<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 JUNE 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.
Class Outstanding as of August 13, 1999
----- ---------------------------------
Common Stock, $.01 par value 12,222,260
<PAGE> 2
MONARCH DENTAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Report of Independent Public Accountants 3
Item 2. 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 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to Vote of Security-Holders 19
Item 6. Exhibits and Reports Filed on Form 8-K 20
Signatures 21
Exhibit Index 22
</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 June 30, 1999 and
the related consolidated statements of income and cash flows for the three-month
and six-month periods ended June 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
August 10, 1999
3
<PAGE> 4
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,849,057 $ 3,992,845
Accounts receivable, net of allowances of approximately
$9,371,000 and $8,128,000, respectively 15,380,433 15,328,575
Prepaid expenses 1,991,823 1,369,503
Federal income tax receivable 229,035 1,239,590
------------- -------------
Total current assets 25,450,348 21,930,513
Property and equipment, net of accumulated depreciation of
approximately $11,799,000 and $9,270,000, respectively 19,397,469 18,725,117
Goodwill, net of accumulated amortization of approximately
$7,271,000 and $4,622,000, respectively 136,820,949 126,450,495
Other assets 2,240,995 1,899,268
------------- -------------
Total assets $ 183,909,761 $ 169,005,393
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,235,996 $ 6,073,726
Accrued payroll 5,952,233 6,524,061
Accrued liabilities 9,435,668 10,297,542
Accrued restructuring charges 1,819,245 4,356,384
Payable to affiliated dental group practices 5,423,005 4,427,816
Current maturities of notes payable and capital lease obligations 2,678,823 4,789,960
------------- -------------
Total current liabilities 27,544,970 36,469,489
Deferred income taxes 1,319,702 1,319,702
Notes payable 84,936,621 70,515,007
Capital lease obligations 687,451 813,073
Other liabilities 6,344,844 2,296,740
------------- -------------
Total liabilities 120,833,588 111,414,011
Minority interest in consolidated subsidiaries 121,602 128,261
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;
12,222,260 and 11,982,254 shares issued and outstanding, respectively 122,223 119,823
Additional paid-in capital 64,624,209 63,439,123
Common Stock to be issued, 904,571 shares in 1999 and 2000 2,564,500 --
Retained earnings (deficit) (4,356,361) (6,095,825)
------------- -------------
Total stockholders' equity 62,954,571 57,463,121
------------- -------------
Total liabilities and stockholders' equity $ 183,909,761 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Patient revenue, net $ 51,469,550 $ 25,852,996 $100,924,569 $ 50,132,522
Operating expenses:
Provider salaries and benefits 17,209,957 7,671,313 33,377,185 14,888,820
Clinical and other salaries and benefits 13,378,808 6,964,948 26,433,540 13,430,596
Dental supplies 2,580,113 1,461,961 5,229,337 2,901,691
Laboratory fees 2,210,711 1,230,699 4,530,026 2,288,612
Occupancy 2,493,383 1,343,091 5,069,353 2,672,360
Advertising 864,052 578,554 1,594,093 1,093,510
Other operating expenses 6,184,043 2,899,479 12,762,344 5,923,912
Depreciation and amortization 2,655,347 1,240,899 5,217,581 2,327,841
------------ ------------ ------------ ------------
47,576,414 23,390,944 94,213,459 45,527,342
------------ ------------ ------------ ------------
Operating income 3,893,136 2,462,052 6,711,110 4,605,180
Interest expense, net 1,905,320 231,274 3,683,650 513,915
Minority interest in consolidated subsidiaries 136,540 14,438 169,919 64,378
------------ ------------ ------------ ------------
Income before income taxes 1,851,276 2,216,340 2,857,541 4,026,887
Income taxes 725,632 864,000 1,118,077 1,571,000
------------ ------------ ------------ ------------
Net income $ 1,125,644 $ 1,352,340 $ 1,739,464 $ 2,455,887
============ ============ ============ ============
Net income per common share $ 0.09 $ 0.13 $ 0.14 $ 0.24
============ ============ ============ ============
Net income per common share - assuming dilution $ 0.09 $ 0.13 $ 0.14 $ 0.24
============ ============ ============ ============
Weighted average number of common shares
outstanding 13,003,031 10,324,303 12,546,975 10,279,761
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 13,003,031 10,466,000 12,546,975 10,396,833
============ ============ ============ ============
</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>
Six months ended
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,739,464 $ 2,455,887
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 5,217,581 2,327,841
Minority interest in consolidated subsidiaries 169,919 64,378
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net 208,657 (872,507)
Prepaid expenses 399,873 (407,797)
Other noncurrent assets (341,727) (71,908)
Accounts payable and accrued expenses (3,813,448) 196,898
Accrued restructuring charges (2,537,139) --
Other liabilities 415,104 53,228
Deferred income taxes -- 786,207
------------ ------------
Net cash provided by operating activities 1,458,284 4,532,227
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,854,856) (3,687,357)
Cash paid for dental group practices, including
related costs, net of cash acquired (7,663,730) (6,291,711)
------------ ------------
Net cash used in investing activities (10,518,586) (9,979,068)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of issuance costs 14,150,000 6,800,000
Payments on notes payable and capital lease obligations (2,018,815) (298,267)
Distribution to stockholders/partners (345,457) (66,454)
Issuance of common stock 1,130,786 46,055
------------ ------------
Net cash provided by financing activities 12,916,514 6,481,334
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,856,212 1,034,493
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,992,845 2,975,142
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,849,057 $ 4,009,635
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 3,761,777 $ 230,988
============ ============
Cash paid for taxes $ -- $ 774,600
============ ============
Debt assumed through acquisitions $ 150,000 $ 936,288
============ ============
</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 June 30, 1999, the Company managed
193 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 six months ended June 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 six months ended June 30, 1999 and 1998, have been
included herein. The results of operations for the three- and six-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 six months ended June 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 six months ended June 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
904,571 common shares to be issued in 1999 and 2000. Such shares
totaled 781,256 and 392,787 on a weighted basis for the three and six
month periods ended June 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 141,697 and
117,072 for the three and six month periods ended June 30, 1998,
respectively. For the three and six month periods ended June 30, 1999,
the Company's average market price for the quarter 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
Effective April 1, 1999, the Company acquired certain assets and
assumed certain liabilities of Chatfield Dental Center, P.A. in Spring
Valley, Minnesota for $255,000 in cash and 7,049 shares of Common Stock
in an asset purchase transaction.
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)
Six Months Ended June 30,
-------------------------
(In thousands, except per share data) 1999 1998
-------- --------
<S> <C> <C>
Patient revenue, net $101,473 $ 93,094
Net income $ 1,820 $ 3,550
Net income per common share - assuming dilution $ 0.15 $ 0.30
</TABLE>
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21B
of the Securities and Exchange Act of 1934. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among others, 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 (8) (2) -- -- --
-------- -------- -------- -------- --------
Offices at end of period 193 194 99 53 12
======== ======== ======== ======== ========
</TABLE>
(1) Through June 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 six
months ended June 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 six months ended June 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 JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Patient revenue, net. Revenue increased to $51.5 million for the three
months ended June 30, 1999 from $25.9 million for the three months ended June
30, 1998, an increase of $25.6 million, or 99.1%. This increase resulted
primarily from acquisitions and to a lesser extent expansion in existing
markets. The acquisitions of Valley Forge Dental Associates, Inc. ("Valley
Forge") and Talbert Medical Management Corporation ("Talbert") in September 1998
contributed combined Revenue of $20.1 million for the three months ended June
30, 1999. Dental offices in the ten markets served at June 30, 1998, namely
Dallas-Fort Worth, Houston, Wisconsin, Arkansas, Indiana, Colorado, San Antonio,
Midland-Odessa, Dayton and New Mexico (the "existing markets") contributed an
additional $5.5 million of the increase in Revenue in the three months ended
June 30, 1999 resulting primarily from the opening of three de novo Dental
Offices, the physical expansion of eleven existing Dental Offices, the
acquisition of ten dental practices and the acquisition of Managed Dental Care
Centers, Inc. ("MDCC") in June 1998 which provided two additional months of
Revenue in the three months ended June 30, 1999.
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 $31.1 million for the three months ended
June 30, 1999 from $16.2 million for the three months ended June 30,1998, an
increase of $14.9 million, or 92.4%, due to acquisitions in new markets and
growth in existing markets. New market growth resulted from the acquisitions of
Valley Forge and Talbert which contributed combined fee-for-service Revenue of
$11.7 million for the respective periods following the dates of acquisition. In
existing markets, fee-for-service Revenue increased to $19.4 million for the
three months ended June 30, 1999 from $16.2 million for the three months ended
June 30, 1998, representing an increase of $3.2 million, or 19.7%. Existing
market growth resulted from the opening of three de novo Dental Offices, the
physical expansion of eleven existing Dental Offices, the acquisition of ten
dental practices and the acquisition of MDCC in June 1998 which provided two
additional months of fee-for-service Revenue in the three months ended June 30,
1999. Managed dental care Revenue (i.e., Revenue from capitated managed dental
care plans, including capitation payments and patient co-payments) increased to
$20.4 million for the three months ended June 30, 1999 from $9.7 million for the
three months ended June 30, 1998, an increase of $10.7 million, or 110.3%. This
increase resulted in part from the acquisitions of Valley Forge and Talbert
which contributed combined managed dental care Revenue of $8.4 million for the
respective periods following the dates of acquisition. In existing markets,
managed dental care Revenue increased to $12.0 million for the three months
ended June 30, 1999 from $9.7 million for the three months ended June 30, 1998,
an increase of $2.3 million or 23.7%. The increase in existing markets resulted
from the opening of three de novo Dental Offices, the physical expansion of
eleven existing Dental Offices, the acquisition of ten dental practices and the
acquisition of MDCC in June 1998 which provided two additional months of managed
dental care Revenue in the three months ended June 30, 1999. As a percentage of
Revenue, fee-for-service Revenue decreased to 60.4% from 62.5% for the three
months ended June 30, 1999 and 1998, respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $17.2 million for the three months ended June 30, 1999 from $7.7
million for the three months ended June 30, 1998, an increase of $9.5 million,
or 124.4%. The increase resulted primarily from the acquisitions of Valley Forge
and Talbert which added combined provider salaries and benefits expense of $7.2
million for the respective periods following the dates of acquisition. In
existing markets, provider salaries and benefits expense increased $2.3 million
as dentist and hygienist compensation increased as a result of a higher level of
production at the Dental Offices and the acquisition of MDCC in June 1998 which
provided two additional months of provider salaries and benefits expense in the
three months ended June 30, 1999. As a percent of Revenue, provider salaries and
benefits expense increased to 33.4% from 29.7% for the three months ended June
30, 1999 and 1998, respectively. This increase was due principally to higher
compensation levels at certain acquired companies.
10
<PAGE> 11
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $13.4 million for the three months ended June
30, 1999 from $7.0 million for the three months ended June 30, 1998, an increase
of $6.4 million, or 92.1%. The increase resulted primarily from the acquisitions
of Valley Forge and Talbert which added combined clinical and other salaries and
benefits expense of $4.8 million for the respective periods following the dates
of acquisition. In existing markets, clinical and other salaries and benefits
expense increased $1.6 million due to the opening of three de novo Dental
Offices, the physical expansion of eleven existing Dental Offices, the
acquisition of ten dental practices and the acquisition of MDCC in June 1998
which provided two additional months of clinical and other salaries and benefits
expense in the three months ended June 30, 1999. As a percent of Revenue,
clinical and other salaries and benefits expense decreased to 26.0% from 26.9%
for the three months ended June 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 $2.6 million for
the three months ended June 30, 1999 from $1.5 million for the three months
ended June 30, 1998, an increase of $1.1 million, or 76.5%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert which added
combined dental supplies expense of $889,000 for the respective periods
following the dates of acquisition. In existing markets, dental supplies expense
increased $229,000 due to 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
5.7% for the three months ended June 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 $2.2 million for
the three months ended June 30, 1999 from $1.2 million for the three months
ended June 30, 1998, an increase of $980,000, or 79.6%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert which added combined
laboratory fee expense of $843,000 for the respective periods following the
dates of acquisition. In existing markets, laboratory fee expense increased
$137,000 as a result of increased production and the acquisition of MDCC in June
1998 which provided two additional months of laboratory fee expense in the three
months ended June 30, 1999. As a percent of Revenue, laboratory fee expense
decreased to 4.3% from 4.8% for the three months ended June 30, 1999 and 1998,
respectively. This decrease was due principally to the acquired companies having
lower laboratory fee expense as a percent of Revenue than the Company's existing
operations.
Occupancy. Occupancy expense increased to $2.5 million for the three
months ended June 30, 1999 from $1.3 million for the three months ended June 30,
1998, an increase of $1.2 million, or 85.6%. This increase resulted primarily
from the acquisitions of Valley Forge and Talbert which added a combined
$841,000 to occupancy expense for the respective periods following the dates of
acquisition. In existing markets, occupancy expense increased $309,000 resulting
from the opening of three de novo Dental Offices, the physical expansion of
eleven existing Dental Offices, the acquisition of ten dental practices and the
acquisition of MDCC in June 1998 which provided two additional months of
occupancy expense in the three months ended June 30, 1999. Additionally, the
Company closed five Dental Offices (three in Houston, one in Arkansas and one in
New Mexico) in the first quarter of 1999 and closed three Dental Offices (two in
Austin and one in Philadelphia) in the second quarter of 1999. As a percent of
Revenue, occupancy expense decreased to 4.8% from 5.2% for the three months
ended June 30, 1999 and 1998, respectively. This decrease was due principally to
the acquired companies having lower occupancy expense as a percent of Revenue
than the Company's existing operations.
Advertising. Advertising expense increased to $864,000 for the three
months ended June 30, 1999 from $578,000 for the three months ended June 30,
1998, an increase of $286,000, or 49.2%. This increase resulted primarily from
the acquisitions of Valley Forge and Talbert which added a combined $175,000 to
advertising expense for the respective periods following the dates of
acquisition. There was an increase of $111,000 in television and print
advertising in the existing markets in 1999. As a percent of Revenue,
advertising expense decreased to 1.7% from 2.2% for the three months ended June
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 $6.2 million for the three months ended June 30, 1999 from $2.9
million for the three months ended June 30, 1998, an increase of $3.3 million,
or 113.3%. This increase resulted primarily from the acquisitions of Valley
Forge and Talbert which
11
<PAGE> 12
added combined other operating expenses of $2.4 million for the respective
periods following the dates of acquisition. Other operating expenses for
existing markets increased $897,000 resulting from the opening of three de novo
Dental Offices, the physical expansion of eleven existing Dental Offices, the
acquisition of ten dental practices, the acquisition of MDCC in June 1998 which
provided two additional months of other operating expenses in the three months
ended June 30, 1999 and the expansion of the Company's corporate infrastructure
to manage growth. As a percent of Revenue, other operating expenses increased to
12.0% from 11.2% for the three months ended June 30, 1999 and 1998,
respectively. This increase was due principally to the acquired companies having
higher other operating expenses as a percent of Revenue than the Company's
existing operations.
Depreciation and amortization. Depreciation and amortization expense
increased to $2.7 million for the three months ended June 30, 1999 from $1.2
million for the three months ended June 30, 1998, an increase of $1.5 million,
or 113.9%. This increase resulted primarily from the acquisitions of Valley
Forge and Talbert which added combined depreciation and amortization expense of
$1.1 million for the respective periods following the dates of acquisition.
Depreciation and amortization expense for existing markets increased $298,000
resulting from the opening of three de novo Dental Offices, the physical
expansion of eleven existing Dental Offices, the acquisition of ten dental
practices and the acquisition of MDCC in June 1998 which provided two additional
months of depreciation and amortization expense in the three months ended June
30, 1999. As a percent of Revenue, depreciation and amortization expense
increased to 5.2% from 4.8% for the three months ended June 30, 1999 and 1998,
respectively. This increase was due principally to the acquired companies having
higher depreciation and amortization expense as a percent of Revenue than the
Company's existing operations.
Operating income. Operating income increased to $3.9 million for the
three months ended June 30, 1999 from $2.5 million for the three months ended
June 30, 1998, an increase of $1.4 million or 58.1%. This increase resulted in
part from the acquisitions of Valley Forge and Talbert which added combined
operating income of $1.9 million for the respective periods following the dates
of acquisition. Income from the Company's existing markets increased $836,000
for the three months ended June 30, 1999, which was offset by increased
corporate expenses of $1.3 million due to the development of corporate
infrastructure. As a percent of Revenue, operating income decreased to 7.6% from
9.5% for the three months ended June 30, 1999 and 1998, respectively. This
decrease was due principally to certain acquired companies experiencing lower
operating margins than the Company's existing operations offset by margin
improvement in clinical and other salaries and benefits expense, dental supplies
expense, laboratory fee expense, occupancy expense and advertising expense in
the existing business.
Interest expense, net. Interest expense, net increased to $1.9 million
for the three months ended June 30, 1999 from $231,000 for the three months
ended June 30, 1998, an increase of $1.7 million, or 724.7%. This increase is
attributable to the higher average outstanding debt balances for the three
months ended June 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 $80.3
million for the three months ended June 30, 1999 compared to average debt
outstanding of $14.9 million for the three months ended June 30, 1998.
Minority interest. Minority interest expense increased to $137,000 for
the three months ended June 30, 1999 from $14,000 for the three months ended
June 30, 1998, an increase of $123,000, or 871.4%. This increase resulted from
higher net income relating to the acquisitions of Dental Centers of Indiana,
Inc., which owns a fifty percent ownership in two partnerships operating four
Dental Offices in Indiana, Dental America, which owns a twenty percent interest
in a group dental practice with two offices located in Midland and Odessa,
Texas, and MDCC, which owns a thirty-five percent interest in a group dental
practice with two offices in Austin, Texas (closed in the second quarter of
1999) and five offices in New Mexico for the three months ended June 30, 1999
and 1998, respectively.
Income taxes. Income tax expense decreased to $726,000 for the three
months ended June 30, 1999 from $864,000 for the three months ended June 30,
1998, a decrease of $138,000, or 16.0%. This decrease was the result of lower
net income before taxes, which decreased to $1.9 million for the three months
ended June 30, 1999 from $2.2 million for the three months ended June 30, 1998,
a decrease of $365,000, or 16.5%.
12
<PAGE> 13
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Patient revenue, net. Revenue increased to $100.9 million for the six
months ended June 30, 1999 from $50.1 million for the six months ended June 30,
1998, an increase of $50.8 million, or 101.3%. This increase resulted primarily
from acquisitions and to a lesser extent expansion in existing markets. The
acquisitions of Valley Forge and Talbert in September 1998 contributed combined
Revenue of $39.3 million for the six months ended June 30, 1999. Revenue for the
Dental offices in existing markets increased $11.5 million, or 23.0%, for the
six months ended June 30, 1999, resulting primarily from the opening of three de
novo Dental Offices, the physical expansion of eleven existing Dental Offices,
the acquisition of ten dental practices and the acquisitions of Dental Care One
and MDCC in March 1998 and June 1998, respectively, which provided two and five
additional months of Revenue for the six months ended June 30, 1999.
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 $61.6 million for the six months ended June
30, 1999 from $31.4 million for the six months ended June 30,1998, an increase
of $30.2 million, or 96.5%, due to acquisitions in new markets and growth in
existing markets. New market growth resulted from the acquisitions of Valley
Forge and Talbert which contributed combined fee-for-service Revenue of $22.9
million for the respective periods following the dates of acquisition. In
existing markets, fee-for-service Revenue increased to $38.7 million for the six
months ended June 30, 1999 from $31.4 million for the six months ended June 30,
1998, representing an increase of $7.3 million, or 23.4%. Existing market growth
resulted from the opening of three de novo Dental Offices, the physical
expansion of eleven existing Dental Offices, the acquisition of ten dental
practices and the acquisitions of Dental Care One and MDCC in March 1998 and
June 1998, respectively, which provided two and five additional months of
fee-for-service Revenue in the six months ended June 30, 1999. Managed dental
care Revenue (i.e., Revenue from capitated managed dental care plans, including
capitation payments and patient co-payments) increased to $39.3 million for the
six months ended June 30, 1999 from $18.7 million for the six months ended June
30, 1998, an increase of $20.6 million, or 109.3%. This increase resulted in
part from the acquisitions of Valley Forge and Talbert which contributed
combined managed dental care Revenue of $16.3 million for the respective periods
following the dates of acquisition. In existing markets, managed dental care
Revenue increased to $23.0 million for the six months ended June 30, 1999 from
$18.7 million for the six months ended June 30, 1998, an increase of $4.3
million or 22.3%. The increase in existing markets resulted from the opening of
three de novo Dental Offices, the physical expansion of eleven existing Dental
Offices, the acquisition of ten dental practices and the acquisitions of Dental
Care One and MDCC in March 1998 and June 1998, respectively, which provided two
and five additional months of managed dental care Revenue in the six months
ended June 30, 1999. As a percentage of Revenue, fee-for-service Revenue
decreased to 61.1% from 62.6% for the six months ended June 30, 1999 and 1998,
respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $33.4 million for the six months ended June 30, 1999 from $14.9
million for the six months ended June 30, 1998, an increase of $18.5 million, or
124.2%. The increase resulted primarily from the acquisitions of Valley Forge
and Talbert which added combined provider salaries and benefits expense of $14.0
million for the respective periods following the dates of acquisition. In
existing markets, provider salaries and benefits expense increased $4.5 million
as dentist and hygienist compensation increased as a result of a higher level of
production at the Dental Offices and the acquisitions of Dental Care One and
MDCC in March 1998 and June 1998, respectively, which provided two and five
additional months of provider salaries and benefits expense in the six months
ended June 30, 1999. As a percent of Revenue, provider salaries and benefits
expense increased to 33.1% from 29.7% for the six months ended June 30, 1999 and
1998, respectively. This increase was due principally to higher compensation
levels at certain acquired companies.
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $26.4 million for the six months ended June
30, 1999 from $13.4 million for the six months ended June 30, 1998, an increase
of $13.0 million, or 96.8%. The increase resulted primarily from the
acquisitions of Valley Forge and Talbert which added combined clinical and other
salaries and benefits expense of $9.5 million for the respective periods
following the dates of acquisition. In existing markets, clinical and other
salaries and benefits expense increased $3.5 million due to the opening of three
de novo Dental Offices, the physical expansion of eleven existing Dental
Offices, the acquisition of ten dental practices and the acquisitions of Dental
Care One and MDCC in March 1998 and June 1998, respectively, which provided two
and five additional months of clinical and other salaries and benefits expense
in the six months ended June 30, 1999. As a percent of Revenue, clinical and
other salaries and benefits expense decreased to 26.2% from 26.8% for the six
months ended June 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.
13
<PAGE> 14
Dental supplies. Dental supplies expense increased to $5.2 million for
the six months ended June 30, 1999 from $2.9 million for the six months ended
June 30, 1998, an increase of $2.3 million, or 80.2%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert which added combined
dental supplies expense of $2.0 million for the respective periods following the
dates of acquisition. In existing markets, dental supplies expense increased
$360,000 due to 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 5.2% from 5.8% for the
six months ended June 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 $4.5 million for
the six months ended June 30, 1999 from $2.3 million for the six months ended
June 30, 1998, an increase of $2.2 million, or 97.9%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert which added combined
laboratory fee expense of $1.9 million for the respective periods following the
dates of acquisition. In existing markets, laboratory fee expense increased
$354,000 as a result of increased production and the acquisitions of Dental Care
One and MDCC in March 1998 and June 1998, respectively, which provided two and
five additional months of laboratory fee expense in the six months ended June
30, 1999. As a percent of Revenue, laboratory fee expense decreased slightly to
4.5% from 4.6% for the six months ended June 30, 1999 and 1998, respectively.
Occupancy. Occupancy expense increased to $5.1 million for the six
months ended June 30, 1999 from $2.7 million for the six months ended June 30,
1998, an increase of $2.4 million, or 89.7%. This increase resulted primarily
from the acquisitions of Valley Forge and Talbert which added a combined $1.7 to
occupancy expense for the respective periods following the dates of acquisition.
In existing markets, occupancy expense increased $684,000 resulting from the
opening of three de novo Dental Offices, the physical expansion of eleven
existing Dental Offices, the acquisition of ten dental practices and the
acquisitions of Dental Care One and MDCC in March 1998 and June 1998,
respectively, which provided two and five additional months of occupancy expense
in the six months ended June 30, 1999. Additionally, the Company closed five
Dental Offices (three in Houston, one in Arkansas and one in New Mexico) in the
first quarter of 1999 and closed three Dental Offices (two in Austin and one in
Philadelphia) in the second quarter of 1999. As a percent of Revenue, occupancy
expense decreased to 5.0% from 5.3% for the six months ended June 30, 1999 and
1998, respectively.
Advertising. Advertising expense increased to $1.6 million for the six
months ended June 30, 1999 from $1.1 million for the six months ended June 30,
1998, an increase of $501,000, or 45.8%. This increase resulted primarily from
the acquisitions of Valley Forge and Talbert which added a combined $351,000 to
advertising expense for the respective periods following the dates of
acquisition. There was an increase of $150,000 in television and print
advertising in the existing markets in 1999. As a percent of Revenue,
advertising expense decreased to 1.6% from 2.2% for the six months ended June
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 $12.8 million for the six months ended June 30, 1999 from $5.9
million for the six months ended June 30, 1998, an increase of $6.9 million, or
115.4%. This increase resulted primarily from the acquisitions of Valley Forge
and Talbert which added combined other operating expenses of $4.9 million for
the respective periods following the dates of acquisition. Other operating
expenses for existing markets increased $2.0 million resulting from the opening
of three de novo Dental Offices, the physical expansion of eleven existing
Dental Offices, the acquisition of ten dental practices, the acquisitions of
Dental Care One and MDCC in March 1998 and June 1998, respectively, which
provided two and five additional months of other operating expenses in the six
months ended June 30, 1999 and the expansion of the Company's corporate
infrastructure to manage growth. As a percent of Revenue, other operating
expenses increased to 12.6% from 11.8% for the six months ended June 30, 1999
and 1998, respectively. This increase was due principally to the acquired
companies having higher other operating expenses as a percent of Revenue than
the Company's existing operations.
Depreciation and amortization. Depreciation and amortization expense
increased to $5.2 million for the six months ended June 30, 1999 from $2.3
million for the six months ended June 30, 1998, an increase of $2.9 million, or
124.1%. This increase resulted primarily from the acquisitions of Valley Forge
and Talbert which added combined depreciation and amortization expense of $2.2
million for the respective periods following the dates of acquisition.
Depreciation and amortization expense for existing markets increased $704,000
resulting from the opening of three de novo Dental Offices, the physical
expansion of eleven existing Dental Offices, the acquisition of ten dental
practices and the acquisitions of Dental Care
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<PAGE> 15
One and MDCC in March 1998 and June 1998, respectively, which provided two and
five additional months of depreciation and amortization expense in the six
months ended June 30, 1999. As a percent of Revenue, depreciation and
amortization expense increased to 5.2% from 4.6% for the six months ended June
30, 1999 and 1998, respectively. This increase was due principally to the
acquired companies having higher depreciation and amortization expense as a
percent of Revenue than the Company's existing operations.
Operating income. Operating income increased to $6.7 million for the
six months ended June 30, 1999 from $4.6 million for the six months ended June
30, 1998, an increase of $2.1 million, or 45.7%. This increase resulted in part
from the acquisitions of Valley Forge and Talbert which added combined operating
income of $2.8 million for the respective periods following the dates of
acquisition. Income from the Company's existing markets increased $1.6 million
for the six months ended June 30, 1999, which was offset by increased corporate
expenses of $2.3 million due to the development of corporate infrastructure. As
a percent of Revenue, operating income decreased to 6.6% from 9.2% for the six
months ended June 30, 1999 and 1998, respectively. This decrease was due
principally to certain acquired companies experiencing lower operating margins
than the Company's existing operations offset by margin improvement in clinical
and other salaries and benefits expense, dental supplies expense, laboratory fee
expense, occupancy expense and advertising expense in the existing business.
Interest expense, net. Interest expense, net increased to $3.7 million
for the six months ended June 30, 1999 from $514,000 for the six months ended
June 30, 1998, an increase of $3.2 million, or 616.7%. This increase is
attributable to the higher average outstanding debt balances for the six months
ended June 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 $76.6 million for the
six months ended June 30, 1999 compared to average debt outstanding of $12.7
million for the six months ended June 30, 1998.
Minority interest. Minority interest expense increased to $170,000 for
the six months ended June 30, 1999 from $64,000 for the six months ended June
30, 1998, an increase of $106,000, or 165.6%. This increase resulted from higher
net income relating to the acquisitions of Dental Centers of Indiana, Inc.,
which owns a fifty percent ownership in two partnerships operating four Dental
Offices in Indiana, Dental America, which owns a twenty percent interest in a
group dental practice with two Dental Offices located in Midland and Odessa,
Texas, and MDCC, which owns a thirty-five percent interest in a group dental
practice with two Dental Offices in Austin, Texas (closed in the second quarter
of 1999) and five Dental Offices in New Mexico for the six months ended June 30,
1999 and 1998, respectively.
Income taxes. Income tax expense decreased to $1.1 million for the six
months ended June 30, 1999 from $1.6 million for the six months ended June 30,
1998, a decrease of $453,000, or 28.8%. This decrease was the result of lower
net income before taxes, which decreased to $2.9 million for the six months
ended June 30, 1999 from $4.0 million for the six months ended June 30, 1998, a
decrease of $1.1 million, or 29.0%.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had a $2.1 million working capital
deficit, representing a decrease of $12.4 million from the working capital
deficit of $14.5 million at December 31, 1998. This working capital deficit
included current liabilities of $27.5 million, consisting of $2.2 million in
accounts payable, $17.2 million in accrued liabilities, $5.4 million in amounts
payable to dental group practices as consideration for accounts receivable
acquired from such group practices and $2.7 million in current maturities of
notes payable and capital lease obligations. Current liabilities were offset by
current assets of $25.4 million, consisting of $7.8 million in cash and cash
equivalents, $15.4 million in accounts receivable, net of allowances, prepaid
expenses of $2.0 million and a federal income tax receivable of $229,000. The
Company's principal sources of liquidity as of June 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 six months ended June 30, 1999 and 1998, cash provided by
operations was $1.5 million and $4.5 million, respectively.
Cash used in investing activities was $10.5 million for the six months
ended June 30, 1999 and $10.0 million for the six months ended June 30, 1998. In
the six months ended June 30, 1999, $7.7 million was utilized for acquisitions
and $2.8 million was invested in the purchase of additional property and
equipment. In the six months ended June 30, 1998, $6.3 million was utilized for
acquisitions and $3.7 million was invested in the purchase of additional
property and equipment.
For the six months ended June 30, 1999 and 1998, cash provided by
financing activities was $12.9 million and $6.5 million, respectively. In the
six months ended June 30, 1999, the cash provided was primarily comprised of
$14.2 million in net borrowings offset by the repayment of $2.0 million in
outstanding debt. In the six months ended June 30, 1998, the cash provided was
primarily comprised of $6.8 million in net borrowings offset by the repayment of
$298,000 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 June 30,
1999, the Company had outstanding borrowings of $79.6 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 is
expected to be completed during fiscal 1999. The Company is also focusing on
major customers, which consist of third-party payors such as preferred provider
plans, and certain key suppliers to assess their compliance. The Company has
received and continues to receive assurances that its major customers and
suppliers are or will be compliant by year 2000; if such assessment is not then
complete or material 2000 concerns are then identified, 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 $25,000. 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.
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<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 8, 1999, a judgment in the amount of $1.1 million was
entered for a formerly employed dentist and against Managed Dental Care Centers,
Inc., a subsidiary of which the Company owns a 65 percent interest. The judgment
awarded damages for fraud, tortious interference and breach of employment and
purchase agreements, as well as punitive damages. The Company prevailed on its
indemnification against this claim and all legal fees, costs and expenses
related thereto by the former shareholders (and current minority partners) of
Managed Dental Care Centers, Inc. As a result, the Company had a $1.0 million
gain related to litigation reserves recorded in December 1998. In addition, the
Company has reached an agreement with one of the minority shareholders to
acquire an additional 17.5% of the Common Stock of Managed Dental Care Centers,
Inc.
On February 8, 1999, the Company was served with a Notice and Demand
for Arbitration on behalf of four limited partnerships who were among the
principal stockholders of Valley Forge Dental Associates, Inc. ("Valley Forge")
in the merger which closed on September 10, 1998, all of which are associated
with Foster Management Company of Valley Forge, Pennsylvania (collectively, the
"Former Principal Stockholders"). On or about May 13, 1999, the Company reached
an agreement to settle this matter with the Former Principal Stockholders. Under
the terms of the settlement, the Company agreed to deliver approximately 400,000
shares of its Common Stock to the Former Principal Stockholders and to appoint a
representative of the Former Principal Stockholders to its board of directors.
The parties to the settlement also agreed to exchange mutual releases and to
stipulate to a dismissal of the arbitration proceeding.
On or about April 26, 1999, the Company was served with a punitive
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, 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 United States
District Court for the Northern District of Texas, which encompass the same
class period and cover almost identical allegations. The Company anticipates
that all three class action complaints eventually will be consolidated into a
single action in the United States District Court for the Northern District of
Texas. The Company is currently reviewing the allegations made in the class
action lawsuits and intends to defend the claims 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.
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.
18
<PAGE> 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) In April 1999, the Company issued 44,182 shares of Common
Stock to Charles Mazza, D.D.S. and Michael Matkov, D.D.S. as
consideration for achieving specified financial performance
goals contained in the asset purchase agreement in reliance
upon the exemption from registration under Regulation D
promulgated under the Securities Act.
In April 1999, pursuant to a stock option agreement, the
Company granted options to purchase 4,000 shares of Common
Stock at an exercise price of $2.438 per share to Richard
Handelman, D.D.S. in reliance upon the exemption from
registration under Regulation D promulgated under the
Securities Act.
In April 1999, pursuant to stock option agreements, the
Company granted options to purchase 390,000 shares of Common
Stock at an exercise price of $3.25 per share to certain of
its employees and affiliated dentists in reliance upon the
exemption from registration under Regulation D promulgated
under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has received waivers from the bank syndicate as a
result of violating the terms of its Credit Facility at March 31,
1999 and December 31, 1998. Additionally, the Company is in the
process of exploring the possibility of obtaining additional
capital, which would most likely entail the restructure of the
covenant package associated with its current credit facility.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
At the Annual Meeting of Shareholders of the Company held on
May 11, 1999, the shareholders of the Company approved the election
of Warren F. Melamed, D.D.S. and W. Barger Tygart, the Board of
Directors' nominees, as Class II Directors of the Company to hold
office until the 2002 Annual Meeting of Shareholders and until their
successors are duly elected and qualified. No other nominations were
made. The total number of votes cast for the election of the Class II
Directors was 10,703,020. Set forth below is a tabulation of the
vote:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Warren F. Melamed, D.D.S. 10,588,396 114,624
W. Barger Tygart 10,602,472 100,548
</TABLE>
There were no broker non-votes on this matter.
ITEM 5. OTHER INFORMATION
Not applicable.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated May 3, 1999, reporting the
commencement of a legal proceeding against the Company.
20
<PAGE> 21
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: August 16, 1999 By: /s/ Gary W. Cage
----------------------------
Gary W. Cage
Chief Executive Officer and
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
</TABLE>
22
<PAGE> 1
EXHIBIT 11
MONARCH DENTAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 1,126 $ 1,352 $ 1,739 $ 2,456
========= ========= ========= =========
Weighted average common shares outstanding 13,003 10,324 12,547 10,280
Weighted average common equivalent shares outstanding -- 142 -- 117
--------- --------- --------- ---------
Weighted average common and common equivalent
shares outstanding
13,003 10,466 12,547 10,397
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Net income $ 0.09 $ 0.13 $ 0.14 $ 0.24
========= ========= ========= =========
NET INCOME PER SHARE - ASSUMING DILUTION:
Net income $ 0.09 $ 0.13 $ 0.14 $ 0.24
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 0 7,849,057
<SECURITIES> 0 0
<RECEIVABLES> 0 24,751,433
<ALLOWANCES> 0 (9,371,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 25,450,348
<PP&E> 0 31,196,469
<DEPRECIATION> 0 (11,799,000)
<TOTAL-ASSETS> 0 183,909,761
<CURRENT-LIABILITIES> 0 27,544,970
<BONDS> 0 0
0 0
0 0
<COMMON> 0 122,223
<OTHER-SE> 0 62,832,348
<TOTAL-LIABILITY-AND-EQUITY> 0 183,909,761
<SALES> 0 0
<TOTAL-REVENUES> 51,469,550 100,924,569
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 47,576,414 94,213,459
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,905,320 3,683,650
<INCOME-PRETAX> 1,851,276 2,857,541
<INCOME-TAX> 725,632 1,118,077
<INCOME-CONTINUING> 1,125,644 1,739,464
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,125,644 1,739,464
<EPS-BASIC> 0.09 0.14
<EPS-DILUTED> 0.09 0.14
</TABLE>
