<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER: 0-22835
MONARCH DENTAL CORPORATION.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0363560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MONARCH DENTAL CORPORATION
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TX 75244
(Address of principal executive offices)
(972) 702-7446
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issue's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding as of November 13, 2000
---------------------------- -----------------------------------
<S> <C>
Common Stock, $.01 par value 12,904,922
</TABLE>
<PAGE> 2
MONARCH DENTAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Report of Independent Public Accountants 3
Item 2. Consolidated Financial Statements 4
Item 3. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Part II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports Filed on Form 8-K 22
Signatures 23
Exhibit Index 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Monarch Dental Corporation:
We have reviewed the accompanying consolidated balance sheet of Monarch Dental
Corporation (a Delaware corporation) and subsidiaries as of September 30, 2000
and the related consolidated statements of income and cash flows for the
three-month and nine-month periods ended September 30, 2000 and 1999. 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 accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
November 7, 2000
3
<PAGE> 4
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,585,715 $ 3,921,193
Accounts receivable, net of allowances of approximately $11,680,000
and $12,678,000, respectively 17,950,683 17,408,886
Prepaid expenses 1,942,070 1,647,897
Income tax receivable 277,242 426,970
------------ ------------
Total current assets 23,755,710 23,404,946
Property and equipment, net of accumulated depreciation of approximately $18,417,000
and $14,363,000, respectively 17,627,680 19,071,714
Goodwill, net of accumulated amortization of approximately $14,019,000 and
$9,938,000, respectively 129,975,042 132,459,266
Deferred tax asset -- 340,999
Other assets 3,724,024 3,666,642
------------ ------------
Total assets $175,082,456 $178,943,567
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,923,759 $ 2,028,804
Accrued payroll 3,415,076 4,231,751
Accrued liabilities 6,462,436 10,862,474
Accrued restructuring charges 373,542 808,975
Payable to affiliated dental group practices 5,600,897 4,755,666
Current maturities of notes payable and capital lease obligations 81,741,570 9,539,775
------------ ------------
Total current liabilities 99,517,280 32,227,445
Deferred tax liability 478,031 --
Notes payable 651,637 76,728,008
Capital lease obligations 432,487 455,240
Other liabilities 2,804,133 2,849,602
------------ ------------
Total liabilities 103,883,568 112,260,295
Minority interest in consolidated subsidiaries 682,768 88,818
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; 12,904,922 and
12,724,886 shares issued and outstanding, respectively 129,049 127,249
Common Stock to be issued 1,196,495 100,000
Additional paid-in capital 66,178,558 65,882,409
Retained earnings 3,012,018 484,796
------------ ------------
Total stockholders' equity 70,516,120 66,594,454
------------ ------------
Total liabilities and stockholders' equity $175,082,456 $178,943,567
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Patient revenue, net $ 51,979,324 $ 51,196,448 $161,171,740 $152,121,017
Operating expenses:
Provider salaries and benefits 17,410,595 16,791,628 53,416,208 50,168,813
Clinical and other salaries and benefits 13,819,107 13,310,514 41,248,405 39,744,054
Dental supplies 2,423,296 2,431,629 7,951,386 7,660,966
Laboratory fees 2,824,855 2,793,745 8,311,511 7,323,771
Occupancy 2,608,613 2,577,167 7,715,675 7,646,520
Advertising 758,430 838,148 2,004,007 2,432,241
Other operating expenses 6,165,638 5,769,454 18,422,278 18,531,798
Strategic alternative costs 585,845 -- 1,059,140 --
Depreciation and amortization 2,755,325 2,768,986 8,226,898 7,986,567
------------ ------------ ------------ ------------
49,351,704 47,281,271 148,355,508 141,494,730
------------ ------------ ------------ ------------
Operating income 2,627,620 3,915,177 12,816,232 10,626,287
Interest expense, net 2,687,540 1,788,335 7,832,772 5,471,985
Minority interest in consolidated subsidiaries 77,316 48,110 246,122 218,029
------------ ------------ ------------ ------------
Income (loss) before income taxes (137,236) 2,078,732 4,737,338 4,936,273
Income taxes 15,772 808,895 2,210,116 1,926,972
------------ ------------ ------------ ------------
Net income (loss) $ (153,008) $ 1,269,837 $ 2,527,222 $ 3,009,301
============ ============ ============ ============
Net income (loss) per common share $ (0.01) $ 0.10 $ 0.20 $ 0.24
============ ============ ============ ============
Net income (loss) per common share - assuming dilution $ (0.01) $ 0.10 $ 0.19 $ 0.24
============ ============ ============ ============
Weighted average number of common shares
outstanding 12,904,922 13,181,402 12,863,643 12,760,774
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 12,904,922 13,181,402 13,344,944 12,760,774
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,527,222 $ 3,009,301
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 8,226,898 7,986,567
Minority interest in consolidated subsidiaries 246,122 218,029
Changes in assets and liabilities, net of effects from
acquisitions-
Accounts receivable, net (513,194) (1,554,932)
Prepaid expenses (294,173) (643,620)
Income tax receivable 149,728 1,239,590
Other noncurrent assets 1,233,731 44,896
Accounts payable and accrued expenses (468,558) (3,640,022)
Accrued restructuring charges (435,433) (3,223,810)
Other liabilities 247,812 240,805
Deferred income taxes 819,030 --
------------ ------------
Net cash provided by operating activities 11,739,185 3,676,804
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,450,138) (3,895,149)
Cash paid for dental group practices, including
related costs, net of cash acquired (5,419,493) (8,538,796)
------------ ------------
Net cash used in investing activities (7,869,631) (12,433,945)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,400,000 16,750,000
Payments for debt issue costs (94,618) (364,853)
Payments on notes payable and capital lease obligations (6,491,163) (4,480,164)
Distribution to stockholders/partners (190,810) (356,710)
Issuance of common stock 171,559 313,481
------------ ------------
Net cash provided by (used in) financing activities (4,205,032) 11,861,754
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (335,478) 3,104,613
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,921,193 3,992,845
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,585,715 $ 7,097,458
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 6,149,203 $ 5,841,321
============ ============
Cash paid for taxes $ 1,284,206 $ 551,376
============ ============
Cash paid for strategic alternative costs $ 1,059,140 $ --
============ ============
Debt assumed through acquisitions $ -- $ 150,000
============ ============
Non-cash issuance of common stock $ 1,222,885 $ 3,624,332
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Monarch Dental Corporation ("Monarch"), a Delaware
corporation, and subsidiaries (collectively, the "Company"), manages
dental group practices in selected markets. At September 30, 2000, the
Company managed 190 dental group practices in Texas, Wisconsin,
Pennsylvania, Virginia, Ohio, Arkansas, Utah, Colorado, Georgia, New
Jersey, Florida, Indiana, Arizona and New Mexico.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION/BASIS OF CONSOLIDATION
The financial statements for the three and nine months ended
September 30, 2000 and 1999, have been prepared by the Company, without
audit, pursuant to Accounting Principles Board (APB) Opinion No. 28,
"Interim Financial Reporting." Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to APB Opinion No. 28; nevertheless,
management of the Company believes that the disclosures herein are
adequate to prevent the information presented from being misleading. In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the results of its
operations for the three and nine months ended September 30, 2000 and
1999, have been included herein. The results of operations for the
three and nine month periods are not necessarily indicative of the
results for the full year.
In thirteen states, the Company accounts for its management
activities with the dental group practices under long-term management
agreements (the "Management Agreements"). The Management Agreements
represent the Company's right to manage the Dental Offices during the
40-year term of the agreement. The Management Agreements cannot be
terminated by the related professional corporation without cause,
consisting primarily of bankruptcy or material default. Under the
Management Agreements, the Company assumes responsibility for the
management of all aspects of the dental group practices' business
(including all operating expenses consisting of the expenses incurred
by the Company in connection with managing the Dental Offices,
including salaries and benefits for personnel other than dentists and
hygienists, dental supplies, dental laboratory fees, occupancy costs,
advertising, equipment leases, management information systems and other
expenses related to the dental practice operations) other than the
provision of dental services and retains a 100% residual interest in
the net income of the dental group practices. The Company receives a
management fee equal to the Company's costs plus the lower of (i) 30%
of the P.C.'s net revenues or (ii) the P.C.'s net pre-tax income. If
net pre-tax income exceeds 30% of the P.C.'s net revenues, the P.C.
would retain the amount of pre-tax income over 30% of the P.C.'s net
revenues. The Company's net revenue is significantly dependent upon the
revenue of the dental group practices. The Company has no material
commitments or guarantees to the dental group practices under the
Management Agreements. In Wisconsin, the Company directly employs the
dentists and hygienists.
Under the Management Agreements, the Company establishes a
"controlling financial interest" as defined by EITF 97-2, "Application
of FASB No. 94 and APB No. 16 to Physician Practice Management Entities
and Certain Other Entities under Contractual Management Arrangement"
("EITF 97-2"). In addition, the Company has nominee shareholder
arrangements with certain of the dental group practices as defined by
EITF 97-2. For these reasons, the Company consolidates the financial
statements of the dental group practices.
7
<PAGE> 8
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
NET INCOME (LOSS) PER COMMON SHARE
The net income (loss) 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 dilutive securities. Such
shares totaled 459,119 for the nine month period ended September 30,
2000. The Company incurred a loss for the three month period ended
September 30, 2000, and the average market price fell below the average
exercise price for the three and nine month periods ended September 30,
1999, therefore, no common stock equivalents are included in the
calculation for those periods. There were 1,615,316 and 1,159,435 stock
options outstanding at September 30, 2000 and 1999, respectively.
OTHER
Certain reclassifications have been made to the 1999 financial
statements to conform to the 2000 presentations.
3. NOTES PAYABLE
The Company has a $75.0 million Credit Facility with a bank
syndicate, which expires June 30, 2001. Additionally, the Company has a
$10.0 million short-term note with certain members of the same
syndicate, which expires April 15, 2001. Under the combined facilities,
the Company may borrow up to $85.0 million. At September 30, 2000 the
Company had $80.3 million outstanding under the facilities and
remaining availability of $4.7 million. 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 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.
During 1999, the Company amended its loan agreement associated
with the Credit Facility. Changes made in the amendment included, but
were not limited to, modifications of certain defined terms and
financial ratios, additions of newly defined terms, limitations on
capital expenditures, modifications to the definition of Events of
Default and the requirement of prior bank approval for consolidations,
mergers, acquisitions, and sales of assets. The methodology by which
the Company's borrowing rates are determined was also adjusted as part
of the amendment. In conjunction with this amendment, the bank
syndicate received contingency compensation in the form of warrants of
the Company representing 3% of the fully diluted outstanding common
shares of the Company at the time of agreement, subject to
anti-dilution provisions, for an exercise price of $0.01 per share. At
September 30, 2000, all of these warrants were vested totaling 394,721
shares.
8
<PAGE> 9
The Company believes that cash generated from operations and
borrowings under its credit facilities will be sufficient to fund its
operating cash requirements in the fourth quarter of 2000. The Credit
Facility expires by its terms on June 30, 2001 and all of the Company's
debt thereunder will then be due. The Company will not generate
sufficient cash flow by June 30, 2001 to repay all of its debt under
the Credit Facility.
As of September 30, 2000, the Company is in compliance with
the terms of the Credit Facility. There can be no assurance that the
Company will maintain the ratios as required by the loan agreement. The
failure to maintain these ratios could adversely affect the Company's
operations in future periods.
In order to meet its short-term and long-term liquidity needs,
the Company may issue additional equity and debt securities, subject to
market and other conditions. In addition, the Company had entered into
discussions with potential acquirors in order to determine if a sale of
the Company would be more beneficial to the Company's stockholders than
raising additional capital to meet its liquidity needs. On October 3,
2000, after fully considering all of its options, the Company announced
that it was no longer actively soliciting offers for a potential sale
or merger of the Company and the Company entered into an agreement
with its lenders pursuant to which the Company would seek by December
15, 2000 to raise a minimum of $15.0 million of unsecured subordinated
debt and to refinance its existing Credit Facility and short-term
loan.
Subsequent to that announcement, on November 7, 2000, the
Company announced that it had been approached by a third party
concerning a possible strategic transaction and is currently in
discussions with the third party related to this matter. In connection
with these discussions, the Company's lenders have agreed to amend the
Credit Facility and short-term loan and to extend the maturity of the
short-term loan to April 15, 2001. Pursuant to these amended
agreements, if the Company is unsuccessful in consummating a strategic
transaction, the Company will have an additional sixty days to raise
a minimum of $15.0 million of unsecured subordinated debt and to
refinance its existing Credit Facility and short-term loan.
The Company enters into interest rate swap agreements to
manage its interest rate exposure. Interest rate swaps are agreements
to exchange interest rate payment streams based on a notional principle
amount. Company policy requires settlement accounting principles for
interest rate swaps in which net interest rate differentials to be paid
or received are recorded currently as adjustments to interest expense.
Transactions involving such agreements did not have a material effect
to the financial statements for the three and nine months ended
September 30, 2000 and 1999, respectively.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards for certain financial instruments, including interest rate
swap agreements. The Company is evaluating the impact of this statement
and expects to adopt the new standard for its year ending December 31,
2000.
9
<PAGE> 10
4. COMMITMENTS AND CONTINGENCIES
LITIGATION, CLAIMS, AND ASSESSMENTS
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.
10
<PAGE> 11
5. SEGMENT REPORTING
The Company organizes its business into five reportable
segments. The Company's reportable segments are strategic business
units, and are comprised of the following:
Region One - Includes Dallas/Fort Worth, Houston, San
Antonio, West Texas, New Mexico and Austin Dental
Offices. The Company exited the Austin market in
the first quarter of 1999.
Region Two - Includes Pittsburgh, Northern Virginia,
Southern Virginia, Atlanta and Florida Dental
Offices.
Region Three - Includes Indiana, Arkansas, Dayton and
Cleveland Dental Offices.
Region Four - Includes Wisconsin, Utah, Arizona and Colorado
Dental Offices.
Region Five - Includes Philadelphia and Northern New Jersey
Dental Offices.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies except that
the Company does not allocate income taxes to any of the regions. They
are managed separately because each region operates under different
contractual arrangements, providing service to a diverse mix of
patients and payors.
11
<PAGE> 12
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Region 1 Region 2 Region 3 Region 4 Region 5 Total
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Patient revenue, net $19,807 $ 9,474 $ 7,168 $11,719 $ 3,811 $51,979
Total operating expenses 16,013 7,535 6,216 10,421 3,314 43,499
------- ------- ------- ------- ------- -------
Segment contribution 3,794 1,939 952 1,298 497 8,480
Contribution margin 19% 20% 13% 11% 13% 16%
Depreciation and
amortization expense 866 532 397 516 426 2,737
Interest expense, net 2 46 1 5 17 71
Segment profit $ 2,926 $ 1,361 $ 554 $ 777 $ 54 $ 5,672
</TABLE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Region 1 Region 2 Region 3 Region 4 Region 5 Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Patient revenue, net $ 18,304 $ 9,245 $ 7,438 $ 11,825 $ 4,384 $ 51,196
Total operating expenses 15,140 7,634 6,038 9,821 3,630 42,263
-------- -------- -------- -------- -------- --------
Segment contribution 3,164 1,611 1,400 2,004 754 8,933
Contribution margin 17% 17% 19% 17% 17% 17%
Depreciation and
amortization expense 923 521 350 460 402 2,656
Interest expense, net 6 70 (28) 4 33 85
Segment profit $ 2,235 $ 1,020 $ 1,078 $ 1,540 $ 319 $ 6,192
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Profit (in thousands) Three Months Ended September 30,
--------------------------------
2000 1999
--------- -----------
<S> <C> <C>
Segment profit $ 5,672 $ 6,192
Unallocated amounts:
Corporate operating expenses 2,511 2,249
Corporate strategic alternative costs 586 --
Corporate depreciation and amortization expense 18 113
Corporate interest expense, net 2,617 1,703
Minority interest in consolidated subsidiaries 77 48
------- -------
Income (loss) before income taxes $ (137) $ 2,079
======= =======
</TABLE>
12
<PAGE> 13
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Region 1 Region 2 Region 3 Region 4 Region 5 Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Patient revenue, net $ 61,489 $ 29,143 $ 22,206 $ 35,945 $ 12,389 $161,172
Total operating expenses 48,392 23,230 18,774 30,974 10,250 131,620
-------- -------- -------- -------- -------- --------
Segment contribution 13,097 5,913 3,432 4,971 2,139 29,552
Contribution margin 21% 20% 15% 14% 17% 18%
Depreciation and
amortization expense 2,657 1,582 1,179 1,483 1,275 8,176
Interest expense, net 9 144 4 18 51 226
Segment profit $ 10,431 $ 4,187 $ 2,249 $ 3,470 $ 813 $ 21,150
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Region 1 Region 2 Region 3 Region 4 Region 5 Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Patient revenue, net $ 55,353 $ 27,126 $ 21,959 $ 34,494 $ 13,189 $ 152,121
Total operating expenses 45,443 22,350 18,280 29,241 11,004 126,318
--------- --------- --------- --------- --------- ---------
Segment contribution 9,910 4,776 3,679 5,253 2,185 25,803
Contribution margin 18% 18% 17% 15% 17% 17%
Depreciation and
amortization expense 2,815 1,562 1,065 1,263 1,095 7,800
Interest expense, net 30 111 (28) 22 104 239
Segment profit $ 7,065 $ 3,103 $ 2,642 $ 3,968 $ 986 $ 17,764
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Profit (in thousands) Nine Months Ended September 30,
-------------------------------
2000 1999
------------ --------------
<S> <C> <C>
Segment profit $21,150 $17,764
Unallocated amounts:
Corporate operating expenses 7,450 7,190
Corporate strategic alternative costs 1,059 --
Corporate depreciation and amortization expense 51 187
Corporate interest expense, net 7,607 5,233
Minority interest in consolidated subsidiaries 246 218
------- -------
Income before income taxes $ 4,737 $ 4,936
======= =======
</TABLE>
13
<PAGE> 14
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 21E
of the Securities and Exchange Act of 1934, including statements under
"Liquidity and Capital Resources" regarding the availability of cash from
operations to fund core operations, interest expense, nonrecurring and
contingency payments and obligations under the Company's short-term debt,
statements regarding amounts anticipated to be due under the Company's
short-term note at future points in time, statements regarding the sufficiency
of cash in the fourth quarter of 2000 and first half of 2001, statements
regarding the extension or replacement of the Company's current credit facility,
statements regarding the possible issuance of debt or equity securities,
including unsecured subordinated debt in particular, statements concerning a
possible sale of the Company and related activities, statements regarding
alternative financing strategies, and statements regarding availability of
additional sources of liquidity and of any failure to raise necessary funding.
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 availability and consummation of
financing or strategic transactions, risks associated with liquidity and cash
flow shortfalls, risks associated with implementation of strategic initiatives,
risks associated with integration of 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.
These and other risk factors are listed in the Company's Form 10-K for the year
ended December 31, 1999 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>
2000(1) 1999 1998 1997 1996
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Offices at beginning of period 190 192 99 53 12
De novo offices 1 -- 7 7 2
Acquired offices -- 7 88 39 39
Closed offices (1) (9) (2) -- --
---- ---- ---- ---- ----
Offices at end of period 190 190 192 99 53
==== ==== ==== ==== ====
</TABLE>
(1) Through September 30, 2000
14
<PAGE> 15
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.
Patient revenue, net ("Revenue") represents the revenue of the
professional dental corporations managed by the Company ("P.C.s") or the Company
(in states in which ownership of dental practices by the Company is permitted),
reported at estimated realizable amounts, received from third-party payors and
patients for dental services rendered at the Dental Offices. Operating expenses
consist of the expenses incurred by the Company or the P.C.s in connection with
the operation and management of the Dental Offices. These include salaries and
benefits paid to dentists and hygienists by the P.C.s or by the Company in
states in which it operates and in which ownership of dental practices by the
Company is permitted (currently Wisconsin), salaries and benefits for personnel
other than dentists and hygienists, dental supplies, dental laboratory fees,
occupancy costs, advertising, equipment leases, management information systems
and other expenses related to dental practice operations, as well as
depreciation and amortization expense.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Patient revenue, net. Revenue increased to $52.0 million for the three
months ended September 30, 2000 from $51.2 million for the three months ended
September 30, 1999, an increase of $783,000, or 1.5%. This increase resulted
primarily from same store revenue growth generated by the successful
implementation of revenue enhancement initiatives in 2000 including patient
focused marketing programs and the expansion or relocation of nineteen existing
Dental Offices and to a lesser extent the opening of one de novo Dental Office.
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) remained constant at $30.4 million for the three months
ended September 30, 2000 and 1999, respectively. Managed dental care revenue
(i.e., revenue from capitated managed dental care plans, including capitation
payments and patient co-payments) increased to $21.6 million for the three
months ended September 30, 2000 from $20.8 million for the three months ended
September 30, 1999, an increase of $764,000, or 3.7%. This increase resulted
primarily from same store revenue growth generated by the successful
implementation of revenue enhancement initiatives in 2000 including patient
focused marketing programs and the expansion or relocation of nineteen existing
Dental Offices and to a lesser extent the opening of one de novo Dental Office.
As a percentage of Revenue, fee-for-service revenue decreased to 58.5% from
59.4% for the three months ended September 30, 2000 and 1999, respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $17.4 million for the three months ended September 30, 2000 from
$16.8 million for the three months ended September 30, 1999, an increase of
$619,000, or 3.7%. This increase resulted primarily from increased dentist and
hygienist compensation due to a higher level of production at the Dental Offices
and to a lesser extent the opening of one de novo Dental Office and the
expansion or relocation of nineteen existing Dental Offices. As a percent of
Revenue, provider salaries and benefits expense increased to 33.5% from 32.8%
for the three months ended September 30, 2000 and 1999, respectively. This
increase was due principally to annual merit increases to hygienists and to a
lesser extent increased costs related to employee benefits.
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $13.8 million for the three months ended
September 30, 2000 from $13.3 million for the three months ended September 30,
1999, an increase of $509,000 or 3.8%. This increase resulted primarily from
annual merit increases and to a lessor extent the opening of one de novo Dental
Office and the expansion or relocation of nineteen existing Dental Offices. As a
percent of Revenue, clinical and other salaries and benefits expense increased
to 26.6% from 26.0% for the three months ended September 30, 2000 and 1999,
respectively. This increase was due principally to annual merit increases and to
a lesser extent increased costs related to employee benefits.
Dental supplies. Dental supplies expense remained constant at $2.4
million for the three months ended September 30, 2000 and 1999, respectively. As
a percent of Revenue, dental supplies expense remained constant at 4.7% for the
three
15
<PAGE> 16
months ended September 30, 2000 and 1999, respectively.
Laboratory fees. Laboratory fee expense remained constant at $2.8
million for the three months ended September 30, 2000 and 1999, respectively. As
a percent of Revenue, laboratory fee expense decreased slightly to 5.4% from
5.5% for the three months ended September 30, 2000 and 1999, respectively.
Occupancy. Occupancy expense remained constant at $2.6 million for the
three months ended September 30, 2000 and 1999, respectively. The expense
associated with the opening of one de novo Dental Office and the expansion or
relocation of nineteen existing Dental Offices was offset by one Dental Office
closure since the end of the third quarter of 1999. As a percent of Revenue,
occupancy expense remained constant at 5.0% for the three months ended September
30, 2000 and 1999, respectively.
Advertising. Advertising expense decreased to $758,000 for the three
months ended September 30, 2000 from $838,000 for the three months ended
September 30, 1999, a decrease of $80,000, or 9.5%. This decrease resulted
primarily from cost control initiatives that included the use of lower cost
advertising. A greater emphasis was placed on direct mailings and other types of
print advertising as opposed to the more expensive television and radio
advertising. As a percent of Revenue, advertising expense decreased slightly to
1.5% from 1.6% for the three months ended September 30, 2000 and 1999,
respectively.
Other operating expenses. Other operating expenses increased to $6.2
million for the three months ended September 30, 2000 from $5.8 million for the
three months ended September 30, 1999, an increase of $396,000, or 6.9%. This
increase resulted primarily from higher bad debt expense and to a lesser extent
the opening of one de novo Dental Office and the expansion or relocation of
nineteen existing Dental Offices. As a percent of Revenue, other operating
expenses increased to 11.9% from 11.3% for the three months ended September 30,
2000 and 1999, respectively.
Strategic alternative costs. Strategic alternative costs were $586,000
for the three months ended September 30, 2000 resulting primarily from legal and
professional fees incurred from efforts to explore strategic alternatives in
order to expand the Company's growth opportunities and maximize shareholder
value. These alternatives included potential strategic transactions, such as the
possible sale or merger of the Company. On October 3, 2000, after fully
considering all of its options, the Company announced that it was no longer
actively soliciting offers for a potential sale or merger of the Company. On
November 7, 2000 the Company announced that it had been approached by a third
party concerning a possible strategic transaction and is currently in
discussions with the third party related to this matter.
Depreciation and amortization. Depreciation and amortization expense
remained constant at $2.8 million for the three months ended September 30, 2000
and 1999, respectively.
Operating income. Operating income decreased to $2.6 million for the
three months ended September 30, 2000 from $3.9 million for the three months
ended September 30, 1999, a decrease of $1.3 million, or 32.9%. This decrease
resulted primarily from strategic alternative costs, higher salaries and
benefits and increased bad debt expense. As a percent of Revenue, operating
income decreased to 5.1% from 7.6% for the three months ended September 30, 2000
and 1999, respectively. This decrease was due principally to strategic
alternative costs and to a lesser extent higher provider salaries and benefits
expense, clinical and other salaries and benefits expense and other operating
expenses as a percentage of Revenue offset by margin improvement in laboratory
fee expense, advertising expense and depreciation and amortization expense.
Interest expense, net. Interest expense, net increased to $2.7 million
for the three months ended September 30, 2000 from $1.8 million for the three
months ended September 30, 1999, an increase of $899,000, or 50.3%. This
increase resulted primarily from amortization expense related to capitalized
loan fees which includes the amortization of warrants awarded to the Company's
bank syndicate in conjunction with an amendment to the Company's loan agreement
associated with its Credit Facility. Additionally, the Company had higher
average outstanding debt balances and higher interest rates for the three months
ended September 30, 2000 and 1999, respectively. Average debt outstanding under
the Credit Facility totaled $80.9 million for the three months ended September
30, 2000 compared to average debt outstanding of $80.1 million for the three
months ended September 30, 1999.
Minority interest in consolidated subsidiaries. Minority interest in
consolidated subsidiaries expense increased to $77,000 for the three months
ended September 30, 2000 from $48,000 for the three months ended September 30,
1999, an increase of $29,000, or 60.4%. This increase resulted from higher net
income in markets that are not wholly owned by the
16
<PAGE> 17
Company for the three months ended September 30, 2000 and 1999, respectively.
The minority ownership percentages in these markets range from 6.25% to 50%.
These markets are located in Indiana, Texas, New Mexico, Georgia, Pennsylvania
and New Jersey.
Income taxes. Income tax expense decreased to $16,000 for the three
months ended September 30, 2000 from $809,000 for the three months ended
September 30, 1999, a decrease of $793,000, or 98.0%. This decrease resulted
from lower income (loss) before income taxes, which decreased to ($137,000) for
the three months ended September 30, 2000 from $2.1 million for the three months
ended September 30, 1999, a decrease of $2.2 million. The Company incurred
income tax expense despite a net loss because the net loss includes goodwill
amortization expense that is not deductible for tax purposes.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Patient revenue, net. Revenue increased to $161.2 million for the nine
months ended September 30, 2000 from $152.1 million for the nine months ended
September 30, 1999, an increase of $9.1 million, or 5.9%. This increase resulted
primarily from same store revenue growth generated by the successful
implementation of revenue enhancement initiatives in 2000 including patient
focused marketing programs and the expansion or relocation of nineteen existing
Dental Offices and to a lesser extent the opening of one de novo Dental Office.
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 $94.6 million for the nine months ended
September 30, 2000 from $90.6 million for the nine months ended September
30,1999, an increase of $4.0 million, or 4.4%. This increase resulted primarily
from same store revenue growth generated by the successful implementation of
revenue enhancement initiatives in 2000 including patient focused marketing
programs and the expansion or relocation of nineteen existing Dental Offices and
to a lesser extent the opening of one de novo Dental Office. Managed dental care
revenue (i.e., revenue from capitated managed dental care plans, including
capitation payments and patient co-payments) increased to $66.6 million for the
nine months ended September 30, 2000 from $61.5 million for the nine months
ended September 30, 1999, an increase of $5.1 million, or 8.2%. This increase
resulted primarily from same store revenue growth generated by the successful
implementation of revenue enhancement initiatives in 2000 including patient
focused marketing programs and the expansion or relocation of nineteen existing
Dental Offices and to a lesser extent the opening of one de novo Dental Office.
As a percentage of Revenue, fee-for-service revenue decreased to 58.7% from
59.6% for the nine months ended September 30, 2000 and 1999, respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $53.4 million for the nine months ended September 30, 2000 from
$50.2 million for the nine months ended September 30, 1999, an increase of $3.2
million, or 6.5%. This increase resulted primarily from increased dentist and
hygienist compensation due to a higher level of production at the Dental Offices
and to a lesser extent the opening of one de novo Dental Office and the
expansion or relocation of nineteen existing Dental Offices. As a percent of
Revenue, provider salaries and benefits expense increased slightly to 33.1% from
33.0% for the nine months ended September 30, 2000 and 1999, respectively.
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $41.2 million for the nine months ended
September 30, 2000 from $39.7 million for the nine months ended September 30,
1999, an increase of $1.5 million, or 3.8%. This increase resulted primarily
from annual merit increases and to a lessor extent the opening of one de novo
Dental Office and the expansion or relocation of nineteen existing Dental
Offices. As a percent of Revenue, clinical and other salaries and benefits
expense decreased to 25.6% from 26.1% for the nine months ended September 30,
2000 and 1999, respectively. This decrease was due principally to the leveraging
of constant salaries and benefits expense against increased revenue.
Dental supplies. Dental supplies expense increased to $8.0 million for
the nine months ended September 30, 2000 from $7.7 million for the nine months
ended September 30, 1999, an increase of $290,000, or 3.8%. This increase
resulted primarily from a higher level of production at the Dental Offices and
to a lesser extent the opening of one de novo Dental Office and the expansion or
relocation of nineteen existing Dental Offices. These increases were partially
offset by the leveraging of national supply contracts. As a percent of Revenue,
dental supplies expense decreased slightly to 4.9% from 5.0% for the nine months
ended September 30, 2000 and 1999, respectively.
Laboratory fees. Laboratory fee expense increased to $8.3 million for
the nine months ended September 30, 2000
17
<PAGE> 18
from $7.3 million for the nine months ended September 30, 1999, an increase of
$988,000, or 13.5%. This increase resulted primarily from increased production
at the Dental Offices and an increase in material costs used in the production
of crowns and to a lesser extent the opening of one de novo Dental Office and
the expansion or relocation of nineteen existing Dental Offices. As a percent of
Revenue, laboratory fee expense increased to 5.2% from 4.8% for the nine months
ended September 30, 2000 and 1999, respectively. This increase was due
principally to the increase in material costs used in the production of crowns.
Occupancy. Occupancy expense increased to $7.7 million for the nine
months ended September 30, 2000 from $7.6 million for the nine months ended
September 30, 1999, an increase of $69,000, or 0.9%. The expense associated with
the opening of one de novo Dental Office and the expansion or relocation of
nineteen existing Dental Offices was partially offset by one Dental Office
closure since the end of the third quarter of 1999. As a percent of Revenue,
occupancy expense decreased to 4.8% from 5.0% for the nine months ended
September 30, 2000 and 1999, respectively. This decrease was due principally to
the leveraging of constant occupancy expense against increased revenue.
Advertising. Advertising expense decreased to $2.0 million for the nine
months ended September 30, 2000 from $2.4 million for the nine months ended
September 30, 1999, a decrease of $428,000, or 17.6%. This decrease resulted
primarily from cost control initiatives implemented in 1999 that included the
use of lower cost advertising. A greater emphasis was placed on direct mailings
and other types of print advertising as opposed to the more expensive television
and radio advertising. As a percent of Revenue, advertising expense decreased to
1.2% from 1.6% for the nine months ended September 30, 2000 and 1999,
respectively. This decrease resulted from the use of lower cost advertising and
the leveraging of advertising expense against increased revenue.
Other operating expenses. Other operating expenses decreased to $18.4
million for the nine months ended September 30, 2000 from $18.5 million for the
nine months ended September 30, 1999, a decrease of $110,000, or 0.6%. This
decrease resulted primarily from cost control initiatives offset by the opening
of one de novo Dental Office and the expansion or relocation of nineteen
existing Dental Offices. As a percent of Revenue, other operating expenses
decreased to 11.4% from 12.2% for the nine months ended September 30, 2000 and
1999, respectively. This decrease resulted from the cost control initiatives
implemented in 1999 and the leveraging of other operating expenses against
increased revenue.
Strategic alternative costs. Strategic alternative costs were $1.1
million for the nine months ended September 30, 2000 resulting primarily from
legal and professional fees incurred from efforts to explore strategic
alternatives in order to expand the Company's growth opportunities and maximize
shareholder value. These alternatives included potential strategic transactions,
such as the possible sale or merger of the Company. On October 3, 2000, after
fully considering all of its options, the Company announced that it is no longer
actively soliciting offers for a potential sale or merger of the Company. On
November 7, 2000 the Company announced that it had been approached by a third
party concerning a possible strategic transaction and is currently in
discussions with the third party related to this matter.
Depreciation and amortization. Depreciation and amortization expense
increased to $8.2 million for the nine months ended September 30, 2000 from $8.0
million for the nine months ended September 30, 1999, an increase of $240,000,
or 3.0%. This slight increase resulted primarily from additional depreciation
expense on fixed assets purchased to facilitate the opening of one de novo
Dental Office and the expansion or relocation of nineteen existing Dental
Offices.
Operating income. Operating income increased to $12.8 million for the
nine months ended September 30, 2000 from $10.6 million for the nine months
ended September 30, 1999, an increase of $2.2 million, or 20.6%. This increase
resulted primarily from increased revenue at the Dental Offices due to the
implementation of revenue initiatives in 2000 and certain cost control
initiatives offset by strategic alternative costs. As a percent of Revenue,
operating income increased to 8.0% from 7.0% for the nine months ended September
30, 2000 and 1999, respectively. This increase was due principally to increased
Revenue and margin improvement in clinical and other salaries and benefits
expense, dental supplies expense, occupancy expense, advertising expense, other
operating expenses and depreciation and amortization expense offset primarily by
strategic alternative costs and to a lessor extent by higher provider salaries
and benefits expense and laboratory fee expense as a percent of Revenue.
Interest expense, net. Interest expense, net increased to $7.8 million
for the nine months ended September 30, 2000 from $5.5 million for the nine
months ended September 30, 1999, an increase of $2.4 million, or 43.1%. This
increase resulted primarily from amortization expense related to capitalized
loan fees which includes the amortization of warrants awarded to the Company's
bank syndicate in conjunction with an amendment to the Company's loan agreement
associated with its Credit
18
<PAGE> 19
Facility. Additionally, the Company had higher average outstanding debt balances
and higher interest rates for the nine months ended September 30, 2000 and 1999,
respectively. Average debt outstanding under the Credit Facility totaled $81.9
million for the nine months ended September 30, 2000 compared to average debt
outstanding of $77.8 million for the nine months ended September 30, 1999.
Minority interest in consolidated subsidiaries. Minority interest in
consolidated subsidiaries expense increased to $246,000 for the nine months
ended September 30, 2000 from $218,000 for the nine months ended September 30,
1999, an increase of $28,000, or 12.8%. This increase resulted from higher net
income in markets that are not wholly owned by the Company for the nine months
ended September 30, 2000 and 1999, respectively.
Income taxes. Income tax expense increased to $2.2 million for the nine
months ended September 30, 2000 from $1.9 million for the nine months ended
September 30, 1999, an increase of $283,000, or 14.7%. This increase resulted
from a higher effective tax rate in 2000 due primarily to the impact of goodwill
amortization that is not deductible for tax purposes partially offset by lower
income before income taxes, which decreased to $4.7 million for the nine months
ended September 30, 2000 from $4.9 million for the nine months ended September
30, 1999, a decrease of $199,000, or 4.0%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had a $75.8 million working capital
deficit, representing an increase of $67.0 million from the working capital
deficit of $8.8 million at December 31, 1999. This working capital deficit was
due principally to the reclassification of $75.0 million in notes payable due
June 30, 2001 under the Credit Facility from long-term to current liabilities.
The Company is currently pursuing a restructuring of the $75.0 million Credit
Facility. Current liabilities also consisted of $1.9 million in accounts
payable, $10.3 million in accrued liabilities, $5.6 million in amounts payable
to dental group practices as consideration for accounts receivable acquired from
such group practices and $6.7 million in current maturities of additional notes
payable and capital lease obligations. Current liabilities were offset by
current assets of $23.8 million, consisting of $3.6 million in cash and cash
equivalents, $18.0 million in accounts receivable, net of allowances, prepaid
expenses of $1.9 million and a federal income tax receivable of $277,000. The
Company's principal sources of liquidity as of September 30, 2000 consisted of
cash and cash equivalents, net accounts receivable and borrowing capacity under
the Credit Facility. There can be no assurance the Company's working capital
deficit will not continue in the future, particularly if additional indebtedness
requires current amortization of principal.
For the nine months ended September 30, 2000 and 1999, cash provided by
operations was $11.7 million and $3.7 million, respectively.
Cash used in investing activities was $7.9 million for the nine months
ended September 30, 2000 and $12.4 million for the nine months ended September
30, 1999. In the nine months ended September 30, 2000, $4.7 million was utilized
to meet contingent payments for acquisitions completed in prior periods,
$700,000 was used to purchase 79% of a dental insurance plan and $2.5 million
was invested in the purchase of additional property and equipment. In the nine
months ended September 30, 1999, $8.5 million was utilized for acquisitions and
to meet contingent payments for acquisitions completed in prior periods and $3.9
million was invested in the purchase of additional property and equipment.
For the nine months ended September 30, 2000, cash used in financing
activities was $4.2 million primarily comprised of the repayment of $6.5 million
in outstanding debt offset by $2.4 million in net borrowings. For the nine
months ended September 30, 1999, cash provided by financing activities was $11.9
million primarily comprised of $16.8 million in net borrowings offset by the
repayment of $4.5 million in outstanding debt and debt issue costs of $365,000.
The Company has a $75.0 million Credit Facility with a bank syndicate,
which expires June 30, 2001. Additionally, the Company has a $10.0 million
short-term note with certain members of the same syndicate, which expires April
15, 2001. Under the combined facilities, the Company may borrow up to $85.0
million. At September 30,
19
<PAGE> 20
2000 the Company had $80.3 million outstanding under the facilities and
remaining availability of $4.7 million. 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 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.
During 1999, the Company amended its loan agreement associated with the
Credit Facility. Changes made in the amendment included, but were not limited
to, modifications of certain defined terms and financial ratios, additions of
newly defined terms, limitations on capital expenditures, modifications to the
definition of Events of Default and the requirement of prior bank approval for
consolidations, mergers, acquisitions, and sales of assets. The methodology by
which the Company's borrowing rates are determined was also adjusted as part of
the amendment. In conjunction with this amendment, the bank syndicate received
contingency compensation in the form of warrants of the Company representing 3%
of the fully diluted outstanding common shares of the Company at the time of
agreement, subject to anti-dilution provisions, for an exercise price of $0.01
per share. At September 30, 2000, all of these warrants were vested totaling
394,721 shares.
The Company believes that cash generated from operations and borrowings
under its credit facilities will be sufficient to fund its operating cash
requirements in the fourth quarter of 2000. The Credit Facility expires by its
terms on June 30, 2001 and all of the Company's debt thereunder will then be
due. The Company will not generate sufficient cash flow by June 30, 2001 to
repay all of its debt under the Credit Facility.
As of September 30, 2000, the Company is in compliance with the terms
of the Credit Facility. There can be no assurance that the Company will maintain
the ratios as required by the loan agreement. The failure to maintain these
ratios could adversely affect the Company's operations in future periods.
In order to meet its short-term and long-term liquidity needs, the
Company may issue additional equity and debt securities, subject to market and
other conditions. In addition, the Company had entered into discussions with
potential acquirors in order to determine if a sale of the Company would be more
beneficial to the Company's stockholders than raising additional capital to meet
its liquidity needs. On October 3, 2000, after fully considering all of its
options, the Company announced that it was no longer actively soliciting offers
for a potential sale or merger of the Company and the Company entered into an
agreement with its lenders pursuant to which the Company would seek by December
15, 2000 to raise a minimum of $15.0 million of unsecured subordinated debt and
to refinance its existing Credit Facility and short-term loan.
Subsequent to that announcement, on November 7, 2000, the Company
announced that it had been approached by a third party concerning a possible
strategic transaction and is currently in discussions with the third party
related to this matter. In connection with these discussions, the Company's
lenders have agreed to amend the Credit Facility and short-term loan and to
extend the maturity of the short-term loan to April 15, 2001. Pursuant to these
amended agreements, if the Company is unsuccessful in consummating a strategic
transaction, the Company will have an additional sixty days to raise a minimum
of $15.0 million of unsecured subordinated debt and to refinance its existing
Credit Facility and Short-term loan.
20
<PAGE> 21
The Company enters into interest rate swap agreements to manage its
interest rate exposure. Interest rate swaps are agreements to exchange interest
rate payment streams based on a notional principle amount. Company policy
requires settlement accounting principles for interest rate swaps in which net
interest rate differentials to be paid or received are recorded currently as
adjustments to interest expense. Transactions involving such agreements did not
have a material effect to the financial statements for the three and nine months
ended September 30, 2000 and 1999, respectively.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for certain financial
instruments, including interest rate swap agreements. The Company is evaluating
the impact of this statement and expects to adopt the new standard for its year
ending December 31, 2000.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
10.1 Employment Agreement dated as of October 18, 2000 by
and between Monarch Dental Corporation and W. Barger
Tygart
10.2 Termination Agreement dated as of October 18, 2000 by
and between Monarch Dental Corporation and Gary W.
Cage
10.3 Resignation Letter dated as of October 18, 2000 by
Dr. Warren F. Melamed
10.4 Second Amended and Restated Employment Agreement
dated as of October 27, 2000 by and between Monarch
Dental Corporation and Lisa K. Peterson
10.5 Fifth Amendment to Second Amended and Restated Loan
Agreement dated September 1, 2000 by and among
Monarch Dental Corporation, Bank of America, N.A. and
Other Entities Designated Herein
10.6 Sixth Amendment to Second Amended and Restated Loan
Agreement dated October 2, 2000 by and among Monarch
Dental Corporation, Bank of America, N.A. and Other
Entities Designated Herein
10.7 Seventh Amendment to Second Amended and Restated Loan
Agreement dated October 18, 2000 by and among Monarch
Dental Corporation, Bank of America, N.A. and Other
Entities Designated Herein
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
(b) Reports on Form 8-K.
Not applicable.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONARCH DENTAL CORPORATION
Date: November 14, 2000 By: /s/ W. Barger Tygart
--------------------
W. Barger Tygart
Interim Chief Executive Officer
Date: November 14, 2000 By: /s/ Lisa K. Peterson
--------------------
Lisa K. Peterson
Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Employment Agreement dated as of October 18, 2000 by and between
Monarch Dental Corporation and W. Barger Tygart
10.2 Termination Agreement dated as of October 18, 2000 by and between
Monarch Dental Corporation and Gary W. Cage
10.3 Resignation Letter dated as of October 18, 2000 by Dr. Warren F.
Melamed
10.4 Second Amended and Restated Employment Agreement dated as of October
27, 2000 by and between Monarch Dental Corporation and Lisa K. Peterson
10.5 Fifth Amendment to Second Amended and Restated Loan Agreement dated
September 1, 2000 by and among Monarch Dental Corporation, Bank of
America, N.A. and Other Entities Designated Herein
10.6 Sixth Amendment to Second Amended and Restated Loan Agreement dated
October 2, 2000 by and among Monarch Dental Corporation, Bank of
America, N.A. and Other Entities Designated Herein
10.7 Seventh Amendment to Second Amended and Restated Loan Agreement dated
October 18, 2000 by and among Monarch Dental Corporation, Bank of
America, N.A. and Other Entities Designated Herein
11 Statement re: Computation of per share earnings
27 Financial Data Schedules
</TABLE>
24
