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 March 31, 1998
[ ] 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
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(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 May 10, 1998: 6,978,065
<PAGE>
DENTAL CARE ALLIANCE, INC.
INDEX
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibits 15
2
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................. $20,367,722 $11,244,018
Consulting and license fees receivable ................ 64,116 47,468
Management fee receivable from PAs .................... 914,026 2,217,175
Advances to PAs, net .................................. 483,421 671,227
Acquisition accounts receivable ....................... -- 1,200,000
Other current assets .................................. 254,412 545,755
Current portion of long-term notes receivable from PA's 83,522 115,405
----------- -----------
TOTAL CURRENT ASSETS ................................ 22,167,219 16,041,048
Property and equipment, net .............................. 1,113,050 2,656,486
Intangible assets, net ................................... 4,747,303 11,731,051
Long-term notes receivable from PAs, less current portion 313,940 710,160
Other assets ............................................. 212,975 216,362
----------- -----------
TOTAL ASSETS ........................................ $28,554,487 $31,355,107
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 638,030 $ 1,227,588
Accrued payroll and payroll related costs ............. 64,933 94,195
Other accrued liabilities ............................. 412,952 185,802
Acquisition and affiliation obligations payable ....... 920,000 1,275,540
Income taxes payable .................................. 179,367 454,795
Current portion of long-term debt and capital leases .. 195,193 397,773
----------- -----------
TOTAL CURRENT LIABILITIES ........................... 2,410,475 3,635,693
Deferred income taxes .................................... 773,269 808,269
Long-term debt, less current portion ..................... 816,918 1,656,460
----------- -----------
TOTAL LIABILITIES ................................... 4,000,662 6,100,422
Commitments and contingencies ............................ -- --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 6,977,700 issued and outstanding ........ 69,777 69,777
Additional paid-in capital ............................... 24,126,009 24,126,009
Retained earnings ........................................ 358,039 1,058,899
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .......................... 24,553,825 25,254,685
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $28,554,487 $31,355,107
=========== ===========
</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 ENDED MARCH 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Management fees .............................. $ 1,119,991 $ 4,812,371
Consulting and licensing fees ................ 84,690 120,600
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TOTAL REVENUES ......................... 1,204,681 4,932,971
----------- -----------
Managed dental center expenses:
Staff salaries and benefits ............... 270,282 1,219,707
Dental supplies ........................... 81,578 359,971
Laboratory fees ........................... 172,256 604,487
Marketing ................................. 97,060 200,178
Occupancy ................................. 156,892 524,312
Other ..................................... 143,074 357,856
----------- -----------
TOTAL MANAGED DENTAL CENTER EXPENSES ... 921,142 3,266,511
----------- -----------
283,539 1,666,460
Salaries and benefits ..................... 180,720 310,186
General and administrative ................ 67,701 323,335
Depreciation and amortization ............. 6,411 123,152
----------- -----------
254,832 756,673
OPERATING INCOME ....................... 28,707 909,787
Interest income, net ...................... 14,936 231,307
----------- -----------
Income before income taxes ................... 43,643 1,141,094
Provision for income taxes ................... 17,021 440,234
----------- -----------
Net income ................................... 26,622 700,860
Cumulative preferred stock dividend ....... (30,000) --
----------- -----------
Net (loss) income applicable to common stock . $ (3,378) $ 700,860
=========== ===========
Basic net income per common share ............ $ -- $ 0.10
Diluted net income per common share .......... $ -- $ 0.10
Basic weighted average common shares
outstanding ............................. 4,080,624 6,977,700
Diluted weighted average common shares
outstanding ............................. 4,168,093 7,064,903
</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)
THREE MONTHS ENDED MARCH 31,
-------------------------------
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 26,622 $ 700,860
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization .......................... 6,411 123,152
Deferred income taxes .................................. -- 35,000
(Increase) decrease in:
Consulting and license fees receivable ................. (29,011) 16,648
Management fee receivable from PAs ..................... (353,938) (1,303,149)
Other assets ........................................... (12,941) (291,343)
Increase (decrease) in:
Accounts payable ....................................... (13,400) 589,558
Accrued payroll & payroll related costs ................ 12,457 29,262
Other accrued liabilities .............................. 70,608 48,278
------------ ------------
Net cash used in operating activities .................. (293,192) (51,734)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ....................... -- (1,606,411)
Advances made on notes receivable from PAs ................ -- (450,000)
Payments received on notes receivable from PAs ............ 11,069 21,897
Investment in management agreements and other assets ...... (9,277) (7,047,311)
Acquisition and affiliation obligations payable ........... -- (844,460)
------------ ------------
Net cash provided by (used in) investing activities .... 1,792 (9,926,285)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................... 20 --
Payments of long-term debt ................................ (14,062) (26,991)
Proceeds from issuance of long-term debt .................. -- 1,069,112
Advances to PAs ........................................... 16,454 (187,806)
------------ ------------
Net cash provided by financing activities .............. 2,412 854,315
------------ ------------
Net decrease in cash and cash equivalents .............. (288,988) (9,123,704)
------------ ------------
Cash and cash equivalents at beginning of period ............. 1,253,259 20,367,722
------------ ------------
Cash and cash equivalents at end of period ................... $ 964,271 $ 11,244,018
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes .............. $ -- $ 144,500
Cash paid during the period for interest .................. $ 10,466 $ 32,814
Increase in cumulative preferred stock dividend ........... $ 30,000 $ --
Acquisition accounts receivable - non cash ................ -- $ 1,200,000
Stock subscription receivable ............................. $ 272,768 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DENTAL CARE ALLIANCE, INC.
Notes to Interim Financial Statements
March, 1998 (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"). As of March 31, 1998, the Company provided management and
licensing services to 44 Managed Dental Centers. Additionally, the Company
provides only licensing services to three Licensed Dental Centers.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION / BASIS OF CONSOLIDATION. The accompanying
consolidated interim financial statements have been prepared on the
accrual basis of accounting and include only those operations which are
under the ownership and financial control of the Company. All intercompany
accounts and transactions have been eliminated in consolidation. The
Company does not have ownership in or exercise control over the dentistry
activities of the PAs and accordingly, the accompanying interim financial
statements do not consolidate the results of the PAs.
The accompanying consolidated interim financial statements are unaudited
and should be read in conjunction with the audited financial statements of
the Company for the year ended December 31, 1997.
In the opinion of management, the accompanying interim financial
statements include all adjustments, consisting only of normal recurring
adjustments, and disclosures necessary to prevent the information
presented from being misleading. 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.
3. AFFILIATIONS
In January 1998, the Company executed 25-year Management Agreements with
two practices located in Bradenton, Florida. Unaudited net practice
revenue of the dental practices was $1.5 million for the year ended
December 31, 1997. The total cost to the Company was approximately
$480,000 of which $225,000 is allocated to tangible assets and $255,000,
is allocated to Management Agreements. The Management Agreements executed
are net revenue contracts.
In February 1998, the Company executed 25-year Management Agreements with
two practices located in Orlando, Florida. Unaudited net practice revenue
of the dental practices was approximately $1.3 million for the year ended
December 31, 1997. The total cost to the Company is approximately $500,000
of which $195,000 is allocated to tangible assets and $305,000 is
allocated to Management Agreements. The Management Agreements executed are
net revenue contracts.
In March 1998, the Company executed a 25-year Management Agreement with a
practice in Mt. Dora, Florida. Unaudited net practice revenue of the
dental practice was approximately $1.0 million. The total cost to the
Company is approximately $349,000 of which $75,000 is allocated to
tangible assets and $274,000 is allocated to the Management Agreement. The
Management Agreement executed is a net revenue contract.
6
<PAGE>
In March 1998, the Company executed a 25-year Management Agreement with a
practice in Dalton, Georgia. Unaudited net practice revenue of the dental
practice was approximately $1.7 million. The total cost to the Company is
approximately $572,000 of which $100,000 has been allocated to tangible
assets and $472,000 to the Management Agreement. The Management Agreement
executed is a net revenue contract.
In March 1998, the Company executed 25-year Management Agreements with
four dental practices in Detroit, Michigan. Unaudited net practice revenue
of the dental practices was approximately $4.4 million. The total cost to
the Company is approximately $2.6 million of which $400,000 has been
allocated to tangible assets and $2.2 million to the Management
Agreements. The Management Agreements executed are net revenue contracts.
4. ACQUISITIONS
On April 1, 1998, the Company acquired all the outstanding capital stock
of Dental One Associates, Inc., a Georgia corporation ("Dental One")
pursuant to a Stock Purchase Agreement effective March 20, 1998.
Pursuant to the Stock Purchase Agreement, the Company acquired all the
assets of Dental One. Such assets consisted primarily of non-dental assets
(including dental equipment) and management agreements. Five hundred
thousand shares (500,000) of the common stock, representing one hundred
percent (100%) of the issued and outstanding shares were purchased by the
Company in consideration of (a) $2.4 million in cash; (b) a promissory
note in the amount of $1,047,510, bearing interest at 8.5% per annum,
payable in equal quarterly payments of principal and interest amortized
over five years with a three year balloon; and (c) a promissory note in
the amount of $1.2 million payable in monthly installments over 120 days.
The Company assumed management fee receivables owed Dental One by its
Managed Dental Centers. These receivables are estimated at $1.2 million
and have been recorded as acquisition accounts receivable.
7
<PAGE>
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 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
PACE OF DEVELOPMENT AND ACQUISITION ACTIVITY, THE DEPENDENCE ON MANAGEMENT
AGREEMENTS, THE PAS AND AFFILIATED DENTISTS, THE REIMBURSEMENT RATES FOR DENTAL
SERVICES, AND OTHER RISKS DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS. OTHER RISK FACTORS ARE LISTED IN THE COMPANY'S REGISTRATION
STATEMENT NO. 333-34429 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, Georgia and Michigan. As
of March 31, 1998 the Company provided management and licensing services to 44
Managed Dental Centers, 30 of which are located in Florida, 9 of which are
located in Michigan and 5 of which are located in Georgia. As of March 31, 1997,
the Company provided management and licensing services to 12 Managed Dental
Centers, all located in Florida. Additionally, the Company provided only
licensing services to 3 Licensed Dental Centers in Florida as of both dates.
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.
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. Subsequent to October 1996, the Company has executed Management
Agreements on terms substantially similar to those of the Standard Management
Agreements with management fees ranging from 67%-74% of total net patient
revenues.
The Company also entered into license agreements with each Dental Center
pursuant to which the Company provided 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.
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 Managed Dental
Centers while the PAs acquired the dental assets of such Managed Dental Centers.
In addition, due to changing market conditions, the Company has begun
compensating PAs for the execution of Management Agreements.
8
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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 March 31, 1998, the total outstanding
balance of such loans was $825,565. The notes underlying such loans generally
have terms ranging from two to five years, bear interest at rates ranging
between 8.5% 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 8.5%, 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 March 31, 1998, the total outstanding
balance of such advances was $671,227. There have been no revisions to the terms
of any such loans or 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 approximately 1% of the Company's Common Stock.
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. 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. Where the Company acquires the assets of another
management company, such a transaction constitutes a business combination and
the Company recognizes the related goodwill, if any, in accordance with the
purchase method of accounting.
In October 1997, the Company expanded its Management Information System
hardware and software in the corporate office. In 1998, the Company has begun
testing of new dental practice management software in several of its Managed
Dental Centers. It is anticipated that all of the dental practices currently
under management will have installed the new software and, where necessary,
upgraded its hardware requirements. The Company believes that the cost for the
hardware and software will not be in excess of $350,000, but this amount may
increase as the number of Managed Dental Centers increases. The new software
installed at several of the Managed Dental Centers and the corporate offices
have addressed the Year 2000 issues for those systems under the Company's
control. The Company has not determined the level of preparedness of third
parties with which it deals nor the implications that a failure on their part
could have on the Company. The Company is in the process of making that
determination. In analyzing potential new affiliations, the Company will
consider the cost and timing of a practice's ability to meet the Year 2000 issue
before executing an agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1997
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 330% from $1.1 million for the three months ended March 31, 1997, to
$4.8 million for the three months ended March 31, 1998. Of this increase,
approximately $110,000 relates to increased revenue at existing practices while
the balance relates to the additional 32 Managed Dental Centers.
9
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CONSULTING AND LICENSING FEES. Consulting and license fees consist of fees
earned by the Company for licensing services to all of the Dental Centers. For
the three months ended March 31, 1997 the Company also provided consulting
services to four Managed Dental Centers in Michigan. Consulting and licensing
fees increased 42.4% from $84,690 for the three months ended March 31, 1997, to
$120,600 for the three months ended March 31, 1998. The increase is attributable
to the 32 additional Managed Dental Centers offset by a $48,000 decrease
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.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses consist of
non-professional expenses at the Managed Dental Centers. Managed dental center
expenses increased from $921,142 for the three months ended March 31, 1997, to
$3.3 million for the three months ended March 31, 1998. As a percentage of net
patient revenue at the Managed Dental Centers, Managed Dental Center Expenses
decreased from 55% to 48%. This decrease is attributable to economies in
purchasing of certain general supplies and insurance (3%) and reduced marketing
expenditures (3%) in new affiliations with established reputations.
SALARIES AND BENEFITS. Salaries and benefits consist of costs for salaries
and benefits for employees at the Company's corporate and regional offices.
Salaries and benefits increased 71.6% from $180,720 for the three months ended
March 31, 1997, to $310,186 for the three months ended March 31, 1998. This
increase is attributable to additional staff required to manage the additional
32 Managed Dental Centers. As a percentage of net patient revenue at Managed
Dental Centers, salaries decreased from 11% to 5%.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consists
of expenses related to the operation of the Company's corporate offices, such as
rent, legal, accounting and travel expenses. General and administrative expenses
increased 377.6% from $67,701 for the three months ended March 31, 1997, to
$323,335 for the three months ended March 31, 1998. This increase is
attributable to the opening of regional offices in Michigan and Palm Beach,
Florida, additional professional costs associated with the change from a
privately-held to public-held company and increased occupancy and travel costs
associated with the additional 32 Managed Dental Centers. As a percentage of net
patient revenue at Managed Dental Centers, general and administrative increased
from 4.1% to 4.8%.
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.
Depreciation and amortization expense increased $116,741 from $6,411 for the
three months ended March 31, 1997, to $123,152 for the three months ended March
31, 1998. This increase was attributable to the depreciation on the acquired
non-dental assets and amortization on the acquired Management Agreements related
to the 32 additional Managed Dental Centers.
INTEREST INCOME, NET. Interest income, net increased from $14,936 for the
three months ended March 31, 1997, to $231,307 income for the three months ended
March 31, 1998. This increase is attributable primarily to earnings on increased
cash balances associated with the Company's public offering in November 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. The Company began managing additional Managed Dental
Centers in Michigan and Georgia in July 1997 and March 1998, respectively. The
Company expects that the seasonality in Florida will be offset to some extent by
fewer seasonal fluctuations in Michigan and Georgia.
10
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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.
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
--------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Number of Managed Dental Centers (1) 13 20 29 44
Net patient revenue at Managed Dental
Dental Centers (2) .............. $1,861,076 $3,190,620 $3,868,333 $6,799,853
Total revenues ...................... 1,428,963 2,256,950 2,970,035 4,932,971
Managed dental center expenses ...... 1,102,791 1,753,070 2,130,256 3,266,511
Operating income .................... 30,440 115,246 246,296 909,787
Net income .......................... 32,989 75,648 285,046 700,860
<FN>
- --------------------
(1) Presented as of the end of the period.
(2) 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 operations for the three months ended March 31,
1997 and 1998 was $293,192 and $51,734, respectively. Net cash used in
operations for the three months ended March 31, 1997 consisted primarily of net
income offset by increases in consulting, license fees and management fee
receivables while net cash used in operations for the three months ended March
31, 1998 consisted primarily of net income, increases in current liabilities
offset with an increase in management fee receivable and other current assets.
Cash provided by (used in) investing activities for the three months ended
March 31, 1997 and 1998 was $1,792 and ($9,926,285), respectively. For the three
months ended March 31, 1997, the investing activities were primarily related to
payments received on notes receivable from PAs offset by an increase in other
assets. For the three months ended March 31, 1998, the investing activities
included $7,047,311 related primarily to the purchase of Management Agreements,
$1,606,411 related to the purchase of non-dental assets and $844,460 related to
satisfaction of outstanding obligations on the acquisition and affiliation with
seven Managed Dental Centers from the fourth quarter of 1997.
Cash provided by financing activities for the three months ended March 31,
1997 and 1998 was $2,412 and $854,315, respectively. For the three months ended
March 31, 1997 the financing activities were primarily related to net proceeds
on the Company's long-term debt. For the three months ended March 31, 1998, the
Company had $1,069,112 in net proceeds on long-term debt and $187,806 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
11
<PAGE>
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 line are guaranteed by the
Company's Chairman of the Board, President and Chief Executive Officer. As of
March 31, 1998, the Company had no outstanding draws against its available line
of credit. In March 1998, the Company executed a non-binding commitment letter
for a new credit facility in the amount of $15 million ("Credit Facility"). The
Credit Facility, which will replace the existing Credit Agreement, provides for
interest at 1.75% over LIBOR and will be collateralized by a majority of the
Company's assets.
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 acquire Management Agreements or 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
issuances 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.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS.
None.
ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS.
There have been no changes in securities. From November 4, 1997
through December 31, 1997 the Company expended an estimated
$2,812,700 for costs incurred in connection with the offering,
including Underwriter discounts and commissions ($1,680,000), legal
($395,000), accounting ($342,000), printing ($155,000) and
miscellaneous expenses. None of these expenses were payable either
directly or indirectly to any directors, officers or affiliates.
After deducting these costs, net proceeds of the offering to the
Company were $21,187,300.
Since its initial public offering, the Company has expended an
estimated $9,692,500 for the purchase of tangible and intangible
non-dental assets and the entering into Management Agreements with
dental practices. No portion of the $9,692,500 was paid to any
directors, officers or affiliates. The balance of the proceeds
remain invested in short-term cash and cash equivalents.
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
--------
21.1 LIST OF SUBSIDIARIES
27 FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED MARCH 31, 1998
(FOR SEC USE ONLY).
REPORTS ON FORM 8-K
-------------------
The Company filed a report on Form 8-K on January 13, 1998
disclosing the acquisition of all the outstanding capital stock of
Marketplace Dental, Inc. on December 29, 1997 pursuant to the merger
of Marketplace Dental, Inc. with and into Dental Care Alliance of
Florida, Inc., a wholly-owned subsidiary of the Company.
The Company filed a report on Form 8-K on March 16, 1998, as an
amendment to Form 8-K filed on January 13, 1998, to include the
financial statements of Marketplace Dental, Inc. and Pro Forma
Financial Statements of the Company.
The Company filed a report on Form 8-K on March 20, 1998, as a
second amendment to Form 8-K filed on January 13, 1998, to include
the audited financial statements of Marketplace Dental, Inc. and
certain changes to the Pro Forma Financial Statements of the
Company.
The Company filed a report on Form 8-K on April 1, 1998 disclosing
the acquisition of all the outstanding stock of Dental One
Associates, Inc.
13
<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: MAY 14, 1998 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)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
21.1 List of Subsidiaries
27 Financial Data Schedule (for SEC use only)
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Dental Care Alliance of Florida, Inc.
Dental Care Alliance of Michigan, Inc.
Dental Care Alliance of Georgia, Inc.
Dental One Associates, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-01-1998
<CASH> 11,244,018
<SECURITIES> 0
<RECEIVABLES> 4,135,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,041,048
<PP&E> 2,828,591
<DEPRECIATION> (172,105)
<TOTAL-ASSETS> 31,355,107
<CURRENT-LIABILITIES> 3,635,693
<BONDS> 0
0
0
<COMMON> 69,777
<OTHER-SE> 24,126,009
<TOTAL-LIABILITY-AND-EQUITY> 31,355,107
<SALES> 4,932,971
<TOTAL-REVENUES> 4,932,971
<CGS> 3,266,511
<TOTAL-COSTS> 4,023,184
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,814
<INCOME-PRETAX> 1,141,094
<INCOME-TAX> 440,234
<INCOME-CONTINUING> 700,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 700,860
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
