<PAGE>   1
                                                                    EXHIBIT 13.1

Newman Graphics
Monarch Dental Corporation
2000 Annual Report
Revision #4
April 11, 2001


Cover:    MONARCH DENTAL CORPORATION
          Annual Report 2000

Letter:   To our shareholders:

          We believe we are on-track to achieve our goals. Despite a
          disappointing fourth quarter, results for the year were generally
          positive relative to 1999. Revenue growth for the year was 3.6% over
          1999 and EBITDA (Earnings Before Interest, Taxes, Depreciation, and
          Amortization) growth, excluding non-recurring items, improved by 1.9%.
          We are also encouraged by the early results reported in 2001. Revenue
          and EBITDA for the first quarter 2001 exceeded revenue and EBITDA for
          the fourth quarter 2000. In addition, our financial stability was
          enhanced by the recent amendment and extension of the Company's credit
          facility.

          Our company went public in 1997 with a simple premise: find the best
          dentists and set them up for success by providing the tools, resources
          and support they need to do what they do best: practice dentistry.
          This model has proven itself again and again and as a result, we have
          become one of the largest publicly traded, multi-specialty dental
          practice management companies in the United States.

          The challenge now is to improve the Company's financial stability by
          improving the operating performance of our existing dental offices.
          The improved operating performance and financial stability will ensure
          that our

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          doctors and staff have the resources necessary to deliver the quality
          care our patients have come to expect.

          New initiatives to recruit additional doctors to more effectively
          utilize our existing office space are already showing results. In the
          first quarter of 2001, we have already successfully recruited 22 new
          dentists. We are committed to enhancing the Company's financial
          stability by improving the operating performance in each of our 189
          existing dental offices. The addition of new doctors and services in
          our current facilities should contribute to increased revenue and
          improved margins, without the need for significant additional capital
          investment.

          Fully realizing our vision is a big task and we would like to thank
          each of our doctors and staff members for their continued support. We
          would like to give special thanks to the former Chairman of the Board,
          Warren F.

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<PAGE>   3

          Melamed, D.D.S., and the former Chief Executive Officer, Gary W. Cage,
          for their insight and support during their tenure with the Company. We
          also welcome Allan S. Huston, who recently joined our Board of
          Directors. Thanks to the dedication of the dentists, management team
          and staff, our efforts to build your company into the country's
          leading dental practice management organization are showing very
          positive results.

          Sincerely,



          W. Barger Tygart
          Chairman of the Board

Headline: CORPORATE PROFILE

          Monarch Dental Corporation is a team of over 2700 dedicated
          professionals working in 189 dental offices, serving the dental needs
          of patients in 14 states. Together, we are committed to building the
          best dental group practice in the country. We believe our people are
          the company's most valuable assets. With excellence as our guide, we
          have grown to over 400 dentists and have become a leading dental
          practice management organization. We provide quality general dental
          services in all of our markets and specialty dental services in the
          majority of our markets. Our goal is to expand our capacity to provide
          quality general dental services and specialty dental services within
          our existing markets.

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<PAGE>   4

Headline: CARING FOR DENTISTS

          In today's competitive business environment, managerial tasks are
          diminishing the amount of time dentists in solo or small group
          practices have to practice dentistry. At Monarch Dental, we believe
          that dentists should be able to take care of patients without all the
          distractions of managing a business. That's why we have designed a
          business model that ensures that our dentists have the time and
          resources they need for effective patient care. At Monarch Dental,
          dentists take care of patients while we manage their office staff,
          assure compliance with regulatory requirements, work with managed care
          and insurance organizations and respond to any other business issues.
          Typically, solo practitioners spend up to 30% of their time dealing
          with regulatory paperwork and other managerial issues. We do things a
          little differently. Monarch Dental dentists spend nearly 100% of their
          time caring for patients. Instead of managing the practice themselves,
          they are supported by a team of professional managers who are
          responsible for all necessary marketing, real estate, purchasing,
          contracting, financial and human resources functions. Our dentists
          focus on doing what they do best: practicing dentistry.

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          This business model works well for young dentists as well as
          established practitioners. The new dentist isn't forced to commit a
          large amount of capital to launch a practice. Equally importantly, as
          the dental practice grows, the established dentist isn't faced with
          spending increasing amounts of time attending to managerial duties. By
          teaming up with us, dentists can significantly reduce the amount of
          time spent on scheduling, billing, marketing and other administrative
          tasks and focus on providing quality dentistry and increasing revenue
          by building their customer base. There are unique advantages for
          specialists as well, since our network of offices can be used to
          provide a steady stream of customers.

          We want our dentists and staff to have the knowledge and skills they
          need to provide customers with the best possible dental care. That's
          why our commitment to training and continuing dental education is so
          critical. We also encourage the participation of dentists in clinical
          study groups to test new treatment protocols and new materials. To
          ensure the opportunity for personal and professional growth, we also
          provide the opportunity to relocate within our 14 state, 20-market
          network if desired. And for those who are interested, we provide the
          opportunity for dentists to join our management team, manage other
          dentists and perform various management duties within the
          organization.

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<PAGE>   6

Headline: CARING FOR PATIENTS

          Our approach to dentistry offers as many benefits for patients as it
          does for dentists. Our well-trained dentists and specialists are
          continually developing and updating their skills and participate in a
          special peer review process that encourages the highest level of
          professionalism, while providing an effective way for doctors and
          staff to share their knowledge and expertise with other dentists
          within the Monarch Dental system.

          Our philosophy of building geographically dense networks in selected
          urban markets also benefits patients by providing them with "one stop"
          shopping for all their dental care needs. In many of our markets,
          patients can take advantage of Monarch Dental offices that provide
          orthodontics, endodontics, periodontics, oral surgery and other
          specialized care. By providing quality specialty services on-site, we
          are able to make dental care much more convenient. Patients enjoy the
          convenience of consolidated billing, and receive a single bill that
          includes both regular and specialized dental services. They can also
          coordinate all their appointments and office visits from a single
          location. By offering specialized dental services in major markets, we
          have been able to maximize the utilization of our infrastructure,
          avoiding the expensive duplication of waiting rooms, business offices
          and information systems.

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          Convenience isn't the only thing we offer patients. Even in our
          smaller rural locations, every patient benefits from our belief that
          dentists should be able to focus their attention on patients without
          the distractions of managing a business. Patients enjoy the caring,
          personal attention they get at Monarch Dental. We have earned a
          reputation for quality dentistry, providing patients with a complete
          array of dental services, convenient locations, extended hours,
          affordable payment plans, a professionally managed environment and
          accurate administration of their insurance and benefit plans.

          In addition to our comprehensive range of dental services, Monarch
          Dental has a patient services center in the key markets of Dallas/Fort
          Worth and Houston to schedule appointments using a centralized
          management information system. The staff at these centers take
          incoming calls from patients, schedule appointments, answer questions,
          and make calls to remind patients that they're due for a check-up or
          ongoing treatment. We are able to send patients to the dental office
          nearest to their home and even offer extended office hours and
          Saturday appointments in some markets. This centralized system gives
          us more effective control over patient scheduling as well as provides
          us with the ability to manage patient volume, thereby enhancing the
          timeliness and convenience of the appointments for the patient.

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Headline: A BUSINESS MODEL THAT WORKS.

          The Monarch Dental business model has proven itself again and again.
          By building a group practice that combines the knowledge and expertise
          of well-trained dentists with the managerial skills of seasoned
          business managers, we have created an organization that is well suited
          to take advantage of the growing market for dental services. By
          clustering dental offices in select target markets, we have been able
          to build a recognized brand name that can be effectively leveraged
          when future growth opportunities occur. With a focused growth
          strategy, we believe there are significant opportunities to build
          brand recognition for our quality of care, comprehensive specialty
          services, affordable payment plans, convenient hours and locations,
          and patient satisfaction levels. We intend to be the brand name
          associated with clinical excellence.

Headline: A CLIMATE FOR GROWTH

          With an aging population, an increased emphasis on personal appearance
          and the growing popularity of dental benefit plans in the workplace,
          the climate for growth at Monarch Dental in 2001 and beyond is very
          positive. The $57 billion dental industry is expected to grow at 5.7%
          per year for the

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          foreseeable future, but this isn't the only reason we are so
          optimistic. Currently, nearly 40% of the U.S. population does not see
          a dentist at least once a year. This alone provides a huge untapped
          source for future crowns, bridges, caps, extractions and implants.
          Aging baby boomers will also soon be requiring increasingly costly
          procedures, such as root canals and crowns. At the same time, recent
          advances in technology are making all types of treatment less painful
          and more affordable. Even cosmetic dental surgery is becoming
          widespread as advanced visual displays and computer imaging systems
          provide patients the assurance they need to improve their smile. The
          U.S. population is finally recognizing the importance of good oral
          hygiene. As we look ahead, that gives the dentists, management, staff
          and shareholders at Monarch Dental Corporation something to smile
          about as well.

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ITEM 6. SELECTED FINANCIAL DATA

    The selected consolidated statement of income data for the years ended
December 31, 2000, 1999, 1998, 1997 and 1996, and the selected consolidated
balance sheet data at December 31, 2000, 1999, 1998, 1997, and 1996, 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)                              2000         1999        1998         1997         1996
                                                                ----------   ----------  ----------   ----------   ----------
<S>                                                             <C>          <C>         <C>          <C>          <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
    Patient revenue, net                                        $  211,339   $  204,070  $  129,601   $   68,619   $   35,980
    Operating expenses:
         Provider salaries and benefits                             70,484       67,089      40,283       21,179       10,527
         Clinical and other salaries and benefits                   56,657       53,195      36,556       18,803        9,386
         Dental supplies                                            10,534       10,386       6,898        4,282        2,216
         Laboratory fees                                            11,068        9,888       5,954        2,902        1,648
         Occupancy                                                  10,265       10,066       7,265        3,709        1,937
         Advertising                                                 2,684        3,073       2,436        1,781        1,210
         Other operating expenses                                   24,693       22,031      17,855        7,944        4,839
         Strategic alternative costs                                 2,347           --          --           --           --
         Depreciation and amortization                              11,110       10,549       9,863        2,938        1,430
                                                                ----------   ----------  ----------   ----------   ----------
                                                                   199,842      186,277     127,110       63,538       33,193
                                                                ----------   ----------  ----------   ----------   ----------
    Operating income                                                11,497       17,793       2,491        5,081        2,787
    Interest expense, net                                           10,527        7,687       2,872        1,545        1,687
    Minority interest in consolidated subsidiaries                     278          225          12           46           --
                                                                ----------   ----------  ----------   ----------   ----------
    Income (loss) before income taxes and extraordinary item           692        9,881        (393)       3,490        1,100
    Income taxes                                                     1,174        3,300          31        1,355          425
                                                                ----------   ----------  ----------   ----------   ----------
    Income (loss) before extraordinary item                           (482)       6,581        (424)       2,135          675
    Extraordinary loss on early extinguishment of debt,
          net of applicable tax benefit of $167                         --           --          --         (264)          --
                                                                ----------   ----------  ----------   ----------   ----------
    Net income (loss)                                           $     (482)  $    6,581  $     (424)  $    1,871   $      675
                                                                ==========   ==========  ==========   ==========   ==========
    Net income (loss) per common share(1):
          Income (loss) before extraordinary item               $    (0.04)  $     0.53  $    (0.04)  $     0.34   $     0.24
          Extraordinary item                                            --           --          --        (0.05)          --
                                                                ----------   ----------  ----------   ----------   ----------
          Net income (loss)                                     $    (0.04)  $     0.53  $    (0.04)  $     0.29   $     0.24
                                                                ==========   ========== ===========  ===========   ==========
    Net income (loss) per common share - assuming dilution(1):
          Income (loss) before extraordinary item               $    (0.04)  $     0.53  $    (0.04)  $     0.26   $     0.13
          Extraordinary item                                            --           --          --        (0.04)          --
                                                                ----------   ----------  ----------   ----------   ----------
          Net income (loss)                                     $    (0.04)  $     0.53  $    (0.04)  $     0.22   $     0.13
                                                                ==========   ==========  ==========   ==========   ==========
    Weighted average common shares outstanding -  basic             12,874       12,507      10,805        6,369        2,846
    Weighted average common and common
          equivalent shares outstanding - diluted                   12,874       12,514      10,805        8,346        5,077
</TABLE>

----------
 (1) Computed on the basis described in Note 2 of Notes to Consolidated
     Financial Statements.


<TABLE>
<CAPTION>
                                                                         DECEMBER 31,

(IN THOUSANDS)                                   2000          1999          1998          1997         1996
                                              ----------    ----------    ----------    ----------   ----------
<S>                                           <C>           <C>           <C>           <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
    Cash and cash equivalents                 $    3,000    $    4,843    $    3,993    $    2,975   $    1,059
    Working capital (deficit)                      2,614        (7,525)      (13,902)        1,337       (3,995)
    Total assets                                 171,696       179,866       167,418        64,592       32,906
    Long-term debt, less current maturities       76,967        77,183        71,328        11,200       18,769
    Redeemable equity securities                      --            --            --            --        9,711
    Total stockholders' equity (deficit)          67,508        66,594        57,463        41,966       (5,408)
</TABLE>



<PAGE>   11

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, obligations under the
Company's amended loan agreement and statements regarding the possible issuance
of debt or equity securities. 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 the Company's reliance on certain personnel, high levels of
indebtedness, acquisition strategy and expansion within existing markets,
possible volatility and possible delisting of Common Stock, competition 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 Dental Offices focus 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
generated 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 has used the acquired
dental group practice as a "pedestal" from which to expand within the newly
entered market.

         The Company's most recent "pedestal" acquisition was completed in
September 1998. Since that time, the Company's acquisition activity has slowed
due to financing constraints and expansion efforts have focused on acquiring
dental practices in existing markets when opportunities arise in order to
strengthen the Company's presence in existing these markets. Patient revenue,
net increased from $129.6 million in 1998 to $204.1 million in 1999, an increase
of 57.5%, and increased to $211.3 million in 2000, representing an increase of
3.6% over 1999. 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 189 through acquisitions and the opening of
new offices, as shown in the table below.

<TABLE>
<CAPTION>
                                    2000          1999            1998(1)        1997         1996
                                 ----------    ----------       ----------    ----------   ----------
<S>                              <C>           <C>              <C>           <C>          <C>
Offices at beginning of period          190           192               99            53           12
De novo offices                           1            --                7             7            2
Acquired offices                          1             7               88            39           39
Closed offices                           (3)           (9)              (2)           --           --
                                 ----------    ----------       ----------    ----------   ----------
Offices at end of period                189           190              192            99           53
                                 ==========    ==========       ==========    ==========   ==========
</TABLE>

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



                                       2
<PAGE>   12

         The growth of the Company since 1996 continues 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's 2000 results of operations were also materially affected
by strategic alternative costs of $2.3 million on a pre-tax basis, or
approximately $0.11 per share after tax. These costs resulted primarily from
legal, investment banking and other professional fees incurred from efforts to
explore strategic alternatives in order to expand the Company's growth
opportunities and maximize shareholder value. These efforts included exploring
potential strategic transactions, such as the possible sale or merger of the
Company or a subordinated debt transaction. On November 20, 2000, the Company
announced that it had terminated discussions with a third party concerning a
potential strategic transaction. On February 15, 2001, the Company announced
that it had terminated discussions with third parties concerning the issuance of
debt securities in a subordinated debt transaction. In addition, the Company
also incurred in the fourth quarter of 2000 a non-recurring expense of $1.0
million consisting of severance payments to Gary W. Cage, who resigned as
President and Chief Executive Officer of the Company in October 2000.

         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 pre-tax
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
pre-tax 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
nontaxable $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 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 Director of the Company,
$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.



                                       3
<PAGE>   13

         Acquisitions. From 1996 to 1998, the Company 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
2000 in-markets                                     1              1             1962         November 2000
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.

         During 2000 and 1999, as a result of its focus on internal operations
and the limited availability of additional capital, the Company significantly
reduced its acquisition activity. Per the terms of the Company's amended Credit
Facility, the Company is prohibited from making acquisitions without bank
approval.

         Existing Market Development. The Company commenced operations in 1983
with a group dental practice in Dallas. From its founding in 1983 through
December 31, 2000, the Company opened 28 additional Dental Offices on a de novo
basis (21 in Dallas-Fort Worth, three in Houston, two in San Antonio and one
each in Indiana and Atlanta.) 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. The Company purchased seven
solo practices in existing markets (three in Dallas-Fort Worth, three in
Wisconsin and one in Georgia) in 1999 and in 2000



                                       4
<PAGE>   14

purchased one solo practice in the Wisconsin market. Patient revenue, net from
the Company's Dallas-Fort Worth operations increased $8.8 million, or 35.5%, to
$33.4 million in 1998, increased $12.3 million, or 36.9%, to $45.7 million in
1999 and increased $4.8 million, or 10.5% to $50.5 million in 2000. Operating
income for the Company's Dallas-Fort Worth operations increased $1.8 million, or
52.2%, to $5.2 million in 1998, increased $3.3 million, or 63.2%, to $8.5
million in 1999 and increased $2.2 million, or 25.4% to $10.7 million in 2000.
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 seventeen de novo Dental
Offices opened since January 1, 1996 was approximately $267,000, which includes
the cost of equipment, leasehold improvements and working capital associated
with the initial operations. Twelve 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)
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.

         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 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



                                       5
<PAGE>   15

procedures. In contrast, under traditional indemnity insurance arrangements, the
insurance company pays a percentage of reasonable charges that 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 58.2%, 59.5% and 59.8% of the Company's total Revenue for
2000, 1999 and 1998, respectively. Managed dental care Revenue increased as a
percentage of Revenue to 41.8% in 2000 from 40.5% in 1999 and 40.2% in 1998. 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.



                                       6
<PAGE>   16

RESULTS OF OPERATIONS

         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,
                                              ---------------------------------------
                                                 2000           1999          1998
                                              ----------     ----------    ----------
<S>                                           <C>            <C>           <C>
Patient revenue, net                               100.0%         100.0%        100.0%
Operating expenses:
   Provider salaries and benefits                   33.3           32.9          31.1
   Clinical and other salaries and benefits         26.8           26.1          28.2
   Dental supplies                                   5.0            5.1           5.3
   Laboratory fees                                   5.2            4.8           4.6
   Occupancy                                         4.9            4.9           5.6
   Advertising                                       1.3            1.5           1.9
   Other operating expenses                         11.7           10.8          13.8
   Strategic alternative costs                       1.1             --            --
   Depreciation and amortization                     5.3            5.2           7.6
                                              ----------     ----------    ----------
                                                    94.6           91.3          98.1
                                              ----------     ----------    ----------
Operating income                                     5.4            8.7           1.9
Interest expense, net                                5.0            3.8           2.2
Minority interest in consolidated
  subsidiaries                                       0.1            0.1            --
                                              ----------     ----------    ----------
Income (loss) before income taxes                    0.3            4.8          (0.3)
Income taxes                                         0.5            1.6            --
                                              ----------     ----------    ----------
Net income (loss)                                   (0.2)%          3.2%         (0.3)%
                                              ==========     ==========    ==========
</TABLE>


YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

         Patient revenue, net. Revenue increased to $211.3 million for 2000 from
$204.1 million for 1999, an increase of $7.2 million, or 3.6%. This increase
resulted primarily from same store revenue growth generated by the
implementation of revenue enhancement initiatives in 2000 including patient
focused marketing programs and the expansion or relocation of twenty existing
Dental Offices and to a lesser extent the opening of one de novo Dental Office
and the acquisition of one dental practice. The revenue initiatives were
partially offset by severe winter weather experienced in many of the Company's
markets in December 2000, which resulted in several offices being closed for up
to five business days during the month.

         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 $123.1 million for 2000 from $121.4 million
for 1999, an increase of $1.7 million, or 1.4%. This increase resulted primarily
from same store revenue growth generated by the implementation of revenue
enhancement initiatives in 2000 including patient focused marketing programs and
the expansion or relocation of twenty existing Dental Offices and to a lesser
extent the opening of one de novo Dental Office and the acquisition of one
dental practice. The revenue initiatives were partially offset by severe winter
weather experienced in many of the Company's markets in December 2000, which
resulted in several offices being closed for up to five business days during the
month. Managed dental care Revenue (i.e., revenue from capitated managed dental
care plans, including capitation payments and patient co-payments) increased to
$88.2 million for 2000 from $82.7 million for 1999, an increase of $5.5 million,
or 6.8%. This increase resulted primarily from several new managed care
contracts, which had more favorable capitated payments and co-payments as
compared with previous contracts. As a percent of Revenue, fee-for-service
Revenue decreased to 58.2% for 2000 from 59.5% for 1999.



                                       7
<PAGE>   17

         Provider salaries and benefits. Provider salaries and benefits expense
increased to $70.5 million for 2000 from $67.1 million for 1999, an increase of
$3.4 million, or 5.1%. This increase resulted primarily from increased dentist
and hygienist compensation due to a higher level of production at the Dental
Offices and to a lesser extent the expansion or relocation of twenty existing
Dental Offices, the opening of one de novo Dental Office and the acquisition of
one dental practice. As a percent of Revenue, provider salaries and benefits
expense increased to 33.3% for 2000 from 32.9% for 1999. This increase was due
principally to increased dentist compensation as a percentage of revenue in
several of the Company's markets.

         Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $56.7 million for 2000 from $53.2 million for
1999, an increase of $3.5 million, or 6.5%. This increase resulted primarily
from annual merit increases, increased costs related to employee benefits and
$1.0 million in severance payments made to a former executive of the Company and
to a lesser extent the expansion or relocation of twenty existing Dental
Offices, the opening of one de novo Dental Office and the acquisition of one
dental practice. As a percent of Revenue, clinical and other salaries and
benefits expense increased to 26.8% for 2000 from 26.1% for 1999. This increase
was due primarily to $1.0 million in severance payments made to a former
executive of the Company and to a lesser extent due to the higher costs of
employee benefits.

         Dental supplies. Dental supplies expense increased to $10.5 million for
2000 from $10.4 million for 1999, an increase of $148,000, or 1.4%. This
increase resulted primarily from increased production at the Dental Offices and
to a lesser extent the expansion or relocation of twenty existing Dental
Offices, the opening of one de novo Dental Office and the acquisition of one
dental practice. As a percent of Revenue, dental supplies expense decreased
slightly to 5.0% for 2000 from 5.1% for 1999.

         Laboratory fees. Laboratory fee expense increased to $11.1 million for
2000 from $9.9 million for 1999, an increase of $1.2 million, or 11.9%. This
increase resulted primarily from increased production at the Dental Offices,
increased use of higher quality crowns as well as an increase in material costs
used in the production of crowns and to a lesser extent the expansion or
relocation of twenty existing Dental Offices, the opening of one de novo Dental
Office and the acquisition of one dental practice. As a percent of Revenue,
laboratory fee expense increased to 5.2% for 2000 from 4.8% for 1999. This
increase was due primarily to increased usage of higher quality, more costly
crowns as well as an increase in material costs used in the production of
crowns.

         Occupancy. Occupancy expense increased to $10.3 million for 2000 from
$10.1 million for 1999, an increase of $199,000, or 2.0%. The expense associated
with the opening of one de novo Dental Office, the expansion or relocation of
twenty existing Dental Offices and the acquisition of one dental practice was
partially offset by three Dental Office closures during 2000. As a percent of
Revenue, occupancy expense remained constant at 4.9% for 2000 and 1999.

         Advertising. Advertising expense decreased to $2.7 million for 2000
from $3.1 million for 1999, a decrease of $389,000, or 12.7%. This decrease
resulted primarily from cost control initiatives that included the use of lower
cost advertising. A greater emphasis was placed on direct mailings and other
types of print advertising as opposed to the more expensive television and radio
advertising. As a percent of Revenue, advertising expense decreased to 1.3% for
2000 from 1.5% for 1999. This decrease resulted from the use of lower cost
advertising and the leveraging of advertising expense against increased revenue.

         Other operating expenses. Other operating expenses increased to $24.7
million for 2000 from $22.0 million for 1999, an increase of $2.7 million, or
12.1%. This increase resulted primarily from 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. As a percent of Revenue, other
operating expenses increased to 11.7% for 2000 from 10.8% for 1999. This
increase was due principally to the $2.9 million credit recorded in the fourth
quarter of 1999.

         Strategic alternative costs. Strategic alternative costs were $2.3
million for 2000 resulting primarily from legal, investment banking and other
professional fees incurred from efforts to explore strategic alternatives in
order to expand the Company's growth opportunities and maximize shareholder
value. These efforts included exploring potential strategic transactions, such
as the possible sale or merger of the Company or a subordinated debt
transaction.



                                       8
<PAGE>   18

On November 20, 2000, the Company announced that it had terminated discussions
with a third party concerning a potential strategic transaction. On February 15,
2001, the Company announced that it had terminated discussions with third
parties concerning the issuance of debt securities in a subordinated debt
transaction.

         Depreciation and amortization. Depreciation and amortization expense
increased to $11.1 million for 2000 from $10.5 million for 1999, an increase of
$562,000, or 5.3%. This increase resulted primarily from additional goodwill
amortization and depreciation expense on fixed assets associated with the
expansion or relocation of twenty existing Dental Offices, the opening of one de
novo Dental Office and the acquisition of one dental practice.

         Operating income. Operating income decreased to $11.5 million for 2000
from $17.8 million for 1999, a decrease of $6.3 million, or 35.4%. This decrease
resulted primarily from 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, $2.3 million in strategic alternative costs in 2000 incurred
from efforts to explore strategic alternatives, $1.0 million in severance
payments made to a former executive of the Company in the fourth quarter of 2000
and increased salary and laboratory costs at the dental offices. As a percent of
Revenue, operating income decreased to 5.4% for 2000 from 8.7% for 1999. This
decrease was due principally to the items discussed above.

         Interest expense, net. Interest expense, net increased to $10.5 million
for 2000 from $7.7 million for 1999, an increase of $2.8 million, or 36.9%. This
increase resulted primarily from amortization expense related to capitalized
loan fees which includes the amortization of warrants awarded to the Company's
bank syndicate in conjunction with an amendment to the Company's loan agreement
associated with its Credit Facility. Additionally, the Company had higher
average outstanding debt balances and higher interest rates in 2000 than in
1999. Average debt outstanding under the Credit Facility totaled $81.5 million
for 2000 compared to average debt outstanding of $78.5 million for 1999. The
average interest rate for 2000 was approximately 10.3% compared to a rate of
approximately 8.7% in 1999.

         Minority interest in consolidated subsidiaries. Minority interest in
consolidated subsidiaries increased to $279,000 for 2000 from $224,000 for 1999,
an increase of $55,000, or 24.1%. This increase resulted from higher net income
in markets that are not wholly-owned by the Company in 2000 compared to 1999.

         Income taxes. Income tax expense decreased to $1.2 million for 2000
from $3.3 million for 1999, a decrease of $2.1 million, or 64.5%. This decrease
resulted from lower income before income taxes, which decreased to $692,000 for
2000 from $9.9 million for 1999, a decrease of $9.2 million, or 93.0%.

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 $121.4 million for 1999 from $77.5 million
for 1998, an increase of $43.9 million, or 56.7%. 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
$32.0 million) in 1999. In existing markets, fee-for-service Revenue increased
to $76.6 million for 1999 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 $82.7
million for 1999 from $52.1 million for 1998, an increase of $30.6 million, or
58.6%. This increase resulted primarily from the acquisitions



                                       9
<PAGE>   19

of Valley Forge and Talbert in September 1998 which provided eight additional
months of managed dental care Revenue (approximately $23.0 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 59.5% 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.

         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



                                       10
<PAGE>   20

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 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



                                       11
<PAGE>   21

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 in consolidated subsidiaries. Minority interest in
consolidated subsidiaries 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 in markets that are not wholly-owned by the Company 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.



                                       12
<PAGE>   22

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, 2000.
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,
                                              2000(1)      2000       2000      2000        1999(2)     1999      1999      1999
                                             --------   ---------   --------  --------     --------  ---------  --------  --------
                                                                              (DOLLARS IN THOUSANDS)
<S>                                          <C>        <C>         <C>       <C>          <C>       <C>        <C>       <C>
Patient revenue, net ......................  $ 50,167   $  51,979   $ 54,170  $ 55,023     $ 51,949  $  51,196  $ 51,470  $ 49,455
Operating expenses:
  Provider salaries and benefits ..........    17,068      17,411     18,077    17,928       16,920     16,792    17,210    16,167
  Clinical and other salaries and
    benefits ..............................    15,409      13,819     13,844    13,585       13,451     13,310    13,379    13,055
  Dental supplies .........................     2,582       2,423      2,561     2,968        2,725      2,432     2,580     2,649
  Laboratory fees .........................     2,757       2,825      2,622     2,864        2,564      2,794     2,211     2,319
  Occupancy ...............................     2,549       2,609      2,524     2,583        2,419      2,577     2,493     2,576
  Advertising .............................       680         758        579       667          641        838       864       730
  Other operating expenses ................     6,270       6,165      5,868     6,390        3,501      5,769     6,184     6,579
  Strategic alternative costs .............     1,288         586        473        --           --         --        --        --
  Depreciation and amortization ...........     2,883       2,755      2,757     2,715        2,562      2,769     2,656     2,562
                                             --------   ---------   --------  --------     --------  ---------  --------  --------
                                               51,486      49,351     49,305    49,700       44,783     47,281    47,577    46,637
                                             --------   ---------   --------  --------     --------  ---------  --------  --------
Operating income (loss) ...................    (1,319)      2,628      4,865     5,323        7,166      3,915     3,893     2,818
Interest expense, net .....................     2,694       2,688      2,564     2,582        2,215      1,788     1,905     1,778
Minority interest in consolidated
  subsidiaries ............................        33          77         81        87            6         48       137        34
                                             --------   ---------   --------  --------     --------  ---------  --------  --------
Income (loss) before income taxes .........    (4,046)       (137)     2,220     2,654        4,945      2,079     1,851     1,006
Income taxes ..............................    (1,037)         16      1,001     1,193        1,374        809       725       392
                                             --------   ---------   --------  --------     --------  ---------  --------  --------
Net income (loss) .........................  $ (3,009)  $    (153)  $  1,219  $  1,461     $  3,571  $   1,270  $  1,126  $    614
                                             ========   =========   ========  ========     ========  =========  ========  ========


Net income (loss) per common share ........  $  (0.23)  $   (0.01)  $   0.09  $   0.11     $   0.28  $    0.10  $   0.09  $   0.05
                                             ========   =========   ========  ========     ========  =========  ========  ========
Net income (loss) per common share-
  assuming dilution .......................  $  (0.23)  $   (0.01)  $   0.09  $   0.11     $   0.28  $    0.10  $   0.09  $   0.05
                                             ========   =========   ========  ========     ========  =========  ========  ========
Weighted average number of common
  shares outstanding ......................    12,905      12,905     12,847    12,839       12,719     13,181    13,003    12,086
                                             ========   =========   ========  ========     ========  =========  ========  ========
Weighted average number of common and
  common equivalent shares outstanding ....    12,905      12,905     13,374    13,312       12,732     13,181    13,003    12,086
                                             ========   =========   ========  ========     ========  =========  ========  ========
</TABLE>

(1)  Includes the effect of approximately $1.0 million (pre-tax) in severance
     payments made to a former executive of the Company.

(2)  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.



                                       13
<PAGE>   23

<TABLE>
<CAPTION>
                                                                                QUARTER ENDED
                                        -------------------------------------------------------------------------------------------
                                        DEC. 31,    SEPT. 30,    JUNE 30,   MAR. 31,     DEC. 31,   SEPT. 30,   JUNE 30,   MAR. 31,
                                         2000(1)       2000        2000       2000        1999(2)      1999       1999       1999
                                        --------    ---------    --------   --------     --------   ---------   --------   --------
                                                                             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 .....      34.0         33.5        33.4       32.6         32.6        32.8       33.4       32.7
  Clinical and other salaries and
    benefits .........................      30.7         26.6        25.5       24.7         25.9        26.0       26.0       26.4
  Dental supplies ....................       5.1          4.7         4.7        5.4          5.2         4.8        5.0        5.4
  Laboratory fees ....................       5.5          5.4         4.8        5.2          4.9         5.5        4.3        4.7
  Occupancy ..........................       5.1          5.0         4.7        4.7          4.7         5.0        4.8        5.2
  Advertising ........................       1.4          1.4         1.1        1.2          1.2         1.6        1.7        1.5
  Other operating expenses ...........      12.5         11.9        10.8       11.6          6.8        11.3       12.0       13.2
  Strategic alternative costs ........       2.6          1.1         0.9         --           --          --         --         --
  Depreciation and amortization ......       5.7          5.3         5.1        4.9          4.9         5.4        5.2        5.2
                                        --------    ---------    --------   --------     --------   ---------   --------   --------
                                           102.6         94.9        91.0       90.3         86.2        92.4       92.4       94.3
                                        --------    ---------    --------   --------     --------   ---------   --------   --------
Operating income (loss) ..............      (2.6)         5.1         9.0        9.7         13.8         7.6        7.6        5.7
Interest expense, net ................       5.4          5.2         4.7        4.7          4.3         3.4        3.7        3.6
Minority interest in consolidated
subsidiaries .........................       0.1          0.2         0.2        0.2           --         0.1        0.3        0.1
                                        --------    ---------    --------   --------     --------   ---------   --------   --------
Income (loss) before income taxes ....      (8.1)        (0.3)        4.1        4.8          9.5         4.1        3.6        2.0
Income taxes .........................      (2.1)          --         1.8        2.1          2.6         1.6        1.4        0.8
                                        --------    ---------    --------   --------     --------   ---------   --------   --------
Net income (loss) ....................      (6.0)%       (0.3)%       2.3%       2.7%         6.9%        2.5%       2.2%       1.2%
                                        ========    =========    ========   ========     ========   =========   ========   ========
</TABLE>

(1)  Includes the effect of approximately $1.0 million (pre-tax) in severance
     payments made to a former executive of the Company.

(2)  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.



                                       14
<PAGE>   24
LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2000, the Company had a $2.6 million working capital
surplus in contrast to a working capital deficit of $7.5 million at December 31,
1999. This working capital surplus included current assets of $25.8 million,
consisting of $3.0 million in cash and cash equivalents, $17.9 million in
accounts receivable, net of allowances, prepaid expenses and other current
assets of $3.1 million and $1.8 million in income tax receivable. Current assets
were partially offset by current liabilities of $23.2 million, consisting of
$4.2 million in accounts payable, $9.8 million in accrued liabilities, $4.8
million in amounts payable to affiliated dental group practices as consideration
for accounts receivable acquired from such group practices and $4.4 million in
current maturities of notes payable and capital lease obligations. The Company's
principal sources of liquidity as of December 31, 2000 consisted of cash and
cash equivalents and net accounts receivable. There can be no assurance that the
Company's working capital surplus will continue in the future.

         For 2000 and 1999, cash provided by operations was $11.3 million and
$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, respectively.

         Cash used in investing activities was $8.7 million for 2000 and $13.9
million for 1999. For 2000, $4.7 million was utilized to meet contingent
payments for acquisitions completed in prior periods, $751,000 was utilized for
acquisitions, $3.1 million was invested in the purchase of additional property
and equipment and $154,000 was utilized for other investing activities. For the
year ended December 31, 1999, $8.8 million was utilized for acquisitions and to
meet contingent payments for acquisitions completed in prior periods and $5.1
million was invested in the purchase of additional property and equipment.

         For 2000, cash used in financing activities was $4.5 million primarily
comprised of the repayment of $6.8 million in outstanding debt offset by $2.7
million in net borrowings. For 1999, cash provided by financing activities was
$9.8 million primarily comprised of $16.8 million in net borrowings offset by
the repayment of $5.3 million in outstanding debt and $1.6 million in debt
issuance costs.

         The Company has a Credit Facility with a bank syndicate. The Loan
Agreement associated with the Credit Facility was amended in April 2001 and
expires on July 1, 2002. The amendment to the Loan Agreement was necessitated
because the prior Loan Agreement was due to expire on June 30, 2001 and the
Company's failure to raise $15.0 million in subordinated debt. At December 31,
2000, the Company had $79.8 million outstanding under the Credit Facility. The
amounts outstanding under the Credit Facility bear interest at the lead lender's
prime rate plus three percent with interest payments due on a monthly basis. The
Credit Facility requires the Company to repay principal based on a schedule
whereby monthly payments are made aggregating $1.0 million, $1.3 million and
$1.3 million in the second, third and fourth quarters of 2001, respectively, and
$2.0 million and $2.3 million in the first quarter of 2002 and two months ended
May 31, 2002, respectively. Additional principal payments will be required two
times during the term of the Credit Facility if the Company exceeds certain
earnings projections. Bank fees totaling $601,000 are to be paid in equal
installments on April 30, 2001 and June 1, 2001. A $500,000 fee is due on
December 31, 2001 and April 30, 2002 if certain thresholds above the required
amortization are not met. In connection with the


                                       15
<PAGE>   25
April 2001 amendment, the lenders will receive warrants to purchase shares of
the Company's Common Stock at an exercise price of $0.01 per share, equal to 5%
of the outstanding shares of the Company's Common Stock as of July 1, 2002, if
all outstanding debt is not paid in full by July 1, 2002. In connection with a
prior amendment, the Company issued to the lenders warrants to purchase 394,721
shares of the Company's Common Stock at an exercise price of $0.01 per share.
The Credit Facility prohibits the Company from incurring additional
indebtedness, incurring liens, disposing of assets, making investments or making
acquisitions without bank approval, and requires the Company to maintain certain
financial covenants. These covenants require the Company to maintain minimum
total net worth of $66.5 million as of December 31, 2001; minimum EBITDA, on a
trailing three month basis, of $5.3 million as of April 30, 2001; and a limit on
capital expenditures of $3.0 million from April 1, 2001 through December 31,
2001. These covenants fluctuate in future periods. The Credit Facility is
secured by all of the assets of the Company.

         At December 31, 2000, the Company was in default with the terms of the
Credit Facility as a result of the failure to raise $15.0 million in
subordinated debt and a financial covenant default related to the failure to
raise the subordinated debt. Based on the amendment to the Credit Facility in
April 2001, the Company is currently in compliance with the terms of its Credit
Facility. The Company believes it will be able to comply with the financial
covenants in the amended Credit Facility through July 1, 2002.

         The Company believes that cash generated from operations will be
sufficient to fund its operating cash, capital requirements and debt service
requirements in 2001. However, the Credit Facility expires by its terms on July
1, 2002, and all of the Company's debt thereunder will then be due. The Company
will not generate sufficient cash flow by July 1, 2002 to repay all or a
substantial portion of its debt under the Credit Facility. In order to meet its
short-term and long-term liquidity needs, including the amortization
requirements of the Credit Facility, the Company may issue additional equity and
debt securities, subject to approval by the bank syndicate and market and other
conditions.

         In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for certain financial
instruments, including interest rate swap agreements. The Company enters into
interest rate hedging agreements to manage its interest rate exposure. The
Company adopted SFAS No. 133 on January 1, 2001 and its existing interest rate
hedges were designated as cash flow hedges. The effective portion of the gain or
loss on a cash flow hedge must be reported as a component of other comprehensive
income and be reclassified into earnings in the same period or periods during
which the hedged forecasted transaction affects earnings. The ineffective
portion, if any, of the gain or loss on a cash flow hedge must be recognized
currently in earnings. Based on the cash flow hedges in effect on December 31,
2000, derivative liabilities would have approximated $66,000. In future periods
derivative liabilities will be recognized in the Company's consolidated balance
sheet with an offsetting amount recognized in accumulated other comprehensive
loss.




                                       16
<PAGE>   26
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

RELIANCE ON CERTAIN PERSONNEL

         The success of the Company, including its ability to continue to
integrate past acquisitions, depends on the continued services of a relatively
limited number of members of the Company's senior management. To date, the
Company has experienced difficulty in attracting enough qualified management
personnel. 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 HIGH LEVELS OF INDEBTEDNESS

         The Company is subject to all of the risks normally associated with
incurring high levels of indebtedness relative to available cash flow from
operations, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest. At December 31, 2000, the
Company had $79.8 million of outstanding indebtedness under its Credit Facility.
This indebtedness matures on July 1, 2002 or earlier in the event the Company
defaults under any of the covenants, including minimum net worth, minimum EBITDA
and maximum capital expenditures, contained in its Credit Facility. Because the
Company anticipates that only a small portion of its existing indebtedness will
be repaid prior to maturity, it will be necessary for the Company to refinance
its debt. Accordingly, there is a significant risk that the existing
indebtedness will not be able to be refinanced or that the terms of such
refinancing will not be as favorable as the terms of the existing indebtedness.

         In the event the Company is unable to refinance this indebtedness
before July 1, 2002, its lenders may foreclose on the Company's assets or force
the Company into bankruptcy upon maturity of the existing indebtedness, in which
circumstances the Company's equity holders may experience a loss equal to the
amount of their investment in the Company's Common Stock. In the event the
Company is unable to refinance the indebtedness on terms as favorable as the
terms of the existing indebtedness, the Company is likely to experience a
material and adverse effect on its financial condition and results of
operations.

RISKS ASSOCIATED WITH ACQUISITION STRATEGY

         The Company has grown substantially in the last five years, principally
through acquisitions. The Company completed 31 acquisitions resulting in the
addition of 174 Dental Offices from 1996 to 2000. The Company 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 historically emphasized
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 does not have sufficient financing
to continue to pursue this acquisition strategy under current conditions.

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 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. 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 increase
efficiency through its management of the existing Dental Offices.



                                       17
<PAGE>   27

POSSIBLE VOLATILITY AND POSSIBLE DELISTING OF COMMON STOCK

         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. At December 31, 2000, the trading price of the Company's Common Stock
was $0.50. At April 18, 2001, the trading price of the Company's Common Stock
was $0.52. 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.

         On January 11, 2001, The Nasdaq Stock Market, Inc. ("NASDAQ") notified
the Company that the Company would not remain eligible for continued listing on
The Nasdaq SmallCap Market unless its Common Stock demonstrated compliance with
NASDAQ's $1.00 minimum bid price requirement during the 90-day period ending
April 11, 2001. On April 12, 2001, NASDAQ notified the Company that the
Company's stock price did not maintain compliance with NASDAQ's minimum bid
price requirement during the 90-day period ended April 11, 2001. On April 18,
2001, the Company requested a panel hearing as permitted by applicable NASDAQ
procedures. NASDAQ notified the Company that the request was granted and set the
hearing date for June 1, 2001. However, there is no assurance that the Company
will  not be delisted either before or after the panel hearing. At the hearing,
the Company will need to provide a definitive plan to achieve near term
compliance with the continued listing requirements and to sustain such
compliance over an extended period of time. The Company intends to present a
plan to effectuate a one-for-six reverse stock split of the Company's Common
Stock. The Company's continued listing on the NASDAQ SmallCap Market is subject
to maintaining a closing bid price at or above $1.00 per share over a sustained
period as well as demonstrating compliance with all of the other NASDAQ SmallCap
Market continued listing requirements. The Board believes that if the proposed
amendment is approved at the Annual Meeting and the reverse stock split is
effected, the Company should regain compliance with the $1.00 per share minimum
bid price required to remain listed on the NASDAQ SmallCap Market. However, the
Company cannot guarantee that these conditions will be met and that the Company
will not be delisted from the NASDAQ SmallCap Market, that even with the reverse
stock split it will meet all of the NASDAQ SmallCap Market's continued listing
criteria, or that the price for shares of the Company's Common Stock after the
reverse stock split will be six times the price for shares immediately before
the split or will be maintained for any period of time.



                                       18
<PAGE>   28

LIMITED CAPITAL; NEED FOR ADDITIONAL FINANCING

         The Company cannot be certain that its cash flow generated from
operations will be sufficient to meet its capital requirements over the next
few years.  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 additional indebtedness, incurring liens, disposing of
assets, making investments or making acquisitions without bank approval, and
requires the Company to maintain certain financial covenants 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.

AVAILABILITY OF DENTISTS

         All dentists practicing at the Dental Offices have entered into
employment agreements individually or through their dental professional
corporations (the "P.C.s") or independent contractor agreements through their
P.C.s. 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
growth 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 Dental Offices, which may have a material adverse effect on the
Company's growth 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.



                                       19
<PAGE>   29

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 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 a percentage of reasonable
charges that 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.

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. 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, 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.



                                       20
<PAGE>   30

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.

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 services industry is highly fragmented, consisting
primarily of solo and smaller group practices. The business of
providing general dental, orthodontic and other specialty dental services is
highly competitive in the markets in which the Company operates. The Company
believes it competes with other providers of dental and specialty services on
the basis of factors such as brand name recognition, convenience, cost and the
quality and range of services provided. Competition may include practitioners
who have more established practices and reputations. The Company's affiliated
dental practices also compete in the retention and recruitment of general
dentists, specialists and clinical staff. If the availability of dentists begins
to decline in the Company's markets, it may become more difficult to attract
qualified dentists to staff the Dental Offices sufficiently or to expand them.
The Dental Offices may not be able to compete effectively against other existing
practices or against new single or multi-specialty dental practices that enter
its markets, or to compete against such other practices in the recruitment of
qualified dentists.

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 (including the possible sale of assets to
meet amortization requirements under the Company's amended Credit Facility),
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. The Company does not believe any impairment of goodwill has
occurred as of December 31, 2000. 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.



                                       21
<PAGE>   31

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.




                                       22
<PAGE>   32

                          INDEX TO FINANCIAL STATEMENTS



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

Consolidated Balance Sheets as of December 31, 2000 and 1999                            2

Consolidated Statements of Income for the Years Ended                                   3
         December 31, 2000, 1999 and 1998

Consolidated Statements of Stockholders' Equity for the                                 4
         Years Ended December 31, 2000, 1999 and 1998

Consolidated Statements of Cash Flows for the Years Ended                               5
         December 31, 2000, 1999 and 1998

Notes to Consolidated Financial Statements                                              6
</TABLE>



                                       23
<PAGE>   33

                    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, 2000
and 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

                                       ARTHUR ANDERSEN LLP

Dallas, Texas,
April 30, 2001



                                       1
<PAGE>   34

                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                   ---------------------------
                                                                                                       2000           1999
                                                                                                   ------------   ------------
<S>                                                                                                <C>            <C>
                                                      ASSETS
Current assets:
   Cash and cash equivalents                                                                       $  3,000,013   $  4,843,315
   Accounts receivable, net of allowances of approximately $12,246,000
        and $12,678,000 in 2000 and 1999, respectively                                               17,873,979     17,408,886
   Prepaid expenses and other current assets                                                          3,085,466      2,945,505
   Income tax receivable                                                                              1,830,335        426,970
                                                                                                   ------------   ------------
        Total current assets                                                                         25,789,793     25,624,676
Property and equipment, net of accumulated depreciation of approximately $19,787,000
    and $14,363,000 in 2000 and 1999, respectively                                                   16,949,128     19,071,714
Goodwill, net of accumulated amortization of approximately $15,527,000 and
    $9,938,000 in 2000 and 1999, respectively                                                       128,176,854    132,459,266
Deferred income taxes                                                                                        --        340,999
Other assets                                                                                            780,398      2,369,034
                                                                                                   ------------   ------------
       Total
assets                                                                                             $171,696,173   $179,865,689
                                                                                                   ============   ============
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                                $  4,237,847   $  2,950,926
   Accrued payroll                                                                                    3,634,797      4,231,751
   Accrued liabilities                                                                                5,835,219     10,862,474
   Accrued restructuring charges                                                                        211,715        808,975
   Payable to affiliated dental group practices                                                       4,816,856      4,755,666
   Current maturities of notes payable and capital lease obligations, net of fair value of
      unamortized warrants of approximately $448,000 in 2000                                          4,439,553      9,539,775
                                                                                                   ------------   ------------
        Total current liabilities                                                                    23,175,987     33,149,567
Deferred income taxes                                                                                 1,113,864             --
Notes payable, net of fair value of unamortized warrants of approximately $112,000 in 2000           76,571,358     76,728,008
Capital lease obligations                                                                               395,705        455,240
Other liabilities                                                                                     2,450,152      2,849,602
                                                                                                   ------------   ------------
        Total liabilities                                                                           103,707,066    113,182,417
Minority interest in consolidated subsidiaries                                                          480,770         88,818
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; 12,905,469 and
     12,724,886 shares issued and outstanding in 2000 and 1999, respectively                            129,055        127,249
   Common Stock to be issued, 55,172 shares in 2000                                                          --        100,000
   Additional paid-in capital                                                                        67,376,312     65,882,409
   Retained earnings                                                                                      2,970        484,796
                                                                                                   ------------   ------------
        Total stockholders' equity                                                                   67,508,337     66,594,454
                                                                                                   ------------   ------------
        Total liabilities and stockholders' equity                                                 $171,696,173   $179,865,689
                                                                                                   ============   ============
</TABLE>


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



                                       2
<PAGE>   35

                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                         -------------------------------------------------
                                                              2000              1999             1998
                                                         --------------    --------------   --------------
<S>                                                      <C>               <C>              <C>
Patient revenue, net                                     $  211,338,687    $  204,069,657   $  129,600,803
Operating expenses:
   Provider salaries and benefits                            70,483,859        67,089,126       40,283,317
   Clinical and other salaries and benefits                  56,656,344        53,195,318       36,556,073
   Dental supplies                                           10,533,829        10,385,867        6,898,237
   Laboratory fees                                           11,068,194         9,888,105        5,953,830
   Occupancy                                                 10,265,129        10,065,790        7,264,869
   Advertising                                                2,684,003         3,072,988        2,436,481
   Other operating expenses                                  24,692,722        22,031,181       17,854,560
   Strategic alternative costs                                2,347,350                --               --
   Depreciation and amortization                             11,110,359        10,548,650        9,862,928
                                                         --------------    --------------   --------------
                                                            199,841,789       186,277,025      127,110,295
                                                         --------------    --------------   --------------
Operating income                                             11,496,898        17,792,632        2,490,508
Interest expense, net                                        10,526,580         7,687,174        2,871,689
Minority interest in consolidated subsidiaries                  278,532           224,474           11,524
                                                         --------------    --------------   --------------
Income (loss) before income taxes                               691,786         9,880,984         (392,705)
Income taxes                                                  1,173,612         3,300,363           31,480
                                                         --------------    --------------   --------------
Net income (loss)                                        $     (481,826)   $    6,580,621   $     (424,185)
                                                         ==============    ==============   ==============
Net income (loss) per common share                       $        (0.04)   $         0.53   $        (0.04)
                                                         ==============    ==============   ==============
Net income (loss) per common share - assuming dilution   $        (0.04)   $         0.53   $        (0.04)
                                                         ==============    ==============   ==============
Weighted average number of common shares
    outstanding                                              12,874,067        12,506,588       10,805,338
                                                         ==============    ==============   ==============
Weighted average number of common and
    common equivalent shares outstanding                     12,874,067        12,513,506       10,805,338
                                                         ==============    ==============   ==============
</TABLE>


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



                                       3
<PAGE>   36

                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000


<TABLE>
<CAPTION>
                                     COMMON STOCK              COMMON        ADDITIONAL      RETAINED          TOTAL
                              ---------------------------     STOCK TO        PAID-IN        EARNINGS      STOCKHOLDERS'
                                 SHARES         AMOUNT       BE ISSUED        CAPITAL       (DEFICIT)         EQUITY
                              ------------   ------------   ------------    ------------   ------------    -------------
<S>                             <C>          <C>            <C>             <C>            <C>             <C>
Balance, December 31, 1997      10,228,473   $    102,285   $         --    $ 47,534,874   $ (5,671,640)   $  41,965,519
   Net loss                             --             --             --              --       (424,185)        (424,185)
   Issuance of Common Stock      1,753,781         17,538             --      15,904,249             --       15,921,787
                              ------------   ------------   ------------    ------------   ------------    -------------
Balance, December 31, 1998      11,982,254        119,823             --      63,439,123     (6,095,825)      57,463,121
   Net income                           --             --             --              --      6,580,621        6,580,621
   Issuance of Common Stock        742,632          7,426        100,000       2,443,286             --        2,550,712
                              ------------   ------------   ------------    ------------   ------------    -------------
Balance, December 31, 1999      12,724,886        127,249        100,000      65,882,409        484,796       66,594,454
   Net loss                             --             --             --              --       (481,826)        (481,826)
   Issuance of Common Stock        180,583          1,806       (100,000)      1,493,903             --        1,395,709
                              ------------   ------------   ------------    ------------   ------------    -------------
Balance, December 31, 2000      12,905,469   $    129,055   $         --    $ 67,376,312   $      2,970    $  67,508,337
                              ============   ============   ============    ============   ============    =============
</TABLE>



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



                                       4
<PAGE>   37

                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                              --------------------------------------------
                                                                                  2000            1999            1998
                                                                              ------------    ------------    ------------
<S>                                                                           <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
        Net income (loss)                                                     $   (481,826)   $  6,580,621    $   (424,185)
        Adjustments to reconcile net income (loss) to net cash
              provided by operating activities -
              Depreciation and amortization                                     11,110,359      10,548,650       9,862,928
              Amortization of bank warrants                                        636,319              --              --
              Minority interest in consolidated subsidiaries                       278,532         224,474          11,524
              Changes in assets and liabilities, net of effects from
                     acquisitions -
                     Accounts receivable, net                                     (436,490)     (2,677,201)     (5,230,288)
                     Prepaid expenses and other current assets                    (139,961)       (529,610)       (482,891)
                     Income tax receivable                                      (1,406,223)        812,620      (1,239,590)
                     Other noncurrent assets                                     1,829,221        (272,128)        433,227
                     Accounts payable and accrued expenses                        (982,061)     (4,666,972)       (743,114)
                     Accrued restructuring charges                                (597,260)     (3,547,409)      4,356,384
                     Other liabilities                                              83,167      (3,231,253)     (1,057,116)
                     Deferred income taxes                                       1,454,863       1,741,319      (2,097,701)
                                                                              ------------    ------------    ------------
                        Net cash provided by operating activities               11,348,640       4,983,111       3,389,178
                                                                              ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchases of property and equipment, net                                (3,093,971)     (5,100,907)     (6,889,830)
        Cash paid for dental group practices, including
              related costs, net of cash acquired                               (5,476,083)     (8,801,908)    (48,601,828)
        Other investing activities                                                (154,189)             --              --
                                                                              ------------    ------------    ------------
                        Net cash used in investing activities                   (8,724,243)    (13,902,815)    (55,491,658)
                                                                              ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Proceeds from notes payable, net of issuance costs                       2,700,000      16,750,000      55,150,000
        Payments for debt issuance costs                                          (242,856)     (1,607,615)       (254,139)
        Payments on notes payable, capital lease obligations and other          (6,821,559)     (5,252,895)     (1,736,018)
        Distributions to stockholders/partners                                    (274,843)       (432,797)       (189,097)
        Issuance of Common Stock                                                   171,559         313,481         149,437
                                                                              ------------    ------------    ------------
                        Net cash provided by (used in) financing activities     (4,467,699)      9,770,174      53,120,183
                                                                              ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            (1,843,302)        850,470       1,017,703
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                     4,843,315       3,992,845       2,975,142
                                                                              ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                        $  3,000,013    $  4,843,315    $  3,992,845
                                                                              ============    ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
        Cash paid during the year for interest                                $  8,278,392    $  8,212,850    $  1,217,422
                                                                              ============    ============    ============
        Cash paid for taxes                                                   $  1,171,964    $    788,010    $  3,624,600
                                                                              ============    ============    ============
        Cash paid for strategic alternative costs                             $  1,533,008    $         --    $         --
                                                                              ============    ============    ============
        Non-cash issuance of Common Stock                                     $  1,224,150    $  2,237,231    $ 15,772,350
                                                                              ============    ============    ============
        Equipment acquired under capital leases                               $    193,834    $         --    $    855,038
                                                                              ============    ============    ============
        Debt assumed through acquisitions                                     $         --    $    150,000    $ 10,886,539
                                                                              ============    ============    ============
        Non-cash reduction of other liabilities                               $         --    $  3,368,000    $         --
                                                                              ============    ============    ============
</TABLE>

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



                                       5
<PAGE>   38

                   MONARCH DENTAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND CURRENT OPERATING ENVIRONMENT:

         Monarch Dental Corporation, a Delaware corporation, and subsidiaries
(collectively, the "Company"), manages dental group practices in selected
markets. At December 31, 2000, the Company managed 189 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, 1996, the Company has completed 31 acquisitions
resulting in the addition of 174 Dental Offices.

         The Company has a Credit Facility with a bank syndicate. The Loan
Agreement associated with the Credit Facility was amended in April 2001 and
expires on July 1, 2002. The amendment to the Loan Agreement was necessitated
because the prior Loan Agreement was due to expire on June 30, 2001 and the
Company's failure to raise $15.0 million in subordinated debt. (see Note 5)

         The Company believes that cash generated from operations will be
sufficient to fund its operating cash, capital requirements and debt service
requirements in 2001. However, the Credit Facility expires by its terms on July
1, 2002, and all of the Company's debt thereunder will then be due. The Company
will not generate sufficient cash flow by July 1, 2002 to repay all or a
substantial portion of its debt under the Credit Facility. In order to meet its
short-term and long-term liquidity needs, including the amortization
requirements of the Credit Facility, the Company may issue additional equity and
debt securities, subject to approval by the bank syndicate and market and other
conditions.

         In the event the Company is unable to refinance this indebtedness
before July 1, 2002, its lenders may foreclose on the Company's assets or force
the Company into bankruptcy upon maturity of the existing indebtedness, in which
circumstances the Company's equity holders may experience a loss equal to the
amount of their investment in the Company's Common Stock. In the event the
Company is unable to refinance the indebtedness on terms as favorable as the
terms of the existing indebtedness, the Company is likely to experience a
material and adverse effect on its financial condition and results of
operations.

         During 2000 and 1999, as a result of its focus on internal operations
and the limited availability of additional capital, the Company significantly
reduced its acquisition activity. Per the terms of the Company's amended Credit
Facility, the Company is prohibited from making acquisitions without bank
approval.

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, 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.



                                       6
<PAGE>   39

    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. Roy
Smith, D.D.S. is an employee 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 37%, 35%, and 46% of total patient
revenue, net in 2000, 1999 and 1998, 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 2000, 1999 and 1998, the Company estimates that approximately
42%, 41%, and 40%, 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 10%, 10% and 16% of the Company's patient revenue,
net during 2000, 1999 and 1998, respectively, was derived from a contract with
Prudential Dental Maintenance Organization, Inc. This contract continues 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 2000, 1999
or 1998.

    Advertising

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

    Strategic Alternative Costs

         During 2000, the Company incurred strategic alternative costs resulting
primarily from legal, investment banking and other professional fees from
efforts to explore strategic alternatives in order to expand the Company's
growth opportunities and maximize shareholder value. These efforts included
exploring potential strategic transactions, such as the possible sale or merger
of the Company or a subordinated debt transaction. On November 20, 2000, the
Company announced that it had terminated discussions with a third party
concerning a potential strategic transaction. On February 15, 2001, the Company
announced that it had terminated discussions with third parties concerning the
issuance of debt securities in a subordinated debt transaction.

    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 reported 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



                                       7
<PAGE>   40

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.

         Bad debt expense was $4,779,033, $4,790,246 and $2,638,674 for 2000,
1999 and 1998, respectively.



                                       8
<PAGE>   41

    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
          Building.........................................                        40
</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.

         The Company evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance of an asset may not be
recoverable. The assessment of possible impairment is based on whether the
carrying amount of the asset exceeds its fair value. The fair value of impaired
assets is estimated based on quoted market prices, if available, or the expected
total value of the cash flows, on a discounted basis.

    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 estimated
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. In the event of any sale
or liquidation of the Company, or a portion of its assets (including the
possible sale of assets to meet amortization requirements under the Company's
amended Credit Facility), there can be no assurance that the value of the
Company's intangible assets will be realized. 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 statement of income.
There were no such charges in 2000 or 1999.

         In February 2001, the Financial Accounting Standards Board issued a
revision to a previously issued exposure draft covering business combinations
proposing new accounting guidance related to goodwill. This proposed standard
would not allow for amortization of goodwill. The carrying amount of goodwill
would be reduced only if it was found to be impaired. Goodwill would be tested
for impairment when events or circumstances occur indicating that goodwill might
be impaired. A fair-value based impairment test would be used to measure
goodwill for impairment in lieu of the method for measuring impairment of
long-lived assets set forth in SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As goodwill is
measured as a residual amount in an acquisition, it is not possible to directly
measure the fair value of goodwill. Under this proposed standard, the net assets
of a reporting unit should be subtracted from the fair value of that reporting
unit to determine the implied fair value of goodwill. Impairment loss would be
recognized to the extent the carrying amount of goodwill exceeds the implied
fair value. The provisions of this proposed standard would be effective for
fiscal quarters beginning after the issuance of a final statement. Management
believes the adoption of this standard, as it is proposed, will have a material
impact on its financial statements if the final statement is issued prior to the
full amortization of the remaining goodwill.

    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, 2000 during
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.



                                       9
<PAGE>   42

    Use of Estimates

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.

    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 in 1999. Because the
Company reported a loss in 2000 and 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 457,691 and 347,819 in 2000 and 1998,
respectively.

    Other

         Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform to the 2000 presentation.

3. ACQUISITIONS:

         The Company made the following acquisitions in 1998, 1999 and 2000. All
of these transactions were accounted for under the purchase method.

    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% and 100% during 1999 and 2000,
respectively.

         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 1999 consolidated
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.



                                       10
<PAGE>   43

         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.

    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.

         During 1999, 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 1999 consolidated
financial statements as a credit to other operating expenses.

    2000 Acquisitions -

         During 2000, the Company acquired 79% of a dental insurance plan in
Wisconsin and acquired certain assets and assumed certain liabilities of one
dental group in Bloomer, Wisconsin for an aggregate purchase consideration of
$751,000 in asset purchase transactions.

         Obligations related to undeterminable contingent purchase
considerations for certain acquisitions have not been earned at December 31,
2000, 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.

         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 2000 and 1999 are summarized as
follows:

<TABLE>
<CAPTION>
                                                    2000            1999
                                                ------------    ------------
<S>                                             <C>             <C>
Cash and cash equivalents ...................   $         --    $         --
Accounts receivable, net ....................         28,603        (596,890)
Other assets ................................         (2,858)         16,638
Property and equipment, net .................         57,138         411,865
Liabilities assumed .........................      4,216,897      (4,354,014)
Intangible assets ...........................      1,203,958      14,585,587
Less - Fair value of Common Stock issued ....        (27,655)     (1,261,278)
                                                ------------    ------------
Cash purchase price (including earnouts) ....   $  5,476,083    $  8,801,908
                                                ============    ============
Total earnouts paid .........................   $  4,725,334    $  5,006,601
                                                ============    ============
</TABLE>



                                       11
<PAGE>   44

         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 2000 and 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>


4. PROPERTY AND EQUIPMENT:

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

<TABLE>
<CAPTION>
                                                          2000            1999
                                                      ------------    ------------
<S>                                                   <C>             <C>
Leasehold improvements ............................   $  9,867,710    $  8,908,798
Furniture and fixtures ............................      4,068,659       3,563,566
Dental equipment ..................................     17,153,460      15,752,773
Computer equipment and software ...................      4,728,389       4,291,495
Building ..........................................        917,963         917,963
                                                      ------------    ------------
                                                        36,736,181      33,434,595
Less - Accumulated depreciation and amortization ..    (19,787,053)    (14,362,881)
                                                      ------------    ------------
Property and equipment, net .......................   $ 16,949,128    $ 19,071,714
                                                      ============    ============
</TABLE>

         Depreciation expense was $5,521,359, $5,232,650 and $3,601,043, for
2000, 1999 and 1998, respectively.



                                       12
<PAGE>   45

5. NOTES PAYABLE:

         Notes payable consists of the following as of December 31:

<TABLE>
<CAPTION>
                                                                                  2000            1999
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
Borrowings under Credit Facility, due April 15, 2001 ......................   $         --    $  5,650,000
Borrowings under Credit Facility, due June 30, 2001 .......................             --      75,000,000
Borrowings under Credit Facility, due July 1, 2002 ........................     79,800,000(A)           --
Unamortized warrants ......................................................       (560,176)             --
Other notes payable, due April 2002, with an interest rate of prime
   plus 0.5%, secured by certain receivables and property .................         12,759          19,719
Notes payable assumed through acquisitions, with interest rates ranging
   between 6.00% and 12.21%, with due dates between January 2001 and
   March 2004, secured by certain receivables and property ................      1,542,640       5,262,930
                                                                              ------------    ------------
                                                                                80,795,223      85,932,649
Less - Current maturities .................................................     (4,223,865)     (9,204,641)
                                                                              ------------    ------------
Notes payable, net ........................................................   $ 76,571,358    $ 76,728,008
                                                                              ============    ============

Note A: The Company amended its Loan Agreement associated with the Credit Facility in April 2001 and
        expires on July 1, 2002.

</TABLE>

         The maturities of notes payable at December 31, 2000, are as follows:

<TABLE>
<S>                                                                                        <C>
                      2001.....................................................            $  4,223,865
                      2002.....................................................              76,488,436
                      2003.....................................................                  52,922
                      2004.....................................................                  30,000
                                                                                           ------------
                                                                                           $ 80,795,223
                                                                                           ============
</TABLE>

         The Company has a Credit Facility with a bank syndicate. The Loan
Agreement associated with the Credit Facility was amended in April 2001 and
expires on July 1, 2002. The amendment to the Loan Agreement was necessitated
because the prior Loan Agreement was due to expire on June 30, 2001 and the
Company's failure to raise $15.0 million in subordinated debt. At December 31,
2000, the Company had $79.8 million outstanding under the Credit Facility. The
amounts outstanding under the Credit Facility bear interest at the lead lender's
prime rate plus three percent with interest payments due on a monthly basis. The
Credit Facility requires the Company to repay principal based on a schedule
whereby monthly payments are made aggregating $1.0 million, $1.3 million and
$1.3 million in the second, third and fourth quarters of 2001, respectively, and
$2.0 million and $2.3 million in the first quarter of 2002 and two months ended
May 31, 2002, respectively. Additional principal payments will be required two
times during the term of the Credit Facility if the Company exceeds certain
earnings projections. Bank fees totaling $601,000 are to be paid in equal
installments on April 30, 2001 and June 1, 2001. A $500,000 fee is due on
December 31, 2001 and April 30, 2002 if certain thresholds above the required
amortization are not met. In connection with the April 2001 amendment, the
lenders will receive warrants to purchase shares of the Company's Common Stock
at an exercise price of $0.01 per share, equal to 5% of the outstanding shares
of the Company's Common Stock as of July 1, 2002, if all outstanding debt is not
paid in full by July 1, 2002. In connection with a prior amendment, the Company
issued to the lenders warrants to purchase 394,721 shares of the Company's
Common Stock at an exercise price of $0.01 per share. The Credit Facility
prohibits the Company from incurring additional indebtedness, incurring liens,
disposing of assets, making investments or making acquisitions without bank
approval, and requires the Company to maintain certain financial covenants.
These covenants require the Company to maintain minimum total net worth of $66.5
million as of December 31, 2001; minimum EBITDA, on a trailing three month
basis, of $5.3 million as of April 30, 2001; and a limit on capital expenditures
of $3.0 million from April 1, 2001 through December 31, 2001. These covenants
fluctuate in future periods. The Credit Facility is secured by all of the assets
of the Company.

         At December 31, 2000, the Company was in default with the terms of the
Credit Facility as a result of the failure to raise $15.0 million in
subordinated debt and a financial covenant default related to the failure to
raise the subordinated debt. Based on the amendment to the Credit Facility in
April 2001, the Company is currently in compliance with the terms of its Credit
Facility. The Company believes it will be able to comply with the financial
covenants in the amended Credit Facility through July 1, 2002.

                                       13
<PAGE>   46
         The Company believes that cash generated from operations will be
sufficient to fund its operating cash, capital requirements and debt service
requirements in 2001. However, the Credit Facility expires by its terms on
July 1, 2002, and all of the Company's debt thereunder will then be due. The
Company will not generate sufficient cash flow by July 1, 2002 to repay all or a
substantial portion of its debt under the Credit Facility. In order to meet its
short-term and long-term liquidity needs, including the amortization
requirements of the Credit Facility, the Company may issue additional equity and
debt securities, subject to approval by the bank syndicate and market and other
conditions.

         In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for certain financial
instruments, including interest rate swap agreements. The Company enters into
interest rate hedging agreements to manage its interest rate exposure. The
Company adopted SFAS No. 133 on January 1, 2001 and its existing interest rate
hedges were designated as cash flow hedges. The effective portion of the gain or
loss on a cash flow hedge must be reported as a component of other comprehensive
income and be reclassified into earnings in the same period or periods during
which the hedged forecasted transaction affects earnings. The ineffective
portion, if any, of the gain or loss on a cash flow hedge must be recognized
currently in earnings. Based on the cash flow hedges in effect on December 31,
2000, derivative liabilities would have approximated $66,000. In future periods
derivative liabilities will be recognized in the Company's consolidated balance
sheet with an offsetting amount recognized in accumulated other comprehensive
loss.

6. STOCKHOLDERS' EQUITY:

         At December 31, 2000, 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.

    Stock-Based Compensation

         The Company administers 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



                                       14
<PAGE>   47

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.

         The following table summarizes the activity during 2000, 1999 and 1998
under the 1999 Plan and 1996 Plan.

<TABLE>
<CAPTION>
                                          2000            1999            1998
                                      ------------    ------------    ------------
<S>                                   <C>             <C>             <C>
Outstanding at beginning of year ..      1,418,477       1,066,875         556,750
Granted ...........................        309,256         418,501         530,750
Exercised .........................             --              --            (625)
Canceled ..........................       (103,917)        (66,899)        (20,000)
                                      ------------    ------------    ------------
Outstanding at end of year ........      1,623,816       1,418,477       1,066,875
                                      ============    ============    ============
Exercisable at end of year ........        915,483         479,557         146,685
Price range .......................   $ 0.84-18.38    $ 2.44-18.38    $ 3.00-17.31
</TABLE>

The following summarizes information about options at December 31, 2000:

<TABLE>
<CAPTION>
                                       Options Outstanding                       Options Exercisable
                            -------------------------------------------        ------------------------
                                               Weighted        Weighted                        Weighted
   Exercise                                     Average         Average                         Average
     Price                                     Remaining       Exercise                        Exercise
     Range                     Number            Term            Price          Number           Price
--------------              -------------      ---------       --------        -------         --------
<S>                         <C>                <C>             <C>             <C>             <C>
$  0.84-4.13                      757,757      8.6 years        $ 2.42         380,882          $ 2.45
$  7.70-11.38                     292,500      7.6 years         11.06         152,500           10.92
$  11.88-15.38                    514,333      6.8 years         13.33         351,988           13.23
$  17.31-18.38                     59,226      7.1 years         18.03          30,113           18.16
                            -------------                                      -------
                                1,623,816                                      915,483
                            =============                                      =======
</TABLE>

The shares exercisable at December 31, 1999 and 1998 had a weighted average
exercise price of $10.47 and $9.29 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>   48

The Company used the Black-Scholes option-pricing model to estimate the fair
value of options. The effects of applying SFAS No. 123 for 2000, 1999 and 1998
are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                             2000          1999         1998
                                                          ----------    ----------   ----------
<S>                                                       <C>           <C>          <C>
Net income (loss):
          As reported                                     $     (482)   $    6,581   $     (424)
          Pro forma                                           (1,507)        5,702       (1,021)

Net income (loss) per common share - assuming dilution:
          As reported                                     $    (0.04)   $     0.53   $    (0.04)
          Pro forma                                            (0.12)         0.46        (0.09)
</TABLE>

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                       2000        1999        1998
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Risk-free interest rates                                 6.59%       6.66%       5.17%
                                                     --------    --------    --------
Expected volatility                                    101.10%      98.77%      62.65%
                                                     --------    --------    --------
Expected weighted average life of options in years        7.0         7.0         7.0
                                                     --------    --------    --------
</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 $8.9 million, $8.6 million and $6.3
million for 2000, 1999 and 1998, 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, 2000:

<TABLE>
<CAPTION>
                                                       OPERATING        CAPITAL
                                                     ------------    ------------
<S>                                                  <C>             <C>
2001 .............................................   $  8,234,846    $    268,134
2002 .............................................      6,873,344         130,255
2003 .............................................      5,246,920         103,759
2004 .............................................      4,094,279          96,051
2005 .............................................      3,091,492          55,059
Thereafter .......................................      4,929,312         168,968
                                                     ------------    ------------
   Total minimum lease obligation ................   $ 32,470,193         822,226
                                                     ============
   Less - Amounts representing interest                                  (210,833)
                                                                     ------------
   Present value of minimum lease obligations ....                        611,393
   Less - Current maturities .....................                       (215,688)
                                                                     ------------
   Capital lease obligations, net ................                   $    395,705
                                                                     ============
</TABLE>

    Litigation, Claims, and Assessments

         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.



                                       16
<PAGE>   49

8. INCOME TAXES:

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

<TABLE>
<CAPTION>
                    2000       1999       1998
                  --------   --------   --------
<S>               <C>        <C>        <C>
Current:
   Federal ....   $    100   $  1,392   $  2,035
   State ......        500        500        350
                  --------   --------   --------
                       600      1,892      2,385
Deferred ......        574      1,408     (2,353)
                  --------   --------   --------
Total .........   $  1,174   $  3,300   $     32
                  ========   ========   ========
</TABLE>

         The Company's effective tax rate of 169.7% in 2000 is higher than the
federal rate of 34.0% due to non-deductible goodwill amortization and state
income taxes. 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 and nondeductible goodwill amortization. Due to the 1998
pre-tax loss, the 1998 effective tax rate is significantly impacted by state
income taxes.

         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, 2000 and 1999
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                            2000        1999
                                                          --------    --------
<S>                                                       <C>         <C>
Deferred tax asset:
   Cash to accrual and other ..........................   $  2,164    $  3,350
   Legal accruals .....................................         --         211
   Accrued compensation ...............................         45         132
                                                          --------    --------
                                                          $  2,209    $  3,693

Deferred tax liability:
   Deferred tax liabilities of acquired companies .....      1,156       1,890
   Intangible asset amortization ......................      2,023       1,318
   Accelerated depreciation ...........................        144         144
                                                          --------    --------
                                                             3,323       3,352
                                                          --------    --------
   Net deferred tax asset (liability) .................   $ (1,114)   $    341
                                                          ========    ========
</TABLE>

         The deferred income tax provision (benefit) of approximately $574,000,
$1,408,000 and $(2,353,000), in 2000, 1999 and 1998, 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 2000, 1999 and 1998 was
approximately $1.2 million, $1.1 million and $1.1 million, respectively. The
leases have average remaining lives of approximately 2.6 years at December 31,
2000.

         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.



                                       17
<PAGE>   50

         Included in accrued restructuring charges in 2000 and 1999 is
approximately $151,000 and $535,000, 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 $384,000 and $1.1 million was paid in 2000 and 1999, respectively,
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 $641,000, $619,000 and $214,000 for 2000, 1999
and 1998, respectively.

    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. During 2000 the number of shares of Common Stock authorized to be
issued under the plan was increased to 500,000 shares from 250,000 shares.
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 110,104 and
129,313 shares of Common Stock under the Purchase Plan in 2000 and 1999,
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, 2000 and 1999.

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.



                                       18
<PAGE>   51

         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>   52

                      FOR THE YEAR ENDED DECEMBER 31, 2000
                             (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        $ 80,366    $ 38,255    $ 29,028    $ 47,602    $ 16,088    $211,339
       Total operating expenses      65,010      31,048      25,083      41,766      13,490     176,397
                                   --------    --------    --------    --------    --------    --------
       Segment contribution          15,356       7,207       3,945       5,836       2,598      34,942
       Contribution margin               19%         19%         14%         12%         16%         17%
       Depreciation and
            amortization expense      3,531       1,918       1,556       1,949       1,533      10,487
       Interest expense, net             12         179           4          21          50         266
       Segment profit                11,813       5,110       2,385       3,866       1,015      24,189
       Capital expenditures(a)        1,056         305         508       1,171          72       3,112
       Total assets(a)               39,435      32,643      23,588      28,249      34,818     158,733
</TABLE>

                      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
                            --------    --------    --------     --------    --------    --------
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       1,871       1,461        1,696       1,369      10,051
Interest expense, net             35         140         (45)          19         129         278
Segment profit                 9,677       4,591       3,229        5,343       1,645      24,485
</TABLE>


<TABLE>
<CAPTION>
Reconciliation of Profit (in thousands)             2000          1999
                                                  --------      --------
<S>                                               <C>           <C>
Segment profit                                    $ 24,189      $ 24,485
Unallocated amounts:
Corporate operating expenses                         9,987(b)      6,473(c)
Corporate strategic alternative costs                2,347            --
Corporate depreciation and amortization expense        623           498
Corporate interest expense, net                     10,261         7,409
Minority interest in consolidated subsidiaries         279           224
                                                  --------      --------
Income before income taxes                        $    692      $  9,881
                                                  ========      ========
Capital expenditures(a)                                265           N/A
Total assets(a)                                     12,963           N/A
</TABLE>

(a)  Information not available for 1999.

(b)  Includes approximately $1.0 million in severance payments to a former
     executive of the Company.

(c)  Includes an approximately $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 an
     approximately $1.0 million credit related to the settlement of a dispute
     with a former owner of an acquired dental practice.



                                       20
<PAGE>   53

13. SUBSEQUENT EVENTS:

         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. At December 31, 2000, the trading price of the Company's Common Stock
was $0.50. At April 18, 2001, the trading price of the Company's Common Stock
was $0.52. 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.

         On January 11, 2001, The Nasdaq Stock Market, Inc. ("NASDAQ") notified
the Company that the Company would not remain eligible for continued listing on
The Nasdaq SmallCap Market unless its Common Stock demonstrated compliance with
NASDAQ's $1.00 minimum bid price requirement during the 90-day period ending
April 11, 2001. On April 12, 2001, NASDAQ notified the Company that the
Company's stock price did not maintain compliance with NASDAQ's minimum bid
price requirement during the 90-day period ended April 11, 2001. On April 18,
2001, the Company requested a panel hearing as permitted by applicable NASDAQ
procedures. NASDAQ notified the Company that the request was granted and set
the hearing date for June 1, 2001. However, there is no assurance that the
Company will not be delisted either before or after the panel hearing. At the
hearing, the Company will need to provide a definitive plan to achieve near term
compliance with the continued listing requirements and to sustain such
compliance over an extended period of time. The Company intends to present a
plan to effectuate a one-for-six reverse stock split of the Company's Common
Stock. The Company's continued listing on the NASDAQ SmallCap Market is subject
to maintaining a closing bid price at or above $1.00 per share over a sustained
period as well as demonstrating compliance with all of the other NASDAQ SmallCap
Market continued listing requirements. The Board believes that if the proposed
amendment is approved at the Annual Meeting and the reverse stock split is
effected, the Company should regain compliance with the $1.00 per share minimum
bid price required to remain listed on the NASDAQ SmallCap Market. However, the
Company cannot guarantee that these conditions will be met and that the Company
will not be delisted from the NASDAQ SmallCap Market, that even with the reverse
stock split it will meet all of the NASDAQ SmallCap Market's continued listing
criteria, or that the price for shares of the Company's Common Stock after the
reverse stock split will be six times the price for shares immediately before
the split or will be maintained for any period of time.



                                       21