except as specifically amended herein, the Purchase Agreement
shall remain in full force and effect in accordance with its terms.
(c) The provisions of this Amendment Agreement are severable, and if
any clause or provision shall be held invalid or unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction and shall
not in any manner affect such clause or provision in this Amendment Agreement in
any jurisdiction.
(d) This Amendment Agreement shall be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
(e) This Amendment Agreement may be executed in counterparts, each
of which shall be deemed an original, but
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all of which taken together shall constitute one and the same instrument.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Agreement to be duly executed on the date first above written.
MT ASSOCIATES
By /s/ Robert K Mehlman, D.D.S
----------------------------
General Partner
/s/ Robert K. Mehlman, D.D.S
-----------------------------
Robert K. Mehlman, D.D.S.
/s/ Bruce L. Tahis, D.M.D
-----------------------------
Bruce L. Talus, D.M.D.
VALLEY FORGE DENTAL ASSOCIATES, INC.
By /s/ W. Gary Liddick
-----------------------------
W. Gary Liddick
Vice President
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"Schedule III
CONTINGENT PAYMENTS
(1) Contingent Period Ending September 30, 1996:
The Target 100% net revenues and pre-tax earnings percentages set
forth below for the 1996 Contingent Period correspond to the Target 100%
headings for net revenues and pre-tax earnings in the Contingent Matrix.
The Target 100% net revenues, pre-tax earnings percentages and
Contingent Payments for the 1996 Contingent Period is as follows:
<TABLE>
<S> <C>
Target 100% net revenues $3,365,000
Target 100% pre-tax earnings
(as a percentage of net 21.6%
revenues)
Target 100% Contingent Payments $ 300,000 and a Convertible
subordinated promissory note in
the principal amount of $500,000.
</TABLE>
In order to calculate the Contingent Payments for the 1996
Contingent Period, the net revenues and pre-tax earnings of the Business shall
be computed in accordance with Section I(E) and a contingent payment multiplier
for such period which shall be determined by reference to the Contingent Matrix.
The percentages set forth in the headings of the Contingent Matrix are
benchmarks only. The aggregate amount of the cash and the principal amount of
the Contingent Notes which comprise the Contingent Payments payable to the
Partnership and Mehlman shall be determined by multiplying the Target 100% cash
and the Target 100% aggregate principal amount of the Contingent Notes for the
1996 Contingent Period by the applicable contingent multiplier.
The maximum Contingent Payments for the 1996 Contingent Period shall
be 144% of the Target 100% Contingent Payments for the 1996 Contingent Period.
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(2) Contingent Period Ending September 30, 1997:
If during the 1997 Contingent Period the Business achieves net
revenues of $3,500,000 and pre-tax earning (as a percentage of net revenues) of
22.0% the Contingent Payments shall be:
$414,000 and a Convertible
subordinated promissory note in the
principal amount of $2,677,200.
(3) Contingent Period Ending September 30, 1998:
If during the 1998 Contingent Period the Business achieves net
revenues of $3,700,000 and pre-tax earnings (as a percentage of net revenues) of
22.5% the Contingent Payments shall be:
$660,000 and a Convertible
subordinated promissory note in the
principal amount of $1,980,000.
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Schedule IV
1996 CONTINGENT PERIOD CONTINGENT PAYMENT MATRIX
REVENUES
TARGE
T
10% 20% 40% 60% 80% 100% 120%
---------------------------------------------------------------
P E 10% 0.01 0.02 0.04 0.06 0.08 0.10 0.12
R A ---------------------------------------------------------------
E R 20% 0.02 0.04 0.08 0.12 0.16 0.20 0.24
T N ---------------------------------------------------------------
A I 40% 0.04 0.08 0.16 0.24 0.32 0.40 0.48
X N ---------------------------------------------------------------
G 60% 0.06 0.12 0.24 0.36 0.48 0.60 0.72
S ---------------------------------------------------------------
80% 0.08 0.16 0.32 0.48 0.64 0.80 0.96
---------------------------------------------------------------
TARGET 0.10 0.20 0.40 0.60 0.80 1.00 1.20
100%
---------------------------------------------------------------
120% 0.12 0.24 0.48 0.72 0.96 1.20 1.44
---------------------------------------------------------------
Contingent Payments will be pro-rated for net revenues
and pre-tax earnings that are between matrix
benchmarks."
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EXHIBIT 4(e)
VALLEY FORGE DENTAL ASSOCIATES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Valley Forge Dental Associates, Inc.
1997 Employee Stock Purchase Plan is to enable and encourage employees of the
Company and its Subsidiaries to acquire the Company's Common Stock through
payroll deductions to enable them to share in the economic prosperity of the
Company.
2. Definitions.
2.1 "Board of Directors" shall mean the Board of Directors of the
Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.3 "Committee" shall mean the Stock Option Committee of the Board
of Directors.
2.4 "Common Stock" shall mean shares of the Company's common stock,
$.01 par value.
2.5 "Company" shall mean Valley Forge Dental Associates, Inc., a
Delaware corporation.
2.6 "Compensation" shall mean the amount received by an Employee
from the Company or a Subsidiary as salary, wages or other direct remuneration
for services rendered, but excluding (a) overtime pay, (b) bonuses, (c) sick pay
and (d) contributions by the Company or any Subsidiary to any employee benefit
plan of the Company or any Subsidiary.
2.7 "Eligible Employees" shall mean only those persons who on an
Offering Date (a) are Employees and (b) who are not deemed for purposes of
Section 423(b)(3) of the Code to own stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or of any
Parent or Subsidiary.
2.8 "Employees" shall mean all persons employed by the Company or
any Subsidiary, within the meaning of Section 423(b)(1) of the Code, excluding
persons (a) employed less than one (1) year, or (b) whose customary employment
is 20 hours or less per calendar week or (c) whose customary employment is for
not more than five months per calendar year.
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2.9 "Exercise Date" shall mean the last business day of each Offering
Period.
2.10 "Fair Market Value" shall mean the last sale price regular way on
the date of reference, or, in case no sale takes place on such date, the average
of the closing high bid and low asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or if the Common Stock is not listed or admitted to trading
on any national securities exchange, the last sale price reported on the
National Market System of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") on such date, or the last sale price
reported on the NASDAQ SmallCap Market on such date, or the average of the
closing high bid and low asked prices in the over-the-counter market on such
date, whichever is applicable, or if there are no such prices reported on NASDAQ
or in the over-the-counter market on such date, as furnished to the Committee by
any New York Stock Exchange member selected from time to time by the Committee
for such purpose. If there is no bid or asked price reported on any such date,
the Fair Market Value shall be determined by the Committee in accordance with
the regulations promulgated under Section 2031 of the Code, or by any other
appropriate method selected by the Committee.
2.11 "Initial Offering Period" shall mean the period commencing on such
date as shall be designated by the Committee (but no earlier than January 1,
1998) and ending on the next June 30 or December 31, whichever is sooner.
2.12 "Normal Offering Period" shall mean the periods commencing January
1 and July 1 of each Plan Year and ending, respectively, on June 30 and December
31 of the same Plan Year. The first Normal Offering Period shall commence on the
first business day following the end of the Initial Offering Period.
2.13 "Offering" shall mean the offering of shares of Common Stock to
Participants pursuant to the Plan that occurs on each Offering Date.
2.14 "Offering Date" shall mean the first business day of each Offering
Period.
2.15 "Parent" shall mean any parent corporation of the Company within
the meaning of Section 424(e) of the Code.
2.16 "Participant" shall mean an Eligible Employee who elects to
participate in the Plan and gives notice to the Company of such election in
accordance with Section 5 hereof.
2.17 "Plan" shall mean the Valley Forge Dental Associates, Inc. 1997
Employee Stock Purchase Plan as set forth herein.
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2.18 "Plan Year" shall mean the period commencing with the first
day of the Initial Offering Period and ending on the next December 31 and,
thereafter, each succeeding calendar period commencing with the first day of
each year that the Plan is in effect.
2.19 "Purchase Price" shall mean the cost of Common Stock acquired
pursuant to the Plan as determined under Section 9 hereof.
2.20 "Rules" shall mean the rules for administering the Plan
adopted pursuant to Section 19 hereof.
2.21 "Stock Purchase Account" shall mean the record of payments
made by a Participant in accordance with Section 6 hereof which is required to
be maintained in accordance with Section 7 hereof.
2.22 "Subsidiary" shall mean any subsidiary corporation of the
Company within the meaning of Section 424(f) of the Code.
3. Shares Offered Pursuant to the Plan. The number of shares of Common
Stock which may be offered under the Plan shall not exceed 350,000, subject to
adjustment in accordance with Section 21 hereof. Such shares may be authorized
but unissued shares, previously issued shares reacquired by the Company, or any
combination thereof.
4. Shares Purchased By Participants. Each Participant on an Offering
Date shall be entitled to purchase from the Company, in the manner and on the
terms herein provided, whole shares of Common Stock at the Purchase Price set
forth in Section 9 hereof with amounts withheld or paid pursuant to Section 6
hereof during the Offering Period commencing on such Offering Date and ending on
the next succeeding Exercise Date. Anything herein to the contrary
notwithstanding, if any person entitled to purchase shares pursuant to any
Offering hereunder would be deemed for purposes of Section 423(b)(3) of the Code
to own stock (including any number of shares which such person would be entitled
to purchase hereunder and under any other such plan maintained by the Company or
any Subsidiary) possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company, the maximum number of shares which
such person shall be entitled to purchase pursuant to the Plan shall be reduced
to that number which, when added to the number of shares of stock of the Company
which such person is so deemed to own (excluding any number of shares which such
person would be entitled to purchase hereunder), is one less than such 5%.
5. Participation in the Plan. Any Eligible Employee may become a
Participant in the Plan by notifying the Company in writing of his intention to
participate prior to the Offering Date on which an Offering commences. Such
notice shall be in the form prescribed by the Rules and shall be delivered by
hand or mailed, postage prepaid, to the Secretary of the Committee, or his
designee.
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6. Method of Payment For Shares.
6.1 Payment for shares of Common Stock purchased hereunder shall be
made by authorized payroll deductions from a Participant's Compensation pursuant
to this Section 6.
6.2 In his written notice to the Company pursuant to Section 5
hereof, a Participant shall authorize a deduction from the payment of his
Compensation during each Offering Period of any full dollar amount; provided,
however, that the minimum deduction shall be $20 per bi-weekly pay period and
the maximum deduction shall be 10% of any payment of Compensation. The maximum
deduction from a Participant's Compensation during any twelve month period shall
be $10,000. A Participant may not change the amount of his deductions during an
Offering Period, but may change the amount to be deducted for any subsequent
Offering by filing notice thereof prior to the Offering Date on which such
subsequent Offering commences in the manner provided in Section 5 hereof.
7. Stock Purchase Accounts. A Stock Purchase Account shall be
established and maintained in the name of each Participant. Amounts deducted
from a Participant's Compensation pursuant to Section 6 hereof shall be credited
to his Stock Purchase Account.
8. Interest. No interest shall accrue or be payable to any Participant
with respect to any amounts credited to his Stock Purchase Account.
9. Purchase Price. The Purchase Price per share of the shares of Common
Stock sold to Participants hereunder for any Offering shall be the lesser of 85%
of the Fair Market Value per share of Common Stock on the (i) Offering Date or
(ii) the Exercise Date.
10. Purchase of Shares. If as of any Exercise Date there is credited to
the Stock Purchase Account of a Participant an amount at least equal to the
Purchase Price of one share of Common Stock, as determined in Section 9 hereof,
for the Offering which expires on such Exercise Date, the Participant shall
purchase from the Company at such Purchase Price the largest number of whole
shares of Common Stock which can be purchased with the amount credited to his
Stock Purchase Account. Anything herein to the contrary notwithstanding, a
Participant may not purchase more than 1,000 shares of Common Stock in any
Offering Period.
11. Expiration of Offering. As of each Exercise Date the amount
credited to the Stock Purchase Account of each Participant in the Offering which
expires on such Exercise Date shall be charged with the aggregate Purchase Price
of the shares of Common Stock purchased by the Participant on such Exercise
Date. The remaining balance credited to his Stock Purchase Account shall be
refunded to each Participant who files notice of his election to receive such a
refund prior to such Exercise Date in the manner provided in Section 23 hereof.
If no such notice is filed by a Participant and such Participant has not
withdrawn from the Plan in accordance with
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Section 13 hereof, any remaining balance credited to his Stock Purchase Account
shall be credited to his Stock Purchase Account for the next succeeding Offering
hereunder.
12. Issuance of Shares; Stock Certificate.
12.1 The shares of Common Stock purchased by a Participant on an
Exercise Date shall, for all purposes, be deemed to have been sold at the close
of business on such Exercise Date. Prior to that time, the Participant shall
have none of the rights or privileges of a stockholder of the Company with
respect to such shares.
12.2 As soon as practicable after such Exercise Date, the Company
shall issue and deliver a certificate for the number of shares of Common Stock
purchased by a Participant on such Exercise Date, which certificate shall be
registered either in the Participant's name or jointly in the names of the
Participant and his spouse, with the right of survivorship, as the Participant
shall designate in his notice to the Company pursuant to Section 23 hereof. The
Participant may change such designation at any time by filing notice of the
change in accordance with Section 23 hereof.
13. Voluntary Withdrawal From the Plan. A Participant may withdraw from
the Plan at any time by filing a notice of withdrawal in writing with the
Company. Upon a Participant's withdrawal, the entire amount credited to his
Stock Purchase Account shall be refunded to him. Any Participant who withdraws
from the Plan may again become a Participant hereunder by filing notice in
accordance with Section 5 hereof.
14. Involuntary Withdrawal From the Plan. If a Participant ceases to be
an Employee by reason of clauses (b) or (c) of Section 2.8 hereof, the entire
credit balance in such Participant's Stock Purchase Account as of the effective
date on which such Participant so ceased to be an Employee shall be used to
purchase shares of Common Stock pursuant to Sections 9 and 10 hereof on the next
Exercise Date and any remaining balance credited to such Participant's Stock
Purchase Account shall be refunded to him.
15. Termination of Employment. If a Participant ceases to be an
Employee other than by reason of clauses (b) or (c) of Section 2.8 hereof, the
entire credit balance in such Participant's Stock Purchase Account shall be
refunded to such Participant. If a Participant dies, the entire credit balance
in such Participant's Stock Purchase Account shall be paid over to such
Participant's estate.
16. Procedure if Insufficient Shares Available. In the event that on
any Exercise Date the aggregate funds available for the purchase of shares of
Common Stock pursuant to Section 9 hereof would purchase a number of shares in
excess of the number of shares then available for purchase under the Plan, the
Committee shall proportionately reduce the number of shares which would
otherwise be purchased by each Participant on such Exercise Date in order
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to eliminate such excess, the Plan shall automatically terminate immediately
after such Exercise Date and any remaining balance credited to the Stock
Purchase Account of a Participant shall be refunded to such Participant.
17. Limitation on Right to Purchase. Anything herein to the contrary
notwithstanding, no Participant shall be granted an option under this Plan which
permits such Participant's rights to purchase Common Stock in any one calendar
year, under this Plan and under all other stock purchase plans of the Company or
any Parent or Subsidiary, to accrue at a rate which exceeds $25,000 of Fair
Market Value of Common Stock (determined on the date the option is granted for
each calendar year such option is outstanding). The purpose of the limitation in
the preceding sentence is to comply with and shall be construed in accordance
with Section 423(b)(8) of the Code.
18. Rights Not Transferable. Rights to purchase shares under the Plan
are exercisable only by the Participant during his lifetime and are not
transferable. If a Participant attempts to transfer such Participant's rights to
purchase shares under the Plan, such Participant shall be deemed to have
requested withdrawal from the Plan and the provisions of Section 13 hereof shall
apply with respect to such Participant.
19. Administration of the Plan. Subject to the general control of, and
superseding action by, the Board of Directors, the Committee shall have full
power to administer the Plan. The Committee shall adopt Rules not inconsistent
with the provisions of the Plan for its administration, including the form of
all notices required hereunder. The Committee's interpretation and construction
of the Plan and the Rules shall, subject as aforesaid, be final and conclusive.
20. Amendment of the Plan. The Board of Directors may at any time, or
from time to time, alter or amend the Plan in any respect, except that, without
approval of the stockholders, no amendment may (i) change the number of shares
reserved under the Plan other than as provided in Section 21 hereof or (ii)
reduce the Purchase Price per share as determined under Section 9 hereof.
21. Recapitalization and Corporate Reorganization.
21.1 The aggregate number of shares of Common Stock reserved for
purchase under the Plan as provided in Section 3 hereof, the maximum number of
shares which a Participant may purchase in any Offering as provided in Section
10 hereof, and the Purchase Price per share as provided in Section 9 hereof
shall be appropriately adjusted by the Committee to reflect any increase or
decrease in the number of issued shares of Common Stock resulting from a
subdivision or consolidation of shares or other capital adjustment, or the
payment of a stock dividend, or other increase or decrease in such shares
effected without receipt of consideration by the Company.
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21.2 Subject to any required action by the stockholders, if the
Company shall be the surviving or resulting corporation in any merger or
consolidation, any Offering hereunder shall pertain to and apply to the shares
of stock of the Company, but a dissolution or liquidation of the Company or a
merger or consolidation in which the Company is not the surviving or the
resulting corporation, shall cause the Plan and any Offering hereunder to
terminate and the entire amount credited to the Stock Purchase Account of each
Participant hereunder shall be paid to such Participant.
22. Expiration and Termination of the Plan. The Plan shall continue in
effect through December 31, 2007 unless terminated prior thereto pursuant to
Section 21 hereof, provided that the Board of Directors shall have the right to
terminate the Plan at any time. In the event of the expiration of the Plan or
its termination pursuant to Section 21 hereof, the entire amount credited to the
Stock Purchase Account of each Participant hereunder shall be refunded to the
Participant.
23. Notice. Any notice which a Participant files pursuant to the Plan
shall be in the appropriate form prescribed by the Rules or, if no provision is
made in the Rules for the particular kind of notice in question, such notice
shall be in writing and shall be delivered by hand or mailed, postage prepaid,
to the Secretary of the Committee, or his designee.
24. Repurchase of Stock. The Company shall not be required to
repurchase from any Participant any shares of Common Stock acquired under the
Plan.
25. Alternative Contribution Methods. Anything herein to the contrary
notwithstanding, in the event authorized payroll deductions from Employees'
Compensation are not permitted by reason of the provisions of local law
applicable to the Company or any Subsidiary, the Committee shall adopt an
appropriate alternative method pursuant to which affected Employees may make
payment for shares of Common Stock purchased hereunder. Payments made under an
alternative contribution method shall be deemed to have been made pursuant to
Section 6 hereof.
<PAGE> 1
EXHIBIT 10 (uu)
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT, effective the 19th day of September,
1995, by and between VFD of Pennsylvania, Inc., a Delaware corporation ("VFD"),
and Bruce L. Talus D.M.D., P.C., a Pennsylvania professional services
corporation (the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing, among
other things, dental services and related activities in the Commonwealth of
Pennsylvania (the "Practice");
WHEREAS, the P.C. desires to obtain the benefit of VFD's expertise
in operating, directing, managing and supervising the non-professional aspects
of the operations of the Practice;
WHEREAS, the P.C. desires to obtain from VFD, and VFD desires to
provide to the P.C., certain premises and certain physical assets, furniture and
equipment needed to operate the Practice;
WHEREAS, VFD and the P.C. entered into a Management Agreement dated
September 19, 1995; and
WHEREAS, VFD and the P.C. wish to amend and restate the Management
Agreement in its entirety on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C.
will provide, and shall be solely responsible for providing, all professional
services for the Practice and VFD will be responsible only for administrative
services (as further described in this Agreement). Nothing contained in this
Agreement shall be construed as permitting or providing for the ownership,
establishment, operation or
<PAGE> 2
2
management by VFD of the professional services of the Practice, which services
shall at all times be the sole responsibility of the P.C. or permitting VFD to
exercise control over the Practice in violation of Pennsylvania Statute 64
P.S.129; provided, however, that pursuant to its engagement hereunder, VFD shall
be the exclusive provider of all administrative services and control all aspects
of the P.C.'s business other than those aspects which relate directly to the
provision of dental services. Without limiting the generality of the foregoing,
the P.C. shall be solely responsible for all activities described in Section 2.4
of this Agreement.
1.2 Relationship of Parties. The P.C. and VFD are not joint
venturers, partners, employees or agents of each other and, except as provided
herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances.
ARTICLE 2
SERVICES OF VFD
2.1 Covered Services. VFD, unless otherwise prohibited by law, shall
control all aspects of, and provide to the P.C. the following services, premises
and assets (such services, premises and assets are hereinafter referred to
collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day
supervision, conduct and management of the general administrative services
required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
b. Personnel. Provision of all personnel (other than licensed or
certified professionals, technicians or hygienists, collectively, the
"Professional Personnel") needed to operate and support the Practice, such as
receptionists and secretarial, clerical, purchasing and marketing personnel
(collectively, the "Administrative Personnel"). VFD shall have the sole and
exclusive responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that VFD's personnel
provided to the P.C. under this Agreement may from time to
<PAGE> 3
3
time perform services for others, this Agreement shall not prevent VFD from
performing such services for others or restrict VFD from so using the
Administrative Personnel provided to the P.C. under this Agreement. VFD will
make every effort consistent with sound business practices to honor the specific
requests of the P.C. with regard to the assignment of its employees to the P.C.;
however, VFD reserves the sole right to determine the assignment of its
employees. Further, VFD, in its sole discretion, may require each of its
employees assigned to the P.C. to perform several of the aforedescribed
functions and duties simultaneously.
c. Professional Personnel. Establish guidelines for the
selection, hiring and firing of the Professional Personnel by the P.C. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of, or independent
contractors to, the P.C.
d. Training. Training of all Administrative Personnel and
assistance to the P.C. in arranging for training and continuing education for
Professional Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.C. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by VFD with the
approval of the P.C., which approval shall not be unreasonably withheld or
delayed), bookkeeping, budgeting, record keeping, accounts receivable and
accounts payable processing, electronic data processing and such other services
as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual
operating and capital budgets for the P.C. which shall be delivered to the P.C.
within thirty (30) days after the end of each fiscal year, with VFD retaining
final authority with respect to budget items including, without limitation, with
respect to compensation and payments to the Professional Personnel and the
Administrative Personnel.
g. Patient Records. Maintenance of patient records (which shall
at all times remain the property and under the control of the P.C.) and
provision of record retrieval and monitoring services to assist the P.C. in
utilization and quality assurance reviews in accordance with instructions and
guidelines issued by the P.C.
<PAGE> 4
4
h. Quality Control. Development of appropriate quality control
programs, including development of performance standards, sampling techniques
for case review, and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation. Marketing of
the professional services provided by the P.C. to potential patients,
facilities, health maintenance organizations, self-insured employer health plans
and various third-party payors (the "Marketing Services"). The Marketing
Services to be provided by VFD may include, but are not necessarily limited to,
(i) assistance and support in the preparation of marketing material and
brochures and responses to requests for proposals, (ii) the placing of
advertisements or articles in magazines, newspapers, other publications and any
and all media determined by VFD to be beneficial to the P.C., (iii) undertaking
telemarketing campaigns and (iv) the holding of seminars. VFD shall also assist
the P.C. in negotiating and securing contracts with self-insured employer health
plans, third-party payors, health maintenance organizations, managed care
companies and any other institution, facility or organization that may be in
need of services that the P.C. is qualified to provide.
j. Equipment and Supplies. Provision of all inventory,
equipment, furnishings and supplies reasonably necessary for the efficient
operation of the Practice. Title to such inventory, equipment, furnishings and
supplies shall at all times remain in VFD. At the end of the term of this
Agreement, VFD shall retain such inventory, equipment, furnishings and supplies
as shall not have been consumed in the day-to-day operations of the Practice.
k. Janitorial and Maintenance Service. Arranging for janitorial,
grounds and maintenance and repair services for the P.C. and its equipment and
furnishings.
l. Malpractice Insurance. Assistance to the P.C. in obtaining
malpractice coverage for the P.C., its employees and agents in an amount not
less than One Million Dollars ($1,000,000). VFD shall also assist the P.C. in
obtaining general liability and property insurance in usual and customary
amounts for the P.C. VFD shall, on behalf and in the name of the P.C., pay the
premiums for all such insurance and shall provide the P.C. with evidence of
payment on a periodic basis or as requested.
m. Contracts with Facilities/Programs. Contracts with facilities
and programs serviced by the
<PAGE> 5
5
Practice shall be by and in the name of the P.C. VFD shall serve as contracting
agent for the P.C. in connection with such facilities or programs contracts.
n. Protecting Goodwill. Take all necessary steps to preserve and
protect the reputation and goodwill associated with the P.C., including
assistance in the monitoring of utilization and quality of services provided by
the P.C., and shall assist the P.C. to take all steps necessary to remedy any
and all deficiencies in the efficiency or the quality of the services provided.
This section shall not be construed as permitting VFD to influence or control
Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for the Practice
shall be made available to the P.C. by VFD.
p. Operations and Regulatory Reports. Deliver to the P.C.
operations reports containing such information as the P.C. may reasonably
request. VFD shall prepare all written reports and information that shall be
lawfully required by any government body or agency having jurisdiction over the
P.C. or the Practice. The P.C. shall review and approve all such required
reports and/or information before any dissemination of the same.
q. Processing Disputes. Administer and process all disputes,
grievances and complaints between the P.C. and all third parties, subject at all
times to the review and final approval of the P.C.
r. Government Regulations; Licenses. To the extent known and
material to the operation of the P.C. and the Practice, VFD shall promptly
notify the P.C. of any changes which may occur in relevant laws or regulations
of any government, governmental body or agency having jurisdiction over the P.C.
or the Practice. The foregoing shall not in any way limit the P.C.'s continuing
professional and legal responsibility to comply with, and be aware of, all
licensing, regulatory, professional or other requirements applicable to
individuals licensed to provide dental services.
s. Advances to VFD. VFD shall make advances to the P.C. as
required by Section 5.6 herein. Such advances shall bear a reasonable rate of
interest, as mutually agreed to by VFD and the P.C.
The Covered Services shall include assumption of all obligations of
the P.C. to provide administrative
<PAGE> 6
6
services to professional personnel who are not employed by the P.C. VFD may
perform the Covered Services directly or by reimbursing the P.C. for the cost of
any Covered Services.
2.2 Performance of Services. VFD is hereby expressly authorized to
perform the Covered Services hereunder in whatever reasonable manner it deems
appropriate to meet the day-to-day administrative needs of the Practice. It is
understood and agreed that VFD will perform some of the Covered Services for the
P.C. at a centralized location.
2.3 Events Excusing Performance. VFD will not be liable to the P.C.
for failure to perform any of the services required herein in the event of
strikes, lockouts, calamities, acts of God, unavailability of supplies or other
events over which VFD has no control for so long as such event continues and for
a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge that
the provision of all professional services, including but not limited to, dental
services by the P.C., shall be separate and independent from the provision of
administrative, fiscal and support services by VFD, and the P.C. shall be solely
and exclusively responsible for all professional dental services rendered to
patients of the Practice. Without limiting the generality of the foregoing, the
parties acknowledge that the P.C. shall be solely responsible for setting all
professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. VFD hereby grants to the P.C. a nontransferable,
nonexclusive license to use the proprietary name "Valley Forge Dental" and any
other proprietary names owned by VFD and used by the P.C. in connection with the
Practice along with any and all trademarked symbols for the term of this
Agreement (the "License"). All applicable common law and statutory rights in the
proprietary name "Valley Forge Dental" and any other proprietary names owned by
VFD and used by the Practice and their accompanying symbols, including, but not
limited to, rights relating to trademark, service mark, patent and copyright
shall be and remain the sole property of VFD. The P.C. shall have no right,
title or interest in any such proprietary rights.
<PAGE> 7
7
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF VFD
3.1 Competition. During the term of this Agreement, neither the P.C.
nor any shareholder of the P.C. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.C. or VFD.
3.2 Confidentiality. The P.C. acknowledges and agrees that VFD is
entitled to prevent its competitors from obtaining and utilizing its trade
secrets. The P.C. agrees to hold VFD's trade secrets in strictest confidence and
not to disclose them or allow them to be disclosed directly or indirectly to any
person or entity other than persons engaged by the P.C. or VFD. The P.C.
acknowledges its fiduciary obligations to VFD and the confidentiality of its
relationship with VFD and of any information relating to the services and
business methods of VFD which it may obtain during the term of this Agreement.
The P.C. shall not, either during the term of this Agreement or at any time
after the expiration or sooner termination of this Agreement, disclose to anyone
other than employees or independent contractors of the P.C. or VFD any
confidential or proprietary information or trade secret obtained by the P.C.
from VFD. The P.C. also agrees to place any persons to whom said information is
disclosed for the purpose of performance under legal obligation to treat such
information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in consultation
with VFD, establish a schedule of fees and charges for the Practice's
professional services or shall comply with the schedule of fees and charges set
forth in the health care contracts pursuant to which the P.C. provides services
through its Professional Personnel.
4.2 Billings. Billings of the Practice for all services rendered by
the P.C. shall be by and in the name of the P.C.
<PAGE> 8
8
4.3 Billing and Collection Agent. VFD shall serve as billing and
collection agent for the P.C. in connection with the Practice. VFD shall
establish a depository bank account on behalf of the Practice and will deposit
into such account collected fees generated from the Practice. As provided for in
standing instructions issued by the P.C. to the bank where such depository
account is located, VFD may withdraw all monies daily from said bank account for
processing at a central location to be used for payment of the P.C.'s expenses,
including the administrative services fee set forth in Section 5.4 hereof and
any amounts advanced to the P.C. pursuant to Section 5.6 hereof. Said processing
will consist of establishing and maintaining a book account for the P.C. showing
all fee collections and expense disbursements made by VFD at the P.C.'s request.
VFD will provide the P.C. with periodic financial statements for the Practice
reflecting such processing.
4.4 Reports. VFD shall provide the P.C. with financial statements
for the Practice, stating Gross Billings (as hereafter defined) and VFD's
Administrative Fees (as hereafter defined).
4.5 Security for VFD's Compensation. To secure the prompt and
orderly payment of any amounts owing by the P.C. to VFD pursuant to this
Agreement, the P.C. hereby agrees to grant, at the request of VFD, a security
interest to VFD or to a third party designated by VFD, in all its existing and
hereafter created accounts receivable, all cash or non-cash proceeds therefrom,
all insurance policies and proceeds relating thereto, and all of the P.C.'s
rights as an unpaid provider of services, whether now existing or hereafter
created or acquired (collectively, the "Collateral"). The P.C. agrees to execute
any and all documents necessary to perfect such security interest, including but
not limited to, UCC financing statements.
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in this
Agreement shall mean all billings by the P.C. in connection with the Practice
for dental services, including any other income or receivables relating thereto,
less contractual allowances, if any, and an allowance for bad debts, to be
determined from time to time by VFD, in its discretion, based upon the actual
experience of the P.C., plus all other cash payments and miscellaneous revenues
received by the P.C. in connection with the Practice.
<PAGE> 9
9
5.2 Intention of the Parties. It is the intention of the parties
hereto that from the Gross Billings of the P.C. in connection with the Practice,
the P.C. shall be entitled to fairly and reasonably compensate its Professional
Personnel, and VFD shall be entitled to receive from the P.C. fair and
reasonable compensation for (i) the provision of the Covered Services pursuant
to this Agreement, (ii) the License provided for in Section 2.5 hereof, and
(iii) the expenses, obligations, and risks assumed by VFD in connection
therewith.
5.3 Fair and Reasonable Compensation of the P.C. for Services of
Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into by the P.C., in consultation with VFD, and the
Professional Personnel.
5.4 Fair and Reasonable Compensation to VFD.
a. VFD's Administrative Fees. The term "Manager's Administrative
Fees" as used in this article shall mean Gross Billings less compensation
payable by the P.C. as set forth in Section 5.3.
b. For Services of VFD. The parties hereto agree that VFD shall
be fairly and reasonably compensated for its administrative services. VFD's
Administrative Fees shall be paid to VFD as compensation for (i) the provision
of the Covered Services under this Agreement, (ii) the License and (iii) its
expenses, obligations, and risks in connection therewith. VFD shall pay all
expenses of the Practice, except for compensation to the Professional Personnel,
(including interest expenses payable with respect to any indebtedness of the
P.C. to which VFD shall have consented in writing) out of VFD's Administrative
Fees or out of funds advanced to the P.C. by VFD.
5.5 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to VFD no less frequently
than annually and more frequently at the request of VFD or the P.C., if changes
in the business of the P.C. or services by VFD warrant such more frequent
review, and may agree in writing to modification of the compensation. Such
review shall consider the scope of
<PAGE> 10
10
operations pursuant to this Agreement at the time of review, the financial
success of VFD and the P.C. in connection with the Practice, changes in the
purchasing power of money, the size and number of facilities being supplied by
VFD, the scope of the Marketing Services, the size of the Administrative
Personnel workforce and the expenses and risks to the respective parties of
performing this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate adequate
revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, VFD shall advance to the P.C. or arrange for such amounts as may be
required. To the extent that VFD advances any funds to the P.C. pursuant to this
Section 5.6, such advances shall be evidenced by interest-bearing demand note(s)
from the P.C. in favor of VFD and shall be secured by the Collateral as provided
in Section 4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The term of this Agreement shall be for a period of forty
(40) years and thereafter this Agreement shall continue indefinitely until
terminated in accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this Agreement to
the contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this Agreement by either
party as a result of such party's gross negligence or fraud, the other party
may, at any time commencing sixty (60) days after written notice of the breach
has been given to the breaching party, terminate this Agreement by delivery to
the breaching party of a further written notice of termination; provided,
however, that if the breaching party, prior to receiving such notice of
termination, has begun and is diligently continuing good faith efforts to cure
such breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court, administrative body
or peer review organization having jurisdiction, to have engaged in conduct that
results in material harm to the P.C. and constitutes (i) a felony or other crime
involving moral turpitude, including fraud,
<PAGE> 11
11
theft, or embezzlement or (ii) a failure to act in an ethical or professional
manner, in keeping with accepted dental care standards, then immediately upon
notice by the other party;
c. If either party has engaged in any practice that results in
material harm to the P.C. and violates in any material respect any federal,
state or local law or regulation that is aimed at protecting the public from
coercion into treatment and preventing fraud upon or abuse of public funding of
health services, then immediately upon notice by the other party;
d. If either party commences a voluntary case under bankruptcy,
insolvency or similar law, or any involuntary case is commenced against either
party under any bankruptcy, insolvency or similar law and such involuntary case
is not dismissed within thirty (30) days after filing, then immediately upon
notice from the other party; or
e. After the initial forty (40) year term of this Agreement,
either party may also terminate this Agreement, with or without cause, by giving
the other written notice of termination not less than one (1) year prior to the
effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have previously accrued and remain to be performed upon the date of
termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel, and agents, including, without
limitation, all consequential damages and attorneys' fees, provided, however,
neither party shall be liable to the other under this Section 7.1 for any claim
covered by insurance, except to the extent liability of the party exceeds the
amount of the coverage.
<PAGE> 12
12
7.2 Assignment. The rights conferred upon the P.C. hereunder may not
be transferred or assigned without the prior written consent of VFD and any
assignment in violation of this Section 7.2 shall be void. This Agreement shall
be assignable by VFD.
7.3 Notices. All notices, requests or instructions hereunder shall
be in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(1) If to the P.C.:
709 Meadowcreek Circle
Lower Gywnedd, Pennsylvania 19002
Telephone No.:
Telecopy No.:
(2) If to VFD:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and two business days after the date of mailing, if mailed.
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such
party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
<PAGE> 13
13
7.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania applicable to
agreements made and to be performed entirely within such State.
7.8 Article and Section Headings. The article and section headings
in this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder
by either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and both of which taken together
shall constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180) days in
order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 14
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the date first above
written.
BRUCE L. TALUS D.M.D., P.C.
By: /s/ Bruce L. Talus, D.M.D.
---------------------------
Name: Bruce L. Talus, D.M.D.
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/ W. Gary Liddick
---------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(VV)
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT, effective the 10th day of October, 1995, by
and between VFD of Pennsylvania, Inc., a Delaware corporation, successor to MID
ATLANTIC MSO, LLC, a Pennsylvania limited liability company (the "Manager"), and
Nancy J. Magone, D.M.D., P.C., a Maryland professional services corporation (the
"P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing, among other
things, dental services and related activities in the State of Maryland (the
"Practice");
WHEREAS, the P.C. desires to obtain the benefit of the Manager's
expertise in operating, directing, managing and supervising the non-professional
aspects of the operations of the Practice;
WHEREAS, the P.C. desires to obtain from the Manager, and the Manager
desires to provide to the P.C., certain premises and certain physical assets,
furniture and equipment needed to operate the Practice;
WHEREAS, the Manager and the P.C. are parties to that certain
Management Agreement dated as of October 10, 1995; and
WHEREAS, the Manager and the P.C. wish to amend and restate the
Management Agreement in its entirety on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C. will
provide, and shall be solely responsible for providing, all professional
services for the Practice and the Manager will be responsible only for
administrative services (as further described in this Agreement). Nothing
contained in this Agreement shall be
<PAGE> 2
2
construed as permitting or providing for the ownership, establishment, operation
or management by the Manager of the professional services of the Practice, which
services shall at all times be the sole responsibility of the P.C. or permitting
the Manager to exercise control over the Practice in violation of Maryland
Statute 4-101(m), 4-601 or 4-603; provided, however that pursuant to its
engagement hereunder, the Manager shall be the exclusive provider of all
administrative services and control all aspects of the P.C.'s business other
than those aspects which relate directly to the provision of dental services.
Without limiting the generality of the foregoing, the P.C. shall be solely
responsible for all activities described in Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.C. and the Manager are not joint
venturers, partners, employees or agents of each other and, except as provided
herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances. ARTICLE 2
SERVICES OF THE MANAGER
2.1 Covered Services. The Manager, unless otherwise prohibited by law,
shall control all aspects of, and provide to the P.C. the following services,
premises and assets (such services, premises and assets are hereinafter referred
to collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day
supervision, conduct and management of the general administrative services
required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
b. Personnel. Provision of all personnel (other than
licensed or certified professionals, technicians or hygienists, collectively,
the "Professional Personnel") needed to operate and support the Practice, such
as receptionists and secretarial, clerical, purchasing and marketing personnel
(collectively, the "Administrative Personnel"). The Manager shall have the sole
and exclusive responsibility for determining the salaries and fringe benefits of
all Administrative Personnel provided hereunder, and for paying such salaries
and providing such fringe
<PAGE> 3
3
benefits. In recognition of the fact that the Manager's personnel provided to
the P.C. under this Agreement may from time to time perform services for others,
this Agreement shall not prevent the Manager from performing such services for
others or restrict the Manager from so using the Administrative Personnel
provided to the P.C. under this Agreement. The Manager will make every effort
consistent with sound business practices to honor the specific requests of the
P.C. with regard to the assignment of its employees to the P.C.; however, the
Manager reserves the sole right to determine the assignment of its employees.
Further, the Manager, in its sole discretion, may require each of its employees
assigned to the P.C. to perform several of the aforedescribed functions and
duties simultaneously.
c. Professional Personnel. Establish guidelines for the
selection, hiring and firing of the Professional Personnel by the P.C. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of, or independent
contractors to, the P.C.
d. Training. Training of all Administrative Personnel
and assistance to the P.C. in arranging for training and continuing education
for Professional Personnel.
e. Administrative and Fiscal Services. Provision of
general administrative, business and fiscal services to the P.C. in connection
with the operation of the Practice, including patient billings, collecting
billings, accounting, auditing (by a certified public accountant selected by the
Manager with the approval of the P.C., which approval shall not be unreasonably
withheld or delayed), bookkeeping, budgeting, record keeping, accounts
receivable and accounts payable processing, electronic data processing and such
other services as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual
operating and capital budgets for the P.C. which shall be delivered to the P.C.
within thirty (30) days after the end of each fiscal year, with the Manager
retaining final authority with respect to budget items including, without
limitation, with respect to compensation and payments to the Professional
Personnel and the Administrative Personnel.
g. Patient Records. Maintenance of patient records
(which shall at all times remain the property and under the control of the P.C.)
and provision of record
<PAGE> 4
4
retrieval and monitoring services to assist the P.C. in utilization and quality
assurance reviews in accordance with instructions and guidelines issued by the
P.C.
h. Quality Control. Development of appropriate quality
control programs, including development of performance standards, sampling
techniques for case review, and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation.
Marketing of the professional services provided by the P.C. to potential
patients, facilities, health maintenance organizations, self-insured employer
health plans and various third-party payors (the "Marketing Services"). The
Marketing Services to be provided by the Manager may include, but are not
necessarily limited to, (i) assistance and support in the preparation of
marketing material and brochures and responses to requests for proposals, (ii)
the placing of advertisements or articles in magazines, newspapers, other
publications and any and all media determined by the Manager to be beneficial to
the P.C., (iii) undertaking telemarketing campaigns and (iv) the holding of
seminars. The Manager shall also assist the P.C. in negotiating and securing
contracts with self-insured employer health plans, third-party payors, health
maintenance organizations, managed care companies and any other institution,
facility or organization that may be in need of services that the P.C. is
qualified to provide.
j. Equipment and Supplies. Provision of all inventory,
equipment, furnishings and supplies reasonably necessary for the efficient
operation of the Practice. Title to such inventory, equipment, furnishings and
supplies shall at all times remain in the Manager. At the end of the term of
this Agreement, the Manager shall retain such inventory, equipment, furnishings
and supplies as shall not have been consumed in the day-to-day operations of the
Practice.
k. Janitorial and Maintenance Service. Arranging for
janitorial, grounds and maintenance and repair services for the P.C. and its
equipment and furnishings.
l. Malpractice Insurance. Assistance to the P.C. in
obtaining malpractice coverage for the P.C., its employees and agents in an
amount not less than One Million Dollars ($1,000,000). The Manager shall also
assist the P.C. in obtaining general liability and property insurance in usual
and customary amounts for the P.C. The Manager shall, on behalf and in the name
of the P.C., pay the premiums for all such insurance and shall provide the P.C.
<PAGE> 5
5
with evidence of payment on a periodic basis or as requested.
m. Contracts with Facilities/Programs. Contracts with
facilities and programs serviced by the Practice shall be by and in the name of
the P.C. The Manager shall serve as contracting agent for the P.C. in connection
with such facilities or programs contracts.
n. Protecting Goodwill. Take all necessary steps to
preserve and protect the reputation and goodwill associated with the P.C.,
including assistance in the monitoring of utilization and quality of services
provided by the P.C., and shall assist the P.C. to take all steps necessary to
remedy any and all deficiencies in the efficiency or the quality of the services
provided. This section shall not be construed as permitting the Manager to
influence or control Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for
the Practice shall be made available to the P.C. by the Manager.
p. Operations and Regulatory Reports. Deliver to the
P.C. operations reports containing such information as the P.C. may reasonably
request. The Manager shall prepare all written reports and information that
shall be lawfully required by any government body or agency having jurisdiction
over the P.C. or the Practice. The P.C. shall review and approve all such
required reports and/or information before any dissemination of the same.
q. Processing Disputes. Administer and process all
disputes, grievances and complaints between the P.C. and all third parties,
subject at all times to the review and final approval of the P.C.
r. Government Regulations; Licenses. To the extent
known and material to the operation of the P.C. and the Practice, the Manager
shall promptly notify the P.C. of any changes which may occur in relevant laws
or regulations of any government, governmental body or agency having
jurisdiction over the P.C. or the Practice. The foregoing shall not in any way
limit the P.C.'s continuing professional and legal responsibility to comply
with, and be aware of, all licensing, regulatory, professional or other
requirements applicable to individuals licensed to provide dental services.
s. Advances to the Manager. The Manager shall make
advances to the P.C. as required by Section 5.6.
<PAGE> 6
6
Such advances shall bear a reasonable rate of interest, as mutually agreed to by
the Manager and the P.C.
The Covered Services shall include assumption of all
obligations of the P.C. to provide administrative services to professional
personnel who are not employed by the P.C. The Manager may perform the Covered
Services directly or by reimbursing the P.C. for the cost of any Covered
Services. The parties acknowledge and agree that the services to be provided by
the Manager to the P.C. are to be provided on a non-exclusive basis. The Manager
is in the independent business of providing these services to other third
parties.
2.2 Performance of Services. The Manager is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day administrative needs of the
Practice. It is understood and agreed that the Manager will perform some of the
Covered Services for the P.C. at a centralized location.
2.3 Events Excusing Performance. The Manager will not be
liable to the P.C. for failure to perform any of the services required herein in
the event of strikes, lockouts, calamities, acts of God, unavailability of
supplies or other events over which the Manager has no control for so long as
such event continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly
acknowledge that the provision of all professional services, including but not
limited to, dental services by the P.C., shall be separate and independent from
the provision of administrative, fiscal and support services by the Manager, and
the P.C. shall be solely and exclusively responsible for all professional dental
services rendered to patients of the Practice. Without limiting the generality
of the foregoing, the parties acknowledge that the P.C. shall be solely
responsible for setting all professional standards of the Practice and shall be
responsible for the employment and discharge of all Professional Personnel.
2.5 Use of Name. The Manager hereby grants to the P.C.
a nontransferable, nonexclusive license to use any proprietary names owned by
the Manager and used by the P.C. in connection with the Practice along with any
and all trademarked symbols for the term of this Agreement (the "License"). All
applicable common law and statutory rights in any proprietary names owned by the
Manager and used by the Practice and their accompanying symbols, including, but
<PAGE> 7
7
not limited to, rights relating to trademark, service mark, patent and copyright
shall be and remain the sole property of the Manager. The P.C. shall have no
right, title or interest in any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF THE MANAGER
3.1 Competition. During the term of this Agreement,
neither the P.C. nor any shareholder of the P.C. shall, directly or indirectly,
own an interest in, administer, manage, advise, assist, operate, join, control,
participate in, or be connected in any manner with any corporation, partnership,
proprietorship, firm, association, person or entity providing dental services or
administrative services in competition with the P.C. or the Manager.
3.2 Confidentiality. The P.C. acknowledges and agrees
that the Manager is entitled to prevent its competitors from obtaining and
utilizing its trade secrets. The P.C. agrees to hold the Manager's trade secrets
in strictest confidence and not to disclose them or allow them to be disclosed
directly or indirectly to any person or entity other than persons engaged by the
P.C. or the Manager. The P.C. acknowledges its fiduciary obligations to the
Manager and the confidentiality of its relationship with the Manager and of any
information relating to the services and business methods of the Manager which
it may obtain during the term of this Agreement. The P.C. shall not, either
during the term of this Agreement or at any time after the expiration or sooner
termination of this Agreement, disclose to anyone other than employees or
independent contractors of the P.C. or the Manager any confidential or
proprietary information or trade secret obtained by the P.C. from the Manager.
The P.C. also agrees to place any persons to whom said information is disclosed
for the purpose of performance under legal obligation to treat such information
as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in
consultation with the Manager, establish a schedule of fees and charges for the
Practice's professional services or shall comply with the schedule of fees and
charges set forth
<PAGE> 8
8
in the health care contracts pursuant to which the P.C. provides services
through its Professional Personnel.
4.2 Billings. Billings of the Practice for all services
rendered by the P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. The Manager shall serve
as billing and collection agent for the P.C. in connection with the Practice.
The Manager shall establish a depository bank account on behalf of the Practice
and will deposit into such account collected fees generated from the Practice.
As provided for in standing instructions issued by the P.C. to the bank where
such depository account is located, the Manager may withdraw all monies daily
from said bank account for processing at a central location to be used for
payment of the P.C.'s expenses, including the administrative services fee set
forth in Section 5.4 hereof and any amounts advanced to the P.C. pursuant to
Section 5.6 hereof. Said processing will consist of establishing and maintaining
a book account for the P.C. showing all fee collections and expense
disbursements made by the Manager at the P.C.'s request. The Manager will
provide the P.C. with periodic financial statements for the Practice reflecting
such processing.
4.4 Reports. The Manager shall provide the P.C. with
financial statements for the Practice, stating Gross Billings (as hereafter
defined) and the Manager's Administrative Fees (as hereafter defined).
4.5 Security for the Manager's Compensation. To
secure the prompt and orderly payment of any amounts owing by the P.C. to the
Manager pursuant to this Agreement, the P.C. hereby agrees to grant, at the
request of the Manager, a security interest to the Manager or to a third party
designated by the Manager, in all its existing and hereafter created accounts
receivable, all cash or non-cash proceeds therefrom, all insurance policies and
proceeds relating thereto, and all of the P.C.'s rights as an unpaid provider of
services, whether now existing or hereafter created or acquired (collectively,
the "Collateral"). The P.C. agrees to execute any and all documents necessary to
perfect such security interest, including but not limited to, UCC financing
statements.
<PAGE> 9
9
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in
this Agreement shall mean all billings by the P.C. in connection with the
Practice for dental services, including any other income or receivables relating
thereto, less contractual allowances, if any, and an allowance for bad debts, to
be determined from time to time by the Manager, in its discretion, based upon
the actual experience of the P.C., plus all other cash payments and
miscellaneous revenues received by the P.C. in connection with the Practice.
5.2 Intention of the Parties. It is the intention of the
parties hereto that from the Gross Billings of the P.C. in connection with the
Practice, the P.C. shall be entitled to fairly and reasonably compensate its
Professional Personnel, and the Manager shall be entitled to receive from the
P.C. fair and reasonable compensation for (i) the provision of the Covered
Services pursuant to this Agreement, (ii) the License provided for in Section
2.5 hereof, and (iii) the expenses, obligations, and risks assumed by the
Manager in connection therewith.
5.3 Fair and Reasonable Compensation of the P.C. for
Services of Professional Personnel. The parties hereto agree that the P.C. shall
have the right to fairly and reasonably compensate its Professional Personnel
for their professional services. Compensation for the Professional Personnel
shall be determined in accordance with employment agreements and other
employment arrangements entered into by the P.C., in consultation with the
Manager, and the Professional Personnel.
5.4 Fair and Reasonable Compensation to the Manager.
a. The Manager's Administrative Fees. The
term "Manager's Administrative Fees" as used in this article shall mean Gross
Billings less compensation payable by the P.C. as set forth in Section 5.3.
b. For Services of the Manager. The parties
hereto agree that the Manager shall be fairly and reasonably compensated for its
administrative services. The Manager's Administrative Fees shall be paid to the
Manager as compensation for (i) the provision of the Covered Services under this
Agreement, (ii) the License and (iii) its expenses, obligations, and risks in
connection
<PAGE> 10
10
therewith. The Manager shall pay all expenses of the Practice, except for
compensation to the Professional Personnel, (including interest expenses payable
with respect to any indebtedness of the P.C. to which the Manager shall have
consented in writing) out of the Manager's Administrative Fees or out of funds
advanced to the P.C. by the Manager.
5.5 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to the Manager no less
frequently than annually and more frequently at the request of the Manager or
the P.C., if changes in the business of the P.C. or services by the Manager
warrant such more frequent review, and may agree in writing to modification of
the compensation. Such review shall consider the scope of operations pursuant to
this Agreement at the time of review, the financial success of the Manager and
the P.C. in connection with the Practice, changes in the purchasing power of
money, the size and number of facilities being supplied by the Manager, the
scope of the Marketing Services, the size of the Administrative Personnel
workforce and the expenses and risks to the respective parties of performing
this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate
adequate revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, the Manager shall advance to the P.C. or arrange for such amounts as
may be required. To the extent that the Manager advances any funds to the P.C.
pursuant to this Section 5.6, such advances shall be evidenced by
interest-bearing demand note(s) from the P.C. in favor of the Manager and shall
be secured by the Collateral as provided in Section 4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The term of this Agreement shall be for a period of
forty (40) years and thereafter this Agreement shall continue indefinitely until
terminated in accordance with Section 6.2 hereof.
<PAGE> 11
11
6.2 Termination. Notwithstanding any provision of this
Agreement to the contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this Agreement by
either party as a result of such party's gross negligence or fraud, the other
party may, at any time commencing sixty (60) days after written notice of the
breach has been given to the breaching party, terminate this Agreement by
delivery to the breaching party of a further written notice of termination;
provided, however, that if the breaching party, prior to receiving such notice
of termination, has begun and is diligently continuing good faith efforts to
cure such breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court,
administrative body or peer review organization having jurisdiction, to have
engaged in conduct that results in material harm to the P.C. and constitutes (i)
a felony or other crime involving moral turpitude, including fraud, theft, or
embezzlement or (ii) a failure to act in an ethical or professional manner, in
keeping with accepted dental care standards, then immediately upon notice by the
other party;
c. If either party has engaged in any practice that
results in material harm to the P.C. and violates any federal, state or local
law or regulation that is aimed at protecting the public from coercion into
treatment and preventing fraud upon or abuse of public funding of health
services, then immediately upon notice by the other party;
d. If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is commenced
against either party under any bankruptcy, insolvency or similar law and such
involuntary case is not dismissed within thirty (30) days after filing, then
immediately upon notice from the other party; or
e. After the initial forty (40) year term of this
Agreement, either party may also terminate this Agreement, with or without
cause, by giving the other written notice of termination not less than one (1)
year prior to the effective date of termination.
6.3 Rights Upon Termination. The termination of this
Agreement shall not release or discharge either party from any obligation, debt
or liability which shall have
<PAGE> 12
12
previously accrued and remain to be performed upon the date of termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless
and defend the other party from and against any liability, loss, claims,
lawsuits, damages, injury, cost, expense or other detriment arising out of or
incident to the performance or nonperformance under this Agreement by such
indemnifying party, its employees, Professional Personnel, and agents,
including, without limitation, all consequential damages and attorneys' fees,
provided, however, neither party shall be liable to the other under this Section
7.1 for any claim covered by insurance, except to the extent liability of the
party exceeds the amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C.
hereunder may not be transferred or assigned without the prior written consent
of the Manager and any assignment in violation of this Section 7.2 shall be
void. This Agreement shall be assignable by the Manager.
7.3 Notices. All notices, requests or instructions hereunder
shall be in writing and delivered personally or sent by registered or certified
mail, postage prepaid, as follows:
(1) If to the P.C.:
198 Thomas Johnson Dr.
Suite 5
Frederick, MD 21702
(2) If to the Manager:
c/o Valley Forge
Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No: (610) 992-3319
Telecopy No: (610) 992-3392
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given
<PAGE> 13
13
in accordance herewith shall be deemed received on the date of delivery, if hand
delivered, and two business days after the date of mailing, if mailed.
7.4 Entire Agreement. This Agreement and the documents
referred to herein contain the entire agreement between the parties hereto with
respect to the transactions contemplated hereby, and no modification hereof
shall be effective unless in writing and signed by the party against which it is
sought to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use
such party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear
such party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
7.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland applicable to
agreements made and to be performed entirely within such State.
7.8 Article and Section Headings. The article and section
headings in this Agreement are inserted solely for convenience of reference and
are not a part of and are not intended to govern, limit or aid in the
construction of any term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty
hereunder by either party shall not prevent that party from later insisting upon
full performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement
shall be binding on either party unless in writing and executed by the duly
authorized representatives of each party.
7.11 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and both of which taken
together shall constitute one and the same instrument.
7.12 Severability. In the event that any provision of
this Agreement shall be held to be void or unenforceable for any reason, the
parties shall negotiate in good faith for a period of up to one hundred eighty
(180)
<PAGE> 14
14
days in order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 15
15
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the date
first above written.
NANCY J. MAGONE, D.M.D., P.C.
By: /s/ Nancy J. Magove, D.M.D.
------------------------------
Name: Nancy J. Magove, D.M.D.
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/ W. Gary Liddick
------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(ww)
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT, effective the 19th day of September, 1995,
by and between VFD of Pennsylvania, Inc., a Delaware corporation ("VFD"), and
Bruce L. Talus, D.M.D. and Associates, P.C., a Virginia professional services
corporation (the "P.C.") formerly known as Hong Cao, D.M.D., P.C.
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing, among other
things, dental services and related activities in the Commonwealth of Virginia
(the "Practice");
WHEREAS, the P.C. desires to obtain the benefit of VFD's expertise in
operating, directing, managing and supervising the nonprofessional aspects of
the operations of the Practice;
WHEREAS, the P.C. desires to obtain from VFD, and VFD desires to
provide to the P.C., certain premises and certain physical assets, furniture and
equipment needed to operate the Practice;
WHEREAS, VFD and the P.C. are parties to that certain Management
Agreement dated as of September 19, 1995; and
WHEREAS, VFD and the P.C. wish to amend and restate the Management
Agreement in its entirety on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C. will
provide, and shall be solely responsible for providing, all professional
services for the Practice and VFD will be responsible only for administrative
services (as further described in this Agreement). Nothing contained in this
Agreement shall be construed as permitting or providing for the ownership,
establishment, operation or management by VFD of the professional services of
the
<PAGE> 2
2
Practice, which services shall at all times be the sole responsibility of the
P.C. or permitting VFD to exercise control over the Practice in violation of
Virginia Statute 541.2717; provided, however, that pursuant to its engagement
hereunder, VFD shall be the exclusive provider of all administrative services
and shall control all aspects of the P.C.'s business other than those aspects
which relate directly to the provision of dental services. Without limiting the
generality of the foregoing, the P.C. shall be solely responsible for all
activities described in Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.C. and VFD are not joint
venturers, partners, employees or agents of each other and, except as provided
herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in
compliance with all applicable laws, rules and ordinances.
ARTICLE 2
SERVICES OF VFD
2.1 Covered Services. VFD, unless otherwise prohibited by law,
shall control all aspects of, and provide to the P.C. the following services,
premises and assets (such services, premises and assets are hereinafter referred
to collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day
supervision, conduct and management of the general administrative services
required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
b. Personnel. Provision of all personnel (other than licensed
or certified professionals, technicians or hygienists, collectively, the
"Professional Personnel") needed to operate and support the Practice, such as
receptionists and secretarial, clerical, purchasing and marketing personnel
(collectively, the "Administrative Personnel"). VFD shall have the sole and
exclusive responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that VFD's personnel
provided to the P.C. under this Agreement may from time to time perform services
for others, this Agreement shall not
<PAGE> 3
3
prevent VFD from performing such services for others or restrict VFD from so
using the Administrative Personnel provided to the P.C. under this Agreement.
VFD will make every effort consistent with sound business practices to honor the
specific requests of the P.C. with regard to the assignment of its employees to
the P.C.; however, VFD reserves the sole right to determine the assignment of
its employees. Further, VFD, in its sole discretion, may require each of its
employees assigned to the P.C. to perform several of the aforedescribed
functions and duties simultaneously.
c. Professional Personnel. Establish guidelines for the selection,
hiring and firing of the Professional Personnel by the P.C. and recruit and
evaluate prospective Professional Personnel; provided, however, that all of the
Professional Personnel shall be employees of, or independent contractors to, the
P.C.
d. Training. Training of all Administrative Personnel and assistance to
the P.C. in arranging for training and continuing education for Professional
Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.C. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by VFD with the
approval of the P.C., which approval shall not be unreasonably withheld or
delayed), bookkeeping, budgeting, record keeping, accounts receivable and
accounts payable processing, electronic data processing and such other services
as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual operating and
capital budgets for the P.C. which shall be delivered to the P.C. within thirty
(30) days after the end of each fiscal year, with VFD retaining final authority
with respect to budget items including, without limitation, with respect to
compensation and payments to the Professional Personnel and the Administrative
Personnel.
g. Patient Records. Maintenance of patient records (which shall at all
times remain the property and under the control of the P.C.) and provision of
record retrieval and monitoring services to assist the P.C. in utilization and
quality assurance reviews in accordance with instructions and guidelines issued
by the P.C.
<PAGE> 4
4
h. Quality Control. Development of appropriate quality control
programs, including development of performance standards, sampling techniques
for case review, and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation. Marketing of the
professional services provided by the P.C. to potential patients, facilities,
health maintenance organizations, self-insured employer health plans and various
third-party payors (the "Marketing Services"). The Marketing Services to be
provided by VFD may include, but are not necessarily limited to, (i) assistance
and support in the preparation of marketing material and brochures and responses
to requests for proposals, (ii) the placing of advertisements or articles in
magazines, newspapers, other publications and any and all media determined by
VFD to be beneficial to the P.C., (iii) undertaking telemarketing campaigns and
(iv) the holding of seminars. VFD shall also assist the P.C. in negotiating and
securing contracts with self-insured employer health plans, third-party payors,
health maintenance organizations, managed care companies and any other
institution, facility or organization that may be in need of services that the
P.C. is qualified to provide.
j. Equipment and Supplies. Provision of all inventory, equipment,
furnishings and supplies reasonably necessary for the efficient operation of the
Practice. Title to such inventory, equipment, furnishings and supplies shall at
all times remain in VFD. At the end of the term of this Agreement, VFD shall
retain such inventory, equipment, furnishings and supplies as shall not have
been consumed in the day-to-day operations of the Practice.
k. Janitorial and Maintenance Service. Arranging for janitorial,
grounds and maintenance and repair services for the P.C. and its equipment and
furnishings.
l. Malpractice Insurance. Assistance to the P.C. in obtaining
malpractice coverage for the P.C., its employees and agents in an amount not
less than One Million Dollars ($1,000,000). VFD shall also assist the P.C. in
obtaining general liability and property insurance in usual and customary
amounts for the P.C. VFD shall, on behalf and in the name of the P.C., pay the
premiums for all such insurance and shall provide the P.C. with evidence of
payment on a periodic basis or as requested.
m. Contracts with Facilities/Programs. Contracts with facilities and
programs serviced by the
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5
Practice shall be by and in the name of the P.C. VFD shall serve as contracting
agent for the P.C. in connection with such facilities or programs contracts.
n. Protecting Goodwill. Take all necessary steps to preserve and
protect the reputation and goodwill associated with the P.C., including
assistance in the monitoring of utilization and quality of services provided by
the P.C., and shall assist the P.C. to take all steps necessary to remedy any
and all deficiencies in the efficiency or the quality of the services provided.
This section shall not be construed as permitting VFD to influence or control
Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for the Practice shall
be made available to the P.C. by VFD.
p. Operations and Regulatory Reports. Deliver to the P.C. operations
reports containing such information as the P.C. may reasonably request. VFD
shall prepare all written reports and information that shall be lawfully
required by any government body or agency having jurisdiction over the P.C. or
the Practice. The P.C. shall review and approve all such required reports and/or
information before any dissemination of the same.
q. Processing Disputes. Administer and process all disputes, grievances
and complaints between the P.C. and all third parties, subject at all times to
the review and final approval of the P.C.
r. Government Regulations; Licenses. To the extent known and material
to the operation of the P.C. and the Practice, VFD shall promptly notify the
P.C. of any changes which may occur in relevant laws or regulations of any
government, governmental body or agency having jurisdiction over the P.C. or the
Practice. The foregoing shall not in any way limit the P.C.'s continuing
professional and legal responsibility to comply with, and be aware of, all
licensing, regulatory, professional or other requirements applicable to
individuals licensed to provide dental services.
s. Advances to VFD. VFD shall make advances to the P.C. as required by
Section 5.6 herein. Such advances shall bear a reasonable rate of interest, as
mutually agreed to by VFD and the P.C.
The Covered Services shall include assumption of all obligations of the
P.C. to provide administrative
<PAGE> 6
6
services to professional personnel who are not employed by the P.C. VFD may
perform the Covered Services directly or by reimbursing the P.C. for the cost of
any Covered Services.
2.2 Performance of Services. VFD is hereby expressly authorized to
perform the Covered Services hereunder in whatever reasonable manner it deems
appropriate to meet the day-to-day administrative needs of the Practice. It is
understood and agreed that VFD will perform some of the Covered Services for the
P.C. at a centralized location.
2.3 Events Excusing Performance. VFD will not be liable to the P.C. for
failure to perform any of the services required herein in the event of strikes,
lockouts, calamities, acts of God, unavailability of supplies or other events
over which VFD has no control for so long as such event continues and for a
reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge that
the provision of all professional services, including but not limited to, dental
services by the P.C., shall be separate and independent from the provision of
administrative, fiscal and support services by VFD, and the P.C. shall be solely
and exclusively responsible for all professional dental services rendered to
patients of the Practice. Without limiting the generality of the foregoing, the
parties acknowledge that the P.C. shall be solely responsible for setting all
professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. VFD hereby grants to the P.C. a nontransferable,
nonexclusive license to use the proprietary name "Valley Forge Dental" and any
other proprietary names owned by VFD and used by the P.C. in connection with the
Practice along with any and all trademarked symbols for the term of this
Agreement (the "License"). All applicable common law and statutory rights in the
proprietary name "Valley Forge Dental" and any other proprietary names owned by
VFD and used by the Practice and their accompanying symbols, including, but not
limited to, rights relating to trademark, service mark, patent and copyright
shall be and remain the sole property of VFD. The P.C. shall have no right,
title or interest in any such proprietary rights.
<PAGE> 7
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ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF VFD
3.1 Competition. During the term of this Agreement, neither the P.C.
nor any shareholder of the P.C. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.C. or VFD.
3.2 Confidentiality. The P.C. acknowledges and agrees that VFD is
entitled to prevent its competitors from obtaining and utilizing its trade
secrets. The P.C. agrees to hold VFD's trade secrets in strictest confidence and
not to disclose them or allow them to be disclosed directly or indirectly to any
person or entity other than persons engaged by the P.C. or VFD. The P.C.
acknowledges its fiduciary obligations to VFD and the confidentiality of its
relationship with VFD and of any information relating to the services and
business methods of VFD which it may obtain during the term of this Agreement.
The P.C. shall not, either during the term of this Agreement or at any time
after the expiration or sooner termination of this Agreement, disclose to anyone
other than employees or independent contractors of the P.C. or VFD any
confidential or proprietary information or trade secret obtained by the P.C.
from VFD. The P.C. also agrees to place any persons to whom said information is
disclosed for the purpose of performance under legal obligation to treat such
information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in consultation with
VFD, establish a schedule of fees and charges for the Practice's professional
services or shall comply with the schedule of fees and charges set forth in the
health care contracts pursuant to which the P.C. provides services through its
Professional Personnel.
4.2 Billings. Billings of the Practice for all services rendered by the
P.C. shall be by and in the name of the P.C.
<PAGE> 8
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4.3 Billing and Collection Agent. VFD shall serve as billing and
collection agent for the P.C. in connection with the Practice. VFD shall
establish a depository bank account on behalf of the Practice and will deposit
into such account collected fees generated from the Practice. As provided for in
standing instructions issued by the P.C. to the bank where such depository
account is located, VFD may withdraw all monies daily from said bank account for
processing at a central location to be used for payment of the P.C.'s expenses,
including the administrative services fee set forth in Section 5.4 hereof and
any amounts advanced to the P.C. pursuant to Section 5.6 hereof. Said processing
will consist of establishing and maintaining a book account for the P.C. showing
all fee collections and expense disbursements made by VFD at the P.C.'s request.
VFD will provide the P.C. with periodic financial statements for the Practice
reflecting such processing.
4.4 Reports. VFD shall provide the P.C. with financial statements for
the Practice, stating Gross Billings (as hereafter defined) and VFD's
Administrative Fees (as hereafter defined).
4.5 Security for VFD's Compensation. To secure the prompt and orderly
payment of any amounts owing by the P.C. to VFD pursuant to this Agreement, the
P.C. hereby agrees to grant, at the request of VFD, a security interest to VFD
or to a third party designated by VFD, in all its existing and hereafter created
accounts receivable, all cash or non-cash proceeds therefrom, all insurance
policies and proceeds relating thereto, and all of the P.C.'s rights as an
unpaid provider of services, whether now existing or hereafter created or
acquired (collectively, the "Collateral"). The P.C. agrees to execute any and
all documents necessary to perfect such security interest, including but not
limited to, UCC financing statements.
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in this Agreement
shall mean all billings by the P.C. in connection with the Practice for dental
services, including any other income or receivables relating thereto, less
contractual allowances, if any, and an allowance for bad debts, to be determined
from time to time by VFD, in its discretion, based upon the actual experience of
the P.C., plus all other cash payments and miscellaneous revenues received by
the P.C. in connection with the Practice.
<PAGE> 9
9
5.2 Intention of the Parties. It is the intention of the parties hereto
that from the Gross Billings of the P.C. in connection with the Practice, the
P.C. shall be entitled to fairly and reasonably compensate its Professional
Personnel, and VFD shall be entitled to receive from the P.C. fair and
reasonable compensation for (i) the provision of the Covered Services pursuant
to this Agreement, (ii) the License provided for in Section 2.5 hereof, and
(iii) the expenses, obligations, and risks assumed by VFD in connection
therewith.
5.3 Fair and Reasonable Compensation of the P.C. for Services of
Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into by the P.C., in consultation with VFD, and the
Professional Personnel.
5.4 Fair and Reasonable Compensation to VFD.
a. VFD's Administrative Fees. The term "VFD's Administrative
Fees" as used in this article shall mean Gross Billings less compensation
payable by the P.C. as set forth in Section 5.3.
b. For Services of VFD. The parties hereto agree that VFD shall
be fairly and reasonably compensated for its administrative services. VFD's
Administrative Fees shall be paid to VFD as compensation for (i) the provision
of the Covered Services under this Agreement, (ii) the License and (iii) its
expenses, obligations, and risks in connection therewith. VFD shall pay all
expenses of the Practice, except for compensation to the Professional Personnel,
(including interest expenses payable with respect to any indebtedness of the
P.C. to which VFD shall have consented in writing) out of VFD's Administrative
Fees or out of funds advanced to the P.C. by VFD.
5.5 Periodic Adjustment of Compensation. The parties hereto recognize
that the Practice may change in size and scope over the term of this Agreement
which may necessitate adjusting the fees provided for herein. Therefore, the
parties shall review the compensation to VFD no less frequently than annually
and more frequently at the request of VFD or the P.C., if changes in the
business of the P.C. or services by VFD warrant such more frequent review, and
may agree in writing to modification of the compensation. Such review shall
consider the scope of
<PAGE> 10
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operations pursuant to this Agreement at the time of review, the financial
success of VFD and the P.C. in connection with the Practice, changes in the
purchasing power of money, the size and number of facilities being supplied by
VFD, the scope of the Marketing Services, the size of the Administrative
Personnel workforce and the expenses and risks to the respective parties of
performing this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate adequate
revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, VFD shall advance to the P.C. or arrange for such amounts as may be
required. To the extent that VFD advances any funds to the P.C. pursuant to this
Section 5.6, such advances shall be evidenced by interest-bearing demand note(s)
from the P.C. in favor of VFD and shall be secured by the Collateral as provided
in Section 4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The term of this Agreement shall be for a period of forty
(40) years and thereafter this Agreement shall continue indefinitely until
terminated in accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this Agreement to the
contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this Agreement by either
party as a result of such party's gross negligence or fraud, the other party
may, at any time commencing sixty (60) days after written notice of the breach
has been given to the breaching party, terminate this Agreement by delivery to
the breaching party of a further written notice of termination; provided,
however, that if the breaching party, prior to receiving such notice of
termination, has begun and is diligently continuing good faith efforts to cure
such breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court, administrative body
or peer review organization having jurisdiction, to have engaged in conduct that
results in material harm to the P.C. and constitutes (i) a felony or other crime
involving moral turpitude, including fraud,
<PAGE> 11
11
theft, or embezzlement or (ii) a failure to act in an ethical or professional
manner, in keeping with accepted dental care standards, then immediately upon
notice by the other party;
c. If either party has engaged in any practice that results in
material harm to the P.C. and violates in any material respect any federal,
state or local law or regulation that is aimed at protecting the public from
coercion into treatment and preventing fraud upon or abuse of public funding of
health services, then immediately upon notice by the other party;
d. If either party commences a voluntary case under bankruptcy,
insolvency or similar law, or any involuntary case is commenced against either
party under any bankruptcy, insolvency or similar law and such involuntary case
is not dismissed within thirty (30) days after filing, then immediately upon
notice from the other party; or
e. After the initial forty (40) year term of this Agreement,
either party may also terminate this Agreement, with or without cause, by giving
the other written notice of termination not less than one (1) year prior to the
effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have previously accrued and remain to be performed upon the date of
termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel, and agents, including, without
limitation, all consequential damages and attorneys' fees, provided, however,
neither party shall be liable to the other under this Section 7.1 for any claim
covered by insurance, except to the extent liability of the party exceeds the
amount of the coverage.
<PAGE> 12
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7.2 Assignment. The rights conferred upon the P.C. hereunder may not be
transferred or assigned without the prior written consent of VFD and any
assignment in violation of this Section 7.2 shall be void. This Agreement shall
be assignable by VFD.
7.3 Notices. All notices, requests or instructions hereunder shall be
in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(1) If to the P.C.:
13873 Park Center Road
Suite 143
Herndon, Virginia 22071
Telephone No.: (703) 478-0116
Telecopy No.: (703) 478-0207
(2) If to VFD:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and two business days after the date of mailing, if mailed.
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
<PAGE> 13
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7.6 Attorneys Fees. Each of the parties hereto shall bear such party's
own expenses in connection with this Agreement and the transactions contemplated
hereby.
7.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia applicable to
agreements made and to be performed entirely within such State.
7.8 Article and Section Headings. The article and section headings in
this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder by
either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and both of which taken together shall
constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180) days in
order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 14
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
BRUCE L. TALUS, D.M.D. AND
ASSOCIATES, P.C.
By: /s/ Bruce L. Talus, D.M.D.
----------------------------
Name: Bruce L. Talus, D.M.D.
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/ W. Gary Liddick
--------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10 (xx)
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement"), effective
the 31st day of January, 1996, by and between VFD of Pennsylvania, Inc., a
Delaware corporation (the "Manager"), and Valley Forge Dental of Florida, P.A.,
a Florida professional association (the "P.A.").
W I T N E S S E T H:
WHEREAS, the P.A. is engaged in the business of providing, among
other things, dental services and related activities in the State of Florida
(the "Practice");
WHEREAS, the P.A. desires to obtain from the Manager, and the
Manager desires to provide to the P.A., the benefit of the Manager's expertise
in operating, directing, managing and supervising the nonprofessional aspects of
the operations of the Practice;
WHEREAS, the P.A. desires to obtain a license from the Manager to
use the proprietary names "Valley Forge Dental", "VFD", "United Dental Group"
and "UDG" and any other proprietary names owned by the Manager and used in
connection with the Practice, and the Manager desires to provide the P.A. with
such a license;
WHEREAS, the P.A. desires to obtain from the Manager, and the Manger
desires to provide to the P.A., certain premises and certain physical assets,
furniture and equipment needed to operate the Practice;
WHEREAS, the Manager and the P.A. entered into an Administrative
Services Agreement dated as of January 31, 1996; and
WHEREAS, the Manager and the P.A. wish to amend and restate the
Administrative Services Agreement in its entirety on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
<PAGE> 2
2
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.A.
will provide, and shall be solely responsible for providing, all professional
services for the Practice and the Manager will be responsible only for
administrative services (as further described in this Agreement). Nothing
contained in this Agreement shall be construed as permitting or providing for
the ownership, establishment, operation or management by the Manager of the
professional services of the Practice, which services shall at all times be the
sole responsibility of the P.A. or permitting the Manager to exercise control
over the Practice in violation of Florida Statute 466.0285 and Florida
Regulation 64B5-17.013; provided, however, that pursuant to its engagement
hereunder, the Manager shall be the exclusive provider of all administrative
services and shall control all aspects of the P.A.'s business other than those
aspects which relate directly to the provision of dental services. Without
limiting the generality of the foregoing, the P.A. shall be solely responsible
for all activities described in Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.A. and the Manager are not joint
venturers, partners, employees or agents of each other and, except as provided
herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.A. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances, including with respect to the
licensing and certification of its providers.
ARTICLE 2
SERVICES OF THE MANAGER
2.1 Covered Services. The Manager, unless otherwise prohibited by
law, shall control all aspects of, and provide to the P.A. the following
services, premises and assets (such services, premises and assets are
hereinafter referred to collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day
supervision, conduct and management of the general administrative services
required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
<PAGE> 3
3
b. Personnel. Provision of all personnel (other than licensed or
certified professionals, including without limitation, dentists, dental
assistants and dental hygienists, collectively, the "Professional Personnel")
needed to operate and support the Practice, such as receptionists and
secretarial, clerical, purchasing and marketing personnel (collectively, the
"Administrative Personnel"). The Manager shall have the sole and exclusive
responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that the
Administrative Personnel provided to the P.A. under this Agreement may from time
to time perform services for others, this Agreement shall not prevent the
Manager from performing such services for others or restrict the Manager from so
using the Administrative Personnel provided to the P.A. under this Agreement.
The Manager will make every effort consistent with sound business practices to
honor the specific requests of the P.A. with regard to the assignment of the
Manager's employees to the P.A.; however, the Manager reserves the sole right to
determine the assignment of its employees. Further, the Manager, in its sole
discretion, may require each of its employees assigned to the P.A. to perform
several of the aforedescribed functions and duties simultaneously.
c. Professional Personnel. Establish guidelines for the
selection, hiring and firing of the Professional Personnel by the P.A. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of, or independent
contractors to, the P.A.
d. Training. Training of all Administrative Personnel and
assistance to the P.A. in arranging for training and continuing education for
Professional Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.A. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by the Manager
with the approval of the P.A., which approval shall not be unreasonably withheld
or delayed), bookkeeping, budgeting, record keeping, accounts receivable and
accounts payable processing, electronic data processing and such other services
as the P.A. may from time to time require.
<PAGE> 4
4
f. Annual Budget. Prepare in reasonable detail, annual operating
and capital budgets for the P.A. which shall be delivered to the P.A. within
thirty (30) days after the end of each fiscal year, with the Manager retaining
final authority with respect to budget items.
g. Patient Records. Maintenance of patient records (which shall
at all times remain the property and under the sole control of the P.A.) and
provision of record retrieval and monitoring services to assist the P.A. in
utilization and quality assurance reviews in accordance with instructions and
guidelines issued by the P.A. it being understood and agreed that nothing in
this Subsection (e) shall permit the Manager to exercise control over patient
records or the selection, procedures or manner of a course of treatment for a
patient.
h. Quality Control. Development of appropriate quality control
programs, including development of performance standards, sampling techniques
for case review, and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation. Assistance to
the P.A. in the marketing of the professional services provided by the P.A. to
potential patients, facilities, health maintenance organizations, insurance
companies, self-insured employer health plans and other various third-party
payors (the "Marketing Services"). The Marketing Services to be provided by the
Manager may include, but are not necessarily limited to, (i) assistance and
support in the preparation of marketing material and brochures and responses to
requests for proposals, (ii) assistance with the placing of advertisements or
articles in magazines, newspapers, other publications and any and all media
determined by the P.A., based on policies determined in its sole discretion to
be beneficial to the P.A., (iii) undertaking telemarketing campaigns and (iv)
the holding of seminars. The Manager shall also assist the P.A., when
appropriate, in negotiating and securing contracts with self-insured employer
health plans, third-party payors, health maintenance organizations, managed care
companies and any other institution, facility or organization that may use the
services that the P.A. is qualified to provide.
j. Equipment and Supplies. Provision of all inventory,
equipment, furnishings and supplies reasonably necessary for the efficient
operation of the Practice. Title to such inventory, equipment, furnishings and
supplies shall at all times remain in the Manager; provided however that during
the term of this Agreement, the P.A. shall maintain complete care, custody and
control of
<PAGE> 5
5
all inventory, equipment and supplies. At the end of the term of this Agreement,
the Manager shall retain and the P.A. shall have no further right to use or
possess, such inventory, equipment, furnishings and supplies as shall not have
been consumed in the day-to-day operations of the Practice.
k. Janitorial and Maintenance Service. Arranging for janitorial,
grounds and maintenance and repair services for the P.A. and its equipment and
furnishings.
l. Malpractice Insurance. Assistance to the P.A. in obtaining
malpractice coverage for the P.A., its employees and agents in an amount not
less than One Million Dollars ($1,000,000). The Manager shall also assist the
P.A. in obtaining general liability and property insurance in usual and
customary amounts for the P.A. The Manager shall, on behalf and in the name of
the P.A., pay the premiums for all such insurance and shall provide the P.A.
with evidence of payment on a periodic basis or as reasonably requested.
m. Contracts with Facilities/Programs. Contracts with facilities
and programs serviced by the Practice shall be by and in the name of the P.A.
The Manager shall serve as contracting agent for the P.A. in connection with
such facility or program contracts; provided however that the P.A. shall retain
ultimate control over all pricing policies with respect to dental services and
decisions relating to such facility or program contracts.
n. Protecting Goodwill. Take all necessary steps to preserve and
protect the reputation and goodwill associated with the P.A., including
assistance in the monitoring of utilization and quality of services provided by
the P.A., and shall assist the P.A. to take all steps necessary to remedy any
and all deficiencies in the efficiency or the quality of the services provided.
This section shall not be construed as permitting the Manager to influence or
control the Practice or the Professional Personnel.
o. Facilities. Facilities occupied by the P.A. for the Practice
shall be made available to the P.A. by the Manager.
p. Operations and Regulatory Reports. Delivery to the P.A. of
operations reports containing such information as the P.A. may reasonably
request. The Manager shall timely assist the P.A. in the preparation of all
written reports and information that shall be lawfully
<PAGE> 6
6
required by any government body or agency having jurisdiction over the Practice
or the P.A. The P.A. shall review and approve all such required reports and/or
information before any dissemination of the same.
q. Processing Disputes. Administer and process all disputes,
grievances and complaints between the P.A. and all third parties, subject at all
times to the review and final approval of the P.A.
r. Government Regulations; Licenses. To the extent known and
material to the operation of the P.A. and the Practice, the Manager shall
promptly notify the P.A. of any changes which may occur in relevant laws or
regulations of any government, governmental body or agency having jurisdiction
over the Practice or the P.A. The foregoing shall not in any way limit the
P.A.'s continuing professional and legal responsibility to comply with, and be
aware of, all licensing, regulatory, professional or other requirements
applicable to individuals licensed to provide dental services.
s. Advances to the P.A. The Manager shall make advances to the
P.A. as provided by Section 5.3 hereof. Such advances shall bear a reasonable
rate of interest, as mutually agreed to by the Manager and the P.A., payable
monthly.
t. Manager's Responsibilities:
(i) Manager shall accurately bill only for those treatments
and procedures under the applicable ADA CPT codes or any successor addition
codes or otherwise in accordance with accepted industry practices as reported to
it by P.A. and P.A.'s Employees.
(ii) Manager shall review any changes to billing codes
submitted to it by P.A. or P.A.'s Employees with P.A. or P.A.'s Employees.
(iii) Manager shall promptly notify P.A. of any information
or communication, whether written or oral, of a nature that would have a
material adverse affect on P.A. that Manager receives from any payor or
governmental agency pertaining to P.A., including, but not limited to, general
policy documents, specific correspondence, profile information, audit requests
and overpayment notification.
(iv) Manager shall indemnify and hold P.A. and its
Shareholders and Professional Personnel harmless from any and all damages caused
by Manager's breach of this
<PAGE> 7
7
Section, including, but not limited to, any fines, penalties, interest, monetary
damages of any kind or nature, reasonable attorneys' fees incurred from the time
P.A. is first notified of a claim, reasonable fees for experts hired to assist
P.A. in its defense of any claims and costs.
The Covered Services shall include assumption of all obligations
of the P.A. to provide administrative services to professional personnel who are
not employed by the P.A. The Manager may perform the Covered Services directly
or by reimbursing the P.A. for the cost of any Covered Services.
2.2 Performance of Services. The Manager is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day administrative needs of the
Practice. It is understood and agreed that the Manager will perform some of the
Covered Services for the P.A. at a centralized location.
2.3 Events Excusing Performance. The Manager will not be liable
to the P.A. for failure to perform any of the services required herein in the
event of strikes, lockouts, calamities, acts of God, unavailability of supplies
or other events over which the Manager has no control for so long as such event
continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge
that the provision of all professional services, including but not limited to,
dental services by the P.A., shall be separate and independent from the
provision of administrative, fiscal and support services by the Manager, and the
P.A. shall be solely and exclusively responsible for all professional services
rendered to patients of the Practice. Without limiting the generality of the
foregoing, the parties acknowledge that:
(a) The P.A. shall be solely responsible for setting all
professional standards of the Practice and shall be solely
responsible for the employment and discharge of all
Professional Personnel; and
(b) The Manager shall not exercise control over the P.A.'s
decisions with regard to:
(i) the selection, procedures or manner of a course of
treatment,
(ii) the professional aspects of patient records,
<PAGE> 8
8
(iii) pricing, credit, refunds, warranties and advertising
of dental services except in connection with the
administrative services provided pursuant to Section
2.1 hereof, or
(iv) licensed personnel and office hours.
2.5 Use of Name. The Manager hereby grants to the P.A. a
nontransferable, nonexclusive license to use the proprietary names "Valley Forge
Dental", "VFD", "United Dental Group" and "UDG" and any other proprietary names
owned by the Manager and used by the Practice along with any and all trademarked
symbols for the term of this Agreement (the "License"). All applicable common
law and statutory rights in the proprietary names "Valley Forge Dental", "VFD",
"United Dental Group" and "UDG" and any other proprietary names owned by the
Manager and used by the Practice and their accompanying symbols, including, but
not limited to, rights relating to trademarks, service marks, patents and
copyrights shall be and remain the sole property of the Manager. The P.A. shall
have no right, title or interest in any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF THE MANAGER
3.1 Competition. During the term of this Agreement, neither the P.A.
nor any shareholder of the P.A. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.A. or the Manager.
3.2 Confidentiality. The P.A. acknowledges and agrees that the
Manager is entitled to prevent its competitors from obtaining and utilizing its
trade secrets. The P.A. agrees to hold the Manager's trade secrets in strictest
confidence and not to disclose them or allow them to be disclosed directly or
indirectly to any person or entity other than persons engaged by the P.A. or the
Manager. The P.A. acknowledges its fiduciary obligations to the Manager and the
confidentiality of its relationship with the Manager and of any information
relating to the services and business methods of the Manager which it may obtain
during the term of this Agreement. The P.A. shall not, either during the term of
this Agreement or at any time after the expiration or sooner termination of this
<PAGE> 9
9
Agreement, disclose to anyone other than employees or independent contractors of
the P.A. or the Manager any confidential or proprietary information or trade
secret obtained by the P.A. from the Manager. The P.A. also agrees to place any
persons to whom said information is disclosed for the purpose of performance
under legal obligation to treat such information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.A. shall establish a schedule
of fees and charges for the Practice's professional services or shall comply
with the schedule of fees and charges set forth in the health care contracts
pursuant to which the P.A. provides services through its Professional Personnel;
provided, however, that in order to obtain the benefit of the Manager's
expertise in establishing schedules of fees and charges for dental practices
similar to the Practice, the P.A. shall consult with the Manager prior to
establishing such a schedule, it being understood and agreed that nothing in
this Section 4.1 shall permit the Manager to exercise control over the setting
of such fees.
4.2 Billings. Billings of the Practice for all services rendered by
the P.A. shall be by and in the name of the P.A.
4.3 Billing and Collection Agent. The Manager shall serve as billing
and collection agent for the P.A. The Manager shall establish a depository bank
account on behalf of the Practice and will deposit into such account collected
fees generated from the Practice. As provided for in standing instructions
issued by the P.A. to the bank where such depository account is located, the
Manager may withdraw all monies daily from said bank account for processing at a
central location to be used for payment of the P.A.'s expenses, including the
amounts payable to the Manager pursuant to Section 5.1 hereof and any amounts
advanced to the P.A. pursuant to Section 5.3 hereof. Said processing will
consist of establishing and maintaining a book account for the P.A. showing all
fee collections and expense disbursements made by the Manager at the P.A.'s
request. The Manager will provide the P.A. with monthly financial statements for
the Practice reflecting such processing.
<PAGE> 10
10
4.4 Reports. The Manager shall provide the P.A. with financial
statements for the Practice, stating gross revenues and amounts to be paid to
the Manager pursuant to Section 5.1 hereof.
4.5 Security for the Manager's Compensation. To secure the prompt
and orderly payment of any amounts owing by the P.A. to the Manager pursuant to
this Agreement, the P.A. hereby agrees to grant, at the request of the Manager,
a security interest to the Manager or to a third-party designated by the
Manager, in all its existing and hereafter created accounts receivable, all cash
or non-cash proceeds therefrom, all insurance policies and proceeds relating
thereto, and all of the P.A.'s rights as an unpaid provider of services, whether
now existing or hereafter created or acquired (collectively, the "Collateral").
The P.A. agrees to execute any and all documents necessary to perfect such
security interest, including but not limited to, UCC financing statements.
ARTICLE 5
FEES
5.1 Fees Payable to the Manager. The P.A. agrees to pay the Manager
for the provision of the Covered Services and the License and all other services
provided hereunder as follows:
a. A monthly license fee for the License in the amount of $* per
clinic location;
b. Monthly reimbursement of all the Manager's direct costs (i.e.
payroll, supplies, travel, etc.) allocated to the P.A., in the Manager's
discretion;
c. Monthly reimbursement of all the Manager's direct costs of
acquiring and/or leasing and maintaining facilities or clinic space
provided to the Practice;
d. Monthly reimbursement of all the Manager's direct costs of
acquiring and/or leasing and
- ----------
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
<PAGE> 11
11
maintaining furniture, fixtures and equipment provided to the Practice;
e. Monthly reimbursement of all the Manager's direct costs
incurred in the provision of the Marketing Services, with a ten percent
(10%) markup for overhead and administration and a fifteen percent (15%)
markup for profit on such costs; and
f. A per clinic location administrative fee (the "Administration
Fee") of $* per year payable in equal monthly installments of $* per month
on the first day of each month of this Agreement and subject to
renegotiation by either party hereto quarterly during the term of this
Agreement. The Administration Fee is intended to compensate the Manager
for its unallocated overhead and a reasonable profit.
5.2 Fair and Reasonable Compensation of the P.A. for Services of
Professional Personnel. The parties hereto agree that the P.A. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into between the P.A., in consultation with the Manager,
and the Professional Personnel.
5.3 Remittances. To the extent the P.A. shall not generate adequate
revenues to meet the P.A.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.2 of this
Agreement, the Manager shall advance to the P.A. or arrange for such amounts as
may be required. To the extent that the Manager advances any funds to the P.A.
pursuant to this Section 5.3, such advances shall be evidenced by
interest-bearing demand note(s) from the P.A. in favor of the Manager and shall
be secured by the Collateral as provided in Section 4.5 hereof.
5.4 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to the Manager no less
frequently than annually and more frequently
- --------
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT AND HAS BEE FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
<PAGE> 12
12
at the request of the Manager or the P.A., if changes in the business of the
P.A. or services by the Manager warrant such more frequent review, and may agree
in writing to modification of the compensation. Such review shall consider the
scope of operations pursuant to this Agreement at the time of review, the
financial success of the Manager and the P.A., changes in the purchasing power
of money, the size and number of facilities being supplied by the Manager, the
scope of the Marketing Services, the size of the Administrative Personnel
workforce and the expenses and risks to the respective parties of performing
this Agreement.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. Unless sooner terminated in accordance with Section 6.2
hereof, the term of this Agreement shall be for a period of forty (40) years and
thereafter this Agreement shall continue indefinitely until terminated in
accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this Agreement to
the contrary, this Agreement may be terminated as set forth below:
(a) In the event of a material breach of this Agreement by either
party as a result of such party's gross negligence or fraud, the other
party may, at any time commencing sixty (60) days after written notice of
the breach has been given to the breaching party, terminate this Agreement
by delivery to the breaching party of a further written notice of
termination; provided, however, that if the breaching party, prior to
receiving such notice of termination, has begun and is diligently
continuing good faith efforts to cure such breach, this Agreement shall
remain in full force and effect;
(b) If either party is determined by a court, administrative body or
peer review organization having jurisdiction, to have engaged in conduct
that results in material harm to the P.A. and constitutes (i) a felony or
other crime involving moral turpitude, including fraud, theft, or
embezzlement or (ii) a failure to act in an ethical or professional
manner, in keeping with
<PAGE> 13
13
accepted dental care standards, then immediately upon notice by the other
party;
(c) If either party has engaged in any practice that results in
material harm to the P.A. and violates in any material respect any
federal, state or local law or regulation that is aimed at protecting the
public from coercion into treatment and preventing fraud upon or abuse of
public funding of health services, then immediately upon notice by the
other party;
(d) If either party commences a voluntary case under bankruptcy,
insolvency or similar law, or any involuntary case is commenced against
either party under any bankruptcy, insolvency or similar law and such
involuntary case is not dismissed within thirty (30) days after filing,
then immediately upon notice from the other party; or
(e) After the initial forty (40) year term of this Agreement, either
party may also terminate this Agreement, with or without cause, by giving
the other written notice of termination not less than one (1) year prior
to the effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have previously accrued and remains to be performed upon the date of
termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel (in the case of the P.A.),
Administrative Personnel (in the case of the Manager), and agents, including,
without limitation, all consequential damages and attorneys' fees, provided,
however, neither party shall be liable to the other under this Section 7.1 for
any claim
<PAGE> 14
14
covered by insurance, except to the extent liability of the party exceeds the
amount of the coverage.
7.2 Assignment. The rights conferred upon the P.A. hereunder may not
be transferred or assigned without the prior written consent of the Manager and
any assignment in violation of this Section 7.2 shall be void. This Agreement
shall be assignable by the Manager.
7.3 Notices. All notices, requests or instructions hereunder shall
be in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(1) If to the P.A.:
713 Tradewinds Drive
Indian Harbour Beach, Florida 32937
Attention: Donald L. Kane, D.D.S.
(2) If to the Manager:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: Mr. Douglas P. Gill
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
with a copy to:
Haythe & Curley
237 Park Avenue
New York, New York 10017
Attention: Robert A. Ouimette, Esq.
Telephone No.: (212) 880-6000
Telecopy No.: (212) 682-0200
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and five (5) business days after the date of mailing, if
mailed.
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
<PAGE> 15
15
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such
party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
7.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Florida applicable to agreements
made and to be performed entirely within such State, without regard to any
conflict of laws principles which would apply the laws of any other
jurisdiction.
7.8 Article and Section Headings. The article and section headings
in this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder
by either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and both of which taken together
shall constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180) days in
order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 16
16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the date first above
written.
VALLEY FORGE DENTAL OF
FLORIDA, P.A.
By: /s/Donald L. Kane, D.D.S
---------------------------------------
Name: Donald L. Kane, D.D.S
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/W. Gary Liddick
---------------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(yy)
* THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ADMINISTRATIVE AND MANAGEMENT SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement"),
effective as of the 29th day of February, 1996, by and between Horizon Group
International, Inc., an Ohio corporation (the "Manager") and Horizon Dental
Group International, Inc. - R.W. Aros, D.D.S., an Ohio professional corporation
(the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing,
among other things, dental services and related activities in the State of Ohio
(the "Practice");
WHEREAS, the P.C. desires to obtain from the Manager, and the
Manager desires to provide to the P.C., the benefit of the Manager's expertise
in operating, directing, managing and supervising the non-professional aspects
of the operations of the Practice;
WHEREAS, the P.C. desires to obtain from the Manager a license
to use the proprietary names "Horizon Group International", "VFD of
Pennsylvania", and "Valley Forge Dental Associates" and any other proprietary
names owned by the Manager and used in connection with the Practice, and the
Manager desires to provide the P.C. with such a license;
WHEREAS, the P.C. desires to obtain from the Manager, and the
Manager desires to provide to the P.C., certain premises and certain physical
assets, furniture and equipment needed to operate the Practice;
WHEREAS, the Manager and the P.C. are parties to an
Administrative and Management Services Agreement dated February 29, 1996; and
WHEREAS, the Manager and the P.C. wish to amend and restate
the Administrative and Management Services Agreement in its entirety on the
terms and conditions set forth herein.
<PAGE> 2
2
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth, the parties hereto, intending
to be legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the
P.C. will provide, and shall be solely responsible for providing, all
professional services for the Practice and the Manager will be responsible only
for administrative services (as further described in this Agreement). Nothing
contained in this Agreement shall be construed as permitting or providing for
the proprietorship, ownership, establishment, operation or management by the
Manager of the professional services of the Practice, which services shall at
all times be the sole responsibility of the P.C.; provided, however, that
pursuant to its engagement hereunder the Manager shall be the exclusive provider
of all administrative services and shall control all aspects of the P.C.'s
business other than those aspects which relate directly to provision of dental
services. Without limiting the generality of the foregoing, the P.C. shall be
solely responsible for all activities described in Section 2.4 of this Agreement
and nothing in this Agreement shall be construed as authorizing the Manager to
decide whether a particular treatment will be provided to a dental patient, or
to direct the mode or manner of any treatment procedures.
1.2 Relationship of Parties. The P.C. and the Manager are not
joint venturers, partners, employees or agents of each other and, except as
provided herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in
compliance with all applicable laws, rules and ordinances, including with
respect to the licensing and certification of its providers.
ARTICLE 2
SERVICES OF THE MANAGER
2.1 Covered Services. The Manager, unless otherwise prohibited
by law, shall control all aspects of, and provide to the P.C., the following
services, premises and assets (such services, premises and assets are
<PAGE> 3
3
hereinafter referred to collectively as the "Covered Services"):
a. General Administrative Services. Overall
day-to-day supervision, conduct and management of the general administrative
services required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
b. Personnel. Provision of all personnel (other than
licensed or certified professionals, collectively, the "Professional Personnel")
needed to operate and support the Practice, such as receptionists and
secretarial, clerical, purchasing and marketing personnel (collectively, the
"Administrative Personnel"). The Manager shall have the sole and exclusive
responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that the
Administrative Personnel provided to the P.C. under this Agreement may from time
to time perform services for others, this Agreement shall not prevent the
Manager from performing such services for others or restrict the Manager from so
using the Administrative Personnel provided to the P.C. under this Agreement.
The Manager will make every effort consistent with sound business practices to
honor the specific requests of the P.C. with regard to the assignment of the
Manager's employees to the P.C.; however, the Manager reserves the sole right to
determine the assignment of its employees. Further, the Manager, in its sole
discretion, may require each of its employees assigned to the P.C. to perform
several of the aforedescribed functions and duties simultaneously.
Notwithstanding the foregoing, it is understood and agreed that nothing in this
Subsection (b) shall permit the Manager to interfere in any way with patient
care.
c. Professional Personnel. Establish guidelines for
the selection, hiring and firing of the Professional Personnel by the P.C. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of, or independent
contractors to, the P.C.
d. Training. Training of all Administrative Personnel
and assistance to the P.C. in arranging for training and continuing education
for Professional Personnel.
<PAGE> 4
4
e. Administrative and Fiscal Services. Provision of
general administrative, business and fiscal services to the P.C. in connection
with the operation of the Practice, including patient billings, collecting
billings, accounting, auditing (by a certified public accountant selected by the
Manager with the approval of the P.C., which approval shall not be unreasonably
withheld or delayed), bookkeeping, budgeting, record keeping, accounts
receivable and accounts payable processing, electronic data processing and such
other services as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail,
annual operating and capital budgets for the P.C. which shall be delivered to
the P.C. within thirty (30) days after the end of each fiscal year, with the
Manager retaining final authority with respect to budget items including,
without limitation, with respect to compensation and payments to the
Professional Personnel and the Administrative Personnel.
g. Patient Records. Maintenance of patient records
(which shall at all times remain the property and under the control of the P.C.)
and provision of record retrieval and monitoring services to assist the P.C. in
utilization and quality assurance reviews in accordance with instructions and
guidelines issued by the P.C., it being understood and agreed that nothing in
this Subsection (g) shall permit the Manager to take actions that bear directly
upon the quality of care and treatment that the P.C. provides to dental
patients.
h. Quality Control. Development of appropriate
quality control programs, including development of performance standards,
sampling techniques for case review, and preparation of appropriately documented
studies.
i. Marketing, Development and Program Negotiation.
Marketing of the professional services provided by the P.C. to potential
patients, facilities, health maintenance organizations, insurance companies,
self-insured employer health plans and other various third-party payors (the
"Marketing Services"). The Marketing Services to be provided by the Manager may
include, but are not necessarily limited to, (i) assistance and support in the
preparation of marketing material and brochures and responses to requests for
proposals, (ii) the placing of advertisements or articles in magazines,
newspapers, other publications and any and all media determined by the Manager
to be beneficial to the P.C., (iii) undertaking telemarketing campaigns and (iv)
the holding of seminars.
<PAGE> 5
5
The Manager shall also assist the P.C., when appropriate, in negotiating and
securing contracts with self-insured employer health plans, third-party payors,
health maintenance organizations, managed care companies and any other
institution, facility or organization that may use the services that the P.C. is
qualified to provide.
j. Equipment and Supplies. Provision of all
inventory, equipment, furnishings and supplies reasonably necessary for the
efficient operation of the Practice, it being understood and agreed that the
Manager's compensation for the services provided in this Subsection (j)
represents the reasonable rental value of such inventory, equipment, furnishings
and supplies. Title to such inventory, equipment, furnishings and supplies shall
at all times remain in the Manager. At the end of the term of this Agreement,
the Manager shall retain and the P.C. shall have no further right to use or
possess, such inventory, equipment, furnishings and supplies as shall not have
been consumed in the day-to-day operations of the Practice.
k. Janitorial and Maintenance Service. Arranging for
janitorial, grounds and maintenance and repair services for the P.C. and its
equipment and furnishings.
l. Malpractice Insurance. Assistance to the P.C. in
obtaining malpractice coverage for the P.C., its employees and agents in an
amount not less than One Million Dollars ($1,000,000). The Manager shall also
assist the P.C. in obtaining general liability and property insurance in usual
and customary amounts for the P.C. The Manager shall, on behalf and in the name
of the P.C., pay the premiums for all such insurance and shall provide the P.C.
with evidence of payment on a periodic basis or as reasonably requested.
m. Contracts with Facilities/Programs. Contracts with
facilities and programs serviced by the Practice shall be by and in the name of
the P.C. The Manager shall serve as contracting agent for the P.C. in connection
with such facility or program contracts.
n. Protecting Goodwill. Take all necessary steps to
preserve and protect the reputation and goodwill associated with the P.C.,
including assistance in the monitoring of utilization and quality of services
provided by the P.C., and shall assist the P.C. to take all steps necessary to
remedy any and all deficiencies in the efficiency or the quality of the services
provided. This section shall not be construed as permitting the Manager to
<PAGE> 6
6
influence or control the Practice or the Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for
the Practice shall be made available to the P.C. by the Manager, it being
understood and agreed that the Manager's compensation for the services provided
in this Subsection (o) represents the reasonable rental value of such
facilities.
p. Operations and Regulatory Reports. Delivery to the
P.C. of operations reports containing such information as the P.C. may
reasonably request. The Manager shall timely assist the P.C. in the preparation
of all written reports and information that shall be lawfully required by any
government body or agency having jurisdiction over the Practice or the P.C. The
P.C. shall review and approve all such required reports and/or information
before any dissemination of the same.
q. Processing Disputes. Administer and process all
disputes, grievances and complaints between the P.C. and all third parties,
subject at all times to the review and final approval of the P.C.
r. Government Regulations; Licenses. To the extent
known and material to the operation of the P.C. and the Practice, the Manager
shall promptly notify the P.C. of any changes which may occur in relevant laws
or regulations of any government, governmental body or agency having
jurisdiction over the Practice or the P.C. The foregoing shall not in any way
limit the P.C.'s continuing professional and legal responsibility to comply
with, and be aware of, all licensing, regulatory, professional or other
requirements applicable to individuals licensed to provide dental services.
s. Advances to the P.C. The Manager shall make
advances to the P.C. as provided by Section 5.3 hereof. Such advances shall bear
a reasonable rate of interest, as mutually agreed to by the Manager and the
P.C., payable monthly.
The Covered Services shall include assumption of all
obligations of the P.C. to provide administrative services to professional
personnel who are not employed by the P.C. The Manager may perform the Covered
Services directly or by reimbursing the P.C. for the cost of any Covered
Services.
<PAGE> 7
7
2.2 Performance of Services. The Manager is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day administrative needs of the
Practice. It is understood and agreed that the Manager will perform some of the
Covered Services for the P.C. at a centralized location.
2.3 Events Excusing Performance. The Manager will not be
liable to the P.C. for failure to perform any of the services required herein in
the event of strikes, lockouts, calamities, acts of God, unavailability of
supplies or other events over which the Manager has no control for so long as
such event continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly
acknowledge that the provision of all professional services, including but not
limited to, dental services by the P.C., shall be separate and independent from
the provision of administrative, fiscal and support services by the Manager, and
the P.C. shall be solely and exclusively responsible for all professional
services rendered to patients of the Practice. Without limiting the generality
of the foregoing, the parties acknowledge that the P.C. shall be solely
responsible for setting all professional standards of the Practice and shall be
responsible for the employment and discharge of all Professional Personnel.
2.5 Use of Name. The Manager hereby grants to the P.C. a
nontransferable, nonexclusive license to use the proprietary names "Horizon
Group International", "VFD of Pennsylvania" and "Valley Forge Dental Associates"
and any other proprietary names owned by the Manager and used by the Practice
along with any and all trademarked symbols for the term of this Agreement (the
"License"). All applicable common law and statutory rights in the proprietary
names "Horizon Group International", "VFD of Pennsylvania" and "Valley Forge
Dental Associates" and any other proprietary names owned by the Manager and used
by the Practice and their accompanying symbols, including, but not limited to,
rights relating to trademark, service mark, patent and copyright shall be and
remain the sole property of the Manager. The P.C. shall have no right, title or
interest in any such proprietary rights.
<PAGE> 8
8
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF THE MANAGER
3.1 Competition. During the term of this Agreement, neither
the P.C. nor any shareholder of the P.C. shall, directly or indirectly, own an
interest in, administer, manage, advise, assist, operate, join, control,
participate in, or be connected in any manner with any corporation, partnership,
proprietorship, firm, association, person or entity providing dental services or
administrative services in competition with the P.C. or the Manager.
3.2 Confidentiality. The P.C. acknowledges and agrees that the
Manager is entitled to prevent its competitors from obtaining and utilizing its
trade secrets. The P.C. agrees to hold the Manager's trade secrets in strictest
confidence and not to disclose them or allow them to be disclosed directly or
indirectly to any person or entity other than persons engaged by the P.C. or the
Manager. The P.C. acknowledges its fiduciary obligations to the Manager and the
confidentiality of its relationship with the Manager and of any information
relating to the services and business methods of the Manager which it may obtain
during the term of this Agreement. The P.C. shall not, either during the term of
this Agreement or at any time after the expiration or sooner termination of this
Agreement, disclose to anyone other than employees or independent contractors of
the P.C. or the Manager any confidential or proprietary information or trade
secret obtained by the P.C. from the Manager. The P.C. also agrees to place any
persons to whom said information is disclosed for the purpose of performance
under legal obligation to treat such information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in
consultation with the Manager, establish a schedule of fees and charges for the
Practice's professional services or shall comply with the schedule of fees and
charges set forth in the health care contracts pursuant to which the P.C.
provides services through its Professional Personnel, it being understood and
agreed that nothing in this Section 4.1 shall permit the Manager to exercise
control over the quality of care and treatment that the P.C. provides to dental
patients.
<PAGE> 9
9
4.2 Billings. Billings of the Practice for all services
rendered by the P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. The Manager shall serve as
billing and collection agent for the P.C. The Manager shall establish a
depository bank account on behalf of the Practice and will deposit into such
account collected fees generated from the Practice. As provided for in standing
instructions issued by the P.C. to the bank where such depository account is
located, the Manager may withdraw all monies daily from said bank account for
processing at a central location to be used for payment of the P.C.'s expenses,
including the amounts payable to the Manager pursuant to Section 5.1 hereof and
any amounts advanced to the P.C. pursuant to Section 5.3 hereof. Said processing
will consist of establishing and maintaining a book account for the P.C. showing
all fee collections and expense disbursements made by the Manager at the P.C.'s
request. The Manager will provide the P.C. with monthly financial statements for
the Practice reflecting such processing.
4.4 Reports. The Manager shall provide the P.C. with financial
statements for the Practice, stating gross revenues and amounts to be paid to
the Manager pursuant to Section 5.1 hereof.
4.5 Security for the Manager's Compensation. To secure the
prompt and orderly payment of any amounts owing by the P.C. to the Manager
pursuant to this Agreement, the P.C. hereby agrees to grant, at the request of
the Manager, a security interest to the Manager or to a third-party designated
by the Manager, in all its existing and hereafter created accounts receivable,
all cash or non-cash proceeds therefrom, all insurance policies and proceeds
relating thereto, and all of the P.C.'s rights as an unpaid provider of
services, whether now existing or hereafter created or acquired (collectively,
the "Collateral"). The P.C. agrees to execute any and all documents necessary to
perfect such security interest, including but not limited to, UCC financing
statements.
<PAGE> 10
10
ARTICLE 5
FEES
5.1 Fees Payable to the Manager. The P.C. agrees to pay the
0Manager for the provision of the Covered Services and the License and all other
services provided hereunder as follows, it being understood and agreed that
nothing in this Section 5.1 is intended to grant the Manager an ownership
interest in the P.C. or make the Manager a proprietor of the P.C. and that any
payments to the Manager represent the fair market value of the services being
rendered by the Manager:
a. A monthly license fee for the License in the amount of $*
per clinic location;
b. Monthly reimbursement of all the Manager's direct costs
(i.e. payroll, supplies, travel, etc.) allocated to the P.C., in the
Manager's discretion;
c. Monthly reimbursement of all the Manager's direct costs of
acquiring and/or leasing and maintaining facilities or clinic space
provided to the Practice;
d. Monthly reimbursement of all the Manager's direct costs of
acquiring and/or leasing and maintaining furniture, fixtures and
equipment provided to the Practice;
e. Monthly reimbursement of all the Manager's direct costs
incurred in the provision of the Marketing Services, with a ten percent
(10%) markup for overhead and administration and a fifteen percent
(15%) markup for profit on such costs; and
f. A per clinic location administrative fee (the
"Administration Fee") of $* per year payable in equal monthly
installments of $* per month on the first day of each month of this
Agreement and subject to renegotiation by either party hereto on each
anniversary of this Agreement. The Administration Fee is intended to
compensate the Manager for its unallocated overhead and a reasonable
profit.
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 11
11
5.2 Fair and Reasonable Compensation of the P.C. for Services
of Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into between the P.C., in consultation with the Manager,
and the Professional Personnel, it being understood and agreed that nothing in
this Section 5.2 shall permit the Manager to exercise control over the quality
of care and treatment that the P.C. provides to dental patients.
5.3 Remittances. To the extent the P.C. shall not generate
adequate revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.2 of this
Agreement, the Manager shall advance to the P.C. or arrange for such amounts as
may be required. To the extent that the Manager advances any funds to the P.C.
pursuant to this Section 5.3, such advances shall be evidenced by
interest-bearing demand note(s) from the P.C. in favor of the Manager and shall
be secured by the Collateral as provided in Section 4.5 hereof.
5.4 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to the Manager no less
frequently than semi-annually and more frequently at the request of the Manager
or the P.C., if changes in the business of the P.C. or services by the Manager
warrant such more frequent review, and may agree in writing to modification of
the compensation. Such review shall consider the scope of operations pursuant to
this Agreement at the time of review, the financial success of the Manager and
the P.C., changes in the purchasing power of money, the size and number of
facilities being supplied by the Manager, the scope of the Marketing Services,
the size of the Administrative Personnel workforce and the expenses and risks to
the respective parties of performing this Agreement.
<PAGE> 12
12
ARTICLE 6
TERM AND TERMINATION
6.1 Term. Unless sooner terminated in accordance with Section
6.2 hereof, the term of this Agreement shall be for a period of forty (40) years
and thereafter this Agreement shall continue indefinitely until terminated in
accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this
Agreement to the contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this
Agreement by either party as a result of such party's gross negligence
or fraud, the other party may, at any time commencing sixty (60) days
after written notice of the breach has been given to the breaching
party, terminate this Agreement by delivery to the breaching party of a
further written notice of termination; provided, however, that if the
breaching party, prior to receiving such notice of termination, has
begun and is diligently continuing good faith efforts to cure such
breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court,
administrative body or peer review organization having jurisdiction, to
have engaged in conduct that results in material harm to the P.C. and
constitutes (i) a felony or other crime involving moral turpitude,
including fraud, theft, or embezzlement or (ii) a failure to act in an
ethical or professional manner, in keeping with accepted dental care
standards, then immediately upon notice by the other party;
c. If either party has engaged in any practice that
results in material harm to the P.C. and violates in any material
respect any federal, state or local law or regulation that is aimed at
protecting the public from coercion into treatment and preventing fraud
upon or abuse of public funding of health services, then immediately
upon notice by the other party;
d. If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is
commenced against either party under any bankruptcy, insolvency or
similar law and such involuntary case is not dismissed within thirty
<PAGE> 13
13
(30) days after filing, then immediately upon notice from the other
party; or
e. After the initial forty (40) year term of this
Agreement, either party may also terminate this Agreement, with or
without cause, by giving the other written notice of termination not
less than one (1) year prior to the effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement
shall not release or discharge either party from any obligation, debt or
liability which shall have previously accrued and remains to be performed upon
the date of termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless
and defend the other party from and against any liability, loss, claims,
lawsuits, damages, injury, cost, expense or other detriment arising out of or
incident to the performance or nonperformance under this Agreement by such
indemnifying party, its employees, Professional Personnel (in the case of the
P.C.), Administrative Personnel (in the case of the Manager), and agents,
including, without limitation, all consequential damages and attorneys' fees,
provided, however, neither party shall be liable to the other under this Section
7.1 for any claim covered by insurance, except to the extent liability of the
party exceeds the amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder
may not be transferred or assigned without the prior written consent of the
Manager and any assignment in violation of this Section 7.2 shall be void. This
Agreement shall be assignable by the Manager.
7.3 Notices. All notices, requests or instructions hereunder
shall be in writing and delivered personally or sent by registered or certified
mail, postage prepaid, as follows:
(1) If to the P.C.:
c/o Horizon Group International, Inc.
1300 Cooper Foster Park Road
Lorain, Ohio 44053
Attention: President
<PAGE> 14
14
(2) If to the Manager:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
With a copy to:
Haythe & Curley
237 Park Avenue
New York, New York 10017
Attention: Robert A. Ouimette, Esq.
Telephone No.: (212) 880-6000
Telecopy No.: (212) 682-0200
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and five (5) business days after the date of mailing, if
mailed.
7.4 Entire Agreement. This Agreement and the documents
referred to herein contain the entire agreement between the parties hereto with
respect to the transactions contemplated hereby, and no modification hereof
shall be effective unless in writing and signed by the party against which it is
sought to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use
such party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such
party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
7.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio applicable to
agreements made and to be performed entirely within such State, without regard
to any conflict of laws principles which would apply the laws of any other
jurisdiction.
<PAGE> 15
15
7.8 Article and Section Headings. The article and section
headings in this Agreement are inserted solely for convenience of reference and
are not a part of and are not intended to govern, limit or aid in the
construction of any term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty
hereunder by either party shall not prevent that party from later insisting upon
full performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement
shall be binding on either party unless in writing and executed by the duly
authorized representatives of each party.
7.11 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and both of which taken
together shall constitute one and the same instrument.
7.12 Severability. In the event that any provision of this
Agreement shall be held to be void or unenforceable for any reason, the parties
shall negotiate in good faith for a period of up to one hundred eighty (180)
days in order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 16
16
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the date
first above written.
HORIZON DENTAL GROUP
INTERNATIONAL, INC.
- R.W. AROS, D.D.S.
By: /s/Keith Libou, D.M.D.
---------------------------
Name: Keith Libou, D.M.D.
Title: Vice President
HORIZON GROUP INTERNATIONAL,
INC.
By: /s/W. Gary Liddick
---------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(zz)
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement"), effective the
29th day of January, 1997, by and between VFD of Pennsylvania, Inc., a Delaware
corporation (the "Administrator"), and Western Dental Associates, P.C., a
Colorado professional corporation (the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the practice of dentistry and related
activities at multiple locations in the State of Colorado (the "Practice");
WHEREAS, the P.C. desires to obtain from the Administrator and the
Administrator desires to provide to the P.C., the benefit of the Administrator's
expertise in operating, directing, managing and supervising the nonprofessional
aspects of the operations of the Practice;
WHEREAS, the P.C. desires to obtain a license from the Administrator to
use the proprietary name "Western Dental" and "Valley Forge Dental Associates"
and any other proprietary names owned by the Administrator and used by the P.C.
in connection with the Practice, and the Administrator desires to provide the
P.C. with such a license;
WHEREAS, the Administrator and the P.C. are parties to that certain
Administrative Services Agreement dated as of January 29, 1997; and
WHEREAS, the P.C. and the Administrator wish to amend and restate the
Administrative Services Agreement in its entirety on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
<PAGE> 2
2
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C. will
provide, and shall be solely responsible for providing, all professional
services for the Practice and the Administrator will be responsible only for
business, administrative and non-professional services (as further described in
this Agreement). Nothing contained in this Agreement shall be construed as
permitting or providing for the ownership, establishment, operation or
management by the Administrator of the professional services of the Practice,
which services shall at all times be the sole responsibility of the P.C. or
permitting the Administrator to exercise control over the Practice in violation
of Colorado Statute 12-35-102, 12-35-110, 12-35-112 or 12-35- 118(g); provided,
however, that pursuant to its engagement hereunder, the Administrator shall be
the exclusive provider of all administrative services and shall control all
aspects of the P.C.'s business other than those aspects which relate directly to
the provision of dental services. Without limiting the generality of the
foregoing, the P.C. shall be solely responsible for all activities described in
Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.C. and the Administrator are not
joint venturers, partners, employees or agents of each other and, except as
provided herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances, including with respect to the
licensing and certification of its providers.
ARTICLE 2
SERVICES OF THE ADMINISTRATOR
2.1 Covered Services. The Administrator, unless otherwise prohibited by
law, shall control all aspect of, and provide to the P.C. the following services
(such services are hereinafter referred to collectively as the "Covered
Services"):
a. General. Supervision, conduct and administration of the
general business administrative services required by the P.C. in connection with
the P.C.'s operation of its Practice.
<PAGE> 3
3
b. Personnel. The Administrator will consult with the P.C. on its
staffing needs. The Practice will have discretion over all decisions relating to
office personnel and hours of practice. The Administrator will employ the
personnel (other than dentists, dental hygienists and dental auxiliaries,
collectively, the "Professional Personnel") needed to operate and support the
business aspects of Practice, such as receptionists and secretarial, clerical,
purchasing and marketing personnel (collectively, the "Administrative
Personnel"). The Administrator shall have the sole and exclusive responsibility
for determining the salaries and fringe benefits of all Administrative Personnel
provided hereunder, and for paying such salaries and providing such fringe
benefits. In recognition of the fact that the Administrative Personnel provided
to the P.C. under this Agreement may from time to time perform services for
others, this Agreement shall not prevent the Administrator from performing such
services for others or restrict the Administrator from so using the
Administrative Personnel provided to the P.C. under this Agreement. The
Administrator will make every effort consistent with sound business practices to
honor the specific requests of the P.C. with regard to the assignment of the
Administrator's employees to the performance of services for the P.C. Further,
the Administrator, in its sole discretion, may require each of its employees
assigned to the P.C. to perform several of the aforedescribed functions and
duties simultaneously. The Administrator will advise the P.C. on the
establishment of, and participation in, incentive and profit sharing plans for
the P.C.'s staff to reward them for increased productivity in the Practice.
c. Professional Personnel. Establish guidelines for the selection,
hiring and firing of the Professional Personnel by the P.C. and recruit and
evaluate prospective Professional Personnel; provided, however, that all of the
Professional Personnel shall be employees of, or independent contractors to the
P.C.
d. Training. Training of all Administrative Personnel and assistance to
the P.C. in arranging for training and continuing education for Professional
Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.C. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by the
Administrator with the approval of the P.C., which approval shall not be
unreasonably withheld or delayed), bookkeeping, budgeting, record keeping,
accounts receivable and accounts payable processing, electronic data
<PAGE> 4
4
processing and such other services as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual operating and
capital budgets for the P.C. which shall be delivered to the P.C. within thirty
(30) days after the end of each fiscal year, with the Administrator retaining
final authority with respect to budget items including, without limitation, with
respect to compensation and payments to the Professional Personnel and the
Administrative Personnel.
g. Patient Records. Maintenance of patient records (which shall at all
times remain the property and under the control of the P.C.) and provision of
record retrieval and monitoring services to assist the P.C. in utilization and
quality assurance reviews in accordance with instructions and guidelines issued
by the P.C.
h. Quality Control. Assistance to the P.C. in the development of
appropriate quality control programs, including development of performance
standards, sampling techniques for case review, and preparation of appropriately
documented studies.
i. Marketing, Development and Program Negotiation. Marketing of the
professional services provided by the P.C. to potential patients, facilities,
health maintenance organizations, insurance companies, self-insured employer
health plans and other various third-party payors (the "Marketing Services").
The Marketing Services to be provided by the Administrator may include, but are
not necessarily limited to, (i) assistance and support in the preparation of
marketing material and brochures and responses to requests for proposals, (ii)
the placing of advertisements or articles in magazines, newspapers, other
publications and any and all media determined by the Administrator to be
beneficial to the P.C., (iii) undertaking telemarketing campaigns and (iv) the
holding of seminars. The Administrator shall also assist the P.C., when
appropriate, in negotiating and securing contracts with self-insured employer
health plans, third-party payors, health maintenance organizations, managed care
companies and any other institution, facility or organization that may use the
services that the P.C. is qualified to provide. The P.C. will exercise control
over all policies relating to advertising and marketing of the Practice and all
marketing activities of the Practice will be conducted in compliance with
applicable laws and regulations of the State of Colorado.
j. Supplies, Inventory and Equipment. Provision of purchasing services
on behalf of the Practice
<PAGE> 5
5
for inventory and supplies reasonably necessary for the efficient operation of
the Practice. The Administrator shall be responsible for maintaining the P.C.'s
inventory on behalf of the P.C.; provided, however, that title to and control
over all dental inventory, equipment and supplies shall be in the name of the
P.C. All equipment or furnishings not used in the provision of professional
services (the "Leased Assets") required by the Practice shall be made available
by the Administrator to the P.C. The Administrator shall assist the P.C. in
securing maintenance and repair services for the dental equipment. The P.C.
shall have complete custody and control over the Leased Assets.
k. Janitorial and Maintenance Service. Arranging for janitorial,
grounds and maintenance and repair services for the P.C. and its equipment and
furnishings.
l. Malpractice Insurance. Assistance to the P.C. in obtaining
malpractice coverage for the P.C.
m. Contracts with Facilities/Programs. Contracts with facilities and
programs serviced by the Practice shall be by and in the name of the P.C. The
Administrator shall serve as contracting agent for the P.C. in connection with
such facility or program contracts.
n. Protecting Goodwill. Take all necessary steps to preserve and
protect the reputation and goodwill associated with the P.C., including
assistance, if requested, in the monitoring of utilization and quality of
services provided by the P.C., and shall assist the P.C. to take all steps
necessary to remedy any and all deficiencies in the efficiency or the quality of
the services provided. This section shall not be construed as permitting the
Administrator to influence or control the professional aspects of the Practice
or the Professional Personnel.
o. Operations and Regulatory Reports. Delivery to the P.C. of
operations reports containing such information as the P.C. may reasonably
request. The Administrator shall timely assist the P.C. in the preparation of
all written reports and information that shall be lawfully required by any
government body or agency having jurisdiction over the Practice or the P.C. The
P.C. shall review and approve all such required reports and/or information
before any dissemination of the same.
p. Processing Disputes. Administer and process all disputes, grievances
and complaints between the P.C. and all third parties, subject at all times to
the review and final approval of the P.C.
<PAGE> 6
6
q. Government Regulations; Licenses. To the extent known and
material to the operation of the P.C. and the Practice, the Administrator shall
promptly notify the P.C. of any changes which may occur in relevant laws or
regulations of any government, governmental body or agency having jurisdiction
over the Practice or the P.C. The foregoing shall not in any way limit the
P.C.'s continuing professional and legal responsibility to comply with, and be
aware of, all licensing, regulatory, professional or other requirements
applicable to individuals licensed to provide dental services.
r. Advances to the P.C. The Administrator shall make advances
to the P.C. as provided by Section 5.6 herein. Such advances shall bear a
reasonable rate of interest, as mutually agreed to by the Administrator and the
P.C., payable monthly.
The Covered Services shall include assumption of all
obligations of the P.C. to provide administrative services to Professional
Personnel who are not employed by the P.C. The Administrator may perform the
Covered Services directly or by reimbursing the P.C. for the cost of any Covered
Services.
2.2 Performance of Services. The Administrator is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day business administrative needs
of the Practice. It is understood and agreed that the Administrator will perform
some of the Covered Services for the P.C. at a centralized location.
2.3 Events Excusing Performance. The Administrator will not be liable
to the P.C. for failure to perform any of the services required herein in the
event of strikes, lockouts, calamities, acts of God, unavailability of supplies
or other events over which the Administrator has no control for so long as such
event continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge that
the provision of all professional services, including but not limited to, dental
services by the P.C., shall be separate and independent from the provision of
administrative, fiscal and support services by the Administrator, and the P.C.
shall be solely and exclusively responsible for all professional services
rendered to patients of the Practice. Without limiting the generality of the
foregoing, the parties acknowledge that the P.C. shall be solely responsible for
setting all professional standards of the Practice and shall be
<PAGE> 7
7
responsible for the employment and discharge of all Professional Personnel.
2.5 Use of Name. The Administrator hereby grants to the P.C. a
nontransferable, nonexclusive license to use the proprietary name "Western
Dental" and "Valley Forge Dental Associates" and any other proprietary names
owned by the Administrator and used by the Practice in connection with the
Practice along with any and all trademarked symbols for the term of this
Agreement (the "License"). All applicable common law and statutory rights in the
proprietary names "Western Dental" and "Valley Forge Dental Associates" and any
other proprietary names owned by the Administrator and used by the Practice and
their accompanying symbols, including, but not limited to, rights relating to
trademarks, service marks, patents and copyrights shall be and remain the sole
property of the Administrator. The P.C. shall have no right, title or interest
in any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF THE ADMINISTRATOR
3.1 Competition. During the term of this Agreement, neither the P.C.
nor any shareholder of the P.C. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.C. or the Administrator.
3.2 Confidentiality. The P.C. acknowledges and agrees that the
Administrator is entitled to prevent its competitors from obtaining and
utilizing its trade secrets. The P.C. agrees to hold the Administrator's trade
secrets in strictest confidence and not to disclose them or allow them to be
disclosed directly or indirectly to any person or entity other than persons
engaged by the P.C. or the Administrator. The P.C. acknowledges its fiduciary
obligations to the Administrator and the confidentiality of its relationship
with the Administrator and of any information relating to the services and
business methods of the Administrator which it may obtain during the term of
this Agreement. The P.C. shall not, either during the term of this Agreement or
at any time after the expiration or sooner termination of this Agreement,
disclose to anyone other than employees or independent contractors of the P.C.
or the Administrator any confidential or proprietary information or trade secret
obtained by the P.C. from the Administrator. The P.C. also agrees to place any
persons to
<PAGE> 8
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whom said information is disclosed for the purpose of performance under legal
obligation to treat such information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall establish a schedule of
fees and charges for the Practice's professional services or shall comply with
the schedule of fees and charges set forth in the health care contracts pursuant
to which the P.C. provides services through its Professional Personnel.
4.2 Billings. Billings of the Practice for all services rendered by the
P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. The Administrator shall serve as
billing and collection agent for the P.C. in connection with the Practice. The
Administrator shall establish a depository bank account on behalf of the
Practice and will deposit into such account collected fees generated from the
Practice. As provided for in standing instructions issued by the P.C. to the
bank where such depository account is located, the Administrator may withdraw
all monies daily from said bank account for processing at a central location to
be used for payment of the P.C.'s expenses, including the administrative
services fee set forth in Section 5.4 hereof and any amounts advanced to the
P.C. pursuant to Section 5.6 hereof. Said processing will consist of
establishing and maintaining a book account for the P.C. showing all fee
collections and expense disbursements made by the Administrator at the P.C.'s
request. The Administrator will provide the P.C. with periodic financial
statements for the Practice reflecting such processing.
4.4 Reports. The Administrator shall provide the P.C. with financial
statements for the Practice, stating Gross Billings (as hereafter defined) and
the Administrator's Administrative Fees (as hereafter defined).
4.5 Security for the Administrator's Compensation. To secure the prompt
and orderly payment of any amounts owing by the P.C. to the Administrator
pursuant to this Agreement, the P.C. hereby agrees to grant, at the request of
the Administrator, a security interest to the Administrator, in all its existing
and hereafter created accounts receivable, all cash or non-cash proceeds
therefrom, all insurance policies and proceeds relating
<PAGE> 9
9
thereto, and all of the P.C.'s rights as an unpaid provider of services, whether
now existing or hereafter created or acquired (collectively, the "Collateral").
The P.C. agrees to execute any and all documents necessary to perfect such
security interest, including but not limited to, UCC financing statements.
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in this Agreement
shall mean all billings by the P.C. in connection with the Practice for dental
services, including any other income or receivables relating thereto, less
contractual allowances, if any, and an allowance for bad debts, to be determined
from time to time by the Administrator, in consultation with the Practice, based
upon the actual experience of the P.C., plus all other cash payments and
miscellaneous revenues received by the P.C. in connection with the Practice.
5.2 Intention of the Parties. It is the intention of the parties hereto
that from the Gross Billings of the P.C. in connection with the Practice, the
P.C. shall be entitled to fairly and reasonably compensate its Professional
Personnel, and the Administrator shall be entitled to receive from the P.C. fair
and reasonable compensation for (i) the provision of the Covered Services
pursuant to this Agreement, (ii) the License provided for in Section 2.5 hereof,
and (iii) the expenses, obligations, and risks assumed by the Administrator in
connection therewith.
5.3 Fair and Reasonable Compensation of the P.C. for Services of
Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into by the P.C., in consultation with the Administrator
and the Professional Personnel.
5.4 Fair and Reasonable Compensation to the Administrator.
a. Administrator's Administrative Fees. The term
"Administrator's Administrative Fees" as used in this article shall mean Gross
Billings less compensation payable by the P.C. as set forth in Section 5.3 and
less the expenses of the P.C.
<PAGE> 10
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b. For Services of the Administrator. The parties hereto agree
that the Administrator shall be fairly and reasonably compensated for its
administrative services. The Administrator's Administrative Fees shall be paid
to the Administrator as compensation for (i) the provision of the Covered
Services under this Agreement, (ii) the License and (iii) its expenses,
obligations, and risks in connection therewith.
5.5 Periodic Adjustment of Compensation. The parties hereto recognize
that the Practice may change in size and scope over the term of this Agreement
which may necessitate adjusting the fees provided for herein. Therefore, the
parties shall review the compensation to the Administrator no less frequently
than annually and more frequently at the request of the Administrator or the
P.C., if changes in the business of the P.C. or services by the Administrator
warrant such more frequent review, and may agree in writing to modification of
the compensation. Such review shall consider the scope of operations pursuant to
this Agreement at the time of review, the financial success of the Administrator
and the P.C. in connection with the Practice, changes in the purchasing power of
money, the size and number of facilities being supplied by the Administrator,
the scope of the Marketing Services, the size of the Administrative Personnel
workforce and the expenses and risks to the respective parties of performing
this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate adequate
revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, the Administrator shall advance to the P.C. or arrange for such
amounts as may be required. To the extent that the Administrator advances any
funds to the P.C. pursuant to this Section 5.6, such advances shall be evidenced
by interest-bearing demand note(s) from the P.C. in favor of the Administrator
and shall be secured by the Collateral as provided in Section 4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. Unless sooner terminated in accordance with Section 6.2
hereof, the term of this Agreement shall be for a period of forty (40) years and
thereafter this Agreement shall continue indefinitely until terminated in
accordance with Section 6.2(e) hereof.
<PAGE> 11
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6.2 Termination. Notwithstanding any provision of this Agreement to the
contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this
Agreement by either party as a result of such party's gross negligence
or fraud, the other party may, at any time commencing sixty (60) days
after written notice of the breach has been given to the breaching
party, terminate this Agreement by delivery to the breaching party of a
further written notice of termination; provided, however, that if the
breaching party, prior to receiving such notice of termination, has
begun and is diligently continuing good faith efforts to cure such
breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court,
administrative body or peer review organization having jurisdiction, to
have engaged in conduct that results in material harm to the P.C. and
constitutes (i) a felony or other crime involving moral turpitude,
including fraud, theft, or embezzlement or (ii) a failure to act in an
ethical or professional manner, in keeping with accepted dental care
standards, then immediately upon notice by the other party;
c. If either party has engaged in any practice that
results in material harm to the P.C. and violates in any material
respect any federal, state or local law or regulation that is aimed at
protecting the public from coercion into treatment and preventing fraud
upon or abuse of public funding of health services, then immediately
upon notice by the other party;
d. If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is
commenced against either party under any bankruptcy, insolvency or
similar law and such involuntary case is not dismissed within thirty
(30) days after filing, then immediately upon notice from the other
party; or
e. After the initial forty (40) year term of this
Agreement, either party may also terminate this Agreement, with or
without cause, by giving the other written notice of termination not
less than one (1) year prior to the effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have
<PAGE> 12
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previously accrued and remains to be performed upon the date of termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel (in the case of the P.C.),
Administrative Personnel (in the case of the Administrator) and agents,
including, without limitation, all consequential damages and attorneys' fees,
provided, however, neither party shall be liable to the other under this Section
7.1 for any claim covered by insurance, except to the extent liability of the
party exceeds the amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder may not be
transferred or assigned without the prior written consent of the Administrator
and any assignment in violation of this Section 7.2 shall be void. This
Agreement shall be assignable by the Administrator.
7.3 Notices. All notices, requests or instructions hereunder shall be
in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(1) If to the P.C.:
1304 North Academy Boulevard
Colorado Springs, Colorado 80909
Attention: President
(2) If to the Administrator:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: President
Telecopy No.: (610) 992-3392
Telephone No.: (610) 992-3319
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date
<PAGE> 13
13
of delivery, if hand delivered, and five (5) business days after the date of
mailing, if mailed.
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such party's
own expenses in connection with this Agreement and the transactions contemplated
hereby.
7.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado applicable to agreements made
and to be performed entirely within such State, without regard to any conflict
of laws principles which would apply the laws of any other jurisdiction.
7.8 Article and Section Headings. The article and section headings in
this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder by
either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and both of which taken together shall
constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180)
<PAGE> 14
14
days in order to arrive at a mutually acceptable substitute provision.
7.13 Regulatory Requirements. If any federal, state or local government
or agency or board created thereby, passes, issues or promulgates any law, rule,
regulation, standard or interpretation or materially changes its current
position as to the interpretation of any existing law, rule, regulation or
standard, at any time while this Agreement is in effect which would prohibit,
restrict, limit or render illegal the relationships described herein, or if a
governmental entity issues a written allegation to the P.C. or any shareholder
thereof, to Leopoldo Rodriguez, D.D.S (the "Shareholder") or the Administrator
or any affiliate thereof to the effect that any relationship described herein is
in violation of any law, rule or regulation, the Administrator may by notice to
the Shareholder amend this Agreement in order to bring it into compliance with
all applicable laws, rules and regulations so long as the basic economic results
of this transaction would survive any such amendment. The Shareholder agrees
that if Administrator shall determine that it is not possible to amend this
Agreement so as to preserve the basic economic results of this transaction, then
the Purchaser is hereby authorized to act as the Shareholder's exclusive agent
for the purpose of selling the Shareholder's interest in the capital stock or
all the assets of Western to a qualified third party. The Shareholder agrees
that the Purchaser shall be entitled to retain all the proceeds of any such sale
as its fee for arranging the sale. The Shareholder agrees to cooperate with any
reasonable request of the Purchaser to facilitate such sale and the payment of
the proceeds to the Purchaser. The agreements of the Shareholder herein shall be
binding upon the Shareholder and any heirs, administrators, executors,
successors or assigns of the Shareholder, whether by operation of law or
otherwise.
<PAGE> 15
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
WESTERN DENTAL, P.C.
By: /s/ Leopoldo Rodriguez, D.D.S.
-------------------------------
Name: Leopoldo Rodriguez, D.D.S.
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/ W. Gary Liddick
-------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(aaa)
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement"), effective
the 19th day of February, 1997, by and between VFD of Georgia, Inc., a Delaware
corporation (the "Manager"), and Witkin Dentistry, P.C., a Georgia professional
corporation (the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing, among
other things, dental services and related activities in the State of Georgia
(the "Practice");
WHEREAS, the P.C. desires to obtain from the Manager and the Manager
desires to provide the P.C., the benefit of the Manager's expertise in
operating, directing, managing and supervising the nonprofessional aspects of
the operations of the Practice;
WHEREAS, the P.C. desires to obtain a license from the Manager to
use the proprietary names "Valley Forge Dental Associates" and "Dental Care
Center" and any other proprietary names owned by the Manager and used by the
P.C. in connection with the Practice, and the Manager desires to provide the
P.C. with such a license;
WHEREAS, the P.C. desires to obtain from the Manager, and the
Manager desires to provide to the P.C., certain premises and certain physical
assets, furniture and equipment needed to operate the Practice;
WHEREAS, the Manager and the P.C. are parties to that certain
Administrative Services Agreement dated as of February 19, 1997; and
WHEREAS, the P.C. and the Manager wish to amend and restate the
Administrative Services Agreement in its entirety on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
<PAGE> 2
2
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C.
will provide, and shall be solely responsible for providing, all professional
services for the Practice and the Manager will be responsible only for
administrative services (as further described in this Agreement). Nothing
contained in this Agreement shall be construed as permitting or providing for
the ownership, establishment, operation or management by the Manager of the
professional services of the Practice, which services shall at all times be the
sole responsibility of the P.C.; provided, however, that pursuant to its
engagement hereunder, the Manager shall be the exclusive provider of all
administrative services and shall control all aspects of the P.C.'s business
other than those aspects which relate directly to the provision of dental
services. Without limiting the generality of the foregoing, the P.C. shall be
solely responsible for all activities described in Section 2.4 of this
Agreement.
1.2 Relationship of Parties. The P.C. and the Manager are not joint
venturers, partners, employees or agents of each other and, except as provided
herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances, including with respect to the
licensing and certification of it providers.
ARTICLE 2
SERVICES OF THE MANAGER
2.1 Covered Services. The Manager, unless otherwise prohibited by
law, shall control all aspects of, and provide to the P.C. the following
services, premises and assets (such services, premises and assets are
hereinafter referred to collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day
supervision, conduct and management of the general administrative services
required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
<PAGE> 3
3
b. Personnel. Provision of all personnel (other than licensed or
certified professionals, including but not limited all dentists, dental
hygienists and dental assistants, collectively, the "Professional Personnel")
needed to operate and support the Practice, such as receptionists and
secretarial, clerical, purchasing and marketing personnel (collectively, the
"Administrative Personnel"). The Manager shall have the sole and exclusive
responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that the
Administrative Personnel provided to the P.C. under this Agreement may from time
to time perform services for others, this Agreement shall not prevent the
Manager from performing such services for others or restrict the Manager from so
using the Administrative Personnel provided to the P.C. under this Agreement.
The Manager will make every effort consistent with sound business practices to
honor the specific requests of the P.C. with regard to the assignment of the
Manger's employees to the P.C.; however, the Manager reserves the sole right to
determine the assignment of its employees. Further, the Manager, in its sole
discretion, may require each of its employees assigned to the P.C. to perform
several of the aforedescribed functions and duties simultaneously.
c. Professional Personnel. Establish guidelines for the
selection, hiring and firing of the Professional Personnel by the P.C. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of, or independent
contractors to, the P.C.
d. Training. Training of all Administrative Personnel and
assistance to the P.C. in arranging for training and continuing education for
Professional Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.C. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by the Manager
with the approval of the P.C., which approval shall not be unreasonably withheld
or delayed), bookkeeping, budgeting, record keeping, accounts receivable and
accounts payable processing, electronic data processing and such other services
as the P.C. may from time to time require.
<PAGE> 4
4
f. Annual Budget. Prepare, in reasonable detail, annual
operating and capital budgets for the P.C. which shall be delivered to the P.C.
within thirty (30) days after the end of each fiscal year, with the Manager
retaining final authority with respect to budget items including, without
limitation, with respect to compensation and payments to the Professional and
the Administrative Personnel.
g. Patient Records. Maintenance of patient records (which shall
at all times remain the property and under the control of the P.C.) and
provision of record retrieval and monitoring services to assist the P.C. in
utilization and quality assurance reviews in accordance with instructions and
guidelines issued by the P.C.
h. Quality Control. Development of appropriate quality control
programs, including development of performance standards, sampling techniques
for case review, and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation. Marketing of
the professional services provided by the P.C. to potential patients,
facilities, health maintenance organizations, insurance companies, self-insured
employer health plans and other various third-party payors (the "Marketing
Services"). The Marketing Services to be provided by the Manager may include,
but are not necessarily limited to, (i) assistance and support in the
preparation of marketing material and brochures and responses to requests for
proposals, (ii) the placing of advertisements or articles in magazines,
newspapers, other publications and any and all media determined by the Manager
to be beneficial to the P.C., (iii) undertaking telemarketing campaigns and (iv)
the holding of seminars. The Manager shall also assist the P.C., when
appropriate, in negotiating and securing contracts with self-insured employer
health plans, third-party payors, health maintenance organizations, managed care
companies and any other institution, facility or organization that may use the
services that the P.C. is qualified to provide.
j. Equipment and Supplies. Provision of all inventory,
equipment, furnishings and supplies reasonably necessary for the efficient
operation of the Practice. Title to such inventory, equipment, furnishings and
supplies shall at all times remain in the Manager. At the end of the term of
this Agreement, the Manager shall retain and the P.C. shall have no further
right to use or possess, such inventory, equipment, furnishings and supplies
<PAGE> 5
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as shall not have been consumed in the day-to-day operations of the Practice.
k. Janitorial and Maintenance Service. Arranging for janitorial,
grounds and maintenance and repair services for the P.C. and its equipment and
furnishings.
l. Malpractice Insurance. Assistance to the P.C. in obtaining
malpractice coverage for the P.C., its employees and agents in an amount not
less than One Million Dollars ($1,000,000). The Manager shall also assist the
P.C. in obtaining general liability and property insurance in usual and
customary amounts for the P.C. The Manager shall, on behalf and in the name of
the P.C., pay the premiums for all such insurance and shall provide the P.C.
with evidence of payment on a periodic basis or as reasonably requested.
m. Contracts with Facilities/Programs. Contracts with facilities
and programs serviced by the Practice shall be by and in the name of the P.C.
The Manager shall serve as contracting agent for the P.C. in connection with
such facility or program contracts.
n. Protecting Goodwill. Take all necessary steps to preserve and
protect the reputation and goodwill associated with the P.C., including
assistance in the monitoring of utilization and quality of services provided by
the P.C., and shall assist the P.C. to take all steps necessary to remedy any
and all deficiencies in the efficiency or the quality of the services provided.
This section shall not be construed as permitting the Manager to influence or
control the professional aspects of the Practice or the Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for the Practice
shall be made available to the P.C. by the Manager.
p. Operations and Regulatory Reports. Delivery to the P.C. of
operations reports containing such information as the P.C. may reasonably
request. The Manager shall timely assist the P.C. in the preparation of all
written reports and information that shall be lawfully required by any
government body or agency having jurisdiction over the Practice or the P.C. The
P.C. shall review and approve all such required reports and/or information
before any dissemination of the same.
q. Processing Disputes. Administer and process all disputes,
grievances and complaints between the
<PAGE> 6
6
P.C. and all third parties, subject at all times to the review and final
approval of the P.C.
r. Government Regulations; Licenses. To the extent known and
material to the operation of the P.C. and the Practice, the Manager shall
promptly notify the P.C. of any changes which may occur in relevant laws or
regulations of any government, governmental body or agency having jurisdiction
over the Practice or the P.C. The foregoing shall not in any way limit the
P.C.'s continuing professional and legal responsibility to comply with, and be
aware of, all licensing, regulatory, professional or other requirements
applicable to individuals licensed to provide dental services.
s. Advances to the P.C. The Manager shall make advances to the
P.C. as provided by Section 5.6 herein. Such advances shall bear a reasonable
rate of interest, as mutually agreed to by the Manager and the P.C., payable
monthly.
The Covered Services shall include assumption of all obligations of
the P.C. to provide administrative services to Professional Personnel who are
not employed by the P.C. The Manager may perform the Covered Services directly
or by reimbursing the P.C. for the cost of any Covered Services.
2.2 Performance of Services. The Manager is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day administrative needs of the
Practice. It is understood and agreed that the Manager will perform some of the
Covered Services for the P.C. at a centralized location.
2.3 Events Excusing Performance. The Manager will not be liable to
the P.C. for failure to perform any of the services required herein in the event
of strikes, lockouts, calamities, acts of God, unavailability of supplies or
other events over which the Manager has no control for so long as such event
continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge that
the provision of all professional services, including but not limited to, dental
services by the P.C., shall be separate and independent from the provision of
administrative, fiscal and support services by the Manager, and the P.C. shall
be solely and exclusively responsible for all professional services rendered to
<PAGE> 7
7
patients of the Practice. Without limiting the generality of the foregoing, the
parties acknowledge that the P.C. shall be solely responsible for setting all
professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. The Manager hereby grants to the P.C. a
nontransferable, nonexclusive license to use the proprietary names "Valley Forge
Dental Associates" and "Dental Care Center" and any other proprietary names
owned by the Manager and used by the P.C. in connection with the Practice along
with any and all trademarked symbols for the term of this Agreement (the
"License"). All applicable common law and statutory rights in the proprietary
names "Valley Forge Dental Associates" and "Dental Care Center" and any other
proprietary names owned by the Manager and used by the Practice and their
accompanying symbols, including, but not limited to, rights relating to
trademark, service mark, patent and copyright shall be and remain the sole
property of the Manager. The P.C. shall have no right, title or interest in any
such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF THE MANAGER
3.1 Competition. During the term of this Agreement, neither the P.C.
nor any shareholder of the P.C. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.C. or the Manager (other than Eugene Witkin's
ownership interest in the Manager).
3.2 Confidentiality. The P.C. acknowledges and agrees that the
Manager is entitled to prevent its competitors from obtaining and utilizing its
trade secrets. The P.C. agrees to hold the Manager's trade secrets in strictest
confidence and not to disclose them or allow them to be disclosed directly or
indirectly to any person or entity other than persons engaged by the P.C. or the
Manager. The P.C. acknowledges its fiduciary obligations to the Manager and the
confidentiality of its relationship with the Manager and of any information
relating to the services and business methods of the Manager which it may obtain
during the term of this Agreement. The P.C. shall not, either during the term of
this Agreement or at any time after the expiration or sooner termination of this
<PAGE> 8
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Agreement, disclose to anyone other than employees or independent contractors of
the P.C. or the Manager any confidential or proprietary information or trade
secret obtained by the P.C. from the Manager. The P.C. also agrees to place any
persons to whom said information is disclosed for the purpose of performance
under legal obligation to treat such information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in consultation
with the Manager, establish a schedule of fees and charges for the Practice's
professional services or shall comply with the schedule of fees and charges set
forth in the health care contracts pursuant to which the P.C. provides services
through its Professional Personnel.
4.2 Billings. Billings of the Practice for all services rendered by
the P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. The Manager shall serve as billing
and collection agent for the P.C. in connection with the Practice. The Manager
shall establish a depository bank account on behalf of the Practice and will
deposit into such account collected fees generated from the Practice. As
provided for in standing instructions issued by the P.C. to the bank where such
depository account is located, the Manager may withdraw all monies daily from
said bank account for processing at a central location to be used for payment of
the P.C.'s expenses, including the administrative services fee set forth in
Section 5.4 hereof and any amounts advanced to the P.C. pursuant to Section 5.6
hereof. Said processing will consist of establishing and maintaining a book
account for the P.C. showing all fee collections and expense disbursements made
by the Manager at the P.C.'s request. The Manager will provide the P.C. with
periodic financial statements for the Practice reflecting such processing.
4.4 Reports. The Manager shall provide the P.C. with financial
statements for the Practice, stating Gross Billings (as hereafter defined) and
the Manager's Administrative Fees (as hereafter defined).
4.5 Security for the Manager's Compensation. To secure the prompt
and orderly payment of any amounts owing by the P.C. to the Manager pursuant to
this Agreement, the
<PAGE> 9
9
P.C. hereby agrees to grant, at the request of the Manager, a security interest
to the Manager or to a third party designated by the Manager, in all its
existing and hereafter created accounts receivable, all cash or non-cash
proceeds therefrom, all insurance policies and proceeds relating thereto, all of
the P.C.'s rights as an unpaid provider of services, and all of the P.C.'s
rights to receive any and all capitated payments whether now existing or
hereafter created or acquired (collectively, the "Collateral"). The P.C. agrees
to execute any and all documents necessary to perfect such security interest,
including but not limited to, UCC financing statements.
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in this
Agreement shall mean all billings by the P.C. in connection with the Practice
for dental services, including any other income or receivables relating thereto
including but not limited to all capitated payments, less contractual
allowances, if any, and an allowance for bad debts, to be determined from time
to time by the Manager, in its discretion, based upon the actual experience of
the P.C., plus all other cash payments and miscellaneous revenues received by
the P.C. in connection with the Practice.
5.2 Intention of the Parties. It is the intention of the parties
hereto that from the Gross Billings of the P.C. in connection with the Practice,
the P.C. shall be entitled to fairly and reasonably compensate its Professional
Personnel, and the Manager shall be entitled to receive from the P.C. fair and
reasonable compensation for (i) the provision of the Covered Services pursuant
to this Agreement, (ii) the License provided for in Section 2.5 hereof, and
(iii) the expenses, obligations, and risks assumed by the Manager in connection
therewith.
5.3 Fair and Reasonable Compensation of the P.C. for Services of
Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into by the P.C., in consultation with the Manager, and the
Professional Personnel.
<PAGE> 10
10
5.4 Fair and Reasonable Compensation to the Manager.
a. Manager's Administrative Fees. The term "Manager's
Administrative Fees" as used in this article shall mean Gross Billings less
compensation payable by the P.C. as set forth in Section 5.3.
b. For Services of the Manager. The parties hereto agree that
the Manager shall be fairly and reasonably compensated for its administrative
services. The Manager's Administrative Fees shall be paid to the Manager as
compensation for (i) the provision of the Covered Services under this Agreement,
(ii) the License and (iii) its expenses, obligations, and risks in connection
therewith. The Manager shall pay all expenses of the Practice, except for
compensation to the Professional Personnel, (including interest expenses payable
with respect to any indebtedness of the P.C. to which the Manager shall have
consented in writing) out of the Manager's Administrative Fees or out of funds
advanced to the P.C. by the Manager.
5.5 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to the Manager no less
frequently than annually and more frequently at the request of the Manager or
the P.C., if changes in the business of the P.C. or services by the Manager
warrant such more frequent review, and may agree in writing to modification of
the compensation. Such review shall consider the scope of operations pursuant to
this Agreement at the time of review, the financial success of the Manager and
the P.C. in connection with the Practice, changes in the purchasing power of
money, the size and number of facilities being supplied by the Manager, the
scope of the Marketing Services, the size of the Administrative Personnel
workforce and the expenses and risks to the respective parties of performing
this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate adequate
revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, the Manager shall advance to the P.C. or arrange for such amounts as
may be required. To the extent that the Manager advances any funds to the P.C.
pursuant to this Section 5.6, such advances shall be evidenced by interest-
bearing demand note(s) from the P.C. in favor of the Manager
<PAGE> 11
11
and shall be secured by the Collateral as provided in Section 4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. Unless sooner terminated in accordance with Section 6.2
hereof, the term of this Agreement shall be for a period of forty (40) years and
thereafter this Agreement shall continue indefinitely until terminated in
accordance with Section 6.2(e) hereof.
6.2 Termination. Notwithstanding any provision of this Agreement to
the contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this Agreement by either
party as a result of such party's gross negligence or fraud, the other
party may, at any time commencing sixty (60) days after written notice of
the breach has been given to the breaching party, terminate this Agreement
by delivery to the breaching party of a further written notice of
termination; provided, however, that if the breaching party, prior to
receiving such notice of termination, has begun and is diligently
continuing good faith efforts to cure such breach, this Agreement shall
remain in full force and effect;
b. If either party is determined by a court, administrative body
or peer review organization having jurisdiction, to have engaged in conduct
that results in material harm to the P.C. and constitutes (i) a felony or
other crime involving moral turpitude, including fraud, theft, or
embezzlement or (ii) a failure to act in an ethical or professional manner,
in keeping with accepted medical and dental care standards, then
immediately upon notice by the other party;
c. If either party has engaged in any practice that results in
material harm to the P.C. and violates in any material respect any federal,
state or local law or regulation that is aimed at protecting the public
from coercion into treatment and preventing fraud upon or abuse of public
funding of health services, then immediately upon notice by the other
party;
<PAGE> 12
12
d. If either party commences a voluntary case under bankruptcy,
insolvency or similar law, or any involuntary case is commenced against
either party under any bankruptcy, insolvency or similar law and such
involuntary case is not dismissed within thirty (30) days after filing,
then immediately upon notice from the other party; or
e. After the initial forty (40) year term of this Agreement,
either party may also terminate this Agreement, with or without cause, by
giving the other written notice of termination not less than one (1) year
prior to the effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have previously accrued and remains to be performed upon the date of
termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel (in the case of the P.C.),
Administrative Personnel (in the case of the Manager) and agents, including,
without limitation, all consequential damages and attorneys' fees, provided,
however, neither party shall be liable to the other under this Section 7.1 for
any claim covered by insurance, except to the extent liability of the party
exceeds the amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder may not
be transferred or assigned without the prior written consent of the Manager and
any assignment in violation of this Section 7.2 shall be void. This Agreement
shall be assignable by the Manager.
7.3 Notices. All notices, requests or instructions hereunder shall
be in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
<PAGE> 13
13
(1) If to the P.C.:
4585 Kings Abbott Way
Norcross, Georgia 30092
Telephone No.: (770) 448-3542
(2) If to Manager:
VFD of Georgia, Inc.
c/o Valley Forge Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: Mr. Joseph Frank
Telecopy No.: (610) 992-3392
Telephone No.: (610) 992-3319
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and five (5) business days after the date of mailing, if
mailed.
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such
party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
7.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Georgia applicable to agreements
made and to be performed entirely within such State, without regard to any
conflict of laws principles which would apply the laws of any other
jurisdiction.
<PAGE> 14
14
7.8 Article and Section Headings. The article and section headings
in this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder
by either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and both of which taken together
shall constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180) days in
order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 15
15
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the date first above
written.
WITKIN DENTISTRY, P.C.
By: /s/ Eugene N. Witkin
_____________________________
Name: Eugene N. Witkin, D.D.S.
Title: President
VFD OF GEORGIA, INC.
By: /s/ W. Gary Liddick
__________________________
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(bbb)
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement"),
effective the 1st day of October, 1997, by and between ProDent, Inc., a
Pennsylvania corporation ("ProDent"), and George Frattali, D.D.S. & Associates,
P.A., a New Jersey professional corporation (the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing,
among other things, dental services and related activities in the State of New
Jersey (the "Practice");
WHEREAS, the P.C. desires to obtain the benefit of ProDent's
expertise in the administration of practices similar to the Practice;
WHEREAS, the P.C. desires to obtain from ProDent, and ProDent
desires to provide to the P.C., certain premises and certain physical assets,
furniture and equipment needed to operate the Practice;
WHEREAS, ProDent and the P.C. are parties to that certain
Management Services Agreement dated November 29, 1983 pursuant to which the P.C.
obtains from ProDent and ProDent provides to the P.C., ProDent's expertise in
operating, directing, managing and supervising the nonprofessional aspects of
the operations of the Practice; and
WHEREAS, ProDent and the P.C. wish to enter into this
Administrative Services Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth, the parties hereto, intending
to be legally bound, hereby agree as follows:
<PAGE> 2
2
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the
P.C. will provide, and shall be solely responsible for providing, all
professional services for the Practice and ProDent will be responsible only for
business, administrative and non-professional services (as further described in
this Agreement). Nothing contained in this Agreement shall be construed as
permitting or providing for the provision by ProDent of the professional
services of the Practice, which services shall at all times be the sole
responsibility of the P.C. or permitting ProDent to exercise control over the
Practice in violation of New Jersey Statute 45:6-19; provided, however, that
pursuant to its engagement hereunder, ProDent shall be the exclusive provider of
all administrative services and shall control all aspects of the P.C.'s business
other than those aspects which relate directly to the provision of dental
services. Without limiting the generality of the foregoing, the P.C. shall be
solely responsible for all activities described in Section 2.4 of this
Agreement.
1.2 Relationship of Parties. The P.C. and ProDent are not
joint venturers, partners, employees or agents of each other and, except as
provided herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in
compliance with all applicable laws, rules and ordinances, including with
respect to the licensing and certification of its providers.
ARTICLE 2
SERVICES OF PRODENT
2.1 Covered Services. ProDent, unless otherwise prohibited by
law, shall control all aspects of, and provide to the P.C., the following
services (such services are hereinafter referred to collectively as the "Covered
Services"):
a. General. Supervision, conduct and
administration of the general business administrative services required by the
P.C. in connection with the P.C.'s operation of its Practice.
<PAGE> 3
3
b. Personnel. ProDent will employ the
personnel (other than dentists, dental hygienists and dental auxiliaries,
collectively, the "Professional Personnel") needed to operate and support the
business aspects of Practice, such as receptionists and secretarial, clerical,
purchasing and marketing personnel (collectively, the "Administrative
Personnel"). ProDent shall have the sole and exclusive responsibility for
determining the salaries and fringe benefits of all Administrative Personnel
provided hereunder, and for paying such salaries and providing such fringe
benefits. In recognition of the fact that the Administrative Personnel provided
to the P.C. under this Agreement may from time to time perform services for
others, this Agreement shall not prevent ProDent from performing such services
for others or restrict ProDent from so using the Administrative Personnel
provided to the P.C. under this Agreement. ProDent will make every effort
consistent with sound business practices to honor the specific requests of the
P.C. with regard to the assignment of ProDent's employees to the performance of
services for the P.C. Further, ProDent, in its sole discretion, may require each
of its employees assigned to the P.C. to perform several of the aforedescribed
functions and duties simultaneously. ProDent will advise the P.C. on the
establishment of, and participation in, incentive and profit sharing plans for
the P.C.'s staff to reward them for increased productivity in the Practice.
c. Professional Personnel. Establish
guidelines for the selection, hiring and firing of the Professional Personnel by
the P.C. and recruit and evaluate prospective Professional Personnel; provided,
however, that all of the Professional Personnel shall be employees of or
independent contractors to the P.C.
d. Training. Training of all Administrative
Personnel and arranging for training and continuing education for Professional
Personnel.
e. Administrative and Fiscal Services.
Provision of general administrative, business and fiscal services to the P.C. in
connection with the operation of the Practice, including patient billings,
collecting billings, accounting, auditing (by a certified public accountant
selected by ProDent with the approval of the P.C., which approval shall not be
unreasonably withheld or delayed), bookkeeping, budgeting, record keeping,
accounts receivable and accounts payable processing, electronic data processing
and such other services as the P.C. may from time to time require.
<PAGE> 4
4
f. Annual Budget. Prepare, in reasonable
detail, annual operating and capital budgets for the P.C. which shall be
delivered to the P.C. within thirty (30) days after the end of each fiscal year,
with ProDent retaining final authority with respect to budget items including,
without limitation, with respect to compensation and payments to the
Professional Personnel and Administrative Personnel.
g. Patient Records. Maintenance of patient
records (which shall at all times remain the property and under the control of
the P.C.) and provision of record retrieval and monitoring services to assist
the P.C. in utilization and quality assurance reviews in accordance with
instructions and guidelines issued by the P.C.
h. Quality Control. Development of appropriate
quality control programs, including performance standards, sampling techniques
for case review, and preparation of appropriately documented studies.
i. Marketing, Development and Program
Negotiation. Marketing of the professional services provided by the P.C. to
potential patients, facilities, health maintenance organizations, insurance
companies, self-insured employer health plans and other various third-party
payors (the "Marketing Services"). The Marketing Services to be provided by
ProDent may include, but are not necessarily limited to, (i) preparation of
marketing material and brochures and responses to requests for proposals, (ii)
the placing of advertisements or articles in magazines, newspapers, other
publications and any and all media determined by ProDent to be beneficial to the
P.C., (iii) undertaking telemarketing campaigns and (iv) the holding of
seminars. ProDent shall also negotiate and secure contracts with self-insured
employer health plans, third-party payors, health maintenance organizations,
managed care companies and any other institution, facility or organization that
may use the services that the P.C. is qualified to provide and may seek the
input of the P.C. in such negotiations as needed or appropriate.
j. Supplies, Inventory and Equipment.
Provision of purchasing services on behalf of the Practice for inventory and
supplies reasonably necessary for the efficient operation of the Practice.
ProDent shall be responsible for maintaining the P.C.'s inventory on behalf of
the P.C.; provided, however, that title to and control over all dental
inventory, equipment and supplies shall be in the name of the P.C. All equipment
or furnishings not used in the provision of professional services (the "Leased
<PAGE> 5
5
Assets") required by the Practice shall be made available by ProDent to the P.C.
ProDent shall secure maintenance and repair services for the dental equipment.
k. Janitorial and Maintenance Service.
Arrangement of janitorial, grounds and maintenance and repair services for the
P.C. and its equipment and furnishings.
l. Malpractice Insurance. Assistance to the
P.C. in obtaining malpractice coverage for the P.C.
m. Contracts with Facilities/Programs.
Contracts with facilities and programs serviced by the Practice shall be in the
name of the P.C. ProDent shall serve as contracting agent for the P.C. in
connection with such facility or program contracts.
n. Protecting Goodwill. Take all necessary
steps to preserve and protect the reputation and goodwill associated with the
P.C., including assistance, if requested, in the monitoring of utilization and
quality of services provided by the P.C., and shall assist the P.C. to take all
steps necessary to remedy any and all deficiencies in the efficiency or the
quality of the services provided. This section shall not be construed as
permitting ProDent to influence or control the professional aspects of the
Practice or the Professional Personnel.
o. Operations and Regulatory Reports. Deliver
to the P.C. operations reports containing such information as the P.C. may
reasonably request. ProDent shall prepare all written reports and information
that shall be lawfully required by any government body or agency having
jurisdiction over the Practice or the P.C. The P.C. shall review and approve all
such required reports and/or information before any dissemination of the same.
p. Processing Disputes. Administer and
process all disputes, grievances and complaints between the P.C. and all third
parties, subject at all times to the review and final approval of the P.C.
q. Government Regulations; Licenses. To the
extent known and material to the operation of the P.C. and the Practice, ProDent
shall promptly notify the P.C. of any changes which may occur in relevant laws
or regulations of any government, governmental body or agency having
jurisdiction over the Practice or the P.C. The foregoing shall not in any way
limit the P.C.'s continuing professional and legal responsibility to comply
with, and be
<PAGE> 6
6
aware of, all licensing, regulatory, professional or other requirements
applicable to individuals licensed to provide dental services.
r. Advances to the P.C. ProDent shall make
advances to the P.C. as provided by Section 5.6 herein. Such advances shall bear
a reasonable rate of interest, as mutually agreed to by ProDent and the P.C.,
payable monthly.
The Covered Services shall include assumption of all
obligations of the P.C. to provide administrative services to Professional
Personnel who are not employed by the P.C. ProDent may perform the Covered
Services directly or by reimbursing the P.C. for the cost of any Covered
Services.
2.2 Performance of Services. ProDent is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day business administrative needs
of the Practice. It is understood and agreed that ProDent will perform some of
the Covered Services for the P.C. at a centralized location.
2.3 Events Excusing Performance. ProDent will not be liable to
the P.C. for failure to perform any of the services required herein in the event
of strikes, lockouts, calamities, acts of God, unavailability of supplies or
other events over which ProDent has no control for so long as such event
continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly
acknowledge that the provision of all professional services, including but not
limited to, dental services by the P.C., shall be separate and independent from
the provision of administrative, fiscal and support services by ProDent, and the
P.C. shall be solely and exclusively responsible for all professional services
rendered to patients of the Practice. Without limiting the generality of the
foregoing, the parties acknowledge that the P.C. shall be responsible for
setting professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. ProDent hereby grants to the P.C. a
nontransferable, nonexclusive license to use the proprietary name "ProDent" and
any other proprietary names owned by ProDent and used by the P.C. in connection
with the Practice along with any and all trademarked symbols for the term of
this Agreement (the "License"). All applicable
<PAGE> 7
7
common law and statutory rights in the proprietary names "ProDent" and any other
proprietary names owned by ProDent and used by the Practice and their
accompanying symbols, including, but not limited to, rights relating to
trademarks, service marks, patents and copyrights shall be and remain the sole
property of ProDent. The P.C. shall have no right, title or interest in any such
proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF PRODENT
3.1 Competition. During the term of this Agreement, neither
the P.C. nor any shareholder of the P.C. shall, directly or indirectly, own an
interest in, administer, manage, advise, assist, operate, join, control,
participate in, or be connected in any manner with any corporation, partnership,
proprietorship, firm, association, person or entity providing dental services or
administrative services in competition with the P.C. or ProDent.
3.2 Confidentiality. The P.C. acknowledges and agrees that
ProDent is entitled to prevent its competitors from obtaining and utilizing its
trade secrets. The P.C. agrees to hold ProDent's trade secrets in strictest
confidence and not to disclose them or allow them to be disclosed directly or
indirectly to any person or entity other than persons engaged by the P.C. or
ProDent. The P.C. acknowledges its fiduciary obligations to ProDent and the
confidentiality of its relationship with ProDent and of any information relating
to the services and business methods of ProDent which it may obtain during the
term of this Agreement. The P.C. shall not, either during the term of this
Agreement or at any time after the expiration or sooner termination of this
Agreement, disclose to anyone other than employees or independent contractors of
the P.C. or ProDent any confidential or proprietary information or trade secret
obtained by the P.C. from ProDent. The P.C. also agrees to place any persons to
whom said information is disclosed for the purpose of performance under legal
obligation to treat such information as strictly confidential.
<PAGE> 8
8
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in
consultation with ProDent, establish a schedule of fees and charges for the
Practice's professional services or shall comply with the schedule of fees and
charges set forth in the health care contracts pursuant to which the P.C.
provides services through its Professional Personnel.
4.2 Billings. Billings of the Practice for all services
rendered by the P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. ProDent shall serve as
billing and collection agent for the P.C. ProDent shall establish a depository
bank account on behalf of the Practice and will deposit into such account
collected fees generated from the Practice. As provided for in standing
instructions issued by the P.C. to the bank where such depository account is
located, ProDent may withdraw all monies daily from said bank account for
processing at a central location to be used for payment of the P.C.'s expenses,
including the amounts payable to ProDent pursuant to Section 5.1 hereof and any
amounts advanced to the P.C. pursuant to Section 5.3 hereof. Said processing
will consist of establishing and maintaining a book account for the P.C. showing
all fee collections and expense disbursements made by ProDent at the P.C.'s
request. ProDent will provide the P.C. with periodic financial statements for
the Practice reflecting such processing.
4.4 Reports. ProDent shall provide the P.C. with financial
statements for the Practice, stating gross revenues and amounts to be paid to
ProDent pursuant to Section 5.1 hereof.
4.5 Security for ProDent's Compensation. To secure the prompt
and orderly payment of any amounts owing by the P.C. to ProDent pursuant to this
Agreement, the P.C. hereby agrees to grant, at the request of ProDent, a
security interest to ProDent or to a third-party designated by ProDent, in all
its existing and hereafter created accounts receivable, all cash or non-cash
proceeds therefrom, all insurance policies and proceeds relating thereto, and
all of the P.C.'s rights as an unpaid provider of services, whether now existing
or hereafter created or acquired (collectively, the "Collateral"). The P.C.
agrees to execute any and all documents necessary to perfect such
<PAGE> 9
9
security interest, including but not limited to, UCC financing statements.
ARTICLE 5
FEES
5.1 Fees Payable to ProDent. The P.C. agrees to pay ProDent
for the provision of the Covered Services and the License and all other services
provided hereunder as follows:
a. A monthly license fee for the License in the amount
of $* per clinic location;
b. Monthly reimbursement of all of ProDent's direct
costs (i.e. payroll, supplies, travel, etc.) allocated to the P.C., in
ProDent's discretion;
c. Monthly reimbursement of all of ProDent's direct
costs of acquiring and/or leasing and maintaining the Leased Assets
provided to the Practice;
d. Monthly reimbursement of all of ProDent's direct
costs incurred in the provision of purchasing services and maintaining
furniture, fixtures and equipment provided to the Practice;
e. Monthly reimbursement of all of ProDent's direct
costs incurred in the provision of the Marketing Services, with a ten
percent (10%) markup for overhead and administration and a fifteen
percent (15%) markup for profit on such costs; and
f. A per clinic location administrative fee (the
"Administration Fee") of $* per year payable in equal monthly
installments of $* per month on the first day of each month of this
Agreement and subject to renegotiation by either party hereto on each
anniversary of this Agreement. The Administration Fee is intended to
compensate ProDent for its unallocated overhead and a reasonable
profit.
5.2 Fair and Reasonable Compensation of the P.C. for Services
of Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and
- --------
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
<PAGE> 10
10
reasonably compensate its Professional Personnel for their professional
services. Compensation for the Professional Personnel shall be determined in
accordance with employment agreements and other employment arrangements entered
into between the P.C., in consultation with ProDent, and the Professional
Personnel.
5.3 Remittances. To the extent the P.C. shall not generate
adequate revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.2 of this
Agreement, ProDent shall advance to the P.C. or arrange for such amounts as may
be required. To the extent that ProDent advances any funds to the P.C. pursuant
to this Section 5.3, such advances shall be evidenced by interest-bearing demand
note(s) from the P.C. in favor of ProDent and shall be secured by the Collateral
as provided in Section 4.5 hereof.
5.4 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to ProDent no less
frequently than annually and more frequently at the request of ProDent or the
P.C., if changes in the business of the P.C. or services by ProDent warrant such
more frequent review, and may agree in writing to modification of the
compensation. Such review shall consider the scope of operations pursuant to
this Agreement at the time of review, the financial success of ProDent and the
P.C., changes in the purchasing power of money, the size and number of
facilities being supplied by ProDent, the scope of the Marketing Services, the
size of the Administrative Personnel workforce and the expenses and risks to the
respective parties of performing this Agreement.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. Unless sooner terminated in accordance with Section
6.2 hereof, the term of this Agreement shall be for a period of forty (40) years
and thereafter this Agreement shall continue indefinitely until terminated in
accordance with Section 6.2(e) hereof.
6.2 Termination. Notwithstanding any provision
of this Agreement to the contrary, this Agreement may be
terminated as set forth below:
<PAGE> 11
11
a. In the event of a material breach of this
Agreement by either party as a result of such party's gross negligence
or fraud, the other party may, at any time commencing sixty (60) days
after written notice of the breach has been given to the breaching
party, terminate this Agreement by delivery to the breaching party of a
further written notice of termination; provided, however, that if the
breaching party, prior to receiving such notice of termination, has
begun and is diligently continuing good faith efforts to cure such
breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court,
administrative body or peer review organization having jurisdiction, to
have engaged in conduct that results in material harm to the P.C. and
constitutes (i) a felony or other crime involving moral turpitude,
including fraud, theft, or embezzlement or (ii) a failure to act in an
ethical or professional manner, in keeping with accepted dental care
standards, then immediately upon notice by the other party;
c. If either party has engaged in any practice that
results in material harm to the P.C. and violates in any material
respect any federal, state or local law or regulation that is aimed at
protecting the public from coercion into treatment and preventing fraud
upon or abuse of public funding of health services, then immediately
upon notice by the other party;
d. If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is
commenced against either party under any bankruptcy, insolvency or
similar law and such involuntary case is not dismissed within thirty
(30) days after filing, then immediately upon notice from the other
party; or
e. After the initial forty (40) year term of this
Agreement, either party may also terminate this Agreement, with or
without cause, by giving the other written notice of termination not
less than one (1) year prior to the effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement
shall not release or discharge either party from any obligation, debt or
liability which shall have previously accrued and remains to be performed upon
the date of termination.
<PAGE> 12
12
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless
and defend the other party from and against any liability, loss, claims,
lawsuits, damages, injury, cost, expense or other detriment arising out of or
incident to the performance or nonperformance under this Agreement by such
indemnifying party, its employees, Professional Personnel (in the case of the
P.C.), Administrative Personnel (in the case of ProDent) and agents, including,
without limitation, all consequential damages and attorneys' fees, provided,
however, neither party shall be liable to the other under this Section 7.1 for
any claim covered by insurance, except to the extent liability of the party
exceeds the amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder
may not be transferred or assigned without the prior written consent of ProDent
and any assignment in violation of this Section 7.2 shall be void. This
Agreement shall be assignable by ProDent.
7.3 Notices. All notices, requests or instructions hereunder
shall be in writing and delivered personally or sent by registered or certified
mail, postage prepaid, as follows:
(1) If to the P.C.:
204 Echelon Mall
Voorhees, New Jersey 08043
Telephone No.: (609) 795-5565
(2) If to ProDent:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No: (610) 992-3392
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date
<PAGE> 13
13
of delivery, if hand delivered, and five (5) business days after the date of
mailing, if mailed.
7.4 Entire Agreement. This Agreement and the documents
referred to herein contain the entire agreement between the parties hereto with
respect to the transactions contemplated hereby, and no modification hereof
shall be effective unless in writing and signed by the party against which it is
sought to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use
such party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such
party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
7.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey applicable to
agreements made and to be performed entirely within such State, without regard
to any conflict of laws principles which would apply the laws of any other
jurisdiction.
7.8 Article and Section Headings. The article and section
headings in this Agreement are inserted solely for convenience of reference and
are not a part of and are not intended to govern, limit or aid in the
construction of any term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty
hereunder by either party shall not prevent that party from later insisting upon
full performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement
shall be binding on either party unless in writing and executed by the duly
authorized representatives of each party.
7.11 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and both of which taken
together shall constitute one and the same instrument.
7.12 Severability. In the event that any provision of this
Agreement shall be held to be void or unenforceable for any reason, the parties
shall negotiate in
<PAGE> 14
14
good faith for a period of up to one hundred eighty (180) days in order to
arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 15
15
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the date
first above written.
GEORGE FRATTALI, D.D.S. &
ASSOCIATES, P.A.
By:/s/ George E. Frattali, D.D.S.
-------------------------------------
Name: George E. Frattali, D.D.S.
Title: President
PRODENT, INC.
By:/s/ W. Gary Liddick
-------------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(ccc)
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT, effective the 1st day of
October, 1997, by and between ProDent, Inc., a Pennsylvania corporation
("ProDent"), and George E. Frattali, D.D.S & Associates, Ltd., a Pennsylvania
professional corporation (the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing, among other
things, dental services and related activities in the Commonwealth of
Pennsylvania (the "Practice");
WHEREAS, the P.C. desires to obtain the benefit of ProDent's expertise
in the administration of practices similar to the Practice;
WHEREAS, the P.C. desires to obtain from ProDent, and ProDent desires
to provide to the P.C., certain premises and certain physical assets, furniture
and equipment needed to operate the Practice;
WHEREAS, ProDent and the P.C. are parties to that certain Management
Services Agreement dated November 29, 1983 pursuant to which the P.C. obtains
from ProDent and ProDent provides to the P.C., ProDent's expertise in operating,
directing, managing and supervising the non-professional aspects of the
operations of the Practice; and
WHEREAS, ProDent and the P.C. wish to enter into this Administrative
Services Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C. will
provide, and shall be solely responsible for providing, all professional
services for the Practice and ProDent will be responsible only for
<PAGE> 2
2
administrative services (as further described in this Agreement). Nothing
contained in this Agreement shall be construed as permitting or providing for
the provision by ProDent of the professional services of the Practice, which
services shall at all times be the sole responsibility of the P.C. or permitting
ProDent to exercise control over the Practice in violation of Pennsylvania
Statute 64 P.S.129; provided, however, that pursuant to its engagement
hereunder, ProDent shall be the exclusive provider of all administrative
services and shall control all aspects of the P.C.'s business other than those
aspects which relate directly to the provision of dental services. Without
limiting the generality of the foregoing, the P.C. shall be solely responsible
for all activities described in Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.C. and ProDent are not joint
venturers, partners, employees or agents of each other and, except as provided
herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances.
ARTICLE 2
SERVICES OF PRODENT
2.1 Covered Services. ProDent, unless otherwise prohibited by law,
shall control all aspects of, and provide to the P.C. the following services,
premises and assets (such services, premises and assets are hereinafter referred
to collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day supervision,
conduct and management of the general administrative services required in
connection with the Practice, including supervision of the non-professional
services and personnel described below.
b. Personnel. Provision of all personnel (other than licensed or
certified professionals, technicians or hygienists, collectively, the
"Professional Personnel") needed to operate and support the Practice, such as
receptionists and secretarial, clerical, purchasing and marketing personnel
(collectively, the "Administrative Personnel"). ProDent shall have the sole and
exclusive
<PAGE> 3
3
responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that ProDent's
personnel provided to the P.C. under this Agreement may from time to time
perform services for others, this Agreement shall not prevent ProDent from
performing such services for others or restrict ProDent from so using the
Administrative Personnel provided to the P.C. under this Agreement. ProDent will
make every effort consistent with sound business practices to honor the specific
requests of the P.C. with regard to the assignment of its employees to the P.C.;
however, ProDent reserves the sole right to determine the assignment of its
employees. Further, ProDent, in its sole discretion, may require each of its
employees assigned to the P.C. to perform several of the aforedescribed
functions and duties simultaneously.
c. Professional Personnel. Establish guidelines for the selection,
hiring and firing of the Professional Personnel by the P.C. and recruit and
evaluate prospective Professional Personnel; provided, however, that all of the
Professional Personnel shall be employees of or independent contractors to the
P.C.
d. Training. Training of all Administrative Personnel and arranging for
training and continuing education for Professional Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.C. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by ProDent with
the approval of the P.C., which approval shall not be unreasonably withheld or
delayed), bookkeeping, budgeting, record keeping, accounts receivable and
accounts payable processing, electronic data processing and such other services
as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual operating and
capital budgets for the P.C. which shall be delivered to the P.C. within thirty
(30) days after the end of each fiscal year, with ProDent retaining final
authority with respect to budget items including, without limitation, with
respect to compensation and payments to the Professional Personnel and the
Administrative Personnel.
<PAGE> 4
4
g. Patient Records. Maintenance of patient records (which shall at all
times remain the property and under the control of the P.C.) and provision of
record retrieval and monitoring services to assist the P.C. in utilization and
quality assurance reviews in accordance with instructions and guidelines issued
by the P.C.
h. Quality Control. Development of appropriate quality control
programs, including performance standards, sampling techniques for case review,
and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation. Marketing of the
professional services provided by the P.C. to potential patients, facilities,
health maintenance organizations, self-insured employer health plans and various
third-party payors (the "Marketing Services"). The Marketing Services to be
provided by ProDent may include, but are not necessarily limited to, (i)
preparation of marketing material and brochures and responses to requests for
proposals, (ii) the placing of advertisements or articles in magazines,
newspapers, other publications and any and all media determined by ProDent to be
beneficial to the P.C., (iii) undertaking telemarketing campaigns and (iv) the
holding of seminars. ProDent shall also negotiate and secure contracts with
self-insured employer health plans, third-party payors, health maintenance
organizations, managed care companies and any other institution, facility or
organization that may be in need of services that the P.C. is qualified to
provide and may seek the input of the P.C. in such negotiations as needed or
appropriate.
j. Equipment and Supplies. Provision of all inventory, equipment,
furnishings and supplies reasonably necessary for the efficient operation of the
Practice. Title to such inventory, equipment, furnishings and supplies shall at
all times remain in ProDent. At the end of the term of this Agreement, ProDent
shall retain such inventory, equipment, furnishings and supplies as shall not
have been consumed in the day-to-day operations of the Practice.
k. Janitorial and Maintenance Service. Arrangement of janitorial,
grounds and maintenance and repair services for the P.C. and its equipment and
furnishings.
l. Malpractice Insurance. Assistance to the P.C. in obtaining
malpractice coverage for the P.C., its employees and agents in an amount not
less than One Million
<PAGE> 5
5
Dollars ($1,000,000). ProDent shall also assist the P.C. in obtaining general
liability and property insurance in usual and customary amounts for the P.C.
ProDent shall, on behalf and in the name of the P.C., pay the premiums for all
such insurance and shall provide the P.C. with evidence of payment on a periodic
basis or as requested.
m. Contracts with Facilities/Programs. Contracts with facilities and
programs serviced by the Practice shall be in the name of the P.C. ProDent shall
serve as contracting agent for the P.C. in connection with such facilities or
programs contracts.
n. Protecting Goodwill. Take all necessary steps to preserve and
protect the reputation and goodwill associated with the P.C., including
assistance in the monitoring of utilization and quality of services provided by
the P.C., and shall assist the P.C. to take all steps necessary to remedy any
and all deficiencies in the efficiency or the quality of the services provided.
This section shall not be construed as permitting ProDent to influence or
control Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for the Practice shall
be made available to the P.C. by ProDent.
p. Operations and Regulatory Reports. Deliver to the P.C. operations
reports containing such information as the P.C. may reasonably request. ProDent
shall prepare all written reports and information that shall be lawfully
required by any government body or agency having jurisdiction over the P.C. or
the Practice. The P.C. shall review and approve all such required reports and/or
information before any dissemination of the same.
q. Processing Disputes. Administer and process of all disputes,
grievances and complaints between the P.C. and all third parties, subject at all
times to the review and final approval of the P.C.
r. Government Regulations; Licenses. To the extent known and material
to the operation of the P.C. and the Practice, ProDent shall promptly notify the
P.C. of any changes which may occur in relevant laws or regulations of any
government, governmental body or agency having jurisdiction over the P.C. or the
Practice. The foregoing shall not in any way limit the P.C.'s continuing
professional and legal responsibility to comply with, and be aware of, all
licensing, regulatory, professional or other
<PAGE> 6
6
requirements applicable to individuals licensed to provide
dental services.
s. Advances to ProDent. ProDent shall make advances to the P.C. as
required by Section 5.6 herein. Such advances shall bear a reasonable rate of
interest, as mutually agreed to by ProDent and the P.C.
The Covered Services shall include assumption of all obligations of the
P.C. to provide administrative services to professional personnel who are not
employed by the P.C. ProDent may perform the Covered Services directly or by
reimbursing the P.C. for the cost of any Covered Services.
2.2 Performance of Services. ProDent is hereby expressly authorized to
perform the Covered Services hereunder in whatever reasonable manner it deems
appropriate to meet the day-to-day administrative needs of the Practice. It is
understood and agreed that ProDent will perform some of the Covered Services for
the P.C. at a centralized location.
2.3 Events Excusing Performance. ProDent will not be liable to the P.C.
for failure to perform any of the services required herein in the event of
strikes, lockouts, calamities, acts of God, unavailability of supplies or other
events over which ProDent has no control for so long as such event continues and
for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge that
the provision of all professional services, including but not limited to, dental
services by the P.C., shall be separate and independent from the provision of
administrative, fiscal and support services by ProDent, and the P.C. shall be
solely and exclusively responsible for all professional dental services rendered
to patients of the Practice. Without limiting the generality of the foregoing,
the parties acknowledge that the P.C. shall be responsible for setting
professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. ProDent hereby grants to the P.C. a nontransferable,
nonexclusive license to use the proprietary name "ProDent" and any other
proprietary names owned by ProDent and used by the P.C. in connection with the
Practice along with any and all trademarked symbols for the term of this
Agreement (the "License"). All applicable common law and statutory rights in the
proprietary name
<PAGE> 7
7
"ProDent" and any other proprietary names owned by ProDent and used by the
Practice and their accompanying symbols, including, but not limited to, rights
relating to trademark, service mark, patent and copyright shall be and remain
the sole property of ProDent. The P.C. shall have no right, title or interest in
any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF PRODENT
3.1 Competition. During the term of this Agreement, neither the P.C.
nor any shareholder of the P.C. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.C. or ProDent.
3.2 Confidentiality. The P.C. acknowledges and agrees that ProDent is
entitled to prevent its competitors from obtaining and utilizing its trade
secrets. The P.C. agrees to hold ProDent's trade secrets in strictest confidence
and not to disclose them or allow them to be disclosed directly or indirectly to
any person or entity other than persons engaged by the P.C. or ProDent. The P.C.
acknowledges its fiduciary obligations to ProDent and the confidentiality of its
relationship with ProDent and of any information relating to the services and
business methods of ProDent which it may obtain during the term of this
Agreement. The P.C. shall not, either during the term of this Agreement or at
any time after the expiration or sooner termination of this Agreement, disclose
to anyone other than employees or independent contractors of the P.C. or ProDent
any confidential or proprietary information or trade secret obtained by the P.C.
from ProDent. The P.C. also agrees to place any persons to whom said information
is disclosed for the purpose of performance under legal obligation to treat such
information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in consultation with
ProDent, establish a schedule of fees
<PAGE> 8
8
and charges for the Practice's professional services or shall comply with the
schedule of fees and charges set forth in the health care contracts pursuant to
which the P.C. provides services through its Professional Personnel.
4.2 Billings. Billings of the Practice for all services rendered by the
P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. ProDent shall serve as billing and
collection agent for the P.C. in connection with the Practice. ProDent shall
establish a depository bank account on behalf of the Practice and will deposit
into such account collected fees generated from the Practice. As provided for in
standing instructions issued by the P.C. to the bank where such depository
account is located, ProDent may withdraw all monies daily from said bank account
for processing at a central location to be used for payment of the P.C.'s
expenses, including the administrative services fee set forth in Section 5.4
hereof and any amounts advanced to the P.C. pursuant to Section 5.6 hereof. Said
processing will consist of establishing and maintaining a book account for the
P.C. showing all fee collections and expense disbursements made by ProDent at
the P.C.'s request. ProDent will provide the P.C. with periodic financial
statements for the Practice reflecting such processing.
4.4 Reports. ProDent shall provide the P.C. with financial statements
for the Practice, stating Gross Billings (as hereafter defined) and ProDent's
Administrative Fees (as hereafter defined).
4.5 Security for ProDent's Compensation. To secure the prompt and
orderly payment of any amounts owing by the P.C. to ProDent pursuant to this
Agreement, the P.C. hereby agrees to grant, at the request of ProDent, a
security interest to ProDent or to a third party designated by ProDent, in all
its existing and hereafter created accounts receivable, all cash or non-cash
proceeds therefrom, all insurance policies and proceeds relating thereto, and
all of the P.C.'s rights as an unpaid provider of services, whether now existing
or hereafter created or acquired (collectively, the "Collateral"). The P.C.
agrees to execute any and all documents necessary to perfect such security
interest, including but not limited to, UCC financing statements.
<PAGE> 9
9
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in this Agreement
shall mean all billings by the P.C. in connection with the Practice for dental
services, including any other income or receivables relating thereto, less
contractual allowances, if any, and an allowance for bad debts, to be determined
from time to time by ProDent, in its discretion, based upon the actual
experience of the P.C., plus all other cash payments and miscellaneous revenues
received by the P.C. in connection with the Practice.
5.2 Intention of the Parties. It is the intention of the parties hereto
that from the Gross Billings of the P.C. in connection with the Practice, the
P.C. shall be entitled to fairly and reasonably compensate its Professional
Personnel, and ProDent shall be entitled to receive from the P.C. fair and
reasonable compensation for (i) the provision of the Covered Services pursuant
to this Agreement, (ii) the License provided for in Section 2.5 hereof, and
(iii) the expenses, obligations, and risks assumed by ProDent in connection
therewith.
5.3 Fair and Reasonable Compensation of the P.C. for Services of
Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into by the P.C., in consultation with ProDent, and the
Professional Personnel.
5.4 Fair and Reasonable Compensation to ProDent.
a. ProDent's Administrative Fees. The term "ProDent's
Administrative Fees" as used in this article shall mean Gross Billings less
compensation payable by the P.C. as set forth in Section 5.3.
b. For Services of ProDent. The parties hereto agree that ProDent
shall be fairly and reasonably compensated for its administrative services.
ProDent's Administrative Fees shall be paid to ProDent as compensation for (i)
the provision of the Covered Services under this Agreement, (ii) the License and
(iii) its expenses, obligations, and risks in connection therewith. ProDent
<PAGE> 10
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shall pay all expenses of the Practice, except for compensation to the
Professional Personnel, (including interest expenses payable with respect to any
indebtedness of the P.C. to which ProDent shall have consented in writing) out
of ProDent's Administrative Fees or out of funds advanced to the P.C. by
ProDent.
5.5 Periodic Adjustment of Compensation. The parties hereto recognize
that the Practice may change in size and scope over the term of this Agreement
which may necessitate adjusting the fees provided for herein. Therefore, the
parties shall review the compensation to ProDent no less frequently than
annually and more frequently at the request of ProDent or the P.C., if changes
in the business of the P.C. or services by ProDent warrant such more frequent
review, and may agree in writing to modification of the compensation. Such
review shall consider the scope of operations pursuant to this Agreement at the
time of review, the financial success of ProDent and the P.C. in connection with
the Practice, changes in the purchasing power of money, the size and number of
facilities being supplied by ProDent, the scope of the Marketing Services, the
size of the Administrative Personnel workforce and the expenses and risks to the
respective parties of performing this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate adequate
revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, ProDent shall advance to the P.C. or arrange for such amounts as may
be required. To the extent that ProDent advances any funds to the P.C. pursuant
to this Section 5.6, such advances shall be evidenced by interest-bearing demand
note(s) from the P.C. in favor of ProDent and shall be secured by the Collateral
as provided in Section 4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The term of this Agreement shall be for a period of forty
(40) years and thereafter this Agreement shall continue indefinitely until
terminated in accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this Agreement to the
contrary, this Agreement may be terminated as set forth below:
<PAGE> 11
11
a. In the event of a material breach of this Agreement by either
party as a result of such party's gross negligence or fraud, the other party
may, at any time commencing sixty (60) days after written notice of the breach
has been given to the breaching party, terminate this Agreement by delivery to
the breaching party of a further written notice of termination; provided,
however, that if the breaching party, prior to receiving such notice of
termination, has begun and is diligently continuing good faith efforts to cure
such breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court, administrative body
or peer review organization having jurisdiction, to have engaged in conduct that
results in material harm to the P.C. and constitutes (i) a felony or other crime
involving moral turpitude, including fraud, theft, or embezzlement or (ii) a
failure to act in an ethical or professional manner, in keeping with accepted
dental care standards, then immediately upon notice by the other party;
c. If either party has engaged in any practice that results in
material harm to the P.C. and violates in any material respect any federal,
state or local law or regulation that is aimed at protecting the public from
coercion into treatment and preventing fraud upon or abuse of public funding of
health services, then immediately upon notice by the other party;
d. If either party commences a voluntary case under bankruptcy,
insolvency or similar law, or any involuntary case is commenced against either
party under any bankruptcy, insolvency or similar law and such involuntary case
is not dismissed within thirty (30) days after filing, then immediately upon
notice from the other party; or
e. After the initial forty (40) year term of this Agreement,
either party may also terminate this Agreement, with or without cause, by giving
the other written notice of termination not less than one (1) year prior to the
effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have previously accrued and remain to be performed upon the date of
termination.
<PAGE> 12
12
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel, and agents, including, without
limitation, all consequential damages and attorneys' fees, provided, however,
neither party shall be liable to the other under this Section 7.1 for any claim
covered by insurance, except to the extent liability of the party exceeds the
amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder may not be
transferred or assigned without the prior written consent of ProDent and any
assignment in violation of this Section 7.2 shall be void. This Agreement shall
be assignable by ProDent.
7.3 Notices. All notices, requests or instructions hereunder shall be
in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(1) If to the P.C.:
218 Exton Square Mall
Exton, Pennsylvania 19341
Telephone No.: (610) 363-5810
(2) If to ProDent:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and two business days after the date of mailing, if mailed.
<PAGE> 13
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such party's
own expenses in connection with this Agreement and the transactions contemplated
hereby.
7.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
agreements made and to be performed entirely within such State.
7.8 Article and Section Headings. The article and section headings in
this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder by
either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and both of which taken together shall
constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180) days in
order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
GEORGE E. FRATTALI, D.D.S. &
ASSOCIATES, LTD.
By: /s/ George E. Frattali, D.D.S.
---------------------------------
Name: George E. Frattali, D.D.S.
Title: President
PRODENT, INC.
By: /s/ W. Gary Liddick
---------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
Exhibit 10(ddd)
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT, effective the 1st day of
October, 1997, by and between ProDent, Inc., a Pennsylvania corporation
("ProDent"), and Village At Newtown Dentists, P.C., a Pennsylvania professional
corporation (the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing, among other
things, dental services and related activities in the Commonwealth of
Pennsylvania (the "Practice");
WHEREAS, the P.C. desires to obtain the benefit of ProDent's expertise
in the administration of practices similar to the Practice;
WHEREAS, the P.C. desires to obtain from ProDent, and ProDent desires
to provide to the P.C., certain premises and certain physical assets, furniture
and equipment needed to operate the Practice;
WHEREAS, ProDent and the P.C. are parties to that certain Management
Services Agreement dated January 25, 1990 pursuant to which the P.C. obtains
from ProDent and ProDent provides to the P.C., ProDent's expertise in operating,
directing, managing and supervising the non-professional aspects of the
operations of the Practice; and
WHEREAS, ProDent and the P.C. wish to enter into this Administrative
Services Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C. will
provide, and shall be solely responsible for providing, all professional
services for the Practice and ProDent will be responsible only for
<PAGE> 2
2
administrative services (as further described in this Agreement). Nothing
contained in this Agreement shall be construed as permitting or providing for
the provision by ProDent of the professional services of the Practice, which
services shall at all times be the sole responsibility of the P.C. or permitting
ProDent to exercise control over the Practice in violation of Pennsylvania
Statute 64 P.S.129; provided, however, that pursuant to its engagement
hereunder, ProDent shall be the exclusive provider of all administrative
services and shall control all aspects of the P.C.'s business other than those
aspects which relate directly to the provision of dental services. Without
limiting the generality of the foregoing, the P.C. shall be solely responsible
for all activities described in Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.C. and ProDent are not joint
venturers, partners, employees or agents of each other and, except as provided
herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances.
ARTICLE 2
SERVICES OF PRODENT
2.1 Covered Services. ProDent, unless otherwise prohibited by law,
shall control all aspects of, and provide to the P.C. the following services,
premises and assets (such services, premises and assets are hereinafter referred
to collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day
supervision, conduct and management of the general administrative services
required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
b. Personnel. Provision of all personnel (other than licensed
or certified professionals, technicians or hygienists, collectively, the
"Professional Personnel") needed to operate and support the Practice, such as
receptionists and secretarial, clerical, purchasing and marketing personnel
(collectively, the "Administrative Personnel"). ProDent shall have the sole and
exclusive
<PAGE> 3
3
responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that ProDent's
personnel provided to the P.C. under this Agreement may from time to time
perform services for others, this Agreement shall not prevent ProDent from
performing such services for others or restrict ProDent from so using the
Administrative Personnel provided to the P.C. under this Agreement. ProDent will
make every effort consistent with sound business practices to honor the specific
requests of the P.C. with regard to the assignment of its employees to the P.C.;
however, ProDent reserves the sole right to determine the assignment of its
employees. Further, ProDent, in its sole discretion, may require each of its
employees assigned to the P.C. to perform several of the aforedescribed
functions and duties simultaneously.
c. Professional Personnel. Establish guidelines for the
selection, hiring and firing of the Professional Personnel by the P.C. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of or independent
contractors to the P.C.
d. Training. Training of all Administrative Personnel and
arranging for training and continuing education for Professional Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.C. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by ProDent with
the approval of the P.C., which approval shall not be unreasonably withheld or
delayed), bookkeeping, budgeting, record keeping, accounts receivable and
accounts payable processing, electronic data processing and such other services
as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual
operating and capital budgets for the P.C. which shall be delivered to the P.C.
within thirty (30) days after the end of each fiscal year, with ProDent
retaining final authority with respect to budget items including, without
limitation, with respect to compensation and payments to the Professional
Personnel and the Administrative Personnel.
<PAGE> 4
4
g. Patient Records. Maintenance of patient records (which
shall at all times remain the property and under the control of the P.C.) and
provision of record retrieval and monitoring services to assist the P.C. in
utilization and quality assurance reviews in accordance with instructions and
guidelines issued by the P.C.
h. Quality Control. Development of appropriate quality control
programs, including performance standards, sampling techniques for case review,
and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation. Marketing
of the professional services provided by the P.C. to potential patients,
facilities, health maintenance organizations, self-insured employer health plans
and various third-party payors (the "Marketing Services"). The Marketing
Services to be provided by ProDent may include, but are not necessarily limited
to, (i) preparation of marketing material and brochures and responses to
requests for proposals, (ii) the placing of advertisements or articles in
magazines, newspapers, other publications and any and all media determined by
ProDent to be beneficial to the P.C., (iii) undertaking telemarketing campaigns
and (iv) the holding of seminars. ProDent shall also negotiate and secure
contracts with self-insured employer health plans, third-party payors, health
maintenance organizations, managed care companies and any other institution,
facility or organization that may be in need of services that the P.C. is
qualified to provide and may seek the input of the P.C. in such negotiations as
needed or appropriate.
j. Equipment and Supplies. Provision of all inventory,
equipment, furnishings and supplies reasonably necessary for the efficient
operation of the Practice. Title to such inventory, equipment, furnishings and
supplies shall at all times remain in ProDent. At the end of the term of this
Agreement, ProDent shall retain such inventory, equipment, furnishings and
supplies as shall not have been consumed in the day-to-day operations of the
Practice.
k. Janitorial and Maintenance Service. Arrangement of
janitorial, grounds and maintenance and repair services for the P.C. and its
equipment and furnishings.
l. Malpractice Insurance. Assistance to the P.C. in obtaining
malpractice coverage for the P.C., its employees and agents in an amount not
less than One Million
<PAGE> 5
5
Dollars ($1,000,000). ProDent shall also assist the P.C. in obtaining general
liability and property insurance in usual and customary amounts for the P.C.
ProDent shall, on behalf and in the name of the P.C., pay the premiums for all
such insurance and shall provide the P.C. with evidence of payment on a periodic
basis or as requested.
m. Contracts with Facilities/Programs. Contracts with
facilities and programs serviced by the Practice shall be in the name of the
P.C. ProDent shall serve as contracting agent for the P.C. in connection with
such facilities or programs contracts.
n. Protecting Goodwill. Take all necessary steps to preserve
and protect the reputation and goodwill associated with the P.C., including
assistance in the monitoring of utilization and quality of services provided by
the P.C., and shall assist the P.C. to take all steps necessary to remedy any
and all deficiencies in the efficiency or the quality of the services provided.
This section shall not be construed as permitting ProDent to influence or
control Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for the
Practice shall be made available to the P.C. by ProDent.
p. Operations and Regulatory Reports. Deliver to the P.C.
operations reports containing such information as the P.C. may reasonably
request. ProDent shall prepare all written reports and information that shall be
lawfully required by any government body or agency having jurisdiction over the
P.C. or the Practice. The P.C. shall review and approve all such required
reports and/or information before any dissemination of the same.
q. Processing Disputes. Administer and process all disputes,
grievances and complaints between the P.C. and all third parties, subject at all
times to the review and final approval of the P.C.
r. Government Regulations; Licenses. To the extent known and
material to the operation of the P.C. and the Practice, ProDent shall promptly
notify the P.C. of any changes which may occur in relevant laws or regulations
of any government, governmental body or agency having jurisdiction over the P.C.
or the Practice. The foregoing shall not in any way limit the P.C.'s continuing
professional and legal responsibility to comply with, and be aware of, all
licensing, regulatory, professional or other
<PAGE> 6
6
requirements applicable to individuals licensed to provide dental services.
s. Advances to ProDent. Make advances to the P.C. as required
by Section 5.6 herein. Such advances shall bear a reasonable rate of interest,
as mutually agreed to by ProDent and the P.C.
The Covered Services shall include assumption of all obligations of the
P.C. to provide administrative services to professional personnel who are not
employed by the P.C. ProDent may perform the Covered Services directly or by
reimbursing the P.C. for the cost of any Covered Services.
2.2 Performance of Services. ProDent is hereby expressly authorized to
perform the Covered Services hereunder in whatever reasonable manner it deems
appropriate to meet the day-to-day administrative needs of the Practice. It is
understood and agreed that ProDent will perform some of the Covered Services for
the P.C. at a centralized location.
2.3 Events Excusing Performance. ProDent will not be liable to the P.C.
for failure to perform any of the services required herein in the event of
strikes, lockouts, calamities, acts of God, unavailability of supplies or other
events over which ProDent has no control for so long as such event continues and
for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge that
the provision of all professional services, including but not limited to, dental
services by the P.C., shall be separate and independent from the provision of
administrative, fiscal and support services by ProDent, and the P.C. shall be
solely and exclusively responsible for all professional dental services rendered
to patients of the Practice. Without limiting the generality of the foregoing,
the parties acknowledge that the P.C. shall be responsible for setting
professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. ProDent hereby grants to the P.C. a nontransferable,
nonexclusive license to use the proprietary name "ProDent" and any other
proprietary names owned by ProDent and used by the P.C. in connection with the
Practice along with any and all trademarked symbols for the term of this
Agreement (the "License"). All applicable common law and statutory rights in the
proprietary name
<PAGE> 7
7
"ProDent" and any other proprietary names owned by ProDent and used by the P.C.
and any and all accompanying symbols, including, but not limited to, rights
relating to trademark, service mark, patent and copyright shall be and remain
the sole property of ProDent. The P.C. shall have no right, title or interest in
any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF PRODENT
3.1 Competition. During the term of this Agreement, neither the P.C.
nor any shareholder of the P.C. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.C. or ProDent.
3.2 Confidentiality. The P.C. acknowledges and agrees that ProDent is
entitled to prevent its competitors from obtaining and utilizing its trade
secrets. The P.C. agrees to hold ProDent's trade secrets in strictest confidence
and not to disclose them or allow them to be disclosed directly or indirectly to
any person or entity other than persons engaged by the P.C. or ProDent. The P.C.
acknowledges its fiduciary obligations to ProDent and the confidentiality of its
relationship with ProDent and of any information relating to the services and
business methods of ProDent which it may obtain during the term of this
Agreement. The P.C. shall not, either during the term of this Agreement or at
any time after the expiration or sooner termination of this Agreement, disclose
to anyone other than employees or independent contractors of the P.C. or ProDent
any confidential or proprietary information or trade secret obtained by the P.C.
from ProDent. The P.C. also agrees to place any persons to whom said information
is disclosed for the purpose of performance under legal obligation to treat such
information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in consultation with
ProDent, establish a schedule of fees
<PAGE> 8
8
and charges for the Practice's professional services or shall comply with the
schedule of fees and charges set forth in the health care contracts pursuant to
which the P.C. provides services through its Professional Personnel.
4.2 Billings. Billings of the Practice for all services rendered by the
P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. ProDent shall serve as billing and
collection agent for the P.C. in connection with the Practice. ProDent shall
establish a depository bank account on behalf of the Practice and will deposit
into such account collected fees generated from the Practice. As provided for in
standing instructions issued by the P.C. to the bank where such depository
account is located, ProDent may withdraw all monies daily from said bank account
for processing at a central location to be used for payment of the P.C.'s
expenses, including the administrative services fee set forth in Section 5.4
hereof and any amounts advanced to the P.C. pursuant to Section 5.6 hereof. Said
processing will consist of establishing and maintaining a book account for the
P.C. showing all fee collections and expense disbursements made by ProDent at
the P.C.'s request. ProDent will provide the P.C. with periodic financial
statements for the Practice reflecting such processing.
4.4 Reports. ProDent shall provide the P.C. with financial statements
for the Practice, stating Gross Billings (as hereafter defined) and ProDent's
Administrative Fees (as hereafter defined).
4.5 Security for ProDent's Compensation. To secure the prompt and
orderly payment of any amounts owing by the P.C. to ProDent pursuant to this
Agreement, the P.C. hereby agrees to grant, at the request of ProDent, a
security interest to ProDent or to a third party designated by ProDent, in all
its existing and hereafter created accounts receivable, all cash or non-cash
proceeds therefrom, all insurance policies and proceeds relating thereto, and
all of the P.C.'s rights as an unpaid provider of services, whether now existing
or hereafter created or acquired (collectively, the "Collateral"). The P.C.
agrees to execute any and all documents necessary to perfect such security
interest, including but not limited to, UCC financing statements.
<PAGE> 9
9
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in this Agreement
shall mean all billings by the P.C. in connection with the Practice for dental
services, including any other income or receivables relating thereto, less
contractual allowances, if any, and an allowance for bad debts, to be determined
from time to time by ProDent, in its discretion, based upon the actual
experience of the P.C., plus all other cash payments and miscellaneous revenues
received by the P.C. in connection with the Practice.
5.2 Intention of the Parties. It is the intention of the parties hereto
that from the Gross Billings of the P.C. in connection with the Practice, the
P.C. shall be entitled to fairly and reasonably compensate its Professional
Personnel, and ProDent shall be entitled to receive from the P.C. fair and
reasonable compensation for (i) the provision of the Covered Services pursuant
to this Agreement, (ii) the License provided for in Section 2.5 hereof, and
(iii) the expenses, obligations, and risks assumed by ProDent in connection
therewith.
5.3 Fair and Reasonable Compensation of the P.C. for Services of
Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into by the P.C., in consultation with ProDent, and the
Professional Personnel.
5.4 Fair and Reasonable Compensation to ProDent.
a. ProDent's Administrative Fees. The term "ProDent's
Administrative Fees" as used in this article shall mean Gross Billings less
compensation payable by the P.C. as set forth in Section 5.3.
b. For Services of ProDent. The parties hereto agree that
ProDent shall be fairly and reasonably compensated for its administrative
services. ProDent's Administrative Fees shall be paid to ProDent as compensation
for (i) the provision of the Covered Services under this Agreement, (ii) the
License and (iii) its expenses, obligations, and risks in connection therewith.
ProDent
<PAGE> 10
10
shall pay all expenses of the Practice, except for compensation to the
Professional Personnel, (including interest expenses payable with respect to any
indebtedness of the P.C. to which ProDent shall have consented in writing) out
of ProDent's Administrative Fees or out of funds advanced to the P.C. by
ProDent.
5.5 Periodic Adjustment of Compensation. The parties hereto recognize
that the Practice may change in size and scope over the term of this Agreement
which may necessitate adjusting the fees provided for herein. Therefore, the
parties shall review the compensation to ProDent no less frequently than
annually and more frequently at the request of ProDent or the P.C., if changes
in the business of the P.C. or services by ProDent warrant such more frequent
review, and may agree in writing to modification of the compensation. Such
review shall consider the scope of operations pursuant to this Agreement at the
time of review, the financial success of ProDent and the P.C. in connection with
the Practice, changes in the purchasing power of money, the size and number of
facilities being supplied by ProDent, the scope of the Marketing Services, the
size of the Administrative Personnel workforce and the expenses and risks to the
respective parties of performing this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate adequate
revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, ProDent shall advance to the P.C. or arrange for such amounts as may
be required. To the extent that ProDent advances any funds to the P.C. pursuant
to this Section 5.6, such advances shall be evidenced by interest-bearing demand
note(s) from the P.C. in favor of ProDent and shall be secured by the Collateral
as provided in Section 4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The term of this Agreement shall be for a period of forty
(40) years and thereafter this Agreement shall continue indefinitely until
terminated in accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this Agreement to the
contrary, this Agreement may be terminated as set forth below:
<PAGE> 11
11
a. In the event of a material breach of this Agreement by
either party as a result of such party's gross negligence or fraud, the other
party may, at any time commencing sixty (60) days after written notice of the
breach has been given to the breaching party, terminate this Agreement by
delivery to the breaching party of a further written notice of termination;
provided, however, that if the breaching party, prior to receiving such notice
of termination, has begun and is diligently continuing good faith efforts to
cure such breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court, administrative
body or peer review organization having jurisdiction, to have engaged in conduct
that results in material harm to the P.C. and constitutes (i) a felony or other
crime involving moral turpitude, including fraud, theft, or embezzlement or (ii)
a failure to act in an ethical or professional manner, in keeping with accepted
dental care standards, then immediately upon notice by the other party;
c. If either party has engaged in any practice that results in
material harm to the P.C. and violates in any material respect any federal,
state or local law or regulation that is aimed at protecting the public from
coercion into treatment and preventing fraud upon or abuse of public funding of
health services, then immediately upon notice by the other party;
d. If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is commenced
against either party under any bankruptcy, insolvency or similar law and such
involuntary case is not dismissed within thirty (30) days after filing, then
immediately upon notice from the other party; or
e. After the initial forty (40) year term of this Agreement,
either party may also terminate this Agreement, with or without cause, by giving
the other written notice of termination not less than one (1) year prior to the
effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have previously accrued and remain to be performed upon the date of
termination.
<PAGE> 12
12
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel, and agents, including, without
limitation, all consequential damages and attorneys' fees, provided, however,
neither party shall be liable to the other under this Section 7.1 for any claim
covered by insurance, except to the extent liability of the party exceeds the
amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder may not be
transferred or assigned without the prior written consent of ProDent and any
assignment in violation of this Section 7.2 shall be void. This Agreement shall
be assignable by ProDent.
7.3 Notices. All notices, requests or instructions hereunder shall be
in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(1) If to the P.C.:
2960 S. Eagle Road
Newtown, Pennsylvania 18040
Telephone No.: (215) 860-6700
(2) If to ProDent:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
Any of the above addresses may be changed at any time by notice given as
provided above provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and two business days after the date of mailing, if mailed.
<PAGE> 13
13
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such party's
own expenses in connection with this Agreement and the transactions contemplated
hereby.
7.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
agreements made and to be performed entirely within such State.
7.8 Article and Section Headings. The article and section headings in
this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder by
either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and both of which taken together shall
constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180) days in
order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 14
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
VILLAGE AT NEWTOWN DENTISTS, P.C.
By: /s/ George E. Frattali, D.D.S.
-----------------------------------
Name: George E. Frattali, D.D.S.
Title: President
PRODENT, INC.
By: /s/ W. Gary Liddick
-----------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
Exhibit 10(eee)
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT, made as of the 23rd day of October, 1997, by
and between VFD OF PENNSYLVANIA, INC., a Delaware corporation ("VFD"), and
DWORKIN AND CLEMENS, D.D.S., P.A., a Maryland professional corporation (the
"P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing, among other
things, dental services and related activities in the State of Maryland (the
"Practice");
WHEREAS, the P.C. desires to obtain the benefit of VFD's expertise in
the administration of practices similar to the Practice;
WHEREAS, the P.C. desires to obtain from VFD, and VFD desires to
provide to the P.C., certain premises and certain physical assets, furniture and
equipment needed to operate the Practice;
WHEREAS, VFD and the P.C. wish to enter into this Management Agreement
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the P.C. will
provide, and shall be solely responsible for providing, all professional
services for the Practice and VFD will be responsible only for administrative
services (as further described in this Agreement). Nothing contained in this
Agreement shall be construed as permitting or providing for the ownership,
establishment, operation or management by VFD of the professional services of
the Practice, which services shall at all times be the sole responsibility of
the P.C. or permitting VFD to exercise control over the Practice in violation of
Maryland Statute 4-101, 4-601, or 4-603; provided, however, that pursuant to its
engagement hereunder, VFD shall be the exclusive provider of all administrative
services and control all aspects of the P.C.'s business other than those aspects
which relate directly to the provision of dental services. Without limiting the
generality of the foregoing, the P.C. shall be solely responsible for all
activities described in Section 2.4 of this Agreement.
<PAGE> 2
2
1.2 Relationship of Parties. The P.C. and VFD are not joint venturers,
partners, employees or agents of each other and, except as provided herein,
neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in compliance
with all applicable laws, rules and ordinances. ARTICLE 2
SERVICES OF VFD
2.1 Covered Services. VFD, unless otherwise prohibited by law, shall
control all aspects of, and provide to the P.C. the following services, premises
and assets (such services, premises and assets are hereinafter referred to
collectively as the "Covered Services"):
a. General Administrative Services. Overall day-to-day
supervision, conduct and management of the general administrative services
required in connection with the Practice, including supervision of the
nonprofessional services and personnel described below.
b. Personnel. Provision of all personnel (other than licensed
or certified professionals, technicians or hygienists, collectively, the
"Professional Personnel") needed to operate and support the Practice, such as
receptionists and secretarial, clerical, purchasing and marketing personnel
(collectively, the "Administrative Personnel"). VFD shall have the sole and
exclusive responsibility for determining the salaries and fringe benefits of all
Administrative Personnel provided hereunder, and for paying such salaries and
providing such fringe benefits. In recognition of the fact that VFD's personnel
provided to the P.C. under this Agreement may from time to time perform services
for others, this Agreement shall not prevent VFD from performing such services
for others or restrict VFD from so using the Administrative Personnel provided
to the P.C. under this Agreement. VFD will make every effort consistent with
sound business practices to honor the specific requests of the P.C. with regard
to the assignment of its employees to the P.C.; however, VFD reserves the sole
right to determine the assignment of its employees. Further, VFD, in its sole
discretion, may require each of its employees assigned to the P.C. to perform
several of the aforedescribed functions and duties simultaneously.
c. Professional Personnel. Establish guidelines for the
selection, hiring and firing of the Professional Personnel by the P.C. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of, or independent
contractors to, the P.C.
<PAGE> 3
3
d. Training. Training of all Administrative Personnel and
assistance to the P.C. in arranging for training and continuing education for
Professional Personnel.
e. Administrative and Fiscal Services. Provision of general
administrative, business and fiscal services to the P.C. in connection with the
operation of the Practice, including patient billings, collecting billings,
accounting, auditing (by a certified public accountant selected by VFD with the
approval of the P.C., which approval shall not be unreasonably withheld or
delayed), bookkeeping, budgeting, record keeping, accounts receivable and
accounts payable processing, electronic data processing and such other services
as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual
operating and capital budgets for the P.C. which shall be delivered to the P.C.
within thirty (30) days after the end of each fiscal year, with VFD retaining
final authority with respect to budget items including, without limitation, with
respect to compensation and payments to the Professional Personnel and the
Administrative Personnel.
g. Patient Records. Maintenance of patient records (which
shall at all times remain the property and under the control of the P.C.) and
provision of record retrieval and monitoring services to assist the P.C. in
utilization and quality assurance reviews in accordance with instructions and
guidelines issued by the P.C.
h. Quality Control. Development of appropriate quality control
programs, including development of performance standards, sampling techniques
for case review, and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation. Marketing
of the professional services provided by the P.C. to potential patients,
facilities, health maintenance organizations, self-insured employer health plans
and various third-party payors (the "Marketing Services"). The Marketing
Services to be provided by VFD may include, but are not necessarily limited to,
(i) assistance and support in the preparation of marketing material and
brochures and responses to requests for proposals, (ii) the placing of
advertisements or articles in magazines, newspapers, other publications and any
and all media determined by VFD to be beneficial to the P.C., (iii) undertaking
telemarketing campaigns and (iv) the holding of seminars. VFD shall also assist
the P.C. in negotiating and securing contracts with self-insured employer health
plans, third-party payors, health maintenance organizations, managed care
companies and any other institution, facility or organization that may be in
need of services that the P.C. is qualified to provide.
j. Equipment and Supplies. Provision of all inventory,
equipment, furnishings and supplies reasonably necessary for the efficient
operation of the Practice. Title to such inventory, equipment, furnishings and
supplies shall at
<PAGE> 4
4
all times remain in VFD. At the end of the term of this Agreement, VFD shall
retain such inventory, equipment, furnishings and supplies as shall not have
been consumed in the day-to-day operations of the Practice.
k. Janitorial and Maintenance Service. Arranging for
janitorial, grounds and maintenance and repair services for the P.C. and its
equipment and furnishings.
l. Malpractice Insurance. Assistance to the P.C. in obtaining
malpractice coverage for the P.C., its employees and agents in an amount not
less than One Million Dollars ($1,000,000). VFD shall also assist the P.C. in
obtaining general liability and property insurance in usual and customary
amounts for the P.C. VFD shall, on behalf and in the name of the P.C., pay the
premiums for all such insurance and shall provide the P.C. with evidence of
payment on a periodic basis or as requested.
m. Contracts with Facilities/Programs. Contracts with
facilities and programs serviced by the Practice shall be by and in the name of
the P.C. VFD shall serve as contracting agent for the P.C. in connection with
such facilities or programs contracts.
n. Protecting Goodwill. Take all necessary steps to preserve
and protect the reputation and goodwill associated with the P.C., including
assistance in the monitoring of utilization and quality of services provided by
the P.C., and shall assist the P.C. to take all steps necessary to remedy any
and all deficiencies in the efficiency or the quality of the services provided.
This section shall not be construed as permitting VFD to influence or control
Professional Personnel.
o. Facilities. Facilities occupied by the P.C. for the
Practice shall be made available to the P.C. by VFD.
p. Operations and Regulatory Reports. Deliver to the P.C.
operations reports containing such information as the P.C. may reasonably
request. VFD shall prepare all written reports and information that shall be
lawfully required by any government body or agency having jurisdiction over the
P.C. or the Practice. The P.C. shall review and approve all such required
reports and/or information before any dissemination of the same.
q. Processing Disputes. Administer and process all disputes,
grievances and complaints between the P.C. and all third parties, subject at all
times to the review and final approval of the P.C.
r. Government Regulations; Licenses. To the extent known and
material to the operation of the P.C. and the Practice, VFD shall promptly
notify the P.C. of any changes which may occur in relevant laws or
<PAGE> 5
5
regulations of any government, governmental body or agency having jurisdiction
over the P.C. or the Practice. The foregoing shall not in any way limit the
P.C.'s continuing professional and legal responsibility to comply with, and be
aware of, all licensing, regulatory, professional or other requirements
applicable to individuals licensed to provide dental services.
s. Advances to VFD. VFD shall make advances to the
P.C. as required by Section 5.6. Such advances shall bear a reasonable rate of
interest, as mutually agreed to by VFD and the P.C.
The Covered Services shall include assumption of all obligations of
the P.C. to provide administrative services to professional personnel who are
not employed by the P.C. VFD may perform the Covered Services directly or by
reimbursing the P.C. for the cost of any Covered Services. The parties
acknowledge and agree that the services to be provided by VFD to the P.C. are to
be provided on a non-exclusive basis. VFD is in the independent business of
providing these services to other third parties.
2.2 Performance of Services. VFD is hereby expressly authorized to
perform the Covered Services hereunder in whatever reasonable manner it deems
appropriate to meet the day-to-day administrative needs of the Practice. It is
understood and agreed that VFD will perform some of the Covered Services for the
P.C. at a centralized location.
2.3 Events Excusing Performance. VFD will not be liable to the P.C.
for failure to perform any of the services required herein in the event of
strikes, lockouts, calamities, acts of God, unavailability of supplies or other
events over which VFD has no control for so long as such event continues and for
a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly acknowledge that
the provision of all professional services, including but not limited to, dental
services by the P.C., shall be separate and independent from the provision of
administrative, fiscal and support services by VFD, and the P.C. shall be solely
and exclusively responsible for all professional dental services rendered to
patients of the Practice. Without limiting the generality of the foregoing, the
parties acknowledge that the P.C. shall be solely responsible for setting all
professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. VFD hereby grants to the P.C. a nontransferable,
nonexclusive license to use the proprietary name "VFD of Pennsylvania" and any
other proprietary names owned by VFD and used by the P.C. in connection with the
Practice along with any and all trademarked symbols for the term of this
Agreement (the "License"). All applicable common law and statutory rights in the
proprietary name "VFD of Pennsyvania" and any other proprietary
<PAGE> 6
6
names owned by VFD and used by the Practice and their accompanying symbols,
including, but not limited to, rights relating to trademark, service mark,
patent and copyright shall be and remain the sole property of VFD. The P.C.
shall have no right, title or interest in any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF VFD
3.1 Competition. During the term of this Agreement, neither the P.C.
nor any shareholder of the P.C. shall, directly or indirectly, own an interest
in, administer, manage, advise, assist, operate, join, control, participate in,
or be connected in any manner with any corporation, partnership, proprietorship,
firm, association, person or entity providing dental services or administrative
services in competition with the P.C. or VFD.
3.2 Confidentiality. The P.C. acknowledges and agrees that VFD is
entitled to prevent its competitors from obtaining and utilizing its trade
secrets. The P.C. agrees to hold VFD's trade secrets in strictest confidence and
not to disclose them or allow them to be disclosed directly or indirectly to any
person or entity other than persons engaged by the P.C. or VFD. The P.C.
acknowledges its fiduciary obligations to VFD and the confidentiality of its
relationship with VFD and of any information relating to the services and
business methods of VFD which it may obtain during the term of this Agreement.
The P.C. shall not, either during the term of this Agreement or at any time
after the expiration or sooner termination of this Agreement, disclose to anyone
other than employees or independent contractors of the P.C. or VFD any
confidential or proprietary information or trade secret obtained by the P.C.
from VFD. The P.C. also agrees to place any persons to whom said information is
disclosed for the purpose of performance under legal obligation to treat such
information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in consultation with
VFD, establish a schedule of fees and charges for the Practice's professional
services or shall comply with the schedule of fees and charges set forth in the
health care contracts pursuant to which the P.C. provides services through its
Professional Personnel.
4.2 Billings. Billings of the Practice for all services rendered by
the P.C. shall be by and in the name of the P.C.
<PAGE> 7
7
4.3 Billing and Collection Agent. VFD shall serve as billing and
collection agent for the P.C. in connection with the Practice. VFD shall
establish a depository bank account on behalf of the Practice and will deposit
into such account collected fees generated from the Practice. As provided for in
standing instructions issued by the P.C. to the bank where such depository
account is located, VFD may withdraw all monies daily from said bank account for
processing at a central location to be used for payment of the P.C.'s expenses,
including the administrative services fee set forth in Section 5.4 hereof and
any amounts advanced to the P.C. pursuant to Section 5.6 hereof. Said processing
will consist of establishing and maintaining a book account for the P.C. showing
all fee collections and expense disbursements made by VFD at the P.C.'s request.
VFD will provide the P.C. with periodic financial statements for the Practice
reflecting such processing.
4.4 Reports. VFD shall provide the P.C. with financial statements for
the Practice, stating Gross Billings (as hereafter defined) and VFD's
Administrative Fees (as hereafter defined).
4.5 Security for VFD's Compensation. To secure the prompt and orderly
payment of any amounts owing by the P.C. to VFD pursuant to this Agreement, the
P.C. hereby agrees to grant, at the request of VFD, a security interest to VFD
or to a third party designated by VFD, in all its existing and hereafter created
accounts receivable, all cash or non-cash proceeds therefrom, all insurance
policies and proceeds relating thereto, and all of the P.C.'s rights as an
unpaid provider of services, whether now existing or hereafter created or
acquired (collectively, the "Collateral"). The P.C. agrees to execute any and
all documents necessary to perfect such security interest, including but not
limited to, UCC financing statements.
ARTICLE 5
COMPENSATION
5.1 Gross Billings. The term "Gross Billings" as used in this
Agreement shall mean all billings by the P.C. in connection with the Practice
for dental services, including any other income or receivables relating thereto,
less contractual allowances, if any, and an allowance for bad debts, to be
determined from time to time by VFD, in its discretion, based upon the actual
experience of the P.C., plus all other cash payments and miscellaneous revenues
received by the P.C. in connection with the Practice.
5.2 Intention of the Parties. It is the intention of the parties
hereto that from the Gross Billings of the P.C. in connection with the Practice,
the P.C. shall be entitled to fairly and reasonably compensate its Professional
Personnel, and VFD shall be entitled to receive from the P.C. fair and
reasonable compensation for (i) the provision of the Covered Services pursuant
to this Agreement, (ii) the License
<PAGE> 8
8
provided for in Section 2.5 hereof, and (iii) the expenses, obligations, and
risks assumed by VFD in connection therewith.
5.3 Fair and Reasonable Compensation of the P.C. for Services of
Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and reasonably compensate its Professional Personnel for their
professional services. Compensation for the Professional Personnel shall be
determined in accordance with employment agreements and other employment
arrangements entered into by the P.C., in consultation with VFD, and the
Professional Personnel.
5.4 Fair and Reasonable Compensation to VFD.
a. VFD's Administrative Fees. The term "VFD's Administrative
Fees" as used in this article shall mean Gross Billings less compensation
payable by the P.C. as set forth in Section 5.3.
b. For Services of VFD. The parties hereto agree that VFD shall be
fairly and reasonably compensated for its administrative services. VFD's
Administrative Fees shall be paid to VFD as compensation for (i) the provision
of the Covered Services under this Agreement, (ii) the License and (iii) its
expenses, obligations, and risks in connection therewith. VFD shall pay all
expenses of the Practice, except for compensation to the Professional Personnel,
(including interest expenses payable with respect to any indebtedness of the
P.C. to which VFD shall have consented in writing) out of VFD's Administrative
Fees or out of funds advanced to the P.C. by VFD.
5.5 Periodic Adjustment of Compensation. The parties hereto recognize
that the Practice may change in size and scope over the term of this Agreement
which may necessitate adjusting the fees provided for herein. Therefore, the
parties shall review the compensation to VFD no less frequently than annually
and more frequently at the request of VFD or the P.C., if changes in the
business of the P.C. or services by VFD warrant such more frequent review, and
may agree in writing to modification of the compensation. Such review shall
consider the scope of operations pursuant to this Agreement at the time of
review, the financial success of VFD and the P.C. in connection with the
Practice, changes in the purchasing power of money, the size and number of
facilities being supplied by VFD, the scope of the Marketing Services, the size
of the Administrative Personnel workforce and the expenses and risks to the
respective parties of performing this Agreement.
5.6 Remittances. To the extent the P.C. shall not generate adequate
revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.3 of this
Agreement, VFD shall advance to the P.C. or arrange for such amounts as may be
required. To the extent that VFD advances any funds to the P.C. pursuant to this
Section 5.6, such advances shall be evidenced by interest-bearing demand note(s)
from the P.C.
<PAGE> 9
9
in favor of VFD and shall be secured by the Collateral as provided in Section
4.5 hereof.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The term of this Agreement shall be for a period of forty
(40) years and thereafter this Agreement shall continue indefinitely until
terminated in accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this Agreement to
the contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this Agreement by
either party as a result of such party's gross negligence or fraud, the other
party may, at any time commencing sixty (60) days after written notice of the
breach has been given to the breaching party, terminate this Agreement by
delivery to the breaching party of a further written notice of termination;
provided, however, that if the breaching party, prior to receiving such notice
of termination, has begun and is diligently continuing good faith efforts to
cure such breach, this Agreement shall remain in full force and effect;
b. If either party is determined by a court, administrative
body or peer review organization having jurisdiction, to have engaged in conduct
that results in material harm to the P.C. and constitutes (i) a felony or other
crime involving moral turpitude, including fraud, theft, or embezzlement or (ii)
a failure to act in an ethical or professional manner, in keeping with accepted
dental care standards, then immediately upon notice by the other party;
c. If either party has engaged in any practice that results in
material harm to the P.C. and violates any federal, state or local law or
regulation that is aimed at protecting the public from coercion into treatment
and preventing fraud upon or abuse of public funding of health services, then
immediately upon notice by the other party;
d. If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is commenced
against either party under any bankruptcy, insolvency or similar law and such
involuntary case is not dismissed within thirty (30) days after filing, then
immediately upon notice from the other party; or
e. After the initial forty (40) year term of this Agreement,
either party may also terminate this Agreement, with or without cause, by giving
<PAGE> 10
10
the other written notice of termination not less than one (1) year prior to the
effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement shall
not release or discharge either party from any obligation, debt or liability
which shall have previously accrued and remain to be performed upon the date of
termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless and
defend the other party from and against any liability, loss, claims, lawsuits,
damages, injury, cost, expense or other detriment arising out of or incident to
the performance or nonperformance under this Agreement by such indemnifying
party, its employees, Professional Personnel, and agents, including, without
limitation, all consequential damages and attorneys' fees, provided, however,
neither party shall be liable to the other under this Section 7.1 for any claim
covered by insurance, except to the extent liability of the party exceeds the
amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder may not
be transferred or assigned without the prior written consent of VFD and any
assignment in violation of this Section 7.2 shall be void. This Agreement shall
be assignable by VFD.
7.3 Notices. All notices, requests or instructions hereunder shall be
in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(1) If to the P.C.:
2 Hamill Road, Suite 266 South
Baltimore, Maryland 21210
Telephone No.: (410) 435-8400
Telecopy No.: (410) 435-6486
(2) If to VFD:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
<PAGE> 11
11
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and two business days after the date of mailing, if mailed.
7.4 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties hereto with respect to
the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the party against which it is sought
to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use such
party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such party's
own expenses in connection with this Agreement and the transactions contemplated
hereby.
7.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland applicable to agreements
made and to be performed entirely within such State.
7.8 Article and Section Headings. The article and section headings in
this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty hereunder by
either party shall not prevent that party from later insisting upon full
performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement shall be
binding on either party unless in writing and executed by the duly authorized
representatives of each party.
7.11 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and both of which taken together shall
constitute one and the same instrument.
7.12 Severability. In the event that any provision of this Agreement
shall be held to be void or unenforceable for any reason, the parties shall
negotiate in good faith for a period of up to one hundred eighty (180) days in
order to arrive at a mutually acceptable substitute provision.
<PAGE> 12
12
* * *
<PAGE> 13
13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
DWORKIN AND CLEMENS, D.D.S., P.A.
By: /s/ Allan M. Dworkin, D.D.S.
------------------------------------
Name: Allan M. Dworkin, D.D.S.
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/ W. Gary Liddick
------------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(fff)
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement"),
effective the 5th day of August, 1997, by and between VFD of Pennsylvania, Inc.,
a Delaware corporation (the "Manager"), and Valley Forge Dental of Florida,
P.A., a Florida professional association (the "P.A.").
W I T N E S S E T H:
WHEREAS, the P.A. is engaged in the business of providing,
among other things, dental services and related activities in the western part
of the State of Florida under the name of Gentle Dental (the "Practice");
WHEREAS, the P.A. desires to obtain from the Manager, and the
Manager desires to provide to the P.A., the benefit of the Manager's expertise
in the administration of practices similar to the Practice;
WHEREAS, the P.A. desires to obtain a license from the Manager
to use the proprietary names "Valley Forge Dental", "VFD" and "Gentle Dental"
and any other proprietary names owned by the Manager and used in connection with
the Practice, and the Manager desires to provide the P.A. with such a license;
WHEREAS, the P.A. desires to obtain from the Manager, and the
Manger desires to provide to the P.A., certain premises and certain physical
assets, furniture and equipment needed to operate the Practice;
WHEREAS, the Administrative Services Agreement dated January
31, 1996 entered into between the Manager and the P.A. does not cover services
provided by the Manager to the P.A. for the Practice and the parties hereto
agree that this Agreement solely shall govern the relationship between the
Manager and the P.A. for the Practice; and
WHEREAS, the Manager and the P.A. wish to enter into this
Administrative Services Agreement on the terms and conditions set forth herein.
<PAGE> 2
2
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AND THE
MUTUAL COVENANTS AND AGREEMENTS HEREIN SET FORTH, THE PARTIES HERETO, INTENDING
TO BE LEGALLY BOUND, HEREBY AGREE AS FOLLOWS:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the
P.A. will provide, and shall be solely responsible for providing, all
professional services for the Practice and the Manager will be responsible only
for administrative services (as further described in this Agreement). Nothing
contained in this Agreement shall be construed as permitting or providing for
the ownership, establishment, operation or management by the Manager of the
professional services of the Practice, which services shall at all times be the
sole responsibility of the P.A. or permitting the Manager to exercise control
over the Practice in violation of Florida Statute 466.0285 and Florida
Regulation 64B5-17.013; provided, however, that pursuant to its engagement
hereunder, the Manager shall be the exclusive provider of all administrative
services and shall control all aspects of the P.A.'s business other than those
aspects which relate directly to the provision of dental services. Without
limiting the generality of the foregoing, the P.A. shall be solely responsible
for all activities described in Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.A. and the Manager are not
joint venturers, partners, employees or agents of each other and, except as
provided herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.A. agrees to conduct the Practice in
compliance with all applicable laws, rules and ordinances, including with
respect to the licensing and certification of its providers.
ARTICLE 2
SERVICES OF THE MANAGER
2.1 Covered Services. The Manager, unless otherwise prohibited
by law, shall control all aspects of, and provide to the P.A. the following
services, premises and assets (such services, premises and assets are
hereinafter referred to collectively as the "Covered Services"):
<PAGE> 3
3
a. General Administrative Services. Overall
day-to-day supervision, conduct and management of the general administrative
services required in connection with the Practice, including supervision of the
non-professional services and personnel described below.
b. Personnel. Provision of all personnel
(other than licensed or certified professionals, including without limitation,
dentists, dental assistants and dental hygienists, collectively, the
"Professional Personnel") needed to operate and support the Practice, such as
receptionists and secretarial, clerical, purchasing and marketing personnel
(collectively, the "Administrative Personnel"). The Manager shall have the sole
and exclusive responsibility for determining the salaries and fringe benefits of
all Administrative Personnel provided hereunder, and for paying such salaries
and providing such fringe benefits. In recognition of the fact that the
Administrative Personnel provided to the P.A. under this Agreement may from time
to time perform services for others, this Agreement shall not prevent the
Manager from performing such services for others or restrict the Manager from so
using the Administrative Personnel provided to the P.A. under this Agreement.
The Manager will make every effort consistent with sound business practices to
honor the specific requests of the P.A. with regard to the assignment of the
Manager's employees to the P.A.; however, the Manager reserves the sole right to
determine the assignment of its employees. Further, the Manager, in its sole
discretion, may require each of its employees assigned to the P.A. to perform
several of the aforedescribed functions and duties simultaneously.
c. Professional Personnel. Establish
guidelines for the selection, hiring and firing of the Professional Personnel by
the P.A. and recruit and evaluate prospective Professional Personnel; provided,
however, that all of the Professional Personnel shall be employees of, or
independent contractors to, the P.A.
d. Training. Training of all Administrative
Personnel and assistance to the P.A. in arranging for training and continuing
education for Professional Personnel.
e. Administrative and Fiscal Services.
Provision of general administrative, business and fiscal services to the P.A. in
connection with the operation of the Practice, including patient billings,
collecting billings, accounting, auditing (by a certified public accountant
selected by the Manager with the approval of the P.A., which
<PAGE> 4
4
approval shall not be unreasonably withheld or delayed), bookkeeping, budgeting,
record keeping, accounts receivable and accounts payable processing, electronic
data processing and such other services as the P.A. may from time to time
require.
f. Annual Budget. Prepare in reasonable
detail, annual operating and capital budgets for the P.A. which shall be
delivered to the P.A. within thirty (30) days after the end of each fiscal year,
with the Manager retaining final authority with respect to budget items.
g. Patient Records. Maintenance of patient
records (which shall at all times remain the property and under the sole control
of the P.A.) and provision of record retrieval and monitoring services to assist
the P.A. in utilization and quality assurance reviews in accordance with
instructions and guidelines issued by the P.A. it being understood and agreed
that nothing in this Subsection (e) shall permit the Manager to exercise control
over patient records or the selection, procedures or manner of a course of
treatment for a patient.
h. Quality Control. Development of
appropriate quality control programs, including development of performance
standards, sampling techniques for case review, and preparation of appropriately
documented studies.
i. Marketing, Development and Program
Negotiation. Assistance to the P.A. in the marketing of the professional
services provided by the P.A. to potential patients, facilities, health
maintenance organizations, insurance companies, self-insured employer health
plans and other various third-party payors (the "Marketing Services"). The
Marketing Services to be provided by the Manager may include, but are not
necessarily limited to, (i) assistance and support in the preparation of
marketing material and brochures and responses to requests for proposals, (ii)
assistance with the placing of advertisements or articles in magazines,
newspapers, other publications and any and all media determined by the P.A.,
based on policies determined in its sole discretion to be beneficial to the
P.A., (iii) undertaking telemarketing campaigns and (iv) the holding of
seminars. The Manager shall also assist the P.A., when appropriate, in
negotiating and securing contracts with self-insured employer health plans,
third-party payors, health maintenance organizations, managed care companies and
any other institution, facility or organization that may use the services that
the P.A. is qualified to provide.
<PAGE> 5
5
j. Equipment and Supplies. Provision of
all inventory, equipment, furnishings and supplies reasonably necessary for the
efficient operation of the Practice. Title to such inventory, equipment,
furnishings and supplies shall at all times remain in the Manager; provided
however that during the term of this Agreement, the P.A. shall maintain complete
care, custody and control of all inventory, equipment and supplies. At the end
of the term of this Agreement, the Manager shall retain and the P.A. shall have
no further right to use or possess, such inventory, equipment, furnishings and
supplies as shall not have been consumed in the day-to-day operations of the
Practice.
k. Janitorial and Maintenance Service.
Arranging for janitorial, grounds and maintenance and repair services for the
P.A. and its equipment and furnishings.
l. Malpractice Insurance. Assistance to
the P.A. in obtaining malpractice coverage for the P.A., its employees and
agents in an amount not less than One Million Dollars ($1,000,000). The Manager
shall also assist the P.A. in obtaining general liability and property insurance
in usual and customary amounts for the P.A. The Manager shall, on behalf and in
the name of the P.A., pay the premiums for all such insurance and shall provide
the P.A. with evidence of payment on a periodic basis or as reasonably
requested.
m. Contracts with Facilities/Programs.
Contracts with facilities and programs serviced by the Practice shall be by and
in the name of the P.A. The Manager shall serve as contracting agent for the
P.A. in connection with such facility or program contracts; provided however
that the P.A. shall retain ultimate control over all pricing policies with
respect to dental services and decisions relating to such facility or program
contracts.
n. Protecting Goodwill. Take all necessary
steps to preserve and protect the reputation and goodwill associated with the
P.A., including assistance in the monitoring of utilization and quality of
services provided by the P.A., and shall assist the P.A. to take all steps
necessary to remedy any and all deficiencies in the efficiency or the quality of
the services provided. This section shall not be construed as permitting the
Manager to influence or control the Practice or the Professional Personnel.
<PAGE> 6
6
o. Facilities. Facilities occupied by the
P.A. for the Practice shall be made available to the P.A. by the Manager.
p. Operations and Regulatory Reports.
Delivery to the P.A. of operations reports containing such information as the
P.A. may reasonably request. The Manager shall timely assist the P.A. in the
preparation of all written reports and information that shall be lawfully
required by any government body or agency having jurisdiction over the Practice
or the P.A. The P.A. shall review and approve all such required reports and/or
information before any dissemination of the same.
q. Processing Disputes. Administer and
process all disputes, grievances and complaints between the P.A. and all third
parties, subject at all times to the review and final approval of the P.A.
r. Government Regulations; Licenses. To
the extent known and material to the operation of the P.A. and the Practice, the
Manager shall promptly notify the P.A. of any changes which may occur in
relevant laws or regulations of any government, governmental body or agency
having jurisdiction over the Practice or the P.A. The foregoing shall not in any
way limit the P.A.'s continuing professional and legal responsibility to comply
with, and be aware of, all licensing, regulatory, professional or other
requirements applicable to individuals licensed to provide dental services.
s. Advances to the P.A. The Manager shall
make advances to the P.A. as provided by Section 5.3 hereof. Such advances shall
bear a reasonable rate of interest, as mutually agreed to by the Manager and the
P.A., payable monthly.
t. Manager's Responsibilities:
(i) Manager shall accurately bill only
for those treatments and procedures under the applicable ADA CPT codes or any
successor addition codes or otherwise in accordance with accepted industry
practices as reported to it by P.A. and P.A.'s Employees.
(ii) Manager shall review any changes to
billing codes submitted to it by P.A. or P.A.'s Employees with P.A. or P.A.'s
Employees.
(iii) Manager shall promptly notify P.A. of
any information or communication, whether written or oral,
<PAGE> 7
7
of a nature that would have a material adverse affect on P.A. that Manager
receives from any payor or governmental agency pertaining to P.A., including,
but not limited to, general policy documents, specific correspondence, profile
information, audit requests and overpayment notification.
(iv) Manager shall indemnify and hold P.A.
and its Shareholders and Professional Personnel harmless from any and all
damages caused by Manager's breach of this Section, including, but not limited
to, any fines, penalties, interest, monetary damages of any kind or nature,
reasonable attorneys' fees incurred from the time P.A. is first notified of a
claim, reasonable fees for experts hired to assist P.A. in its defense of any
claims and costs.
The Covered Services shall include assumption of all
obligations of the P.A. to provide administrative services to professional
personnel who are not employed by the P.A. The Manager may perform the Covered
Services directly or by reimbursing the P.A. for the cost of any Covered
Services.
2.2 Performance of Services. The Manager is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day administrative needs of the
Practice. It is understood and agreed that the Manager will perform some of the
Covered Services for the P.A. at a centralized location.
2.3 Events Excusing Performance. The Manager will not be
liable to the P.A. for failure to perform any of the services required herein in
the event of strikes, lockouts, calamities, acts of God, unavailability of
supplies or other events over which the Manager has no control for so long as
such event continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly
acknowledge that the provision of all professional services, including but not
limited to, dental services by the P.A., shall be separate and independent from
the provision of administrative, fiscal and support services by the Manager, and
the P.A. shall be solely and exclusively responsible for all professional
services rendered to patients of the Practice. Without limiting the generality
of the foregoing, the parties acknowledge that:
(a) The P.A. shall be solely responsible for setting all
professional standards of the Practice and
<PAGE> 8
8
shall be solely responsible for the employment and discharge
of all Professional Personnel; and
(b) The Manager shall not exercise control over the P.A.'s
decisions with regard to:
(i) the selection, procedures or manner of a course of
treatment,
(ii) the professional aspects of patient records,
(iii) pricing, credit, refunds, warranties and advertising
of dental services except in connection with the
administrative services provided pursuant to Section
2.1 hereof, or
(iv) licensed personnel and office hours.
2.5 Use of Name. The Manager hereby grants to the P.A. a
nontransferable, nonexclusive license to use the proprietary names "Valley Forge
Dental", "VFD" and "Gentle Dental" and any other proprietary names owned by the
Manager and used by the Practice along with any and all trademarked symbols for
the term of this Agreement (the "License"). All applicable common law and
statutory rights in the proprietary names "Valley Forge Dental", "VFD" and
"Gentle Dental" and any other proprietary names owned by the Manager and used by
the Practice and their accompanying symbols, including, but not limited to,
rights relating to trademarks, service marks, patents and copyrights shall be
and remain the sole property of the Manager. The P.A. shall have no right, title
or interest in any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF THE MANAGER
3.1 Competition. During the term of this Agreement,
neither the P.A. nor any shareholder of the P.A. shall, directly or indirectly,
own an interest in, administer, manage, advise, assist, operate, join, control,
participate in, or be connected in any manner with any corporation, partnership,
proprietorship, firm, association, person or entity providing dental services or
administrative services in competition with the P.A. or the Manager.
3.2 Confidentiality. The P.A. acknowledges and agrees
that the Manager is entitled to prevent its competitors from obtaining and
utilizing its trade secrets.
<PAGE> 9
9
The P.A. agrees to hold the Manager's trade secrets in strictest confidence and
not to disclose them or allow them to be disclosed directly or indirectly to any
person or entity other than persons engaged by the P.A. or the Manager. The P.A.
acknowledges its fiduciary obligations to the Manager and the confidentiality of
its relationship with the Manager and of any information relating to the
services and business methods of the Manager which it may obtain during the term
of this Agreement. The P.A. shall not, either during the term of this Agreement
or at any time after the expiration or sooner termination of this Agreement,
disclose to anyone other than employees or independent contractors of the P.A.
or the Manager any confidential or proprietary information or trade secret
obtained by the P.A. from the Manager. The P.A. also agrees to place any persons
to whom said information is disclosed for the purpose of performance under legal
obligation to treat such information as strictly confidential.
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.A. shall establish a
schedule of fees and charges for the Practice's professional services or shall
comply with the schedule of fees and charges set forth in the health care
contracts pursuant to which the P.A. provides services through its Professional
Personnel; provided, however, that in order to obtain the benefit of the
Manager's expertise in establishing schedules of fees and charges for dental
practices similar to the Practice, the P.A. shall consult with the Manager prior
to establishing such a schedule, it being understood and agreed that nothing in
this Section 4.1 shall permit the Manager to exercise control over the setting
of such fees.
4.2 Billings. Billings of the Practice for all
services rendered by the P.A. shall be by and in the name of the P.A.
4.3 Billing and Collection Agent. The Manager shall serve as
billing and collection agent for the P.A. The Manager shall establish a
depository bank account on behalf of the Practice and will deposit into such
account collected fees generated from the Practice. As provided for in standing
instructions issued by the P.A. to the bank where such depository account is
located, the Manager may withdraw all monies daily from said bank account for
processing at a central location to be used for payment of
<PAGE> 10
10
the P.A.'s expenses, including the amounts payable to the Manager pursuant to
Section 5.1 hereof and any amounts advanced to the P.A. pursuant to Section 5.3
hereof. Said processing will consist of establishing and maintaining a book
account for the P.A. showing all fee collections and expense disbursements made
by the Manager at the P.A.'s request. The Manager will provide the P.A. with
monthly financial statements for the Practice reflecting such processing.
4.4 Reports. The Manager shall provide the P.A.
with financial statements for the Practice, stating gross
revenues and amounts to be paid to the Manager pursuant to
Section 5.1 hereof.
4.5 Security for the Manager's Compensation. To secure
the prompt and orderly payment of any amounts owing by the P.A. to the Manager
pursuant to this Agreement, the P.A. hereby agrees to grant, at the request of
the Manager, a security interest to the Manager or to a third-party designated
by the Manager, in all its existing and hereafter created accounts receivable,
all cash or non-cash proceeds therefrom, all insurance policies and proceeds
relating thereto, and all of the P.A.'s rights as an unpaid provider of
services, whether now existing or hereafter created or acquired (collectively,
the "Collateral"). The P.A. agrees to execute any and all documents necessary to
perfect such security interest, including but not limited to, UCC financing
statements.
ARTICLE 5
FEES
5.1 Fees Payable to the Manager. The P.A. agrees
to pay the Manager for the provision of the Covered Services
and the License and all other services provided hereunder as
follows:
a. A monthly license fee for the License in
the amount of $* per clinic location;
b. Monthly reimbursement of all the Manager's
direct costs (i.e. payroll, supplies, travel,
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 11
11
etc.) allocated to the P.A., in the Manager's discretion;
c. Monthly reimbursement of all the Manager's
direct costs of acquiring and/or leasing and maintaining facilities or
clinic space provided to the Practice;
d. Monthly reimbursement of all the Manager's
direct costs of acquiring and/or leasing and maintaining furniture,
fixtures and equipment provided to the Practice;
e. Monthly reimbursement of all the Manager's
direct costs incurred in the provision of the Marketing Services, with
a ten percent (10%) markup for overhead and administration and a
fifteen percent (15%) markup for profit on such costs; and
f. A per clinic location administrative fee (the
"Administration Fee") of $* per year payable in equal monthly
installments of $* per month on the first day of each month of this
Agreement and subject to renegotiation by either party hereto quarterly
during the term of this Agreement. The Administration Fee is intended
to compensate the Manager for its unallocated overhead and a reasonable
profit.
5.2 Fair and Reasonable Compensation of the P.A. for
Services of Professional Personnel. The parties hereto agree that the P.A. shall
have the right to fairly and reasonably compensate its Professional Personnel
for their professional services. Compensation for the Professional Personnel
shall be determined in accordance with employment agreements and other
employment arrangements entered into between the P.A., in consultation with the
Manager, and the Professional Personnel.
5.3 Remittances. To the extent the P.A. shall not
generate adequate revenues to meet the P.A.'s ongoing operating expenses,
including the compensation for professional services pursuant to Section 5.2 of
this Agreement, the Manager shall advance to the P.A. or arrange for such
amounts as may be required. To the extent that the Manager advances any funds to
the P.A. pursuant to this Section 5.3, such advances shall be evidenced by
interest-
*THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
<PAGE> 12
12
bearing demand note(s) from the P.A. in favor of the Manager and shall be
secured by the Collateral as provided in Section 4.5 hereof.
5.4 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to the Manager no less
frequently than annually and more frequently at the request of the Manager or
the P.A., if changes in the business of the P.A. or services by the Manager
warrant such more frequent review, and may agree in writing to modification of
the compensation. Such review shall consider the scope of operations pursuant to
this Agreement at the time of review, the financial success of the Manager and
the P.A., changes in the purchasing power of money, the size and number of
facilities being supplied by the Manager, the scope of the Marketing Services,
the size of the Administrative Personnel workforce and the expenses and risks to
the respective parties of performing this Agreement.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. Unless sooner terminated in accordance with Section
6.2 hereof, the term of this Agreement shall be for a period of forty (40) years
and thereafter this Agreement shall continue indefinitely until terminated in
accordance with Section 6.2 hereof.
6.2 Termination. Notwithstanding any provision of this
Agreement to the contrary, this Agreement may be terminated as set forth below:
(a) In the event of a material breach of this Agreement by
either party as a result of such party's gross negligence or fraud, the
other party may, at any time commencing sixty (60) days after written
notice of the breach has been given to the breaching party, terminate
this Agreement by delivery to the breaching party of a further written
notice of termination; provided, however, that if the breaching party,
prior to receiving such notice of termination, has begun and is
diligently continuing good faith efforts to cure such breach, this
Agreement shall remain in full force and effect;
<PAGE> 13
13
(b) If either party is determined by a court, administrative
body or peer review organization having jurisdiction, to have engaged
in conduct that results in material harm to the P.A. and constitutes
(i) a felony or other crime involving moral turpitude, including fraud,
theft, or embezzlement or (ii) a failure to act in an ethical or
professional manner, in keeping with accepted dental care standards,
then immediately upon notice by the other party;
(c) If either party has engaged in any practice that results
in material harm to the P.A. and violates in any material respect any
federal, state or local law or regulation that is aimed at protecting
the public from coercion into treatment and preventing fraud upon or
abuse of public funding of health services, then immediately upon
notice by the other party;
(d) If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is
commenced against either party under any bankruptcy, insolvency or
similar law and such involuntary case is not dismissed within thirty
(30) days after filing, then immediately upon notice from the other
party; or
(e) After the initial forty (40) year term of this Agreement,
either party may also terminate this Agreement, with or without cause,
by giving the other written notice of termination not less than one (1)
year prior to the effective date of termination.
6.3 Rights Upon Termination. The termination of this Agreement
shall not release or discharge either party from any obligation, debt or
liability which shall have previously accrued and remains to be performed upon
the date of termination.
<PAGE> 14
14
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless
and defend the other party from and against any liability, loss, claims,
lawsuits, damages, injury, cost, expense or other detriment arising out of or
incident to the performance or nonperformance under this Agreement by such
indemnifying party, its employees, Professional Personnel (in the case of the
P.A.), Administrative Personnel (in the case of the Manager), and agents,
including, without limitation, all consequential damages and attorneys' fees,
provided, however, neither party shall be liable to the other under this Section
7.1 for any claim covered by insurance, except to the extent liability of the
party exceeds the amount of the coverage.
7.2 Assignment. The rights conferred upon the P.A. hereunder
may not be transferred or assigned without the prior written consent of the
Manager and any assignment in violation of this Section 7.2 shall be void. This
Agreement shall be assignable by the Manager.
7.3 Notices. All notices, requests or instructions hereunder
shall be in writing and delivered personally or sent by registered or certified
mail, postage prepaid, as follows:
(1) If to the P.A.:
713 Tradewinds Drive
Indian Harbour Beach, Florida 32937
Attention: Donald L. Kane, D.D.S.
(2) If to the Manager:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: Mr. Douglas P. Gill
Telephone No.: (610) 992-3319
Telecopy No.: (610) 992-3392
<PAGE> 15
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with a copy to:
Haythe & Curley
237 Park Avenue
New York, New York 10017
Attention: Robert A. Ouimette, Esq.
Telephone No.: (212) 880-6000
Telecopy No.: (212) 682-0200
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, and five (5) business days after the date of mailing, if
mailed.
7.4 Entire Agreement. This Agreement and the documents
referred to herein contain the entire agreement between the parties hereto with
respect to the transactions contemplated hereby, and no modification hereof
shall be effective unless in writing and signed by the party against which it is
sought to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use
such party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such
party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
7.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida applicable to
agreements made and to be performed entirely within such State, without regard
to any conflict of laws principles which would apply the laws of any other
jurisdiction.
7.8 Article and Section Headings. The article and section
headings in this Agreement are inserted solely for convenience of reference and
are not a part of and are not intended to govern, limit or aid in the
construction of any term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty
hereunder by either party shall not prevent that party from later insisting upon
full performance of the same.
<PAGE> 16
16
7.10 Amendment. No amendment in the terms of this Agreement
shall be binding on either party unless in writing and executed by the duly
authorized representatives of each party.
7.11 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and both of which taken
together shall constitute one and the same instrument.
7.12 Severability. In the event that any provision of this
Agreement shall be held to be void or unenforceable for any reason, the parties
shall negotiate in good faith for a period of up to one hundred eighty (180)
days in order to arrive at a mutually acceptable substitute provision.
* * *
<PAGE> 17
17
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the date
first above written.
VALLEY FORGE DENTAL OF
FLORIDA, P.A.
By: /s/Donald L. Kane, D.D.S.
--------------------------------
Name: Donald L. Kane, D.D.S
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/ W. Gary Liddick
--------------------------------
Name: W. Gary Liddick
Title: Vice President
<PAGE> 1
EXHIBIT 10(ggg)
* THIS INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement"),
effective the 22nd day of October, 1997, by and between VFD of Pennsylvania,
Inc., a Delaware corporation ("VFD of PA"), and Poller Dental Centers, P.A., a
New Jersey professional corporation (the "P.C.").
W I T N E S S E T H:
WHEREAS, the P.C. is engaged in the business of providing,
among other things, dental services and related activities in the State of New
Jersey (the "Practice");
WHEREAS, the P.C. desires to obtain the benefit of VFD of PA's
expertise in the administration of practices similar to the Practice;
WHEREAS, the P.C. desires to obtain from VFD of PA, and VFD of
PA desires to provide to the P.C., certain premises and certain physical assets,
furniture and equipment needed to operate the Practice; and
WHEREAS, VFD of PA and the P.C. wish to enter into this
Administrative Services Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth, the parties hereto, intending
to be legally bound, hereby agree as follows:
ARTICLE 1
RELATIONSHIP OF PARTIES
1.1 Responsibilities of Parties. The parties agree that the
P.C. will provide, and shall be solely responsible for providing, all
professional services for the Practice and VFD of PA will be responsible only
for business, administrative and non-professional services (as further described
in this Agreement). Nothing contained in
<PAGE> 2
2
this Agreement shall be construed as permitting or providing for the provision
by VFD of PA of the professional services of the Practice, which services shall
at all times be the sole responsibility of the P.C. or permitting VFD of PA to
exercise control over the Practice in violation of New Jersey Statute 45:6-19;
provided, however, that pursuant to its engagement hereunder, VFD of PA shall be
the exclusive provider of all administrative services and shall control all
aspects of the P.C.'s business other than those aspects which relate directly to
the provision of dental services. Without limiting the generality of the
foregoing, the P.C. shall be solely responsible for all activities described in
Section 2.4 of this Agreement.
1.2 Relationship of Parties. The P.C. and VFD of PA are not
joint venturers, partners, employees or agents of each other and, except as
provided herein, neither party shall have any authority to bind the other.
1.3 Practice. The P.C. agrees to conduct the Practice in
compliance with all applicable laws, rules and ordinances, including with
respect to the licensing and certification of its providers.
ARTICLE 2
SERVICES OF VFD of PA
2.1 Covered Services. VFD of PA, unless otherwise prohibited
by law, shall control all aspects of, and provide to the P.C., the following
services (such services are hereinafter referred to collectively as the "Covered
Services"):
a. General. Supervision, conduct and administration of the
general business administrative services required by the P.C. in connection with
the P.C.'s operation of its Practice.
b. Personnel. VFD of PA will employ the personnel (other
than dentists, dental hygienists and dental auxiliaries, collectively, the
"Professional Personnel") needed to operate and support the business aspects of
Practice, such as receptionists and secretarial, clerical, purchasing and
marketing personnel (collectively, the "Administrative Personnel"). VFD of PA
shall have the sole and exclusive responsibility for determining the salaries
and fringe benefits of all Administrative Personnel provided hereunder, and for
paying such salaries and providing such fringe benefits. In recognition of the
fact that the
<PAGE> 3
3
Administrative Personnel provided to the P.C. under this Agreement may from time
to time perform services for others, this Agreement shall not prevent VFD of PA
from performing such services for others or restrict VFD of PA from so using the
Administrative Personnel provided to the P.C. under this Agreement. VFD of PA
will make every effort consistent with sound business practices to honor the
specific requests of the P.C. with regard to the assignment of VFD of PA's
employees to the performance of services for the P.C. Further, VFD of PA, in its
sole discretion, may require each of its employees assigned to the P.C. to
perform several of the aforedescribed functions and duties simultaneously. VFD
of PA will advise the P.C. on the establishment of, and participation in,
incentive and profit sharing plans for the P.C.'s staff to reward them for
increased productivity in the Practice.
c. Professional Personnel. Establish guidelines for the
selection, hiring and firing of the Professional Personnel by the P.C. and
recruit and evaluate prospective Professional Personnel; provided, however, that
all of the Professional Personnel shall be employees of or independent
contractors to the P.C.
d. Training. Training of all Administrative Personnel and
arranging for training and continuing education for Professional Personnel.
e. Administrative and Fiscal Services. Provision of
general administrative, business and fiscal services to the P.C. in connection
with the operation of the Practice, including patient billings, collecting
billings, accounting, auditing (by a certified public accountant selected by VFD
of PA with the approval of the P.C., which approval shall not be unreasonably
withheld or delayed), bookkeeping, budgeting, record keeping, accounts
receivable and accounts payable processing, electronic data processing and such
other services as the P.C. may from time to time require.
f. Annual Budget. Prepare, in reasonable detail, annual
operating and capital budgets for the P.C. which shall be delivered to the P.C.
within thirty (30) days after the end of each fiscal year, with VFD of PA
retaining final authority with respect to budget items including, without
limitation, with respect to compensation and payments to the Professional
Personnel and Administrative Personnel.
g. Patient Records. Maintenance of patient records (which
shall at all times remain the property and
<PAGE> 4
4
under the control of the P.C.) and provision of record retrieval and monitoring
services to assist the P.C. in utilization and quality assurance reviews in
accordance with instructions and guidelines issued by the P.C.
h. Quality Control. Development of appropriate quality
control programs, including performance standards, sampling techniques for case
review, and preparation of appropriately documented studies.
i. Marketing, Development and Program Negotiation.
Marketing of the professional services provided by the P.C. to potential
patients, facilities, health maintenance organizations, insurance companies,
self-insured employer health plans and other various third-party payors (the
"Marketing Services"). The Marketing Services to be provided by VFD of PA may
include, but are not necessarily limited to, (i) preparation of marketing
material and brochures and responses to requests for proposals, (ii) the placing
of advertisements or articles in magazines, newspapers, other publications and
any and all media determined by VFD of PA to be beneficial to the P.C., (iii)
undertaking telemarketing campaigns and (iv) the holding of seminars. VFD of PA
acknowledges that the P.C. is also a party, by assignment, to that certain
Public Relations Agreement dated August 1, 1997 with Union Marketing Associates,
Inc. ("Union"), pursuant to which Union provides certain active public relations
and consulting services, as more fully described therein. VFD of PA shall also
negotiate and secure contracts with self-insured employer health plans,
third-party payors, health maintenance organizations, managed care companies and
any other institution, facility or organization that may use the services that
the P.C. is qualified to provide and may seek the input of the P.C. in such
negotiations as needed or appropriate.
j. Supplies, Inventory and Equipment. Provision of
purchasing services on behalf of the Practice for inventory and supplies
reasonably necessary for the efficient operation of the Practice. VFD of PA
shall be responsible for maintaining the P.C.'s inventory on behalf of the P.C.;
provided, however, that title to and control over all dental inventory,
equipment and supplies shall be in the name of the P.C. All equipment or
furnishings not used in the provision of professional services (the "Leased
Assets") required by the Practice shall be made available by VFD of PA to the
P.C. VFD of PA shall secure maintenance and repair services for the dental
equipment.
<PAGE> 5
5
k. Janitorial and Maintenance Service. Arrangement of
janitorial, grounds and maintenance and repair services for the P.C. and its
equipment and furnishings.
l. Malpractice Insurance. Assistance to the P.C. in
obtaining malpractice coverage for the P.C.
m. Contracts with Facilities/Programs. Contracts with
facilities and programs serviced by the Practice shall be in the name of the
P.C. VFD of PA shall serve as contracting agent for the P.C. in connection with
such facility or program contracts.
n. Protecting Goodwill. Take all necessary steps to
preserve and protect the reputation and goodwill associated with the P.C.,
including assistance, if requested, in the monitoring of utilization and quality
of services provided by the P.C., and shall assist the P.C. to take all steps
necessary to remedy any and all deficiencies in the efficiency or the quality of
the services provided. This section shall not be construed as permitting VFD of
PA to influence or control the professional aspects of the Practice or the
Professional Personnel.
o. Operations and Regulatory Reports. Deliver to the P.C.
operations reports containing such information as the P.C. may reasonably
request. VFD of PA shall prepare all written reports and information that shall
be lawfully required by any government body or agency having jurisdiction over
the Practice or the P.C. The P.C. shall review and approve all such required
reports and/or information before any dissemination of the same.
p. Processing Disputes. Administer and process all
disputes, grievances and complaints between the P.C. and all third parties,
subject at all times to the review and final approval of the P.C.
q. Government Regulations; Licenses. To the extent known
and material to the operation of the P.C. and the Practice, VFD of PA shall
promptly notify the P.C. of any changes which may occur in relevant laws or
regulations of any government, governmental body or agency having jurisdiction
over the Practice or the P.C. The foregoing shall not in any way limit the
P.C.'s continuing professional and legal responsibility to comply with, and be
aware of, all licensing, regulatory, professional or other requirements
applicable to individuals licensed to provide dental services.
<PAGE> 6
6
r. Advances to the P.C. VFD of PA shall make advances to
the P.C. as provided by Section 5.3 herein. Such advances shall bear a
reasonable rate of interest taking into account VFD of PA's cost of money, as
mutually agreed to by VFD of PA and the P.C., payable monthly.
The Covered Services shall include assumption of all
obligations of the P.C. to provide administrative services to Professional
Personnel who are not employed by the P.C. VFD of PA may perform the Covered
Services directly or by reimbursing the P.C. for the cost of any Covered
Services.
2.2 Performance of Services. VFD of PA is hereby expressly
authorized to perform the Covered Services hereunder in whatever reasonable
manner it deems appropriate to meet the day-to-day business administrative needs
of the Practice. It is understood and agreed that VFD of PA will perform some of
the Covered Services for the P.C. at a centralized location.
2.3 Events Excusing Performance. VFD of PA will not be liable
to the P.C. for failure to perform any of the services required herein in the
event of strikes, lockouts, calamities, acts of God, unavailability of supplies
or other events over which VFD of PA has no control for so long as such event
continues and for a reasonable period of time thereafter.
2.4 Excluded Services. The parties hereto expressly
acknowledge that the provision of all professional services, including but not
limited to, dental services by the P.C., shall be separate and independent from
the provision of administrative, fiscal and support services by VFD of PA, and
the P.C. shall be solely and exclusively responsible for all professional
services rendered to patients of the Practice. Without limiting the generality
of the foregoing, the parties acknowledge that the P.C. shall be responsible for
setting professional standards of the Practice and shall be responsible for the
employment and discharge of all Professional Personnel.
2.5 Use of Name. VFD of PA hereby grants to the P.C. a
nontransferable, nonexclusive license to use the proprietary name "Valley Forge
Dental Associates" and any other proprietary names used by VFD of PA and used by
the P.C. in connection with the Practice along with any and all trademarked
symbols for the term of this Agreement (the "License"). All applicable common
law and statutory rights in the proprietary name "Valley Forge Dental
Associates" and any other proprietary names owned by VFD of PA and used by
<PAGE> 7
7
the Practice and their accompanying symbols, including, but not limited to,
rights relating to trademarks, service marks, patents and copyrights shall be
and remain the sole property of VFD of PA. The P.C. shall have no right, title
or interest in any such proprietary rights.
ARTICLE 3
PROPRIETARY INTEREST AND RIGHTS OF VFD of PA
3.1 Competition. During the term of this Agreement, neither
the P.C. nor any shareholder of the P.C. shall, directly or indirectly, own an
interest in, administer, manage, advise, assist, operate, join, control,
participate in, or be connected in any manner with any corporation, partnership,
proprietorship, firm, association, person or entity providing dental services or
administrative services in competition with the P.C. or VFD of PA.
3.2 Confidentiality. The P.C. acknowledges and agrees that VFD
of PA is entitled to prevent its competitors from obtaining and utilizing its
trade secrets. The P.C. agrees to hold VFD of PA's trade secrets in strictest
confidence and not to disclose them or allow them to be disclosed directly or
indirectly to any person or entity other than persons engaged by the P.C. or VFD
of PA. The P.C. acknowledges its fiduciary obligations to VFD of PA and the
confidentiality of its relationship with VFD of PA and of any information
relating to the services and business methods of VFD of PA which it may obtain
during the term of this Agreement. The P.C. shall not, either during the term of
this Agreement or at any time after the expiration or sooner termination of this
Agreement, disclose to anyone other than employees or independent contractors of
the P.C. or VFD of PA any confidential or proprietary information or trade
secret obtained by the P.C. from VFD of PA. The P.C. also agrees to place any
persons to whom said information is disclosed for the purpose of performance
under legal obligation to treat such information as strictly confidential.
<PAGE> 8
8
ARTICLE 4
BILLING AGENT AGREEMENT
4.1 Professional and Other Fees. The P.C. shall, in
consultation with VFD of PA but in the ultimate discretion of the P.C.,
establish a schedule of fees and charges for the Practice's professional
services or shall comply with the schedule of fees and charges set forth in the
health care contracts pursuant to which the P.C. provides services through its
Professional Personnel.
4.2 Billings. Billings of the Practice for all services
rendered by the P.C. shall be by and in the name of the P.C.
4.3 Billing and Collection Agent. VFD of PA shall serve as
billing and collection agent for the P.C. VFD of PA shall establish a depository
bank account on behalf of the Practice and will deposit into such account
collected fees generated from the Practice. As provided for in standing
instructions issued by the P.C. to the bank where such depository account is
located, VFD of PA may withdraw all monies daily from said bank account for
processing at a central location to be used for payment of the P.C.'s expenses,
including the amounts payable to VFD of PA pursuant to Section 5.1 hereof and
any amounts advanced to the P.C. pursuant to Section 5.3 hereof. Said processing
will consist of establishing and maintaining a book account for the P.C. showing
all fee collections and expense disbursements made by VFD of PA at the P.C.'s
request. VFD of PA will provide the P.C. with periodic financial statements for
the Practice reflecting such processing.
4.4 Reports. VFD of PA shall provide the P.C. with financial
statements for the Practice, stating gross revenues and amounts to be paid to
VFD of PA pursuant to Section 5.1 hereof.
4.5 Security for VFD of PA's Compensation. To secure the
prompt and orderly payment of any amounts owing by the P.C. to VFD of PA
pursuant to this Agreement, the P.C. hereby agrees to grant, at the request of
VFD of PA, a security interest to VFD of PA or to a third-party designated by
VFD of PA, in all its existing and hereafter created accounts receivable, all
cash or non-cash proceeds therefrom, all insurance policies and proceeds
relating thereto, and all of the P.C.'s rights as an unpaid provider of
services, whether now existing or hereafter created or acquired (collectively,
the "Collateral"). The P.C. agrees to execute any and all documents necessary to
perfect such
<PAGE> 9
9
security interest, including but not limited to, UCC financing statements.
ARTICLE 5
FEES
5.1 Fees Payable to VFD of PA. The P.C. agrees to pay VFD of
PA for the provision of the Covered Services and the License and all other
services provided hereunder as follows:
a. A monthly license fee for the License in the amount of
$* per clinic location;
b. Monthly reimbursement of all of VFD of PA's direct
costs (i.e. payroll, supplies, travel, etc.) allocated to the P.C., in
VFD of PA's discretion;
c. Monthly reimbursement of all of VFD of PA's direct
costs of acquiring and/or leasing and maintaining the Leased Assets
provided to the Practice;
d. Monthly reimbursement of all of VFD of PA's direct
costs incurred in the provision of purchasing services and maintaining
furniture, fixtures and equipment provided to the Practice;
e. Monthly reimbursement of all of VFD of PA's direct
costs incurred in the provision of the Marketing Services, with a ten
percent (10%) markup for overhead and administration and a fifteen
percent (15%) markup for profit on such costs; and
f. A per clinic location administrative fee (the
"Administration Fee") of $* per year payable in equal monthly
installments of $* per month on the first day of each month of this
Agreement and subject to renegotiation by either party hereto on each
anniversary of this Agreement. The Administration Fee is intended to
compensate VFD of PA for its unallocated overhead and a reasonable
profit.
5.2 Fair and Reasonable Compensation of the P.C. for Services
of Professional Personnel. The parties hereto agree that the P.C. shall have the
right to fairly and
- -------------
*This information has been omitted pursuant to a request for
confidential treatment and has been filed separately with the Securities and
Exchange Commission.
<PAGE> 10
10
reasonably compensate its Professional Personnel for their professional
services. Compensation for the Professional Personnel shall be determined in
accordance with employment agreements and other employment arrangements entered
into between the P.C., in consultation with VFD of PA, and the Professional
Personnel.
5.3 Remittances. To the extent the P.C. shall not generate
adequate revenues to meet the P.C.'s ongoing operating expenses, including the
compensation for professional services pursuant to Section 5.2 of this
Agreement, VFD of PA shall advance to the P.C. or arrange for such amounts as
may be required. To the extent that VFD of PA advances any funds to the P.C.
pursuant to this Section 5.3, such advances shall be evidenced by
interest-bearing demand note(s) from the P.C. in favor of VFD of PA and shall be
secured by the Collateral as provided in Section 4.5 hereof.
5.4 Periodic Adjustment of Compensation. The parties hereto
recognize that the Practice may change in size and scope over the term of this
Agreement which may necessitate adjusting the fees provided for herein.
Therefore, the parties shall review the compensation to VFD of PA no less
frequently than annually and more frequently at the request of VFD of PA or the
P.C., if changes in the business of the P.C. or services by VFD of PA warrant
such more frequent review, and may agree in writing to modification of the
compensation. Such review shall consider the scope of operations pursuant to
this Agreement at the time of review, the financial success of VFD of PA and the
P.C., changes in the purchasing power of money, the size and number of
facilities being supplied by VFD of PA, the scope of the Marketing Services, the
size of the Administrative Personnel workforce and the expenses and risks to the
respective parties of performing this Agreement.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. Unless sooner terminated in accordance with Section
6.2 hereof, the term of this Agreement shall be for a period of forty (40) years
and thereafter this Agreement shall continue indefinitely until terminated in
accordance with Section 6.2(e) hereof.
<PAGE> 11
11
6.2 Termination. Notwithstanding any provision of this
Agreement to the contrary, this Agreement may be terminated as set forth below:
a. In the event of a material breach of this Agreement by
either party as a result of such party's gross negligence or fraud, the
other party may, at any time commencing sixty (60) days after written
notice of the breach has been given to the breaching party, terminate
this Agreement by delivery to the breaching party of a further written
notice of termination; provided, however, that if the breaching party,
prior to receiving such notice of termination, has begun and is
diligently continuing good faith efforts to cure such breach, this
Agreement shall remain in full force and effect;
b. If either party is determined by a court,
administrative body or peer review organization having jurisdiction, to
have engaged in conduct that results in material harm to the P.C. and
constitutes (i) a felony or other crime involving moral turpitude,
including fraud, theft, or embezzlement or (ii) a failure to act in an
ethical or professional manner, in keeping with accepted dental care
standards, then immediately upon notice by the other party;
c. If either party has engaged in any practice that
results in material harm to the P.C. and violates in any material
respect any federal, state or local law or regulation that is aimed at
protecting the public from coercion into treatment and preventing fraud
upon or abuse of public funding of health services, then immediately
upon notice by the other party;
d. If either party commences a voluntary case under
bankruptcy, insolvency or similar law, or any involuntary case is
commenced against either party under any bankruptcy, insolvency or
similar law and such involuntary case is not dismissed within thirty
(30) days after filing, then immediately upon notice from the other
party; or
e. After the initial forty (40) year term of this
Agreement, either party may also terminate this Agreement, with or
without cause, by giving the other written notice of termination not
less than one (1) year prior to the effective date of termination.
<PAGE> 12
12
6.3 Rights Upon Termination. The termination of this Agreement
shall not release or discharge either party from any obligation, debt or
liability which shall have previously accrued and remains to be performed upon
the date of termination.
ARTICLE 7
GENERAL PROVISIONS
7.1 Indemnification. Each party shall indemnify, hold harmless
and defend the other party from and against any liability, loss, claims,
lawsuits, damages, injury, cost, expense or other detriment arising out of or
incident to the performance or nonperformance under this Agreement by such
indemnifying party, its employees, Professional Personnel (in the case of the
P.C.), Administrative Personnel (in the case of VFD of PA) and agents,
including, without limitation, all consequential damages and attorneys' fees,
provided, however, neither party shall be liable to the other under this Section
7.1 for any claim covered by insurance, except to the extent liability of the
party exceeds the amount of the coverage.
7.2 Assignment. The rights conferred upon the P.C. hereunder
may not be transferred or assigned without the prior written consent of VFD of
PA and any assignment in violation of this Section 7.2 shall be void. This
Agreement shall be assignable by VFD of PA.
7.3 Notices. All notices, requests or instructions hereunder
shall be in writing and delivered personally or sent by registered or certified
mail, postage prepaid, as follows:
(1) If to the P.C.:
470 Clifton Avenue
Clifton, New Jersey 07011
(2) If to VFD of PA:
c/o Valley Forge Dental Associates, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Telephone No.: (610) 992-3319
Telecopy No: (610) 992-3392
Either of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any
<PAGE> 13
13
such notice of change of address shall be effective only upon receipt. All
notices, requests or instructions given in accordance herewith shall be deemed
received on the date of delivery, if hand delivered, and five (5) business days
after the date of mailing, if mailed.
7.4 Entire Agreement. This Agreement and the documents
referred to herein contain the entire agreement between the parties hereto with
respect to the transactions contemplated hereby, and no modification hereof
shall be effective unless in writing and signed by the party against which it is
sought to be enforced.
7.5 Further Assurances. Each of the parties hereto shall use
such party's best efforts to take such actions as may be necessary or reasonably
requested by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
7.6 Attorneys Fees. Each of the parties hereto shall bear such
party's own expenses in connection with this Agreement and the transactions
contemplated hereby.
7.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey applicable to
agreements made and to be performed entirely within such State, without regard
to any conflict of laws principles which would apply the laws of any other
jurisdiction.
7.8 Article and Section Headings. The article and section
headings in this Agreement are inserted solely for convenience of reference and
are not a part of and are not intended to govern, limit or aid in the
construction of any term or provision hereof.
7.9 Waiver. The waiver of any covenant, condition or duty
hereunder by either party shall not prevent that party from later insisting upon
full performance of the same.
7.10 Amendment. No amendment in the terms of this Agreement
shall be binding on either party unless in writing and executed by the duly
authorized representatives of each party.
7.11 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and both of which taken
together shall constitute one and the same instrument.
<PAGE> 14
14
7.12 Severability. In the event that any provision of this
Agreement shall be held to be void or unenforceable for any reason, the parties
shall negotiate in good faith for a period of up to one hundred eighty (180)
days in order to arrive at a mutually acceptable substitute provision.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the date
first above written.
POLLER DENTAL CENTERS, P.A.
By: /s/Craig Abramowitz, D.D.S.
------------------------------
Name: Craig Abramowitz, D.D.S.
Title: President
VFD OF PENNSYLVANIA, INC.
By: /s/W. Gary Liddick
------------------------------
Name: W. Gary Liddick
Title: Vice President
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