SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
|_| 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 August 11, 2000 was 6,417,206.
<PAGE>
CASTLE DENTAL CENTERS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
December 31, 1999 and June 30, 2000............................... 3
Condensed Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 1999 and 2000.. 4
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 2000................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................... 16
PART II. OTHER INFORMATION
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........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES................................................................... 18
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 59 $ 60
Patient receivables, net .................................................... 16,928 17,071
Unbilled patient receivables, net ........................................... 4,667 4,961
Prepaid expenses and other current assets ................................... 6,687 6,063
----------- ------------
Total current assets ............................................ 28,341 28,155
----------- ------------
Property and equipment, net ................................................. 20,361 21,135
Intangibles, net ............................................................ 64,020 62,869
Other assets ................................................................ 2,260 2,687
----------- ------------
Total assets .................................................... $ 114,982 $ 114,846
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 2,192 $ 61,770
Accounts payable and accrued liabilities .................................... 9,855 9,631
Deferred compensation payable, related party ................................ 526 263
----------- ------------
Total current liabilities ....................................... 12,573 71,664
----------- ------------
Long-term debt, net of current portion ........................................ 53,996 1,337
Deferred income taxes ......................................................... 6,896 5,281
Minority interest ............................................................. 4,354 --
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 19,000,000 shares authorized, 6,417,206 shares
issued and outstanding at December 31, 1999 and June 30, 20000, respectively 6 6
Additional paid-in capital .................................................. 42,086 42,086
Accumulated deficit ......................................................... (4,929) (5,528)
----------- ------------
Total stockholders' equity ...................................... 37,163 36,564
----------- ------------
Total liabilities and stockholders' equity ...................... $ 114,982 $ 114,846
=========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net patient revenues ............................ $ 25,661 $ 26,699 $ 50,828 $ 53,229
Expenses:
Dentist salaries and other professional costs 6,947 6,931 13,545 13,909
Clinical salaries ........................... 5,444 5,127 10,773 10,161
Dental supplies and laboratory fees ......... 2,185 2,965 4,479 5,651
Rental and lease expense .................... 1,483 1,703 2,930 3,364
Advertising and marketing ................... 947 984 1,761 1,934
Depreciation and amortization ............... 1,443 1,746 2,856 3,383
Other operating expenses .................... 1,499 1,839 2,968 3,555
Bad debt expense ............................ 647 1,129 1,402 2,297
General and administrative .................. 2,501 2,570 4,910 5,326
-------- -------- -------- --------
Total expenses ........................... 23,096 24,994 45,624 49,580
-------- -------- -------- --------
Operating income ................................ 2,565 1,705 5,204 3,649
Litigation expense .............................. 1,366 1,495 1,366 1,495
Interest expense ................................ 1,023 1,661 2,016 3,095
Other (income) expense, net ..................... 1 (1) 2 (3)
-------- -------- -------- --------
Income (loss) before income taxes ............... 175 (1,450) 1,820 (938)
Provision (benefit) for income taxes ............ 68 (539) 710 (339)
-------- -------- -------- --------
Net income (loss) ............................... $ 107 $ (911) $ 1,110 $ (599)
======== ======== ======== ========
Income (loss) per common share:
Basic and diluted ........................... $ 0.02 $ (0.14) $ 0.16 $ (0.09)
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic ....................................... 6,825 6,417 6,825 6,484
======== ======== ======== ========
Diluted ..................................... 6,896 6,884 6,885 6,900
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1999 2000
------- --------
<S> <C> <C>
Net cash provided by operating activities ........................ $ 3,364 $ 1,423
Investing activities:
Capital expenditures ........................................... (6,014) (2,364)
Acquisition of affiliated dental practices, net of cash acquired (365) (5,039)
------- --------
Net cash used in investing activites ............................. (6,379) (7,403)
------- --------
Financing activities:
Payments of long-term debt and capital lease obligations ....... (1,165) (8,792)
Proceeds from debt ............................................. 3,800 15,570
Debt issuance costs ............................................ -- (797)
------- --------
Net cash provided by financing activities ........................ 2,635 5,981
------- --------
Net change in cash and cash equivalents .......................... (380) 1
Cash and cash equivalents, beginning of the period ............... 695 59
------- --------
Cash and cash equivalents, end of the period ..................... $ 315 $ 60
======= ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements
5
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED 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 ("affiliated dental practices") under long-term management services
agreements.
The consolidated financial statements include the accounts of the Company and
all wholly-owned and beneficially-owned subsidiaries and the accounts of
affiliated dental practices in which the Company has a long-term controlling
financial interest. 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
("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 majority shareholder of the capital stock of the professional corporation at
a nominal cost ("nominee arrangements"). At June 30, 2000, all of the affiliated
dental practices were wholly-owned by dentists with whom the Company had a
nominee arrangement. 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, except professional
corporations located in California, is generally comprised of three components:
(i) the costs incurred by it on behalf of the affiliated dental 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. In California, the Company is
paid a monthly management fee comprised of two components: (i) the costs
incurred by it on behalf of the affiliated practice and (ii) a management fee in
an amount ranging from 15.0% to 30.0% of net patient revenues. The amount of the
management fee is reviewed by the Company and the affiliated dental practice at
least annually in order to determine whether such fee should be adjusted to
continue to reflect the fair value of the management services rendered by the
Company.
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. Net patient revenues are
presented in the accompanying statement of operations because the Company must
present consolidated financial statements. All significant intercompany accounts
and transactions, including management fees, have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements as of June 30,
2000 and for the three and six months ended June 30, 1999 and 2000 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
6
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year.
2. EARNINGS PER SHARE:
Basic earnings per share for all periods presented equals net income divided
by weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share reflects the effect of dilutive stock options
and convertible debt.
3. ACQUISITIONS
In January 2000, the Company entered into a settlement agreement with Dental
Consulting Services, LLC ("DCS"), a 20% shareholder in the Company's California
entity, Castle West. Pursuant to the terms of the settlement agreement, the
Company acquired the 20% minority interest and a conversion right held by DCS.
Total consideration paid by the Company was $5.3 million of which $300,000 was
paid in November 1999 as a deposit. The additional consideration was recorded as
follows:
Prepaid expenses and other current assets ..................... $ (334)
Other assets .................................................. (305)
Management services agreements ................................ 149
Accounts payable and accrued liabilities ...................... (100)
Deferred income taxes ......................................... 1,275
Minority interest ............................................. 4,354
-------
Cash purchase price, net of cash acquired ................. $ 5,039
=======
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 $55.0 million and is scheduled
to mature November 2002. Revolving credit advances under the Credit Agreement
require quarterly interest payments through March 2001 when principal is
scheduled to become payable based on a five-year quarterly amortization and a
final payment at maturity. Borrowings under the bank credit facility may at no
time exceed a specified borrowing base, which is calculated as a multiple of the
Company's earnings before interest, income taxes, depreciation and amortization
("EBITDA"), as adjusted. 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 percent to 0.5 percent of the unused
amounts for such quarter. The Credit Agreement is collateralized by
substantially all of the Company's assets and contains affirmative and negative
covenants that require the Company to maintain certain financial ratios, limit
the creation or existence of liens and set certain restrictions on acquisitions,
mergers, sale of assets and restrict the payment of dividends. At June 30, 2000,
approximately $43.9 million was outstanding under the Credit Agreement.
In January 2000, the Company amended its Credit Agreement and entered into a
senior subordinated note agreement (Subordinated Note Agreement) and a
subordinated convertible note agreement (Convertible Note Agreement) with two
lenders. The Subordinated Note Agreement and Convertible Note Agreement provide
for borrowings of $13.7 million and $1.3 million, respectively. Loans under the
Subordinated Note Agreement bear interest at the 90-day LIBOR rate plus five and
one-half percent, payable quarterly, and are due in eight quarterly
7
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
installments beginning in the sixty-third month following the closing date.
Loans under the Convertible Note Agreement bear interest at the same rate as
loans under the Subordinated Note Agreement and are due on demand beginning
seven years after the closing date with a final maturity date of January 30,
2009. The convertible note is convertible at any time into 442,880 shares of
Company common stock at the request of the holders at a fixed conversion price
of $3.1125 per share. The Subordinated Note Agreement and Convertible Note
Agreement contain affirmative and negative covenants that require that the
Company maintain certain financial ratios, limit the amount of additional
indebtedness, limit the creation or existence of liens, set certain restrictions
on acquisitions, mergers and sales of assets and restrict the payment of
dividends.
As a result of losses due to litigation expenses incurred in June 2000,
the Company was not in compliance with certain financial covenants of the Credit
Agreement, Subordinated Note Agreement and Convertible Note Agreement (Debt
Agreements). As a result, amounts outstanding under these agreements at June 30,
2000 were callable. Accordingly, the Company was in default under these
agreements and has classified the related debt as a current liability at June
30, 2000. The Company has requested waivers of these covenant violations and
expects to obtain such waivers by September 15, 2000. There can be no assurance
that the Company will receive the requested waivers. Based upon its current
operating plans which assume that the debt is not called, the Company projects
to have sufficient funds to meet its operating requirements through the fiscal
year ending December 31, 2000. However, there may not be sufficient funds to
begin scheduled repayments under the Credit Agreement in March 2001 or pay the
outstanding debt under the Debt Agreements if waivers cannot be obtained.
Management believes it will be able to replace the bank credit facility with
other financing or restructure the bank credit facility. However, there is no
assurance that such financing will be available or that the related terms and
conditions will be acceptable to the Company. If the Company cannot obtain such
alternative financing or refinancing of its current line of credit, it would
have a material and adverse effect on the Company's financial position.
In order to increase its liquidity, the Company has developed the
following strategies; (i) suspension of the development of any new dental
centers after completion of two centers presently under construction, (ii)
implementation of stricter credit policies to reduce the amount of new accounts
receivable, (iii) selective reductions in personnel and other overhead expenses,
(iv) raising additional capital, and (v) seeking other strategic alternatives
such as the merger or sale of the Company. However, there can be no assurance
that these efforts will be successful.
5. COMMITMENTS AND CONTINGENCIES:
In June 2000, the Company recorded litigation expenses of $1,495,000
resulting from an adverse arbitration award in an arbitration proceeding in Los
Angeles, California. The arbitrator found that the Company had breached a
contractual agreement to acquire a dental practice and awarded the plaintiffs
actual damages and costs of $442,000, plus attorneys' fees that have not been
determined as of this date. Management has based the charge to earnings recorded
in June on its estimate of the likely total cost that will be incurred. This
amount may be adjusted in future periods based on the actual attorneys' fees
awarded to the plaintiffs.
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 contingencies, management believes that its insurance protection is
reasonable in view of the nature and scope of the Company's operations.
The Company is from time to time 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.
8
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. SEGMENT INFORMATION
The following table sets forth the financial information with respect to the
Company and its reportable segments:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net patient revenues:
Texas ........................................ $ 17,017 $ 17,966 $ 33,325 $ 35,574
Florida ...................................... 3,143 3,024 6,353 5,986
Tennessee .................................... 2,593 3,160 4,869 6,340
California ................................... 2,908 2,549 6,281 5,329
-------- -------- -------- --------
Total revenue ................................ 25,661 26,699 50,828 53,229
-------- -------- -------- --------
Operating expenses:
Texas ........................................ 14,261 15,528 28,141 30,604
Florida ...................................... 2,999 2,888 6,005 5,693
Tennessee .................................... 2,326 2,790 4,385 5,683
California ................................... 2,498 2,293 5,044 4,589
Corporate, general and administrative expenses 1,012 1,495 2,049 3,011
-------- -------- -------- --------
Total operating expenses ..................... 23,096 24,994 45,624 49,580
-------- -------- -------- --------
Operating income:
Texas ........................................ 2,756 2,438 5,184 4,970
Florida ...................................... 144 136 348 293
Tennessee .................................... 267 370 484 657
California ................................... 410 256 1,237 740
Corporate, general and administrative expenses (1,012) (1,495) (2,049) (3,011)
-------- -------- -------- --------
Total operating income ....................... 2,565 1,705 5,204 3,649
-------- -------- -------- --------
Litigation expense ............................... 1,366 1,495 1,366 1,495
Interest expense ................................. 1,023 1,661 2,016 3,095
Other (income) expense ........................... 1 (1) 2 (3)
-------- -------- -------- --------
Income before income taxes ....................... $ 175 $ (1,450) $ 1,820 $ (938)
======== ======== ======== ========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD LOOKING STATEMENTS WITHIN
THE MEANING OF THE SECURITIES ACT OF 1933 AND SECTION 21B OF THE SECURITIES AND
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, AMONG OTHERS, THE CHANGING ENVIRONMENT FOR
DENTAL HEALTH CARE, THE PACE OF THE COMPANY'S DEVELOPMENT AND ACQUISITION
ACTIVITIES, THE REIMBURSEMENT RATES FOR DENTAL SERVICES, AND OTHER RISK FACTORS
DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING
THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999, 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. The Company does not
engage in the practice of dentistry but rather establishes integrated dental
networks through affiliations with dental practices providing quality care in
selected markets with a view to establishing broad geographic coverage within
those markets. The Company seeks to achieve operating efficiencies by
consolidating and integrating affiliated practices into regional networks,
realizing economies of scale in such areas as marketing, administration and
purchasing and enhancing the revenues of its affiliated dental practices by
increasing both patient visits and the range of specialty services offered. At
June 30, 2000 the Company managed 103 dental centers with approximately 235
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.
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 expenses, advertising and
marketing costs, management information systems, and other operating expenses
incurred at the dental centers. In addition to these expenses, the Company
incurs general and administrative expenses related to the billing and collection
of accounts receivable, financial management and control of the dental
operations, insurance, training and development, and other general corporate
expenditures.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages of patient revenues represented
by certain items reflected in the Company's Income Statement. 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
Financial Information, included in this Form 10-Q.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net patient revenues ............................ 100.0% 100.0% 100.0% 100.0%
Expenses:
Dentist salaries and other professional costs 27.1% 26.0% 26.6% 26.1%
Clinical salaries ........................... 21.2% 19.2% 21.2% 19.1%
Dental supplies and laboratory fees ......... 8.5% 11.1% 8.8% 10.6%
Rental and lease expense .................... 5.8% 6.4% 5.8% 6.3%
Advertising and marketing ................... 3.7% 3.7% 3.5% 3.6%
Depreciation and amortization ............... 5.6% 6.5% 5.6% 6.4%
Other operating expenses .................... 5.8% 6.9% 5.8% 6.7%
Bad debt expense ............................ 2.5% 4.2% 2.8% 4.3%
General and administrative .................. 9.7% 9.6% 9.7% 10.0%
-------- -------- -------- --------
Total expenses ............................ 90.0% 93.6% 89.8% 93.1%
-------- -------- -------- --------
Operating income ................................ 10.0% 6.4% 10.2% 6.9%
Litigation expense .............................. 5.3% 5.6% 2.7% 2.8%
Interest expense ................................ 4.0% 6.2% 4.0% 5.8%
Other (income) expense, net ..................... 0.0% 0.0% 0.0% 0.0%
-------- -------- -------- --------
Income before income taxes ...................... 0.7% -5.4% 3.6% -1.8%
Provision for income taxes ...................... 0.3% -2.0% 1.4% -0.6%
-------- -------- -------- --------
Net income ...................................... 0.4% -3.4% 2.2% -1.1%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET PATIENT REVENUE - Net patient revenues of affiliated dental practices
increased from $25.7 million for the three months ended June 30, 1999 to $26.7
million for the same period of 2000, an increase of $1.0 million or 4.0%.
Approximately, $1.4 million of the increase was attributable to the opening of
12 de novo offices in Texas, Florida and Tennessee. Patient revenues for dental
centers open for more than one year increased approximately $0.4 million, or
1.4%, from the first quarter of 1999, offset by decreased revenues of
approximately $0.7 million from four dental centers closed in the last year.
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 June 30, 2000, dentist salaries and other professional
costs were $6.9 million, about equal to dentist compensation in the comparable
period of 1999. Expressed as a percentage of net patient revenues, dentist
salaries and other professional costs were 26.0% for the three months ended June
30, 2000 compared to 27.1% for the comparable period last year. The decrease was
due primarily to reduced salary costs.
11
<PAGE>
CLINICAL SALARIES - Clinical salaries decreased from $5.4 million for the
three months ended June 30, 1999, to $5.1 million for the three months ended
June 30, 2000, a decrease of $0.3 million or 5.8%. Reduced personnel levels in
existing dental centers accounted for the decrease. Expressed as a percentage of
net patient revenues, clinical salaries decreased from 21.2% for the three
months ended June 30, 1999 to 19.2% for the comparable 2000 period.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $2.2 million for the three months ended June 30, 1999 to $3.0
million for the three months ended June 30, 2000, an increase of $0.8 million or
35.7%. The increase is attributable to additional dental supplies required for
the opening of de novo dental centers and increased lab costs. Expressed as a
percentage of patient revenues, dental supplies and laboratory fees increased
from 8.5% for the three months ended June 30, 1999 to 11.1% for the three months
ended June 30, 2000.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $1.5 million
for the three months ended June 30, 1999, to $1.7 million for the three months
ended June 30, 2000, an increase of $0.2 million or 14.8%. The opening of de
novo centers in Texas, Florida and Tennessee and scheduled rent increases on
existing leases accounted for the increase. Expressed as a percentage of net
patient revenues, rent and lease expense increased from 5.8% for the three
months ended June 30, 1999 to 6.4% for the three-month period ended June 30,
2000.
ADVERTISING AND MARKETING - As a percentage of patient revenue, advertising
and marketing expense were relatively unchanged. Expressed as a percentage of
net patient revenues, advertising and marketing were 3.7% for the three months
ended June 30, 1999 and 2000.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$1.4 million for the three months ended June 30, 1999, to $1.7 million for the
three months ended June 30, 2000, an increase of $0.3 million or 21.0%. The
increase is attributable to the depreciation of leasehold improvements and
dental equipment associated with the opening of de novo dental centers in Texas,
Florida and Tennessee. Expressed as a percentage of net patient revenues,
depreciation and amortization increased from 5.6% in the prior year period to
6.5% the three months ended June 30, 2000.
OTHER OPERATING EXPENSES - Other operating expenses increased from $1.5
million for the three months ended June 30, 1999, to $1.8 million for the three
months ended June 30, 2000, an increase of $0.3 million or 22.7%. Other
operating expenses represent expenses related to the operation of the Company's
dental centers. The increase is attributable primarily to additional operating
expenses associated with the opening of de novo dental centers. Expressed as a
percentage of net patient revenues, other operating expenses increased from 5.8%
for the three months ended June 30, 1999 to 6.9% for the comparable 2000 period.
BAD DEBT EXPENSE - Bad debt expense increased from $0.6 million for the three
months ended June 30, 1999 to $1.1 million for the three months ended June 30,
2000, an increase of $0.5 million or 74.5%. An increase in the Company's
allowance for uncollectable patient receivables resulting from a higher level of
patient receivables accounted for the increase in bad debt expense. Expressed as
a percentage of net patient revenues, bad debt expense increased from 2.5% for
the three months ended June 30, 1999 to 4.2% for the same period of 2000.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $2.5 million for the three months ended June 30, 1999, to $2.6
million for the three months ended June 30, 2000, an increase of less than $0.1
million, or 2.8%. Expressed as a percentage of net patient revenues, general and
administrative expense decreased from 9.7% for the three months ended June 30,
1999 to 9.6% for the comparable period of 2000.
LITIGATION EXPENSE -For the three months ended June 30, 2000 the company
recorded a $1.5 million charge resulting from an adverse arbitration award in an
arbitration proceeding in Los Angeles, California (Note 5). In the three months
ended June 30, 1999, litigation expense of $1.4 million resulted from the
settlement of a lawsuit filed by the former owner of certain dental practices
acquired by the Company in 1996.
INTEREST EXPENSE - Interest expense increased from $1.0 million for the three
months ended June 30, 1999 to $1.7 million for the three months ended June 30,
2000, an increase of $0.6 million or 62.4%. The increase is attributable to
higher borrowings and an increase in the Company's variable interest rate under
the Credit Agreement.
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INCOME TAXES - For the three months ended June 30, 1999, the Company recorded
a provision for income taxes of $68,000 resulting from income before income
taxes of $0.2 million. For the three months ended June 30, 2000, the Company
recorded a benefit for income taxes of $0.5 million resulting from a loss before
income taxes of $1.5 million. The Company's effective tax rate for the second
quarter of 1999 was 38.9% compared to a benefit of 37.2% for the comparable
period of 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET PATIENT REVENUE - Net patient revenues of affiliated dental practices
increased from $50.8 million for the six months ended June 30, 1999 to $53.2
million for the same period of 2000, an increase of $2.4 million or 4.7%.
Approximately, $3.2 million of the increase was attributable to the opening of
de novo dental centers in Houston, Dallas, San Antonio, and Corpus Christi,
Texas, Florida and Nashville, Tennessee. Patient revenues for dental centers
open for more than one year increased approximately $0.5 million, or 0.9%, from
the first six months of 1999, offset by decreased revenues of approximately $1.3
million from four dental centers closed in the last year.
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 six months ended June 30, 2000, dentist salaries and other professional
costs were $13.9 million, an increase of 2.7% from $13.5 million in the
comparable period of 1999. The increase was due primarily to staffing of de novo
centers. Expressed as a percentage of net patient revenues, dentist salaries and
other professional costs were 26.1% for six months ended June 30, 2000 compared
to 26.6% for the comparable period last year.
CLINICAL SALARIES - Clinical salaries decreased from $10.8 million for the
six months ended June 30, 1999, to $10.2 million for the six months ended June
30, 2000, a decrease of $0.6 million or 5.7%. Reduced personnel levels in
existing dental centers accounted for the decrease. Expressed as a percentage of
net patient revenues, clinical salaries decreased from 21.2% for six months
ended June 30, 1999 to 19.1% for the comparable 2000 period.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $4.5 million for the six months ended June 30, 1999 to $5.7
million for the six months ended June 30, 2000, an increase of $1.2 million or
26.2%. The increase is attributable to additional dental supplies required for
the opening of de novo dental centers and increased lab costs. Expressed as a
percentage of patient revenues, dental supplies and laboratory fees increased
from 8.8% for six months ended June 30, 1999 to 10.6% for six months ended June
30, 2000.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $2.9 million
for the six months ended June 30, 1999, to $3.4 million for the six months ended
June 30, 2000, an increase of $0.4 million or 14.8%. The opening of de novo
centers in Texas, Florida and Tennessee and scheduled rent increases on existing
leases accounted for the increase. Expressed as a percentage of net patient
revenues, rent and lease expense increased from 5.8% for six months ended June
30, 1999 to 6.3% for the six month period ended June 30, 2000.
ADVERTISING AND MARKETING - Advertising and marketing expense increased $0.2
million or 9.8% due primarily to incremental television advertising in Florida
and Dallas, Texas. As a percentage of patient revenue, advertising and marketing
expense were relatively unchanged. Expressed as a percentage of net patient
revenues, advertising and marketing were 3.5% for six months ended June 30, 1999
and 3.6% for six months ended June 30, 2000.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$2.9 million for the six months ended June 30, 1999, to $3.4 million for the six
months ended June 30, 2000, an increase of $0.5 million or 18.5%. The increase
is attributable to the depreciation of leasehold improvements and dental
equipment associated with the opening of de novo dental centers in Texas,
Florida and Tennessee. Expressed as a percentage of net patient revenues,
depreciation and amortization increased to 6.4% for six months ended June 30,
2000, compared to 5.6% for the prior year period.
OTHER OPERATING EXPENSES - Other operating expenses increased from $3.0
million for the six months ended June 30, 1999, to $3.6 million for the six
months ended June 30, 2000, an increase of $0.6 million or 19.8%. Other
operating expenses represent expenses related to the operation of the Company's
dental centers. The increase is
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attributable primarily to additional operating expenses associated with the
opening of de novo dental centers. Expressed as a percentage of net patient
revenues, other operating expenses increased from 5.8% for the six months ended
June 30, 1999 to 6.7% for the comparable 2000 period.
BAD DEBT EXPENSE - Bad debt expense increased from $1.4 million for the six
months ended June 30, 1999 to $2.3 million for the six months ended June 30,
2000, an increase of $0.9 million or 63.8%. An increase in the Company's
allowance for uncollectable patient receivables resulting from a higher level of
patient receivables accounted for the increase in bad debt expense. Expressed as
a percentage of net patient revenues, bad debt expense increased from 2.8% for
the six months ended June 30, 1999 to 4.3% for the same period of 2000.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $4.9 million for the six months ended June 30, 1999, to $5.3
million for the six months ended June 30, 2000, an increase of $0.4 million, or
8.5%. Expressed as a percentage of net patient revenues, general and
administrative expense increased from 9.7% for the six months ended June 30,
1999 to 10.0% for the comparable period of 2000.
LITIGATION EXPENSE - For the six months ended June 30, 2000 the company
recorded a $1.5 million charge resulting from an adverse arbitration award in an
arbitration proceeding in Los Angeles, California (Note 5 of Notes to Condensed
Consolidated Financial Statements). In the six months ended June 30, 1999,
litigation expense of $1.4 million resulted from the settlement of a lawsuit
filed by the former owner of certain dental practices acquired by the Company in
1996.
INTEREST EXPENSE - Interest expense increased from $2.0 million for the six
months ended June 30, 1999 to $3.1 million for the six months ended June 30,
2000, an increase of $1.1 million or 53.5%. The increase is attributable to
higher borrowings and an increase in the Company's variable interest rate under
the Credit Agreement.
INCOME TAXES - For the six months ended June 30, 1999, the Company
recorded a provision for income taxes of $0.7 million resulting from income
before income taxes of $1.8 million. For the six months ended June 30, 2000, the
Company recorded a benefit for income taxes of $0.3 million resulting from a
loss before income taxes of $0.9 million. The Company's effective tax rate for
the first half of 1999 was 39.0% compared to 36.1% for the same period of 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000 the Company had a net working deficit of $43.5 million,
resulting primarily from the classification as a current liability of $43.9
million of outstanding borrowings under the Company's senior bank credit
facility and $15.0 million in senior subordinated note and convertible note
agreements. Current assets consisted of cash and cash equivalents of $60,000,
billed and unbilled accounts receivable of $22.0 million and prepaid expenses
and other current assets, including deferred income taxes, of $6.1 million.
Current liabilities totaled $71.7 million, consisting of $9.6 million in
accounts payable and accrued liabilities, $61.8 million in current maturities of
long-term debt and $0.3 million of deferred compensation payable to a
stockholder.
For the six months ended June 30, 1999 and 2000, cash provided by operating
activities was $3.4 million and $1.4 million, respectively. In the six months
ended June 30, 1999, cash used in investing activities amounted to $6.4 million,
consisting primarily of $400,000 to fund acquisitions and $6.0 million for
capital expenditures primarily for the construction of new dental offices and
equipment. For the six months ended June 30, 2000, cash used in investing
activities was $7.4 million, consisting primarily of $5.0 million to acquire a
20% minority interest in the Company's California subsidiary and $2.4 million
for capital expenditures. For the six months ended June 30, 1999, cash provided
by financing activities totaled $2.6 million representing $3.8 million in
advances under the Company's bank credit agreement, offset partially by $1.2
million in repayments of long-term debt and capital lease obligations. For the
six months ended June 30, 2000, cash provided by financing activities totaled
$6.0 million representing $15.6 million in proceeds from long-term debt offset
partially by $8.8 million in repayments of long-term debt and capital lease
obligations and payment of $0.8 million in debt issuance costs.
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During the first six months of 2000, the Company's principal sources of
liquidity consisted primarily of cash and cash equivalents, net accounts
receivable and borrowing availability under the Company's bank credit agreement
("Credit Agreement"). In January 2000, the Company amended its Credit Agreement
with its existing bank s and entered into a senior subordinated note agreement
("Subordinated Note Agreement") and a subordinated convertible note agreement
("Convertible Note Agreement") with two lenders. In March 2000, the Company
advised its lenders under the Credit Agreement that it was in violation of
certain financial covenants of the Credit Agreement. Accordingly, in May 2000,
the Company amended its credit facility to provide additional availability for
the Company to complete the de novo dental centers that are under development
for 2000.
The Credit Agreement provides for borrowings up to $55.0 million and matures
November 2002. Advances under the Credit Agreement require quarterly interest
payments through March 2001 at which time principal becomes payable quarterly
based on a five-year amortization with final payment at maturity. 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 interest,
income taxes, depreciation and amortization ("EBITDA"), as adjusted. The Credit
Agreement bears interest at variable rates, which are based upon either the
bank's base rate or LIBOR, plus, in either case, a margin which varies according
to the ratio of the Company's funded debt to the EBITDA, each as defined in the
Credit Agreement. A commitment fee is payable quarterly at rates ranging from
0.125 percent to 0.5 percent of the unused amounts for such quarter. The Credit
Agreement contains affirmative and negative covenants that require that Company
to maintain certain financial ratios, limit the amount of additional
indebtedness, limit the creation or existence of liens, set certain restrictions
on acquisitions, mergers and sales of assets and restrict the payment of
dividends. In addition, under the May 2000 amended Credit Agreement, capital
expenditures for 2000 are limited to no more than $3.5 million, further
acquisitions are not permitted in 2000, and the payment of any litigation
settlement is restricted to no more than $100,000, without consent of the
lenders. At June 30, 2000, $43.9 million was outstanding under the Credit
Agreement.
The Subordinated Note Agreement and Convertible Note Agreement provided
borrowings of $13.7 and $1.3 million, respectively. Proceeds from these notes
were used to reduce borrowings under the bank credit facility, to acquire a 20%
minority interest in the Company's California subsidiary and to reduce other
accrued liabilities and accounts payable. Loans under the Subordinated Note
Agreement bear interest at the 90-day LIBOR rate plus five and one-half percent,
payable quarterly, and are due in eight quarterly installments beginning in the
sixty-third month following the closing date. Loans under the Convertible Note
Agreement bear interest at the same rate as loans under the Subordinated Note
Agreement and are due on demand beginning seven years after the closing date
with a final maturity date of January 30, 2009. The convertible note is
convertible at any time into 442,880 shares of Company common stock at the
request of the holders at a fixed conversion price of $3.1125 per share. The
Subordinated Note Agreement and Convertible Note Agreement contain affirmative
and negative covenants that require that Company to maintain certain financial
ratios, limit the amount of additional indebtedness, limit the creation or
existence of liens, set certain restrictions on acquisitions, mergers and sales
of assets and restrict the payment of dividends.
As a result of losses due to litigation expenses incurred in June 2000, the
Company was not in compliance with certain financial covenants of the Credit
Agreement, Subordinated Note Agreement and Convertible Note Agreement (Debt
Agreements). As a result, amounts outstanding under these agreements at June 30,
2000 were callable. Accordingly, the Company was in default under these
agreements and has classified the related debt as a current liability at June
30, 2000. The Company has requested waivers of these covenant violations and
expects to obtain such waivers by September 15, 2000. There can be no assurance
that the Company will receive the requested waivers. Based upon its current
operating plans which assume that the debt is not called, the Company projects
to have sufficient funds to meet its operating requirements through the fiscal
year ending December 31, 2000. However, there may not be sufficient funds to
begin scheduled repayments under the Credit Agreement in March 2001 or pay the
outstanding debt under the Debt Agreements if waivers cannot be obtained.
Management believes it will be able to replace the bank credit facility with
other financing or restructure the bank credit facility. However, there is no
assurance that such financing will be available or that the related terms and
conditions will be acceptable to the Company. If the Company cannot obtain such
alternative financing or refinancing of its current line of credit, it would
have a material and adverse effect on the Company's financial position.
In order to increase its liquidity, the Company has developed the following
strategies; (i) suspension of the development of any new dental centers after
completion of two centers presently under construction, (ii) implementation of
stricter credit policies to reduce the amount of new accounts receivable, (iii)
selective reductions in personnel and other overhead expenses, (iv) raising
additional capital, and (v) seeking other strategic alternatives
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such as the merger or sale of the Company. However, there can be no assurance
that these efforts will be successful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments with market risk exposure include
borrowings under its Credit Agreement, Subordinated Note Agreement and
Convertible Note Agreement, which total $58.9 million at June 30, 2000. Based on
this balance, a change of one percent in the interest rate would cause a change
in interest expense of approximately $590,000, or $0.05 per share (diluted), on
an annual basis. These financial instruments were not entered into for trading
purposes and each financial instrument bears interest at a pre-agreed upon
percentage point spread from either the prime interest rate or Eurodollar
interest rate.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 2000, the Company recorded litigation expenses of $1,495,000
resulting from an adverse arbitration award in an arbitration proceeding in Los
Angeles, California. The arbitrator found that the Company had breached a
contractual agreement to acquire a dental practice and awarded the plaintiffs
actual damages and costs of $442,000, plus attorneys' fees that have not been
determined as of this date. Management has based the charge to earnings recorded
in June on its estimate of the likely total cost that will be incurred. This
amount may be adjusted in future periods based on the actual attorneys' fees
awarded to the plaintiffs.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company was in default of its senior bank credit facility senior
subordinated note agreements and subordinated convertible note agreements ("Debt
Agreements") at June 30, 2000, resulting from non-compliance with certain
financial covenants of the agreements. As a result, amounts outstanding under
these agreements at June 30, 2000 were callable. Accordingly, the Company was in
default under these agreements and has classified the related debt as a current
liability at June 30, 2000. The Company has requested waivers of these covenant
violations and expects to obtain such waivers by September 15, 2000. There can
be no assurance that the Company will receive the requested waivers. Based upon
its current operating plans which assume that the debt is not called, the
Company projects to have sufficient funds to meet its operating requirements
through the fiscal year ending December 31, 2000. However, there may not be
sufficient funds to begin scheduled repayments under the Credit Agreement in
March 2001 or pay the outstanding debt under the Debt Agreements if waivers
cannot be obtained. Management believes it will be able to replace the bank
credit facility with other financing or restructure the bank credit facility.
However, there is no assurance that such financing will be available or that the
related terms and conditions will be acceptable to the Company. If the Company
cannot obtain such alternative financing or refinancing of its current line of
credit, it would have a material and adverse effect on the Company's financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on June 27, 2000 in
Houston, Texas. A total of 6,031,035 shares, 94.0% of total shares authorized to
vote of 6,417,206, were voted at the meeting. Security holders voted on the
following matters:
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1. Election of Directors. The following individuals were elected to serve as
directors until the 2000 annual meeting of stockholders:
----------------------------------------------------------------------
SHARES SHARES
SHARES FOR AGAINST ABSTAIN NOT VOTED
---------- ------- ------- ---------
Jack H. Castle, Jr. 5,778,735 - 252,300 386,171
Jack H. Castle, D.D.S. 5,778,235 - 252.800 386,171
Robert J. Cresci 5,771,035 - 260,000 386,171
G. Kent Kahle 5,771,035 - 260,000 386,171
Elizabeth A. Tilney 5,779,135 - 251,900 386,171
Emmett E. Moore 5,779,135 - 251,900 386,171
----------------------------------------------------------------------
2. To amend the Company's certificate of incorporation to create a new
class of non-voting common stock. The proposal was approved by the
stockholders with a vote of 5,760,550 shares voted for; 264,685 shares
voted against, 5,800 shares abstained, and 386,171 not voted.
3. To amend the Company's certificate of incorporation to reduce the
number of authorized shares of common stock from 30,000,000 shares of
common stock and 5,000,000 shares of preferred stock to 18,000,000
shares of common stock, 1,000,000 shares of Class B common stock, and
1,000,000 of preferred stock. The proposal was approved by the
stockholders with a vote of 6,018,300 shares voted for, 12,535 shares
voted against, 200 shares abstained, and 386,171 not voted.
4. To amend and restate the Company's certificate of incorporation in
order to eliminate references to preferred shares no longer
outstanding. The proposal was approved by the stockholders with a vote
of 5,802,600 shares voted for, 221,735 shares voted against, 6,700
shares abstained, and 386,171 not voted.
5. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent certified public accountants for the year ending December
31, 2000. The proposal was approved by the stockholders with a vote of
6,025,735 shares voted for; 5,100 shares voted against, 200 shares
abstained, and 386,171 not voted.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The following exhibits are filed with this report:
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASTLE DENTAL CENTERS, INC.
Date: August 14, 2000 By: JACK H. CASTLE, JR.
-----------------------
Jack H. Castle, Jr.
Chief Executive Officer
Date: August 14, 2000 By: JOHN M. SLACK
----------------
John M. Slack
Chief Financial Officer
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