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 June 30, 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 August 14, 1998 was 6,696,029.
CASTLE DENTAL CENTERS, INC.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1997 and June 30, 1998......................... 3
Consolidated Statements of Operations For the Three
Months and Six Months Ended June 30, 1997 and 1998.......... 4
Condensed Consolidated Statements of Cash Flows For the
Six Months Ended June 30, 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..................................... 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...................... 16
SIGNATURES............................................................. 16
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PART I: FINANCIAL INFORMATION
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, JUNE 30,
1997 1998
-------- --------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 2,908 $ 3,958
Patient receivables, net........................ 5,841 7,845
Unbilled patient receivables, net............... 2,521 2,834
Prepaid expenses and other current assets....... 838 1,017
-------- --------
Total current assets....................... 12,108 15,654
-------- --------
Property and equipment, net........................ 5,189 9,113
Intangible assets, net............................. 25,565 44,714
Other assets....................................... 526 639
Deferred income taxes, net......................... 1,125 262
-------- --------
Total assets................................ $ 44,513 $ 70,382
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and
capital lease obligations .................... $2,598 $ 1,429
Accounts payable and accrued liabilities........ 4,935 7,420
Deferred compensation payable, related party.... 658 526
-------- --------
Total current liabilities.................. 8,191 9,375
-------- --------
Long-term debt and capital lease obligations,
net of current portion .......................... 2,607 21,611
Other long-term liabilities, related party......... 1,052 789
Minority interest.................................. -- 241
Preferred stock, $.001 par value, 5,000,000
shares authorized; 119,231 shares Series B
issued and outstanding December 31, 1997 and
June 30, 1998.................................... 1,550 1,550
Stockholders' equity:
Common stock, $.001 par value, 30,000,000
shares authorized; 6,229,239 and 6,660,039
shares issued and outstanding, respectively.... 6 7
Additional paid-in capital....................... 40,818 45,077
Accumulated deficit.............................. (9,711) (8,268)
-------- --------
Total stockholders' equity.................. 31,113 36,816
-------- --------
Total liabilities and stockholders' equity......... $ 44,513 $ 70,382
======== ========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1998 1997 1998
-------- -------- -------- --------
Patient revenues of affiliated dental practices ................ $ 10,871 $ 19,679 $ 21,327 $ 34,220
Amounts retained by affiliated dental practices ................ 2,333 4,538 4,746 8,285
-------- -------- -------- --------
Net revenues ................................................... 8,538 15,141 16,581 25,935
-------- -------- -------- --------
Expenses:
Clinic salaries ................................................ 2,551 4,447 4,989 7,638
Dental supplies and laboratory fees ............................ 1,056 1,973 1,967 3,291
Rental and lease expense ....................................... 621 996 1,258 1,755
Advertising and marketing ...................................... 518 800 1,031 1,394
Depreciation and amortization .................................. 536 987 963 1,608
Other operating expenses ....................................... 928 1,962 1,784 3,340
General and administrative ..................................... 1,589 2,263 3,047 4,121
-------- -------- -------- --------
Total expenses .......................................... 7,799 13,428 15,039 23,147
-------- -------- -------- --------
Operating income ............................................... 739 1,713 1,542 2,788
Interest expense ............................................... (905) (493) (1,683) (617)
Interest expense, related party ................................ -- (58) -- (58)
Other income ................................................... 3 3 12 26
-------- -------- -------- --------
Income (loss) before income taxes .............................. (163) 1,165 (129) 2,139
Provision (benefit) for income taxes ........................... (62) 384 (49) 696
-------- -------- -------- --------
Net income (loss) .............................................. (101) 781 (80) 1,443
Preferred stock accretion ...................................... (159) -- (309) --
-------- -------- -------- --------
Income (loss) attributable to common stock ..................... $ (260) $ 781 $ (389) $ 1,443
======== ======== ======== ========
Income (loss) per common share:
Net Income
Basic.................................................... $ (0.03)(1) $ 0. 12 $ (0.02)(1) $ 0.22
======== ======== ======== ========
Diluted.................................................. $ (0.03)(1) $ 0.12 $ (0.02)(1) $ 0.22
======== ======== ======== ========
Weighted average number of common and
Common equivalent shares outstanding
Basic ................................................... 3,308 6,660 3,308 6,448
======== ======== ======== ========
Diluted.................................................. 3,308 6,704 3,308 6,461
======== ======== ======== ========
(1) Per share information differs from less attributable to common stock
dividend by weighted average number of common and common equivalent shares
outstanding because accretion of the preferred stock is added back to the
loss attributable to common stock under the if-converted method of arriving
at common equivalent shares outstanding.
The accompanying notes are an integral part of the
consolidated financial statements.
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CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
SIX MONTHS ENDED JUNE 30,
------------------------
1997 1998
------- --------
Net cash provided by operating activities ........... $ 1,076 $ 3,050
Investing activities:
Capital expenditures ............................. (443) (2,889)
Acquisition of affiliated practices,
net of cash acquired ........................... -- (12,905)
Escrow deposit ................................... (1,000) --
------- --------
Net cash used by investing activities ............... (1,443) (15,794)
------- --------
Financing activities:
Payments of long-term debt and capital
lease obligations .............................. (148) (1,747)
Proceeds from debt, related party ................ 2,000 --
Proceeds from debt ............................... 70 15,541
Offering costs ................................... (146) --
------- --------
Net cash provided by financing activities ........... 1,776 13,794
------- --------
Net change in cash and cash equivalents ...... 1,409 1,050
Cash and cash equivalents, beginning of period ...... 79 2,908
------- --------
Cash and cash equivalents, end of period ............ $ 1,488 $ 3,958
======= ========
Supplemental Cash Flow Information:
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of capital lease obligation for
purchase of property and equipment ......... $ 357 $ --
Issuance of note payable for purchase of
property and equipment ...................... -- 276
Issuance of preferred stock in
connection with related party financing .... 1,144 --
Series A Preferred Stock Accretion ........... 309 --
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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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 June 30,
1998 and for the three and six months ended June 30, 1997 and 1998 include the
accounts of the Company and its wholly owned management company subsidiaries and
the affiliated professional corporations. 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. 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 10-K 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.
RECENT FASB PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 131
establishes standards for the way that public enterprises report segment
information in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports to shareholders. These statements are both effective for fiscal years
beginning after December 15, 1997. The Company does not believe implementation
of SFAS Nos. 130 and 131 will have a material effect on its financial position,
results of operation or cash flows.
2. EARNINGS PER SHARE:
In June 1997, the Company's Board of Directors declared and the stockholders
approved a 1-for-2 reverse split of the Company's common stock. All share and
per share information in the accompanying consolidated financial statements have
been retroactively restated to reflect the effects of the reverse stock split.
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 the three and six months ended June 30, 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.
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.
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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 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 40,454 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 the Company's 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 June 30, 1998, approximately $18.6 million was
outstanding under the Credit Agreement.
In March 1998, the company issued $2.7 million in 8.0% subordinated notes
("Seller Notes") (Note 2) in conjunction with an acquisition. The Seller Notes
are payable in quarterly installments of $134,458 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 August 1998, the former owner of certain dental practices acquired by the
Company in August 1996, filed a lawsuit against the Company in the 190th
District Court of Harris County, Texas. The lawsuit alleges that the Company
committed various acts of fraud, securities fraud, conspiracy, breach of
contract and misrepresentation concerning the value of the Company's common
stock issued in the acquisition of the dental practices. The lawsuit seeks
damages and exemplary damages in the amount of $11 million. The Company believes
that the asserted claims are without merit and 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-
6. SUBSEQUENT EVENTS
In July and August 1998, the Company acquired the assets of three dental
practices and the stock of a dental management company, all located in Florida,
and acquired the stock of two dental practices in the Los Angeles area.
Consideration for these acquisitions consisted of a combination of cash, notes
and stock of approximately $4.1 million.
ITEM 2. 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 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 PROSPECTUS, DATED SEPTEMBER 12, 1997, AS FILED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
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 June 30, 1998, the Company managed 58 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 includes 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
-8-
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.
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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
of Austin, Texas in September 1997, and two individual practices located in Fort
Worth, Texas and Nashville, Tennessee in December 1997. 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. All of the
acquisitions are referred to herein as the "Completed Acquisitions". 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 10-K filed with the Securities and Exchange Commission, as well as the
Unaudited Consolidated Financial Information, included in this Form 10-Q.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1998 1997 1998
------ ------ ------ ------
Patient revenues of affiliated dental practices ................ 100.0% 100.0% 100.0% 100.0%
Amounts retained by affiliated dental practices ................ 21.5% 23.1% 22.3% 24.2%
------ ------ ------ ------
Net revenues ................................................... 78.5% 76.9% 77.7% 75.8%
------ ------ ------ ------
Expenses:
Clinical salaries .............................................. 23.5% 22.6% 23.4% 22.3%
Dental supplies and laboratory fees ............................ 9.7% 10.0% 9.2% 9.6%
Rental and lease expense ....................................... 5.7% 5.1% 5.9% 5.1%
Advertising and marketing ...................................... 4.8% 4.1% 4.8% 4.1%
Depreciation and amortization .................................. 4.9% 5.0% 4.5% 4.7%
Other operating expenses ....................................... 8.5% 10.0% 8.4% 9.8%
General and administrative .................................. 14.6% 11.4% 14.3% 12.1%
------ ------ ------ ------
Total expenses .......................................... 71.7% 68.2% 70.5% 67.7%
------ ------ ------ ------
Operating income ........................................ 6.8% 8.7% 7.2% 8.1%
Interest expense ............................................... (8.3%) (2.4%) (7.9%) (1.8%)
Interest expense, related party ................................ 0.0% (0.3%) 0.0% (0.2%)
Other income ................................................... 0.0% 0.0% 0.1% 0.1%
------ ------ ------ ------
Income(loss) before income taxes ............................... (1.5%) 6.0% (0.6%) 6.2%
Provision(benefit) for income taxes ............................ (0.6%) 2.0% (0.2%) 2.0%
------ ------ ------ ------
Net profit(loss) ............................................... (0.9%) 4.0% (0.4%) 4.2%
Preferred stock accretion ...................................... (1.5%) 0.0% (1.4%) 0.0%
------ ------ ------ ------
Net profit(loss) attributable to common stock .................. (2.4%) 4.0% (1.8%) 4.2%
====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES - Patient revenues of
affiliated dental practices increased from $10.9 million to $19.7 million, an
increase of $8.8 million or 81.0%. Approximately, $5.9 million of the increase
was attributable to the Completed Acquisitions. The opening of seven de novo
offices in Houston, Austin, and Nashville contributed $1.4 million in patient
revenues and dental centers open more than one year realized increased patient
revenues of $1.5 million, or 13.8%, above comparable levels in the year earlier
period.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES - Amounts retained by
affiliated dental practices consists primarily of compensation paid to dentists,
orthodontists, and hygienists employed by the affiliated dental practices. For
the three months ended June 30, 1998, amounts retained by affiliated dental
practices were $4.5 million, an increase of $2.2 million or 94.5% from the
comparable period of 1997. The increase was due primarily to the
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Completed Acquisitions, staffing of new dental centers and increased dentist
compensation resulting from higher patient revenues. Expressed as a percentage
of patient revenues, amounts retained by affiliated dental practices increased
from 21.5% for the three months ended June 30, 1997 to 23.1% from the comparable
1998 period.
NET REVENUES - For the three months ended June 30, 1998, net revenues were
$15.1 million, an increase of $6.6 million or 77.3%. The Completed Acquisitions
and de novo dental centers contributed $5.7 million to the increase. Expressed
as a percentage of patient revenues, net revenues decreased from 78.5% for the
three months ended June 30, 1997 to 76.9% for the same 1998 period.
CLINIC SALARIES - Clinic salaries increased from $2.6 million for the three
months ended June 30, 1997, to $4.4 million for the three months ended June 30,
1998, an increase of $1.8 million or 74.3%. The Completed Acquisitions and de
novo dental centers accounted for approximately $1.6 million of the increase in
clinical salaries. Expressed as a percentage of patient revenues, clinic
salaries decreased from 23.5% for the second quarter of 1997 to 22.6% for the
second quarter of 1998.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $1.1 million for the three months ended June 30, 1997 to $2.0
million for the three months ended June 30, 1998, an increase of $0.9 million or
86.9%. Approximately 90.0% of the increase is attributable to the Completed
Acquisitions and the new dental centers. Expressed as a percentage of patient
revenues, dental supplies and laboratory fees increased from 9.7% for the 1997
period to 10.0% for the 1998 period.
RENT AND LEASE EXPENSe - Rent and lease expense increased from $0.6 million
for the three months ended June 30, 1997, to $1.0 million for the three months
ended June 30, 1998, an increase of $0.4 million or 60.4%. The Completed
Acquisitions accounted for $0.3 million of the increase with the opening of
seven de novo centers in Texas and Tennessee accounting for the balance of the
increase. Expressed as a percentage of patient revenues, rent and lease expense
decreased from 5.7 % for the 1997 period to 5.1% for the 1998 period.
ADVERTISING AND MARKETING - Advertising and marketing expense increased from
$0.5 million in the second quarter of 1997 to $0.8 million in the second quarter
of 1998, an increase of $0.3 million or 54.5%. Over 50% of the increase is
attributable to direct mail advertising incurred in the opening of new dental
centers, with the Completed Acquisitions accounting for the balance. Expressed
as a percentage of patient revenues, advertising and marketing decreased from
4.8% for the 1997 period to 4.1% for the 1998 period.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$0.5 million for the three months ended June 30, 1997, to $1.0 million for the
same period of 1998, an increase of $0.5 million or 84.1%. Most of the increase
is attributable to depreciation of fixed assets and amortization of goodwill
related to the Completed Acquisitions. Expressed as a percentage of patient
revenues, depreciation and amortization increased from 4.9% for the 1997 period
to 5.0% for the 1998 period.
OTHER OPERATING EXPENSES - Other operating expenses increased from $0.9
million for the three months ended June 30, 1997, to $2.0 million for the three
months ended June 30, 1998, an increase of $1.1 million or 111.5%. 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. Higher provision for bad debts
accounted for $0.2 million of the increase and was attributed to the Completed
Acquisitions. The remainder of the increase was attributed to higher monthly
communications and data processing expenses related to new management
information systems and other operating expenses at the acquired dental centers.
Expressed as a percentage of patient revenues, other operating expenses
increased from 8.5% for the second quarter of 1997 to 10.0% for the comparable
period of 1998.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $1.6 million for the three months ended June 30, 1997, to $2.3
million for the three months ended June 30, 1998, an increase of $0.7 million,
or 42.4%. Approximately $0.4 million of the increase resulted from the
acquisitions in Houston and California that were completed in March 1998. Higher
corporate and regional administrative overhead accounted for the balance of the
increase to support the Company's infrascture. Expressed as a percentage of
patient revenues,
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general and administrative expense decreased from 14.6% for the three months
ended June 30, 1997 to 11.4% for the 1998 period.
INTEREST EXPENSE - Interest expense decreased from $0.9 million for the
second quarter of 1997 to $0.5 million for the second quarter of 1998. The
decrease is attributable to the repayment of approximately $23.9 million in debt
in September 1997 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 a benefit of $0.1 million
for the three months ended June 30, 1997, compared to a provision for income
taxes of $0.4 million for the three months ended June 30, 1998. The increase in
the provision for income taxes results from increased pre-tax earnings. The
estimated effective tax rate of 33.0% for the three months ended June 30, 1998
is lower than statutory tax rates due to realization of the Company's net
operating loss carryforwards 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 three months ended June 30, 1997, the Company recorded a $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.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES - Patient revenues of
affiliated dental practices increased from $21.3 million for the six months
ended June 30, 1997 to $34.2 million for the same period in 1998, an increase of
$12.9 million or 60.6%. The increase was primarily attributable to the Completed
Acquisitions, which accounted for $7.7 million of the increase. The opening of
seven de novo offices in Houston, Austin, and Nashville contributed $2.2 million
of the increase. Dental centers that have been open for more than one year had
increased revenue of $3.0 million, or 14%, above comparable levels in the same
period of 1997.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES - For the six months ended
June 30, 1998, amounts retained by affiliated dental practices were $8.3
million, an increase of $3.4 million or 74.6% from the comparable period of
1997. Completed Acquisitions accounted for $1.9 million of the increase.
Staffing of new dental centers and increased dentist compensation resulting from
higher patient revenues accounted for $1.6 million of the increase. Expressed as
a percentage of patient revenues, amounts retained by affiliated dental
practices increased from 22.3% for the three months ended June 30, 1997 to 24.2%
from the comparable 1998 period.
NET REVENUES - For the six months ended June 30, 1998, net revenues were
$25.9 million, an increase of $9.5 million or 56.4%. The Completed Acquisitions
and de novo dental centers contributed $7.6 million of the increase. Expressed
as a percentage of patient revenues, net revenues decreased from 77.7% for the
six months ended June 30, 1997 to 75.8% for the same period of 1998.
CLINIC SALARIES - Clinic salaries increased from $5.0 million for the six
months ended June 30, 1997, to $7.6 million for the six months ended June 30,
1998, an increase of $2.6 million or 53.1%. The Completed Acquisitions accounted
for approximately $1.7 million, or 65.6%, of the increase in clinical salaries.
Expressed as a percentage of patient revenues, clinic salaries decreased from
23.4% for the first six months of 1997 to 22.3% for the same period of 1998.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $2.0 million for the six months ended June 30, 1997 to $3.3
million for the six months ended June 30, 1998, an increase of $1.3 million or
67.3%. Approximately $0.8 million of the increase is attributable to the
Completed Acquisitions and de novo dental centers accounted for $0.3 million of
the increase. Expressed as a percentage of patient revenues, dental
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supplies and laboratory fees increased from 9.2% to 9.6%, for the six month
periods ended June 30, 1997 and 1998, respectively.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $1.3 million
for the six months ended June 30, 1997, to $1.8 million for the same period of
1998, an increase of $0.5 million or 39.5%. The increase is attributable to the
opening of de novo dental centers and the Completed Acquisitions. Expressed as a
percentage of patient revenues, rent and lease expense decreased from 5.9% to
5.1%, for the six month periods ended June 30, 1997 and 1998, respectively.
ADVERTISING AND MARKETING - Advertising and marketing expense increased from
$1.0 million in the six months ended June 30,1997 to $1.4 million for the
comparable period of 1998, an increase of $0.4 million or 35.2%. The increase
was attributable to the increased marketing efforts to promote de novo dental
centers and to the Completed Acquisitions. Expressed as a percentage of patient
revenues, advertising and marketing decreased from 4.8% for the six months ended
June 30, 1997 to 4.1% for the comparable 1998 period.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$1.0 million for the six months ended June 30, 1997, to $1.6 million for the
same period of 1998, an increase of $0.6 million or 66.9%. Approximately $0.4
million or 62.0% of the increase is attributable to the amortization of goodwill
related to the acquisitions. Expressed as a percentage of patient revenues,
depreciation and amortization increased from 4.5% to 4.7%, for the six month
periods ended June 30, 1997 and 1998, respectively.
OTHER OPERATING EXPENSES - Other operating expenses increased from $1.8
million for the six months ended June 30, 1997, to $3.3 million for the three
months ended June 30, 1998, an increase of $1.5 million or 87.2%. Increased bad
debt expense related to the Completed Acquisitions and the Company's
installation of new communications and data systems accounted for the majority
of the increase. Expressed as a percentage of patient revenues, other operating
expenses increased from 8.4% for the period of 1997 to 9.8% for the comparable
period of 1998.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $3.0 million for the six months ended June 30, 1997, to $4.1
million for the six months ended June 30, 1998, an increase of $1.1 million or
35.2%. An increase of $0.4 million resulted from the acquisitions and a $0.7
million increase resulted from higher regional and general corporate expenses at
the Company's headquarters in Houston. Expressed as a percentage of patient
revenues, general and administrative expense decreased from 14.3% for the six
months ended June 30, 1997 to 12.1% for the 1998 period.
INTEREST EXPENSE - Interest expense decreased from $1.7 million for the six
months ended June 30, 1997 to $0.6 million for the corresponding period of 1998.
The decrease resulted from the repayment of approximately $23.9 million in debt
with proceeds of the initial public offering of the Company's common stock in
September 1997. 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 a benefit of $49,000 for
the six months ended June 30, 1997, compared to an expense of $696,000 for the
six months ended 1998. The increase in the provision for income taxes results
from increased earnings before income taxes in the six months ended June 30,
1998 compared to a loss before income taxes of $129,000 in the comparable period
in 1997. The estimated effective tax rate of 32.5% for the six months ended June
30, 1998 is lower than statutory tax rates due to realization of the Company's
net operating loss carryforwards that totaled $6.0 million at December 31, 1997.
PREFERRED STOCK ACCRETION - At June 30, 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 six months ended June 30, 1997, the Company recorded a $0.3 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.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had net working capital of $6.3 million,
representing an increase in working capital of $2.4 million from net working
capital of $3.9 million at December 31, 1997. Current assets consisted of cash
and cash equivalents of $4.0 million, billed and unbilled accounts receivable of
$10.7 million and prepaid expenses and other current assets of $1.0 million.
These current assets were partially offset by current liabilities of $9.4
million, consisting of $7.4 million in accounts payable and accrued liabilities,
$1.4 million in current maturities of long-term debt and $ 0.5 million of
deferred compensation payable to a stockholder.
For the six months ended June 30, 1997 and 1998, cash provided by operating
activities was $1.1 million and $3.1 million, respectively. In the six months
ended June 30, 1997, cash used in investing activities amounted to $1.4 million
primarily to fund acquisitions and capital expenditures. For the six months
ended June 30, 1998, cash used in investing activities was $15.8 million,
consisting primarily of $12.9 million to fund acquisitions and $2.9 million for
capital expenditures. For the six months ended June 30, 1997, cash provided by
financing activities was $1.8 million resulting primarily from proceeds from a
bridge loan from a related party. For the six months ended June 30, 1998, cash
provided by financing activities totaled $13.8 million representing $15.5
million in advances under the Company's bank credit agreement, offset partially
by $1.7 million in repayments of long term debt and capital lease obligations.
During 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 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 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 June 30, 1998, approximately $18.6 million was outstanding under
the Credit Agreement.
On March 24, 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. 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
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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.
RECENT FASB PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 131
establishes standards for the way that public enterprises report segment
information in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports to shareholders. These statements are both effective for fiscal years
beginning after December 15, 1997. The Company does not believe implementation
of SFAS Nos. 130 and 131 will have a material effect on its financial position,
results of operation or cash flows.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In August 1998, the former owner of certain dental practices acquired by
the Company in August 1996, filed a lawsuit against the Company in the
190th District Court of Harris County, Texas. The lawsuit alleges that the
Company committed various acts of fraud, securities fraud, conspiracy,
breach of contract and misrepresentation concerning the value of the
Company's common stock issued in the acquisition of the dental practices.
The lawsuit seeks damages and exemplary damages in the amount of $11
million. The Company believes that the asserted claims are without merit
and 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.
The Company's Annual Meeting of Stockholders was held on May 28, 1998 in
Houston, Texas. A total of 4,700,734 shares, 75.18% of total shares
authorized to vote of 6,252,581, were voted at the meeting. Security
holders voted the following matters on.
1. Election of Directors. The following individuals were elected to serve
as directors until the 1999 annual meeting of stockholders:
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SHARES SHARES
SHARES FOR AGAINST ABSTAIN NOT VOTED
---------- ------- ------- ---------
Jack H. Castle, Jr. 4,690,834 - 9,900 1,551,847
Jack H. Castle, D.D.S 4,690,834 - 9,900 1,551,847
Robert J. Cresci 4,690,634 - 10,100 1,551,847
G. Kent Kahle 4,690,834 - 9,900 1,551,847
Elizabeth A. Tilney 4,690,434 - 10,300 1,551,847
Emmett E. Moore 4,689,834 - 10,900 1,551,847
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2. Amendment to the Company's Omnibus Stock and incentive Plan to increase
the number of shares of common stock available to be granted thereunder
by 300,000 shares, from 750,000 shares to 1,050,000 shares. The
proposal was approved by the stockholders with a vote of 4,106,219
shares for, 583,415 shares against, 11,100 shares abstained, and
1,551,847 not voted.
3. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent certified public accountants for the year ending December
31, 1998. The proposal was approved by the stockholders with a vote of
4,696,134 shares voted for; 1,800 shares voted against, 2,800 shares
abstained, and 1,551,847 not voted.
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this report:
27. Financial Data Schedule.
(b) In the second quarter of 1998, the company filed Forms 8-K and 8-K/A
in connection with the acquisition of an 80% interest in Dental
Consulting Services, L.L.C.
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: August 14,1998 By: JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chief Executive Officer
Date: August 14, 1998 By: JOHN M. SLACK
John M. Slack
Chief Financial Officer