<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark one)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1997
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OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File No. 33-11935
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DENTAL SERVICES OF AMERICA, INC.
(Name of small business issuer in its charter)
DELAWARE 8021 59-2754843
- -------------------------- ----------------------------- ------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation Classification Code Number) Identification No.)
or organization)
Issuer's Telephone Number, Including Area Code: (305) 642-9090
--------------
Securities registered under Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
- ------------------- ----------------------
Securities registered under Section 12(g) of the Act:
None
----------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
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<PAGE>
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[X]
The Issuer's revenues for its most recent fiscal year are $673,660
The aggregate market value of the common stock held by non-affiliates of the
registrant, computed by reference to the last known bid quotation ($ 1.78) for
the common stock, is $ 2,218,964.02.
The number of shares outstanding of the issuer's common stock, $.005 par value
per share as of September 30, 1997 is $ 1,840,743.
2
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PART I
------
Item 1. Description of Business
Dental Services of America, Inc. (formerly known as "Campbell Capital Corp.")
("Company") was organized under the laws of the State of Delaware on January
6, 1987 by International Asset Management Group, Inc. ("IAMG"), the promoter and
parent of the Company, for the purpose of providing a vehicle to raise capital
and seek business opportunities. The Company completed an initial public
offering of its securities in August 1987, raising net proceeds of approximately
$110,000. Subsequent to the public offering, the Company invested most of its
capital in Asbestos Management Enterprise, Inc., which investment was
subsequently lost when Asbestos Management Enterprise, Inc. ran out of capital
and was forced to discontinue operations. During 1993, the Company's then
current board of directors determined to seek a business acquisition and to
bring the Company into compliance with its reporting obligations under Section
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Effective as of July, 1996, the Company acquired 100% of the issued and
outstanding capital stock of Dental Practice Administrators, Inc. ("DPA"), a
Florida corporation which was formed in 1995 to engage in the business of
operating dental centers. In conjunction with the acquisition of DPA, the
Company changed its corporate name to Dental Services of America, Inc.
References herein to the "Company" may be deemed to refer to Dental Services of
America, Inc. and/or to its wholly owned subsidiaries.
The Company currently operates six dental centers, five of which are located in
the South Florida area, and one near Tampa, Florida. The Company anticipates
opening its seventh dental center late February 1998. This center will be
located within the Company's headquarters building, in South Florida. Each
dental center is located within or in close proximity to a high volume medical
clinic. The medical clinics serve primarily Medicaid patients. The Company also
operates a portable dental unit as well as a mobile dental health practice which
operate five days per week at different sites under an agreement with the Miami-
Dade County School Board.
In most states, including Florida where all of the Company's dental centers are
located, dental practices must be owned by a licensed dentist. In keeping with
these legal requirements, the Company operates its dental centers and derives
revenue from such centers through comprehensive management agreements with one
or more corporations, which are owned by licensed dentists. The Company provides
the required capital, management and marketing services, allowing the dentists
employed by such corporations to focus on delivery of high quality dental care.
The dental industry and dental practices are regulated extensively at the state
and federal levels. The Company does not control the practice of dentistry by
the affiliated dentists or their compliance with the regulatory requirements
directly applicable to dentists and their practices. The laws of many states
prohibit non-dental entities (such as the Company) from practicing dentistry
(which in certain states includes managing or operating a dental office),
splitting professional fees with dentists, owning a dental practice or
controlling the content of a dentist's advertising. The laws of many
states also prohibit dentists from paying any portion of fees received for
dental services in consideration for the referral of a patient. In addition,
many states impose limits on the tasks that may be delegated by a dentist to
dental hygienists and other staff members. These laws and their interpretation
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vary from state to state and are enforced by regulatory authorities with broad
discretion. The Company believes it is in compliance with applicable laws and
regulations in Florida and intends to comply with applicable laws and
regulations in any other state in which it may do business in the future.
The Company plans to open new dental centers in other Florida regions and
additional locations in the greater Miami metropolitan area. The Company
currently plans to concentrate its business operations and expansion efforts in
Florida and has no immediate plans to expand outside of the state of Florida.
In April, 1997, the Company obtained a license from the Florida Department of
Insurance to operate a prepaid dental care plan in Florida. Since obtaining the
license, the Company has developed a network of dentists to provide dental
services to plan members and has enrolled approximately 800 members. The license
is owned by the Company's wholly owned subsidiary, DentAll Plans of Florida,
Inc. Because it requires a significant amount of funds to effectively market the
dental plan, the Company is reevaluating its business strategy with respect to
future expansion of the dental plan. For the short term, the Company intends to
concentrate its resources on the expansion of its dental practice management
operations.
The Company competes with other licensed dentists, as well as with other dental
care management companies, the majority of which may have more capital,
resources, expertise and experience than the Company. The Company also
competes with other companies offering prepaid dental care services as well as
other types of businesses in the health care industry, including insurance
companies offering both prepaid managed dental care plans and indemnity dental
care insurance, Health Maintenance Organizations (HMO's), self-funded employer
plans, Preferred Provider Organizations (PPOs), and discount fee-for-service
dental plans. The Company believes that the competition for prepaid managed
dental care plans will continue to increase in the future and that insurance
companies and HMOs in particular will continue to seek to enter the managed
dental care benefits business and expand their dental care markets. Many of the
Company's competitors are better known to the public and have substantially
greater financial and other resources than the Company. The Company believes
that its pricing is competitive with other prepaid dental plans.
The Company meets certain OSHA and other governmental regulation and guidelines
in its dental clinics. The cost of such compliance has not been material. The
Company has not been engaged in research and development of products or delivery
systems as of September 30, 1997.
As of the date hereof, the Company has eight (8) affiliated dental
practitioners, and a total of forty (40) employees, including thirteen (13)
dental assistants. None of the Company's employees are members of a labor union,
and the relationship between the Company and its employees is favorable. The
Company provides incentives and benefits to its employees, such as health care
insurance and stock option plans.
Item 2. Description of Property
The Company's principal executive offices are located at 2260 SW 8th Street
Miami, Florida 33135. The Company owns this office building which it acquired
in 1997 from its Chairman Luis Cruz (See Item 12 below). The building contains
approximately 10,000 square feet of office space and is in good condition. The
Company believes this building will be sufficient for its needs as both a
headquarter as well as for premises for a dental center for the foreseeable
future. In February 1998, the Company plans to open a dental center in this
building.
4
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Other than the soon to be opened dental center in the Company's headquarters,
the Company leases or rents the location of its dental centers. The Company's
obligation under these lease or rental agreements, in the large part, are
subject to the Company continuing to use and operate the dental clinic in the
location. In the event that the Company, reduces or discontinues a facility,
most of the agreements would result in a reduction or termination of an
obligation to pay rent.
The Company has entered into contracts for the purchase of two distinct real
estate properties, one located in Jacksonville, Florida, another in Flagler
Street, Miami, Florida. In these locations the Company plans on opening dental
centers which it will manage.
Item 3. Legal Proceedings
The Company is named as a Defendant in SUJIT SHYAM v. DENTAL SERVICES OF
AMERICA, INC. f/k/a CAMPBELL CAPITAL CORP., and INTERNATIONAL ASSET MANAGEMENT
GROUP, INC. The claim, filed by a former Director and employee, alleges a
breach of employment contract, earned and unpaid wages and breach of share
exchange agreement. This suit which was fled in September, 1997 and is pending
in Circuit Court for the Eleventh Judicial Circuit, Miami-Dade County. The
Plaintiff is seeking compensatory damages in excess of $15,000, 40,000 shares of
DSA common stock, prejudgment interests and costs.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1997. A one-for-five reverse
split of the Company's common stock was approved by written consent of a
majority of the holders of the Company's voting shares, without meeting, as of
November 18, 1997. Shareholders owning a total of 1,328,900 votes consented to
the reverse split, which is effective as of January 1, 1998.
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
Market for Common Equity
The Company's Common Stock and Class A Warrants have been quoted from time to
time on the NASDAQ bulletin board. Prior to the Company's acquisition of DPA, in
July, 1996, only sporadic trading of the Company's securities had occurred since
its initial public offering in 1987. Since the acquisition of DPA, there has
been increased trading in the Company's securities. The Company's Common Stock
is currently trading on the NASDAQ bulletin board under the symbol "FLOS". The
Company's Class A Warrants expired December, 1997; the Class B Warrants expire
June, 1998. If and when the Company meets applicable listing requirements, the
Company will apply to have its securities listed on the NASDAQ Small
Capitalization Market.
As indicated in Item 4 above, in November, 1997, the Company's shareholders
approved a one-for-five reverse split of the Company's common stock, to be
effective as of January 1, 1998. All references herein to the number of
outstanding shares and/or the market price of the Company's common stock refer
to post-split shares.
During fiscal year 1997, the Company requested a number of shareholders who had
received their shares in connection with the Company's acquisition of Dental
Practice Administrators, Inc. in 1996 to contribute up to one-half of their
shares back to the
5
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Company, in order to reduce the number of outstanding shares and facilitate the
raising of additional capital. A total of 216,000 shares were contributed back
to the Company and were cancelled in December, 1997. Such shares were still
outstanding as of the date of the financial statements contained herein.
Set forth below are the high and low bid prices for the Company's common stock
for the past fiscal year. These quotations reflect inter-dealer prices, without
retail mark-up, markdown or commissions, and may not represent actual
transactions.
Security High Low
- -----------------------------------------------------
Common Stock
- ------------
1997
First Quarter 11.25 10
Second Quarter 10.00 5.60
Third Quarter 7.20 1.55
Fourth Quarter 4.69 1
Holders
As of September 30, 1997, the Company had approximately 100 record holders of
its Common Stock and believes that there are more than 300 beneficial holders of
its Common Stock.
The transfer agent for the common stock is American Stock Transfer and Trust
Company, 40 Wall Street, 46th Floor, New York, New York 10005.
Dividends
The Company has never paid dividends on its Common Stock. The Company presently
intends to retain future earnings, if any, to finance the growth of its business
and does not anticipate that any cash dividends will be paid on the Common Stock
in the foreseeable future.
Recent Sales of Unregistered Securities
During the last quarter of fiscal year 1997, the Company issued to Dr. Luis Cruz
250,000 shares of its Class C Convertible Preferred Stock and 100,000 shares of
its Class A Convertible Preferred Stock. The Class C Convertible Preferred Stock
was issued in consideration for the transfer to the Company of the three story
building containing approximately 10,000 square feet, located at 2260 SW 8th
Street Miami, which currently serves as the Company's Corporate Headquarters and
the location of a soon to be completed dental practice. The Series A Convertible
Preferred Stock was issued as consideration for $495,000 cash. Such funds were
used for general working capital and to expand the Company's dental clinic
management operations. A description of the terms pursuant to which such
securities are convertible into common stock is set forth in Exhibit 4 to this
filing.
In July, 1997, the Company issued 120,000 shares of its common stock to Mr.
Daniel Katz as consideration for consulting services provided to the Company by
Mr. Katz; this was in addition to cash considerations and stock options.
Substantially all Directors of the Board of Directors which approved the
issuance of this stock have resigned. Current management believes that this was
excessive consideration for the services actually obtained.
In August, 1997, the Company issued 40,000 shares of its common stock to
Medconomics,
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Inc. in connection with the Company's acquisition of the assets of a dental
practice located at 27th Avenue, Miami.
The shares of Convertible Preferred Stock and common stock referred to above
were issued without registration pursuant to the exemption for registration for
transactions not involving a public offering set forth as Section 4(2) of the
Securities Act of 1933.
7
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Item 6. Management's Discussion and Analysis or Plan of Operation
Selected Financial Data
The following table sets forth the selected financial data for the Company for
the period indicated and should be read in conjunction with the financial
statements and notes appearing elsewhere in this Annual Report on Form 10-KSB:
<TABLE>
<CAPTION>
Years Ended September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(AS RESTATED)
<S> <C> <C> <C> <C> <C>
Selected Data from
Statement of Operations:
Revenue $ 55 $ 207,315 $ 673,660
Net loss (2,145) (371,334) (2,455,946)
Net loss per share (.046) (0.30) (1.52)
Cash dividends none none none
<CAPTION>
As of September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(AS RESTATED)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $ 1,995 $ 4,232 $ 2,087 $ 1,356,833 $2,659,944
Total liabilities - $10,060 $10,060 $ 89,140 $ 886,023
Long term debt - - - - -
Working capital $ 1,955 (5,828) (7,973) $ 597,565 (441,319)
Total Stockholder's Equity $ 6,818 $ 1,955 (5,828) $ 1,217,693 $ 1,723,921
(Deficit)
</TABLE>
Results of Operations
Subsequent to its initial public offering, the Company invested most of its
capital in Asbestos Management Enterprise, Inc., which investment was lost.
Since that time, and until the acquisition of Dental Practice Administrators,
the principal activity of the Company was to conserve its assets for use in
connection with a businesses acquisition.
Total revenue were $673,660 for Fiscal 1997 as compared to $ 207,315 (as
restated) $55, $52, and $35 for Fiscal 1997, 1996, 1995, 1994 and 1993
respectively. Total revenues was
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derived from the operations of dental practices managed by the Company and sales
of the Company's prepaid managed dental plan. Total revenue prior to Fiscal 1996
consisted primarily of interest income.
Total operating expenses for the dental practice management operations in Fiscal
year 1997 was $ 3,036,231.General and administrative expenses for Fiscal year
1997 were $944,255 as compared to $ 288,342 (as restated) and $ 2,145 in Fiscal
years 1996 and 1995 respectively. Included in these operating expenses is
compensation for consulting services rendered in the amount of $ 860,239 for
Fiscal year 1997.
The Company incurred a net loss of $2,455,946 for Fiscal year 1997, as compared
to a net loss of $ 371,334 (as restated) for Fiscal year 1996 and $ 2,145 for
Fiscal year 1995. Although the Company incurred losses, the actual net cash
used in operating activities was $ 1,505,928 for Fiscal year 1997. The
difference of $950,018 did not affect the Company's cash flow. The costs related
to starting new dental practices, acquisitions of existing practices and the
membership growth of the managed care plan were a significant burden on
revenues.
Financial Condition, Liquidity and Capital Resources
The Company's cash at hand was $353,150, $559,272 (as restated) and $2,087 at
September 30,1997, 1996 and 1995 respectively. Working capital was ($441,319)
as a direct result of deposits on the Series 10 Preferred Stock in the amount of
$637,500 in current liabilities of which $300,000 is expected to be contributed
as additional paid in capital in a private offering.
It is the intention of management to conduct a private offering of its common
stock to raise additional capital Management feels that if it successfully
completes the intended private offering of its common stock it will have
sufficient liquidity and capital resources to operate the Company for the next
12 months. Such capital will be utilized for the opening and acquisitions of
new dental practices. As a result the Company should realize increased revenues
without incurring significant additional expenses. Management believes this will
allow the Company to continue as a going concern and ultimately attain
successful operations in the near future. In addition to Management's intentions
for a private offering, the Company could also obtain any additional financing
by using the unencumbered land and building it owns with an estimated fair
market value of $1,250,000, as a collateral. Additional financing may also be
obtained through the issuance of additional securities, or through other
financing arrangements. There can be no assurance that any such financing will
be available when it is required or, even if it is available, that it will be
available on terms acceptable to the Company.
Item 7. Financial Statements
See index to Financial Statements in Item 13 which is included in Part III of
this report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
As of December, 1997, the Company has engaged the services of McKean Paul,
Chrycy Fletcher & Co. as the Company's new accounting firm. The Company
dismissed its former accountant, Harvey Judkowitz, C.P.A., at the time it
engaged its new accounting firm because the Company wishes to have the resource
of a larger accounting firm available to it as it expands its business. The
change was initiated and approved by the Company's executive officers. There
were no disagreements with its former accountant.
9
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PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons
The following table set forth certain information concerning the directors and
executive officers of the Company as of December 29, 1997.
Name Age Position
- ----- --- --------
Luis Cruz, M.D. 37 Chairman, Chief Executive Officer
Ronaldo Figueroa, C.P.A. 39 Chief Financial Officer
Robert M. Leopold 71 Director
Roger Prieto, D.D.S. 33 Director, Chief Dental Director
Maria C. Suarez, J.D. 31 Director, Secretary, Executive Vice President
Directors of the Company are elected at the annual meeting of stockholders or
appointed by the Board of Directors and hold office until the following annual
meeting and until their successors are elected and qualified. All officers serve
at the discretion of the Board of Directors. Mr. Leopold has served as a
Director of the Company since its inception. Mr. Henry Ewen resigned from the
Board of Directors. Dr. Roger Prieto and Carolina Sierra, M.D. resigned from the
Board of Directors effective April 17, 1997. On this same date, Mr. Paul Rothman
resigned as President of the Company. The Board elected Mrs. Beatrice Horton
Crapp as a Director of the Company on April 17, 1997. Luis Cruz, M.D. was
appointed as Chairman of the Board and Chief Executive Officer of the Company
and Maria C. Suarez, J.D. was appointed as a Director on June 22, 1997. On June
26, 1997 the Board of Directors accepted the resignation of Sujit Shyam as the
Company's Secretary and Paulo Dominguez as the Company's President. At that time
Luis Cruz, M.D. was elected President of the Company. On September 13, 1997 Mr.
Peter Kilissanly was elected as a Director. On October 29th, 1997 Hershel
Krasnow resigned as Director of the Company. On November 9th, 1997 Mrs. Beatrice
Horton Crapp and Peter Kilissanly resigned as Directors. On November 18th, 1997
Roger Prieto, D.D.S. was appointed to the Board of Directors and Maria C.
Suarez, J.D. was appointed Secretary of the Company.
Set forth below is a brief summary of the background of each director and
executive officer.
Luis Cruz, M.D., serves as the Company's Chairman and Chief Executive Officer
since June 23, 1997. Dr. Cruz is a licensed Physician in the states of Florida
and Georgia. He was the founder and Chief Executive Officer of Miami Dade Health
Plans, Inc., a Florida licensed HMO, and Miami Dade Home Health Agency, Inc.
from 1989 till 1993 when the business was sold to CAC-Ramsay HMO, Inc. He sits
in the Board of Gibraltar Bank and is the sole owner and President of various
real estate holding companies including Cruz & Cruz, Inc. and W.L. Dairy Farms,
Inc.
Ronaldo R. Figueroa, C.P.A. has been the Company's Chief Financial Officer since
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December, 1997. Mr. Figueroa is a Certified Public Accountant, a member of the
American Institute of Certified Public Accountants and the Florida Institute of
Certified Public Accountants. He is a partner in the accounting firm of Figueroa
and Garcia, P.A., Certified Public Accountants in Coral Gables, Florida.
Robert M. Leopold serves as a Director of the Company. Mr. Leopold has been
President of Huguenot Associates, Inc., a financial and business consulting
company, since 1977, and Chairman of the Board of International Asset Management
Group, Inc. since 1983. Huguenot Associates, Inc. is a wholly owned subsidiary
of IAMG. From June 1982 to December 1990, Mr. Leopold held various positions
with Insituform of North America, Inc., including Vice Chairman (1982-1986),
Chief Executive Officer (1986 - 1989), Chairman (1986- 1987) and Advisor to the
Chairman (1989 - 1990). Mr. Leopold was also a director of Insituform Mid-
America, Inc. Mr. Leopold is a director of H.E.R.C. Products Incorporated,
Infodata Systems, Inc., and Standard Security Life Insurance Company of New
York, a wholly owned subsidiary of Independence Holding Company.
Roger Prieto, D.D.S., serves as the Company's Chief Dental Officer and
Director. He was the Staff Dentist at Morris Heights Health Center in New York
from 1995 to 1996, when he joined the Company. He obtained his Doctor in
Dentistry from University of Central East Dominican Republic in 1989 and a
D.D.S. degree from New York University College of Dentistry in 1994. He has
practiced dentistry in the Dominican Republic and since moving to the United
States in 1990, practiced as a dental assistant in Miami, Florida and
Providence, Rhode Island prior to obtaining his D.D.S. degree. He is licensed to
practice dentistry in the states of Florida, New York and Rhode Island.
Maria C. Suarez, J.D., has served as Director of the Company since June 23, 1997
and was named Vice-President and Secretary of the Company in November, 1997. Ms.
Suarez has been a licensed attorney in the state of Florida since 1990. She
served as Legal Counsel for Miami Dade Health Plans, Inc. until the time of its
sale. In 1994, she served as Director of Legislative Affairs for CAC-Ramsay, HMO
and later served as Legal Counsel for West Gables Management, Inc. a property
management company.
The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee receives regular
reports from the Chief Operating Officer regarding the business operations of
the Company and supervises the operations of the Company between meetings of the
Board of Directors. The Audit Committee reviews with the Company's independent
accountants, the scope of their audit and their report thereon. The Compensation
Committee reviews and approves the compensation of executive offices and is
responsible for administering the Company's stock option plans. All Directors
who served on such Committees resigned their positions in 1997 and the Board of
Directors has not appointed new Committee members.
Compliance with Section 16(a) of the Exchange Act: Not Applicable
Item 10. Executive Compensation
Director Compensation
Directors will receive a Directors fee of $200 per meeting for each Board of
Directors meeting attended and $100 per meeting for each committee meeting
attended.
In addition, all Directors receive stock option grants on an annual basis under
the 1996 Director Stock Option Plan. Five-year options to purchase 2,000 shares
of the Company's Common Stock are automatically granted to each Director on
October 1 of each year, starting October 1, 1996, at an option price equal to
the market price of the
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Common Stock on the date of the grant. Existing Directors have each been granted
five-year options to purchase 2,000 shares of Common Stock at an option price
equal to the market price as of the date of such grant, and Directors appointed
to the Board of Directors in the future will also be granted options to purchase
2,000 shares of common stock when they are appointed to the Board, at an option
price equal to the market price of the Common Stock as of the date of their
appointment to the Board. In addition, Directors will be granted options to
purchase 1,000 shares for each committee of which they are a member and options
to purchase 2,000 shares for serving as chairman of a committee. As of September
30, 1997, options to purchase 30,000 shares at an exercise price of $5.415 per
share were outstanding under the Director's Plan. Additional options granted
under the Director's Plan have been cancelled as a result of the resignations
from the Board of Directors of persons to whom such options had been granted.
Officers Compensation
Luis Cruz, M.D. has been serving since June 23, 1997, as the Company's Chief
Executive Officer without compensation.
Set forth below is a summary compensation table showing compensation paid to the
Company's current Chief Executive Officer and each executive officer receiving
annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards
Payouts -------------------------------------------------------------
- --------
<S> <C> <C> <C> <C>
Other Securities All
Annual Underlying Other
Compensation Restricted Options
LTIP Compensation
Stock Awards
Payouts
</TABLE>
<TABLE>
<CAPTION>
Name & Principal Position Year Salary($) Bonus($) ($) ($) (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Luis Cruz, M.D. 1997 $0 N/A N/A N/A 20,000 N/A
N/A
Chairman
Chief Executive Officer
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information concerning stock ownership of
all persons known by the Company to own beneficially 5% or more of the
outstanding shares of the Company's Common Stock, each director, each executive
officer, and all officers and directors of the Company, as a group, as of
September 30, 1997, and their percentage ownership of Common Stock after
exercise of all stock options granted to directors and employees of the Company
and conversion of Convertible Preferred Stock.
12
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After Exercise of Options and Conversion of Convertible Preferred Stock
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
Name/1/ Shares of Common Stock Percentage of Common Stock
Beneficially Owned Beneficially Owned _______
<S> <C> <C>
International Asset 90,800 4.933%
Management Group, Inc./2/
1101 96th Street
Miami, FL 33154
Roger Prieto, D.D.S. 40,000 2.173%
Robert M. Leopold/3/
4 Gilder Street N/A N/A
Larchmont, NY 10504
Luis Cruz, M.D./4/ /5/ 456,667 24.809%
Maria C. Suarez, J.D. 6,667 .362%
Ronaldo Figueroa, C.P.A. N/A N/A
All officers and directors 594,134 32.277%
as a group
</TABLE>
/1/ Except as otherwise indicated, the address of all named holders is c/o
Dental Services of America, Inc., 2260 SW 8th Street, Miami, Florida 33135.
/2/ /3/ Mr. Leopold, as officer and director of International Asset Management
Group, Inc. ("IAMG"), may be deemed to be beneficial owner of the Common Stock
of the Company owned by IAMG.
/4/ Assumes exercise by Dr. Luis Cruz at the lowest convertible number of the
Class A and Class C Convertible Preferred Stock held by him.
/5/ Dr. Luis Cruz owns 100,000 shares of Class A Convertible Preferred Stock and
250,000 shares of Class C Convertible Preferred Stock, which shares represent
100% of each class currently issued and outstanding.
Item 12. Certain Relationships and Related Transactions
In July, 1996, the Company acquired 100% of the outstanding capital stock of DPA
in a transaction in which the shareholders and certain other persons who had
made investments in or provided services to DPA acquired from IAMG 874,000
shares of the Company's common stock and 1,820,000 Non-Public Warrants formerly
held by IAMG.
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Persons receiving securities of the Company in such transaction included Roger
Prieto, D.D.S. (80,000 shares). Dr. Prieto subsequently contributed 40,000
shares back to the Company for cancellation.
Dr. Roger Prieto serves as a Director to the Company's Board of Directors as
well as the Company's Chief Dental Director. Dr. Prieto is also the President of
the dental practices which the Company renders management services to. Dr.
Prieto derives his full annual salary from his position in these dental
practices.
In June, 1997, Luis Cruz, M.D., currently Chairman and Chief Executive Officer
of the Company, entered into a Preferred Stock Purchase Agreement with the
Company pursuant to which the Company issued to Dr. Cruz (i) 250,000 shares of
its Series C Convertible Preferred Stock, par value $.01 per share, and (ii)
100,000 shares of its Series A Convertible Preferred Stock, par value $.01 per
share, in consideration for (a) a three story building of approximately 10,000
square fee, located at 2260 SW 8th Street, Miami, Florida (which building
currently serves as the Company's Corporate Headquarters and the location of a
soon to be opened dental clinic), and (b) $495,000 in cash. The preferences,
rights, powers and privileges of the Series C Convertible Preferred Stock and
Series A Convertible Preferred Stock are set forth in Exhibit 4 to this filing.
Item 13. Exhibits, Lists and Reports on Form 8-K
Financial Statements
The following financial statements of the Company are included in this report:
Independent Auditor's Report;
Balance Sheet as of September 30, 1997 and 1996;
Statement of Operations for the two years ended September 30, 1997;
Statement of Cash Flows for the two years ended September 30, 1997;
Statement of Changes in Stockholders' Equity for the two years ended September
30, 1997; and Notes to Financial Statements.
Exhibits
Exhibit (3i): Articles of Incorporation. Incorporated by reference to certain
exhibits to the Registration Statement on Form SB-2, Registration No. 333-13591,
and to the Exhibit to the Form 8K filed December 22, 1997.
Exhibit (3ii): By-Laws. Incorporated by reference to certain exhibits to the
Registration Statement on Form SB-2, Registration No. 333-13591.
Exhibit (4): Instruments defining the rights of holders of Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock. Attached
hereto.
Exhibit (27): Financial Data Schedule. Attached hereto.
Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of the
Company's fiscal year ended September 30, 1997.
Supplemental information to be furnished with reports files pursuant Section
15(d) of the Exchange Act by registrants which have not registered securities
pursuant to Section 12 of the Exchange Act.
No annual report or proxy material has been sent to security holders, nor are
such materials anticipated to be sent, with the exception of this Annual Report
on Form 10-KSB.
14
<PAGE>
Pursuant to the requirements of the Securities 1933, , the Registrant
has
Signatures
15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Annual Report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, State of Florida,
on the 20th day of February, 1998.
DENTAL SERVICES OF AMERICA, INC.
By:
------------------------------
LUIS CRUZ,M.D.
Signature Title Date
Chairman, Chief Executive Officer February 20, 1998
- ---------------------
Luis Cruz, M.D.
Vice President, Director February 20, 1998
- ---------------------
Maria C. Suarez, J.D.
Chief Dental Director, Director February 20, 1998
- ---------------------
Roger Prieto, D.D.S.
Director February 20, 1998
- ---------------------
Robert M. Leopold
Chief Financial Officer February 20, 1998
- ---------------------
Ronaldo Figueroa, C.P.A.
16
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Dental Services of America, Inc.:
We have audited the accompanying consolidated balance sheet of Dental Services
of America, Inc. and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dental Services of
America, Inc. and subsidiaries as of September 30, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplates
continuation of the Company as a going concern. As shown in the financial
statements, the Company incurred a net loss of $2,455,946 during the year ended
September 30, 1997, and, as of that date, the Company's current liabilities
exceeded its current assets by $441,319. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan in regard to these matters is described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II - Valuation and
Qualifying Accounts is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
Miami, Florida,
January 15, 1998
18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Shareholders of
Dental Services of America, Inc.:
I have audited the accompanying consolidated balance sheet of Dental Services of
America, Inc. and subsidiaries as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 audit. As discussed in Note 2 to the financial
statements, the Company's 1996 financial statements have been restated to
account for an acquisition using the purchase method of accounting rather than a
pooling-of-interest, as previously reported method. The restatement results
from information, which became available subsequent to the issuance of the
financial statements.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dental Services of America, Inc.
and subsidiaries as of September 30, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Harvey Judkowitz
Miami, Florida,
December 19, 1996, except as to
Note 3 as to which the date is January 15, 1998
19
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
(As Restated See
Note 2)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 353,150 $ 559,272
Accounts receivable, net 55,207 49,308
Prepaid expenses 36,347 78,125
----------- -----------
Total Current Assets 444,704 686,705
----------- -----------
Property and Equipment, net 1,546,541 161,172
Intangible Assets, net 574,400 470,250
Other Assets 94,299 38,706
----------- -----------
Total Assets $ 2,659,944 $ 1,356,833
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 148,249 $ 67,690
Loan payable to bank - 21,450
Accrued expenses 100,274 -
Deposits on series 10, preferred stock 637,500 -
----------- -----------
Total Current Liabilities 886,023 89,140
----------- -----------
Commitments and Contingencies - -
Redeemable Common Stock, $.005 par value; 5,000 issued and outstanding
50,000 50,000
----------- -----------
Stockholders' Equity:
Series A, convertible preferred stock, $0.01 par value, 100,000
authorized, issued and outstanding 1,000 -
Series C, convertible preferred stock , $0.01 par value, 250,000
authorized, issued and outstanding 2,500 -
Common stock, $0.005 par value; 25,000,000 shares authorized, 1,840,743
and 1,469,000 shares issued and outstanding, respectively
9,204 7,345
Additional paid-in capital 4,775,497 1,818,682
Accumulated deficit (3,064,280) (608,334)
----------- -----------
Total Stockholders' Equity 1,723,921 1,217,693
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,659,944 $ 1,356,833
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
20
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
For the Year Ended
September 30, September 30,
1997 1996
---- ----
(As Restated See
Note 2)
<S> <C> <C>
Dental group practices revenue, net $ 673,660 $ 207,315
----------- ----------
Operating Expenses:
Clinical salaries and benefits 318,030 121,045
Other salaries and benefits 299,577 13,027
Dental supplies 97,669 11,429
Laboratory fees 16,645 10,890
Occupancy 190,913 13,502
Advertising 103,173 58,739
Depreciation, amortization and write-off of goodwill 200,837 9,335
Consulting services 860,239 57,475
General and administrative 949,148 288,342
----------- ----------
Total operating expenses 3,036,231 583,784
----------- ----------
Operating loss (2,362,571) (376,469)
----------- ----------
Other Income (Expense), net (93,375) 5,135
----------- ----------
Loss before income taxes (2,455,946) (371,334)
Income Taxes - -
----------- ----------
Net loss $(2,455,946) $ (371,334)
=========== ==========
Weighted Average Common Shares Outstanding 1,611,160 $1,218,945
=========== ==========
Net Loss Per Common Share $ (1.52) $ (0.30)
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
21
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Series A/ Series C Common Stock Paid-In Accumulated
Preferred Stock Shares Amount Capital Deficit Total
--------------- ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 $ - 1,100,000 $5,500 $ 223,527 $ (237,000) $ (7,973)
Restatement of acquisition of
DPA under purchase method
of accounting - - - 692,000 - 692,000
Issuance of common stock for
consulting services - 10,000 50 24,950 - 25,000
Accretion on Redeemable
common stock - - - (37,500) - (37,500)
Exercise of Non-Public
warrants at $2.50 per share - 353,000 1,765 880,735 - 882,500
Issuance of common stock at
$2.50 per share - 6,000 30 14,970 - 15,000
Issuance of 200,000 Private
Warrants at $0.10 - - - 20,000 - 20,000
Net loss - - - - (371,334) (371,334)
------ --------- ------ ---------- ------------ ----------
Balance at September 30,
1996, as restated - 1,469,000 7,345 1,818,682 (608,334) 1,217,693
Exercise of Non-Public
warrants at $2.50 per share - 98,950 495 246,880 - 247,375
Exercise of Class A warrants
at $2.50 per share - 59,460 297 148,353 - 148,650
Redemption of Class A
warrants at $0.05 per share - - - (512) - (512)
Issuance of 100,000 shares of
Series A preferred stock
and 250,000 shares of
Series C preferred stock 3,500 - - 1,741,500 - 1,745,000
Exercise of stock options - 53,333 267 528,894 - 529,161
Issuance of common stock for
consulting services - 120,000 600 186,900 - 187,500
Issuance of stock for
acquisition of dental - 40,000 200 104,800 - 105,000
practice assets
Net loss - - - - (2,455,946) (2,455,946)
------ --------- ------ ---------- ------------ ----------
Balance at September 30, 1997 $3,500 1,840,743 $9,204 $4,775,497 $(3,064,280) $1,723,921
====== ========= ====== ========== ============ ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
22
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
For the Year Ended
September 30, September 30,
1997 1996
---- ----
(As Restated See
Note 2)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,455,946) $(371,334)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation, amortization and write-off of goodwill 200,837 9,335
Issuance of stock for consulting services 583,062 57,475
Changes in operating assets and liabilities:
Accounts receivable (5,899) 103,792
Prepaid expenses and other assets (8,815) (88,524)
Accounts payable and accrued expenses 180,833 50,965
----------- ---------
Net cash used in operating activities (1,505,928) (238,291)
----------- ---------
Cash Flows From Investing Activities:
Purchase of property and equipment (140,356) (21,364)
Advances to DPA prior to acquisition - (109,231)
Cash acquired in acquisition - 27,096
Acquisition of assets of dental practice (200,000) -
----------- ---------
Net cash used in investing activities (340,356) (103,499)
----------- ---------
Cash Flows From Financing Activities:
Proceeds from sale of stock and exercise of warrants and options 1,024,624 897,525
Deposits on series 10 preferred stock 637,500 -
Redemption of Class A warrants (512) -
(Payment of) increase in debt (21,450) 1,450
----------- ---------
Net cash provided by financing activities 1,640,162 898,975
----------- ---------
Increase (Decrease) In Cash and Cash Equivalents (206,122) 557,185
Cash and Cash Equivalents, beginning of period 559,272 2,087
----------- ---------
Cash and Cash Equivalents, end of period $ 353,150 $ 559,272
=========== =========
</TABLE>
(CONTINUED)
23
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
For the Year Ended
September 30, September 30,
1997 1996
---- ----
(As Restated See
Note 2)
<S> <C> <C>
(CONTINUED)
Noncash Investing and Financing Activities:
Value of DPA net assets acquired -
Accounts receivable $ - $ 153,100
================= ============
Property and equipment, net $ - $ 144,000
================= ============
Other assets $ - $ 28,700
================= ============
Goodwill $ - $ 475,000
================= ============
Purchase price and assumed liabilities $ - $ (827,896)
================= ============
Stock issued in exchange for land and building $ 1,250,000 $ -
================= ============
Stock issued for acquisition of assets of dental practices $ 105,000 $ -
================= ============
Supplemental Disclosures:
Cash paid during the year for interest expense $ 6,510 $ 1,654
================= ============
Cash paid during the year for income taxes $ - $ -
================= ============
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
24
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company was incorporated in 1987 under the name Campbell Capital Corp.,
and was a 90.91% owned subsidiary of International Asset Management Group,
Inc. ("IAMG"). The Company remained relatively inactive until the
acquisition of 100% of the common stock of Dental Practice Administrators,
Inc. ("DPA") in July 1996. DPA was formed in October 1995 and managed 6
dental practices ("the Practices") in Florida when acquired (see Note 3). In
connection with the acquisition of DPA, the Company name was changed to
Dental Services of America, Inc.
The dental practices are owned by a corporation whose sole shareholder is a
licensed dentist and a member of the Company's Board of Directors. Licensed
dentists at each practice supervise the professional dental staff and
provide all of the clinical services to the patients. The Company receives
the gross dental revenue from the Practices and pays all operating and other
expenses, including those of the professional staff. The Company is
responsible for all matters relating to the operations including, but not
limited to, the leasing of rental space, maintenance, staffing and
supervision of the support staff, the purchasing of all necessary equipment
and supplies, and managing all of the administrative affairs of the
Practices. Each Practice serves primarily Medicaid patients. At September
30, 1997, the Company managed 7 Practices, all located in Florida.
In April 1997, the Company's wholly owned subsidiary, DentAll Plans of
Florida, Inc., obtained a license from the Florida Department of Insurance
to operate a prepaid dental care plan in Florida. Operations to date have
been minimal. In addition, the Company has two other inactive subsidiaries.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
incurred net losses of $2,455,946 and $371,334 for the years ended September
30, 1997 and 1996, respectively, and current liabilities exceed current
assets by $441,319 at September 30, 1997. Management intends to conduct a
private placement of the Company's stock in 1998 to raise additional capital
and has been informed that the President of the Company plans on purchasing
$1,000,000 of common stock in connection with the offering. The Company is
also committed to generating significant new business through acquisitions
or openings of new centers and reducing expenses in the future. Management
has also indicated the Company could obtain funds by financing its assets.
Management believes these plans will allow it to continue as a going concern
and ultimately attain successful operations in the future.
3. ACQUISITIONS AND RESTATEMENT OF 1996 FINANCIAL STATEMENTS
In July 1996, the Company acquired all the outstanding common stock of DPA
(which managed 5 dental practices and 1 portable unit) in a transaction in
which the shareholders and certain other persons who had made investments in
or provided services to DPA received 874,000 restricted shares of the
Company's common stock and 364,000 Non-Public warrants which were owned by
IAMG. The warrants are convertible into common stock at an exercise price of
$2.50 per share and expire on December 29, 1997. The 1996 financial
statements reflected the acquisition of DPA using the pooling-of-interest
method of accounting. Subsequent to the issuance of those financial
statements, certain information became available which required the
acquisition to be treated using the purchase method of accounting.
Accordingly, the accompanying 1996 financial statements have been restated
to reflect this change. The effect of the restatement on 1996 was to
increase net assets by $466,763, and increase net loss by $96,291 and the
loss per common share by $0.07.
The fair value of the restricted common stock and Non-Public warrants issued
($692,000) has been allocated to the fair value of the net assets acquired
($217,000), with the excess acquisition costs ($475,000) being allocated to
goodwill (for the five dental practices and one portable practice acquired)
and amortized on a straight-line basis over the estimated life of the
practices (25 years). The fair value of the common stock and warrants
exchanged in the acquisition is based on a valuation performed by an
independent third party. The Company reviews the recorded amount of goodwill
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If this review
indicates the carrying amount of the asset may not be recoverable because of
disposal of the operation or, as determined based on the expected
undiscounted cash flows of the operations acquired, the carrying value of
the asset is reduced to fair value.
The consolidated balance sheet at September 30, 1996 includes the balance
sheet of the Company and its wholly owned subsidiary, DPA. The consolidated
statements of operations, stockholders' equity and cash flows include the
Company's operations for the year ended September 30, 1996 and those of its
wholly owned subsidiary DPA from the acquisition date (July 29, 1996)
through September 30, 1996.
The following unaudited pro forma information reflects the effect of the
acquisition on the consolidated results of operations of the Company had the
acquisition of DPA occurred on October 1, 1995.
Year Ended
September 30,
1996
----
Revenues, net $ 625,485
Net loss $(383,670)
Net loss per common share $ (0.31)
Weighted average shares outstanding 1,218,945
During fiscal 1997, the Company reorganized its dental practices in an
attempt to achieve profitability. After analyzing the utilization patterns
of its dental practices and the income derived from those facilities,
management determined it was in the Company's best interest to close 3
practices and sell 1 practice, previously acquired in July 1996. The effect
of the closures and sale was a write off of goodwill of $157,701 net of
accumulated amortization of $4,211 ($153,490 net) in 1997.
In August 1997, the Company acquired the assets of a dental practice for
$200,000 and the issuance of 40,000 shares of the Company's restricted stock
which were valued at $2.625 per share ($105,000) on the acquisition date
($305,000 in the aggregate). The cost of the acquisition in excess of the
fair value of assets acquired of $30,000 has been allocated to a management
agreement as the Company entered into an agreement to manage the center. The
value assigned to the management agreement ($275,000) is included in
"Intangible Assets" in the accompanying 1997 consolidated balance sheet and
is being amortized on a straight-line basis over 25 years.
4. 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 and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the period reported.
Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents. The
concentration of credit risk associated with cash and equivalents is
considered low due to the credit quality of the issuers of the financial
instruments.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization is
computed over the estimated useful lives of the assets on a straight-line
method. Expenditures for maintenance and repairs are charged to expenses as
incurred and expenditures for additions and betterments are capitalized. The
cost of assets sold or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss
is reflected in the statement of operations.
Income Taxes
------------
The Company has established deferred tax assets and liabilities for
temporary differences between financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to
25
<PAGE>
reverse. Deferred tax assets are reduced by a valuation account when, in
the opinion of management, it is more likely than not the tax assets will
not be realized.
Loss Per Share
Loss per common and common equivalent share is computed using the weighted
average number of common and dilutive common-equivalent shares outstanding.
Dilutive common-equivalent shares consist of the incremental shares
issuable upon the exercise of stock options and warrants (using the
treasury stock method). Fully diluted earnings per share has not been
presented because the effect of common stock equivalents in calculating
loss per share would be anti-dilutive.
Fair Value of Financial Instruments
Carrying amounts of financial instruments included in current assets and
current liabilities approximate estimated fair value because of the
short-term maturities of these instruments.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share", which simplifies existing
computational guidelines, revises disclosure requirements, and increases
the comparability of earnings per share ("EPS"). SFAS No. 128 is effective
for period ending after December 15, 1997 and requires restatement of all
prior period EPS data presented. The Company will adopt SFAS No. 128 in
fiscal 1998. The effect of adopting this standard is not expected to be
material.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS No. 130
is effective for fiscal years beginning after December 31, 1997. The
Company will adopt SFAS No. 130 in fiscal 1999.
5. PROPERTY AND EQUIPMENT
Property and equipment, consisted of the following:
<TABLE>
<CAPTION>
Estimated September 30, September 30,
Useful Life 1997 1996
----------- ---- ----
<S> <C> <C>
Land - $ 300,000 $ -
Building 39 years 950,000 -
Dental equipment 5 - 7 years 169,940 138,262
Furniture, fixtures and office equipment 5 - 7 years 113,848 5,102
Leasehold improvements 10 years 40,577 22,000
----------- -----------
Total cost 1,574,365 165,364
Less accumulated depreciation and amortization (27,824) (4,192)
----------- -----------
Property and equipment, net $ 1,546,541 $ 161,172
=========== ===========
</TABLE>
Depreciation and amortization expense was $23,632 and $4,192 for the
years ended September 30, 1997 and 1996, respectively.
6. INTANGIBLE ASSETS
Intangible assets, consisted of the following:
<TABLE>
<CAPTION>
Amortization September 30, September 30,
Period 1997 1996
------ ---- ----
<S> <C> <C> <C>
Goodwill 25 years $317,088 $475,000
Management agreement 25 years 275,000 -
-------- --------
Total cost 592,088 475,000
Less accumulated amortization (17,688) (4,750)
-------- --------
Intangible assets, net $574,400 $470,250
======== ========
</TABLE>
An analysis of intangible assets is as follows:
26
<PAGE>
<TABLE>
<S> <C>
Intangible assets at October 1, 1995 $ -
Additions 475,000
Amortization (4,750)
---------
Intangible assets at September 30, 1996 470,250
Additions 275,000
Amortization (17,149)
Write off relating to 3 closed centers and 1 sold center net of
accumulated amortization of $4,211 (153,701)
---------
Intangible assets at September 30, 1997 $ 574,400
=========
</TABLE>
7. STOCKHOLDERS' EQUITY
Common Stock
------------
In November 1997, the Company declared a one-for-five reverse common stock
split effective January 1, 1998. All references to the number of shares and
per share amounts have been restated to reflect the effect of the reverse
split.
In July 1996, the Company issued 5,000 shares of common stock for services
rendered with rights to put the shares of common stock back to the Company
at $10.00 per share ($50,000 in the aggregate) at any time through December
31, 1998. The put rights expire if the Company's common stock trades at
prices in excess of $11.25 per share for at least ten days during the
period from August 1, 1998 through December 31, 1998. As of September 30,
1997 and 1996, these shares and the associated put rights have been
classified as "Redeemable Common Stock" in the accompanying consolidated
balance sheets.
In June 1997, the Company issued 120,000 shares of common stock to a
consultant for services to be rendered, which were valued at the market
price of the common stock on the date of issuance ($1.5625 per share or
$187,500 in the aggregate). The amount has been expensed as "Consulting
services" in the accompanying 1997 consolidated statement of operations, as
the consultant no longer provides services to the Company. Also during
fiscal 1997, from November 1996 to February 1997, the Company issued 53,333
stock options to the same consultant, for the purchase of common stock at
an exercise price of $2.50 per share when the market price of the Company's
stock ranged from $8.125 to $11.250 per share. All options were exercised
in February 1997, resulting in proceeds to the Company of $133,332 and a
charge to operations for consulting services of $395,829. The consultant
received $130,000 in fees simultaneously with the exercise of the options,
which has also been included in "Consulting services".
Warrants to Purchase Common Stock
---------------------------------
As of September 30, 1995, the Company had 1,000,000 Non-Public warrants
outstanding, which were held by IAMG and convertible into one share of
common stock at an exercise price of $2.50. In connection with the
acquisition of DPA in July 1996 (see Note 3), IAMG transferred 364,000
warrants and also sold 511,000 warrants to outside investors, of which
353,000 warrants were converted into common stock at $2.50 per share
resulting in proceeds to the Company of $882,500. During fiscal 1997,
98,950 shares of common stock were issued upon the conversion of Non-Public
warrants at $2.50 per share resulting in proceeds to the Company of
$247,375.
As of September 30, 1995, the Company had 100,000 Class A Warrants
outstanding, which entitled the holder to purchase, at $2.50 per share, one
share of common stock and receive one Class B Warrant upon the exercise of
Class A Warrants. The Class B Warrants entitle the holder to purchase one
share of common stock at an exercise price of $5.00 per share. During
fiscal 1997, 59,460 shares of common stock and 59,460 Class B Warrants were
issued upon the exercise of Class A Warrants resulting in proceeds to the
Company of $148,650. The Class A and Class B warrants may be redeemed by
the Company, in whole or in part, at any time and from time to time, at the
redemption price of $0.05 per warrant upon thirty days written notice.
During fiscal 1997, the Company redeemed 10,240 Class A Warrants for $512.
In July 1996, the Company issued 200,000 Private Warrants valued at $0.10
per warrant ($20,000 in the aggregate) to IAMG, in consideration for past
consulting and administrative services. Each Private Warrant entitled the
holder to purchase one share of common stock at an exercise price of $12.50
per share and are callable at $0.025 per warrant. The Private Warrants were
called in December 1997 for $5,000.
The outstanding warrants, conversion price and expiration dates at
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Warrant Type Outstanding Conversion Price Expiration Date
------------ ----------- ---------------- ---------------
<S> <C> <C> <C>
Non-Public Warrants 548,050 $2.50 Expired on December 29, 1997
Class A Warrants 30,300 2.50 Expired on December 29, 1997
Class B Warrants 59,460 5.00 June 29, 1998
Private Warrants 200,000 12.50 Called during December 1997 at
------- $0.025 per warrant ($5,000 in the
aggregate)
Total warrants outstanding 837,810
=======
</TABLE>
27
<PAGE>
As of September 30, 1997, the Company had reserved 837,810 shares of common
stock for the exercise of these warrants, of which 778,350 were called or
subsequently expired.
Series A and Series C, Convertible, Preferred Stock
---------------------------------------------------
In June 1997, the Company issued 100,000 shares of Series A, Convertible,
Preferred Stock for $495,000 to the President of the Company and 250,000
shares of Series C, Convertible, Preferred Stock in exchange for land and a
building to be used as the Company's administrative offices and as a dental
clinic, valued at $1,250,000 which had also been owned by the President.
The Series A and Series C preferred stock is redeemable, in whole or in
part, at the option of the Company at a redemption price of $5.00 per
share. The shares are not entitled to receive dividends, but are entitled
to four votes and one vote, respectively, on all matters to which
stockholders of the Company have a right to vote. The shares may be
converted at any time at the option of the holder into two shares (subject
to upward adjustment upon the Company achieving certain pre-determined
earning requirements) and one share, respectively, of the Company common
stock unless certain events have occurred, as defined, which terminate the
conversion feature.
Deposit on Series 10 Preferred Stock
------------------------------------
In July and August 1997, the Company received $637,500 in connection with
an offering of Series 10, 12% convertible preferred stock. The preferred
stock was never issued and in November 1997, the Board of Directors
rescinded the offering. Accordingly, the Series 10, 12% convertible
preferred stock has been reflected as a current liability in the
accompanying consolidated balance sheet. Investors who deposited $300,000
in connection with the preferred stock offering have indicated their intent
to have their funds applied to a planned private offering of the Company's
common stock.
Dental Preferred Stock
----------------------
The Company has designated 5,000,000 shares of preferred stock as Dental
Preferred Stock and has authorized the issuance of such stock to licensed
dental practitioners and other dental professionals, including licensed
dentists, dental office managers, dental assistants and dental hygienists.
None have been issued to date.
8. INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,439,000 at September 30, 1997, which begin to
expire in 2011.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Deferred tax (liabilities) assets
--------------------------------------------------------------------------------
Net operating loss carryforwards $829,000 $124,500
--------------------------------------------------------------------------------
Less valuation allowance (829,000) (124,500)
--------------------------------------------------------------------------------
Net deferred tax (liabilities) assets $ - $ -
======== ========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
Realization of the above deferred tax assets is dependent on generating
sufficient taxable income in the future to offset the deductible temporary
differences generating the deferred tax assets. Net deferred tax assets
have been fully reserved, as their net realizability is not assured at the
current time.
28
<PAGE>
9. STOCK OPTION PLANS
The Company has a Director Stock Option Plan which authorizes the granting
of options to directors of the Company to acquire a maximum of the greater
of 60,000 shares or 5% of the number of shares of common stock outstanding
(92,037 and 73,450 at September 30, 1997 and 1996, respectively).
The Company also has an Employee Stock Option Plan which authorizes the
granting of options to executive officers, employees (including employees
who are directors), independent contractors and consultants of the Company
to acquire a maximum of the greater of 100,000 shares of common stock or 8%
of the shares of common stock outstanding (147,259 and 117,520 at September
30, 1997 and 1996, respectively).
Pursuant to the plans, unless otherwise determined, one-third of the
options granted are exercisable upon grant, one-third are exercisable on
the first anniversary of the grant and the final one-third are exercisable
on the second anniversary of the grant. However, options granted under the
plans shall become immediately vested if the holder is terminated by the
Company or is no longer a director of the Company subsequent to certain
"changes in control" of the Company, as defined. All options expire after
ten years from the date of grant. Generally, options granted under the
plans may remain outstanding and may be exercised at any time up to three
months after the person to whom such options were granted is no longer
employed or retained by the Company or serving on the Company's Board of
Directors.
The following is a summary of stock option activity for the years ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Director Weighted Employee Weighted
Option Average Option Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1995 - $ - - $ -
Granted 19,000 2.500 18,000 3.299
Cancelled or expired (2,000) 2.500 - -
Exercised - - - -
------- --------- ------- ---------
Outstanding at September 30, 1996 17,000 2.500 18,000 3.299
Granted 23,000 7.933 163,093 3.115
Cancelled or expired (10,000) 6.250 (17,960) 3.802
Exercised - (53,333) 2.500
------- -------
Outstanding at September 30, 1997 30,000 $ 5.415 109,800 $ 3.331
======= ========= ======= =========
Exercisable at September 30, 1997 14,333 39,267
======= =======
</TABLE>
During fiscal 1997, the Company adopted Statement No. 123, ("SFAS No. 123")
"Accounting for Stock-Based Compensation", which requires the Company to
either recognize expense for stock based awards based on the fair value on
the date of grant or provide footnote disclosure regarding the impact of
such charges. The Company will continue to account for stock options
pursuant to APB No. 25. Accordingly, the Company does not record
compensation costs unless the market price exceeds the exercise price on
the date of grant. If the Company had elected to recognize compensation
cost based on the fair value of the options granted, the pro forma net loss
and net loss per common share would be as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net loss - as reported $(2,455,946) $(371,334)
=========== =========
Net loss - pro forma $(2,718,125) $(406,523)
=========== =========
Net loss per share - as reported $(1.52) $(0.30)
====== ======
Net loss per share - pro forma $(1.69) $(0.33)
====== ======
</TABLE>
The value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted average
assumptions: expected volatility approximating 76%, risk-free interest rate
ranging from 6% to
29
<PAGE>
7%, expected dividends of $0 and expected lives of 10 years.
10. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a lawsuit, filed in September 1997, with a
former director/employee alleging breach of an employment contract. The
employee is seeking compensatory damages in excess of $25,000 and 40,000
shares of common stock. The suit is in the preliminary stage and management
believes it is without merit.
Leases
The Company leases facilities under long-term operating leases that expire
in 2004. Some of the leases provide for escalating fixed annual rentals.
The Company is also required to pay other expenses. Future annual minimum
lease payments required under the leases as of September 30, 1997 are as
follows:
September 30, 1997
---------------------------
Year Amount
---- ------
1998 $172,035
1999 96,755
2000 67,547
2001 42,300
2002 15,385
Thereafter 20,513
--------
Total $414,535
========
11. SUBSEQUENT EVENTS
In May 1997, the Company requested certain stockholders who had received
stock from IAMG in connection with the DPA acquisition (see Note 3) to
return a portion of their stock to the Company. In December 1997, 236,500
shares were cancelled and will be accounted for as a $81,500 reduction of
goodwill included in "Intangibles Assets" and "Additional paid in capital".
DENTAL SERVICES OF AMERICA, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Other
Beginning of Year Cost and Expenses Accounts (A) Deductions (B)
----------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997
Allowances deducted from assets for
Doubtful accounts $6,303 $ - $ - $6,303
====== ======== ======= ======
YEAR ENDED SEPTEMBER 30, 1996
Allowances deducted from assets for
Doubtful accounts $ - $ - $ 6,303 $ -
====== ======== ======= ======
</TABLE>
(A) Allowance of acquired in acquisition.
(B) Results from write-offs of accounts receivable.
30
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK
100,000 shares of the Preferred Stock shall be designated "Series A
Convertible Preferred Stock" and shall have the powers, preferred rights,
qualifications, limitations and restrictions as follows:
(i) Dividends. The Series A Convertible Preferred Stock shall not
---------
be entitled to receive any dividends.
(ii) Redemption.
----------
(a) Optional Redemption. The Series A Convertible Preferred
-------------------
Stock shall be redeemable, in whole or in part, at the option of the
Corporation, at any time after five years from the date of issue or from time to
time thereafter, at a redemption price equal to $5.00 per share.
(b) Selection of Shares to be Redeemed. In the case of a
----------------------------------
redemption of only a part of the outstanding shares of a class of Preferred
Stock, all shares of the class of Preferred Stock to be redeemed shall be
selected pro rata and there shall be so redeemed from each registered holder in
whole shares, as nearly as practicable to the nearest share, that proportion of
all of the shares to be redeemed which the number of shares held of record by
such holder bears to the total number of shares of such class of Preferred
Stock at the time outstanding.
(iii) Liquidation. Upon dissolution, liquidation or winding up of the
-----------
Corporation, the holders of the Series A Convertible Preferred Stock shall be
entitled to receive, before any distribution is made to the holders of shares of
Common Stock of the Corporation, the sum of $5.00 per share.
(iv) Voting. Each share of Series A Convertible Preferred Stock
------
shall entitle the holder thereof to twenty (20) votes on all matters as to which
shareholders of the Corporation have a right to vote as provided in the
Certificate of Incorporation and/or under applicable law. On all matters
presented to a vote of shareholders of the Corporation, the holders of the
Series A Convertible Preferred Stock and Common Stock shall vote together as a
single class.
(v) Conversion.
----------
(a) Subject to the provision for adjustment hereinafter set
forth, shares of Series A Convertible Preferred Stock shall be convertible at
any time at the option of the holder thereof, upon surrender to the transfer
agent for the Series A Convertible Preferred Stock of the certificate or
certificates evidencing the shares so to be converted, into fully paid and
nonassessable shares of Common Stock of the Corporation, as follows:
(1) The initial conversion rate shall be ten (10) shares of
Common Stock for each share of Series A Convertible Preferred Stock so
surrendered for conversion.
<PAGE>
(2) In the event that the Corporation has consolidated net
income, before income taxes and any extraordinary income or loss, of $1 million
in any of the five (5) fiscal years beginning after the fiscal year ending
September 30, 1997 the conversion rate shall be twenty (20) shares of Common
Stock for each share of Series A Convertible Preferred Stock so surrendered for
conversion.
(3) In the event that the Corporation does not meet the
earnings requirement of the foregoing subsection but has cumulative consolidated
net income before income taxes and extraordinary income or loss of $1 million in
the five (5) fiscal years ending September 30, 2002, then the conversion rate
shall be fifteen (15) shares of Common Stock for each share of Series A.
Convertible Preferred Stock so surrendered for conversion.
(4) In the event that the conversion rate does not meet the
earnings requirements of the foregoing two subsections, then, in that event,
five (5) years after the date of issue the conversion rate shall be ten (10)
shares of Common Stock for each share of Series A Convertible Preferred Stock so
surrendered for conversion.
The right to convert shares of the Series A Convertible
Preferred Stock called for redemption shall terminate thirty (30) days after the
notice of redemption has been mailed to the registered holders of the Series A
Convertible Preferred Stock by certified mail to the address of record of the
holders of such shares.
(b) The number of shares of Common Stock into which such shares of
Series A Convertible Preferred Stock may be converted shall be subject to
adjustment as follows:
(1) In the event of a stock split, reverse stock split, stock
dividend, reorganization or recapitalization affecting the number of shares of
outstanding Common Stock, then in each such case, the number of shares of Common
Stock into which shares of Series A Convertible Preferred Stock may be converted
shall be equitably adjusted so as not to impair the conversion rights of the
Series B Convertible Preferred Stock.
(2) In the event the Corporation determines to offer rights to
the holders of the outstanding Common Stock entitling them to subscribe for
additional shares of Common Stock or securities convertible into Common Stock,
the Corporation shall also extend such rights to the holders of Series A
Convertible Preferred Stock. There shall be no adjustment in the conversion rate
by virtue of such rights offering or by virtue of any sale of any class of
securities of the Corporation.
(3) No fractional share of Common Stock shall be issued upon
any conversion or redemption but, in lieu thereof, there shall be paid to the
holder of the shares of Series A
<PAGE>
Convertible Preferred Stock surrendered for conversion as soon as practicable
after the date such shares are surrendered for conversion, an amount in cash
equal to the same fraction of the current market price per share of Common
Stock, unless the Board of Directors shall determine to adjust fractional shares
in some other manner.
(4) No adjustment in the number of shares of Common Stock into
which each share of Series A Convertible Preferred Stock is convertible or
redeemable shall be required unless such adjustment would require an increase or
decrease of at least 1/25th of a share in the number of shares of Common Stock
into which such share is then convertible; provided, however, that any
adjustments which by reason of this subparagraph are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
(5) Whenever any adjustment is required in the shares into
which each share of Series A Convertible Preferred Stock is convertible or
redeemable, the Corporation shall forthwith (i) file with the transfer agent, if
any, for the Series A Convertible Preferred Stock a statement describing in
reasonable detail the adjustment and the method of calculation used and (ii)
cause a copy of such notice to be mailed to the holders of record of the shares
of Series A Convertible Preferred Stock.
(c) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares the full number of shares into which
all shares of Series A Convertible Preferred Stock from time to time outstanding
are convertible or redeemable.
(d) The Corporation will pay any and all issue and other taxes that
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion or redemption of shares of Series A Convertible Preferred Stock. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of Common Stock in
a name other than that in which the shares of Series A Convertible Preferred
Stock is converted were registered, and no such issue or delivery shall be made
unless and until the person requesting such issue has paid to the Corporation
the amount of any such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
<PAGE>
SERIES C CONVERTIBLE PREFERRED STOCK
250,000 shares of the Preferred Stock shall be designated "Series C
Convertible Preferred Stock" and shall have the powers, preferred rights,
qualifications, limitations and restrictions as follows:
(i) Dividends. The Series C Convertible Preferred Stock shall not
---------
be entitled to receive any dividends.
(ii) Redemption.
----------
(a) Optional Redemption. The Series C Convertible Preferred
-------------------
Stock shall be redeemable, in whole or in part, at the option of the
Corporation, at any time or from time to time, at a redemption price equal to
$5.00 per share.
(b) Selection of Shares to be Redeemed. In the case of a
----------------------------------
redemption of only a part of the outstanding shares of a class of Preferred
Stock, all shares of the class of Preferred Stock to be redeemed shall be
selected pro rata and there shall be so redeemed from each registered holder in
whole shares, as nearly as practicable to the nearest share, that proportion of
all of the shares to be redeemed which the number of shares held of record by
such holder bears to the total number of shares of such class of Preferred Stock
at the time outstanding.
(iii) Liquidation. Upon dissolution, liquidation or winding up of the
-----------
Corporation, the holders of the Series C Convertible Preferred Stock shall be
entitled to receive, before any distribution is made to the holders of shares of
Common Stock of the Corporation, the sum of $5.00 per share.
(iv) Voting. In each share of Series C Convertible Preferred Stock
------
shall entitle the holder thereof to five (5) votes on all matters as to which
shareholders of the Corporation have a right to vote as provided in the
Certificate of Incorporation and/or under applicable law. On all matters
presented to a vote of shareholders of the Corporation, the holders of the
Series C Convertible Preferred Stock and Common Stock shall vote together as a
single class.
(v) Conversion.
----------
(a) Subject to the provisions for adjustment hereinafter set
forth, shares of Series C Convertible Preferred Stock shall be convertible at
any time at the option of the holder thereof, upon surrender to the transfer
agent for the Series C Convertible Preferred Stock of the certificate or
certificates evidencing the shares so to be converted, into fully paid and
nonassessable shares of Common Stock of the Corporation at the rate of five (5)
shares of Common Stock for each share of Series C Convertible Preferred Stock so
surrendered for conversion. The right to convert shares of the Series C
Convertible Preferred Stock called for redemption shall terminate thirty (30)
days after the notice of redemption has been mailed to the registered holders of
the Series C Convertible Preferred Stock by certified mail to the
<PAGE>
address of record of the holders of such shares.
(b) The number of shares of Common Stock into which such shares of
Series C Convertible Preferred Stock may be converted shall be subject to
adjustment as follows:
(1) In the event of a stock split, reverse stock split, stock
dividend, reorganization or recapitalization affecting the number of shares of
outstanding Common Stock, then in each such case, the number of shares of Common
Stock into which shares of Series C Convertible Preferred Stock may be converted
shall be equitably adjusted so as not to impair the conversion rights of the
Series B Convertible Preferred Stock.
(2) In the event the Corporation determines to offer rights to
the holders of the outstanding Common Stock entitling them to subscribe for
additional shares of Common Stock or securities convertible into Common Stock,
the Corporation shall also extend such rights to the holders of Series C
Convertible Preferred Stock. There shall be no adjustment in the conversion rate
by virtue of such rights offering or by virtue of any sale of any class of
securities of the Corporation.
(3) No fractional share of Common Stock shall be issued upon
any conversion or redemption but, in lieu thereof, there shall be paid to the
holder of the shares of Series C Convertible Preferred Stock surrendered for
conversion as soon as practicable after the date such shares are surrendered for
conversion, an amount in cash equal to the same fraction of the current market
price per share of Common Stock, unless the Board of Directors shall determine
to adjust fractional shares in some other manner.
(4) No adjustment in the number of shares of Common Stock into
which each share of Series C Convertible Preferred Stock is convertible or
redeemable shall be required unless such adjustment would require an increase or
decrease of at least 1/25th of a share in the number of shares of Common Stock
into which such share is then convertible; provided, however, that any
adjustments which by reason of this subparagraph are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
(5) Whenever any adjustment is required in the shares into
which each share of Series C Convertible Preferred Stock is convertible or
redeemable, the Corporation shall forthwith (i) file with the transfer agent, if
any, for the Series C Convertible Preferred Stock a statement describing in
reasonable detail the adjustment and the method of calculation used and (ii)
cause a copy of such notice to be mailed to the holders of record of the shares
of Series C Convertible Preferred Stock.
(c) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares the full number of shares into which
all shares of Series C Convertible Preferred Stock from time to time outstanding
are convertible or redeemable.
(d) The Corporation will pay any and all issue and other
<PAGE>
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion or redemption of shares of Series C Convertible
Preferred Stock. The Corporation shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of Common Stock in a name of other than that in which the shares of
Series C Convertible Preferred Stock is converted were registered, and no such
issue of delivery shall be made unless and until the person requesting such
issue has paid to the Corporation the amount of any such tax, or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 166,860
<SECURITIES> 0
<RECEIVABLES> 55,207
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 444,704
<PP&E> 1,546,541
<DEPRECIATION> 23,632
<TOTAL-ASSETS> 2,659,944
<CURRENT-LIABILITIES> 886,023
<BONDS> 0
0
3,500
<COMMON> 9,204
<OTHER-SE> 1,711,217
<TOTAL-LIABILITY-AND-EQUITY> 2,659,944
<SALES> 673,660
<TOTAL-REVENUES> 673,660
<CGS> 3,036,231
<TOTAL-COSTS> 3,036,231
<OTHER-EXPENSES> 93,375
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,455,946)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,455,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,455,946)
<EPS-PRIMARY> (1.52)
<EPS-DILUTED> (1.52)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 559,272
<SECURITIES> 0
<RECEIVABLES> 49,308
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 686,705
<PP&E> 161,172
<DEPRECIATION> 4,192
<TOTAL-ASSETS> 1,356,833
<CURRENT-LIABILITIES> 89,140
<BONDS> 0
0
0
<COMMON> 7,345
<OTHER-SE> 1,210,348
<TOTAL-LIABILITY-AND-EQUITY> 1,356,833
<SALES> 207,315
<TOTAL-REVENUES> 207,315
<CGS> 583,784
<TOTAL-COSTS> 583,784
<OTHER-EXPENSES> (5,135)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (371,334)
<INCOME-TAX> 0
<INCOME-CONTINUING> (371,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (371,334)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
