<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER
E-DENTIST.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0545043
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 952-1200
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 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 / / No / /
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at November 3, 2000, was 10,054,175.
<PAGE>
FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO.
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000 and
March 31, 2000................................................... 1
Consolidated Statements of Operations for the Three and Six
Months Ended September 30, 2000, and September 30, 1999.......... 2
Consolidated Statement of Changes in Shareholders'
Equity (Deficit) as of September 30, 2000........................ 3
Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2000 and September 30, 1999........... 4
Notes to Consolidated Financial Statements ...................... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 12
Item 2 - Change in Securities and Use of Proceeds..................... 12
Item 3 - Defaults of Senior Securities................................ 12
Item 4 - Submission of Matters to a Vote of Security Holders.......... 12
Item 5 - Other Information............................................ 12
Item 6 - Exhibits and Reports on Form 8-K............................. 12
Signature............................................................. 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
-------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 1,028 $ 553
Receivables from affiliated practices, net of allowance for doubtful
accounts of $2,092 and $3,269 respectively............................ 177 2,966
Prepaid and other current assets.......................................... 226 499
Notes receivable from affiliated practices - current, net................. 326 421
-------------- -------------
Total current assets.................................................. 1,757 4,439
Property and equipment, net................................................. 3,850 6,886
Intangible assets, net...................................................... 3,283 25,786
Notes receivable from affiliated practices, net............................. 1,117 709
Other assets................................................................ 228 86
-------------- -------------
Total assets.......................................................... $ 10,235 $ 37,906
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Credit facility........................................................... $ 9,739 $
Current portion of long term debt......................................... 97 492
Accounts payable and accrued liabilities.................................. 2,822 1,908
Accrued employment agreement.............................................. 350 400
Current portion of capital leases......................................... 328 309
----------------- ---------------
Total current liabilities............................................. 13,336 3,109
Credit facility............................................................. 10,100
Long term debt, less current maturities..................................... 3,483 4,729
Capital lease obligations................................................... 811 961
Commitment and contingencies
Shareholders' equity (deficit):
Common stock, $.001 par value 40,000,000 shares authorized, 10,820,783
issued ............................................................... 11 11
Additional paid-in capital................................................ 25,604 25,604
Accumulated deficit....................................................... (31,913) (6,432)
Less: Treasury shares at cost, 898,753 and 154,748, respectively........ (1,097) (176)
----------------- ---------------
Total shareholders' equity (deficit).................................. (7,395) 19,007
----------------- ---------------
Total liabilities and shareholders' equity (deficit).................. $ 10,235 $ 37,906
================= ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
1
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E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue................................. $ 2,210 $ 15,609 $ 8,566 $ 28,058
Operating expenses:
Clinical salaries, wages and benefits. 6,394 3,452 11,520
Dental supplies and lab fees.......... 2,856 286 5,081
Rent.................................. 1,155 176 1,988
Advertising........................... 388 33 657
General and administrative............ 3,288 1,424 5,105 2,429
Other operating expenses.............. 2,042 192 3,596
Impairment of assets.................. 18,046 23,000
Depreciation and amortization......... 638 661 1,267 1,192
------------- -------------- -------------- --------------
Total operating expenses.............. 21,972 14,920 33,511 26,463
Earnings (loss) from operations....... (19,762) 689 (24,945) 1,595
Interest expense............................ 336 292 725 538
Interest income............................. (81) (48) (136) (85)
Other income................................ (44) (80) (53) (81)
------------- -------------- -------------- --------------
Income (loss) before income taxes........... (19,973) 525 (25,481) 1,223
Income taxes.......................... 250 529
------------- -------------- -------------- --------------
Net (loss) income.......................... $ (19,973) $ 275 $ (25,481) $ 694
============= ============== ============== ==============
Basic and diluted earnings (loss) per share. $ (2.00) $ 0.03 $ (2.53) $ 0.07
============= ============== ============== ==============
Weighted average number of shares -
outstanding - basic and diluted........... 9,969 10,844 10,072 9,973
============= ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
2
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E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY (DEFICIT)
--------- --------- ----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 1, 2000......... 10,821 $ 11 $ 25,604 $ (6,432) $ (176) $ 19,007
Shares repurchased.............. (921) (921)
Net loss........................ (25,481) (25,481)
--------- -------- ----------- ----------- ----------- -----------------
Balances, September 30, 2000.... 10,821 $ 11 $ 25,604 $ (31,913) $ (1,097) $ (7,395)
========= ======== =========== =========== =========== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
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E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
---------- --------------
<S> <C> <C>
Net cash provided by (used in) operating activities.................... $ 979 $ (532)
Cash flows from investing activities:
Capital expenditures............................................. (59) (207)
Acquisitions of affiliated practices, net of cash acquired....... (1,210)
Issuance of notes receivable..................................... (24)
Repayment of notes receivable.................................... 164 40
---------- --------------
Net cash provided by (used in) investing activities........... 81 (1,377)
---------- --------------
Cash flows from financing activities:
Repayment of long-term debt...................................... (585) (73)
Proceeds from line of credit..................................... 1,000
---------- --------------
Net cash provided by (used in) financing activities........... (585) 927
---------- --------------
Net change in cash and cash equivalents................................ 475 (982)
Cash and cash equivalents, beginning of period......................... 553 1,047
---------- --------------
Cash and cash equivalents, end of period............................... $ 1,028 $ 65
========== ==============
Supplemental disclosures of cash flow information:
Convertible subordinated notes offset against receivables from
affiliated practices............................................... $ 540 $ 144
Conversion of receivables from affiliated practices to notes receivables $ 1,887 $
Treasury stock acquired for payment of receivable from affiliated
practices and purchase of property and equipment................... $ 921 $
Notes payable offset against future membership fees.................... $ 868 $
Equipment purchased with capital leases................................ $ $ 942
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
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E-DENTIST.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
e-dentist.com, Inc. (the "Company") delivers a dual eBusiness strategy that
provides online services to the dental industry as well as access to business
services and products by dentists and their staff. Services provided include
access to e-dentist.com's e-Learning, Dental Careers, Practice Tools and
Shopping Engine, all designed to work in conjunction with its traditional
practice enhancement services. Since its formation in March of 1998, the Company
has utilized its virtual private network over the Internet to process
transactions of its affiliated practices.
The unaudited consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Pursuant to such regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the presentation and disclosures
herein are adequate to make the information not misleading, but do not purport
to be a complete presentation inasmuch as all note disclosures required by
generally accepted accounting principles are not included. In the opinion of
management, the consolidated financial statements reflect all elimination
entries and normal adjustments that are necessary for a fair presentation of the
results for the interim periods ended September 30, 2000 and 1999.
Fiscal operating results for interim periods are not necessarily indicative
of the results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements of the Company
and related notes thereto, and management's discussion and analysis related
thereto, all of which are included in the Company's annual report on Form 10-K
for the year ended March 31, 2000, as filed with the SEC.
RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS
In conjunction with the expanded eBusiness strategy, a name change of the
Company to "E-DENTIST.COM" was approved by the Board of Directors in April,
2000. The name change was approved by shareholder vote at the August 25, 2000
Annual Shareholders' Meeting.
Management is continuing the development of a Business-to-Business Web site
focusing on the following on-line services:
1. E-LEARNING - Live and on-line interactive learning
2. DENTAL CAREERS - Employment opportunities for both employers and employees
3. PRACTICE SERVICES - Payroll, human resources, practice enhancement, patient
financing, etc.
4. COMMUNITY - Dental and professional idea communication in chat rooms and
message boards
5. PURCHASING - Dental supplies and equipment purchasing from major suppliers
to all dentists
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services.
In early May 2000, the Company launched the first generation Web site and
expects to launch its second generation Web site in November 2000.
As of September 30, 2000, the Company modified 76 and terminated 14 of its
Management Service Agreements to a shorter term (from 25-40 year terms) of five
years, and decreased and fixed the future monthly management fees. The new
service agreements modify the type of services the Company provides each
affiliated practice. The modification of the terms include the following:
1. The payroll and payables process will cease for the affiliated practices.
All practice expenses will be paid
5
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by the dentist and not reimbursed. All practice employees will become
employees of the dentists and payroll will be processed at the practice
level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed for three
years, drawn weekly at the agreed upon fixed amount.
3. Assets and other equipment will be transferred back to the doctors at the
end of the amended management service agreement term, at a nominal value.
The Company prepared an impairment analysis to determine the recoverability
of the management service agreement intangible assets and fixed assets grouped
at the practice level. The Company prepared the analysis by calculating the
expected discounted future cash flows under modified contracts less the carrying
amount of the intangible asset and fixed assets to determine the impairment
charge. Based on the modified and terminated Management Service Agreements as of
September 30, 2000, the Company has recorded a charge due to impairment of
approximately $18 and $23 million for the three and six months ended September
30, 2000, respectively.
During fiscal 2000, the Company incurred a net loss of approximately $5.4
million and had an accumulated deficit of $6.4 million at March 31, 2000. In
addition, the Company used cash flow from operations of $628,000 during the
period ending March 31, 2000. During the three and six months ended September
30, 2000, the Company incurred net losses of approximately $20 and $25.5 million
respectively and has an accumulated deficit of $31.9 million at September 30,
2000. In addition, the Company generated cash flow from operations of $979,000
during the six months ended September 30, 2000.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for amounts it collects from its notes receivable during each quarter. The
Company paid $111,000 to the bank relating to the collection of notes receivable
as of September 30, 2000. At the end of each quarter, the bank may receive an
additional principal payment up to $50,000 if the Company's cash balance exceeds
$750,000 and if the bank has not received at least $350,000 in principal
payments from note receivable collections. In October 2000, the Company paid an
additional $43,000 to the bank. No additional borrowings are permitted under the
amendment.
As of September 30, 2000 the Company was in technical violation of
certain financial ratio covenants due to the restructure. This technical
violation occurred in spite of the preliminary attempt by management and the
bank to project the effect of the restructure on the ratios and to set the
ratios at a level to avoid the technical violation. The bank is currently
working on a waiver of the violation which is expected to be delivered to the
Company.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Based upon its current strategy to enhance cash collections and
reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the balance of the
credit agreement obligation due July 31, 2001. Management believes it will be
able to replace the credit facility with other financing alternatives or
refinance its current line of credit. There is no assurance that other financing
or refinancing of its current line of credit will be available in sufficient
amounts, if at all, and there can be no assurance that the related terms and
conditions will be acceptable to the Company. Failure of the Company to obtain
such alternative financing or refinancing of its current line of credit would
have a material and adverse effect on the Company's financial position and
viability.
In order to increase its liquidity, the Company has developed the following
strategies; (i) suspension of its new practice affiliation program, (ii)
implement its revised eBusiness based strategic alternative described above,
(iii) implementation of more rigid credit policies with its affiliated
practices, (iv) consider terminating the services agreements of selected under
performing affiliated practices, (v) reducing costs in the Company's corporate
office, and (vi) raising additional capital. However, there can be no assurance
that the Company's strategy will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding during each
period. Diluted earnings per share are not separately presented
6
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because such amounts would be the same as amounts computed for basic earnings
per share.
Outstanding options to purchase approximately 1,932,773 and 596,666 shares
of Common Stock at exercise prices above the market value of Common Stock were
excluded from the calculation of earnings per share for the three and six months
ended September 30, 2000 and 1999, respectively, because their effect would have
been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
3. LEGAL PROCEEDINGS
The Company has settled all claims and counterclaims with certain
affiliated practices which had been pending in a previously disclosed lawsuit in
the 190th District Court in Harris County, Texas. The Company has also initiated
collection proceedings against nine of its affiliated practices for the failure
to pay management fees in breach of its management services agreements. Those
practices in response have claimed breach of the agreements by e-dentist. The
Company believes that it will prevail in these matters and will recover the past
due fees together with other damages. Management believes that the claims of the
defendant practices are without merit.
4. SUBSEQUENT EVENTS
The Company closed the Dexpo.com, Inc. transaction on October 13, 2000. The
Company entered into an Asset Purchase Agreement with Dexpo.com, Inc. The
consideration for the purchase of assets is 750,000 shares of e-dentist.com
common stock with an additional 500,000 shares to be held in escrow and paid
contingent upon meeting certain performance criteria.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF THE
COMPANY AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS
OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND
RISKS DETAILED IN THE COMPANY'S SEC FILINGS.
OVERVIEW
e-dentist.com, Inc. (the "Company") provides eBusiness, eLearning and
practice enhancement products and services to the dental industry including its
affiliated practices.
The Company provided practice management services to fee-for-service dental
practices in the United States. On March 30, 1998, the Company acquired
simultaneously with the closing of its initial public offering ("IPO"),
substantially all of the tangible and intangible assets, and assumed the
liabilities, of the 51 founding affiliated practices. The Company also began to
provide practice management services to professional corporations or
associations owned by the dentist-owners of those affiliated practices (one of
which split into two separate dental practices immediately after the IPO)
pursuant to long-term Management Service Agreements entered into at the time of
the Affiliations.
The expenses incurred by the Company in fulfilling its obligations under
the Management Service Agreements were generally of the same nature as the
operating costs and expenses that would have otherwise been incurred by the
affiliated practices, including salaries, wages and benefits of practice
personnel (excluding dentists
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and certain other licensed dental care professionals), dental supplies and
office supplies used in administering their practices and the office (general
and administrative) expenses of their practices. In addition to the operating
costs and expenses discussed above, the Company incurs personnel and
administrative expenses in connection with maintaining a corporate office, which
provides management, practice enhancements, administrative and business
development services.
RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS
In conjunction with the expanded eBusiness strategy, a name change of the
Company to "E-DENTIST.COM" was approved by the Board of Directors in April 2000.
The name change was approved by shareholder vote at the August 25, 2000 Annual
Shareholders' Meeting.
Management is continuing the development of a Business-to-Business Web site
focusing on the following on-line services:
1. E-LEARNING - Live and on-line interactive learning
2. DENTAL CAREERS - Employment opportunities for both employers and employees
3. PRACTICE SERVICES - Payroll, human resources, practice enhancement, patient
financing, etc.
4. COMMUNITY - Dental and professional idea communication in chat rooms and
message boards
5. PURCHASING - Dental supplies and equipment purchasing from major suppliers
to all dentists
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services.
In early May 2000, the Company launched the first generation Web site and
expects to launch its second generation Web site in November 2000. The current
focus of functionality is concentrated toward revenue generation for the
Company.
As of September 30, 2000, the Company had modified 76 and terminated 14 of
its Management Service Agreements to a shorter term (from 25-40 year terms) of
five years, and decreased and fixed the future monthly management fees. The new
service agreements modify the type of services the Company provides each
affiliated practice. The modification of the terms include the following:
1. The payroll and payables process will cease for the affiliated practices.
All practice expenses will be paid by the dentist and not reimbursed. All
practice employees will become employees of the dentists and payroll will
be processed at the practice level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed for three
years, drawn weekly at the agreed upon fixed amount.
3. Assets and other equipment will be transferred back to the doctors at the
end of the amended management service agreement term, at a nominal value.
The Company prepared an impairment analysis to determine the recoverability
of the management service agreement intangible assets and fixed assets grouped
at the practice level. The Company prepared the analysis by calculating the
expected discounted future cash flows under modified contracts less the carrying
amount of the intangible asset and fixed assets to determine the impairment
charge. Based on the modified and terminated Management Service Agreements as of
September 30, 2000, the Company has recorded a charge due to impairment of
approximately $18 and $23 million for the three and six months ended September
30, 2000, respectively.
During fiscal 2000, the Company incurred a net loss of approximately $5.4
million and had an accumulated deficit of $6.4 million at March 31, 2000. In
addition, the Company used cash flow from operations of $628,000 during the
period ending March 31, 2000. During the three and six months ended September
30, 2000, the Company incurred net losses of approximately $20 and $25.5 million
respectively and has an accumulated deficit of $31.9 million at September 30,
2000. In addition, the Company generated cash flow from operations of $979,000
during
8
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the six months ended September 30, 2000.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for any amount it collects from its notes receivable during each quarter.
The Company paid $111,000 to the bank relating to the collection of notes
receivable as of September 30, 2000. At the end of each quarter, the bank may
receive an additional principal payment up to $50,000 if the Company's cash
balance exceeds $750,000 and if the bank has not received at least $350,000 in
principal payments from note receivable collections. In October 2000, the
Company paid an additional $43,000 to the bank. No additional borrowings are
permitted under the amendment.
As of September 30, 2000 the Company was in technical violation of
certain financial ratio covenants due to the restructure. This technical
violation occurred in spite of the preliminary attempt by management and the
bank to project the effect of the restructure on the ratios and to set the
ratios at a level to avoid the technical violation. The bank is currently
working on a waiver of the violation which is expected to be delivered to the
Company.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Based upon its current strategy to enhance cash collections and
reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the credit agreement
obligations due July 31, 2001. Management believes it will be able to replace
the credit facility with other financing alternatives or refinance its current
line of credit. There is no assurance that other financing or refinancing of its
current line of credit will be available in sufficient cash, if at all, and
there can be no assurance that the related terms and conditions will be
acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company's financial position and viability.
In order to increase its liquidity, the Company has developed the following
strategies; (i) suspension of its new practice affiliation program, (ii)
implement its revised eBusiness based strategic alternative described above,
(iii) implement more rigid credit policies with its affiliated practices, (iv)
consider terminating the services agreements of selected under performing
affiliated practices, (v) reducing costs in the Company's corporate office, and
(vi) raising additional capital. However, there can be no assurance that the
Company's strategy will be achieved.
RESULTS OF OPERATIONS (UNAUDITED)
Following completion of the IPO on March 30, 1998, the Company began
operations effective April 1, 1998. Management service fee recognition and
related expenses began April 1, 1998, and the Company began managing 51 dental
practices in 18 states.
COMPONENTS OF REVENUES AND EXPENSES
The Company has embarked upon a strategy focusing on eBusiness primarily in
the dental industry. Prior to the transition toward eBusiness, the Company
processed all payments to vendors and employed the staff of affiliated
practices. The modified Management Service Agreements caused the staff to cease
working as employees for e-dentist.com, Inc., and they have become employees of
the individual affiliated practices. In addition, processing of payments to
practice vendors is now performed at the practice level, by practice employees.
The Company no longer pays or is reimbursed for expenses paid on the practices'
behalf. As a result, the components of net revenues and expenses have changed
and decreased significantly with the modified Management Service Agreements.
Under the terms of the original management services agreement with an
affiliated practice, the Company served as the exclusive manager and
administrator of all non-dental services relating to the operation of an
affiliated practice. The obligations of the Company included assuming
responsibility for the operating expenses incurred in connection with managing
the dental centers. These expenses included salaries, wages and related costs of
non-dental personnel, dental supplies and laboratory fees, rental and lease
expenses, promotion and marketing costs, management information systems and
other operating expenses incurred at the affiliated practices. In addition, the
Company incurred general and administrative expenses related to the financial
and administrative management of dental operations, insurance, training and
development and other typical corporate expenditures. As compensation for its
services under the original services agreement and subject to applicable law,
the Company was paid a
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management fee comprised of two components: (1) the costs incurred by it on
behalf of the affiliated practice, and (2) a management fee either fixed in
amount, an amount usually approximating 35% of the affiliated practice's
operating profit, before dentist compensation or 15% of the affiliated
practice's collected gross revenue ("Service Fee"). Therefore, net revenues
represented amounts earned by the Company under the terms of its Management
Service Agreements with the affiliated practices, which generally equated to the
sum of the Service Fees and the operating expenses that the affiliated practices
paid to the Company under the service agreements.
NET REVENUE
Net revenue was $2.2 and $15.6 million for the three months ended September
30, 2000 and 1999, respectively. Net revenue was $8.6 and $28.0 million for the
six months ended September 30, 2000 and 1999, respectively. Net revenue
generated for the three months ended September 30, 2000 and 1999 related to
service fees was approximately $2.2 and $2.8 million, respectively. Net revenue
generated for the six months ended September 30, 2000 and 1999 related to
service fees was approximately $4.4 and $5.2 million. The decreases in each
period are due to the modification of the Management Service Agreements and the
resulting elimination of pass thru revenue and expense reporting.
Net revenue generated by paying the operating expenses of the affiliated
practices was approximately $0 and $4.1 million for the three and six months
ended September 30, 2000 and approximately $12.8 and $22.8 million for the three
and six months ended September 30, 1999. The decreases in each period are due to
the modification of the Management Service Agreements and the resulting
elimination of pass thru revenue and expense reporting.
OPERATING EXPENSES
The Company incurred operating expenses of approximately $22.0 and $14.9
million for the three months ended September 30, 2000 and 1999, respectively.
The Company incurred operating expenses of approximately $33.5 and $26.5 million
for the six months ended September 30, 2000 and 1999, respectively. Operating
expenses consisted primarily of salaries, wages and benefits, dental supplies
and laboratory fees, rent, advertising and marketing, depreciation and
amortization, and general and administrative expenses. The changes in each
period are due to the impairment changes, offset by the modification of the
Management Service Agreements and the resulting elimination of pass thru revenue
and expense reporting.
General and administrative expenses consist of the corporate expenses of
the Company. These corporate expenses include salaries, wages and benefits,
rent, bad debt expenses, consulting fees, travel, office costs and other general
corporate expenses. For the three months ended September 30, 2000 and 1999,
general and administrative expenses were approximately $3.3 and $1.4 million, an
increase of $1.9 million. The increase is primarily due to an increase in bad
debt expense of approximately $1.5 million due to a reevaluation of the
collectibility of the receivables from the affiliated practices in connection
with the impairment analysis and increased professional fees of approximately
$200,000.
For the six months ended September 30, 2000 and 1999, general and
administrative expenses were approximately $5.1 and $2.4 million, an increase of
$2.7 million. The increase is primarily due to increases in bad debt expense of
approximately $1.8 million and professional fees of $350,000.
INCOME TAX EXPENSE
The Company recorded no tax benefit during the three and six months ended
September 30, 2000 because it concluded it is not likely it would be able to
recognize the tax asset created due to the lack of operating history in its
eBusiness plan. Income tax expense for the three months ended September 30, 1999
totaled $250,000, or 48% of income (loss) before income taxes. Income tax
expense for the six months ended September 30, 1999 totaled $529,000 or 43% of
income (loss) before income taxes.
For the three and six months ended September 30, 2000, the Company recorded
a valuation allowance for its entire deferred tax asset of $6.2 and $7.8 million
because it concluded it is not likely it would be able to recognize the tax
asset due to the lack of operating history of its implementation of the
e-Business plan, modification of its Management Service Agreements and maturity
of its line of credit on July 31, 2001. At September 30, 2000, the Company has a
net deferred tax asset of $11.0 million with a corresponding valuation
allowance. Additionally,
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the Company also has $6.1 million of available deductions related to the
increase in tax basis of the assets acquired in the Affiliations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had a working capital deficit of
approximately $11.6 million. Current assets included approximately $1 million in
cash and $503,000 in net receivables, due from affiliated practices. Current
liabilities consisted of approximately $2.8 million in accounts payable and
accrued liabilities. Included in the current liabilities are approximately $9.7
million of anticipated payments on the line of credit.
On June 1, 1998 the Company closed a revolving bank credit facility with
Bank One, Texas, N.A., which provided the Company with a revolving line of
credit of up to $15.0 million, to be used for general corporate purposes
including financing of acquisitions, capital expenditures and working capital.
The credit facility is collateralized by liens on certain of the Company's
assets, including its rights under the Management Service Agreements and
accounts receivable. The credit facility contains restrictions on the incurrence
of additional indebtedness and payment of dividends on the Common Stock.
Additionally, compliance with certain financial covenants is required and the
lender has approval rights with respect with acquisitions exceeding certain
limits. As of September 30, 2000 the Company was in technical violation of
certain financial ratio covenants due to the restructure. This technical
violation occurred in spite of the preliminary attempt by management and the
bank to project the effect of the restructure on the ratios and to set the
ratios at a level to avoid the technical violation. The bank is currently
working on a waiver of the violation which is expected to be delivered to the
Company. At September 30, 2000, $9.7 million was outstanding under the
revolving line of credit.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for amounts it collects from its notes receivable during each quarter. The
Company paid $111,000 to the bank relating to the collection of notes receivable
as of September 30, 2000. At the end of each quarter, the bank may receive an
additional principal payment up to $50,000 if the Company's cash balance exceeds
$750,000 and if the bank has not received at least $350,000 in principal
payments from note receivable collections. In October 2000, the Company paid an
additional $43,000 to the bank. No additional borrowings are permitted under the
amendment.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Based upon its current strategy to enhance cash collections and
reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the balance of the
credit agreement obligation due July 31, 2001. Management believes it will be
able to replace the credit facility with other financing alternatives or
refinance its current line of credit. There is no assurance that other financing
or refinancing of its current line of credit will be available in sufficient
amounts, if at all, and there can be no assurance that the related terms and
conditions will be acceptable to the Company. Failure of the Company to obtain
such alternative financing or refinancing of its current line of credit would
have a material and adverse effect on the Company's financial position and
viability.
Cash provided by investing activities for the six months ended September
30, 2000 and 1999 involved collections on notes receivable of $164,000 and
$40,000, respectively. Cash used in investing activities for the six months
ended September 30, 2000 and 1999 included approximately $59,000 and $207,000,
respectively, for purchases of capital equipment and $0 and $1.2 million
respectively, for the purchase of intangibles associated with new practice
affiliations.
Cash used in financing activities for the six-month period ended September
30, 2000 and 1999 included payments on the Company's long-term debt and capital
leases of $585,000 and $73,000, respectively. Cash generated from financing
activities for the six-month period ended September 30, 1999 was draws on the
revolving line of credit of $1 million.
SUBSEQUENT EVENTS
The Company closed the Dexpo.com, Inc. transaction on October 13, 2000. The
Company entered into an Asset Purchase Agreement with Dexpo.com, Inc. The
consideration for the purchase of assets is 750,000 shares of e-dentist.com
common stock with an additional 500,000 shares to be held in escrow and paid
contingent upon meeting certain performance criteria.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has settled all claims and counterclaims with certain
affiliated practices which had been pending in a previously disclosed lawsuit in
the 190th District Court in Harris County, Texas. The Company has also initiated
collection proceedings against nine of its affiliated practices for the failure
to pay management fees in breach of its management services agreements. Those
practices in response have claimed breach of the agreements by e-dentist. The
Company believes that it will prevail in these matters and will recover the past
due fees together with other damages. Management believes that the claims of the
defendant practices are without merit.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
As of September 30, 2000 the Company was in technical violation of
certain financial ratio covenants due to the restructure. This technical
violation occurred in spite of the preliminary attempt by management and the
bank to project the effect of the restructure on the ratios and to set the
ratios at a level to avoid the technical violation. The bank is currently
working on a waiver of the violation which is expected to be delivered to the
Company.
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In conjunction with the expanded eBusiness strategy, a name change of the
Company to "E-DENTIST.COM" was approved by the Board of Directors in April 2000.
The name change was approved by shareholder vote at the August 25, 2000 Annual
Shareholders' Meeting.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, e-dentist.com, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
e-dentist.com, Inc.
Dated: November 14, 2000
/s/ Charles Sanders
------------------------------------------
By: Charles Sanders
Sr. Vice President - Chief Financial Officer
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