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 September 30, 1997
[ ] 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) 513-1400
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 [ ] No [X]
The number of shares of Common Stock issued and outstanding, par value,
$0.001 per share, as of November 10, 1997 was 6,064,239.
<PAGE>
CASTLE DENTAL CENTERS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1996 and September 30, 1997 ............................. 3
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 1996 and 1997 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1997 ................ 5
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
for the Nine months ended September 30, 1997 ......................... 6
Notes to Consolidated Financial Statements ........................... 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ....................................... 10
PART II
Item 1. Legal Proceedings .............................................. 17
Item 2. Changes in Securities and Use of Proceeds ...................... 17
Item 3. Defaults Upon Senior Securities ................................ 17
Item 4. Submission of Matters to a Vote of Security Holders ............ 18
Item 5. Other Information .............................................. 18
Item 6. Exhibits and Reports on Form 8-K ............................... 18
SIGNATURES ............................................................. 19
-2-
<PAGE>
PART I: FINANCIAL INFORMATION
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................................ $ 79 $ 3,854
Patient receivables, net ................................................................. 3,649 4,823
Unbilled patient receivables, net ........................................................ 1,637 2,465
Prepaid expenses and other current assets ................................................ 326 380
Deferred income taxes, net ............................................................... 284 284
-------- --------
Total current assets ................................................................ 5,975 11,806
-------- --------
Property and equipment, net .................................................................. 3,882 4,831
Intangible assets, net ....................................................................... 16,432 22,724
Other assets ................................................................................. 2,278 190
Deferred income taxes, net ................................................................... 600 668
-------- --------
Total assets ........................................................................ $ 29,167 $ 40,219
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving line of credit ................................................................. $ 1,200 $ --
Current portion of long-term debt and capital lease obligations .......................... 2,370 3,984
Accounts payable and accrued liabilities ................................................. 3,850 3,946
Deferred compensation payable, related party ............................................. 789 526
Due to affiliated dental practices ....................................................... 1,010 808
-------- --------
Total current liabilities ........................................................... 9,219 9,264
-------- --------
Long-term debt and capital lease obligations, net of current portion ......................... 13,616 3,144
Long-term debt related party, net of current portion ......................................... 5,335 --
Other long-term liabilities, related party ................................................... 1,578 1,184
Preferred stock, $.001 par value, 5,000,000 shares authorized;
119,231 shares Series B issued and outstanding September 30, 1997 and
1,244,737 shares Series A and 485,382 shares Series C issued and outstanding
December 31, 1996 ........................................................................ 2,928 1,550
Stockholders' equity (deficit):
Common stock, $.001 par value, 30,000,000 shares authorized;
2,331,996 and 5,780,239 shares issued and outstanding, respectively ...................... 2 6
Additional paid-in capital ................................................................. 3,416 35,794
Accumulated deficit ........................................................................ (6,927) (10,723)
-------- --------
Total stockholders' equity (deficit) ................................................ (3,509) 25,077
-------- --------
Total liabilities and stockholders' equity (deficit) ................................ $ 29,167 $ 40,219
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1996 1997 1996 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Patient revenues of affiliated dental practices ................. $ 9,194 $ 11,727 $ 19,902 $ 33,054
Amounts retained by affiliated dental practices ................. 3,270 3,674 6,656 10,628
------- -------- -------- --------
Net revenues ................................................ 5,924 8,053 13,246 22,426
------- -------- -------- --------
Expenses:
Clinical salaries ........................................... 1,409 1,766 2,768 4,547
Dental supplies and laboratory fees ......................... 904 1,081 2,255 3,047
Rental and lease expense .................................... 511 641 1,001 1,899
Advertising and marketing ................................... 477 520 1,010 1,551
Depreciation and amortization ............................... 383 518 717 1,482
Other operating expenses .................................... 699 1,141 1,743 2,925
General and administrative .................................. 1,211 1,551 2,412 4,598
------- -------- -------- --------
Total expenses ......................................... 5,594 7,218 11,906 20,049
------- -------- -------- --------
Operating income ....................................... 330 835 1,340 2,377
Interest expense ................................................ (333) (232) (688) (1,110)
Interest expense, related party ................................. (356) (674) (1,067) (1,479)
Other income (expense) .......................................... (27) 22 79 33
------- -------- -------- --------
Loss before income taxes and extraordinary item ................. (386) (49) (336) (179)
Benefit for income taxes ........................................ (103) (19) (84) (68)
------- -------- -------- --------
Loss before extraordinary item .................................. (283) (30) (252) (111)
Extraordinary item .............................................. -- (3,685) -- (3,685)
------- -------- -------- --------
Net loss ........................................................ (283) (3,715) (252) (3,796)
Preferred Stock Accretion ....................................... -- (1,621) -- (1,930)
------- -------- -------- --------
Loss attributable to common stock ............................... $ (283) $(5,336) $ (252) $ (5,726)
======= ======== ======== ========
Loss per common share:
Loss before extraordinary item .............................. $ (0.09) $ (0.01) $ (0.08) $ (0.03)
Extraordinary item .......................................... -- (0.96) -- (1.06)
------- -------- -------- --------
Net loss .................................................... $ (0.09) $ (0.97) $ (0.08) $ (1.09)
======= ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding .......................... 3,246 3,828 3,087 3,486
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional Stockholders'
----------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
--------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ........................ 2,331,996 $2 $ 3,416 $ (6,927) $ (3,509)
Issuance of common stock ........................ 2,500,000 3 28,310 -- 28,313
Conversion of Series A Preferred Stock .......... 705,552 1 3,328 -- 3,329
Conversion of Series C Preferred Stock .......... 242,691 - 2,670 -- 2,670
Preferred Stock dividends ....................... -- - (1,930) -- (1,930)
Net Loss ........................................ -- - -- (3,796) (3,796)
--------- ---------- -------- -------- --------
Balance, September 30, 1997 ..................... 5,780,239 $6 $ 35,794 $(10,723) $ 25,077
========= == ======== ======== ========
</TABLE>
-5-
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------
1996 1997
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities .................................... $ 184 $ (441)
Investing activities:
Capital expenditures ............................................................... (1,124) (956)
Proceeds from sale of property & equipment ......................................... 607 --
Acquisition of affiliated practices, net of cash acquired .......................... (10,260) (4,882)
Escrow deposit ..................................................................... (500) --
-------- --------
Net cash used by investing activities .................................................. (11,277) (5,838)
-------- --------
Financing activities:
Payments of long-term debt and capital lease obligations ........................... (520) (20,900)
Proceeds from debt, related party .................................................. -- 2,000
Proceeds from debt ................................................................. 6,550 70
Proceeds from issuance of common stock ............................................. -- 30,225
Offering costs ..................................................................... (439) (1,266)
Debt issuance cost ................................................................. (94) (75)
-------- --------
Net cash provided by financing activities .............................................. 5,497 10,054
-------- --------
Net change in cash and cash equivalents ....................................... (5,596) 3,775
Cash and cash equivalents, beginning of period ......................................... 6,439 79
-------- --------
Cash and cash equivalents, end of period ............................................... $ 843 $ 3,854
======== ========
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 notes payable for accrued interest ................................ -- 450
Series A and Series C Preferred Stock dividends ............................... -- 1,930
Issuance of Series B Preferred Stock in connection
with an acquisition ......................................................... -- 1,550
Issuance of preferred stock in connection
with related party financing ................................................ -- 1,144
Conversion of Series A and Series C Preferred Stock ........................... -- 5,898
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
<PAGE>
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 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
September 30, 1997 and for the nine and three months ended September 30,
1996 and 1997 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.
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 Registration Statement on Form S-1 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:
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 all periods reflect the conversion of
the Series A and Series C Preferred Stock (Note 5) as of the beginning of
the period. The related non-cash dividend recorded in 1997 has been excluded
from the earnings per share calculation. Fully diluted earnings per share
are not presented because such amounts would be the same as amounts computed
for primary earnings per share.
3. ACQUISITIONS:
In June 1997, the Company entered into a management services agreement
and option agreement to acquire all of the membership interest in SW Dental
Associates, LC ("SW Dental"), a group dental practice located in Austin,
Texas. In September 1997, the Company completed the acquisition. The
purchase price, including related acquisition expenses, of approximately
$7.0 million consisted of $5.5 million in cash and $1.5 million in Series B
Preferred Stock (Note 5). The cash portion included $1.5 million in
previously paid non-refundable deposits.
The assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The purchase price and related expenses
exceeded the fair market value of net assets by approximately $6.8 million,
which has been assigned to management services agreements, included in
intangible assets. The Company recognized management fee income from June
1997 until the completion of the acquisition. Patient revenues, management
fees and related costs are included in the consolidated financial statements
from the acquisition date.
-7-
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
At September 30, 1997, long-term debt and capital lease obligations
consisted primarily of $6.2 million due under the Company's Bank Credit
Facility. The Company retired approximately $20.7 million of long-term debt
in September 1997 (Note 5) and an additional $3.2 million in November 1997
(Note 8). In connection with the repayment of $9.5 million in 12% Senior
Subordinated Debt in September 1997, the Company recognized a $3.7 million
extraordinary loss associated with the early retirement of such debt.
In November 1997, the Company entered into a new Credit Agreement with
its existing bank and refinanced the outstanding balance of $3.0 million due
under the previous Bank Credit Facility. The Credit Agreement provides for
borrowings up to $25.0 million and matures November 2002. The $3.0 million
outstanding at November 7, 1997, plus accrued interest, is due in 16
quarterly payments beginning March 15, 1998. Future advances under the
Credit Agreement 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 form 0.125 percent to 0.5 percent 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, limit the creation or existence of liens and set certain
restrictions on acquisitions, mergers, sale of assets and restrict the
payment of dividends.
The current and long-term portions of debt at September 30, 1997, have
been classified in accordance with the November 1997, Credit Agreement.
5. STOCK
COMMON STOCK
On September 12, 1997, the Company completed an initial public
offering of 2,500,000 shares of its common stock at $13.00 per share.
Proceeds of $28.3 million, net of underwriting commission and offering
expenses were used primarily to retire debt and complete the SW Dental
acquisition.
Coincident with the completion of the initial public offering, the
holders of 1,244,737 shares of Series A and 485,382 shares of Series C
Preferred Stock converted such shares into an aggregate of 948,243
shares of Company common stock. During the three and nine month periods
ended September 30, 1997, the Company recorded approximately $1.6
million and $1.9 million, respectively, in non-cash dividends which
represents the accretion of the difference between the recorded value of
the Preferred Stock and the redemption value.
PREFERRED STOCK
In September 1997, the Company issued 119,231 shares of Series B
Convertible Preferred Stock in connection with the acquisition of SW
Dental (Note 3.) The shares issued were equivalent to $1,550,000 divided
by the initial public offering price of the Company's common stock of
$13.00 per share. The Series B Stock is convertible at the holder's
option, for a thirty-day period beginning September 17, 1998, (the
"Conversion Period"), into an equivalent number of shares of the
Company's common stock. Alternatively, during the Conversion Period, the
holder may require the Company to redeem the Series B Stock in quarterly
increments of $114,000. The Company may call the Series B Stock at any
time following the Conversion Period.
-8-
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. STOCK OPTIONS
On August 11, 1997, a majority of the stockholders of the Company signed
a written consent approving the Third Amendment to Castle Dental
Centers, Inc. Omnibus Stock and Incentive Plan. The number of shares
reserved for issuance and available for option under the Castle Dental
Centers, Inc. Omnibus Stock and Incentive Plan was increased to 750,000
shares.
On August 11, 1997, a majority of the stockholders of the Company signed
a written consent approving the Second Amendment to 1996 Castle Dental
Centers, Inc. Non-Employee Directors Stock Option. The number of shares
reserved for issuance and available for option under the Castle Dental
Centers, Inc. Non-Employee Directors Stock Option Plan was increased to
150,000 shares.
7. 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 1997, the former owner of Horizon Dental Centers, who is
employed by the Company as a regional manager, 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 to him of approximately 200,000 additional
shares. The Company believes that these claims for additional
consideration from the sale of Horizon Dental Centers are without merit.
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.
8. SUBSEQUENT EVENT
In October 1997, the Company's underwriters exercised the
over-allotment option granted by the Company in the initial public
offering. In connection therewith, the Company issued 284,000 shares of
Company common stock at $13.00 per share resulting in net proceeds of
$3.4 million after underwriter discount. The net proceeds were used to
repay $3.2 million in long-term debt due under the Company's Bank Credit
Facility.
9. 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.
-9-
<PAGE>
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 and Tennessee. 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 November 1, 1997, the
Company managed 41 dental centers with 110 affiliated dentists, orthodontists
and specialists.
The Company's objective is to make each of its dental networks the
leading group dental care provider in each market it serves. The Company applies
traditional retail principles of business to the practice of dentistry,
including situating practices in high-profile locations, offering affordable
fees and payment plans, expanding the range of services offered, increasing
market share through targeted advertising and offering extended office hours. By
using the Castle Dental Centers' approach to managing affiliated dental
practices, the Company believes it will enable affiliated dentists,
orthodontists and other dental specialists to focus on delivering quality
patient care and to realize greater productivity than traditional retail and
small group dental practices.
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 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.
-10-
<PAGE>
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 1st Dental Care of
Clearwater, Florida in May 1996, Mid-South Dental of Nashville, Tennessee in May
1996, Horizon Dental Centers of Ft. Worth and Austin, Texas in August 1996 and
Southwest Dental Associates of Austin, Texas in September 1997 (all of which are
collectively referred to as "Completed Acquisitions"). The information that
follows should be read in conjunction with the Annual Audited Financial
Statements of the Company included in the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission and notes thereto, as
well as the Unaudited Consolidated Financial Information, included in this Form
10Q.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Patient revenues of affiliated dental practices ................ 100.0% 100.0% 100.0% 100.0%
Amounts retained by affiliated dental practices ................ 35.6% 31.3% 33.4% 32.1%
--------- --------- --------- ---------
Net revenues ............................................... 64.4% 68.7% 66.6% 67.9%
--------- --------- --------- ---------
Expenses:
Clinical salaries .......................................... 15.2% 15.1% 13.9% 13.8%
Dental supplies and laboratory fees ........................ 9.8% 9.2% 11.3% 9.2%
Rental and lease expense ................................... 5.6% 5.5% 5.0% 5.7%
Advertising and marketing .................................. 5.2% 4.4% 5.1% 4.7%
Depreciation and amortization .............................. 4.2% 4.5% 3.6% 4.5%
Other operating expenses ................................... 7.6% 9.7% 8.8% 8.9%
General and administrative ................................. 13.2% 13.2% 12.1% 13.9%
--------- --------- --------- ---------
Total expenses ........................................ 60.8% 61.6% 59.9% 60.7%
--------- --------- --------- ---------
Operating income ...................................... 3.6% 7.1% 6.7% 7.2%
Interest expense ............................................... (7.5%) (7.7%) (8.8%) (7.8%)
Other income (expense) ......................................... (0.3%) 0.2% 0.4% 0.1%
--------- --------- --------- ---------
Loss before income taxes and extraordinary item ................ (4.2%) (0.4%) (1.7%) (0.5%)
Benefit for income taxes ....................................... (1.1%) (0.1%) (0.4%) (0.2%)
--------- --------- --------- ---------
Loss before extraordinary item ................................. (3.1%) (0.3%) (1.3%) (0.3%)
Extraordinary item ............................................. 0.0% (31.4%) 0.0% (11.2%)
--------- --------- --------- ---------
Net loss ....................................................... (3.1%) (31.7%) (1.3%) (11.5%)
Preferred stock dividends ...................................... 0.0% (12.9%) (0.0%) (5.5%)
--------- --------- --------- ---------
Net loss attributable to common stock .......................... (3.1%) (44.6%) (1.3%) (17.0%)
========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES -- Patient revenues of
affiliated dental practices increased from $9.2 million for the three months
ended September 30, 1996 to $11.7 million for the three months ended September
30, 1997, an increase of $2.5 million or 27.6%. This increase resulted partially
from the acquisitions of Southwest Dental Associates ("Southwest") in September
1997 and Horizon Dental Centers ("Horizon") in August 1996, which contributed an
aggregate of $1.3 million to the increase in patient revenues. Patient revenues
of the Company's affiliated dental practices in Houston, Tennessee and Florida
increased by $1.2 million, or 15.4%, resulting from the opening of two de novo
offices in Houston and the expansion of specialty services.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES - For the three months
ended September 30, 1997, amounts retained by affiliated dental practices were
$3.7 million, an increase of $0.4 million or 12.4% from the third quarter 1996.
The increase was primarily due to the Southwest and Horizon acquisitions.
Expressed as a
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percentage of patient revenues, amounts retained by affiliated dental practices
decreased from 35.6% to 31.3% for the three month periods ended September 30,
1996 and 1997, respectively, due to lower average compensation paid to dentists
and other dental care personnel.
NET REVENUES - For the three months ended September 30, 1997, net
revenues were $8.1 million, an increase of $2.1 million, or 35.9%, from the
three-month period ended September 30, 1996. As a percentage of patient
revenues, net revenues increased from 64.4% to 68.7% for the three months ended
September 30, 1996 and 1997, respectively.
CLINICAL SALARIES -- Clinical salaries increased from $1.4 million for
the three months ended September 30, 1996 to $1.8 million for the three months
ended September 30, 1997, an increase of $357,000 or 25.3%. The Southwest and
Horizon acquisitions accounted for most of the increase. Expressed as a
percentage of patient revenues, clinical salaries decreased from 15.2% to 15.1%
for the three-month period ended September 30, 1996 and 1997, respectively.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory
fees increased from $0.9 million for the three months ended September 30, 1996
to $1.1 million for the three months ended September 30, 1997, an increase of
$177,000 or 19.6%. This increase resulted primarily from the Southwest and
Horizon acquisitions. Expressed as a percentage of patient revenues, dental
supplies and laboratory fees decreased from 9.8% to 9.2% for the three month
periods ended September 30, 1996 and 1997, respectively.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $511,000
for the three months ended September 30, 1996 to $641,000 for the three months
ended September 30, 1997, an increase of $130,000 or 25.5%. Rental expense from
the Southwest and Horizon acquisitions accounted for $70,000 of the increase.
The addition of two de novo dental centers in Houston and the expansion of
dental facilities in Tennessee accounted for the balance. Expressed as a
percentage of patient revenues, rental and lease expense decreased from 5.6% to
5.5% for the three month periods ended September 30, 1996 and 1997,
respectively.
ADVERTISING AND MARKETING - Advertising and marketing expense increased
from $477,000 for the three months ended September 30, 1996 to $520,000 for the
three months ended September 30, 1997, an increase of $43,000 or 9.1%. The
Southwest and Horizon acquisitions accounted for the increase. Expressed as a
percentage of patient revenues, however, advertising and marketing costs
decreased from 5.2% to 4.4% for the three month periods ended September 30, 1996
and 1997, respectively, due primarily to lower television advertising
expenditures in Houston.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased
from $383,000 for the three months ended September 30, 1996 to $518,000 for the
three months ended September 30, 1997, an increase of $135,000 or 35.2%,
primarily resulting from the Horizon and Southwest acquisitions and increased
depreciation expense related to the opening of de novo dental centers in
Houston. As a percentage of patient revenues, depreciation and amortization
increased from 4.2% to 4.5% for the three month periods ended September 30, 1996
and 1997, respectively.
OTHER OPERATING EXPENSES - Other operating expenses increased from $0.7
million for the three months ended September 30, 1996 to $1.1 million for the
three months ended September 30, 1997, an increase of $0.4 million, or 63.3%.
Other operating expenses include certain expenses related to the operation of
the Company's dental centers and bad debt expense incurred in the financing of
patient receivables at the affiliated dental practices. Expressed as a
percentage of revenues, other operating expenses increased from 7.6% to 9.7% for
the three-month periods ended September 30, 1996 and 1997, respectively.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $1.2 million for the three months ended September 30, 1996 to
$1.6 million for the three months ended September 30, 1997, an increase of $0.3
million, or 28.1%. The increase resulted from the addition of general and
administrative expenses of the Southwest and Horizon acquisitions, as well as
increased personnel and general corporate expenses at the Company's headquarters
in Houston. Expressed as a percentage of patient revenues, general and
administrative expenses were 13.2% for the three-month period ended September
30, 1997, unchanged from the prior year period.
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INTEREST EXPENSE - Interest expense increased from $689,000 for the
three months ended September 30, 1996 to $906,000 for the three months ended
September 30, 1997, an increase of $217,000, or 31.4%. Increased borrowings
related to acquisitions and higher subordinated debt accounted for most of the
increase. Expressed as a percentage of patient revenues, interest expense
increased from 7.5% to 7.7% for the three-month periods ended September 30, 1996
and 1997, respectively.
INCOME TAXES - The Company recorded a benefit for income taxes of
$19,000 in the three month period ended September 30, 1997 compared with a
benefit for income taxes of $103,000 recorded in the prior year period, due to
lower losses before income taxes and extraordinary item.
EXTRAORDINARY ITEM - In September 1997, the Company recorded an
extraordinary loss of $3.7 million related to the early retirement of the
Company's 12% Senior Subordinated Notes in the aggregate amount of $10.5 million
including accrued interest and interest notes. The Senior Subordinated Notes had
been issued in December 1995 and in June 1997 in original principal amounts of
$7.5 million and $2.0 million, respectively.
PREFERRED STOCK DIVIDENDS - Coincident with the completion of the
initial public offering, the holders of the Company's Series A and Series C
Preferred Stock converted such shares into an aggregate of 948,243 shares of
Company common stock. During the three month period ended September 30, 1997,
the Company recorded $1.6 million in non-cash dividends, representing the
accretion of the difference between the recorded value of the Preferred Stock
and its redemption value.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES - Patient revenues of
affiliated dental practices increased from $19.9 million for the nine months
ended September 30, 1996 to $33.1 million for the nine months ended September
30, 1997, an increase of $13.2 million or 66.1%. Approximately $12.2 million of
the increase was attributable to the Completed Acquisitions. Patient revenues in
Houston increased from $14.1 million in the first nine months of 1996 to $15.0
million in the first nine months of 1997, primarily the result of the opening of
two new dental centers in Houston in December 1996 and July 1997.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES - For the nine months ended
September 30, 1997, amounts retained by affiliated dental practices were $10.6
million, an increase of $4.0 million or 59.7% from the comparable period in
1996. The acquired dental practices accounted for nearly all of the increase.
Expressed as a percentage of patient revenues, amounts retained by affiliated
dental practices decreased from 33.4% to 32.1% for the nine month periods ended
September 30, 1996 and 1997, respectively.
NET REVENUES - For the nine months ended September 30, 1997, net revenues
were $22.4 million, an increase of $9.2 million, or 69.3%, from the nine-month
period ended September 30, 1996. This increase is attributable to net revenues
of the Completed Acquisitions. Expressed as a percentage of patient revenues,
net revenues increased from 66.6% to 67.9% for the nine months ended September
30, 1996 and 1997, respectively.
CLINICAL SALARIES -- Clinical salaries increased from $2.8 million for the
nine months ended September 30, 1996 to $4.5 million for the nine months ended
September 30, 1997, an increase of $1.8 million or 64.3%. The Completed
Acquisitions accounted for all of the increase in clinical employee salaries.
Expressed as a percentage of patient revenues, clinical salaries decreased
slightly from 13.9% to 13.8% for the nine-month periods ended September 30, 1996
and 1997, respectively.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $2.2 million for the nine months ended September 30, 1996 to $3.0
million for the nine months ended September 30, 1997, an increase of $0.8
million or 35.1%. This increase was attributed to the Completed Acquisitions,
which accounted for $1.1 million of the increase in dental supplies and
laboratory expenses. Dental supplies and laboratory expenses in the Houston
market decreased from $1.7 million to $1.4 million in the first nine months of
1996 and 1997, respectively, primarily resulting from the outsourcing of the
Company's purchasing and inventory control functions in Houston in mid-1996.
Expressed as a percentage of patient revenues, dental supplies and laboratory
fees decreased from 11.3% in the first nine months of 1996 to 9.2% in the first
nine months of 1997.
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RENT AND LEASE EXPENSE - Rent and lease expense increased from $1.0 million
for the nine months ended September 30, 1996 to $1.9 million for the nine months
ended September 30, 1997, an increase of $0.9 million or 89.7%. Rental expense
from the acquisitions in Florida, Tennessee and Texas accounted for $0.7 million
of the increase, with the remainder resulting from the opening of two new dental
centers in Houston. Expressed as a percentage of patient revenues, rental and
lease expense increased from 5.0% in the first nine months of 1996 to 5.7% in
the first nine months of 1997, as the acquisitions had relatively higher
percentage rent and lease expense than the Houston operation.
ADVERTISING AND MARKETING - Advertising and marketing expense increased from
$1.0 million for the nine months ended September 30, 1996 to $1.6 million for
the nine months ended September 30, 1997, an increase of $541,000 or 53.7%. The
Completed Acquisitions accounted for all of the increase. Expressed as a
percentage of patient revenues, advertising and marketing costs decreased from
5.1% to 4.7% for the nine month periods ended September 30, 1996 and 1997,
respectively.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$717,000 for the nine months ended September 30, 1996 to $1.5 million for the
nine months ended September 30, 1997, an increase of $764,000, primarily
resulting from the Completed Acquisitions and amortization of deferred loan
costs incurred in connection with the Reorganization in December 1995.
Amortization of intangibles resulting from the Completed Acquisitions was
$543,000 in the first nine months of 1997. As a percentage of patient revenues,
depreciation and amortization increased from 3.6% to 4.5% for the nine-month
periods ended September 30, 1996 and 1997, respectively.
OTHER OPERATING EXPENSES - Other operating expenses increased from $1.7
million for the nine months ended September 30, 1996 to $2.9 million for the
nine months ended September 30, 1997, an increase of approximately $1.2 million,
or 67.8%. Other operating expenses include certain expenses related to the
operation of the Company's dental centers and bad debt expense incurred in the
financing of patient receivables at the affiliated dental practices.. The
Completed Acquisitions accounted for approximately $0.8 million of the increase
in other operating expenses. Expressed as a percentage of revenues, other
operating expenses increased slightly from 8.8% to 8.9% for the nine-month
periods ended September 30, 1996 and 1997, respectively.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $2.4 million for the nine months ended September 30, 1996 to $4.6
million for the nine months ended September 30, 1997, an increase of
approximately $2.2 million, or 90.7%. The increase resulted from the addition of
general and administrative expenses of the Completed Acquisitions 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 increased from 12.2% to 13.9% for the nine-month periods
ended September 30, 1996 and 1997, respectively.
INTEREST EXPENSE - Interest expense increased from $1.8 million for the nine
months ended September 30, 1996 to $2.6 million for the nine months ended
September 30, 1997, an increase of or 47.6%. Increased borrowings and higher
borrowing rates related to the Completed Acquisitions resulted in higher
interest expense. Expressed as a percentage of patient revenues, interest
expense decreased from 8.8% to 7.8% for the nine-month periods ended September
30, 1996 and 1997, respectively, primarily resulting from the relatively greater
percentage increase in patient revenues from the prior year period.
INCOME TAXES - For the nine months ended September 30, 1997, the Company
recorded a benefit for income taxes of $68,000 resulting from the loss before
taxes of $179,000 for the period. In the first nine months of 1996, the Company
recorded a benefit for income taxes of $84,000 on a loss before taxes of
$336,000.
EXTRAORDINARY ITEM - In September 1997, the Company recorded an
extraordinary loss of $3.7 million related to the early retirement of the
Company's 12% Senior Subordinated Notes in the aggregate amount of $10.5 million
including accrued interest and interest notes. The Senior Subordinated Notes had
been issued in December 1995 and in June 1997 in original principal amounts of
$7.5 million and $2.0 million, respectively.
PREFERRED STOCK DIVIDENDS - Coincident with the completion of the initial
public offering, the holders of the Company's Series A and Series C Preferred
Stock converted such shares into an aggregate of 948,243 shares of
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Company common stock. During the nine month period ended September 30, 1997,
the Company recorded $1.9 million in non-cash dividends, representing the
accretion of the difference between the recorded value of the Preferred Stock
and its redemption value.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had net working capital of $2.5
million, representing an increase in working capital of $5.7 million from the
net working capital deficit of $3.2 million at December 31, 1996. Current assets
consisted of cash of $3.9 million, billed and unbilled accounts receivable of
$7.3 million and other current assets of $664,000. These were partially offset
by current liabilities of $9.3 million, consisting of $3.9 million in accounts
payable and accrued liabilities, $4.0 million in current maturities of long-term
debt, $526,000 of deferred compensation payable to a stockholder and $808,000
payable to affiliated dental practices in consideration for accounts receivable
from the affiliated dental practices. In October 1997, the Company received an
additional $3.4 million in net proceeds, from the recently completed initial
public offering of its common stock, which was used to reduce the current
portion of long-term debt to $784,000, thereby increasing the Company's net
working capital.
For the nine months ended September 30, 1996 and 1997, cash
provided/(used) by operations was $184,000 and $(441,000), respectively. For the
nine months ended September 30, 1996, cash used in investing activities was
$11.3 million, of which $ 10.3 million was utilized to purchase three group
dental practices in Florida, Tennessee and Texas. In the nine months ended
September 30, 1997, $5.8 million was used in investing activities, of which $4.9
million was used to complete the acquisition of Southwest Dental Associates and
$0.9 million was used for capital expenditures, including development of two de
novo dental centers in Houston. Net cash provided by financing activities was
$5.5 million and $10.1 million in the nine-month periods ending September 30,
1996 and 1997, respectively. In the first nine months of 1996, cash provided by
financing activities consisted primarily of bank borrowings of $6.6 million. In
the nine months ended September 30, 1997, cash provided by financing activities
of $10.1 million consisted primarily of $2.0 million in additional subordinated
debt borrowings and net proceeds of $30.2 million from the initial public
offering of the Company's common stock, partially offset by debt repayments
totaling $20.9 million, including payment of all of the Company's subordinated
debt, payment of $5.4 million outstanding under the Company's bank credit
facility and offering costs of $1.3 million. In connection with the repayment of
$9.5 million of 12% Senior Subordinated Notes, the Company recognized a $3.7
million extraordinary loss associated with the early retirement of such debt.
The Company's principal sources of liquidity as of September 30, 1997
consisted of cash and cash equivalents, net accounts receivable and borrowing
availability under the Company's bank credit facility. On November 7, 1997, the
Company entered into a new credit agreement with a bank. The credit agreement
provides for borrowings up to $25.0 million and expires November 7, 2002. The
principal balance under the bank credit facility was $3.0 million at November 7,
1997 and is payable in 16 quarterly payments beginning in March 1998. Future
advances under the bank credit facility are payable in 12 quarterly payments
beginning in November 1999. Borrowings under the bank credit facility 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. The amounts outstanding under the bank credit facility bear interest
at variable rates which are based on either the bank's base rate or LIBOR, plus,
in either case, a margin which varies according to the ratio of the Company's
funded debt to EBITDA, each as defined in the credit agreement. The bank credit
facility contains affirmative and negative covenants that require the Company to
maintain certain financial ratios, limit the amount of additional indebtedness,
limit the creation or existence of liens, limit the ability of the Company to
use the proceeds of equity financings, and set certain restrictions on
acquisitions, mergers and sales of assets. The Company and the bank intend to
increase the bank credit facility by an additional $5.0 to $10.0 million through
an additional syndication on a best efforts basis. The Company believes that the
bank credit facility, along with existing cash resources and cash flow from
operations, will be sufficient to fund its acquisition, expansion and working
capital needs for the next 18 months. There can be no assurance that the Company
will be able to increase the syndicated credit facility.
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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 July and August 997, 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 the
asserted claims are without merit and has denied the demand for the
issuance of additional shares of Common Stock. In the event litigation
is initiated against the Company, the Company intends to defend itself
vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Pursuant to a Registration Statement on Form S-1 (Registration
No. 333-11335) that was declared effective September 11, 1997,
the Company offered for sale 2,500,000 shares of Common Stock,
$0.001 par value, by means of a prospectus dated September 12,
1997. The Company registered 2,500,00 shares of Common Stock (up
to 2,875,000 shares if the Underwriters' over-allotment option
was exercised in full) and offered such shares to the public at a
price of $13.00 per share for an aggregate offering price of
$32,500,000 ($37,375,000 if the Underwriters' over-allotment
option was exercised in full). During the period covered by this
report, the Company sold 2,500,000 shares for an aggregate
offering price of $32,500,000. The aggregate underwriting
discount was $2,275,000 and other expenses in connection with the
offering were reasonably estimated to be $1,700,000. The total
expenses, including the underwriting discount and other expenses,
were reasonably estimated to be $3,975,000. The net offering
proceeds to the Company, after subtracting the total expenses,
were $28,525,000. The net proceeds to the Company were reasonably
estimated to be applied as follows:
1. Payment of 12% Senior Subordinated Notes, plus
accrued interest.* $10,668,951
2. Payment of principal on bank credit facility to
Nations Bank of Texas, N.A. 6,000,000
3. Payment of 10% subordinated notes issued in
conjunction with acquisitions, plus accrued
interest. 4,494,045
4. Payment made to John and Sheryl Goodman to fund
the cash portion of the purchase price of
Southwest Dental Associates LC 3,849,000
5. Payment on deferred compensation agreement to
Dr. Jack H. Castle, director and shareholder. 526,000
6. Increase in working capital 2,987,004
-----------
Total Proceeds to the Company $28,525,000
* Robert J Cresci, a director of the company, is a managing director of
Pecks Managent Partners, Ltd., the investment advisor for the holders
of the 12% Senior Subordinated Notes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 11, 1997, a majority of the stockholders of the Company signed
a written consent approving the Third Amendment to Castle Dental
Centers, Inc. Omnibus Stock and Incentive Plan (the "Third Amendment").
The number of shares reserved for issuance and available for option
under the Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan
(the "Plan") was increased to 750,000 shares. The administrator of the
Plan was changed from a compensation committee to the Board of Directors
of the Company. Of the shares then outstanding, 2,326,552 shares were
voted in favor of the Third Amendment.
On August 11, 1997, a majority of the stockholders of the Company signed
a written consent approving the Second Amendment to 1996 Castle Dental
Centers, Inc. Non-Employee Directors Stock Option Plan (the "Second
Amendment"). The number of shares reserved for issuance and available
for option under the Castle Dental Centers, Inc. Non-Employee Directors
Stock Option Plan (the "Director Plan") was increased to 150,000 shares.
The administrator of the Director Plan was changed from a compensation
committee to the Board of Directors of the Company. Of the shares then
outstanding, 2,326,552 shares were voted in favor of the Second
Amendment.
ITEM 5. OTHER INFORMATION.
Not Applicable.
TEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this report:
10.1 Third Amendment to Castle Dental Centers, Inc. Omnibus
Stock and Incentive Plan.
10.2 Second Amendment to 1996 Castle Dental Centers, Inc.
Non-Employee Directors Stock Option Plan.
11 Computation of Earnings Per Share
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: November 14, 1997 By: JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chief Executive Officer
Date: November 14, 1997 By: JOHN M. SLACK
John M. Slack
Chief Financial Officer
EXHIBIT 10.1
THIRD AMENDMENT TO CASTLE DENTAL CENTERS, INC.
OMNIBUS STOCK AND INCENTIVE PLAN
W I T N E S S E T H:
WHEREAS, Castle Dental Centers, Inc. (the "Company") presently maintains
the Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan (the "Plan")
which became effective on January 23, 1996; and
WHEREAS, the Company, pursuant to Section 8.2 of the Plan, has the right
to amend the Plan from time to time subject to certain limitations.
NOW, THEREFORE, in order to make various revisions desired by the
Company, the Plan is hereby amended in the following manner:
1. Paragraph 2.1.5 is amended to read as follows:
"2.1.5 "Committee" means all or certain members of the Committee
as described in Section 3.1."
2. Paragraph 3.1 is amended to read as follows:
"3.1 COMMITTEE. The Plan shall be administered by the Board of
Directors of the Company (the "Board"). The Board while administering
the Plan shall hereinafter be referred to as the "Committee"."
3. Paragraph 4.1 is amended to read as follows:
"4.1 STOCK RESERVED. Subject to adjustment as provided in
Section 4.2 hereof, the aggregate number of shares of Stock that may be
issued under this Plan shall not exceed 750,000. The shares subject to
this Plan shall consist of authorized but unissued shares of Stock or
treasury Stock and such number of shares shall be and is hereby reserved
for issuance for such purpose. Any of such shares which may remain
unissued and which are not subject to outstanding Awards at the
termination of this Plan shall cease to be reserved for the purpose of
this Plan, but until termination of this Plan or the termination of the
last of the Awards granted under this Plan, whichever last occurs, the
Company shall at all times reserve a sufficient number of shares to meet
the requirements of this Plan. To the extent that an Award lapses or the
rights of the Participant holding such Award terminate or the Award is
paid in cash, any shares of Stock subject to such Award may again be
made subject to another Award under this Plan."
4. Paragraph 6.3.2 is deleted.
5. Paragraph 6.3.3 is redesignated as Paragraph 6.3.2.
6. Paragraph 6.3.4 is redesignated as Paragraph 6.3.3.
7. Paragraph 6.3.5 is deleted.
8. Paragraph 6.3.6 is deleted.
9. Paragraph 6.3.7 is redesignated as Paragraph 6.3.4.
10. Paragraph 10.2 is amended to read as follows:
"10.2 STOCK WITHHOLDING ELECTIONS. Subject to the consent of the
Committee, due to (i) the exercise of a Nonqualified Option or (ii) the
lapse of restrictions on Restricted Stock, a Participant may make an
irrevocable election to (a) have shares of Stock otherwise issuable
under (i) withheld, or (b) tender back to the Company shares of Stock
received pursuant to (i) or (ii), or (c) deliver back to the Company
pursuant to (i) or (ii) previously-acquired shares of Stock of the
Company having a Fair Market Value sufficient to satisfy all or part of
the Participant's estimated total Federal, state, and local tax
obligations associated with the transaction, provided that such tax
withholding or stock delivery right was specifically pre-approved by the
Committee as a feature of the Nonqualified Option or Restricted Stock or
is otherwise approved in accordance with Rule 16b-3. Such elections must
be made by a Participant on or prior to the date the amount of tax to be
withheld is determined (the "tax date")."
11. Paragraph 10.3 is deleted.
12. Paragraph 10.4 is redesignated as Paragraph 10.3 and is amended to
read as follows:
"10.3 STOCK WITHHOLDING DELIVERY REQUIREMENTS. Pursuant to rules
adopted by the Committee, when a Participant makes an election under
Code Section 83(b), and the Participant elects share withholding
pursuant to Subsection 10.2 above, the full number of shares of Stock
shall be issued or transferred to the Participant upon the exercise of
the Nonqualified Option, but the Participant shall be unconditionally
obligated to tender back or deliver to the Company the proper number of
shares on the tax date. When the tax date occurs in connection with the
lapse of restrictions on Restricted Stock and the Participant elects
share withholding, the Participant shall be unconditionally obligated to
tender back or deliver to the Company a sufficient number of shares of
Stock of the Company to satisfy the tax obligations on the tax date."
IN WITNESS WHEREOF, the Company has executed this Third Amendment to the
Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan to be effective as
of this ___ day of August, 1997.
CASTLE DENTAL CENTERS, INC.
Attest:
By: JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
JOHN M. SLACK
John M. Slack
Secretary
EXHIBIT 10.2
SECOND AMENDMENT TO 1996
CASTLE DENTAL CENTERS, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
W I T N E S S E T H:
WHEREAS, Castle Dental Centers, Inc. (the "Company") presently maintains
the 1996 Castle Dental Centers, Inc. Non-Employee Directors Stock Option Plan
(the "Plan") which became effective on August 19, 1996; and
WHEREAS, the Company, pursuant to Section 7 of the Plan, has the right
to amend the Plan from time to time subject to certain limitations.
NOW, THEREFORE, in order to make revisions desired by the Company, the
Plan is hereby amended in the following manner:
1. Section 2(a) is amended to read as follows:
"(a) COMPOSITION OF THE COMMITTEE. The Plan shall be
administered by the Board of Directors of the Company (the "Board"). The
Board while administering the Plan shall hereinafter be referred to as
the "Committee"."
2. The first sentence of Section 3 is amended to read as follows:
"Subject to adjustment as provided in Section 6(j) hereof, the
aggregate number of shares of Common Stock that may be optioned
under this Plan is 150,000."
3. Section 10(b) is amended to read as follows:
"(b) Notwithstanding the terms of Section 10(a), any Optionee
may pay all or any portion of the taxes required to be withheld by the
Company or paid by the Optionee in connection with the exercise of an
option by electing to have the Company withhold shares of Common Stock,
or by delivering previously owned shares of Common Stock, having a fair
market value, determined in accordance with Section 6(b), equal to the
amount required to be withheld or paid; provided that such tax
withholding or stock delivery right was specifically pre-approved by the
Committee as a feature of the option or is otherwise approved in
accordance with Rule 16b-3. An Optionee must make the foregoing election
on or before the date that the amount of tax to be withheld is
determined ("Tax Date"). All such elections are irrevocable and subject
to disapproval by the Committee. Where the Optionee elects share
withholding, the full amount of shares of Common Stock will be issued or
transferred to the Optionee upon exercise of the option, but the
Optionee shall be unconditionally obligated to tender back to the
Company the number of shares necessary to discharge the Company's
withholding obligation or the Optionee's estimated tax obligation on the
Tax Date."
IN WITNESS WHEREOF, the Company has executed this Second Amendment to
the 1996 Castle Dental Centers, Inc. Non-Employee Directors Stock Option Plan to
be effective as of this ___ day of August, 1997.
CASTLE DENTAL CENTERS, INC.
Attest: By: JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
JOHN M. SLACK
John M. Slack, Secretary
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
CASTLE DENTAL CENTERS, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding ......................... 2,353 2,993 2,194 2,555
Assumed conversion of preferred stock issued within
one year of initial public offering .............................. 865 804 865 900
Treasury stock calculation of stock options and
warrants issued within one year of initial public offering ....... 28 31 28 31
------- ------- ------- -------
Total primary shares ............................................... 3,246 3,828 3,087 3,486
======= ======= ======= =======
Loss before extraordinary item ..................................... $ (283) $ (30) $ (252) $ (111)
Extraordinary item ................................................. -- (3,685) -- (3,685)
======= ======= ======= =======
Net loss ........................................................... $ (283) $(3,715) $ (252) $(3,796)
======= ======= ======= =======
Loss per common share:
Loss before extraordinary item ................................... $ (0.09) $ (0.01) $ (0.08) $ (0.03)
Extraordinary item ............................................... -- (0.96) -- (1.06)
======= ======= ======= =======
Net loss ......................................................... $ (0.09) $ (0.97) $ (0.08) $ (1.09)
======= ======= ======= =======
FULLY DILUTED:
Weighted average common shares outstanding ......................... 2,353 2,993 2,194 2,555
Assumed conversion of preferred stock issued within one
year of initial public offering .................................. 865 804 865 900
Treasury stock calculation of stock options and warrants
issued within one year of initial public offering ................ 28 31 28 31
------- ------- ------- -------
Total fully diluted shares ......................................... 3,246 3,828 3,087 3,486
======= ======= ======= =======
Loss before extraordinary item ..................................... $ (283) $ (30) $ (252) $ (111)
Extraordinary item ................................................. -- (3,685) -- (3,685)
======= ======= ======= =======
Net loss ........................................................... $ (283) $(3,715) $ (252) $(3,796)
======= ======= ======= =======
Loss per common share:
Loss before extraordinary item ................................... $ (0.09) $ (0.01) $ (0.08) $ (0.03)
Extraordinary item ............................................... -- (0.96) -- (1.06)
======= ======= ======= =======
Net loss ......................................................... $ (0.09) $ (0.97) $ (0.08) $ (1.09)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997
AND THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,845
<SECURITIES> 0
<RECEIVABLES> 11,150
<ALLOWANCES> 3,861
<INVENTORY> 0
<CURRENT-ASSETS> 380
<PP&E> 8,140
<DEPRECIATION> 3,309
<TOTAL-ASSETS> 40,219
<CURRENT-LIABILITIES> 9,264
<BONDS> 3,144
1,550
0
<COMMON> 6
<OTHER-SE> 25,071
<TOTAL-LIABILITY-AND-EQUITY> 40,219
<SALES> 22,426
<TOTAL-REVENUES> 22,426
<CGS> 0
<TOTAL-COSTS> 20,049
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,589
<INCOME-PRETAX> (179)
<INCOME-TAX> (68)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (3,685)
<CHANGES> 0
<NET-INCOME> (3,796)
<EPS-PRIMARY> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
