<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------- ---------
COMMISSION FILE NUMBER: 0-22835
MONARCH DENTAL CORPORATION.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0363560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MONARCH DENTAL CORPORATION
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TX 75244
(Address of principal executive offices)
(972) 702-7446
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issue's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding as of November 14, 1997
----- -----------------------------------
<S> <C>
Common Stock, $.01 par value 10,219,688
</TABLE>
<PAGE> 2
MONARCH DENTAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Report of Independent Public Accountants 3
Item 2. Financial Statements 4
Item 3. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports Filed on Form 8-K 17
Signatures 18
Exhibit Index 19
</TABLE>
2
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
We have reviewed the accompanying consolidated balance sheet of Monarch Dental
Corporation (a Delaware corporation) as of September 30, 1997 and the related
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1997 and 1996, and the consolidated statements of cash
flows for the nine-month periods ended September 30, 1997 and 1996. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
November 13, 1997
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
----------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,059,337 $ 3,860,586
Accounts receivable, net of allowances of approximately $1,676,000 and
$2,848,000, respectively 3,431,114 4,399,022
Other current assets 191,922 233,116
------------ ------------
Total current assets 4,682,373 8,492,724
Property and equipment, net of accumulated depreciation of $2,741,097
and $3,807,000, respectively 4,681,943 6,420,615
Intangible assets, net of accumulated amortization of $573,156 and
$1,300,000, respectively 22,971,867 33,591,145
Other assets 569,640 207,357
------------ ------------
Total assets $ 32,905,823 $ 48,711,841
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,070,035 $ 1,729,482
Accrued payroll 1,301,723 1,538,801
Accrued liabilities 909,759 1,155,438
Deferred income taxes 203,267 524,643
Payable to affiliated dental group practices 1,083,339 1,720,761
Deferred purchase price 545,000 --
Current maturities of notes payable and capital lease obligations 3,563,891 375,589
------------ ------------
Total current liabilities 8,677,014 7,044,714
Deferred income taxes 115,352 592,364
Notes payable 18,358,829 55,855
Capital lease obligations 410,252 724,669
Other liabilities 1,041,619 2,231,655
------------ ------------
Total liabilities 28,603,066 10,649,257
Minority interest in combined subsidiaries -- 152,355
Commitments and Contingencies
Convertible Participating Preferred Stock, $.01 par value,
4,800,000 shares authorized; 4,800,000 shares issued and
outstanding in 1996 9,313,315 --
Redeemable Preferred Stock, $.01 par value, 3,840,000 shares
authorized; no shares issued and outstanding -- --
Redeemable Common Stock, $.01 par value, 175,000 shares issued
and outstanding in 1996 397,767 --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 2,000,000 shares authorized;
no shares issued or outstanding -- --
Series A Convertible Junior Preferred Stock, $.01 par
value, 1,704,550 shares authorized; 734,645 shares issued and
outstanding in 1996 7,346 --
Common Stock, $.01 par value, 50,000,000 shares authorized: 3,133,750 and
10,011,178 shares issued and outstanding in 1996 and 1997, respectively 31,338 100,112
Common Stock to be issued, 30,000 shares in 1996 75,000 --
Additional paid-in capital 1,936,322 44,377,017
Retained earnings (deficit) (7,458,331) (6,566,900)
------------ ------------
Total stockholders' equity (deficit) (5,408,325) 37,910,229
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 32,905,823 $ 48,711,841
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE> 5
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1997 1996 1997
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Dental group practices revenue, net $ 9,178,270 $ 17,436,339 $23,019,849 $ 48,157,197
Less - Amounts retained by dental group practices 2,967,261 5,673,996 7,384,953 16,160,255
----------- ------------ ----------- ------------
Net revenue 6,211,009 11,762,343 15,634,896 31,996,942
Operating expenses:
Clinical salaries and benefits 1,608,121 2,986,584 3,938,799 8,286,618
Other salaries and benefits 836,614 1,765,652 1,985,932 4,779,086
Dental supplies 517,380 1,119,034 1,277,982 3,036,627
Laboratory fees 402,627 769,749 1,141,536 2,021,608
Occupancy 497,159 955,151 1,208,664 2,617,162
Advertising 345,171 515,663 919,507 1,261,961
Depreciation and amortization 373,983 724,169 935,289 1,957,498
General and administrative 959,517 1,636,532 2,259,054 4,608,611
----------- ------------ ----------- ------------
5,540,572 10,472,534 13,666,763 28,569,171
----------- ------------ ----------- ------------
Operating income 670,437 1,289,809 1,968,133 3,427,771
Interest expense, net 467,305 149,557 1,134,568 1,374,406
Minority interest in combined subsidiaries -- 30,178 -- 30,178
----------- ------------ ----------- ------------
Income before provision for income taxes and
extraordinary item 203,132 1,110,074 833,565 2,023,187
Income tax provision 78,974 428,532 324,182 783,815
----------- ------------ ----------- ------------
Income before extraordinary item 124,158 681,542 509,383 1,239,372
Extraordinary loss on early extinguishment of debt,
net of applicable tax benefit of $166,540 -- (263,796) -- (263,796)
----------- ------------ ----------- ------------
Net income $ 124,158 $ 417,746 $ 509,383 $ 975,576
=========== ============ =========== ============
Income per common share:
Income before extraordinary item $ 0.02 $ 0.07 $ 0.10 $ 0.16
Extraordinary loss -- (0.03) -- (0.03)
----------- ------------ ----------- ------------
Net income per common share $ 0.02 $ 0.04 $ 0.10 $ 0.13
=========== ============ =========== ============
Weighted average number of common and common
equivalent shares outstanding 5,437,011 9,582,316 4,866,063 7,711,948
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
<PAGE> 6
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 509,383 $ 975,576
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 935,289 1,957,498
Extraordinary loss -- 263,796
Minority interest in combined subsidiaries -- 30,178
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net 110,671 (438,036)
Other current assets 85,074 (35,978)
Other noncurrent assets 128,367 (49,257)
Accounts payable and accrued expenses (776,288) 298,724
Other liabilities (136,785) (25,963)
Deferred income taxes 324,666 487,915
------------ ------------
Net cash provided by operating activities 1,180,377 3,464,453
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (884,285) (1,501,941)
Cash paid for dental group practices, including
related costs, net of cash acquired (20,699,789) (7,407,614)
------------ ------------
Net cash used in investing activities (21,584,074) (8,909,555)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, net of issuance costs 21,772,750 4,985,000
Payments on notes payable and capital
lease obligations (1,876,788) (27,314,751)
Distribution to stockholders/partners (2,007,997) (20,000)
Redemption of Common Stock (6,684,856) (1,811)
Redemption of Redeemable Preferred Stock -- (8,000,000)
Issuance of stock 9,379,830 38,597,913
------------ ------------
Net cash provided by financing 20,582,939 8,246,351
------------ ------------
NET INCREASE IN CASH 179,242 2,801,249
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 759,919 1,059,337
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 939,161 $ 3,860,586
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 762,350 $ 1,221,849
============ ============
Cash paid for taxes $ -- $ 300,000
============ ============
Equipment acquired under capital leases $ 276,723 $ 666,176
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
6
<PAGE> 7
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Monarch Dental Corporation ("Monarch"), a Delaware corporation, and
subsidiaries (collectively, the "Company"), manages dental group practices
in selected markets including Dallas-Fort Worth, Houston, Wisconsin,
Arkansas and Indiana at September 30, 1997. As of September 30, 1997, the
Company managed 83 dental group practices in Texas, Wisconsin, Arkansas and
Indiana.
2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION/BASIS OF
CONSOLIDATION
The financial statements for the three and nine months ended September 30,
1996 and 1997, have been prepared by the Company, without audit, pursuant
to Accounting Principles Board (ABP) Opinion No. 28, "Interim Financial
Reporting." Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to APB
Opinion No. 28; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from
being misleading. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
results of its operations for the three and nine months ended September 30,
1996 and 1997, have been included herein. The results of operations for the
three- and nine-month periods are not necessarily indicative of the results
for the full year.
3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share.
SFAS 128 establishes new standards for computing and presenting earnings
per share ("EPS"). Implementation of SFAS 128 is required for all financial
statements issued subsequent to December 15, 1997 but requires pro forma
disclosure in financial statements issued prior to that date.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1997 1996 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item $ 124 $ 682 $ 509 $ 1,239
Extraordinary loss -- (264) -- (264)
--------- -------- -------- --------
Net income $ 124 $ 418 $ 509 $ 975
========= ======== ======== ========
Weighted Average Shares Outstanding 2,972 8,746 2,751 4,734
Earnings per Share before extraordinary item $ 0.04 $ 0.08 $ 0.19 $ 0.26
Extraordinary loss -- (0.03) -- (0.06)
--------- -------- -------- --------
Basic Earnings per Common Share $ 0.04 $ 0.05 $ 0.19 $ 0.20
========= ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Weighted Average Shares Outstanding 2,972 8,746 2,751 4,734
Common Stock Equivalents 2,465 836 2,115 2,978
--------- -------- -------- --------
Total Common Stock and Common Stock Equivalents 5,437 9,582 4,866 7,712
========= ======== ======== ========
Earnings per share before extraordinary item $ 0.02 $ 0.07 $ 0.10 $ 0.16
Extraordinary loss -- (0.03) -- (0.03)
--------- -------- -------- --------
Diluted Earnings per Common Share $ 0.02 $ 0.04 $ 0.10 $ 0.13
========= ======== ======== ========
</TABLE>
7
<PAGE> 8
4. BUSINESS COMBINATIONS
Effective January 1, 1997, the Company acquired all of the outstanding
stock of Arkansas Dental Health Associates, Inc. in Arkansas, for $1.6
million in cash and 57,500 shares of Common Stock in a stock purchase
transaction accounted for as a purchase. Additionally, the seller has a
right to receive additional purchase consideration of up to $500,000
contingent upon meeting specified financial performance goals in 1997.
Effective April 1, 1997, the Company acquired certain assets and assumed
certain liabilities of United Dental Care Tom Harris D.D.S. & Associates in
Arkansas, for $2.8 million in cash and 68,750 shares of Common Stock in an
asset purchase transaction accounted for as a purchase.
Effective August 1, 1997, the Company acquired all of the outstanding
stock of Dental Centers of Indiana, Inc. for $1.8 million in cash and
139,944 shares of Common Stock in a stock purchase transaction accounted
for as a purchase. Additionally, the seller has a right to receive
additional purchase consideration contingent upon meeting specified
financial performance goals in 1997.
Effective September 1, 1997, the Company acquired certain assets and
assumed certain liabilities of Diane Earle, D.D.S. in Dallas, Texas for
$200,000 in cash in an asset purchase transaction accounted for as a
purchase.
5. INITIAL PUBLIC OFFERING
On July 23, 1997, the Company completed the public offering of 3,162,500
shares of Common Stock at $13 per share resulting in proceeds, net of
underwriter commissions and offering costs, of approximately $37.0 million.
Of these net proceeds, $24.8 million was used to retire outstanding debt
and $8.0 million was paid to holders of Redeemable Preferred Stock. At
September 30, 1997 the balance of the net proceeds was invested in
short-term, investment grade, interest-bearing obligations.
6. BORROWINGS
The Company extinguished its senior secured credit facility and wrote-off
unamortized loan fees of $430,336, net of the applicable tax benefit of
$166,540, as an extraordinary item. The Company completed a new credit
facility agreement expiring December 31, 2002.
7. SUBSEQUENT EVENTS
Effective October 1, 1997, October 1, 1997 and November 3, 1997, the
Company acquired certain assets and assumed certain liabilities of Ronald
S. Stewart, D.D.S. in Dallas, Texas, Dental Diagnostic and Treatment Center
in Fayetteville, Arkansas and Three Peaks Dental Health L.P. in Colorado
Springs, Colorado, respectively,for $2.9 million in cash and 28,774 shares
of Common Stock in asset purchase transactions accounted for as purchases.
Effective November 3, 1997, the Company acquired certain assets and assumed
certain liabilities of Press Family Dental in San Antonio, Texas for $6.6
million in cash and 179,736 shares of Common Stock in an asset purchase
transaction accounted for as a purchase.
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21B
of the Securities and Exchange Act of 1934. 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, the
constantly changing health care environment, the pace of development and
acquisition activity, the reimbursement rates for dental services, and other
risks detailed in the Company's Securities and Exchange Commission filings.
Other risk factors are listed in the Company's Prospectus dated July 17, 1997 as
filed with the U.S. Securities and Exchange Commission.
OVERVIEW
The Company manages dental group practices in selected markets, including
Dallas-Fort Worth, Houston, Wisconsin, Arkansas and Indiana at September 30,
1997. The managed dental facilities (each, a "Dental Office" and collectively,
the "Dental Offices") provide general dentistry services such as examinations,
cleanings, fillings, bonding, placing crowns and fitting and placing fixed or
removable prostheses. Many of the Dental Offices also provide specialty dental
services such as orthodontics, oral surgery, endodontics, periodontics and
pediatric dentistry. The Company focuses on fee-for-service dentistry,
supplementing this business with revenue from contracts with capitated managed
dental care plans.
The Company seeks to build geographically dense networks of dental
providers by expanding within its existing markets. The Company has generated
growth within its existing markets by increasing patient volume and fees in
existing Dental Offices, either on a per-patient or per-procedure basis, by
increasing the physical space of existing Dental Offices and by opening Dental
Offices on a de novo basis. The Company has entered selected new markets by
acquiring dental group practices, which have a significant market presence, or
which the Company believes can achieve such a presence in the near term. The
Company then seeks to use the acquired dental group practice as a "pedestal"
from which to expand within the newly entered market.
The following table sets forth the increase in the number of Dental Offices
owned and managed by the Company during each of the years indicated, including
the number of de novo Dental Offices and acquired Dental Offices in each such
year.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997(1)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Offices at beginning of period 8 9 10 12 53
De novo offices 1 1 2 2 4
Acquired offices -- -- -- 39 26
---- ---- ---- ---- ----
Offices at end of period 9 10 12 53 83
==== ==== ==== ==== ====
</TABLE>
(1) Through October 1, 1997
COMPONENTS OF REVENUE AND EXPENSES
Dental group practices revenue, net ("Revenue") represents the revenue of the
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. Net revenue represents Revenue less amounts retained by the dental
group practices. The amounts retained by dental group practices represent
amounts paid by (i) the P.C.s as salary, benefits and other payments to employed
dentists and hygienists and contracted specialists and (ii) the Company as
salary, benefits and other payments to employed dentists and hygienists and
contracted specialists in states in which it operates and in which ownership of
dental practices by the Company is permitted (currently Wisconsin). The
Company's net revenue is dependent on the Revenue of the dental group practices.
Operating expenses consist 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 dental practice operations. The Company also incurs
personnel and administrative expenses in
9
<PAGE> 10
connection with maintaining a corporate function that provides management,
administrative, marketing and development services to the Dental Offices.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Dental group practices revenue, net. Revenue increased from $9.2 million
for the three months ended September 30, 1996 to $17.4 million for the three
months ended September 30, 1996, an increase of $8.2 million, or 90.0%. This
increase resulted from the acquisitions of Convenient Dental Care, Inc.
("Convenient"), Arkansas Dental Health Associates, Inc. ("Arkansas Dental
Health"), United Dental Care Tom Harris D.D.S. and Associates ("United") and
Dental Centers of Indiana, Inc. ("DCI") in November 1996, January 1997, April
1997 and August 1997, respectively, which contributed combined Revenue of $3.2
million for the three months ended September 30, 1997. Dental offices in the
Dallas-Fort Worth, Houston and Wisconsin markets (the "existing markets")
contributed an additional $5.0 million of the increase in Revenue in 1997
resulting from the opening of four de novo Dental Offices, the physical
expansion of five existing Dental Offices, the acquisition of two solo practices
and the acquisition of Midwest Dental Care ("Midwest") in September 1996, which
provided two additional months of Revenue for the three months ended September
30, 1997.
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 from $5.7 million for the three months ended
September 30, 1996 to $10.8 million for the three months ended September 30,
1997, an increase of $5.1 million, or 90.2%. This increase resulted from the
acquisitions of Convenient, Arkansas Dental Health, United and DCI which
contributed combined fee-for-service Revenue of $2.8 million for the three
months ended September 30, 1997. In existing markets, fee-for-service Revenue
increased from $5.7 million for the three months ended September 30, 1996 to
$8.0 million for the three months ended September 30, 1997, representing an
increase of $2.3 million, or 38.6%. The increase in existing markets resulted
from the opening of four de novo Dental Offices, the physical expansion of five
existing Dental Offices, the acquisition of two solo practices and the
acquisition of Midwest in September 1996 which provided two additional months of
fee-for-service Revenue for the three months ended September 30, 1997. Managed
dental care Revenue (i.e., Revenue from capitated managed dental care plans,
including capitation payments and patient co-payments) increased from $3.5
million for the three months ended September 30, 1996 to $6.6 million for the
three months ended September 30, 1997, an increase of $3.1 million, or 89.5%.
This increase resulted in part from the acquisitions of Convenient, Arkansas
Dental Health, United and DCI which contributed combined managed dental care
Revenue of $466,000 for the three months ended September 30, 1997. In existing
markets, managed dental care Revenue increased from $3.5 million for the three
months ended September 30, 1996 to $6.2 million for the three months ended
September 30, 1997, an increase of $2.7 million or 77.1%. The increase in
existing markets resulted from the opening of four de novo Dental Offices, the
physical expansion of five existing Dental Offices, the acquisition of two solo
practices and the acquisition of Midwest in September 1996 which provided two
additional months of managed dental care Revenue for the three months ended
September 30, 1997. As a percentage of Revenue, fee-for-service Revenue
increased slightly from 61.6% to 61.7% for the three months ended September 30,
1996 and 1997, respectively.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $3.0 million for the three months ended September
30, 1996 to $5.7 million for the three months ended September 30, 1997, an
increase of $2.7 million, or 91.2%. The increase was due to the acquisitions of
Convenient, Arkansas Dental Health, United and DCI which together added amounts
retained by dental group practices of $1.1 million for the three months ended
September 30, 1997. In existing markets, amounts retained by dental group
practices increased $1.6 million as dentist and hygienist compensation increased
as a result of a higher level of production at the Dental Offices and the
acquisition of Midwest in September 1996 which provided two additional months of
amounts retained by dental group practices for the three months ended September
30, 1997. As a percent of Revenue, amounts retained by dental group practices
increased slightly from 32.3% to 32.5% for the three months ended September 30,
1996 and 1997, respectively.
Clinical salaries and benefits. Clinical salaries and benefits expense
increased from $1.6 million for the three months ended September 30, 1996 to
$3.0 million for the three months ended September 30, 1997, an increase of $1.4
million, or 85.7%. The increase resulted from the acquisitions of Convenient,
Arkansas Dental Health, United and DCI which added combined clinical salaries
and benefits expense of $668,000 for the three months ended September 30,1997.
In existing markets, clinical salaries and benefits expense increased $710,000
due to the opening of four de novo Dental Offices, the physical expansion of
five existing Dental Offices, the acquisition of two solo practices and the
acquisition of Midwest in September 1996 which provided two additional months of
clinical salaries and benefits
10
<PAGE> 11
expense for the three months ended September 30, 1997. As a percent of Revenue,
clinical salaries and benefits expense decreased slightly from 17.5% to 17.1%
for the three months ended September 30, 1996 and 1997, respectively.
Other salaries and benefits. Other salaries and benefits expense increased
from $837,000 for the three months ended September 30, 1996 to $1.8 million for
the three months ended September 30, 1997, an increase of $929,000, or 111.0%.
This increase resulted primarily from the acquisition of Midwest in September
1996 which provided two additional months of other salaries and benefits expense
for the three months ended September 30, 1997 as well as the building of
additional corporate infrastructure to manage corporate growth. As a percent of
Revenue, other salaries and benefits expense increased from 9.1% to 10.1% for
the three months ended September 30, 1996 and 1997, respectively, as the three
months ended September 30, 1997 reflected a more fully staffed corporate
infrastructure.
Dental supplies. Dental supplies expense increased from $517,000 for the
three months ended September 30, 1996 to $1.1 million for the three months ended
September 30, 1997, an increase of $602,000, or 116.4%. This increase resulted
from the acquisitions of Convenient, Arkansas Dental Health, United and DCI
which added $193,000 of combined dental supplies expense for the three months
ended September 30, 1997. In existing markets, dental supplies expense increased
$409,000 as a result of increased production and the acquisition of Midwest in
September 1996 which provided two additional months of dental supplies expense
for the three months ended September 30, 1997. As a percent of Revenue, dental
supplies expense increased from 5.6% to 6.4% for the three months ended
September 30, 1996 and 1997, respectively. This increase was due to higher
collective dental supplies expense at the acquired businesses.
Laboratory fees. Laboratory fee expense increased from $403,000 for the
three months ended September 30, 1996 to $770,000 for the three months ended
September 30, 1997, an increase of $367,000, or 91.1%. This increase resulted
from the acquisitions of Convenient, Arkansas Dental Health, United and DCI
which added combined laboratory fee expense of $183,000 for the three months
ended September 30, 1997. In existing markets, laboratory fee expense increased
$184,000 as a result of increased production and the acquisition of Midwest in
September 1996 which provided two additional months of laboratory fee expense
for the three months ended September 30, 1997. As a percent of Revenue,
laboratory fee expense remained constant at 4.4% for the three months ended
September 30, 1996 and 1997, respectively.
Occupancy. Occupancy expense increased from $497,000 for the three months
ended September 30, 1996 to $955,000 for the three months ended September 30,
1997, an increase of $458,000, or 92.2%. This increase resulted from the
acquisitions of Convenient, Arkansas Dental Health, United and DCI which added a
combined $153,000 to occupancy expense for the three months ended September 30,
1997. In existing markets, occupancy expense increased $305,000 resulting from
the opening of four de novo Dental Offices, the physical expansion of five
existing Dental Offices, the acquisition of two solo practices and the
acquisition of Midwest in September 1996 which provided two additional months of
occupancy expense for the three months ended September 30, 1997. As a percent of
Revenue, occupancy expense increased slightly from 5.4% to 5.5% for the three
months ended September 30, 1996 and 1997, respectively.
Advertising. Advertising expense increased from $345,000 for the three
months ended September 30, 1996 to $516,000 for the three months ended September
30, 1997, an increase of $171,000, or 49.4%. This increase resulted from the
acquisitions of Convenient, Arkansas Dental Health, United and DCI which added a
combined $76,000 to advertising expense for the three months ended September 30,
1997. There was an increase of $95,000 in television and print advertising in
the existing markets in 1997. As a percent of Revenue, advertising expense
decreased from 3.8% to 3.0% for the three months ended September 30, 1996 and
1997, respectively. This decrease resulted from leveraging advertising expense
with greater market penetration in existing markets.
Depreciation and amortization. Depreciation and amortization expense
increased from $374,000 for the three months ended September 30, 1996 to
$724,000 for the three months ended September 30, 1997, an increase of $350,000,
or 93.6%. This increase resulted from the acquisitions of Convenient, Arkansas
Dental Health, United and DCI which added combined depreciation and amortization
expense of $141,000 for the three months ended September 30, 1997. Depreciation
and amortization expense for existing markets increased $209,000 resulting from
the opening of four de novo Dental Offices, the physical expansion of five
existing Dental Offices, the acquisition of two solo practices and the
acquisition of Midwest in September 1996 which provided two additional months of
depreciation and amortization expense for the three months ended September 30,
1997. As a percent of Revenue, depreciation and amortization expense increased
slightly from 4.1% to 4.2% for the three months ended September 30, 1996 and
1997, respectively.
General and administrative. General and administrative expense increased
from $960,000 for the three months
11
<PAGE> 12
ended September 30, 1996 to $1.6 million for the three months ended September
30, 1997, an increase of $677,000, or 70.5%. This increase resulted from the
acquisitions of Convenient, Arkansas Dental Health, United and DCI which added
combined general and administrative expense of $203,000 for the three months
ended September 30, 1997, the acquisition of Midwest in September 1996 which
provided two additional months of general and administrative expense for the
three months ended September 30, 1997 and the expansion of the Company's
corporate infrastructure to manage growth. As a percent of Revenue, general and
administrative expense decreased from 10.5% to 9.4% for the three months ended
September 30, 1996 and 1997, respectively. This decrease was due principally to
the acquisitions having lower general and administrative costs as a percent of
Revenue than the Company's existing operations.
Operating income. Operating income increased from $670,000 for the three
months ended September 30, 1996 to $1.3 million for the three months ended
September 30, 1997, an increase of $619,000, or 92.4%. This increase resulted
from the acquisitions of Convenient, Arkansas Dental Health, United and DCI
which added combined operating income of $381,000 for the three months ended
September 30, 1997. Income from the Company's existing markets increased
$488,000 for the three months ended September 30, 1997, which was offset by
increased corporate expenses of $250,000 due to the development of corporate
infrastructure. As a percent of Revenue, operating income increased slightly
from 7.3% to 7.4% for the three months ended September 30, 1996 and 1997,
respectively.
Interest expense, net. Interest expense, net decreased from $467,000 for
the three months ended September 30, 1996 to $150,000 for the three months ended
September 30, 1997, a decrease of $317,000, or 68.0%. This decrease is
attributable to the retirement of $24.8 million in outstanding debt under a
senior secured credit facility (the "Credit Facility") with the use of proceeds
obtained from the Company's initial public offering on July 23, 1997 compared to
interest expense on average debt outstanding of $20.7 million under the Credit
Facility for the three months ended September 30, 1996.
Minority interest. Minority interest expense was $30,000 for the three
months ended September 30, 1997 as a result of the acquisition of DCI, which
owns a fifty percent ownership in two partnerships operating four Dental Offices
in Indiana.
Income taxes. Income tax expense increased from $79,000 for the three
months ended September 30, 1996 to $429,000 for the three months ended September
30, 1997, an increase of $350,000, or 442.6%. This increase was the result of
higher net income before taxes, which increased from $203,000 for the three
months ended September 30, 1996 to $1.1 million for the three months ended
September 30, 1997, an increase of $907,000, or 446.5%.
Extraordinary loss. The Company incurred an extraordinary loss of
$264,000, net of tax for the three months ended September 30, 1997 as it
extinguished its Credit Facility and wrote off $431,000 in unamortized loan
fees, net of a tax benefit of $167,000.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Dental group practices revenue, net. Revenue increased from $23.0 million
for the nine months ended September 30, 1996 to $48.2 million for the nine
months ended September 30, 1997, an increase of $25.2 million, or 109.2%. This
increase resulted from the acquisitions of Convenient, Arkansas Dental Health,
United and DCI in November 1996, January 1997, April 1997 and August 1997,
respectively, which contributed combined Revenue of $7.0 million for the nine
months ended September 30, 1997. Revenue for the Dental Offices in the
Dallas-Fort Worth, Houston and Wisconsin markets ("existing markets") increased
$18.2 million, or 78.7%, for the nine months ended September 30, 1997, resulting
from the opening of four de novo Dental Offices, the physical expansion of five
existing Dental Offices, the acquisition of two solo practices and the
acquisitions of MacGregor Dental Centers ("MacGregor") and Midwest Dental Care
("Midwest") in February 1996 and September 1996, respectively, which provided
one and eight additional months of Revenue for the nine months ended September
30, 1997.
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 from $14.0 million for the nine months ended
September 30, 1996 to $29.6 million for the nine months ended September 30,
1997, an increase of $15.6 million, or 111.2%. This increase resulted from the
acquisitions of Convenient, Arkansas Dental Health, United and DCI which
contributed combined fee-for-service Revenue of $6.3 million for the nine months
ended September 30, 1997. In existing markets, fee-for-service Revenue increased
from $14.0 million for 1996 to $23.3 million for 1997, representing an increase
of $9.3 million or 66.4%. This increase resulted from the opening of four de
novo Dental Offices, the physical expansion of five existing Dental Offices, the
acquisition of two solo practices and the acquisitions of MacGregor and Midwest
in February 1996 and September 1996, respectively, which provided one and eight
additional months of fee-for-service Revenue for the nine months ended September
30, 1997. Managed dental care Revenue (i.e., Revenue from capitated managed
dental care plans, including capitation payments and patient co-payments)
increased from $9.0 million for the nine months ended September 30, 1996 to
$18.5
12
<PAGE> 13
million for the nine months ended September 30, 1997, an increase of $9.5
million, or 106.0%. This increase resulted in part from the acquisitions of
Convenient, Arkansas Dental Health, United and DCI which contributed combined
managed dental care Revenue of $713,000 for the nine months ended September 30,
1997. In existing markets, managed dental care Revenue increased from $9.0
million for the nine months ended September 30, 1996 to $17.8 million for the
nine months ended September 30, 1997, an increase of $8.8 million or 97.8%. This
increase resulted from the opening of four de novo Dental Offices, the physical
expansion of five existing Dental Offices, the acquisition of two solo practices
and the acquisitions of MacGregor and Midwest in February 1996 and September
1996, respectively, which provided one and eight additional months of managed
dental care Revenue for the nine months ended September 30, 1997. As a
percentage of Revenue, fee-for-service Revenue increased from 60.9% to 61.5% for
the nine months ended September 30, 1996 and 1997, respectively.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $7.4 million for the nine months ended September
30, 1996 to $16.2 million for the nine months ended September 30, 1997, an
increase of $8.8 million, or 118.9%. The increase was due to the acquisitions of
Convenient, Arkansas Dental Health, United and DCI which together added amounts
retained by dental group practices of $2.6 million for the nine months ended
September 30, 1997. In existing markets, amounts retained by dental group
practices increased $6.2 million, or 83.8%, as dentist and hygienist
compensation increased as a result of a higher level of production at the Dental
Offices and the acquisitions of MacGregor and Midwest in February 1996 and
September 1996, respectively, which provided one and eight additional months of
amounts retained by dental group practices for the nine months ended September
30, 1997. As a percent of Revenue, amounts retained by dental group practices
increased from 32.1% to 33.6% for the nine months ended September 30, 1996 and
1997, respectively, due to the acquisition of dental group practices with higher
dentist and hygienist compensation levels relative to Revenue.
Clinical salaries and benefits. Clinical salaries and benefits expense
increased from $3.9 million for the nine months ended September 30, 1996 to $8.3
million for the nine months ended September 30, 1997, an increase of $4.4
million, or 110.4%. The increase resulted from the acquisitions of Convenient,
Arkansas Dental Health, United and DCI which added combined clinical salaries
and benefits expense of $1.4 million for the nine months ended September 30,
1997. In existing markets, clinical salaries and benefits expense increased $3.0
million as a result of the opening of four de novo Dental Offices, the physical
expansion of five existing Dental Offices, the acquisition of two solo practices
and the acquisitions of MacGregor and Midwest in February 1996 and September
1996, respectively, which provided one and eight additional months of clinical
salaries and benefits expense for the nine months ended September 30, 1997. As a
percent of Revenue, clinical salaries and benefits expense increased slightly
from 17.1% to 17.2% for the nine months ended September 30, 1996 and 1997,
respectively.
Other salaries and benefits. Other salaries and benefits expense increased
from $2.0 million for the nine months ended September 30, 1996 to $4.8 million
for the nine months ended September 30, 1997, an increase of $2.8 million, or
140.6%. This increase resulted primarily from the acquisitions of MacGregor and
Midwest in February 1996 and September 1996, respectively, which provided one
and eight additional months of other salaries and benefits expense for the nine
months ended September 30, 1997 as well as the building of additional corporate
infrastructure to manage corporate growth. As a percent of Revenue, other
salaries and benefits expense increased from 8.6% to 9.9% for 1996 and 1997,
respectively, as the nine months ended September 30, 1997 reflected a more fully
staffed corporate infrastructure.
Dental supplies. Dental supplies expense increased from $1.3 million for
the nine months ended September 30, 1996 to $3.0 million for the nine months
ended September 30, 1997, an increase of $1.7 million, or 137.6%. This increase
resulted from the acquisitions of Convenient, Arkansas Dental Health, United and
DCI which added $400,000 of combined dental supplies expense for the nine months
ended September 30, 1997. In existing markets, dental supplies expense increased
$1.3 million as a result of increased production and the acquisitions of
MacGregor and Midwest in February 1996 and September 1996, respectively, which
provided one and eight additional months of dental supplies expense for the nine
months ended September 30, 1997. As a percent of Revenue, dental supplies
expense increased from 5.6% to 6.3% for the nine months ended September 30, 1996
and 1997, respectively. This increase was due to higher dental supply expense at
the acquired businesses.
Laboratory fees. Laboratory fee expense increased from $1.1 million for the
nine months ended September 30, 1996 to $2.0 million for the nine months ended
September 30, 1997, an increase of $880,000, or 77.1%. This increase resulted
from the acquisitions of Convenient, Arkansas Dental Health, United and DCI
which added combined laboratory fee expense of $427,000 for the nine months
ended September 30, 1997. In existing markets, laboratory fee expense increased
$453,000 as a result of increased production and the acquisitions of MacGregor
and Midwest in February 1996 and September 1996, respectively, which
13
<PAGE> 14
provided one and eight additional months of laboratory fee expense for the nine
months ended September 30, 1997. As a percent of Revenue, laboratory fee expense
decreased from 5.0% to 4.2% for the nine months ended September 30, 1996 and
1997, respectively, as the result of purchasing internal labs in connection with
the Midwest and United acquisitions.
Occupancy. Occupancy expense increased from $1.2 million for the nine
months ended September 30, 1996 to $2.6 million for the nine months ended
September 30, 1997, an increase of $1.4 million, or 116.5%. This increase
resulted from the acquisitions of Convenient, Arkansas Dental Health, United and
DCI which added a combined $321,000 to occupancy expense for the nine months
ended September 30, 1997. In existing markets, occupancy expense increased $1.1
million resulting from the opening of four de novo Dental Offices, the physical
expansion of five existing Dental Offices, the acquisition of two solo practices
and the acquisitions of MacGregor and Midwest in February 1996 and September
1996, respectively, which provided one and eight additional months of occupancy
expense for the nine months ended September 30, 1997. As a percent of Revenue,
occupancy expense increased slightly from 5.3% to 5.4% for the nine months ended
September 30, 1996 and 1997, respectively.
Advertising. Advertising expense increased from $920,000 for the nine
months ended September 30, 1996 to $1.3 million for the nine months ended
September 30, 1997, an increase of $342,000, or 37.2%. This increase resulted
from the acquisitions of Convenient, Arkansas Dental Health, United and DCI
which added a combined $152,000 to advertising expense for the nine months ended
September 30, 1997. There was an increase of $190,000 in television and print
advertising in the existing markets for the nine months ended September 30,
1997. As a percent of Revenue, advertising expense decreased from 4.0% to 2.6%
for the nine months ended September 30, 1996 and 1997, respectively. This
decrease resulted from leveraging advertising expense with greater market
penetration in existing markets.
Depreciation and amortization. Depreciation and amortization expense
increased from $935,000 for the nine months ended September 30, 1996 to $1.9
million for the nine months ended September 30, 1997, an increase of $1.0
million, or 109.3%. This increase resulted from the acquisitions of Convenient,
Arkansas Dental Health, United and DCI which added combined depreciation and
amortization expense of $274,000 for the nine months ended September 30, 1997.
In existing markets, depreciation and amortization expense increased $748,000
resulting from the opening of four de novo Dental Offices, the physical
expansion of five existing Dental Offices, the acquisition of two solo practices
and the acquisitions of MacGregor and Midwest in February 1996 and September
1996, respectively, which provided one and eight additional months of occupancy
expense for the nine months ended September 30, 1997. As a percent of Revenue,
depreciation and amortization expense remained constant at 4.1% for the nine
months ended September 30, 1996 and 1997, respectively.
General and administrative. General and administrative expense increased
from $2.3 million for the nine months ended September 30, 1996 to $4.6 million
for the nine months ended September 30, 1997, an increase of $2.3 million, or
104.0%. This increase resulted in part from the acquisitions of Convenient,
Arkansas Dental Health, United and DCI which added combined general and
administrative expense of $487,000 for the nine months ended September 30, 1997.
In existing markets, general and administrative expense increased $1.8 million
resulting from the opening of four de novo Dental Offices, the physical
expansion of five existing Dental Offices, the acquisition of two solo practices
and the acquisitions of MacGregor and Midwest in February 1996 and September
1996, respectively, which provided one and eight additional months of general
and administrative expense for the nine months ended September 30, 1997. As a
percent of Revenue, general and administrative expense decreased slightly from
9.8% to 9.6% for the nine months ended September 30, 1996 and 1997,
respectively.
Operating income. Operating income increased from $2.0 million for the nine
months ended September 30, 1996 to $3.4 million for the nine months ended
September 30, 1997, an increase of $1.4 million, or 74.2%. This increase
resulted from the acquisitions of Convenient, Arkansas Dental Health, United and
DCI which added combined operating income of $776,000 for the nine months ended
September 30, 1997. Income from the Company's existing markets increased $1.6
million for the nine months ended September 30, 1997, which was offset by
increased corporate expenses of $944,000 due to the development of corporate
infrastructure. As a percent of Revenue, operating income decreased from 8.5% to
7.1% for the nine months ended September 30, 1996 and 1997, respectively,
primarily due to the increased corporate expenses outweighing the increased
operating margins of the acquired businesses.
Interest expense, net. Interest expense, net increased from $1.1 million
for the nine months ended September 30, 1996 to $1.4 million for the nine months
ended September 30, 1997, an increase of $240,000, or 21.1%. This increase is
attributable to average debt outstanding under the Credit Facility of $18.0
million for the nine months ended September 30, 1997 compared to $16.1 million
for the nine months ended September 30, 1996. The Company retired $24.8 million
in
14
<PAGE> 15
outstanding debt under the Credit Facility with the use of proceeds obtained
from the Company's initial public offering on July 23, 1997.
Minority interest. Minority interest expense was $30,000 for the nine
months ended September 30, 1997 as a result of the acquisition of DCI, which
owns a fifty percent ownership in two partnerships operating four Dental Offices
in Indiana.
Income taxes. Income tax expense increased from $324,000 for the nine
months ended September 30, 1996 to $784,000 for the nine months ended September
30, 1997, an increase of $460,000, or 141.8%. This increase was the result of
higher net income before taxes, which increased from $834,000 for 1996 to $2.0
million for 1997, an increase of $1.2 million, or 142.7%.
Extraordinary Item. The Company incurred an extraordinary loss of
$264,000, net of tax for the nine months ended September 30, 1997 as it
extinguished its Credit Facility and wrote off $431,000 in unamortized loan
fees, net of a tax benefit of $167,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had a $1.4 million working capital
surplus, representing an increase of $5.4 million from the working capital
deficit of $4.0 million at December 31, 1996. This working capital surplus
included $7.0 million in current liabilities, including $1.7 million in accounts
payable, $2.7 million in accrued liabilities, $1.7 million in amounts payable to
dental group practices as consideration for accounts receivable acquired from
such group practices and $376,000 in current maturities of notes payable and
capital lease obligations. These current liabilities were partially offset by
current assets, including $3.9 million in cash and cash equivalents and $4.4
million in accounts receivable, net of allowances. The Company's principal
sources of liquidity as of September 30, 1997 consisted of cash and cash
equivalents, net accounts receivable and borrowing capacity under the Credit
Facility. The repayment of $24.8 million of indebtedness under the Credit
Facility with a portion of the net proceeds from the recently completed initial
public offering and the retention of a portion of the net proceeds for general
corporate purposes has eliminated the Company's prior working capital deficit.
However, there can be no assurance the Company will not have working capital
deficits in the future, particularly if additional indebtedness requires current
amortization of principal.
For the nine months ended September 30, 1996 and 1997, cash provided by
operations was $1.2 million and $3.5 million, respectively.
Cash used in investing activities was $21.6 million for the nine months
ended September 30, 1996 and $8.9 million for the nine months ended September
30, 1997. In the nine months ended September 30, 1996, $20.7 million was
utilized for acquisitions and $884,000 was invested in the purchase of
additional property and equipment. In the nine months ended September 30, 1997,
$7.4 million was utilized for acquisitions and $1.5 million was invested in the
purchase of additional property and equipment.
For the nine months ended September 30, 1996 and 1997, cash provided by
financing activities was $20.6 million and $8.2 million, respectively. In the
nine months ended September 30, 1996, the cash provided was comprised of $19.9
million in net borrowings and $9.4 million in proceeds from the issuance of
stock, partially offset by $6.7 million used to repurchase stock and $2.0
million in distributions to the Company's then sole stockholder. In the nine
months ended September 30, 1997, the cash provided was comprised of $38.6
million in proceeds from the issuance of stock, offset by the net repayment of
$22.3 million in outstanding debt and payments to owners of Redeemable Preferred
Stock of $8.0 million to redeem this stock in conjunction with the initial
public offering.
The Company extinguished its Credit Facility, which was to expire on August
29, 1999, with a bank. The Company has entered into a new Credit Facility with
a bank syndicate. Under the new Credit Facility, the Company may borrow up to
$30.0 million. As of September 30, 1997, the Company had no outstanding
borrowings under the Credit Facility. The amounts outstanding under the new
Credit Facility bear interest at variable rates which are based upon either the
lender's base rate or LIBOR, plus, in either case, a margin which varies
according to the ratio of the Company's funded debt to EBITDA, each as defined
in the Credit Facility. The Credit Facility prohibits the Company from
incurring indebtedness, incurring liens, disposing of assets, making
investments or making acquisitions above a predetermined consideration level
without bank approval, and requires the Company to maintain certain financial
ratios on an ongoing basis. The Credit Facility is secured by pledges of all
of the outstanding capital stock of, or other equity interests in, the
Company's subsidiaries, and a lien on substantially all of the assets of the
Company.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 23, 1997, (i) the Company's non-voting Class A Common
Stock and Series A Convertible Junior Preferred Stock were
converted into Common Stock and (ii) the Company's Convertible
Participating Preferred Stock was converted into Redeemable
Preferred Stock and Common Stock, in each case in accordance with
the terms of these securities and in conjunction with the closing
of the Company's initial public offering.
The Company commenced its initial public offering of 3,162,500
shares of Common Stock at $13.00 per share on July 18, 1997
pursuant to an effective registration statement on Form S-1
(Commission File No. 333-24409). The managing underwriters were
Hambrecht & Quist, Montgomery Securities and Salomon Brothers. The
gross proceeds generated were $41.1 million and the expenses
incurred were as follows: (i) $2.9 million for underwriters
discount and fees (ii) $1.2 million in other expenses, including
legal, accounting and printing fees. The Company used the net
proceeds of $37.1 million as follows: (i) approximately $24.8
million was used to repay the Company's outstanding indebtedness
under the Credit Facility, including accrued and unpaid interest;
(ii) $8.0 million was used to redeem all of the outstanding
Redeemable Preferred Stock; and (iii) approximately $2.0 million
was used for working capital and other general corporate purposes
including $1.8 million for the acquisition of Dental Centers of
Indiana, Inc. and $200,000 for the acquisition of Diane Earle,
D.D.S. At September 30, 1997, the balance of the net proceeds was
invested in short-term, investment grade, interest-bearing
obligations.
(b) Not applicable
(c) In July 1997, pursuant to the 1996 Stock Option and Incentive
Plan, the Company granted 106,000 options to purchase Common
Stock at $13.00 per share.
In August 1997, pursuant to a Stock Purchase Agreement, the
Company issued 139,944 shares of Common Stock to James W. Willis,
Mark R. Johnson and Thurman H. Brown, II in partial consideration
for the sale of all the stock of Dental Centers of Indiana, Inc.
in reliance upon the exemption from registration under Regulation
D promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
11 Statement re: Computation of per share earnings data
27 Financial Data Schedules
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated August 15, 1997, reporting the
acquisition of Dental Centers of Indiana, Inc. which was amended
to add Financial Statements and pro forma financial information by
Form 8-K/A (Amendment No. 1), dated October 15, 1997.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONARCH DENTAL CORPORATION
Date: November 14, 1997 By: /s/ GARY W. CAGE
-------------------------------
Gary W. Cage
Chief Executive Officer
Date: November 14, 1997 By: /s/ STEVEN G. PETERSON
-------------------------------
Steven G. Peterson
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Statement re: Computation of per share earnings data
27 Financial Data Schedules
</TABLE>
19
<PAGE> 1
EXHIBIT 11
MONARCH DENTAL CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Primary
Net income before extraordinary item $ 124 $ 682 $ 509 $1,239
Extraordinary loss -- (264) -- (264)
------ ------ ------ -----
Net income $ 124 $ 418 $ 509 $ 975
====== ====== ====== =====
Weighted average common equivalent shares outstanding:
Average common shares outstanding 2,972 8,746 2,751 4,734
Common stock equivalents -
stock options 2,465 836 2,115 2,978
------ ------ ------ -----
Weighted average common and
common stock equivalent shares 5,437 9,582 4,866 7,712
====== ====== ====== =====
Income before extraordinary item per share $0.02 $0.07 $0.10 $0.16
Extraordinary loss per share -- (.03) -- (.03)
------ ------ ------ -----
Net income per share $0.02 $0.04 $0.10 $0.13
====== ====== ====== =====
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 0 3,860,586
<SECURITIES> 0 0
<RECEIVABLES> 0 7,247,022
<ALLOWANCES> 0 (2,848,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 8,492,724
<PP&E> 0 10,227,615
<DEPRECIATION> 0 (3,807,000)
<TOTAL-ASSETS> 0 48,711,841
<CURRENT-LIABILITIES> 0 7,044,714
<BONDS> 0 0
0 0
0 0
<COMMON> 0 110,112
<OTHER-SE> 0 37,810,117
<TOTAL-LIABILITY-AND-EQUITY> 0 48,711,841
<SALES> 0 0
<TOTAL-REVENUES> 17,436,339 47,157,197
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 10,472,534 28,569,171
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 149,557 1,374,406
<INCOME-PRETAX> 1,110,074 2,023,187
<INCOME-TAX> 428,532 783,815
<INCOME-CONTINUING> 681,542 1,239,372
<DISCONTINUED> 0 0
<EXTRAORDINARY> (263,796) (263,796)
<CHANGES> 0 0
<NET-INCOME> 417,746 975,576
<EPS-PRIMARY> 0.04 0.13
<EPS-DILUTED> 0.04 0.13
</TABLE>
