SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
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, 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.
(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
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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 10, 1998: 7,031,066
<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 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibits 17
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................. $ 7,653,597 $20,367,722
Consulting and license fees receivable ................ 25,282 64,116
Management fee receivable from PAs .................... 3,808,311 914,026
Advances to PAs, net .................................. 3,015,900 483,421
Other current assets .................................. 627,850 254,412
Current portion of long-term notes receivable from PA's 101,894 83,522
----------- -----------
TOTAL CURRENT ASSETS ............................... 15,232,834 22,167,219
Property and equipment, net ............................... 3,738,091 1,113,050
Intangible assets, net .................................... 13,669,662 4,747,303
Long-term notes receivable from PAs, less current portion . 660,536 313,940
Other assets .............................................. 625,601 212,975
----------- -----------
TOTAL ASSETS ....................................... $33,926,724 $28,554,487
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 1,217,948 $ 638,030
Accrued payroll and payroll related costs ............. 216,806 64,933
Other accrued liabilities ............................. 518,717 412,952
Acquisition and affiliation obligations payable ....... 451,563 920,000
Income taxes payable .................................. 436,836 179,367
Current portion of long-term debt and capital leases .. 1,495,800 195,193
----------- -----------
TOTAL CURRENT LIABILITIES .......................... 4,337,670 2,410,475
Deferred income taxes ..................................... 835,720 773,269
Long-term debt, less current portion ...................... 1,603,893 816,918
----------- -----------
TOTAL LIABILITIES .................................. 6,777,283 4,000,662
Commitments and contingencies ............................. -- --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 7,031,066 and 6,977,700 issued
and outstanding, respectively ...................... 70,311 69,777
Additional paid-in capital ................................ 24,222,213 24,126,009
Retained earnings ......................................... 2,856,917 358,039
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ......................... 27,149,441 24,553,825
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $33,926,724 $28,554,487
=========== ===========
</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,
-------------------------- ---------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management fees ......................... $7,859,224 $ 2,220,997 $19,661,806 $ 4,692,756
Consulting and licensing fees ........... 171,182 54,399 465,315 216,284
---------- ----------- ----------- -----------
TOTAL REVENUES ................. 8,030,406 2,275,396 20,127,121 4,909,040
Managed dental center expenses:
Staff salaries and benefits ........ 2,127,601 693,063 5,449,512 1,294,446
Dental supplies .................... 562,703 177,981 1,393,777 391,315
Laboratory fees .................... 864,970 254,600 2,176,457 627,610
Marketing .......................... 310,659 86,404 734,273 263,031
Occupancy .......................... 914,637 281,895 2,192,823 614,980
Other .............................. 560,785 259,127 1,389,025 585,621
---------- ----------- ----------- -----------
TOTAL MANAGED DENTAL CENTER
EXPENSES .............. 5,341,355 1,753,070 13,335,867 3,777,003
---------- ----------- ----------- -----------
2,689,051 522,326 6,791,254 1,132,037
Salaries and benefits ................... 436,607 184,512 1,223,020 557,528
General and administrative .............. 496,642 177,084 1,316,869 313,054
Depreciation and amortization ........... 309,075 45,484 698,827 87,062
---------- ----------- ----------- -----------
1,242,324 407,080 3,238,716 957,644
OPERATING INCOME ............... 1,446,727 115,246 3,552,538 174,393
Interest income, net .................... 120,976 9,345 513,931 45,809
---------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES .............. 1,567,703 124,591 4,066,469 220,202
Provision for income taxes .............. 603,566 48,943 1,567,591 84,943
---------- ----------- ----------- -----------
NET INCOME .............................. 964,137 75,648 2,498,878 135,259
Adjustment to redemption value of
common and preferred securities -- -- -- (10,500)
Cumulative preferred stock dividend -- (30,000) -- (90,000)
---------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON
STOCK .............................. $ 964,137 $ 45,648 $ 2,498,878 $ 34,759
========== =========== =========== ===========
Basic net income per common share ....... $ 0.14 $ 0.01 $ 0.36 $ 0.01
Diluted net income per common share ..... $ 0.14 $ 0.01 $ 0.35 $ 0.01
Basic weighted average common shares
outstanding ........................ 6,999,957 4,243,341 6,985,295 4,169,197
Diluted weighted average common shares
outstanding ........................ 7,071,644 4,330,810 7,084,768 4,256,666
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
DENTAL CARE ALLIANCE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 2,498,878 $ 135,259
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................... 698,827 87,062
Stock issued for services ........................ 4,384 --
Deferred income taxes ............................ 62,451 --
(Increase) decrease in:
Consulting and license fees receivable .............. 38,834 240,008
Management fee receivable from PAs .................. (2,894,285) (255,736)
Other assets ........................................ (786,064) (104,018)
Increase in:
Accounts payable .................................... 579,918 149,142
Accrued liabilities ................................. 363,234 260,597
Accrued payroll & payroll related costs ............. 151,873 204,268
------------ -----------
Net cash provided by operating activities ........... 718,050 716,582
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .................... (2,947,386) (555,158)
Advances made on notes receivable from PAs ............. (450,000) (72,200)
Payments received on notes receivable from PAs ......... 85,032 51,758
Acquisition and affiliations obligations payable ...... (468,437) --
Investment in servicing agreements and other assets .... (9,298,841) (1,058,871)
------------ -----------
Net cash used in investing activities ............... (13,079,632) (1,634,471)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................. 92,354 20,000
Payments of long-term debt ............................. (211,510) (38,351)
Proceeds from issuance of long-term debt ............... 2,299,092 926,828
Advances to PAs ........................................ (2,532,479) (801,100)
------------ -----------
Net cash (used in) provided by financing activities . (352,543) 107,377
Net decrease in cash and cash equivalents ........... (12,714,125) (810,512)
Cash and cash equivalents at beginning of period ............ 20,367,722 1,253,259
Cash and cash equivalents at end of period .................. $ 7,653,597 $ 442,747
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes ........... $ 1,249,274 $ 67,065
Cash paid during the period for interest ............... $ 124,676 $ 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
<PAGE>
DENTAL CARE ALLIANCE, INC.
Notes to Interim Consolidated Financial Statements
September, 1998 (Unaudited)
1. OPERATIONS AND ORGANIZATION
Dental Care Alliance, Inc. together with its consolidated subsidiaries
(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 September 30, 1998, the Company provided management and licensing
services to 55 Managed 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 $191,000 is allocated to
tangible assets and $158,000 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
$185,000 has been allocated to tangible assets and $2.4 million to the
Management Agreements. The Management Agreements executed are net
revenue contracts.
In May, 1998, the Company executed a 25-year Management Agreement with
a practice in Savannah, Georgia. Unaudited net practice revenue of the
dental practice was approximately $700,000. The total cost to the
Company is approximately $170,000 of which $2,000 has been allocated to
tangible assets and $168,000 to the Management Agreement. The
Management Agreement executed is a net revenue contract.
In June, 1998, the Company executed a 25-year Management Agreement with
a dental practice in Orange City, Florida. Unaudited net practice
revenue of the dental practice was approximately $1.1 million. The
total cost to the Company is approximately $365,000 of which $77,000
has allocated to tangible assets and $288,000 to the Management
Agreement. The Management Agreement executed is a net revenue contract.
In June, 1998, the Company executed a 25-year Management Agreement with
a practice in Tallahassee, Florida. Unaudited net practice revenue of
the dental practice was approximately $550,000. The total cost to the
Company is approximately $140,000 of which $80,000 is allocated to
tangible assets and $60,000 to the Management Agreement. The Management
Agreement executed is a net revenue contract.
In June, 1998, the Company executed 25-year Management Agreements with
two dental practices in the Atlanta, Georgia area. Unaudited net
practice revenue of the dental practices was approximately $1.5
million. The total cost to the Company is approximately $510,000 of
which $105,000 is allocated to tangible assets and $405,000 to the
Management Agreement. The Management Agreements executed are net
revenue contracts.
In August 1998, the Company executed a 25-year Management Agreement
with a dental practice in Gainesville, Florida. Unaudited net practice
revenue of the dental practice was approximately $241,000. The total
cost to the Company is approximately $30,000 of which $21,000 is
allocated to tangible assets and $9,000 to the Management Agreement.
The Management Agreement executed is a net revenue contract.
In August 1998, the Company executed a 25-year Management Agreement
with three dental practices in northwest Indiana. Unaudited net
practice revenue of the dental practices was approximately $1.5
million. The total cost to the Company is approximately $391,000 of
which $130,000 is allocated to tangible assets and $261,000 to the
Management Agreement. The Management Agreements executed are net
revenue contracts.
In September 1998, the Company executed a 25-year Management Agreement
with a dental practice in Ocala, Florida. Unaudited net practice
revenue of the dental practice was approximately $525,000. The total
cost to the Company is approximately $184,000 of which $52,000 is
allocated to tangible assets and $132,000 is allocated to the
Management Agreement. The Management Agreement executed is a net
revenue contract.
7
<PAGE>
In September 1998, the Company executed a 25-year Management Agreement
with a dental practice in Jacksonville, Florida. Unaudited net practice
revenue of the dental practice was approximately $1.2 million. The
total cost to the Company is approximately $365,000 of which $165,000
is allocated to tangible assets and $200,000 to the Management
Agreement. The Management Agreement executed is a net revenue contract.
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 of Dental One,
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.
5. SUBSEQUENT EVENTS
On October 15, 1998 the Company executed an Agreement and Plan of
Reorganization and Merger with Gentle Dental Service Corporation
(NASDAQ: GNTL), a dental practice management company headquartered in
El Segundo, California. In this proposed transaction, Gentle Dental
Service Corporation ("Gentle") and the Company will each become a
wholly-owned subsidiary of a new corporation to be headquartered in
California. Each share of the Company's common stock will be converted
into 1.67 shares of common stock of the new corporation. This proposed
transaction is subject to, among other things, regulatory and
stockholder approval.
In November 1998, the Company executed 25-year Management Agreements
with 22 dental practices in Pennsylvania. Unaudited net practice
revenue of the dental practices was approximately $8.0 million. The
total cost to the Company is approximately $2.8 million, with the
allocation between tangible assets and the Management Agreement to be
determined upon completion of an appraisal. The Management Agreements
executed are net revenue contracts.
8
<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,
Michigan and Indiana. As of September 30, 1998 the Company provided management
and licensing services to 55 Managed Dental Centers, 35 of which are located in
Florida, nine of which are located in Michigan, eight of which are located in
Georgia, and three of which are located in Indiana. As of September 30, 1997,
the Company provided management and licensing services to 20 Managed Dental
Centers, 16 located in Florida and 4 in Michigan. Additionally, the Company
provided only licensing services to three Licensed Dental Centers in Florida as
of September 30, 1997. 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 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 as defined in the Management Agreements of the individual
Managed Dental Center, 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
defined as 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 related
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 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.
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.
9
<PAGE>
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, 1998, the total
outstanding balance of such loans was $762,430. 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 need to extend loans and advances to the PAs by the Company is not
considered upon entering into Management Agreements. 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 securing 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, 1998, the total outstanding balance of
such advances was $3,015,900, net of a $120,000 reserve. 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
management 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 its corporate office. In 1998, the Company began
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 $500,000, 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 with respect to 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 prepare for the Year
2000 issues before executing a Management Agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 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 253% from $2.2 million for the three months ended September 30, 1997,
to $7.9 million for the three months ended September 30, 1998. Revenues at
practices grew 13.5%, or approximately $590,000, while the balance of the
increase relates to the addition of 35 Managed Dental Centers.
10
<PAGE>
CONSULTING AND LICENSING FEES. Consulting and licensing fees consist of
fees earned by the Company for licensing services to all of the Dental Centers.
Consulting and licensing fees increased 215% from $54,399 for the three months
ended September 30, 1997, to $171,182 for the three months ended September 30,
1998. The increase is primarily attributable to the addition of 35 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 205% from $1.8 million for the three months ended
September 30, 1997, to $5.3 million for the three months ended September 30,
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 reduced staff salaries (3%), economies in purchasing of dental
supplies and laboratories (1%) and other general costs associated with new
affiliations (3%).
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 137% from $184,512 for the three months
ended September 30, 1997, to $436,607 for the three months ended September 30,
1998. This increase is attributable to the hiring of additional staff required
to manage the additional 35 Managed Dental Centers. As a percentage of net
patient revenue at Managed Dental Centers, salaries decreased from 6% to 4%.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
consists of expenses related to the operation of the Company's corporate and
regional offices, such as rent, legal, accounting and travel expenses. General
and administrative expenses increased 180% from $177,084 for the three months
ended September 30, 1997, to $496,642 for the three months ended September 30,
1998. This increase is attributable to the opening of regional offices in
Michigan, Georgia and Palm Beach, Florida, additional professional costs
associated with the change from a privately-held to publicly-held company and
increased occupancy and travel costs associated with the additional 35 Managed
Dental Centers. As a percentage of net patient revenue at Managed Dental
Centers, general and administrative expenses decreased from 6% to 4%.
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. It also
includes amortization on intangible assets, primarily Management Agreements.
Depreciation and amortization expense increased 580% from $45,484 for the three
months ended September 30, 1997, to $309,075 for the three months ended
September 30, 1998. This increase was attributable to the depreciation on the
acquired non-dental assets and amortization on the acquired and purchased
Management Agreements related to the 35 additional Managed Dental Centers. As a
percentage of net patient revenue at Managed Dental Centers, depreciation and
amortization expense increased from 1% to 3%.
INTEREST INCOME, NET. Interest income, net increased from $9,345 for
the three months ended September 30, 1997, to $120,976 for the three months
ended September 30, 1998. This increase is attributable primarily to earnings on
increased cash balances associated with the Company's public offering in
November 1997, less acquisition and affiliation costs expended to date on the 35
additional Managed Dental Centers.
11
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997
MANAGEMENT FEES. Management fees increased 319% from $4.7 million for
the nine months ended September 30, 1997 to $19.7 million for the nine months
ended September 30, 1998. Revenues at practices under management during both
periods grew 10%, or approximately $2.8 million, while the balance of the
increase relates to the addition of 43 Managed Dental Centers since January 1,
1997.
CONSULTING AND LICENSING FEES. Consulting and licensing fees increased
115% from $216,284 for the nine months ended September 30, 1997 to $465,315 for
the nine months ended September 30, 1998. The increase is primarily attributable
to the addition of 43 Managed Dental Centers, offset by the cessation of
approximately $85,000 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.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses
increased 253% from $3.8 million for the nine months ended September 30, 1997 to
$13.3 million for the nine months ended September 30, 1998. As a percentage of
net patient revenue at Managed Dental Centers, Managed Dental Center expenses
decreased from 56% to 48%. The decrease is due to economics in purchasing of
dental supplies and laboratories (2%), reduced marketing expenditures (1%) in
new affiliations with established reputations, occupancy costs (1%) and other
general and administrative expenses (4%).
SALARIES AND BENEFITS. Salaries and benefits increased 119% from
$557,528 for the nine months ended September 30, 1997 to $1.2 million for the
nine months ended September 30, 1998. This increase is attributable primarily to
the hiring of additional personnel in the Company's accounting and business
development departments and regional offices in Michigan, Georgia and Palm
Beach, Florida to administer the additional 43 Managed Dental Centers. As a
percentage of net patient revenue, salaries and benefits decreased from 8% to 5%
due to operating leverage of corporate infrastructure.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 321% from $313,054 for the nine months ended September 30, 1997 to
$1.3 million for the nine months ended September 30, 1998. This increase is
attributable primarily to opening of regional offices, additional professional
costs associated with the change from a privately-held to publicly-held company
and increased occupancy and travel costs associated with the additional 43
Managed Dental Centers. As a percentage of the net patient revenue, general and
administrative expense remained at 5% for both periods.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 703% from $87,062 for the nine months ended September 30, 1997 to
$698,827 for the nine months ended September 30, 1998. This increase is
attributable to the depreciation on the acquired non-dental assets and
amortization on the Management Agreements obtained in connection with the 43
additional Managed Dental Centers. As a percentage of net patient revenue,
depreciation and amortization expense increased from 1% to 3%.
INTEREST INCOME, NET. Interest income, net increased from $45,809 for
the nine months ended September 30, 1997 to $513,931 for the nine months ended
September 30, 1998. This increase is attributable primarily to earnings on the
higher cash balance associated with the Company's public offering in November,
1997, less funds expended to date on the 43 additional Managed Dental Centers.
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, Georgia and Indiana in July 1997, March 1998 and August
1998, respectively. The Company expects that the seasonality in Florida will be
offset to some extent by fewer seasonal fluctuations in Michigan and Georgia and
Indiana and this expectation held true for the third quarter ended September 30,
1998.
12
<PAGE>
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
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1998 1998 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Number of managed dental centers (1) 29 44 49 55
Net patient revenue at managed
dental centers (2) ............. $3,868,333 $6,799,853 $9,942,993 $11,185,900
Total revenues ..................... 2,970,035 4,932,971 7,163,745 8,030,406
Managed dental center expenses ..... 2,130,256 3,266,401 4,728,111 5,341,355
Operating income ................... 246,296 909,898 1,195,915 1,446,727
Net income ......................... 285,046 700,928 833,815 964,137
<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 the 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 provided by operations for the nine months ended September
30, 1997 and 1998 was $716,582 and $718,050, respectively. Net cash provided by
operations for these periods consisted primarily of net income and increases in
current liabilities offset by increases in consulting, license fees and
management fee receivables.
Cash used in investing activities for the nine months ended September
30, 1997 and 1998 was $1.6 million and $13.1 million, respectively. For the nine
months ended September 30, 1997, the investing activities included $555,158
related to the purchase of non-dental assets and $1.0 million related to the
purchase of Management Agreements. For the nine months ended September 30, 1998,
the investing activities included $9.3 million related primarily to the purchase
of Management Agreements, $2.9 million related to the purchase of non-dental
assets, $468,437 related to satisfaction of outstanding obligations on
acquisitions and affiliations and $450,000 related to an increase in notes
receivable to PAs.
Cash provided by (used in) financing activities for the nine months
ended September 30, 1997 and 1998 was $107,377 and ($352,543), respectively. For
the nine months ended September 30, 1997 the financing activities were primarily
related to advances to PAs offset by proceeds of new long-term debt. For the
nine months ended September 30, 1998, the Company had $2.3 million in net
proceeds on long-term debt offset by $2.5 million 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 line are guaranteed by the
Company's Chairman of the Board, President and Chief Executive Officer.
13
<PAGE>
On May 14, 1998, the Company executed a $15 million Revolving Note with
Nationsbank, N.A. which replaced the Credit Agreement. The Revolving Note is
intended to provide funds for the acquisition and affiliation with dental
practices and working capital uses in a revolving line of credit facility. The
note matures in one year, with annual renewals thereafter. The Company and its
subsidiaries have pledged substantially all of their assets as collateral. The
note bears interest at 1.75% over LIBOR, payable monthly. The Company is
required to maintain certain financial covenants during the term of the note. As
of September 30, 1998, the Company had $1.0 million outstanding under the note.
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 existing
cash, 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 December 31, 1999.
14
<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 approximately
$2.8 million for costs incurred in connection with the offering,
including Underwriter discounts and commissions ($1.7 million),
legal ($395,000), accounting ($342,000), printing ($155,000) and
miscellaneous expenses ($221,000). 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 $21.2 million.
Since its initial public offering, the Company has expended
approximately $13.6 million of the proceeds therefrom for the
purchase of tangible and intangible assets ($2.5 million),
advances to PAs ($1.9 million) and the entering into Management
Agreements with dental practices ($9.2 million). No portion of
the $13.6 million was paid to any directors, officers or
affiliates. The balance of the proceeds remain invested in
short-term interest-bearing accounts.
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 SUBSIDIARIES
27 FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED
SEPTEMBER 30, 1998 (FOR SEC USE ONLY).
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on October 30, 1998
concerning the Agreement and Plan of Reorganization and Merger
with Gentle Dental Service Corporation.
15
<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 13, 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)
16
<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.
Dental Care Alliance of Indiana, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,653,597
<SECURITIES> 0
<RECEIVABLES> 6,849,493
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,232,834
<PP&E> 4,148,213
<DEPRECIATION> (410,122)
<TOTAL-ASSETS> 33,926,724
<CURRENT-LIABILITIES> 4,337,670
<BONDS> 0
0
0
<COMMON> 70,311
<OTHER-SE> 24,222,213
<TOTAL-LIABILITY-AND-EQUITY> 33,926,724
<SALES> 8,030,406
<TOTAL-REVENUES> 8,030,406
<CGS> 5,341,355
<TOTAL-COSTS> 5,341,355
<OTHER-EXPENSES> 1,242,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,440
<INCOME-PRETAX> 1,567,703
<INCOME-TAX> 603,566
<INCOME-CONTINUING> 964,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 964,137
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
