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 March 31, 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 May 12, 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 March 31, 2000............................ 3
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 2000 ............. 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 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............................................................ 14
PART II.
Item 1. Legal Proceedings......................................... 14
Item 2. Changes in Securities and Use of Proceeds................. 14
Item 3. Defaults Upon Senior Securities........................... 14
Item 4. Submission of Matters to a Vote of Security Holders....... 15
Item 5. Other Information......................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
SIGNATURES................................................................. 16
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
December 31, 2000
1999 (Unaudited)
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 59 $ 1,031
Patient receivables, net .................................................... 16,928 17,285
Unbilled patient receivables, net ........................................... 4,667 4,867
Prepaid expenses and other current assets ................................... 6,687 5,942
------------ ---------
Total current assets ............................................ 28,341 29,125
------------ ---------
Property and equipment, net ................................................. 20,361 21,044
Intangibles, net ............................................................ 64,020 63,582
Other assets ................................................................ 2,260 2,739
------------ ---------
Total assets .................................................... $ 114,982 $ 116,490
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 2,192 $ 5,454
Accounts payable and accrued liabilities .................................... 9,855 9,305
Deferred compensation payable, related party ................................ 526 395
------------ ---------
Total current liabilities ....................................... 12,573 15,154
------------ ---------
Long-term debt, net of current portion ........................................ 53,996 58,041
Deferred income taxes ......................................................... 6,896 5,820
Minority interest ............................................................. 4,354 --
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 30,000,000 shares authorized, 6,417,206
shares issued and outstanding at December 31, 1999 and March 31, 20000,
respectively .............................................................. 6 6
Additional paid-in capital .................................................. 42,086 42,086
Accumulated deficit ......................................................... (4,929) (4,617)
------------ ---------
Total stockholders' equity ...................................... 37,163 37,475
------------ ---------
Total liabilities and stockholders' equity ...................... $ 114,982 $ 116,490
============ =========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements.
3
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 2000
-------- --------
(in thousands)
Net patient revenues .................................. $ 25,167 $ 26,530
Expenses:
Dentist salaries and other professional costs ..... 6,598 6,978
Clinical salaries ................................. 5,329 5,034
Dental supplies and laboratory fees ............... 2,294 2,685
Rental and lease expense .......................... 1,447 1,661
Advertising and marketing ......................... 814 951
Depreciation and amortization ..................... 1,413 1,637
Other operating expenses .......................... 1,469 1,715
Bad debt expense .................................. 755 1,169
General and administrative ........................ 2,409 2,756
-------- --------
Total expenses .................................. 22,528 24,586
-------- --------
Operating income ...................................... 2,639 1,944
Interest expense ...................................... 993 1,434
Other (income) expense, net ........................... 1 (2)
-------- --------
Income before income taxes ............................ 1,645 512
Provision for income taxes ............................ 642 200
-------- --------
Net income ............................................ $ 1,003 $ 312
======== ========
Income per common share:
Basic ............................................. $ 0.15 $ 0.05
======== ========
Diluted ........................................... $ 0.15 $ 0.05
======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic ............................................. 6,825 6,552
======== ========
Diluted ........................................... 6,873 6,912
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
4
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
---------- ----------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities ........................ $ 1,756 $ 1,183
Investing activities:
Capital expenditures ........................................... (2,822) (1,558)
Acquisition of affiliated dental practices, net of cash acquired (214) (5,022)
---------- ----------
Net cash used in investing activities ............................ (3,036) (6,580)
---------- ----------
Financing activities:
Payments of long-term debt and capital lease obligations ....... (588) (8,004)
Proceeds from debt ............................................. 1,600 15,170
Debt issuance costs ............................................ -- (797)
---------- ----------
Net cash provided by financing activities ........................ 1,012 6,369
---------- ----------
Net change in cash and cash equivalents .......................... (268) 972
Cash and cash equivalents, beginning of the period ............... 695 59
---------- ----------
Cash and cash equivalents, end of the period ..................... $ 427 $ 1,031
========== ==========
</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 March 31, 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 March 31,
2000 and for the three months ended March 31, 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, warrants 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 ........................ 132
Accounts payable and accrued liabilities .............. (100)
Deferred income taxes ................................. 1,275
Minority interest ..................................... 4,354
-------
Cash purchase price, net of cash acquired ......... $ 5,022
=======
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 matures
November 2002. Revolving credit advances under the Credit Agreement require
quarterly interest payments through December 2000 when principal becomes 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 March 31, 2000,
approximately $43.5 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 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
7
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 the credit facility to cure the
covenant violations and to provide additional borrowing availability. 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.
5. COMMITMENTS AND CONTINGENCIES:
In December 1998, a dentist with whom the Company had entered into an
agreement to acquire his dental practice filed a demand for arbitration alleging
that the Company is liable for damages resulting from the failure to complete
the transaction. The transaction was not completed because at least one of the
conditions required for closing was not met. The dentist is claiming damages
equal to the difference between the purchase price provided for in the agreement
of $8.1 million and the fair market value of the practice. The Company believes
that the asserted claims are without merit and that it is not liable for damages
resulting from these allegations.
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:
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 2000
-------- --------
Net patient revenues:
Texas ............................................ $ 16,307 $ 17,607
Florida .......................................... 3,210 2,963
Tennessee ........................................ 2,276 3,180
California ....................................... 3,374 2,780
-------- --------
Total revenue .................................... 25,167 26,530
-------- --------
Operating expenses:
Texas ............................................ 13,879 15,076
Florida .......................................... 3,005 2,805
Tennessee ........................................ 2,059 2,893
California ....................................... 2,547 2,297
Corporate, general and administrative expenses ... 1,038 1,515
-------- --------
Total operating expenses ......................... 22,528 24,586
-------- --------
Operating income:
Texas ............................................ 2,428 2,531
Florida .......................................... 205 158
Tennessee ........................................ 217 287
California ....................................... 827 483
Corporate, general and administrative expenses ... (1,038) (1,515)
-------- --------
Total operating income ........................... 2,639 1,944
-------- --------
Interest expense ....................................... 993 1,434
Other (income) expense ................................. 1 (2)
-------- --------
Income before income taxes ............................. $ 1,645 $ 512
======== ========
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
March 31, 2000 the Company managed 105 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.
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 2000
-------- --------
Net patient revenues ................................... 100.0% 100.0%
Expenses:
Dentist salaries and other professional costs ...... 26.2% 26.3%
Clinical salaries .................................. 21.2% 19.0%
Dental supplies and laboratory fees ................ 9.1% 10.1%
Rental and lease expense ........................... 5.7% 6.3%
Advertising and marketing .......................... 3.2% 3.6%
Depreciation and amortization ...................... 5.6% 6.2%
Other operating expenses ........................... 5.8% 6.5%
Bad debt expense ................................... 3.0% 4.4%
General and administrative ......................... 9.6% 10.4%
-------- --------
Total expenses ................................... 89.5% 92.7%
-------- --------
Operating income ....................................... 10.5% 7.3%
Interest expense ....................................... 3.9% 5.4%
Other (income) expense, net ............................ -- --
-------- --------
Income before income taxes ............................. 6.5% 1.9%
Provision for income taxes ............................. 2.6% 0.8%
-------- --------
Net income ............................................. 4.0% 1.2%
======== ========
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET PATIENT REVENUE - Net patient revenues of affiliated dental practices
increased from $25.2 million for the three months ended March 31, 1999 to $26.5
million for the same period of 2000, an increase of $1.4 million or 5.2%.
Approximately, $1.8 million of the increase was attributable to the opening of
13 de novo offices 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 $0.1 million from the first quarter
of 1999, offset by decreased revenues of approximately $0.6 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 March 31, 2000, dentist salaries and other professional
costs were $7.0 million, an increase of $0.4 million or 5.8% from the comparable
period of 1999. The increase was due primarily to staffing of new dental
centers. Expressed as a percentage of net patient revenues, dentist salaries and
other professional costs were relatively unchanged, amounting to 26.3% for the
three months ended March 31, 2000 compared to 26.2% for the comparable period
last year.
11
<PAGE>
CLINIC SALARIES - Clinic salaries decreased from $5.3 million for the three
months ended March 31, 1999, to $5.0 million for the three months ended March
31, 2000, a decrease of $0.3 million or 5.5%. Reduced personnel levels in
existing dental centers accounted for the decrease. Expressed as a percentage of
net patient revenues, clinic salaries decreased from 21.2% for three months
ended March 31, 1999 to 19.0% for the comparable 2000 period.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory fees
increased from $2.3 million for the three months ended March 31, 1999 to $2.7
million for the three months ended March 31, 2000, an increase of $0.4 million
or 17.0%. The increase is attributable to additional dental supplies required
for the opening of de novo dental centers. Expressed as a percentage of patient
revenues, dental supplies and laboratory fees increased from 9.1% for the three
months ended March 31, 1999 to 10.1% for the three months ended March 31, 2000.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $1.4 million
for the three months ended March 31, 1999, to $1.7 million for the three months
ended March 31, 2000, an increase of $0.2 million or 14.8%. The opening of 13 de
novo centers in Texas, Florida and Tennessee and scheduled increases in existing
leases accounted for the increase. Expressed as a percentage of net patient
revenues, rent and lease expense increased from 5.7% for three months ended
March 31, 1999 to 6.3% for the three month period ended March 31, 2000.
ADVERTISING AND MARKETING - Advertising and marketing expense increased from
$0.8 million for the three months ended March 31, 1999, to $0.9 million for the
three months ended March 31, 2000, an increase of $0.1 million or 16.8%. The
increase was attributable to the direct mail advertising for de novo dental
centers and increased television advertising in the San Antonio and Dallas/Fort
Worth markets. Expressed as a percentage of net patient revenues, advertising
and marketing increased from 3.2% to 3.6% for the three months ended March 31,
1999 and 2000, respectively.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased from
$1.4 million for the three months ended March 31, 1999, to $1.6 million for the
three months ended March 31, 2000, an increase of $0.2 million or 15.8%. The
increase is attributable to the depreciation of leasehold improvements and
dental equipment associated with the opening of 13 de novo dental centers in
Texas, Florida and Tennessee. Expressed as a percentage of net patient revenues,
depreciation and amortization increased from to 6.2% for the three months ended
March 31, 2000, from 5.6% in the prior year period.
OTHER OPERATING EXPENSES - Other operating expenses increased from $1.5
million for the three months ended March 31, 1999, to $1.7 million for the three
months ended March 31, 2000, an increase of $0.2 million or 16.7%. 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 March 31, 1999 to 6.5% for the comparable 2000
period.
BAD DEBT EXPENSE - Bad debt expense increased from $0.8 million for the three
months ended March 31, 1999 to $1.2 million for the three months ended March 31,
2000, an increase of $0.4 million or 14.4%. 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 3.0% for
the three months ended March 31, 1999 to 4.4% for the same period of 2000.
GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $2.4 million for the three months ended March 31, 1999, to $2.8
million for the three months ended March 31, 2000, an increase of $0.4 million,
or 14.4%. The increase resulted primarily from higher personnel and general
corporate expenses at the Company's headquarters in Houston. Expressed as a
percentage of net patient revenues, general and administrative expense increased
from 9.6% for the three months ended March 31, 1999 to 10.4% for the comparable
period of 2000.
INTEREST EXPENSE - Interest expense increased from $1.0 million for the three
months ended March 31, 1999 to $1.4 million for three months ended March 31,
2000, an increase of $0.4 million or 40%. The increase is attributable to higher
borrowings and an increase in the Company's variable interest rate under the
Credit Agreement.
12
<PAGE>
PROVISION FOR INCOME TAXES - The provision for income taxes decreased from
$0.6 million for the three months ended March 31, 1999, to $0.2 million for the
three months ended March 31, 2000, an decrease of $0.4 million, or 68.8%,
resulting from decreased income before income taxes. The Company's effective
income tax rate was 39.0% for both periods.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 the Company had net working capital of $14.0 million,
representing a decrease in working capital of $1.8 million from net working
capital of $15.8 million at December 31, 1999. Current assets consisted of cash
and cash equivalents of $1.0 million, billed and unbilled accounts receivable of
$22.2 million and prepaid expenses and other current assets, including deferred
income taxes, of $5.9 million. These current assets were partially offset by
current liabilities of $15.1 million, consisting of $9.3 million in accounts
payable and accrued liabilities, $5.4 million in current maturities of long-term
debt and $0.4 million of deferred compensation payable to a stockholder.
For the three months ended March 31, 1999 and 2000, cash provided by
operating activities was $1.8 million and $1.2 million, respectively. In the
three months ended March 31, 1999, cash used in investing activities amounted to
$3.0 million, consisting primarily of $200,000 to fund acquisitions and $2.8
million for capital expenditures. For the three months ended March 31, 2000,
cash used in investing activities was $6.6 million, consisting primarily of $5.0
million to acquire a 20% minority interest in the Company's California
subsidiary and $1.6 million for capital expenditures. For the three months ended
March 31, 1999, cash provided by financing activities totaled $1.0 million
representing $1.6 million in advances under the Company's bank credit agreement,
offset partially by $0.6 million in repayments of long-term debt and capital
lease obligations. For the three months ended March 31, 2000, cash provided by
operating activities totaled $6.4 million representing $22.7 million in proceeds
from long-term debt offset partially by $15.4 million in repayments of long-term
debt and capital lease obligations and payment of $0.8 million in debt issuance
costs.
During the first three 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 banks 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 again amended its credit facility to cure its covenant violations
and 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 March 31, 2000, $43.5 million was outstanding under the Credit
Agreement.
The Subordinated Note Agreement and Convertible Note Agreement provided
borrowings of $13.7 and $1.3
13
<PAGE>
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.
Management believes that cash flow from operations and borrowings available
under the Credit Agreement should be sufficient to meet its anticipated capital
expenditures and other operating requirements for the next 12 months. However,
because future cash flows and the availability of financing are subject to a
number of variables, such as the level of capital spending, the Company's
financial performance and other factors, there can be no assurance that the
Company's capital resources will be sufficient to maintain currently planned
levels of capital expenditures or to fund future acquisitions. Additional debt
and equity financing may be required for the Company to fund its de novo
development plans and to support operations. The availability of these capital
sources will depend on prevailing market conditions and interest rates and the
then-existing financial condition of the Company.
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 $58.5 million at March 31, 2000. Based
on this balance, a change of one percent in the interest rate would cause a
change in interest expense of approximately $585,000, 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 December 1998, a dentist with whom the Company had entered into an
agreement to acquire his dental practice filed a demand for arbitration alleging
that the Company is liable for damages resulting from the failure to complete
the transaction. The transaction was not completed because at least one of the
conditions required for closing was not met. The dentist is claiming damages
equal to the difference between the purchase price provided for in the agreement
of $8.1 million and the fair market value of the practice. The Company believes
that the asserted claims are without merit and that it is not liable for damages
resulting from these allegations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
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.
In May 2000, the Company amended the Credit Agreement to cure its covenant
violations.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The following exhibits are filed with this report:
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
NONE
15
<PAGE>
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: May 19, 2000 By:/s/ JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chief Executive Officer
Date: May 19, 2000 By:/s/ JOHN M. SLACK
John M. Slack
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2000 AND
THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,031
<SECURITIES> 0
<RECEIVABLES> 37,661
<ALLOWANCES> 15,509
<INVENTORY> 0
<CURRENT-ASSETS> 29,125
<PP&E> 29,835
<DEPRECIATION> 8,791
<TOTAL-ASSETS> 116,490
<CURRENT-LIABILITIES> 15,154
<BONDS> 58,041
0
0
<COMMON> 6
<OTHER-SE> 37,469
<TOTAL-LIABILITY-AND-EQUITY> 116,490
<SALES> 26,530
<TOTAL-REVENUES> 26,530
<CGS> 0
<TOTAL-COSTS> 24,586
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,434
<INCOME-PRETAX> 512
<INCOME-TAX> 200
<INCOME-CONTINUING> 312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
