<PAGE>   1
                                                                    EXHIBIT 13.1


ITEM 6.  SELECTED FINANCIAL DATA

         The selected consolidated statement of income data for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995, and the selected consolidated
balance sheet data at December 31, 1999, 1998, 1997, 1996 and 1995, have been
derived from the Consolidated Financial Statements of Monarch Dental Corporation
(the "Company") that have been audited by Arthur Andersen LLP, independent
public accountants. The following selected consolidated financial information
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Company.

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,

(IN THOUSANDS, EXCEPT PER SHARE DATA)                               1999        1998        1997         1996        1995
                                                                 ---------   ---------    ---------    ---------   ---------
<S>                                                              <C>        <C>         <C>       <C>        <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
    Patient revenue, net                                         $ 204,070   $ 129,601    $  68,619    $  35,980   $  13,223
    Operating expenses:
      Provider salaries and benefits                                67,089      40,283       21,179       10,527       3,978
      Clinical and other salaries and benefits                      53,195      36,556       18,803        9,386       3,214
      Dental supplies                                               10,386       6,898        4,282        2,216         833
      Laboratory fees                                                9,888       5,954        2,902        1,648         633
      Occupancy                                                     10,066       7,265        3,709        1,937         471
      Advertising                                                    3,073       2,436        1,781        1,210         710
      Other operating expenses                                      22,031      17,855        7,944        4,839       1,422
      Depreciation and amortization                                 10,549       9,863        2,938        1,430         293
                                                                 ---------   ---------    ---------    ---------   ---------
                                                                   186,277     127,110       63,538       33,193      11,554
                                                                 ---------   ---------    ---------    ---------   ---------
    Operating income                                                17,793       2,491        5,081        2,787       1,669
    Interest expense, net                                            7,687       2,872        1,545        1,687          87
    Minority interest in combined subsidiaries                         225          12           46         --          --
                                                                 ---------   ---------    ---------    ---------   ---------
    Income (loss) before income taxes and extraordinary item         9,881        (393)       3,490        1,100       1,582
    Income taxes(1)                                                  3,300          31        1,355          425        --
                                                                 ---------   ---------    ---------    ---------   ---------
    Income (loss) before extraordinary item                          6,581        (424)       2,135          675       1,582

    Extraordinary loss on early extinguishment of debt,
      net of applicable tax benefit of $167                           --          --           (264)        --          --
                                                                 ---------   ---------    ---------    ---------   ---------

    Net income (loss)                                            $   6,581   $    (424)   $   1,871    $     675   $   1,582
                                                                 =========   =========    =========    =========   =========
    Pro forma net income(1)                                           --          --           --           --     $     970
    Net income (loss) per common share(2):
      Income (loss) before extraordinary item                    $    0.53    $   (0.04)   $    0.34   $    0.24
      Extraordinary item                                              --          --           (0.05)       --
                                                                 ---------    ---------    ---------   ---------
      Net income (loss)                                          $    0.53    $   (0.04)   $    0.29   $    0.24
    Net income (loss) per common share - assuming dilution(2):
      Income (loss) before extraordinary item                    $    0.53    $   (0.04)   $    0.26   $    0.13
      Extraordinary item                                              --          --           (0.04)       --
                                                                 ---------    ---------    ---------   ---------
      Net income (loss)                                          $    0.53    $   (0.04)   $    0.22   $    0.13

    Weighted average common shares outstanding - basic              12,507       10,805        6,369       2,846
    Weighted average common and common
      equivalent shares outstanding - diluted                       12,514       10,805        8,346       5,077
</TABLE>

-----------

(1) The Company was an S corporation prior to February 6, 1996, and accordingly
    its consolidated statements of income for periods prior to such date did not
    include income tax expense. Pro forma net income includes an adjustment to
    reflect estimated income tax effects on net income for the year ended
    December 31, 1995, at an assumed effective tax rate of 38.7%.

(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
    Statements. Due to the effect of the reorganization that occurred on
    February 6, 1996 on the Company's capital structure, per share data for the
    periods ended prior to January 1, 1996 are not comparable to subsequent
    periods and, therefore, have not been presented.


                                       1
<PAGE>   2



<TABLE>
<CAPTION>
                                                                   DECEMBER 31,

(IN THOUSANDS)                               1999        1998         1997        1996        1995
                                          ---------   ---------    ---------    ---------   ---------
<S>                                       <C>        <C>         <C>       <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents               $   3,921    $   3,993    $   2,975   $   1,059    $     760
  Working capital (deficit)                  (8,822)     (13,902)       1,337      (3,995)         349

  Total assets                              178,944      167,418       64,592      32,906        3,182
  Long-term debt, less current
   maturities                                 77,183       71,328       11,200      18,769        1,077
  Redeemable equity securities                 --           --           --         9,711         --
  Total stockholders' equity (deficit)       66,594       57,463       41,966      (5,408)         623
</TABLE>


                                       2
<PAGE>   3


         ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

         This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities and Exchange Act of 1934, including statements under
"Liquidity and Capital Resources" regarding the availability of cash from
operations to fund core operations, interest expense, nonrecurring and
contingency payments and obligations under the Company's short-term note,
statements regarding extensions of the short-term note and availability of
additional credit, statements regarding the sufficiency of cash in the third and
fourth quarters of 2000, statements regarding the possible issuance of debt or
equity securities, statements concerning a possible sale of the Company and
related activities, statements regarding alternative financing strategies, and
statements regarding availability of additional sources of liquidity and of any
failure to raise necessary funding. The Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include, among others, risks
associated with availability and consummation of financing or strategic
transactions, risks associated with liquidity and cash flow, risks associated
with implementation of strategic initiatives, risks associated with integration
of acquired companies, risks associated with the change of status or departure
of key management personnel, risks associated with the constantly changing
health care environment, the pace of development and acquisition activity, the
reimbursement rates for dental services, and other risks detailed in the
Company's Securities and Exchange Commission filings. These and other risk
factors are listed below under the caption "Certain Factors That May Affect
Future Results."

OVERVIEW

         The Company manages dental group practices in selected markets located
in Texas, Wisconsin, Pennsylvania, Virginia, Ohio, Arkansas, Utah, Colorado,
Georgia, New Jersey, Florida, Indiana, Arizona and New Mexico. The managed
dental facilities (each, a "Dental Office" and collectively, the "Dental
Offices") provide general dentistry services such as examinations, cleanings,
fillings, bonding, placing crowns and fitting and placing fixed or removable
prostheses. Many of the Dental Offices also provide specialty dental services
such as orthodontics, oral surgery, endodontics, periodontics and pediatric
dentistry. The Company focuses on fee-for-service dentistry, supplementing this
business with revenue from contracts with capitated managed dental care plans.

         The Company seeks to build geographically dense networks of dental
providers by expanding within its existing markets. The Company has generated
growth within its existing markets by increasing patient volume and fees in
existing Dental Offices, either on a per-patient or per-procedure basis, by
increasing the physical space of existing Dental Offices and by opening Dental
Offices on a de novo basis. The Company has entered selected new markets by
acquiring dental group practices. The Company then seeks to use the acquired
dental group practice as a "pedestal" from which to expand within the newly
entered market.

         The Company has grown rapidly in recent years. Patient revenue, net
increased from $68.6 million in 1997 to $129.6 million in 1998, an increase of
88.9%, and increased to $204.1 million in 1999, representing an increase of
57.5% over 1998. Since 1997 the Company increased the number of markets in which
it operates from eight to 20 through acquisitions and increased the number of
Dental Offices it manages from 99 to 190 through acquisitions and the opening of
new offices, as shown in the table below.

<TABLE>
<CAPTION>
                                   1999      1998(1)   1997     1996     1995
                                   ----      ----      ----     ----     ----
<S>                                 <C>        <C>       <C>      <C>      <C>
Offices at beginning of period      192        99        53       12       10
De novo offices                      --         7         7        2        2
Acquired offices                      7        88        39       39       --
Closed offices                       (9)       (2)       --       --       --
                                   ----      ----      ----     ----     ----
Offices at end of period            190       192        99       53       12
                                   ====      ====      ====     ====     ====
</TABLE>

(1)  Includes two less acquired offices due to two office closings prior to the
     Valley Forge Dental Associates, Inc. acquisition.

         The rapid growth of the Company has and will continue to place strains
on the Company's management, operations and systems. It has also resulted in
substantially increased operating expenses, including expense levels associated
with the operation of the Dental Offices (mainly salaries, benefits and other
expenses) as well as increased depreciation and amortization and interest
expense. The Company demonstrated improved profitability in

                                       3
<PAGE>   4


1999 as a result of internal growth, improved operations from underperforming
markets, cost control initiatives, the successful integration of acquired
practices and the closure of nine unprofitable Dental Offices. However, there
can be no assurance that the Company will be able to continue this improved
profitability through these management initiatives. There also can be no
assurance that difficulties associated with the Company's rapid growth will not
adversely affect its operations.

         The Company's 1999 results of operations were materially affected by
two items recorded in the second quarter and two items recorded in the fourth
quarter, which in the aggregate increased net income $2.3 million, or
approximately $0.18 per share. In the second quarter, a $1.0 million charge was
recorded related to the settlement of a dispute with the former shareholders of
an acquired company. This amount was offset by a $1.0 million reduction in
liabilities related to a favorable outcome of a dispute with a former owner of
an acquired dental practice. In the fourth quarter, a $2.9 million credit, net
of related legal expenses, was recorded in conjunction with a settlement of a
dispute with the sellers of an affiliated dental practice. This credit was
offset by an income tax adjustment of $588,000 relating to goodwill amortization
that is not deductible for tax purposes.

         The Company's 1998 results of operations were also materially affected
by unusual charges recorded in the fourth quarter of $7.7 million in the
aggregate on a pre-tax basis ($4.9 million after tax). These charges include
$1.6 million associated with the change of status of Dr. Warren F. Melamed, the
Company's founder, who is no longer an employee but remains as a non-employee
Chairman of the Board, $3.3 million relating to goodwill impairments associated
with the closure of certain Dental Offices in Houston and Austin, Texas and
Arkansas, $1.8 million in litigation expenses related to the settlement of a
dispute with the former shareholders of an acquired company and the settlement
of a dispute with a former owner of an acquired dental practice and $1.0 million
associated with non-impairment expenses incurred in conjunction with the closing
of the aforementioned Dental Offices.



                                       4
<PAGE>   5


         Acquisitions. Beginning with the acquisition of MacGregor Dental
Centers in February 1996, the Company has conducted an active program to
identify dental group practices outside of the Dallas-Fort Worth market as
potential acquisition candidates with a view to expanding the Company's
operations into new markets. Since December 31, 1995, the Company has completed
the following acquisitions:

<TABLE>
<CAPTION>
                                               NUMBER OF       NUMBER OF         DATE         EFFECTIVE DATE
DENTAL GROUP PRACTICE / MARKET               DENTAL OFFICES   DENTISTS (1)      FOUNDED       OF ACQUISITION
------------------------------               --------------   ------------     ---------      --------------
<S>                                          <C>              <C>              <C>            <C>
1996 in-markets                                    1               1             1981         October 1996
1997 in-markets                                    4               4            Various       Various
1998 in-markets                                    7               7            Various       Various
1999 in-markets                                    7               9            Various       Various
MacGregor Dental Centers, Houston                 15              42             1962         February 1996
Midwest Dental Care, Wisconsin                    22              36             1975         September 1996
Convenient Dental Care, Arkansas                   1               6             1982         November 1996
Arkansas Dental Health, Arkansas                   3               7             1984         January 1997
United Dental Care, Arkansas                       9              15             1990         April 1997
Dental Centers of Indiana, Indiana                11              14             1980         August 1997
J.B. Hays, Arkansas                                1               6             1994         October 1997
Three Peaks Dental Management, Colorado            6              10             1990         November 1997
Press Family Dental, San Antonio                   3              14             1971         November 1997
Dental America, Midland - Odessa                   2               4             1994         December 1997
Dental Care One, Ohio                              8              14             1979         March 1998
Managed Dental Care Centers, Austin & New
  Mexico                                           9              10             1995         June 1998
Valley Forge Dental Associates, Various           55             130             1995         September 1998
Talbert Dental, Arizona and Utah                  10              32             1973         September 1998
</TABLE>

-----------------

(1) Includes full-time general dentists and specialists employed by or under
    contract with the Company (in the case of Midwest) or the applicable
    professional corporation (in the case of each dental group practice other
    than Midwest).

For information concerning the purchase prices for these acquisitions, each of
which was accounted for as a purchase, reference is made to Note 3 of the
Company's Consolidated Financial Statements included herein.

         The Company has financed its rapid expansion through acquisitions with
a combination of debt and equity issuances. As a result of its acquisitions, the
amount of intangible assets on the Company's consolidated balance sheets has
increased from $123.2 million at December 31, 1998 to $132.5 million at December
31, 1999; this has resulted and will continue to result in an increase in the
Company's amortization expense relative to historic levels. In addition,
outstanding total indebtedness has increased from $76.1 million at December 31,
1998 to $86.7 million at December 31, 1999; this has resulted and will continue
to result in increased interest expense relative to historic levels.

         During 1999, as a result of its focus on internal operations and the
uncertain availability of additional capital, the pace of acquisitions was
significantly reduced. The Company continues to review acquisitions in selected
existing markets on an opportunistic basis when and as opportunities arise and
to the extent the Company has available capital. Further expansion through
acquisitions is likely to require additional borrowings and unless a substantial
increase in the current market price of the Company's common stock permits the
raising of additional capital in the equity markets, there can be no assurance
that such capital will be available. The Company may decide to refinance all or
a portion of existing indebtedness with longer term indebtedness having lower
amortization requirements but higher interest payments, which would result in
higher levels of interest expense in the future.


                                       5
<PAGE>   6

         Existing Market Development. The Company commenced operations in 1983
with a group dental practice in Dallas. From its founding in 1983 through
December 31, 1999, the Company opened 27 additional Dental Offices on a de novo
basis (21 in Dallas-Fort Worth, three in Houston, two in San Antonio and one in
Indiana.) The Company completed its first acquisition of a solo practice in an
existing market (Dallas-Fort Worth) in October 1996. The Company purchased four
solo practices in existing markets (three in Dallas-Fort Worth and one in
Houston) in 1997. The Company purchased seven solo practices in existing markets
(one in Dallas-Fort Worth, two in Indiana, two in San Antonio, one in Wisconsin
and one in Midland-Odessa) in 1998 and in 1999 purchased seven solo practices in
existing markets (three in Dallas-Fort Worth, three in Wisconsin and one in
Georgia). Patient revenue, net from the Company's Dallas-Fort Worth operations
increased $6.3 million, or 34.4%, to $24.6 million in 1997, increased $8.8
million, or 35.5%, to $33.4 million in 1998 and increased $12.3 million, or
36.9%, to $45.7 million in 1999. Operating income for the Company's Dallas-Fort
Worth operations increased $542,000, or 18.8%, to $3.4 million in 1997,
increased $1.8 million, or 52.2%, to $5.2 million in 1998 and increased $3.3
million, or 63.2%, to $8.5 million in 1999. However, there can be no assurance
that the Company's revenue and operating income in this market will continue to
grow at these historical rates or that the Company's operations in other markets
will grow at rates comparable to those experienced in Dallas-Fort Worth.

         The average investment by the Company in the sixteen de novo Dental
Offices opened since January 1, 1996 was approximately $280,000, which includes
the cost of equipment, leasehold improvements and working capital associated
with the initial operations. Eleven de novo Dental Offices opened since January
1, 1996 began contributing operating income to the Company within three months
of opening. The remaining five de novo Dental Offices opened since January 1,
1996 began contributing operating income to the Company within four, five, five,
seven and fifteen months, respectively, of opening. Future de novo Dental
Offices, however, may require a greater investment by the Company and may not
begin contributing operating income to the Company within that period of time.
The Company expenses operating costs (other than costs related to fixed assets
and inventory costs) in connection with the establishment of a de novo Dental
Office as these costs are incurred.

COMPONENTS OF REVENUE AND EXPENSES

         Under the Management Agreements, the Company establishes a "controlling
financial interest" as defined by EITF 97-2, "Application of FASB No. 94 and APB
No. 16 to Physician Practice Management Entities and Certain Other Entities
under Contractual Management Arrangement" ("EITF 97-2") in its affiliated dental
group practices. In addition, the Company has nominee shareholder arrangements
with certain of the dental group practices as defined by EITF 97-2. For these
reasons, the Company consolidates the financial statements of the dental group
practices. The Company's 1997 and prior year consolidated financial statements
have been restated to conform with the provisions of EITF 97-2. The restatement
affected the display of previously reported revenues, and amounts retained by
the dental group practices and general and administrative expenses only and did
not affect the Company's 1997 and prior year financial position, results of
operations or cash flows.

         Patient revenue, net ("Revenue") represents the revenue of the
professional dental corporations managed by the Company ("P.C.s") or the Company
(in states in which ownership of dental practices by the Company is permitted),
reported at estimated realizable amounts, received from third-party payors and
patients for dental services rendered at the Dental Offices. Operating expenses
consist of the expenses incurred by the Company or the P.C.s in connection with
the operation and management of the Dental Offices. These include salaries and
benefits paid to dentists and hygienists by the P.C.s or by the Company in
states in which it operates and in which ownership of dental practices by the
Company is permitted (currently Wisconsin), salaries and benefits for personnel
other than dentists and hygienists, dental supplies, dental laboratory fees,
occupancy costs, advertising, equipment leases, management information systems
and other expenses related to dental practice operations, as well as
depreciation and amortization expense.

         The Company's Revenue is derived principally from fee-for-service
Revenue and Revenue from capitated managed dental care plans. Fee-for-service
Revenue consists of Revenue of the P.C.s or the Company (in states in which the
ownership of dental practices by the Company is permitted) received from
indemnity dental plans, preferred provider plans and direct payments by patients
not covered by any third-party payment arrangement. Managed dental care Revenue
consists of Revenue of the P.C.s or the Company (in states in which the
ownership of dental practices by the Company is permitted) received from
capitated managed dental care plans, including capitation payments and patient
co-payments. Capitated managed dental care contracts are between dental benefits
organizations, the Company and the


                                       6
<PAGE>   7


P.C.s (except in Wisconsin). Under the Management Agreements, the Company
negotiates and administers these contracts on behalf of the P.C.s. Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental group practice obligated to provide them. This arrangement
shifts the risk of utilization of these services to the dental group practice
providing the dental services. Because the Company assumes responsibility under
the Management Agreements for all aspects of the operation of the dental
practices (other than the practice of dentistry) and thus bears all costs of the
P.C.s associated with the provision of dental services at the Dental Offices
(other than compensation and benefits of dentists and hygienists), the risk of
over-utilization of dental services at the Dental Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive co-payments for more complicated or elective procedures. In
contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided.

         The Company seeks to increase fee-for-service business at the Dental
Offices by increasing the size of existing offices, opening new offices and
advertising. The Company seeks to supplement this fee-for-service business with
Revenue from contracts with capitated managed dental care plans. Fee-for-service
Revenue accounted for 58.3%, 59.8%, and 62.0% of the Company's total Revenue for
1999, 1998 and 1997, respectively. Managed dental care Revenue increased as a
percentage of Revenue to 41.7% in 1999 from 40.2% in 1998 and 38.0% in 1997 due
to the acquisitions of dental practices with higher managed care Revenue
relative to total Revenue. As the Company has increased capacity by expanding
within its existing markets and into new markets, managed dental care Revenue
has contributed to overall higher utilization of the Company's facilities. Thus,
although the Company's fee-for-service business generally is more profitable
than its capitated managed dental care business on a per-patient and
per-procedure basis, capitated managed dental care business serves to increase
facility utilization and dentist productivity.

         The relative percentage of the Company's Revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable terms in such contracts. In addition, the profitability of managed
dental care Revenue varies from market to market depending on the level of
capitation payments and co-payments in proportion to the level of benefits
required to be provided. Variations in the relative penetration and popularity
of capitated managed dental care from market to market make it difficult to
determine whether the Company's experience in new markets will be consistent
with its experience in existing markets. The Company expects that the level of
profitability of its operations in new markets entered through acquisition will
vary depending in part on these factors and may not replicate or be comparable
to the Company's results in existing markets.



                                       7
<PAGE>   8

RESULTS OF OPERATIONS

         As a result of the recent rapid expansion of its business through
existing market development and acquisitions and the Company's limited period of
affiliation with these practices, the Company believes that the period-to-period
comparisons set forth below may not be meaningful.

         The following table sets forth the percentages of Revenue represented
by certain items reflected in the Company's consolidated statements of income.
The information that follows should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                -------------------------------
                                                  1999        1998         1997
                                                ------      ------       ------
<S>                                              <C>         <C>          <C>
Patient revenue, net                             100.0%      100.0%       100.0%
Operating expenses:
   Provider salaries and benefits                 32.9        31.1         30.9
   Clinical and other salaries and benefits       26.1        28.2         27.4
   Dental supplies                                 5.1         5.3          6.2
   Laboratory fees                                 4.8         4.6          4.2
   Occupancy                                       4.9         5.6          5.4
   Advertising                                     1.5         1.9          2.6
   Other operating expenses                       10.8        13.8         11.6
   Depreciation and amortization                   5.2         7.6          4.3
                                                ------      ------       ------
                                                  91.3        98.1         92.6
                                                ------      ------       ------
Operating income                                   8.7         1.9          7.4
Interest expense, net                              3.8         2.2          2.2
Minority interest                                  0.1          --          0.1
                                                ------      ------       ------
Income (loss) before income taxes and
   extraordinary item                              4.8        (0.3)         5.1
Income taxes                                       1.6          --          2.0
                                                ------      ------       ------
Income (loss) before extraordinary item            3.2        (0.3)         3.1
Extraordinary loss, net of applicable
  tax benefit                                       --          --          0.4
                                                ------      ------       ------
Net income (loss)                                  3.2%       (0.3)%        2.7%
                                                ======      ======       ======
</TABLE>


YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

         Patient revenue, net. Revenue increased to $204.1 million for 1999 from
$129.6 million for 1998, an increase of $74.5 million, or 57.5%. This increase
resulted primarily from the acquisitions of Valley Forge Dental Associates, Inc.
("Valley Forge") and Talbert Medical Management Corporation ("Talbert") in
September 1998 which provided eight additional months of Revenue (approximately
$55.0 million) in 1999. Dental Offices in the ten remaining markets, namely
Dallas-Fort Worth, Houston, Wisconsin, Arkansas, Indiana, Colorado, San Antonio,
Midland-Odessa, Dayton and New Mexico (the "existing markets") contributed $19.5
million of the increase in Revenue in 1999 resulting primarily from the
expansion or relocation of twenty-two existing Dental Offices and the
acquisition of seven dental practices offset by nine Dental Office closures.

         Fee-for-service Revenue (i.e., Revenue derived from indemnity dental
plans, preferred provider plans and direct payments by patients not covered by
any third-party payor) increased to $119.0 million for 1999 from $77.5 million
for 1998, an increase of $41.5 million, or 53.6%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert in September 1998
which provided eight additional months of fee-for-service Revenue (approximately
$29.6 million) in 1999. In existing markets, fee-for-service Revenue increased
to $76.6 million for 1999


                                       8
<PAGE>   9


from $64.7 million for 1998, representing an increase of $11.9 million, or
18.5%. Existing market growth resulted primarily from the expansion or
relocation of twenty-two existing Dental Offices and the acquisition of seven
dental practices offset by nine Dental Office closures. Managed dental care
Revenue (i.e., Revenue from capitated managed dental care plans, including
capitation payments and patient co-payments) increased to $85.1 million for 1999
from $52.1 million for 1998, an increase of $33.0 million, or 63.2%. This
increase resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of managed dental care
Revenue (approximately $25.5 million) in 1999. In existing markets, managed
dental care Revenue increased to $47.9 million for 1999 from $40.4 million for
1998, an increase of $7.5 million or 18.5%. The increase in existing markets
resulted primarily from the expansion or relocation of twenty-two existing
Dental Offices and the acquisition of seven dental practices offset by nine
Dental Office closures. As a percent of Revenue, fee-for-service Revenue
decreased to 58.3% from 59.8% for 1999 and 1998, respectively.

         Provider salaries and benefits. Provider salaries and benefits expense
increased to $67.1 million for 1999 from $40.3 million for 1998, an increase of
$26.8 million, or 66.5%. This increase resulted primarily from the acquisitions
of Valley Forge and Talbert in September 1998 which provided eight additional
months of provider salaries and benefits expense (approximately $19.2 million)
in 1999. In existing markets, provider salaries and benefits expense increased
$7.6 million due to the expansion or relocation of twenty-two existing Dental
Offices, the acquisition of seven dental practices and increased dentist and
hygienist compensation as a result of a higher level of production at the Dental
Offices offset by nine Dental Office closures. As a percent of Revenue, provider
salaries and benefits expense increased to 32.9% from 31.1% for 1999 and 1998,
respectively. This increase was due principally to higher compensation levels
relative to Revenue at certain acquired companies.

         Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $53.2 million for 1999 from $36.6 million for
1998, an increase of $16.6 million, or 45.5%. This increase resulted primarily
from the acquisitions of Valley Forge and Talbert in September 1998 which
provided eight additional months of clinical and other salaries and benefits
expense (approximately $12.4 million) in 1999. In existing markets, clinical and
other salaries and benefits expense increased $4.2 million due to the expansion
or relocation of twenty-two existing Dental Offices and the acquisition of seven
dental practices offset by a $1.6 million (pretax) unusual charge in the fourth
quarter of 1998 representing a change in employment status of Dr. Warren F.
Melamed, the Company's founder and former President and Chief Dental Officer
("Dr. Melamed"). As a percent of Revenue, clinical and other salaries and
benefits expense decreased to 26.1% from 28.2% for 1999 and 1998, respectively.
This decrease was due principally to certain acquired companies having lower
clinical and other salaries and benefits expense as a percent of Revenue than
the Company's existing operations and to the $1.6 million unusual charge
recorded in the fourth quarter of 1998.

         Dental supplies. Dental supplies expense increased to $10.4 million for
1999 from $6.9 million for 1998, an increase of $3.5 million, or 50.6%. This
increase resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of dental supplies expense
(approximately $2.7 million) in 1999. In existing markets, dental supplies
expense increased $771,000 due to the expansion or relocation of twenty-two
existing Dental Offices, the acquisition of seven dental practices and increased
production at the Dental Offices partially offset by nine Dental Office closures
and the leveraging of supply contracts against expansion in existing markets. As
a percent of Revenue, dental supplies expense decreased to 5.1% from 5.3% for
1999 and 1998, respectively. This decrease was due principally to the leveraging
of supply contracts with expansion in existing markets and to certain acquired
companies having lower dental supplies expense as a percent of Revenue than the
Company's existing operations.

         Laboratory fees. Laboratory fee expense increased to $9.9 million for
1999 from $6.0 million for 1998, an increase of $3.9 million, or 66.1%. This
increase resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of laboratory fee expense
(approximately $2.8 million) in 1999. In existing markets, laboratory fee
expense increased $1.1 million due to the expansion or relocation of twenty-two
existing Dental Offices, the acquisition of seven dental practices and increased
production at the Dental Offices offset by nine Dental Office closures. As a
percent of Revenue, laboratory fee expense increased to 4.8% from 4.6% for 1999
and 1998, respectively. This increase was due principally to certain acquired
companies having higher laboratory fee expense as a percent of Revenue than the
Company's existing operations.



                                       9
<PAGE>   10


         Occupancy. Occupancy expense increased to $10.1 million for 1999 from
$7.3 million for 1998, an increase of $2.8 million, or 38.6%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of occupancy expense
(approximately $2.1 million) in 1999. In existing markets, occupancy expense
increased $780,000 resulting from the expansion or relocation of twenty-two
existing Dental Offices and the acquisition of seven dental practices offset by
a $476,000 (pretax) unusual charge in the fourth quarter of 1998 representing
costs associated with unprofitable Dental Office closures. The Company closed a
total of nine unprofitable Dental Offices in Houston and Austin, Texas,
Arkansas, New Mexico, Pennsylvania and Virginia in 1999. As a percent of
Revenue, occupancy expense decreased to 4.9% from 5.6% for 1999 and 1998,
respectively. This decrease was due principally to the $476,000 (pretax) unusual
charge recorded in the fourth quarter of 1998 and to certain acquired companies
having lower occupancy expense as a percent of Revenue than the Company's
existing operations.

         Advertising. Advertising expense increased to $3.1 million for 1999
from $2.4 million for 1998, an increase of $637,000, or 26.1%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of advertising expense
(approximately $539,000) in 1999. Television and print advertising increased
$98,000 in the existing markets in 1999. As a percent of Revenue, advertising
expense decreased to 1.5% from 1.9% for 1999 and 1998, respectively. This
decrease resulted from lower advertising expense for certain acquired companies
as a percent of Revenue than the Company's existing operations and leveraging
advertising expense with greater market penetration in existing markets.

         Other operating expenses. Other operating expenses increased to $22.0
million for 1999 from $17.9 million for 1998, an increase of $4.1 million, or
23.4%. This increase resulted primarily from the acquisitions of Valley Forge
and Talbert in September 1998 which provided eight additional months of other
operating expenses (approximately $3.9 million) in 1999. The increase associated
with the acquisitions was net of a $2.9 million credit recorded in the fourth
quarter of 1999 representing the settlement of a dispute with the sellers of an
affiliated dental practice. In existing markets, other operating expenses
increased $253,000 resulting from the expansion or relocation of twenty-two
existing Dental Offices, the acquisition of seven dental practices and the
expansion of the Company's corporate infrastructure to manage growth offset by
nine Dental Office closures and a $2.2 million (pretax) unusual charge recorded
in the fourth quarter of 1998 representing costs associated with establishing
litigation reserves ($1.8 million) and reserves for expenses associated with
certain Dental Office closures ($419,000). Additionally, other operating
expenses included two items recorded in the second quarter of 1999, which in
the aggregate had no impact on the Company's net income. The two items were a
$1.0 million charge related to the settlement of a dispute with the former
shareholders of an acquired company offset by a $1.0 million reduction in
liabilities related to a favorable outcome of a dispute with a former owner of
an acquired dental practice. As a percent of Revenue, other operating expenses
decreased to 10.8% from 13.8% for 1999 and 1998, respectively. This decrease
was due principally to the $2.9 million credit recorded in the fourth quarter
of 1999 and the $2.2 million unusual charge recorded in the fourth quarter of
1998.

         Depreciation and amortization. Depreciation and amortization expense
increased to $10.5 million for 1999 from $9.9 million for 1998, an increase of
$686,000, or 7.0%. This increase resulted primarily from the acquisitions of
Valley Forge and Talbert in September 1998 which provided eight additional
months of depreciation and amortization expense (approximately $3.1 million) in
1999. In existing markets, depreciation and amortization expense decreased $2.4
million resulting from the expansion or relocation of twenty-two existing Dental
Offices and the acquisition of seven solo practices offset by nine Dental Office
closures and a $3.3 million (pretax) unusual charge recorded in the fourth
quarter of 1998 for goodwill impairment associated with the closure of certain
Dental Offices in Houston and Austin, Texas and Arkansas.

         Operating income. Operating income increased to $17.8 million for 1999
from $2.5 million for 1998, an increase of $15.3 million, or 614.3%. This
increase resulted in part from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of operating income
(approximately $8.2 million) in 1999. The increase associated with the
acquisitions includes a $2.9 million credit recorded in the fourth quarter of
1999 representing the settlement of a dispute with the sellers of an affiliated
dental practice. Income from the Company's existing markets increased $8.2
million in 1999, which was offset by increased corporate expenses of $1.1
million due to the development of corporate infrastructure. The increase
associated with the existing markets reflects the effect of the $7.7 million
(pretax) unusual charges recorded in the fourth quarter of 1998, as described
above, representing costs associated with a change in employment status of Dr.
Melamed, goodwill impairment and the



                                       10
<PAGE>   11


establishment of litigation reserves and reserves for the closure of certain
Dental Offices. As a percent of Revenue, operating income increased to 8.7% from
1.9% for 1999 and 1998, respectively. This increase was due principally to the
$2.9 million credit recorded in the fourth quarter of 1999 and the $7.7 million
(pretax) unusual charges recorded in the fourth quarter of 1998.

         Interest expense, net. Interest expense, net increased to $7.7 million
for 1999 from $2.9 million for 1998, an increase of $4.8 million, or 167.7%.
This increase is attributable to the higher average outstanding debt balances in
1999 versus 1998. The Company has a Credit Facility (the "Credit Facility") with
a bank syndicate. Average debt outstanding under the Credit Facility totaled
$78.5 million for 1999 compared to average debt outstanding of $29.5 million for
1998.

         Minority interest. Minority interest expense increased to $224,000 for
1999 from $12,000 for 1998, an increase of $212,000, or 1,775.0%. This increase
resulted from higher net income at certain acquired companies which owned
between a six-and-one-quarter percent and fifty percent interest in dental group
practices located in Indiana, Texas, New Mexico, Georgia, Pennsylvania and New
Jersey in 1999 compared to 1998.

         Income taxes. Income tax expense increased to $3.3 million for 1999
from $31,000 for 1998, an increase of $3.3 million, or 10,545.2%. This increase
was the result of higher net income before taxes, which increased to $9.9
million for 1999 from a net loss before taxes of $393,000 for 1998, an increase
of $10.3 million, or 2,614.2% and the effects of a $588,000 income tax
adjustment relating to goodwill amortization that is not deductible for tax
purposes.


YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

         Patient revenue, net. Revenue increased to $129.6 million for 1998 from
$68.6 million for 1997, an increase of $61.0 million, or 88.9%. This increase
resulted from the acquisitions of Dental Care One, Managed Dental Care Centers,
Inc. ("MDCC"), Valley Forge Dental Associates, Inc. ("Valley Forge") and Talbert
Medical Management Corporation ("Talbert") in March 1998, June 1998, September
1998 and September 1998, respectively, which contributed combined Revenue of
$30.4 million for the ten months, seven months, four months and four months
ended December 31, 1998, respectively. Dental offices in the eight markets
served at December 31, 1997, namely Dallas-Fort Worth, Houston, Wisconsin,
Arkansas, Indiana, Colorado, San Antonio and Midland-Odessa (the "existing
markets") contributed an additional $30.6 million of the increase in Revenue in
1998 resulting from the opening of seven de novo Dental Offices, the physical
expansion of ten existing Dental Offices, the acquisition of seven solo
practices and the acquisitions of United Dental Care Tom Harris D.D.S. and
Associates ("United"), Dental Centers of Indiana, Inc. ("DCI"), Three Peaks
Dental Health L.P. ("Three Peaks"), Press Family Dental ("Press") and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of Revenue, respectively, in 1998.

         Fee-for-service Revenue (i.e., Revenue derived from indemnity dental
plans, preferred provider plans and direct payments by patients not covered by
any third-party payor) increased to $77.5 million for 1998 from $42.5 million
for 1997, an increase of $35.0 million, or 82.2%, due to acquisitions in new
markets and growth in existing markets. New market growth resulted from the
acquisitions of Dental Care One, MDCC, Valley Forge and Talbert which
contributed combined fee-for-service Revenue of $16.9 million for the respective
periods following the dates of acquisition. In existing markets, fee-for-service
Revenue increased to $60.6 million for 1998 from $42.5 million for 1997,
representing an increase of $18.1 million, or 42.6%. Existing market growth
resulted from the opening of seven de novo Dental Offices, the physical
expansion of ten existing Dental Offices, the acquisition of seven solo
practices and the acquisitions of United, DCI, Three Peaks, Press and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of fee-for-service Revenue, respectively, in 1998. Managed dental care
Revenue (i.e., Revenue from capitated managed dental care plans, including
capitation payments and patient co-payments) increased to $52.1 million for 1998
from $26.1 million for 1997, an increase of $26.0 million, or 99.7%. This
increase resulted in part from the acquisitions of Dental Care One, MDCC, Valley
Forge and Talbert which contributed combined managed dental care Revenue of
$13.5 million for the respective periods following the dates of acquisition. In
existing markets, managed dental care Revenue increased to $38.6 million for
1998 from $26.1 million for 1997, an increase of $12.5 million or 47.7%. The
increase in existing markets resulted from the opening of seven de novo Dental
Offices, the physical expansion of ten


                                       11
<PAGE>   12


existing Dental Offices, the acquisition of seven solo practices and the
acquisitions of United, DCI, Three Peaks, Press and Dental America in April
1997, August 1997, November 1997, November 1997 and December 1997, respectively,
which provided three, seven, ten, ten and eleven additional months of managed
dental care Revenue, respectively, in 1998. As a percent of Revenue,
fee-for-service Revenue decreased to 59.8% from 62.0% for 1998 and 1997,
respectively.

         Provider salaries and benefits. Provider salaries and benefits expense
increased to $40.3 million for 1998 from $21.2 million for 1997, an increase of
$19.1 million, or 90.2%. The increase was due to the acquisitions of Dental Care
One, MDCC, Valley Forge and Talbert which added combined provider salaries and
benefits expense of $10.3 million for the respective periods following the dates
of acquisition. In existing markets, provider salaries and benefits expense
increased $8.8 million as dentist and hygienist compensation increased as a
result of a higher level of production at the Dental Offices and the
acquisitions of United, DCI, Three Peaks, Press and Dental America in April
1997, August 1997, November 1997, November 1997 and December 1997, respectively,
which provided three, seven, ten, ten and eleven additional months of provider
salaries and benefits expense, respectively, in 1998, and also as a result of
higher compensation levels at certain acquired companies. As a percent of
Revenue, provider salaries and benefits expense increased slightly to 31.1% from
30.9% for 1998 and 1997, respectively, reflecting constant or higher salary
levels for providers across the Company's network of Dental Offices and reduced
revenue levels at certain of the Company's offices in the fourth quarter of
1998.

         Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $36.6 million for 1998 from $18.8 million for
1997, an increase of $17.8 million, or 94.4%. The increase resulted from the
acquisitions of Dental Care One, MDCC, Valley Forge and Talbert which added
combined clinical and other salaries and benefits expense of $8.2 million for
the respective periods following the dates of acquisition. In existing markets,
clinical and other salaries and benefits expense increased $9.6 million due to
the opening of seven de novo Dental Offices, the physical expansion of ten
existing Dental Offices, the acquisition of seven solo practices and the
acquisitions of United, DCI, Three Peaks, Press and Dental America in April
1997, August 1997, November 1997, November 1997 and December 1997, respectively,
which provided three, seven, ten, ten and eleven additional months of clinical
and other salaries and benefits expense, respectively, in 1998. Additionally,
the Company recorded a $1.6 million (pretax) unusual charge in the fourth
quarter of 1998 representing a change in employment status of Dr. Melamed, the
Company's founder, former President and Chief Dental Officer. As a percent of
Revenue, clinical and other salaries and benefits expense increased to 28.2%
from 27.4% for 1998 and 1997, respectively. This increase was due principally to
the $1.6 million (pretax) unusual charge recorded in the fourth quarter of 1998.

         Dental supplies. Dental supplies expense increased to $6.9 million for
1998 from $4.3 million for 1997, an increase of $2.6 million, or 61.1%. This
increase resulted from the acquisitions of Dental Care One, MDCC, Valley Forge
and Talbert which added combined dental supplies expense of $1.6 million for the
respective periods following the dates of acquisition. In existing markets,
dental supplies expense increased $1.0 million as a result of increased
production and the acquisitions of United, DCI, Three Peaks, Press and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of dental supplies expense, respectively, for 1998. As a percent of
Revenue, dental supplies expense decreased to 5.3% from 6.2% for 1998 and 1997,
respectively. This decrease was due principally to the leveraging of supply
contracts with expansion in existing markets and to the acquisitions having
lower dental supplies expense as a percent of Revenue than the Company's
existing operations.

         Laboratory fees. Laboratory fee expense increased to $6.0 million for
1998 from $2.9 million for 1997, an increase of $3.1 million, or 105.2%. This
increase resulted from the acquisitions of Dental Care One, MDCC, Valley Forge
and Talbert which added combined laboratory fee expense of $1.6 million for the
respective periods following the dates of acquisition. In existing markets,
laboratory fee expense increased $1.5 million as a result of increased
production and the acquisitions of United, DCI, Three Peaks, Press and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of laboratory fees expense, respectively, for 1998. As a percent of
Revenue, laboratory fee expense increased to 4.6% from 4.2% for 1998 and 1997,
respectively. This increase was due principally to the acquisitions having
higher laboratory fee expense as a percent of Revenue than the Company's
existing operations.



                                       12
<PAGE>   13


         Occupancy. Occupancy expense increased to $7.3 million for 1998 from
$3.7 million for 1997, an increase of $3.6 million, or 95.9%. This increase
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added a combined $1.5 million to occupancy expense for the
respective periods following the dates of acquisition. In existing markets,
occupancy expense increased $2.1 million resulting from the opening of seven de
novo Dental Offices, the physical expansion of ten existing Dental Offices, the
acquisition of seven solo practices and the acquisitions of United, DCI, Three
Peaks, Press and Dental America in April 1997, August 1997, November 1997,
November 1997 and December 1997, respectively, which provided three, seven, ten,
ten and eleven additional months of occupancy expense, respectively, for 1998.
Additionally, the Company recorded a $476,000 (pretax) unusual charge in the
fourth quarter of 1998 representing costs associated with Dental Office closures
in Houston and Austin, Texas and Arkansas. The majority of these closures
occurred in the first quarter of 1999. As a percent of Revenue, occupancy
expense increased slightly to 5.6% from 5.4% for 1998 and 1997, respectively.
This increase was due principally to the $476,000 (pretax) unusual charge
recorded in the fourth quarter of 1998.

         Advertising. Advertising expense increased to $2.4 million for 1998
from $1.8 million for 1997, an increase of $655,000, or 36.8%. This increase
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added a combined $335,000 to advertising expense for the
respective periods following the dates of acquisition. There was an increase of
$320,000 in television and print advertising in the existing markets in 1998. As
a percent of Revenue, advertising expense decreased to 1.9% from 2.6% for 1998
and 1997, respectively. This decrease resulted from leveraging advertising
expense with greater market penetration in existing markets.

         Other operating expenses. Other operating expenses consist of general
and administrative expenses and bad debt expense (which was reported as a
component of amounts retained by dental group practices for periods prior to
1997). Other operating expenses increased to $17.9 million for 1998 from $7.9
million for 1997, an increase of $10.0 million, or 124.8%. This increase
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added combined other operating expenses of $3.7 million for the
respective periods following the dates of acquisition. Other operating expenses
for existing markets increased $6.3 million resulting from the opening of seven
de novo Dental Offices, the physical expansion of ten existing Dental Offices,
the acquisition of seven solo practices, the acquisitions of United, DCI, Three
Peaks, Press and Dental America in April 1997, August 1997, November 1997,
November 1997 and December 1997, respectively, which provided three, seven, ten,
ten and eleven additional months of other operating expenses, respectively, for
1998 and the expansion of the Company's corporate infrastructure to manage
growth. Additionally, other operating expenses reflect a $2.2 million (pretax)
unusual charge recorded in the fourth quarter of 1998 representing costs
associated with establishing litigation reserves ($1.8 million) and reserves for
expenses associated with certain Dental Office closures ($419,000). As a percent
of Revenue, other operating expenses increased to 13.8% from 11.6% for 1998 and
1997, respectively. This increase was due principally to the $2.2 million
(pretax) unusual charge recorded in the fourth quarter of 1998.

         Depreciation and amortization. Depreciation and amortization expense
increased to $9.9 million for 1998 from $2.9 million for 1997, an increase of
$7.0 million, or 235.7%. This increase resulted from the acquisitions of Dental
Care One, MDCC, Valley Forge and Talbert which added combined depreciation and
amortization expense of $1.7 million for the respective periods following the
dates of acquisition. Depreciation and amortization expense for existing markets
increased $5.3 million resulting from the opening of seven de novo Dental
Offices, the physical expansion of ten existing Dental Offices, the acquisition
of seven solo practices and the acquisitions of United, DCI, Three Peaks, Press
and Dental America in April 1997, August 1997, November 1997, November 1997 and
December 1997, respectively, which provided three, seven, ten, ten and eleven
additional months of depreciation and amortization expense, respectively, for
1998. Additionally, the Company recorded a $3.3 million (pretax) unusual charge
in the fourth quarter of 1998 for goodwill impairment associated with the
closure of certain Dental Offices in Houston and Austin, Texas and Arkansas. As
a percent of Revenue, depreciation and amortization expense increased to 7.6%
from 4.3% for 1998 and 1997, respectively. This increase was due principally to
the $3.3 million (pretax) unusual charge recorded in the fourth quarter of 1998
and to the acquired companies having higher depreciation and amortization
expense as a percent of Revenue than the Company's existing operations.

         Operating income. Operating income decreased to $2.5 million for 1998
from $5.1 million for 1997, a decrease of $2.6 million, or 51.0%. This decrease
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added combined operating income of $1.7 million for the respective
periods following the dates of acquisition and a $5.5 million increase in
operating income in existing markets in 1998 offset by increased corporate


                                       13
<PAGE>   14


expenses of $2.1 million due to the development of corporate infrastructure and
the $7.7 million (pretax) of unusual charges recorded in the fourth quarter of
1998, as described above, representing costs associated with a change in
employment status of Dr. Melamed, goodwill impairment and the establishment of
litigation reserves and reserves for the closure of certain Dental Offices. As a
percent of Revenue, operating income decreased to 1.9% from 7.4% for 1998 and
1997, respectively. This decrease was due principally to the $7.7 million
(pretax) unusual charges recorded in the fourth quarter of 1998.

         Interest expense, net. Interest expense, net increased to $2.9 million
for 1998 from $1.5 million for 1997, an increase of $1.4 million, or 85.9%. This
increase is attributable to the higher average outstanding debt balances in 1998
versus 1997. Effective November 1997, the Company entered into a new Credit
Facility (the "Credit Facility") with a bank syndicate. Average debt outstanding
under the Credit Facility totaled $29.5 million for 1998 compared to average
debt outstanding of $14.7 million for 1997.

         Minority interest. Minority interest expense decreased to $12,000 for
1998 from $46,000 for 1997, a decrease of $34,000, or 73.9%. This decrease
resulted from lower net income relating to the acquisitions of DCI, which owned
a fifty percent ownership in two partnerships operating four Dental Offices in
Indiana, Dental America, which owned a twenty percent interest in a group dental
practice with two offices located in Midland and Odessa, Texas, and MDCC, which
owned a thirty-five percent interest in a group dental practice with two offices
in Austin, Texas and five offices in New Mexico for the twelve months ended
December 31, 1998 and 1997, respectively.

         Income taxes. Income tax expense decreased to $31,000 for 1998 from
$1.4 million for 1997, a decrease of $1.3 million, or 97.7%. This decrease was
the result of lower net income before taxes, which decreased to a net loss
before taxes of $393,000 for 1998 from $3.5 million for 1997, a decrease of $3.9
million, or 111.3%.

         Extraordinary loss. The Company incurred an extraordinary loss of
$264,000, net of tax for 1997 as it extinguished its prior credit facility and
wrote off $431,000 in unamortized loan fees, net of a tax benefit of $167,000.



                                       14
<PAGE>   15


QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

    The following table sets forth unaudited quarterly consolidated operating
results for each of the Company's last eight quarters ended December 31, 1999.
This information has been prepared by the Company on a basis consistent with the
Company's audited consolidated financial statements and includes all adjustments
(consisting only of normal recurring adjustments) that management considers
necessary for a fair presentation of the data. These quarterly consolidated
results are not necessarily indicative of future consolidated results of
operations. This information should be read in conjunction with the Consolidated
Financial Statements and Notes.

<TABLE>
<CAPTION>
                                                                            QUARTER ENDED
                                              -------------------------------------------------------------------------------------
                                              DEC. 31,   SEPT. 30,  JUNE 30,   MAR. 31,   DEC. 31,    SEPT. 30,  JUNE 30,  MAR. 31,
                                              1999 (1)     1999       1999       1999      1998 (2)      1998       1998     1998
                                              --------   --------   --------   --------   --------    --------   --------  --------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                           <C>        <C>        <C>        <C>        <C>         <C>        <C>       <C>
Patient revenue, net ........................ $ 51,949   $ 51,196   $ 51,470   $ 49,455   $ 45,378    $ 34,090   $ 25,853  $ 24,280
Operating expenses:
  Provider salaries and benefits ............   16,920     16,792     17,210     16,167     14,910      10,484      7,671     7,218
  Clinical and other salaries and benefits ..   13,451     13,310     13,379     13,055     13,873       9,252      6,965     6,466
  Dental supplies ...........................    2,725      2,432      2,580      2,649      2,372       1,624      1,462     1,440
  Laboratory fees ...........................    2,564      2,794      2,211      2,319      2,155       1,510      1,231     1,058
  Occupancy .................................    2,419      2,577      2,493      2,576      2,856       1,737      1,343     1,329
  Advertising ...............................      641        838        864        730        745         599        578       515
  Other operating expenses ..................    3,501      5,769      6,184      6,579      8,000       3,930      2,900     3,024
  Depreciation and amortization .............    2,562      2,769      2,656      2,562      5,816       1,719      1,241     1,087
                                              --------   --------   --------   --------   --------    --------   --------  --------
                                                44,783     47,281     47,577     46,637     50,727      30,855     23,391    22,137
                                              --------   --------   --------   --------   --------    --------   --------  --------
Operating income (loss) .....................    7,166      3,915      3,893      2,818     (5,349)      3,235      2,462     2,143
Interest expense, net .......................    2,215      1,788      1,905      1,778      1,876         482        231       282
Minority interest in combined subsidiaries ..        6         48        137         34        (37)        (15)        15        50
                                              --------   --------   --------   --------   --------    --------   --------  --------
Income (loss) before income taxes ...........    4,945      2,079      1,851      1,006     (7,188)      2,768      2,216     1,811
Income taxes ................................    1,374        809        725        392     (2,620)      1,080        864       707
                                              --------   --------   --------   --------   --------    --------   --------  --------
Net income (loss) ........................... $  3,571   $  1,270   $  1,126   $    614   $ (4,568)   $  1,688   $  1,352  $  1,104
                                              ========   ========   ========   ========   ========    ========   ========  ========


Net income (loss) per common share            $   0.28   $   0.10   $   0.09   $   0.05   $  (0.38)   $   0.16   $   0.13  $   0.11
                                              ========   ========   ========   ========   ========    ========   ========  ========
Net income (loss) per common share-
  assuming dilution                           $   0.28   $   0.10   $   0.09   $   0.05   $  (0.38)   $   0.16   $   0.13  $   0.11
                                              ========   ========   ========   ========   ========    ========   ========  ========
Weighted average number of common
  shares outstanding - basic                    12,719     13,181     13,003     12,086     11,936      10,708     10,324    10,235
                                              ========   ========   ========   ========   ========    ========   ========  ========
Weighted average number of common and
  common equivalent shares outstanding -
  diluted                                       12,732     13,181     13,003     12,086     11,936      10,797     10,466    10,322
                                              ========   ========   ========   ========   ========    ========   ========  ========
</TABLE>

(1)   Includes the effect of an approximately $2.9 million credit, net of
      related legal expenses, relating to the settlement of a dispute with the
      sellers of an affiliated dental practice offset by a $588,000 income tax
      adjustment relating to goodwill amortization that is not deductible for
      tax purposes.

(2)   Includes the effect of approximately $7.7 million (pre-tax) in charges
      relating primarily to costs associated with a change in employment status
      of Dr. Melamed, litigation reserves, goodwill impairment and Dental Office
      closure costs.


                                       15
<PAGE>   16


<TABLE>
<CAPTION>
                                                                            QUARTER ENDED
                                              -------------------------------------------------------------------------------------
                                              DEC. 31,   SEPT. 30,  JUNE 30,   MAR. 31,   DEC. 31,    SEPT. 30,  JUNE 30,  MAR. 31,
                                              1999 (1)     1999       1999       1999      1998 (2)      1998       1998     1998
                                              --------   --------   --------   --------   --------    --------   --------  --------
                                                                        PERCENTAGE OF REVENUE
                                              -------------------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>        <C>         <C>        <C>        <C>       <C>
Patient revenue, net ........................   100.0%     100.0%     100.0%     100.0%      100.0%     100.0%     100.0%    100.0%
Operating expenses:
  Provider salaries and benefits ............    32.6       32.8       33.4       32.7        32.9       30.8       29.7      29.7
  Clinical and other salaries and benefits ..    25.9       26.0       26.0       26.4        30.7       27.1       26.9      26.6
  Dental supplies ...........................     5.2        4.8        5.0        5.4         5.2        4.8        5.7       5.9
  Laboratory fees ...........................     4.9        5.5        4.3        4.7         4.7        4.4        4.8       4.4
  Occupancy .................................     4.7        5.0        4.8        5.2         6.3        5.1        5.2       5.5
  Advertising ...............................     1.2        1.6        1.7        1.5         1.6        1.8        2.2       2.1
  Other operating expenses ..................     6.8       11.3       12.0       13.2        17.6       11.5       11.2      12.5
  Depreciation and amortization .............     4.9        5.4        5.2        5.2        12.8        5.0        4.8       4.5
                                                -----      -----      -----      -----       -----      -----      -----     -----
                                                 86.2       92.4       92.4       94.3       111.8       90.5       90.5      91.2
                                                -----      -----      -----      -----       -----      -----      -----     -----
Operating income (loss) .....................    13.8        7.6        7.6        5.7       (11.8)       9.5        9.5       8.8
Interest expense, net .......................     4.3        3.4        3.7        3.6         4.1        1.4        0.9       1.1
Minority interest in combined subsidiaries ..     --         0.1        0.3        0.1        (0.1)       --         --        0.2
                                                -----      -----      -----      -----       -----      -----      -----     -----

Income (loss) before income taxes ...........     9.5        4.1        3.6        2.0       (15.8)       8.1        8.6       7.5
Income taxes ................................     2.6        1.6        1.4        0.8        (5.7)       3.1        3.4       3.0
                                                -----      -----      -----      -----       -----      -----      -----     -----
Net income (loss) ...........................     6.9%       2.5%       2.2%       1.2%      (10.1)%      5.0%       5.2%      4.5%
                                                =====      =====      =====      =====       =====      =====      =====     =====
</TABLE>


(1)  Includes the effect of an approximately $2.9 million credit, net of related
     legal expenses, relating to the settlement of a dispute with the sellers of
     an affiliated dental practice offset by a $588,000 income tax adjustment
     relating to goodwill amortization that is not deductible for tax purposes.

(2)  Includes the effect of approximately $7.7 million (pre-tax) in charges
     relating primarily to costs associated with a change in employment status
     of Dr. Melamed, litigation reserves, goodwill impairment and Dental Office
     closure costs.


                                       16
<PAGE>   17


LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1999, the Company had an $8.8 million working capital
deficit, representing a decrease of $5.1 million from the working capital
deficit of $13.9 million at December 31, 1998. This working capital deficit
included $32.2 million in current liabilities, consisting of $2.0 million in
accounts payable, $15.9 million in accrued liabilities, $4.8 million in amounts
payable to dental group practices as consideration for accounts receivable
acquired from such group practices and $9.5 million in current maturities of
notes payable and capital lease obligations. These current liabilities were
offset by current assets of $23.4 million, consisting of $3.9 million in cash
and cash equivalents, $17.4 million in accounts receivable, net of allowances,
prepaid expenses of $1.6 million and $427,000 in federal income tax receivable.
The Company's principal sources of liquidity as of December 31, 1999 consisted
of cash and cash equivalents, net accounts receivable and borrowing capacity
under the Credit Facility. There can be no assurance that the Company's working
capital deficit will not continue in the future, particularly if additional
indebtedness requires current amortization of principal.

         For the years ended December 31, 1999 and 1998, cash provided by
operations was $5.0 million, net of a non-cash reduction of other liabilities of
$3.4 million due to the settlement of a dispute with the sellers of an
affiliated dental practice, and $3.4 million, respectively.

         Cash used in investing activities was $13.9 million for the year ended
December 31, 1999 and $55.5 million for the year ended December 31, 1998. For
the year ended December 31, 1999, $8.8 million was utilized for acquisitions and
$5.1 million was invested in the purchase of additional property and equipment.
For the year ended December 31, 1998, $48.6 million was utilized for
acquisitions and $6.9 million was invested in the purchase of additional
property and equipment.

         For the years ended December 31, 1999 and 1998, cash provided by
financing activities was $8.8 million and $53.1 million, respectively. In the
year ended December 31, 1999, the cash provided was primarily comprised of $16.8
million in net borrowings offset by the repayment of $6.2 million in outstanding
debt and $1.6 million in debt issue costs. In the year ended December 31, 1998,
the cash provided was primarily comprised of $55.2 million in net borrowings
offset by the repayment of $1.7 million in outstanding debt.

         The Company has a Credit Facility with a bank syndicate, which was
amended in June 1999. Under the Credit Facility, the Company may borrow up to
$85.0 million. At December 31, 1999 the Company had $80.7 million outstanding
under the Credit Facility and remaining availability of $4.3 million. The
amounts outstanding under the Credit Facility bear interest at variable rates
which are based upon either the lender's base rate or LIBOR, plus, in either
case, a margin which varies according to the ratio of the Company's funded debt
to EBITDA, each as defined in the Credit Facility. The Credit Facility prohibits
the Company from incurring indebtedness, incurring liens, disposing of assets,
making investments or making acquisitions without bank approval, and requires
the Company to maintain certain financial ratios on an ongoing basis. The Credit
Facility is secured by pledges of all of the outstanding capital stock of, or
other equity interests in, the Company's subsidiaries, and a lien on
substantially all of the assets of the Company.

         During 1999, the Company amended its loan agreement associated with the
Credit Facility. Changes made in the amendment included, but were not limited
to, modifications of certain defined terms and financial ratios, additions of
newly defined terms, limitations on capital expenditures, modifications to the
definition of Events of Default and the requirement of prior bank approval for
consolidations, mergers, acquisitions, and sales of assets. The methodology by
which the Company's borrowing rates are determined was also adjusted as part of
the amendment. In conjunction with this amendment, the bank syndicate received
contingency compensation in the form of warrants of the Company representing 3%
of the fully diluted outstanding common shares of the Company at the time of
agreement, subject to anti-dilution provisions, for an exercise price of $0.01
per share. The warrants are contingent based upon specific performance of the
Company in conjunction with dates set forth in a vesting schedule. The vesting
dates for the warrants are March 31, April 30, May 31, and June 30, 2000 upon
such dates, an aggregate 3% of the fully diluted outstanding common stock will
vest at a rate of 1/2%, 1/2%, 1/2%, and 1 1/2%, respectively. The Company
believes that it will not meet the specific performance requirements under this
amendment and that all of the warrants will vest by June 30, 2000.


                                       17
<PAGE>   18


         As of December 31, 1999, the Company is in compliance with the terms of
the Credit Facility. There can be no assurance that the Company will maintain
the ratios as required by the loan agreement. The failure to maintain these
ratios could adversely affect the Company's operations in future periods.

         The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, the Company may not have
sufficient cash from operations to fund interest expense and certain
non-recurring and contingency payments aggregating approximately $3.5 million
during the second quarter of 2000. In addition, the Company does not expect to
generate sufficient cash from operations to repay its obligations under its
short-term note, due June 30, 2000 under the Credit Facility, which the Company
expects will approximate $10.0 million at that time. Failure to make the
required principal payment would constitute a default under the Credit Facility.
The Company is currently discussing with its lenders an extension of this
short-term note and the extension of additional credit to cover the potential
cash shortfall in the second quarter. However, the Company can provide no
assurance that its lenders will extend the maturity of this short-term note or
that additional credit will be available to meet the potential cash shortfall in
the second quarter. Assuming that the Company can obtain additional financing in
the second quarter to meet any cash shortfall, the Company believes that cash
from operations will be sufficient in the third and fourth quarters of 2000 to
meet its obligations.

         In order to meet its short-term and long-term liquidity needs, the
Company may issue additional equity and debt securities, subject to market and
other conditions. In addition, the Company is also in the process of contacting
potential acquirors in order to determine if a sale of the Company would be more
beneficial to the Company's stockholders than raising additional capital to meet
its liquidity needs. The Company expects that potential acquirors would commence
due diligence procedures in the second quarter 2000. There can be no assurance
that any such sale will be available on terms acceptable to the Company. In the
event a sale transaction is not consummated, the Company would pursue the
issuance of debt securities and has signed an engagement letter with an
investment bank to pursue the issuance of these securities. Although there can
be no assurance that this financing will be available on terms acceptable to the
Company, the Company believes that additional sources of liquidity are available
at rates that would increase the Company's interest obligations. The failure to
raise the funds necessary to finance its future cash requirements could
adversely affect the Company's operations in future periods.



                                       18
<PAGE>   19

YEAR 2000 ISSUE

         The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.

         Many existing computer programs and databases use two digits to
identify a year in the date field (i.e., 98 would represent 1998). These
programs and databases were not originally designed to operate after December
31, 1999. If left uncorrected, these computer programs and databases were apt to
fail or create erroneous results after December 31, 1999.

         The Company is not aware of any significant problems that have arisen
with respect to the Company or any of its suppliers or customers as a result of
year 2000 issues. Prior to the year 2000, the Company completed a comprehensive
review of its key management information systems and operational systems,
including equipment with embedded microprocessors. As part of this review, the
Company completed any required program and database modifications or
replacements. The Company also reviewed the readiness of its major customers,
which consist of third-party payors such as preferred provider plans, and
certain key suppliers.

         The Company has spent approximately $90,000 to date related to its
review of year 2000 issues. Based on the lack of any problems related to the
year 2000 issue since December 31, 1999, the Company does not expect that it
will experience any material year 2000 problems in the future or incur
significant additional costs to address year 2000 issues. The Company believes
that the total cost of addressing year 2000 issues will not be material to its
financial condition, liquidity or results of operations.

         The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Section 27A Securities Act of 1933. These
forward-looking statements represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Readiness Disclosure", the
words "believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to its estimated cost of addressing
all year 2000 issues and the Company's belief that it will not have significant
problems related to the year 2000 in the future. All forward-looking statements
involve a number of risks and uncertainties that could cause the actual results
to differ materially from the projected results. Factors that may cause these
differences include, but are not limited to, the availability of qualified
personnel and other information technology resources and the ability to identify
and remediate all date sensitive lines of computer code or to replace embedded
computer chips in affected systems or equipment.




                                       19
<PAGE>   20


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

RISKS ASSOCIATED WITH ACQUISITION STRATEGY

         The Company has grown substantially in a relatively short period of
time, principally through acquisitions. The Company has completed 30
acquisitions resulting in the addition of 173 Dental Offices since January 1,
1996. The Company has incurred substantial indebtedness to finance these
acquisitions. The Company has experienced setbacks in managing and integrating
certain acquired operations, which has adversely affected the Company's
operating results. Failure of the Company's management to manage and integrate
the Company's existing and acquired operations and to improve the operating
performance of these operations could continue to have a material adverse effect
on the Company's business, financial condition and operating results.

         The Company's long-term growth strategy emphasizes entering selected
new markets by acquiring group practices which have a significant market
presence or which the Company believes can achieve such a presence in the near
term, and seeking to use the acquired practices as a "pedestal" from which to
expand. The Company's "pedestal" expansion strategy for new markets entered
through acquisition are untested and there can be no assurance that the Company
will be able to implement such strategy successfully.

         The Company's management has historically devoted substantial time and
resources to acquisition-related activities. There can be no assurance that
suitable acquisition candidates will be identified, that acquisitions will be
consummated on terms favorable to the Company, on a timely basis or at all, or
that the Company will have sufficient capital resources to complete additional
acquisitions. In the event the closing of a planned acquisition fails to occur
or is delayed, the Company's financial results may be materially lower than
analysts' expectations, which likely would cause a decline, perhaps substantial,
in the market price of the Company's Common Stock. In addition, increasing
consolidation in the dental services industry may result in an increase in
purchase prices required to be paid by the Company to acquire dental practices.

         In the event the Company is able to identify and consummate
acquisitions, the integration of such acquisitions may be a difficult, costly
and time-consuming process. During the period immediately following an
acquisition, the Company's expenditures related to the integration of the
acquired dental practices may exceed the operating cash flow of such dental
practices. Moreover, the Company's operating results in fiscal quarters
immediately following an acquisition may be adversely affected while the Company
attempts to integrate the acquired practices. As a result, there can be no
assurance that future acquisitions will not have a material adverse effect on
the Company's business, financial condition and operating results.

RISKS ASSOCIATED WITH EXPANSION WITHIN EXISTING MARKETS

         The Company seeks to increase revenue and profitability in existing
markets by physically expanding its existing Dental Offices to add more general
dentists, specialists and hygienists, by establishing Dental Offices on a de
novo basis and by improving the efficiency of the Dental Offices. The Company's
success will be dependent, in part, upon increasing the revenue from existing
Dental Offices and successfully establishing de novo Dental Offices. The Company
is subject to risks associated with this growth strategy, including the risk
that the Company will be unable to successfully expand existing Dental Offices
or establish de novo Dental Offices, or increase efficiency through its
management of the existing Dental Offices.


                                       20
<PAGE>   21


MANAGEMENT OF GROWTH

         The Company has experienced a period of rapid growth with a substantial
increase in the number of its Dental Offices, resulting from expansion into 20
new markets since January 1, 1996. The number of Dental Offices owned and
managed by the Company increased from 12 at January 1, 1996 to 190 at December
31, 1999. This growth has placed, and will continue to place, strains on the
Company's management, operations and systems. The Company's ability to compete
effectively will depend upon its ability to hire, train and assimilate
additional management and other employees and its ability to expand, improve and
effectively utilize its operating, management, marketing and financial systems
to accommodate its expanded operations. Any failure by the Company's management
to effectively anticipate, implement and manage the changes required to sustain
the Company's growth may have a material adverse effect on the Company's
business, financial condition and operating results.

POSSIBLE VOLATILITY OF STOCK PRICE

         The trading price of the Company's Common Stock was subject to a major
decline triggered by the Company's failure to meet the expectations of
securities analysts and investors for the fourth quarter and year ended December
31, 1998. The Company cannot provide any assurance that the trading price of the
Company's Common Stock will recover or that it will not experience a further
decline. Moreover, the trading price of the Company's Common Stock could be
subject to additional fluctuations in response to quarter-to-quarter variations
in the Company's operating results, material announcements by the Company or its
competitors, governmental regulatory action, conditions in the health care
industry generally or in the dental services industry specifically, or other
events or factors, many of which are beyond the Company's control. The Company's
operating results in future quarters may be below the expectations of securities
analysts and investors. In such event, the price of the Company's Common Stock
would likely decline, perhaps substantially.

         Effective September 14, 1999 the Company transferred its stock listing
to the NASDAQ SmallCap Market from the NASDAQ National Market system ("NMS").
This move occurred because the trading price of the Company's Common Stock did
not demonstrate compliance with NASDAQ's $5 minimum bid price for trading on the
NMS. Listing on the NASDAQ SmallCap Market may result in the Company's stock
price experiencing greater volatility than it previously experienced.

LIMITED CAPITAL; NEED FOR ADDITIONAL FINANCING

         Implementation of the Company's growth strategy has required and is
expected to continue to require significant capital resources. Such resources
will be needed to acquire or establish additional Dental Offices and for the
effective integration, operation and expansion of the Dental Offices. The
Company historically has used a combination of cash, promissory notes, stock and
the assumption of certain liabilities (including indebtedness) as consideration
in acquisitions of dental practices and intends to continue to do so. The
Company cannot be certain that its cash flow generated from operations and
borrowings available under the Company's existing Credit Facility or any
successor credit facility will be sufficient to meet its capital requirements
over the next few years. The Company anticipates that it will need from time to
time to raise additional capital through equity or debt financings. Additional
debt or non-Common Stock equity financings could be required to the extent that
the Company's Common Stock does not have a market value sufficient to permit its
use for future financing needs. The Company may not be able to obtain additional
required capital on satisfactory terms, if at all. In particular, the Company's
existing Credit Facility prohibits the Company from incurring indebtedness,
incurring liens, disposing of assets, making investments or making acquisitions
without bank approval, and requires the Company to maintain certain financial
ratios on an ongoing basis. The failure to raise the funds necessary to finance
the expansion of the Company's operations or meet the Company's other capital
requirements could materially and adversely affect the Company's ability to
pursue its strategy and its operating results in future periods.


                                       21
<PAGE>   22


PURSUIT OF STRATEGIC ALTERNATIVES

         The Company recently announced that it has retained the services of
Bank of America Securities LLC to explore strategic alternatives in order to
expand the Company's growth opportunities and maximize stockholder value. These
alternatives include potential strategic transactions, such as the possible sale
or merger of the Company. There can be no assurance that any actions taken by
the Company will result in the identification of any such transaction. There
also can be no assurance that, if any such transaction is commenced, it will be
completed or as to the value that any such transaction might have for the
Company's stockholders.

AVAILABILITY OF DENTISTS

         All dentists practicing at the Dental Offices have entered into
employment agreements individually or through their professional corporations or
independent contractor agreements through their professional corporations. Such
agreements typically contain a non-competition agreement for up to three years
following termination of the agreement within a specified geographic area,
usually a specified number of miles from the relevant Dental Office. The
agreements with dentists who have sold their practices to the Company generally
are for a specified initial term of up to five years. Although the Company will
endeavor to renew agreements with affiliated dentists or their professional
corporations, in the event that many of the Company's affiliated dentists
terminate or do not renew their agreements or in the event the non-competition
agreements are determined to be unenforceable or more limited in scope than
their terms, the Company's business, financial condition and operating results
could be materially and adversely affected. The Company has historically
experienced difficulty at times in retaining dentists in some of its markets,
which has adversely affected the Company's financial condition and operating
results. There can be no assurance that the Company will not experience further
difficulty in retaining dentists in the future and that the Company's financial
results will not be adversely affected as a result. In addition, the Company's
expansion strategy is dependent on the availability and successful recruitment
of dentists. The Company may not be able to successfully recruit new dentists
for its existing and newly established Dental Offices, which may have a material
adverse effect on the Company's expansion strategy and its business, financial
condition and operating results.

RISKS ASSOCIATED WITH COST CONTAINMENT INITIATIVES

         The health care industry, including the dental services market, is
experiencing a trend toward cost containment, as third-party and government
payors seek to impose lower reimbursement rates upon providers. The Company
believes that this trend will continue and will increasingly affect dental
services. This may result in a reduction in per-patient and per-procedure
revenue from historic levels. Significant reductions in payments to dentists or
other changes in reimbursement by third-party payors for dental services may
have a material adverse effect on the Company's business, financial condition
and operating results.

RISKS ASSOCIATED WITH CAPITATED PAYMENT ARRANGEMENTS

         Part of the Company's growth strategy involves obtaining capitated
managed dental care contracts. Capitated managed dental care contracts are
between dental benefits organizations, the Company and the dental professional
corporations (the "P.C.s") (except in Wisconsin). The Company negotiates and
administers these contracts on behalf of the P.C.s pursuant to management
agreements with the P.C.s (the "Management Agreements"). Because the Company
assumes responsibility under such Management Agreements for all aspects of the
operation of the dental practices (other than the practice of dentistry) and
thus bears all costs of the P.C.s associated with the provision of dental
services at the Dental Offices (other than compensation and benefits of dentists
and hygienists), the risk of over-utilization of dental services at the Dental
Offices under the capitated managed dental care plans is effectively shifted to
the Company. In contrast, under traditional indemnity insurance arrangements,
the insurance company pays whatever reasonable charges are billed by the dental
group practice for the dental services provided.

         There can be no assurance that the Company will be able to negotiate
future capitation arrangements on behalf of itself or the P.C.s, as applicable,
on satisfactory terms or at all, or that the fees offered in current capitation
arrangements will not be reduced to levels unsatisfactory to the Company.
Moreover, to the extent that costs incurred by the Company's affiliated dental
practices in providing services to patients covered by capitated managed dental
care contracts exceed the revenue under such contracts, the Company's business,
financial condition and operating results may be materially and adversely
affected.


                                       22
<PAGE>   23


GEOGRAPHIC CONCENTRATION

         The geographic concentration of the Company's operations in markets
such as the Dallas-Fort Worth, Houston, Wisconsin, Arkansas and Utah markets
increases the risk to the Company of adverse economic or regulatory developments
or action within these markets. In addition, the Company's growth strategy is
dependent, in part, upon acquiring larger group practices in selected markets.
The Company's strategy of focused expansion within selected markets increases
the risk to the Company that adverse economic or regulatory developments in one
or more of these markets may have a material adverse effect on the Company's
business, financial condition and operating results.

GOVERNMENT REGULATION

         The practice of dentistry is regulated at both the state and federal
levels. There can be no assurance that the regulatory environment in which the
Company or P.C.s operate will not change significantly in the future. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
general, regulation of health care-related companies is increasing. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The ability of the Company to operate
profitably will depend in part upon the ability of the Company and the P.C.s to
operate in compliance with applicable health care regulations.

         Although the Company believes its operations as currently conducted are
in material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.

RISKS ARISING FROM HEALTH CARE REFORM

         There can be no assurance that the laws and regulations of the states
in which the Company operates will not change or be interpreted in the future
either to restrict or adversely affect the Company's relationships with dentists
or the operation of Dental Offices. Federal and state governments periodically
consider various types of health care initiatives and revisions to the health
care and health insurance system. Such initiatives and revisions could, if
adopted, have a material adverse effect on the Company's business, financial
condition and operating results. It is uncertain what legislative programs, if
any, will be adopted in the future, or what actions Congress or state
legislatures may take regarding health care reform proposals or legislation. In
addition, changes in the health care industry, such as the growth of managed
care organizations and provider networks, may result in lower payments for the
services of the Company's affiliated dental practices.


                                       23
<PAGE>   24


POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY

         In recent years, dentists have become subject to an increasing number
of lawsuits alleging malpractice and related legal theories. Some of these
lawsuits involve large claims and significant defense costs. Any suits involving
the Company or dentists at the Dental Offices, if successful, could result in
substantial damage awards that may exceed the limits of the Company's insurance
coverage.

COMPETITION

         The dental practice management segment of the dental services industry,
currently in its formative stage, is highly competitive and is expected to
become increasingly more competitive. In this regard, the Company expects that
the provision of multi-specialty dental services at convenient locations will
become increasingly more common. The Company is aware of several dental practice
management companies that are currently operating in its existing markets. There
are also a number of companies with dental practice management businesses
similar to that of the Company currently operating in other parts of the country
which may enter the Company's existing markets in the future. Such competitors
may be better capitalized or otherwise enjoy competitive advantages which may
make it difficult for the Company to compete against them or to acquire
additional Dental Offices on terms acceptable to the Company. As the Company
seeks to expand its operations into new markets, it is likely to face
competition from dental practice management companies which already have
established a strong business presence in such locations.

RELIANCE ON CERTAIN PERSONNEL

         The success of the Company, including its ability to complete and
integrate acquisitions, depends on the continued services of a relatively
limited number of members of the Company's senior management. Implementation of
the Company's business strategy will require the addition of qualified
management personnel. To date, the Company has experienced difficulty in
attracting enough qualified management personnel to keep pace with its growth.
The loss of the services of one or more members of the Company's senior
management or the failure to add qualified management personnel could have a
material adverse effect on the Company's business, financial condition and
operating results.

RISKS ASSOCIATED WITH INTANGIBLE ASSETS

         The acquisition of dental practices may result in significant increases
in the Company's intangible assets relating to goodwill. The Company expects the
amount allocable to goodwill on its consolidated balance sheet to increase in
the future if additional acquisitions are made, which will increase the
Company's amortization expense. In the event of any sale or liquidation of the
Company or a portion of its assets, there can be no assurance that the value of
the Company's intangible assets will be realized. In addition, the Company
continually evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of the amount allocable to the
Company's goodwill may not be recoverable. When factors indicate that the amount
allocable to the Company's goodwill should be evaluated for possible impairment,
the Company may be required to reduce the carrying value of such assets. Based
on such an assessment, the Company was required to write off $3.3 million in
impaired goodwill in the quarter ended December 31, 1998. Any future
determination requiring the write off of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition and operating results.


                                       24
<PAGE>   25


DEPENDENCE ON MANAGEMENT AGREEMENTS, THE P.C.s AND AFFILIATED DENTISTS

         Except with respect to its Wisconsin operations, the Company receives
fees for services provided to the P.C.s under a Management Agreement. The
Company owns all of the operating assets of the Dental Offices, but does not
employ or contract with dentists, employ hygienists or control the provision of
dental care at the Dental Offices, except in Wisconsin. The Company's revenue is
dependent on the revenue generated by the P.C.s at the Dental Offices.
Therefore, effective and continued performance of dentists providing services
for the P.C.s is essential to the Company's long-term success. Under each
Management Agreement, the Company pays substantially all of the operating and
nonoperating expenses associated with the provision of dental services except
for the salaries and benefits of the dentists and hygienists. Any material loss
of revenue by the P.C.s would have a material adverse effect on the Company's
business, financial condition and operating results, and any termination of a
Management Agreement (which is permitted in the event of a bankruptcy or
dissolution or material breach by either the P.C. or the Company, or upon 90
days' notice by the Company) could have such an effect. In the event of a breach
of a Management Agreement by a P.C., there can be no assurance that the legal
remedies available to the Company will be adequate to compensate the Company for
its damages resulting from such breach. The P.C.s are owned by dentists who are
licensed to practice dentistry in the relevant state. The Company has entered
into a succession agreement with the respective stockholders of the P.C.s
whereby upon termination of such stockholder's affiliation with the Company by
the Company or such stockholder for any reason, the stockholder is required to
sell his or her ownership in the P.C. for a nominal amount and the Company is
entitled to designate a successor.

EFFECTIVE CONTROL BY PRINCIPAL STOCKHOLDERS

         As of December 31, 1999, Dr. Warren Melamed, along with members of his
family and trusts for the benefit of members of his family, and investors
principally including investment funds associated with TA Associates, Inc.
beneficially owned in the aggregate approximately 18.3% and 13.3%, respectively,
of the Company's outstanding Common Stock. As a result, these stockholders will
have the ability to control or exert significant influence over the outcome of
fundamental corporate transactions requiring stockholder approval, including
mergers and sales of assets and the election of the members of the Company's
Board of Directors. Sales of shares by such stockholders could reduce the level
of such influence.


                                       25
<PAGE>   26



                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                               <C>
Report of Independent Public Accountants                          1

Consolidated Balance Sheets as of December 31, 1999 and 1998      2

Consolidated Statements of Income for the Years Ended             3
         December 31, 1999, 1998 and 1997

Consolidated Statements of Stockholders' Equity for the Years     4
         Ended December 31, 1999, 1998 and 1997

Consolidated Statements of Cash Flows for the Years Ended         5
         December 31, 1999, 1998 and 1997

Notes to Consolidated Financial Statements                        6
</TABLE>


                                       26
<PAGE>   27


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



TO THE STOCKHOLDERS OF MONARCH DENTAL CORPORATION:

We have audited the accompanying consolidated balance sheets of Monarch Dental
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Monarch Dental Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.



                                             ARTHUR ANDERSEN LLP

Dallas, Texas,
February 23, 2000



                                       1
<PAGE>   28


                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                -------------------------------
                                                                     1999              1998
                                                                -------------     -------------
                                    ASSETS
<S>                                                             <C>               <C>
    Current assets:
       Cash and cash equivalents                                $   3,921,193     $   3,992,845
       Accounts receivable, net of allowances of
         approximately $12,678,000 and $9,419,000 in
         1999 and 1998, respectively                               17,408,886        15,328,575
       Prepaid expenses                                             1,647,897         1,101,649
       Income tax receivable                                          426,970         1,239,590
                                                                -------------     -------------
           Total current assets                                    23,404,946        21,662,659
    Property and equipment, net of accumulated
         depreciation of approximately $14,363,000 and
         $9,270,000 in 1999 and 1998, respectively                 19,071,714        18,725,117
    Goodwill, net of accumulated amortization of
         approximately $9,938,000 and $4,622,000 in
         1999 and 1998, respectively                              132,459,266       123,160,844
    Deferred income taxes                                             340,999         2,082,318
    Other assets                                                    3,666,642         1,786,899
                                                                -------------     -------------
           Total assets                                         $ 178,943,567     $ 167,417,837
                                                                =============     =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:
       Accounts payable                                         $   2,028,804     $   6,073,726
       Accrued payroll                                              4,231,751         5,849,952
       Accrued liabilities                                         10,862,474         9,393,126
       Accrued restructuring charges                                  808,975         4,356,384
       Payable to affiliated dental group practices                 4,755,666         5,101,925
       Current maturities of notes payable and
         capital lease obligations                                  9,539,775         4,789,960
                                                                -------------     -------------
            Total current liabilities                              32,227,445        35,565,073
    Notes payable                                                  76,728,008        70,515,007
    Capital lease obligations                                         455,240           813,073
    Other liabilities                                               2,849,602         2,933,302
                                                                -------------     -------------
            Total liabilities                                     112,260,295       109,826,455
    Minority interest in consolidated subsidiaries                     88,818           128,261
    Commitments and contingencies
    Stockholders' equity:
       Preferred Stock, $.01 par value, 2,000,000 shares
         authorized; no shares issued or outstanding                       --                --
       Common Stock, $.01 par value, 50,000,000 shares
         authorized; 12,724,886 and 11,982,254 shares issued
         and outstanding in 1999 and 1998, respectively               127,249           119,823
       Common Stock to be issued, 55,172 shares in 2000               100,000                --
       Additional paid-in capital                                  65,882,409        63,439,123
       Retained earnings (deficit)                                    484,796        (6,095,825)
                                                                -------------     -------------
            Total stockholders' equity                             66,594,454        57,463,121
                                                                -------------     -------------
            Total liabilities and stockholders' equity          $ 178,943,567     $ 167,417,837
                                                                =============     =============
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       2
<PAGE>   29


                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                -------------------------------------------------
                                                                     1999             1998               1997
                                                                -------------     -------------      -------------
<S>                                                             <C>               <C>                <C>
    Patient revenue, net                                        $ 204,069,657     $ 129,600,803      $  68,619,379
    Operating expenses:
       Provider salaries and benefits                              67,089,126        40,283,317         21,178,925
       Clinical and other salaries and benefits                    53,195,318        36,556,073         18,802,599
       Dental supplies                                             10,385,867         6,898,237          4,281,608
       Laboratory fees                                              9,888,105         5,953,830          2,902,088
       Occupancy                                                   10,065,790         7,264,869          3,709,226
       Advertising                                                  3,072,988         2,436,481          1,781,017
       Other operating expenses                                    22,031,181        17,854,560          7,944,179
       Depreciation and amortization                               10,548,650         9,862,928          2,938,466
                                                                -------------     -------------      -------------
                                                                  186,277,025       127,110,295         63,538,108
                                                                -------------     -------------      -------------
    Operating income                                               17,792,632         2,490,508          5,081,271
    Interest expense, net                                           7,687,174         2,871,689          1,545,340
    Minority interest in consolidated subsidiaries                    224,474            11,524             45,661
                                                                -------------     -------------      -------------
    Income (loss) before income taxes and
       extraordinary item                                           9,880,984          (392,705)         3,490,270
    Income taxes                                                    3,300,363            31,480          1,355,637
                                                                -------------     -------------      -------------
    Income (loss) before extraordinary item                         6,580,621          (424,185)         2,134,633
    Extraordinary loss on early extinguishment of debt,
       net of applicable tax benefit of $166,540                           --                --           (263,796)
                                                                -------------     -------------      -------------
    Net income (loss)                                           $   6,580,621     $    (424,185)     $   1,870,837
                                                                =============     =============      =============
    Net income (loss) per common share:
       Income (loss) before extraordinary item                  $        0.53     $       (0.04)     $        0.34
       Extraordinary item                                                  --                --              (0.05)
                                                                -------------     -------------      -------------
       Net income (loss)                                        $        0.53     $       (0.04)     $        0.29
                                                                =============     =============      =============

    Net income (loss) per common share - assuming dilution:
       Income (loss) before extraordinary item                  $        0.53     $       (0.04)     $        0.26
       Extraordinary item                                                  --                --              (0.04)
                                                                -------------     -------------      -------------
       Net income (loss)                                        $        0.53     $       (0.04)     $        0.22
                                                                =============     =============      =============
    Weighted average number of common shares
        outstanding                                                12,506,588        10,805,338          6,368,982
                                                                =============     =============      =============
    Weighted average number of common and
        common equivalent shares outstanding                       12,513,506        10,805,338          8,346,289
                                                                =============     =============      =============
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                       3
<PAGE>   30



                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999


<TABLE>
<CAPTION>

                                           PREFERRED STOCK                   COMMON STOCK               COMMON       ADDITIONAL
                                     ----------------------------    ----------------------------      STOCK TO        PAID-IN
                                         SHARES          AMOUNT          SHARES        AMOUNT          BE ISSUED       CAPITAL
                                     ------------    ------------    ------------    ------------    ------------    ------------
<S>                                  <C>             <C>             <C>             <C>             <C>             <C>
Balance, December 31, 1996                734,645    $      7,346       3,133,750    $     31,338    $     75,000    $  1,936,322
     Net income                                --              --              --              --              --              --
     Accretion of Redeemable
        Common Stock                           --              --              --              --              --              --
     Issuance of Common Stock                  --              --       3,850,990          38,509         (75,000)     42,606,147
     Issuance of Preferred Stock          969,905           9,699              --              --              --       1,696,293
     Conversion of Preferred Stock     (1,704,550)        (17,045)        852,275           8,523              --           8,522
     Conversion of Redeemable
        Common Stock                           --              --       2,400,000          24,000              --       1,289,315
     Repurchase of Common Stock                --              --          (8,542)            (85)             --          (1,725)
                                     ------------    ------------    ------------    ------------    ------------    ------------
Balance, December 31, 1997                     --              --      10,228,473         102,285              --      47,534,874
     Net loss                                  --              --              --              --              --              --
     Issuance of Common Stock                  --              --       1,753,781          17,538              --      15,904,249
                                     ------------    ------------    ------------    ------------    ------------    ------------
Balance, December 31, 1998                     --              --      11,982,254         119,823              --      63,439,123
     Net income                                --              --              --              --              --              --
     Issuance of Common Stock                  --              --         742,632           7,426         100,000       2,443,286
                                     ------------    ------------    ------------    ------------    ------------    ------------
Balance, December 31, 1999                     --    $         --      12,724,886    $    127,249    $    100,000    $ 65,882,409
                                     ============    ============    ============    ============    ============    ============

<CAPTION>

                                       RETAINED          TOTAL
                                       EARNINGS      STOCKHOLDERS'
                                       (DEFICIT)        EQUITY
                                     ------------    ------------
<S>                                  <C>             <C>
Balance, December 31, 1996           $ (7,458,331)   $ (5,408,325)
     Net income                         1,870,837       1,870,837
     Accretion of Redeemable
        Common Stock                      (84,146)        (84,146)
     Issuance of Common Stock                  --      42,569,656
     Issuance of Preferred Stock               --       1,705,992
     Conversion of Preferred Stock             --              --
     Conversion of Redeemable
        Common Stock                           --       1,313,315
     Repurchase of Common Stock                --          (1,810)
                                     ------------    ------------
Balance, December 31, 1997             (5,671,640)     41,965,519
     Net loss                            (424,185)       (424,185)
     Issuance of Common Stock                  --      15,921,787
                                     ------------    ------------
Balance, December 31, 1998             (6,095,825)     57,463,121
     Net income                         6,580,621       6,580,621
     Issuance of Common Stock                  --       2,550,712
                                     ------------    ------------
Balance, December 31, 1999           $    484,796    $ 66,594,454
                                     ============    ============
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                       4
<PAGE>   31

                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             YEARS ENDED DECEMBER 31,
                                                                    --------------------------------------------
                                                                        1999            1998            1997
                                                                    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
        Net income (loss)                                           $  6,580,621    $   (424,185)   $  1,870,837
        Adjustments to reconcile net income (loss) to net cash
              provided by operating activities -
              Depreciation and amortization                           10,548,650       9,862,928       2,938,466
              Extraordinary loss, net                                         --              --         263,796
              Minority interest in consolidated subsidiaries             224,474          11,524          45,661
              Changes in assets and liabilities, net of effects
                from acquisitions -
                     Accounts receivable, net                         (2,677,201)     (5,230,288)     (1,273,681)
                     Prepaid expenses                                   (529,610)       (482,891)        (58,635)
                     Income tax receivable                               812,620      (1,239,590)             --
                     Other noncurrent assets                            (272,128)        433,227        (183,056)
                     Accounts payable and accrued expenses            (4,666,972)       (743,114)       (334,778)
                     Accrued restructuring charges                    (3,547,409)      4,356,384              --
                     Other liabilities                                (3,231,253)     (1,057,116)        400,410
                     Deferred income taxes                             1,741,319      (2,097,701)        650,844
                                                                    ------------    ------------    ------------
                        Net cash provided by operating activities      4,983,111       3,389,178       4,319,864
                                                                    ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchases of property and equipment, net                      (5,100,907)     (6,889,830)     (3,330,102)
        Cash paid for dental group practices, including
              related costs, net of cash acquired                     (8,801,908)    (48,601,828)    (16,508,796)
                                                                    ------------    ------------    ------------
                        Net cash used in investing activities        (13,902,815)    (55,491,658)    (19,838,898)
                                                                    ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Proceeds from notes payable, net of issuance costs            16,750,000      55,150,000      15,235,000
        Payments for debt issue costs                                 (1,607,615)       (254,139)       (241,638)
        Payments on notes payable and capital lease obligations       (6,175,017)     (1,736,018)    (28,133,626)
        Distributions to stockholders/partners                          (432,797)       (189,097)        (30,000)
        Repurchase of Common Stock                                            --              --          (1,810)
        Redemption of Convertible Participating Preferred Stock               --              --      (8,000,000)
        Issuance of Common Stock                                         313,481         149,437      38,606,913
                                                                    ------------    ------------    ------------
                        Net cash provided by financing activities      8,848,052      53,120,183      17,434,839
                                                                    ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     (71,652)      1,017,703       1,915,805

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                           3,992,845       2,975,142       1,059,337
                                                                    ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                              $  3,921,193    $  3,992,845    $  2,975,142
                                                                    ============    ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
        Cash paid during the year for interest                      $  8,212,850    $  1,217,422    $  1,260,285
                                                                    ============    ============    ============
        Cash paid for taxes                                         $    788,010    $  3,624,600    $    640,000
                                                                    ============    ============    ============
        Equipment acquired under capital leases                     $         --    $    855,038    $    961,225
                                                                    ============    ============    ============
        Debt assumed through acquisitions                           $    150,000    $ 10,886,539    $  1,275,000
                                                                    ============    ============    ============
        Non-cash issuance of Common Stock                           $  2,237,231    $ 15,772,350    $  3,962,743
                                                                    ============    ============    ============

        Non-cash reduction of other liabilities                     $  3,368,000    $         --    $         --
                                                                    ============    ============    ============
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                       5
<PAGE>   32

                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF BUSINESS AND CURRENT OPERATING ENVIRONMENT:

         Monarch Dental Corporation ("Monarch"), a Delaware corporation, and
subsidiaries (collectively, the "Company"), manages dental group practices in
selected markets. At December 31, 1999, the Company managed 190 dental group
practices in Texas, Wisconsin, Pennsylvania, Virginia, Ohio, Arkansas, Utah,
Colorado, Georgia, New Jersey, Florida, Indiana, Arizona and New Mexico (each a
"Dental Office" and collectively, the "Dental Offices.") The Company has grown
substantially in a relatively short period of time, principally through
acquisitions. Since January 1, 1997, the Company has completed 26 acquisitions
resulting in the addition of 135 Dental Offices.

         During 1999, as a result of its focus on internal operations and the
uncertain availability of additional capital, the pace of acquisitions was
significantly reduced. The Company continues to review acquisitions in selected
existing markets on an opportunistic basis when and as opportunities arise and
to the extent the Company has available capital. Further expansion through
acquisitions is likely to require additional borrowings unless a substantial
increase in the current market price of the Company's common stock permits the
raising of additional capital in the equity markets, there can be no assurance
that such capital will be available. The Company may decide to refinance all or
a portion of existing indebtedness with longer term indebtedness having lower
amortization requirements but higher interest payments, which would result in
higher levels of interest expense in the future.


2.  SIGNIFICANT ACCOUNTING POLICIES:

    Basis of Presentation / Basis of Consolidation

         The accompanying consolidated financial statements have been prepared
on the accrual basis of accounting. All intercompany accounts and transactions
have been eliminated in the consolidation.

         In thirteen states, the Company accounts for its management activities
with the dental group practices under long-term management agreements (the
"Management Agreements"). The Management Agreements represent the Company's
right to manage the Dental Offices during the 40-year term of the agreement. The
Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default. Under the Management Agreements, the Company assumes responsibility for
the management of all aspects of the dental group practices' business (including
all operating expenses consisting of the expenses incurred by the Company in
connection with managing the Dental Offices, including salaries and benefits for
personnel other than dentists and hygienists, dental supplies, dental laboratory
fees, occupancy costs, equipment leases, management information systems and
other expenses related to the dental practice operations) other than the
provision of dental services and retains a 100% residual interest in the net
income of the dental group practices. The Company receives a management fee
equal to the Company's costs plus the lower of (i) 30% of the P.C.'s net
revenues or (ii) the P.C.'s net pre-tax income. If net pre-tax income exceeds
30% of the P.C.'s net revenues, the P.C. would retain the amount of pre-tax
income over 30% of the P.C.'s net revenues. The Company's net revenue and
operating results are significantly dependent upon the revenue of the dental
group practices. The Company has no material commitments or guarantees to the
dental group practices under the Management Agreements. In one state, currently
Wisconsin, the Company directly employs the dentists and hygienists.

         Under the Management Agreements, the Company establishes a "controlling
financial interest" as defined by EITF 97-2, "Application of FASB No. 94 and APB
No. 16 to Physician Practice Management Entities and Certain Other Entities
under Contractual Management Arrangement" ("EITF 97-2"). In addition, the
Company has nominee shareholder arrangements with certain of the dental group
practices as defined by EITF 97-2. For these reasons, the Company consolidates
the financial statements of the dental group practices. The Company's 1997
consolidated financial statements have been restated to conform with the
provisions of EITF 97-2. The restatement affected the display of previously
reported revenue and amounts retained by the dental group practices only and did
not affect the Company's 1997 financial position, results of operations or cash
flows.

                                       6
<PAGE>   33


    Patient Revenue, Net

         Patient revenue, net represents the revenue of the Dental Offices
reported at the estimated realizable amounts from third-party payors and
patients for services rendered, net of contractual and other adjustments. In
certain states, dental services are billed and collected by the Company in the
name of the Dental Offices in accordance with the Management Agreements. Warren
F. Melamed, D.D.S. ("Dr. Melamed") is chairman of the Board of the Company and
sole shareholder of Modern Dental Professional, P.C. ("Modern Dental"), the
professional corporation in Texas which employs the dentists and other licensed
personnel. Patient revenue, net generated by Modern Dental approximated 35%, 46%
and 58% of total patient revenue, net in 1999, 1998 and 1997, respectively. No
other dental group practices provided more than 10% of patient revenue, net.

         Revenue under certain third-party payor agreements is subject to audit
and retroactive adjustments. There are no material claims, disputes or other
unsettled matters that exist to management's knowledge concerning third-party
reimbursements.

         During 1999, 1998 and 1997, the Company estimates that approximately
42%, 40% and 38%, respectively, of patient revenue, net was received under
capitated managed dental care plan agreements with payors. The remainder of
patient revenue, net for these periods was earned under fee-for-service
arrangements. Approximately 20%, 20% and 26% of the Company's patient revenue,
net during 1999, 1998 and 1997 respectively, was derived from contracts with
Prudential Dental Maintenance Organization, Inc. and Compcare Health Services
Insurance Corporation. These contracts continue until terminated by either party
upon 60 to 90 days' prior written notice, and the material economic terms can be
renegotiated periodically, adversely affecting the Company's patient revenue,
net. Since the Company is required to provide only basic dental services under
these contracts, there are no significant future losses anticipated under these
contracts. There were no other contracts with payors comprising more than 10% of
patient revenues, net during 1999, 1998 or 1997.

    Advertising

         The costs of advertising, promotion and marketing are expensed in the
year incurred.

    Cash and Cash Equivalents

         Cash and cash equivalents include money market accounts and all highly
liquid investments with original maturities of three months or less.

    Accounts Receivable

         Accounts receivable represent receivables from patients and other
third-party payors for dental services provided. Such amounts are recorded net
of contractual allowances and estimated bad debts. The Dental Offices grant
credit without collateral to their patients, most of whom are local residents
and are insured under third-party payor agreements. Periodically, the Dental
Offices transfer the patient receivables to the Company under the terms of the
Management Agreements. Amounts collected on behalf of and payable to the Dental
Offices are reflected as payable to affiliated dental group practices in the
accompanying consolidated balance sheets. These amounts are unsecured and
consist primarily of salary and benefits expense of the dental group practices.
Management continually monitors and periodically adjusts its allowances
associated with these receivables based on estimated collection and payment
rates. Any adjustments to these estimates are made in the period that they
become known and quantifiable.


                                       7
<PAGE>   34
    Property and Equipment

         Property and equipment are stated at cost or fair market value at dates
of acquisition, net of accumulated depreciation. Property and equipment are
depreciated using the straight-line method over the following useful lives:

<TABLE>
<CAPTION>
                                                                YEARS
                                                                -----
<S>                                                     <C>
 Leasehold improvements..........................       Remaining life of lease
 Furniture and fixtures..........................                5-8
 Dental equipment................................                5-7
 Computer equipment and software.................                 5
</TABLE>

         Equipment held under capital lease obligations is amortized on a
straight-line basis over the shorter of the lease term or estimated life of the
asset.

    Goodwill

         The Company's acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
dental group practices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible assets acquired and liabilities
assumed, based on estimated fair market values. Costs of acquisition in excess
of the net estimated fair value of tangible assets acquired and liabilities
assumed are allocated first to identifiable intangibles and the remainder to
goodwill. The Company amortizes goodwill over twenty-five years using the
straight-line method.

         The Company reviews the recorded amount of goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization periods, the carrying value of the asset is reduced to fair value.
Among the factors that the Company continually evaluates are unfavorable changes
in each Dental Office's relative market share and local market competitive
environment, current period and forecasted operating results, cash flow levels
of the Dental Offices and the impact on the net revenue earned by the Company,
and legal factors governing the practice of dentistry. During the fourth quarter
of 1998, the Company recorded impairment charges totaling approximately $3.3
million (pretax) relating to Dental Offices that the Company closed in the first
and second quarters of 1999. Such charges are included in depreciation and
amortization expense in the accompanying 1998 consolidated statements of income.
There were no such charges in 1999 or 1997.

    Accrued Restructuring Charges

         Accrued restructuring charges include Dental Office closure costs,
accrued compensation costs for a former officer (see Note 9), litigation
reserves, accrued interest and property taxes. During the fourth quarter of
1998, in connection with the Dental Office closings discussed above, the Company
recorded charges of approximately $765,000 related primarily to estimated lease
abandonment liabilities and severance costs. The Company expects to expend the
remaining accrued restructuring amounts recorded as of December 31, 1999 during
2000 and 2001.

    Other Liabilities

         Other liabilities consist primarily of estimated liabilities related to
acquisitions accounted for as purchases and deferred rent for the Company's
facilities.

    Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.


                                       8
<PAGE>   35

    Income Taxes

         The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.

    Net Income (Loss) Per Common Share

         The net income (loss) per common share is based on the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share has been calculated using the treasury stock method for stock options
and other diluted securities. Such shares totaled 6,918 and 1,977,307 in 1999
and 1997, respectively. Because the Company reported a loss in 1998, no
additional shares related to stock options have been included since the effect
would be antidilutive. If stock options had been included in the computation of
diluted earnings per share, the number of shares would have increased by
347,819.

    Other

         Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.

3.       ACQUISITIONS:

         The Company made the following acquisitions in 1996, 1997, 1998 and
1999. All of these transactions were accounted for under the purchase method.

    1996 Acquisitions -

         The Company acquired certain assets and assumed certain liabilities of
MacGregor Dental Centers, Inc. and Shears Management, Inc. (collectively
referred to as "MacGregor") for $15.9 million in cash and 700,000 shares of
Common Stock.

         Effective September 1, 1996, the Company acquired all of the
outstanding stock of Midwest Dental Care - Sheboygan, SC ("Sheboygan"), and
Midwest Dental Care - Mondovi, SC ("Mondovi") in a stock purchase transaction
and acquired certain assets and assumed certain liabilities of Advance Dental
Management, a related entity to Sheboygan and Mondovi, in an asset purchase
transaction. All three entities (collectively referred to as "Midwest") were
acquired for $5.3 million in cash and 350,000 shares of Common Stock.
Additionally, the seller has the right to receive additional purchase
consideration of up to 80,000 stock options upon meeting specified financial
performance goals. As of December 31, 1999, none of these stock options have
been issued to the seller.

         Effective October 1, 1996, the Company acquired certain assets and
assumed certain liabilities of John H. Davis, DDS for $172,000 in cash and 5,000
shares of Common Stock in an asset purchase transaction.

         Effective November 7, 1996, the Company acquired all of the outstanding
stock of Convenient Dental Care, Inc. ("Convenient") in Arkansas for a $500,000
promissory note, paid in January 1997, and 30,000 shares of Common Stock in a
stock purchase transaction. Additionally, the seller was given the right to
receive additional purchase consideration of up to $200,000 contingent upon
meeting specified financial performance goals. The full amount of the additional
consideration was earned by the seller during 1998.

    1997 Acquisitions -

         Effective January 1, 1997, the Company acquired all of the outstanding
stock of Arkansas Dental Health Associates, Inc. in Arkansas, for $1.6 million
in cash and 57,500 shares of Common Stock in a stock purchase transaction.
Additionally, the seller was given the right to receive additional purchase
consideration of up to $500,000 contingent upon meeting specified financial
performance goals. As of December 31, 1999, the seller has earned approximately
$423,000 of this amount with no future contingent amounts payable.


                                       9
<PAGE>   36

         Effective April 1, 1997, the Company acquired certain assets and
assumed certain liabilities of United Dental Care Tom Harris D.D.S. & Associates
in Arkansas for $2.8 million in cash and 68,750 shares of Common Stock in an
asset purchase transaction.

         Effective August 1, 1997, the Company acquired all of the outstanding
stock of Dental Centers of Indiana, Inc. in Indiana, for $1.8 million in cash
and 139,944 shares of Common Stock in a stock purchase transaction.
Additionally, the seller was given the right to receive additional purchase
consideration contingent upon meeting specified financial performance goals. As
of December 31, 1999, this additional consideration was earned by the seller
with no future contingent amounts payable.

         Effective November 3, 1997, the Company acquired certain assets and
assumed certain liabilities of Press Family Dental in San Antonio, Texas for
$6.6 million in cash and 179,736 shares of Common Stock in an asset purchase
transaction.

         Effective December 1, 1997, the Company acquired an 80% interest in
certain assets and assumed certain liabilities of Dental America in Midland,
Texas for $650,000 in cash and 8,785 shares of Common Stock in an asset purchase
transaction. Additionally, the seller was given the right to receive additional
purchase consideration contingent upon meeting specified financial performance
goals. As of December 31, 1999, this additional consideration was earned by the
seller with no future contingent amounts payable.

         During 1997, the Company acquired certain assets and assumed certain
liabilities of four dental groups in Dallas and Conroe, Texas, Fayetteville,
Arkansas and Colorado Springs, Colorado for $3.4 million in cash and 28,774
shares of Common Stock in asset purchase transactions. Additionally, the sellers
were given the right to receive additional purchase consideration contingent
upon meeting specified financial performance goals. As of December 31, 1999,
this additional consideration was earned by the sellers with no future
contingent amounts payable.

    1998 Acquisitions -

         Effective March 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Dental Care One in Dayton, Ohio for $2.3 million
in cash and 34,781 shares of Common Stock in an asset purchase transaction.

         Effective June 1, 1998, the Company acquired 65% of the outstanding
stock of Managed Dental Care Centers, Inc. in Dallas, Texas for $2.0 million in
cash and 27,686 shares of Common Stock in a stock purchase transaction. The
Company increased its ownership to 82.5% during 1999.

         Effective September 1, 1998, the Company acquired all of the
outstanding stock of Valley Forge Dental Associates, Inc. ("Valley Forge") in
King of Prussia, Pennsylvania for 1,559,111 shares of Common Stock and the
issuance of approximately $42.0 million in debt in a stock purchase transaction.
As of December 31, 1998, Valley Forge had contingent purchase obligations in
cash, notes and stock totaling approximately $8.3 million in cash and notes and
approximately 41,122 shares of stock. These obligations were assumed by the
Company. In 1999, the Company issued an additional 400,000 shares of Common
Stock to the former shareholders of Valley Forge as consideration for the
settlement of a dispute. The settlement is reflected in the financial statements
as a $1.0 million charge to other operating expenses. Subsequent to December 31,
1999, all contingent purchase obligations have been settled.

         Effective September 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Talbert Medical Management Corporation, which
operated dental offices in Utah and Arizona, for $7.0 million in cash in an
asset purchase transaction.

         During 1998, the Company acquired certain assets and assumed certain
liabilities of five dental groups in Indianapolis, Indiana, San Antonio and
Abilene, Texas and Manitowoc, Wisconsin for $946,000 in cash and 12,702 shares
of Common Stock in asset purchase transactions.


                                       10
<PAGE>   37


    1999 Acquisitions -

         During 1999, the Company acquired certain assets and assumed certain
liabilities of seven dental groups in Duncanville, Texas, Eau Claire and New
Richmond, Wisconsin, Tucker, Georgia and Spring Valley, Minnesota for an
aggregate purchase consideration of $4.9 million, consisting of $3.8 million in
cash, 163,312 shares of Common Stock and the assumption of $150,000 in debt in
asset purchase transactions.

         Obligations related to undeterminable contingent purchase
considerations for certain acquisitions have not been earned at December 31,
1999, and, accordingly, have not been reflected in the accompanying consolidated
financial statements. Such liability, if any, will be recorded as additional
purchase price in the period in which the outcome of the contingencies becomes
known.

         The Company's liabilities for future obligations to sellers of
affiliated dental practices were reduced by $2.9 million as a result of a
settlement of a dispute. This amount is reflected in the financial statements as
a credit to other operating expenses.

         All of the acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed based on the
estimated fair values at the dates of acquisition. Some of these estimates are
preliminary and subject to further adjustment. The estimated fair values of
assets acquired and liabilities assumed during 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
                                                    1999              1998
                                                ------------    ------------
<S>                                             <C>             <C>
Cash and cash equivalents ...................   $         --    $    649,000
Accounts receivable, net ....................       (596,890)      4,380,082
Other assets ................................         16,638       5,611,052
Property and equipment, net .................        411,865       6,780,225
Liabilities assumed .........................     (4,354,014)    (33,669,377)
Intangible assets ...........................     14,585,587      79,416,395
Less - Fair value of Common Stock issued ....     (1,261,278)    (14,701,698)
                                                ------------    ------------
Cash purchase price (including earnouts) ....   $  8,801,908    $ 48,465,679
                                                ============    ============
Total earnouts paid .........................   $  5,006,601    $  2,016,627
                                                ============    ============
</TABLE>

         The following unaudited pro forma information reflects the effects of
acquisitions on the consolidated results of operations of the Company had the
acquisitions occurred at January 1, 1998. Pro forma results for 1999 are not
materially different from historical amounts reported.

<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                                       DECEMBER 31,1998
                                                       ----------------
                                                        (IN THOUSANDS)
                                                         (UNAUDITED)
<S>                                                    <C>
Patient revenue, net ..................................   $ 187,927
                                                          =========
Net income ............................................   $   1,875
                                                          =========
Net income per common share - assuming dilution .......   $    0.15
                                                          =========
</TABLE>


                                       11
<PAGE>   38


4.  PROPERTY AND EQUIPMENT:

         Property and equipment consists of the following as of December 31:

<TABLE>
<CAPTION>
                                           1999            1998
                                       ------------    ------------
<S>                                    <C>             <C>
Leasehold improvements .............   $  8,309,290    $  6,957,563
Furniture and fixtures .............      4,125,909       3,629,209
Dental equipment ...................     17,208,224      14,501,512
Computer equipment and software ....      3,791,067       2,906,560
                                       ------------    ------------
                                         33,434,490      27,994,844
Less - Accumulated depreciation ....    (14,362,776)     (9,269,727)
                                       ------------    ------------
Property and equipment, net ........   $ 19,071,714    $ 18,725,117
                                       ============    ============
</TABLE>

         Depreciation expense was $5,232,650, $3,601,043, and $1,813,241 for
1999, 1998 and 1997, respectively.

5.  NOTES PAYABLE:

         Notes payable consists of the following as of December 31:

<TABLE>
<CAPTION>
                                                                                   1999              1998
                                                                               ------------    ------------
<S>                                                                            <C>             <C>
Borrowings under credit facility, due June 30, 2000 ........................   $  5,650,000    $         --
Borrowings under credit facility, due June 30, 2001 ........................     75,000,000      65,400,000
Other notes payable, due April 2002, with an interest rate of prime
   plus 0.5%, secured by certain receivables and property ..................         19,719         102,417
Notes payable assumed through acquisitions, with interest rates ranging
   between 6.00% and 12.21%, with due dates between March 2000 and
   March 2004, secured by certain receivables and property .................      5,262,930       8,987,550
                                                                                ------------    ------------
                                                                                 85,932,649      74,489,967
Less - Current maturities ..................................................     (9,204,641)     (3,974,960)
                                                                                ------------    ------------
Notes payable, net .........................................................   $ 76,728,008    $ 70,515,007
                                                                               ============    ============
</TABLE>

         The maturities of notes payable at December 31, 1999, are as follows:

<TABLE>
<S>                                        <C>
                         2000 ..........   $ 9,204,641
                         2001 ..........    76,342,781
                         2002 ..........       300,984
                         2003 ..........        54,243
                         2004 ..........        30,000
                                           -----------
                                           $85,932,649
                                           ===========
</TABLE>


         The Company has a Credit Facility with a bank syndicate, which was
amended in June 1999. Under the Credit Facility, the Company may borrow up to
$85.0 million. At December 31, 1999 the Company had $80.7 million outstanding
under the Credit Facility and remaining availability of $4.3 million. The
amounts outstanding under the Credit Facility bear interest at variable rates
which are based upon either the lender's base rate or LIBOR, plus, in either
case, a margin which varies according to the ratio of the Company's funded debt
to EBITDA, each as defined in the Credit Facility. The Credit Facility prohibits
the Company from incurring indebtedness, incurring liens, disposing of assets,
making investments or making acquisitions without bank approval, and requires
the Company to maintain certain financial ratios on an ongoing basis. The Credit
Facility is secured by pledges of all of the outstanding capital stock of, or
other equity interests in, the Company's subsidiaries, and a lien on
substantially all of the assets of the Company.



                                       12
<PAGE>   39


         During 1999, the Company amended its loan agreement associated with the
Credit Facility. Changes made in the amendment included, but were not limited
to, modifications of certain defined terms and financial ratios, additions of
newly defined terms, limitations on capital expenditures, modifications to the
definition of Events of Default and the requirement of prior bank approval for
consolidations, mergers, acquisitions, and sales of assets. The methodology by
which the Company's borrowing rates are determined was also adjusted as part of
the amendment. In conjunction with this amendment, the bank syndicate received
contingency compensation in the form of warrants of the Company representing 3%
of the fully diluted outstanding common shares of the Company at the time of
agreement, subject to anti-dilution provisions, for an exercise price of $0.01
per share. The warrants are contingent based upon specific performance of the
Company in conjunction with dates set forth in a vesting schedule. The vesting
dates for the warrants are March 31, April 30, May 31, and June 30, 2000 upon
such dates, an aggregate 3% of the fully diluted outstanding common stock will
vest at a rate of 1/2%, 1/2%, 1/2%, and 1 1/2%, respectively. The Company
believes that it will not meet the specific performance requirements under this
amendment and that all of the warrants will vest by June 30, 2000.

         As of December 31, 1999, the Company is in compliance with the terms of
the Credit Facility. There can be no assurance that the Company will maintain
the ratios as required by the loan agreement. The failure to maintain these
ratios could adversely affect the Company's operations in future periods.

         The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, the Company may not have
sufficient cash from operations to fund interest expense and certain
non-recurring and contingency payments aggregating approximately $3.5 million
during the second quarter of 2000. In addition, the Company does not expect to
generate sufficient cash from operations to repay its obligations under its
short-term note, due June 30, 2000 under the Credit Facility, which the Company
expects will approximate $10.0 million at that time. Failure to make the
required principal payment would constitute a default under the Credit Facility.
The Company is currently discussing with its lenders an extension of this
short-term note and the extension of additional credit to cover the potential
cash shortfall in the second quarter. However, the Company can provide no
assurance as to the probability that its lenders will extend the maturity of
this short-term note or that additional credit will be available to meet the
potential cash shortfall in the second quarter. Assuming that the Company can
obtain additional financing in the second quarter to meet any cash shortfall,
the Company believes that cash from operations will be sufficient in the third
and fourth quarters of 2000 to meet its obligations.

         In order to meet its short-term and long-term liquidity needs, the
Company may issue additional equity and debt securities, subject to market and
other conditions. In addition, the Company is also in the process of contacting
potential acquirors in order to determine if a sale of the Company would be more
beneficial to the Company's stockholders than raising additional capital to meet
its liquidity needs. The Company expects that potential acquirors would commence
due diligence procedures in the second quarter 2000. There can be no assurance
that any such sale will be available on terms acceptable to the Company. In the
event a sale transaction is not consummated, the Company would pursue the
issuance of debt securities and, as a contingency plan, has signed an engagement
letter with an investment bank to pursue the issuance of these securities.
Although there can be no assurance that this financing will be available on
terms acceptable to the Company, the Company believes that additional sources of
liquidity are available at rates that would increase the Company's interest
obligations. The failure to raise the funds necessary to finance its future cash
requirements could adversely affect the Company's operations in future periods.

         The Company enters into interest rate swap agreements to manage its
interest rate exposure. Interest rate swaps are agreements to exchange interest
rate payment streams based on a notional principle amount. Company policy
requires settlement accounting principles for interest rate swaps in which net
interest rate differentials to be paid or received are recorded currently as
adjustments to interest expense. Transactions involving such agreements did not
have a material effect to the 1999 financial statements.

         The Company incurred an extraordinary loss of $264,000, net of tax, in
1997 as it extinguished its previous credit facility and wrote off $431,000 in
unamortized loan fees, net of a tax benefit of $167,000.



                                       13
<PAGE>   40


6.  STOCKHOLDERS' EQUITY:

         At December 31, 1999, the Company has authorized 52,000,000 shares of
stock, of which (a) 50,000,000 shares, par value $0.01 per share, are designated
Common Stock, and (b) 2,000,000 shares, par value $0.01 per share, are
designated Preferred Stock.

         In July 1997, the Company completed its initial public offering of
3,162,500 shares of Common Stock at $13.00 per share, resulting in net proceeds
of approximately $37.2 million.

    Preferred Stock

         During 1996, the Company issued 734,645 shares of Series A Convertible
Junior Preferred Stock to the holders of previously issued Convertible
Participating Preferred Stock. During 1997, an additional 969,905 shares were
issued, resulting in a total of 1,704,550 shares outstanding. These shares were
converted into Common Stock on a 1-for-2 basis upon the completion of the
initial public offering.


                                       14
<PAGE>   41


    Stock-Based Compensation

         During 1999, the Company's Board of Directors approved the 1999 Stock
Option and Grant Plan (the "1999 Plan") under which 1,000,000 options to
purchase shares of the Company's Common Stock may be granted to employees,
advisors, consultants and other key persons of the Company and its subsidiaries,
including affiliated professional corporations. Options granted under the 1999
Plan are non-qualified stock options ("NQSO"). The Company also administers the
1996 Stock Option and Incentive Plan (the "1996 Plan") under which 1,376,250
options to purchase shares of the Company's Common Stock may be granted to
officers and other employees, directors, advisors, consultants and other key
persons of the Company and its subsidiaries. Options granted under the 1996 Plan
may be either incentive stock options ("ISO") or NQSO. The option price per
share may not be less than 100% of the fair market value at the grant date for
ISO and may not be less than 85% of the fair market value at the grant date for
NQSO. Generally, options vest over a 4-year period and are exercisable over a
ten-year life. As of December 31, 1999, 1998, and 1997, 1,418,477, 1,066,875 and
556,750 shares, respectively, were outstanding under the 1999 Plan and the 1996
Plan.

         The following table summarizes the activity during 1999, 1998 and 1997
under the 1999 Plan and 1996 Plan.

<TABLE>
<CAPTION>
                                               1999          1998          1997
                                           -----------   -----------   ------------
<S>                                        <C>           <C>           <C>
Outstanding at beginning of year ........    1,066,875       556,750         25,000
Granted .................................      418,501       530,750        531,750
Exercised ...............................           --          (625)            --
Canceled ................................      (66,899)      (20,000)            --
                                            ----------   -----------   ------------
Outstanding at end of year ..............    1,418,477     1,066,875        556,750
                                           ===========   ===========   ============
Exercisable at end of year ..............      479,557       146,685          6,250
Price range .............................  $2.44-18.38   $3.00-17.31    $3.00-13.00
</TABLE>

The following summarizes information about options at December 31, 1999:

<TABLE>
<CAPTION>
                              Options Outstanding              Options Exercisable
                    ----------------------------------------   -------------------
                                    Weighted        Weighted                Weighted
     Exercise                        Average         Average                 Average
       Price                        Remaining       Exercise                Exercise
       Range           Number          Term            Price    Number        Price
---------------      ---------      ---------       --------    -------     --------
<C>                  <C>            <C>             <C>         <C>         <C>
$   1.69- 4.13         448,501      9.5 years         $ 2.57    124,250       $ 3.55
$   7.70-11.38         375,000      8.7 years          11.13    100,000        10.92
$  11.88-15.38         523,250      7.7 years          13.35    231,000        13.19
$  17.00-18.38          71,726      8.0 years          17.90     24,307        18.24
                     ---------                                  -------
                     1,418,477                                  479,557
                     =========                                  =======
</TABLE>

The shares exercisable at December 31, 1998 and 1997 had a weighted average
exercise price of $9.29 and $3.00 per share, respectively.

The Company accounts for its stock-based compensation arrangements under the
provisions of APB No. 25, "Accounting for Stock Issued to Employees." In 1995,
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued, whereby
companies may elect to account for stock-based compensation using a fair value
based method or continue measuring compensation expense using the intrinsic
value method prescribed in APB No. 25. SFAS No. 123 requires that companies
electing to continue to use the intrinsic value method make pro forma
disclosures of net income and net income per share as if the fair value based
method of accounting had been applied.


                                       15
<PAGE>   42


The Company used the Black-Scholes option-pricing model to estimate the fair
value of options. The effects of applying SFAS No. 123 for 1999, 1998 and 1997
are as follows (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                              1999       1998         1997
                                                          ---------   ---------    ---------
<S>                                                       <C>         <C>          <C>
Net income (loss):
          As reported                                     $   6,581   $    (424)   $   1,871
          Pro forma                                           5,710      (1,054)       1,604

Net income (loss) per common share - assuming dilution:
          As reported                                     $    0.53   $   (0.04)   $    0.22
          Pro forma                                            0.46       (0.10)        0.19
</TABLE>


7.  COMMITMENTS AND CONTINGENCIES:

    Operating and Capital Lease Obligations

         The Company leases all of its facilities, including the Dental Offices
and corporate office, under non-cancelable operating leases, extending through
2011. Rent expense totaled approximately $8.6 million, $6.3 million and $3.1
million for 1999, 1998 and 1997, respectively.

         Future minimum lease commitments under capital and noncancelable
operating leases with remaining terms of one or more years are as follows as of
December 31, 1999:


<TABLE>
<CAPTION>
                                                      OPERATING      CAPITAL
                                                     -----------   -----------
<S>                                                  <C>           <C>
2000 .............................................   $ 7,507,302   $   453,642
2001 .............................................     6,424,104       223,721
2002 .............................................     5,001,278        79,786
2003 .............................................     3,539,908        51,723
2004 .............................................     2,588,413        41,675
Thereafter .......................................     4,148,669       211,846
                                                     -----------   -----------
   Total minimum lease obligation ................   $29,209,674     1,062,393
                                                     ===========
   Less - Amounts representing interest                               (272,019)
                                                                   -----------
   Present value of minimum lease obligations                          790,374
   Less - Current maturities                                          (335,134)
                                                                   -----------
   Capital lease obligations, net ................                 $   455,240
                                                                   ===========
</TABLE>

    Litigation, Claims, and Assessments

         On or about April 26, 1999, the Company was served with a putative
class action complaint against the Company and certain of its officers and
directors, captioned Robert O. Neibert, et al. v. Monarch Dental Corp., Warren
F. Melamed, Gary W. Cage and Roger B. Kafker, Civil No. 3-99-CV-0762-X. The
class action complaint, which was filed in the United States District Court for
the Northern District of Texas (the "District Court"), alleges that the Company
and certain of its officers and directors violated the federal securities laws
by making material misrepresentations and omissions in certain public
disclosures during the period between February 24, 1998 and December 22, 1998.
The public disclosures relate to, among other things, acquired dental practices,
the Company's internal growth and growth prospects, and the Company's past and
future financial performance. Following the announcement of the filing of this
class action lawsuit, the Company was served with two similar putative class
actions in the District Court, which encompass the same class period and cover
almost identical allegations. On May 24, 1999, the District Court consolidated
these three class action complaints into a single action. The Company was
subsequently served on September 10, 1999 with a consolidated amended class
action complaint which contained substantially the same allegations as were
encompassed in the prior separate class action complaints. The Company and all
of the defendants named in the amended class action complaint filed motions to
dismiss all of the claims set forth in this complaint in October 1999.

                                       16
<PAGE>   43



         After the motions to dismiss were filed but before the District Court
decided on them, the parties reached agreement on the terms of a potential
settlement of the action. Accordingly, the parties entered into a Memorandum of
Understanding dated January 31, 2000, which sets forth the principal bases of a
settlement of the action, subject to approval by the District Court. The
Memorandum of Understanding and the proposed settlement will be contingent upon
(i) the parties' execution of an appropriate Stipulation of Settlement
("Stipulation"); (ii) conditional certification of the Class for purposes of the
Settlement; (iii) Court approval of the Settlement; and (iv) dismissal of the
Action with prejudice.

         In the Stipulation, the parties will request that the District Court
certify, for purposes of settlement, a class of all persons (exclusive of
Defendants and their affiliates) who purchased or otherwise acquired shares of
the Company during the period between February 24, 1998 and December 22, 1998,
and their successors in interest and transferees, immediate and remote (the
"Class"); that the District Court approve the settlement, including the release
of all claims by Class members against the Defendants; and that the Court enter
final judgment dismissing with prejudice all claims of the plaintiffs and the
Class against the Defendants. As part of the settlement, the Company will pay
$3.5 million into a settlement fund which will, among other things, be used to
pay authorized members of the Class. The entire settlement amount will be funded
by Monarch's directors & officers liability insurance carrier. No cash
contribution is required of Monarch or any of the other defendants. The parties
are currently negotiating the Stipulation and related settlement documentation.

         The Company also settled a dispute with the sellers of an affiliated
dental practice regarding the original purchase price and future obligations to
the sellers based on earnings of the practice.

         In accordance with generally accepted accounting principles, the
difference between the obligations terminated and the total consideration was
reflected in the Company's fourth quarter 1999 financial statements as a special
income item of $2.9 million, net of related legal expenses, or approximately
$0.23 per share.

         In addition to the matters discussed above, the Company is engaged in
various legal proceedings incidental to its business activities. Management does
not believe the resolution of such matters will have a material adverse effect
on the Company's financial position, results of operations or liquidity.


8.  INCOME TAXES:

         The income tax provision (benefit) consisted of the following for the
years ended December 31 (in thousands):


<TABLE>
<CAPTION>
                    1999       1998       1997
                  -------    -------   -------
<S>               <C>        <C>        <C>
Current:
   Federal ....   $ 1,392    $ 2,035   $   754
   State ......       500        350       184
                  -------    -------   -------
                    1,892      2,385       938

Deferred ......     1,408     (2,353)      418
                  -------    -------   -------
Total .........   $ 3,300    $    32   $ 1,356
                  =======    =======   =======
</TABLE>

         The Company's effective tax rate of 33.4% in 1999 is lower than the
federal rate of 34.0% due to a $2.9 million credit recorded in the fourth
quarter related to the settlement of a dispute with the sellers of an affiliated
dental practice that is not considered taxable income, offset by the impact of
state income taxes. Due to the 1998 pre-tax loss, the 1998 effective tax rate is
significantly impacted by state income taxes. The Company's effective tax rate
of 38.8% in 1997 is greater than the federal rate of 34.0% due to the impact of
state income taxes.


                                       17

<PAGE>   44


         Deferred income taxes are recorded for temporary differences between
the basis of assets and liabilities for financial reporting purposes and income
tax purposes. Temporary differences comprising the deferred tax assets and
liabilities in the consolidated balance sheets as of December 31, 1999 and 1998
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                           1999     1998
                                                          ------   ------
<S>                                                       <C>      <C>
Deferred tax asset:
   Cash to accrual and other ..........................   $3,350   $3,828
   Net operating loss carryforwards ...................      354       --
   Legal accruals .....................................      211      633
   Accrued compensation ...............................      132      510
                                                          ------   ------
                                                          $4,047   $4,971

Deferred tax liability:
   Deferred tax liabilities of acquired companies .....    2,244    2,177
   Intangible asset amortization ......................    1,318      307
   Accelerated depreciation ...........................      144      405
                                                          ------   ------
                                                           3,706    2,889
                                                          ------   ------
   Net deferred tax asset (liability) .................   $  341   $2,082
                                                          ======   ======
</TABLE>

         The deferred income tax provision (benefit) of approximately
$1,408,000, $(2,353,000), and $418,000 in 1999, 1998 and 1997, respectively,
consists primarily of nondeductible accruals, the excess of the tax over book
amortization of intangible assets, the excess of the tax over book depreciation
of fixed assets and cash to accrual adjustments.


9.  RELATED-PARTY TRANSACTIONS:

         The Company leases several of its facilities from affiliated entities.
Total rent expense paid to related parties for 1999, 1998 and 1997, was
approximately $1.1 million, $1.1 million and $715,000, respectively. The leases
have average remaining lives of approximately 3.5 years at December 31, 1999.

         The Management Agreement activity between the Company and the Dental
Offices is reflected as a liability in the consolidated balance sheets. Such
amounts are generally payable within a 30-day period following month-end and are
unsecured.

         Included in accrued restructuring charges in 1999 and 1998 is
approximately $535,000 and $1.6 million, respectively, in compensation expense
related to a change in employment status of Dr. Melamed. This amount was
recorded in the fourth quarter of 1998. Of the total amount accrued,
approximately $1.1 million was paid in 1999 with the remaining amount payable in
equal monthly installments through July 2001.


10.  BENEFIT PLANS:

    401(k) Plans

         Prior to 1999, the Company maintained three defined contribution plans
that conformed to IRS provisions for 401(k) plans. One plan covered the
employees of the Company located in the Dallas-Fort Worth, Houston, San Antonio,
Indiana, Arkansas and Wisconsin markets. The second plan covered employees
formerly of Valley Forge and a third plan covered employees located in the
Dayton, Ohio market. During 1999, these three plans were consolidated into one
plan. The plan, referred to as the "Monarch 401(k) Plan," covers all employees
of the Company. Under this plan, employees are eligible to participate in the
plan provided they have attained the age of 18 and have completed the 90-day
initial employment period. The Company makes discretionary matching
contributions up to a maximum dollar amount. Total contributions by the Company
for the plan were approximately $544,000, $214,000, and $118,000 for 1999, 1998,
and 1997, respectively.

                                       18
<PAGE>   45

    Employee Stock Purchase Plan

         The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors and approved by the Company's
stockholders. Up to 250,000 shares of Common Stock may be issued under the
Purchase Plan. Offerings under the Purchase Plan commence on each January 1 and
July 1 and have a duration of six months. Generally, all employees who are
customarily employed for more than 20 hours per week as of the first day of the
applicable offering period are eligible to participate in the Purchase Plan.

         During each offering, an employee may purchase shares under the
Purchase Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares which may
be purchased by any participating employee during any offering period is limited
to 1,000 shares. Unless the employee has previously withdrawn from the offering,
his or her accumulated payroll deductions will be used to purchase Common Stock
on the last business day of the period at a price equal to 85% of the fair
market value of the Common Stock on the first or last day of the offering
period, whichever is lower. The Company issued an aggregate of 129,313 and
45,339 shares of Common Stock under the Purchase Plan in 1999 and 1998,
respectively.

11.  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

         SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's notes payable and capital lease
obligations are based on similar issues or on current rates available to the
Company and approximate their carrying values at December 31, 1999 and 1998.

12.      SEGMENT REPORTING:

         The Company organizes its business into five reportable segments. The
Company's reportable segments are strategic business units, and are comprised of
the following:

         Region One - Includes Dallas/Fort Worth, Houston, San Antonio, West
                      Texas, New Mexico and Austin Dental Offices. The Company
                      exited the Austin market in the first quarter of 1999.

         Region Two - Includes Pittsburgh, Northern Virginia, Southern Virginia,
                      Atlanta and Florida Dental Offices.

         Region Three - Includes Indiana, Arkansas, Dayton and Cleveland Dental
                        Offices.

         Region Four - Includes Wisconsin, Utah, Arizona and Colorado Dental
                       Offices.

         Region Five - Includes Philadelphia and Northern New Jersey Dental
                       Offices.

         The accounting policies of the segments are the same as those described
in the summary of significant accounting policies except that the Company does
not allocate income taxes to any of the regions. They are managed separately
because each region operates under different contractual arrangements, providing
service to a diverse mix of patients and payors.


                                       19
<PAGE>   46



                      FOR THE YEAR ENDED DECEMBER 31, 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                            Region 1    Region 2     Region 3    Region 4    Region 5      Total
                            --------    --------     --------    --------    --------    --------
<S>                         <C>         <C>         <C>          <C>         <C>         <C>
Patient revenue, net        $ 74,883    $ 36,440    $ 28,958     $ 46,133    $ 17,656    $204,070
Total operating expenses      61,517      29,838      24,313       39,075      14,513     169,256 (a)
                            --------    --------     --------    --------    --------    --------
Segment contribution          13,366       6,602       4,645        7,058       3,143      34,814
Contribution margin               18%         18%         16%          15%         18%         17%
Depreciation and
     amortization expense      3,654       2,053       1,483        1,716       1,522      10,428
Interest expense, net             35         140         (45)          19         129         278
Segment profit                 9,677       4,409       3,207        5,323       1,492      24,108
</TABLE>

                      FOR THE YEAR ENDED DECEMBER 31, 1998
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                            Region 1    Region 2     Region 3    Region 4    Region 5      Total
                            --------    --------     --------    --------    --------    --------
<S>                         <C>         <C>         <C>         <C>         <C>         <C>
Patient revenue, net        $ 61,473    $ 11,046    $ 22,307    $ 29,122    $  5,653    $129,601
Total operating expenses      52,434       8,740      19,114      24,084       4,264     108,636
                            --------    --------     --------    --------    --------    --------
Segment contribution           9,039       2,306       3,193       5,038       1,389      20,965
Contribution margin               15%         21%         14%         17%         25%         16%
Depreciation and
     amortization expense      6,193         581       1,522         992         380       9,668 (b)
Interest expense, net             64          38          12          45          10         169
Segment profit                 2,782       1,687       1,659       4,001         999      11,128
</TABLE>



       Reconciliation of Profit (in thousands)


<TABLE>
<CAPTION>
                                                    1999       1998
                                                  --------   --------
<S>                                               <C>        <C>
Segment profit                                    $ 24,108   $ 11,128
Unallocated amounts:
Corporate operating expenses                         6,473      8,611
Corporate depreciation and amortization expense        121        195
Corporate interest expense, net                      7,409      2,703
Minority interest in consolidated subsidiaries         224         12
                                                  --------   --------
Income (loss) before income taxes                 $  9,881   $   (393)
                                                  ========   ========
</TABLE>

(a)  Includes a $1.0 million charge related to the settlement of a dispute with
     the former shareholders of an acquired company and a credit of
     approximately $2.9 million related to the settlement of a dispute with the
     sellers of an affiliated dental practice (see Note 3). Also includes $1.0
     million credit related to the settlement of a dispute with a former owner
     of an acquired dental practice.

(b)  Includes impairment charges of approximately $3.3 million related to Dental
     Office closures (see Note 2).



                                       20