SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: ____________ to ____________
Commission file number: 0 - 23219
DENTAL CARE ALLIANCE, INC.
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(exact name of registrant as specified in its charter)
DELAWARE 65-0555126
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
DENTAL CARE ALLIANCE, INC.
1343 MAIN STREET, SUITE 700
SARASOTA, FL. 34236
(941) 955-3150
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(Registrant's telephone number, including area code)
N/A
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(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 15d of the Securities and Exchange Act of 1934
during the preceding 12 months (or 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.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
Total number of shares of Common Stock, as of November 14, 1997: 6,897,700
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DENTAL CARE ALLIANCE, INC
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
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Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of matters to a vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
EXHIBIT INDEX 19
2
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1996 1997 1997
----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents ............................ $ 1,253,259 $ 442,747 $ 442,747
Consulting and license fees receivable ............... 59,000 70,917 70,917
Management fee receivable from PAs ................... 397,441 653,177 653,177
Advances to PAs ...................................... 16,454 817,554 817,554
Other current assets ................................. 27,644 131,662 131,662
Current portion of long-term notes receivable
from PAs ........................................... 68,460 72,533 72,533
----------- ----------- -----------
TOTAL CURRENT ASSETS ............................... 1,822,258 2,188,590 2,188,590
Property and equipment, net ............................. 40,230 559,104 559,104
Intangible assets, net .................................. 803,753 1,682,420 1,682,420
Long-term notes receivable from PAs, less current portion 129,935 146,304 146,304
Consulting and license fees receivable, non current ..... 251,925 -- --
Other assets ............................................ 74,838 204,264 204,264
----------- ----------- -----------
TOTAL ASSETS ....................................... $ 3,122,939 $ 4,780,682 $ 4,780,682
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 491,509 $ 640,651 $ 640,651
Accrued payroll and payroll related costs ............ 124,236 328,504 328,504
Other accrued liabilities ............................ 67,008 327,585 327,585
Bank credit facility ................................. -- 212,687 212,687
Current portion of long-term debt .................... 173,652 208,281 208,281
----------- ----------- -----------
TOTAL CURRENT LIABILITIES .......................... 856,405 1,717,708 1,717,708
Long-term debt, less current portion .................... 40,350 681,511 681,511
----------- ----------- -----------
TOTAL LIABILITIES .................................. 896,755 2,399,219 2,399,219
Commitments and contingencies
Mandatorily redeemable preferred stock, $.01 par value,
15,000 shares authorized, issued and outstanding ..... 1,402,562 1,503,062 --
Put rights associated with common stock ................. 191,237 191,237 --
----------- ----------- -----------
1,593,799 1,694,299 --
----------- ----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 3,995,460 and 4,243,342 issued and
outstanding ........................................ 39,955 42,433 48,977
Additional paid-in capital .............................. 554,696 845,006 2,532,761
Stock subscription receivable ........................... -- (272,768) (272,768)
Retained earnings ....................................... 37,734 72,493 72,493
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ......................... 632,385 687,164 2,381,463
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 3,122,939 $ 4,780,682 $ 4,780,682
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
<CAPTION>
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management fees .............................. $ 142,042 $ 2,220,997 $ 547,114 $ 4,692,756
Consulting and licensing fees ................ 114,288 54,399 253,100 216,284
----------- ----------- ----------- -----------
TOTAL REVENUES ......................... 256,330 2,275,396 800,214 4,909,040
----------- ----------- ----------- ----------
Managed dental center expenses:
Staff salaries and benefits ............... -- 693,063 -- 1,294,446
Dental supplies ........................... -- 177,981 -- 391,315
Laboratory fees ........................... -- 254,600 -- 627,610
Marketing ................................. -- 86,404 -- 263,031
Occupancy ................................. -- 281,895 -- 614,980
Other ..................................... -- 259,127 -- 585,621
----------- ----------- ----------- ----------
TOTAL MANAGED DENTAL CENTER EXPENSES ... -- 1,753,070 -- 3,777,003
----------- ----------- ----------- ----------
256,330 522,326 800,214 1,132,037
Salaries and benefits ..................... 137,549 184,512 399,191 557,528
General and administrative ................ 119,515 177,084 237,991 313,054
Depreciation and amortization ............. 5,126 45,484 15,380 87,062
----------- ----------- ----------- ---------
262,190 407,080 652,562 957,644
OPERATING INCOME (LOSS) ................ (5,860) 115,246 147,652 174,393
Interest income (expense), net ............ (646) 9,345 (5,704) 45,809
----------- ----------- ----------- ---------
Income (loss) before income taxes and
minority interest ......................... (6,506) 124,591 141,948 220,202
Provision for income taxes ................... -- 48,943 -- 84,943
Minority interest ............................ 2,219 -- 5,756 --
----------- ----------- ----------- ----------
Net income (loss) ............................ (8,725) 75,648 136,192 135,259
Adjustment to redemption value of
common and preferred securities ........ -- -- -- (10,500)
Cumulative preferred stock dividend ....... -- (30,000) -- (90,000)
----------- ----------- ----------- ----------
Net income (loss) applicable to common stock . $ (8,725) $ 45,648 $ 136,192 $ 34,759
=========== =========== =========== ===========
Unaudited pro forma data:
Income (loss) before income taxes
and minority interest .................. (6,506) 124,591 141,948 220,202
Pro forma provision (benefit) for income
taxes ................................. (3,000) 48,943 54,000 84,943
Minority interest ......................... 2,219 -- 5,756 --
----------- ----------- - ----------- -----------
Pro forma net income (loss) ............... $ (5,725) $ 75,648 $ 82,192 $ 135,259
=========== =========== =========== ===========
Primary pro forma net income per
common share .............................. $ -- $ .02 $ .02 $ .03
=========== =========== =========== ===========
Primary weighted average common
shares outstanding ........................ 3,957,952 4,947,276 3,957,952 4,943,462
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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<TABLE>
<CAPTION>
DENTAL CARE ALLIANCE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 136,192 $ 135,259
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation and amortization ........................ 15,380 87,062
Minority interest .................................... 5,756 --
(Increase) decrease in:
Consulting and license fees receivable ............... (67,791) 240,008
Management fee receivable from PAs ................... (129,275) (255,736)
Other assets ......................................... (2,573) (104,018)
Increase (decrease) in:
Accounts payable ..................................... 11,191 149,142
Other accrued liabilities ............................ 4,464 260,597
Accrued payroll & payroll related costs .............. 957 204,268
----------- -----------
Net cash (used in) provided by operating activities .. (25,699) 716,582
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ..................... (4,447) (555,158)
Advances made on notes receivable from PAs .............. (50,000) (72,200)
Payments received on notes receivable from PAs .......... 56,765 51,758
Investment in servicing agreements and other assets ..... (52,226) (1,058,871)
----------- -----------
Net cash used in investing activities ................ (49,908) (1,634,471)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................. -- 20,000
Payments of long-term debt .............................. (37,941) (38,351)
Proceeds from issuance of long-term debt ................ 84,991 714,141
Proceeds from borrowing against bank credit facility .... -- 212,687
Advances to PAs ......................................... -- (801,100)
----------- -----------
Net cash provided by financing activities ............ 47,050 107,377
----------- -----------
Net decrease in cash and cash equivalents ............ (28,557) (810,512)
----------- -----------
Cash and cash equivalents at beginning of period ........... 42,193 1,253,259
----------- -----------
Cash and cash equivalents at end of period ................. $ 13,636 $ 442,747
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes .............. $ -- $ 67,065
Cash paid during the year for interest .................. $ 10,466 $ 14,390
Increase to redemption value of preferred stock ......... $ -- $ 10,500
Increase in cumulative preferred stock dividend ......... $ -- $ 90,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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DENTAL CARE ALLIANCE, INC.
Notes to Interim Financial Statements
September, 1997 (Unaudited)
1. OPERATIONS AND ORGANIZATION
Dental Care Alliance, Inc. (the "Company") provides management services to
dental practices ("Managed Dental Centers") by entering into
administrative services agreements ("Management Agreements") with
individual dental professional corporations or professional associations
(the "PAs"). In addition, the Company provides licensing services to
Managed Dental Centers and certain non-managed practices ("Licensed Dental
Centers").
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION/BASIS OF CONSOLIDATION. In the opinion of
management, the accompanying interim financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission and should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year
ended December 31, 1996. Certain information and footnote disclosures
normally in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. In the opinion of Company management, the
consolidated financial statements for the unaudited interim periods
presented include all adjustments, consisting only of normal recurring
adjustments, and disclosures necessary to present a fair statement of the
results for such interim periods. Certain prior period financial
statement balances have been reclassified to conform with the current
period presentation. The results of operations for the periods presented
are not necessarily indicative of results for the full year.
INCOME TAXES AND PRO FORMA INCOME TAXES. Upon its incorporation on October
23, 1996, the Company terminated its predecessor status as a Limited
Liability Corporation and is now subject to federal income taxes. As such,
the financial statements herein include a pro forma adjustment for income
taxes as if the Company had been treated as a C Corporation. The effective
rate utilized approximates the combined statutory federal and state income
tax rate, net of the tax effects of minority interest in current earnings.
Effective October 25, 1996, the Company accounted for income taxes under
the liability method in accordance with Statement of Financial Accounting
Standards, NO. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109").
3. EARNINGS PER SHARE AND PRO FORMA EARNINGS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure due to the conversion of preferred stock into common
stock and the termination of the common stock put rights occured
concurrent with the closing of the Company's initial public offering in
November, 1997. Accordingly, historical net income per share is not
considered meaningful and has not been presented herein.
Pro forma net income per share is based on the weighted average number of
common shares and dilutive common equivalent shares outstanding during the
periods. Pro forma net income per share also assumes the conversion of
preferred stock into common stock on the date of issuance and assumes the
issuance of all contingently issuable options. Common stock and common
equivalent shares issued within one year prior to the filing of the
Company's registration statement at prices less that the initial public
offering price have been included for all periods using the treasury stock
method.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings
Per Share. SFAS 128 establishes new standards for computing and presenting
earnings per share ("EPS"). Implementation of SFAS 128 is required for all
financial statements issued subsequent to December 15, 1997 but requires
pro forma disclosure in financial statements issued prior to that date.
6
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3. EARNINGS PER SHARE AND PRO FORMA EARNINGS PER SHARE (CONTINUED)
Had the effects of conversion of preferred stock into common stock and
elimination of put rights not been assumed, historical earnings per share
would have been as follows. Fully diluted are consistent with primary
earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net Income $ (8,725) $ 45,648 $ 136,192 $ 34,759
Weighted Average Shares Outstanding 3,957,952 4,947,276 3,957,952 4,943,462
Basic Earnings per Share $ -- $ .01 $ .03 $ .01
</TABLE>
4. FINANCING
In August 1997, the Company entered into two revolving lines of credit
with a financial institution which provides for an aggregate of $1.2
million. The Company may use up to $600,000 for the purchase of non-dental
assets of dental centers provided each borrowing is repaid within 45 days
of draw down. The remaining $600,000 may be used for general working
capital needs. The revolving lines of credit bear interest at prime plus
.75% and is payable on June 1, 1998, and contain limitations on
acquisition activity without prior approval. As of September 30, 1997, the
Company had drawn $212,687 against its available working capital line of
credit.
5. SIGNIFICANT EVENTS
In April 1997, the Company acquired approximately $200,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Temple Terrace, Florida. Unaudited net practice revenue of the
dental practice was approximately $950,000 for the year ended December 31,
1996. The Management Agreement executed is a net revenue contract.
In July 1997, the Company executed a 25-year Management Agreement with a
dental practice located in Flint, Michigan. Unaudited net practice revenue
of the dental practice was approximately $4 million for the year ended
December 31, 1996. The Management Agreement executed is a net revenue
contract.
In July 1997, the Company acquired four Management Agreements for
$846,000, wherein it will provide management services to the PAs for 8
years. The seller financed $546,00 of this amount with terms of monthly
principal and interest at 8% per annum for eight years. The PAs were
previously subject to consulting and licensing agreements. Unaudited net
practice revenue of the dental practices was approximately $3.4 million
for the period ended December 31, 1996. The acquired Management Agreements
are executed under the net revenue contract.
In August 1997, the Company acquired approximately $175,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Tallahassee, Florida. Unaudited net practice revenue of the
dental practice was approximately $900,000 for the year ended December 31,
1996. The Management Agreement executed is a net revenue contract.
In September 1997, the Company acquired approximately $120,000 of
non-dental assets and executed a 25-year Management Agreement with a
dental practice located in St. Petersburg,
7
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Florida. Unaudited practice revenue of the dental practice was approximately
$400,000 for the year ended December 31, 1996. The Management Agreement executed
is a net revenue contract.
6. SUBSEQUENT EVENTS
On November 4, 1997, the Company completed the public offering of
2,000,000 shares of Common Stock at $12 per share resulting in proceeds,
net of underwriter commissions and offering costs, of approximately $21.0
million.
8
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Item 2. Management's discussion and analysis of financial condition and
results of operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21B
OF THE SECURITIES AND EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, AMONG OTHERS, THE
CONSTANTLY CHANGING HEALTH CARE ENVIRONMENT, THE PACE OF DEVELOPMENT AND
ACQUISITION ACTIVITY, THE REIMBURSEMENT RATES FOR DENTAL SERVICES, AND OTHER
RISKS DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISION FILINGS. OTHER
RISK FACTORS ARE LISTED IN THE COMPANY'S PROSPECTUS DATED NOVEMBER 4, 1997 AS
FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
The Company is a dental practice management company providing management
and licensing services to dental practices in Florida and Michigan. As of
September 30, 1997 the Company provided management and licensing services to 20
Managed Dental Centers, 15 of which are located in Florida and 5 of which are
located in Michigan. Additionally, the Company provides only licensing services
to 3 Licensed Dental Centers in Florida. Management services include financial,
accounting, billing, training, efficiency and productivity enhancement,
recruiting, team building, marketing, advertising, purchasing, collection and
other services, as well as the provision of management and administrative
personnel. Licensing services include marketing, advertising and purchasing.
With respect to management services it provides to dental practices, the
Company enters into Management Agreements with the professional association or
corporation ("PAs") that own the practices. The Company commenced operations in
November 1993 by providing management and licensing services to five dental
practices located in Sarasota, Palmetto, Largo, Port Charlotte and Venice,
Florida. In 1994, the Company entered into its first Management Agreement for a
newly developed practice located in Englewood, Florida and entered into a
Management Agreement to manage an additional existing practice in Fort Myers,
Florida. In 1995, the Company entered into four new Management Agreements, two
of which were with respect to newly developed practices located in Kissimmee and
Bradenton, Florida and the remaining two of which were with respect to existing
practices located in Sarasota and Port Richey, Florida. The Company entered into
four additional Management Agreements in 1996 to manage practices located in
Orlando, Tampa, Ocoee and Clearwater, Florida. In addition, the Company
terminated its Management Agreements with respect to the Palmetto and Venice
Managed Dental Centers in 1995 and with respect to the Port Richey Managed
Dental Center in 1996.
In April 1997, the Company acquired approximately $200,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Temple Terrace, Florida. Unaudited net practice revenue of the dental
practice was approximately $950,000 for the year ended December 31, 1996.
In July 1997, the Company acquired four Management Agreements for $846,000
wherein it will provide management services to the PAs for 8 years. The seller
financed $546,000 of this amount with terms of monthly principal and interest at
8% per annum for eight years. The PAs were previously subject to consulting and
licensing agreements. Unaudited net practice revenue of the dental practices was
approximately $3.4 million for the period ended December 31, 1996.
In July 1997, the Company executed a 25-year Management Agreement with a
dental practice located in Flint, Michigan. Unaudited net practice revenue of
the dental practice was approximately $4 million for the year ended December 31,
1996. The Management Agreement executed is a net revenue contract.
In August 1997, the Company acquired approximately $175,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Tallahassee, Florida.
9
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Unaudited net practice revenue of the dental practice was approximately $900,000
for the year ended December 31, 1996.
In September 1997, the Company acquired approximately $120,000 of
non-dental assets and executed a 25-year Management Agreement with a dental
practice located in St. Petersburg, Florida. Unaudited practice revenue of the
dental practice was approximately $400,000 for the year ended December 31, 1996.
The Company believes that certain of the Management Agreements are
material to the Company as a whole. For example, it is anticipated the Managed
Dental Center in Flint, Michigan, will contribute in excess of 10% of the
Company's aggregate revenue in 1997 and may contribute in excess of 10% of the
Company's aggregate revenue in 1998. Further, the PA located in Port Charlotte,
Florida contributed approximately 18% and 10% to the Company's revenues in 1996
and for the nine months ended September 30, 1997, respectively. The Flint
Management Agreement has a term of 25 years and provides for a management fee
equal to 74% of the Net Collected Revenues of the associated PA. The Port
Charlotte Management Agreement expires in 2003 and provides for a management fee
of 55% of the net profits of the associated PA. In addition, the Port Charlotte
Management Agreement provides that the PA may, during the period commencing on
October 20, 1998 and ending 90 days thereafter, terminate the agreement by
paying the Company an amount equal to $185,460 less the amount by which the
aggregate fees paid to the Company pursuant to such Management Agreement during
either or both of the successive one year periods following October 20, 1996
exceeds $100,000, and satisfying other conditions set forth therein.
Prior to October 1996, the management fee paid to the Company pursuant to
the Management Agreements had been equal to a percentage ranging from 50-90% of
the net profits of the individual Managed Dental Centers, as defined in the
Management Agreements, plus reimbursement to the Company of its non-professional
expenses. Effective October 1996, the Company revised all of its 12 then
existing Management Agreements. Ten of these agreements were revised such that
the Company earns management fees based on 74% of total net patient revenues and
is based on cash collected minus any patient refunds ("Net Collected Revenue")
and the Company assumes responsibility for the payment of the non-professional
expenses of the Managed Dental Centers (the "Standard Management Agreements").
The remaining two Management Agreements continue to have management fee
structures based upon 50-55% of the net profit, as defined, of the two Managed
Dental Centers. The Company will seek to cause future Management Agreements to
be on terms substantially similar to those of the Standard Management
Agreements. The method by which the Company manages the revenue and
profitability of Managed dental Centers is fundamentally the same, regardless of
whether the Management Agreement with any particular PA provides for a
management fee based upon net profits or net patient revenue. In the "net
profits" type of Management Agreement, both the PA owner and the Company share
proportionally in the favorable impact of any initiatives. In the "net patient
revenues" type of Management Agreement, the cost management benefits resulting
from such initiatives accrue to the party responsible for such costs and both
parties share proportionally in revenue enhancements. Period to period
comparisons of the Company's results of operations set forth below should be
considered in light of the significant changes in the Company's recognition of
revenues and expenses resulting from the revisions to the Management Agreements
in October 1996.
All patient revenues are billed to patients and providers under the
authority and identification numbers of the individual PAs. Patient revenues and
receivables are recorded on the accounts of the PAs. Funds are dispersed
initially to pay all the professional costs of the PAs. Thereafter, funds are
disbursed to the Company under the terms of the Management Agreements. Any
remaining funds are retained by the PA. If funds are insufficient to pay the
Company under the terms of the relevant Management Agreement, a payable from the
PA to the Company is recorded on the Company's books.
The Company also enters into license agreements with each Dental Center
pursuant to which the Company provides licensing and advertising services to the
Dental Centers. In return for such services, the Company has collected fees
generally ranging from $800 to $1,000 per month from each Managed Dental Center
and from $600 to $1,200 from each Licensed Dental Center.
10
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Historically, in connection with the execution of a Management Agreement,
a PA has typically acquired both the dental and the non-dental assets of a
Managed Dental Center. The Company has either made loans to the acquiring PA or
has assisted the PA in obtaining third-party financing to purchase such assets.
Recently, the Company has acquired the non-dental assets of three Managed Dental
Centers while the PAs acquired the dental assets of such Managed Dental Centers.
The Company intends to use the proceeds of its public offering in part to make
additional loans to PAs to purchase both the dental and non-dental assets of
additional Managed Dental Centers and in part for the Company to acquire the
non-dental assets of additional Managed Dental Centers.
The Company from time to time has made loans to newly formed PAs with
which it has entered into Management Agreements to purchase the dental assets of
the related dental practices. In return the PAs execute promissory notes to the
Company in the amount of such loans. At September 30, 1997, the total
outstanding balance of such loans was $218,837. The notes underlying such loans
generally have terms ranging from two to five years, bear interest at rates
ranging between 10% and 18.5% and are secured by the assets of the related
dental practice. The PAs to which such loans are made are newly formed and have
no assets other than the assets of the dental practices being acquired and no
liabilities other than the liabilities relating to the loans. In addition, the
Company from time to time makes working capital advances to individual PAs,
although it is not obligated contractually or otherwise to make such advances.
The extension of loans and advances to the PAs by the Company is not considered
upon entering into Management Agreements with the Company. Extension of any such
loans or advances is entirely within the Company's discretion. These advances
are due within 12 months of issuance, bear interest at 8%, subject to adjustment
based on changes in the rates at which the Company may borrow from its lenders.
All advances made to PAs are guaranteed by the relevant PA owner, although there
is no independent collateral for these working capital advances. A repayment
default under such advances is also a default under the relevant Management
Agreement which permits the Company, among other things, to liquidate the assets
of the dental practice. At September 30, 1997, the total outstanding balance of
such advances was $817,554. There have been no revisions to the terms of any
such loans or advances. The PAs are current in the payment of their loans or
advances and the Company believes that the financial condition of the PAs to
which it has made loans or advances is satisfactory. Prior to making any loan or
advance, the Company analyzes the collectibility of the receivables resulting
from such loans or advances based on the projected cash flow of the relevant PA
and the estimated fair market value of the assets to be owned or owned by such
PA. The Company, through its obligations under the Management Agreements, is
able to assess on a periodic basis the collectibility of its receivables since
it has access to the billing and collection information relating to the PAs'
patient receivables and operational cash flow, and evaluate on a periodic basis
outstanding receivables versus accounts payable and revenue trends. Accordingly,
the Company is in a position to quickly assess the ability of each PA to meet
its obligations under the notes and advances. As a result, the Company is able
to react quickly in the event that there is a material change in the
creditworthiness of any of the PAs. The Company also analyzes any historical
trends of the PAs relating to bad debts or the inability of the PAs to generate
collectible patient receivables. The Company assesses the guaranty of its PA
owners for financial stability and creditworthiness through periodic reviews
which include analysis of credit reports, bank references, personal and business
tax returns and personal financial statements. In addition, the reputation of
each PA owner in the business community and the length and quality of the PAs'
relationship with the Company are examined by the Company to assess the PA
owners as guarantors of the loans and advances.
None of the PA owners are officers, directors or employees of the
Company. Dr. Dennis A. Corona, the owner of PAs operating a majority of the
Managed Dental Centers, owns 2% of the Company's Common Stock prior to the
Offering. No other PA owner owns any Common Stock. In addition, four
Managed Dental Centers in Michigan are owned by PAs commonly controlled by
Dr. Ross Johnson.
The PAs are primarily liable for repayment of the notes and advances to
the Company with the PA owners being secondarily liable for repayment under the
notes and advances. The PAs and PA
11
<PAGE>
owners to the extent that the assets of PAs or PA owners are insufficient to pay
the outstanding balances under the notes or advances upon any default.
The PAs take reserves against, and, when appropriate, write-off bad debts
on, patient receivables. For the year ended December 31, 1996, reserves and
write-offs for bad debts on patient receivables aggregated to approximately
$30,000 on net patient revenues of $5,576,000. To date, there have been no
defaults under, or write-offs in connection with, notes receivable from or
advances to PAs, although there can be no assurance that there will be no such
defaults or write-offs in the future. As there has to date been no default or
material delinquency under the notes or advances, the Company has not
established any reserves for such defaults. The Company will consider
establishing reserves against such defaults should future circumstances
demonstrate the need for such reserves.
The Management Agreements for PAs that have acquisition loans from the
Company and for most PAs with working capital advances provide that the PAs must
meet their repayment obligations under any outstanding indebtedness, whether
owed to the Company or any third party, prior to paying any management fees. A
default under any such obligation is by its terms a default under the Management
Agreement. In the event of such a default, the Company or its designee is
entitled to purchase the assets and liabilities or the capital stock of the
relevant PA at a price equal to 60% of the annualized gross revenues of such PA
owner over the previous 24 months, minus any liabilities, including outstanding
indebtedness, if any, to the Company of the PA at the date of purchase. In such
event, the Company would evaluate whether, at its option, to have another PA
owner or other licensed dentist assume control of the practice and continue to
generate management fees or to liquidate the assets of such PA.
The Company does not consolidate the balance sheets or the operating
results (including revenue and expenses) of the dental practices under the
Management Agreements since these revenues and expenses are earned and incurred
by the PAs, not the Company. Similarly, the Company does not record any goodwill
in connection with its execution of the Standard Management Agreements or the
acquisition of non-dental assets from a dental practice, since neither of such
transactions constitutes a business combination. The Company has recorded
goodwill and other intangible assets in cases where the Company has paid a PA in
consideration for a modification to an existing Management Agreement or entering
into new Management Agreements.
Prior to October 1996, the majority of the Company's operations were
performed through limited liability companies. Except for the period from
January through September, 1994 with respect to one of the Company's
predecessors in interest, the Company's statements of operations prior to
October 1996 do not include a provision for income taxes. Included in the
Company's 1996 tax provision are amounts related to the income tax expense
associated with establishing a deferred tax liability for book/tax differences
arising from its reorganization from Limited Liability Corporation to C
Corporation status.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
MANAGEMENT FEES. Management fees consist of a percentage of the net
realizable patient-related revenue at the majority of the PAs and a percentage
of the net realizable profits earned by the remaining PAs. Management fees
increased 1451% from $142,042 for the three months ended September 30, 1996, to
$2.2 million for the three months ended September 30, 1997. Of this increase,
$1.3 million is derived from the addition of eight Managed Dental Centers while
the balance primarily relates to the October 1996 revision to the Management
Agreements. Prior to 1996 the Company was not responsible for any managed dental
center expenses.
CONSULTING AND LICENSING FEES. Consulting and license fees consist of fees
earned by the Company for licensing services to all of the Dental Centers and
consulting services to four Managed Dental Centers in Michigan. Consulting and
licensing fees decreased 52.4% from $114,288 for the three
12
<PAGE>
months ended September 30, 1996, to $54,399 for the three months ended September
30, 1997. The decrease is attributable to the cessation of consulting fees on
four Michigan practices which were converted effective July 1, 1997 into Managed
Dental Centers. Income from these consulting fees are now included in management
fees. The decrease in consulting fees was partially offset by $15,600 in
additional license fees on the eight additional Managed Dental Centers.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses consist of
non-professional expenses at the Managed Dental Centers. Managed dental center
expenses increased from $0 for the three months ended September 30, 1996, to
$1.8 million for the three months ended September 30, 1997. Of this increase,
$636,106 is derived from the addition of eight Managed Dental Centers while the
balance relates to the October 1996 revision to the Management Aghreements.
Prior to October 1996, the Company was not responsible for any managed dental
center expenses.
SALARIES AND BENEFITS. Salaries and benefits consist of costs for salaries
and benefits for employees at the Company's corporate offices. Salaries and
benefits increased 34.1% from $137,549 for the three months ended September 30,
1996, to $184,512 for the three months ended September 30, 1997. This increase
was attributable primarily to the hiring of additional personnel in the
Company's accounting and business development departments to administer the
additional eight Managed Dental Centers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consists of expenses related to the operation of the Company's corporate office,
such as rent, legal, accounting and travel expenses. General and administrative
expenses increased 48.2% from $119,515 for the three months ended September 30,
1996, to $177,084 for the three months ended September 30, 1997. This increase
was primarily attributable to increased occupancy costs associated with
corporate office expansion, travel and overhead for administering the additional
eight Managed Dental Centers.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of the depreciation expense on capital assets owned by the Company and
located at either the corporate offices or at Managed Dental Centers and
amortization expense on Management Services Agreements or other intangible
assets. Depreciation and amortization expense increased 787.3% from $5,126 for
the three months ended September 30, 1996, to $45,484 for the three months ended
September 30, 1997. This increase was attributable to the depreciation on the
acquired non-dental assets and amortization on the acquired Management
Agreements related to the eight additional Managed Dental Centers, as well as a
full quarter's amortization on the Management Agreements capitalized in October
1996.
INTEREST INCOME/(EXPENSE), NET. Interest income/(expense), net increased
from ($646) expense for the three months ended September 30, 1996, to $9,345
income for the three months ended September 30, 1997. This increase was
attributable primarily to earnings on increased cash balances on notes
receivable from Managed Dental Centers.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
MANAGEMENT FEES. Management fees increased 757.8% from $547,114 for the
nine months ended September 30, 1996 to $4.7 million for the nine months ended
September 30, 1997. Of this increase, $1.4 million is derived from the addition
of eight Managed Dental Centers while the balance primarily relates to the
October 1996 revision to the Management Agreements.
CONSULTING AND LICENSING FEES. Consulting and license fees decreased 14.5%
from $253,100 for the nine months ended September 30, 1996 to $216,284 for the
nine months ended September 30, 1997. The decrease is attributable to the
cessation of consulting fees on four Michigan practices which were converted
effective July 1, 1997 into Managed Dental Centers. Income from consulting fees
is now included in management fees. The decrease in consulting fees was
partially offset by $18,600 in additional license fees on the eight additional
Managed Dental Centers.
13
<PAGE>
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses increased
from $0 for the nine months ended September 30, 1996 to $3.8 million for the
nine months ended September 30, 1997. Of this increase, $749,381 is derived from
the addition of eight Managed Dental Centers while the balance relates to the
October 1996 revision to the Management Agreements. Prior to October 1996, the
Company was not responsible for any managed dental center expenses.
SALARIES AND BENEFITS. Salaries and benefits increased 39.7% from $399,191
for the nine months ended September 30, 1996 to $557,528 for the nine months
ended September 30, 1997. This increase was attributable primarily to the hiring
of additional personnel in the Company's accounting and business development
department to administer the additional eight Managed Dental Centers.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
31.5% from $237,991 for the nine months ended September 30, 1996 to $313,054 for
the nine months ended September 30, 1997. This increase was attributable
primarily to additional occupancy costs associated with the corporate office
expansion and secondarily, by additional travel-related expense incurred in
connection with business development to administer the additional eight Managed
Dental Centers.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 466.1% from $15,380 for the nine months ended September 30, 1996 to
$87,062 for the nine months ended September 30, 1997. This increase was
attributable to the depreciation on the acquired non-dental assets and
amortization on the Management Agreements obtained in connection with the eight
additional Managed Dental Centers as well as a full period's amortization on the
Management Agreements capitalized in October, 1996.
INTEREST INCOME/(EXPENSE), NET. Interest income/(expense), net increased
from ($5,704) expense for the nine months ended September 30, 1996 to $45,809
income for the nine months ended September 30, 1997. This increase was
attributable primarily to earnings on the higher cash balance as well as
earnings on a subscription stock receivable in February 1997.
SEASONALITY
The Company historically has experienced seasonal fluctuations in its
quarterly revenue. Specifically, the first and fourth quarters reflect the
highest patient volume, while the third quarter has traditionally had the lowest
patient volume. The Managed Dental Centers in Florida have traditionally
experienced increased patient visits in November through March due to an
increase in the population base during these months, while patient visits
decrease during the summer. Beginning in July 1997, the Company executed
Management Agreements with Managed Dental Centers in Michigan. The Company
expects that the seasonality in Florida will be offset to some extent by fewer
seasonal fluctuations in Michigan.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited quarterly operating results for
each of the Company's last four quarters. This information has been prepared on
a basis consistent with the Company's audited financial statements and includes
all adjustments (consisting only of normal recurring adjustments) that
management considers necessary for a fair presentation of the data. These
quarterly results are not necessarily indicative of future results of
operations. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the Company's Prospectus
dated November 4, 1997.
14
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996(1) 1997 1997 1997
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Number of Managed Dental Centers (2) 12 12 13 20
Net patient revenue at Managed Dental
Dental Centers (3) .............. $1,434,969 $1,668,166 $1,861,076 $3,190,620
Total revenues ...................... 837,214 1,204,681 1,428,963 2,275,396
Managed dental center expenses ...... 603,138 921,142 1,102,791 1,753,070
Operating income .................... 71,649 28,707 30,440 115,246
Net income .......................... 66,766 26,622 32,989 75,648
<FN>
- ----------
(1) Effective October 1996, the Company revised the terms of all its 12 then
existing Management Agreements such that the Company is responsible for
the payment of all non-professional expenses of the Managed Dental
Centers. Ten Management Agreements were also revised to base the Company's
mangement fee from a percentage of net profits at each PA to a percentage
of net patient revenues from each PA. Accordingly, prior to these
revisions to such 12 Managements Agreements, all non-professional expenses
of the Managed Dental Centers and related revenues were reflected in each
PA's financial statements.
(2) Presented as of the end of the period.
(3) Net patient revenue is the total amount of revenue recorded by the PAs
during the period. Revenue is included from and after the date on which
the relevant PA executed a Management Agreement with Company.
</FN>
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through internal cash flow, the sale of equity securities and commercial bank
borrowings. Net cash (used in) provided by operations for the nine months ended
September 30, 1996 and 1997 was ($25,699) and $716,582, respectively. Net cash
used in operations for the nine months ended September 30, 1996 consisted
primarily of net income offset by increases in consulting, license fees and
management fee receivables while net cash provided by operations for the nine
months ended September 30, 1997 consisted primarily of net income, increases in
current liabilities and decreases in consulting and license fees receivable,
partially offset with an increase in management fee receivable and other assets.
Cash used in investing activities for the nine months ended September 30,
1996 and 1997 was ($49,908) and ($1,634,471), respectively. For the nine months
ended September 30, 1996, the investing activities were primarily related to
organizational costs associated with the formation of the Company in October
1996 through a reorganization of its predecessor entities. For the nine months
ended September 30, 1997, the investing activities included $1,058,871 related
primarily to the purchase of Management Agreements for the four Michigan Managed
Dental Centers and $555,158 related primarily to the purchase of non-dental
assets for three additional Managed Dental Centers and certain equipment
purchases for the Corporate office expansion.
Cash provided by (used in) financing activities for the nine months ended
September 30, 1996 and 1997 was $47,050 and $107,377, respectively. For the nine
months ended September 30, 1996 the financing activities were exclusively
related to net proceeds on the Company's long-term debt. For the nine months
ended September 30, 1997, the Company had $946,828 in net proceeds on long-term
debt, the bank credit facility and common stock issuances offset by $801,100 in
working capital advances to PAs.
In August 1997, the Company entered into a revolving line of credit (the
"Credit Agreement") which provides for an aggregate of $1.2 million. Under the
terms of the Credit Agreement, the Company may use up to $600,000 of the credit
line for the purchase of non-dental assets of dental centers provided that each
borrowing is repaid within 45 days of its drawdown. The remaining $600,000 may
be used for general working capital needs. The revolving line of credit bears
interest at 0.75% per annum above the lender's prime rate and is payable on
demand. Interest only is payable monthly. Amounts borrowed pursuant to the
Credit Agreement are secured by a first security interest in most of the
Company's assets, including receivables and equipment. Additionally, any
outstanding balances under the working capital
15
<PAGE>
line are guaranteed by the Company's Chairman of the Board, President and Chief
Executive Officer. As of September 30, 1997, the Company had drawn $212,687
against its available line of credit.
The Company previously has made loans to various PAs in connection with
the PAs' acquisition of assets of dental practices and has made working capital
advances to various PAs for their operations. The loans, which are evidenced by
interest-bearing notes that are payable upon demand, are being paid in
accordance with their terms. Both the loans and advances are personally
guaranteed by the PA owners.
The Company intends to enter into additional Management Agreements with
respect to, as well as purchase the non-dental assets of, additional practices.
In addition, the Company intends to lend money to PAs to fund the purchase of
the assets of additional dental practices. The Company plans to finance these
activities through a combination of the net proceeds of its public offering,
cash flow from operations, bank financing and isssuances of Common Stock.
On November 4, 1997, the Company completed the public offering of
2,000,000 shares of Common Stock at $12 per share resulting in proceeds, net of
underwriter commissions and offering costs, of approximately $21.0 million.
Based upon the Company's anticipated needs for acquisition of non-dental assets
of dental practices, working capital and general corporate purposes, management
believes that the combination of existing cash, cash flow from operations,
available credit lines and net proceeds from the Offering will be sufficient to
meet its capital requirements through 1998.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS.
None.
ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS.
On November 4, 1997, the Company completed the public offering of
2,000,000 shares of Common Stock at $12 per share resulting in
proceeds, net of underwriter commissions and offering costs, of
approximately $21.0 million. As of November 14, 1997, the Company
has not used any of the net proceeds.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5.OTHER INFORMATION.
None.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
27 FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED SEPTEMBER 30, 1997
(FOR SEC USE ONLY).
REPORTS ON FORM 8-K
NONE.
17
<PAGE>
DENTAL CARE ALLIANCE, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DATE: NOVEMBER 17, 1997
DENTAL CARE ALLIANCE, INC.
/s/ STEVEN R. MATZKIN, DDS
----------------------------
STEVEN R. MATZKIN, DDS
President and Chief Executive Officer
Chairman of the Board
/s/ DAVID P. NICHOLS
----------------------------
DAVID P. NICHOLS
Chief Financial Officer
(Principal Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
27 Financial Data Schedule
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 442,747
<SECURITIES> 0
<RECEIVABLES> 1,541,648
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,188,590
<PP&E> 638,986
<DEPRECIATION> 79,882
<TOTAL-ASSETS> 4,780,682
<CURRENT-LIABILITIES> 1,717,708
<BONDS> 0
1,503,062
0
<COMMON> 42,433
<OTHER-SE> 644,731
<TOTAL-LIABILITY-AND-EQUITY> 4,780,682
<SALES> 4,909,040
<TOTAL-REVENUES> 4,909,040
<CGS> 0
<TOTAL-COSTS> 3,777,033
<OTHER-EXPENSES> 957,644
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,297
<INCOME-PRETAX> 220,202
<INCOME-TAX> 84,943
<INCOME-CONTINUING> 135,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,259
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
