<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 14, 1999
----- ------------------------------
<S> <C>
Common Stock, $.01 par value 12,178,078
</TABLE>
<PAGE> 2
MONARCH DENTAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Report of Independent Public Accountants 3
Item 2. 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 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 6. Exhibits and Reports Filed on Form 8-K 15
Signatures 16
Exhibit Index 17
</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 March 31, 1999 and
the related consolidated statements of income and cash flows for the three-month
periods ended March 31, 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
May 13, 1999
3
<PAGE> 4
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,183,222 $ 3,992,845
Accounts receivable, net of allowances of approximately
$9,364,000 and $8,128,000, respectively 15,529,202 15,328,575
Prepaid expenses 1,536,756 1,369,503
Federal income tax receivable 847,145 1,239,590
------------- -------------
Total current assets 22,096,325 21,930,513
Property and equipment, net of accumulated depreciation of
approximately $10,574,000 and $9,270,000, respectively 20,090,683 18,725,117
Goodwill, net of accumulated amortization of approximately
$5,935,000 and $4,622,000, respectively 130,332,898 126,450,495
Other assets 2,150,553 1,899,268
------------- -------------
Total assets $ 174,670,459 $ 169,005,393
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,969,611 $ 6,073,726
Accrued payroll 6,969,394 6,524,061
Accrued liabilities 11,023,281 14,653,926
Payable to affiliated dental group practices 5,435,626 4,427,816
Current maturities of notes payable and capital lease obligations 3,746,076 4,789,960
------------- -------------
Total current liabilities 30,143,988 36,469,489
Deferred income taxes 1,319,702 1,319,702
Notes payable 81,055,593 70,515,007
Capital lease obligations 784,707 813,073
Other liabilities 2,266,030 2,296,740
------------- -------------
Total liabilities 115,570,020 111,414,011
Minority interest in consolidated subsidiaries (27,288) 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;
12,178,078 and 11,982,254 shares issued and outstanding,
respectively 121,781 119,823
Additional paid-in capital 64,487,951 63,439,123
Retained earnings (deficit) (5,482,005) (6,095,825)
------------- -------------
Total stockholders' equity 59,127,727 57,463,121
------------- -------------
Total liabilities and stockholders' equity $ 174,670,459 $ 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 MARCH 31,
----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Patient revenue, net $49,455,019 $ 24,279,526
Operating expenses:
Provider salaries and benefits 16,167,228 7,217,507
Clinical and other salaries and benefits 13,054,732 6,465,648
Dental supplies 2,649,224 1,439,730
Laboratory fees 2,319,315 1,057,913
Occupancy 2,575,970 1,329,269
Advertising 730,041 514,956
Other operating expenses 6,578,301 3,024,433
Depreciation and amortization 2,562,234 1,086,942
----------- ------------
46,637,045 22,136,398
----------- ------------
Operating income 2,817,974 2,143,128
Interest expense, net 1,778,330 282,641
Minority interest in consolidated subsidiaries 33,379 49,940
----------- ------------
Income before income taxes 1,006,265 1,810,547
Income taxes 392,445 707,000
----------- ------------
Net income $ 613,820 $ 1,103,547
=========== ============
Net income per common share $ 0.05 $ 0.11
=========== ============
Net income per common share - assuming dilution $ 0.05 $ 0.11
=========== ============
Weighted average number of common shares
outstanding 12,085,851 10,234,723
=========== ============
Weighted average number of common and common
equivalent shares outstanding 12,085,851 10,322,400
=========== ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE> 6
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 613,820 $ 1,103,547
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 2,562,234 1,086,942
Minority interest in consolidated subsidiaries 33,379 49,940
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net 22,889 (596,892)
Prepaid expenses 241,830 (224,725)
Other noncurrent assets (251,285) 14,051
Accounts payable and accrued expenses (2,846,100) (156,156)
Other liabilities (270,710) 37,713
Deferred income taxes -- 291,000
------------ ------------
Net cash provided by operating activities 106,057 1,605,420
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,267,862) (1,514,155)
Cash paid for dental group practices, including
related costs, net of cash acquired (7,008,342) (607,950)
------------ ------------
Net cash used in investing activities (9,276,204) (2,122,105)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of issuance costs 10,450,000 1,600,000
Payments on notes payable and capital lease obligations (1,035,335) (186,789)
Distribution to stockholders/partners (188,927) (30,000)
Issuance of common stock 134,786 46,054
------------ ------------
Net cash provided by financing activities 9,360,524 1,429,265
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 190,377 912,580
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,992,845 2,975,142
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,183,222 $ 3,887,722
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 2,324,665 $ 166,269
============ ============
Cash paid for taxes $ -- $ 416,000
============ ============
Debt assumed through acquisitions $ 150,000 $ 363,440
============ ============
</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 March 31, 1999, the Company managed
196 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 months ended March 31, 1999 and
1998, have been prepared by the Company, without audit, pursuant to
Accounting Principles Board (ABP) Opinion No. 28, "Interim Financial
Reporting." Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the
information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results of its operations
for the three months ended March 31, 1999 and 1998, have been included
herein. The results of operations for the three-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 months ended March 31, 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 the 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 months ended March 31, 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. Diluted net income per
share has been calculated using the treasury stock method for stock
options and other diluted securities. Such shares totaled 87,676 for
the three months ended March 31, 1998. For the three months ended March
31, 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.
7
<PAGE> 8
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 January 1, 1999, February 1, 1999, March 1, 1999 and March 1,
1999, respectively, the Company acquired certain assets and assumed
certain liabilities of Charles I. Williams, D.D.S. in Duncanville,
Texas, Gregory M. Gella, D.D.S. in Eau Claire, Wisconsin, Robert H.
Larsen, D.D.S. in Tucker, Georgia and John W. Fitzgerald, D.D.S. in New
Richmond, Wisconsin for an aggregate purchase consideration of $4.6
million, consisting of $3.5 million in cash, 156,263 shares of Common
Stock and the assumption of $150,000 in debt. The above acquisitions
were accounted for as asset purchases.
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)
Three Months Ended March 31,
------------------------------
(In thousands, except per share data) 1999 1998
--------- --------
<S> <C> <C>
Patient revenue, net $ 49,907 $ 46,322
Net income $ 726 $ 1,718
Net income per common share - assuming dilution $ 0.06 $ 0.14
</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 implementation of strategic initiatives to improve
profitability, risks associated with 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 (5) (2) -- -- --
------- ---- ---- ---- ----
Offices at end of period 196 194 99 53 12
======= ==== ==== ==== ====
</TABLE>
(1) Through March 31, 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 months ended
March 31, 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 months ended March 31, 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Patient revenue, net. Revenue increased to $49.5 million for the three
months ended March 31, 1999 from $24.3 million for the three months ended March
31, 1998, an increase of $25.2 million, or 103.7%. This increase resulted
primarily from acquisitions and to a lesser extent expansion in existing
markets. The acquisitions of Managed Dental Care Centers, Inc. ("MDCC"), Valley
Forge Dental Associates, Inc. ("Valley Forge") and Talbert Medical Management
Corporation ("Talbert") in June 1998, September 1998 and September 1998,
respectively, contributed combined Revenue of $20.2 million for the three months
ended March 31, 1999. Dental offices in the nine markets served at March 31,
1998, namely Dallas-Fort Worth, Houston, Wisconsin, Arkansas, Indiana, Colorado,
San Antonio, Midland-Odessa and Dayton (the "existing markets") contributed an
additional $5.0 million of the increase in Revenue in the three months ended
March 31, 1999 resulting primarily from the opening of five de novo Dental
Offices, the physical expansion of eleven existing Dental Offices, the
acquisition of nine dental practices and the acquisition of Dental Care One in
March 1998 which provided two additional months of Revenue in the three months
ended March 31, 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 $30.5 million for the three months ended
March 31, 1999 from $15.2 million for the three months ended March 31,1998, an
increase of $15.3 million, or 101.5%, due to acquisitions in new markets and
growth in existing markets. New market growth resulted from the acquisitions of
MDCC, 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 $18.8
million for the three months ended March 31, 1999 from $15.2 million for the
three months ended March 31, 1998, representing an increase of $3.6 million, or
23.8%. Existing market growth resulted from the opening of five de novo Dental
Offices, the physical expansion of eleven existing Dental Offices, the
acquisition of nine dental practices and the acquisition of Dental Care One in
March 1998 which provided two additional months of fee-for-service Revenue in
the three months ended March 31, 1999. Managed dental care Revenue (i.e.,
Revenue from capitated managed dental care plans, including capitation payments
and patient co-payments) increased to $19.0 million for the three months ended
March 31, 1999 from $9.1 million for the three months ended March 31, 1998, an
increase of $9.9 million, or 107.4%. This increase resulted in part from the
acquisitions of MDCC, Valley Forge and Talbert which contributed combined
managed dental care Revenue of $8.5 million for the respective periods following
the dates of acquisition. In existing markets, managed dental care Revenue
increased to $10.5 million for the three months ended March 31, 1999 from $9.1
million for the three months ended March 31, 1998, an increase of $1.4 million
or 15.6%. The increase in existing markets resulted from the opening of five de
novo Dental Offices, the physical expansion of eleven existing Dental Offices,
the acquisition of nine dental practices and the acquisition of Dental Care One
in March 1998 which provided two additional months of managed dental care
Revenue in the three months ended March 31, 1999. As a percentage of Revenue,
fee-for-service Revenue decreased to 61.8% from 62.5% for the three months ended
March 31, 1999 and 1998, respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $16.2 million for the three months ended March 31, 1999 from $7.2
million for the three months ended March 31, 1998, an increase of $9.0 million,
or 124.0%. The increase resulted primarily from the acquisitions of MDCC, Valley
Forge and Talbert which added combined provider salaries and benefits expense of
$7.1 million for the respective periods following the dates of acquisition. In
existing markets, provider salaries and benefits expense increased $1.9 million
as dentist and hygienist compensation increased as a result of a higher level of
production at the Dental Offices and the acquisition of Dental Care One in March
1998 which provided two additional months of provider salaries and benefits
expense in the three months ended March 31, 1999. As a percent of
10
<PAGE> 11
Revenue, provider salaries and benefits expense increased to 32.7% from 29.7%
for the three months ended March 31, 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 $13.1 million for the three months ended March
31, 1999 from $6.5 million for the three months ended March 31, 1998, an
increase of $6.6 million, or 101.9%. The increase resulted primarily from the
acquisitions of MDCC, Valley Forge and Talbert which added combined clinical and
other salaries and benefits expense of $5.1 million for the respective periods
following the dates of acquisition. In existing markets, clinical and other
salaries and benefits expense increased $1.5 million due to the opening of five
de novo Dental Offices, the physical expansion of eleven existing Dental
Offices, the acquisition of nine dental practices and the acquisition of Dental
Care One March 1998 which provided two additional months of clinical and other
salaries and benefits expense in the three months ended March 31, 1999. As a
percent of Revenue, clinical and other salaries and benefits expense decreased
slightly to 26.4% from 26.6% for the three months ended March 31, 1999 and 1998,
respectively.
Dental supplies. Dental supplies expense increased to $2.6 million for
the three months ended March 31, 1999 from $1.4 million for the three months
ended March 31, 1998, an increase of $1.2 million, or 84.0%. This increase
resulted primarily from the acquisitions of MDCC, Valley Forge and Talbert which
added combined dental supplies expense of $1.2 million for the respective
periods following the dates of acquisition. In existing markets, dental supplies
expense increased $15,000 as a result of leveraging supply contracts against
expansion in existing markets. As a percent of Revenue, dental supplies expense
decreased to 5.4% from 5.9% for the three months ended March 31, 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 $2.3 million for
the three months ended March 31, 1999 from $1.1 million for the three months
ended March 31, 1998, an increase of $1.2 million, or 119.2%. This increase
resulted primarily from the acquisitions of MDCC, Valley Forge and Talbert which
added combined laboratory fee expense of $1.1 million for the respective periods
following the dates of acquisition. In existing markets, laboratory fee expense
increased $163,000 as a result of increased production and the acquisition of
Dental Care One in March 1998 which provided two additional months of laboratory
fees expense in the three months ended March 31, 1999. As a percent of Revenue,
laboratory fee expense increased to 4.7% from 4.4% for the three months ended
March 31, 1999 and 1998, respectively. This increase was due principally to the
acquisitions having higher laboratory fee expense as a percent of Revenue than
the Company's existing operations.
Occupancy. Occupancy expense increased to $2.6 million for the three
months ended March 31, 1999 from $1.3 million for the three months ended March
31, 1998, an increase of $1.3 million, or 93.8%. This increase resulted
primarily from the acquisitions of MDCC, Valley Forge and Talbert which added a
combined $951,000 to occupancy expense for the respective periods following the
dates of acquisition. In existing markets, occupancy expense increased $295,000
resulting from the opening of five de novo Dental Offices, the physical
expansion of eleven existing Dental Offices, the acquisition of nine dental
practices and the acquisition of Dental Care One in March 1998 which provided
two additional months of occupancy expense in the three months ended March 31,
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. As a
percent of Revenue, occupancy expense decreased to 5.2% from 5.5% for the three
months ended March 31, 1999 and 1998, respectively.
Advertising. Advertising expense increased to $730,000 for the three
months ended March 31, 1999 from $515,000 for the three months ended March 31,
1998, an increase of $215,000, or 41.7%. This increase resulted primarily from
the acquisitions of MDCC, Valley Forge and Talbert which added a combined
$183,000 to advertising expense for the respective periods following the dates
of acquisition. There was an increase of $32,000 in television and print
advertising in the existing markets in 1999. As a percent of Revenue,
advertising expense decreased to 1.5% from 2.1% for the three months ended March
31, 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 $6.6 million for the three months ended March 31, 1999 from $3.0
million for the three months ended March 31, 1998, an increase of $3.6 million,
or 117.5%. This increase resulted primarily from the acquisitions of MDCC,
Valley Forge and Talbert which added combined other operating expenses of $2.7
million for the respective periods following the dates of acquisition.
11
<PAGE> 12
Other operating expenses for existing markets increased $861,000 resulting from
the opening of five de novo Dental Offices, the physical expansion of eleven
existing Dental Offices, the acquisition of nine dental practices, the
acquisition of Dental Care One in March 1998 which provided two additional
months of other operating expenses in the three months ended March 31, 1999 and
the expansion of the Company's corporate infrastructure to manage growth. As a
percent of Revenue, other operating expenses increased to 13.3% from 12.5% for
the three months ended March 31, 1999 and 1998, respectively.
Depreciation and amortization. Depreciation and amortization expense
increased to $2.6 million for the three months ended March 31, 1999 from $1.1
million for the three months ended March 31, 1998, an increase of $1.5 million,
or 135.7%. This increase resulted primarily from the acquisitions of MDCC,
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 $365,000 resulting from the opening of five de novo Dental Offices,
the physical expansion of eleven existing Dental Offices, the acquisition of
nine dental practices and the acquisition of Dental Care One in March 1998 which
provided two additional months of depreciation and amortization expense in the
three months ended March 31, 1999. As a percent of Revenue, depreciation and
amortization expense increased to 5.2% from 4.5% for the three months ended
March 31, 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 $2.8 million for the
three months ended March 31, 1999 from $2.1 million for the three months ended
March 31, 1998, an increase of $675,000 or 31.5%. This increase resulted in part
from the acquisitions of MDCC, Valley Forge and Talbert which added combined
operating income of $736,000 for the respective periods following the dates of
acquisition. Income from the Company's existing markets increased $878,000 for
the three months ended March 31, 1999, which was offset by increased corporate
expenses of $939,000 due to the development of corporate infrastructure. As a
percent of Revenue, operating income decreased to 5.7% from 8.8% for the three
months ended March 31, 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 dental
supplies expense, laboratory fee expense and advertising expense in the existing
business.
Interest expense, net. Interest expense, net increased to $1.8 million
for the three months ended March 31, 1999 from $283,000 for the three months
ended March 31, 1998, an increase of $1.5 million, or 528.6%. This increase is
attributable to the higher average outstanding debt balances for the three
months ended March 31, 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 $72.8
million for the three months ended March 31, 1999 compared to average debt
outstanding of $10.5 million for the three months ended March 31, 1998.
Minority interest. Minority interest expense decreased to $33,000 for
the three months ended March 31, 1999 from $50,000 for the three months ended
March 31, 1998, a decrease of $17,000, or 34.0%. This decrease resulted from
lower 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 and five offices in New Mexico for
the three months ended March 31, 1999 and 1998, respectively.
Income taxes. Income tax expense decreased to $392,000 for the three
months ended March 31, 1999 from $707,000 for the three months ended March 31,
1998, a decrease of $315,000, or 44.6%. This decrease was the result of lower
net income before taxes, which decreased to $1.0 million for the three months
ended March 31, 1999 from $1.8 million for the three months ended March 31,
1998, a decrease of $804,000, or 44.4%.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had an $8.0 million working capital
deficit, representing a decrease of $6.5 million from the working capital
deficit of $14.5 million at December 31, 1998. This working capital deficit
included current liabilities of $30.1 million, consisting of $3.0 million in
accounts payable, $18.0 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 $3.7 million in current maturities of
notes payable and capital lease obligations. Current liabilities were offset by
current assets of $22.1 million, consisting of $4.2 million in cash and cash
equivalents, $15.5 million in accounts receivable, net of allowances, prepaid
expenses of $1.5 million and a federal income tax receivable of $847,000. The
Company's principal sources of liquidity as of March 31, 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 three months ended March 31, 1999 and 1998, cash provided by
operations was $106,000 and $1.6 million, respectively.
Cash used in investing activities was $9.3 million for the three months
ended March 31, 1999 and $2.1 million for the three months ended March 31, 1998.
In the three months ended March 31, 1999, $7.0 million was utilized for
acquisitions and $2.3 million was invested in the purchase of additional
property and equipment. In the three months ended March 31, 1998, $608,000 was
utilized for acquisitions and $1.5 million was invested in the purchase of
additional property and equipment.
For the three months ended March 31, 1999 and 1998, cash provided by
financing activities was $9.4 million and $1.4 million, respectively. In the
three months ended March 31, 1999, the cash provided was primarily comprised of
$10.5 million in net borrowings offset by the repayment of $1.0 million in
outstanding debt. In the three months ended March 31, 1998, the cash provided
was primarily comprised of $1.6 million in net borrowings offset by the
repayment of $187,000 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 March 31,
1999, the Company had outstanding borrowings of $75.9 million under the Credit
Facility. The amounts outstanding under the Credit Facility bear interest at
variable rates which are based upon either the lender's base rate or LIBOR,
plus, in either case, a margin which varies according to the ratio of the
Company's funded debt to EBITDA, each as defined in the Credit Facility. The
Credit Facility prohibits the Company from incurring indebtedness, incurring
liens, disposing of assets, making investments or making acquisitions above a
predetermined consideration level without bank approval, and requires the
Company to maintain certain financial ratios on an ongoing basis. The Credit
Facility is secured by pledges of all of the outstanding capital stock of, or
other equity interests in, the Company's subsidiaries, and a lien on
substantially all of the assets of the Company.
The Company believes that the cash generated from operations will be
sufficient to fund its anticipated working capital needs and capital
expenditures (other than financing necessary to complete future acquisitions)
for 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 strategy and could negatively affect its
operations in future periods.
13
<PAGE> 14
YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Many existing computer programs and databases use two digits to
identify a year in the date field (i.e., 98 would represent 1998). These
programs and databases were not originally designed to operate after December
31, 1999. If not corrected, many computer programs and databases could fail or
create erroneous results relating to the year 2000. If the Company, its
significant customers, or suppliers fail to make necessary modifications and
conversions on a timely basis, the year 2000 issue could have a material adverse
effect on 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 expects
to complete such assessment by June 30, 1999; if such assessment is not then
complete or material year 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 $83,000 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.
14
<PAGE> 15
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 65%. The judgment awards damages
for fraud, tortious interference and breach of employment and purchase
agreements, as well as punitive damages. The Company has filed a motion for a
new trial and a motion for judgment notwithstanding the verdict. Furthermore,
the Company is indemnified 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., although the ability to collect
under this indemnification may be in question. The Company intends to contest
this matter vigorously.
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"). In the Notice and Demand for Arbitration, the
Former Principal Stockholders asserted claims based on alleged
misrepresentations and/or non-disclosures by the Company in connection with the
Valley Forge transaction and sought damages in an amount not less than $8
million. The Company has agreed in principle to a settlement of this pending
arbitration with the Former Principal Stockholders. Under the terms of the
proposed settlement, the Company will deliver approximately 400,000 shares of
its Common Stock to the Former Principal Stockholders. Completion of the
settlement is subject to negotiation and execution of definitive settlement and
release documents. There can be no assurance that the proposed settlement will
be consummated on these terms or at all.
On or about April 26, 1999, Monarch Dental Corporation (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, 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. The Company has been advised that two
similar putative class actions have been filed against the Company in the United
States District Court for the Northern District of Texas, although service of
process has not been effected with respect to these additional lawsuits. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) In February 1999, the Company issued 2,301 shares of Common
Stock to David B. Wells, D.D.S., Douglass Quinn, D.D.S. and
Allen Dworkin, 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 February 1999, pursuant to an Asset Purchase Agreement, the
Company issued 77,232 shares of Common Stock to Charles I.
Williams in partial consideration for the sale of certain
assets and assumption of certain liabilities of Charles I.
Williams, D.D.S. in reliance upon the exemption from
registration under Regulation D promulgated under the
Securities Act.
In March 1999, pursuant to an Asset Purchase Agreement, the
Company issued 62,959 shares of Common Stock to Robert H.
Larsen in partial consideration for the sale of certain assets
and assumption of certain liabilities of Robert H. Larsen,
D.D.S. in reliance upon the exemption from registration under
Regulation D promulgated under the Securities Act.
In March 1999, pursuant to an Asset Purchase Agreement, the
Company issued 16,072 shares of Common Stock to John W.
Fitzgerald in partial consideration for the sale of certain
assets and assumption of certain liabilities of John W.
Fitzgerald, D.D.S. in reliance upon the exemption from
registration under Regulation D promulgated under the
Securities Act.
In March 1999, pursuant to stock option agreements, the
Company granted options to purchase 100,001 shares of Common
Stock at an exercise price of $3.125 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 is in violation of the terms of its Credit Facility at
March 31, 1999, and has requested a waiver from the bank syndicate,
which the Company reasonably expects to receive. 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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated February 8, 1999,
reporting the commencement of a legal proceeding against the
Company and the Company's potential delisting of its Common
Stock from the Nasdaq National Market.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONARCH DENTAL CORPORATION
Date: May 17, 1999 By: /s/ Gary W. Cage
---------------------------
Gary W. Cage
Chief Executive Officer and
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
</TABLE>
17
<PAGE> 1
EXHIBIT 11
MONARCH DENTAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
-------- -------
<S> <C> <C>
Net income $ 614 $ 1,104
======== =======
Weighted average common shares outstanding 12,086 10,235
Weighted average common equivalent shares outstanding -- 87
-------- -------
Weighted average common and common equivalent
shares outstanding 12,086 10,322
======== =======
NET INCOME PER COMMON SHARE:
- ----------------------------------------------------
Net income $ 0.05 $ 0.11
======== =======
NET INCOME PER SHARE - ASSUMING DILUTION:
- ----------------------------------------------------
Net income $ 0.05 $ 0.11
======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,183,222
<SECURITIES> 0
<RECEIVABLES> 24,893,202
<ALLOWANCES> (9,364,000)
<INVENTORY> 0
<CURRENT-ASSETS> 22,096,325
<PP&E> 30,664,683
<DEPRECIATION> (10,574,000)
<TOTAL-ASSETS> 174,670,459
<CURRENT-LIABILITIES> 30,143,988
<BONDS> 0
0
0
<COMMON> 121,781
<OTHER-SE> 59,005,946
<TOTAL-LIABILITY-AND-EQUITY> 174,670,459
<SALES> 0
<TOTAL-REVENUES> 49,455,019
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 46,637,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,778,330
<INCOME-PRETAX> 1,006,265
<INCOME-TAX> 392,445
<INCOME-CONTINUING> 613,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 613,820
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
