SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-22985
CASTLE DENTAL CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0486898
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1360 POST OAK BOULEVARD, SUITE 1300 77056
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (713) 479-8000
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST YEAR)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock issued and outstanding, par value,
$0.001 per share, as of May 14, 1998 was 6,252,585.
CASTLE DENTAL CENTERS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1997 and March 31, 1998 ............ 3
Consolidated Statements of Operations
For the Three Months Ended March 31, 1997 and
1998............................................. 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and
1998............................................. 5
Notes to Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations... 8
PART II.
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
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PART I: FINANCIAL INFORMATION
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, March 31,
1997 1998
-------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 2,908 $ 1,779
Patient receivables, net........................ 5,841 7,540
Unbilled patient receivables, net............... 2,521 2,600
Prepaid expenses and other current assets....... 838 1,249
-------- ---------
Total current assets....................... 12,108 13,168
-------- ---------
Property and equipment, net........................ 5,189 8,499
Intangible assets, net............................. 25,565 44,928
Deferred income taxes, net......................... 1,125 813
Other assets....................................... 526 769
-------- ---------
Total assets................................ $ 44,513 $ 68,177
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease
obligations..................................... $2,598 $ 2,255
Accounts payable and accrued liabilities........ 4,935 6,563
Deferred compensation payable, related party.... 658 526
-------- ---------
Total current liabilities................... 8,191 9,344
-------- ---------
Long-term debt and capital lease obligations, net of
current portion.................................. 2,607 20,136
Other long-term liabilities, related party......... 1,052 921
Minority interest.................................. -- 166
Preferred stock, $.001 par value, 5,000,000 shares
authorized; 119,231 shares Series B issued and
outstanding March 31, 1998 and December 31, 1997. 1,550 1,550
Stockholders' equity:
Common stock, $.001 par value, 30,000,000 shares
authorized; 6,229,239 and 6,252,585 shares
issued and outstanding.......................... 6 6
Additional paid-in capital....................... 40,818 45,103
Accumulated deficit.............................. (9,711) (9,049)
-------- ---------
Total stockholders' equity.................. 31,113 36,060
-------- ---------
Total liabilities and stockholders' equity.. $ 44,513 $ 68,177
======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
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CASTLE DENTAL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
-------- --------
Patient revenues of affiliated dental practices .... $ 10,456 $ 14,541
Amounts retained by affiliated dental practices .... 2,413 3,746
-------- --------
Net revenues ....................................... 8,043 10,795
-------- --------
Expenses:
Clinical salaries .................................. 2,437 3,191
Dental supplies and laboratory fees ................ 911 1,318
Rental and lease expense ........................... 637 759
Advertising and marketing .......................... 513 594
Depreciation and amortization ...................... 427 621
Other operating expenses ........................... 857 1,378
General and administrative ......................... 1,458 1,858
-------- --------
Total expenses .............................. 7,240 9,719
-------- --------
Operating income ............................ 803 1,076
Interest expense ................................... 778 124
Other income ....................................... (8) (22)
-------- --------
Income before income taxes ......................... 33 974
Provision for income taxes ......................... 12 312
-------- --------
Net income ......................................... 21 662
Preferred stock accretion .......................... (150) --
-------- --------
Income (loss) attributable to common stock ......... $ (129) $ 662
======== ========
Income per common share:
Net Income ......................................... $ 0.01 $ 0.11
======== ========
Weighted average number of common and
common equivalent shares outstanding ............. 3,308 6,236
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
------- --------
Net cash provided by operating activities ................... $ 1,307 $ 481
Investing activities:
Capital expenditures ..................................... (397) (1,471)
Acquisitions of affiliated practices, net of cash acquired -- (13,108)
------- --------
Net cash used by investing activities .................... (397) (14,579)
------- --------
Financing activities:
Payments of long-term debt and capital lease obligations . (88) (1,731)
Proceeds from debt ....................................... 70 14,700
Debt issuance cost ....................................... (4) --
------- --------
Net cash provided (used in) by financing activities ......... (22) 12,969
------- --------
Net change in cash and cash equivalents .............. 888 (1,129)
Cash and cash equivalents, beginning of period .............. 119 2,908
------- --------
Cash and cash equivalents, end of period .................... $ 1,007 $ 1,779
======= ========
Supplemental Cash Flow Information:
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of note payable for purchase of
property and equipment .............................. $ -- $ 276
Series A Preferred Stock Accretion ................... 150 --
The accompanying notes are an integral part of the
condensed consolidated financial statements.
-5-
CASTLE DENTAL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management systems and services, non-healthcare personnel,
facilities and equipment to certain professional corporations in Texas,
Florida, California and Tennessee under long-term management services
agreements. These professional corporations are collectively referred to as
the affiliated dental practices.
The accompanying unaudited consolidated financial statements as of March
31, 1998 and for the three months ended March 31, 1997 and 1998 include the
accounts of the Company and its wholly owned management company subsidiaries.
The Company's subsidiaries acquire operating assets and assume certain
liabilities of the affiliated dental practices and provide management
activities to the affiliated dental practices under the Company's long-term
management services agreements. In 1997, the Emerging Issues Task Force
released issued No. 97-2 "Applications of FASB Statement No. 94,
Consolidation of all Majority-Owned Subsidiaries, and APB Opinion No. 16,
Business Combinations, to Physician Practice management Entities and Certain
Other Entities With Contractual management Arrangements" (Issue No. 97-2).
Issue 97-2 allows consolidation by the physician practice management company
(the "PPM") with the affiliated physician practice when the PPM has
controlling financial interest through a contractual management arrangement.
The Company's management services agreement meet the criteria of Issue 97-2
and the Company has consolidated the affiliated dental practices.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The unaudited consolidated financial
statements have been prepared consistent with the accounting policies
reflected in the Company's annual financial statements included in the
Company's Form 10K filed with the Securities and Exchange Commission, and
should be read in conjunction therewith. In management's opinion, the
unaudited consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year.
2. EARNINGS PER SHARE:
Earnings per share are computed based upon the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period. Shares outstanding for three months ended March 31, 1997, reflect the
conversion of the Series A and Series C Preferred Stock as of the beginning
of the period. The related non-cash dividend recorded in 1997 has been
excluded from the earnings per share calculation. Diluted earnings per share
are not presented because such amounts would be the same as amounts computed
for basic earnings per share.
Options and warrants to purchase 687,000 shares of common stock were
excluded from the calculation of earnings per share for the three months
ended March 31, 1998, because their effect would have been antidilutive.
3. ACQUISITIONS:
In March 1998, the Company acquired all the outstanding stock of Dental
World, Inc. ("DWI"), a dental practice management company located in Houston,
Texas. On March 30, 1998, the Company acquired an 80.0% interest in Dental
Consulting Services L.L.C. ("DCS"), a dental practice management company with
headquarters in Los Angeles, California.
The aggregate purchase price of $20.3 million, including related
acquisition expenses and excluding assumed liabilities, consisted of $13.3
million in cash, $2.7 million in seller notes payable (Note 4) and 23,342
shares of Company common stock and the rights to acquire Company common stock
with an aggregate fair
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market value of $4.3 million. Included as part of the acquisition of DCS, the
Company granted the sellers a one-time right to convert a portion of their
ownership interests into 407,454 shares of Company common stock. This right
may be exercised not earlier than twelve months after the closing date. This
conversion right has been recorded at fair market value as of the closing
date. In connection with these acquisitions, the Company entered into
employment and consulting agreements with certain employees and former owners
of the businesses acquired and into long-term management services agreements
with each of the affiliated dental practices. In addition, the former owners
of DCS have been granted the right to put all or a portion of their 20%
minority ownership to the Company, beginning twenty-four months after the
closing date, for a combination of cash and common stock. The consideration
to be paid, will be determined based on the EBITDA, as adjusted, for the DCS
business.
The assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The aggregate purchase price and related
expenses exceeded the fair market value of the net assets, which value has
been assigned to management services agreements and included in intangible
assets. The allocation of the purchase price is preliminary and subject
to change based on completion of our due diligence.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company maintains a revolving credit agreement with its bank (the
"Credit Agreement") which provides for borrowings up to $42.5 million and
expires November 2002. Under the Credit Agreement the original $3.0 million
term loan is payable in sixteen quarterly payments beginning March 1998,
while future advances require quarterly interest payments through November
1999 when principal becomes payable based on a five-year amortization and a
final payment at maturity. The Credit Agreement bears interest at variable
rates, which are based upon (a) either (i) the bank's base rate or (ii) LIBOR
plus (b) a margin which varies according to the ratio of the Company's funded
debt to EBITDA, each as defined in the Credit Agreement. A commitment fee is
payable quarterly at rates ranging from 0.125% to 0.5% of the unused amounts
for such quarter. The Credit Agreement is collateralized by substantially all
the Company's assets and contains affirmative and negative covenants that
require the Company to maintain certain financial ratios, limit the creation
or existence of liens and set certain restrictions on acquisitions, mergers,
sale of assets and restrict the payment of dividends. At March 31, 1998,
approximately $17.6 million was outstanding under the Credit Agreement.
In March 1998, the company issued $2.7 million in 8.0% subordinated notes
("Seller Note") (Note 2) in conjunction with an acquisition. The Seller Notes
are payable in quarterly installments of $134,460 through December 31, 2000
with a final payment of $1.2 million due on March 31, 2001. The Seller Notes
bear interest at 8.0% and are subordinated to the Company's Credit Agreement.
5. COMMITMENTS AND CONTINGENCIES:
The Company is subject to claims and suits arising in the ordinary course
of operations. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
In July and August 1997, a dentist from whom the Company acquired Horizon
Dental Centers in August 1996, contacted the Company asserting that the
Company misrepresented the value of the Common Stock issued to him as a part
of the consideration for the acquisition and demanded the issuance of
approximately 200,000 shares of Common Stock as additional consideration for
the transaction. The Company believes that these asserted claims are without
merit and has denied the demand for the issuance of additional shares of
Common Stock. In the event, that litigation is initiated against the Company,
the Company intends to defend itself vigorously. In the opinion of
management, resolution of these claims will not have a material adverse
effect on the Company's financial position, results of operations or cash
flows.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10Q CONTAINS FORWARD LOOKING STATEMENTS
WITHIN THE MEANING 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
CHANGING ENVIRONMENT FOR DENTAL HEALTH CARE, THE PACE OF THE COMPANY'S
DEVELOPMENT AND ACQUISITION ACTIVITIES, THE REIMBURSEMENT RATES FOR DENTAL
SERVICES, AND OTHER RISK FACTORS DETAILED IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS, INCLUDING THE COMPANY'S FORM 10K FOR THE YEAR
ENDED DECEMBER 31, 1997, AS FILED WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION.
INTRODUCTION
The Company develops, manages and operates integrated dental networks
through contractual affiliations with general, orthodontic and
multi-specialty dental practices in Texas, Florida, California and Tennessee.
On March 30, 1998, the Company entered the southern California market by
acquiring 80% of Dental Consulting Services L.L.C. ("DCS"), a dental practice
management company in Los Angeles, California. The Company does not engage in
the practice of dentistry but rather establishes integrated dental networks
through affiliations with dental practices providing quality care in selected
markets with a view to establishing broad geographic coverage within those
markets. The Company seeks to achieve operating efficiencies by consolidating
and integrating affiliated practices into regional networks, realizing
economies of scale in such areas as marketing, administration and purchasing
and enhancing the revenues of its affiliated dental practices by increasing
both patient visits and the range of specialty services offered. At March 31,
1998, the Company managed 55 dental centers with 165 affiliated dentists,
orthodontists and specialists.
COMPONENTS OF REVENUES AND EXPENSES
Patient revenues from affiliated dental practices represent amounts billed
by the affiliated dental practices to patients and third-party payors for
dental services rendered. Such amounts also include monthly capitation
payments received from third-party payors pursuant to managed care contracts.
Amounts retained by group dental practices include compensation paid to
dentists, hygienists and other dental care personnel employed by the
affiliated dental practices, as well as other costs directly incurred by the
affiliated practices such as employment taxes, personnel benefits and
insurance costs. Net revenues represent amounts earned by the Company under
the terms of its management services agreements with the affiliated dental
practices, which generally equal patient revenues less amounts retained by
the affiliated practices. The Company's net revenues, therefore, are
dependent upon patient revenues realized by the affiliated practices as well
as compensation and other expenses of the affiliated practices.
Under the terms of the typical management services agreement with an
affiliated dental practice, the Company becomes the exclusive manager and
administrator of all non-dental services relating to the operation of the
practice. The obligations of the Company include assuming responsibility for
the operating expenses incurred in connection with managing the dental
centers. These expenses include salaries, wages, and related costs of
non-dental personnel, dental supplies and laboratory fees, rental and lease
expenses, advertising and marketing costs, management information systems and
other operating expenses incurred at the dental centers. In addition to these
expenses, the Company incurs general and administrative expenses related to
the billing and collection of accounts receivable, financial management and
control of the dental operations, insurance, training and development, and
other general corporate expenditures. As compensation for its services under
the typical management services agreement and subject to applicable law, the
Company is paid a management fee comprised of three components: (i) the costs
incurred by it on behalf of the affiliated practice; (ii) a base management
fee in an amount ranging from 12.5% to 20.0% of adjusted gross revenues; and
(iii) a performance fee equal to the patient revenues of the affiliated
dental practice less (a) the expenses of the affiliated dental practice and
(b) the sum of (i) and (ii).
-8-
RESULTS OF OPERATIONS
The following table sets forth the percentages of patient revenues
represented by certain items reflected in the Company's Statements of
Operations. The information that follows represents historical results of the
Company and does not include pre-acquisition results of the dental practices
that the Company has acquired. The Company acquired Southwest Dental
Associates ("SW Dental") of Austin, Texas in September 1997, and two
individual practices located in Fort Worth, Texas and Nashville, Tennessee in
December 1997. (Collectively referred to as the "1997 Acquisitions") In March
1998, the Company acquired Dental World, Inc. a dental practice management
company located in Houston, Texas. On March 30, 1998, the Company acquired an
80.0% interest in DCS, a California-based dental practice management company.
The information that follows should be read in conjunction with the Annual
Audited Financial Statements and notes thereto of the Company included in the
Company's Form 10K filed with the Securities and Exchange Commission, as well
as the Unaudited Consolidated Financial Information, included in this Form
10Q.
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
1997 1998
------ ------
Patient revenues of affiliated dental practices ...... 100.0% 100.0%
Amounts retained by affiliated dental practices ...... 23.1% 25.8%
------ ------
Net revenues ........................................ 76.9% 74.2%
------ ------
Expenses:
Clinical salaries ................................... 23.3% 21.9%
Dental supplies and laboratory fees ................. 8.7% 9.1%
Rental and lease expense ............................ 6.1% 5.2%
Advertising and marketing ........................... 4.9% 4.1%
Depreciation and amortization ....................... 4.1% 4.3%
Other operating expenses ............................ 8.2% 9.5%
General and administrative ........................... 13.9% 12.8%
------ ------
Total expenses ...................................... 69.2% 66.9%
------ ------
Operating income .................................... 7.7% 7.3%
Interest expense ..................................... 7.4% 0.9%
Other income ......................................... (0.1%) (0.2%)
------ ------
Income before income taxes ........................... 0.3% 6.6%
------ ------
Provision for income taxes ........................... 0.1% (2.1%)
------ ------
Net income ........................................... 0.2% 4.5%
------ ------
Preferred stock accretion ............................ (1.4%) (--%)
------ ------
Net income (loss) attributable to common stock ....... (1.2%) (4.5%)
====== ======
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES - Patient revenues of
affiliated dental practices increased from $10.5 million to $14.5 million, an
increase of $4.0 million or 39.1%. Approximately, $1.8 million of the
increase was attributable to the 1997 Acquisitions. The opening of three de
novo offices in Houston and one in Austin, Texas and the expansion of
specialty services contributed to the balance of the increase.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES - Amounts retained by
affiliated dental practices consist primarily of compensation paid to
dentists, orthodontists, hygienists and other dental care personnel employed
by the affiliated
-9-
dental practice. For the three months ended March 31, 1998, amounts retained
by affiliated dental practices were $3.7 million, an increase of $1.3 million
or 55.2% from the comparable period of 1997. The increase was due primarily
to the acquisition of SW Dental and general increase in business activity.
NET REVENUES - For the three months ended March 31, 1998, net revenues
were $10.8 million, an increase of $2.8 million or 34.2%. The acquisitions
completed during 1997 contributed $1.2 million to the increase.
Expressed as a percentage of patient revenues, net revenues decreased from
76.9% for the three months ended March 31, 1997 to 74.2% for the same 1998
period.
CLINICAL SALARIES - Clinical salaries increased from $2.4 million for the
three months ended March 31, 1997, to $3.2 million for the three months ended
March 31, 1998, an increase of $0.8 million or 30.9%. The 1997 Acquisitions
accounted for approximately 57.5% of the increase in clinical salaries.
Expressed as a percentage of patient revenues, clinical salaries decreased
from 23.3% for the first quarter of 1997 to 21.9% for the first quarter of
1998.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $0.9 million for the three months ended March 31, 1997 to $1.3
million for the three months ended March 31, 1998, an increase of $0.4
million or 44.7%. Approximately 30.6% of the increase is attributable to 1997
Acquisitions. Higher specialty services revenues that typically require more
expensive supplies accounted for the majority of the remaining increase.
Expressed as a percentage of patient revenues, dental supplies and laboratory
fees increased from 8.7% for the 1997 period to 9.1% for the 1998 period
resulting primarily from the increase in specialty services.
RENT AND LEASE EXPENSe - Rent and lease expense increased from $0.6
million for the three months ended March 31, 1997, to $0.8 million for the
three months ended March 31, 1998, an increase of $0.2 million or 19.2%. The
increase is attributable to the opening of four new de novo centers in Texas
during the later part of 1997 and the first quarter 1998 and the 1997
Acquisitions. Expressed as a percentage of patient revenues, rent and lease
expense decreased from 6.1 % for the 1997 period to 5.2% for the 1998 period.
ADVERTISING AND MARKETING - Advertising and marketing expense increased
from $0.5 million in the first quarter of 1997 to $0.6 million for the first
quarter of 1998, an increase of $0.1 million or 15.7%. The increase was
attributable primarily to the 1997 Acquisitions. Expressed as a percentage of
patient revenues, advertising and marketing decreased from 4.9% for the 1997
period to 4.1% for the 1998 period.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased
from $0.4 million for the three months ended March 31, 1997, to $0.6 million
for the same period of 1998, and increase of $0.2 million or 45.4%. The
increase is attributable to higher depreciation and amortization of goodwill
related to the 1997 Acquisitions, the opening of four new de novo offices in
Texas during the last half of 1997 and early 1998 and the opening of a
regional office in Austin, Texas.
OTHER OPERATING EXPENSES - Other operating expenses increased from $0.9
million for the three months ended March 31, 1997, to $1.4 million for the
three months ended March 31, 1998, and increase of $0.5 million or 60.9%.
Other operating expenses include certain expenses related to the operation of
the Company's dental centers and bad debt expense incurred in financing of
patient receivables at the affiliated dental practices. Provisions for bad
debt expense from the 1997 Acquisitions and the Company's additional Houston
dental offices accounted for most of the increase. Expressed as a percentage
of patient revenues, other operating expenses increased from 8.2% for the
first quarter of 1997 to 9.5% for the comparable period of 1998.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $1.5 million for the three months ended March 31, 1997, to
$1.9 million for the three months ended March 31, 1998, and increase of $0.4
million or 27.4%. The increase resulted from opening a regional office in
Austin, Texas and increased personnel and general corporate expenses at the
Company's headquarters in Houston. Expressed as a percentage of patient
revenues, general and administrative expense decreased from 13.9% for the
three months ended March 31, 1997 to 12.8% for the 1998 period.
-10-
INTEREST EXPENSE - Interest expense decreased from $0.8 million for the
first quarter of 1997 to $0.1 million for the first quarter of 1998. In
September 1997 the Company repaid approximately $23.9 million in debt with
proceeds of the initial public offering of the Company's common stock. The
Company has borrowed additional funds during 1998 in connection with certain
acquisitions (Note 4 of Notes to the Consolidated Financial Statements),
accordingly management anticipates that interest expense will increase
throughout the year.
INCOME TAXES - The provision for income taxes was $12,000 for the three
months ended March 31, 1997, compared to $0.3 million for the same period of
1998. The increase in the provision for income taxes results from increased
pre-tax earnings. The estimated effective tax rate for 1998 is 32.0% which is
lower then statutory tax rates due to adjustments to the Company's net
operating loss carry forwards that totaled $6.0 million at December 31, 1997.
PREFERRED STOCK ACCRETION - At March 31, 1997, the Company had outstanding
Series A Preferred Stock that the holders converted to common stock
coincident with the completion of the Company's initial public offering in
September 1997. During the first quarter of 1997 the Company recorded an
approximately $0.2 million non-cash dividend, representing the difference
between the recorded value of the Preferred Stock and its redemption value.
As the Preferred Stock was converted to common stock in September 1997 no
accretion was recorded for the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had net working capital of $3.8 million,
representing a decrease in working capital of $0.1 million from the December
31, 1997, net working capital of $3.9 million. Current assets consisted of
cash and cash equivalents of $1.8 million, billed and unbilled accounts
receivable of $10.1 million and prepaid expenses and other current assets of
$1.2 million. These current assets were partially offset by current
liabilities of $9.3 million, consisting of $6.6 million in accounts payable
and accrued liabilities, $2.3 million in current maturities of long-term debt
and $526,000 of deferred compensation payable to a stockholder.
For the three months ended March 31, 1997 and 1998, cash provided by
operating activities was $1.3 million and $0.5 million, respectively. In the
three months ended March 31, 1997, cash used in investing activities amounted
to $0.4 million primarily for capital expenditures. For the three months
ended March 31, 1998, cash used in investing activities was $14.6 million,
consisting primarily of $13.1 million to fund acquisitions and $1.7 million
for capital expenditures. For the three months ended March 31, 1997, cash
used in financing activities was $22,000, primarily from net payments of
long-term debt. For the three months ended March 31, 1998, cash provided by
financing activities totaled $13.0 million representing $14.7 million in
advances under the Company's bank credit agreement, offset partially by $1.7
million in repayments of long term debt.
During the first three months of 1998, the Company's principal sources of
liquidity consisted of cash and cash equivalents, net accounts receivable and
borrowing availability under the Company's bank credit facility. The Company
maintains a credit agreement with its bank (the "Credit Agreement") which
provides for borrowing up to $42.5 million and matures November 2002.
Borrowings under the Credit Agreement may at no time exceed a specified
borrowing base, which is calculated as a multiple of the Company's earnings
before taxes, depreciation and amortization ("EBITDA"), as adjusted. Under
the Credit Agreement an original $3.0 million term loan is payable in sixteen
quarterly payments beginning March 1998, while future advances require
quarterly interest payments through November 1999 when principal becomes
payable based on a five-year amortization and a final payment at maturity.
The Credit Agreement bears interest at variable rates, which are based upon
(a) either (i) the bank's base rate or (ii) LIBOR plus (b) a margin which
varies according to the ratio of the Company's funded debt to EBITDA, each as
defined in the Credit Agreement. A commitment fee is payable quarterly at
rates ranging from 0.125% to 0.5% of the unused amounts for such quarter. The
Credit Agreement is collateralized by substantially all of the Company's
assets and contains affirmative and negative covenants that require the
Company to maintain certain financial ratios, sale of assets and restrict the
payments of dividends. At March 31, 1998, approximately $17.6 million was
outstanding under the Credit Agreement.
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In March 1998, the Company acquired Dental World, Inc. a dental practice
management company located in Houston, Texas. On March 30, 1998, the Company
acquired an 80.0% interest in DCS a dental practice management company
headquartered in Los Angeles California. Total consideration for the
acquisitions amounted to $20.3 million, consisting of cash, 8.0% subordinated
seller notes payable and Company common stock. The Company anticipates that
the consideration for future acquisitions will consist of a combination of
cash, borrowings under the Company's Credit Agreement, the issuance of
Company common stock, the issuance of seller notes and the assumption of
existing indebtedness of the acquired business. The Company anticipates
making ongoing capital expenditures of approximately $3.0 million during the
remainder of 1998, primarily to develop new dental centers in its existing
markets.
Management believes that cash flow from operations and borrowings
available under the Credit Agreement should be sufficient to meet its
anticipated capital expenditures and other operating requirements and to fund
anticipated acquisitions for the next twelve months. However, because future
cash flows and the availability of financing are subject to a number of
variables, such as the number and size of acquisitions made by the Company,
the Company's financial performance and other factors, there can be no
assurance that the Company's capital resources will be sufficient to maintain
currently planned levels of capital expenditures or to fund future
acquisitions. Additional debt and equity financing may be required in
connection with future acquisitions. The availability of these capital
sources will depend on prevailing market conditions and interest rates and
the then-existing financial condition of the Company.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July and August 1997, a dentist from whom the Company acquired Horizon
Dental Centers in August 1996, contacted the Company asserting that the
Company misrepresented the value of the Common Stock issued to him as a
part of the consideration for the acquisition and demanded the issuance of
approximately 200,000 shares of Common Stock as additional consideration
for the transaction. The Company believes that these asserted claims are
without merit and has denied the demand for the issuance of additional
shares of Common Stock. In the event, that litigation is initiated against
the Company, the Company intends to defend itself vigorously. In the
opinion of management, resolution of these claims will not have a material
adverse effect on the Company's financial position, results of operations
or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable..
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this report:
27 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASTLE DENTAL CENTERS, INC.
Date: May 14, 1998 By: JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chief Executive Officer
Date: May 14, 1998 By: JOHN M. SLACK
John M. Slack
Chief Financial Officer
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