UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) APRIL 14, 1998
CASTLE DENTAL CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-22985 76-0486898
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) FILE NUMBER) 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)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 30, 1998, Castle Dental Centers, Inc., a Delaware corporation
("Castle"), acquired (the "Acquisition") the Class A Membership Interest and
Class D Membership Interest of Castle Dental Centers of California, L.L.C., a
Delaware limited liability company ("Castle West"), for $10,756,780 in cash,
$2,689,151 in Castle's subordinated promissory notes and 407,454 shares of
common stock. Castle West was formed by CDC of California, Inc., a wholly owned
subsidiary of Castle ("CDC"), and Dental Consulting Services, LLC, a California
limited liability company ("DCS"), for the purpose of acquiring the dental
practice management business of DCS ("Business") from DCS. The Business consists
primarily of five dental offices in the Los Angeles metropolitan area with 27
affiliated dentists.
Castle financed the cash portion of the Acquisition through borrowings under its
existing Credit Facility with NationsBank of Texas, N.A., as agent for the
lenders thereunder.
Following the Acquisition: (i) CDC owns the Class A Membership Interest and the
Class D Membership Interest in Castle West; (ii) sole-purpose corporations (the
"Corporate B Members") formed by the members of DCS ("DCS Members") collectively
own 100% of DCS, which owns the Class B Membership Interest in Castle West; and
(iii) sole-purpose corporations (the "Corporate C Members") formed by the
members ("Holdings Members") of Capital West Holdings, LLC, a newly formed
limited liability company ("Holdings"), collectively own 100% of Holdings, which
owns the Class C Membership Interest in Castle West.
The Class A Membership Interest and the Class D Membership Interest have, in the
aggregate, an 80% interest in Castle West's profits and losses and a 60%
interest in Castle West's initial capital. The Class B Membership Interest has
no interest in Castle West's profits and losses and a 20% interest in Castle
West's initial capital. The Class C Membership Interest has a 20% interest in
Castle West's profits and losses and a 20% interest in Castle West's initial
capital. Castle West will be governed by a board of directors ("Board")
consisting of five members, three of whom are elected by CDC as the holder of
the Class D Membership Interest.
CDC has entered into a Management Agreement ("Management Agreement") with
Holdings pursuant to which Holdings will, subject to the control of the Board,
manage the day-to-day operations of Castle West's operations. The Management
Agreement provides for the payment of certain incentive fees if Castle West's
EBITDA growth rate exceeds 25% per annum.
The Corporate B Members as a group were granted the one-time right (the "B
Right"), beginning at least one year after the consummation of the closing of
the Acquisition ("Closing"), to convert their indirect interests in Castle West
into shares of common stock of Castle ("Castle Common Stock"), through a merger
of all of the Corporate B Members into CDC. An aggregate of 407,452 shares of
Castle Common Stock are currently issuable upon conversion of the B Right,
subject to adjustment on the first anniversary of the Closing as described
below.
Over the one-year period following the Closing, the purchase price of the Class
A Membership Interest and the number of shares of Castle Common Stock issuable
upon exercise of the B Right will be increased to reflect the anticipated
acquisition by Castle West of additional clinics in the Los Angeles metropolitan
area. The amount of cash and notes payable for the Class A Membership Interest
will be increased as such acquisitions are made and the number of shares
issuable upon exercise of the B Right will be adjusted at the first anniversary
of the Closing Date. Such adjustments will be made in such a manner that the
aggregate purchase price for the Class A Membership Interest and number of
shares issuable upon exercise of the B Right will continue to be in the ratio of
60% in cash, 15% in notes and 25% in Castle Common Stock.
<PAGE>
Each Corporate C Member was granted the one-time right (the "Put Right"),
beginning at the start of the 25th month after the consummation of the Closing,
to convert its indirect interest in Castle West into shares of Castle Common
Stock and/or cash through a merger of the Corporate C Member into CDC. The
consideration to be received upon the exercise of the Put Right ("Put
Consideration") will be dependent upon the financial performance of Castle West
up to the date the Put Right is exercised. Each Corporate C Member will have the
right to elect to receive the Put Consideration (i) 100% in Castle Common Stock
or (ii) up to 50% in cash and the remainder in Castle Common Stock; provided
that if a Corporate C Member elects to receive more than 25% of the Put
Consideration in cash, CDC has the right to substitute subordinated promissory
notes ("Notes") of Castle for cash in excess of such 25%.
CDC was granted the one-time right ("Call Right"), beginning at the start of the
31st month after the consummation of the Closing, to convert all of the
Corporate C Members' indirect interests in Castle West into shares of Castle
Common Stock and/or cash through a merger of the Corporate C Members into CDC.
The consideration to be received upon the exercise of the Call Right ("Call
Consideration") will be determined and payable in the same manner as the Put
Consideration.
If Castle West terminates the Management Agreement or breaches the Management
Agreement in such a manner as to give Holdings the right to terminate the
Management Agreement, the Corporate B Members, as a group, will have the right
to accelerate the Put Right and the B Right. If Holdings terminates the
Management Agreement or breaches the Management Agreement in such a manner as to
give Castle West the right to terminate the Management Agreement, Castle West
will have the right to accelerate the Call Right and treat the B Right as being
exercised.
At the Closing, Castle West, DCS, Holdings, each Corporate B Member, each
stockholder of each Corporate B Member ("B Stockholder"), each Corporate C
Member and each stockholder of each Corporate C Member ("C Stockholder") entered
into a Shareholders' Agreement ("Shareholders' Agreement") with CDC which, among
other things (i) precludes the transfers of ownership interests in Castle West,
DCS, Holdings, any Corporate B Member or any Corporate C Member (collectively,
the "Companies") other than to immediate family members or persons controlled
by, controlling or under common control with the B Stockholders or C
Stockholders and (ii) grants powers of attorney coupled with an interest to
certain officers of Castle which would allow such attorneys-in-fact to vote the
outstanding shares of common stock of each Corporate B Member and Corporate C
Member in favor of the mergers necessary to consummate the Call Right and the B
Right. The Shareholders' Agreement will remain in place until CDC acquires,
directly or indirectly, all of the outstanding securities of the Companies.
The Shareholders' Agreement does not restrict CDC's right to sell the Class D
Membership Interest. However, pursuant to the limited liability company
agreement of Castle West, unless the Class D Membership Interest is sold as part
of the sale of all of Castle's assets or in a similar transaction, (i) Holdings
will have a tag along right to participate in any such sale and (ii) Castle must
first offer to Holdings a right to negotiate to purchase the Business.
Castle entered into a Registration Rights Agreement with regard to the Castle
Common Stock issuable to the Corporate B Stockholders and the Corporate C
Stockholders upon consummation of the mergers contemplated by the B Right, Put
Right and Call Right granting them (i) piggyback registration rights and (ii)
one demand right with respect to any shares issued upon exercise of the Call
Right.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
These financial statements include the accounts and records for
DCS as of December 31, 1996 and 1997 and for the period from
inception July 1, 1996 to December 31, 1996 and the year ended
December 31, 1997. The financial information of DCS and the
affiliated dental practices are not shown on a combined basis, as
the information was not available. The combined financial
information, as well as pro forma financial information will be
prepared as soon as it becomes available.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Dental Consulting Services, LLC
We have audited the accompanying balance sheets of Dental Consulting Services,
LLC (a limited liability company) (the "Company") as of December 31, 1996 and
1997, and the related statements of operations, changes in members' deficit and
cash flows for the period from July 1, 1996 (Inception) through December 31,
1996 and the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dental Consulting Services, LLC
(a limited liability company) as of December 31, 1996 and 1997, and the results
of its operations and its cash flows for the period from July 1, 1996
(Inception) through December 31, 1996 and the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
March 30, 1998
<PAGE>
DENTAL CONSULTING SERVICES, LLC
(A Limited Liability Company)
BALANCE SHEETS
December 31, 1996 And 1997
(In Thousands)
1996 1997
---- ----
A S S E T S:
Current assets:
Cash $1 $112
Prepaid expenses 1 1
- -----
Total current assets 2 113
Equipment, net of accumulated depreciation of $3 - 18
Other assets - 1
- -
Total assets $2 $132
= ===
LIABILITIES AND MEMBERS' DEFICIT:
Liabilities:
Accrued salaries and benefits $36 $44
Accounts payable 1 193
Due to affiliated dental practices 6 58
---- ----
Total current liabilities 43 295
-- ---
Commitments and contingencies
Members' deficit:
Additional paid-in capital 59 -
Accumulated deficit (100) (163)
--- ---
Total members' deficit (41) (163)
-- ---
Total liabilities and members' deficit $2 $132
= ===
The accompanying notes are an integral part of these financial statements.
<PAGE>
DENTAL CONSULTING SERVICES, LLC
(A Limited Liability Company)
STATEMENTS OF OPERATIONS
For The Period From July 1, 1996 (Inception)
Through December 31, 1996
And The Year Ended December 31, 1997
(In Thousands)
1996 1997
---- ----
Revenue:
Management fees $500 $4,288
--- -----
Expenses:
Salaries and benefits 423 1,015
Guaranteed payments 500 331
Legal expense 3 289
Advertising and marketing 109 275
General and administrative 15 76
-- --
Total expenses 600 1,986
--- -----
Net (loss) income ($100) $2,302
=== =====
If all of the Company's operations had been subject to
income taxes, net income would have been as
follows (unaudited):
Historical (loss) income before income taxes ($100) $2,302
Benefit (provision) for income taxes 42 (974)
-- ----
Pro forma net (loss) income ($58) $1,328
== =====
The accompanying notes are an integral part of these financial statements.
<PAGE>
DENTAL CONSULTING SERVICES, LLC
(A Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
For The Period From July 1, 1996 (Inception)
Through December 31, 1996
And The Year Ended December 31, 1997
(In Thousands)
ADDITIONAL TOTAL
PAID-IN RETAINED MEMBERS'
CAPITAL EARNINGS DEFICIT
Balance, July 1, 1996 (Inception) - - -
Contributions from members $109 - $109
Distributions to members (50) - (50)
Net loss - ($100) (100)
--- --- ---
Balance, December 31, 1996 59 (100) (41)
Contributions from members 318 - 318
Distributions to members (377) (2,365) (2,742)
Net income - 2,302 2,302
--- ----- -----
Balance, December 31, 1997 $ - ($163) ($163)
====== === ===
The accompanying notes are an integral part of these financial statements.
<PAGE>
DENTAL CONSULTING SERVICES, LLC
(A Limited Liability Company)
STATEMENTS OF CASH FLOWS
For The Period From July 1, 1996 (Inception)
Through December 31, 1996
And The Year Ended December 31, 1997
(In Thousands)
1996 1997
---- ----
Cash flows from operating activities:
Net (loss) income ($100) $2,302
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation - 3
Changes in assets and liabilities:
Other assets - (1)
Prepaid expenses (1) -
Accrued salaries and benefits 36 8
Accounts payable 1 192
Due to affiliated dental practices 6 52
- --
Net cash (used in) provided by
operating activities (58) 2,556
-- -----
Cash flows from investing activities:
Purchase of equipment - (21)
--- --
Net cash used in investing activities - (21)
--- --
Cash flows from financing activities:
Contributions from members 109 318
Distributions to members (50) (2,742)
--- -----
Net cash provided by (used in)
financing activities 59 (2,424)
-- -----
Net increase in cash 1 111
Cash, beginning of period - 1
--- -
Cash, end of period $1 $112
= ===
The accompanying notes are an integral part of these financial statements.
<PAGE>
DENTAL CONSULTING SERVICES, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
1. Organization And Formation Of The Company:
Dental Consulting Services, LLC (the "Company" or "DCS"), was formed on
July 1, 1996 to provide various consulting and administrative services to
dental centers located in the Los Angeles, California area.
The Company is owned by four members and as of December 31, 1997, each
member had a 25% interest in the Company. The Company shall terminate on
December 31, 2060 or prior, subject to certain conditions noted in Section
9.1 of the Operating Agreement (the "Agreement").
2. Summary Of Significant Accounting Policies:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
CASH
The Company considers all highly liquid financial investments with
original maturities of three months or less when purchased to be cash and
cash equivalents.
EQUIPMENT
Equipment is stated at cost and depreciated using a method approximating
the straight-line method over the estimated useful lives, which range from
5 to 7 years. Maintenance and repairs are charged to operations. Major
renewals and betterments are capitalized.
REVENUE RECOGNITION
Management fees are earned by the Company through services provided to
various dental practices. Management fees, which are recognized as earned,
are based on the excess of cash receipts over disbursements of the dental
practices (see Note 5).
<PAGE>
2. Summary Of Significant Accounting Policies, Continued:
GUARANTEED PAYMENTS
Guaranteed payments are earned by certain members who provide additional
administrative and management services to the Company. These payments must
be approved by all four members.
INCOME TAXES
The Company is a limited liability company ("LLC") and is treated as a
partnership for federal income tax purposes. As such, any tax attributes
flow through to the members.
Income taxes for the pro forma calculation are determined under the
liability method. Under this method, deferred taxes are based on the
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted marginal tax rates
currently in effect.
ADVERTISING
Advertising costs are expensed as incurred.
CONCENTRATION OF CREDIT RISK
The Company has cash in accounts with financial institutions, which are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000 each. At various times throughout the year, the Company may have
cash in financial institutions that exceeds the FDIC insurance limit.
3. Members' Deficit:
The Company has made distributions to members in excess of earnings
resulting in a members' deficit of $163,000 as of December 31, 1997.
As discussed in Note 1, during 1996, the Company was organized as an LLC.
As such, the liability of the members of the Company is limited to their
respective capital contributions, and in no event shall any member be
personally liable for any liabilities or obligations of the Company.
However, under California statute, if excess distributions are made by the
Company resulting in a members' deficit, the members could be obligated to
reimburse the amount of excess distributions.
<PAGE>
3. Members' Deficit, Continued:
The business and affairs of the Company are managed by the Company's
managers, who are also members. Pursuant to the Agreement, the number of
managers is fixed at four. However, the Agreement provides that the number
of managers appointed may be increased by an affirmative vote or written
consent of a majority of the managers.
Distributions by the Company shall be made to the members, first, in
proportion to their unreturned capital contributions until those
contributions have been recovered, and, second, in proportion of the
members' percentage interest in the LLC. As of December 31, 1997, all
members have recovered their initial capital contributions.
4. Income Taxes:
The difference between the federal tax rate and the Company's effective
tax rate for the six months ended December 31, 1996 and the year ended
December 31, 1997 was as follows:
DECEMBER 31,
1996 1997
(In Thousands)
(Benefit) tax at U.S. statutory rate (34%) ($34) $783
State income (benefit) tax, net of
federal tax (8) 191
Income not subject to corporate level
federal and state taxes 42 (974)
-- ---
$ - $ -
==== ===
5. Management Consulting Agreements:
As of December 31, 1997, the Company had entered into Management
Consulting Agreements ("Consulting Agreements") with dental centers
(herein after referred to as "affiliated dental practices"). According to
the Consulting Agreements, services to be provided include selection and
training of nondental personnel, billing, marketing, collection and
accounting services, purchasing of office and dental supplies, and access
to, and maintenance of, dental equipment.
<PAGE>
5. Management Consulting Agreements, Continued:
Compensation for management services rendered is payable monthly, and is
based on cash receipts, less cash disbursements associated with the
operations of the affiliated dental practices. The Company earned
management fees totalling $500,000 and $4,288,000 for the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively.
The Consulting Agreements, effective July 1, 1996, will continue
indefinitely, with termination determined by mutual agreement of all
parties, upon an occurrence of a breach of the Consulting Agreements, or
as determined by a court of law.
The financial information of the Company and the affiliated dental
practices are not shown on a combined basis, as they were not operated
under common control, nor did the Company have controlling financial
interests in the affiliated dental practices. The historical information
of the affiliated dental practices is included solely for potential
investors regarding the group of entities with which DCS has contracted to
provide services.
The historical operating revenues and expenses of the affiliated dental
practices were as follows (in thousands):
For The Six For The
Months Ended Year Ended
December 31, December 31,
1996 1997
---- ----
(Unaudited)
Revenue:
Revenue $3,877 $9,469
----- -----
Expenses:
Salaries and benefits 650 1,277
Associates and services fees 762 1,833
Management fees 500 4,157
Advertising and marketing 89 110
Depreciation 16 29
Drugs and other supplies 299 946
Professional fees 9 74
General and administration 612 870
--- ---
Total expenses 2,937 9,296
----- -----
Net income $940 $173
=== ===
<PAGE>
6. Subsequent Event:
On March 30, 1998, the Company and Castle Dental Centers, Inc., a Delaware
corporation, formed Castle Dental Centers of California, LLC, a Delaware
limited liability company ("Castle West"). Castle West then acquired 80%
of the business of the Company. Castle West, a dental practice management
company, was formed to operate and develop the Southern California market.
Total consideration for the acquisition was approximately $18,000,000,
consisting of cash, subordinated notes, and common stock. Castle West
intends to immediately begin entering into management agreements with
additional practices in the Los Angeles, California area.
Certain assets of the affiliated dental practices were transferred to
Castle West. The assets consisted of property and equipment, the recorded
value of which totaled $228,000 as of December 31, 1997.
Upon consummation of the transaction, Castle West entered into new
Management Services Agreements with the affiliated dental practices. In
addition, each of DCS' members have entered into a noncompetition
agreement, which prohibits each member from competing with Castle West for
a minimum period of five years.
7. Related-Party Transactions:
Two of the members of the Company are also owners of the affiliated dental
practices and are each paid an annual salary of $60,000. One of these
members is also hired as a consultant for another dental practice, and is
paid an annual salary of $60,000. In addition, the other two members of
the Company are hired by the affiliated dental practices as consultants,
and are each paid $60,000 annually. Such compensation arrangement was
negotiated between the owners of the affiliated dental practices and the
members of the Company.
Certain managers of the Company, who are also members, provided additional
services and were paid for their time. These amounts are reflected as
"Guaranteed Payments." Expenses for such additional services totalling
$50,000 and $331,000 were incurred for the six months ended December 31,
1996 and the year ended December 31, 1997, respectively.
The Company utilizes the facilities of one of the affiliated dental
practices to maintain its operations. However, the Company does not pay
the affiliated dental practice for usage of the facilities.
<PAGE>
7. Related-Party Transactions, Continued:
In June 1996, Smile Network, Inc. ("Smile") was formed to provide
marketing and advertising services for the Company and the affiliated
dental practices. The sole owner of Smile was a former employee of one of
the affiliated dental practices. All of Smile's operating expenses,
including payroll, are reimbursed by the Company and the affiliated dental
practices. The Company incurred $109,000 and $275,000 for services
rendered by Smile for the six months ended December 31, 1996 and the year
ended December 31, 1997, respectively. The Company acquired Smile in March
1998.
Certain expenses were paid by all four of the members on behalf of the
Company. These amounts have been expensed by the Company and the remaining
liability due to the members totals $6,000 and $58,000 for the six months
ended December 31, 1996 and the year ended December 31, 1997,
respectively.
8. Commitments And Contingencies:
The Company is involved in various litigation arising in the ordinary course of
business. Although the final outcome of these legal matters cannot be
determined, it is management's opinion that the final resolution of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
(b) Pro forma financial information
Pro forma financial information including the Business acquired is
not included in this Form 8-K/A Amendment No. 1. Such pro forma
financial information will be filed as soon as the financial
statements are available. See Item 7. (a).
(c) Exhibits
Previously 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 hereunto duly authorized.
CASTLE DENTAL CENTERS, INC.
June 15, 1998 By: JOHN M. SLACK
Chief Financial Officer
