<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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER: 0-22835
MONARCH DENTAL CORPORATION.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0363560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MONARCH DENTAL CORPORATION
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TX 75244
(Address of principal executive offices)
(972) 702-7446
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issue's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding as of November 12, 1999
---------------------------- -----------------------------------
<S> <C>
Common Stock, $.01 par value 12,706,236
</TABLE>
<PAGE> 2
MONARCH DENTAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Report of Independent Public Accountants 3
Item 2. Consolidated Financial Statements 4
Item 3. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
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, 1999
and the related consolidated statements of income and cash flows for the
three-month and nine-month periods ended September 30, 1999 and 1998. 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, 1999
3
<PAGE> 4
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 7,097,458 $ 3,992,845
Accounts receivable, net of allowances of approximately
$10,121,000 and $8,128,000, respectively ...................... 17,144,022 15,328,575
Prepaid expenses ................................................ 1,761,907 1,369,503
Federal income tax receivable ................................... -- 1,239,590
-------------- --------------
Total current assets ....................................... 26,003,387 21,930,513
Property and equipment, net of accumulated depreciation of
approximately $13,129,000 and $9,270,000, respectively ........ 19,152,389 18,725,117
Goodwill, net of accumulated amortization of approximately
$11,407,000 and $7,920,000, respectively ...................... 136,030,060 126,450,495
Other assets ....................................................... 2,219,225 1,899,268
-------------- --------------
Total assets ................................................ $ 183,405,061 $ 169,005,393
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 2,003,433 $ 6,073,726
Accrued payroll ................................................. 5,828,204 6,524,061
Accrued liabilities ............................................. 8,265,928 10,297,542
Accrued restructuring charges ................................... 1,132,574 4,356,384
Taxes payable ................................................... 251,058 --
Payable to affiliated dental group practices .................... 4,786,815 4,427,816
Current maturities of notes payable and capital lease obligations 4,116,090 4,789,960
-------------- --------------
Total current liabilities .................................. 26,384,102 36,469,489
Deferred income taxes .............................................. 1,319,702 1,319,702
Notes payable ...................................................... 83,597,530 70,515,007
Capital lease obligations .......................................... 727,926 813,073
Other liabilities .................................................. 6,807,106 2,296,740
-------------- --------------
Total liabilities .......................................... 118,836,366 111,414,011
Minority interest in consolidated subsidiaries ..................... 158,460 128,261
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares authorized;
no shares issued or outstanding ............................... -- --
Common Stock, $.01 par value, 50,000,000 shares authorized;
12,706,236 and 11,982,254 shares issued and outstanding,
respectively .................................................. 127,062 119,823
Additional paid-in capital ...................................... 65,823,697 63,439,123
Common Stock to be issued, 706,581 shares in 1999 and 2000 ...... 1,546,000 --
Retained earnings (deficit) ..................................... (3,086,524) (6,095,825)
-------------- --------------
Total stockholders' equity 64,410,235 57,463,121
-------------- --------------
Total liabilities and stockholders' equity ................. $ 183,405,061 $ 169,005,393
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Patient revenue, net .......................... $ 51,196,448 $ 34,090,265 $ 152,121,017 $ 84,222,787
Operating expenses:
Provider salaries and benefits ............ 16,791,628 10,484,147 50,168,813 25,372,967
Clinical and other salaries and benefits .. 13,310,514 9,252,293 39,744,054 22,682,889
Dental supplies ........................... 2,431,629 1,624,394 7,660,966 4,526,085
Laboratory fees ........................... 2,793,745 1,510,029 7,323,771 3,798,641
Occupancy ................................. 2,577,167 1,736,411 7,646,520 4,408,771
Advertising ............................... 838,148 598,528 2,432,241 1,692,038
Other operating expenses .................. 5,769,454 3,930,643 18,531,798 9,854,555
Depreciation and amortization ............. 2,768,986 1,719,016 7,986,567 4,046,857
-------------- -------------- -------------- --------------
47,281,271 30,855,461 141,494,730 76,382,803
-------------- -------------- -------------- --------------
Operating income .............................. 3,915,177 3,234,804 10,626,287 7,839,984
Interest expense, net ......................... 1,788,335 481,906 5,471,985 995,821
Minority interest in consolidated subsidiaries 48,110 (15,143) 218,029 49,235
-------------- -------------- -------------- --------------
Income before income taxes .................... 2,078,732 2,768,041 4,936,273 6,794,928
Income taxes .................................. 808,895 1,080,000 1,926,972 2,651,000
-------------- -------------- -------------- --------------
Net income .................................... $ 1,269,837 $ 1,688,041 $ 3,009,301 $ 4,143,928
============== ============== ============== ==============
Net income per common share ................... $ 0.10 $ 0.16 $ 0.24 $ 0.40
============== ============== ============== ==============
Net income per common share - assuming dilution $ 0.10 $ 0.16 $ 0.24 $ 0.39
============== ============== ============== ==============
Weighted average number of common shares
outstanding ............................... 13,181,402 10,708,241 12,760,774 10,424,157
============== ============== ============== ==============
Weighted average number of common and
common equivalent shares outstanding ...... 13,181,402 10,796,667 12,760,774 10,585,986
============== ============== ============== ==============
</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,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 3,009,301 $ 4,143,928
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization ........................ 7,986,567 4,046,857
Minority interest in consolidated subsidiaries ....... 218,029 49,235
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net ....................... (1,554,932) (1,963,896)
Prepaid and other current assets ............... 595,970 (438,169)
Other noncurrent assets ........................ (319,957) (784,774)
Accounts payable and accrued expenses .......... (3,640,022) 1,034,099
Accrued restructuring charges .................. (3,223,810) --
Other liabilities .............................. 240,805 (576,465)
Deferred income taxes .......................... -- 770,524
------------ ------------
Net cash provided by operating activities ... 3,311,951 6,281,339
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ...................... (3,895,149) (5,329,372)
Cash paid for dental group practices, including
related costs, net of cash acquired .................. (8,538,796) (49,452,034)
------------ ------------
Net cash used in investing activities ....... (12,433,945) (54,781,406)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of issuance costs ....... 15,250,000 52,750,000
Payments on notes payable and capital lease obligations .. (2,980,164) (1,363,785)
Distribution to stockholders/partners .................... (356,710) (102,176)
Issuance of common stock ................................. 313,481 149,437
------------ ------------
Net cash provided by financing activities ... 12,226,607 51,433,476
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 3,104,613 2,933,409
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 3,992,845 2,975,142
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ 7,097,458 $ 5,908,551
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ................................... $ 5,841,321 $ 689,500
============ ============
Cash paid for taxes ...................................... $ 551,376 $ 2,024,600
============ ============
Equipment acquired under capital leases .................. $ -- $ 855,038
============ ============
Debt assumed through acquisitions ........................ $ 150,000 $ 42,936,288
============ ============
Non-cash issuance of common stock ........................ $ 976,000 $ --
============ ============
</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. At September 30, 1999, the Company
managed 192 dental group practices in Texas, Wisconsin, Pennsylvania,
Virginia, Ohio, Arkansas, Utah, Colorado, Georgia, New Jersey, Florida,
Indiana, Arizona and New Mexico.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION / BASIS OF CONSOLIDATION
The financial statements for the three and nine months ended September
30, 1999 and 1998, have been prepared by the Company, without audit,
pursuant to Accounting Principles Board (APB) 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, 1999 and 1998, 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 thirteen states, the Company accounts for its management activities
with the dental group practices under long-term management agreements
(the "Management Agreements"). The Management Agreements represent the
Company's right to manage the Dental Offices during the 40-year term of
the agreement. The Management Agreements cannot be terminated by the
related professional corporation without cause, consisting primarily of
bankruptcy or material default. Under the Management Agreements, the
Company assumes responsibility for the management of all aspects of the
dental group practices' business (including all operating expenses
consisting of the expenses incurred by the Company in connection with
managing the Dental Offices, including salaries and benefits for
personnel other than dentists and hygienists, dental supplies, dental
laboratory fees, occupancy costs, advertising, equipment leases,
management information systems and other expenses related to the dental
practice operations) other than the provision of dental services and
retains a 100% residual interest in the net income of the dental group
practices. The Company receives a management fee equal to the Company's
costs plus the lower of (i) 30% of the P.C.'s net revenues or (ii) the
P.C.'s net pre-tax income. If net pre-tax income exceeds 30% of the
P.C.'s net revenues, the P.C. would retain the amount of pre-tax income
over 30% of the P.C.'s net revenues. The Company's net revenue is
significantly dependent upon the revenue of the dental group practices.
The Company has no material commitments or guarantees to the dental
group practices under the Management Agreements. In Wisconsin, the
Company directly employs the dentists and hygienists.
Under the Management Agreements, the Company establishes a "controlling
financial interest" as defined by EITF 97-2, "Application of FASB No.
94 and APB No. 16 to Physician Practice Management Entities and Certain
Other Entities under Contractual Management Arrangement" ("EITF 97-2").
In addition, the Company has nominee shareholder arrangements with
certain of the dental group practices as defined by EITF 97-2. For
these reasons, the Company consolidates the financial statements of the
dental group practices. The Company's consolidated financial statements
for the three and nine months ended September 30, 1998 have been
restated to conform with the provisions of EITF 97-2. The restatement
affected the display of previously reported revenues, amounts retained
by dental group practices and general and administrative expenses only
7
<PAGE> 8
and did not affect the Company's financial position, results of
operations or cash flows for the three and nine months ended September
30, 1998.
NET INCOME PER COMMON SHARE
The net income per common share is based on the weighted average number
of common shares outstanding during the period. The weighted average
number of common shares outstanding calculation for 1999 includes
706,581 common shares to be issued in 1999 and 2000. Such shares
totaled 475,166 and 325,644 on a weighted basis for the three and nine
month periods ended September 30, 1999, respectively. Diluted net
income per share has been calculated using the treasury stock method
for stock options and other diluted securities. Such shares totaled
88,426 and 161,829 for the three and nine month periods ended September
30, 1998, respectively. For the three and nine month periods ended
September 30, 1999, the Company's average market price for each
respective period has fallen below the average exercise price,
therefore, no common stock equivalents are included in the calculation.
OTHER LIABILITIES
Other liabilities consist primarily of reserves related to acquisitions
accounted for as purchases and deferred rent for the Company's
facilities.
OTHER
Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentations.
3. BUSINESS COMBINATIONS
The following unaudited pro forma information reflects the effect of
acquisitions on the consolidated results of operations of the Company
had the acquisitions occurred at January 1, 1998. Future results may
differ substantially from pro forma results and cannot be considered
indicative of future results.
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended September 30,
-------------------------------
(In thousands, except per share data) 1999 1998
---------- ----------
<S> <C> <C>
Patient revenue, net .......................... $ 152,636 $ 140,763
Net income .................................... $ 3,064 $ 5,534
Net income per common share - assuming dilution $ 0.25 $ 0.46
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LITIGATION, CLAIMS, AND ASSESSMENTS
On or about April 26, 1999, the Company was served with a putative
class action complaint against the Company and certain of its officers
and directors, captioned Robert O. Neibert, et al., v. Monarch Dental
Corp., Warren F. Melamed, Gary W. Cage and Roger B. Kafker, Civil No.
3-99-CV-0762-X. The class action complaint, which was filed in the
United States District Court for the Northern District of Texas (the
"District Court"), alleges that the Company and certain of its officers
and directors violated the federal securities laws by making material
misrepresentations and omissions in certain public disclosures during
the period between February 24, 1998 and December 22, 1998. The public
disclosures relate to, among other things, acquired dental practices,
the Company's internal growth and growth prospects, and the Company's
past and future financial performance. Following the announcement of
the filing of this class action lawsuit, the Company was served with
two similar putative class actions in the District Court, which
encompass the same class period and cover almost identical allegations.
On May 24, 1999, the District Court consolidated these three class
action complaints into a single action. The Company was subsequently
served on September 10, 1999 with a consolidated amended class action
complaint which contained substantially the same allegations as were
encompassed in the prior separate class action complaints. The Company
and all of the defendants named in the amended class action complaint
filed motions to dismiss all of the claims set forth in this complaint
in October 1999. The Company intends to defend all of the claims set
forth in the amended class action complaint vigorously. The Company
believes that the defense of the claims could involve significant
litigation-related expenses. The outcome of this matter is uncertain
and, as a result, at this time the Company is not able to quantify any
related financial exposure.
The Company also disclosed other legal proceedings which have been
terminated in prior periods in its Current Reports on Form 10-Q for the
quarters ended March 31, 1999 and June 30, 1999.
In addition to the matters discussed above, the Company is engaged in
various legal proceedings incidental to its business activities.
Management does not believe the resolution of such matters will have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
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, risks
associated with the implementation of strategic initiatives to improve
profitability, risks associated with the integration of newly acquired
companies, risks associated with the change of status or departure of key
management personnel, risks associated with 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
Form 10-K dated December 31, 1998 as filed with the U.S. Securities and Exchange
Commission.
OVERVIEW
The Company manages dental group practices in selected markets located
in Texas, Wisconsin, Pennsylvania, Virginia, Ohio, Arkansas, Utah, Colorado,
Georgia, New Jersey, Florida, Indiana, Arizona and New Mexico. The managed
dental facilities (each, a "Dental Office" and collectively, the "Dental
Offices") provide general dentistry services such as examinations, cleanings,
fillings, bonding, placing crowns and fitting and placing fixed or removable
prostheses. Many of the Dental Offices also provide specialty dental services
such as orthodontics, oral surgery, endodontics, periodontics and pediatric
dentistry. The 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>
1999(1) 1998 1997 1996 1995
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Offices at beginning of period 194 99 53 12 10
De novo offices .............. -- 7 7 2 2
Acquired offices ............. 7 90 39 39 --
Closed offices ............... (9) (2) -- -- --
------ ------ ------ ------ ------
Offices at end of period ..... 192 194 99 53 12
====== ====== ====== ====== ======
</TABLE>
(1) Through September 30, 1999
COMPONENTS OF REVENUE AND EXPENSES
Under the Management Agreements, the Company establishes a "controlling
financial interest" as defined by EITF 97-2, "Application of FASB No. 94 and APB
No. 16 to Physician Practice Management Entities and Certain Other Entities
under Contractual Management Arrangement" ("EITF 97-2"). In addition, the
Company has nominee shareholder arrangements with certain of the dental group
practices as defined by EITF 97-2. For these reasons, the Company consolidates
the financial statements of the dental group practices. The Company's
consolidated financial statements have been restated for the three and nine
months ended September 30, 1998 to conform with the provisions of EITF 97-2. The
restatement affected the display of previously reported revenues, amounts
retained by dental group practices and general and administrative expenses only
and did not affect the Company's financial position, results of operations or
cash flows for the three and nine months ended September 30, 1998.
9
<PAGE> 10
Patient revenue, net ("Revenue") represents the revenue of the
professional dental corporations managed by the Company ("P.C.s") or the Company
(in states in which ownership of dental practices by the Company is permitted),
reported at estimated realizable amounts, received from third-party payors and
patients for dental services rendered at the Dental Offices. Operating expenses
consist of the expenses incurred by the Company or the P.C.s in connection with
the operation and management of the Dental Offices. These include salaries and
benefits paid to dentists and hygienists by the P.C.s or by the Company in
states in which it operates and in which ownership of dental practices by the
Company is permitted (currently Wisconsin), salaries and benefits for personnel
other than dentists and hygienists, dental supplies, dental laboratory fees,
occupancy costs, advertising, equipment leases, management information systems
and other expenses related to dental practice operations, as well as
depreciation and amortization expense.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Patient revenue, net. Revenue increased to $51.2 million for the three
months ended September 30, 1999 from $34.1 million for the three months ended
September 30, 1998, an increase of $17.1 million, or 50.2%. This increase
resulted primarily from the acquisitions of Valley Forge Dental Associates, Inc.
("Valley Forge") and Talbert Medical Management Corporation ("Talbert") in
September 1998 which provided two additional months of Revenue totaling $13.9
million in the three months ended September 30, 1999. Dental offices in the ten
remaining markets, namely Dallas-Fort Worth, Houston, Wisconsin, Arkansas,
Indiana, Colorado, San Antonio, Midland-Odessa, Dayton and New Mexico (the
"existing markets") contributed $3.2 million of the increase in Revenue in the
three months ended September 30, 1999 resulting primarily from the opening of
one de novo Dental Office, the physical expansion of eleven existing Dental
Offices and the acquisition of eight 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 $31.2 million for the three months ended
September 30, 1999 from $20.3 million for the three months ended September
30,1998, an increase of $10.9 million, or 53.5%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert in September 1998
which provided two additional months of fee-for-service Revenue totaling $8.8
million in the three months ended September 30, 1999. In existing markets,
fee-for-service Revenue increased to $19.1 million for the three months ended
September 30, 1999 from $17.0 million for the three months ended September 30,
1998, representing an increase of $2.1 million, or 12.2%. Existing market growth
resulted from the opening of one de novo Dental Office, the physical expansion
of eleven existing Dental Offices and the acquisition of eight dental practices.
Managed dental care Revenue (i.e., Revenue from capitated managed dental care
plans, including capitation payments and patient co-payments) increased to $20.0
million for the three months ended September 30, 1999 from $13.8 million for the
three months ended September 30, 1998, an increase of $6.2 million, or 45.2%.
This increase resulted primarily from the acquisitions of Valley Forge and
Talbert in September 1998 which provided two additional months of managed dental
care Revenue totaling $5.1 million in the three months ended September 30, 1999.
In existing markets, managed dental care Revenue increased to $11.9 million for
the three months ended September 30, 1999 from $10.8 million for the three
months ended September 30, 1998, an increase of $1.1 million or 10.4%. The
increase in existing markets resulted from the opening of one de novo Dental
Office, the physical expansion of eleven existing Dental Offices and the
acquisition of eight dental practices. As a percentage of Revenue,
fee-for-service Revenue increased to 61.0% from 59.6% for the three months ended
September 30, 1999 and 1998, respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $16.8 million for the three months ended September 30, 1999 from
$10.5 million for the three months ended September 30, 1998, an increase of $6.3
million, or 60.2%. The increase resulted primarily from the acquisitions of
Valley Forge and Talbert in September 1998 which provided two additional months
of provider salaries and benefits expense totaling $4.8 million in the three
months ended September 30, 1999. In existing markets, provider salaries and
benefits expense increased $1.5 million due to the opening of one de novo Dental
Office, the physical expansion of eleven existing Dental Offices, the
acquisition of eight dental practices and increased dentist and hygienist
compensation as a result of a higher level of production at the Dental Offices.
As a percent of Revenue, provider salaries and benefits expense increased to
32.8% from 30.8% for the three months ended September 30, 1999 and 1998,
respectively. This increase was due principally to higher compensation levels
relative to Revenue at certain acquired companies.
10
<PAGE> 11
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $13.3 million for the three months ended
September 30, 1999 from $9.3 million for the three months ended September 30,
1998, an increase of $4.0 million, or 43.9%. The increase resulted primarily
from the acquisitions of Valley Forge and Talbert in September 1998 which
provided two additional months of clinical and other salaries and benefits
expense totaling $3.0 million in the three months ended September 30, 1999. In
existing markets, clinical and other salaries and benefits expense increased
$1.0 million due to the opening of one de novo Dental Office, the physical
expansion of eleven existing Dental Offices and the acquisition of eight dental
practices. As a percent of Revenue, clinical and other salaries and benefits
expense decreased to 26.0% from 27.1% for the three months ended September 30,
1999 and 1998, respectively. This decrease was due principally to the acquired
companies having lower clinical and other salaries and benefits expense as a
percent of Revenue than the Company's existing operations.
Dental supplies. Dental supplies expense increased to $2.4 million for
the three months ended September 30, 1999 from $1.6 million for the three months
ended September 30, 1998, an increase of $807,000, or 49.7%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided two additional months of dental supplies expense
totaling $686,000 in the three months ended September 30, 1999. In existing
markets, dental supplies expense increased $121,000 due to the opening of one de
novo Dental Office, the physical expansion of eleven existing Dental Offices,
the acquisition of eight dental practices and a higher level of production at
the Dental Offices offset by the leveraging of supply contracts against
expansion in existing markets. As a percent of Revenue, dental supplies expense
decreased slightly to 4.7% from 4.8% for the three months ended September 30,
1999 and 1998, respectively.
Laboratory fees. Laboratory fee expense increased to $2.8 million for
the three months ended September 30, 1999 from $1.5 million for the three months
ended September 30, 1998, an increase of $1.3 million, or 85.0%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided two additional months of laboratory fee expense
totaling $871,000 in the three months ended September 30, 1999. In existing
markets, laboratory fee expense increased $413,000 due to the opening of one de
novo Dental Office, the physical expansion of eleven existing Dental Offices,
the acquisition of eight dental practices and increased production at the Dental
Offices. As a percent of Revenue, laboratory fee expense increased to 5.5% from
4.4% for the three months ended September 30, 1999 and 1998, respectively. This
increase was due principally to the acquired companies having higher laboratory
fee expense as a percent of Revenue than the Company's existing operations.
Occupancy. Occupancy expense increased to $2.6 million for the three
months ended September 30, 1999 from $1.7 million for the three months ended
September 30, 1998, an increase of $841,000, or 48.4%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert in September 1998
which provided two additional months of occupancy expense totaling $591,000 in
the three months ended September 30, 1999. In existing markets, occupancy
expense increased $250,000 resulting from the opening of one de novo Dental
Office, the physical expansion of eleven existing Dental Offices and the
acquisition of eight dental practices. Additionally, the Company closed five
Dental Offices (three in Houston, one in Arkansas and one in New Mexico) in the
first quarter of 1999, closed three Dental Offices (two in Austin and one in
Philadelphia) in the second quarter of 1999 and closed one Dental Office
(Southern Virginia) in the third quarter of 1999. As a percent of Revenue,
occupancy expense decreased slightly to 5.0% from 5.1% for the three months
ended September 30, 1999 and 1998, respectively.
Advertising. Advertising expense increased to $838,000 for the three
months ended September 30, 1999 from $599,000 for the three months ended
September 30, 1998, an increase of $239,000, or 40.1%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert in September 1998
which provided two additional months of advertising expense totaling $143,000 in
the three months ended September 30, 1999. There was an increase of $96,000 in
television and print advertising in the existing markets in 1999. As a percent
of Revenue, advertising expense decreased to 1.6% from 1.8% for the three months
ended September 30, 1999 and 1998, respectively. This decrease resulted from
lower advertising expense for certain acquired companies as a percent of Revenue
than the Company's existing operations and leveraging advertising expense with
greater market penetration in existing markets.
Other operating expenses. Other operating expenses consist of general
and administrative expenses and bad debt expense (which was formerly a component
of amounts retained by dental group practices). Other operating expenses
increased to $5.8 million for the three months ended September 30, 1999 from
$3.9 million for the three months ended September 30, 1998, an increase of $1.9
million, or 46.8%. This increase resulted primarily from the acquisitions of
Valley Forge and Talbert which provided two additional months of other operating
expenses totaling $1.5 million in the three months ended September 30, 1999.
Other operating expenses for existing markets increased $348,000 resulting from
the opening of one de novo Dental
11
<PAGE> 12
Office, the physical expansion of eleven existing Dental Offices, the
acquisition of eight dental practices and the expansion of the Company's
corporate infrastructure to manage growth. As a percent of Revenue, other
operating expenses decreased to 11.3% from 11.5% for the three months ended
September 30, 1999 and 1998, respectively.
Depreciation and amortization. Depreciation and amortization expense
increased to $2.8 million for the three months ended September 30, 1999 from
$1.7 million for the three months ended September 30, 1998, an increase of $1.1
million, or 61.1%. This increase resulted primarily from the acquisitions of
Valley Forge and Talbert which provided two additional months of depreciation
and amortization expense totaling $873,000 in the three months ended September
30, 1999. Depreciation and amortization expense for existing markets increased
$177,000 resulting from the opening of one de novo Dental Office, the physical
expansion of eleven existing Dental Offices and the acquisition of eight dental
practices.
Operating income. Operating income increased to $3.9 million for the
three months ended September 30, 1999 from $3.2 million for the three months
ended September 30, 1998, an increase of $680,000 or 21.0%. This increase
resulted in part from the acquisitions of Valley Forge and Talbert in September
1998 which provided two additional months of operating income totaling $1.5
million in the three months ended September 30, 1999. Income from the Company's
existing markets increased $401,000 for the three months ended September 30,
1999, which was offset by increased corporate expenses of $1.2 million due to
the development of corporate infrastructure. As a percent of Revenue, operating
income decreased to 7.6% from 9.5% for the three months ended September 30, 1999
and 1998, respectively. This decrease was due principally to higher provider
salaries and benefits expense and laboratory fee expense as a percent of Revenue
offset by margin improvement in clinical and other salaries and benefits
expense.
Interest expense, net. Interest expense, net increased to $1.8 million
for the three months ended September 30, 1999 from $482,000 for the three months
ended September 30, 1998, an increase of $1.3 million, or 271.1%. This increase
is attributable to the higher average outstanding debt balances for the three
months ended September 30, 1999 and 1998, respectively. Effective November 1997,
the Company entered into a Credit Facility (the "Credit Facility") with a bank
syndicate. Average debt outstanding under the Credit Facility totaled $80.1
million for the three months ended September 30, 1999 compared to average debt
outstanding of $28.0 million for the three months ended September 30, 1998.
Minority interest. Minority interest expense increased to $48,000 for
the three months ended September 30, 1999 from ($15,000) for the three months
ended September 30, 1998, an increase of $63,000, or 417.7%. This increase
resulted from higher net income at certain acquired companies which own between
a six-and-one-quarter percent and fifty percent interest in dental group
practices located in Indiana, Midland, Odessa, and Abilene, Texas, New Mexico,
Georgia, Pennsylvania and New Jersey for the three months ended September 30,
1999 and 1998 respectively.
Income taxes. Income tax expense decreased to $809,000 for the three
months ended September 30, 1999 from $1.1 million for the three months ended
September 30, 1998, a decrease of $271,000, or 25.1%. This decrease was the
result of lower income before income taxes, which decreased to $2.1 million for
the three months ended September 30, 1999 from $2.8 million for the three months
ended September 30, 1998, a decrease of $689,000 or 24.9%.
12
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Patient revenue, net. Revenue increased to $152.1 million for the nine
months ended September 30, 1999 from $84.2 million for the nine months ended
September 30, 1998, an increase of $67.9 million, or 80.6%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of Revenue totaling $53.2
million in the nine months ended September 30, 1999. Revenue for the Dental
Offices in the remaining existing markets increased $14.7 million, or 18.9%, for
the nine months ended September 30, 1999, resulting primarily from the opening
of one de novo Dental Office, the physical expansion of eleven existing Dental
Offices and the acquisition of eight 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 $92.8 million for the nine months ended
September 30, 1999 from $51.6 million for the nine months ended September
30,1998, an increase of $41.2 million, or 79.8%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert in September 1998
which provided eight additional months of fee-for-service Revenue totaling $31.7
million in the nine months ended September 30, 1999. In existing markets,
fee-for-service Revenue increased to $57.8 million for the nine months ended
September 30, 1999 from $48.3 million for the nine months ended September 30,
1998, representing an increase of $9.5 million, or 19.6%. Existing market growth
resulted from the opening of one de novo Dental Office, the physical expansion
of eleven existing Dental Offices and the acquisition of eight dental practices.
Managed dental care Revenue (i.e., Revenue from capitated managed dental care
plans, including capitation payments and patient co-payments) increased to $59.3
million for the nine months ended September 30, 1999 from $32.6 million for the
nine months ended September 30, 1998, an increase of $26.7 million, or 81.9%.
This increase resulted primarily from the acquisitions of Valley Forge and
Talbert in September 1998 which provided eight additional months of managed
dental care Revenue totaling $21.4 million in the nine months ended September
30, 1999. In existing markets, managed dental care Revenue increased to $34.9
million for the nine months ended September 30, 1999 from $29.6 million for the
nine months ended September 30, 1998, an increase of $5.3 million or 17.8%. The
increase in existing markets resulted from the opening of one de novo Dental
Office, the physical expansion of eleven existing Dental Offices and the
acquisition of eight dental practices. As a percentage of Revenue,
fee-for-service Revenue decreased to 61.0% from 61.3% for the nine months ended
September 30, 1999 and 1998, respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $50.2 million for the nine months ended September 30, 1999 from
$25.4 million for the nine months ended September 30, 1998, an increase of $24.8
million, or 97.7%. The increase resulted primarily from the acquisitions of
Valley Forge and Talbert in September 1998 which provided eight additional
months of provider salaries and benefits expense totaling $18.7 million in the
nine months ended September 30, 1999. In existing markets, provider salaries and
benefits expense increased $6.1 million due to the opening of one de novo Dental
Office, the physical expansion of eleven existing Dental Offices, the
acquisition of eight dental practices and increased dentist and hygienist
compensation as a result of a higher level of production at the Dental Offices.
As a percent of Revenue, provider salaries and benefits expense increased to
33.0% from 30.1% for the nine months ended September 30, 1999 and 1998,
respectively. This increase was due principally to higher compensation levels
relative to Revenue at certain acquired companies.
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $39.7 million for the nine months ended
September 30, 1999 from $22.7 million for the nine months ended September 30,
1998, an increase of $17.0 million, or 75.2%. The increase resulted primarily
from the acquisitions of Valley Forge and Talbert in September 1998 which
provided eight additional months of clinical and other salaries and benefits
expense totaling $12.5 million in the nine months ended September 30, 1999. In
existing markets, clinical and other salaries and benefits expense increased
$4.5 million due to the opening of one de novo Dental Office, the physical
expansion of eleven existing Dental Offices and the acquisition of eight dental
practices. As a percent of Revenue, clinical and other salaries and benefits
expense decreased to 26.1% from 26.9% for the nine months ended September 30,
1999 and 1998, respectively. This decrease was due principally to the acquired
companies having lower clinical and other salaries and benefits expense as a
percent of Revenue than the Company's existing operations.
Dental supplies. Dental supplies expense increased to $7.7 million for
the nine months ended September 30, 1999 from $4.5 million for the nine months
ended September 30, 1998, an increase of $3.2 million, or 69.3%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of dental supplies expense
totaling $2.7 million in the nine months ended September 30, 1999. In existing
markets, dental supplies expense increased $481,000 due to the opening of one de
novo Dental Office, the physical expansion of eleven
13
<PAGE> 14
existing Dental Offices, the acquisition of eight dental practices and a higher
level of production at the Dental Offices offset by the leveraging of supply
contracts against expansion in existing markets. As a percent of Revenue, dental
supplies expense decreased to 5.0% from 5.4% for the nine months ended September
30, 1999 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 to $7.3 million for
the nine months ended September 30, 1999 from $3.8 million for the nine months
ended September 30, 1998, an increase of $3.5 million, or 92.8%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of laboratory fee expense
totaling $2.8 million in the nine months ended September 30, 1999. In existing
markets, laboratory fee expense increased $817,000 due to the opening of one de
novo Dental Office, the physical expansion of eleven existing Dental Offices,
the acquisition of eight dental practices and increased production at the Dental
Offices. As a percent of Revenue, laboratory fee expense increased to 4.8% from
4.5% for the nine months ended September 30, 1999 and 1998, respectively. This
increase was due principally to the acquired companies having higher laboratory
fee expense as a percent of Revenue than the Company's existing operations.
Occupancy. Occupancy expense increased to $7.6 million for the nine
months ended September 30, 1999 from $4.4 million for the nine months ended
September 30, 1998, an increase of $3.2 million, or 73.4%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of occupancy expense
totaling $2.3 million in the nine months ended September 30, 1999. In existing
markets, occupancy expense increased $934,000 resulting from the opening of one
de novo Dental Office, the physical expansion of eleven existing Dental Offices
and the acquisition of eight dental practices. Additionally, the Company closed
five Dental Offices (three in Houston, one in Arkansas and one in New Mexico) in
the first quarter of 1999, closed three Dental Offices (two in Austin and one in
Philadelphia) in the second quarter of 1999 and closed one Dental Office
(Southern Virginia) in the third quarter of 1999. As a percent of Revenue,
occupancy expense decreased to 5.0% from 5.2% for the nine months ended
September 30, 1999 and 1998, respectively.
Advertising. Advertising expense increased to $2.4 million for the nine
months ended September 30, 1999 from $1.7 million for the nine months ended
September 30, 1998, an increase of $740,000, or 43.7%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert in September 1998
which provided eight additional months of advertising expense totaling $494,000
in the nine months ended September 30, 1999. There was an increase of $246,000
in television and print advertising in the existing markets in 1999. As a
percent of Revenue, advertising expense decreased to 1.6% from 2.0% for the nine
months ended September 30, 1999 and 1998, respectively. This decrease resulted
from lower advertising expense for certain acquired companies as a percent of
Revenue than the Company's existing operations and leveraging advertising
expense with greater market penetration in existing markets.
Other operating expenses. Other operating expenses consist of general
and administrative expenses and bad debt expense (which was formerly a component
of amounts retained by dental group practices). Other operating expenses
increased to $18.5 million for the nine months ended September 30, 1999 from
$9.9 million for the nine months ended September 30, 1998, an increase of $8.6
million, or 88.0%. This increase resulted primarily from the acquisitions of
Valley Forge and Talbert in September 1998 which provided eight additional
months of other operating expenses totaling $6.4 million in the nine months
ended September 30, 1999. Other operating expenses for existing markets
increased $2.2 million resulting from the opening of one de novo Dental Office,
the physical expansion of eleven existing Dental Offices, the acquisition of
eight dental practices and the expansion of the Company's corporate
infrastructure to manage growth. As a percent of Revenue, other operating
expenses increased to 12.2% from 11.7% for the nine months ended September 30,
1999 and 1998, respectively. This increase was due principally to the
development of the Company's corporate infrastructure.
Depreciation and amortization. Depreciation and amortization expense
increased to $8.0 million for the nine months ended September 30, 1999 from $4.0
million for the nine months ended September 30, 1998, an increase of $4.0
million, or 97.4%. This increase resulted primarily from the acquisitions of
Valley Forge and Talbert in September 1998 which provided eight additional
months of depreciation and amortization expense totaling $3.1 million in the
nine months ended September 30, 1999. Depreciation and amortization expense for
existing markets increased $881,000 resulting from the opening of one de novo
Dental Office, the physical expansion of eleven existing Dental Offices and the
acquisition of eight dental practices.
Operating income. Operating income increased to $10.6 million for the
nine months ended September 30, 1999 from $7.8 million for the nine months ended
September 30, 1998, an increase of $2.8 million, or 35.5%. This increase
resulted in part from the acquisitions of Valley Forge and Talbert in September
1998 which provided eight additional months of operating
14
<PAGE> 15
income totaling $4.3 million in the nine months ended September 30, 1999. Income
from the Company's existing markets increased $2.0 million for the nine months
ended September 30, 1999, which was offset by increased corporate expenses of
$3.5 million due to the development of corporate infrastructure. As a percent of
Revenue, operating income decreased to 7.0% from 9.3% for the nine months ended
September 30, 1999 and 1998, respectively. This decrease was due principally to
higher provider salaries and benefits expense as a percent of Revenue offset by
margin improvement in clinical and other salaries and benefits expense.
Interest expense, net. Interest expense, net increased to $5.5 million
for the nine months ended September 30, 1999 from $996,000 for the nine months
ended September 30, 1998, an increase of $4.5 million, or 449.5%. This increase
is attributable to the higher average outstanding debt balances for the nine
months ended September 30, 1999 and 1998, respectively. Effective November 1997,
the Company entered into a Credit Facility with a bank syndicate. Average debt
outstanding under the Credit Facility totaled $77.8 million for the nine months
ended September 30, 1999 compared to average debt outstanding of $17.8 million
for the nine months ended September 30, 1998.
Minority interest. Minority interest expense increased to $218,000 for
the nine months ended September 30, 1999 from $49,000 for the nine months ended
September 30, 1998, an increase of $169,000, or 342.8%. This increase resulted
from higher net income at certain acquired companies which own between a
six-and-one-quarter percent and fifty percent interest in dental group practices
located in Indiana, Midland, Odessa, and Abilene, Texas, New Mexico, Georgia,
Pennsylvania and New Jersey for the nine months ended September 30, 1999 and
1998, respectively.
Income taxes. Income tax expense decreased to $1.9 million for the nine
months ended September 30, 1999 from $2.7 million for the nine months ended
September 30, 1998, a decrease of $724,000, or 27.3%. This decrease was the
result of lower income before income taxes, which decreased to $4.9 million for
the nine months ended September 30, 1999 from $6.8 million for the nine months
ended September 30, 1998, a decrease of $1.9 million, or 27.4%.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had a $381,000 working capital
deficit, representing an improvement of $14.2 million from the working capital
deficit of $14.5 million at December 31, 1998. This working capital deficit
included current liabilities of $26.4 million, consisting of $2.0 million in
accounts payable, $15.5 million in accrued liabilities, $4.8 million in amounts
payable to dental group practices as consideration for accounts receivable
acquired from such group practices and $4.1 million in current maturities of
notes payable and capital lease obligations. Current liabilities were offset by
current assets of $26.0 million, consisting of $7.1 million in cash and cash
equivalents, $17.1 million in accounts receivable, net of allowances and prepaid
expenses of $1.8 million. The Company's principal sources of liquidity as of
September 30, 1999 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, 1999 and 1998, cash provided by
operations was $3.3 million and $6.3 million, respectively.
Cash used in investing activities was $12.4 million for the nine months
ended September 30, 1999 and $54.8 million for the nine months ended September
30, 1998. In the nine months ended September 30, 1999, $8.5 million was utilized
for acquisitions and $3.9 million was invested in the purchase of additional
property and equipment. 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.
For the nine months ended September 30, 1999 and 1998, cash provided by
financing activities was $12.2 million and $51.4 million, respectively. In the
nine months ended September 30, 1999, the cash provided was primarily comprised
of $15.2 million in net borrowings offset by the repayment of $3.0 million in
outstanding debt. In the nine months ended September 30, 1998, the cash provided
was primarily comprised of $52.8 million in net borrowings offset by the
repayment of $1.4 million in outstanding debt.
The Company has a Credit Facility with a bank syndicate. Under the
Credit Facility, the Company may borrow up to $85.0 million. As of September 30,
1999, the Company had outstanding borrowings of $80.7 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 the foreseeable future. The Company expects to fund future acquisitions with
cash from operations and borrowings under the Credit Facility. In order to meet
its long-term liquidity needs, the Company may issue additional equity and debt
securities, subject to market and other conditions. There can be no assurance
that any such additional financing will be available on terms acceptable to the
Company. Moreover, there can also be no assurance that cash generated from
operations will be sufficient to cover the Company's interest expense or that
the Company will not experience losses in the future. The failure to raise the
funds necessary to finance its future cash requirements could adversely affect
the Company's ability to pursue its expansion strategy and could negatively
affect its operations in future periods.
16
<PAGE> 17
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 or 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 the 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 will 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 has received and
continues to receive assurances that its major customers and suppliers are or
will be compliant by year 2000. If the Company believes any material customer or
supplier will not be compliant by year 2000 the Company will develop contingency
plans. 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 Company has spent approximately $90,000 to date related to these
programs and the Company expects its future costs related to these programs to
be approximately $50,000. Such costs have been and will continue to be funded
through operating cash flows. The Company presently believes that the total cost
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
On or about April 26, 1999, the Company was served with a putative
class action complaint against the Company and certain of its officers and
directors, captioned Robert O. Neibert, et al., v. Monarch Dental Corp., Warren
F. Melamed, Gary W. Cage and Roger B. Kafker, Civil No. 3-99-CV-0762-X. The
class action complaint, which was filed in the United States District Court for
the Northern District of Texas (the "District Court"), alleges that the Company
and certain of its officers and directors violated the federal securities laws
by making material misrepresentations and omissions in certain public
disclosures during the period between February 24, 1998 and December 22, 1998.
The public disclosures relate to, among other things, acquired dental practices,
the Company's internal growth and growth prospects, and the Company's past and
future financial performance. Following the announcement of the filing of this
class action lawsuit, the Company was served with two similar putative class
actions in the District Court, which encompass the same class period and cover
almost identical allegations. On May 24, 1999, the District Court consolidated
these three class action complaints into a single action. The Company was
subsequently served on September 10, 1999 with a consolidated amended class
action complaint which contained substantially the same allegations as were
encompassed in the prior separate class action complaints. The Company and all
of the defendants named in the amended class action complaint filed motions to
dismiss all of the claims set forth in this complaint in October 1999. The
Company intends to defend all of the claims set forth in the amended class
action complaint vigorously. The Company believes that the defense of the claims
could involve significant litigation-related expenses. The outcome of this
matter is uncertain and, as a result, at this time the Company is not able to
quantify any related financial exposure.
The Company also disclosed other legal proceedings which have been
terminated in prior periods in its Current Reports on Form 10-Q for the quarters
ended March 31, 1999 and June 30, 1999.
In addition to the matters discussed above, the Company is engaged in
various legal proceedings incidental to its business activities. Management does
not believe the resolution of such matters will have a material adverse effect
on the Company's financial position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) In April 1999, pursuant to an Asset Purchase Agreement, the
Company issued 7,049 shares of Common Stock to Chatfield
Dental Center, P.A. in partial consideration for the sale of
certain assets and assumption of certain liabilities of
Chatfield Dental Center, P.A. in reliance upon the exemption
from registration under Regulation D promulgated under the
Securities Act.
In May 1999, pursuant to a Purchase and Sale Agreement, the
Company issued 7,661 shares of Common Stock to Dwight B. Lee,
D.D.S. in partial consideration for the sale of certain assets
and assumption of certain liabilities of Dwight B. Lee, D.D.S.
in reliance upon the exemption from registration under
Regulation D promulgated under the Securities Act.
In August 1999, pursuant to a Settlement Agreement, the
Company issued 225,000 shares of Common Stock to Business
Development Capital Limited Partnership III, Abbingdon Venture
Partners Limited Partnership, Abbington Venture Partners LTD
Partnership II and Abbingdon Venture Partners LTD Partnership
III in partial consideration of a legal settlement in reliance
upon the exemption from registration under Regulation D
promulgated under the Securities Act.
18
<PAGE> 19
In September 1999, pursuant to a Settlement Agreement, the
Company issued 175,000 shares of Common Stock to Business
Development Capital Limited Partnership III, Abbingdon Venture
Partners Limited Partnership, Abbington Venture Partners LTD
Partnership II and Abbingdon Venture Partners LTD Partnership
III in partial consideration of a legal settlement in reliance
upon the exemption from registration under Regulation D
promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
10.1 Employment Agreement dated as of August 9, 1999 by and
between the Registrant and Lisa Corbett Peterson
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
(b) Reports on Form 8-K.
Not applicable.
19
<PAGE> 20
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 15, 1999 By: /s/ Gary W. Cage
--------------------------------
Gary W. Cage
Chief Executive Officer
Date: November 15, 1999 By: /s/ Lisa Peterson
--------------------------------
Lisa Peterson
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Employment Agreement dated as of August 9, 1999 by and
between the Registrant and Lisa Corbett Peterson
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
</TABLE>
21
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made as of August 9,
1999 (the "Effective Date"), by and between Monarch Dental Corporation, a
Delaware corporation (the "Company"), and Lisa Corbett Peterson (the
"Executive").
WHEREAS, the parties hereto desire that the Executive become an
employee of the Company; and
WHEREAS, the parties hereto desire to assure that the Executive's
knowledge and experience will be available to the Company for the period of time
set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:
A. Employment. The Company agrees to employ the Executive and the
Executive agrees to be employed by the Company on the terms and conditions set
forth in this Agreement.
A. Capacity. During the Term (as defined below), the Executive (a) shall
serve as an employee of the Company with the title and position of Chief
Financial Officer, reporting to the Chief Executive Officer of the Company (the
"CEO"), (b) shall have general supervisory responsibility in such capacity for
the financial operations of the Company, as well as such other responsibilities
as may be specified from time to time by the Board of Directors of the Company,
consistent with the Executive's position and general area of experience and
skills, provided that, in all cases the Executive shall be subject to the
oversight and supervision of the CEO of the Company in the performance of her
duties, (c) upon the request of the CEO of the Company, shall serve as an
officer and/or director of any of the Company's subsidiaries, and (d) shall
render all services reasonably incident to the foregoing. The Executive hereby
accepts such employment, agrees to serve the Company in the capacities
indicated, and agrees to use her best efforts in, and shall devote her full
working time, attention, skill and energies to, the advancement of the interests
of the Company and its subsidiaries and the performance of her duties and
responsibilities hereunder.
A. Term. Subject to the provisions of Section 5 hereof, the term of
employment pursuant to this Agreement (the "Term") shall be four (4) years from
the Effective Date; provided, however, that this Agreement shall be extended
automatically for successive one-year periods ending on the relevant anniversary
of the Effective Date unless either party gives the other notice no later than
180 days prior to the scheduled
<PAGE> 2
termination date (i.e., the fourth anniversary of the Effective Date or any
later anniversary) of her or its determination not to extend this Agreement,
whereupon it shall terminate as of such anniversary date.
A. Compensation and Benefits. The compensation and benefits payable to the
Executive under this Agreement shall be as follows:
1. Salary. For all services rendered by the Executive under this
Agreement, the Company shall pay the Executive a salary (the "Salary") at the
annual rate of One Hundred and Seventy-Five Thousand Dollars ($175,000), subject
to increase from time to time in the discretion of the Compensation Committee of
the Board of Directors (the "Compensation Committee"). The Salary shall be
payable in periodic installments in accordance with the Company 's usual
practice for its senior executives.
1. Bonus. In addition to the Salary payable to the Executive
pursuant to Section 4(a), during the Term, the Executive shall be eligible to
receive a bonus of up to 30% of her annual Salary based upon achievement (i) by
the Company of certain corporate and financial goals (the "Corporate Goals") and
(ii) by the Executive of certain management goals (the "Management Goals");
provided however, that the Executive receive a bonus for the Company's 1999
fiscal year of not less than 30% of her annual Salary, as pro rated for the
number of days during such year for which she was an employee of the Company.
The Corporate Goals and Management Goals will be set in the sole discretion of
the Board of Directors of the Company acting in good faith. Nothing in this
Section 4(b) shall be deemed to create any right of the Executive to receive any
bonus (other than for the Company's 1999 fiscal year, as described above), such
decision on the amount of a bonus, if any, to be made in the sole and absolute
discretion of the Board of Directors of the Company or a duly appointed
committee thereof.
1. Stock Options. Contemporaneous with the execution and delivery
of this Agreement, the Company has granted to the Executive options to acquire
25,000 shares of the Company's Common Stock in accordance with and subject to
option agreements dated as of even date herewith.
1. Regular Benefits. During the Term, the Executive shall be
entitled to participate in any employee benefit plans, medical insurance plans,
life insurance plans, disability income plans, retirement plans and
arrangements, vacation plans, expense reimbursement plans and other benefit
plans which the Company may determine from time to time in its sole discretion
to have in effect for all or most of its senior executives. Such participation
shall be subject to the terms of the applicable plan documents, generally
applicable policies of the Company, applicable law and the discretion of the
Board of Directors or any administrative or other committee provided for in or
contemplated by any such plan.
<PAGE> 3
1. Taxation of Payments and Benefits. The Company shall undertake
to make deductions, withholdings and tax reports with respect to payments and
benefits under this Agreement to the extent that it reasonably and in good faith
believes that it is required to make such deductions, withholdings and tax
reports. Payments under this Agreement shall be in amounts net of any such
deductions or withholdings. Nothing in this Agreement shall be construed to
require the Company to make any payments to compensate the Executive for any
adverse tax effect associated with any payments or benefits or for any deduction
or withholding from any payment or benefit.
1. Exclusivity of Salary and Benefits. The Executive shall not be
entitled to any payments or benefits other than those provided under this
Agreement. Compliance with the provisions of this Section 4 shall in no way
create or be deemed to create any obligation, express or implied, on the part of
the Company or any of its affiliates with respect to the continuation of any
particular benefit or other plan or arrangement maintained by them or their
subsidiaries as of or prior to the date hereof or the creation and maintenance
of any particular benefit or other plan or arrangement at any time after the
date hereof.
(f) Expenses. The Company shall promptly reimburse the Executive for
all reasonable business expenses incurred by the Executive during the Term in
accordance with the Company 's practices for executive officers of the Company
with a similar level of responsibility, as in effect from time to time.
(g) Vacation. During the Term, the Employee shall receive paid
vacation annually in accordance with the Company 's practices for executive
officers, as in effect from time to time, but in any event not less than three
(3) weeks during each 365 days of the Term.
A. Termination and Termination Benefits. Notwithstanding the provisions of
Section 3, the Executive's employment under this Agreement shall terminate under
the following circumstances set forth in this Section 5.
1. Termination by the Company for Cause. The Executive's
employment under this Agreement may be terminated for cause without further
liability on the part of the Company effective immediately upon written notice
to the Executive by the Company. Only the following shall constitute "cause" for
such termination:
a) dishonest statements or acts of the Executive with respect to
the Company or any affiliate of the Company or acting in a manner that
discredits or is detrimental to the reputation, character or standing of the
Company or any of its affiliates;
a) the commission, in the reasonable judgment of the Board of
Directors, of an act involving a material violation of any material policy of
the Company applicable to the Executive;
<PAGE> 4
a) the indictment of the Executive for (A) a felony or (B) any
misdemeanor involving moral turpitude, deceit, dishonesty or fraud
("indictment," for these purposes, means an indictment, probable cause hearing
or any other procedure pursuant to which an initial determination of probable or
reasonable cause with respect to such offense is made);
a) the Executive shall commit a material breach of any of the
covenants, terms or provisions hereof, which breach has not been remedied within
sixty (60) days after delivery to the Executive by the Company of written notice
of the facts constituting the breach;
a) the Executive shall have failed to comply with written
instructions from the Company, which are reasonable and consistent with Section
2, or shall have substantially failed to perform the Executive's duties
hereunder for a period of sixty (60) days after written notice from the Company;
or
a) gross negligence or willful misconduct of the Executive with
respect to the Company or any affiliate of the Company.
Upon termination for cause as provided in this Section 5(a), the Company
shall have any and all rights and remedies under this Agreement and applicable
law in addition to its rights under Section 5(g).
1. Termination by the Executive. The Executive's employment under
this Agreement may be terminated by the Executive by written notice to the Board
of Directors at least thirty (30) days prior to such termination.
1. Termination by the Company Without Cause. Subject to the
payment of Termination Benefits pursuant to Section 5(e), the Executive's
employment under this Agreement may be terminated by the Company without cause
upon written notice to the Executive.
1. Termination by the Executive With Cause. The Executive shall
have the right to terminate her employment hereunder in the event of a material
breach by the Company in the performance of its obligations hereunder after the
Executive has given written notice to the Company specifying such breach by the
Company and giving the Company a reasonable time, not less than 60 days, to
conform its performance to its obligations hereunder.
1. Certain Termination Benefits. Unless otherwise specifically
provided in this Agreement or otherwise required by law, all compensation and
benefits payable to the Executive under this Agreement shall terminate on the
date of termination of the Executive's employment under this Agreement.
Notwithstanding the foregoing, in the event of termination of the Executive's
employment with the
<PAGE> 5
Company pursuant to Section 5(c) or 5(d) above, the Company shall provide to the
Executive the following termination benefits ("Termination Benefits"):
a) continuation for the applicable period specified in the next
following paragraph of the Executive's Salary at the rate then in effect
pursuant to Section 4(a); and
a) continuation for the applicable period specified in the next
following paragraph of group health plan benefits to the extent authorized by
and consistent with 29 U.S.C. Section 1161 et seq. (commonly known as "COBRA"),
with the cost of the regular premium for such benefits shared in the same
relative proportion by the Company and the Executive as in effect on the date of
termination.
The Termination Benefits set forth in (i) and (ii) above shall continue in
effect until the earliest to occur of (i) the date which is (a) six months after
the date of termination if the Executive has been employed by the Company for
less than six months as of the date of termination, (b) nine months after the
date of termination if the Executive has been employed by the Company for six
months or more but less than one year as of the date of termination or (c) the
first anniversary of the date of termination if (1) the Executive has been
employed by the Company for one year or more as of the date of termination or
(2) such termination occurs within one year following a Change of Control (as
defined below); and (ii) any breach by the Executive of Section 6 below (the
"Termination Benefits Period"). The Company may, at its option, elect to pay
amounts due under Section 5(e)(i) in a lump-sum. Notwithstanding the foregoing,
nothing in this Section 5(e) shall be construed to affect the Executive's right
to receive COBRA continuation entirely at the Executive's own cost to the extent
that the Executive may continue to be entitled to COBRA continuation after the
Executive's right to cost sharing under Section 5(e)(ii) ceases. The Executive
shall be obligated to give prompt notice of the date of commencement of any
employment or self-employment during the Termination Benefits Period and shall
respond promptly to any reasonable inquiries concerning any employment or
self-employment in which the Executive engages during the Termination Benefits
Period. The parties hereto agree that the Termination Benefits are to be in full
satisfaction, compromise and release of any claims arising out of any
termination of the Employee's employment pursuant to Section 5(c) or 5(d), and
in either case with such amounts to be contingent upon the Employee's delivery
upon termination of employment of a general release of any and all claims
arising out of facts or circumstances which occurred prior to the date of such
termination in a form reasonably satisfactory to the Company, it being
understood that no Termination Benefits shall be provided unless and until the
Employee determines to execute and deliver such release. For purposes of this
Agreement, a "Change of Control" shall mean (a) the dissolution or liquidation
of the Company, (b) a merger, reorganization or consolidation in which a
majority of the outstanding voting power of the Company is acquired by another
person or entity (other than a holding company formed by the Company), (c) the
sale of all or substantially all of the assets of the Company to another person
or entity, or (d) the sale of all of the stock of the Company to an unrelated
person or entity.
<PAGE> 6
1. Death; Disability. Upon the death of the Executive, or upon
the permanent disability (as defined below) of the Executive continuing for a
period in excess of one hundred eighty (180) consecutive days, all obligations
of the Company under this Agreement shall immediately terminate other than any
obligation of the Company with respect to earned but unpaid Salary and benefits
contemplated hereby to the extent accrued or vested through the date of
termination. As used herein, the terms "permanent disability" or "permanently
disabled" shall mean the inability of the Executive, by reason of injury,
illness or other similar cause, to perform essential functions of her position
as described in Section 2 above, as determined reasonably and in good faith by
the Company. Nothing in this Section 5(f) shall be construed to waive the
Executive's rights, if any, under existing law including, without limitation,
the Family and Medical Leave Act of 1993, 29 U.S.C. Section 2601 et seq. and the
Americans with Disabilities Act, 42 U.S.C. Section 12101 et seq.
1. Non-Competition and Related Agreements. Notwithstanding
termination of this Agreement as provided in this Section 5 or any other
termination of the Executive's employment with the Company, the Executive's
obligations under Section 6 hereof shall survive any termination of the
Executive's employment with the Company at any time and for any reason as
provided therein.
A. Non-Competition; Confidential Information and Cooperation.
1. Non-Competition; Non-Solicitation. Executive recognizes that
if she were to attempt to perform as an employee of a competitor of the Company,
there would be a genuine and inevitable threat that Executive would use or
disclose Confidential Information. Therefore, and in consideration for
Executive's employment by the Company under the terms provided in this Agreement
and as a means to aid in the performance and enforcement of the terms of the
confidentiality provisions of Paragraph 6(c), the Executive hereby agrees that
during the period commencing on the date hereof and ending on the date which is
the first anniversary of the date on which the Executive's employment with the
Company terminates (the "Noncompetition Period"), the Executive will not,
without the express written consent of the Company, directly or indirectly,
anywhere in the United States, engage in any activity which is, or participate
or invest in, or provide or facilitate the provision of financing to, or assist
(whether as owner, part-owner, shareholder, member, partner, director, officer,
trustee, employee, agent or consultant, or in any other capacity), any business,
organization or person other than the Company (or any subsidiary or affiliate of
the Company), and including any such business, organization or person involving,
or which is, a family member of the Executive, whose business, activities,
products or services are competitive with any of the business, activities,
products or services conducted or offered by the Company or its subsidiaries or
affiliates during any period in which the Executive serves as an officer or
employee of the Company or any of its subsidiaries or affiliates, which
business, activities, products and services shall include in any event and
without limitation consulting services regarding information systems relating to
the management of dental practices. Without implied limitation, the
<PAGE> 7
foregoing covenant shall be deemed to prohibit (a) hiring or engaging or
attempting to hire or engage for or on behalf of the Executive or any such
competitor any officer or employee of the Company or any of its direct and/or
indirect subsidiaries and affiliates, or any former employee of the Company and
any of its direct and/or indirect subsidiaries and affiliates who was employed
during the six (6) month period immediately preceding the date of such attempt
to hire or engage, (b) encouraging for or on behalf of the Executive or any such
competitor any such officer or employee to terminate his or her relationship or
employment with the Company or any of its direct or indirect subsidiaries and
affiliates, (c) soliciting for or on behalf of Executive or any such competitor
any client of the Company or any of its direct or indirect subsidiaries and
affiliates, or any former client of the Company or any of its direct or indirect
subsidiaries and affiliates who was a client during the six (6) month period
immediately preceding the date of such solicitation and (d) diverting to any
person (as hereinafter defined) any client or business opportunity of the
Company or any of any of its direct or indirect subsidiaries and affiliates.
Notwithstanding anything herein to the contrary, the Executive may make
passive investments in any enterprise the shares of which are publicly traded if
such investment constitutes less than one percent (1%) of the equity of such
enterprise.
Neither the Executive nor any business entity controlled by the
Executive is a party to any contract, commitment, arrangement or agreement which
could, following the date hereof, restrain or restrict the Company or any
subsidiary or affiliate of the Company from carrying on its business or restrain
or restrict the Executive from performing his employment obligations, and as of
the date of this Agreement the Executive has no business interests whatsoever in
or relating to the industries in which the Company or its subsidiaries or
affiliates currently engage and other than passive investments in the shares of
public companies of less than one percent (1%).
1. Confidential Information. As used in this Agreement,
"Confidential Information" means information belonging to the Company which is
of value to the Company in the course of conducting its business and the
disclosure of which could result in a competitive or other disadvantage to the
Company. Confidential Information includes, without limitation, financial
information, reports, and forecasts; inventions, improvements and other
intellectual property; trade secrets; know-how; designs, processes or formulae;
software; market or sales information or plans; customer lists; and business
plans, prospects and opportunities (such as possible acquisitions or
dispositions of businesses or facilities) which have been discussed or
considered by the management of the Company. Confidential Information includes
information developed by the Executive in the course of the Executive's
employment by the Company, as well as other information to which the Executive
may have access in connection with the Executive's employment. Confidential
Information also includes the confidential information of others with which the
Company has a business relationship. Notwithstanding the foregoing, Confidential
Information does not include information in the public domain, unless due to
breach of the Executive's duties under Section 6(c).
<PAGE> 8
1. Confidentiality. The Executive understands and agrees that her
employment creates a relationship of confidence and trust between the Executive
and the Company with respect to all Confidential Information. Executive
acknowledges that in the course of her employment with the Company, she will be
allowed to become acquainted with the Company's Confidential Information. The
Company agrees to provide on an ongoing basis such Confidential Information as
the Company deems necessary or desirable to aid Executive in the performance of
her duties. At all times, both during the Executive's employment with the
Company and after her termination, the Executive will keep in confidence and
trust all such Confidential Information, and will not use or disclose any such
Confidential Information without the written consent of the Company, except as
may be necessary in the ordinary course of performing the Executive's duties to
the Company.
1. Inventions. The Executive recognizes that the Company and its
affiliates possess a proprietary interest in all of the Confidential Information
and have the exclusive right and privilege to use, protect by copyright, patent
or trademark, or otherwise exploit the processes, ideas and concepts described
therein to the exclusion of the Executive, except as otherwise agreed between
the Company and the Executive in writing. The Executive expressly agrees that
any products, inventions, discoveries or improvements made by the Executive or
her agents or affiliates in the course of the Executive's employment, including
any of the foregoing which is based on or arises out of the Confidential
Information, shall be the property of and inure to the exclusive benefit of the
Company. The Executive further agrees that any and all products, inventions,
discoveries or improvements developed by the Executive (whether or not able to
be protected by copyright, patent or trademark) during the course of her
employment, or involving the use of the time, materials or other resources of
the Company or any of its affiliates, shall be promptly disclosed to the Company
and shall become the exclusive property of the Company, and the Executive shall
execute and deliver any and all documents necessary or appropriate to implement
the foregoing.
1. Business Opportunities. The Executive agrees, while she is
employed by the Company, to offer or otherwise make known or available to it, as
directed by the Board of Directors of the Company and without additional
compensation or consideration, any business prospects, contracts or other
business opportunities that she may discover, find, develop or otherwise have
available to her in any field in which the Company or its affiliates are engaged
or propose to be engaged, and further agrees that any such prospects, contacts
or other business opportunities shall be the property of the Company.
1. Documents, Records, etc. All documents, records, data,
apparatus, equipment and other physical property, whether or not pertaining to
Confidential Information, which are furnished to the Executive by the Company or
are produced by the Executive in connection with the Executive's employment will
be and remain the sole property of the Company. The Executive will return to the
Company all such materials and property as and when requested by the Company. In
any event,
<PAGE> 9
the Executive will return all such materials and property immediately upon
termination of the Executive's employment for any reason. The Executive will not
retain with the Executive any such material or property or any copies thereof
after such termination.
1. Third-Party Agreements and Rights. The Executive hereby
confirms that the Executive is not bound by the terms of any agreement with any
previous company or other party which restricts in any way the Executive's use
or disclosure of information or the Executive's engagement in any business. The
Executive represents to the Company that the Executive's execution of this
Agreement, the Executive's employment with the Company and the performance of
the Executive's proposed duties for the Company will not violate any obligations
the Executive may have to any such previous company or other party. In the
Executive's work for the Company, the Executive will not disclose or make use of
any information in violation of any agreements with or rights of any such
previous company or other party, and the Executive will not bring to the
premises of the Company any copies or other tangible embodiments of non-public
information belonging to or obtained from any such previous employment or other
party.
1. Litigation and Regulatory Cooperation. During and after the
Executive's employment, the Executive shall cooperate fully with the Company in
the defense or prosecution of any claims or actions now in existence or which
may be brought in the future against or on behalf of the Company which relate to
events or occurrences that transpired while the Executive was employed by the
Company. The Executive's full cooperation in connection with such claims or
actions shall include, but not be limited to, being available to meet with
counsel to prepare for discovery or trial and to act as a witness on behalf of
the Company at mutually convenient times. During and after the Executive's
employment, the Executive also shall cooperate fully with the Company in
connection with any investigation or review of any federal, state or local
regulatory authority as any such investigation or review relates to events or
occurrences that transpired while the Executive was employed by the Company. The
Company shall reimburse the Executive for any reasonable out-of-pocket expenses
incurred in connection with the Executive's performance of obligations pursuant
to this Section 6(g).
1. Injunction. The Executive agrees that it would be difficult to
measure any damages caused to the Company which might result from any breach by
the Executive of the promises set forth in this Section 6, and that in any event
money damages would be an inadequate remedy for any such breach. Accordingly,
subject to Section 7 of this Agreement, the Executive agrees that if the
Executive breaches, or proposes to breach, any portion of this Agreement, the
Company shall be entitled, in addition to all other remedies that it may have,
to an injunction or other appropriate equitable relief, including, without
limitation, specific performance, to restrain any such breach without posting
bond or showing or proving any actual damage to the Company.
<PAGE> 10
A. Dispute Resolution. Any controversy or claim arising out of or relating
to this Agreement or the breach thereof or otherwise arising out of the
Executive's employment or the termination of that employment (including, without
limitation, any claims of unlawful employment discrimination whether based on
age or otherwise) shall, to the fullest extent permitted by law, be settled by
arbitration under the auspices of the American Arbitration Association ("AAA")
in Dallas, Texas in accordance with the Employment Dispute Resolution Rules of
the AAA, including, but not limited to, the rules and procedures applicable to
the selection of arbitrators. The arbitrators shall be governed by the United
States Arbitration Act, 9 U.S.C. ss.ss.1-16. Judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof. This
Section 7 shall be specifically enforceable.
Notwithstanding anything to the contrary contained herein, the provisions of
this Section 7 shall not apply with regard to any equitable remedies to which
any party may be entitled hereunder.
Each of the parties hereto (a) hereby irrevocably submits to the
jurisdiction of the United States District Court for the Northern District of
Texas and the courts of general jurisdiction of the State of Texas in Dallas
county, Texas for all disputes hereunder including for the purposes of enforcing
the award or decision in any arbitration proceeding under this Section 7, (b)
hereby waives, and agrees not to assert, by way of motion, as a defense, or
otherwise, in any such suit, action or proceeding, any claim that it is not
subject personally to the jurisdiction of the above-named courts, that the suit,
action or proceeding is brought in an inconvenient forum, or that the venue of
the suit, action or proceeding is improper. Each of the parties hereto hereby
consents to service of process by registered mail at the address to which
notices are to be given. Each of the parties hereto agrees that its or her
submission to jurisdiction and its or her consent to service of process by mail
is made for the express benefit of the other parties hereto. Final judgment
against any party hereto in any such action, suit or proceeding may be enforced
in other jurisdictions by suit, action or proceeding on the judgment, or in any
other manner provided by or pursuant to the laws of such other jurisdiction;
provided, however, that any party hereto may at its or her option bring suit, or
institute other judicial proceedings, in any state or federal court of the
United States or of any country or place where the other parties or their
assets, may be found.
A. Integration. Except as provided herein, this Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior agreements between the parties with respect to any
related subject matter.
A. Assignment; Successors and Assigns, etc. Neither the Company nor the
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party; provided that the Company may assign its rights under this Agreement
without the consent of the Executive in the event that the Company shall effect
a reorganization, consolidate with or merge into any other corporation,
partnership, organization or other entity, or transfer all or substantially all
of its properties or assets to any other
<PAGE> 11
corporation, partnership, organization or other entity. This Agreement shall
inure to the benefit of and be binding upon the Company and the Executive, their
respective successors, executors, administrators, heirs and permitted assigns.
A. Enforceability. If any portion or provision of this Agreement
(including, without limitation, any portion or provision of any section of this
Agreement) shall to any extent be declared illegal or unenforceable by a court
of competent jurisdiction, then the remainder of this Agreement, or the
application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby,
and each portion and provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
A. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
A. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by a nationally recognized overnight courier service or by
registered or certified mail, postage prepaid, return receipt requested, to the
Executive at the last address the Executive has filed in writing with the
Company or, in the case of the Company, at its main offices, attention of the
President and/or Secretary, and shall be effective on the date received.
A. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Company.
A. Governing Law. This contract shall be construed under and be governed
in all respects by the laws of the State of Texas, without giving effect to the
conflict of laws principles thereof.
A. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute one and the same
document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 12
IN WITNESS WHEREOF, this Employment Agreement has been executed as a
sealed instrument by the Company, by its duly authorized officer, and by the
Executive, as of the Effective Date.
COMPANY:
MONARCH DENTAL CORPORATION
By: /s/ GARY W. CAGE
------------------------------------
Gary W. Cage
Chief Executive Officer
EXECUTIVE:
/s/ LISA CORBETT PETERSON
---------------------------------------
Lisa Corbett Peterson
<PAGE> 1
EXHIBIT 11
MONARCH DENTAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ............................................... $ 1,270 $ 1,688 $ 3,009 $ 4,144
========== ========== ========== ==========
Weighted average common shares outstanding ............... 13,181 10,708 12,761 10,424
Weighted average common equivalent shares outstanding..... -- 89 -- 162
---------- ---------- ---------- ----------
Weighted average common and common equivalent
shares outstanding .................................... 13,181 10,797 12,761 10,586
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Net income ............................................... $ 0.10 $ 0.16 $ 0.24 $ 0.40
========== ========== ========== ==========
NET INCOME PER SHARE - ASSUMING DILUTION:
Net income ............................................... $ 0.10 $ 0.16 $ 0.24 $ 0.39
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 0 7,097,458
<SECURITIES> 0 0
<RECEIVABLES> 0 27,265,024
<ALLOWANCES> 0 (10,121,002)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 26,003,387
<PP&E> 0 32,281,766
<DEPRECIATION> 0 (13,129,377)
<TOTAL-ASSETS> 0 183,405,061
<CURRENT-LIABILITIES> 0 26,384,102
<BONDS> 0 0
0 0
0 0
<COMMON> 0 127,062
<OTHER-SE> 0 64,283,173
<TOTAL-LIABILITY-AND-EQUITY> 0 183,405,061
<SALES> 0 0
<TOTAL-REVENUES> 51,196,448 152,121,017
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 47,281,271 141,494,730
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,788,335 5,471,985
<INCOME-PRETAX> 2,078,732 4,936,273
<INCOME-TAX> 808,895 1,926,972
<INCOME-CONTINUING> 1,269,837 3,009,301
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,269,837 3,009,301
<EPS-BASIC> 0.10 0.24
<EPS-DILUTED> 0.10 0.24
</TABLE>
