10-Q 1 d10q.txt FORM 10-Q FOR QUARTER ENDED 3/31/2002 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, 2002 [_] 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 13, 2002 was 6,417,206. CASTLE DENTAL CENTERS, INC. Index
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets December 31, 2001 and March 31, 2002.................................. 3 Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2001 and 2002.................... 4 Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2001 and 2002.................... 5 Notes to Condensed Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risks..... 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................ 17 Item 2. Changes in Securities and Use of Proceeds........................ 18 Item 3. Defaults Upon Senior Securities.................................. 18 Item 4. Submission of Matters to a Vote of Security Holders.............. 18 Item 5. Other Information................................................ 18 Item 6. Exhibits and Reports on Form 8-K................................. 18 SIGNATURES........................................................................ 20
2 PART I: FINANCIAL INFORMATION Item 1. Financial Statements CASTLE DENTAL CENTERS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except per share data)
December 31, March 31, 2001 2002 -------------- ----------- ASSETS Current assets: Cash and cash equivalents................................................. $ 3,979 $ 3,209 Patient receivables, net.................................................. 4,810 5,749 Unbilled patient receivables, net......................................... 2,869 2,828 Prepaid expenses and other current assets................................. 1,373 1,708 -------- -------- Total current assets................................................ 13,031 13,494 -------- -------- Property and equipment, net............................................... 14,746 14,063 Goodwill and intangibles, net............................................. 54,994 54,978 Other assets.............................................................. 1,311 1,133 -------- -------- Total assets........................................................ $ 84,082 $ 83,668 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................................... $ 63,759 $ 63,711 Accounts payable and accrued liabilities.................................. 16,983 18,061 Deferred compensation payable, related party.............................. 132 132 -------- -------- Total current liabilities........................................... 80,874 81,904 -------- -------- Long-term debt, net of current portion...................................... 16 14 Commitments and contingencies Stockholders' equity: Common stock, $.001 par value, 19,000,000 shares authorized, 6,417,206 shares issued and outstanding.................................. 6 6 Additional paid-in capital................................................ 42,086 42,086 Accumulated deficit....................................................... (38,900) (40,342) -------- -------- Total stockholders' equity.......................................... 3,192 1,750 -------- -------- Total liabilities and stockholders' equity.......................... $ 84,082 $ 83,668 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 CASTLE DENTAL CENTERS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data)
Three Months Ended March 31, ------------------------ 2001 2002 -------- -------- Net patient revenues............................................................................ $ 27,723 $ 25,488 Expenses: Dentist salaries and other professional costs................................................. 7,352 7,249 Clinical salaries............................................................................. 5,133 5,655 Dental supplies and laboratory fees........................................................... 2,949 3,001 Rental and lease expense...................................................................... 1,732 1,522 Advertising and marketing..................................................................... 783 840 Depreciation and amortization................................................................. 1,726 915 Other operating expenses...................................................................... 1,902 1,955 Bad debt expense.............................................................................. 1,148 777 Restructuring costs and other charges......................................................... 466 526 General and administrative.................................................................... 2,633 2,771 Asset impairment.............................................................................. - 104 -------- -------- Total expenses............................................................................... 25,824 25,315 -------- -------- Operating income................................................................................ 1,899 173 Interest expense................................................................................ 2,199 1,628 Other income.................................................................................... (9) (13) -------- -------- Loss before income taxes and cumulative effect of change in accounting principle.......................................................................... (291) (1,442) Income taxes.................................................................................... - - -------- -------- Loss before cumulative effect of change in accounting principle................................. (291) (1,442) Cumulative effect of change in accounting principle............................................. (250) - -------- -------- Net loss........................................................................................ $ (541) $ (1,442) ======== ======== Loss per common share: Loss before cumulative effect of change in accounting principle............................... $ (0.05) $ (0.22) Cumulative effect of change in accounting principle........................................... (0.03) - -------- -------- Net loss...................................................................................... $ (0.08) $ (0.22) ======== ======== Weighted average number of common and common equivalent shares outstanding Basic......................................................................................... 6,417 6,417 ======== ======== Diluted....................................................................................... 6,417 6,417 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 4 CASTLE DENTAL CENTERS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
For the Three Months Ended March 31, --------------------------- 2001 2002 ----------- ---------- Cash flows from operating activities: Net loss......................................................................................... $ (541) $ (1,442) Adjustments: Provisions for bad debts..................................................................... 1,148 777 Depreciation and amortization................................................................ 1,726 915 Amortization of loan cost.................................................................... 103 183 Asset impairment............................................................................. - 104 Cumulative effect of change in accounting principle.......................................... 250 - Changes in operating assets and liabilities: Patient receivables........................................................................ (382) (1,726) Unbilled patient receivables............................................................... (31) 51 Prepaid expenses and other current assets.................................................. (218) (335) Other assets............................................................................... 4 (5) Accounts payable and accrued liabilities................................................... 617 1,078 ----------- ---------- Net cash provided by (used in) operating activities..................................... 2,676 (400) ----------- ---------- Cash flows used in investing activities: Capital expenditures........................................................................... (102) (320) ----------- ---------- Net cash used in investing activities................................................... (102) (320) ----------- ---------- Cash flows from financing activities: Payments of long-term debt..................................................................... (134) (50) ----------- ---------- Net cash used in financing activities................................................... (134) (50) ----------- ---------- Net change in cash and cash equivalents.......................................................... 2,440 (770) Cash and cash equivalents, beginning of period................................................... 901 3,979 ----------- ---------- Cash and cash equivalents, end of period......................................................... $ 3,341 $ 3,209 =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 5 CASTLE DENTAL CENTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: Going Concern Basis The accompanying consolidated financial statements of Castle Dental Centers, Inc. and subsidiaries (the "Company") have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $19.1 million in 2000, $14.8 million in 2001 and $1.4 million for the three months ended March 31, 2002 and, as a result, has not been in compliance with the financial covenants of its debt agreements since June 30, 2000. At March 31, 2002, approximately $45.2 million in senior debt and $15.0 million in subordinated debt were outstanding under its debt agreements in addition to approximately $3.5 million in other outstanding subordinated debt. Since the Company is in default under these agreements, all amounts outstanding are subject to acceleration and have been classified as current liabilities. The Company has continued to pay interest (other than cumulative default interest of $2.2 million classified as a current liability) on the amounts outstanding under its senior credit facility, but has not made scheduled principal payments of $11.3 million as of March 31, 2002 under its senior credit facility, nor made interest or principal payments of $6.3 million owed to subordinated creditors since July 2000. The Company has requested a forbearance of scheduled principal payments and is negotiating with its lenders to restructure the debt agreements. However, these negotiations have not resulted in a forbearance agreement or restructuring of the debt. The Company also has current liabilities, exclusive of its bank and subordinated indebtedness, in excess of its current assets at March 31, 2002. Given the financial position of the Company and the current condition of financial markets, the Company believes that it is unlikely that either a new lender group will be brought in to replace the existing lender group or that an equity investment by a third party in the Company will be obtained that would be sufficient to satisfy its capital needs. The Company has implemented a plan to improve operating results. Components of this plan include: (i) increased hiring of new dentists and improving dentist retention; (ii) continuing to monitor and close unprofitable and under- performing dental centers; (iii) refurbishing and modernizing existing dental centers within capital expenditure constraints; (iv) upgrading dental office management personnel; and (v) improving patient services in order to increase patient retention rates. However, there can be no assurance that these efforts to improve operating results and cash flows will be sufficient to allow the Company to meet its obligations in a timely manner or that the Company's creditors will agree with the plan. Therefore, there is substantial doubt about the Company's ability to continue in existence. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue in existence. Corporate Organization and Basis of Presentation The Company provides administrative and management services, non-healthcare personnel, facilities and equipment to 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, upon the 6 CASTLE DENTAL CENTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) occurrence of certain events, 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, 2002, all of the affiliated dental practices were 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 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 from 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 net patient revenues; and, (iii) a performance fee equal to the net 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 dental practice and (ii) a management fee in an amount ranging from 15.0% to 30.0% of net patient revenues. With respect to certain professional corporations in California, the Company is paid a bonus equal to 30% of net patient revenues in excess of average monthly net patient revenues over the prior two-year period. 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," consolidates 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, 2002, and for the three months ended March 31, 2001 and 2002 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 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. Recent Accounting Pronouncements On August 16, 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligation". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. These provisions of SFAS 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. Management believes the application of SFAS 143 will not have a material effect on the Company. On October 3, 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and 7 CASTLE DENTAL CENTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", both of which address the disposal of a segment of a business. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with early application encouraged. The Company is currently evaluating the impact of the adoption of this Statement but does not believe it will have a material impact on the Company's net income, cash flows, or financial condition. In May 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (SFAS 145), "Rescission of FAS Nos.4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002." This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements issued for fiscal years beginning after May 15, 2002. SFAS No. 145 is not expected to affect our results of operations, liquidity or financial position. 2. Goodwill and Intangibles On July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 supercedes APB Opinion No. 16, Business Combinations, to prohibit use of the pooling-of- interest (pooling) method of accounting for business combinations initiated after the issuance date of the final Statement. SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets, by stating that goodwill will no longer be amortized, but will be tested for impairment in a manner different from how other assets are tested for impairment. SFAS No. 142 establishes a new method of testing goodwill for impairment by requiring that goodwill be separately tested for impairment using a fair value approach rather than an undiscounted cash flow approach. The provisions of SFAS No. 141 and SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 effective January 1, 2002, and has reclassified approximately $54.9 million from management services agreements to goodwill, and as required by SFAS 142, the Company no longer records amortization expenses related to this goodwill. The effect of this change reduced the net loss by approximately $0.7 million, or $0.10 per share for the three months ended March 31, 2002. Had the Company adopted SFAS 142 effective January 1, 2001, the effect would have been to reduce the net loss by approximately $0.7 million, or $0.11 per share for the three months ended March 31, 2001. The Company is currently in the process of determining the effect of implementing SFAS 142 on goodwill. It is likely that the Company will record a significant impairment charge as a change in accounting principle related to certain of its markets upon completion of the initial impairment review. Management of the Company expects to complete the assessment by the end of the second quarter 2002. 3. Long-term Debt and Capital Lease Obligations: The Company maintains a credit agreement with a bank group (the "Credit Agreement") that provides for borrowings up to $55.0 million and matures in November 2002. Advances under the Credit Agreement required quarterly interest payments only through March 2001 at which time principal became 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 bank credit facility 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 the Company to maintain certain financial ratios, limit the amount of additional indebtedness, limit the creation or existence of liens, set certain restrictions on 8 CASTLE DENTAL CENTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) acquisitions, mergers and sales of assets and restrict the payment of dividends. At March 31, 2002, the Company was not in compliance with the financial covenants of the Credit Agreement. In November 2001, the Credit Agreement became a term note, therefore additional borrowings under the agreement are not available. In January 2000, the Company amended the 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 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. At March 31, 2002, the Company was not in compliance with the financial covenants of the Subordinated Note Agreement and Convertible Note Agreement. As a result of the losses incurred during the past two years and for the three months ended March 31, 2002, the Company has not been in compliance with the financial covenants of the Credit Agreement, Subordinated Note Agreement and Convertible Note Agreement ("Debt Agreements") since June 30, 2000. At March 31, 2002, approximately $45.2 million in senior debt and $15.0 million in subordinated debt were outstanding under the Debt Agreements in addition to approximately $3.5 million in other outstanding subordinated debt. The Company has continued to pay interest (other than cumulative default interest of $2.2 million) on the amounts outstanding under the Debt Agreements, but has not made scheduled principal payments of $11.3 million as of March 31, 2002 due under the Credit Agreement, nor made interest or principal payments of $6.3 million owed to subordinated creditors since July 2000. Since the Company is in default under these agreements, all amounts outstanding are subject to acceleration and have been classified as current liabilities. The Company has requested a forbearance of scheduled principal payments and is negotiating with its lenders to restructure the Debt Agreements. However, these negotiations have not resulted in a forbearance agreement or restructuring of the debt. There can be no assurance that the Company's lenders will consent to a forbearance agreement and the restructuring necessary to allow the Company to continue to operate. If the Company and the lenders cannot reach an agreement, it may be necessary for the Company to seek protection under Chapter 11 of the Bankruptcy Code. 4. Commitments and Contingencies: Litigation In June 2000, the Company recorded litigation expenses of $1,495,000 resulting from an arbitration award against two subsidiaries of the Company in an arbitration proceeding in Los Angeles, California. The arbitrator found that the subsidiaries had breached a contractual agreement to acquire a dental practice and awarded the plaintiffs actual damages and costs of $442,000. In August 2000, the arbitrator awarded the plaintiffs an additional $666,000 for attorney fees and costs, resulting in a total judgment of $1,108,000 against the Company's subsidiaries. None of the judgment amount awarded to the plaintiffs has been paid as of May 13, 2002. In October 2001, the former owners of Dental Centers of America filed suit in Bexar County, Texas alleging that the Company breached a letter agreement offering payment as settlement for past due amounts on two subordinated promissory notes that were part of the purchase consideration for Dental Centers of America. In March 2002, the plaintiffs obtained a judgment for $625,000 plus interest and attorneys' fees, against the 9 CASTLE DENTAL CENTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company. The Company is currently involved in settlement negotiations with the plaintiffs and none of the judgment award has been paid as of May 13, 2002. The Company also is a defendant in a lawsuit with a landlord of a leased property that was abandoned by the Company in 2001 as part of its restructuring plan. The lease had remaining term of 42 months at monthly rental rates of $3,800 at the time the Company stopped paying rent on the lease. The Company is attempting to negotiate a settlement with the landlord. In April 2002, the Company paid $45,000 in settlement of another lease that it had abandoned and that had been the subject of a lawsuit. The Company carries insurance with coverages 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. 5. Restructuring Costs and Other Charges and Asset Impairment In the first quarter of 2001, the Company announced plans to restructure the Credit Agreement (Note 3). At May 13, 2002, the Company is still in negotiation with the lender. Restructuring costs and other charges for the three months ended March 31, 2001 include legal and other professional fees of $0.4 million and $0.1 million in severance costs. Restructuring costs and other charges for the three months ended March 31, 2002, include legal and other professional fees of $0.3 million and $0.2 million for estimated future rent accrued on dental offices closed during the first quarter of 2002. The $0.1 million asset impairment for the three months ended March 31, 2002, results primarily from the write-off of leasehold improvements associated with the closing of one dental office in Texas and three dental offices in Florida during the period. 6. Earnings Per Share: Basic earnings per share for all periods presented equals net loss divided by the weighted average number of shares of common stock outstanding during each period. The effect of stock options and convertible debt was excluded from the calculation of diluted loss per share for both periods because their effect would have been anti-dilutive. 7. Derivative Instruments and Hedging Activities During June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires that companies recognize all derivative instruments as either assets or liabilities on the balance sheet and measure those instruments at fair value. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," deferred the implementation of SFAS 133 until the fiscal year ending December 31, 2001. The Company implemented SFAS 133 effective January 1, 2001. During the three month period ended March 31, 2001, the Company accrued $0.1 million in additional interest expense under a hedging arrangement. The cumulative effect of accounting change as of January 1, 2001, was a charge of $0.3 million, or $0.03 per common share, that was reflected in the first quarter of 2001. The term of the swap contract expired July 10, 2001. 10 CASTLE DENTAL CENTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. Segment Information The following table sets forth the financial information with respect to the Company and its reportable segments:
Three Months Ended March 31, ------------------------------ 2001 2002 ------------ ----------- (in thousands) Net patient revenues: Texas................................................................................ $ 18,865 $ 16,377 Florida.............................................................................. 2,857 2,951 Tennessee............................................................................ 2,960 3,182 California........................................................................... 3,041 2,978 ------------ ----------- Total net patient revenues........................................................... $ 27,723 $ 25,488 ------------ ----------- Operating expenses: Texas................................................................................ $ 16,057 $ 15,350 Florida.............................................................................. 2,819 2,799 Tennessee............................................................................ 2,608 2,607 California........................................................................... 2,365 2,331 Corporate, general and administrative expenses....................................... 1,509 1,702 Restructuring costs and other charges................................................ 466 526 ------------ ----------- Total operating expenses............................................................. $ 25,824 $ 25,315 ------------ ----------- Operating income: Texas................................................................................ 2,808 1,027 Florida.............................................................................. 38 152 Tennessee............................................................................ 352 575 California........................................................................... 676 647 Corporate, general and administrative expenses....................................... (1,509) (1,702) Restructuring costs and other charges................................................ (466) (526) ------------ ----------- Total operating income............................................................... 1,899 173 Interest expense.......................................................................... 2,199 1,628 Other income.............................................................................. (9) (13) ------------ ----------- Loss before benefit for income taxes and cumulative change in accounting principle.......................................................... $ (291) $ (1,442) ============ ===========
11 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 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, 2001, 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, 2002, the Company managed 85 dental centers with approximately 210 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. Net patient revenues are reported at established rates reduced by contractual amounts based on agreements with patients, third-party payors 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. Results of Operations The following table sets forth the percentages of net patient revenues represented by certain items reflected in the Company's Statement of Operations. 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 Consolidated Financial Information, included in this Form 10-Q. 12
Three Months Ended March 31, -------------------------------- 2001 2002 ----------- ------------ Net patient revenues............................................................... 100.0% 100.0% Expenses: Dentist salaries and other professional costs.................................... 26.5% 28.4% Clinical salaries................................................................ 18.5% 22.2% Dental supplies and laboratory fees.............................................. 10.6% 11.8% Rental and lease expense......................................................... 6.2% 6.0% Advertising and marketing........................................................ 2.8% 3.3% Depreciation and amortization.................................................... 6.2% 3.6% Other operating expenses......................................................... 6.9% 7.7% Bad debt expense................................................................. 4.1% 3.0% Restructuring costs and other charges............................................ 1.7% 2.1% General and administrative....................................................... 9.5% 10.9% Asset impairment................................................................. -- 0.4% ----------- ------------ Total expenses............................................................... 93.2% 99.3% ----------- ------------ Operating income................................................................... 6.8% 0.7% Interest expense................................................................... 7.9% 6.4% Other income....................................................................... 0.0% -0.1% ----------- ------------ Loss before income taxes and cumulative effect of change in accounting principle................................................... -1.0% -5.7% Income taxes....................................................................... 0.0% 0.0% ----------- ------------ Loss before cumulative effect of change in accounting principle.................... -1.0% -5.7% Cumulative effect of change in accounting principle................................ -0.9% -- ----------- ------------ Net loss........................................................................... -2.0% -5.7% =========== ============
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 Net Patient Revenues - Net patient revenues decreased from $27.7 million for the three months ended March 31, 2001, to $25.5 million for the same period of 2002, a decrease of $2.2 million or 8.1%. Patient revenues from dental centers opened for more than one year decreased approximately $0.6 million, or 2.3%. The decrease is attributable to the slowdown in general economic activity compared to the prior year. The closing of nine dental centers between April 1, 2001 and March 31, 2002 accounted for $1.6 million of the decrease in revenues. 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, 2002, dentist salaries and other professional costs were $7.2 million, $0.1 million, or 1.4% lower than dentist compensation in the prior year period. The decrease is attributable to the closing of nine dental centers in the past year. Expressed as a percentage of net patient revenues, dentist salaries and other professional costs increased from 26.5% to 28.4% for the three months ended March 31, 2001 and 2002, respectively. Clinical Salaries - Clinical salaries increased from $5.1 million for the three months ended March 31, 2001 to $5.7 million for the three months ended March 31, 2002, an increase of $0.5 million or 10.2%. The increase is attributable to the upgrading of dental office management and other personnel. Expressed as a 13 percentage of net patient revenues, clinical salaries increased from 18.5% for the three months ended March 31, 2001 to 22.2% for the comparable 2002 period. Dental Supplies and Laboratory Fees - Dental supplies and laboratory fees increased slightly, from $2.9 million for the three months ended March 31, 2001 to $3.0 million for the three months ended March 31, 2002, an increase of 1.8%. Higher laboratory fees as a result of price increases and improved quality of lab products accounted for the increase. Expressed as a percentage of patient revenues, dental supplies and laboratory fees increased from 10.6% for the three months ended March 31, 2001 to 11.8% for the three months ended March 31, 2002. Rent and Lease Expense - Rent and lease expense of $1.5 million for the three months ended March 31, 2002 decreased by $0.2 million, or 12.1%, from the first quarter of 2001. The closing of nine dental centers over the past year accounted for the decrease. Expressed as a percentage of net patient revenues, rent and lease expense decreased from 6.2% for the three months ended March 31, 2001 to 6.0% for the three-month period ended March 31, 2002. Advertising and Marketing - Advertising and marketing expenses of $0.8 million in the first quarter of 2002 was relatively unchanged from the same period of 2001. Expressed as a percentage of net patient revenues, advertising and marketing expenses increased from 2.8% in the prior year period to 3.3% for the three months ended March 31, 2002. Depreciation and Amortization - Depreciation and amortization decreased from $1.7 million for the three months ended March 31, 2001, to $0.9 million for the three months ended March 31, 2002, a decrease of 0.8 million or 47.0%. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets and reclassified approximately $54.9 million from management services agreements to goodwill, and as required by SFAS 142, the company no longer records amortization expenses related to this goodwill. The effect of this change reduced the net loss by approximately $0.7 million, or $0.10 per share for the three months ended March 31, 2002. Had the Company adopted SFAS 142 effective January 1, 2001, the effect would have been to reduce the net loss by approximately $0.7 million, or $0.11 per share for the three months ended March 31, 2001. The Company is currently in the process of determining the effect of implementing SFAS 142 on goodwill. It is likely that the Company will record a significant impairment charge as a change in accounting principle related to certain of its markets upon completion of the initial impairment review. Management of the Company expects to complete the assessment by the end of the second quarter 2002. The remainder of the decrease resulted from the closing of nine centers over the past year. Expressed as a percentage of net patient revenues, depreciation and amortization decreased from 6.2% in the prior year period to 3.6% for the three months ended March 31, 2002 . Other Operating Expenses - Other operating expenses increased slightly from $1.9 million for the three months ended March 31, 2001, to $2.0 million for the three months ended March 31, 2002, an increase of $0.1 million or 2.8%. Other operating expenses represent expenses related to the operation of the Company's dental centers. The increase is attributable primarily to recruiting for new dentists and increased communication costs. Expressed as a percentage of net patient revenues, other operating expenses increased from 6.9% for the three months ended March 31, 2001 to 7.7% for the comparable 2002 period. Bad Debt Expense - Bad debt expense of $0.8 million for the three months ended March 31, 2002 decreased by $0.4 million, or 32.3%. Expressed as a percentage of net patient revenues, bad debt expense decreased from 4.1% for the three months ended March 31, 2001 to 3.0% for the same period of 2002. The decrease is attributable to improved collection efforts and increased collection staff. Restructuring Costs and Other Charges - For the three months ended March 31, 2002 the Company recorded restructuring costs and other charges of $0.5 million including remaining lease obligations on closed offices and legal and professional fees related to the restructuring of the Company's senior credit facility. For the three months ended March 31, 2001 the Company recorded restructuring costs and other charges of $0.5 million including severance costs and legal and professional fees related to the implementation of the plan to improve operating results and restructure the Company's credit facilities. General & Administrative Expense - General and administrative expenses of $2.8 million for the three months ended March 31, 2002 increased by 5.2% from general and administrative expenses of $2.6 million in the first quarter of 2001. Expressed as a percentage of net patient revenues, general and administrative 14 expense increased from 9.5% for the three months ended March 31, 2001 to 10.9% for the comparable period of 2002. This increase in general and administrative expenses is attributable to additional support staff in the corporate office and increased legal expenses. Interest Expense - Interest expense decreased from $2.2 million for the three months ended March 31, 2001 to $1.6 million for the three months ended March 31, 2002, a decrease of $0.6 million or 26.0%. The decrease resulted from a decrease in the variable interest rate under the bank credit facility and senior subordinated note agreements. Cumulative Effect of Change in Accounting Principle - During June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires that companies recognize all derivative instruments as either assets or liabilities on the balance sheet and measure those instruments at fair value. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," deferred the implementation of SFAS 133 until the fiscal year ending December 31, 2001. The Company implemented SFAS 133 effective January 1, 2001, resulting in a cumulative effect adjustment of $0.3 million during the first quarter of 2001. Liquidity and Capital Resources At March 31, 2002 the Company had a net working capital deficit of $68.4 million, resulting primarily from the classification as a current liability of $45.2 million of outstanding borrowings under the Company's senior bank credit facility, $15.0 million in senior subordinated note and convertible note agreements (see below) and $3.5 million in other subordinated notes. Current assets consisted of cash and cash equivalents of $3.2 million, billed and unbilled accounts receivable of $8.6 million and prepaid expenses and other current assets of $1.7 million. Current liabilities totaled $81.9 million, consisting of $18.1 million in accounts payable and accrued liabilities, $63.7 million in current maturities of long-term debt and $0.1 million of deferred compensation payable to a stockholder. For the three months ended March 31, 2001, cash provided by operating activities was $2.7 million. In the three months ended March 31, 2002, cash used in operating activities amounted to $0.4 million. For the three months ended March 31, 2001 and 2002 cash used in investing activities was $0.1 million and $0.3 million, respectively, consisting primarily of capital expenditures. For the three months ended March 31, 2001 and 2002, cash used in financing activities totaled $0.1 million and $50,000, respectively, representing repayments of long-term debt and capital lease obligations. During the first three months of 2002, the Company's principal sources of liquidity consisted primarily of cash and cash equivalents and net accounts receivable. The Company incurred losses of $19.1 million in 2000, $14.8 million in 2001 and $1.4 million for the three months ended March 31, 2002, and, as a result, has not been in compliance with certain financial covenants of the Credit Agreement, the Subordinated Note Agreement and the Convertible Note Agreement since June 30, 2000 (collectively the "Debt Agreements"). The Credit Agreement provides for borrowings up to $55.0 million and matures November 2002. Advances under the Credit Agreement required quarterly interest payments only through March 2001 at which time principal became 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 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 the 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. At March 31, 15 2002, $45.2 million was outstanding under the Credit Agreement. In November 2001, the Credit Agreement became a term note, therefore additional borrowings under the agreement are not available. The Subordinated Note Agreement and Convertible Note Agreement provided borrowings of $13.7 and $1.3 million, respectively. Proceeds from these notes were used to reduce borrowings under the bank credit facility, to acquire a 20% minority interest in the Company's California subsidiary and to reduce other accrued liabilities and accounts payable. Loans under the Subordinated Note Agreement bear interest at the 90-day LIBOR rate plus five and one-half percent, payable quarterly, and are due in eight quarterly installments beginning in the sixty-third month following the closing date. Loans under the Convertible Note Agreement bear interest at the same rate as loans under the Subordinated Note Agreement and are due on demand beginning seven years after the closing date with a final maturity date of January 30, 2009. The convertible note is convertible at any time into 442,880 shares of Company common stock at the request of the holders at a fixed conversion price of $3.1125 per share. The Subordinated Note Agreement and Convertible Note Agreement contain affirmative and negative covenants that require the Company to maintain certain financial ratios, limit the amount of additional indebtedness, limit the creation or existence of liens, set certain restrictions on acquisitions, mergers and sales of assets and restrict the payment of dividends . As a result of losses incurred in the past two years and the three months ended March 31, 2002, the Company has not been in compliance with the financial covenants of the Debt Agreements since June 30, 2000. At March 31, 2002, approximately $45.2 million in senior debt and $15.0 million in subordinated debt were outstanding under the Debt Agreements in addition to approximately $3.5 million in other outstanding subordinated debt. Since the Company is in default under these agreements, all amounts outstanding are subject to acceleration and have been classified as current liabilities. The Company has continued to pay interest (other than default interest) on the amounts outstanding under the Credit Agreement, but has not made scheduled principal payments of $11.3 million under the Credit Agreement, nor made interest or principal payments of $6.3 million owed to subordinated creditors since July 2000. During the last half of 2001, the Company negotiated with its creditors and an unrelated third party concerning a potential equity investment and the restructuring of the Debt Agreements and other Company debt. However, due to the deterioration in operating results in the fourth quarter 2001, the discussions concerning the potential equity investment were terminated in January 2002 and the Company has continued negotiations with the senior and subordinated lenders concerning a forbearance agreement or a restructuring of the Company's debt. However, these negotiations have not resulted in a forbearance agreement or restructuring of the debt as of May 13, 2002. There can be no assurance that the Company's lenders will consent to the restructuring necessary to allow the Company to continue to operate. If the Company and its lenders cannot reach an agreement, it may be necessary for the Company to seek protection under Chapter 11 of the Bankruptcy Code. These factors, among others, indicate that the Company may be unable to continue as a going concern. The Company has implemented a plan to improve operating results. Components of this plan include (i) increased hiring of new dentists and improving dentist retention; (ii) continuing to monitor and close unprofitable and under performing dental centers; (iii) refurbishing and modernizing existing dental centers within capital expenditure constraints of $1.5 million; (iv) upgrading dental office management personnel; and (v) improving patient services in order to increase patient retention rates. However, there can be no assurance that the these efforts to improve operating results and cash flows will be sufficient to allow the Company to meet its obligations in a timely manner or that the Company's creditors will agree with the plan. Therefore, there is substantial doubt about the Company's ability to continue in existence. Recent Accounting Pronouncements On August 16, 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligation". SFAS 143 addresses financial accounting and reporting for obligations 16 associated with the retirement of tangible long-lived assets and the associated asset retirement costs. These provisions of SFAS 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. Management believes the application of SFAS 143 will not have a material effect on the Company. On October 3, 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", both of which address the disposal of a segment of a business. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with early application encouraged. The Company is currently evaluating the impact of the adoption of this Statement but does not believe it will have a material impact on the Company's net income, cash flows, or financial condition. In May 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (SFAS 145), "Rescission of FAS Nos.4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002." This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements issued for fiscal years beginning after May 15, 2002. SFAS No. 145 is not expected to affect our results of operations, liquidity or financial position. Item 3. Quantitative and Qualitative Disclosures About Market Risks The Company's financial instruments with market risk exposure are revolving credit borrowings under its Debt Agreements, which total $60.2 million at March 31, 2002. Based on this balance, a change of one percent in the interest rate would cause a change in interest expense of approximately $602,000, or $0.09 per share, on an annual basis. The bank credit facility was not entered into for trading purposes and carries interest at a pre-agreed upon percentage point spread from either the prime interest rate or Eurodollar interest rate. PART II -- OTHER INFORMATION Item 1. Legal Proceedings. In June 2000, the Company recorded litigation expenses of $1,495,000 resulting from an arbitration award against two subsidiaries of the Company in an arbitration proceeding in Los Angeles, California. The arbitrator found that the subsidiaries had breached a contractual agreement to acquire a dental practice and awarded the plaintiffs actual damages and costs of $442,000. In August 2000, the arbitrator awarded the plaintiffs an additional $666,000 for attorney fees and costs, resulting in a total judgment of $1,108,000 against the Company's subsidiaries. This amount, as well as additional legal expenses incurred by the Company, was included in the litigation expenses recorded in June 2000. None of the judgment amount awarded to the plaintiffs has been paid as of May 13, 2002. In October 2001, the former owners of Dental Centers of America filed suit in Bexar County, Texas alleging that the Company breached a letter agreement offering payment as settlement for past due amounts on two subordinated promissory notes that were part of the purchase consideration for Dental Centers of America. In March 2002, the plaintiffs obtained a judgment for $625,000 plus interest and attorneys' fees, against the Company. The Company is currently involved in settlement negotiations with the plaintiffs and none of the judgment award has been paid as of May 13, 2002. 17 The Company also is a defendant in a lawsuit with the landlord of a leased property that was abandoned by the Company in 2001 as part of its restructuring plan. The lease had a remaining term of 42 months at a monthly rental rate of $3,800 at the time the Company stopped paying rent on the lease. The Company is attempting to negotiate a settlement with the landlord. In April 2002, the Company paid $45,000 in settlement of another lease that it had abandoned and that had been the subject of a lawsuit. The Company carries insurance with coverages 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. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. As a result of losses incurred in 2000, 2001 and the three months ended March 31, 2002, the Company has not been in compliance with the financial covenants of the Credit Agreement, Subordinated Note Agreement and Convertible Note Agreement ("Debt Agreements") since June 30, 2000. At March 31, 2002, approximately $45.2 million in senior debt and $15.0 million in subordinated debt were outstanding under the Debt Agreements in addition to approximately $3.5 million in other outstanding subordinated debt. The Company has continued to pay interest (other than cumulative default interest of $2.2 million) on the amounts outstanding under the Debt Agreements, but has not made scheduled principal payments of $11.3 million as of March 31, 2002 due under the Credit Agreement, nor made interest or principal payments of $6.3 million owed to subordinated creditors since July 2000. Since the Company is in default under these agreements, all amounts outstanding are subject to acceleration and have been classified as current liabilities. The Company has requested a forbearance of scheduled principal payments and is negotiating with its lenders to restructure the Debt Agreements. However, these negotiations have not resulted in a forbearance agreement or restructuring of the debt. There can be no assurance that the Company's lenders will consent to forbearance agreement and restructuring necessary to allow the Company to continue to operate. If the Company and the lenders cannot reach an agreement, it may be necessary for the Company to seek protection under Chapter 11 of the Bankruptcy Code. 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: (a) Exhibits 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation of Succession* 3. Articles of Incorporation and By-laws 3.1 Amended and Restated Certificate of Incorporation of Castle Dental Centers, Inc. (incorporated by reference from Exhibit 3.1 of the Company's 18 Annual Report on Form 10-K for the period ended December 31, 2001, File No. 001-13263) 3.2 Bylaws of Castle Dental Centers, Inc. (incorporated by reference to Exhibit 3.3 of the Company's Registration Statement on Form S-1, filed September 3, 1996, Reg. No. 333-1335) 3.3 Amendment to Bylaws of Castle Dental Centers, Inc. dated August 16, 1996 (incorporated by reference to Exhibit 3.4 of the Company's Registration Statement on Form S-1, filed September 3, 1996, Reg. No. 333-1335) 4. Instruments defining the rights of security holders, including indentures. 4.1 Form of Certificate representing the Common Stock, par value $.001 per share, of Castle Dental Centers, Inc. (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-1, filed September 3, 1996, Reg. No. 333-1335) 4.2 Registration Rights Agreement dated December 18, 1995, among Castle Dental Centers, Inc. and Delaware State Employees' Retirement Fund, Declaration of Trust for Defined Benefit Plan of ICI American Holdings, Inc., Declaration of Trust for Defined Benefit Plan of Zeneca Holdings, Inc. and certain stockholders and investors in the Company (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-1, filed September 3, 1996, Reg. No. 333-1335) 4.3 Stockholders Agreement dated as of January 31, 2000, by and among Castle Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and certain stockholders and investors in the Company (incorporated by reference to Exhibit 4.3 of the Company's Form Annual Report on Form 10-K for the period ended March 31, 2000, File No. 001- 13263) 4.4 Registration Rights Agreement dated as of January 31, 2000, by and among Castle Dental Centers, Inc., Heller Financial, Inc., Midwest Mezzanine Fund II, L.P., and certain stockholders and investors in the Company. (incorporated by reference to Exhibit 4.4 of the Company's Form Annual Report on Form 10-K for the period ended March 31, 2000, File No. 001-13263) 10. Material Contracts* 11. Statement re computation of per share earnings* 15. Letter re unaudited interim financial information* 18. Letter re change in accounting principles* 19. Report furnished to security holders* 22. Published report regarding matters submitted to vote of security holders* 23. Consents of experts and counsel* 24. Power of attorney* 99. Additional exhibits* 19 -------------------- *Inapplicable to this filing (b) Reports on Form 8-K None 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 20, 2002 /s/ JAMES M.USDAN ----------------------------- James M. Usdan Chief Executive Officer Date: May 20, 2002 /s/ JOSEPH P. KEANE ----------------------------- Joseph P. Keane Chief Financial Officer 20