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, 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: 1-13263
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 November 16, 1998 was 6,291,764.
<PAGE>
CASTLE DENTAL CENTERS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1997 and September 30, 1998................ 3
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September
30, 1997 and 1998 ..................................... 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 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.......... 9
PART II.
Item 1. Legal Proceedings................................. 16
Item 2. Changes in Securities and Use of Proceeds......... 16
Item 3. Defaults Upon Senior Securities................... 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information ................................ 16
Item 6. Exhibits and Reports on Form 8-K ................. 16
SIGNATURES......................................................... 16
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<PAGE>
PART I: FINANCIAL INFORMATION
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 2,908 $ 1,314
Patient receivables, net ...................................... 5,841 8,850
Unbilled patient receivables, net ............................. 2,521 2,911
Prepaid expenses and other current assets ..................... 838 1,936
-------- --------
Total current assets ..................................... 12,108 15,011
-------- --------
Property and equipment, net ...................................... 5,189 10,677
Intangible assets, net ........................................... 25,565 48,162
Other assets ..................................................... 526 742
Deferred income taxes, net ....................................... 1,125 --
-------- --------
Total assets .............................................. $ 44,513 $ 74,592
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.............................. $ 2,598 $ 1,744
Accounts payable and accrued liabilities ...................... 4,935 7,657
Deferred compensation payable, related party .................. 658 526
-------- --------
Total current liabilities ................................ 8,191 9,927
-------- --------
Long-term debt net, of current portion............................ 2,607 24,363
Other long-term liabilities, related party ....................... 1,052 658
Commitments and contingencies
Minority interest ................................................ -- 3,946
Redeemable preferred stock, $.001 par value, 5,000,000
shares authorized; 119,231 shares Series B issued
and outstanding ............................................... 1,550 1,550
Stockholders' equity:
Common stock, $.001 par value, 30,000,000 shares
authorized; 6,229,239 and 6,291,764 shares issued
and outstanding, respectively ................................ 6 6
Additional paid-in capital ..................................... 40,818 41,389
Accumulated deficit ............................................ (9,711) (7,247)
-------- --------
Total stockholders' equity ................................ 31,113 34,148
-------- --------
Total liabilities and stockholders' equity ....................... $ 44,513 $ 74,592
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net patient revenues ........................ $ 11,727 $ 20,175 $ 33,054 $ 54,395
Expenses:
Dentist salaries and other professional costs 2,936 5,162 7,847 13,447
Clinic salaries ............................. 2,504 4,392 7,328 12,030
Dental supplies and laboratory fees ......... 1,081 2,013 3,047 5,279
Rental and lease expense .................... 641 1,106 1,898 2,861
Advertising and marketing ................... 520 580 1,551 1,974
Depreciation and amortization ............... 518 1,025 1,482 2,632
Other operating expenses .................... 1,141 1,938 2,925 5,196
General and administrative ............... 1,551 1,986 4,599 6,215
-------- -------- -------- --------
Total expenses ....................... 10,892 18,202 30,677 49,634
-------- -------- -------- --------
Operating income ............................ 835 1,973 2,377 4,761
Interest expense ............................ (906) (560) (2,589) (1,178)
Other income, net ........................... 22 82 33 51
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary loss ......................... (49) 1,495 (179) 3,634
Provision (benefit) for income taxes ........ (19) 474 (68) 1,170
-------- -------- -------- --------
Income (loss) before extraordinary loss ..... (30) 1,021 (111) 2,464
Extraordinary loss .......................... (3,685) -- (3,685) --
Net income (loss) ........................... (3,715) 1,021 (3,796) 2,464
Preferred stock accretion ................... (1,621) -- (1,930) --
-------- -------- -------- --------
Income (loss) attributable to common stock .. $ (5,336) $ 1,021 $ (5,726) $ 2,464
Income (loss) per common share:
Basic and diluted:
Income (loss) before extraordinary item $ (0.01) $ 0. 15 $ (0.03) $ 0.38
Extraordinary item .................... (0.96) -- (1.06) --
Net income (loss) ..................... $ (0.97) $ 0.15 $ (1.09) $ 0.38
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic ................................. 3,828 6,698 3,486 6,535
======== ======== ======== ========
Diluted ............................... 3,828 6,718 3,486 6,544
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Net cash provided by (used in) operating activities ............... $ (441) $ 3,711
Investing activities:
Capital expenditures ........................................... (956) (4,450)
Acquisition of affiliated dental practices, net of cash acquired (4,882) (17,219)
Net cash used by investing activities ............................. (5,838) (21,669)
-------- --------
Financing activities:
Payments of long-term debt and capital lease obligations ....... (20,900) (2,577)
Proceeds from debt, related party .............................. 2,000 --
Proceeds from debt ............................................. 70 18,941
Proceeds from issuance of common stock ......................... 30,225 --
Offering costs ................................................. (1,266) --
Debt issuance cost ............................................. (75) --
Net cash provided by financing activities ......................... 10,054 16,364
-------- --------
Net change in cash and cash equivalents .................... 3,775 (1,594)
Cash and cash equivalents, beginning of period .................... 79 2,908
-------- --------
Cash and cash equivalents, end of period .......................... $ 3,854 $ 1,314
======== ========
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 --
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 --
Conversion of Series A and Series C Preferred Stock ........ 5,898 --
Series A Preferred Stock Accretion ......................... 309 --
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management services, non-healthcare personnel, facilities and
equipment to certain professional corporations in Texas, Florida, California and
Tennessee under long-term management services agreements.
The consolidated financial statements include the accounts of the Company and
all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in the states in which the Company operates, the
Company does not own dental practices but instead enters into exclusive
long-term management services agreements with professional corporations that
operate the dental practices. In addition, the Company has the contractual right
to designate, in its sole discretion and at any time, the licensed dentist who
is the owner of the capital stock of the professional corporation at a nominal
cost ("nominee arrangements"). Under the Management Services Agreements, the
Company establishes annual operating and capital budgets for the professional
corporations and compensation guidelines for the licensed dental professionals.
The Management Services Agreements have initial terms of twenty-five to forty
years. The management fee charged by the Company to an affiliated dental
practice is intended to reflect and is based on the fair value of the management
services rendered by the Company to the affiliated dental practice. Subject to
applicable law, the management fee earned by the Company is generally comprised
of three components: (i) the costs incurred by it on behalf of the affiliated
practice; (ii) a base management fee ranging from 12.5% to 20.0% of patient
revenues; and, (iii) a performance fee equal to the patient revenues of the
affiliated dental practice less (a) the expenses of the affiliated dental
practice and (b) the sum of (i) and (ii), as described in the agreements.
Through the management services agreements and the nominee arrangements, the
Company has a significant long-term controlling financial interest in the
affiliated dental practices and, therefore, according to Emerging Issues Task
Force Issue No. 97-2, "Application of FASB Statement No. 94, CONSOLIDATION OF
ALL MAJORITY-OWNED SUBSIDIARIES, and APB No. 16, BUSINESS COMBINATIONS, to
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Agreements," must consolidate the results of the
affiliated practices with those of the Company. Because the Company must present
consolidated financial statements, net patient revenues are presented in the
accompanying statement of operations and all significant intercompany accounts
and transactions, including management fees, have been eliminated.
The accompanying unaudited consolidated financial statements as of September
30, 1998 and for the three and nine months ended September 30, 1997 and 1998
include the accounts of the Company and its majority owned management company
subsidiaries and the affiliated dental practices. Pursuant to the rules and
regulations of the Securities and Exchange Commission, certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted.
The unaudited consolidated financial statements have been prepared consistent
with the accounting policies reflected in the Company's annual financial
statements included in the Company's Form 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
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<PAGE>
are both effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS No. 130 and No. 131 in 1998. Adoption of the SFASs did not
effect the reporting requirements because the Company does not have
comprehensive income or operating segments.
2. EARNINGS PER SHARE:
Earnings per share are computed based upon the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period. Shares outstanding for the three and nine months ended September 30,
1997 reflect the conversion of the Series A and Series C Preferred Stock as of
the beginning of the period. The effect of the preferred stock accretion
recorded in 1997 has been excluded from the earnings per share calculation
because the share attributable to the preferred stock are treated under the
if-converted method of arriving at common equivalents shares outstanding.
3. ACQUISITIONS:
On March 30, 1998, the Company acquired an 80.0% interest in Dental
Consulting Services L.L.C. ("DCS"), a dental practice management company with
headquarters in Los Angeles, California. The purchase price of $18.0 million
included cash of $10.8 million and $2.7 million in seller notes payable. In
addition, as part of the purchase consideration, the sellers may convert a
portion of their ownership interests into 407,454 shares of Company common stock
(the "conversion right"). This conversion may be exercised not earlier than
twelve months after the closing date. This convertible ownership interest has
been recorded at fair market value. The difference between the convertible
ownership interest and the Company's common stock into which it may be converted
is being amortized over the period to the earliest conversion date and reflected
as a charge to minority interest. In connection with these acquisitions, the
Company entered into management 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 earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined in the purchase agreement,
as adjusted, for the DCS business, and will be accounted for as additional
purchase consideration at its fair value at the date of the exchange. The
Company will also pay additional consideration to the former owners of DCS
related to the acquisition of certain additional dental practices in the Los
Angeles area. For the three month period ending September 30, 1998, the amount
of such additional consideration related to the acquisition of two dental
practices is estimated to be $320,000, subject to completion of due diligence,
and has been included in the purchase price of the dental practices acquired.
The Company has restated its second quarter Form 10-Q to reflect the value of
the convertible ownership interest from stockholders equity to minority
interest.
In July 1998, the Company entered into stock and asset purchase agreements to
acquire a dental management company and five dental practices operated by Dr.
Jared Woolf in Florida. In August 1998, the Company entered into a stock
purchase agreement to acquire all the outstanding common stock of two dental
practices in the Los Angeles area. The aggregate purchase price of $4.3 million,
including related acquisition expenses, consisted of $3.3 million in cash, $0.6
million in seller notes payable and 39,179 shares of Company common stock.
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
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<PAGE>
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) the London Inter-bank Borrowing Rate ("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 September 30, 1998,
approximately $21.9 million was outstanding under the Credit Agreement.
5. REDEEMABLE PREFERRED STOCK:
In September 1998, the holders of 119,231 shares of Series B Preferred Stock
elected to redeem the stock. The redemption is payable in sixteen quarterly
installments of $114,000 beginning in October 1998.
6. 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 $11.0 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. YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs using two digits to
define the applicable year instead of four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system that is not year 2000 compliant would not be
able to correctly process certain data, or in extreme situations, system failure
could result.
As part of the Company's continuing program to upgrade its information
systems in anticipation of future growth, the Company is currently involved in
the installation of year 2000 compliant software for its corporate and regional
operations. This installation is currently expected to be complete by the first
quarter of 1999. The Company presently believes that, with such upgrades, the
year 2000 problem will not pose significant operational problems for the
Company's computer systems. The estimated costs of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations.
The Company is currently making inquires of certain of its vendors and banks
to determine what impact, if any, their year 2000 compliance exposure might have
on the company's operations. The Company plans to receive assurances that those
vendors' systems are or will be year 2000 compliant in a timely manner.
The failure to correct a material year 2000 problem could possibly result in
an interruption in or failure of, certain normal business activities or
operations. Such failure materially and adversely affect the Company's financial
position, results of operation sand cash flows. Due to the general uncertainty
inherent in the year 2000 problem, including uncertainty regarding the year 2000
readiness of third party suppliers and potential future acquisitions, the
Company is unable to determine at this time whether the consequences of any
possible year 2000 failures will have a material impact on the Company's
financial position, results of operations and cash flows. The
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<PAGE>
Company believes that, with the scheduled completion of its computer system
upgrades, the possibly of any material interruption to normal operations should
be significantly reduced.
The Company's plans to comply with year 2000 requirements and completion
dates are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources and other factors. There can no assurance, however, that these
estimates will be achieved and actual results could differ materially from those
estimates. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to identify and correct potential problems, and similar
uncertainties.
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. In March 1998, the
Company acquired all the outstanding stock of Dental World, Inc. ("DWI"), a
dental practice management company located in Houston, Texas. Additionally in
March 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. In July 1998, the Company entered into stock
and asset purchase agreements to acquire a dental management company and five
dental practices operated by Dr. Jared Woolf in Florida. In August 1998, the
Company entered a stock purchase agreement to acquire all the outstanding common
stock of two dental practices in the Los Angeles area. 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
September 30, 1998, the Company managed 66 dental centers with 185 affiliated
dentists, orthodontists and specialists.
COMPONENTS OF REVENUES AND EXPENSES
Net patient revenues 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. Revenues are reported at established
rates reduced by contractual amounts based on agreements with patients, third
party payers and others obligated to pay for services rendered.
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. While actual terms of the various management service agreements may
vary from practice to practice, material aspects of all the management service
agreements, including the ability of the Company to nominate the majority
shareholder and the calculation of the management fees, are consistent. 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
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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.
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.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net patient revenue ................................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Dentist salaries and other professional costs.......... 25.0% 25.6% 23.7% 24.7%
Clinic salaries ....................................... 21.4% 21.8% 22.2% 22.1%
Dental supplies and laboratory fees................... 9.2% 10.0% 9.2% 9.7%
Rental and lease expense .............................. 5.5% 5.5% 5.7% 5.3%
Advertising and marketing ............................. 4.4% 2.9% 4.7% 3.6%
Depreciation and amortization ......................... 4.4% 5.0% 4.5% 4.8%
Other operating expenses .............................. 9.7% 9.6% 8.8% 9.6%
General and administrative ......................... 13.2% 9.8% 13.9% 11.4%
----- ----- ----- -----
Total expenses ................................. 92.9% 90.2% 92.8% 91.2%
----- ----- ----- -----
Operating income ............................... 7.1% 9.8% 7.2% 8.8%
Interest expense ...................................... (7.7%) (2.8%) (7.8%) (2.2%)
Other income, net ..................................... 0.2% 0.4% 0.1% 0.1%
----- ----- ----- -----
Income (loss) before income taxes and ................. (0.4%) 7.4% (0.5%) 6.7%
extraordinary item
Provision (benefit) for income taxes .................. (0.2%) 2.3% (0.2%) 2.2%
----- ----- ----- -----
Income (loss) before extraordinary item ............... (0.3%) 5.1% (0.3%) 4.5%
Extraordinary item .................................... (31.4%) -- (11.1%) --
-----
Net income (loss) ..................................... (31.7%) 5.1% (11.5%) 4.5%
Preferred stock accretion ............................. (13.8%) -- (5.8%) --
----- ----- ----- -----
Net income (loss) attributable to common stock ........ (45.5%) 5.1% (17.3%) 4.5%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET PATIENT REVENUE - Net patient revenues of affiliated dental practices
increased from $11.7 million to $20.2 million, an increase of $8.4 million or
72.0%. Approximately, $5.9 million of the increase was attributable to the
Completed Acquisitions. The opening of four de novo offices in Houston, Austin,
and Nashville contributed $1.5 million in patient revenues and dental centers
open more than one year realized increased patient revenues of $1.0 million
above comparable levels in the year earlier period.
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DENTIST SALARIES AND OTHER PROFESSIONAL COSTS - Dentist salaries and other
professional costs consist primarily of compensation paid to dentists,
orthodontists, and hygienists employed by the affiliated dental practices. For
the three months ended September 30, 1998, dentist salaries and other
professional costs were $5.2 million, an increase of $2.2 million or 75.8% from
the comparable period of 1997. The increase was due primarily to the Completed
Acquisitions, staffing of new dental centers and increased dentist compensation
resulting from higher patient revenues. Expressed as a percentage of patient
revenues, dentist salaries and other professional costs increased from 25.0% for
the three months ended September 30, 1997 to 25.6% for the comparable 1998
period. The increase as a percentage of patient revenue, is a result of
acquisitions and higher dentist compensation in the Houston region.
CLINIC SALARIES - Clinic salaries increased from $2.5 million for the three
months ended September 30, 1997, to $4.4 million for the three months ended
September 30, 1998, an increase of $1.9 million or 75.4%. The Completed
Acquisitions and de novo dental centers accounted for approximately $1.7 million
of the increase in clinical salaries. Expressed as a percentage of patient
revenues, clinic salaries increased from 21.4% for the third quarter of 1997 to
21.8% for the third quarter of 1998.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $1.1 million for the three months ended September 30, 1997 to
$2.0 million for the three months ended September 30, 1998, an increase of $0.9
million or 86.3%. Approximately 93.4% 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 9.2% for
the 1997 period to 10.0% for the 1998 period. The increase as a percentage of
patient revenue, is a result of higher dental supplies and laboratory fees for
current acquisitions.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $0.6 million
for the three months ended September 30, 1997, to $1.1 million for the three
months ended September 30, 1998, an increase of $0.5 million or 72.5%. The
Completed Acquisitions accounted for $0.3 million of the increase with the
opening of six 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 was 5.5 % for the 1997 and the 1998 period.
ADVERTISING AND MARKETING - Advertising and marketing expense increased from
$0.5 million in the third quarter of 1997 to $0.6 million in the third quarter
of 1998, an increase of $0.1 million or 11.6%. Expressed as a percentage of
patient revenues, advertising and marketing decreased from 4.4% for the 1997
period to 2.9% for the 1998 period. The decrease in percentage, as a percent of
patient revenues, is attributable to leveraging the current advertising in
existing regions to the new centers and as well as decreasing advertising during
the summer months.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$0.5 million for the three months ended September 30, 1997, to $1.0 million for
the same period of 1998, an increase of $0.5 million or 97.6%. Most of the
increase is attributable to depreciation of fixed assets and amortization of
intangible assets acquired in connection with Completed Acquisitions. Expressed
as a percentage of patient revenues, depreciation and amortization increased
from 4.4% for the 1997 period to 5.1% for the 1998 period.
OTHER OPERATING EXPENSES - Other operating expenses increased from $1.1
million for the three months ended September 30, 1997, to $1.9 million for the
three months ended September 30, 1998, an increase of $0.8 million or 69.9%.
Other operating expenses include certain expenses related to the operation of
the Company's dental centers and bad debt expense incurred in financing of
patient receivables at the affiliated dental practices. Expressed as a
percentage of patient revenues, other operating expenses decreased from 9.7% for
the third quarter of 1997 to 9.6% for the comparable period of 1998.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $1.6 million for the three months ended September 30, 1997, to
$2.0 million for the three months ended September 30, 1998, an increase of $0.4
million, or 28.0%. Approximately $0.3 million of the increase resulted from the
acquisitions in Florida and California that were completed during the third
quarter of 1998. Expressed as a percentage of patient revenues, general and
administrative expense decreased from 13.2% for the three months ended September
30, 1997 to 9.8% for the 1998 period.
-11-
<PAGE>
INTEREST EXPENSE - Interest expense decreased from $0.9 million for the third
quarter of 1997 to $0.6 million for the third 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 Condensed
Consolidated Financial Statements), accordingly management anticipates that
interest expense will increase throughout the year.
OTHER INCOME, NET - Other Income, Net, is primarily comprised of minority
interest from the DCS acquisition, completed on March 30, 1998 and interest
earned on money market accounts.
INCOME TAXES - The provision for income taxes was a benefit of $19,000 for
the three months ended September 30, 1997, compared to a provision for income
taxes of $0.5 million for the three months ended September 30, 1998. The
increase in the provision for income taxes results from increased pre-tax
earnings. The estimated effective tax rate of 32.0% for the three months ended
September 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.
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 June 1997 in original principal amounts of $7.5 million and
$2.0 million, respectively.
PREFERRED STOCK ACCRETION - 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 September 30, 1997, the Company recorded a $1.6 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
NET PATIENT REVENUES - Net Patient Revenues increased from $33.0 million for
the nine months ended September 30, 1997 to $54.4 million for the same period in
1998, an increase of $21.3 million or 64.6%. The increase was primarily
attributable to the Completed Acquisitions, which accounted for $13.6 million of
the increase. The opening of six de novo offices in Houston, Austin, and
Nashville contributed $3.8 million of the increase. Dental centers that have
been open for more than one year had increased revenue of $3.9 million, above
comparable levels in the same period of 1997.
DENTIST SALARIES AND OTHER PROFESSIONAL COSTS - For the nine months ended
September 30, 1998, dentist salaries and other professional costs were $13.4
million, an increase of $5.6 million or 71.4% from the comparable period of
1997. Completed Acquisitions accounted for $3.4 million of the increase.
Staffing of new dental centers and increased dentist compensation resulting from
higher patient revenues accounted for $2.2 million of the increase. Expressed as
a percentage of patient revenues, dentist salaries and other professional costs
increased from 23.7% for the nine months ended September 30, 1997 to 24.7% from
the comparable 1998 period. The increase as a percentage of patient revenue, is
a result of acquisitions and higher dentist compensation in the Houston region.
CLINIC SALARIES - Clinic salaries increased from $7.3 million for the nine
months ended September 30, 1997, to $12.0 million for the nine months ended
September 30, 1998, an increase of $4.7 million or 64.2%. The Completed
Acquisitions accounted for approximately $3.0 million, or 64.4%, of the increase
in clinical salaries. Expressed as a percentage of patient revenues, clinic
salaries decreased from 22.2% for the first nine months of 1997 to 22.1% for the
same period of 1998.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $3.0 million for the nine months ended September 30, 1997 to $5.3
million for the nine months ended September 30, 1998, an increase of $2.2
million or 73.2%. Approximately $1.5 million of the increase is attributable to
the Completed Acquisitions and de novo dental centers accounted for $0.6 million
of the increase. Expressed as a percentage of patient revenues,
-12-
<PAGE>
dental supplies and laboratory fees increased from 9.2% to 9.7%, for the nine
month periods ended September 30, 1997 and 1998, respectively. The increase as a
percentage of patient revenue, is a result of higher dental supplies and
laboratory fees for current acquisitions.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $1.9 million
for the nine months ended September 30, 1997, to $2.9 million for the same
period of 1998, an increase of $1.0 million or 50.7%. 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 5.7% to 5.3%, for the nine month periods ended September
30, 1997 and 1998, respectively.
ADVERTISING AND MARKETING - Advertising and marketing expense increased from
$1.6 million in the nine months ended September 30, 1997 to $2.0 million for the
comparable period of 1998, an increase of $0.4 million or 27.3%. 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 4.7 % for the nine months
ended September 30, 1997 to 3.6% for the comparable 1998 period.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$1.5 million for the nine months ended September 30, 1997, to $2.6 million for
the same period of 1998, an increase of $1.2 million or 77.7%. Approximately
$0.4 million or 62.0% of the increase is attributable to the amortization of
intangible assets acquired in connection with the Completed Acquisitions.
Expressed as a percentage of patient revenues, depreciation and amortization
increased from 4.5% to 4.8%, for the nine month period ended September 30, 1997
and 1998, respectively.
OTHER OPERATING EXPENSES - Other operating expenses increased from $2.9
million for the nine months ended September 30, 1997, to $5.2 million for the
nine months ended September 30, 1998, an increase of $2.3 million or 77.6%.
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 8.8% for the period of 1997 to 9.6% for the
comparable period of 1998.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $4.6 million for the nine months ended September 30, 1997, to
$6.2 million for the nine months ended September 30, 1998, an increase of $1.6
million or 35.2%. An increase of $0.7 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 13.9% for
the nine months ended September 30, 1997 to 11.4% for the 1998 period.
INTEREST EXPENSE - Interest expense decreased from $2.6 million for the nine
months ended September 30, 1997 to $1.2 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 Condensed
Consolidated Financial Statements), accordingly management anticipates that
interest expense will increase throughout the year.
OTHER INCOME, NET - Other Income, Net, is primarily comprised of minority
interest from the DCS acquisition, completed on March 30, 1998 and interest
earned on money market accounts.
INCOME TAXES - The provision for income taxes was a benefit of $68,000 for
the nine months ended September 30, 1997, compared to an expense of $1.2 million
for the nine months ended 1998. The increase in the provision for income taxes
results from increased earnings before income taxes in the nine months ended
September 30, 1998 compared to a loss before income taxes of $179,000 in the
comparable period in 1997. The estimated effective tax rate of 32.0% for the
nine months ended September 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.
-13-
<PAGE>
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 June 1997 in original principal amounts of $7.5 million and
$2.0 million, respectively.
PREFERRED STOCK ACCRETION - 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 nine
months ended September 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had net working capital of $5.1 million,
representing an increase in working capital of $1.2 million from net working
capital of $3.9 million at December 31, 1997. Current assets consisted of cash
and cash equivalents of $1.3 million, billed and unbilled accounts receivable of
$11.8 million and prepaid expenses and other current assets of $1.9 million.
These current assets were partially offset by current liabilities of $9.9
million, consisting of $7.7 million in accounts payable and accrued liabilities,
$1.7 million in current maturities of long-term debt and $ 0.5 million of
deferred compensation payable to a stockholder.
For the nine months ended September 30, 1997 and 1998, cash provided by (used
in) operating activities was ($.4) million and $3.7 million, respectively. In
the nine months ended September 30, 1997, cash used in investing activities
amounted to $5.8 million primarily to fund acquisitions and capital
expenditures. For the nine months ended September 30, 1998, cash used in
investing activities was $21.7 million, consisting primarily of $17.2 million to
fund acquisitions and $4.4 million for capital expenditures. For the nine months
ended September 30, 1997, cash provided by financing activities was $10.1
million resulting primarily from the Company's issuance of common stock. For the
nine months ended September 30, 1998, cash provided by financing activities
totaled $16.4 million representing $18.9 million in advances under the Company's
bank credit agreement, offset partially by $2.6 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 September 30, 1998, approximately $21.9 million was outstanding
under the Credit Agreement.
During 1998, the Company acquired dental management companies and dental
practices operating 19 dental centers in Texas, California and Florida. Total
consideration for the acquisitions amounted to $24.6 million, including related
acquisition expenses and excluding assumed liabilities, consisting of $16.6
million in cash, $3.3 million in subordinated seller notes payable and 469,979
shares of Company common stock. The Company anticipates that 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 capital expenditures of approximately
$1.5 million during the remainder of 1998, and $7.0 million in 1999, primarily
to develop new dental centers in its existing markets.
-14-
<PAGE>
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 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.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs using two digits to
define the applicable year instead of four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system that is not year 2000 compliant would not be
able to correctly process certain data, or in extreme situations, system failure
could result.
As part of the Company's continuing program to upgrade its information
systems in anticipation of future growth, the Company is currently involved in
the installation of year 2000 compliant software for its corporate and regional
operations. This installation is currently expected to be complete by the first
quarter of 1999. The Company presently believes that, with such upgrades, the
year 2000 problem will not pose significant operational problems for the
Company's computer systems. The estimated costs of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations.
The Company is currently making inquires of certain of its vendors and banks
to determine what impact, if any, their year 2000 compliance exposure might have
on the Company's operations. The Company plans to receive assurances that those
vendors' systems are or will be year 2000 compliant in a timely manner.
The failure to correct a material year 2000 problem could possibly result in
an interruption in or failure of, certain normal business activities or
operations. Such failure could materially and adversely affect the Company's
financial position, results of operations and cash flows. Due to the general
uncertainty inherent in the year 2000 problem, including uncertainty regarding
the year 2000 readiness of third party suppliers and potential future
acquisitions, the company is unable to determine at this time whether the
consequences of any possible year 2000 failures will have a material impact on
the Company's financial position, results of operations and cash flows. The
Company believes that, with the scheduled completion of its computer system
upgrades, the possibly of any material interruption to normal operations should
be significantly reduced.
The Company's plans to comply with year 2000 requirements and completion
dates are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources and other factors. There can no assurance, however, that these
estimates will be achieved and actual results could differ materially from those
estimates. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to identify and correct potential problems, and similar
uncertainties.
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 has adopted SFAS Nos. 130 and 131. The Company adopted SFAS No. 130
and No. 131 in 1998. Adoption of the SFASs did not effect the reporting
requirements because the Company does not have comprehensive income or
operating segments.
-15-
<PAGE>
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.
None.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this report:
27. Financial Data Schedule.
(b) The company filed no reports on Form 8-K during the quarter for
which this report is filed.
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 16, 1998 By: JACK H. CASTLE, JR.
-----------------------
Jack H. Castle, Jr.
Chief Executive Officer
Date: November 16, 1998 By: JOHN M. SLACK
----------------
John M. Slack
Chief Financial Officer
-16-
<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, 1998
AND THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,314
<SECURITIES> 0
<RECEIVABLES> 18,365
<ALLOWANCES> 6,604
<INVENTORY> 0
<CURRENT-ASSETS> 15,011
<PP&E> 17,564
<DEPRECIATION> 6,887
<TOTAL-ASSETS> 74,592
<CURRENT-LIABILITIES> 9,927
<BONDS> 0
1,550
0
<COMMON> 6
<OTHER-SE> 41,389
<TOTAL-LIABILITY-AND-EQUITY> 74,592
<SALES> 54,395
<TOTAL-REVENUES> 54,395
<CGS> 0
<TOTAL-COSTS> 49,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,178
<INCOME-PRETAX> 3,634
<INCOME-TAX> 1,170
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,464
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
