<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) of
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] 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 0-20222
PRINCETON DENTAL MANAGEMENT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3484607
------------------------------ ----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7421 West 100th Place, Bridgeview, Illinois 60455-2442
(Address of principal executive offices)
(Zip Code)
(708) 974-4000
(Registrant's telephone number, including area code)
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 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
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 10,122,323 SHARES OF THE
COMPANY'S COMMON STOCK ($.0001 PAR VALUE) PER SHARE OUTSTANDING AS OF SEPTEMBER
30, 1996.
1
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PRINCETON DENTAL MANAGEMENT CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE(S)
CONDENSED CONSOLIDATED BALANCE SHEETS 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-12
PART II - OTHER INFORMATION 12-17
2
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PRINCETON DENTAL MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
(Unaudited)
Assets
------
Current assets
Cash and cash equivalents $ - $ 124,872
Trade accounts receivable, net
of allowances for doubtful
accounts of $394,000 and
$275,000, respectively 1,103,427 1,138,469
Loan receivable - shareholders 2,190 2,190
Current portion of loan
receivable - affiliate 7,272 7,272
Inventories 121,304 111,554
Other current assets 99,805 118,901
----------- ----------
Total current assets 1,333,998 1,503,258
Property and equipment, net 1,246,799 1,278,632
Goodwill, net of accumulated
amortization of $1,748,895 and
$1,293,987, respectively 10,701,229 11,150,730
Loan receivable - affiliate 12,467 12,467
Refinancing costs - net (Note 4) 509,969 -
Other Assets 54,166 51,846
----------- -----------
Total Assets $13,858,628 $13,996,933
=========== ===========
</TABLE>
See accompanying notes
3
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PRINCETON DENTAL MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity September 30, 1996 December 31, 1995
------------------------------------ ------------------ ------------------
(Unaudited)
<S> <C> <C>
Current liabilities
Notes payable $ - $ 18,835
Current portion of long term debt 922,501 506,046
Current portion of capital lease obligations 27,818 27,532
Note payable to shareholder 122,946 1,935,434
Convertible notes payable - Shareholders (Note 4) 2,058,788 -
Accounts payable 1,248,023 671,035
Accrued salaries and wages 658,939 569,383
Other accrued expenses 649,380 455,853
----------- -----------
Total current liabilities 5,688,395 4,184,118
Long-term debt 3,146,853 3,731,963
Capital lease obligations 42,383 6,581
----------- -----------
Total liabilities 8,877,631 7,922,662
Shareholders' equity (Note 4)
Convertible preferred stock, Series A,
11.75% cumulative, par value $1.00 per share:
authorized shares - 10,000;
issued and outstanding - 2,848 2,848 -
Common stock, par value
$0.0001 per share:
authorized - 25,000,000;
10,122,323 issued and outstanding 1,012 812
Less: 291,667 shares Common stock
held in Treasury, at cost (331,771) -
Additional paid-in capital 15,107,556 14,055,045
Accumulated deficit (9,798,648) (7,981,586)
----------- -----------
Total shareholders' equity 4,980,997 6,074,271
----------- -----------
Total liabilities and shareholders' equity $13,858,628 $13,996,933
=========== ===========
</TABLE>
See accompanying notes
4
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PRINCETON DENTAL MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Practice revenue $ 3,215,844 $ 3,192,775 $10,655,030 $10,051,614
Laboratory revenue 949,182 958,683 2,937,493 2,812,003
------------ ------------ ----------- -----------
Total revenue 4,165,026 4,151,458 13,592,523 12,863,617
Expenses:
Practice compensation and benefits 2,473,483 1,940,675 7,656,711 6,195,044
Practice supplies and services 411,835 475,219 1,399,751 1,493,963
Other practice expenses 380,298 411,477 1,144,019 1,168,972
Cost of laboratory revenue 740,246 604,010 2,163,691 1,845,912
Other laboratory expenses 271,625 106,067 845,496 438,969
General corporate expense 144,995 741,942 1,022,478 1,165,407
Depreciation and amortization 273,753 244,325 750,255 715,245
------------ ------------ ----------- -----------
Total operating expenses 4,696,235 4,523,715 14,982,401 13,023,512
------------ ------------ ----------- -----------
Operating loss (531,209) (372,257) (1,389,878) (159,895)
Litigation settlement - (45,000) - (45,000)
Interest expense (155,008) (117,841) (465,515) (333,472)
Other income 12,120 15,762 38,331 27,654
------------ ------------ ----------- -----------
Net loss (674,097) $ (519,336) $(1,817,062) $ (510,713)
============ ============ =========== ===========
Net loss per share $ (0.07) $ (0.06) $ (0.21) $ (0.06)
============ ============ =========== ===========
Weighted average number of
shares outstanding 9,146,096 8,119,870 8,489,723 8,119,870
============ ============ =========== ===========
</TABLE>
See accompanying notes
5
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PRINCETON DENTAL MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 1996 September 1995
----------------- -----------------
<S> <C> <C>
Operating activities:
Net loss $(1,817,062) $ (510,713)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 750,255 715,245
Loss on sale of assets 1,410 6,414
Provision for bad debts 119,000 (226,050)
Stock redemption price in excess of market 18,229 -
Issuance of stock under Incentive Stock Bonus Plan 70,750 -
Changes in operating assets and liabilities:
Accounts receivable (83,958) 295,853
Inventories (9,750) 5,693
Other assets 16,776 41,949
Accounts payable 576,988 (623,331)
Accrued expenses 395,150 63,595
Deferred compensation 67,147 (26,897)
----------- ----------
Net cash provided by (used in) operating activities 104,935 (258,242)
Investing activities:
Purchase of property and equipment (147,146) (58,556)
Purchase of dental lab - goodwill (5,407) -
Other - 43,051
Debt issuance costs (27,819) (33,376)
----------- ----------
Net cash (used in) investing activities (180,372) (48,881)
Financing activities:
Proceeds from sale of preferred stock 13,000 -
Draws under the convertible debt agreement 187,000 -
Draws from revolving demand note - 1,159,500
Principal payments on capital lease obligations (25,316) (33,538)
Proceeds from issuance of long term debt 31,826 -
Principal payments on notes payable (18,835) (605,062)
Principal payments on long-term debt and
notes payable to shareholders (237,110) (201,099)
----------- ----------
Net cash provided by (used in) financing activities (49,435) 319,801
Increase (decrease) in cash and cash equivalents (124,872) 12,678
----------- ----------
Cash and cash equivalents at beginning of period 124,872 25,950
----------- ----------
Cash and cash equivalents at end of period $ - $ 38,628
=========== ==========
</TABLE>
6
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PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Note 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by Princeton Dental Management Corporation
(the Company) for quarterly financial reporting purposes are the same as those
disclosed in the Company's annual financial statements. In the opinion of
management, the accompanying condensed consolidated financial statements
reflect all adjustments (which consist only of normal recurring adjustments
other than the transaction disclosed in Note 4) necessary for a fair
presentation of the information presented.
The quarterly condensed consolidated financial statements herein have been
prepared by the Company without audit. Certain information and footnote
disclosures included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
Although the Company's management believes the disclosures are adequate to make
the information not misleading, it is suggested that these quarterly condensed
financial statements be read in conjunction with the audited annual financial
statements and footnotes thereto.
Note 2 - RECLASSIFICATIONS
The accompanying condensed consolidated financial statements contain certain
reclassifications of previously reported information. The reclassifications
have been made to more appropriately reflect the operating results of the
Company.
Note 3 - CONSULTING AGREEMENT
In June 1995, the Company had entered into an agreement with Stratum
Management, Inc. and certain individual consultants (collectively, the
"Consultants") for consulting services, terminable by either party at any time.
The Consultants were to provide the Company with operations management,
provider relations, systems development, standardization and development of
operations manuals, marketing analysis and development, strategic alliances
development and acquisition evaluation services. The board of directors of the
Company had final approval of all actions of the Consultants. In addition to
consulting fees approximating $41,000 per month in 1996, the Consultants were
issued warrants to purchase up to 600,000 shares of the Company's common stock
at an exercise price of $1 per share expiring December 31, 1998. Subsequently,
in July 1996 the Warrants Agreement was amended to reduce the number of
warrants available from 600,000 to 388,000 as a condition of the financing
agreement disclosed in Note 4. This consulting agreement was terminated by the
Company effective August 1, 1996.
Dr. Charles R. Mitchell, who was appointed as President of the Company
effective October 26, 1995, was originally affiliated with the consultants.
While Dr. Mitchell has reported to have severed all direct ties with the
Consultants in conjunction with his appointment as President of the Company and
has reported to have received no compensation from the Consultants, Dr.
Mitchell's wife remained a shareholder in, and an employee of, Stratum
Management, Inc., which is directly affiliated with the Consultants. As a
condition of the financing agreement disclosed in Note 4, Dr. Mitchell resigned
as President and CEO of the company.
7
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PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Note 4 - FINANCING AGREEMENT
On April 22, 1996, the Company entered into a financing arrangement pursuant to
which the Company issued Convertible Debt (the Convertible Debt) to Amsterdam
Equities Limited in the amount of $2,483,620 and 3,599.77 shares of Series A
11.75% Cumulative Convertible Preferred Stock (the Preferred Stock) to
Amsterdam Equities Limited (195 shares), to Frank Leonard Laport (1,904.77
shares) and to Beverly Trust Company, as custodian for the Frank Leonard Laport
Rollover Individual Retirement Account No. 75-49990 (1,500 shares) (the
Investor Group). The Convertible Debt and Preferred Stock replaces
indebtedness of the Company at April 22, 1996, in the amount of $1,976,700
incurred under that certain letter agreement dated December 7, 1994 (Letter
Agreement). Under the terms of the Convertible Debt and Preferred Stock
Agreements (also referred to herein collectively as the Financing Arrangements)
the Investor Group may lend additional funds, in increments to be determined
solely by the Group. The funds may be used by the Company subject to the
approval of the Group, to fund certain acquisitions. The Convertible Debt and
Preferred Stock will bear interest and have a coupon rate, respectively of
11.75%, plus the payment of any withholding taxes which may be due and owing
with respect to any person which is a foreign entity. Payments on the
Convertible Debt are interest only due in quarterly installments which were to
begin in September 1996. The Convertible Debt has a maturity of seven years
from the date of closing, subject to acceleration in the event of a default.
Subsequent to September 30, 1996 the Company was unable to pay the interest
only requirements of the Convertible Debt Agreement, therefore effective
October 1, 1996 until the accrued interest is paid or the requirements are
waived, interest will accrue at the default rate of 21.75%. The accrued
interest on the Convertible Debt totaled $127,000 at September 30, 1996.
In addition to the amount owed under the Letter Agreement, the terms of the
Convertible Debt and Preferred Stock Agreements called for the conversion of
291,667 share of Regulation D stock held by the Group into $350,000.00 of
Convertible Debt and Preferred Stock. The shares of common stock redeemed are
being held in treasury at September 30, 1996.
An additional provision of the Convertible Debt and Preferred Stock Agreements
include the payment of $300,000.00 as a closing fee and require the Company to
reimburse the legal fees and out-of-pocket costs and expenses of the Group in
connection with the negotiation and the closing of the transaction which
totaled $216,897. The closing fees and reimbursement of the costs and expenses
are payable in the form of Convertible Debt and Preferred Stock. In total, the
Company incurred costs of $544,716 in connection with the refinancing which has
been capitalized and will be amortized over a period of seven years.
Amortization of refinancing fees totaled $34,747 through September 30, 1996.
The terms of the Convertible Debt and Preferred Stock Agreements provides the
Group with certain rights pertaining to the registration of any common stock to
which the Group may convert from Convertible Debt or Preferred Stock,
anti-dilution, and a right of first refusal on any future offering of the
Company securities.
Under the terms of the transaction, the Company has issued a warrant to
purchase 100 shares of Series B Preferred Stock. The Series B Preferred Stock
entitles Amsterdam Equities Limited, after the occurrence of an event of
default, to elect a Class B director who will have super-majority voting powers
on the Company s Board of Directors. The Convertible Debt and Preferred Stock
may be converted into the common stock of the Company, as the sole option of
the Group, at various conversion rates as set forth in the conversion formula
contained in the Convertible Debt and Preferred Stock Agreement.
8
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PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Note 4 - FINANCING AGREEMENT (cont.)
Conversion pursuant to such conversion formula would result in a conversion
price per share of the Company's common stock significantly below present
market levels. If the Group were to convert the Convertible Debt and Preferred
Stock at the present time, the conversion would result in the issuance to the
Group of approximately 9,600,000 shares of the Company's common stock,
representing approximately forty-two percent (42%) of the issued and
outstanding shares of the Company's common stock (assuming full conversion and
anti-dilution).
In addition, pursuant to the terms of the Financing Arrangement, the Company
has issued to the holders of the Convertible Debt and the Preferred Stock a
warrant to purchase shares of common stock at an exercise price of $.10 per
share. The Group may exercise the warrant only upon the occurrence of an event
of default under the terms of the minimum financial goals of net income of at
least one dollar in the fiscal year ending December 31, 1996, and net income at
least equal to 60% of the dollar amount of Convertible Debt of the Company
outstanding at the end of 1997 for the fiscal year ending December 31, 1997,
increased by 10% each year thereafter, compounded, plus 60% of the additional
Convertible debt outstanding at the end of such year over the immediately
preceding year. The Company can make no assurances that such financial goals
can be achieved by the Company. The cumulative effect of the issuance of
shares pursuant to the default warrant to the Group could result in ownership
by the Group of up to 75% of the Company's total issued and outstanding common
stock.
The Convertible Debt and Preferred Stock may be called by the Company only
during the first year of the Financing Arrangement in accordance with the
following schedule: Up to 120 days after the closing, at the principal amount
of the Convertible Debt and liquidation value ($100.00 per share) of the
Preferred Stock, plus $300,000.00; from the 120th day after the closing to the
240th day after closing, at the principal amount of the Convertible Debt and
liquidation value of the Preferred Stock, plus $500,000.00; and, for the 240th
day after closing to the one year anniversary date of the closing at the
principal amount of the Convertible Debt and liquidation value of the Preferred
Stock, plus $750,000.00.
In August 1996, the Company entered into a Letter Agreement by and among the
Company; Dr. Charles R. Mitchell, the President of the Company; Stratum
Management, Inc. (Stratum), a consultant to the Company; John H. Hagan, a
director of the Company; Dr. Seymour Kessler, a director of the Company; and
Amsterdam Equities, Ltd. (Amsterdam), Frank Leonard Laport, and Beverly
Trust Company, as Custodian of the Frank Leonard Laport Rollover Individual
Retirement Account No. 75-49990, each members of the investment group (the
Investor Group). Under the Letter Agreement, which became effective on August
9, 1996, the Series B Preferred Stock previously referred to in the Convertible
Debt Agreement executed by the Company on April 22, 1996 was to be amended to
be immediately effective and Class B Preferred Stock was immediately issued to
Amsterdam.
The Class B Preferred Stock entitled Amsterdam to elect a Director to the Board
of Directors of the Company who shall have super majority voting powers. In
effect, the Class B director appointed by Amsterdam shall have the number of
votes on the Board of Directors as the current Board currently holds, plus one
vote. The amendment and activation of the Class B Preferred Stock occurred
upon the satisfaction of the following two conditions: (i) delivery to the
Company of a notice, pursuant to which the Investor Group would convert on a
pro rate basis, an aggregate amount of U.S. $700,000 of currently outstanding
Convertible Debt/Preferred Stock into the Company's Common Stock in accordance
with the contractual terms of the Convertible Debt and Preferred Stock
Agreements executed on April 22, 1996 and (ii) upon the advance to the Company
of an additional $200,000.00 pursuant to the Convertible Debt
9
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PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Note 4 - FINANCING AGREEMENT (cont.)
and the Preferred Stock Agreements executed April 22, 1996. As of August 9,
1996, the Investor Group had satisfied these two conditions and the Class B
Preferred Stock has been issued to Amsterdam, and Frank Leonard Laport has been
elected as the Series B Director. The Series B Director has not voted on any
matters to date.
In connection with the activation of the Class B Preferred Stock, the provision
of additional funding and conversion of debt, Stratum, Hagan and Kessler have
agreed to forfeit, on a pro rata basis, an aggregate amount of 300,000
options/warrants to purchase the Company's Common Stock.
In connection with the above, Dr. Mitchell resigned as President of the
Company, but assisted the Company in the transition to a new management team.
Dr. Mitchell, Dr. Kessler, and John Hagan remained directors until the
Company's annual meeting on September 27, 1996. Gary Lockwood, Dr. Richard
Staller, Frank Leonard Laport, Esq. and George Collins, Esq., who also acts as
attorney in fact for Amsterdam Equities Limited, have been appointed to the
Board to fill vacancies created by an increase in the number of directors.
Gary Lockwood, President of Mason Dental Laboratories, a subsidiary of the
Company, has been appointed as President of the Company. Frank Leonard Laport
has been elected as Chairman of the Board of Directors of the Company. Frank
Leonard Laport has also been elected as the
Series B director by Amsterdam Equities Limited.
Effective September 16, 1996, the Company relocated its corporate offices to
7421 West 100th Place, Bridgeview, Illinois.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1995.
Results of Operations
Revenue for the nine month period ended September 30, 1996 was $13,592,523
compared with $12,863,617 for the nine month period ended September 30, 1995,
an increase of $728,906. The change in revenue is due in part to an expanded
patient base, an increase in specialty services provided, and fee schedule
increases.
Operating expenses increased $1,958,889 to $14,982,401 for the nine month
period ended September 30, 1996 from $13,023,512. This increase is due in
large part to the increase in payroll cost as well as the cost of materials and
supplies for both the dental practices and the dental labs. The increase in
payroll costs is attributable to both an increased number of employees as well
as increased costs associated with General Practitioners and Specialty
Providers. In addition, the company had incurred costs during the latter half
of 1995 and during 1996 to engage consultants to provide various operational
and administrative services.
10
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PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Item 2 (cont.)
Interest expense increased $132,043 to $465,515 for the nine month period ended
September 30, 1996 versus $333,472 incurred in the comparable nine month period
last year. The increase is primarily the result of additional advances during
1995 and in the third quarter of 1996 under the Revolving Demand Note which was
subsequently rolled into the Convertible Debt and Preferred Stock Agreement.
The net loss for the nine month period ended September 30,1996 of $1,817,062 is
primarily the result of the increase in the overall cost of providing dental
services and expanding the patient base to include more specialty services as
well as the production cost within the laboratory division.
Financial Condition
Changes in the Company's financial condition at September 30, 1996 as compared
with December 31, 1995 resulted primarily from the Company's operating results
for the nine month period ended September 30, 1996 as well as a significant
reduction in the amount of funding provided by the Investor Group during 1996.
The Company's current revenue base is insufficient to cover the costs of
providing the dental services, overhead costs, and debt service requirements.
During the nine months ended September 30, 1995, the Company funded its losses
from operations primarily through advances from the Investor Group of
approximately $1,160,000. During the nine month period ended September 30, 1996
the advances from the Investor Group have been limited to $200,000 which
required the Company to negotiate extended credit terms with it's suppliers in
order to fund operations. However, several of the Company's larger suppliers
have ceased extending credit and are filling orders on a C.O.D. basis or a very
limited credit terms basis. One of the Company's largest suppliers has
temporarily discontinued shipping supplies and providing services until a
mutually agreed upon plan is put into place to reduce the outstanding balances.
The company can give no assurances as to whether or not a mutually agreed upon
plan can be established.
Given the Company's recurring losses from operations, the significant working
capital deficits, the uncertainty in obtaining additional funding to provide
working capital in the short term, and the current situation with the Company's
vendors, a substantial doubt has been raised as to the entity's ability to
continue as a going concern. Absent significant improvement in operations or
significant additional funding, the Company may need to consider filing for
bankruptcy.
The Company is currently in the process of developing revenue enhancement
programs in both the dental practice segment as well as the laboratory segment.
In addition, the Company is also working to improve the operating results of
the various operations by reducing the costs of patient services including the
reduction in payroll. The Company has begun steps to reduce general and
administrative expenses by eliminating substantially all outside consulting
arrangements which totaled approximately $302,000 for the nine months ended
September 30, 1996. However, the Company can make no assurances in regards to
the results of these programs.
In addition, the Company is in the process of negotiating the sale of one of
its dental practices in Pennsylvania and is formulating a plan to sell several
other of its dental practices which would provide significant working capital
before or shortly after year end. However, the Company can make no assurances
as to whether or not these sales will be consummated.
11
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PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Item 2 (cont.)
During the first and second quarters of 1996, the Company did not deposit
certain state payroll tax liabilities totaling approximately $53,000. The
company is currently negotiating with the State to pay the
payroll obligations in monthly installments and to abate penalties associated
with the late payment. In addition, during 1994 the Company did not make
certain federal payroll tax deposits on a timely basis and is in the process of
negotiating with the IRS to abate penalties associated with these late filings.
Management has provided a reserve of approximately $60,000 for the state tax
liability and penalties and $70,000 to cover the IRS penalties should the IRS
ruling be unfavorable. Management believes these reserves are sufficient to
cover these obligations.
Liquidity and Capital Resources
As of September 30, 1996, the Company had a working capital deficit of
$4,354,397 and a financial accumulated deficit of $9,798,648. Goodwill and
other intangibles comprise approximately 80% of total assets, leaving tangible
assets of approximately $2,647,000 and negative tangible net worth of
approximately $6,230,000.
During the nine month period ended September 30, 1996, the Company's cash and
cash equivalents decreased $124,872. Cash provided by operations was $104,935
resulting primarily from the Company's increase in accounts payable, accrued
expenses, and deferred compensation for the period of $1,039,285 of which this
increase was partially offset by depreciation and amortization of $750,255,
$88,979 of costs associated with the issuance and redemption of the Company's
common stock, and a slight increase in accounts receivable.
Investing activities utilized $180,372 of cash primarily related to the
acquisition of a small dental lab and property and equipment for $152,553 and
debt issuance costs of $27,819. Cash of $49,435 was used in financing
activities primarily as a result of debt principal payments of $281,261, net of
proceeds from issuance of debt and advance from the Investor Group of $231,826.
As disclosed in Note 4, the Company's primary source of outside financing is
from the Investor Group. Given the Company's working capital deficit and
negative tangible net worth, the Company is heavily reliant on the Investor
Group's financing to continue the Company's expansion plans and to a larger
extent, provide working capital to fund the operations. The Company can make
no assurances the Company will be able to meet the requirements to obtain the
additional financing in the increments required. In fact, given the
performance of the Company for the nine months ended September 30, 1996, these
requirements would most likely not be met and additional funding would only be
obtained if the Investor Group waived or restructured certain portions of the
Convertible Debt Agreement.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
a) On June 14, 1995, the Company filed a complaint for declaratory
relief against Messrs. Terry D. Gingle and Oscar L. Hausdorff (the
"Gingle Group"), certain former members of senior management, regarding
an alleged pledge of shares of Company Common Stock to the Group.
Settlement of this matter has been reached in principal and is in the
process of being finalized.
12
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PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Item 1 (cont.)
b) On October 16, 1996, the Company was sued for $160,000 by Romajo
Partners Limited Partnership, a Partnership controlled by Dr. Seymour
Kessler, a former director of the Company. The Company intends to
vigorously contest the suit.
c) The Company is involved in a number of other legal proceedings
related to malpractice, worker's compensation, general employment and
contract disputes all in various stages of proceedings, most of which
will be covered by insurance. Management believes settlements, if any,
in excess of insurance coverage would be immaterial.
Item 5. Other Information
a) Effective November 20, 1996, Dr. Richard Staller resigned as a
Director of the Company. Effective December 3, 1996, Dr. Staller will
resign as President of Florida Dental Team, P.A., Fairfield Dental
Center, P.A., and Century Dental Center, P.C..
b) As discussed in detail in Part I, Item 2, and has been previously
reported, the Company's financial condition continues to be poor. While
the Company is taking steps to increase revenues and to reduce costs,
there can be no assurances made that such steps will be effective. At
present, the Company is considering several options, including the sale
of significant assets, but, absent significant improvement in operations
and/or significant additional funding, there is substantial doubt
regarding the Company's ability to continue as a going concern.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following documents are filed as an exhibit to this Report:
(10.1) Employment Agreement by and between the Company and Dr.
Charles R. Mitchell, DDS dated March 1996, with an
effective date of January 1, 1996 (incorporated by
reference to the exhibit to the Registrant's Form 10-QSB
filed with the Commission on September 23, 1996).
(10.2) Consulting Agreement by and between the Company and Stratum
Management, Inc. dated January 1, 1996 (incorporated by
reference to the exhibit to the Registrant's Form 10-QSB
filed with the Commission on September 23, 1996).
(10.3) Amendment to the Warrant Agreement by and between the
Company and Stratum Management, Inc., dated July 17, 1996.
This Warrant Agreement was part and parcel to the
Consulting Agreement dated January 1, 1996 (incorporated by
reference to the exhibit to the Registrant's Form 10-QSB
filed with the Commission on September 23, 1996).
(10.4) Non-Statutory Stock option agreement by and between the
Company and John H. Hagan, dated March 21, 1996
(incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).
13
<PAGE> 14
PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(10.5) Amendment to the Non-Statutory Stock Option Agreement by
and between the Company and John H. Hagan dated July 17,
1996 (incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).
(10.6) Non-Statutory Stock Option Agreement by and between the
Company and Dr. Seymour Kessler dated March 21, 1996
(incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).
(10.7) Amendment to the Non-Statutory Stock Option Agreement dated
July 17, 1996, by and between the Company and Dr. Seymour
Kessler (incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).
(10.8) Series A 11.75% Cumulative Convertible Preferred Stock
Purchase Agreement by and between Frank Leonard Laport,
Beverly Trust Company, as Custodian of the Frank Leonard
Laport Rollover Individual Retirement Account Number 75-
49990, and Amsterdam Equities Limited, dated April 22, 1996
(incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).
(10.9) Convertible Debt Agreement by and between the Company and
Amsterdam Equities Limited, dated April 22, 1996
(incorporated by reference to the exhibit to the
Registrant's Form 10-QSB filed with the Commission on
September 23, 1996).
(10.10) Letter of Agreement dated July 15, 1996 and effective
August 9, 1996, by and between the Company, Dr. Charles R.
Mitchell, Stratum Management Inc., John H. Hagan, Dr.
Seymour Kessler, Amsterdam Equities Limited, Frank Leonard
Laport, and Beverly Trust Company, as custodian of the
Frank Leonard Laport Rollover Individual Retirement Account
Number 75-49990 (incorporated by reference to the exhibit
to the Registrant's Form 10-QSB filed with the Commission
on September 23, 1996).
b. Reports on Form 8-K
The Registrant filed the following Form 8-Ks during the period from
January 1, 1996 through September 30, 1996:
(9) On March 4, 1996, the Registrant filed with the Securities and
Exchange Commission a current report on Form 8-K relating to the
extension of warrants to October 14, 1996; the ratification of an
Employment Contract for Dr. Charles R. Mitchell; the ratification
of a Management Consulting Agreement for Stratum Management; and
the lawsuit filed against the Company by Frank Leonard Laport.
14
<PAGE> 15
PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(10) On March 21, 1996, the Registrant filed with the Securities
and Exchange Commission a current report on Form 8-K regarding the
Board of Director's ratification of the grant of non-statutory
stock options to John Hagan and Seymour Kessler for past services
to the Board of Directors.
(11) On May 9, 1996, the Registrant filed with the Securities and
Exchange Commission a current report on an amended Form 8-K
regarding a financing arrangement pursuant to which the Company
issued Convertible Debt (the Convertible Debt) to Amsterdam
Equities Limited in the amount of $2,483,620.15 and 3,599.77 shares
of Series A 11.75 Cumulative Convertible Preferred Stock (the
Preferred Stock) to Amsterdam Equities Limited (195), to Frank
Leonard Laport (1,904.77) and to Beverly Trust Company, as
custodian for the Frank Leonard Laport Rollover Individual
Retirement Account No. 75-4990 (1,500) (the Investor Group).
The Convertible Debt and Preferred Stock replaces indebtedness of
the Company in the amount of $1,976,699.99 incurred under that
certain letter agreement dated December 7, 1994 (Letter Agreement)
Under the terms of the Convertible Debt and Preferred Stock
Agreements (also referred to herein collectively as the Financing
Arrangements") the Investor Group will lend up to $15 million, in
increments to be determined solely by the Group. The funds may be
used by the Company, subject to the approval of the Group, to fund
certain acquisitions. The Convertible Debt and Preferred Stock
will bear interest and have a coupon rate, respectively of 11.75%,
plus the payment of any withholding taxes which may be due and
owing with respect to any person which is a foreign entity. The
Convertible Debt has a maturity of seven years from the date of
closing, subject to acceleration in the event of a default.
In addition to the amount owed under the Letter of Agreement, the
terms of the Convertible Debt and Preferred Stock Agreements call
for the conversion of Regulation D stock held by the Group into
$350,000.00 of Convertible Debt and Preferred Stock.
In addition to the amount owed to the Group under the Letter
Agreement, the terms of the Convertible Debt and Preferred Stock
Agreements include the payment of $300,000.00 as a closing fee in
the form of fully paid Convertible Debt and Preferred Stock. The
terms of the Convertible Debt and Preferred Stock Agreements also
require the Company to reimburse the legal fees and out-of-pocket
costs and expenses of the Group in connection with the negotiation
and the closing of the transaction, payable in the form of
Convertible Debt and Preferred Stock in the aggregate amount of
$216,896.74.
12) On August 15, 1996, The Registrant filed with the Securities
and Exchange Commission current Report on Form 8-K regarding a
Letter Agreement by and among the Company; Dr. Charles R.
Mitchell, the President of the Company; Stratum Management, Inc.
(Stratum), a consultant to the Company; John H. Hagan, a director
of the Company; Dr. Seymour Kessler, a director of the Company;
and Amsterdam Equities, Ltd. (Amsterdam), Frank Leonard Laport,
and Beverly Trust Company, as Custodian of the Frank Leonard Laport
Rollover Individual Retirement Account No. 75-49990, each members
of the investment group (the Investment Group).
15
<PAGE> 16
PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Under the Letter Agreement, which became effective on August 9,
1996, the Series B Preferred Stock referred to in the Convertible
Debt Agreement executed by the Company on April 22, 1996 was to be
amended to be immediately effective and was to be immediately
issued to Amsterdam. The Class B Preferred Stock entitles
Amsterdam to elect a Director to the Board of Directors of the
Company who shall have super majority voting powers. In effect,
the Class B Director appointed by Amsterdam shall have the number
of votes on the Board of Directors as the Board currently holds,
plus one vote.
The amendment and activation of the Class B Preferred Stock was to
occur upon the satisfaction of the following two conditions: (i)
delivery to the Company of a notice, pursuant to which the
Investment Group would convert on a pro rate basis, an aggregate
amount of U.S. $700,000.00 of currently outstanding convertible
debt/preferred stock into the Company's common stock in accordance
with the contractual terms of the Convertible Debt and Preferred
Stock Agreements executed on April 22, 1996, and (ii) upon the
advance to the Company of an additional U.S. $200,000.00 pursuant
to the Convertible Debt and the Preferred Stock Agreements executed
April 22, 1996. As of August 9, 1996, the Investment Group has
satisfied these two conditions and the Class B Preferred Stock has
been issued to Amsterdam.
In connection with the activation of the Class B Preferred Stock,
the provision of additional funding, and conversion of debt,
Stratum, Hagan and Kessler have agreed to forfeit, on a pro rate
basis, an aggregate amount of 300,000 options/warrants to purchase
the Company's common stock.
In connection with the above, Dr. Mitchell has resigned as Chief
Executive Officer and President of the Company, but will continue
to assist the Company in the transition to a new management team.
Dr. Mitchell will stay on as a director until the Company s next
annual meeting is held, which is scheduled to take place on
September 27, 1996. Hagan and Kessler would also continue to serve
as directors until the Company's next annual meeting. Gary
Lockwood, Dr. Richard Staller, Frank Leonard Laport, Esq. and
George Collins, Esq. have been appointed to the Board to fill
vacancies created by an increase in the number of directors.
Gary Lockwood, President of Mason Dental Laboratories, a subsidiary
of the Company, has been appointed as President of the Company.
Mr. Lockwood will continue to serve in his role as President of
Mason Dental in addition to his new duties as President of the
Company. Frank Leonard Laport has been elected as Chairman of the
Board of Directors of the Company.
In connection with the letter agreement transaction, the Company
shall relocate its principal offices to another location in the
Chicago metropolitan area on or about September 30, 1996.
16
<PAGE> 17
PRINCETON DENTAL MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
13) On September 30, 1996 the Registrant filed with the Securities
and Exchange Commission a current report on Form 8-K regarding the
extension of the outstanding warrants to purchase 4,140,000 shares
of the Company's Common Stock traded under the PDMCW symbol. The
warrants were extended to October 13, 1997. In addition, the
Company had elected a new Board of Directors during the September
27, 1996 Annual Stockholder's meeting comprised of Frank Leonard
Laport, Chairman and CEO, Gary Lockwood, President, Richard
Staller, DDS and George B. Collins, Esq.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly report of Form 10-QSB for the quarter
ended September 30, 1996, to be signed on its behalf, by the undersigned there
unto duly authorized.
DATED: Princeton Dental Management Corporation
By: /s/ Gary A. Lockwood
--------------------------------
Gary A. Lockwood
President
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly report of Form 10-QSB for the quarter
ended September 30, 1996, to be signed on its behalf, by the undersigned there
unto duly authorized.
DATED: Princeton Dental Management Corporation
By: /s/ Steven M. Sierakowski
-----------------------------
Steven M. Sierakowski
Chief Financial Officer
and Head Accounting Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SEPTEMBER 30, 1996 UNAUDITED FINANCIAL STATEMENTS PREPARED BY MANAGEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SEPTEMBER 30, 1996 UNAUDITED
FINANCIAL STATEMENTS PREPARED BY MANAGEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,103,427
<ALLOWANCES> 394,000
<INVENTORY> 121,304
<CURRENT-ASSETS> 1,333,998
<PP&E> 2,202,259
<DEPRECIATION> 955,460
<TOTAL-ASSETS> 13,858,628
<CURRENT-LIABILITIES> 5,688,395
<BONDS> 6,251,088
0
2848
<COMMON> 1012
<OTHER-SE> 4,977,137
<TOTAL-LIABILITY-AND-EQUITY> 13,858,628
<SALES> 2,937,493
<TOTAL-REVENUES> 13,592,523
<CGS> 3,009,187
<TOTAL-COSTS> 14,982,401
<OTHER-EXPENSES> 427,182
<LOSS-PROVISION> 119,000
<INTEREST-EXPENSE> 465,515
<INCOME-PRETAX> (1,817,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,817,062)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,817,062)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
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