<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 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)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE> 2
The aggregate market value of the shares of the Registrant's Common Stock held
by non-affiliates of the Registrant on March 17, 1998 was approximately
$72,783,758 million based upon the closing price per share of the Registrant's
Common Stock as reported on the Nasdaq Stock Market on March 17, 1998. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of March 17, 1998,
there were 10,235,818 outstanding shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Parts
of this Report on Form 10-K indicated below:
(1) The Annual Report to Stockholders for fiscal year ended December 31,
1997 (Part II).
(2) The Company's definitive proxy statement dated April 9, 1998 for the
Annual Meeting of Stockholders to be held on May 14, 1998 (Part III).
STATEMENTS MADE OR INCORPORATED INTO THIS ANNUAL REPORT INCLUDE A
NUMBER OF FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND WORDS OF
SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENT
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE RISKS ASSOCIATED WITH THE
COMPANY'S ACQUISITION STRATEGY AND EXPANSION WITHIN EXISTING MARKETS, MANAGEMENT
OF GROWTH AND COMPETITION, WHICH ARE DESCRIBED IN THE SECTION ENTITLED "RISK
FACTORS" FOUND ON PAGE 7 OF THE COMPANY'S PROSPECTUS DATED JULY 17, 1997.
<PAGE> 3
MONARCH DENTAL CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page No.
Part I.
<S> <C> <C> <C>
Item 1. Business I-1
Item 2. Properties I-10
Item 3. Legal Proceedings I-10
Item 4. Submission of Matters to a Vote of Security Holders I-10
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters II-1
Item 6. Selected Financial Data *
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations *
Item 8. Financial Statements and Supplementary Data *
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-2
Part III.
Item 10. Directors and Executive Officers of the Registrant **
Item 11. Executive Compensation **
Item 12. Security Ownership of Certain Beneficial Owners and Management **
Item 13. Certain Relationships and Related Transactions **
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K IV-1
Signatures IV-2
</TABLE>
* Incorporated by reference to the Company's Annual Report to Stockholders
for fiscal year ended December 31, 1997.
** Incorporated by reference to the Company's definitive proxy statement dated
April 9, 1998 for the Annual Meeting of Stockholders to be held on May 14,
1998.
<PAGE> 4
PART I
ITEM 1. BUSINESS
The information contained in this report is provided as of December 31,
1997, unless otherwise indicated.
The Company manages dental group practices in selected markets,
including Dallas-Fort Worth, Houston, San Antonio and Midland-Odessa, Texas;
Wisconsin; Arkansas; Indiana and Colorado at December 31, 1997. Dentists
practicing at the Company's dental offices (the "Dental Offices") provide
general dentistry services such as examinations, cleanings, fillings, bonding,
placing crowns and fitting and placing fixed or removable prostheses. At many of
the Company's Dental Offices, dentists also provide specialty dental services
such as orthodontics, oral surgery, endodontics, periodontics and pediatric
dentistry. The Company seeks to build geographically dense networks of dental
providers by expanding within its existing markets and entering new markets
through acquisition. At December 31, 1997, the Company owned and managed 99
Dental Offices, of which 21 were internally developed and 78 were acquired by
the Company. At December 31, 1997, 169 full-time general dentists and 20
full-time specialists practiced at the Company's Dental Offices. The Company
was incorporated under the laws of Delaware on December 28, 1994.
DENTAL SERVICES
Dentists practicing at the Dental Offices provide general dentistry
services such as examinations, cleanings, fillings, bonding, placing crowns and
fitting and placing fixed or removable prostheses. At many of the Company's
Dental Offices, dentists also provide specialty dental services such as
orthodontics, oral surgery, endodontics, periodontics and pediatric dentistry.
Specialty dental services are typically offered through teams which rotate
through several Dental Offices in a particular market. This enables the dental
professional corporations managed by the Company (the "P.C.s") or the Company,
as applicable, to capture revenue from services that would otherwise be referred
to independent specialists.
Except with respect to Dental Offices located in states in which the
ownership of dental practices by non-dentists is permitted, dental services
provided at the Dental Offices are provided by or under the supervision of
licensed dentists employed by or under independent contracts with the P.C.s. In
states in which the Company operates and in which the ownership of dental
practices by non-dentists is permitted (currently Wisconsin), dental services
provided at the Dental Offices are provided by or under the supervision of
licensed dentists employed by or under independent contracts with the Company.
The Company owns all of the operating assets of each of the Dental Offices,
including inventory, equipment, leases and leasehold improvements. The Company
typically equips its Dental Offices with state-of-the-art clinical and
diagnostic equipment such as fiber optic handpieces, intraoral video cameras and
panoramic and cephalometric X-ray equipment.
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<PAGE> 5
The following table shows the principal areas in which the Company owns
and manages Dental Offices, the number of Dental Offices and dentists in each
area at December 31, 1997, the year that each practice was established and the
effective date of each practice's affiliation with the Company:
<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>
Monarch, Dallas-Fort Worth 22 47 1983 N/A
MacGregor Dental Centers, Houston 18 44 1962 February 1, 1996
Midwest Dental Care, Wisconsin 22 36 1975 September 1, 1996
Convenient Dental Care, Arkansas 1 6 1982 November 1, 1996
Arkansas Dental Health, Arkansas 3 7 1984 January 1, 1997
United Dental Care, Arkansas 9 11 1990 April 1, 1997
Dental Centers of Indiana, Indiana 12 10 1980 August 1, 1997
J.B. Hays, Arkansas 1 4 1994 October 1, 1997
Three Peaks Dental Health, Colorado 6 7 1990 November 1, 1997
Press Family Dental, San Antonio 3 13 1971 November 1, 1997
Dental America, Midland - Odessa 2 4 1994 December 1, 1997
-- --
Total 99 189
== ===
</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 P.C.
(in the case of each dental group practice other than Midwest).
The attributes of the Dental Offices vary from market to market. In
urban and suburban areas a Dental Office may have, for example, 15 or more
single-chair operatories, a multi-chair specialty bay, several full-time general
dentists, several dental hygienists and dental assistants, a business manager
and a receptionist. In more rural markets, a Dental Office may have, for
example, only three or four single chair operatories, and be staffed by one
general dentist, one hygienist or dental assistant and a receptionist. One
general dentist, designated as the Dental Director, oversees professional
matters at each Dental Office.
ADVERTISING AND MARKETING
The Company seeks to increase patient volume at the Dental Offices
through television, radio and print advertising and other marketing techniques.
The Company has developed these techniques over the past 14 years in its
Dallas-Fort Worth operations and adapts them for use in its other markets as
appropriate. The Company's advertising emphasizes regional brand name
recognition of its affiliated Dental Offices, quality of care, comprehensive
specialty services, affordable payment plans for more complex procedures and
patient satisfaction. The Company operates as "Monarch TM Dental" or under
established regional brand names, such as "MacGregor Dental Centers SM" in
Houston and "Midwest Dental SM" in Wisconsin, depending on the nature and
requirements of the relevant market. The Company believes the brand name
recognition by consumers and managed dental care payors generated by its
advertising programs has contributed to its growth.
The Company complements its advertising and marketing programs in
Dallas-Fort Worth with a regional call center for the Dental Offices located in
that market. The Company's advertising and marketing support activities also
include the offering of convenient office hours, selecting favorable locations
for its Dental Offices, offering same-day emergency care and introducing or
expanding additional, higher-margin specialty services at the Dental Offices.
The Company has been able to leverage its existing advertising program to
generate revenue as it expands within its markets.
I-2
<PAGE> 6
PAYOR MIX
Third-party payment arrangements from which the Company derives revenue
directly or through the P.C.s include indemnity insurance, preferred provider
plans and capitated managed dental care plans. Under indemnity insurance plans,
the patient or the patient's employer pays insurance premiums and the insurance
company reimburses the dentist for all or a portion of the dentist's usual and
customary fee, with the patient paying the portion not covered by insurance.
Under preferred provider plans, dentists agree to provide dental services to
plan members on a discounted fee-for-service basis. Capitated managed dental
care plans typically pay dental group practices that agree to provide services
to plan members a fixed monthly amount for each plan member covered for a
specified 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 to the dental group practice that
provides 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,
members of capitated managed dental care plans pay the P.C.s or the Company, as
applicable, additional amounts as co-payments for more complex procedures. The
relative size of capitation payments and co-payments varies in accordance with
the level of benefits provided and plan design.
The Company seeks to optimize the revenue mix at the Dental Offices
between revenue from fee-for-service business and revenue from capitated managed
dental care plans. The Company focuses on fee-for-service business, which
includes fees paid by indemnity insurers, fees from preferred provider plans and
direct patient billings. The Company seeks to increase fee-for-service business
by expanding its operations within existing markets, entering new markets and
advertising.
The Company seeks to supplement fee-for-service business with revenue
derived from contracts with capitated managed dental care plans. Capitated
managed dental care relationships with the Company and the P.C.s increase
dentist productivity and facility utilization. These relationships also provide
increased co-payment revenue, referrals of additional fee-for-service patients
and opportunities for dentists practicing at the Dental Offices to educate
patients about the benefits of elective dental procedures that may not be
covered by the patients' capitated managed dental care plans.
The following table sets forth information regarding the sources of
revenue of the dental groups practicing at the Company's Dental Offices for the
years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
-------------------- ------------------- --------------------
PERCENT PERCENT PERCENT
REVENUE SOURCE REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fee-for-Service (1) $ 9,051 68.5% $21,863 60.8% $42,506 62.0%
Managed Dental Care:
Capitation 1,642 12.4% 8,142 22.6% 15,728 22.9%
Co-payment 2,530 19.1% 5,975 16.6% 10,385 15.1%
------- ----- ------- ----- ------- -----
Total $13,223 100.0% $35,980 100.0% $68,619 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
(1) Constitutes Revenue derived from indemnity dental plans, preferred provider
plans and direct payments by patients not covered by any third party payor.
I-3
<PAGE> 7
OPERATIONS
The Company has achieved operational efficiencies based on the best
practices identified in its affiliated dental groups. The Company adapts and
implements these practices throughout its provider networks, when appropriate,
to (i) reduce purchasing and administrative expenses, (ii) improve operational
efficiencies in such areas as scheduling, billing and personnel management and
(iii) introduce and standardize patient record keeping, treatment protocols and
technique utilization. The Company establishes and maintains geographically
dense networks of dentists in each of its markets. The Company believes that
these provider networks offer preferred provider and capitated managed dental
care plans the ability to enter the markets served by the networks more quickly
and comprehensively and to service their plan members more efficiently than
contracting through solo or smaller group practices. The Company believes these
networks provide it with advantages in establishing and maintaining
relationships with capitated managed dental care plans and other third-party
payors, including greater leverage than that of solo or smaller group practices
when negotiating provider agreements.
Recruiting
Establishing geographically dense networks of providers by effective
recruiting of qualified dentists is an important element of the Company's
business strategy. In the Company's experience, many dentists in the early
stages of their careers have incurred substantial student loans. As a result
they face significant financial constraints to starting their own practices or
buying into existing practices, especially in view of the capital-intensive
nature of modern dentistry. The Company believes that practice in its network of
Dental Offices offers both recently graduated dentists and more experienced
dentists without their own practices advantages over a solo or smaller group
practice, including relief from the burden of administrative and management
responsibilities and the resulting ability to focus almost exclusively on
practicing dentistry. Advantages to dentists may also include, depending upon
the market involved, compensation which rewards productivity, employee benefits
such as health insurance, paid vacation, continuing education, payment of
professional membership fees and malpractice insurance, and, for affiliated
specialists, the prospect of a steadier stream of referrals than a specialist
practicing independently. In markets in which it is difficult to recruit and
retain dentists, such as certain rural areas, the Company may seek to establish
partnerships in which these dentists retain a portion of the equity interest in
the practice.
The Company believes that hygienists, dental assistants and office
staff are critical to attracting and retaining patients. Accordingly, the
Company actively recruits such staff by offering salaries and benefits which it
believes are generally superior to those offered by many solo or smaller group
practices.
Call Centers; Scheduling
The Company maintains a regional call center in Dallas-Fort Worth. The
call center staff fields calls generated by advertising, schedules patient
visits, answers patient questions and initiates contact with patients for
follow-up of ongoing treatment programs. The Company has implemented or is
currently implementing similar call centers that will serve each of its other
markets.
The Company utilizes a centralized management information system in the
call centers to schedule patient appointments. The Dental Offices generally
offer extended office hours and Saturday appointments. The Company sends
patients to the Dental Office that is most convenient for the patient in terms
of timing and location. The Company's centralized scheduling systems provide the
Company with better control over patient scheduling, resulting in increased
productivity, as well as the ability to analyze and control the revenue mix at
the Dental Offices by balancing fee-for-service and capitated managed dental
care patients. This also enables the staff at each Dental Office to focus on
patient care and customer service by eliminating a significant number of
incoming calls.
Purchasing
The integration of the Dental Offices enables the Company to take
advantage of economies of scale that are generally not available to solo or
smaller group practices. The Company is able to purchase dental supplies,
laboratory services, insurance, office furniture, equipment, information systems
and advertising at reduced costs. The Company also can contract for employee
benefits at a lower cost than solo or smaller group practices typically can
obtain for themselves and their employees.
I-4
<PAGE> 8
Management Information Systems
The Company has licensed for use at its Dental Offices a management
information system for dental practice management. Substantially all of the
Dental Offices are currently utilizing this information system. The Company uses
the information system to track data related to each Dental Office's operations
and financial performance. The information system can provide each of the Dental
Offices with data such as patient and practitioner scheduling information,
insurance coverage information, clinical record-keeping and revenue and
collection data (including credit history). Within each market, the Company uses
the information system to manage billing and collections, including electronic
insurance claims processing. In addition, the Company uses the information
system to provide information for case management and outcome related research.
Quality Assurance
The Company requires the dentists and hygienists at each of its Dental
Offices to develop and implement clinical management procedures and treatment
protocols, as well as uniform business and administrative standards under which
dental services are provided. These procedures, protocols and standards vary
from region to region and are determined by the Dental Directors in each region
in consultation with and under the guidance of a committee of the Regional
Dental Directors. The protocols include treatment planning, diagnostic
screening, radiographic records, record keeping, specialty referrals and dental
hygiene protocols. State licensing authorities require dentists to undergo
annual training. The dentists and hygienists practicing at the Dental Offices
can obtain some of the required continuing education training through the
Company's internal training programs in each regional market, certain of which
have been accredited by the Academy of General Dentistry.
AFFILIATION STRUCTURE
Relationship with P.C.s
In states in which the ownership of dental practices by non-dentists is
prohibited, the Company derives all of its revenue from its Management
Agreements with the P.C.s. Under each of the Management Agreements, 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. The Company's
costs include all direct and indirect costs, overhead and expenses relating to
the Company's provision of services to the P.C.s under the Management
Agreements, such that substantially all costs associated with the provision of
dental services at the Dental Offices are borne by the Company, other than the
compensation and benefits of the dentists and hygienists who are employed by or
are independent contractors of the P.C.s. Under the Management Agreements, the
Company provides the P.C.s with, among other things, the facilities,
administrative personnel and supplies, as well as numerous services, including
administrative, accounting, cash management, financial statements and reports,
budgeting including capital expenditures, recruiting, insurance, litigation
management, negotiation of managed dental care contracts (which are entered into
by the Company and the P.C.s (except in Wisconsin)), management information
systems, billing and collection services. Each Management Agreement is for a
term of 40 years, with automatic renewal thereafter. Further, each Management
Agreement generally may be terminated by the P.C. only for cause, which includes
an uncured breach of the agreement by the Company, or upon the P.C.'s bankruptcy
or voluntary dissolution and may be terminated by the Company as of any
anniversary date of the Management Agreement upon 90 days' prior written notice.
In addition to the Management Agreements, the Company has a contractual right to
designate or approve the licensed dentists who own each P.C.'s capital stock. In
states in which non-dentists are permitted to own dental practices, such as
Wisconsin, there is no need for this structure and the dentists are employed
directly by or are independent contractors of the Company.
I-5
<PAGE> 9
Employment Agreements
All dentists practicing at the Dental Offices have entered into
employment agreements, or independent contractor agreements through their
professional corporations, with the P.C.s or, in the case of dentists practicing
in dental offices located in states (currently Wisconsin) in which the ownership
of dental practices by the Company is permitted, the Company. Such agreements
typically contain a non-competition agreement for up to three years following
their termination within a specified geographic area, usually a specified number
of miles from the relevant Dental Office. The employment agreements with
dentists who have sold their practices to the Company generally are for a
specified initial term of up to five years. Under each agreement, the dentist
assigns billing and collection rights to the P.C., in the case of states in
which non-dentists are permitted to own dental practices, or to the P.C. in
other states, with the P.C. in turn assigning such rights to the Company under
the terms of the applicable Management Agreement. In return, the dentist
receives either a fixed salary or collections-based compensation, which may have
a minimum guarantee, and a package of benefits which varies from region to
region. The dentists' compensation and benefits are paid by the entity, either
the Company or the relevant P.C., with whom the dentist has entered into an
employment agreement. At December 31, 1997, 78.9% of the dentists practicing at
the Dental Offices received collections-based compensation while 21.1% received
a fixed salary.
COMPETITION
The dental services industry is highly fragmented, consisting primarily
of solo and smaller group practices. The dental practice management segment of
this industry, currently in its formative stage, is highly competitive and is
expected to become more competitive. In this regard, the Company expects that
the provision of multi-specialty dental services at convenient locations will
become increasingly more common. The Company is aware of several dental practice
management companies that are currently operating in its existing markets.
Companies with dental practice management businesses similar to that of the
Company, which currently operate in other parts of the country, may begin
targeting the Company's existing markets for expansion. Such competitors may be
better capitalized or otherwise enjoy competitive advantages which may make it
difficult for the Company to compete against them or to acquire additional
Dental Offices on terms acceptable to the Company. As the Company seeks to
expand its operations into new markets, it is likely to face competition from
dental practice management companies which already have established a strong
business presence in such locations.
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.
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. The laws
and regulations of all states in which the Company operates impact the Company's
operations but do not currently materially restrict the Company's operations in
those states. In addition, state and federal laws regulate health maintenance
organizations and other managed care organizations for which dentists may be
providers. In general, regulation of health care-related companies is
increasing. In connection with its operations in existing markets and expansion
into new markets, the Company may become subject to additional laws, regulations
and interpretations or enforcement actions. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
I-6
<PAGE> 10
State Regulation
The laws of many states, including Arkansas, Colorado, Indiana and
Texas but excluding Wisconsin, permit a dentist to conduct a dental practice
only as an individual, a member of a partnership or an employee of a
professional corporation, limited liability company or limited liability
partnership. These laws typically prohibit, either by specific provision or as a
matter of general policy, non-dental entities, such as the Company, from
practicing dentistry, from employing dentists and, in certain circumstances,
hygienists or dental assistants, or from otherwise exercising control over the
provision of dental services. Because under the Management Agreements the
Company bears all costs associated with the provision of dental services by the
P.C.s at the Dental Offices other than compensation and benefits of dentists and
hygienists and determines annual budgets for the P.C.s, the Company is
effectively able to manage the profitability of the Dental Offices. Under the
Management Agreements, however, the P.C.s control all clinical aspects of the
practice of dentistry and the provision of dental services at the Dental
Offices, including the exercise of independent professional judgment regarding
the diagnosis or treatment of any dental disease, disorder or physical
condition. Under the Management Agreements, persons to whom dental services are
provided at the Dental Offices are patients of the P.C.s and not of the Company
and the Company does not have or exercise any control or direction over the
manner or methods in which dental services are performed nor does the Company
interfere in any way with the exercise of professional judgment by the dentists
who are employees or independent contractors of the P.C.s.
Many states in which the Company's Dental Offices presently are located
have fraud and abuse laws which are similar to the federal fraud and abuse law
described below, and which in many cases apply to referrals for items or
services reimbursable by any insurer, not just by Medicare and Medicaid. A
number of states, including all of the states in which Dental Offices are
currently located, also impose significant penalties for submitting false claims
for dental services. Many states, including all of the states in which the
Dental Offices are currently located, either prohibit or require disclosure of
self-referral arrangements and impose penalties for the violation of these laws.
Many states also prohibit dentists from splitting fees with non-dentists.
Many states, including Indiana and Texas, but excluding Wisconsin,
limit the ability of a person other than a licensed dentist to own or control
equipment or offices used in a dental practice. Some of these states allow
leasing of equipment and office space to a dental practice, under a bona fide
lease, if the equipment and office remain under the control of the dentist. Some
states (none in which the Company currently operates) prohibit the advertising
of dental services under a trade or corporate name. Some states, including
Arkansas, require all advertisements to be in the name of the dentist. A number
of states also regulate the content of advertisements of dental services and the
use of promotional gift items. In addition, many states impose limits on the
tasks that may be delegated by dentists to hygienists and dental assistants.
Some states (none in which the Company currently operates) require entities
designated as "clinics" to be licensed, and may define clinics to include dental
practices that are owned or controlled in whole or in part by non-dentists.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. As the Company or the P.C.s contract with third-party
payors, on a capitation or other basis under which the Company or the relevant
P.C. assumes financial risk, the Company or the P.C.s may become subject to
state insurance laws. Specifically, in some states, regulators may determine
that the Company or the P.C.s are engaged in the business of insurance,
particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. To the extent that the Company or the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's revenue may be materially and adversely affected.
Federal Regulation
Many of the federal laws regulating the provision of dental care apply
only to dental services which are reimbursed under the Medicare or Medicaid
programs. Because very little dental care is currently provided by Medicare and
Medicaid, the Company derives very little revenue from these programs.
Therefore, the current impact of these laws
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<PAGE> 11
is negligible. However, there can be no assurance that the reach of these laws
will not be expanded in the future to cover services reimbursable by any payor.
If these laws were to be expanded in such a manner, they could have a material
adverse effect upon the Company.
The federal fraud and abuse statute prohibits, subject to certain safe
harbors, the payment, offer, solicitation or receipt of any form of remuneration
in return for, or in order to induce, (i) the referral of a person for service,
(ii) the furnishing or arranging for the furnishing of items or services or
(iii) the purchase, lease or order or the arrangement or recommendation of a
purchase, lease or order of any item or service which is, in each case,
reimbursable under Medicare or Medicaid. The statute reflects the federal
government's policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse related to Medicare and Medicaid costs. Because dental services are
covered under various government programs, including Medicare and Medicaid, this
federal law applies to dentists and the provision of dental services.
Significant prohibitions against dentist self-referrals for services
covered by Medicare and Medicaid programs were enacted, subject to certain
exceptions, by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician and dentist
self-referral legislation known as Stark I (which applied only to clinical
laboratory referrals) by dramatically enlarging the list of services and
investment interests to which the self-referral prohibitions apply. Effective
January 1, 1995, Stark II prohibits a physician or dentist, or a member of his
or her immediate family, from making referrals for certain "designated health
services" to entities in which the physician or dentist has an ownership or
investment interest, or with which the physician or dentist has a compensation
arrangement. "Designated health services" include, among other things, clinical
laboratory services, radiology and other diagnostic services, radiation therapy
services, durable medical equipment, prosthetics, outpatient prescription drugs,
home health services and inpatient and outpatient hospital services. Stark II
prohibitions include referrals within the physician's or dentist's own group
practice (unless such practice satisfies the "group practice" exception) and
referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with, or
violation of, Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Even if the Company were deemed to provide "designated health services," the
Company believes its activities would be protected under the employment and
group practice exceptions to Stark II. Nevertheless, there can be no assurance
that Stark II will not be interpreted or hereafter amended in a manner that has
a material adverse effect on the Company's operations as presently conducted.
Proposed federal regulations also govern physician incentive plans
associated with certain managed care organizations that offer risk-based
Medicare or Medicaid contracts. These regulations define physician incentive
plans to include any compensation arrangement (such as capitation arrangements,
bonuses and withholds) that may directly or indirectly have the effect of
reducing or limiting services furnished to patients covered by the Medicare or
Medicaid programs. Direct monetary compensation which is paid by a managed care
plan, dental group or intermediary to a dentist for services rendered to
individuals covered by the Medicare or Medicaid programs is subject to these
regulations, if the compensation arrangement places the dentist at substantial
financial risk. When applicable, the regulations generally require disclosure to
the federal government or, upon request, to a Medicare beneficiary or Medicaid
recipient regarding such financial incentives, and require the dentist to obtain
stop-loss insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing agents.
These rules prohibit a billing agent from receiving a fee based on a percentage
of Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.
I-8
<PAGE> 12
Federal regulations also allow state licensing boards to revoke or
restrict a dentist's license in the event such dentist defaults in the payment
of a government-guaranteed student loan, and further allow the Medicare program
to offset such overdue loan payments against Medicare income due to the
defaulting dentist's employer. The Company cannot assure compliance by dentists
with the payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including
governmental insurers, are subject to significant regulation. Some payors limit
the extent to which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain
conditions are met such as acceptance by dentists of assignment of the payor
receivables from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided "incident to" a dentist's
services. Under these "incident to" rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Dental Office staff unless certain conditions are met such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Dental Office
staff must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its Revenue under such programs.
The operations of the Dental Offices are also subject to compliance
with regulations promulgated by the Occupational Safety and Health
Administration ("OSHA"), relating to such matters as heat sterilization of
dental instruments and the usage of barrier techniques such as masks, goggles
and gloves. The Company incurs expenses on an ongoing basis relating to OSHA
monitoring and compliance.
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.
INSURANCE
The Company maintains professional malpractice and general liability
insurance for itself and maintains professional liability insurance covering
dentists, hygienists and dental assistants at the Dental Offices. The Company
generally is a named insured under such policies and is named as an additional
insured on each individual dentist's policy. The Company maintains general
liability and umbrella coverage, including malpractice coverage, of up to $5
million per occurrence and $5 million in the aggregate. Certain types of risks
and liabilities are not covered by insurance, however, and there can be no
assurance that coverage will continue to be available upon terms satisfactory to
the Company or that the coverage will be adequate to cover losses. Malpractice
insurance, moreover, can be expensive and varies from state to state. Successful
malpractice claims asserted against the dentists, the P.C.s or the Company may
have a material adverse effect on the Company's business, financial condition
and operating results. While the Company believes its insurance policies are
adequate in amount and coverage for its current operations, there can be no
assurance that the coverage maintained by the Company will be sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
I-9
<PAGE> 13
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,157 employees,
including 36 dentists and 53 hygienists located at Midwest but excluding the 171
dentists and 74 hygienists employed by or contracting with the P.C.s. The
Company is not party to any collective bargaining agreement with a labor union
and considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 4201 Spring Valley
Road, Dallas, Texas, in approximately 8,500 square feet occupied under a lease
which expires on December 31, 1999.
The Company also leases real estate at the location of each Dental
Office. Typically, each acquired Dental Office is located at the site used by
the respective selling dentist prior to the Company's acquisition. For the year
ended December 31, 1997, the Company had lease costs of approximately $3.1
million.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to
its business. The Company is not presently a party to any material litigation.
The dentists employed by the P.C.s or the Company are from time to time subject
to malpractice claims. Such claims, if successful, could result in damage awards
exceeding, perhaps substantially, applicable insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.
I-10
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock of the Company has been traded on the Nasdaq National
Market since the Company's initial public offering on July 18, 1997 and trades
under the symbol "MDDS". The following table sets forth the high and low sale
prices for the Common Stock during the periods indicated.
<TABLE>
<CAPTION>
PERIOD HIGH ($) LOW ($)
- -------------------------------------------- -------- --------
<S> <C> <C>
1997
Third Quarter (from July 18)........... 23.8750 14.9375
Fourth Quarter......................... 21.7500 11.2500
</TABLE>
HOLDERS
As of March 17, 1998, the closing price of the Common Stock was $16.75.
The number of record holders of the Company's Common Stock as of March 17, 1998
was 61. The Company believes the number of beneficial owners of the Company's
Common Stock at that date was substantially greater.
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock since it became a C corporation in February 1996. The Company currently
intends to retain its earnings for future growth and, therefore, does not
anticipate paying cash dividends in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial
condition, operating results and current and anticipated cash needs. In
addition, under the terms of the Company's senior credit facility, the payment
of cash dividends is currently prohibited without the consent of the lender.
CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 1997, pursuant to an Asset Purchase Agreement, the Company
issued 454 shares of Common Stock to Ronald S. Stewart, D.D.S. in partial
consideration for the sale of certain assets and assumption of certain
liabilities of Ronald S. Stewart, D.D.S. in reliance upon the exemption from
registration under Regulation D promulgated under the Securities Act.
In November 1997, pursuant to an Asset Purchase Agreement, the Company
issued 28,320 shares of Common Stock to Richard J. Handelman, D.D.S. in partial
consideration for the sale of certain assets and assumption of certain
liabilities of Three Peaks Dental Management in reliance upon the exemption from
registration under Regulation D promulgated under the Securities Act.
In November 1997, pursuant to an Asset Purchase Agreement, the Company
issued 179,736 shares of Common Stock to VP Interests, L.P. in partial
consideration for the sale of certain assets and assumption of certain
liabilities of Press Family Dental in reliance upon the exemption from
registration under Regulation D promulgated under the Securities Act.
In December 1997, pursuant to an Asset Purchase Agreement, the Company
issued 8,785 shares of Common Stock to Paul J. O'Malley, D.D.S. in partial
consideration for the sale of an 80% interest in certain assets and assumption
of certain liabilities of Dental America in reliance upon the exemption from
registration under Regulation D promulgated under the Securities Act.
II-1
<PAGE> 15
The Company commenced its initial public offering of 3,162,500 shares
of Common Stock on July 18, 1997. 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) $1.1 million in other expenses, including
legal, accounting and printing fees. The Company used the net proceeds of $37.2
million as follows: (i) approximately $24.8 million was used to repay the
Company's outstanding indebtedness under its prior 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 $3.2 million was
used for the acquisitions of Dental Centers of Indiana, Inc. and three solo
practices (two in Dallas, Texas and one in Fayetteville, Arkansas). The net
proceeds remaining were used for de novo office development in the Company's
local markets.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in "Selected Consolidated Financial
Information" on pages 9 through 10 of the Annual Report to Stockholders for the
fiscal year ended December 31, 1997 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 11 through 20 of the
Annual Report to Stockholders for the fiscal year ended December 31, 1997 is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company set forth on pages
21 through 32 of the Annual Report to Stockholders for the fiscal year ended
December 31, 1997 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-2
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Information Regarding
Directors" and "Executive Officers" in the registrant's definitive proxy
statement dated April 9, 1998 relating to the Annual Meeting of Stockholders to
be held on May 14, 1998 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation" in
the registrant's definitive proxy statement dated April 9, 1998 relating to the
Annual Meeting of Stockholders to be held on May 14, 1998 is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal and Management
Stockholders" in the registrant's definitive proxy statement dated April 9, 1998
relating to the Annual Meeting of Stockholders to be held on May 14, 1998 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Transactions" in
the registrant's definitive proxy statement dated April 9, 1998 relating to the
Annual Meeting of Stockholders to be held on May 14, 1998 is incorporated herein
by reference.
III-1
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS FILED ON
FORM 8-K
(a) Documents Filed as Part of this Annual Report on Form 10-K:
1. Financial Statements: The following Consolidated Financial
Statements of Monarch Dental Corporation and Report of
Arthur Andersen LLP, Independent Public Accountants, are
incorporated by reference to pages 21 through 32 of the
Registrant's 1997 Annual Report to Stockholders:
Report of Arthur Andersen LLP, Independent Public
Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: The following financial
statement schedule for Monarch Dental Corporation is filed
as part of this Annual Report and should be read in
conjunction with the Consolidated Financial Statements of
Monarch Dental Corporation:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they
are not applicable or are not required or the information
required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
3. Exhibits:
The Exhibits listed on the accompanying Exhibit Index
immediately following the financial statement schedules are
filed as part of, or incorporated by reference into, this
Annual Report.
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated November 27, 1997,
reporting the acquisition of Press Family Dental Health
Centers which was amended to add Financial Statements and
pro forma financial information by Form 8-K/A (Amendment No.
1), dated January 26, 1998.
(c) Exhibits
The Company hereby files as part of this Annual Report on
Form 10-K the Exhibits listed in the attached Exhibit Index
pages of this Annual Report.
(d) Financial Statement Schedules
The Company hereby files as part of this Annual Report on
Form 10-K the financial statement schedule listed in item 14
(a) 2 as set forth above.
IV-1
<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: March 31, 1998 By: /s/ GARY W. CAGE
------------------
Gary W. Cage
Chief Executive Officer
Date: March 31, 1998 By: /s/ STEVEN G. PETERSON
------------------------
Steven G. Peterson
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Warren F. Melamed and Gary W. Cage, joint
and severally, his or her attorneys-in-fact, each with the power of
substitution, for such person in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WARREN F. MELAMED, D.D.S. Chairman of the Board, March 31, 1998
- ------------------------------- President, Chief Dental Officer
Warren F. Melamed, D.D.S. and Director
/s/ GARY W. CAGE Chief Executive Officer March 31, 1998
- ------------------------------- and Director
Gary W. Cage
/s/ STEVEN G. PETERSON Chief Financial Officer March 31, 1998
- ------------------------------- (principal financial officer
Steven G. Peterson and principal accounting officer)
/s/ GLENN E. HEMMERLE Director March 31, 1998
- --------------------------------
Glenn E. Hemmerle
/s/ ROGER B. KAFKER Director March 31, 1998
- --------------------------------
Roger B. Kafker
/s/ JOHN E. MAUPIN, JR., D.D.S. Director March 31, 1998
- --------------------------------
John E. Maupin, Jr., D.D.S
</TABLE>
IV-2
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Monarch Dental Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Monarch Dental Corporation and
subsidiaries included in this Form 10-K and have issued our report thereon
dated February 13, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index to the financial statement schedules is presented for the purposes
of complying with the Securities and Exchange Commission's rules and is not
part of audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 13, 1998
<PAGE> 20
SCHEDULE II
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO FROM BALANCE
BEGINNING COSTS AND ACQUIRED AT END
CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS OF PERIOD
- -------------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Allowance for Doubtful Accounts $ 1,676 $ 1,546 $ 1,547 $(1,904)(b) $ 2,865
Accumulated Amortization of Intangible
Assets
573 1,127 -- (23) 1,677
------- ------- ------- ------- -------
Total Reserves and Allowances $ 2,249 $ 2,673 $ 1,547 $(1,927) $ 4,542
======= ======= ======= ======= =======
December 31, 1996:
Allowance for Doubtful Accounts $ 385 $ 1,324 $ 851 $ (884)(b) $ 1,676
Accumulated Amortization of Intangible
Assets
-- 573 -- -- 573
------- ------- ------- ------- -------
Total Reserves and Allowances $ 385 $ 1,897 $ 851 $ (884) $ 2,249
======= ======= ======= ======= =======
December 31, 1995:
Allowance for Doubtful Accounts $ 212 $ 409 $ -- $ (236)(b) $ 385
Accumulated Amortization of Intangible
Assets -- -- -- -- --
------- ------- ------- ------- -------
Total Reserves and Allowances $ 212 $ 409 $ -- $ (236) $ 385
======= ======= ======= ======= =======
</TABLE>
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(b) Write-off of uncollectible receivables net of recoveries of bad debt
write-offs.
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- --------
<S> <C>
2.1 Stock Redemption Agreement dated as of February 5, 1996 by and
between the Registrant and Warren F. Melamed, D.D.S. (excluding
schedules, which the Registrant agrees to furnish supplementally to
the Commission upon request) (1)
2.2 Stock Purchase Agreement dated as of February 5, 1996 by and among
the Registrant and the investors named therein (excluding schedules,
which the Registrant agrees to furnish supplementally to the
Commission upon request) (1)
2.3 Asset Contribution Agreement dated as of January 31, 1996 by and
among the Registrant, Shears Vanguard Ltd., Shears Vanguard Inc.,
MDC Dental, Inc., Shears Vanguard SMI Inc., Shears Vanguard General,
Inc. and Charles G. Shears, D.D.S. (excluding schedules, which the
Registrant agrees to furnish supplementally to the Commission upon
request) (1)
2.4 Asset Contribution Agreement dated as of February 5, 1996 by and
among the Registrant, Warren F. Melamed, D.D.S. and Roy D. Smith,
III, D.D.S. (excluding schedules, which the Registrant agrees to
furnish supplementally to the Commission upon request) (1)
2.5 Stock Purchase Agreement dated as of August 29, 1996 by and between
the Registrant and David L. Hehli, D.D.S. (excluding exhibit, which
the Registrant agrees to furnish supplementally to the Commission
upon request) (1)
2.6 Agreement and Plan of Merger dated as of June 19, 1997 by and among
the Registrant, Dental Centers of Indiana (Monarch), Inc., Dental
Centers of Indiana, Inc., James W. Willis, Mark R. Johnson and
Thurman H. Brown, II (excluding exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon request) (3)
2.7 First Amendment to Agreement and Plan of Merger dated as of July 25,
1997 by and among Monarch Dental Corporation, Dental Centers of
Indiana (Monarch), Inc., Dental Centers of Indiana, Inc. and James
W. Willis, Mark R. Johnson, and Thurman H. Brown, II (4)
2.8 Asset Purchase Agreement dated as of November 12, 1997 by and among
Monarch Dental (Press) Associates, L.P., Victor Press, B.D.S., P.C.,
VP Investments, Inc., Victor Press, Roger Obregon, Edgardo A.
Gonzalez, Jeffrey J. Jacobs, Campbell R. Janse, Nick M. Higgins,
Frank B. Lewis and Bruce M. Kral (excluding exhibits, which the
Registrant agrees to furnish supplementally to the Commission upon
request) (5)
*3.1 Restated Certificate of Incorporation
*3.2 Second Amended and Restated By-Laws
4.1 Specimen certificate for Shares of Common Stock, $.01 par value, of
the Registrant (2)
10.1 Monarch Dental Corporation 1996 Stock Option and Incentive Plan, as
amended (2)
10.2 Monarch Dental Corporation 1997 Employee Stock Purchase Plan (1)
10.3 Monarch Dental Corporation 1996 Equity Acquisition Option Plan (2)
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.4 Amended and Restated Stockholders' Agreement dated as of August 29,
1996 by and among the Registrant, the TA Investors (as defined), the
MacGregor Investors (as defined), the Monarch Investors (as defined)
and the Hehli Investors (as defined) (2)
10.6 Amended and Restated Non-Competition Agreement dated as of July 1,
1997 by and between the Registrant and Warren F. Melamed, D.D.S. (3)
10.7 Management Agreement by and between Modern Dental Professionals,
P.C. and Monarch Dental Associates, L.P. (2)
10.8 Management Agreement by and between Modern Dental Professionals,
P.C. and MacGregor Dental Associates, L.P. (2)
10.9 Management Agreement by and between Modern Dental Professionals -
Girlinghouse, P.A. and Convenient Dental Care, Inc. (2)
10.10 Management Agreement by and between Modern Dental Professionals -
Beavers, P.A. and Arkansas Dental Health Associates, Inc. (2)
10.11 Management Agreement by and between Modern Dental Professionals /
UDC - Girlinghouse, P.A. and United Dental Care, Inc. (2)
10.12 Management Agreement by and between William T. Harris and
Associates, a Professional Dental Corporation and United Dental
Care, Inc. (2)
10.13 Management Agreement by and between United Dental Care Tom Harris,
D.D.S. & Associates and United Dental Care, Inc. (2)
*10.14 Management Agreement by and between Modern Dental Professionals -
Indiana, P.C. and Dental Centers of Indiana (Monarch), Inc.
*10.15 Management Agreement by and between Modern Dental Professionals -
Colorado, P.C. and Three Peaks Dental Management, Inc.
10.16 Restricted Stock Agreement dated as of February 6, 1996 by and
between the Registrant and Warren F. Melamed, D.D.S. (1)
10.17 Employment Agreement dated as of August 29, 1996 by and among the
Registrant, David L. Hehli, D.D.S. and Midwest Dental Management,
Inc. (1)
10.18 Non-Competition Agreement dated as of August 29, 1996 by and among
the Registrant, David L. Hehli, D.D.S., Advance Dental Management,
Inc. and Midwest Dental Plan, Ltd. (1)
10.19 Primary Care Dentist Agreement effective April 1, 1997 by and
between Prudential Dental Maintenance Organization, Inc. and Modern
Dental Professionals, P.C. and Monarch Dental Associates, L.P.
(excluding certain portions which have been omitted as indicated
based upon a request for confidential treatment, but which have been
separately filed with the Commission) (2)
10.20 Dental Service Agreement dated January 1, 1995 by and between
Compcare Health Services Insurance Corporation and Advance Dental
Management, Inc. (excluding certain portions which have been omitted
as indicated based upon a request for confidential treatment, but
which have been separately filed with the Commission) (2)
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
10.21 Form of Director Indemnification Agreement (1)
10.22 Sublease Agreement dated as of March 7, 1996 by and between Old
American Country Mutual Fire Insurance Company and Oral Health
Concepts Inc. (1)
10.23 Office Lease Agreement dated as of September 6, 1996 by and between
Government Employees Insurance Company and Monarch Dental
Associates, L.P. (1)
10.24 Employment Agreement dated as of July 1, 1997 by and among the
Registrant, Monarch Dental Associates, L.P. and Warren F. Melamed,
D.D.S. (3)
10.25 Employment Agreement dated as of July 1, 1997 by and among the
Registrant, Monarch Dental Associates, L.P. and Mr. Gary W. Cage (3)
10.26 Non-Competition Agreement dated as of July 1, 1997 by and between
the Registrant and Mr. Gary W. Cage (3)
*11.1 Statement re: Computation of per share earnings data
*13.1 Annual Report to Stockholders for the fiscal year ended December 31,
1997 (such report, except for those portions thereof which are
expressly incorporated by reference in this filing, is furnished for
the information of the Commission and is not deemed "filed" as part
hereof)
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Arthur Andersen LLP
*24.1 Powers of Attorney (included on signature page hereto)
*27.1 Financial Data Schedule
</TABLE>
* Filed herewith
(1) Filed as an exhibit to the Registrant's Pre-Effective Amendment No. 1 to its
Registration Statement on Form S-1 (File No. 333-24409) filed with the
Securities and Exchange Commission on May 20, 1997 and incorporated herein
by reference thereto.
(2) Filed as an exhibit to the Registrant's Pre-Effective Amendment No. 2 to its
Registration Statement on Form S-1 (File No. 333-24409) filed with the
Securities and Exchange Commission on June 23, 1997 and incorporated herein
by reference thereto.
(3) Filed as an exhibit to the Registrant's Pre-Effective Amendment No. 3 to its
Registration Statement on Form S-1 (File No. 333-24409) filed with the
Securities and Exchange Commission on July 17, 1997 and incorporated herein
by reference thereto.
(4) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 15, 1997 and
incorporated herein by reference thereto.
(5) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 19, 1997 and
incorporated herein by reference thereto.
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
MONARCH DENTAL CORPORATION
Monarch Dental Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is Monarch Dental Corporation. The date
of the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware was December 28, 1994.
2. This Restated Certificate of Incorporation restates and integrates
and does not further amend the provisions of the Second Amended and Restated
Certificate of Incorporation of the Corporation filed with the Secretary of
State of the State of Delaware on July 17, 1997 (the "Second Amended and
Restated Certificate of Incorporation"), there is no discrepancy between the
provisions of this Restated Certificate of Incorporation and the provisions of
the Second Amended and Restated Certificate of Incorporation, and was duly
adopted by the Board of Directors in accordance with the provisions of Section
245 of the General Corporation Law of the State of Delaware (the "DGCL").
3. The text of the Second Amended and Restated Certificate of
Incorporation is hereby restated in its entirety to provide as herein set forth
in full.
ARTICLE I
NAME
The name of the Corporation is Monarch Dental Corporation.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
<PAGE> 2
ARTICLE III
PURPOSES
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
Section 1. Number of Shares.
The total number of shares of capital stock which the Corporation shall
have the authority to issue is Fifty-Two Million (52,000,000) shares, of which
(i) Fifty Million (50,000,000) shares shall be Common Stock, par value $.01 per
share (the "Common Stock") and (ii) Two Million (2,000,000) shares shall be
Undesignated Preferred Stock, par value $.01 per share (the "Undesignated
Preferred Stock"). As set forth in this Article IV, the Board of Directors or
any authorized committee thereof is authorized from time to time to establish
and designate one or more series of Undesignated Preferred Stock, to fix and
determine the variations in the relative rights and preferences as between the
different series of Undesignated Preferred Stock in the manner hereinafter set
forth in this Article IV, and to fix or alter the number of shares comprising
any such series and the designation thereof to the extent permitted by law.
The number of authorized shares of the class of Undesignated Preferred
Stock may be increased or decreased (but not below the number of shares
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Undesignated Preferred Stock,
pursuant to the resolution or resolutions establishing the class of Undesignated
Preferred Stock or this Restated Certificate of Incorporation, as it may be
amended from time to time.
Section 2. General.
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, Sections 3 and
4 of this Article IV.
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<PAGE> 3
Section 3. Common Stock.
Subject to all of the rights, powers and preferences of the
Undesignated Preferred Stock, and except as provided by law or in this Article
IV (or in any certificate of designation of any series of Undesignated Preferred
Stock) or by the Board of Directors or any authorized committee thereof pursuant
to this Article IV:
(a) the holders of the Common Stock shall have the exclusive
right to vote for the election of Directors and on all other matters requiring
stockholder action, each share being entitled to one vote;
(b) dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends, but only when and as declared by
the Board of Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock in accordance with their
respective rights and interests.
Section 4. Undesignated Preferred Stock.
Subject to any limitations prescribed by law, the Board of Directors or
any authorized committee thereof is expressly authorized to provide for the
issuance of the shares of Undesignated Preferred Stock in one or more series of
such stock, and by filing a certificate pursuant to applicable law of the State
of Delaware, to establish or change from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and the relative, participating, optional or other special rights of the shares
of each series and any qualifications, limitations and restrictions thereof. Any
action by the Board of Directors or any authorized committee thereof under this
Article IV.5 shall require the affirmative vote of a majority of the Directors
then in office or a majority of the members of such committee. The Board of
Directors or any authorized committee thereof shall have the right to determine
or fix one or more of the following with respect to each series of Undesignated
Preferred Stock to the extent permitted by law:
(a) The distinctive serial designation and the number of
shares constituting such series;
(b) The dividend rates or the amount of dividends to be paid
on the shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating and other rights, if any, with respect to dividends;
3
<PAGE> 4
(c) The voting powers, full or limited, if any, of the shares
of such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and conditions on which, such
shares may be redeemed;
(e) The amount or amounts payable upon the shares of such
series and any preferences applicable thereto in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such shares
may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Corporation
and, if so convertible or exchangeable, the conversion price or prices, or the
rate or rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
(h) The price or other consideration for which the shares of
such series shall be issued;
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
Undesignated Preferred Stock (or series thereof) and whether such shares may be
reissued as shares of the same or any other class or series of stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors or any authorized
committee thereof may deem advisable.
ARTICLE V
STOCKHOLDER ACTION
Any action required or permitted to be taken by the stockholders of the
Corporation at any annual or special meeting of stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders and
may not be taken or effected by a written consent of stockholders in lieu
thereof.
4
<PAGE> 5
ARTICLE VI
DIRECTORS
Section 1. General.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors except as otherwise provided
herein or required by law.
Section 2. Election of Directors.
Election of Directors need not be by written ballot unless the By-laws
of the Corporation shall so provide.
Section 3. Terms of Directors.
The number of Directors of the Corporation shall be fixed by resolution
duly adopted from time to time by the Board of Directors. The Directors, other
than those who may be elected by the holders of any series of Undesignated
Preferred Stock of the Corporation, shall be classified, with respect to the
term for which they severally hold office, into three classes, as nearly equal
in number as possible. The initial Class I Director of the Corporation shall be
Dr. Charles G. Shears; the initial Class II Directors of the Corporation shall
be Dr. Warren F. Melamed and Roger B. Kafker; and the initial Class III
Directors of the Corporation shall be Gary W. Cage and Glenn E. Hemmerle. The
initial Class I Directors shall serve for a term expiring at the annual meeting
of stockholders to be held in 1998, the initial Class II Directors shall serve
for a term expiring at the annual meeting of stockholders to be held in 1999,
and the initial Class III Directors shall serve for a term expiring at the
annual meeting of stockholders to be held in 2000. At each annual meeting of
stockholders, the successor or successors of the class of Directors whose term
expires at that meeting shall be elected by a plurality of the votes cast at
such meeting and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
Directors elected to each class shall hold office until their successors are
duly elected and qualified or until their earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Restated Certificate of Incorporation, the holders of any one
or more series of Undesignated Preferred Stock shall have the right, voting
separately as a series or together with holders of other such series, to elect
Directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Restated Certificate of Incorporation and any
certificate of designations applicable thereto, and such Directors so elected
shall not be divided into classes pursuant to this Article V.3.
5
<PAGE> 6
During any period when the holders of any series of Undesignated
Preferred Stock have the right to elect additional Directors as provided for or
fixed pursuant to the provisions of Article IV hereof, then upon commencement
and for the duration of the period during which such right continues: (i) the
then otherwise total authorized number of Directors of the Corporation shall
automatically be increased by such specified number of Directors, and the
holders of such Undesignated Preferred Stock shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions, and
(ii) each such additional Director shall serve until such Director's successor
shall have been duly elected and qualified, or until such Director's right to
hold such office terminates pursuant to said provisions, whichever occurs
earlier, subject to such Director's earlier death, disqualification, resignation
or removal. Except as otherwise provided by the Board in the resolution or
resolutions establishing such series, whenever the holders of any series of
Undesignated Preferred Stock having such right to elect additional Directors are
divested of such right pursuant to the provisions of such stock, the terms of
office of all such additional Directors elected by the holders of such stock, or
elected to fill any vacancies resulting from the death, resignation,
disqualification or removal of such additional Directors, shall forthwith
terminate and the total and authorized number of Directors of the Corporation
shall be reduced accordingly.
Section 4. Vacancies.
Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors, when the number of Directors is
increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.
Section 5. Removal.
Subject to the rights, if any, of any series of Undesignated Preferred
Stock to elect Directors and to remove any Director whom the holders of any such
stock have the right to elect, any Director (including persons elected by
Directors to fill vacancies in the Board of
6
<PAGE> 7
Directors) may be removed from office (i) only with cause and (ii) only by the
affirmative vote of at least two-thirds of the total votes which would be
eligible to be cast by stockholders in the election of such Director. At least
30 days prior to any meeting of stockholders at which it is proposed that any
Director be removed from office, written notice of such proposed removal shall
be sent to the Director whose removal will be considered at the meeting. For
purposes of this Restated Certificate of Incorporation, "cause," with respect to
the removal of any Director shall mean only (i) conviction of a felony, (ii)
declaration of unsound mind by order of court, (iii) gross dereliction of duty,
(iv) commission of any action involving moral turpitude, or (v) commission of an
action which constitutes intentional misconduct or a knowing violation of law if
such action in either event results both in an improper substantial personal
benefit and a material injury to the Corporation.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the Director derived an improper personal benefit. If the
DGCL is amended after the effective date of this Restated Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
Section 1. Amendment by Directors
Except as otherwise provided by law, the By-laws of the Corporation may
be amended or repealed by the Board of Directors.
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<PAGE> 8
Section 2. Amendment by Stockholders
The By-laws of the Corporation may be amended or repealed at any annual
meeting of stockholders, or special meeting of stockholders called for such
purpose, by the affirmative vote of at least two-thirds of the total votes
eligible to be cast on such amendment or repeal by holders of voting stock,
voting together as a single class; provided, however, that if the Board of
Directors recommends that stockholders approve such amendment or repeal at such
meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Restated
Certificate of Incorporation in the manner now or hereafter prescribed by
statute and this Restated Certificate of Incorporation, and all rights conferred
upon stockholders herein are granted subject to this reservation. No amendment
or repeal of this Restated Certificate of Incorporation shall be made unless the
same is first approved by the Board of Directors pursuant to a resolution
adopted by the Board of Directors in accordance with Section 242 of the DGCL,
and, except as otherwise provided by law, thereafter approved by the
stockholders. Whenever any vote of the holders of voting stock is required, and
in addition to any other vote of holders of voting stock that is required by
this Restated Certificate of Incorporation or by law, the affirmative vote of a
majority of the total votes eligible to be cast by holders of voting stock with
respect to such amendment or repeal, voting together as a single class, at a
duly constituted meeting of stockholders called expressly for such purpose shall
be required to amend or repeal any provisions of this Restated Certificate of
Incorporation; provided, however, that the affirmative vote of not less than 80%
of the total votes eligible to be cast by holders of voting stock, voting
together as a single class, shall be required to amend or repeal any of the
provisions of Article VI or Article IX of this Restated Certificate of
Incorporation.
8
<PAGE> 9
I, Warren F. Melamed, President of the Corporation, for the purpose of
amending and restating the Corporation's Second Amended and Restated Certificate
of Incorporation pursuant to the General Corporation Law of the State of
Delaware, do make this certificate, hereby declaring and certifying that this is
my act and deed on behalf of the Corporation this 13th day of August, 1997.
/s/ Warren F. Melamed
------------------------------
Warren F. Melamed, President
<PAGE> 1
EXHIBIT 3.2
SECOND AMENDED AND RESTATED
BY-LAWS
OF
MONARCH DENTAL CORPORATION
(the "Corporation")
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of stockholders shall be
held at the hour, date and place within or without the United States which is
fixed by the majority of the Board of Directors, the Chairman of the Board, if
one is elected, or the President, which time, date and place may subsequently be
changed at any time by vote of the Board of Directors. If no annual meeting has
been held for a period of thirteen months after the Corporation's last annual
meeting of stockholders, a special meeting in lieu thereof may be held, and such
special meeting shall have, for the purposes of these By-laws or otherwise, all
the force and effect of an annual meeting. Any and all references hereafter in
these By-laws to an annual meeting or annual meetings also shall be deemed to
refer to any special meeting(s) in lieu thereof.
SECTION 2. Matters to be Considered at Annual Meetings. At any annual
meeting of stockholders or any special meeting in lieu of annual meeting of
stockholders (the "Annual Meeting"), only such business shall be conducted, and
only such proposals shall be acted upon, as shall have been properly brought
before such Annual Meeting. To be considered as properly brought before an
Annual Meeting, business must be: (a) specified in the notice of meeting, (b)
otherwise properly brought before the meeting by, or at the direction of, the
Board of Directors, or (c) otherwise properly brought before the meeting by any
holder of record (both as of the time notice of such proposal is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of capital stock of the Corporation entitled to vote
at such Annual Meeting who complies with the requirements set forth in this
Section 2.
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder of record of any
shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (a) give timely notice as required by this Section 2 to the
Secretary of the Corporation and (b) be present at such meeting, either in
person or by a representative. For the first Annual Meeting following the
initial public offering of common stock of the Corporation, a stockholder's
notice shall be timely if delivered to, or mailed to and received by, the
Corporation at its principal executive office not
<PAGE> 2
later than the close of business on the later of (a) the 75th day prior to the
scheduled date of such Annual Meeting or (b) the 15th day following the day on
which public announcement of the date of such Annual Meeting is first made by
the Corporation. For all subsequent Annual Meetings, a stockholder's notice
shall be timely if delivered to, or mailed to and received by, the Corporation
at its principal executive office not less than 75 days nor more than 120 days
prior to the anniversary date of the immediately preceding Annual Meeting (the
"Anniversary Date"); provided, however, that in the event the Annual Meeting is
scheduled to be held on a date more than 30 days before the Anniversary Date or
more than 60 days after the Anniversary Date, a stockholder's notice shall be
timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not later than the close of business on the later of
(a) the 75th day prior to the scheduled date of such Annual Meeting or (b) the
15th day following the day on which public announcement of the date of such
Annual Meeting is first made by the Corporation.
For purposes of these By-laws, "public announcement" shall mean: (a)
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service, (b) a report or other document filed
publicly with the Securities and Exchange Commission (including, without
limitation, a Form 8-K), or (c) a letter or report sent to stockholders of
record of the Corporation at the time of the mailing of such letter or report.
A stockholder's notice to the Secretary shall set forth as to each
matter proposed to be brought before an Annual Meeting: (a) a brief description
of the business the stockholder desires to bring before such Annual Meeting and
the reasons for conducting such business at such Annual Meeting, (b) the name
and address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation's capital stock beneficially owned by the stockholder proposing such
business, (d) the names and addresses of the beneficial owners, if any, of any
capital stock of the Corporation registered in such stockholder's name on such
books, and the class and number of shares of the Corporation's capital stock
beneficially owned by such beneficial owners, (e) the names and addresses of
other stockholders known by the stockholder proposing such business to support
such proposal, and the class and number of shares of the Corporation's capital
stock beneficially owned by such other stockholders, and (f) any material
interest of the stockholder proposing to bring such business before such meeting
(or any other stockholders known to be supporting such proposal) in such
proposal.
If the Board of Directors or a designated committee thereof determines
that any stockholder proposal was not made in a timely fashion in accordance
with the provisions of this Section 2 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2 in any material respect, such proposal shall not be presented for
action at the Annual Meeting in question. If neither the Board of Directors nor
such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the Annual
Meeting shall determine whether
2
<PAGE> 3
the stockholder proposal was made in accordance with the terms of this Section
2. If the presiding officer determines that any stockholder proposal was not
made in a timely fashion in accordance with the provisions of this Section 2 or
that the information provided in a stockholder's notice does not satisfy the
information requirements of this Section 2 in any material respect, such
proposal shall not be presented for action at the Annual Meeting in question. If
the Board of Directors, a designated committee thereof or the presiding officer
determines that a stockholder proposal was made in accordance with the
requirements of this Section 2, the presiding officer shall so declare at the
Annual Meeting and ballots shall be provided for use at the meeting with respect
to such proposal.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder with respect to the matters set forth in this Section 2, and nothing
in this Section 2 shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
SECTION 3. Special Meetings. Except as otherwise required by law and
subject to the rights, if any, of the holders of any series of preferred stock,
special meetings of the stockholders of the Corporation may be called only by
the Board of Directors pursuant to a resolution approved by the affirmative vote
of a majority of the directors then in office.
SECTION 4. Matters to be Considered at Special Meetings. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
SECTION 5. Notice of Meetings; Adjournments. A written notice of each
Annual Meeting stating the hour, date and place of such Annual Meeting shall be
given by the Secretary or an Assistant Secretary (or other person authorized by
these By-laws or by law) not less than 10 days nor more than 60 days before the
Annual Meeting, to each stockholder entitled to vote thereat and to each
stockholder who, by law or under the Restated Certificate of Incorporation of
the Corporation (as the same may hereafter be amended and/or restated, the
"Certificate") or under these By-laws, is entitled to such notice, by delivering
such notice to him or by mailing it, postage prepaid, addressed to such
stockholder at the address of such stockholder as it appears on the
Corporation's stock transfer books. Such notice shall be deemed to be delivered
when hand delivered to such address or deposited in the mail so addressed, with
postage prepaid.
Notice of all special meetings of stockholders shall be given in the
same manner as provided for Annual Meetings, except that the written notice of
all special meetings shall state the purpose or purposes for which the meeting
has been called.
3
<PAGE> 4
Notice of an Annual Meeting or special meeting of stockholders need not
be given to a stockholder if a written waiver of notice is signed before or
after such meeting by such stockholder or if such stockholder attends such
meeting, unless such attendance was for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any Annual Meeting or special meeting of stockholders need
be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled Annual Meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 2 of this
Article I or Section 3 of Article II hereof or otherwise. In no event shall the
public announcement of an adjournment, postponement or rescheduling of any
previously scheduled meeting of stockholders commence a new time period for the
giving of a stockholder's notice under Section 2 of Article I and Section 3 of
Article II of these Bylaws.
When any meeting is convened, the presiding officer may adjourn the
meeting if (a) no quorum is present for the transaction of business, (b) the
Board of Directors determines that adjournment is necessary or appropriate to
enable the stockholders to consider fully information which the Board of
Directors determines has not been made sufficiently or timely available to
stockholders, or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any Annual Meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting other than an announcement at
the meeting at which the adjournment is taken of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who, by
law or under the Certificate or these By-laws, is entitled to such notice.
SECTION 6. Quorum. The holders of shares of voting stock representing a
majority of the voting power of the outstanding shares of voting stock issued,
outstanding and entitled to vote at a meeting of stockholders, represented in
person or by proxy at such meeting, shall constitute a quorum; but if less than
a quorum is present at a meeting, the holders of voting stock representing a
majority of the voting power present at the meeting or the presiding officer may
adjourn the meeting from time to time, and the meeting may be held as adjourned
without further notice, except as provided in Section 5 of this Article I. At
such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
noticed. The stockholders present at a duly constituted meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
4
<PAGE> 5
SECTION 7. Voting and Proxies. Stockholders shall have one vote for
each share of stock entitled to vote owned by them of record according to the
books of the Corporation, unless otherwise provided by law or by the
Certificate. Stockholders may vote either in person or by written proxy, but no
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. Proxies shall be filed with the Secretary of
the meeting before being voted. Except as otherwise limited therein or as
otherwise provided by law, proxies shall entitle the persons authorized thereby
to vote at any adjournment of such meeting, but they shall not be valid after
final adjournment of such meeting. A proxy with respect to stock held in the
name of two or more persons shall be valid if executed by or on behalf of any
one of them unless at or prior to the exercise of the proxy the Corporation
receives a specific written notice to the contrary from any one of them. A proxy
purporting to be executed by or on behalf of a stockholder shall be deemed
valid, and the burden of proving invalidity shall rest on the challenger.
SECTION 8. Action at Meeting. When a quorum is present, any matter
before any meeting of stockholders shall be decided by the vote of a majority of
the voting power of shares of voting stock, present in person or represented by
proxy at such meeting and entitled to vote on such matter, except where a larger
vote is required by law, by the Certificate or by these By-laws. Any election by
stockholders shall be determined by a plurality of the votes cast, except where
a larger vote is required by law, by the Certificate or by these By-laws. The
Corporation shall not directly or indirectly vote any shares of its own stock;
provided, however, that the Corporation may vote shares which it holds in a
fiduciary capacity to the extent permitted by law.
SECTION 9. Stockholder Lists. The Secretary or an Assistant Secretary
(or the Corporation's transfer agent or other person authorized by these By-laws
or by law) shall prepare and make, at least 10 days before every Annual Meeting
or special meeting of stockholders, a complete list of the stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the hour, date and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 10. Presiding Officer. The Chairman of the Board, if one is
elected, or if not elected or in his or her absence, the President, shall
preside at all Annual Meetings or special meetings of stockholders and shall
have the power, among other things, to adjourn such meeting at any time and from
time to time, subject to Sections 5 and 6 of this Article I. The order of
business and all other matters of procedure at any meeting of the stockholders
shall be determined by the presiding officer.
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SECTION 11. Voting Procedures and Inspectors of Elections. The
Corporation shall, in advance of any meeting of stockholders, appoint one or
more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the presiding officer shall appoint one or more
inspectors to act at the meeting. Any inspector may, but need not, be an
officer, employee or agent of the Corporation. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall perform such duties as are
required by the General Corporation Law of the State of Delaware, as amended
from time to time (the "DGCL"), including the counting of all votes and ballots.
The inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of the duties of the inspectors. The presiding
officer may review all determinations made by the inspectors, and in so doing
the presiding officer shall be entitled to exercise his or her sole judgment and
discretion and he or she shall not be bound by any determinations made by the
inspectors. All determinations by the inspectors and, if applicable, the
presiding officer, shall be subject to further review by any court of competent
jurisdiction.
ARTICLE II
Directors
SECTION 1. Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate or required by law.
SECTION 2. Number and Terms. The number of directors of the Corporation
shall be fixed by resolution duly adopted from time to time by the Board of
Directors. The directors shall hold office in the manner provided in the
Certificate.
SECTION 3. Director Nominations. Nominations of candidates for election
as directors of the Corporation at any Annual Meeting may be made only (a) by,
or at the direction of, a majority of the Board of Directors or (b) by any
holder of record (both as of the time notice of such nomination is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of the capital stock of the Corporation entitled to
vote at such Annual Meeting who complies with the timing, informational and
other requirements set forth in this Section 3. Any stockholder who has complied
with the timing, informational and other requirements set forth in this Section
3 and who seeks to make such a nomination, or his, her or its representative,
must be present in person at the Annual Meeting. Only persons nominated in
accordance with the procedures set forth in this Section 3 shall be eligible for
election as directors at an Annual Meeting.
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Nominations, other than those made by, or at the direction of, the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 3. For the first
Annual Meeting following the initial public offering of common stock of the
Corporation, a stockholder's notice shall be timely if delivered to, or mailed
to and received by, the Corporation at its principal executive office not later
than the close of business on the later of (a) the 75th day prior to the
scheduled date of such Annual Meeting or (b) the 15th day following the day on
which public announcement of the date of such Annual Meeting is first made by
the Corporation. For all subsequent Annual Meetings, a stockholder's notice
shall be timely if delivered to, or mailed to and received by, the Corporation
at its principal executive office not less than 75 days nor more than 120 days
prior to the Anniversary Date; provided, however, that in the event the Annual
Meeting is scheduled to be held on a date more than 30 days before the
Anniversary Date or more than 60 days after the Anniversary Date, a
stockholder's notice shall be timely if delivered to, or mailed and received by,
the Corporation at its principal executive office not later than the close of
business on the later of (a) the 75th day prior to the scheduled date of such
Annual Meeting or (b) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation.
A stockholder's notice to the Secretary shall set forth as to each
person whom the stockholder proposes to nominate for election or re-election as
a director: (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation's capital stock which are beneficially
owned by such person on the date of such stockholder notice, and (d) the consent
of each nominee to serve as a director if elected. A stockholder's notice to the
Secretary shall further set forth as to the stockholder giving such notice: (a)
the name and address, as they appear on the Corporation's stock transfer books,
of such stockholder and of the beneficial owners (if any) of the Corporation's
capital stock registered in such stockholder's name and the name and address of
other stockholders known by such stockholder to be supporting such nominee(s),
(b) the class and number of shares of the Corporation's capital stock which are
held of record, beneficially owned or represented by proxy by such stockholder
and by any other stockholders known by such stockholder to be supporting such
nominee(s) on the record date for the Annual Meeting in question (if such date
shall then have been made publicly available) and on the date of such
stockholder's notice, and (c) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by such stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not made in accordance with the terms of
this Section 3 or that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 3 in any material
respect, then such nomination shall not be considered at the Annual Meeting in
question. If neither the Board of Directors nor such committee makes a
determination as to whether a nomination was made in accordance with the
provisions of this
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Section 3, the presiding officer of the Annual Meeting shall determine whether a
nomination was made in accordance with such provisions. If the presiding officer
determines that any stockholder nomination was not made in accordance with the
terms of this Section 3 or that the information provided in a stockholder's
notice does not satisfy the informational requirements of this Section 3 in any
material respect, then such nomination shall not be considered at the Annual
Meeting in question. If the Board of Directors, a designated committee thereof
or the presiding officer determines that a nomination was made in accordance
with the terms of this Section 3, the presiding officer shall so declare at the
Annual Meeting and ballots shall be provided for use at the meeting with respect
to such nominee.
Notwithstanding anything to the contrary in the second sentence of the
second paragraph of this Section 3, in the event that the number of directors to
be elected to the Board of Directors of the Corporation is increased and there
is no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least 75
days prior to the Anniversary Date, a stockholder's notice required by this
Section 3 shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if such notice shall be delivered
to, or mailed to and received by, the Corporation at its principal executive
office not later than the close of business on the 15th day following the day on
which such public announcement is first made by the Corporation.
No person shall be elected by the stockholders as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. Election of directors at an Annual Meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such Annual Meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as directors at
the Annual Meeting in accordance with the procedures set forth in this Section
shall be provided for use at the Annual Meeting.
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SECTION 4. Qualification. No director need be a stockholder of the
Corporation.
SECTION 5. Vacancies. Subject to the rights, if any, of the holders of
any series of preferred stock to elect directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a director, shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
if less than a quorum of the Board of Directors. Any director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
preferred stock to elect directors, when the number of directors is increased or
decreased, the Board of Directors shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned; provided,
however, that no decrease in the number of directors shall shorten the term of
any incumbent director. In the event of a vacancy in the Board of Directors, the
remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
SECTION 6. Removal. Directors may be removed from office in the manner
provided in the Certificate.
SECTION 7. Resignation. A director may resign at any time by giving
written notice to the Chairman of the Board, if one is elected, the President or
the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides.
SECTION 8. Regular Meetings. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Section 8, on the same
date and at the same place as the Annual Meeting following the close of such
meeting of stockholders. Other regular meetings of the Board of Directors may be
held at such hour, date and place as the Board of Directors may by resolution
from time to time determine without notice other than such resolution.
SECTION 9. Special Meetings. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
directors, the Chairman of the Board, if one is elected, or the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
SECTION 10. Notice of Meetings. Notice of the hour, date and place of
all special meetings of the Board of Directors shall be given to each director
by the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated
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by the Chairman of the Board, if one is elected, or the President. Notice of any
special meeting of the Board of Directors shall be given to each director in
person, by telephone, or by facsimile, telex, telecopy, telegram, or other
written form of electronic communication, sent to his or her business or home
address, at least 24 hours in advance of the meeting, or by written notice
mailed to his or her business or home address, at least 48 hours in advance of
the meeting. Such notice shall be deemed to be delivered when hand delivered to
such address, read to such director by telephone, deposited in the mail so
addressed, with postage thereon prepaid if mailed, dispatched or transmitted if
faxed, telexed or telecopied, or when delivered to the telegraph company if sent
by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Certificate or
by these By-laws, neither the business to be transacted at, nor the purpose of,
any meeting of the Board of Directors need be specified in the notice or waiver
of notice of such meeting.
SECTION 11. Quorum. At any meeting of the Board of Directors, a
majority of the directors then in office shall constitute a quorum for the
transaction of business, but if less than a quorum is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time, and
the meeting may be held as adjourned without further notice, except as provided
in Section 10 of this Article II. Any business which might have been transacted
at the meeting as originally noticed may be transacted at such adjourned meeting
at which a quorum is present.
SECTION 12. Action at Meeting. At any meeting of the Board of Directors
at which a quorum is present, a majority of the directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Certificate or by these By-laws.
SECTION 13. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
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SECTION 14. Manner of Participation. Directors may participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
SECTION 15. Committees. The Board of Directors, by vote of a majority
of the directors then in office, may elect from its number one or more
committees, including, without limitation, an Executive Committee, a
Compensation and Option Committee and an Audit Committee, and may delegate
thereto some or all of its powers except those which by law, by the Certificate
or by these By-laws may not be delegated. Except as the Board of Directors may
otherwise determine, any such committee may make rules for the conduct of its
business, but unless otherwise provided by the Board of Directors or in such
rules, its business shall be conducted so far as possible in the same manner as
is provided by these By-laws for the Board of Directors. All members of such
committees shall hold such offices at the pleasure of the Board of Directors.
The Board of Directors may abolish any such committee at any time. Any committee
to which the Board of Directors delegates any of its powers or duties shall keep
records of its meetings and shall report its action to the Board of Directors.
The Board of Directors shall have power to rescind any action of any committee,
to the extent permitted by law, but no such rescission shall have retroactive
effect.
SECTION 16. Compensation of Directors. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors provided that directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as directors of the
Corporation.
ARTICLE III
Officers
SECTION 1. Enumeration. The officers of the Corporation shall consist
of a President, a Treasurer, a Secretary and such other officers, including,
without limitation, a Chairman of the Board, a Chief Executive Officer and one
or more Vice Presidents (including Executive Vice Presidents or Senior Vice
Presidents), Assistant Vice Presidents, Assistant Treasurers and Assistant
Secretaries, as the Board of Directors may determine.
SECTION 2. Election. At the regular annual meeting of the Board
following the Annual Meeting of stockholders, the Board of Directors shall elect
the President, the Treasurer and the Secretary. Other officers may be elected by
the Board of Directors at such regular annual meeting of the Board of Directors
or at any other regular or special meeting.
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SECTION 3. Qualification. No officer need be a stockholder or a
director. Any person may occupy more than one office of the Corporation at any
time. Any officer may be required by the Board of Directors to give bond for the
faithful performance of his or her duties in such amount and with such sureties
as the Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the Certificate or
by these Bylaws, each of the officers of the Corporation shall hold office until
the regular annual meeting of the Board of Directors following the next Annual
Meeting of stockholders and until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
SECTION 5. Resignation. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 6. Removal. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
SECTION 7. Absence or Disability. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 9. Chairman of the Board. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
SECTION 10. Chief Executive Officer. The Chief Executive Officer, if
one is elected, shall, subject to the direction of the Board of Directors, have
general supervision and control of the Corporation's business. If there is no
Chairman of the Board or if he or she is absent, the Chief Executive Officer
shall preside, when present, at all meetings of stockholders and of the Board of
Directors. The Chief Executive Officer shall have such other powers and perform
such other duties as the Board of Directors may from time to time designate.
SECTION 11. President. The President shall generally have such powers
and shall perform such duties as the Board of Directors may from time to time
designate. However, if no Chief Executive Officer is elected, the President
shall have general supervision and control of the Corporation's business. If
there is neither a Chairman of the Board nor a Chief
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Executive Officer or if both such officers are absent, the President shall
preside, when present, at all meetings of stockholders and of the Board of
Directors.
SECTION 12. Vice Presidents and Assistant Vice Presidents. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
SECTION 13. Treasurer and Assistant Treasurers. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 14. Secretary and Assistant Secretaries. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof. The Secretary shall have charge of
the stock ledger (which may, however, be kept by any transfer or other agent of
the Corporation). The Secretary shall have custody of the seal of the
Corporation, and the Secretary, or an Assistant Secretary, shall have authority
to affix it to any instrument requiring it, and, when so affixed, the seal may
be attested by his or her signature or that of an Assistant Secretary. The
Secretary shall have such other duties and powers as may be designated from time
to time by the Board of Directors or the Chief Executive Officer. In the absence
of the Secretary, any Assistant Secretary may perform his or her duties and
responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 15. Other Powers and Duties. Subject to these By-laws and to
such limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
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ARTICLE IV
Capital Stock
SECTION 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board of Directors, the President or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary. The Corporation seal and the signatures by the
Corporation's officers, the transfer agent or the registrar may be facsimiles.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue. Every certificate
for shares of stock which are subject to any restriction on transfer and every
certificate issued when the Corporation is authorized to issue more than one
class or series of stock shall contain such legend with respect thereto as is
required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and
unless otherwise provided by the Board of Directors, shares of stock may be
transferred only on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such proof of
the authenticity of signature as the Corporation or its transfer agent may
reasonably require.
SECTION 3. Record Holders. Except as may otherwise be required by law,
by the Certificate or by these By-laws, the Corporation shall be entitled to
treat the record holder of stock as shown on its books as the owner of such
stock for all purposes, including the payment of dividends and the right to vote
with respect thereto, regardless of any transfer, pledge or other disposition of
such stock, until the shares have been transferred on the books of the
Corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the Corporation of
his or her post office address and any changes thereto.
SECTION 4. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (a) in the case of
determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless
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otherwise required by law, not be more than sixty nor less than ten days before
the date of such meeting and (b) in the case of any other action, shall not be
more than sixty days prior to such other action. If no record date is fixed: (a)
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is held
and (b) the record date for determining stockholders for any other purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
Indemnification
SECTION 1. Definitions. For purposes of this Article: (a) "Officer"
means any person who serves or has served as a director or officer of the
Corporation or in any other office filled by election or appointment by the
stockholders or the Board of Directors of the Corporation and any heirs,
executors, administrators or personal representatives of such person; (b)
"Non-Officer Employee" means any person who serves or has served as an employee
of the Corporation, but who is not or was not an Officer, and any heirs,
executors, administrators or personal representatives of such person; (c)
"Proceeding" means any threatened, pending, or completed action, suit or
proceeding (or part thereof), whether civil, criminal, administrative,
arbitrative or investigative, any appeal of such an action, suit or proceeding,
and any inquiry or investigation which could lead to such an action, suit, or
proceeding; and (d) "Expenses" means any liability fixed by a judgment, order,
decree or award in a Proceeding, any amount reasonably paid in settlement of a
Proceeding and any professional fees and other expenses and disbursements
reasonably incurred in a Proceeding or in settlement of a Proceeding, including
fines, taxes and penalties relating thereto.
SECTION 2. Officers. Except as provided in Section 4 of this Article V,
each Officer of the Corporation shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader rights
than said law permitted the Corporation to provide prior to such amendment)
against any and all Expenses incurred by such Officer in connection with any
Proceeding in which such Officer is involved as a result of serving or having
served (a) as an Officer or employee of the Corporation, (b) as a director,
officer or employee of any subsidiary of the Corporation, or (c) in any capacity
with any other corporation, organization, partnership, joint venture, trust or
other entity at the written request or direction of the
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Corporation, including service with respect to employee or other benefit plans,
and shall continue as to an Officer after he or she has ceased to be an Officer
and shall inure to the benefit of his or her heirs, executors, administrators
and personal representatives; provided, however, that the Corporation shall
indemnify any such Officer seeking indemnification in connection with a
Proceeding initiated by such Officer only if such Proceeding was authorized by
the Board of Directors of the Corporation.
SECTION 3. Non-Officer Employees. Except as provided in Section 4 of
this Article V, each Non-Officer Employee of the Corporation may, in the
discretion of the Board of Directors, be indemnified by the Corporation to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader rights than said law
permitted the Corporation to provide prior to such amendment) against any or all
Expenses incurred by such Non-Officer Employee in connection with any Proceeding
in which such Non-Officer Employee is involved as a result of serving or having
served (a) as a Non-Officer Employee of the Corporation, (b) as a director,
officer or employee of any subsidiary of the Corporation, or (c) in any capacity
with any other corporation, organization, partnership, joint venture, trust or
other entity at the request or direction of the Corporation, including service
with respect to employee or other benefit plans, and shall continue as to a
Non-Officer Employee after he or she has ceased to be a Non-Officer Employee and
shall inure to the benefit of his or her heirs, personal representatives,
executors and administrators; provided, however, that the Corporation may
indemnify any such Non-Officer Employee seeking indemnification in connection
with a Proceeding initiated by such Non-Officer Employee only if such Proceeding
was authorized by the Board of Directors of the Corporation.
SECTION 4. Good Faith. No indemnification shall be provided pursuant to
this Article V to an Officer or to a Non-Officer Employee with respect to a
matter as to which such person shall have been finally adjudicated in any
Proceeding (a) not to have acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and (b) with respect to any criminal Proceeding, to have had
reasonable cause to believe his or her conduct was unlawful. In the event that a
Proceeding is compromised or settled prior to final adjudication so as to impose
any liability or obligation upon an Officer or Non-Officer Employee, no
indemnification shall be provided pursuant to this Article V to said Officer or
Non-Officer Employee with respect to a matter if there be a determination that
with respect to such matter such person did not act in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal Proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The
determination contemplated by the preceding sentence shall be made by (a) a
majority vote of those directors who are not involved in such Proceeding (the
"Disinterested Directors"); (b) by the stockholders; or (c) if directed by a
majority of Disinterested Directors, by independent legal counsel in a written
opinion. However, if more than half of the directors are not Disinterested
Directors, the determination shall be made by (a) a majority vote of a committee
of one or more disinterested director(s) chosen by the Disinterested Director(s)
at a
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regular or special meeting; (b) by the stockholders; or (c) by independent legal
counsel chosen by the Board of Directors in a written opinion.
SECTION 5. Prior to Final Disposition. Unless otherwise determined by
(a) the Board of Directors, (b) if more than half of the directors are involved
in a Proceeding by a majority vote of a committee of one or more Disinterested
Director(s) chosen in accordance with the procedures specified in Section 4 of
this Article or (c) if directed by the Board of Directors, by independent legal
counsel in a written opinion, any indemnification extended to an Officer or
Non-Officer Employee pursuant to this Article V shall include payment by the
Corporation or a subsidiary of the Corporation of Expenses as the same are
incurred in defending a Proceeding in advance of the final disposition of such
Proceeding upon receipt of an undertaking by such Officer or Non-Officer
Employee seeking indemnification to repay such payment if such Officer or
Non-Officer Employee shall be adjudicated or determined not to be entitled to
indemnification under this Article V.
SECTION 6. Contractual Nature of Rights. The foregoing provisions of
this Article V shall be deemed to be a contract between the Corporation and each
Officer and Non-Officer Employee who serves in such capacity at any time while
this Article V is in effect, and any repeal or modification thereof shall not
affect any rights or obligations then existing with respect to any state of
facts then or theretofore existing or any Proceeding theretofore or thereafter
brought based in whole or in part upon any such state of facts. If a claim for
indemnification or advancement of expenses hereunder by an Officer or
Non-Officer Employee is not paid in full by the Corporation within 60 days after
a written claim for indemnification or documentation of expenses has been
received by the Corporation, such Officer or Non-Officer Employee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim, and if successful in whole or in part, such Officer or Non-Officer
Employee shall also be entitled to be paid the expenses of prosecuting such
claim. The failure of the Corporation (including its Board of Directors or any
committee thereof, independent legal counsel, or stockholders) to make a
determination concerning the permissibility of such indemnification or
advancement of expenses under this Article V shall not be a defense to the
action and shall not create a presumption that such indemnification or
advancement is not permissible
SECTION 7. Non-Exclusivity of Rights. The provisions in respect of
indemnification and the payment of expenses incurred in defending a Proceeding
in advance of its final disposition set forth in this Article V shall not be
exclusive of any right which any person may have or hereafter acquire under any
statute, provision of the Certificate or these By-laws, agreement, vote of
stockholders or disinterested directors or otherwise; provided, however, that in
the event the provisions of this Article V in any respect conflict with the
terms of any agreement between the Corporation or any of its subsidiaries and
any person entitled to indemnification under this Article V, then,
notwithstanding anything contained herein to the contrary, the provision which
is more favorable to the relevant individual shall govern.
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SECTION 8. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Officer or Non-Officer Employee against any
liability of any character asserted against or incurred by the Corporation or
any such Officer or Non-Officer Employee, or arising out of any such status,
whether or not the Corporation would have the power to indemnify such person
against such liability under the DGCL or the provisions of this Article V.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. Except as otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of
December of each year.
SECTION 2. Seal. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Corporation as the Board of Directors or Executive Committee may
authorize.
SECTION 4. Voting of Securities. Unless the Board of Directors
otherwise provides, the Chairman of the Board, if one is elected, the President
or the Treasurer may waive notice of and act on behalf of this Corporation, or
appoint another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution, at
any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.
SECTION 5. Resident Agent. The Board of Directors may appoint a
resident agent upon whom legal process may be served in any action or proceeding
against the Corporation.
SECTION 6. Corporate Records. The original or attested copies of the
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock transfer books, which
shall contain the names of all stockholders, their record addresses and the
amount of stock held by each, may be kept outside the State of Delaware and
shall be kept at the principal office of the Corporation, at the office of its
counsel or at an office of its transfer agent or at such other place or places
as may be designated from time to time by the Board of Directors.
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SECTION 7. Certificate. All references in these By-laws to the
Certificate shall be deemed to refer to the Restated Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.
SECTION 8. Amendment of By-laws.
(a) Amendment by Directors. Except as provided otherwise by law, these
By-laws may be amended or repealed by the Board of Directors.
(b) Amendment by Stockholders. These By-laws may be amended or repealed
at any Annual Meeting of stockholders, or special meeting of stockholders called
for such purpose, by the affirmative vote of at least two-thirds of the total
votes eligible to be cast on such amendment or repeal by holders of voting
stock, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
Adopted May 1, 1997 and effective as of July 17, 1997.
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EXHIBIT 10.14
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made by and
between Modern Dental Professionals - Indiana, P.C., a professional corporation
organized and existing under the laws of the State of Indiana ("P.C."), and
Dental Centers of Indiana (Monarch), Inc., a corporation organized and existing
under the laws of the State of Indiana (the "Service Company").
RECITALS
A. P.C. is engaged in the practice of dentistry through dentists
licensed by the Indiana State Board of Dental Examiners and who are employed by
P.C. or who have entered into independent contractor agreements with P.C. to
provide services to patients of P.C. and conducts such practice at dental
centers located in the State of Indiana (the "Dental Centers").
B. Service Company has been organized for the purpose of
providing comprehensive management and related administrative services to
dental practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.C.
C. P.C., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Indiana Dental Practice Act and the
Regulations of the Indiana State Board of Dental Examiners adopted pursuant
thereto.
(b) "Cost of Dental Services" means: the aggregate
compensation of dentists who are employed by or who are independent contractors
with P.C. at the Dental Centers and other personnel who must be employed by the
P.C. under applicable law including dental hygienists ("Support Personnel")
together with the cost of expenses, taxes and benefits of such dentists and
Support Personnel including, but not limited to, vacation pay, sick pay, health
care expenses, professional dues, expense reimbursement, discretionary bonuses
or incentive payments, if any, based on profitability or productivity and other
expenses and payments required to be made to or for the benefit of the dentists
or the Support Personnel pursuant to their employment agreements or independent
contractor agreements or otherwise plus P.C.'s portion of all employment and
payroll taxes; other expenses incurred by P.C. in carrying out its obligations
under this Agreement; and the costs of malpractice insurance, in each case on
an accrual basis.
(c) "Dental Board" means the Indiana State Board of
Dental Examiners established under the Act.
(d) "Dental Center" means the facility or facilities
operated by P.C. and at which Dental Services are, or in the future may be,
rendered by P.C. identified on Exhibit A hereto, as amended, supplemented or
modified from time to time.
(e) "Dental Services" means all services rendered by P.C.
which constitute the practice of dentistry as defined by the Act.
<PAGE> 2
(f) "Net Pre-Tax Income" means Net Revenues less the
total of Service Company Costs and the Cost of Dental Services, but without
regard for the provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or
billing adjustments.
(h) "Non-Dental Personnel" means all personnel including,
but not limited to, accountants, bookkeepers and receptionists who perform
services which do not constitute the practice of dentistry or who are not
required by applicable law to be employees of P.C.
(i) "Revenues" means all amounts on an accrual basis
which P.C. receives or becomes entitled to receive for any services or sales of
products or otherwise, including, without limitation, for the performance of
Dental Services for its patients by dentists or Support Personnel who are
employees or independent contractors of P.C. or for the sale of products
including pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by
Service Company, including indirect overhead and other expenses attributable to
the carrying out of its obligations under this Agreement, in each case on an
accrual basis, but excludes costs which are reimbursed to Service Company under
leases for premises or personal property or licenses.
(k) "Support Personnel" shall have the meaning specified
in the definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this
Agreement and all renewals and extensions thereof, P.C. engages Service Company
to provide sole and exclusive development, management and administrative
services with respect to all non-dental functions relating to the operation of
the Dental Centers, and Service Company agrees to furnish to P.C. all of the
non-dental development, management and administrative services needed by P.C.
in connection with the operation of the Dental Centers. Pursuant to its
engagement hereunder, Service Company shall control all aspects of P.C.'s
business other than those aspects which relate to the provision of dental
services, as contemplated by Section 4.
3. Services. The non-dental development, management and
administrative services to be provided by Service Company shall include the
following:
(a) Bookkeeping and Accounts. Service Company shall
provide all bookkeeping and accounting services necessary or appropriate to the
functioning of the Dental Centers including, but not limited to, maintenance,
custody and supervision of all business records, ledgers, journals and reports,
and the preparation, distribution and recordation of all bills and statements
for professional services rendered by P.C. including the billing and completion
of reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists.
(b) Billing; Collections. Service Company shall be
responsible, for and on behalf of P.C., as its agent, for billing and
collecting the charges made with respect to all Dental Services provided by
P.C. at the Dental Centers. The extent to which Service Company attempts to
collect such charges, the methods of collection and the amount of settlements
with respect to disputed charges, and the determination of which charges are
not collectible, shall be within the sole discretion of the Service Company;
provided that Service Company will comply with all applicable law, including
without limitation, the Federal Fair Debt Collection Practice Act.
(c) Non-Dental Personnel. Service Company shall, in its
sole discretion but following consultation with P.C., select for employment and
terminate the employment of all Non-Dental Personnel as Service Company shall
deem necessary or advisable, and shall be responsible for the supervision,
direction, training and assigning of duties of all Non-Dental Personnel, with
the exception of activities carried on by Non-Dental Personnel which must be
under the direction or supervision of licensed dentists in accordance with
applicable law and regulations. Unless otherwise specifically agreed in
writing, all Non-Dental Personnel shall be employees or independent contractors
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employed or engaged by Service Company, and the selection and terms of
employment or engagement, including the rates of compensation, supervision,
direction, training and assignment of duties of all Non-Dental Personnel shall
be determined and controlled exclusively by Service Company.
(d) Dental Personnel. Service Company shall (in
consultation with P.C.) establish guidelines for the selection, hiring and
firing of dentists and Support Personnel by P.C. and shall recruit and evaluate
prospective dentists and Support Personnel as employees or independent
contractors of P.C., provided that all dentists and Support Personnel shall be
employees of or independent contractors to P.C.
(e) Marketing and Advertising Programs. Service Company
shall: develop marketing and advertising programs for P.C.; provide advice and
assistance to P.C. on overall marketing programs, and determine and analyze the
effect of such programs; plan, create, write and prepare advertising materials;
negotiate contracts with advertising media for space and time; and obtain
services necessary in connection with the production and presentation of
advertisements.
(f) Insurance. Service Company shall, in its sole
discretion but following consultation with P.C., make reasonable efforts to
obtain and maintain in full force and effect during the term of this Agreement,
and all extensions and renewals thereof, public liability and property
insurance which Service Company deems appropriate to protect against loss,
claims, and other risks, or which is necessary to comply with the terms of
lease agreements for the Dental Centers, and Service Company shall assist P.C.
and the dentists in obtaining professional liability insurance.
(g) Supplies. Service Company shall acquire and supply
to P.C. all dental and non-dental supplies which may be reasonably required in
connection with the operation of the Dental Centers.
(h) Negotiation; Plans. Service Company shall carry on
and be responsible for all negotiations (in consultation with P.C.) with
managed care plans, preferred provider plans, insurers and other third party
payors relating to the provision of services by P.C. Service Company shall
develop, negotiate, market and administer prepaid managed and other health
plans for the providing of dental care and shall obtain licensure as a third-
party administrator, and any other appropriate licenses, registrations or
certificates, if and to the extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is
authorized to establish and maintain for and on behalf of P.C. bank accounts
for the collection and disbursement of P.C.'s funds. Service Company is
authorized to disburse funds from such accounts for the payment of costs
incurred by or on behalf of P.C. in accordance with this Agreement, for Service
Company's compensation, and for all other costs, expenses, and disbursements
which are incurred in connection with this Agreement. Service Company shall
manage all cash and cash equivalents of P.C.
(j) Tax Returns, Reports. Service Company shall be
responsible for preparing and filing all tax returns and reports required or
necessary in connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide
P.C. with overall supervision and management, including maintenance and repair,
of the Dental Centers and all furniture, fixtures, furnishings, equipment, and
leasehold improvements located in or used at the Dental Centers.
(l) Equipment and Furnishings. Service Company shall
provide and maintain, either directly or through appropriate lease agreements,
all necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide
planning and studies to determine the location of new Dental Centers (including
acquired Dental Centers), provide designs for such new Dental Centers, obtain
leases for the space for Dental Centers, and do all things necessary in
connection with equipping of such new Dental Centers for operation, and shall
make such space available to P.C. pursuant to appropriate subleases, or other
documents or agreements, all in such forms as may be required by Service
Company and/or its lessor. Service Company shall amend, modify or supplement
Exhibit A to this Agreement in connection with the establishment of new Dental
Centers, as appropriate.
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(n) Financial Statements and Budgets. Service Company
shall prepare monthly and annual financial statements containing a balance
sheet and statement of income for P.C. Annual financial statements shall be
delivered to P.C. within 90 days after the end of each fiscal year and monthly
financial statements shall be delivered to P.C. within 30 days after the end of
each calendar month. Service Company shall prepare, in reasonable detail, an
annual operating and capital budgets for P.C. which shall be delivered to P.C.
within 30 days after the end of each fiscal year, with Service Company
retaining final authority with respect to budgeting including, without
limitation, as to compensation and payments to independent contractors.
(o) Litigation Management. Service Company will (i)
manage and direct the defense of all claims, actions, proceedings, or
investigations against P.C. or any of its officers, directors or employees in
their capacity as such, and (ii) manage and direct the initiation and
prosecution of all claims, actions, proceedings or investigations brought by
P.C. against any person other than the Service Company.
(p) Access. Service Company shall grant access to its
facilities to all employees and independent contractors of P.C. for the purpose
of performing Dental Services in connection with the business of the Dental
Centers.
(q) Business Operations. Service Company shall generally
control and manage all aspects of business of the Dental Centers other than
those aspects relating to the provision of Dental Services which under
applicable law are required to be subject to the control of P.C., as
contemplated by Section 4.
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.C. shall be solely and
exclusively in control of all clinical aspects of the practice of dentistry and
the delivery of Dental Services at the Dental Centers, including the exercise
of independent professional judgment regarding the diagnosis or treatment of
any dental disease, disorder or physical condition (which Service Company shall
not control, attempt to control, influence, attempt to influence or otherwise
interfere with), and P.C. shall be responsible for providing all Dental
Services and for the payment of all Costs of Dental Services. All persons to
whom such Dental Services are provided shall be patients of P.C. and not of
Service Company, and Service Company shall not have or exercise any control or
direction over the manner or methods with which Dental Services and related
duties are performed or interfere in any way with the exercise by the dentists
who are employees or independent contractors of P.C. of their professional
judgment. P.C. shall be solely responsible for assuring that all dentists who
are employed or who are independent contractors of P.C. hold all necessary
licenses from the State of Indiana and that such licenses are current and in
good standing, and that such professional services are performed in accordance
with the applicable ethical standards, laws and regulations relating to
professional practice in the State of Indiana. P.C. shall take all actions
necessary to maintain its status as a professional corporation including
provision for succession so that the outstanding shares of P.C. are owned at
all times by a person licensed to practice dentistry in the State of Indiana.
(b) Patient Referrals. It is not a purpose of this
Agreement to induce or encourage the referral of patients. The parties agree
that the benefits to P.C. and Service Company do not require, are not payment
or inducement for, and are not in any way contingent upon the admission,
referral or any other arrangement for the provisions of any item or service
offered by Service Company to any of P.C.'s patients or for the referral of any
patient.
(c) Noncompetition. P.C. hereby irrevocably appoints
Service Company as its agent and attorney-in-fact during the term of this
Agreement with full power and authority to enforce the terms of any employment
or independent contractor agreements to which it is a party and any
noncompetition, confidentiality and similar covenants or restrictions
(collectively, "Non-competition Agreements") of which it is the beneficiary.
During the term of this Agreement, P.C. shall not establish, operate or provide
dental services at any dental office, clinic or other health care facility
providing services substantially similar to those provided by P.C. pursuant to
this Agreement anywhere within 100 miles of any facility operated by Service
Company. The provisions of this Section 4(c) shall not in any way limit or
otherwise affect the terms and provisions of the Non-Competition Agreement
dated as of August 1, 1997 by and among Dental Centers of Indiana (Monarch),
Inc., Mark R. Johnson, D.D.S. and the other parties identified on the signature
pages thereto (the "Johnson Non-Competition Agreement"). To the extent of any
conflict between the
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<PAGE> 5
provisions of this Section 4(c) and the provisions of the Johnson Non-
Competition Agreement, the provisions of the Johnson Non-Competition Agreement
shall control.
(d) Attorney-in-Fact. P.C. hereby appoints Service
Company for the term of this Agreement to be its true and lawful attorney-in-
fact for all purposes relating to or arising in connection with the provisions
by Service Company of the comprehensive management and related administrative
services as provided in this Agreement including, without limitation, the
provisions of Section 3(b) and Section 3(i). This power of attorney and the
power of attorney granted under Section 4(c) are coupled with an interest and
shall be irrevocable and remain in effect for the term of this Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.C. assigns to
Service Company all of P.C.'s right and interests in all Revenues such that all
Revenues shall be paid to and collected by Service Company and all Revenues of
P.C. (and all accounts receivable relating thereto) shall be reported on the
income stated and balance sheet of Service Company during the term of this
Agreement; provided, however, that no assignment shall be made of any such
rights or interests, the assignment of which is prohibited by law (for example,
amounts receivable from Medicare or Medicaid accounts). P.C. hereby issues a
standing instruction, which it shall confirm upon request from time to time,
that all payments due to P.C. shall be remitted directly to Service Company as
its agent and attorney-in-fact hereunder. To the extent that the foregoing
assignment of Revenues shall be ineffective for any reason, P.C. hereby grants
a security interest in all accounts receivable, contract rights, Revenues and
general intangibles of P.C. to Service Company to secure all indebtedness and
obligations of P.C. to Service Company arising under or in connection with this
Agreement. At the request of Service Company, P.C. shall execute all documents
and instruments necessary to evidence and perfect the foregoing security
interest.
(b) Compensation of Service Company. As consideration
for the services provided by Service Company under this Agreement, Service
Company shall receive a service fee (the "Service Fee") in an amount equal to:
(i) Service Company Costs, plus (ii) an amount equal to the lesser of Net
Pre-Tax Income or 30% of Net Revenues.
(c) Application of Net Revenues. Service Company shall
apply Net Revenues as follows:
(i) First, Service Company shall remit to P.C.,
or cause to be paid on behalf of P.C., from
Net Revenues an amount equal to the Costs of
Dental Services and such other payments or
disbursements as P.C. shall direct Service
Company to make in accordance with this
Agreement;
(ii) Second, Service Company shall retain out of
Net Revenues an amount equal to the Service
Fee; and
(iii) Third, Service Company shall remit all
remaining Net Revenues to P.C.
(d) Adjustment. The Service Fee shall be payable monthly
in arrears based upon Service Company Costs and P.C.'s Net Revenues in the
prior month. Adjustments to the estimated payments shall be made to reconcile
actual amounts due under Section 5(b) by the end of the following month. The
Service Fee shall be reviewed annually and at such other times as may be deemed
appropriate and adjusted in such manner as the parties may agree; in the
absence of such agreement, the Service Fee then in effect shall continue in
effect.
6. General Obligations of P.C. and Service Company. P.C. and
Service Company each agrees to cooperate fully with the other in connection
with the carrying out of their respective obligations under this Agreement and
to employ their best efforts to resolve any dispute which may arise under or in
connection with the carrying out of this Agreement.
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7. Term. The term of this Agreement shall be for a period of 40
years from August 1, 1997 and, unless either party shall give notice to the
contrary at least 180 days prior to the thirty-first (31st) anniversary of this
Agreement or any anniversary thereafter, the term shall be extended for an
additional year on the thirty-first (31st) anniversary and on each anniversary
thereafter so that at each anniversary of this Agreement, the remaining term
shall always be, unless such notice is given, ten (10) years.
8. Subleases.
(a) Service Company hereby subleases (collectively, the
"Subleases") to P.C., for the purpose of conducting and operating a Dental
Center, the "Demised Premises," as described in each of the Leases listed on
Exhibit B attached hereto and incorporated herein by reference (collectively,
the "Leases"). Each such Sublease shall be subject to and upon the terms,
provisions and conditions of the Lease to which it applies. Service Company
and P.C. hereby agree, from time to time upon request of Service Company, to
enter into separate confirmatory Sublease Agreements confirming each of the
Subleases.
(b) The initial term of such Subleases shall begin
(unless otherwise indicated) on the date hereof and continue until the earlier
to occur of (a) the expiration or earlier termination of the Lease to which it
applies, or (b) the expiration or earlier termination of this Agreement. If
Service Company extends the term of the Leases, P.C. shall, at the request of
Service Company, extend the Subleases for such additional period.
(c) P.C. shall pay to Service Company as rent an amount
equal to the rent being paid by Service Company to landlord under the Leases.
(d) P.C. covenants that it will be bound by and will
perform and comply with all the obligations of tenant under the Leases, all of
which are incorporated herein by reference, and agrees that whenever
appropriate, the term "tenant" shall be deemed to refer to P.C. to the same
extent as if P.C. were a party to the Leases; provided, however, that P.C.
shall have no rights against landlord under the Leases and shall have only such
rights against Service Company as are set forth in this Agreement.
(e) Without limiting the foregoing provisions, P.C. shall
not have any right or obligation to enter into agreements directly with
landlord; shall not have any right to extend, without the consent of Service
Company, the term of any of the Subleases; and shall not have any right to
sublet, without the consent of Service Company, any of the Demised Premises
under any Lease. P.C. further agrees that in the event of any amendment of any
of the Leases, it will, upon the request of Service Company, promptly execute
such amendment of Sublease as is necessary to conform the Sublease to the
amended Leases.
(f) The rights of P.C. under the Subleases shall remain
at all times subject to the rights of Service Company under the Leases and in
the event any of the Leases is terminated for any reason, the respective
Sublease shall also terminate and Service Company shall not incur any liability
or obligation to P.C. as a result of such termination.
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its
obligations under this Agreement and, after written notice from the other party
demanding that such failure be cured, the party on whom such notice is served
shall fail to cure such breach within 30 days after such notice or, if such
breach will reasonably require more than 30 days to cure, such party is not
diligently pursuing efforts to cure such breach; provided, however, that if the
party on whom such demand is made elects to submit such dispute to arbitration,
no action to terminate this Agreement can be taken until such arbitration has
been finally adjudicated and then only if the party guilty of such failure
shall fail to comply with the arbitration award within 60 days after its
issuance.
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(c) If any bankruptcy, insolvency or receivership
proceedings are instituted by or against the P.C. and not dismissed within
sixty (60) days after the commencement of such proceedings or if the P.C. shall
voluntarily dissolve.
(d) As of any anniversary date of this Agreement, by
Service Company delivering written notice to P.C. of such termination at least
90 days prior to such anniversary date.
If this Agreement is terminated for any reason, P.C. shall have the
right, exercisable within 60 days after the date of termination, to purchase
equipment and furnishings provided by Service Company at the Dental Centers for
a purchase price equal to the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and
shall not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.C.
Since the dentists who perform services for the P.C. are not employees or
independent contractors of Service Company, Service Company shall not withhold
on their behalf any amounts for income tax, social security, unemployment
compensation, workers compensation or other similar withholding provisions and
all such withholding shall be the obligation of P.C.
11. Confidential Information. Each of P.C. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.C. acknowledges that Service Company has a proprietary interest
in such information, that such information constitutes trade secrets and that
P.C. does not, by reason of this Agreement, acquire any continuing right or
interest in such proprietary information or trade secrets. P.C. will hold such
proprietary information and trade secrets in confidence and will not disclose
them, either during the term of this Agreement or thereafter, to any person or
entity other than employees or independent contractors of P.C. or Service
Company without the prior written consent of Service Company or as may be
required by law. Service Company will preserve the confidentiality of all
files and records of P.C. including patient records and comply with all
federal, state and local laws, rules and regulations relating to the
confidentiality of P.C.'s files and records (including patient records).
Service Company will use the information in such records only for the limited
purposes necessary to perform the services of Service Company set forth herein
(including billing and collections) and shall not use patient names, addresses
or any other patient information for marketing or any other purpose except as
expressly permitted by this Agreement without the prior written consent of P.C.
Each of P.C. and Service Company acknowledges that it does not have an adequate
remedy at law for a breach of this Section 11, will suffer irreparable harm in
the event of such breach and that, therefore, the other party shall be entitled
to injunctive and other equitable relief for the enforcement of this Section
11. The provisions of this Section 11 shall survive termination of this
Agreement.
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable
by either party hereto without the express prior written consent of the other;
provided, however, that this Agreement shall be assignable by Service Company
to any of its affiliates or successors without the consent of P.C.
(b) Waiver. Waiver of any agreement or obligation set
forth in this Agreement by either party shall not prevent that party from later
insisting upon full performance of such agreement or obligation and no course
of dealing, partial exercise or any delay or failure on the part of any party
hereto in exercising any right, power, privilege, or remedy under this
Agreement or any related agreement or instrument shall impair or restrict any
such right, power, privilege or remedy or be construed as a waiver therefor.
No waiver shall be valid against any party unless made in writing and signed by
the party against whom enforcement of such waiver is sought.
(c) Amendment. No amendment or change in the provisions
of this Agreement shall be effective unless made in writing and signed by and
on behalf of the parties to this Agreement or their successors and assigns.
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(d) Entire Agreement. This Agreement constitutes the
entire agreement between the parties in connection with the subject matter of
this Agreement and supersedes all prior agreements entered into before the
effective date of this Agreement.
(e) Notices. The mailing addresses of Service Company and
P.C. for the purposes of any notices to be given under this Agreement are as
follows:
If to Service Company: Dental Centers of Indiana (Monarch), Inc.
301 Gaslight Drive
Versailles, Indiana 47042
Attn: Vice President
With a copy to: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
If to P.C.: Modern Dental Professionals - Indiana, P.C
301 Gaslight Drive
Versailles, Indiana 47042
Attn: President
(f) Binding Effect. Subject to the provisions set forth
in this Agreement, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and upon their respective successors and assigns.
(g) Arbitration. Any disputes arising under this
Agreement shall be resolved by arbitration; provided, however, that arbitration
shall not apply to the enforcement of the Service Company's rights under
Section 11. Any party electing to submit an action to arbitration shall give
written notice to the other party of such election. The dispute shall be
submitted to arbitration in accordance with the Rules of the American
Arbitration Association. Such arbitration shall be conducted, unless otherwise
agreed by the parties, by a single arbitrator in Indianapolis, Indiana. The
award of the arbitrator can be confirmed or enforced in any court of competent
jurisdiction. The prevailing party in any arbitration shall be entitled to
recover all costs incurred by such party in connection with such proceedings,
including reasonable attorney fees.
(h) Severability. If any one or more of the provisions
of this Agreement is adjudged to any extent invalid, unenforceable, or contrary
to law by a court of competent jurisdiction, each and all of the remaining
provisions of this Agreement will not be affected thereby and shall be valid
and forcible to the fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by
and enforced in accordance with the laws of the State of Indiana.
(j) Change in Law. If after the effective date of this
Agreement, any new law, rule or regulation becomes effective which renders
illegal the structure of the relationship between P.C. and the Service Company
set forth in this Agreement, or otherwise substantially impairs the economics
of the parties hereunder, this Agreement shall not terminate, but the parties
hereto agree to exclusively negotiate with each other in good faith for a
period of six months following such change of law or circumstance with respect
to the subject matter hereof. To the maximum extent possible, any amendment
hereto shall preserve the underlying economic and financial arrangements
between P.C. and the Service Company.
* * * * *
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IN WITNESS WHEREOF, the parties have signed this Agreement and agreed
that it shall be deemed effective as of the 1st day of August, 1997.
SERVICE COMPANY:
DENTAL CENTERS OF INDIANA (MONARCH), INC.
By: /s/ GARY W. CAGE
----------------------------------
Gary W. Cage, Vice President
P.C.:
MODERN DENTAL PROFESSIONALS - INDIANA, P.C.
By: /s/ MARK R. JOHNSON, D.D.S.
----------------------------------
Mark R. Johnson, D.D.S., President
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<PAGE> 10
EXHIBIT A
DENTAL CENTERS
1. 301 Gaslight Drive
Versailles, Indiana 47042
2. 5699 East 71st Street
Indianapolis, Indiana 46220
3. 9820 East 38th Street
Indianapolis, Indiana 46236
4. 4949 Carson Avenue, Suite G
Indianapolis, Indiana 46227
5. 1216 West Eads Parkway
Lawrenceburg, Indiana 47025
6. 1060 North "J" Street
Richmond, Indiana 47374
7. 2529 East 10th Street
Anderson, Indiana 46012
8. 622 North Madison, Suite 10
Greenwood, Indiana 46142
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EXHIBIT B
LEASES
1. 301 Gaslight Drive
Versailles, Indiana 47042
2. 5699 East 71st Street
Indianapolis, Indiana 46220
3. 9820 East 38th Street
Indianapolis, Indiana 46236
4. 4949 Carson Avenue, Suite G
Indianapolis, Indiana 46227
5. 1216 West Eads Parkway
Lawrenceburg, Indiana 47025
6. 1060 North "J" Street
Richmond, Indiana 47374
7. 2529 East 10th Street
Anderson, Indiana 46012
8. 622 North Madison, Suite 10
Greenwood, Indiana 46142
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EXHIBIT 10.15
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made by and
between Modern Dental Professionals - Colorado, P.C., a professional
corporation organized and existing under the laws of the State of Colorado
("P.C."), and Three Peaks Dental Management, Inc., a corporation organized and
existing under the laws of the State of Colorado (the "Service Company").
RECITALS
A. P.C. is engaged in the practice of dentistry through dentists
licensed by the Colorado State Board of Dental Examiners and who are employed
by P.C. or who have entered into independent contractor agreements with P.C. to
provide services to patients of P.C. and conducts such practice at dental
centers located in the State of Colorado (the "Dental Centers").
B. Service Company has been organized for the purpose of providing
comprehensive management and related administrative services to dental
practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.C.
C. P.C., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Colorado Dental Practice Act and the
Regulations of the Colorado State Board of Dental Examiners adopted pursuant
thereto.
(b) "Cost of Dental Services" means: the aggregate
compensation of dentists who are employed by or who are independent contractors
with P.C. at the Dental Centers and other personnel who must be employed by the
P.C. under applicable law including dental hygienists ("Support Personnel")
together with the cost of expenses, taxes and benefits of such dentists and
Support Personnel including, but not limited to, vacation pay, sick pay, health
care expenses, professional dues, expense reimbursement, discretionary bonuses
or incentive payments, if any, based on profitability or productivity and other
expenses and payments required to be made to or for the benefit of the dentists
or the Support Personnel pursuant to their employment agreements or independent
contractor agreements or otherwise plus P.C.'s portion of all employment and
payroll taxes; other expenses incurred by P.C. in carrying out its obligations
under this Agreement; and the costs of malpractice insurance, in each case on
an accrual basis.
(c) "Dental Board" means the Colorado State Board of Dental
Examiners established under the Act.
(d) "Dental Center" means the facility or facilities operated
by P.C. and at which Dental Services are, or in the future may be, rendered by
P.C. identified on Exhibit A hereto, as amended, supplemented or modified from
time to time.
(e) "Dental Services" means all services rendered by P.C.
which constitute the practice of dentistry as defined by the Act.
<PAGE> 2
(f) "Net Pre-Tax Income" means Net Revenues less the total of
Service Company Costs and the Cost of Dental Services, but without regard for
the provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or
billing adjustments.
(h) "Non-Dental Personnel" means all personnel including, but
not limited to, accountants, bookkeepers and receptionists who perform services
which do not constitute the practice of dentistry or who are not required by
applicable law to be employees of P.C.
(i) "Revenues" means all amounts on an accrual basis which
P.C. receives or becomes entitled to receive for any services or sales of
products or otherwise, including, without limitation, for the performance of
Dental Services for its patients by dentists or Support Personnel who are
employees or independent contractors of P.C. or for the sale of products
including pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by
Service Company, including indirect overhead and other expenses attributable to
the carrying out of its obligations under this Agreement, in each case on an
accrual basis, but excludes costs which are reimbursed to Service Company under
leases for premises or personal property or licenses.
(k) "Support Personnel" shall have the meaning specified in
the definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this
Agreement and all renewals and extensions thereof, P.C. engages Service Company
to provide sole and exclusive development, management and administrative
services with respect to all non-dental functions relating to the operation of
the Dental Centers, and Service Company agrees to furnish to P.C. all of the
non-dental development, management and administrative services needed by P.C.
in connection with the operation of the Dental Centers. Pursuant to its
engagement hereunder, Service Company shall control all aspects of P.C.'s
business other than those aspects which relate to the provision of dental
services, as contemplated by Section 4.
3. Services. The non-dental development, management and
administrative services to be provided by Service Company shall include the
following:
(a) Bookkeeping and Accounts. Service Company shall provide
all bookkeeping and accounting services necessary or appropriate to the
functioning of the Dental Centers including, but not limited to, maintenance,
custody and supervision of all business records, ledgers, journals and reports,
and the preparation, distribution and recordation of all bills and statements
for professional services rendered by P.C. including the billing and completion
of reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists.
(b) Billing; Collections. Service Company shall be
responsible, for and on behalf of P.C., as its agent, for billing and
collecting the charges made with respect to all Dental Services provided by
P.C. at the Dental Centers. The extent to which Service Company attempts to
collect such charges, the methods of collection and the amount of settlements
with respect to disputed charges, and the determination of which charges are
not collectible, shall be within the sole discretion of the Service Company;
provided that Service Company will comply with all applicable law, including
without limitation, the Federal Fair Debt Collection Practice Act.
(c) Non-Dental Personnel. Service Company shall, in its sole
discretion but following consultation with P.C., select for employment and
terminate the employment of all Non-Dental Personnel as Service Company shall
deem necessary or advisable, and shall be responsible for the supervision,
direction, training and assigning of duties of all Non-Dental Personnel, with
the exception of activities carried on by Non-Dental Personnel which must be
under the direction or supervision of licensed dentists in accordance with
applicable law and regulations. Unless otherwise specifically agreed in
writing, all Non-Dental Personnel shall be employees or independent contractors
employed or engaged by Service Company, and the selection and terms of
employment or engagement, including the
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rates of compensation, supervision, direction, training and assignment of
duties of all Non-Dental Personnel shall be determined and controlled
exclusively by Service Company.
(d) Dental Personnel. Service Company shall (in consultation
with P.C.) establish guidelines for the selection, hiring and firing of
dentists and Support Personnel by P.C. and shall recruit and evaluate
prospective dentists and Support Personnel as employees or independent
contractors of P.C., provided that all dentists and Support Personnel shall be
employees of or independent contractors to P.C.
(e) Marketing and Advertising Programs. Service Company
shall: develop marketing and advertising programs for P.C.; provide advice and
assistance to P.C. on overall marketing programs, and determine and analyze the
effect of such programs; plan, create, write and prepare advertising materials;
negotiate contracts with advertising media for space and time; and obtain
services necessary in connection with the production and presentation of
advertisements.
(f) Insurance. Service Company shall, in its sole discretion
but following consultation with P.C., make reasonable efforts to obtain and
maintain in full force and effect during the term of this Agreement, and all
extensions and renewals thereof, public liability and property insurance which
Service Company deems appropriate to protect against loss, claims, and other
risks, or which is necessary to comply with the terms of lease agreements for
the Dental Centers, and Service Company shall assist P.C. and the dentists in
obtaining professional liability insurance.
(g) Supplies. Service Company shall acquire and supply to
P.C. all dental and non-dental supplies which may be reasonably required in
connection with the operation of the Dental Centers.
(h) Negotiation; Plans. Service Company shall carry on and be
responsible for all negotiations (in consultation with P.C.) with managed care
plans, preferred provider plans, insurers and other third party payors relating
to the provision of services by P.C. Service Company shall develop, negotiate,
market and administer prepaid managed and other health plans for the providing
of dental care and shall obtain licensure as a third-party administrator, and
any other appropriate licenses, registrations or certificates, if and to the
extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is
authorized to establish and maintain for and on behalf of P.C. bank accounts
for the collection and disbursement of P.C.'s funds. Service Company is
authorized to disburse funds from such accounts for the payment of costs
incurred by or on behalf of P.C. in accordance with this Agreement, for Service
Company's compensation, and for all other costs, expenses, and disbursements
which are incurred in connection with this Agreement. Service Company shall
manage all cash and cash equivalents of P.C.
(j) Tax Returns, Reports. Service Company shall be
responsible for preparing and filing all tax returns and reports required or
necessary in connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide P.C.
with overall supervision and management, including maintenance and repair, of
the Dental Centers and all furniture, fixtures, furnishings, equipment, and
leasehold improvements located in or used at the Dental Centers.
(l) Equipment and Furnishings. Service Company shall provide
and maintain, either directly or through appropriate lease agreements, all
necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide
planning and studies to determine the location of new Dental Centers (including
acquired Dental Centers), provide designs for such new Dental Centers, obtain
leases for the space for Dental Centers, and do all things necessary in
connection with equipping of such new Dental Centers for operation, and shall
make such space available to P.C. pursuant to appropriate subleases, or other
documents or agreements, all in such forms as may be required by Service
Company and/or its lessor. Service Company shall amend, modify or supplement
Exhibit A to this Agreement in connection with the establishment of new Dental
Centers, as appropriate.
(n) Financial Statements and Budgets. Service Company shall
prepare monthly and annual financial statements containing a balance sheet and
statement of income for P.C. Annual financial statements shall be
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<PAGE> 4
delivered to P.C. within 90 days after the end of each fiscal year and monthly
financial statements shall be delivered to P.C. within 30 days after the end of
each calendar month. Service Company shall prepare, in reasonable detail, an
annual operating and capital budgets for P.C. which shall be delivered to P.C.
within 30 days after the end of each fiscal year, with Service Company
retaining final authority with respect to budgeting including, without
limitation, as to compensation and payments to independent contractors.
(o) Litigation Management. Service Company will (i) manage
and direct the defense of all claims, actions, proceedings, or investigations
against P.C. or any of its officers, directors or employees in their capacity
as such, and (ii) manage and direct the initiation and prosecution of all
claims, actions, proceedings or investigations brought by P.C. against any
person other than the Service Company.
(p) Access. Service Company shall grant access to its
facilities to all employees and independent contractors of P.C. for the purpose
of performing Dental Services in connection with the business of the Dental
Centers.
(q) Business Operations. Service Company shall generally
control and manage all aspects of business of the Dental Centers other than
those aspects relating to the provision of Dental Services which under
applicable law are required to be subject to the control of P.C., as
contemplated by Section 4.
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.C. shall be solely and
exclusively in control of all clinical aspects of the practice of dentistry and
the delivery of Dental Services at the Dental Centers, including the exercise
of independent professional judgment regarding the diagnosis or treatment of
any dental disease, disorder or physical condition (which Service Company shall
not control, attempt to control, influence, attempt to influence or otherwise
interfere with), and P.C. shall be responsible for providing all Dental
Services and for the payment of all Costs of Dental Services. All persons to
whom such Dental Services are provided shall be patients of P.C. and not of
Service Company, and Service Company shall not have or exercise any control or
direction over the manner or methods with which Dental Services and related
duties are performed or interfere in any way with the exercise by the dentists
who are employees or independent contractors of P.C. of their professional
judgment. P.C. shall be solely responsible for assuring that all dentists who
are employed or who are independent contractors of P.C. hold all necessary
licenses from the State of Colorado and that such licenses are current and in
good standing, and that such professional services are performed in accordance
with the applicable ethical standards, laws and regulations relating to
professional practice in the State of Colorado. P.C. shall take all actions
necessary to maintain its status as a professional corporation including
provision for succession so that the outstanding shares of P.C. are owned at
all times by a person licensed to practice dentistry in the State of Colorado.
(b) Patient Referrals. It is not a purpose of this Agreement
to induce or encourage the referral of patients. The parties agree that the
benefits to P.C. and Service Company do not require, are not payment or
inducement for, and are not in any way contingent upon the admission, referral
or any other arrangement for the provisions of any item or service offered by
Service Company to any of P.C.'s patients or for the referral of any patient.
(c) Noncompetition. P.C. hereby irrevocably appoints Service
Company as its agent and attorney-in-fact during the term of this Agreement
with full power and authority to enforce the terms of any employment or
independent contractor agreements to which it is a party and any
noncompetition, confidentiality and similar covenants or restrictions
(collectively, "Non-competition Agreements") of which it is the beneficiary.
During the term of this Agreement, P.C. shall not establish, operate or provide
dental services at any dental office, clinic or other health care facility
providing services substantially similar to those provided by P.C. pursuant to
this Agreement anywhere within 100 miles of any facility operated by Service
Company. The provisions of this Section 4(c) shall not in any way limit or
otherwise affect the terms and provisions of the Non-Competition Agreement
dated as of October 31, 1997 by and among Three Peaks Dental Management, Inc.,
Richard J. Handelman, D.D.S. and the other parties identified on the signature
pages thereto (the "Handelman Non-Competition Agreement"). To the extent of
any conflict between the provisions of this Section 4(c) and the provisions of
the Handelman Non-Competition Agreement, the provisions of the Handelman Non-
Competition Agreement shall control.
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(d) Attorney-in-Fact. P.C. hereby appoints Service Company
for the term of this Agreement to be its true and lawful attorney-in-fact for
all purposes relating to or arising in connection with the provisions by
Service Company of the comprehensive management and related administrative
services as provided in this Agreement including, without limitation, the
provisions of Section 3(b) and Section 3(i). This power of attorney and the
power of attorney granted under Section 4(c) are coupled with an interest and
shall be irrevocable and remain in effect for the term of this Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.C. assigns to Service
Company all of P.C.'s right and interests in all Revenues such that all
Revenues shall be paid to and collected by Service Company and all Revenues of
P.C. (and all accounts receivable relating thereto) shall be reported on the
income stated and balance sheet of Service Company during the term of this
Agreement; provided, however, that no assignment shall be made of any such
rights or interests, the assignment of which is prohibited by law (for example,
amounts receivable from Medicare or Medicaid accounts). P.C. hereby issues a
standing instruction, which it shall confirm upon request from time to time,
that all payments due to P.C. shall be remitted directly to Service Company as
its agent and attorney-in-fact hereunder. To the extent that the foregoing
assignment of Revenues shall be ineffective for any reason, P.C. hereby grants
a security interest in all accounts receivable, contract rights, Revenues and
general intangibles of P.C. to Service Company to secure all indebtedness and
obligations of P.C. to Service Company arising under or in connection with this
Agreement. At the request of Service Company, P.C. shall execute all documents
and instruments necessary to evidence and perfect the foregoing security
interest.
(b) Compensation of Service Company. As consideration for the
services provided by Service Company under this Agreement, Service Company
shall receive a service fee (the "Service Fee") in an amount equal to: (i)
Service Company Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax
Income or 30% of Net Revenues.
(c) Application of Net Revenues. Service Company shall apply
Net Revenues as follows:
(i) First, Service Company shall remit to P.C., or
cause to be paid on behalf of P.C., from Net
Revenues an amount equal to the Costs of Dental
Services and such other payments or disbursements
as P.C. shall direct Service Company to make in
accordance with this Agreement;
(ii) Second, Service Company shall retain out of Net
Revenues an amount equal to the Service Fee; and
(iii) Third, Service Company shall remit all remaining
Net Revenues to P.C.
(d) Adjustment. The Service Fee shall be payable monthly in
arrears based upon Service Company Costs and P.C.'s Net Revenues in the prior
month. Adjustments to the estimated payments shall be made to reconcile actual
amounts due under Section 5(b) by the end of the following month. The Service
Fee shall be reviewed annually and at such other times as may be deemed
appropriate and adjusted in such manner as the parties may agree; in the
absence of such agreement, the Service Fee then in effect shall continue in
effect.
6. General Obligations of P.C. and Service Company. P.C. and
Service Company each agrees to cooperate fully with the other in connection
with the carrying out of their respective obligations under this Agreement and
to employ their best efforts to resolve any dispute which may arise under or in
connection with the carrying out of this Agreement.
7. Term. The term of this Agreement shall be for a period of 40
years from October 31, 1997 and, unless either party shall give notice to the
contrary at least 180 days prior to the thirty-first (31st) anniversary of this
Agreement or any anniversary thereafter, the term shall be extended for an
additional year on the thirty-first (31st) anniversary and on each anniversary
thereafter so that at each anniversary of this Agreement, the remaining term
shall always be, unless such notice is given, ten (10) years.
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8. Subleases.
(a) Service Company hereby subleases (collectively, the
"Subleases") to P.C., for the purpose of conducting and operating a Dental
Center, the "Demised Premises," as described in each of the Leases listed on
Exhibit B attached hereto and incorporated herein by reference (collectively,
the "Leases"). Each such Sublease shall be subject to and upon the terms,
provisions and conditions of the Lease to which it applies. Service Company
and P.C. hereby agree, from time to time upon request of Service Company, to
enter into separate confirmatory Sublease Agreements confirming each of the
Subleases.
(b) The initial term of such Subleases shall begin (unless
otherwise indicated) on the date hereof and continue until the earlier to occur
of (a) the expiration or earlier termination of the Lease to which it applies,
or (b) the expiration or earlier termination of this Agreement. If Service
Company extends the term of the Leases, P.C. shall, at the request of Service
Company, extend the Subleases for such additional period.
(c) P.C. shall pay to Service Company as rent an amount equal
to the rent being paid by Service Company to landlord under the Leases.
(d) P.C. covenants that it will be bound by and will perform
and comply with all the obligations of tenant under the Leases, all of which
are incorporated herein by reference, and agrees that whenever appropriate, the
term "tenant" shall be deemed to refer to P.C. to the same extent as if P.C.
were a party to the Leases; provided, however, that P.C. shall have no rights
against landlord under the Leases and shall have only such rights against
Service Company as are set forth in this Agreement.
(e) Without limiting the foregoing provisions, P.C. shall not
have any right or obligation to enter into agreements directly with landlord;
shall not have any right to extend, without the consent of Service Company, the
term of any of the Subleases; and shall not have any right to sublet, without
the consent of Service Company, any of the Demised Premises under any Lease.
P.C. further agrees that in the event of any amendment of any of the Leases, it
will, upon the request of Service Company, promptly execute such amendment of
Sublease as is necessary to conform the Sublease to the amended Leases.
(f) The rights of P.C. under the Subleases shall remain at all
times subject to the rights of Service Company under the Leases and in the
event any of the Leases is terminated for any reason, the respective Sublease
shall also terminate and Service Company shall not incur any liability or
obligation to P.C. as a result of such termination.
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its obligations
under this Agreement and, after written notice from the other party demanding
that such failure be cured, the party on whom such notice is served shall fail
to cure such breach within 30 days after such notice or, if such breach will
reasonably require more than 30 days to cure, such party is not diligently
pursuing efforts to cure such breach; provided, however, that if the party on
whom such demand is made elects to submit such dispute to arbitration, no
action to terminate this Agreement can be taken until such arbitration has been
finally adjudicated and then only if the party guilty of such failure shall
fail to comply with the arbitration award within 60 days after its issuance.
(c) If any bankruptcy, insolvency or receivership proceedings
are instituted by or against the P.C. and not dismissed within sixty (60) days
after the commencement of such proceedings or if the P.C. shall voluntarily
dissolve.
(d) As of any anniversary date of this Agreement, by Service
Company delivering written notice to P.C. of such termination at least 90 days
prior to such anniversary date.
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If this Agreement is terminated for any reason, P.C. shall have the
right, exercisable within 60 days after the date of termination, to purchase
equipment and furnishings provided by Service Company at the Dental Centers for
a purchase price equal to the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and
shall not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.C.
Since the dentists who perform services for the P.C. are not employees or
independent contractors of Service Company, Service Company shall not withhold
on their behalf any amounts for income tax, social security, unemployment
compensation, workers compensation or other similar withholding provisions and
all such withholding shall be the obligation of P.C.
11. Confidential Information. Each of P.C. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.C. acknowledges that Service Company has a proprietary interest
in such information, that such information constitutes trade secrets and that
P.C. does not, by reason of this Agreement, acquire any continuing right or
interest in such proprietary information or trade secrets. P.C. will hold such
proprietary information and trade secrets in confidence and will not disclose
them, either during the term of this Agreement or thereafter, to any person or
entity other than employees or independent contractors of P.C. or Service
Company without the prior written consent of Service Company or as may be
required by law. Service Company will preserve the confidentiality of all
files and records of P.C. including patient records and comply with all
federal, state and local laws, rules and regulations relating to the
confidentiality of P.C.'s files and records (including patient records).
Service Company will use the information in such records only for the limited
purposes necessary to perform the services of Service Company set forth herein
(including billing and collections) and shall not use patient names, addresses
or any other patient information for marketing or any other purpose except as
expressly permitted by this Agreement without the prior written consent of P.C.
Each of P.C. and Service Company acknowledges that it does not have an adequate
remedy at law for a breach of this Section 11, will suffer irreparable harm in
the event of such breach and that, therefore, the other party shall be entitled
to injunctive and other equitable relief for the enforcement of this Section
11. The provisions of this Section 11 shall survive termination of this
Agreement.
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by
either party hereto without the express prior written consent of the other;
provided, however, that this Agreement shall be assignable by Service Company
to any of its affiliates or successors without the consent of P.C.
(b) Waiver. Waiver of any agreement or obligation set forth
in this Agreement by either party shall not prevent that party from later
insisting upon full performance of such agreement or obligation and no course
of dealing, partial exercise or any delay or failure on the part of any party
hereto in exercising any right, power, privilege, or remedy under this
Agreement or any related agreement or instrument shall impair or restrict any
such right, power, privilege or remedy or be construed as a waiver therefor.
No waiver shall be valid against any party unless made in writing and signed by
the party against whom enforcement of such waiver is sought.
(c) Amendment. No amendment or change in the provisions of
this Agreement shall be effective unless made in writing and signed by and on
behalf of the parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the entire
agreement between the parties in connection with the subject matter of this
Agreement and supersedes all prior agreements entered into before the effective
date of this Agreement.
7
<PAGE> 8
(e) Notices. The mailing addresses of Service Company and
P.C. for the purposes of any notices to be given under this Agreement are as
follows:
If to Service Company: Three Peaks Dental Management, Inc.
701 Citadel Drive East
Colorado Springs, Colorado 80909
Attn: President
With a copy to: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
If to P.C.: Modern Dental Professionals Colorado, P.C.
701 Citadel Drive East
Colorado Springs, Colorado 80909
Attn: President
(f) Binding Effect. Subject to the provisions set forth in
this Agreement, this Agreement shall be binding upon and inure to the benefit
of the parties hereto and upon their respective successors and assigns.
(g) Arbitration. Any disputes arising under this Agreement
shall be resolved by arbitration; provided, however, that arbitration shall not
apply to the enforcement of the Service Company's rights under Section 11. Any
party electing to submit an action to arbitration shall give written notice to
the other party of such election. The dispute shall be submitted to
arbitration in accordance with the Rules of the American Arbitration
Association. Such arbitration shall be conducted, unless otherwise agreed by
the parties, by a single arbitrator in Denver, Colorado. The award of the
arbitrator can be confirmed or enforced in any court of competent jurisdiction.
The prevailing party in any arbitration shall be entitled to recover all costs
incurred by such party in connection with such proceedings, including
reasonable attorney fees.
(h) Severability. If any one or more of the provisions of
this Agreement is adjudged to any extent invalid, unenforceable, or contrary to
law by a court of competent jurisdiction, each and all of the remaining
provisions of this Agreement will not be affected thereby and shall be valid
and forcible to the fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by and
enforced in accordance with the laws of the State of Colorado.
(j) Change in Law. If after the effective date of this
Agreement, any new law, rule or regulation becomes effective which renders
illegal the structure of the relationship between P.C. and the Service Company
set forth in this Agreement, or otherwise substantially impairs the economics
of the parties hereunder, this Agreement shall not terminate, but the parties
hereto agree to exclusively negotiate with each other in good faith for a
period of six months following such change of law or circumstance with respect
to the subject matter hereof. To the maximum extent possible, any amendment
hereto shall preserve the underlying economic and financial arrangements
between P.C. and the Service Company.
* * * * *
8
<PAGE> 9
IN WITNESS WHEREOF, the parties have signed this Agreement and agreed
that it shall be deemed effective as of the 31st day of October, 1997.
SERVICE COMPANY:
THREE PEAKS DENTAL MANAGEMENT, INC.
By: /s/ GARY W. CAGE
----------------------------
Gary W. Cage, Vice President
P.C.:
MODERN DENTAL PROFESSIONALS - COLORADO,
P.C.
By: /s/ RICHARD J. HANDELMAN, D.D.S.
---------------------------------
Richard J. Handelman, D.D.S., President
9
<PAGE> 10
EXHIBIT A
DENTAL CENTERS
1. 701 Citadel Drive East, Colorado Springs, Colorado
2. 8010 South Holly, Littleton, Colorado
3. 1001-1025 South Briscoe, Suites 105A and 103A, Castle Rock, Colorado
4. 1840 Folsom Street, Suite 100, Boulder, Colorado
5. 3685 Cherry Creek Drive North, Denver, Colorado
6. 1539 Mesita Blvd., Colorado Springs, Colorado
10
<PAGE> 11
EXHIBIT B
LEASES
1. Lease dated June 1, 1994, by and between Robert Shepard and Richard
Shepard, as Tenants in Common, as Landlord, and Richard J. Handelman,
d/b/a/ Citadel Dental Center, as Tenant, for the premises located at 701
Citadel Drive East, Colorado Springs, Colorado
2. Lease dated June 12, 1995, by and between Holly Medical Center Joint
Venture (assigned to Selden Patrick Properties LLC), as Landlord, and
Citadel Dental of Colorado, as Tenant, for the premises located at 8010
S. Holly Street, Littleton, Colorado
3. Lease dated January 6, 1995, and First Amendment thereto dated September
2, 1997, by and between Swedish Medical Center (assigned to Columbia
health/One, LLC) and Richard J. Handelman, DDS, for the premises located
at 1001-1025 S. Briscoe Street, Castle Rock, Colorado
4. Lease dated October 15, 1995, and Addendum thereto dated September 16,
1996, by and between WEJ Limited Liability Company, as Landlord, and
Richard J. Handelman, dba Citadel Dental Center, as Tenant, for the
premises located at 1840 Folsom, Suite 100, Boulder Colorado
5. Lease dated February 20, 1997, by and between Cherry Terrace, Ltd., as
Landlord, and Three Peaks Dental Health, P.C., as Tenant, for the
premises located at 3865 Cherry Creek Drive North, Suite 200, Denver,
Colorado
6. Lease dated May 1, 1997, by and between Gary L. Stiehl, as Landlord, and
Three Peaks Dental Health, P.C., as Tenant, for the premises located at
1539 Mesita Blvd., Colorado Springs, Colorado
11
<PAGE> 1
EXHIBIT 11.1
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
--------- ------
<S> <C> <C>
Income before extraordinary item $ 2,135 $ 675
Extraordinary loss, net of applicable tax benefit (264) --
--------- ------
Net income $ 1,871 $ 675
========= ======
Weighted average common shares outstanding 6,369 2,846
Weighted average common equivalent shares outstanding 1,977 2,231
--------- ------
Weighted average common and common equivalent shares
outstanding 8,346 5,077
========= ======
NET INCOME PER COMMON SHARE:
Income before extraordinary item $ 0.34 $ 0.24
Extraordinary item (0.05) --
--------- ------
Net income $ 0.29 $ 0.24
========= ======
NET INCOME PER SHARE - ASSUMING DILUTION:
Income before extraordinary item $ 0.26 $ 0.13
Extraordinary item (0.04) --
--------- ------
Net income $ 0.22 $ 0.13
========= ======
</TABLE>
<PAGE> 1
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL INFORMATION
MONARCH DENTAL CORPORATION
The selected consolidated statement of income data for the years ended December
31, 1994, 1995, 1996 and 1997 and the selected consolidated balance sheet data
at December 31, 1995, 1996 and 1997 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
selected consolidated statement of income data for the year ended December 31,
1993 and the selected consolidated balance sheet data at December 31, 1993 and
1994 have been derived from unaudited consolidated financial statements of the
Company. The following selected consolidated financial information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income Data:
Dental group practices revenue, net $68,619 $35,980 $13,223 $9,559 $8,028
Less: amounts retained by dental group practices 22,729 11,802 4,301 3,070 2,669
--------------------------------------------------
Net revenue 45,890 24,178 8,922 6,489 5,359
Operating expenses:
Clinical salaries and benefits 12,350 6,259 2,243 1,553 1,399
Other salaries and benefits 6,453 3,127 971 688 555
Dental supplies 4,282 2,216 833 509 436
Laboratory fees 2,902 1,648 633 430 391
Occupancy 3,709 1,937 471 392 334
Advertising 1,781 1,210 710 626 479
Depreciation and amortization 2,938 1,430 293 252 257
General and administrative 6,394 3,564 1,099 951 822
--------------------------------------------------
40,809 21,391 7,253 5,401 4,673
--------------------------------------------------
Operating income 5,081 2,787 1,669 1,088 686
Interest expense, net 1,545 1,687 87 81 56
Minority interest in combined subsidiaries 46 -- -- -- --
--------------------------------------------------
Income before income taxes and extraordinary item 3,490 1,100 1,582 1,007 630
Income taxes(1) 1,355 425 -- -- --
--------------------------------------------------
Income before extraordinary item 2,135 675 1,582 1,007 630
Extraordinary loss on early extinguishment of debt,
net of applicable tax benefit of $167 (264) -- -- -- --
--------------------------------------------------
Net income $ 1,871 $ 675 $ 1,582 $1,007 $ 630
--------------------------------------------------
Pro forma net income(1) $ 1,871 $ 675 $ 970 $ 617 $ 386
Net income per common share(2):
Income before extraordinary item $ 0.34 $ 0.24
Extraordinary item (0.05) --
------------------
Net income $ 0.29 $ 0.24
Net income per common share - assuming dilution(2):
Income before extraordinary item $ 0.26 $ 0.13
Extraordinary item (0.04) --
Net income $ 0.22 $ 0.13
------------------
Weighted average common shares outstanding 6,369 2,846
Weighted average common and common
equivalent shares outstanding 8,346 5,077
</TABLE>
(1) The Company was an S corporation prior to February 6, 1996, and accordingly
its consolidated statements of income for periods prior to such date did
not include income tax expense. Pro forma net income includes an adjustment
to reflect estimated income tax effects on net income for the years ended
December 31, 1993, 1994 and 1995 at an assumed effective tax rate of 38.7%.
(2) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements of the Company. Due to the effect of the 1996
transactions on the Company's capital structure, per share data for the
periods ended prior to January 1, 1996 are not comparable to subsequent
periods and, therefore, have not been presented.
9
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL INFORMATION
MONARCH DENTAL CORPORATION
<TABLE>
<CAPTION>
DECEMBER 31,
(in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 2,975 $ 1,059 $ 760 $ 413 $ 426
Working capital (deficit) 1,337 (3,995) 349 22 109
Total assets 64,592 32,906 3,182 1,952 1,929
Long-term debt, less current maturities 11,200 18,769 1,077 688 712
Redeemable equity securities -- 9,711 -- -- --
Total stockholders' equity (deficit) 41,966 (5,408) 623 146 270
</TABLE>
10
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MONARCH DENTAL CORPORATION
This discussion 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, San Antonio and Midland-Odessa, Texas; Wisconsin;
Arkansas; Indiana and Colorado. 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>
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Offices at beginning of period 53 12 10 9 8
De novo offices 7 2 2 1 1
Acquired offices 39 39 -- -- --
---------------------------------------------
Offices at end of period 99 53 12 10 9
---------------------------------------------
</TABLE>
EXISTING MARKET DEVELOPMENT
AND ACQUISITION SUMMARY
EXISTING MARKET DEVELOPMENT. Monarch commenced operations in 1983 with a group
dental practice in Dallas. From its founding in 1983 through December 31, 1997,
the Company opened 20 additional Dental Offices on a de novo basis (17 in
Dallas-Fort Worth, two in Houston and one in Indiana.) The Company completed its
first acquisition of a solo practice in an existing market (Dallas-Fort Worth)
in October 1996 for an aggregate purchase price of $182,000, consisting of 5,000
shares of Common Stock valued at $10,000 at the date of issuance, a subordinated
note in the principal amount of $122,000 and cash of $50,000. The Company
purchased four additional solo practices in existing markets (three in Dallas-
Fort Worth and one in Houston) in 1997 for an aggregate purchase price of
$890,000. Revenue from the Company's Dallas-Fort Worth operations increased $3.6
million, or 38.3%, to $13.2 million in 1995, increased $5.1 million, or 38.1%,
to $18.3 million in 1996 and increased an additional $6.3 million, or 34.4%, to
$24.6 million in 1997. Operating income for the Company's Dallas-Fort Worth
operations increased $694,000, or 52.7%, to $2.0 million in 1995, increased
$805,000, or 40.0%, to $2.8 million in 1996 and increased an additional
$542,000, or 18.8%, to $3.4 million in 1997. 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 nine de novo Dental Offices opened
since January 1, 1996 was approximately $236,000, which includes the cost of
equipment, leasehold improvements and working capital associated with the
initial operations. The six de novo Dental Offices opened between January 1,
1996 and September 30, 1997 and one de novo Dental Office opened in October 1997
began contributing operating income to the Company within three months of
opening (the remaining two de novo Dental Offices were opened in October and
December 1997 and had not yet begun contributing operating income at December
31, 1997). 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 rather than capitalizing them.
ACQUISITIONS. Beginning with the acquisition of MacGregor in February 1996, the
Company has conducted an active program to identify dental group practices as
potential acquisition candidates with a view to expanding the Company's
operations. Since December 31, 1995, the Company has completed the following
acquisitions:
11
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MONARCH DENTAL CORPORATION
<TABLE>
<CAPTION>
NUMBER
OF DENTAL NUMBER OF DATE EFFECTIVE DATE
DENTAL GROUP PRACTICE / MARKET OFFICES DENTISTS(1) FOUNDED OF ACQUISITION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MacGregor, Houston 15 42 1962 February 1, 1996
1996 in-market 1 1 1981 October 1, 1996
1997 in-markets 4 4 Various Various
Midwest, Wisconsin 22 36 1975 September 1, 1996
Convenient, Arkansas 1 6 1982 November 1, 1996
Arkansas Dental Health, Arkansas 3 7 1984 January 1, 1997
United, Arkansas 9 15 1990 April 1, 1997
Dental Centers of Indiana, Indiana 11 14 1980 August 1, 1997
J.B. Hays, Arkansas 1 6 1994 October 1, 1997
Three Peaks Dental Health, Colorado 6 10 1990 November 1, 1997
Press Family Dental, San Antonio 3 14 1971 November 1, 1997
Dental America, Midland - Odessa 2 4 1994 December 1, 1997
</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 P.C. (in
the case of each dental group practice other than Midwest).
The purchase prices paid by the Company in connection with the acquisitions
described in the table above were as follows: (i) MacGregor, $16.8 million,
consisting of 700,000 shares of Common Stock valued at $148,000 at the date of
issuance, the assumption of $662,000 of debt and cash of $15.9 million funded
out of the proceeds of equity investments and borrowings under the credit
facility; (ii) Midwest, $6.2 million, consisting of 350,000 shares of Common
Stock valued at $700,000 at the date of issuance, the assumption of $246,000 of
debt and cash of $5.3 million primarily borrowed under the credit facility;
(iii) Convenient, $575,000, consisting of 30,000 shares of Common Stock valued
at $75,000 at the date of issuance and cash of $500,000 primarily borrowed under
the credit facility; (iv) Arkansas Dental Health, $2.4 million, consisting of
57,500 shares of Common Stock valued at $201,000 at the date of issuance, the
assumption of $659,000 of debt and cash of $1.6 million primarily borrowed under
the credit facility; (v) United, $3.8 million, consisting of 68,750 shares of
Common Stock valued at $529,000 at the date of issuance, the assumption of
$445,000 of debt and cash of $2.8 million primarily borrowed under the credit
facility; (vi) Dental Centers of Indiana, $3.3 million, consisting of 139,944
shares of Common Stock valued at $1.5 million at the date of issuance and cash
of $1.8 million primarily from the proceeds of the Company's initial public
offering; (vii) J.B. Hays, $850,000 in cash primarily from the proceeds of the
Company's initial public offering; (viii) Three Peaks Dental Health, $2.1
million, consisting of 28,320 shares of Common Stock valued at $411,000 at the
date of issuance and cash of $1.7 million primarily borrowed from the Credit
Facility; (ix) Press Family Dental, $9.3 million, consisting of 179,736 shares
of Common Stock valued at $2.6 million at the date of issuance, the assumption
of $100,000 of debt and cash of $6.6 million primarily borrowed under the Credit
Facility; and (x) Dental America, $796,000, consisting of 8,785 shares of Common
Stock valued at $99,000 at the date of issuance, the assumption of $47,000 of
debt and cash of $650,000 primarily borrowed under the Credit Facility.
Additional purchase consideration consisting of options to purchase up to
262,500 shares of Common Stock will be granted over five years following the
effective dates of certain of the completed acquisitions if specified financial
performance goals are achieved. Additional purchase consideration of up to $1.2
million in cash will be paid if certain completed acquisitions achieve targeted
annual operating results in the year following the effective dates of the
acquisitions.
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 connection with maintaining a corporate
function that provides management, administrative, marketing and development
services to the Dental Offices.
12
<PAGE> 5
In states in which the ownership of dental practices by non-dentists is
prohibited, the Company derives all of its Revenue from its Management
Agreements with the P.C.s. Under the Management Agreements, the Company assumes
responsibility for the management of all aspects of the dental group practices'
business other than the provision of dental services. 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. The Company's costs
include all direct and indirect costs, overhead and expenses relating to the
Company's provision of services to the P.C.s under the Management Agreements,
such that substantially all costs associated with the provision of dental
services at the Dental Offices are borne by the Company, other than the
compensation and benefits of the dentists and hygienists who are employed by or
are independent contractors of the P.C.s. The Company is responsible for
preparing and has final authority with respect to annual budgets for the P.C.s
under the Management Agreements. This enables the Company to manage the
profitability of the P.C.s. Under the Management Agreements, the Company
provides the P.C.s with, among other things, the facilities, administrative
personnel and supplies, as well as numerous services, including administrative,
accounting, cash management, financial statements and reports, budgeting
including capital expenditures, recruiting, insurance, managed care contracting,
management information systems, litigation management, billing and collection
services. Each Management Agreement is for a term of 40 years, with automatic
renewal thereafter. Further, each Management Agreement generally may be
terminated by the P.C. only for cause, which includes an uncured breach of the
agreement by the Company, or upon the P.C.'s bankruptcy or voluntary dissolution
and may be terminated by the Company as of any anniversary date of the
Management Agreement upon 90 days' prior written notice.
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 procedures. In contrast, under traditional indemnity insurance
arrangements, the insurance company pays whatever reasonable charges are billed
by the dental group practice for the dental services provided.
The Company seeks to increase fee-for-service business at the Dental Offices by
increasing the size of existing offices, opening new offices and advertising.
The Company seeks to supplement this fee-for-service business with Revenue from
contracts with capitated managed dental care plans. Fee-for-service Revenue
accounted for 60.8% and 62.0% of the Company's total Revenue for 1996 and 1997,
respectively. Managed dental care Revenue increased as a percentage of Revenue
from 31.6% in 1995 to 39.2% in 1996, due to the fact that managed dental care
Revenue increased at a faster rate than fee-for-service Revenue, principally at
the Dallas-Fort Worth Dental Offices. Managed dental care Revenue decreased
slightly as a percentage of Revenue in 1997 to 38.0%, due to the acquisitions of
dental practices with lower managed care Revenue relative to total Revenue. As
the Company has increased capacity by expanding within its existing markets and
into new markets, managed dental care Revenue has contributed to overall higher
utilization of the Company's facilities. Thus, although the Company's
fee-for-service business generally is more profitable than its capitated managed
dental care business on a per-patient and per-procedure basis, capitated managed
dental care business serves to increase facility utilization and dentist
productivity.
The relative percentage of the Company's Revenue derived from fee-for-service
business and capitated managed dental care contracts varies from market to
market depending on the availability of capitated managed dental care contracts
in any particular market and the Company's ability to negotiate favorable terms
in such contracts. In addition, the profitability of managed dental care Revenue
varies from market to market depending on the level of capitation payments and
co-payments in proportion to the level of benefits required to be provided.
Variations in the relative penetration and popularity of capitated managed
dental care from market to market across the country, however, make it difficult
to determine whether the Company's experience in new markets will be consistent
with its experience in Dallas-Fort Worth. The Company expects that the level of
profitability
13
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MONARCH DENTAL CORPORATION
of its operations in new markets entered through acquisition will vary depending
in part on these factors and may not replicate or be comparable to the Company's
results in Dallas-Fort Worth.
RESULTS OF OPERATIONS
As a result of the recent rapid expansion of its business through existing
market development and acquisitions and the Company's limited period of
affiliation with these practices, the Company believes that the period-to-period
comparisons set forth below may not be meaningful.
The following table sets forth the percentages of Revenue represented by certain
items reflected in the Company's consolidated statements of income. The
information that follows should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dental group practices revenue, net 100.0% 100.0% 100.0%
Less: amounts retained by dental group practices 33.1 32.8 32.5
-----------------------------------
Net revenue 66.9 67.2 67.5
Operating expenses:
Clinical salaries and benefits 18.0 17.4 17.0
Other salaries and benefits 9.4 8.7 7.3
Dental supplies 6.2 6.2 6.3
Laboratory fees 4.2 4.6 4.8
Occupancy 5.4 5.4 3.6
Advertising 2.6 3.4 5.4
Depreciation and amortization 4.3 4.0 2.2
General and administrative 9.4 9.9 8.3
-----------------------------------
59.5 59.6 54.9
-----------------------------------
Operating income 7.4 7.6 12.6
Interest expense, net 2.2 4.7 0.7
Minority interest 0.1 -- --
-----------------------------------
Income before income taxes and
extraordinary item 5.1 2.9 11.9
Income taxes 2.0 1.2 --
-----------------------------------
Income before extraordinary item 3.1 1.7 11.9
Extraordinary loss, net of applicable tax
benefit 0.4 -- --
-----------------------------------
Net income 2.7% 1.7% 11.9%
-----------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
DENTAL GROUP PRACTICES REVENUE, NET. Revenue increased from $36.0 million for
1996 to $68.6 million for 1997, an increase of $32.6 million, or 90.7%. This
increase resulted from the acquisitions of Arkansas Dental Health Associates,
Inc. ("Arkansas Dental Health"), United Dental Care Tom Harris D.D.S. and
Associates ("United"), Dental Centers of Indiana, Inc. ("DCI"), Dental
Diagnostic and Treatment Center ("J.B. Hays"), Three Peaks Dental Health L.P.
("Three Peaks"), Press Family Dental and Dental America in January 1997, April
1997, August 1997, October 1997, November 1997, November 1997 and December 1997,
respectively, which contributed combined Revenue of $10.6 million for the twelve
months, nine months, five months, three months, two months, two months and one
month ended December 31, 1997, respectively. Dental offices in the Dallas-Fort
Worth, Houston, Wisconsin and Arkansas markets (the "existing markets")
contributed an additional $22.0 million of the increase in Revenue in 1997
resulting from the opening of seven de novo Dental Offices, the physical
expansion of five existing Dental Offices, the acquisition of four solo
practices and the acquisitions of Midwest Dental Care ("Midwest") and Convenient
Dental Care, Inc. ("Convenient") in September 1996 and November 1996,
respectively, which provided eight and ten additional months of Revenue,
respectively, in 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 $21.9 million for 1996 to $42.5 million for
1997, an increase of $20.6 million, or 94.4%, due to acquisitions in new markets
and growth in existing markets. This increase resulted from the acquisitions of
Arkansas Dental Health, United, DCI, J.B. Hays, Three Peaks, Press Family Dental
and Dental America which contributed combined fee-for-service Revenue of $8.8
million for the respective periods following the dates of acquisition. In
existing markets, fee-for-service Revenue increased from $21.9 million for 1996
to $33.7 million for 1997, representing an increase of $11.8 million, or 54.3%.
The increase in existing markets resulted from the opening of seven de novo
Dental Offices, the physical expansion of five existing Dental Offices, the
acquisition of four solo practices and the acquisitions of Midwest and
Convenient in September 1996 and November 1996, respectively, which provided
eight and ten additional months of fee-for-service Revenue, respectively, in
1997. Managed dental care Revenue (i.e., Revenue from capitated managed dental
care plans, including capitation payments and patient co-payments) increased
from $14.1 million for 1996 to $26.1 million for 1997, an increase of $12.0
million, or 85.0%. This increase resulted in part from the acquisitions of
Arkansas Dental Health, United, DCI, J.B Hays, Three Peaks, Press Family Dental
and Dental America which contributed combined managed dental care Revenue of
$1.8 million for the respective periods following the dates of acquisition. In
existing markets, managed dental care Revenue increased from $14.1 million for
1996 to $24.3 million for 1997, an increase of $10.2 million or 72.3%. The
increase in existing markets resulted from the opening of seven de novo Dental
Offices, the physical expansion of five existing Dental Offices, the acquisition
of four solo practices and the acquisitions of Midwest and Convenient in
September 1996 and November 1996, respectively, which provided eight and ten
additional months of managed dental care Revenue, respectively, in 1997. As a
percentage of Revenue, fee-for-service Revenue increased from 60.8% to 62.0% for
1996 and 1997, respectively.
14
<PAGE> 7
AMOUNTS RETAINED BY DENTAL GROUP PRACTICES. Amounts retained by dental group
practices increased from $11.8 million for 1996 to $22.7 million for 1997, an
increase of $10.9 million, or 92.6%. The increase was due to the acquisitions of
Arkansas Dental Health, United, DCI, J.B. Hays, Three Peaks, Press Family Dental
and Dental America which together added amounts retained by dental group
practices of $3.4 million for the respective periods following the dates of
acquisition. In existing markets, amounts retained by dental group practices
increased $7.5 million as dentist and hygienist compensation increased as a
result of a higher level of production at the Dental Offices and the
acquisitions of Midwest and Convenient in September 1996 and November 1996,
respectively, which provided eight and ten additional months of amounts retained
by dental group practices, respectively, in 1997. As a percent of Revenue,
amounts retained by dental group practices increased slightly from 32.8% to
33.1% for 1996 and 1997, respectively.
CLINICAL SALARIES AND BENEFITS. Clinical salaries and benefits expense increased
from $6.3 million for 1996 to $12.3 million for 1997, an increase of $6.0
million, or 97.3%. The increase resulted from the acquisitions of Arkansas
Dental Health, United, DCI, J.B. Hays, Three Peaks, Press Family Dental and
Dental America which added combined clinical salaries and benefits expense of
$2.3 million for the respective periods following the dates of acquisition. In
existing markets, clinical salaries and benefits expense increased $3.7 million
due to the opening of seven de novo Dental Offices, the physical expansion of
five existing Dental Offices, the acquisition of four solo practices and the
acquisitions of Midwest and Convenient in September 1996 and November 1996,
respectively, which provided eight and ten additional months of clinical
salaries and benefits expense, respectively, in 1997. As a percent of Revenue,
clinical salaries and benefits expense increased from 17.4% to 18.0% for 1996
and 1997, respectively. This increase is the result of acquisitions having
higher clinical salaries and benefits as a percent of Revenue than the Company's
existing operations.
OTHER SALARIES AND BENEFITS. Other salaries and benefits expense increased from
$3.1 million for 1996 to $6.4 million for 1997, an increase of $3.3 million, or
106.4%. This increase resulted primarily from the acquisition of Midwest in
September 1996 which provided eight additional months of other salaries and
benefits expense for 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 8.7% to 9.4% for 1996 and 1997,
respectively, as the year ended December 31, 1997 reflected a more fully staffed
corporate infrastructure.
DENTAL SUPPLIES. Dental supplies expense increased from $2.2 million for 1996 to
$4.3 million for 1997, an increase of $2.1 million, or 93.2%. This increase
resulted from the acquisitions of Arkansas Dental Health, United, DCI, J.B.
Hays, Three Peaks, Press Family Dental and Dental America which added $684,000
of combined dental supplies expense for the respective periods following the
dates of acquisition. In existing markets, dental supplies expense increased
$1.4 million as a result of increased production and the acquisitions of Midwest
and Convenient in September 1996 and November 1996, respectively, which provided
eight and ten additional months of dental supplies expense for 1997. As a
percent of Revenue, dental supplies expense remained constant at 6.2% for 1996
and 1997, respectively.
LABORATORY FEES. Laboratory fee expense increased from $1.6 million for 1996 to
$2.9 million for 1997, an increase of $1.3 million, or 76.1%. This increase
resulted from the acquisitions of Arkansas Dental Health, United, DCI, J.B.
Hays, Three Peaks, Press Family Dental and Dental America which added combined
laboratory fee expense of $577,000 for the respective periods following the
dates of acquisition. In existing markets, laboratory fee expense increased
$677,000 as a result of increased production and the acquisitions of Midwest and
Convenient in September 1996 and November 1996, respectively, which provided
eight and ten additional months of laboratory fees expense for 1997. As a
percent of Revenue, laboratory fee expense decreased from 4.6% to 4.2% for 1996
and 1997, respectively.
OCCUPANCY. Occupancy expense increased from $1.9 million for 1996 to $3.7
million for 1997, an increase of $1.8 million, or 91.5%. This increase resulted
from the acquisitions of Arkansas Dental Health, United, DCI, J.B Hays, Three
Peaks, Press Family Dental and Dental America which added a combined $503,000 to
occupancy expense for the respective periods following the dates of acquisition.
In existing markets, occupancy expense increased $1.3 million resulting from the
opening of seven de novo Dental Offices, the physical expansion of five existing
Dental Offices, the acquisition of four solo practices and the acquisitions of
Midwest and Convenient in September 1996 and November 1996, respectively, which
provided eight and ten additional months of occupancy expense, respectively, for
1997. As a percent of Revenue, occupancy expense remained constant at 5.4% for
1996 and 1997, respectively.
ADVERTISING. Advertising expense increased from $1.2 million for 1996 to $1.8
million for 1997, an increase of $571,000, or 47.2%. This increase resulted from
the acquisitions of Arkansas Dental Health, United, DCI, J.B. Hays, Three Peaks,
Press Family Dental and Dental America which added a combined $260,000 to
advertising expense for the respective periods following the dates of
acquisition. There was an increase of $311,000 in television and print
advertising in the existing markets in 1997. As a percent of Revenue,
advertising expense decreased from 3.4% to 2.6% for 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 $1.4 million for 1996 to $2.9 million for 1997, an increase of $1.5
million, or 105.5%. This increase resulted from the acquisitions of Arkansas
Dental Health, United, DCI, J.B. Hays, Three Peaks, Press Family Dental and
Dental America which
15
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MONARCH DENTAL CORPORATION
added combined depreciation and amortization expense of $521,000 for the
respective periods following the dates of acquisition. Depreciation and
amortization expense for existing markets increased $987,000 resulting from the
opening of seven de novo Dental Offices, the physical expansion of five existing
Dental Offices, the acquisition of four solo practices and the acquisitions of
Midwest and Convenient in September 1996 and November 1996, respectively, which
provided eight and ten additional months of depreciation and amortization
expense for 1997. As a percent of Revenue, depreciation and amortization expense
increased from 4.0% to 4.3% for 1996 and 1997, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased from
$3.6 million for 1996 to $6.4 million for 1997, an increase of $2.8 million, or
79.4%. This increase resulted from the acquisitions of Arkansas Dental Health,
United, DCI, J.B. Hays, Three Peaks, Press Family Dental and Dental America
which added combined general and administrative expense of $608,000 for the
respective periods following the dates of acquisition. General and
administrative expense for existing markets increased $2.2 million resulting
from the opening of seven de novo Dental Offices, the physical expansion of five
existing Dental Offices, the acquisition of four solo practices, the
acquisitions of Midwest and Convenient in September 1996 and November 1996,
respectively, which provided eight and ten additional months of general and
administrative expense for 1997 and the expansion of the Company's corporate
infrastructure to manage growth. As a percent of Revenue, general and
administrative expense decreased from 9.9% to 9.4% for 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 $2.8 million for 1996 to $5.1
million for 1997, an increase of $2.3 million, or 82.3%. This increase resulted
from the acquisitions of Arkansas Dental Health, United, DCI, J.B. Hays, Three
Peaks, Press Family Dental and Dental America which added combined operating
income of $1.3 million for the respective periods following the dates of
acquisition. Income from the Company's existing markets increased $2.3 million
for 1997, which was offset by increased corporate expenses of $1.3 million due
to the development of corporate infrastructure. As a percent of Revenue,
operating income decreased slightly from 7.6% to 7.4% for 1996 and 1997,
respectively.
INTEREST EXPENSE, NET. Interest expense, net decreased from $1.7 million for
1996 to $1.5 million for 1997, a decrease of $200,000, or 8.4%. This decrease is
attributable to the retirement of $24.8 million in outstanding debt under the
prior credit facility with the use of proceeds obtained from the Company's
initial public offering on July 23, 1997. Effective November 1997 the Company
entered into a new credit facility (the "Credit Facility") with a bank
syndicate. Average debt outstanding under the two credit facilities totaled
$14.7 million for 1997 compared to average debt outstanding of $17.7 million for
1996.
MINORITY INTEREST. Minority interest expense was $46,000 for 1997 as a result of
the acquisitions of DCI, which owns a fifty percent ownership interest in two
partnerships operating four Dental Offices in Indiana, and Dental America, which
owns a twenty percent interest in a group dental practice with two offices
located in Midland and Odessa, Texas.
INCOME TAXES. Income tax expense increased from $425,000 for 1996 to $1.4
million for 1997, an increase of $1.0 million, or 218.6%. This increase was the
result of higher net income before taxes, which increased from $1.1 million for
1996 to $3.5 million for 1997, an increase of $2.4 million, or 217.3%.
EXTRAORDINARY LOSS. The Company incurred an extraordinary loss of $264,000, net
of tax for 1997 as it extinguished its prior credit facility and wrote off
$431,000 in unamortized loan fees, net of a tax benefit of $167,000.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
DENTAL GROUP PRACTICES REVENUE, NET. Revenue increased from $13.2 million for
1995 to $36.0 million for 1996, an increase of $22.8 million, or 172.1%. This
increase resulted primarily from the acquisitions of MacGregor in February 1996
and Midwest in September 1996, which contributed Revenue of $12.1 million and
$5.3 million for the 11 months and four months ended December 31, 1996,
respectively. Dental Offices in the Dallas-Fort Worth market contributed an
additional $5.1 million of the increase in Revenue in 1996 resulting from the
opening of two de novo Dental Offices, the physical expansion of six existing
Dental Offices and the acquisition of a solo practice.
Fee-for-service Revenue increased from $9.1 million for 1995 to $21.9 million
for 1996, an increase of $12.8 million, or 141.6%, due to acquisitions in new
markets and growth in existing markets. This increase resulted from the
acquisitions of MacGregor and Midwest, which contributed fee-for-service Revenue
of $7.6 million and $3.2 million for the respective periods following the dates
of acquisition. In the Dallas-Fort Worth market, fee-for-service Revenue
increased from $9.1 million for 1995 to $10.7 million for 1996, representing an
increase of $1.6 million, or 18.4%. Managed dental care Revenue increased from
$4.2 million for 1995 to $14.1 million for 1996, an increase of $9.9 million, or
238.4%, due to acquisitions in new markets and growth in existing markets. This
increase resulted in part from the acquisitions of MacGregor and Midwest, which
contributed managed dental care Revenue of $4.5 million and $2.1 million for the
respective periods following the dates of acquisition. In the Dallas-Fort Worth
market, managed dental care Revenue increased $3.3 million, or 80.8%, over 1995.
As a percentage of Revenue,
16
<PAGE> 9
fee-for-service Revenue decreased from 68.4% to 60.8% for 1995 and 1996,
respectively, as managed dental care Revenue grew at a higher rate than
fee-for-service Revenue.
AMOUNTS RETAINED BY DENTAL GROUP PRACTICES. Amounts retained by dental group
practices increased from $4.3 million for 1995 to $11.8 million for 1996, an
increase of $7.5 million, or 174.4%. The increase was primarily due to the
acquisitions of MacGregor and Midwest which added amounts retained by dental
group practices of $3.8 million and $1.9 million for the respective periods
following the dates of acquisition. In the Dallas-Fort Worth market, amounts
retained by dental group practices increased $1.6 million as dentist and
hygienist compensation generally increased in relation to increased productivity
at the Dental Offices. As a percent of Revenue, amounts retained by dental group
practices increased from 32.5% to 32.8% for 1995 and 1996, respectively.
CLINICAL SALARIES AND BENEFITS. Clinical salaries and benefits increased from
$2.2 million for 1995 to $6.3 million for 1996, an increase of $4.1 million, or
179.0%. The increased clinical salaries and benefits were due primarily to the
increased number of Dental Offices resulting from the acquisitions of MacGregor
and Midwest which added clinical salaries of $2.0 million and $1.0 million for
the respective periods following the dates of acquisition. As a percent of
Revenue, clinical salaries and benefits increased from 17.0% to 17.4% for 1995
and 1996, respectively, as a result of higher salary costs in the acquired
Dental Offices.
OTHER SALARIES AND BENEFITS. Other salaries and benefits increased from $971,000
for 1995 to $3.1 million for 1996, an increase of $2.1 million, or 222.0%. This
increase resulted primarily from additional corporate infrastructure associated
with MacGregor and Midwest as well as the building of additional corporate
infrastructure in 1996 to manage growth. As a percent of Revenue, other salaries
and benefits increased from 7.3% to 8.7% for 1995 and 1996, respectively.
DENTAL SUPPLIES. Dental supplies expense increased from $833,000 for 1995 to
$2.2 million for 1996, an increase of $1.4 million, or 166.0%. This increase
resulted primarily from the acquisitions of MacGregor and Midwest, which added
$688,000 and $422,000 of dental supplies expense for the respective periods
following the dates of acquisition. As a percent of Revenue, dental supplies
expense remained relatively constant at 6.3% and 6.2% for 1995 and 1996,
respectively.
LABORATORY FEES. Laboratory fees increased from $633,000 for 1995 to $1.6
million for 1996, an increase of $1.0 million, or 160.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $753,000 and
$25,000 to laboratory fees for the respective periods following the dates of
acquisition. As a percent of Revenue, laboratory fees decreased slightly from
4.8% to 4.6% for 1995 and 1996, respectively.
OCCUPANCY. Occupancy expense increased from $471,000 for 1995 to $1.9 million
for 1996, an increase of $1.4 million, or 311.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $766,000 and
$346,000 to occupancy expense for the respective periods following the dates of
acquisition. As a percent of Revenue, occupancy expense increased from 3.6% to
5.4% for 1995 and 1996, respectively, reflecting the assumption of higher-cost
leases in Houston.
ADVERTISING. Advertising expense increased from $710,000 for 1995 to $1.2
million for 1996, an increase of $490,000, or 70.4%. This increase was the
result of advertising in the Houston market at a cost of $326,000 for the 11
months ended December 31, 1996 and an increase of $162,000 in television and
print advertising in the Dallas-Fort Worth market in 1996. As a percent of
Revenue, advertising expense decreased from 5.4% to 3.4% for 1995 and 1996,
respectively. This decrease resulted from leveraging advertising expense with
greater market penetration and the acquisition of Midwest which has not
conducted television or radio advertising.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
from $293,000 for 1995 to $1.4 million for 1996, an increase of $1.1 million, or
388.1%. This increase was primarily the result of the acquisitions of MacGregor
and Midwest, which added depreciation and amortization expense of $730,000 and
$178,000 for the respective periods following the dates of acquisition.
Depreciation and amortization expense for the Dallas-Fort Worth operations
increased $226,000 as two de novo Dental Offices were opened and six Dental
Offices were expanded. As a percent of Revenue, depreciation and amortization
expense increased from 2.2% to 4.0% for 1995 and 1996, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased from
$1.1 million for 1995 to $3.6 million for 1996, an increase of $2.5 million, or
224.3%. This increase resulted primarily from the acquisitions of MacGregor and
Midwest during 1996 and the expansion of the Company's corporate infrastructure
in 1996 to manage growth. As a percent of Revenue, general and administrative
expense increased from 8.3% to 9.9% for 1995 and 1996, respectively. This
increase was due principally to MacGregor and Midwest having higher general and
administrative costs as a percent of Revenue than the Company's operations in
Dallas-Fort Worth.
OPERATING INCOME. Operating income increased from $1.7 million for 1995 to $2.8
million for 1996, an increase of $1.1 million, or 67.0%. This increase resulted
from the addition of MacGregor and Midwest which added operating income of
$966,000 and $213,000 for the respective periods following the dates of
acquisition. Income from the Company's Dallas-Fort Worth operations increased
$805,000 in 1996, which was largely offset by increased expenses due to the
development of corporate infrastructure. As a percent of Revenue, operating
income decreased from 12.6% in 1995 to 7.6% in 1996.
17
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MONARCH DENTAL CORPORATION
This decrease was primarily the result of adding the MacGregor and Midwest
acquisitions, which experienced lower operating margins than the Company's
Dallas-Fort Worth operations.
INTEREST EXPENSE, NET. Interest expense, net increased from $87,000 for 1995 to
$1.7 million for 1996, an increase of $1.6 million, or 1,839.1%. This increase
is attributable to $17.4 million of indebtedness incurred under the previous
credit facility in connection with the 1996 transactions and an additional $5.0
million of indebtedness incurred under the credit facility in connection with
the acquisition of Midwest.
INCOME TAXES. Income taxes for 1996 were $425,000, representing an effective tax
rate of 38.7%. Prior to February 6, 1996, the Company had elected to be treated
as an S corporation for federal income tax purposes and, therefore, no income
tax expense was recorded for the year ended December 31, 1995.
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited quarterly consolidated operating
results for each of the Company's last eight quarters as well as such data
expressed as a percentage of Revenue for the periods indicated. 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 thereto of the Company.
<TABLE>
<CAPTION>
QUARTER ENDED
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
(DOLLARS IN THOUSANDS) 1997 1997 1997 1997 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental group practices revenue, net $ 20,462 $ 17,436 $ 16,245 $ 14,476 $ 12,960 $ 9,178 $ 7,526 $ 6,316
Less: Amounts retained by dental
group practices 6,568 5,674 5,458 5,029 4,417 2,967 2,358 2,060
---------------------------------------------------------------------------------------------
Net revenue 13,894 11,762 10,787 9,447 8,543 6,211 5,168 4,256
Operating expenses:
Clinical salaries and benefits 4,065 2,986 2,852 2,447 2,320 1,608 1,266 1,065
Other salaries and benefits 1,674 1,766 1,626 1,387 1,141 836 684 466
Dental supplies 1,245 1,119 1,006 912 937 517 435 327
Laboratory fees 880 770 661 591 507 403 416 322
Occupancy 1,092 955 862 800 729 497 393 318
Advertising 519 516 421 325 291 345 349 225
Depreciation and amortization 980 724 669 565 495 374 313 248
General and administrative 1,785 1,636 1,515 1,458 1,305 960 726 573
---------------------------------------------------------------------------------------------
12,240 10,472 9,612 8,485 7,725 5,540 4,582 3,544
---------------------------------------------------------------------------------------------
Operating income 1,654 1,290 1,175 962 818 671 586 712
Interest expense, net 171 150 645 579 552 467 409 259
Minority interest in combined
subsidiaries 16 30 -- -- -- -- -- --
---------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 1,467 1,110 530 383 266 204 177 453
Income taxes 572 428 205 150 101 79 71 174
---------------------------------------------------------------------------------------------
Income before extraordinary item 895 682 325 233 165 125 106 279
Extraordinary loss on early
extinguishment of debt,
net of applicable tax benefit -- (264) -- -- -- -- -- --
---------------------------------------------------------------------------------------------
Net income $ 895 $ 418 $ 325 $ 233 $ 165 $ 125 $ 106 $ 279
=============================================================================================
</TABLE>
18
<PAGE> 11
<TABLE>
<CAPTION>
QUARTER ENDED
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
(PERCENTAGE OF REVENUE) 1997 1997 1997 1997 1996 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental group practices revenue, net 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100% 100.0%
Less: Amounts retained by dental
group practices 32.1 32.5 33.6 34.7 34.1 32.3 31.3 32.6
Net revenue 67.9 67.5 66.4 65.3 65.9 67.7 68.7 67.4
Operating expenses:
Clinical salaries and benefits 19.9 17.1 17.6 16.9 17.9 17.5 16.8 16.9
Other salaries and benefits 8.2 10.1 10 9.6 8.8 9.1 9.1 7.4
Dental supplies 6.1 6.4 6.2 6.3 7.2 5.6 5.8 5.2
Laboratory fees 4.3 4.4 4.1 4.1 3.9 4.4 5.5 5.1
Occupancy 5.3 5.5 5.3 5.5 5.6 5.4 5.2 5.0
Advertising 2.5 3.0 2.6 2.2 2.2 3.8 4.7 3.6
Depreciation and amortization 4.8 4.2 4.1 3.9 3.8 4.1 4.1 3.9
General and administrative 8.7 9.4 9.3 10.2 10.1 10.5 9.6 9.1
----------------------------------------------------------------------------------
59.8 60.1 59.2 58.7 59.5 60.4 60.8 56.2
----------------------------------------------------------------------------------
Operating income 8.1 7.4 7.2 6.6 6.4 7.3 7.9 11.2
Interest expense, net 0.8 0.9 4.0 4.0 4.3 5.1 5.4 4.1
Minority interest in combined
subsidiaries 0.1 0.1 -- -- -- -- -- --
----------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 7.2 6.4 3.2 2.6 2.1 2.2 2.5 7.1
Income taxes 2.8 2.5 1.2 1.0 0.8 0.9 0.9 2.8
----------------------------------------------------------------------------------
Income before extraordinary item 4.4 3.9 2 1.6 1.3 1.3 1.6 4.3
Extraordinary loss on early
extinguishment of debt,
net of applicable tax benefit -- 1.5 -- -- -- -- -- --
----------------------------------------------------------------------------------
Net income 4.4% 2.4% 2.0% 1.6% 1.3% 1.3% 1.6% 4.3%
----------------------------------------------------------------------------------
</TABLE>
- -----------
The Company's operating results may vary from quarter-to-quarter. During 1997,
for example, factors including the improvement of operating margins for
acquisitions and the leveraging of corporate infrastructure contributed to
successive increases in operating income as a percentage of Revenue for each
quarter-to-quarter period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had a $1.3 million working capital surplus,
representing an increase of $5.3 million from the working capital deficit of
$4.0 million at December 31, 1996. This working capital surplus included $9.1
million in current assets, consisting primarily of $3.0 million in cash and cash
equivalents and $5.9 million in accounts receivable, net of allowances. These
current assets were partially offset by current liabilities including $1.9
million in accounts payable, $2.9 million in accrued liabilities, $2.1 million
in amounts payable to dental group practices as consideration for accounts
receivable acquired from such group practices and $618,000 in current maturities
of notes payable and capital lease obligations. The Company's principal sources
of liquidity as of December 31, 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 previous credit facility
with a portion of the net proceeds from the recently completed initial public
offering 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 year ended December 31, 1996 and 1997, cash provided by operations was
$2.3 million and $4.1 million, respectively.
Cash used in investing activities was $23.4 million for the year ended December
31, 1996 and $19.8 million for the year ended December 31, 1997. For the year
ended December 31, 1996, $22.3 million was utilized for acquisitions and $1.1
million was invested in the purchase of additional property and equipment. For
the year ended December 31, 1997, $16.5 million was utilized for acquisitions
and $3.3 million was invested in the purchase of additional property and
equipment.
For the year ended December 31, 1996 and 1997, cash provided by financing
activities was $21.5 million and $17.7 million, respectively. In the year ended
December 31, 1996, the cash provided was comprised of $19.5 million in net
borrowings and $10.7 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 year ended December
31, 1997, the cash provided was comprised of $38.6 million in proceeds from the
issuance of stock, offset by the net repayment of $12.9 million in
19
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MONARCH DENTAL CORPORATION
outstanding debt and payments of $8.0 million to redeem the Redeemable Preferred
Stock in conjunction with the initial public offering.
The Company extinguished its prior credit facility, which was to expire on
August 29, 1999, with a bank. The Company entered into a new Credit Facility
with a bank syndicate effective November 1997. Under the new Credit Facility,
the Company may borrow up to $30.0 million. As of December 31, 1997, the Company
had $10.3 million outstanding 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.
The Company believes that the cash generated from operations will be sufficient
to fund its anticipated working capital needs and capital expenditures (other
than financing necessary to complete future acquisitions) for at least the next
12 months. The Company expects to fund future acquisitions with cash from
operations and borrowings under the Credit Facility. In order to meet its
long-term liquidity needs, the Company may issue additional equity and debt
securities, subject to market and other conditions. There can be no assurance
that such additional financing will be available on terms acceptable to the
Company. The failure to raise the funds necessary to finance its future cash
requirements could adversely affect the Company's ability to pursue its strategy
and could negatively affect its operations in future periods.
YEAR 2000 ISSUE
The Company has reviewed its computer programs and systems at each of the
Company's facilities to ensure that the programs and systems will function
properly and be Year 2000 compliant. In this process, the Company expects to
upgrade some systems.
The Company presently believes that, with such upgrades, the Year 2000 problem
will not pose significant operational problems for the Company's computer
systems. The estimated cost of these efforts is not expected to be material to
the Company's financial position or any year's results of operations.
20
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
MONARCH DENTAL CORPORATION
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,975,142 $ 1,059,337
Accounts receivable, net of allowances of approximately
$2,865,000 and $1,676,000, respectively 5,855,694 3,431,114
Other current assets 255,773 191,922
-----------------------------
Total current assets 9,086,609 4,682,373
Property and equipment, net of accumulated depreciation
of approximately $4,381,000 and $2,741,000, respectively 8,665,758 4,681,943
Intangible assets, net of accumulated amortization
of approximately $1,677,000 and $573,000, respectively 46,261,511 22,971,867
Other assets 577,794 569,640
-----------------------------
Total assets $ 64,591,672 $ 32,905,823
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,898,118 $ 1,070,035
Accrued payroll 1,798,487 1,301,723
Accrued liabilities 1,055,712 752,622
Taxes payable 297,380 203,267
Payable to affiliated dental group practices 2,071,564 1,083,339
Deferred purchase price -- 545,000
Unearned revenue 10,742 157,137
Current maturities of notes payable and capital
lease obligations 617,582 3,563,891
-----------------------------
Total current liabilities 7,749,585 8,677,014
Deferred income taxes 2,264,312 919,352
Notes payable 10,350,512 18,358,829
Capital lease obligations 849,425 410,252
Other liabilities 1,241,666 237,619
-----------------------------
Total liabilities 22,455,500 28,603,066
Minority interest in combined subsidiaries 170,653 --
Commitments and contingencies
Convertible Participating Preferred Stock, $.01 par
value, no shares and 4,800,000 shares authorized;
no shares and 4,800,000 issued and outstanding
in 1997 and 1996, respectively -- 9,313,315
Redeemable Preferred Stock, $.01 par value, no shares
and 3,840,000 shares authorized; -- --
no shares issued and outstanding
Redeemable Common Stock, $.01 par value, no shares
and 175,000 issued and outstanding in 1997 and
1996, respectively -- 397,767
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding -- --
Series A Convertible Junior Preferred Stock, $.01
par value, no shares and 1,704,550 shares authorized;
no shares and 734,645 issued and outstanding in 1997
and 1996, respectively -- 7,346
Common Stock, $.01 par value, 50,000,000 shares
authorized; 10,228,473 and 3,133,750 shares issued
and outstanding in 1997 and 1996, respectively 102,285 31,338
Common Stock to be issued, 30,000 shares in 1996 -- 75,000
Additional paid-in capital 47,534,874 1,936,322
Retained earnings (deficit) (5,671,640) (7,458,331)
Total stockholders' equity 41,965,519 (5,408,325)
-----------------------------
Total liabilities and stockholders' equity $ 64,591,672 $ 32,905,823
=============================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
MONARCH DENTAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Dental group practices revenue, net $ 68,619,379 $ 35,980,260 $ 13,222,740
Less - Amounts retained by dental group practices 22,729,549 11,801,862 4,300,351
---------------------------------------------
Net revenue 45,889,830 24,178,398 8,922,389
Operating expenses:
Clinical salaries and benefits 12,349,949 6,259,230 2,243,385
Other salaries and benefits 6,452,650 3,127,336 971,001
Dental supplies 4,281,608 2,215,405 833,160
Laboratory fees 2,902,088 1,648,017 633,012
Occupancy 3,709,226 1,937,353 470,984
Advertising 1,781,017 1,210,100 709,530
Depreciation and amortization 2,938,466 1,430,447 293,393
General and administrative 6,393,555 3,563,998 1,098,877
---------------------------------------------
40,808,559 21,391,886 7,253,342
---------------------------------------------
Operating income 5,081,271 2,786,512 1,669,047
Interest expense, net 1,545,340 1,686,392 87,309
Minority interest in combined subsidiaries 45,661 -- --
------------
Income before income taxes and extraordinary item 3,490,270 1,100,120 1,581,738
Income taxes 1,355,637 425,466 --
------------
Income before extraordinary item 2,134,633 674,654 1,581,738
Extraordinary loss on early extinguishment of debt,
net of applicable tax benefit of $166,540 (263,796) -- --
------------
Net income 1,870,837 674,654 1,581,738
Pro forma income taxes -- -- 612,133
Pro forma net income $ 1,870,837 $ 674,654 $ 969,605
---------------------------------------------
Net income per common share:
Income before extraordinary item $ 0.34 $ 0.24
Extraordinary item (0.05) --
-----------------------------
Net income $ 0.29 $ 0.24
-----------------------------
Net income per common share - assuming dilution:
Income before extraordinary item $ 0.26 $ 0.13
Extraordinary item (0.04) --
-----------------------------
Net income $ 0.22 $ 0.13
-----------------------------
Weighted average number of common shares outstanding 6,368,982 2,845,618
-----------------------------
Weighted average number of common and common equivalent shares outstanding 8,346,289 5,077,359
-----------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
22
<PAGE> 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MONARCH DENTAL CORPORATION
For the years ended December 31, 1995, 1996, and 1997
<TABLE>
<CAPTION>
Series A
Convertible Junior
Preferred Stock Common Stock
------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 -- $ -- 28,040,223 $ 280,402
Net income -- -- -- --
Distributions -- -- -- --
------------------------------------------------------
Balance, December 31, 1995 -- -- 28,040,223 280,402
Net income -- -- -- --
Accretion of Redeemable
Common Stock -- -- -- --
Distributions -- -- -- --
Repurchase of Common Stock -- -- (26,534,463) (265,345)
Issuance of Class A Common Stock -- -- 353,750 3,538
Issuance of Series A Junior
Preferred Stock 734,645 7,346 -- --
Issuance of Common Stock -- -- 1,274,240 12,743
------------------------------------------------------
Balance, December 31, 1996 734,645 7,346 3,133,750 31,338
Net income -- -- -- --
Accretion of Redeemable
Common Stock -- -- -- --
Issuance of Common Stock -- -- 3,850,990 38,509
Issuance of Series A Junior
Preferred Stock 969,905 9,699 -- --
Conversion of Series A Junior
Preferred Stock (1,704,550) (17,045) 852,275 8,523
Conversion of Redeemable
Common Stock -- -- 2,400,000 24,000
Repurchase of Common Stock -- -- (8,542) (85)
------------------------------------------------------
Balance, December 31, 1997 -- $ -- 10,228,473 $ 102,285
------------------------------------------------------
<CAPTION>
Additional Retained Total
Stock to be Paid-In Earnings Stockholders'
issued capital (Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- $ -- $ (134,448) $ 145,954
Net income -- -- 1,581,738 1,581,738
Distributions -- -- (1,105,000) (1,105,000)
------------------------------------------------------------------------
Balance, December 31, 1995 -- -- 342,290 622,692
Net income -- -- 674,654 674,654
Accretion of Redeemable
Common Stock -- -- (47,767) (47,767)
Distributions -- -- (2,007,997) (2,007,997)
Repurchase of Common Stock -- -- (6,419,511) (6,684,856)
Issuance of Class A Common Stock -- 71,457 -- 74,995
Issuance of Series A Junior
Preferred Stock -- 1,285,629 -- 1,292,975
Issuance of Common Stock 75,000 579,236 -- 666,979
------------------------------------------------------------------------
Balance, December 31, 1996 75,000 1,936,322 (7,458,331) (5,408,325)
Net income -- -- 1,870,837 1,870,837
Accretion of Redeemable
Common Stock -- -- (84,146) (84,146)
Issuance of Common Stock (75,000) 42,606,147 -- 42,569,656
Issuance of Series A Junior
Preferred Stock -- 1,696,293 -- 1,705,992
Conversion of Series A Junior
Preferred Stock -- 8,522 -- --
Conversion of Redeemable
Common Stock -- 1,289,315 -- 1,313,315
Repurchase of Common Stock -- (1,725) -- (1,810)
------------------------------------------------------------------------
Balance, December 31, 1997 $ -- $ 47,534,874 $ (5,671,640) $ 41,965,519
========================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
23
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOW
MONARCH DENTAL CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,870,837 $ 674,654 $ 1,581,738
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 2,938,466 1,430,447 293,393
Extraordinary loss, net 263,796 -- --
Minority interest 45,661 -- --
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net (1,273,681) 166,298 (377,629)
Other current assets (58,635) 410,096 (3,991)
Other noncurrent assets (424,694) 219,902 (81,721)
Accounts payable and accrued expenses (334,778) (1,918,083) 281,185
Other liabilities 400,410 851,204 146,028
Deferred income taxes 650,844 425,666 --
------------------------------------------------
Net cash provided by operating activities 4,078,226 2,260,184 1,839,003
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,330,102) (1,128,835) (712,519)
Cash paid for dental group practices, including related
costs, net of cash acquired (16,508,796) (22,291,515) --
------------------------------------------------
Net cash used in investing activities (19,838,898) (23,420,350) (712,519)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of issuance costs 15,235,000 21,772,750 587,000
Payments on notes payable and capital lease obligations (28,133,626) (2,301,598) (262,028)
Distribution to minority interest stockholders (30,000) -- --
Distribution to stockholders -- (2,007,997) (1,105,000)
Repurchase of common stock (1,810) (6,684,856) --
Redemption of convertible participating preferred stock (8,000,000) -- --
Issuance of common stock 38,606,913 10,681,285 --
------------------------------------------------
Net cash provided by (used in) financing activities 17,676,477 21,459,584 (780,028)
------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,915,805 299,418 346,456
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,059,337 759,919 413,463
------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,975,142 $ 1,059,337 $ 759,919
================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,260,285 $ 1,529,508 $ 29,620
================================================
Cash paid for taxes $ 640,000 $ -- $ --
================================================
Equipment acquired under capital leases $ 961,225 $ 526,351 $ 20,589
================================================
Debt assumed through acquisitions $ 1,275,000 $ 908,000 $ --
================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
24
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MONARCH DENTAL CORPORATION
1. DESCRIPTION OF BUSINESS AND REORGANIZATION
Monarch Dental Corporation ("Monarch"), a Delaware corporation, and subsidiaries
(collectively, the "Company"), manages dental group practices in selected
markets presently including Dallas-Fort Worth, Houston, San Antonio and
Midland-Odessa, Texas; Wisconsin; Arkansas; Indiana and Colorado. At December
31, 1997, the Company managed 99 dental group practices in Texas, Arkansas,
Wisconsin, Indiana and Colorado. The Company has grown substantially in a
relatively short period of time, principally through acquisitions. In 1997, the
Company completed 11 acquisitions resulting in the addition of 39 Dental
Offices.
Monarch was originally incorporated in Texas on December 28, 1994, and was
wholly-owned by Warren F. Melamed, D.D.S. ("Melamed"). On December 30, 1994,
eight Texas S corporations (later converted to limited partnerships) owned by
Melamed merged with and into Monarch in exchange for 1,150 shares of Monarch
Common Stock. These transactions were accounted for as a reorganization of
entities under common control.
On February 6, 1996, Melamed and another investor contributed their respective
interests in one limited partnership to Monarch in exchange for cash and Common
Stock in Monarch. The limited partnership interest held by the investor was
recorded by Monarch at fair market value. Under the Amended and Restated
Certificate of Incorporation of Monarch, Melamed's 1,150 shares were converted
into 28,040,223 shares of Common Stock in a transaction accounted for as a stock
split. Under a Stock Redemption Agreement, on February 6, 1996, Monarch redeemed
26,534,463 shares of Common Stock from Melamed for cash of $6.7 million. Melamed
also purchased 150,000 shares of Monarch restricted Common Stock at fair market
value. These transactions on February 6, 1996 are collectively referred to as
the "Reorganization".
In July 1997, the Company completed its initial public offering of 3,162,500
shares of Common Stock at $13.00 per share, resulting in net proceeds of
approximately $37.2 million.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION / BASIS OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. These financial statements present the financial
position and results of operations of the entities under common control. All
intercompany accounts and transactions have been eliminated in the
consolidation.
In four states the Company accounts for its management activities with the
dental group practices under long-term management agreements (the "Management
Agreements"). In one state, the Company directly employs the dentists and
hygienists. The Company does not consolidate the operating results (including
the revenues and expenses) of the dental group practices under Management
Agreements since these revenues and expenses are not earned or incurred by the
Company.
The Company has presented dental group practices revenue and amounts retained by
dental group practices (which typically consists of 30% - 35% of the dental
groups practices' net revenue, including dental hygienist salaries and
contracted dental specialists and is retained by the affiliated dental group
practices in accordance with the Management Agreements), in the accompanying
consolidated statements of income to arrive at the Company's net revenue. The
Company believes that a display presentation combining the revenue of the dental
group practices under Management Agreements with those owned by the Company
(collectively referred to as the "Dental Offices") is more meaningful. See
further discussion below.
DENTAL GROUP PRACTICES REVENUE, NET Dental group practices 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. As of
December 31, 1997, dental services were provided by the Company's Dental Offices
under separate Management Agreements.
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 1995, 1996 and 1997 the Company estimates that approximately 45%, 47% and
45%, respectively, of dental group practices revenue, net was received under
agreements with third-party payors. Approximately 26% and 20% of the Company's
revenue for the years ended December 31, 1996 and 1997 was derived from
contracts with Prudential Dental Maintenance Organization, Inc. and Compcare
Health Services Insurance Corporation, respectively. These contracts continue
until terminated by either party upon 60 to 90 days' prior written notice, and
the material economic terms can be renegotiated periodically. Since the Company
is required to provide only basic dental services under these contracts, there
are no significant future losses anticipated under these contracts.
NET REVENUE Net revenue represents revenue from Dental Offices less amounts
retained by dental group practices. The amounts retained by dental group
practices represent amounts paid by (i) the professional corporations as salary,
benefits and other payments to employed dentists, hygienists and contracted
specialists, and (ii) the Company as salary, benefits and other payments to
employed dentists, hygienists and contracted specialists in states where it
operates and which ownership of dental practices by the Company is permitted
(currently Wisconsin). The Company's historical net revenue and operating income
levels would be the same as those reported even if the Company directly employed
all of the dentists, hygienists and contracted specialists. 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
25
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MONARCH DENTAL CORPORATION
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 is
dependent upon the revenue of the dental group practices.
A summary of the dental group practices revenue, net, amounts retained by dental
group practices and management fee and net revenues of the Company is as
follows:
<TABLE>
<CAPTION>
Dentists and
Professional hygienists
Corporations employed by
under and specialists
Management contracted by
(IN THOUSANDS) Agreements the Company Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Dental group practices revenue, net $51,650 $16,969 $68,619
Amounts retained by dental group practices 16,648 6,081 22,729
-------------------------------------
Management fee revenue $35,002 $ -- $35,002
-------------------------------------
Net revenue $ -- $10,888 $10,888
=====================================
1996
Dental group practices revenue, net $30,730 $ 5,250 $35,980
Amounts retained by dental group practices 9,860 1,942 11,802
-------------------------------------
Management fee revenue $20,870 $ -- $20,870
-------------------------------------
Net revenue $ -- $ 3,308 $ 3,308
=====================================
1995
Dental group practices revenue, net $13,222 $ -- $13,222
Amounts retained by dental group practices 4,300 -- 4,300
-------------------------------------
Management fee revenue $ -- $ -- $ --
-------------------------------------
Net revenue $ 8,922 $ -- $ 8,922
=====================================
</TABLE>
The Company began earning management fee revenue upon the acquisition of each
dental group practice, except for the Company's dental group practices existing
prior to February 6, 1996. The Company began earning management fee revenue for
those practices except in the case of one Dental Office on February 6, 1996.
Melamed is the sole shareholder of Modern Dental Professional, P.C. ("Modern
Dental"), the professional corporation in Texas which employs the dentists and
other licensed personnel. Dental group practices revenue, net generated by
Modern Dental approximated 58% of the Company's total dental group practices
revenue, net during 1997. The Company and Melamed have a succession agreement
whereby upon any termination of Melamed's affiliation with the Company, Melamed
is required to sell his ownership interest in Modern Dental for a nominal
amount.
ADVERTISING The costs of advertising, promotion and marketing are expensed in
the year incurred.
CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash
flows, cash and cash equivalents include money market accounts and all highly
liquid investments with original maturities of three months or less.
ACCOUNTS RECEIVABLE Accounts receivable represent receivables from patients and
other third-party payors for dental services provided. Such amounts are recorded
net of contractual allowances and estimated bad debts. Unearned revenue
represents amounts relating to longer term services, such as orthodontics.
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. 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. The Company does not believe these receivables
represent any concentrated credit risk. Management continually monitors and
periodically adjusts its allowances associated with these receivables.
At December 31, 1997, approximately 64%, 18%, 15% and 3% of the Company's
accounts receivable were from services rendered in Texas, Wisconsin, Arkansas
and Indiana, respectively. In addition, at December 31, 1997, approximately $2.5
million in accounts receivable were from third party payors.
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
Computer equipment 5
</TABLE>
Equipment held under capital lease obligations is amortized on a straight-line
basis over the shorter of the lease term or estimated life of the asset.
INTANGIBLE ASSETS 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 is allocated first to identifiable intangibles and then either to the
Management Agreement (in those transactions where the Company has effectively
acquired the right to manage the Dental Office) or goodwill (for
26
<PAGE> 19
acquired Dental Offices). The Management Agreement represents 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. At December 31, 1997, the average life of the intangibles assigned to
all Management Agreements was 25 years.
The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization periods, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate 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 November 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued guidance on certain accounting matters relating to the
physician practice management industry. The guidance includes criteria for the
consolidation of professional corporation revenues under management agreements.
The Company is currently reviewing the impact such guidance may have on its
current accounting and reporting practices. The guidance is required to be
adopted during 1998 and the effects, if any, can be reported through a
restatement of previously issued financial statements or prospectively as a
change in accounting principle.
OTHER LIABILITIES Other liabilities consist primarily of reserves related to
acquisitions accounted for as purchases and deferred rent for the Company's
facilities.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
OTHER Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentation.
INCOME TAXES At the Reorganization, Monarch terminated its status as an S
corporation and is now subject to federal income taxes. As such, the
consolidated financial statements in 1995 include a pro forma adjustment for
federal income taxes as if Monarch had not been treated as an S corporation. In
1996 and 1997, the Company accounted for income taxes under the liability method
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
NET INCOME PER COMMON SHARE The net income per common share is based on the
weighted average number of common shares outstanding adjusted for actual shares
issued during the period. Shares of Common Stock issued upon conversion of the
Convertible Participating Preferred Stock, Redeemable Common Stock and Series A
Convertible Participating Preferred Stock, Redeemable Common Stock and Series A
Convertible Junior Preferred Stock are assumed to be common stock equivalent
shares until conversion date. Diluted net income per share has been calculated
using the treasury stock method for stock options.
3. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires presentation of total nonowner changes in equity for all periods
displayed. The Company plans to adopt this statement for the year ending
December 31, 1998.
In June 1997, the Financial Accounting Standards Board also issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard defines reporting
requirements for operating segments and related information about products and
services, geographic areas and reliance on major customers. The Company is
evaluating the impact of this statement on its current reporting and expects to
adopt the new standard for its year ending December 31, 1998.
4. ACQUISITIONS
Concurrent with the Reorganization discussed in Note 1, the Company acquired
certain assets and assumed certain liabilities of MacGregor Dental Center, Inc.
and Shears Management, Inc. (collectively referred to as "MacGregor") for $15.9
million in cash and 700,000 shares of Common Stock in an asset contribution
transaction accounted for as a purchase.
Effective September 1, 1996, the Company acquired all of the outstanding stock
of Midwest Dental Care - Sheboygan, SC ("Sheboygan") and Midwest Dental Care -
Mondovi, SC ("Mondovi") in a stock purchase transaction and acquired certain
assets and assumed certain liabilities of Advance Dental Management, a related
entity to Sheboygan and Mondovi, in an asset purchase transaction. All three
entities (collectively referred to as "Midwest") were acquired for $5.3 million
in cash and 350,000 shares of Common Stock. Additionally, the seller has the
right to receive additional purchase consideration of up to 80,000 stock options
upon meeting specified financial performance goals.
Effective October 1, 1996, the Company acquired certain assets and assumed
certain liabilities of John H. Davis, DDS for $172,000 in cash and 5,000 shares
of Common Stock in an asset purchase transaction accounted for as a purchase.
27
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MONARCH DENTAL CORPORATION
Effective November, 7 1996, the Company acquired all of the outstanding stock of
Convenient Dental Care, Inc. ("Convenient") in Arkansas for a $500,000
promissory note, paid in January 1997, and 30,000 shares of Common Stock in a
stock purchase transaction accounted for as a purchase. Additionally, the seller
has a right to receive additional purchase consideration of up to $200,000 upon
meeting specified financial performance goals.
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.
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. in Indiana, 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.
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.
Effective December 1, 1997, the Company acquired an 80% interest in certain
assets and assumed certain liabilities of Dental America in Midland, Texas for
$650,000 in cash and 8,785 shares of Common Stock in an asset purchase
transaction accounted for as a purchase.
During 1997, the Company acquired certain assets and assumed certain liabilities
of four dental groups in Dallas and Conroe, Texas, Fayetteville, Arkansas and
Colorado Springs, Colorado for $3.4 million in cash and 28,774 shares of Common
Stock in asset purchase transactions accounted for as purchases.
Obligations related to contingent purchase consideration have not been
quantified 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. The estimated fair values of
assets acquired and liabilities assumed during 1997 are summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents $ 667,600
Accounts receivable, net 1,150,899
Other assets 5,216
Property and equipment, net 1,519,222
Liabilities assumed (5,841,261)
Intangible assets 24,416,542
Less - Fair value of Common Stock issued (5,186,822)
Deferred purchase price (payable in cash) (100,000)
-----------
Cash purchase price $16,631,396
===========
</TABLE>
The following information reflects the historical operating results of the Texas
region (except San Antonio and Midland-Odessa) and the Arkansas region (except
Arkansas Dental Health) dental practice groups for the year ended December 31,
1997.
<TABLE>
<CAPTION>
(IN THOUSANDS) Texas Arkansas
- ---------------------------------------------------------------------------------
<S> <C> <C>
Dental group practices revenue, net $38,976 $ 6,092
Operating expenses:
Salaries and benefits 10,934 2,074
Bad debt expense 1,232 153
Management fee - operating expenses:
Clinical salaries and benefits 6,638 1,330
Other salaries and benefits 2,558 257
Dental supplies 2,292 363
Laboratory fees 2,028 330
Occupancy 2,063 340
Advertising 1,452 192
Depreciation and amortization 1,789 231
General and administrative 3,251 319
Management fee - lesser of (i) 30% of P.C.'s net revenue
or (ii) P.C.'s net pre-tax income 4,739 503
-------------------
38,976 6,092
-------------------
Operating income $ -- $ --
===================
</TABLE>
Under the Management Agreement between the Company and the dental group
practices, the Company received 100% of the practices pre-tax income in 1997.
Accordingly, there is no operating income at the dental group practice entity.
The following unaudited pro forma information reflects the effect of
acquisitions and the initial public offering on the consolidated results of
operations of the Company had the acquisitions and the initial public offering
occurred at January 1, 1996. Future results may differ substantially from pro
forma results and cannot be considered indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(UNAUDITED; IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Dental group practices revenue, net $85,415 $66,813
===================
Net income $ 3,202 $ 1,321
===================
Net income per common share-assuming dilution $ 0.31 $ 0.13
===================
</TABLE>
28
<PAGE> 21
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Dental equipment $ 6,476,916 $ 4,103,901
Furniture and fixtures 2,186,944 1,680,788
Leasehold improvements 3,032,795 1,280,114
Computer equipment 1,349,729 358,237
---------------------------------
$ 13,046,384 $ 7,423,040
Less - Accumulated depreciation (4,380,626) (2,741,097)
---------------------------------
Property and equipment, net $ 8,665,758 $ 4,681,943
=================================
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Management Agreements $ 41,122,786 $ 17,276,138
Goodwill 6,815,865 6,268,885
Less - Accumulated amortization (1,677,140) (573,156)
---------------------------------
Intangible assets, net $ 46,261,511 $ 22,971,867
=================================
</TABLE>
7. NOTES PAYABLE
Notes payable consists of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Borrowings under credit facility, due 2002 $ 10,250,000 $ 21,551,686
Other notes payable, due 1999-2002,
with an interest rate of prime plus 0.5%,
secured by certain receivables
and property 283,316 --
---------------------------------
10,533,316 21,551,686
Less - Current maturities (182,804) (3,192,857)
---------------------------------
Notes payable, net $ 10,350,512 $ 18,358,829
=================================
</TABLE>
The maturities of notes payable at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 182,804
1999 254,028
2000 691,308
2001 692,110
2002 8,713,066
-----------
$10,533,616
===========
</TABLE>
Effective November 1997, the Company entered into a new credit facility (the
"Credit Facility") with a bank syndicate. Under the Credit Facility, the Company
may borrow up to $30.0 million. As of December 31, 1997, the Company had $10.3
million in borrowings under the Credit Facility. The amounts outstanding under
the Credit Facility bear interest at variable rates which are based upon either
the lender's base rate or LIBOR, plus, in either case, a margin which varies
according to the ratio of the Company's funded debt to EBITDA, each as defined
in the Credit Facility. The Credit Facility prohibits the Company from incurring
indebtedness, incurring liens, disposing of assets, making investments or making
acquisitions 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.
The Company incurred an extraordinary loss of $264,000, net of tax for 1997 as
it extinguished its previous credit facility and wrote off $431,000 in
unamortized loan fees, net of a tax benefit of $167,000.
8. STOCKHOLDERS' EQUITY
At December 31, 1997, 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 undesignated
Preferred Stock.
CONVERTIBLE PARTICIPATING PREFERRED STOCK
On February 6, 1996, Monarch sold 4,800,000 shares of Convertible Participating
Preferred Stock (the "Preferred Stock") to an unrelated investor group for
approximately $10.0 million. The Preferred Stock converted to 2,400,000 shares
of Common Stock plus 3,840,000 shares of Redeemable Preferred Stock upon the
completion of the Company's initial public offering in July 1997. The Redeemable
Preferred Stock was automatically redeemed upon the completion of the initial
public offering for cash of approximately $8.0 million.
REDEEMABLE COMMON STOCK In connection with the acquisition of Midwest, the
seller acquired the right to put 175,000 shares of Common Stock back to the
Company contingent upon certain events as defined in the Midwest purchase
agreement. These shares were converted to Common Stock upon the completion of
the initial public offering.
SERIES A CONVERTIBLE JUNIOR PREFERRED STOCK
During 1996, the Company issued 734,645 shares of Series A Convertible Junior
Preferred Stock (the "Junior Preferred Stock") to the holders of the Convertible
Participating Preferred Stock. During 1997, an additional 969,905 shares were
issued, resulting in a total of 1,704,550 shares outstanding. These shares were
converted into Common Stock on a 1-for-2 basis upon the completion of the
initial public offering.
COMMON STOCK Of the 3,133,750 shares of Common Stock outstanding at December 31,
1996, 203,750 shares were designated as non-voting Class A Common Stock. These
shares were converted to Common Stock upon the completion of the Company's
initial public offering.
COMMON STOCK TO BE ISSUED In connection with the acquisition of Convenient in
November 1996, 30,000 shares of Common Stock valued at $75,000 were issued in
January 1997. The number of common shares to be issued and the price per share
were fixed as of the consummation date of the acquisition in November 1996.
29
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MONARCH DENTAL CORPORATION
STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is
effective for fiscal years beginning after December 15, 1995. Under SFAS No.
123, the Company may elect to recognize stock-based compensation expense based
on the fair value of the awards or continue to account for stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and disclose in the financial statements the effects
of SFAS No. 123 as if the recognition provisions were adopted. The Company has
not adopted the recognition provisions of SFAS No. 123. The Company has
calculated the effects of SFAS No. 123 and determined that the result is
immaterial.
The following table summarizes the share activity during 1996 and 1997 under the
Company's 1996 Stock Option and Incentive Plan. A total of 1,000,000 shares are
reserved under the plan.
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Shares outstanding at beginning of year 25,000 --
Granted 531,750 25,000
Exercised -- --
Canceled -- --
--------------------------
Shares outstanding at end of year 556,750 25,000
==========================
Shares exercisable at end of year 6,250 --
Price range of shares outstanding $3.00-13.00 $ 3.00
</TABLE>
The shares exerciseable at December 31, 1997 had a weighted average exercise
price of $3.00 per share.
9. COMMITMENTS AND CONTINGENCIES:
OPERATING AND CAPITAL LEASE OBLIGATIONS
The Company leases all of its facilities, including the Dental Offices and
corporate office, under noncancelable operating leases, extending through 2009.
Rent expense totaled approximately $367,000, $1.6 million and $3.1 million for
the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of December
31, 1997:
<TABLE>
<CAPTION>
Operating Capital
- --------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 3,192,299 $ 579,115
1999 2,682,470 501,799
2000 2,214,439 160,240
2001 1,934,897 64,517
2002 1,464,194 42,091
Thereafter 4,511,029 271,239
---------------------------------
Total minimum lease obligation $ 15,999,328 1,619,001
============
Less - Amounts representing interest 334,798
------------
Present value of minimum lease obligations 1,284,203
Less - Current maturities (434,778)
------------
Capital lease obligations, net $ 849,425
============
</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.
MANAGEMENT AGREEMENTS The Company has no material commitments and guarantees to
the dental group practices under Management Agreements.
10. INCOME TAXES
The income tax provision consisted of the following for the years ended December
31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------
<S> <C> <C>
Current:
Federal $ 754 $ 184
State 184 20
-----------------
938 204
Deferred 418 221
-----------------
Total $1,356 $ 425
=================
</TABLE>
The Company's effective tax rate of 38.8% is greater than the federal rate of
34% due to the impact of 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, 1996 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax asset:
Tax loss carryforwards $ (32) $(104)
Cash to accrual and other (233) (76)
------ -----
$ (265) $(180)
Deferred tax liability:
Deferred tax liability of
acquired companies 1,677 750
Accelerated depreciation 431 173
Intangible assets amortization 421 176
------ -----
2,529 349
------ -----
Net deferred tax liability $2,264 $ 919
====== =====
</TABLE>
The deferred income tax provision of $418,000 in 1997 relates primarily to the
excess of the tax over book amortization of intangible assets and the excess of
the tax over book depreciation of fixed assets.
30
<PAGE> 23
11. RELATED-PARTY TRANSACTIONS
The Company leases several of its facilities from affiliated entities. Total
rent expense paid to related parties for the years ended December 31, 1995, 1996
and 1997, was approximately $42,000, $478,000 and $715,000, respectively.
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.
12. BENEFIT PLANS:
401 (K) PLANS The Company maintains two defined contribution plans which conform
to IRS provisions for 401 (k) plans. One plan covers Dallas-Fort Worth employees
of the Company, referred to as the "Monarch 401 (k) Plan." Under this plan,
employees are eligible to participate in the plan provided they have attained
the age of 18, have completed 1,000 hours of service, and have been employed for
at least one year. The Company makes discretionary matching contributions up to
a maximum dollar amount. The second plan, referred to as the "Midwest 401(k)
Plan," covers all employees of the Company's Midwest subsidiary. Under the
Midwest 401 (k) Plan, employees are eligible to participate in the plan provided
they have attained the age of 21, have completed 1,000 hours of service, and
have been employed for at least one year. Employer matching contribution
percentages as well as additional contributions are determined annually. Total
contributions by the Company for both plans were approximately $27,000, $76,000
and $118,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
HEALTH AND WELFARE BENEFIT PLAN The Company has one self-funded plan at December
31, 1997 to provide these benefits to full-time employees. The plan covers all
employees of Midwest and is a self-funded plan which maintains stop-loss
insurance coverage. This plan's stop-loss policy stipulates if total annual plan
claims exceed $240,000 or if an individual's insured claims exceed $20,000
annually, the excess amounts are covered by the stop-loss policy. Monthly
contribution amounts are determined annually by the plan administrator based on
funding requirements and plan experience.
In September, 1997, the Company terminated its self-funded plan which had
covered Dallas-Fort Worth employees and entered into a new premium-based
insurance plan with NYLCare.
Total contributions by the Company for these plans were approximately $228,000,
$355,000 and $455,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
13. 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, capital lease
obligations, and convertible participating preferred stock are based on similar
issues or on current rates available to the Company. The carrying values and
estimated fair values were estimated to be the same at December 31, 1996 and
1997.
31
<PAGE> 24
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, 1996
and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Monarch Dental Corporation and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 13, 1998
32
<PAGE> 1
EXHIBIT 21.1
MONARCH DENTAL CORPORATION AND AFFILIATES
Monarch Dental Corporation
Partners Dental Corporation
Monarch Dental Associates, L.P.
MacGregor Dental Associates, L.P.
Monarch Dental Management, Inc.
Modern Dental Professionals, P.C.
Midwest Dental Care, Mondovi, Inc.
Midwest Dental Care, Sheboygan, Inc.
Midwest Dental Management, Inc.
Monarch Dental Associates (Arkansas), Inc.
Modern Dental Professionals - Girlinghouse, P.A.
Modern Dental Professionals - St. Raymond (a Professional Dental Corporation)
Dental Centers of Indiana (Monarch), Inc.
DCI, Lee, L.P.
Drs. Johnson, Terry and Associates, L.P.
Modern Dental Professionals - Indiana, P.C.
Three Peaks Dental Management, Inc.
Modern Dental Professionals - Colorado, P.C.
Monarch Dental (Press) Associates, L.P.
Monarch Dental Associates (Midland/Odessa), L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated February 13,
1998. It should be noted that we have not audited any financial statements of
the company subsequent to December 31, 1997 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,975,142
<SECURITIES> 0
<RECEIVABLES> 8,720,694
<ALLOWANCES> 2,865,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,086,609
<PP&E> 13,046,758
<DEPRECIATION> 4,381,000
<TOTAL-ASSETS> 64,591,672
<CURRENT-LIABILITIES> 7,749,585
<BONDS> 0
0
0
<COMMON> 102,285
<OTHER-SE> 41,863,234
<TOTAL-LIABILITY-AND-EQUITY> 64,591,672
<SALES> 0
<TOTAL-REVENUES> 68,619,379
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 40,808,559
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,545,340
<INCOME-PRETAX> 3,490,270
<INCOME-TAX> 1,355,637
<INCOME-CONTINUING> 2,134,633
<DISCONTINUED> 0
<EXTRAORDINARY> 263,796
<CHANGES> 0
<NET-INCOME> 1,870,837
<EPS-PRIMARY> .29
<EPS-DILUTED> .22
</TABLE>
