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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
For the fiscal year ended September 30, 1998
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OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation Classification Code Number) Identification No.)
or organization)
2260 S.W. 8th Street, Miami, Florida 33135
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (305) 642-9090
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Securities registered under Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
None None
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Securities registered under Section 12(g) of the Act:
None
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(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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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 $2,275,219.
The aggregate market value of the common stock held by non-affiliates of the
registrant, computed by reference to the closing price of $1.875 per share for
the common stock on January 12, 1999, is $8,620,174.
The number of shares outstanding of the issuer's common stock, $.005 par value
per share, as of December 31, 1998 is 6,036,893.
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PART I
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Item 1. Description of Business
Development of Business
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Dental Services of America, Inc. (formerly known as Campbell Capital Corp.;
hereinafter referred to as the "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 and the affiliated dental
centers and dental practices managed by the Company.
During the fiscal year ended September 30, 1998, the Company significantly
expanded the scope and the nature of its operations. Prior to the fiscal year
ended September 30, 1998, the Company developed and operated a limited number of
dental centers, all of which were located in or in close proximity to high
volume medical clinics serving primarily Medicaid patients. The Company's
dental centers also served primarily Medicaid patients.
During fiscal 1998, the Company began to implement its strategy of acquiring
existing dental centers and dental practices which serve primarily non-Medicaid
patients. During fiscal 1998, the Company developed and opened three new dental
centers and acquired thirteen existing dental centers or practices, and
substantially increased the percentage of revenue generated from non-Medicaid
patients. The recent acquisitions have been focused on established dental
practices with a high volume of private pay and/or managed care patients. Most
of these acquisitions occurred during the third and fourth quarters of fiscal
1998, so the Company's financial results for the full fiscal year do not reflect
a full year of operations for these recently acquired dental centers and
practices. At the end of fiscal 1998, the Company was deriving approximately
67% of its total revenues from non-
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Medicaid patients, compared to approximately 5% of total revenue derived from
non-Medicaid patients at the end of fiscal 1997.
Seven of the dental centers acquired by the Company in 1998 were acquired in a
single transaction. Effective as of June 1, 1998, the Company acquired the
equipment, fixtures, leasehold, improvements and inventory of seven dental
centers located in Miami-Dade County, Florida. Two of the seven dental centers
service primarily Medicaid patients. The other five dental centers service
primarily managed care patients. The seven dental centers acquired in this
transaction are strategically well-located so as to provide, when combined with
the Company's other dental centers, comprehensive coverage for virtually all of
Miami-Dade County. Such comprehensive coverage enhances the value of and
benefits produced by the Company's local marketing program. In the same
transaction, the Company acquired 100% of the stock of Dental Management
Consultants, Inc., a Florida corporation which was managing the seven dental
centers acquired by the Company.
The stock of Dental Management Consultants, Inc. and the dental practice assets
were acquired from Maurice H. Nahmad, D.D.S. and from various professional
corporations owned by Dr. Nahmad. The total purchase price paid by the Company
was $2,675,000, payable in the form of $1,675,000 cash at closing and a five
year promissory note for $1,000,000, with interest at 9%. The promissory note
is secured by a mortgage on the building owned by the Company located at 2260
S.W. 8th Street, Miami, Florida, in which the Company's principal executive
offices and a dental center are located. The Company also entered into a three
year employment agreement with Dr. Nahmad, for Dr. Nahmad to serve, at an
initial salary of $150,000 per year (subject to 20% annual increases), as Chief
Operating Officer of Dental Practice Administrators, Inc, the Company's wholly-
owned subsidiary, which is party, on behalf of the Company, to the dental
management services agreements with dentist-owned corporations which control the
dental practices managed by the Company.
In September, 1998, the Company suspended Dr. Nahmad, with pay, from his
position as Chief Operating Officer of Dental Practice Administrators, Inc. The
Company contends that Dr. Nahmad violated the terms of his employment agreement,
and the Company and Dr. Nahmad are currently engaged in a dispute concerning the
parties' respective rights and responsibilities under such employment agreement.
The Company believes that the acquisition of eight dental centers in a single
transaction provided an excellent opportunity for the Company to quickly expand
its revenue base and to establish a foundation for further expansion.
During fiscal 1998, the Company completed a private offering of its common stock
and common stock purchase warrants, generating gross proceeds of $6,000,000,
which was used for the acquisition and development of dental practices, for
repayment of indebtedness, and for working capital. See Item 5. Market for
Common Equity of Related Stockholder Matters - Recent Sales of Unregistered
Securities.
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Business Operations
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Operating Strategy. The Company's strategic objective is to develop or acquire
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and operate a network of affiliated dental centers and dental practices which
provide convenient, comprehensive dental care to a broad range of patients in a
cost-efficient manner. The Company strives to achieve operating efficiencies
and to enhance revenues at its affiliated dental centers and dental practices.
The Company is seeking to achieve operating efficiencies through i)
centralizing management and administrative functions, including marketing,
payroll, accounting and management information systems, ii) utilizing innovative
dental center design and layout to promote increased productivity, iii)
utilizing dental assistants and other dental center personnel more efficiently;
iv) utilizing centralized purchasing and distribution of equipment and supplies,
and v) developing efficient return and recall procedures.
The Company believes it can enhance patient volume and practice revenue through
a centralized marketing program. The Company markets the services provided at
its dental centers by use of direct mail, through community, civic and religious
organizations, and through direct patient contact with written materials
provided at medical clinics located near the Company's dental centers. The
Company recruits additional business through health fairs, public and private
schools and other community and civic events.
Dental centers and dental practices generally derive revenues from three
distinct payment sources: Medicaid, private-pay patients, and managed care
insurance payments. The Company's management believes that, in order to
maintain stability and produce reliable revenue growth, a dental practice
management company must derive revenue from all three of these payment sources.
A company which is overly dependent upon Medicaid patients may be severely
adversely affected by changes in Medicaid law. A company which is overly
dependent upon private-pay patients will be adversely affected as more persons
who currently pay for their own dental services become members of managed care
dental plans. Excessive reliance on managed care revenue could result in a
company becoming overly dependent upon a small number of large payers which
could adversely affect a provider by lowering payment rates.
The Company's operating and growth strategy contemplates participating actively
in all three revenue sources. The Company's initial efforts were directed
toward the establishment of dental centers to service primarily Medicaid
patients. During the past year, the Company has continued to develop centers
servicing Medicaid patients, but has also been aggressively acquiring dental
practices which service primarily private-pay and managed care patients. In
addition, the Company is increasing its revenue base by adding several dental
specialties in its existing dental centers.
Dental offices servicing the different patient bases are generally located in
different demographic areas (Medicaid centers are generally located in
economically disadvantaged areas, while private pay and managed care offices are
located in more affluent areas), are generally staffed differently (because of
higher patient volumes in Medicaid and managed care offices, there is generally
a higher
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ratio of staff persons for each dentist to provide services to patients), and
marketing for the various types of dental centers and practices is usually
targeted toward a particular patient base. Notwithstanding these differences,
the Company's objective is to provide the same high quality dental service at
all of its dental centers and dental practices.
Dental Centers and Dental Practices. The Company currently operates a total of
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23 dental centers and dental practices, including two mobile dental centers and
one portable dental unit. Material information regarding the Company's dental
centers and dental practices is set forth below:
The Company currently operates 12 fixed site dental centers in Miami-Dade
County, Florida, and one dental center in each of the following Florida cities:
Lighthouse Point, Flagler Beach, Plantation, Winter Park, Brandon and Edgewater.
The dental practices located in Lighthouse Point, Flagler Beach, Edgewater and
Winter Park are located in relatively high income areas and serve primarily
private-pay patients. The Company acquired these practices in order to
determine whether the Company's program of centralized management, marketing and
trademarking, purchasing and distribution of supplies, and the provision of high
quality dental services, could be successfully transplanted to private-pay
dental practices located outside Miami-Dade County. Based on initial operating
results being achieved by these practices, the Company believes that such
practices will operate successfully. The Company is currently in the process of
developing a dental center in Jacksonville. When completed, the Jacksonville
dental center will have 11 dental chairs and will be oriented primarily toward
servicing pediatric and Medicaid patients.
The Company operates two mobile dental centers servicing the Hillsborough County
Health Plan. One of these mobile practices operates in a 40 foot bus and the
other in a recreational vehicle. Each of these vehicles has been outfitted as a
full service dental facility with several dental chairs and related dental
equipment. Operation of mobile dental centers enables the Company to make
dental services available to indigent persons in inner city locations, who might
be unable to travel to fixed-site dental centers located in outlying areas. The
Company's dental center in Brandon also services the Hillsborough County Health
Plan, as well as servicing the Head Start Program in Hillsborough County. The
Company operates a portable unit in Miami - Dade County which services a number
of schools pursuant to a contract with the Miami-Dade County School Board.
Many of the dental centers established by the Company are situated within or in
close proximity to high volume medical centers servicing primarily Medicaid
patients. In its program of acquiring existing dental centers or dental
practices, the Company seeks to acquire established dental practices, in
favorable locations, with a high volume of private pay and/or managed care
patients.
The Company's dental centers normally operate six days per week. To accommodate
persons unable to schedule appointments during normal working hours, most
centers are open until 8:00 p.m. at least one or two evenings per week. In
addition, the Company's mobile dental centers allow the Company to make dental
services available to persons unable to travel to fixed-site dental centers.
The Company also provides transportation, using Company-owned vans, for patients
of certain medical centers which service primarily Medicaid patients. At all
times during normal business hours, all
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centers have dentists, receptionists or staff to assist with appointments and
emergency situations. During off hours, appointments are scheduled through other
open dental centers which receive the telephone calls through forwarding, and an
integrated appointment scheduling system.
Three of the dental centers operated by the Company are located in premises
which are owned by the Company, including one dental center in the building in
which the Company's executive offices are located. The remaining dental centers
are located in leased premises. See Item 2. Description of Property.
In most states, including Florida, where all of the Company's dental centers and
dental practices are located, dental practices must be owned by a licensed
dentist. In keeping with these legal requirements, the Company operates its
dental centers and dental practices and derives revenues from the operations
thereof through comprehensive long-term management agreements with corporations
owned by licensed dentists. The Company generally owns the dental equipment
utilized by the practice and provides such equipment, capital, staffing,
management and marketing services to the practice, allowing the dentists
employed by such corporations to focus on delivery of high quality dental care.
The licensed dentists receive compensation directly from the dentist-owned
corporation. The Company receives the remaining gross revenue from dental
services provided at the dental centers and pays all operating and other
expenses, including staff salaries and benefits.
Management Agreements. The Company enters into long-term management agreements
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with licensed dentists or dentist-owned corporations pursuant to which the
Company manages all non-clinical aspect of the dental practices. The management
agreements typically run for a term of forty years. Pursuant to such management
agreements, the Company provides facilities, dental and office equipment and
supplies, non-clinical staffing, management support, marketing and other
ancillary services. The Company bills and collects all receivables on behalf of
the managed practices.
As compensation for all management services provided by the Company, the managed
practice agrees to pay to the Company, as an administrative management fee, all
of the practice revenues in excess of the amounts required to pay compensation
to the dentist(s) and dental hygienists employed by the practice. The Company
is responsible for paying all practice expenses including staff salaries, from
and out of the management fee. If revenues are not sufficient to pay clinical
salaries, the unpaid portion of the management fee is accrued.
Prepaid Dental Care Plan. In April, 1997, the Company obtained a license from
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the Florida Department of Insurance to operate a prepaid dental care plan in
Florida. After obtaining the license, the Company focused its attention on the
operation and expansion of its dental center operations, and did not devote
substantial attention or resources to further development of the prepaid dental
plan. The plan currently has approximately 1,100 members. The Company has
recently reached an agreement in principle with Oral Health Services, which is
licensed to operate a prepaid dental plan, for Oral Health Services to assume
responsibility for the Company's plan members. The Company
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will retain its license to operate a prepaid dental plan, but currently has no
plans to develop that business.
Expansion Strategy
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The Company plans to continue to expand its dental center business through
acquisition and development of additional dental centers and dental practices,
leading to the establishment of networks of dental centers, managed and operated
by the Company. The Company plans to continue to increase revenues from
Medicaid patients, private-pay patients and managed care patients. The Company
will continue to develop centers servicing primarily Medicaid patients and to
increase the patient flow to its dental centers by contracting with third-party
payers, health insurance companies and managed health care organizations. The
Company's dental centers have entered into arrangements with, or have been
credentialed to provide services for patients of, approximately 450 insurance
plans or other payors.
The Company intends to continue to expand its business operations both through
the establishment of new dental centers within or in close proximity to
established medical and health care related facilities, and through the
acquisition of existing dental practices in favorable locations. The Company
will also seek to provide dental care services at certain institutional
locations, such as schools and correctional facilities, through portable and
mobile dental centers. The Company anticipates offering its own network of
dental centers on a fee-for-service and capitated basis to third-party payers,
insurance companies and managed care organizations.
The Company is currently focusing on providing general dentistry services to its
patients. The Company has expanded its revenue base by adding specialized
dental services, which can be provided for the Company's existing patient base.
The Company plans to engage dental specialists, on an independent contractor
basis, to provide endodontic, periodontic and orthodontic care, dental implants
and maxillo-facial surgery for the Company's patient base. The Company believes
it will be able to negotiate favorable contracts for the provision of such
services because it has a sizable patient population already utilizing the
general dentistry services provided at the Company's dental centers.
The Company plans to focus its expansion efforts within the state of Florida.
The Company believes that at this stage of its development, it can achieve
substantial operating economies by concentrating its operations in a single
state.
In order to build a profitable and successful full-service dental services
company, the Company will focus on achieving the following objectives:
1. Establishing a statewide network of high quality dental care centers,
managed and operated by the Company.
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2. Contracting the network with third-party payers, insurance companies and
managed health care organizations.
3. Establishing patient loyalty through high quality service, innovative
marketing programs, and name recognition.
4. Providing specialized dental care services to the existing patient base.
Government Regulation
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The field of dentistry is highly regulated, and there can be no assurance that
the regulatory environment in which the Company operates will not change
significantly in the future.
Every state imposes licensing and other requirements on individual dentists,
dental facilities, dental services and dental managed care plans. In addition,
federal and state laws regulate third party payers for dental services.
Insurance laws and regulations and prepaid managed dental care plan licensing
laws and regulations establish licensing, financial, operational, marketing and
other requirements relating to prepaid managed dental care plans. In the
future, the Company may become subject to compliance with additional
regulations.
The operation and management of the dental centers must meet federal, state and
local regulatory standards in the areas of health and safety. Those standards
have not had any material affect on the operation of the dental centers or the
operations of the Company. Based on management's familiarity and knowledge of
the operations of the dental centers and the activities of the affiliated
dentists, management believes that the dental centers and the dentists are in
compliance in all material respects with all applicable federal, state and local
laws and regulations relating to health and safety. The Company meets certain
OSHA and other governmental regulation and guidelines in its dental clinics.
The cost of such compliance has not been material.
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
revenues from such centers through comprehensive long-term management agreements
with one or more corporations, which are owned by licensed dentists.
The laws of many states prohibit dentists from splitting fees with non-dentists
and prohibit non-dental entities (such as the Company) from practicing
dentistry, and from employing dentists or, in certain circumstances, dental
assistants. The laws of some states prohibit advertising dental services under
a trade or corporate name and further require that all advertisements of dental
services be in the name of the dentist providing the services. A few states
also regulate the content of advertisements of dental services and the use of
promotional gift items to attract new clients.
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Some states limit the ability of a non-licensed dentist or non-dentist to own or
control equipment or offices used in a dental practice. Some of the states
allow leasing of equipment and office space to a dental practice, under a
bonafide lease, if the equipment and office remains in the complete care and
custody of the dentist. Management believes, based on its familiarity and
knowledge of the operations of the Company and the activities of the affiliated
dentists, that the Company's current and planned activities do not violate
applicable statutes and regulations. There can be no assurance, however, that
future interpretation of such laws, or the enactment of new laws, will not
require structural and organizational modifications of the Company's existing
contractual relationship with the affiliated dentists or the operation of the
dental centers. In addition, statutes in some states could restrict expansion
of the Company's operations in those jurisdictions.
The Company regularly monitors changes in laws and regulations relating to the
dental industry, dentistry and the business of prepaid managed dental care
plans. The Company may be required to modify its agreements, operations and
marketing from time to time in response to changes in the business and
regulatory environment. The Company plans to structure all of its agreements,
operations and marketing in accordance with applicable laws and regulations,
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. If the Company seeks to expand its
prepaid dental plan business, the failure of the Company's prepaid managed
dental care plans to maintain regulatory compliance could adversely affect the
Company's ability to conduct that portion of its business and may result in (i)
revocation of the Company's prepaid managed dental care plan's license, (ii)
enrollment limitations, and/or (iii) limits on the Company's ability to receive
the proper approval for new products, premium increases or market expansions.
Competition
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The business of providing dental care services through dental centers is very
competitive, though highly fragmented. Each dental center will compete with
dentists who maintain single offices or operate satellite offices, as well as
with dentists who maintain group practices or operate in multiple offices. The
dental centers will compete with general and specialist dental practitioners, as
well as with other health care related companies and medical care centers which
provide dental services. The Company also competes against other dental practice
management companies. The Company may compete with such other dental management
companies in seeking to acquire additional practices, and in seeking to expand
the patient base of affiliated practices managed by the Company. While there can
be no assurances, management believes that it will be able to effectively
compete in the dental marketplace because of the marketing programs and
operational systems that are currently being used and developed by the Company.
Employees
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As of the date hereof, the Company has 20 affiliated dental practitioners, and 8
dental hygienists, all of whom are employed by affiliated dental practices. The
Company and/or its consolidated subsidiaries employs a total of 76 full-time
employees, including 34 dental assistants. None of the Company's employees are
members of a labor union, and the relationship between the
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Company and its employees is favorable. The Company provides various incentives
and benefits to its employees, such as health care insurance and stock option
plans.
Research and Development
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The Company has not been engaged in research and development of products or
delivery systems as of September 30, 1998.
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 three-story office building which
it acquired in 1997 from its Chairman Luis Cruz (See Item 12 below). The
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building contains approximately 10,000 square feet of office space and is in
good condition. The premises contain the Company's principal executive offices
and a full service dental center with four dental chairs. The Company believes
this building will be sufficient for its needs as both a corporate headquarters
and as a site for a dental center for the foreseeable future. This building is
subject to a mortgage in favor of Dr. Maurice Nahmad to secure the Company's
promissory note to Dr. Nahmad.
The Company owns a one story, free standing building containing approximately
1,400 square feet located at 215 South Third, Flagler Beach, Florida. This
building contains a dental practice with four dental chairs acquired by the
Company during fiscal 1998. The building was acquired as part of the practice
acquisition. The Company allocated $170,000 of the aggregate purchase price to
the purchase of the real estate.
The Company owns a 1,200 square foot office condominium located at 8370 West
Flagler Street, Miami, Florida, in which a dental center developed by the
Company is located. This dental center has four dental chairs.
The Company owns a 2,200 square foot, one-story, free standing building in
Jacksonville, Florida, where a dental center is currently being developed. When
completed, this dental center will have eleven dental chairs.
The remaining dental centers operated by the Company are in leased premises.
The Company's obligations under these lease agreements are, in many cases,
subject to the Company continuing to operate a dental center in the specific
location. In the event the Company reduces or discontinues use of a particular
facility, many of the agreements provide for a termination or reduction of the
rental obligation.
The Company believes that the facilities which it owns and which it leases are
adequate and suitable for utilization as dental centers.
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Item 3. Legal Proceedings
In December, 1998, two lawsuits were filed against the Company in the U.S.
District Court for the Middle District of Florida by two former employees of the
Company, alleging sexual harassment, and employment discrimination, and seeking
compensatory and punitive damages. The suits are styled Caro vs. Dental
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Practice Administrators, Inc., and Campbell vs. Dental Practice Administrators,
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Inc. The Company does not believe there is any merit to the plaintiffs'
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claims.
The Company is a defendant in a lawsuit by a former director and employee
alleging breach of employment contract and breach of a share exchange agreement.
Shyam vs. Dental Services of America, Inc. and International Asset Management
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Group. The Company has settled a portion of the claim by issuing 20,000 shares
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of common stock. See Recent Sales of Unregistered Securities. Plaintiff
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continues to seek damages for unpaid wages and benefits. The Company does not
believe there is any merit to plaintiff's remaining claims.
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, 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 is currently trading on the NASDAQ Bulletin Board
under the symbol "FLOS." If and when the Company meets applicable listing
requirements, the Company will apply to have its securities listed on the NASDAQ
SmallCap Market.
In November, 1997, the Company's shareholders approved a one-for-five reverse
split of the Company's common stock, 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.
Set forth below are the high and low bid prices for the Company's common stock
for the past two fiscal years on the NASDAQ Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark-up, markdown or commissions,
and may not represent actual transactions.
<TABLE>
<CAPTION>
Security High Low
- -------- ------ -------
<S> <C> <C>
Common Stock
- ----------------
1997
First Quarter $11.25 $ 9.375
Second Quarter 10.00 5.00
Third Quarter 7.20 1.48
Fourth Quarter 5.625 2.1875
</TABLE>
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<TABLE>
<CAPTION>
Security High Low
-------- ------ ------
<S> <C> <C>
1998
First Quarter $ 5.00 $.9375
Second Quarter 2.36 .875
Third Quarter 5.125 1.25
Fourth Quarter 3.375 1.75
</TABLE>
Holders
As of December 31, 1998, the Company had approximately 180 record holders of its
Common Stock and believes that there are approximately 600 beneficial holders
of its Common Stock.
The transfer agent for the Company's 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 fiscal 1998, the Company successfully completed a private placement of
2,000,000 Units of the Company's securities. Each Unit consisted of two shares
of the Company's Common Stock and one warrant to purchase a share of common
stock at an exercise price of $5.00 per share. The warrants are exercisable
until September 30, 1999. Units were sold for a price of $3.00 per Unit. The
Company received gross proceeds of $6,000,000 from the private placement. The
private placement commenced in April, 1998, and was completed in September,
1998.
The Units were sold only to accredited investors (as that term is defined in
Rule 501 under the Securities Act of 1933) pursuant to an exemption from
registration for transactions not involving a public offering set forth in
Section 4(2) of the Securities Act of 1933, and pursuant to Rule 506 of
Regulation D under the Securities Act of 1933.
The Units were offered and sold by certain officers and directors of the
Company. No underwriters participated in the offer and sale of the Units, and
no sales commissions were paid in connection with the sale of the Units.
In September, 1998, the Company issued 200,000 shares of its common stock to
Magnum Opus Capital, Inc. ("Magnum Opus") and 200,000 shares of its common stock
to Medconomics, Inc. ("Medconomics") as partial consideration for consulting
services provided to the Company by Magnum Opus and Medconomics with respect to
the following matters: investor relations, public
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relations, identifying potential acquisition candidates and negotiating
acquisitions, obtaining financing, structuring the terms of the Company's
private offering and identifying potential investors. The Company also issued
warrants to purchase 900,000 shares of the Company's common stock to Magnum Opus
(300,000 of which are exercisable at $1.50 per share and expire September 30,
1999; 300,000 are exercisable at $3.00 per share and expire September 30, 2001;
and 300,000 are exercisable at $5.00 per share and expire September 30, 2001),
and warrants to purchase 900,000 shares of the Company's common stock to
Medconomics (such warrants bearing the same exercise prices and expiration dates
as the warrants issued to Magnum Opus). All of such shares and warrants were
issued without registration pursuant to the exemption from registration for
transactions not involving a public offering set forth in Section 4(2) of the
Securities Act of 1933. The Company also paid Magnum Opus $120,000 and
Medconomics $80,000 as consideration for services provided.
In December, 1998, the Company issued 20,000 shares of common stock to Sujit
Shyam, a former director and employee of the Company, in partial settlement of a
lawsuit brought by Mr. Shyam against the Company in which he had alleged breach
of employment agreement and breach of a share exchange agreement.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a safe harbor for forward-looking statements made by or on behalf of
the Company. All statements contained in this Report, other than statements of
historical facts, which address activities, events or developments that the
Company anticipates will or may occur in the future, including such things as
the acquisition or development of additional dental centers or dental practices,
future capital expenditures, and other such matters, are forward-looking
statements within the meaning of the Act. These forward-looking statements are
based largely on the Company's expectations and assumptions and are subject to a
number of risks and uncertainties, many of which are beyond the Company's
control. Actual results could differ materially from the forward-looking
statements as a result of a number of factors, including but not limited to, the
Company's early stage of development, the need for additional financing, intense
competition, regulatory changes and other unforeseen circumstances. In light of
these risks and uncertainties, all of the forward-looking statements made herein
are qualified by these cautionary statements, and there can be no assurance that
the actual results or developments anticipated by the Company will be realized.
The Company undertakes no obligation to update or revise any of the forward-
looking statements contained herein.
Selected Financial Data
The following table sets forth the selected financial data for the Company for
the periods indicated and should be read in conjunction with the financial
statements and notes appearing elsewhere in this Annual Report on Form 10-KSB:
14
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
- --------------------------------------------------------
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Selected Data from
Statement of Operations
- --------------------------------------------------------
Revenue $ 2,275,219 $ 673,660
- --------------------------------------------------------
Net Loss (3,479,888) (2,455,946)
- --------------------------------------------------------
Net Loss per share (1.22) (1.52)
- --------------------------------------------------------
Cash Dividends none none
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
- ----------------------------------------------------
1998 1997
- ----------------------------------------------------
<S> <C> <C>
Selected Balance Sheet Data
- ----------------------------------------------------
Total Assets 7,409,540 2,659,944
- ----------------------------------------------------
Total Liabilities 2,985,006 886,023
- ----------------------------------------------------
Long Term Debt 1,333,725 -
- ----------------------------------------------------
Working Capital (961,352) (441,319)
- ----------------------------------------------------
Total Stockholder's Equity 4,374,533 1,723,921
- ----------------------------------------------------
</TABLE>
The following table outlines the payor mix for the Company's revenue for the
periods presented:
<TABLE>
<CAPTION>
Years Ended September 30,
- ----------------------------------------------
1998 1997
- ----------------------------------------------
<S> <C> <C>
HMOs/Indemnity 30% -
- ----------------------------------------------
Private Insurers 37% 5%
- ----------------------------------------------
Medicaid 33% 95%
- ----------------------------------------------
Total 100% 100%
- ----------------------------------------------
</TABLE>
15
<PAGE>
Results of Operations
The tables and discussion set forth below generally compares expenses to total
revenues of the dental practices managed by the Company. The Company reports
net patient revenue and associated clinical salaries and benefits of managed
dental practices in accordance with the consolidation requirements established
by the Emerging Issues Task Force ("EITF"), an advisory committee of the
Financial Accounting Standards Board. The consolidation requirements are set
forth in EITF Bulletin 97-2.
The following table sets forth, as a percentage of net revenue, certain items in
the Company's statements of operations for the years indicated. The performance
of the Company during these years are not indicative of future financial results
or conditions.
<TABLE>
<CAPTION>
Years Ended September 30,
- ---------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Net revenue $ 2,275,219 $ 673,660
- ---------------------------------------------------------------------
Dental Center expenses:
- ---------------------------------------------------------------------
Clinical salaries and benefits 913,834 318,030
- ---------------------------------------------------------------------
Dental supplies and lab fees 587,912 114,314
- ---------------------------------------------------------------------
Occupancy 265,069 190,913
- ---------------------------------------------------------------------
Total Dental Center expenses 1,766,815 623,257
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Gross Profit 508,404 50,403
- ---------------------------------------------------------------------
General and administrative 1,295,298 949,148
- ---------------------------------------------------------------------
Other salaries & Benefits 1,789,552 299,577
- ---------------------------------------------------------------------
Advertising 255,873 103,173
- ---------------------------------------------------------------------
Depreciation and amortization 417,478 200,837
- ---------------------------------------------------------------------
Other 230,091 953,614
- ---------------------------------------------------------------------
Total general and administrative 3,988,292 2,506,349
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Net Loss (3,479,888) (2,455,946)
- ---------------------------------------------------------------------
</TABLE>
16
<PAGE>
Net Revenue
Net revenue increased 238% from $ 673,660 for the year ended September 30, 1997
to $2,275,219 for the year ended September 30, 1998. This increase was mainly
caused by a 214% increase in net revenue attributable to the 12 dental centers
acquired during the year.
Salaries and Benefits
Clinical salaries and benefits increased 187% from $318,030 for the year ended
September 30, 1997, to $913,834 million for the year ended September 30, 1998.
This increase was attributable primarily to the acquisition of 12 dental centers
and development of 3 dental centers during fiscal 1998, and the resulting
payment of salaries to the clinical staffs of the new centers. As a percentage
of net revenue, clinical salaries decreased from 47% for the year ended
September 30, 1997 to 40% for the year ended September 30, 1998. The decrease
was caused primarily by the substantial increase in revenues. However, the
Company had a significant increase in staffing due to the addition of
internally developed and acquired dental centers.
Other (non-clinical) salaries increased 497% from $299,577 for the year ended
September 30, 1997, to $1,789,552 for the year ended September 30, 1998. This
increase was caused by the acquisition and development of additional dental
centers in 1998. A significant portion of this increase ($276,000) was
attributable to a compensation expense incurred in connection with the grant of
stock options to an individual who sold seven dental practices to the Company
and became an employee of the Company. As a percentage of net revenues, other
salaries increased from 44% for the year ended September 30, 1997, to 78% for
the year ended September 30, 1998. This increase was caused primarily by the
increase in staffing due to the addition of internally developed and acquired
dental centers.
While an internally developed dental center can operate with a relatively
limited dental staff in the early stages of its development, the services of a
dentist, dental hygienist, dental assistant and front desk are still necessary.
As a result, staff salaries as a percentage of net revenue will typically be
higher in the first six months of operation until patient visits are increased.
In addition, for acquired dental centers, staff salaries as a percentage of net
revenue will typically be higher in the first three to six months following
acquisition as the Company implements its method of operation model to increase
productivity and efficiency.
Subsequent to September 30, 1998, the Company has reduced its staff and staff
salaries at all levels, including affiliated dental practitioners and
hygienists, dental assistants and other full-time employees, in an effort to
significantly reduce the Company's operating expenses. Management believes that
such reductions in staff and staff salaries will result in savings of
approximately $130,000 per month. Management believes that the recent
reductions in staff will not adversely affect the Company's operations.
Dental Supplies and Lab Fees
Dental supplies and lab fees increased 414% from $114,314 for the year ended
September 30, 1997, to $587,912 for the year ended September 30, 1998. This
increase was caused by the increase in
17
<PAGE>
patient visits and dental services provided at the 20 dental centers and
practices, and the two mobile units and one portable unit. As a percentage of
net revenue, dental supplies and lab fees increased from 17% for the year ended
September 30, 1997, to 26% for the year ended September 30, 1998. This increase
was caused primarily by increased per unit costs for supplies, which management
believes is attributable to increased consolidation and reduced competition in
the dental supply industry.
Occupancy
Occupancy expenses increased 39% from $190,913 for the year ended September 30,
1997, to $265,069 for the year ended September 30, 1998. This increase was
caused primarily by the addition of internally developed and acquired dental
centers. As a percentage of net revenue, occupancy expenses decreased from 28%
for the year ended September 30, 1997 to 11% for the year ended September 30,
1998. This decrease was caused primarily by substantial increase in revenues.
General and Administrative Expenses
General and administrative expenses, increased 36% from $949,148 for the year
ended September 30, 1997, to $1,295,298 for the year ended September 30, 1998.
This increase was caused primarily by the growth of the Company. As a percentage
of net revenue, general and administrative expenses decreased from 141% for the
year ended September 30, 1997 to 57% for the year ended September 30, 1998.
Depreciation and Amortization.
Depreciation and amortization expense at the Dental Centers increased 108% from
$200,837 for the year ended September 30, 1997, to $417,478 for the year ended
September 30, 1998. The increase was primarily associated with the addition of
internally developed and acquired dental centers. As a percentage of net
revenue, depreciation expense decreased from 30% for the year ended September
30, 1997, to 18% for the year ended September 30, 1998.
Adjustments to Income and Expenses
During the fourth quarter of the year ended September 30, 1998, the Company
recorded approximately $1,130,000 of adjustments, which had the effect of
increasing the Company's loss from operations. See Footnote 11 in the Notes to
---
Consolidated Financial Statements. Such adjustments include, among others, a
$276,000 increase in compensation expense attributable to the grant of options
to an individual who sold seven dental practices to the Company and became an
employee of the Company, a $300,000 write off of certain accounts receivable and
the addition of $105,000 to reserves for uncollectible accounts receivable, and
a $151,000 understatement of accounts payable. Such adjustments are
attributable, to a substantial extent, to periods prior to the fourth quarter of
the year September 30, 1998, and if timely recognized and recorded, would have
increased the Company's loss from operations for such prior periods.
Financial Condition, Liquidity and Capital Resources
The Company's cash and cash equivalents were $189,000, and $353,150 at
September 30, 1998 and 1997 respectively.
The Company has financed the acquisition and development of additional dental
centers and its working capital requirements with the net proceeds of a
$6,000,000 private placement of securities completed in fiscal 1998, and, in the
case of certain acquisitions, with financing from the sellers of the acquired
dental practices. Subsequent to the completion of the private placement, the
Company has relied heavily upon loans from two shareholders/officers/directors
to provide working capital to support the Company's operations. The Company is
currently considering the sale or refinancing
18
<PAGE>
of certain real properties owned by the Company to generate additional cash for
working capital and/or expansion.
The Company anticipates that once the operations of newly acquired dental
practices and dental centers are normalized, the Company will generate
sufficient cash flow on an ongoing basis to sustain the operations of the
Company. There can be no assurance, however, as to whether the Company can
generate sufficient cash flow from its existing dental centers and dental
practices to support its operations. There can be no assurance that the
Company's principal shareholders, who have previously loaned funds to the
Company, will be willing or able to continue to loan funds, if the Company
requires additional funds. The Company is currently investigating other sources
of financing, but 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.
As a result of the significant expansion of the Company's operations through the
acquisition of dental practices during 1998, the Company's expenses increased
substantially. Commencing in approximately September, 1998, and continuing on
an ongoing basis, the Company's management has been examining all aspects of the
Company's operations, with a view toward reducing expenses wherever possible.
Substantial progress has been made in the area of reducing personnel expense.
The Company's objective is to reduce operating expenses and to generate
sufficient cash flow from its existing dental centers to allow the Company to
continue as a going concern. If management's projections regarding increased
revenues and decreased expenses are accurate, the Company anticipates that it
will be operating on a break-even basis by the end of the second quarter or the
beginning of the third quarter of fiscal 1999. There can be no assurance that
the Company will meet this objective.
Year 2000 Matters
Some computer applications were originally designed to recognize calendar years
by their last two digits. As a result, beginning in the year 2000, such
applications may be unable to accurately process certain date-based
information. The Company could potentially be adversely affected by this
problem, to the extent its own computer systems are not year 2000 compliant, or
if the computer systems of its principal suppliers are not year 2000 compliant.
The consequences of incomplete or untimely resolution of year 2000 problems
represent an uncertainty that could adversely affect future financial results.
The Company recognized and began addressing this problem during its fiscal year
ended September 30, 1998, The Company has reviewed its computer systems for
year 2000 compliance and has implemented measures to ensure that its business
operations will not be disrupted. The computer software used by the Company has
all been purchased relatively recently, and is year 2000 compliant. The Company
has been assured by its principal software vendors that the Company's computer
systems are year 2000 compliant. The Company is presently taking steps to
insure that other systems which may be affected (e.g., alarm systems) are year
---
2000 compliant. The Company does not believe the cost of such actions as may be
required will be material.
19
<PAGE>
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
In December, 1997, the Company engaged the services of McKean Paul, Chrycy
Fletcher & Co. as the Company's 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 wished to have the resources 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 the Company's former accountant.
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 January 11, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
- -------------------------------------------------------------------------
<S> <C> <C>
Luis Cruz, M.D. 37 Chairman, President, Chief Executive Officer
- -------------------------------------------------------------------------
Ramiro Casanas 44 Chief Financial Officer
- -------------------------------------------------------------------------
Jose M. Garcia 49 Senior Vice President, Secretary, Director
- -------------------------------------------------------------------------
Robert M. Leopold 72 Director
- -------------------------------------------------------------------------
Gerardo Necuze 33 Vice President, Operations
- -------------------------------------------------------------------------
Roger Prieto, D.D.S. 34 Director, Chief Dental Director
- -------------------------------------------------------------------------
Theodore Swaebe 32 Director
- -------------------------------------------------------------------------
</TABLE>
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.
Set forth below is a brief summary of the background of each director and
executive officer.
Luis Cruz, M.D., has served 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
20
<PAGE>
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.
Ramiro Casanas became the Company's Chief Financial Officer, effective as of
January 8, 1999. He has served as the Company's Controller since July, 1998.
Mr. Casanas is a certified public accountant. His experience includes 10 years
of international finance with Warner Lambert & Co. Since relocating to Florida,
he has also served as CFO for Palm Springs General Hospital, Controller for
Tenet Health Systems and Controller for Bascom Palmer Eye Institute.
Jose M. Garcia has served as a Director of the Company since April, 1998 and was
appointed Vice President in charge of Acquisitions in June, 1998, when the
Company began its aggressive dental practice acquisition plans. Mr. Garcia was
appointed as Secretary of the Company in January, 1999. Mr. Garcia founded San
Jose Funeral Homes in 1994. The business was sold in 1997 to ECI. At the time
of the sale, Mr. Garcia entered into a joint venture with ECI for the
establishment of funeral homes in Hispanic markets. Mr. Garcia is also the
President of Medex Medical Rehab Centers in Miami-Dade County, 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. 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.
Gerardo Necuze was appointed as Senior Vice President, Operations, in September,
1998. Mr. Necuze's experience includes 12 years of health care administration
with Tenet Health Systems. Mr. Necuze has developed and managed independent
practice associations, management services organizations, and medical group
practices. He has served as Administrator of Larkin Community Hospital as well
as Vice-President - Operations of Ornda Health Corp.
Roger Prieto, D.D.S., serves as the Company's Chief Dental Director 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.
Theodore Swaebe, J.D., has served as a Director of the Company since April,
1998. Mr. Swaebe received an MBA from the University of Miami in 1992 and a
Juris Doctor Degree from the University of Miami School of Law in 1995. Since
1996, Mr. Swaebe has practiced law in Miami-Dade County, Florida specializing in
insurance litigation and personal injury.
21
<PAGE>
Maria C. Suarez, who served as a Director of the Company since June, 1997, and
as Vice President and Secretary since November, 1997, resigned as a Vice
President as of September 30, 1998, and resigned as a Director and Secretary in
December, 1998.
Aldo Erazo resigned as President of Dental Practice Administrators, a subsidiary
of the Company, and as a Director of the Company in December 1998.
Ronaldo R. Figueroa, who served as the Company's Chief Financial Officer since
December, 1997, completed his previously agreed-upon term of employment in such
position as of January 8, 1999.
The Board of Directors has established an Audit Committee and a Compensation
Committee. 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. Mr. Leopold and
Mr. Swaebe serve as members of the Audit Committee. Mr. Swaebe, Mr. Leopold and
Dr. Cruz serve as members of the Compensation Committee.
Compliance with Section 16(a) of the Exchange Act: Not Applicable. During
fiscal 1998, the Company's securities were not registered pursuant to Section 12
of the Securities Exchange Act of 1934.
Item 10. Executive Compensation
Director Compensation
Outside directors receive a directors fee of $500 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 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. Due to significant changes in the composition of the
Board of Directors during fiscal 1998, the Company determined not to grant any
options under the Directors Plan during fiscal 1998. As of September 30, 1998,
options to purchase 8,000 shares at exercise prices between $2.50 and $5.415 per
share were outstanding under the Directors' Stock Option Plan.
22
<PAGE>
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 $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- -------------------------------------------------------------------------------------------------------------------
Awards Payouts
- -------------------------------------------------------------------------------------------------------------------
Other Securities
Name Annual Restricted Underlying
and Compen- Stock Options/ LTIP All Other
Principal Salary Bonus sation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Luis Cruz, M.D. 1998 0 0 0 0 0 0 0
Chairman, Chief
Executive Officer 1997 0 0 0 0 20,000 0 0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
No executive officer of the Company received annual compensation from the
Company in excess of $100,000 during fiscal 1998. Dr. Roger Prieto, who serves
as the Company's chief dental director, received compensation in the amount of
$115,000 during fiscal 1998, but such compensation was paid by Dental Doctor
Services, Inc., a corporation owned by Dr. Prieto which employs dentists and
which has entered into a long-term management agreement with the Company.
Option Grants for the Year
ended September 30, 1998
Set forth below is a table showing option grants to and option exercises by
executive officers named in the summary compensation table above.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
No. of Shares % of Total
Underlying Options Granted Exercise Price Per Expiration Date
Name Options Granted to Employees Share
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Luis Cruz, M.D. 0 0% N/A N/A
- ------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Aggregated Option Exercises
and Year End Values
<TABLE>
<CAPTION>
Shares No. of Shares Underlying Value of Unexercised in the
Acquired on Value Unexercised Options at FY End Money Options at FY End
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
Luis Cruz, M.D. 0 $0 20,000/0 $0/$0
</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
January 1, 1999, 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.
After Exercise of Options and Conversion of Convertible Preferred Stock
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares of Common Stock Percentage of Common Stock
Name/1/ Beneficially Owned Beneficially Owned
<S> <C> <C>
Ramiro Casanas 0 -
Luis Cruz, M.D./2/ 1,000,667 15.61%
Jose M. Garcia 560,000 8.74%
Robert M. Leopold/3/ 100,800 1.57%
4 Gilder Street
Larchmont, NY 10504
Gerardo Necuze 0 -
Roger Prieto, D.D.S./4/ 142,000 2.21%
Theodore Swaebe 10,000 .15%
1215 S.W. 7th Street
Miami, FL 33135
Medconomics, Inc./5/ 378,332 5.9%
Miami, FL
All officers and directors as a 1,813,467 28.29%
group (7 persons)
</TABLE>
24
<PAGE>
/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/ Assumes exercise by Dr. Luis Cruz at the lowest convertible number of the
Class A and Class C Convertible Preferred Stock held by him. 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. Also includes options to purchase 20,000
shares held by Dr. Cruz.
/3/ Includes 96,800 shares owned by International Asset Management Group, Inc.
("IAMG"), a company of which Mr. Leopold is an officer and a director. Mr.
Leopold disclaims beneficial ownership of such shares. Also includes options to
purchase 4,000 shares held by Mr. Leopold.
/4/ Includes options to purchase 100,000 shares held by Dr. Prieto.
/5/ The majority shareholder and sole director of Medconomics, Inc. is Carlos
Garcia. Carlos Garcia is the son of Jose M. Garcia. Mr. Jose M. Garcia
disclaims beneficial ownership of shares held by Medconomics, Inc.
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.
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
dental clinic), and (b) $495,000 in cash. The preferences, rights,
25
<PAGE>
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.
Effective as of October 23, 1998, Luis Cruz, M.D. loaned the Company $200,175,
and Jose M. Garcia loaned the Company $200,000. Each of such loans bears
interest at the rate of 10% per annum, is due and payable on October 23, 2000,
and is convertible into shares of the Company's common stock at the conversion
price of $1.50 per share. If the notes are converted prior to September 30,
1999, the holder will also receive warrants to purchase a share of common stock,
at the rate of one warrant for each two shares acquired. The warrants are
exercisable at a price of $5.00 per share, and expire on September 30, 1999.
Subsequent to the above-described loans, Dr. Cruz loaned the Company an
additional $275,000, and Mr. Garcia loaned the Company an additional $30,000.
Such loans bear interest at the prime rate of interest plus 1% per annum and are
not convertible.
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;
Consolidated Balance Sheet as of September 30, 1998 and 1997;
Consolidated Statement of Operations for the two years ended September 30, 1998;
Consolidated Statement of Stockholders' Equity for the two years ended September
30, 1998;
Consolidated Statement of Cash Flows for the two years ended September 30, 1998;
and
Notes to Consolidated Financial Statements.
Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (2)
4.1 Instruments defining the rights of holders of Series A
Convertible Preferred Stock and Series Convertible
Preferred Stock (3)
10.1 1996 Director Stock Option Plan (2)
10.2 1996 Employee Stock Option Plan (2)
10.3 Management Agreement dated July, 1997, between Dental Doctor
Services Inc. and Dental Practice Administrators, Inc. (4)
10.4 Preferred Stock Purchase Agreement dated June 22, 1997
between the Company and Luis Cruz, M.D. (5)
21.1 Subsidiaries of the Registrant (2)
27.1 Financial Data Schedule (4)
26
<PAGE>
- ---------------
(1) Incorporated by reference to an exhibit of the same number to Registration
Statement on Form SB-2, Registration No. 333-13591, and to the exhibit to
Form 8-K filed December 22, 1997.
(2) Incorporated by reference to an exhibit of the same number to
Registration Statement on Form SB-2, Registration No. 333-13591.
(3) Incorporated by reference to an exhibit of the same number to Registrant's
Annual Report on Form 10-KSB for the year ended September 30, 1997.
(4) Filed herewith.
(5) Incorporated by reference to the exhibit to Form 8-K filed June 30, 1987.
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, 1998.
27
<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 14th day of January, 1999.
DENTAL SERVICES OF AMERICA, INC.
By: /s/ Luis Cruz, M.D.
---------------------------------------
LUIS CRUZ,M.D.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Luis Cruz, M.D. Chairman, Chief Executive Officer January 14, 1999
- ------------------------
Luis Cruz, M.D.
/s/ Jose M. Garcia Director, Senior Vice President January 14, 1999
- ------------------------
Jose M. Garcia
/s/ Roger Prieto, D.D.S. Chief Dental Officer, Director January 14, 1999
- ------------------------
Roger Prieto, D.D.S.
/s/ Robert M. Leopold Director January 14, 1999
- ------------------------
Robert M. Leopold
/s/ Theodore Swaebe Director January 14, 1999
- ------------------------
Theodore Swaebe
/s/ Ramiro Casanas Chief Financial Officer January 14, 1999
- ------------------------
Ramiro Casanas
</TABLE>
28
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1998 AND 1997
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
<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 sheets of DENTAL SERVICES
OF AMERICA, INC. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years 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 audits.
We conducted our audits 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 audits 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, 1998 and 1997, and the
results of their operations and their cash flows for the years 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 has incurred net losses of $3,479,888 and $2,455,946,
respectively, for the years ended September 30, 1998 and 1997, the Company's
current liabilities exceeded its current assets by $961,352 and $441,319,
respectively, as of September 30, 1998 and 1997, and the Company is currently
experiencing difficulties in meeting cash flow needs. 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.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
Miami, Florida,
December 24, 1998
1
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 189,000 $ 353,150
Accounts receivable, net 236,646 55,207
Other current assets 264,283 36,347
----------- -----------
Total Current Assets 689,929 444,704
----------- -----------
Property and Equipment, net 3,432,409 1,546,541
Intangible Assets, net 3,207,435 574,400
Other Assets 79,766 94,299
----------- -----------
Total Assets $ 7,409,539 $ 2,659,944
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current portion of long term debt $ 294,171 $ -
Accounts payable 719,725 148,249
Accrued expenses 349,885 100,274
Deposits on series 10, preferred stock 287,500 637,500
----------- -----------
Total Current Liabilities 1,651,281 886,023
----------- -----------
Long Term Debt 1,333,725 -
----------- -----------
Commitments and Contingencies - -
----------- -----------
Redeemable Common Stock, $.005 par value; 5,000 shares issued and
outstanding 50,000 50,000
----------- -----------
Stockholders' Equity:
Series A, convertible preferred stock, $0.01 par value, 100,000
shares authorized, issued and outstanding 1,000 1,000
Series C, convertible preferred stock , $0.01 par value, 250,000
shares authorized, issued and outstanding 2,500 2,500
Common stock, $0.005 par value; 25,000,000 shares authorized,
6,036,893 and 1,840,743 shares issued and outstanding,
respectively 30,184 9,204
Additional paid-in capital 10,885,017 4,775,497
Accumulated deficit (6,544,168) (3,064,280)
----------- -----------
Total Stockholders' Equity 4,374,533 1,723,921
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,409,539 $ 2,659,944
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
2
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
For the Year Ended
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Dental group practices revenue, net $ 2,275,219 $ 673,660
----------- -----------
Operating Expenses:
Clinical salaries and benefits 913,834 318,030
Other salaries and benefits 1,789,552 299,577
Dental supplies 450,135 97,669
Laboratory fees 137,777 16,645
Occupancy 265,069 190,913
Advertising 255,873 103,173
Depreciation, amortization and impairment loss on
intangible assets 417,478 200,837
Consulting services 110,389 860,239
General and administrative 1,295,298 949,148
----------- -----------
Total operating expenses 5,635,405 3,036,231
----------- -----------
Operating loss (3,360,186) (2,362,571)
----------- -----------
Other Income (Expense):
Interest expense (110,466) (25,635)
Other, net (9,236) (67,740)
----------- -----------
Total other income (expense) (119,702) (93,375)
----------- -----------
Loss before income taxes (3,479,888) (2,455,946)
Income Taxes - -
----------- -----------
Net loss $(3,479,888) $(2,455,946)
=========== ===========
Weighted Average Common Shares Outstanding 2,849,182 1,611,160
=========== ===========
Net Loss Per Common Share $ (1.22) $(1.52)
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
3
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Series A/ Additional
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, 1996 $ - 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 warrant - - - (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 practice
assets - 40,000 200 104,800 - 105,000
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
Exercise of Non-Public
warrants at $2.50 per share - 2,400 12 5,988 - 6,000
Redemption of Private warrants
at $0.025 per warrant - - - (5,000) - (5,000)
Shares returned by DPA
holders - (236,500) (1,183) (80,317) - (81,500)
Proceeds from sale of
4,000,000 shares of common
stock and 2,000,000 warrants,
net of issuance costs of
$1,153,500 - 4,000,000 20,000 4,826,500 - 4,846,500
Issuance of common stock for
consulting services provided
in connection with private
offering - 400,000 2,000 1,001,500 - 1,003,500
Issuance of stock for
acquisition of dental practice
assets - 30,250 151 84,849 - 85,000
Compensation expense on
200,000 stock options - - - 276,000 - 276,000
Net loss - - - - (3,479,888) (3,479,888)
------- --------- ------- ----------- ----------- -----------
Balance at September 30, $ 3,500 6,036,893 $30,184 $10,885,017 $(6,544,168) $ 4,374,533
1998 ======= ========= ======= =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
4
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
For the Year Ended
September 30, September 30,
1998 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(3,479,888) $(2,455,946)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, amortization and impairment
loss on intangible assets 417,479 200,837
Issuance of stock for consulting services - 583,062
Provision for doubtful accounts receivable 105,000 -
Compensation expense on stock options granted 276,000 -
Changes in operating assets and liabilities:
Accounts receivable (286,439) (5,899)
Current assets and other assets (123,055) (8,815)
Accounts payable and accrued expenses 730,740 180,833
----------- -----------
Net cash used in operating activities (2,360,163) (1,505,928)
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (1,006,789) (140,356)
Acquisition of assets of dental practices (2,634,999) (200,000)
----------- -----------
Net cash used in investing activities (3,641,788) (340,356)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from sale of stock, net of issuance costs and exercise
of warrants and options 5,506,000 1,024,624
Deposits on series 10 preferred stock - 637,500
Redemption of warrants (5,000) (512)
(Payment of) increase in debt 336,801 (21,450)
----------- -----------
Net cash provided by financing activities 5,837,801 1,640,162
----------- -----------
Decrease In Cash and Cash Equivalents (164,150) (206,122)
Cash and Cash Equivalents, beginning of period 353,150 559,272
----------- -----------
Cash and Cash Equivalents, end of period $ 189,000 $ 353,150
=========== ===========
</TABLE>
(CONTINUED)
5
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
For the Year Ended
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
(CONTINUED)
Noncash Investing and Financing Activities:
Value of net assets acquired of dental practices -
Property and equipment $ 855,454 $ -
========== =========
Management service agreement $ 219,546 $ -
========== =========
Issuance of notes payable $ 1,075,000 $ -
========== =========
Series 10 proceeds applied to private offering of common stock $ 350,000 $ -
========== =========
Write off of intangible assets in connection with returned shares $ 81,500 $ -
========== =========
Property and equipment acquired through issuance of notes payable $ 216,095 $ -
========== =========
Stock issued for acquisition of assets of dental practices $ 85,000 $ 105,000
========== =========
Stock issued in exchange for land and building $ - $1,250,000
========== =========
Supplemental Disclosures:
Cash paid during the year for interest expense $ 86,466 $ 6,510
========== =========
Cash paid during the year for income taxes $ - $ -
========== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
6
<PAGE>
DENTAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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 in
Florida when acquired. In connection with the acquisition, the Company name
was changed to Dental Services of America, Inc.
The Company provides management services to dental practices ("DP") under
long-term management service agreements ("MSA"). Corporate practices of
dentistry laws in Florida (the state in which the Company currently operates)
prohibit the Company from owning dental practices. In response to these laws,
the Company has executed management service agreements with various dental
practices. Under the terms of the MSA, the Company, among other things, bills
and collects patient receivables and provides all administrative support to
the DP. The DP are owned by corporations 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. At September 30, 1998 and 1997, the
Company managed 21 and 7 DP, respectively, all located in Florida.
In 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board evaluated certain matters relating to the physician practice
management industry (EITF issue number 97-2) and reached a consensus on the
accounting for transactions between physician practice management companies
("PPM") and physician practices and the financial reporting of such entities.
For financial reporting purposes, EITF 97-2 mandates the consolidation of
affiliated physician practices with the PPM when certain conditions have been
met, even though the PPM does not have an equity investment in the physician
practice. The accompanying financial statements are prepared in conformity
with the consensus reached in EITF 97-2. Accordingly, all accounts of the DP
are included in the accompanying consolidated financial statements.
At September 30, 1998 and 1997, and for the years ended September 30, 1998 and
1997, the consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and the affiliated DP. DP that were
acquired during the year are included in consolidated statement of operations
from the respective acquisition date through September 30, 1998. All
intercompany accounts and transactions have been eliminated in consolidation.
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 $3,479,888 and $2,455,946 for the years ended September
30, 1998 and 1997, respectively, and current liabilities exceeded current
assets by $961,352 and $441,319 at September 30, 1998 and 1997, respectively,
and the Company is experiencing difficulties in meeting cash flow needs.
These conditions raise substantial doubt as to
7
<PAGE>
the ability of the Company to continue as a going concern. Management
anticipates that the Company will generate sufficient cash flows from its
existing and newly acquired DP (see Note 3 for acquisitions) and from efforts
to reduce operating expenses. Management has also indicated the Company could
obtain funds by re-financing certain of its assets and debt and from
additional loans from officers. Management believes these plans will allow it
to continue as a going concern and ultimately attain successful operations in
the future. The eventual outcome of the success of management's plans cannot
be ascertained with any degree of certainty. The accompanying consolidated
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
3. ACQUISITIONS
During fiscal 1997, the Company reorganized its DP in an attempt to achieve
profitability. After analyzing the utilization patterns of its DP 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 an impairment
write off of intangible assets of $157,701 net of accumulated amortization of
$4,211 ($153,490 net) in 1997. During 1998, the Company closed 2 DP resulting
in an impairment write off of intangible assets of $145,735 net of accumulated
amortization of $13,542 ($132,193 net).
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 tangible assets acquired ($30,000) has been allocated to a
management service agreement, as the Company entered into an agreement to
manage the center. The original value assigned to the management service
agreement ($275,000) is included in "Intangible Assets" in the accompanying
1997 consolidated balance sheet.
From April through June 1998, the Company acquired the assets of 12 DP and all
of the outstanding capital stock of a management company affiliated with
certain acquired DP, for $3,795,000 in the aggregate, consisting of cash
payments of $2,635,000, the issuance of notes payable totaling $1,075,000 and
the issuance of 30,250 shares of restricted common stock, valued at $2.81, the
fair market value of the common stock on the acquisition date ($85,000 in the
aggregate). The acquisitions have been accounted for using the purchase
method of accounting. The excess of the cost of the acquisitions ($2,939,546)
over the fair value of tangible assets acquired ($855,454) has been allocated
primarily to MSA as the Company entered into agreements to manage the centers,
and are included in "Intangible Assets" in the accompanying consolidated
balance sheet. These allocations may be adjusted to the extent that
management becomes aware of additional information within one reporting year
of the acquisition date which results in a material change in the estimated
fair market value of assets acquired.
The following unaudited pro forma information reflects the effect of the
acquisition on the consolidated results of operations of the Company had the
acquisitions occurred on October 1, 1997 and 1996, respectively. The pro
forma results have been prepared for comparative purposes only and are not
necessarily indicative of what the actual results of operations would have
been had the acquisitions occurred as of that date, nor does it purport to
represent future operations of the Company.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues, net $ 5,446,571 $ 5,112,890
=========== ===========
Net loss $(3,065,230) $(1,999,112)
=========== ===========
Net loss per common share $ (1.07) $ (1.22)
=========== ===========
Weighted average shares outstanding 2,875,785 1,641,410
=========== ===========
</TABLE>
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.
Revenue Recognition
-------------------
Patient revenues from affiliated DP ("Patient Revenue") represent the
estimated realizable amount to be received from patients, third-party payors
and others for services rendered by affiliated dentists, net of contractual
adjustments. Revenue is recognized as services are provided.
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.
Accounts Receivable
-------------------
Accounts receivable consist primarily of receivables from patients, insurers,
government programs and contracts between the affiliated DP and third-party
payors for dental services provided by dentists, and are net of contractual
adjustments and an allowance for doubtful accounts. The allowance for
doubtful accounts was $105,000 and $0 at September 30, 1998 and 1997,
respectively.
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.
Intangible Assets
-----------------
The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated DP. As
part of the purchase allocation, the Company allocates the purchase price to
the tangible assets acquired and liabilities assumed, based on estimated fair
market values. The Company believes that the affiliated DP with which it has
9
<PAGE>
MSA are long-lived entities with an indeterminable life and that the
dentists, patient demographics and various contracts will be continuously
replaced. Accordingly, the excess of cost over net tangible assets
purchased is allocated to intangible assets (MSA) and amortized on a
straight-line basis over 15 years, or such shorter period as may be
indicated by the facts and circumstances.
During the year, the Company revised the estimated life for amortizing
intangible assets on the straight-line basis from 25 years to 15 years. The
change in the estimated useful lives was made to more accurately reflect
management's estimates of the life of a DP. The effect of this change
increased the loss for 1998 by approximately $12,131.
Long Lived Assets
-----------------
It is the Company's policy to evaluate the recoverability of asset
balances, including management service agreements, on a periodic basis. To
perform this review, the Company estimates the sum of expected future
undiscounted net cash flows from the assets. If the estimated net cash
flows are less than the carrying amount of the asset, the Company
recognizes an impairment loss in an amount necessary to write-down the
asset to a fair value as determined from the expected future cash flows.
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 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
--------------
Basic loss per common share is computed by dividing net loss attributable
to common stockholders by the weighted average number of shares of common
stock outstanding during the year. Diluted loss per share, which assumes
that the convertible preferred stock is converted into common stock and the
stock options and warrants to purchase shares of common stock (see Notes 8
and 10) are exercised, is not presented because the effect would be anti-
dilutive for both 1998 and 1997. The Company's reported loss per share for
1997 has been revised to comply with the requirements of SFAS No. 128
"Earnings Per Share"; however, there was no change to the amount previously
reported.
Fair Value of Financial Assets, Liabilities, and Redeemable Common Stock
------------------------------------------------------------------------
The Company estimates that the carrying value of all of its monetary
assets, liabilities, and redeemable common stock approximates fair value
because of the short-term maturities of these instruments as of September
30, 1998 and 1997. The Company estimates the fair value of its long term
debt based upon the existing interest rates for instruments with a similar
nature and degree of risk.
Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board ("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 15, 1997. The Company will adopt SFAS No. 130 in
fiscal 1999.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the
way that public business enterprises report
10
<PAGE>
information about operating segments in annual financial statements and
requires selected information about operating segments in interim financial
reports. This Statement is effective for financial statements for periods
beginning after December 15, 1997 (effective for the Company's fiscal 1999
year) with restatement of earlier periods required in the initial year of
application. The Company is currently determining if these disclosure
requirements will be applicable and, therefore, required in future periods.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated September 30, September 30,
Useful Life 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Land - $ 351,000 $ 300,000
Building 39 years 1,283,559 950,000
Dental equipment 5 - 7 years 1,160,131 151,796
Vehicles 5 years 187,347 18,144
Furniture, fixtures and office equipment 5 - 7 years 515,734 113,848
Leasehold improvements 10 years 150,954 40,577
---------- ----------
Total cost 3,648,725 1,574,365
Less accumulated depreciation and amortization (216,316) (27,824)
---------- ----------
Property and equipment, net $3,432,409 $1,546,541
========== ==========
</TABLE>
Depreciation and amortization expense was $192,469 and $23,632 for the
years ended September 30, 1998 and 1997, respectively.
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
Amortization September 30, September 30,
Period 1998 1997
------ ---- ----
<S> <C> <C> <C>
Management service agreements 15 years $3,304,398 $592,088
Less accumulated amortization (96,963) (17,688)
---------- --------
Intangible assets, net $3,207,435 $574,400
========== ========
</TABLE>
An analysis of intangible assets is as follows:
<TABLE>
<S> <C>
Intangible assets at October 1, 1996 $ 470,250
Additions 275,000
Amortization (17,149)
Impairment loss 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
Additions 2,939,546
Amortization (92,818)
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Write off relating to return of common stock (81,500)
Impairment loss relating to 2 closed centers, net of accumulated
amortization of $13,542 (132,193)
----------
Intangible assets at September 30, 1998 $3,207,435
==========
</TABLE>
7. LONG TERM DEBT
Long term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Note payable on property acquired; bearing interest at 12% per
annum; $1,006 principal and interest due monthly; balance payable
May 1, 1999, secured by building. $ 72,871 $ -
Note payable on property acquired; bearing interest at 9% per
annum; $2,385 principal and interest due monthly through June 1,
2001, secured by building. 69,491 -
Note payable issued in connection with acquisition of DP; bearing
interest at 9% per annum; $20,758 principal and interest due
monthly through June 1, 2003; secured by first mortgage on
building. 959,926 -
Note payable to financial institution; bearing simple interest at
9.5% per annum; $2,367 principal due monthly through January 28,
2003; secured by mobile unit. 125,433 -
Convertible promissory notes with officers; bearing simple
interest at 10% per annum; principal and accrued interest payable
on October 23, 2000. Accrued interest may be paid at the
Company's option in cash or stock. Principal convertible at
holders' option at any time prior to maturity into 133,333 shares
of common stock. If converted prior to September 30, 1999, the
holder will also receive warrants to purchase 66,666 shares of
common stock (exercise price $5.00 per share). 400,175 -
----------
1,627,896
Less current portion of long term debt (294,171) -
---------- ---------
Long term portion $1,333,725 $ -
========== =========
</TABLE>
The following are the scheduled maturities of long term debt at September
30, 1998:
<TABLE>
<S> <C>
1999 $ 294,171
2000 239,396
2001 652,155
2002 250,332
2003 191,842
----------
$1,627,896
==========
</TABLE>
12
<PAGE>
8. 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,
1998 and 1997, 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, 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".
In May 1997, the Company requested certain stockholders who had received
stock from IAMG in connection with the DPA acquisition to return a portion
of their stock to the Company. In December 1997, 236,500 shares were
returned and accounted for as a $81,500 reduction of "Intangibles Assets"
and "Stockholders' Equity".
During 1998, the Company sold 2,000,000 units through a private offering
(consisting of 4,000,000 shares of common stock and 2,000,000 warrants
("the 98 Warrants") to purchase common stock), for $6,000,000. Each warrant
is convertible into one share of common stock at an exercise price of $5.00
per share through September 1999. Also, the Company issued 400,000 shares
of common stock, 1,800,000 warrants and paid $150,000 to consultants who
provided services in connection with the offering, which has been reflected
as issuance costs and offset against the proceeds of the offering. The
400,000 shares of common stock were valued at the fair market value on the
dates of issuance (ranging from $2.44 to $2.75, or $1,003,500 in the
aggregate).
During 1998 pursuant to an employment agreement, 200,000 options to acquire
common stock were issued at an exercise price of $1.50 per share. The
market value of the Company's common stock on
13
<PAGE>
the date of grant was $2.88. The Company recognized compensation expense of
$276,000 representing the difference between the exercise price and the
fair value on the date of grant.
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, 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. During November 1997,
2,400 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 $6,000.
The remaining 545,650 Non-Public warrants expired in December 1997.
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.
The remaining 30,300 Class A warrants expired in December 1997. The
remaining 59,460 Class B warrants expired in June 1998.
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.
In connection with the $6,000,000 private offering in 1998, the Company
issued 2,000,000 warrants, which entitle the holder to purchase one share
of common stock at an exercise price of $5.00 per share until September 30,
1999. The warrants are subject to redemption at $0.01 per warrant on thirty
days written notice. Also in connection with the private offering, the
Company issued warrants to consultants who provided services as follows:
<TABLE>
<CAPTION>
Number of Conversion
Warrants Price Expiration Date
-------- ----- ---------------
<S> <C> <C>
600,000 $1.50 September 30, 1999
600,000 $3.00 September 30, 2001
600,000 $5.00 September 30, 2001
---------
1,800,000
=========
</TABLE>
14
<PAGE>
The outstanding warrants, conversion price and expiration dates at September 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------
Warrant Type Conversion Conversion Expiration Date
------------ ---------- ---------- ---------------
Outstanding Price Outstanding Price
----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Non-Public Warrants - - 548,050 $ 2.50 Expired in December 97
Class A Warrants - - 30,300 2.50 Expired in December 97
Class B Warrants - - 59,460 5.00 Expired in June 98
Private Warrants - - 200,000 12.50 Called in December 97
98 Warrants 2,000,000 $ 5.00 - - September 99
98 Consultants 1,800,000 $1.50- $5.00 - - September 99 & 01
--------- -------
Total warrants
outstanding 3,800,000 837,810
========= =======
Weighted average
conversion price $4.13 $ 5.06
===== ======
</TABLE>
As of September 30, 1998, the Company reserved 3,800,000 shares of common stock
for the exercise of these warrants.
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. Upon dissolution, liquidation or winding up of the
Company, the holders of Series A and Series C convertible, preferred stock are
entitled to a liquidation preference payment of $5.00 per share before any
distributions to common shareholders.
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
15
<PAGE>
stock has been reflected as a current liability in the accompanying
consolidated balance sheet. During the current year, investors who
initially deposited $350,000 in connection with the preferred stock
offering applied their funds, plus accrued interest, to the private
offering of the Company's common stock. The Company plans on repaying the
remaining balance of funds received of $287,500.
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.
9. INCOME TAXES
The Company's basis of consolidation for federal income tax purposes
differs than for financial statements presentation, principally by
excluding the DP. The Company has net operating loss carryforwards for
federal income tax purposes of approximately $5,560,000 and $2,439,000 at
September 30, 1998 and 1997, respectively, which begin to expire in 2011.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
<S> <C> <C>
Deferred tax (liabilities) assets:
Net operating loss carryforwards $ 2,168,000 $ 829,000
Less valuation allowance (2,168,000) (829,000)
----------- ---------
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.
10. 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
(301,845 and 92,037 at September 30, 1998 and 1997, respectively). Under
the plan, 5 year options to purchase 2,000 shares of common stock are
granted each year at an option price equal to the market price on the date
of grant. In addition, Directors will be granted 1,000 options to purchase
shares of common stock for each committee they participate in and 2,000
options to purchase shares of common stock for serving as chairman of a
committee. Due to significant changes in the composition of the Board of
Directors during 1998, the Company determined not to grant any options to
Directors during 1998. During 1998 pursuant to a consultants agreement with
one Director, 100,000 options to acquire common stock were issued at an
exercise price of $1.50 per share. These options were granted pursuant to
the Director Stock Option Plan.
16
<PAGE>
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 (482,951 and 147,259 at September
30, 1998 and 1997, respectively). Subsequent to year end, 50,000 options
were forfeited in connection with the termination of an employee.
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, 1998 and 1997:
<TABLE>
<CAPTION>
Director Weighted Employee Weighted
Option Average Option Average
Shares Exercise Price Shares Exercise Price
------ --------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at October 1, 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
Granted 100,000 1.500 430,000 1.500
Cancelled or expired (22,000) 5.339 (37,340) 4.216
------- -------
Outstanding at September 30, 1998 108,000 $1.806 502,460 $1.698
======= ====== ======= ======
Exercisable at September 30,1998 39,333 283,307
======= =======
</TABLE>
The Company applies the provisions of 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 continues 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, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net loss - as reported $(3,479,888) $(2,455,946)
=========== ===========
Net loss - pro forma $(3,955,178) $(2,718,125)
=========== ===========
Net loss per share - as reported $ (1.22) $ (1.52)
=========== ===========
Net loss per share - pro forma $ (1.39) $ (1.69)
=========== ===========
</TABLE>
17
<PAGE>
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 250%, risk-free interest
rate ranging from 6% to 7%, expected dividends of $0 and expected lives of
10 years.
11. COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases facilities under long-term operating leases that expire
through 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, 1998
are as follows: 1999 - $272,665; 2000 - $244,018; 2001 - $182,206; 2002 -
$153,961; 2003 - $79,803; Thereafter - $2,934 (Total $938,587).
Agreements
----------
In connection with the 1998 acquisitions, an employment agreement was
entered into with each full time dentist. Although the form of contract
varies somewhat among practices and among dentists with different
specialties, the typical contract provides for a defined compensation
arrangement, including performance-based compensation, liquidated damages
and a covenant not to compete. The additional consideration to be paid
under these agreements is not presently determinable. However, such
additional consideration, if any, is not expected to have a material impact
on the financial condition or on the results of operations of the Company.
The Company entered into employment agreements with various officers and
certain key employees of the Company. The agreements generally provide for
the employee's annual base salary, annual salary increases and stock
options. The agreements also generally provide for non-competition
agreements and severance payments of between one and three year's salary in
the event the employee is terminated without cause.
In September 1998, the Company suspended one of its officers with pay
contending that the officer violated the terms of a three year employment
agreement which requires an initial salary of $150,000 per year (subject to
20% annual increases, $546,000 in the aggregate). The Company and the
officer are currently engaged in a dispute concerning the rights and
responsibilities under the employment agreement. Total amounts paid through
September 30, 1998 pursuant to the agreement were $48,000. In connection
with the employment agreement, this officer received 200,000 stock options
for which the Company recognized $276,000 in compensation expense during
the year ended September 30, 1998. If it is ultimately determined that the
options must be surrendered, the Company would recognize a credit to
operations for $276,000 at such time.
Litigation
----------
Subsequent to year end, the Company issued 20,000 shares of common stock to
a former director/employee in partial settlement of a lawsuit against the
Company for an alleged breach of employment and other agreements. The
former director/employee is also seeking damage for unpaid wages and other
benefits. The suit is in the preliminary stage and management believes it
is without merit.
18
<PAGE>
The Company is involved from time to time in litigation arising in the
ordinary course of its business, none of which is expected to have a
material adverse effect on the Company's consolidated financial position or
results of operations.
11. YEAR END ADJUSTMENTS
During the fourth quarter for the year ended September 30, 1998, the
Company recorded approximately $1,130,000 of adjustments which had the
effect of increasing the loss from operations and are considered material
to the operating results of the fourth quarter of fiscal 1998.
19
<PAGE>
EXHIBIT 10.3
MANAGEMENT AGREEMENT
--------------------
THIS MANAGEMENT AGREEMENT (the "Agreement") shall be effective as of the
day of July, 1997 (the "Effective Date"), and is entered into by and between
Dental Doctor Services, Inc., a Florida Corporation (the " Practice"), and
Dental Practice Administrators, Inc., a Florida Corporation (the "Manager").
W I T N E S S E T H:
-------------------
WHEREAS, the Practice is a dental practice with several sites as described
in Schedule A attached hereto and made a part of this Agreement;
WHEREAS, all shareholders of the Practice are dentists licensed in the
State of Florida;
WHEREAS, the Manager and the Manager's principals possess certain skills
and experience required for the performance of the services set forth in this
Agreement;
WHEREAS, the Practice desires to retain the Manager to conduct the
administrative management of the Practice so that the dentists may concentrate
on the delivery of patient care and the practice of dentistry and the Manager
desires to render services to the Practice on the terms and conditions set forth
in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the promises
contained in this Agreement, the parties agree as follows:
1. Term of Engagement. The Practice agrees to engage the services of the
------------------
Manager for the term commencing on the Effective Date and ending forty years
from effective date (the "Term").
2.(a) The Manager's Duties. The Manager shall be responsible for any
--------------------
and all matters relating to the operation of the Practice including, but not
limited to, the leasing of rental space where needed, maintenance of the
Practice, staffing and supervision of all staff of Practice (other than the
employment or supervision of the Dentist(s) of the Practice), the purchasing of
all necessary equipment and supplies for the Practice, and the procurement of
necessary insurance for the Practice. At no time during the Term of this
Agreement should the Manager engage, employ, supervise, or in any way interfere
with the professional judgment of the Dentist(s) rendering services at the
Practice to the Practice patients. The parties acknowledge that the Manager is,
and in the future may be, retained to perform similar services for other
businesses which may or may not be competitive with the Business of the
Practice.
(b) The Practice's Duties. The Practice shall be responsible for engaging
---------------------
the dentist(s) who will provide dental care at the different Practice sites. The
Practice shall assume all responsibility for the professional practice of
dentistry by all dentists engaged to practice dentistry
<PAGE>
at any of the Practice sites. The Practice shall be responsible for all patient
records and the upkeep of licensure and professional liability requirements for
all dentists engaged by the Practice. At all times the Practice shall be
responsible for the dental care and procedures performed at anyone of its sites
without intervention from the Manager and/or any of its principals.
3. Management Fee. The Practice shall pay the compensation of all
--------------
dentists engaged by the Practice. For each calendar month during the Term, all
revenues over and above the funds required to pay the dentists' compensation
shall be transferred to the Manager as its Management Fee.
4. Manager's Representations. The Manager warrants and represents that:
-------------------------
4.1 The Manager is a corporation duly organized and validly existing
and in good standing under the laws of the State of Florida with the full power
and authority to undertake this Agreement.
4.2 The execution, performance and delivery of this Agreement by the
Manager will not conflict with, nor result in the breach of, the Manager's
Articles of Incorporation, Bylaws or any decree or order of any court or
administrative or governmental body, or any material agreement, document,
indenture or other instrument to which the Manager is a party or by which is
bound.
5. Involuntary Termination. The Manager should have the right to
-----------------------
terminate this agreement if the Practice fails to comply with its obligations
under this Agreement. The Practice shall have the right to terminate this
Agreement and cause the relationship existing between the parties pursuant to
this Agreement to be severed only upon the occurrence of any of the following
events (the "Event of Default"):
5.1 The placement or imposition of any restrictions or limitations
upon the Manager by any governmental authority having jurisdiction over the
Manager or the Practice that causes the Manager not to be able to perform the
duties for which the Manager was retained pursuant to this Agreement.
5.2 The Manager fails or refuses to faithfully or diligently perform
the provisions of this Agreement following the receipt of written notice from
the Practice specifically setting forth all provisions of this Agreement that
the Manager has violated.
Notwithstanding anything in this Section 5 to the contrary, the
defaulting party shall have thirty (30) days from the receipt of written notice
of default to comply with the provisions of this Agreement.
Should the defaulting party fail to comply with the provisions of this
Agreement which it has defaulted on thirty (30) days after receipt of notice of
default, then any termination made pursuant
2
<PAGE>
to this Section 5 shall become effective as of the original date of receipt of
written notice of default (the "Date of Termination"). Any and all compensation
due to the Manager through the Date of Termination shall be paid within fifteen
(15) days of the Date of Termination. In the event of termination for any reason
other than those set forth in this Section 5, the Practice shall be obligated to
pay the compensation set forth in Section 3 for the remaining months of the
Term.
6. Miscellaneous Provisions.
------------------------
6.1 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Florida without application of any
conflicts of laws principles.
6.2 Amendment. Any and all provisions of this Agreement, including,
---------
but not limited to, the Management Fee established herein, may be reviewed and
if necessary amended during the term of this Agreement by agreement of the
parties herein. Notwithstanding the foregoing, no amendment to this Agreement or
any of the provisions of this Agreement shall be effective unless in writing and
executed by each of the parties to this Agreement.
6.3 Waiver. The failure of any of the parties to insist upon the
------
full and faithful performance by the other party of any of the covenants, terms
and conditions of this Agreement shall not be construed in the future as a
waiver of the first party's right to require the full and faithful performance
of the breached condition or provision, or any other covenant, term, condition
or provision of this Agreement.
6.4 Assignability. This Agreement shall not be assignable by either
-------------
party to this Agreement without prior written consent of the other party.
6.5 Notices. Except as otherwise provided in this Agreement, all
-------
notices which are permitted or required to be given under this Agreement shall
be in writing and shall be deemed given when delivered personally, or if sent by
mail, five (5) business days after being mailed by registered or certified mail,
postage prepaid, or any such other method (including air courier) which provides
for a signed receipt upon delivery, addressed as provided herein, or to such
other person or address as may be designated by written notice to the other
party or parties in accordance with this provision.
As to Practice: Roger Prieto, DDS
President
Dental Doctor Services, Inc.
2260 SW 8th Street
Miami, Florida 33135
As to Manager: Aldo Erazo, President
Dental Practice Administrators, Inc.
2260 SW 8th Street
Miami, Florida 33135
3
<PAGE>
6.6 Invalidity of Provisions. The invalidity of any one or more of
------------------------
the words, phrases, sentences, clauses or sections contained in this Agreement
shall not affect the enforceability of the remaining portions of this Agreement,
or any portion of this Agreement, all of which are inserted conditionally upon
their being valid in law. In the event that any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall be
invalid by a court of competent jurisdiction, then in such event, then this
Agreement shall be construed ass if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted.
6.7 Further Assurances. The parties to this Agreement shall execute
------------------
and deliver to the other party any additional or supplemental documents as may
be necessary or a reasonably requested by the other party to give full effect
and to implement any of the terms or provisions of this Agreement or to carry
out the intent of this Agreement.
6.8 Survival of Terms. Each provision contained in this Agreement
-----------------
shall survive the date of termination of this Agreement with the same full force
and effect as if made on that date and shall be enforceable against the party
against which it is intended to be enforced, notwithstanding expiration or
termination of this Agreement.
6.9 Entire Agreement. This Agreement constitutes the entire
----------------
understanding of the parties to this Agreement with respect to the subject
matter of this Agreement. All prior negotiations, agreements, understandings and
arrangements both oral and written between the parties to this Agreement
superseded by this Agreement.
6.10 Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties to this Agreement, their successors and permitted
assigns, and their heirs, executors and administrators, as the case may be.
6.11 Attorney's Fees. In the event litigation or other dispute
---------------
(whether or not suit is instituted) shall arise between the parties based in
whole or in part upon this Agreement or any of the provisions contained in this
Agreement, the prevailing party in any such litigation or other dispute shall be
entitled to recover from the non-prevailing party and shall be awarded by the
court of competent jurisdiction, any and all reasonable attorneys', paralegals',
and/or accountants' fees and costs of trial and appellate counsel paid, incurred
or suffered by such prevailing party as a result of, arising from, or in
connection with such litigations or dispute.
6.12 Section Headlines; Counterparts. The section headings contained
-------------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of any or all of the provisions of this
Agreement. This agreement may be executed in any number of counterparts, each of
which, when so executed and delivered shall be deemed to constitute an original
and a of which shall be deemed to be one in the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement on the date
first written above.
PRACTICE:
DENTAL DOCTOR SERVICES, INC.
By: /s/ Roger Prieto
--------------------------------
Roger Prieto, D.D.S.
Its President
MANAGER:
DENTAL PRACTICE ADMINISTRATORS,
INC., a Florida Corporation
By: /s/ Aldo Erazo
--------------------------------
Print: Aldo Erazo
Its: President
5
<PAGE>
SCHEDULE A TO THE MANAGEMENT AGREEMENT
--------------------------------------
DESCRIPTION OF THE SITES OF SERVICE FOR THE PRACTICE
----------------------------------------------------
215 South Third, Flagler Beach
2260 SW 8th Street, Miami
8370 West Flagler Street
1809 NE 24 Street, Lighthouse Point
201 S. Ridgewood #3, Edgewater
7500 NW 5th Street, Plantation
1435 Howell Branch Road, Winter Park
8226 Mills Drive, Miami
1601 W. 49th Street, Hialeah
747 Ponce de Leon Blvd., Coral Gables
4538 NW 183 Street, Carol City
27525 S. Dixie Highway, Miami
1399 NW 17th Avenue
9000 SW 87th Court, Miami
977 West Palm Dr., Fl City
7900 NW 27th Avenue, Miami
1051 NW 14 Street #150, Miami
1111 Oakfield Drive, Brandon
1600 North State Road 7, Lauderhill
18301 North Miami Avenue, Miami
6
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