<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
Class Outstanding as of November 13, 1998
----- -----------------------------------
Common Stock, $.01 par value 11,931,582
<PAGE> 2
MONARCH DENTAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Part I. Financial Information
Item 1. Report of Independent Public Accountants 3
Item 2. Consolidated Financial Statements 4
Item 3. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports Filed on Form 8-K 19
Signatures 20
Exhibit Index 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the stockholders of
Monarch Dental Corporation:
We have reviewed the accompanying consolidated balance sheet of Monarch Dental
Corporation (a Delaware corporation) and subsidiaries as of September 30, 1998
and the related consolidated statements of income and cash flows for the
three-month and nine-month periods ended September 30, 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
November 10, 1998
3
<PAGE> 4
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,908,551 $ 2,975,142
Accounts receivable, net of allowances of approximately
$8,832,000 and $2,865,000, respectively 12,125,035 5,855,694
Prepaid expenses 1,322,381 255,773
------------- ------------
Total current assets 19,355,967 9,086,609
Property and equipment, net of accumulated depreciation of
approximately $8,064,000 and $4,381,000, respectively 18,402,174 8,665,758
Intangible assets, net of accumulated amortization of
approximately $3,331,000 and $1,677,000, respectively 124,570,034 46,261,511
Other assets 4,615,518 577,794
------------- ------------
Total assets $ 166,943,693 $ 64,591,672
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,238,679 $ 1,898,118
Accrued payroll 2,116,264 1,798,487
Accrued liabilities 12,826,703 1,066,454
Taxes payable 1,133,520 297,380
Payable to affiliated dental group practices 3,446,975 2,071,564
Current maturities of notes payable and capital lease obligations 5,090,733 617,582
------------- ------------
Total current liabilities 31,852,874 7,749,585
Deferred income taxes 3,054,407 2,264,312
Notes payable 66,096,921 10,350,512
Capital lease obligations 922,620 849,425
Other liabilities 3,057,630 1,241,666
------------- ------------
Total liabilities 104,984,452 22,455,500
Minority interest in combined subsidiaries 98,239 170,653
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;
11,931,582 and 10,228,473 shares issued and outstanding
respectively 119,316 102,285
Additional paid-in capital 63,269,398 47,534,874
Retained earnings (deficit) (1,527,712) (5,671,640)
------------- ------------
Total stockholders' equity 61,861,002 41,965,519
------------- ------------
Total liabilities and stockholders' equity $ 166,943,693 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dental group practices revenue, net $ 34,090,265 $17,436,339 $84,222,787 $48,157,197
Less - Amounts retained by dental group practices 11,177,506 5,673,996 27,061,293 16,160,255
------------ ----------- ----------- -----------
Net revenue 22,912,759 11,762,343 57,161,494 31,996,942
Operating expenses:
Clinical salaries and benefits 6,490,228 2,986,584 15,471,508 8,286,618
Other salaries and benefits 2,762,065 1,765,652 7,211,381 4,779,086
Dental supplies 1,624,394 1,119,034 4,526,085 3,036,627
Laboratory fees 1,510,029 769,749 3,798,641 2,021,608
Occupancy 1,736,411 955,151 4,408,771 2,617,162
Advertising 598,528 515,663 1,692,038 1,261,961
Depreciation and amortization 1,719,016 724,169 4,046,857 1,957,498
General and administrative 3,237,284 1,636,532 8,166,229 4,608,611
------------ ----------- ----------- -----------
19,677,955 10,472,534 49,321,510 28,569,171
------------ ----------- ----------- -----------
Operating income 3,234,804 1,289,809 7,839,984 3,427,771
Interest expense, net 481,906 149,557 995,821 1,374,406
Minority interest in combined subsidiaries (15,143) 30,178 49,235 30,178
------------ ----------- ----------- -----------
Income before income taxes and extraordinary item 2,768,041 1,110,074 6,794,928 2,023,187
Income taxes 1,080,000 428,532 2,651,000 783,815
------------ ----------- ----------- -----------
Income before extraordinary item 1,688,041 681,542 4,143,928 1,239,372
Extraordinary loss on early extinguishment of debt,
net of applicable tax benefit of $166,540 -- 263,796 -- 263,796
------------ ----------- ----------- -----------
Net income $ 1,688,041 $ 417,746 $ 4,143,928 $ 975,576
============ =========== =========== ===========
Net income per common share:
Income before extraordinary item $ 0.16 $ 0.08 $ 0.40 $ 0.24
Extraordinary item -- 0.03 -- 0.05
------------ ----------- ----------- -----------
Net income $ 0.16 $ 0.05 $ 0.40 $ 0.19
============ =========== =========== ===========
Net income per common share - assuming dilution:
Income before extraordinary item $ 0.16 $ 0.07 $ 0.39 $ 0.16
Extraordinary item -- 0.03 -- 0.03
------------ ----------- ----------- -----------
Net income $ 0.16 $ 0.04 $ 0.39 $ 0.13
============ =========== =========== ===========
Weighted average number of common shares
outstanding 10,708,241 8,746,347 10,424,157 5,101,724
============ =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding 10,796,667 9,587,293 10,585,986 7,716,925
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial Statements.
5
<PAGE> 6
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,143,928 $ 975,576
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 4,046,857 1,957,498
Extraordinary loss -- 263,796
Minority interest in combined subsidiaries 49,235 30,178
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net (1,963,896) (438,036)
Prepaid expenses (438,169) (35,978)
Other noncurrent assets (784,774) (49,257)
Accounts payable and accrued expenses 1,034,099 298,724
Other liabilities (576,465) (25,963)
Deferred income taxes 770,524 487,915
------------ ------------
Net cash provided by operating activities 6,281,339 3,464,453
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,329,372) (1,501,941)
Cash paid for dental group practices, including
related costs, net of cash acquired (49,452,034) (7,407,614)
------------ ------------
Net cash used in investing activities (54,781,406) (8,909,555)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of issuance costs 52,750,000 4,985,000
Payments on notes payable and capital lease obligations (1,363,785) (27,314,751)
Distribution to stockholders/partners (102,176) (20,000)
Repurchase of Common Stock -- (1,811)
Repurchase of Redeemable Preferred Stock -- (8,000,000)
Issuance of common stock 149,437 38,597,913
------------ ------------
Net cash provided by financing 51,433,476 8,246,351
------------ ------------
NET INCREASE IN CASH 2,933,409 2,801,249
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,975,142 1,059,337
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,908,551 $ 3,860,586
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 689,500 $ 1,221,849
============ ============
Cash paid for taxes $ 2,024,600 $ 300,000
============ ============
Equipment acquired under capital leases $ 855,038 $ 666,176
============ ============
Debt assumed through acquisitions $ 42,936,288 $ 1,128,000
============ ============
</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, Midland- Odessa and Austin, Texas; Wisconsin; Arkansas;
Indiana; Colorado; Cleveland and Dayton, Ohio; New Mexico; Northern
and Southern Virginia; Florida; Atlanta, Georgia; Pittsburgh and
Philadelphia, Pennsylvania; Northern New Jersey; Arizona and Utah. As
of September 30, 1998, the Company managed 194 dental group practices
in Texas, Wisconsin, Arkansas, Indiana, Colorado, Ohio, New Mexico,
Virginia, Florida, Georgia, Pennsylvania, New Jersey, Arizona and
Utah.
2. BASIS OF PRESENTATION
The financial statements for the three and nine months ended September
30, 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 and nine months ended September 30, 1998 and
1997, have been included herein. The results of operations for the
three- and nine-month periods are not necessarily indicative of the
results for the full year.
In November 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued guidance in EITF 97-2 on certain
accounting matters relating to the physician practice management
industry including criteria for the consolidation of professional
corporation revenue under management agreements. The Company has
determined that it meets the criteria for consolidation under its
management agreements and will adopt the provisions of EITF 97-2 in
the fourth quarter of 1998. Adoption of the new accounting standard
will not have a material impact on the Company's financial position or
results of operation.
Other Liabilities. Other liabilities consist primarily of reserves
related to acquisitions accounted for as purchases and deferred rent
for the Company's facilities.
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
for an aggregate purchase consideration of $3.0 million, consisting of
$2.5 million in cash and 38,037 shares of Common Stock in asset
purchase transactions accounted for as purchases.
Effective May 1, 1998, June 1, 1998 and June 1, 1998, the Company
acquired certain assets and assumed certain liabilities of H.T. Green,
D.D.S. in San Antonio, Texas, A. Scott Terry, D.D.S., S.C. in
Manitowoc, Wisconsin and Louis Garcia, D.D.S. in San Antonio, Texas
for an aggregate purchase consideration of $602,000, consisting of
$534,000 in cash and 4,757 shares of Common Stock in asset purchase
transactions accounted for as purchases.
Effective June 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Managed Dental Care Centers, Inc. in
Dallas, Texas, for $2.2 million, consisting of $2.0 million in cash and
27,686 shares of Common Stock in an asset purchase transaction
accounted for as a purchase.
Effective September 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Gary Paterick, D.D.S. in Abilene,
Texas, for $274,000, consisting of $211,000 in cash and 4,689 shares of
Common Stock in an asset purchase transaction accounted for as a
purchase.
7
<PAGE> 8
Effective September 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Valley Forge Dental Associates, Inc. in
King of Prussia, Pennsylvania, for $55.7 million, consisting of
1,559,111 shares of Common Stock and the assumption of $42.0 million
of debt in an asset purchase transaction accounted for as a purchase.
Effective September 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Talbert Medical Management Corporation,
which operated dental offices in Utah and Arizona, for $7.0 million in
cash in an asset purchase transaction accounted for as a purchase.
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, 1997. Future results
may differ substantially from pro forma results and cannot be
considered indicative of future results.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------------------------------------------------
(Unaudited; in thousands) 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C>
Dental group practices revenue, net $ 125,576 $ 70,788
--------------------------------------------------------------------------------------
Net income $ 1,332 $ 1,204
--------------------------------------------------------------------------------------
Net income per common share - assuming
dilution $ 0.11 $ 0.13
--------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
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 and success of the
Company's 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
September 30, 1998, these markets included Dallas-Fort Worth, Houston, San
Antonio, Midland-Odessa and Austin, Texas; Wisconsin; Arkansas; Indiana;
Colorado; Cleveland and Dayton, Ohio; New Mexico; Northern and Southern
Virginia; Florida; Atlanta, Georgia; Pittsburgh and Philadelphia, Pennsylvania;
Northern New Jersey; Arizona and Utah. 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, by opening Dental
Offices on a de novo basis and through acquisitions of existing dental
practices. 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 7
Acquired offices -- -- 39 39 90
Closed offices -- -- -- -- (2)
---- ---- ---- ---- ----
Offices at end of period 10 12 53 99 194
== == == == ====
</TABLE>
(1) Through September 30, 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,
9
<PAGE> 10
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Dental group practices revenue, net. Revenue increased to $34.1
million for the three months ended September 30, 1998 from $17.4 million for
the three months ended September 30, 1997, an increase of $16.7 million, or
95.5%. This increase resulted primarily from acquisitions and to a lesser
extent expansion in existing markets. The acquisitions of Three Peaks Dental
Health L.P. ("Three Peaks"), Press Family Dental, Dental America, Dental Care
One, Managed Dental Care Centers, Inc. ("MDCC"), Valley Forge Dental
Associates, Inc. ("Valley Forge") and Talbert Medical Management Corporation
("Talbert") in November 1997, November 1997, December 1997, March 1998, June
1998, September 1998 and September 1998, respectively, contributed combined
Revenue of $12.4 million for the three months ended September 30, 1998. Dental
offices in the Dallas-Fort Worth, Houston, Wisconsin, Arkansas and Indiana
markets (the "existing markets") contributed an additional $4.3 million of the
increase in Revenue in the three months ended September 30, 1998 resulting
primarily from the opening of nine de novo Dental Offices, the physical
expansion of seven existing Dental Offices and the acquisition of nine dental
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 to $20.3 million for the three months ended
September 30, 1998 from $10.8 million for the three months ended September 30,
1997, an increase of $9.5 million, or 89.8%. This increase resulted primarily
from the acquisitions of Three Peaks, Press Family Dental, Dental America,
Dental Care One, MDCC, Valley Forge and Talbert which contributed combined
fee-for-service Revenue of $7.6 million for the three months ended September
30, 1998. In existing markets, fee-for-service Revenue increased to $12.7
million for the three months ended September 30, 1998 from $10.8 million for
the three months ended September 30, 1997, representing an increase of $1.9
million, or 18.6%. The increase in existing markets resulted primarily from the
opening of nine de novo Dental Offices, the physical expansion of seven
existing Dental Offices and the acquisition of nine dental practices. Managed
dental care Revenue (i.e., Revenue from capitated managed dental care plans,
including capitation payments and patient co-payments) increased to $13.8
million for the three months ended September 30, 1998 from $6.6 million for the
three months ended September 30, 1997, an increase of $7.2 million, or 107.0%.
This increase resulted in part from the acquisitions of Three Peaks, Press
Family Dental, Dental America, Dental Care One, MDCC, Valley Forge and Talbert
which contributed combined managed dental care Revenue of $4.8 million for the
three months ended September 30, 1998. In existing markets, managed dental
care Revenue increased to $9.0 million for the three months ended September 30,
1998 from $6.6 million for the three months ended September 30, 1997, an
increase of $2.4 million or 36.5%. The increase in existing markets resulted
primarily from the opening of nine de novo Dental Offices, the physical
expansion of seven existing Dental Offices and the acquisition of nine dental
practices. As a percentage of Revenue, fee-for-service Revenue decreased to
59.6% from 61.7% for the three months ended September 30, 1998 and 1997,
respectively.
Amounts retained by dental group practices. Amounts retained by
dental group practices increased to $11.2 million for the three months ended
September 30, 1998 from $5.7 million for the three months ended September 30,
1997, an increase of $5.5 million, or 97.0%. The increase resulted primarily
from the acquisitions of Three Peaks, Press Family Dental, Dental America,
Dental Care One, MDCC, Valley Forge and Talbert which together added amounts
retained by dental group practices of $4.2 million for the three months ended
September 30, 1998. In existing markets, amounts retained by dental group
practices increased $1.3 resulting from an increase in dentist and hygienist
compensation due to a higher level of production at the Dental Offices, the
opening of nine de novo Dental Offices, the physical expansion of seven
existing Dental Offices and the acquisition of nine dental practices. As a
percent of Revenue, amounts retained by dental group practices increased
slightly to 32.8% from 32.5% for the three months ended September 30, 1998 and
1997, respectively.
10
<PAGE> 11
Clinical salaries and benefits. Clinical salaries and benefits
expense increased to $6.5 million for the three months ended September 30, 1998
from $3.0 million for the three months ended September 30, 1997, an increase of
$3.5 million, or 117.3%. The increase resulted primarily from the acquisitions
of Three Peaks, Press Family Dental, Dental America, Dental Care One, MDCC,
Valley Forge and Talbert which added combined clinical salaries and benefits
expense of $2.7 million for the three months ended September 30,1998. In
existing markets, clinical salaries and benefits expense increased $786,000
resulting primarily from the opening of nine de novo Dental Offices, the
physical expansion of seven existing Dental Offices and the acquisition of nine
dental practices. As a percent of Revenue, clinical salaries and benefits
expense increased to 19.0% from 17.1% for the three months ended September 30,
1998 and 1997, 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 to $2.8 million for the three months ended September 30, 1998 from
$1.8 million for the three months ended September 30, 1997, an increase of
$996,000, or 56.4%. The increase resulted primarily from the acquisitions of
Three Peaks, Press Family Dental, Dental America, Dental Care One, MDCC, Valley
Forge and Talbert which added combined other salaries and benefits expense of
$675,000 for the three months ended September 30,1998. In existing markets,
other salaries and benefits expense increased $321,000 primarily from the
building of additional corporate infrastructure to manage growth. As a percent
of Revenue, other salaries and benefits expense decreased to 8.1% from 10.1%
for the three months ended September 30, 1998 and 1997, respectively. This
decrease was due principally to leveraging corporate expenses against
additional Revenue resulting from acquisitions and expansion in existing
markets.
Dental supplies. Dental supplies expense increased to $1.6 million
for the three months ended September 30, 1998 from $1.1 million for the three
months ended September 30, 1997, an increase of $505,000, or 45.2%. This
increase resulted primarily from the acquisitions of Three Peaks, Press Family
Dental, Dental America, Dental Care One, MDCC, Valley Forge and Talbert which
added $652,000 of combined dental supplies expense for the three months ended
September 30, 1998. In existing markets, dental supplies expense decreased
$147,000 as a result of leveraging supply contracts against expansion in
existing markets. As a percent of Revenue, dental supplies expense decreased
to 4.8% from 6.4% for the three months ended September 30, 1998 and 1997,
respectively. This decrease was due principally to the leveraging of supply
contracts with expansion in existing markets.
Laboratory fees. Laboratory fee expense increased to $1.5 million for
the three months ended September 30, 1998 from $770,000 for the three months
ended September 30, 1997, an increase of $740,000, or 96.2%. This increase
resulted primarily from the acquisitions of Three Peaks, Press Family Dental,
Dental America, Dental Care One, MDCC, Valley Forge and Talbert which added
combined laboratory fee expense of $733,000 for the three months ended
September 30, 1998. In existing markets, laboratory fee expense increased
$7,000 as a result of increased production. As a percent of Revenue,
laboratory fee expense remained constant at 4.4% for the three months ended
September 30, 1998 and 1997.
Occupancy. Occupancy expense increased to $1.7 million for the
three months ended September 30, 1998 from $955,000 for the three months ended
September 30, 1997, an increase of $781,000, or 81.8%. This increase resulted
primarily from the acquisitions of Three Peaks, Press Family Dental, Dental
America, Dental Care One, MDCC, Valley Forge and Talbert which added a combined
$596,000 to occupancy expense for the three months ended September 30, 1998.
In existing markets, occupancy expense increased $185,000 resulting primarily
from the opening of nine de novo Dental Offices, the physical expansion of seven
existing Dental Offices and the acquisition of nine dental practices. As a
percent of Revenue, occupancy expense decreased slightly to 5.1% from 5.5% for
the three months ended September 30, 1998 and 1997, respectively.
Advertising. Advertising expense increased to $599,000 for the three
months ended September 30, 1998 from $516,000 for the three months ended
September 30, 1997, an increase of $83,000, or 16.1%. This increase resulted
from the acquisitions of Three Peaks, Press Family Dental, Dental America,
Dental Care One, MDCC, Valley Forge and Talbert which added a combined $189,000
to advertising expense for the three months ended September 30, 1998. In
existing markets, there was a decrease of $106,000 in television and print
advertising as a result of leveraging advertising expense against expansion in
existing markets. As a percent of Revenue, advertising expense decreased to
1.8% from 3.0% for the three months ended September 30, 1998 and 1997,
respectively. This decrease was due to the acquisitions having lower
advertising expense as a percent of Revenue than the Company's existing
operations and leveraging advertising expense with greater market penetration
in existing markets.
11
<PAGE> 12
Depreciation and amortization. Depreciation and amortization expense
increased to $1.7 million for the three months ended September 30, 1998 from
$724,000 for the three months ended September 30, 1997, an increase of
$995,000, or 137.4%. This increase resulted principally from the acquisitions
of Three Peaks, Press Family Dental, Dental America, Dental Care One, MDCC,
Valley Forge and Talbert which added combined depreciation and amortization
expense of $632,000 for the three months ended September 30, 1998.
Depreciation and amortization expense for existing markets increased $363,000
resulting primarily from the opening of nine de novo Dental Offices, the
physical expansion of seven existing Dental Offices and the acquisition of nine
dental practices. As a percent of Revenue, depreciation and amortization
expense increased to 5.0% from 4.2% for the three months ended September 30,
1998 and 1997, 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 to $3.2 million for the three months ended September 30, 1998 from
$1.6 million for the three months ended September 30, 1997, an increase of $1.6
million, or 97.8%. This increase resulted principally from the acquisitions of
Three Peaks, Press Family Dental, Dental America, Dental Care One, MDCC, Valley
Forge and Talbert which added combined general and administrative expense of
$1.1 million for the three months ended September 30, 1998. General and
administrative expense for existing markets increased $467,000 resulting from
the expansion of the Company's corporate infrastructure to manage growth. As a
percent of Revenue, general and administrative expense increased slightly to
9.5% from 9.4% for the three months ended September 30, 1998 and 1997,
respectively.
Operating income. Operating income increased to $3.2 million for the
three months ended September 30, 1998 from $1.3 million for the three months
ended September 30, 1997, an increase of $1.9 million, or 150.8%. This
increase resulted in part from the acquisitions of Three Peaks, Press Family
Dental, Dental America, Dental Care One, MDCC, Valley Forge and Talbert which
added combined operating income of $831,000 for the three months ended
September 30, 1998. Income from the Company's existing markets increased $1.6
million for the three months ended September 30, 1998, which was offset by
increased corporate expenses of $498,000 due to the development of corporate
infrastructure. As a percent of Revenue, operating income increased to 9.5%
from 7.4% for the three months ended September 30, 1998 and 1997, respectively.
This increase was due principally to the margin improvement in other salaries
and benefits expense, dental supplies expense, occupancy expense and
advertising expense.
Interest expense, net. Interest expense, net increased to $482,000
for the three months ended September 30, 1998 from $150,000 for the three
months ended September 30, 1997, an increase of $332,000, or 222.2%. This
increase 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. This retirement was offset
by subsequent borrowing by the Company under a new Credit Facility (the "Credit
Facility") with a bank syndicate. Average debt outstanding for the three
months ended September 30, 1998 was $28.0 million compared to average debt
outstanding of $5.9 million for the three months ended September 30, 1997.
Minority interest. Minority interest expense decreased to ($15,000)
for the three months ended September 30, 1998 from $30,000 for the three months
ended September 30, 1997, a decrease of $45,000, or 150.2%. This decrease
resulted from lower net income relating to the acquisitions of Dental Centers
of Indiana, Inc. ("DCI"), which owns a fifty percent ownership in two
partnerships operating four Dental Offices in Indiana, Dental America, which
owns a twenty percent interest in a group dental practice with two offices
located in Midland and Odessa, Texas, and MDCC, which owns a thirty-five
percent interest in a group dental practice with two offices in Austin, Texas
and five offices in New Mexico for the three months ended September 30, 1998
and 1997, respectively.
Income taxes. Income tax expense increased to $1.1 million for the
three months ended September 30, 1998 from $429,000 for the three months ended
September 30, 1997, an increase of $651,000, or 152.0%. This increase was the
result of higher net income before taxes, which increased to $2.8 million for
the three months ended September 30, 1998 from $1.1 million for the three
months ended September 30, 1997, an increase of $1.7 million, or 149.4%.
12
<PAGE> 13
Extraordinary loss. The Company incurred an extraordinary loss of
$264,000, net of tax for the three months ended September 30, 1997 as it
extinguished its Credit Facility and wrote off $431,000 in unamortized loan
fees, net of a tax benefit of $167,000.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Dental group practices revenue, net. Revenue increased to $84.2
million for the nine months ended September 30, 1998 from $48.2 million for the
nine months ended September 30, 1997, an increase of $36.0 million, or 74.9%.
This increase resulted primarily from acquisitions and to a lesser extent
expansion in existing markets. The acquisitions of Three Peaks, Press Family
Dental, Dental America, Dental Care One, MDCC, Valley Forge and Talbert in
November 1997, November 1997, December 1997, March 1998, June 1998, September
1998 and September 1998, respectively, which contributed combined Revenue of
$21.2 million for the nine months ended September 30, 1998. Revenue for the
Dental offices in existing markets increased $14.8 million, or 30.8% for the
nine months ended September 30, 1998, resulting primarily from the opening of
nine de novo Dental Offices, the physical expansion of seven existing Dental
Offices, the acquisition of nine dental practices and the acquisitions of
United Dental Care Tom Harris D.D.S. and Associates ("United") and DCI in April
1997 and August 1997, respectively, which provided three and seven additional
months of Revenue for the nine months ended September 30, 1998.
Fee-for-service Revenue increased to $51.6 million for the nine months
ended September 30, 1998 from $29.6 million for the nine months ended September
30, 1997, an increase of $22.0 million, or 74.6%. This increase resulted from
the acquisitions of Three Peaks, Press Family Dental, Dental America, Dental
Care One, MDCC, Valley Forge and Talbert which contributed combined
fee-for-service Revenue of $14.4 million for the nine months ended September
30, 1998. In existing markets, fee-for-service Revenue increased to $37.2
million for the nine months ended September 30, 1998 from $29.6 million for the
nine months ended September 30, 1997, representing an increase of $7.6 million
or 25.9%. This increase resulted primarily from the opening of nine de novo
Dental Offices, the physical expansion of seven existing Dental Offices, the
acquisition of nine dental practices and the acquisitions of United and DCI in
April 1997 and August 1997, respectively, which provided three and seven
additional months of Revenue for the nine months ended September 30, 1998.
Managed dental care Revenue increased to $32.6 million for the nine months
ended September 30, 1998 from $18.5 million for the nine months ended September
30, 1997, an increase of $14.1 million, or 76.1%. This increase resulted in
part from the acquisitions of Three Peaks, Press Family Dental, Dental America,
Dental Care One, MDCC, Valley Forge and Talbert which contributed combined
managed dental care Revenue of $6.8 million for the nine months ended September
30, 1998. In existing markets, managed dental care Revenue increased to $25.8
million for the nine months ended September 30, 1998 from $18.5 million for the
nine months ended September 30, 1997, an increase of $7.3 million or 39.2%.
This increase resulted primarily from the opening of nine de novo Dental
Offices, the physical expansion of seven existing Dental Offices, the
acquisition of nine dental practices and the acquisitions of United and DCI in
April 1997 and August 1997, respectively, which provided three and seven
additional months of managed dental care Revenue for the nine months ended
September 30, 1998. As a percentage of Revenue, fee-for-service Revenue
decreased to 61.3% from 61.5% for the nine months ended September 30, 1998 and
1997, respectively.
Amounts retained by dental group practices. Amounts retained by
dental group practices increased to $27.1 million for the nine months ended
September 30, 1998 from $16.2 million for the nine months ended September 30,
1997, an increase of $10.9 million, or 67.5%. The increase resulted from the
acquisitions of Three Peaks, Press Family Dental, Dental America, Dental Care
One, MDCC, Valley Forge and Talbert which together added amounts retained by
dental group practices of $6.7 million for the nine months ended September 30,
1998. In existing markets, amounts retained by dental group practices
increased $4.2 million, or 25.7%, as dentist and hygienist compensation
increased as a result of a higher level of production at the Dental Offices,
the opening of nine de novo Dental Offices, the physical expansion of seven
existing Dental Offices, the acquisition of nine dental practices and the
acquisitions of United and DCI in April 1997 and August 1997, respectively,
which contributed three and seven additional months of amounts retained by
dental group practices for the nine months ended September 30, 1998. As a
percent of Revenue, amounts
13
<PAGE> 14
retained by dental group practices decreased to 32.1% from 33.6% for the nine
months ended September 30, 1998 and 1997, respectively. This decrease was due
to the acquisitions having lower amounts retained by dental group practices as
a percent of Revenue than the Company's existing operations, and a reduction in
the amounts retained by dental group practices as a percent of Revenue for the
Company's current markets.
Clinical salaries and benefits. Clinical salaries and benefits
increased to $15.5 million for the nine months ended September 30, 1998 from
$8.3 million for the nine months ended September 30, 1997, an increase of $7.2
million, or 86.7%. The increase resulted from the acquisitions of Three Peaks,
Press Family Dental, Dental America, Dental Care One, MDCC, Valley Forge and
Talbert which together added combined clinical salaries and benefits expense of
$4.8 million for the nine months ended September 30, 1998. In existing
markets, clinical salaries and benefits expense increased $2.4 million
resulting primarily from the opening of nine de novo Dental Offices, the
physical expansion of seven existing Dental Offices, the acquisition of nine
dental practices and the acquisitions of United and DCI in April 1997 and
August 1997, respectively, which provided three and seven additional months of
clinical salaries and benefits expense for the nine months ended September 30,
1998. As a percent of Revenue, clinical salaries and benefits expense
increased to 18.4% from 17.2% for the nine months ended September 30, 1998 and
1997, 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 to $7.2 million for the nine months ended September 30, 1998 from
$4.8 million for the nine months ended September 30, 1997, an increase of $2.4
million, or 50.9%. The increase resulted from the acquisitions of Three Peaks,
Press Family Dental, Dental America, Dental Care One, MDCC, Valley Forge and
Talbert which added combined other salaries and benefits expense of $1.2 for
the nine months ended September 30, 1998. In existing markets, other salaries
and benefits expense increased $1.2 primarily from the building of additional
corporate infrastructure to manage growth. As a percent of Revenue, other
salaries and benefits expense decreased to 8.6% from 9.9% for the nine months
ended September 30, 1998 and 1997, respectively. This decrease was due
principally to leveraging corporate expenses against additional Revenue
resulting from acquisitions and expansion in existing markets.
Dental supplies. Dental supplies expense increased to $4.5 million
for the nine months ended September 30, 1998 from $3.0 million for the nine
months ended September 30, 1997, an increase of $1.5 million, or 49.0%. This
increase resulted from the acquisitions of Three Peaks, Press Family Dental,
Dental America, Dental Care One, MDCC, Valley Forge and Talbert which added
$1.3 of combined dental supplies expense for the nine months ended September
30, 1998. In existing markets, dental supplies expense increased $237,000 as a
result of increased production and the acquisitions of United and DCI in April
1997 and August 1997, respectively, which provided three and seven additional
months of dental supplies expense for the nine months ended September 30, 1998.
As a percent of Revenue, dental supplies expense decreased to 5.4% from 6.3%
for the nine months ended September 30, 1998 and 1997, respectively. This
decrease was due principally to the leveraging of supply contracts with
expansion in existing markets.
Laboratory fees. Laboratory fee expense increased to $3.8 million for
the nine months ended September 30, 1998 from $2.0 million for the nine months
ended September 30, 1997, an increase of $1.8 million, or 87.9%. This increase
resulted from the acquisitions of Three Peaks, Press Family Dental, Dental
America, Dental Care One, MDCC, Valley Forge and Talbert which added combined
laboratory fee expense of $1.2 for the nine months ended September 30, 1998.
In existing markets, laboratory fee expense increased $537,000 as a result of
increased production. As a percent of Revenue, laboratory fee expense
increased slightly to 4.5% from 4.2% for the nine months ended September 30,
1998 and 1997, respectively.
Occupancy. Occupancy expense increased to $4.4 million for the nine
months ended September 30, 1998 from $2.6 million for the nine months ended
September 30, 1997, an increase of $1.8 million, or 68.5%. This increase
resulted from the acquisitions of Three Peaks, Press Family Dental, Dental
America, Dental Care One, MDCC, Valley Forge and Talbert which added a combined
$1.1 million to occupancy expense for the nine months ended September 30, 1998.
In existing markets, occupancy expense increased $738,000 resulting primarily
from the opening of nine de novo Dental Offices, the physical expansion of
seven existing Dental Offices, the acquisition of nine dental practices and the
acquisitions of United and DCI in April 1997 and August 1997, respectively,
which provided three and seven
14
<PAGE> 15
additional months of occupancy expense for the nine months ended September 30,
1998. As a percent of Revenue, occupancy expense decreased slightly to 5.2%
from 5.4% for the nine months ended September 30, 1998 and 1997, respectively.
Advertising. Advertising expense increased to $1.7 million for the
nine months ended September 30, 1998 from $1.3 million for the nine months
ended September 30, 1997, an increase of $430,000, or 34.1%. This increase
resulted from the acquisitions of Three Peaks, Press Family Dental, Dental
America, Dental Care One, MDCC, Valley Forge and Talbert which added a combined
$405,000 to advertising expense for the nine months ended September 30, 1998.
There was an increase of $25,000 in television and print advertising in
existing markets for the nine months ended September 30, 1998. As a percent of
Revenue, advertising expense decreased to 2.0% from 2.6% for the nine months
ended September 30, 1998 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 to $4.0 million for the nine months ended September 30, 1998 from
$1.9 million for the nine months ended September 30, 1997, an increase of $2.1
million, or 106.7%. This increase resulted from the acquisitions of Three
Peaks, Press Family Dental, Dental America, Dental Care One, MDCC, Valley Forge
and Talbert which added combined depreciation and amortization expense of $1.1
million for the nine months ended September 30, 1998. Depreciation and
amortization expense for existing markets increased $1.0 million resulting
primarily from the opening of nine de novo Dental Offices, the physical
expansion of seven existing Dental Offices, the acquisition of nine dental
practices and the acquisitions of United and DCI in April 1997 and August 1997,
respectively, which provided three and seven additional months of depreciation
and amortization expense for the nine months ended September 30, 1998. As a
percent of Revenue, depreciation and amortization expense increased to 4.8%
from 4.1% for the nine months ended September 30, 1998 and 1997, 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 to $8.2 million for the nine months ended September 30, 1998 from
$4.6 million for the nine months ended September 30, 1997, an increase of $3.6
million, or 77.2%. This increase resulted from the acquisitions of Three Peaks,
Press Family Dental, Dental America, Dental Care One, MDCC, Valley Forge and
Talbert which added combined general and administrative expense of $1.7 million
for the nine months ended September 30, 1998. General and administrative
expense for existing markets increased $1.9 million resulting from the
expansion of the Company's corporate infrastructure to manage growth. As a
percent of Revenue, general and administrative expense increased slightly to
9.7% from 9.6% for the nine months ended September 30, 1998 and 1997,
respectively.
Operating income. Operating income increased to $7.8 million for the
nine months ended September 30, 1998 from $3.4 million for the nine months
ended September 30, 1997, an increase of $4.4 million, or 128.7%. This
increase resulted from the acquisitions of Three Peaks, Press Family Dental,
Dental America, Dental Care One, MDCC, Valley Forge and Talbert which added
combined operating income of $1.7 million for the nine months ended September
30, 1998. Income from the Company's existing markets increased $4.1 million
for the nine months ended September 30, 1998, which was offset by increased
corporate expenses of $1.4 due to the development of corporate infrastructure.
As a percent of Revenue, operating income increased to 9.3% from 7.1% for the
nine months ended September 30, 1998 and 1997, respectively. This increase 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, occupancy expense and advertising expense.
Interest expense, net. Interest expense, net decreased to $996,000
for the nine months ended September 30, 1998 from $1.4 million for the nine
months ended September 30, 1997, a decrease of $379,000, or 27.5%. 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. This retirement was
partially offset by subsequent borrowing by the Company under a new Credit
Facility. Average debt outstanding for the nine months ended September 30,
1998 was $17.8 million compared to average debt outstanding of $17.9 million
for the nine months ended September 30, 1997.
15
<PAGE> 16
Minority interest. Minority interest expense increased to $49,000 for
the nine months ended September 30, 1998 from $30,000 for the nine months ended
September 30, 1997, an increase of $19,000, or 63.1%. This increase resulted
from higher net income relating to the acquisitions of DCI, which owns a fifty
percent ownership in two partnerships operating four Dental Offices in Indiana,
Dental America, which owns a twenty percent interest in a group dental practice
with two offices located in Midland and Odessa, Texas, and MDCC, which owns a
thirty-five percent interest in a group dental practice with two offices in
Austin, Texas and five offices in New Mexico for the nine months ended
September 30, 1998 and 1997, respectively.
Income taxes. Income tax expense increased to $2.7 million for the
nine months ended September 30, 1998 from $784,000 for the nine months ended
September 30, 1997, an increase of $1.9 million, or 238.2%. This increase was
the result of higher net income before taxes, which increased to $6.8 million
for the nine months ended September 30, 1998 from $2.0 million for the nine
months ended September 30, 1997, an increase of $4.8 million, or 235.9%.
Extraordinary loss. The Company incurred an extraordinary loss of
$264,000, net of tax for the nine months ended September 30, 1997 as it
extinguished its Credit Facility and wrote off $431,000 in unamortized loan
fees, net of a tax benefit of $167,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a $12.5 million working capital
deficit, representing a decrease of $13.8 million from the working capital
surplus of $1.3 million at December 31, 1997. This working capital deficit
included current liabilities of $31.9 million, consisting of $7.2 million in
accounts payable, $15.0 million in accrued liabilities, $1.1 million in income
taxes payable, $3.5 million in amounts payable to dental group practices as
consideration for accounts receivable acquired from such group practices and
$5.1 million in current maturities of notes payable and capital lease
obligations. Current liabilities were offset by current assets of $19.4
million, consisting of $5.9 million in cash and cash equivalents, $12.2 million
in accounts receivable, net of allowances and prepaid expenses of $1.3 million.
The Company's principal sources of liquidity as of September 30, 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 nine months ended September 30, 1998 and 1997, cash provided
by operations was $6.3 million and $3.5 million, respectively.
Cash used in investing activities was $54.8 million for the nine
months ended September 30, 1998 and $8.9 million for the nine months ended
September 30, 1997. In the nine months ended September 30, 1998, $49.5 million
was utilized for acquisitions and $5.3 million was invested in the purchase of
additional property and equipment. In the nine months ended September 30,
1997, $7.4 million was utilized for acquisitions and $1.5 million was invested
in the purchase of additional property and equipment.
For the nine months ended September 30, 1998 and 1997, cash provided
by financing activities was $51.4 million and $8.2 million, respectively. In
the nine months ended September 30, 1998, the cash provided was comprised of
$51.4 million in net borrowings and $149,000 in proceeds from the issuance of
stock offset by $102,000 in partnership distributions. In the nine months
ended September 30, 1997, the cash provided was comprised of $38.6 million in
proceeds from the issuance of stock, offset by the net repayment of $22.4
million in outstanding debt and payments to owners of Redeemable Preferred
Stock of $8.0 million to redeem this stock in conjunction with the Company's
initial public offering on July 23, 1997.
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
$75.0 million. As of September 30, 1998, the Company had outstanding
borrowings of $63.0 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
16
<PAGE> 17
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 remaining available balance under the
Credit Facility, together with cash generated from operations, will be
sufficient to fund its near term liquidity needs for at least the next twelve
months.
YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Many existing computer programs and databases use two digits to
identify a year in the date field (i.e., 98 would represent 1998). These
programs and databases were not originally designed to operate after December
31, 1999. If not corrected, many computer programs and databases could fail or
create erroneous results relating to the year 2000. If the Company, its
significant customers, or suppliers fail to make necessary modifications and
conversions on a timely basis, the year 2000 issue could have a material adverse
effect on Company operations. However, the impact cannot be quantified at this
time. The Company believes that its competitors face a similar risk.
The Company is in the process of addressing the possible exposures
related to the impact on its computer programs and databases of the year 2000
issue. Key management information systems and operational systems, including
equipment with embedded microprocessors, have been or are currently being
inventoried and assessed, and detailed plans have been or are currently being
developed for the required program and database modifications or replacements.
Progress against these plans is monitored and reported to management on a
regular basis. Implementation of required changes to critical systems is
expected to be completed during fiscal 1999. The Company is also focusing on
major customers, which consist of third-party payors such as preferred provider
plans, and certain key suppliers to assess their compliance. The Company
expects to complete such assessment by December 31, 1998. In the event a
material customer or supplier is not Year 2000 compliant, the Company's
business, financial condition and results of operations could be materially and
adversely affected.
The costs incurred to date related to these programs have not been
material and the Company does not expect its future costs related to these
programs to be material. Such costs have been and will continue to be funded
through operating cash flows. The Company presently believes that the total
costs of achieving year 2000 compliance will not be material to its financial
condition, liquidity, or results of operations.
Time and cost estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to, the
availability and cost of trained personnel; the ability to locate and correct
all relevant computer code and systems; and remediation success of the Company's
customers and suppliers.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Section 27A Securities Act of 1933. These
forward-looking statements represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Readiness Disclosure," the
words "believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
modification and testing phases of its Year 2000 project plan as well as its
Year 2000 contingency plans; its estimated cost of achieving Year 2000
readiness; and the Company's belief that its internal systems will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.
17
<PAGE> 18
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 September 1998, pursuant to an Asset Purchase Agreement,
the Company issued 4,689 shares of Common Stock to Gary
Paterick, D.D.S. in partial consideration for the sale of
certain assets and assumption of certain liabilities of Gary
Paterick, D.D.S. in reliance upon the exemption from
registration under Regulation D promulgated under the
Securities Act.
In September 1998, pursuant to an Agreement and Plan of
Merger, the Company issued 1,559,111 shares of Common Stock to
certain shareholders of Valley Forge Dental Associates, Inc.
in partial consideration for the sale of certain assets and
assumption of certain liabilities of Valley Forge Dental
Associates, Inc. in reliance upon the exemption from
registration under Regulation D promulgated under the
Securities Act.
In September 1998, pursuant to an Agreement and Plan of Merger,
the Company granted options to purchase 300,000 shares of
Common Stock at an exercise price of $11.375 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.
The Company filed a Form 8-K, dated September 25, 1998,
reporting the acquisition of Valley Forge Dental Associates,
Inc.
The Company filed a Form 8-K, dated October 2, 1998,
reporting the acquisition of certain assets of Talbert
Medical Management Corporation.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONARCH DENTAL CORPORATION
Date: November 16, 1998 By: /s/ Gary W. Cage
-------------------------------
Gary W. Cage
Chief Executive Officer
Date: November 16, 1998 By: /s/ Steven G. Peterson
-------------------------------
Steven G. Peterson
Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
11 Statement re:Computation of per share earnings data
27 Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT 11
MONARCH DENTAL CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------ ------- ------
<S> <C> <C> <C> <C>
BASIC:
Income before extraordinary item $ 1,688 $ 682 $ 4,144 $1,239
Extraordinary item -- 264 -- 264
------- ------ ------- ------
Net income $ 1,688 $ 418 $ 4,144 $ 975
======= ====== ======= ======
Weighted average common shares outstanding 10,708 8,746 10,424 5,102
======= ====== ======= ======
Net income per common share:
Income before extraordinary item $ 0.16 $ 0.08 $ 0.40 $ 0.24
Extraordinary item -- 0.03 -- 0.05
------- ------ ------- ------
Net income $ 0.16 $ 0.05 $ 0.40 $ 0.19
======= ====== ======= ======
DILUTED:
Income before extraordinary item $ 1,688 $ 682 $ 4,144 $1,239
Extraordinary item -- 264 -- 264
------- ------ ------- ------
Net income $ 1,688 $ 418 $ 4,144 $ 975
======= ====== ======= ======
Weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding 10,708 8,746 10,424 5,102
Weighted average common equivalent shares outstanding 89 841 162 2,615
------- ------ ------- ------
Weighted average common and common equivalent
shares outstanding: 10,797 9,587 10,586 7,717
======= ====== ======= ======
Net income per share:
Income before extraordinary item $ 0.16 $ 0.07 $ 0.39 $ 0.16
Extraordinary item -- 0.03 -- 0.03
------- ------ ------- ------
Net income $ 0.16 $ 0.04 $ 0.39 $ 0.13
======= ====== ======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 0 5,908,551
<SECURITIES> 0 0
<RECEIVABLES> 0 20,957,035
<ALLOWANCES> 0 (8,832,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 19,355,967
<PP&E> 0 26,466,174
<DEPRECIATION> 0 (8,064,000)
<TOTAL-ASSETS> 0 166,943,693
<CURRENT-LIABILITIES> 0 31,852,874
<BONDS> 0 0
0 0
0 0
<COMMON> 0 119,316
<OTHER-SE> 0 61,741,686
<TOTAL-LIABILITY-AND-EQUITY> 0 166,943,693
<SALES> 0 0
<TOTAL-REVENUES> 34,090,265 84,222,787
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 19,677,955 49,321,510
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 481,906 995,821
<INCOME-PRETAX> 2,768,041 6,794,928
<INCOME-TAX> 1,080,000 2,651,000
<INCOME-CONTINUING> 1,688,041 4,143,928
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,688,041 4,143,928
<EPS-PRIMARY> 0.16 0.40
<EPS-DILUTED> 0.16 0.39
</TABLE>
