<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER: 0-22835
MONARCH DENTAL CORPORATION.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0363560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MONARCH DENTAL CORPORATION
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TX 75244
(Address of principal executive offices)
(972) 702-7446
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issue's classes of
common stock, as of the latest practicable date.
<TABLE>
Class Outstanding as of May 14, 1998
----- ------------------------------
<S> <C>
Common Stock, $.01 par value 10,325,730
</TABLE>
<PAGE> 2
MONARCH DENTAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Report of Independent Public Accountants 3
Item 2. Financial Statements 4
Item 3. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports Filed on Form 8-K 13
Signatures 14
Exhibit Index 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
We have reviewed the accompanying consolidated balance sheet of Monarch Dental
Corporation (a Delaware corporation) as of March 31, 1998 and the related
consolidated statements of income and cash flows for the three-month periods
ended March 31, 1998 and 1997. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 11, 1998
3
<PAGE> 4
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,887,722 $ 2,975,142
Accounts receivable, net of allowances of approximately
$3,297,000 and $2,865,000, respectively 6,523,637 5,855,694
Other current assets 480,498 255,773
------------ ------------
Total current assets 10,891,857 9,086,609
Property and equipment, net of accumulated depreciation of
approximately $5,026,500 and $4,381,000, respectively 9,739,520 8,665,758
Intangible assets, net of accumulated amortization of
approximately $2,093,000 and $1,677,000, respectively 49,824,581 46,261,511
Other assets 373,743 577,794
------------ ------------
Total assets $ 70,829,701 $ 64,591,672
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,235,902 $ 1,898,118
Accrued payroll 1,698,965 1,798,487
Accrued liabilities 1,127,007 1,066,454
Taxes payable 588,380 297,380
Payable to affiliated dental group practices 2,147,958 2,071,564
Deferred purchase price 2,799,600 --
Current maturities of notes payable and capital lease obligations 497,947 617,582
------------ ------------
Total current liabilities 11,095,759 7,749,585
Deferred income taxes 2,264,312 2,264,312
Notes payable 11,850,988 10,350,512
Capital lease obligations 836,603 849,425
Other liabilities 1,474,117 1,241,666
------------ ------------
Total liabilities 27,521,779 22,455,500
Minority interest in combined subsidiaries 163,335 170,653
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common Stock, $.01 par value, 50,000,000 shares authorized;
10,235,818 and 10,228,473 shares issued and outstanding,
respectively 102,358 102,285
Additional paid-in capital 47,610,322 47,534,874
Retained earnings (deficit) (4,568,093) (5,671,640)
------------ ------------
Total stockholders' equity 43,144,587 41,965,519
------------ ------------
Total liabilities and stockholders' equity $ 70,829,701 $ 64,591,672
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
----------- ------------
<S> <C> <C>
Dental group practices revenue, net $24,279,526 $14,475,561
Less - Amounts retained by dental group practices 7,918,818 5,028,465
----------- -----------
Net revenue 16,360,708 9,447,096
Operating expenses:
Clinical salaries and benefits 4,245,357 2,446,786
Other salaries and benefits 2,220,291 1,387,354
Dental supplies 1,439,730 911,867
Laboratory fees 1,057,913 590,729
Occupancy 1,329,269 800,355
Advertising 514,956 325,026
Depreciation and amortization 1,086,942 565,003
General and administrative 2,323,122 1,457,786
----------- -----------
14,217,580 8,484,906
----------- -----------
Operating income 2,143,128 962,190
Interest expense, net 282,641 579,384
Minority interest in combined subsidiaries 49,940 --
----------- -----------
Income before income taxes 1,810,547 382,806
Income taxes 707,000 150,283
----------- -----------
Net income $ 1,103,547 $ 232,523
=========== ===========
Net income per common share $ 0.11 $ 0.07
=========== ===========
Net income per common share - assuming dilution $ 0.11 $ 0.04
=========== ===========
Weighted average number of common shares
outstanding 10,234,723 3,216,602
=========== ===========
Weighted average number of common and common
equivalent shares outstanding 10,322,400 6,406,789
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,103,547 $ 232,523
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 1,086,942 565,003
Minority interest in combined subsidiaries 49,940 --
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net (596,892) (376,012)
Other current assets (224,725) (24,620)
Other noncurrent assets 14,051 (8,872)
Accounts payable and accrued expenses (156,156) (143,961)
Other liabilities 37,713 227,954
Deferred income taxes 291,000 --
----------- -----------
Net cash provided by operating activities 1,605,420 472,015
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,514,155) (383,827)
Cash paid for dental group practices, including
related costs, net of cash acquired (607,950) (2,741,189)
----------- -----------
Net cash used in investing activities (2,122,105) (3,125,016)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of issuance costs 1,600,000 2,145,000
Payments on notes payable and capital lease obligations (186,789) (1,810,913)
Distribution to stockholders/partners (30,000) --
Repurchase of common stock -- (1,811)
Issuance of common stock 46,054 1,707,682
----------- -----------
Net cash provided by financing 1,429,265 2,039,958
----------- -----------
NET INCREASE (DECREASE) IN CASH 912,580 (613,043)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,975,142 1,059,337
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,887,722 $ 446,294
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 166,269 $ 511,638
=========== ===========
Cash paid for taxes $ 416,000 $ 150,000
=========== ===========
Equipment acquired under capital leases $ -- $ 348,443
=========== ===========
Debt assumed through acquisitions $ 363,440 $ 659,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Monarch Dental Corporation ("Monarch"), a Delaware corporation, and
subsidiaries (collectively, the "Company"), manages dental group
practices in selected markets including Dallas-Fort Worth, Houston, San
Antonio and Midland-Odessa, Texas; Wisconsin; Arkansas; Indiana;
Colorado and Ohio. As of March 31, 1998, the Company managed 110 dental
group practices in Texas, Wisconsin, Arkansas, Indiana, Colorado and
Ohio.
2. BASIS OF PRESENTATION
The financial statements for the three months ended March 31, 1998 and
1997, have been prepared by the Company, without audit, pursuant to
Accounting Principles Board (ABP) Opinion No. 28, "Interim Financial
Reporting." Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the
information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results of its operations
for the three months ended March 31, 1998 and 1997, have been included
herein. The results of operations for the three-month periods are not
necessarily indicative of the results for the full year.
3. BUSINESS COMBINATIONS
Effective February 2, 1998 and March 1, 1998, the Company acquired
certain assets and assumed certain liabilities of E. Harrison Cole,
D.D.S. in Indianapolis, Indiana and Dental Care One in Dayton, Ohio,
respectively, for an aggregate of $3.0 million in cash and 38,037
shares of Common Stock in asset purchase transactions accounted for
as purchases.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21B
of the Securities and Exchange Act of 1934. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among others, the
constantly changing health care environment, the pace of development and
acquisition activity, the reimbursement rates for dental services, and other
risks detailed in the Company's Securities and Exchange Commission filings.
Other risk factors are listed in the Company's Prospectus dated July 17, 1997 as
filed with the U.S. Securities and Exchange Commission.
OVERVIEW
The Company manages dental group practices in selected markets. At
March 31, 1998, these markets included Dallas-Fort Worth, Houston, San Antonio
and Midland-Odessa, Texas; Wisconsin; Arkansas; Indiana; Colorado and Ohio. 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>
1994 1995 1996 1997 1998 (1)
---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Offices at beginning of period 9 10 12 53 99
De novo offices 1 2 2 7 2
Acquired offices - - 39 39 10
Closed offices - - - - (1)
- - - - -
Offices at end of period 10 12 53 99 110
== == == == ===
</TABLE>
(1) Through March 31, 1998
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.
8
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Dental group practices revenue, net. Revenue increased from $14.5
million for the three months ended March 31, 1997 to $24.3 million for the three
months ended March 31, 1998, an increase of $9.8 million, or 67.7%. This
increase resulted from the acquisitions of 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, Dental America and Dental Care One in
April 1997, August 1997, October 1997, November 1997, November 1997, December
1997 and March 1998, respectively, which contributed combined Revenue of $6.9
million for the three months ended March 31, 1998. Dental offices in the
Dallas-Fort Worth, Houston, Wisconsin and Arkansas markets (the "existing
markets") contributed an additional $2.9 million of the increase in Revenue in
the three months ended March 31, 1998 resulting from the opening of eight de
novo Dental Offices, the physical expansion of eight existing Dental Offices and
the acquisition of six solo practices.
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 $9.1 million for the three months ended
March 31, 1997 to $15.2 million for the three months ended March 31, 1998, an
increase of $6.1 million, or 67.7%. This increase resulted from the acquisitions
of United, DCI, J.B. Hays, Three Peaks, Press Family Dental, Dental America and
Dental Care One which contributed combined fee-for-service Revenue of $5.2
million for the three months ended March 31, 1998. In existing markets,
fee-for-service Revenue increased from $9.1 million for the three months ended
March 31, 1997 to $9.9 million for the three months ended March 31, 1998,
representing an increase of $845,000, or 9.3%. The increase in existing markets
resulted from the opening of eight de novo Dental Offices, the physical
expansion of eight existing Dental Offices and the acquisition of six solo
practices. Managed dental care Revenue (i.e., Revenue from capitated managed
dental care plans, including capitation payments and patient co-payments)
increased from $5.4 million for the three months ended March 31, 1997 to $9.1
million for the three months ended March 31, 1998, an increase of $3.7 million,
or 68.8%. This increase resulted in part from the acquisitions of United, DCI,
J.B. Hays, Three Peaks, Press Family Dental, Dental America and Dental Care One
which contributed combined managed dental care Revenue of $1.7 million for the
three months ended March 31, 1998. In existing markets, managed dental care
Revenue increased from $5.4 million for the three months ended March 31, 1997 to
$7.4 million for the three months ended March 31, 1998, an increase of $2.0
million or 37.2%. The increase in existing markets resulted from the opening of
eight de novo Dental Offices, the physical expansion of eight existing Dental
Offices and the acquisition of six solo practices. As a percentage of Revenue,
fee-for-service Revenue decreased slightly from 62.6% to 62.5% for the three
months ended March 31, 1997 and 1998, respectively.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $5.0 million for the three months ended March 31,
1997 to $7.9 million for the three months ended March 31, 1998, an increase of
$2.9 million, or 57.5%. The increase was due to the acquisitions of United, DCI,
J.B. Hays, Three Peaks, Press Family Dental, Dental America and Dental Care One
which together added amounts retained by dental group practices of $2.1 million
for the three months ended March 31, 1998. In existing markets, amounts retained
by dental group practices increased $764,000 resulting from an increase in
dentist and hygienist compensation due to a higher level of production at the
Dental Offices, the opening of eight de novo Dental Offices, the physical
expansion of eight existing Dental Offices and the acquisition of six solo
practices. As a percent of Revenue, amounts retained by dental group practices
decreased from 34.7% to 32.6% for the three months ended March 31, 1997 and
1998, respectively. This decrease was due principally to the acquisitions having
lower amounts retained by dental group practices as a percent of Revenue than
the Company's existing operations.
Clinical salaries and benefits. Clinical salaries and benefits expense
increased from $2.4 million for the three months ended March 31, 1997 to $4.2
million for the three months ended March 31, 1998, an increase of $1.8 million,
or 73.5%. The increase resulted from the acquisitions of United, DCI, J.B. Hays,
Three Peaks, Press Family Dental,
9
<PAGE> 10
Dental America and Dental Care One which added combined clinical salaries and
benefits expense of $1.4 million for the three months ended March 31,1998. In
existing markets, clinical salaries and benefits expense increased $384,000 due
to the opening of eight de novo Dental Offices, the physical expansion of eight
existing Dental Offices and the acquisition of six solo practices. As a percent
of Revenue, clinical salaries and benefits expense increased from 16.9% to 17.5%
for the three months ended March 31, 1997 and 1998, respectively. This increase
was due principally to the acquisitions having higher clinical salaries and
benefits expense as a percent of Revenue than the Company's existing operations.
Other salaries and benefits. Other salaries and benefits expense
increased from $1.4 million for the three months ended March 31, 1997 to $2.2
million for the three months ended March 31, 1998, an increase of $833,000, or
60.1%. The increase resulted from the acquisitions of United, DCI, J.B. Hays,
Three Peaks, Press Family Dental, Dental America and Dental Care One which added
combined other salaries and benefits expense of $403,000 for the three months
ended March 31,1998. In existing markets, other salaries and benefits expense
increased $430,000 primarily from the building of additional corporate
infrastructure to manage corporate growth. As a percent of Revenue, other
salaries and benefits expense decreased from 9.6% to 9.1% for the three months
ended March 31, 1997 and 1998, respectively. This decrease was due principally
to leveraging corporate expenses against additional Revenue and expansion in
existing markets.
Dental supplies. Dental supplies expense increased from $912,000 for
the three months ended March 31, 1997 to $1.4 million for the three months ended
March 31, 1998, an increase of $528,000, or 57.9%. This increase resulted from
the acquisitions of United, DCI, J.B. Hays, Three Peaks, Press Family Dental,
Dental America and Dental Care One which added $419,000 of combined dental
supplies expense for the three months ended March 31, 1998. In existing markets,
dental supplies expense increased $109,000 as a result of increased production.
As a percent of Revenue, dental supplies expense decreased from 6.3% to 5.9% for
the three months ended March 31, 1997 and 1998, respectively. This decrease was
due principally to the leveraging of supply contracts with expansion in existing
markets.
Laboratory fees. Laboratory fee expense increased from $591,000 for the
three months ended March 31, 1997 to $1.1 million for the three months ended
March 31, 1998, an increase of $467,000, or 79.0%. This increase resulted from
the acquisitions of United, DCI, J.B. Hays, Three Peaks, Press Family Dental,
Dental America and Dental Care One which added combined laboratory fee expense
of $335,000 for the three months ended March 31, 1998. In existing markets,
laboratory fee expense increased $132,000 as a result of increased production.
As a percent of Revenue, laboratory fee expense increased from 4.1% to 4.4% for
the three months ended March 31, 1997 and 1998, respectively. This increase was
due principally to the acquisitions having higher laboratory fee expense as a
percent of Revenue than the Company's existing operations.
Occupancy. Occupancy expense increased from $800,000 for the three
months ended March 31, 1997 to $1.3 million for the three months ended March 31,
1998, an increase of $529,000, or 66.1%. This increase resulted from the
acquisitions of United, DCI, J.B. Hays, Three Peaks, Press Family Dental, Dental
America and Dental Care One which added a combined $347,000 to occupancy expense
for the three months ended March 31, 1998. In existing markets, occupancy
expense increased $182,000 resulting from the opening of eight de novo Dental
Offices, the physical expansion of eight existing Dental Offices and the
acquisition of six solo practices. As a percent of Revenue, occupancy expense
remained constant at 5.5% for the three months ended March 31, 1997 and 1998.
Advertising. Advertising expense increased from $325,000 for the three
months ended March 31, 1997 to $515,000 for the three months ended March 31,
1998, an increase of $190,000, or 58.5%. This increase resulted from the
acquisitions of United, DCI, J.B. Hays, Three Peaks, Press Family Dental, Dental
America and Dental Care One which added a combined $140,000 to advertising
expense for the three months ended March 31, 1998. There was an increase of
$50,000 in television and print advertising in the existing markets in 1998. As
a percent of Revenue, advertising expense decreased slightly from 2.2% to 2.1%
for the three months ended March 31, 1997 and 1998, respectively.
Depreciation and amortization. Depreciation and amortization expense
increased from $565,000 for the three months ended March 31, 1997 to $1.1
million for the three months ended March 31, 1998, an increase of $522,000, or
10
<PAGE> 11
92.4%. This increase resulted from the acquisitions of United, DCI, J.B. Hays,
Three Peaks, Press Family Dental, Dental America and Dental Care One which added
combined depreciation and amortization expense of $331,000 for the three months
ended March 31, 1998. Depreciation and amortization expense for existing markets
increased $191,000 resulting from the opening of eight de novo Dental Offices,
the physical expansion of eight existing Dental Offices and the acquisition of
six solo practices. As a percent of Revenue, depreciation and amortization
expense increased from 3.9% to 4.5% for the three months ended March 31, 1997
and 1998, respectively. This increase was due principally to the acquisitions
having higher depreciation and amortization expense as a percent of Revenue than
the Company's existing operations.
General and administrative. General and administrative expense
increased from $1.5 million for the three months ended March 31, 1997 to $2.3
million for the three months ended March 31, 1998, an increase of $865,000, or
59.3%. This increase resulted from the acquisitions of United, DCI, J.B. Hays,
Three Peaks, Press Family Dental, Dental America and Dental Care One which added
combined general and administrative expense of $416,000 for the three months
ended March 31, 1998. General and administrative expense for existing markets
increased $449,000 resulting from the expansion of the Company's corporate
infrastructure to manage growth. As a percent of Revenue, general and
administrative expense decreased from 10.2% to 9.6% for the three months ended
March 31, 1997 and 1998, respectively. This decrease was due principally to
leveraging corporate expenses against additional Revenue and expansion in
existing markets.
Operating income. Operating income increased from $962,000 for the
three months ended March 31, 1997 to $2.1 million for the three months ended
March 31, 1998, an increase of $1.2 million, or 122.8%. This increase resulted
from the acquisitions of United, DCI, J.B. Hays, Three Peaks, Press Family
Dental, Dental America and Dental Care One which added combined operating income
of $997,000 for the three months ended March 31, 1998. Income from the Company's
existing markets increased $660,000 for the three months ended March 31, 1998,
which was offset by increased corporate expenses of $476,000 due to the
development of corporate infrastructure. As a percent of Revenue, operating
income increased from 6.6% to 8.8% for the three months ended March 31, 1997 and
1998, respectively. This incease was due principally to the acquisitions
experiencing higher operating margins than the Company's existing operations
and margin improvement in amounts retained by dental group practices, other
salaries and benefits expense, dental supplies expense and general and
administrative expense in the existing business.
Interest expense, net. Interest expense, net decreased from $579,000
for the three months ended March 31, 1997 to $283,000 for the three months ended
March 31, 1998, a decrease of $296,000, or 51.3%. This decrease is attributable
to the retirement of $24.8 million in outstanding debt under a 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 for the three months ended March 31, 1997 was $23.2 million compared
to average debt outstanding of $10.5 million for the three months ended March
31, 1998.
Minority interest. Minority interest expense was $50,000 for the three
months ended March 31, 1998 as a result of the acquisitions of DCI, which owns a
fifty percent ownership 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 $150,000 for the three
months ended March 31, 1997 to $707,000 for the three months ended March 31,
1998, an increase of $557,000, or 371.3%. This increase was the result of higher
net income before taxes, which increased from $383,000 for the three months
ended March 31, 1997 to $1.8 million for the three months ended March 31, 1998,
an increase of $1.4 million, or 372.8%.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a $204,000 working capital deficit,
representing a decrease of $1.5 million from the working capital surplus of $1.3
million at December 31, 1997. This working capital deficit included $11.1
million in current liabilities, consisting primarily of $2.2 million in accounts
payable, $2.8 million in accrued liabilities, $2.8 million in deferred purchase
price as consideration for the acquisition of a dental group practice, $2.1
million in amounts payable to dental group practices as consideration for
accounts receivable acquired from such group practices and $498,000 in current
maturities of notes payable and capital lease obligations. Current liabilities
were substantially offset by current assets of $10.9 million, consisting
primarily of $3.9 million in cash and cash equivalents and $6.5 million in
accounts receivable, net of allowances. The Company's principal sources of
liquidity as of March 31, 1998 consisted of cash and cash equivalents, net
accounts receivable and borrowing capacity under the Credit Facility. 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 three months ended March 31, 1997 and 1998, cash provided by
operations was $472,000 and $1.6 million, respectively.
Cash used in investing activities was $3.1 million for the three months
ended March 31, 1997 and $2.1 million for the three months ended March 31, 1998.
In the three months ended March 31, 1997, $2.7 million was utilized for
acquisitions and $384,000 was invested in the purchase of additional property
and equipment. In the three months ended March 31, 1998, $608,000 was utilized
for acquisitions and $1.5 million was invested in the purchase of additional
property and equipment.
For the three months ended March 31, 1997 and 1998, cash provided by
financing activities was $2.0 million and $1.4 million, respectively. In the
three months ended March 31, 1997, the cash provided was comprised of $1.7
million in proceeds from the issuance of stock and $334,000 in net borrowings.
In the three months ended March 31, 1998, the cash provided was comprised of
$1.4 million in net borrowings, $46,000 in proceeds from the issuance of stock
and $30,000 in partnership distributions.
The Company has a Credit Facility, which expires November 4, 2002, with
a bank syndicate. Under the Credit Facility, the Company may borrow up to $30.0
million. As of March 31, 1998, the Company had outstanding borrowings of $11.9
million 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 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 three months. The Company expects to fund future
acquisitions with cash from operations and borrowings under the Credit Facility.
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 costs of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) In January 1998, pursuant to an Asset Purchase Agreement, the
Company issued 3,256 shares of Common Stock to E. Harrison Cole,
D.D.S. in partial consideration for the sale of certain assets
and assumption of certain liabilities of E. Harrison Cole, D.D.S
in reliance upon the exemption from registration under Regulation
D promulgated under the Securities Act.
In March 1998, pursuant to the 1996 Stock Option and Incentive
Plan, the Company granted options to purchase 117,000 shares of
Common Stock at an exercise price of $15.375 per share to certain
employees of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
11 Statement re: Computation of per share earnings data
27 Financial Data Schedules
(b) Reports on Form 8-K.
Not applicable.
13
<PAGE> 14
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: May 15, 1998 By: Gary W.Cage
-----------------------------
Gary W. Cage
Chief Executive Officer
Date: May 15, 1998 By: Steven G. Peterson
-----------------------------
Steven G. Peterson
Chief Financial Officer
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
11 Statement re: Computation of per share earnings data
27 Financial Data Schedules
</TABLE>
15
<PAGE> 1
EXHIBIT 11
MONARCH DENTAL CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
PRIMARY:
Net income $ 1,104 $ 233
------- -------
Weighted average common shares outstanding 10,235 3,217
------- -------
Net income per share $ 0.11 $ 0.07
======= =======
FULLY DILUTED:
Net income $ 1,104 $ 233
------- -------
Weighted average common and common equivalent shares outstanding:
Weighted average common shares outstanding 10,235 3,217
Weighted average common equivalent shares outstanding 87 3,190
------- -------
Weighted average common and common equivalent shares outstanding 10,322 6,407
------- -------
Net income per share $ 0.11 $ 0.04
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,887,722
<SECURITIES> 0
<RECEIVABLES> 9,835,637
<ALLOWANCES> (3,297,000)
<INVENTORY> 0
<CURRENT-ASSETS> 10,891,857
<PP&E> 14,766,020
<DEPRECIATION> (5,026,500)
<TOTAL-ASSETS> 70,829,701
<CURRENT-LIABILITIES> 11,095,759
<BONDS> 0
0
0
<COMMON> 102,358
<OTHER-SE> 43,042,229
<TOTAL-LIABILITY-AND-EQUITY> 70,829,701
<SALES> 0
<TOTAL-REVENUES> 24,279,526
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,217,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282,641
<INCOME-PRETAX> 1,810,547
<INCOME-TAX> 707,000
<INCOME-CONTINUING> 1,103,547
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,103,547
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
