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Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
March 30, 1998
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
CASTLE DENTAL CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 1-13263 76-0486898
(STATE OR OTHER (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1360 Post Oak Boulevard, Suite 1300 Houston, Texas 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 479-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
Not applicable
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 30, 1998, Castle Dental Centers, Inc., a Delaware corporation
("Castle"), acquired (the "DCS Acquisition") the Class A Membership Interest and
Class D Membership Interest of Castle Dental Centers of California, L.L.C. The
DCS Acquisition was described in Castle's Current Report on Form 8-K dated March
30, 1998, as filed with the Securities and Exchange Commission (the
"Commission") on April 14, 1998, and as amended by Castle's Current Report on
Form 8-K/A filed with the Commission on June 15, 1998 (as so amended, the "March
30 8-K").
On December 30, 1998, Castle acquired (the "DCA Acquisition")
substantially all of the assets of DCA Limited Partnership, L.L.P., Dental
Administrators of Texas Limited Partnership, L.L.P., Dental Centers of America
Paymaster P.C., Bandera Road Dental Center, P.C., Ingram Park Family Dental
Center, P.C., Northeast Family Dental Center, P.C., Dental Centers of America at
Rolling Oaks Mall, PLLC, San Pedro Family Dental Center, P.C., Southpark Family
Dental Center, P.C., Windsor Park Family Dental Center, P.C., Dental Centers of
America at Barton Creek Square Mall, PLLC, Dental Centers of America at Lakeline
Mall, PLLC, Dental Centers of America at Hurst Northeast Mall, PLLC, Dental
Centers of America at Irving Mall, PLLC, Dental Centers of America at Six Flags
Mall, PLLC, Dental Centers of America at Waco, P.C., Dental Centers of America
at Mesquite, P.C., Dental Centers of America at Sherman, P.C., Dental Centers of
America at Richardson Square Mall, P.C. The DCA Acquisition was described in
Castle's Current Report on Form 8-K dated December 30, 1998, as filed with the
Commission on January 14, 1999 (the "December 30 8-K").
Castle included the financial statements of the businesses acquired in
the DCA Acquisition on December 1, 1998, the effective date in the December 30
8-K.
Castle hereby amends both the March 30 8-K and the December 30 8-K to
include the financial information concerning the DCS Acquisition and the DCA
Acquisition not previously included therein.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Not applicable
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS
Not applicable
ITEM 5. OTHER EVENTS
Not applicable
ITEM 6. REGISTRATION OF REGISTRANT'S DIRECTORS
Not applicable
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Financial Statements of the Businesses Acquired in connection with the DCS
Acquisition are set forth below:
(1) Martin Schechter, D.D.S., Inc., Elliot P Schlang, D.D.S., Inc.
and Soheil Soleimani, D.M.D., Inc.
(A) Report of Independent Accountants
(B) Combined Balance Sheets at December 31, 1997 and March 29,
1998
(C) Combined Statements of Operations for the year ended December
31, 1997 and for the period from January 1, 1998 through March
29, 1998
(D) Combined Statements of Changes in Stockholders Equity for the
year ended December 31, 1997 and for the period from January
1, 1998 through March 29, 1998
(E) Combined Statements of Cash Flows for the year ended December
31, 1997 and for the period from January 1, 1998 through March
29, 1998
(F) Notes to Combined Financial Statements
(2) Dental Consulting Services, LLC
(A) Report of Independent Accountants
(B) Balance Sheets at December 31, 1996 and 1997 and March 29,
1998
(C) Statements of Operations for the period from July 1, 1996
(Inception) through December 31, 1996, the year ended December
31, 1997, and for the period from January 1, 1998 through
March 29, 1998
(D) Statements of Changes in Members' Deficit for the period from
July 1, 1996 (Inception) through December 31, 1996, the year
ended December 31, 1997, and for the period from January 1,
1998 through March 29, 1998
(E) Statements of Cash Flows for the period from July 1, 1996
(Inception) through December 31, 1996, the year ended
December 31, 1997, and for the period from January 1, 1998
through March 29, 1998
(F) Notes to Financial Statements
Financial Statements of the Businesses Acquired in connection with the DCA
Acquisition were included in the December 30 8-K.
(b) Pro forma Financial Information
(1) Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1997
(2) Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1998
Pro forma consolidated balance sheets are not separately provided because the
accounts of the businesses acquired in the DCS Acquisition and the DCA
Acquisition are reflected in the Company's historical balance sheet at December
31, 1998.
(c) Exhibits
Not applicable
<PAGE>
ITEM 8. CHANGE IN FISCAL YEAR
Not applicable
ITEM 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S
Not applicable
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.
March 31, 1999 BY: /s/ JOHN M. SLACK
John M. Slack, Chief Financial Officer
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statements of Operations for the
years ended December 31, 1997 and 1998 have been prepared to reflect adjustments
to the Company's historical financial position and results of operations to give
effect to the transactions described below. They reflect such transactions as if
they had occured as of January 1, 1997.
On March 30, 1998, Castle acquired (the "DCS 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 and $2,689,151 in Castle's subordinated promissory notes.
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. At the time of closing of the DCS Acquisition, DCS
managed the dental practices of Martin Schechter, D.D.S., Inc., Elliot P.
Schlang, D.D.S., Inc., Soheil Soleimani, D.M.D., Inc.
Following the DCS 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.
On December 30, 1998, Castle acquired (the "DCA Acquisition")
substantially all of the assets of DCA Limited Partnership, L.L.P. ("DCA,
Ltd."), Dental Administrators of Texas Limited Partnership, L.L.P. ("DAI,
Ltd."), Dental Centers of America Paymaster P.C. ("Paymaster"), Bandera Road
Dental Center, P.C. ("Bandera"), Ingram Park Family Dental Center, P.C.
("Ingram"), Northeast Family Dental Center, P.C. ("Northeast"), Dental Centers
of America at Rolling Oaks Mall, PLLC ("Rolling Oaks"), San Pedro Family Dental
Center, P.C. ("San Pedro"), Southpark Family Dental Center, P.C. ("Southpark"),
Windsor Park Family Dental Center, P.C. ("Windsor"), Dental Centers of America
at Barton Creek Square Mall, PLLC ("Barton Creek"), Dental Centers of America at
Lakeline Mall, PLLC ("Lakeline"), Dental Centers of America at Hurst Northeast
Mall, PLLC ("Hurst"), Dental Centers of America at Irving Mall, PLLC ("Irving"),
Dental Centers of America at Six Flags Mall, PLLC ("Six Flags"), Dental Centers
of America at Waco, P.C. ("Waco"), Dental Centers of America at Mesquite, P.C.
("Mesquite"), Dental Centers of America at Sherman, P.C. ("Sherman"), for Dental
Centers of America at Richardson Square Mall, P.C. ("Richardson"), for
$13,220,000 in cash, $1,250,000 in promissory notes, 125,000 shares of common
stock, $.001 par value ("Common Stock"), of Castle.
<PAGE>
Castle Dental Centers, Inc.
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
HISTORICAL DCA DCS PRO FORMA,
COMPANY ACQUISITION ACQUISITION ACQUISITION AS
(A) (B) (C) ADJUSTMENTS ADJUSTED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net patient revenues ............ $ 46,225 $ 11,224 $ 9,146 $ -- $ 66,595
Expenses:
Dentist salaries and other
professional costs ......... 11,325 2,942 1,782 (34)(D) 16,015
Clinical salaries ............ 10,248 1,732 1,239 -- 13,219
Dental supplies and
laboratory fees ............ 4,335 1,488 911 -- 6,734
Rental and lease expense ..... 2,590 411 354 -- 3,355
Advertising and marketing .... 2,033 223 384 -- 2,640
Depreciation and
amortization ............... 2,132 161 51 1,286 (E) 3,630
Other operating expenses ..... 4,314 252 -- -- 4,566
General and administrative ... 5,929 3,890 2,057 (2,522)(F) 9,354
------- ------- ------- ------- -------
Total expenses ............ 42,906 11,099 6,778 (1,270) 59,513
------- ------- ------- ------- -------
Operating income ................ 3,319 125 2,368 1,270 7,082
Interest expense ................ 2,792 97 2 2,441 (G) 5,332
Other income .................... (84) (102) -- -- (186)
------- ------- ------- ------- -------
Income before income taxes and
extraordinary loss ............ 611 130 2,366 (1,171) 1,936
Provision for income taxes ...... 200 -- -- 535 (H) 735
------- ------- ------- ------- -------
Income before extraordinary loss 411 130 2,366 (1,706) 1,201
Extraordinary loss .............. (3,195) -- -- -- (3,195)
------- ------- ------- ------- -------
Net income (loss) ............... (2,784) 130 2,366 (1,706) (1,994)
Preferred stock dividends ....... (1,930) -- -- -- (1,930)
------- ------- ------- ------- -------
Net income (loss) attributable to
common stock .................. $(4,714) $ 130 $ 2,366 $(1,706) $(3,924)
======= ======= ======= ======= =======
Income (loss) per common share:
Basic and diluted:
Income before
Extraordinary loss ........ $ 0.10 $ 0.26
Extraordinary loss .......... (0.78) (0.69)
Net income (loss) ........... $ (0.68) $ (0.43)
======= =======
Weighted average number of
Common and common
Equivalent shares outstanding
Basic ....................... 4,100 4,632
======= =======
Diluted ..................... 4,132 4,664
======= =======
</TABLE>
<PAGE>
(A) Represents the consolidated statements of operations data of the
Company, for the year ended December 31, 1997.
(B) Represents the combined statement of operations data of DCA, Ltd, DAI,
Ltd., Paymaster, Bandera, Ingram, Northeast, Rolling Oaks, San Pedro, Southpark,
Windsor, Barton Creek, Lakeline, Hurst, Irving, Six Flags, Waco, Mesquite,
Richardson, and Sherman, for the year ended December 31, 1997.
(C) Represents the combined statement of operations data of Martin
Schechter, D.D.S., Inc., Elliot P. Schlang, D.D.S., Inc., Soheil Soleimani,
D.M.D., Inc, and Dental Consulting Services, LLC for the year ended December 31,
1997.
(D) To reflect the decrease in dentist salaries and other professional
costs in accordance with amounts due under the terms of employment agreements.
(E) To reflect the amortization of the costs of the acquisitions in excess
of the fair value of net assets obtained. The excess of cost over the fair value
of the net assets acquired has been assigned to the management service agreement
and is amortized over 25 years.
(F) To reflect the decrease in general and administrative costs,
management salaries, and other distributions to the former owners of the DCA and
DCS under the terms of employment and management service agreements.
(G) To reflect the increase in interest expense for borrowings under the
Company's credit facility to purchase DCS and DCA and interest on the
subordinated debt to the Sellers. The interest expense was computed based upon
actual interest rates under the credit facility and subordinated debt.
(H) To reflect the estimated tax effect of the pro forma adjustments (D)
through (G) utilizing a 38.0% combined federal and state tax rate.
<PAGE>
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1998
(In thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
HISTORICAL DCA DCS PRO FORMA
COMPANY ACQUISITION ACQUISITION ACQUISITION AS
(A) (B) (C) ADJUSTMENTS ADJUSTED
------------ ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net patient revenues ............ $ 74,823 $ 12,822 $ 2,600 $ -- $ 90,245
Expenses:
Dentist salaries and other
professional costs ......... 18,516 3,729 501 (181)(D) 22,565
Clinical salaries ............ 16,612 1,904 350 -- 18,866
Dental supplies and
laboratory fees ............ 7,197 2,010 297 -- 9,504
Rental and lease expense ..... 4,091 473 98 -- 4,662
Advertising and marketing .... 2,763 253 222 -- 3,238
Depreciation and
amortization ............... 3,615 134 20 721 (E) 4,490
Other operating expenses ..... 6,976 549 -- -- 7,525
General and administrative ... 8,145 3,413 611 (1,517)(F) 10,652
------- ------- ------- ------- -------
Total expenses ............ 67,915 12,465 2,099 (977) 81,502
------- ------- ------- ------- -------
Operating income ................ 6,908 357 501 977 8,743
Interest expense ................ 1,889 69 1 556 (G) 2,515
Other income .................... (57) (69) -- -- (126)
------- ------- ------- ------- -------
Income before income taxes ...... 5,076 357 500 421 6,354
Provision for income taxes ...... 1,490 -- -- 478 (H) 1,968
------- ------- ------- ------- -------
Net income (loss) ............... $ 3,586 $ 357 $ 500 $ (57) $ 4,386
======= ======= ======= ======= =======
Income per common share:
Basic and diluted:
Net income .................. $ 0.54 $ 0.64
======= =======
Weighted average number of
Common and common
Equivalent shares outstanding
Basic ....................... 6,586 6,799
======= =======
Diluted ..................... 6,608 6,821
======= =======
</TABLE>
<PAGE>
(A) Represents the consolidated statement of operations data of the
Company for the year ended December 31, 1998.
(B) Represents the combined statement of operations data of DCA, Ltd, DAI,
Ltd., Paymaster, Bandera, Ingram, Northeast, Rolling Oaks, San Pedro, Southpark,
Windsor, Barton Creek, Lakeline, Hurst, Irving, Six Flags, Waco, Mesquite,
Richardson, and Sherman, for the period from January 1, 1998 through November
30, 1998.
(C) Represents the combined statement of operations data of Martin
Schechter, D.D.S., Inc., Elliot P. Schlang, D.D.S., Inc., Soheil Soleimani,
D.M.D., Inc, and Dental Consulting Services, LLC for the period from January 1,
1998 through March 29, 1998.
(D) To reflect the decrease in dentist salaries and other professional
costs in accordance with amounts due under the terms of employment agreements.
(E) To reflect the amortization of the costs of the acquisitions in excess
of the fair value of net assets obtained. The excess of cost over the fair value
of the net assets acquired has been assigned to the management service agreement
and is amortized over 25 years.
(F) To reflect the decrease in general and administrative costs,
management salaries, and other distributions to the former owners of the DCA and
DCS under the terms of employment and management service agreements.
(G) To reflect the increase in interest expense for borrowings under the
Company's credit facility to purchase DCS and DCA and interest on the
subordinated debt to the Sellers. The interest expense was computed based upon
actual interest rates under the credit facility and subordinated debt.
(H) To reflect the estimated tax effect of the pro forma adjustments (D)
through (G) utilizing a 31.0% combined federal and state tax rate.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Martin Schechter, D.D.S., Inc.,
Elliot P. Schlang, D.D.S., Inc. and
Soheil Soleimani, D.M.D., Inc.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the combined financial position
of Martin Schechter, D.D.S., Inc., Elliot P. Schlang, D.D.S., Inc. and Soheil
Soleimani, D.M.D., Inc. as of December 31, 1997 and March 29, 1998, and the
combined results of their operations and their combined cash flows for the year
ended December 31, 1997, and for the period from January 1, 1998 through March
29, 1998, in conformity with generally accepted accounting principles. These
combined financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these combined
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
March 26, 1999
<PAGE>
MARTIN SCHECHTER, D.D.S., INC.
ELLIOT P. SCHLANG, D.D.S., INC. AND
SOHEIL SOLEIMANI, D.M.D., INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 29, 1998
(IN THOUSANDS)
DECEMBER 31, MARCH 29,
1997 1998
------------ ----------
ASSETS
Current assets:
Cash .......................................... $ 94 $ 156
Patient receivables, net ...................... 730 985
Related party receivables ..................... 51 64
Prepaid expenses and other current assets ..... 7 29
------ ------
Total current assets ......................... 882 1,234
Property and equipment, net ..................... 133 134
Intangible assets, net .......................... 8 99
Other assets .................................... 85 16
------ ------
Total assets ................................. $1,108 $1,483
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................. $ 27 $ 14
Accounts payable .............................. 212 72
Accrued salaries and benefits ................. 32 197
------ ------
Total current liabilities .................... 271 283
Amounts due to related parties .................. 333 333
Commitments and contingencies
Stockholders' equity:
Common stock .................................. 3 3
Retained earnings ............................. 501 864
------ ------
Total stockholders' equity ................... 504 867
------ ------
Total liabilities and stockholders' equity ... $1,108 $1,483
====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
MARTIN SCHECHTER, D.D.S., INC.
ELLIOT P. SCHLANG, D.D.S., INC. AND
SOHEIL SOLEIMANI, D.M.D., INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE PERIOD
FROM JANUARY 1,
YEAR ENDED 1998 THROUGH
DECEMBER 31, MARCH 29,
1997 1998
------------ ---------------
Net patient revenue ........................... $9,146 $2,600
Expenses:
Dentists' salaries .......................... 1,782 501
Clinical salaries ........................... 1,239 350
Dental supplies and laboratory fees ......... 911 297
Rent ........................................ 354 98
Advertising and marketing ................... 109 35
Depreciation and amortization ............... 51 20
General and administrative .................. 545 174
Management service fees ..................... 4,089 698
------ ------
Total expenses ............................. 9,080 2,173
------ ------
Operating income ........................... 66 427
Interest expense .............................. 2 1
------ ------
Net income ................................. $ 64 $ 426
====== ======
If all of the Company's operations had
been subject to income taxes, net income
would have been as follows (unaudited):
Historical income before income taxes ....... 64 426
Provision for income taxes .................. 27 179
------ ------
Pro forma net income ....................... $ 37 $ 247
====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
MARTIN SCHECHTER, D.D.S., INC.
ELLIOT P. SCHLANG, D.D.S., INC. AND
SOHEIL SOLEIMANI, D.M.D., INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
<S> <C> <C> <C> <C>
Balance At January 1, 1997 ........... 3,000 $ 3 $ 634 $ 637
Contribution from stockholders ..... -- -- 18 18
Distribution to stockholders ....... -- -- (215) (215)
Net income ......................... -- -- 64 64
------ ------ ------ ------
Balance at December 31, 1997 ......... 3,000 3 501 504
Distribution to stockholders ....... -- -- (65) (65)
Net income ......................... -- -- 428 428
------ ------ ------ ------
Balance at March 29, 1998 ............ 3,000 $ 3 $ 864 $ 867
====== ====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
MARTIN SCHECHTER, D.D.S., INC.
ELLIOT P. SCHLANG, D.D.S., INC. AND
SOHEIL SOLEIMANI, D.M.D., INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE
PERIOD FROM
JANUARY 1,
YEAR ENDED 1998 THROUGH
DECEMBER 31, MARCH 29,
1997 1998
Cash flows from operating activities:
Net income ................................ $ 64 $ 426
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization ............. 51 20
Changes in assets and liabilities:
Patient receivables ....................... (50) (255)
Related party receivables ................. (33) (13)
Prepaid expenses and other
current assets .......................... 3 (22)
Other assets .............................. (20) 6
Accounts payable and accrued
salaries and benefits ................... 92 25
----- -----
Net cash provided by operating
activities ............................ 107 187
----- -----
Cash flows from investing activities:
Purchase of equipment ..................... (76) (19)
Purchase of a dental practice ............. -- (93)
----- -----
Net cash used in investing
activities ............................ (76) (112)
----- -----
Cash flows from financing activities:
Proceeds from notes payable ............... 16
Repayment of notes payable ................ (13)
----- -----
Net cash provided by (used in)
financing activities .................. 16 (13)
----- -----
Net change in cash ...................... 47 62
Cash, beginning of period ................... 47 94
===== =====
Cash, end of period ......................... $ 94 $ 156
===== =====
Noncash transactions from financing
activities:
Noncash dividend to stockholders ........ $ 18 $ --
Noncash contribution from stockholders .. $ 215 $ 65
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
MARTIN SCHECHTER, D.D.S., INC.
ELLIOT P. SCHLANG, D.D.S., INC. AND
SOHEIL SOLEIMANI, D.M.D., INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION:
The statements reflect the combined operations of Martin Schechter,
D.D.S., Inc., Elliot P. Schlang, D.D.S., Inc. and Soheil Soleimani,
D.M.D., Inc. (collectively, the "Company"). The Company owns and operates
dental centers in the Southern California area that provide dental
services and products.
The financial statements for 1997 and 1998 reflect the combined operations
because these entities were under common management and control.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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.
PROPERTY AND EQUIPMENT
Property and Equipment is stated at cost. Depreciation of property and
equipment are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, which range
from three to seven years. Maintenance and repairs are charged to
operations whereas major renewals and betterments are capitalized.
INTANGIBLE ASSETS
The excess purchase price over the fair value of identifiable assets
acquired in transactions accounted for as a purchase are included in
intangible assets and amortized on a straight line basis over ten years.
In February 1998, the Company purchased a dental practice for $93,000.
The Company reviews the intangible asset for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. No such event has occurred in 1997 or 1998.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION
Net patient revenues represent amounts billed to patients for services
performed by dentists and sales of related products in connection with
those services. Dental revenue is recognized as the services are performed
and billed. Net revenues are reported at established rates reduced by
contractual amounts based on agreements with patients, third parties
payors and others obligated to pay for services rendered.
Accounts receivable consist primarily of receivables from patients,
insurers, and other third-party payers for dental services provided by
dentists at their net realizable amounts.
INCOME TAXES
The Companies are Subchapter S entities and, accordingly, all federal and
state tax liabilities are the responsibility of the shareholders.
Income taxes for the pro forma calculation are determined under the
liability method. Under this method, deferred income taxes are based on
the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted marginal tax rates
currently in effect.
ADVERTISING
Advertising costs are expensed as incurred.
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 date of the
financial statements and the reported amounts of revenue and expenses
during each reporting period. Actual results could differ from those
estimates.
<PAGE>
3. PROPERTY AND EQUIPMENT:
The details of property and equipment are as follows:
DECEMBER 31, MARCH 29,
1997 1998
(IN THOUSANDS)
Property and equipment:
Equipment ........................................ $ 273 $ 286
Leasehold improvements ........................... 198 199
Furniture and fixtures ........................... 359 364
----- -----
Total property and equipment .................... 830 849
Less: accumulated depreciation and amortization . (697) (715)
----- -----
Property and equipment, net ..................... $ 133 $ 134
===== =====
4. NOTES PAYABLE:
Notes payable consisted of the following:
DECEMBER 31, MARCH 29,
1997 1998
(IN THOUSANDS)
Term loan payable.............................. $ 16 $ 14
Notes payable.................................. 11 --
----- -----
$ 27 $ 14
===== =====
In 1997, the Company entered into a term loan payable for approximately
$16,000. Principal is payable in monthly installments including interest
of approximately $500 through December 2000, at which time all unpaid
principal together with accrued but unpaid interest shall be due and
payable in full.
5. MANAGEMENT CONSULTING AGREEMENTS:
The Company had entered into Management Consulting Agreements ("Consulting
Agreements") with Dental Consulting Services, LLC ("DCS"), an affiliate.
Three members of DCS are stockholders of the Company. According to the
Consulting Agreements, services to be provided by DCS 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 to DCS,
and is based on cash receipts, less cash disbursements associated with the
operations of the affiliated dental practices. The Company paid management
fees totaling $4,089,000, and $698,000 for the year ended December 31,
1997, and for the period from January 1, 1998 through March 29, 1998,
respectively.
6. 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.
7. RELATED-PARTY TRANSACTIONS:
Amounts due to related parties consist of cash proceeds from certain
entities owned by the stockholders to the Company used to finance the
operations of the dental centers and for general corporate purposes.
In addition to the management fees (note 5), the Company pays rental
expense on two of its locations to partnerships in which one of the
stockholders is a partner and one location in which two of the
stockholders of the Company are partners. The monthly rental expense for
these three locations are $12,000, $4,000 and $12,000, respectively.
Rental expense paid for these three locations totaled $288,000 and
$83,000, for the year ended December 31, 1997 and the period from January
1, 1998 to March 29, 1998, respectively.
8. SUBSEQUENT EVENT:
On March 30, 1998, DCS and Castle Dental Centers, Inc., formed Castle
Dental Centers of California, LLC, ("Castle West"). Castle West then
acquired 100% of the business of the Company. Castle West, a dental
practice management company, was formed to operate and develop the
Southern California market. Upon consummation of the transaction, Castle
West entered into new management services agreements with the Company.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Dental Consulting Services, LLC:
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in members' deficit and cash flows present fairly, in all
material respects, the financial position of Dental Consulting Services, LLC (a
limited liability company) (the "Company") as of December 31, 1996 and 1997 and
March 29, 1998, and the results of their operations and their cash flows for the
period from July 1, 1996 (inception) through December 31, 1996, the year ended
December 31, 1997, and for the period from January 1, 1998 through March 29,
1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Los Angeles, California
March 26, 1999
<PAGE>
DENTAL CONSULTING SERVICES, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 29,
1996 1997 1998
ASSETS
<S> <C> <C> <C>
Current assets:
Cash ........................................ $ 1 $ 112 $ 80
Prepaid expenses ............................ 1 1 1
----- ----- -----
Total current assets ................... 2 113 81
Equipment, net ................................ -- 18 16
Other assets .................................. -- 1 1
----- ----- -----
Total assets ........................... $ 2 $ 132 $ 98
===== ===== =====
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accrued salaries and benefits ............... $ 36 $ 44 $ 62
Accounts payable ............................ 1 193 82
Due to affiliated dental practices .......... 6 58 43
----- ----- -----
Total current liabilities .............. 43 295 187
----- ----- -----
Commitments and contingencies
Members' deficit:
Paid-in capital ............................. 59 -- --
Accumulated deficit ......................... (100) (163) (89)
----- ----- -----
Total members' deficit ................. (41) (163) (89)
----- ----- -----
Total liabilities and members' deficit . $ 2 $ 132 $ 98
===== ===== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE 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, THE YEAR
ENDED DECEMBER 31, 1997, AND FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MARCH
29, 1998
(IN THOUSANDS)
1996 1997 1998
Revenue:
Management fees ............................. $ 500 $ 4,288 $ 698
Expenses:
Salaries and benefits ....................... 423 1,015 292
Guaranteed payments ......................... 50 331 --
Legal expense ............................... 3 289 129
Advertising and marketing ................... 109 275 187
General and administrative .................. 15 76 16
------- ------- -------
Total expenses ......................... 600 1,986 624
------- ------- -------
Net income (loss) ...................... $ (100) $ 2,302 $ 74
======= ======= =======
If all of the Company's operations
had been subject to income taxes,
net income would have been as
follows (unaudited):
Historical income (loss) before income taxes $ (100) $ 2,302 $ 74
Benefit (provision) for income taxes ........ 42 (974) (31)
------- ------- -------
Pro forma net income (loss) ............ $ (58) $ 1,328 $ 43
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
DENTAL CONSULTING SERVICES, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
(IN THOUSANDS)
TOTAL
PAID-IN RETAINED MEMBERS'
CAPITAL EARNINGS DEFICIT
Balance at July 1, 1996 (inception) ... -- -- --
Contributions from members .......... $ 109 -- $ 109
Distributions to members ............ (50) -- (50)
Net loss ............................ -- $ (100) (100)
------- ------- -------
Balance at 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 at December 31, 1997 .......... -- (163) (163)
Net income .......................... -- 74 74
------- ------- -------
Balance at March 29, 1998 ............. $ -- $ (89) $ (89)
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE 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, THE YEAR
ENDED DECEMBER 31, 1997, AND FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MARCH
29, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ (100) $ 2,302 $ 74
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation .......................................... -- 3 2
Changes in operating assets and liabilities:
Prepaid expenses ..................................... (1) -- --
Other assets ......................................... -- (1) --
Accrued salaries and benefits ........................ 36 8 18
Accounts payable ..................................... 1 192 (111)
Due to affiliated dental practices ................... 6 52 (15)
------- ------- -------
Net cash provided by (used in) operating activities (58) 2,556 (32)
------- ------- -------
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 (decrease) in cash ................... 1 111 (32)
Cash, beginning of period ................................. -- 1 112
------- ------- -------
Cash, end of period ....................................... $ 1 $ 112 $ 80
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE 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"), 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 five members. As of March 29, 1998, one member
held a 1% interest in the Company and each of the four remaining members
had a 24.75% interest in the Company. The Company shall terminate on
December 31, 2060 or prior, subject to certain conditions noted in the
operating 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).
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.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 income taxes are based on
the differences between the financial reporting and tax bases 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 $41,000 and $163,000 as of December 31,
1996 and 1997. There were no distributions made during the period from
January 1, 1998 through March 29, 1998.
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.
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.
<PAGE>
4. MANAGEMENT CONSULTING AGREEMENTS:
As of December 31, 1997, the Company had entered into management
consulting agreements (the "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.
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.
5. SUBSEQUENT EVENT:
On March 30, 1998, the Company and Castle Dental Centers, Inc., formed
Castle Dental Centers of California, LLC, ("Castle West"). Castle West
then acquired 100% 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.
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.
6. RELATED-PARTY TRANSACTIONS:
Three of the members of the Company were also owners of the affiliated
dental practices as of March 29, 1998 and were each paid an annual salary
and consulting fee of $60,000.
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 totaling
$50,000 and $331,000 were incurred for the six months ended December 31,
1996 and the year ended December 31, 1997, respectively. There were no
such payments for the period from January 1, 1998 through March 29, 1998.
<PAGE>
6. 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, were reimbursed by the Company and the affiliated
dental practices. The Company incurred $109,000, $275,000 and $187,000 for
services rendered by Smile for the six months ended December 31, 1996, the
year ended December 31, 1997 and for the period from January 1, 1998
through March 29, 1998, respectively. Castle West acquired Smile on March
30, 1998.
Certain expenses were paid by affiliated dental practices and the members
on behalf of the Company. These expenses totaled $6,000 and $52,000 for
the six months ended December 31, 1996 and the year ended December 31,
1997. There were no such expenses for the period from January 1, 1998
through March 29, 1998. The remaining liability due to the affiliates
totaled $6,000, $58,000 and $43,000 as of December 31, 1996, and 1997 and
as of March 29, 1998, respectively.
7. 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.
The Company carries insurance with coverage and coverage limits that it
believes to be customary in the dental industry. Although there can be no
assurance that such insurance will be sufficient to protect the Company
against all contingincies, management believes that its insurance
protection is resonable in view of the nature and scope of the Company's
operations.
