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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 001-13725
e-dentist.com, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0545043
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2999 NORTH 44TH STREET, SUITE 650
PHOENIX, ARIZONA 85018
(Address of principal executive offices) (Zip Code)
(602) 952-1200
(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 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 of the Registrant, par value $.001 per
share, outstanding at February 2, 2001 was 10,617,475.
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FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO.
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of December 31, 2000 and
March 31, 2000................................................... 1
Consolidated Statements of Operations for the Three and
Nine Months Ended December 31, 2000, and December 31, 1999....... 2
Consolidated Statement of Changes in Shareholders' Equity
(Deficit) as of December 31, 2000................................ 3
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 2000 and December 31, 1999.................... 4
Notes to Consolidated Financial Statements ...................... 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 7-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 12
Item 2. Change in Securities and Use of Proceeds......................... 12
Item 3. Defaults of Senior Securities.................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.............. 12
Item 5. Other Information................................................ 12
Item 6. Exhibits and Reports on Form 8-K................................. 12
Signature................................................................ 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
2000 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 1,054 $ 553
Receivables from affiliated practices, net of allowance for doubtful
accounts of $1,686 and $3,269, respectively ............................. 294 2,966
Prepaid and other current assets ......................................... 166 499
Notes receivable from affiliated practices - current, net ................ 291 421
-------- --------
Total current assets ................................................... 1,805 4,439
Property and equipment, net ................................................ 3,575 6,886
Intangible assets, net ..................................................... 3,325 25,786
Notes receivable from affiliated practices, net ............................ 1,102 709
Other assets ............................................................... 211 86
-------- --------
Total assets ........................................................ $ 10,018 $ 37,906
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Credit facility .......................................................... $ 9,581 $ --
Current portion of long term debt ........................................ 98 492
Accounts payable and accrued liabilities ................................. 1,141 1,702
Current portion of deferred revenue ...................................... 1,026 206
Accrued employment agreement ............................................. 278 400
Current portion of capital leases ........................................ 333 309
-------- --------
Total current liabilities ........................................... 12,457 3,109
Credit facility ............................................................ -- 10,100
Long term debt, less current maturities .................................... 3,119 4,729
Capital lease obligations .................................................. 743 961
Deferred revenue............................................................ 600 --
Commitment and contingencies
Shareholders' equity (deficit):
Common stock, $.001 par value 40,000,000 shares authorized, 11,570,783 and
10,820,783 issued, respectively ......................................... 11 11
Additional paid-in capital ............................................... 25,895 25,604
Accumulated deficit ...................................................... (31,647) (6,432)
Less: Treasury shares at cost, 1,085,453 and 154,748, respectively ....... (1,160) (176)
-------- --------
Total shareholders' equity (deficit) ................................ (6,901) 19,007
-------- --------
Total liabilities and shareholders' equity (deficit) ................ $ 10,018 $ 37,906
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
1
E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net revenue ................................................ $ 1,966 $ 14,967 $ 10,533 $ 43,025
Operating expenses:
Clinical salaries, wages and benefits .................. -- 5,720 3,452 17,240
Dental supplies and lab fees ........................... -- 2,886 286 7,967
Rent ................................................... -- 1,032 176 3,020
Advertising ............................................ -- 470 32 1,128
General and administrative ............................. 966 1,673 6,071 4,102
Other operating expenses ............................... -- 2,306 192 5,901
Impairment of assets ................................... -- -- 23,000 --
Depreciation and amortization .......................... 513 674 1,780 1,866
-------- -------- -------- --------
Total operating expenses ............................... 1,479 14,761 34,989 41,224
Earnings (loss) from operations ........................ 487 206 (24,456) 1,801
Interest expense ........................................... (328) (391) (1,053) (930)
Interest income ............................................ 107 62 241 148
Other income ............................................... -- 131 53 212
-------- -------- -------- --------
Income (loss) before income taxes and extraordinary item.... 266 8 (25,215) 1,231
Income taxes................................................ -- 49 -- 579
-------- -------- -------- --------
Income (loss) before extraordinary item .................... 266 (41) (25,215) 652
Extraordinary item-gain on debt forgiveness (net of tax
effect of $133)............................................ -- 217 -- 217
-------- -------- -------- --------
Net income (loss) .......................................... $ 266 $ 176 $(25,215) $ 869
======== ======== ======== ========
Basic and diluted earnings (loss) per share
Earnings (loss) before extraordinary item ................ $ 0.03 $ -- $ (2.47) $ 0.06
Extraordinary item ....................................... -- 0.02 -- 0.02
-------- -------- -------- --------
Net earnings (loss) ...................................... $ 0.03 $ 0.02 $ (2.47) $ 0.08
======== ======== ======== ========
Weighted average number of shares - outstanding-basic
and diluted............................................... 10,463 10,802 10,202 10,249
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
2
E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY (DEFICIT)
--------- -------- ---------- ----------- -------- ----------------
Balances, April 1, 2000......... 10,821 $ 11 $ 25,604 $ (6,432) $ (176) $ 19,007
Shares repurchased.............. -- -- -- -- (984) (984)
Issuance of common stock........ 750 -- 291 -- -- 291
Net loss........................ -- -- -- (25,215) -- (25,215)
--------- ----- ---------- ---------- -------- --------
Balances, December 31, 2000..... 11,571 $ 11 $ 25,895 $ (31,647) $ (1,160) $ (6,901)
========= ===== ========== ========== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
E-DENTIST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
---------------------
2000 1999
------- -------
Net cash provided by (used in) operating activities ....................................... $ 1,146 $ (556)
Cash flows from investing activities:
Capital expenditures .................................................................... (108) (245)
Acquisitions, net of cash acquired ...................................................... (31) (1,230)
Issuance of notes receivable ............................................................ (24) --
Repayment of notes receivable ........................................................... 264 121
Disposition of property and equipment ................................................... 84 --
------- -------
Net cash provided by (used in) investing activities ................................... 185 (1,354)
------- -------
Cash flows from financing activities:
Repayment of long-term debt ............................................................. (830) (231)
Proceeds from line of credit ............................................................ -- 1,500
------- -------
Net cash provided by (used in) financing activities ................................... (830) 1,269
------- -------
Net change in cash and cash equivalents ................................................... 501 (641)
Cash and cash equivalents, beginning of period ............................................ 553 1,047
------- -------
Cash and cash equivalents, end of period .................................................. $ 1,054 $ 406
======= =======
Supplemental disclosures of cash flow information:
Convertible subordinated notes offset against receivables from affiliated practices........ $ 540 $ 144
Conversion of receivables from affiliated practices to notes receivables .................. $ 1,927
Treasury stock acquired for payment of receivable from affiliated practices and
purchase of property and equipment........................................................ $ 975
Notes payable offset against future membership fees ....................................... $ 1,347
Equipment purchased with capital leases ................................................... $ 1,061
Issuance of common stock for acquisition .................................................. $ 291
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
E-DENTIST.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
e-dentist.com, Inc. (the "Company") delivers a dual eBusiness strategy that
provides online services to the dental industry as well as access to business
services and products by dentists and their staff. Services provided include
access to e-dentist.com's e-Learning, Dental Careers, Practice Tools and
Shopping Engine, all designed to work in conjunction with its traditional
practice enhancement services. Since its formation in March of 1998, the Company
has utilized its virtual private network over the Internet to process
transactions of its affiliated practices.
The unaudited consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Pursuant to such regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the presentation and disclosures
herein are adequate to make the information not misleading, but do not purport
to be a complete presentation inasmuch as all note disclosures required by
generally accepted accounting principles are not included. In the opinion of
management, the consolidated financial statements reflect all elimination
entries and normal adjustments that are necessary for a fair presentation of the
results for the interim periods ended December 31, 2000 and 1999.
Fiscal operating results for interim periods are not necessarily indicative
of the results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements of the Company
and related notes thereto, and management's discussion and analysis related
thereto, all of which are included in the Company's annual report on Form 10-K
for the year ended March 31, 2000, as filed with the SEC.
RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS
Management is continuing the development of a Business-to-Business Web site
focusing on the following on-line services:
1. E-LEARNING--Live and on-line interactive learning
2. DENTAL CAREERS--Employment opportunities for both employers and
employees
3. PRACTICE SERVICES--Payroll, human resources, practice enhancement,
patient financing, etc.
4. COMMUNITY--Dental and professional idea communication in chat rooms
and message boards
5. PURCHASING--Dental supplies and equipment purchasing from major
suppliers to all dentists
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services.
In early May 2000, the Company launched the first generation Web site and
launched its second generation Web site in November 2000.
During the three months ended December 31, 2000, the Company modified 3 and
terminated 2 of its Management Service Agreements. As of December 31, 2000, the
Company has modified 79 and terminated 16 of its Management Service Agreements
to a shorter term (from 25-40 year terms) of five years, and decreased and fixed
the future monthly management fees. The new service agreements modify the type
of services the Company provides each affiliated practice. The modification of
the terms include the following:
1. The payroll and payables process will cease for the affiliated
practices. All practice expenses will be paid by the dentist and not
reimbursed. All practice employees will become employees of the
dentists and payroll will be processed at the practice level.
5
2. Management fees will be 90% of fiscal year 2000 fees and fixed for
three years, drawn weekly at the agreed upon fixed amount.
3. Assets and other equipment will be transferred back to the doctors at
the end of the amended management service agreement term, at a nominal
value.
The Company prepared an impairment analysis to determine the recoverability
of the management service agreement intangible assets and fixed assets grouped
at the practice level. The Company prepared the analysis by calculating the
expected discounted future cash flows under modified contracts less the carrying
amount of the intangible asset and fixed assets to determine the impairment
charge. Based on the modified and terminated Management Service Agreements as of
December 31, 2000, the Company has recorded a charge due to impairment of
approximately $23 million for the nine months ended December 31, 2000.
During fiscal 2000, the Company incurred a net loss of $5.4 million and had
an accumulated deficit of $6.4 million at March 31, 2000. In addition, the
Company used cash flow from operations of $628,000 during the period ending
March 31, 2000. During the three and nine months ended December 31, 2000, the
Company had net income of $266,000 and incurred a net loss of $25.2 million
respectively and has an accumulated deficit of $31.6 million at December 31,
2000. In addition, the Company generated cash flow from operations of $1.1
million during the nine months ended December 31, 2000.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for amounts it collects from its notes receivable during each quarter. The
Company paid $226,000 to the bank relating to the collection of notes receivable
as of December 31, 2000. At the end of each quarter, the bank may receive an
additional principal payment up to $50,000 if the Company's cash balance exceeds
$750,000 and if the bank has not received at least $350,000 in principal
payments from note receivable collections. In January 2001, the Company paid an
additional $50,000 to the bank. No additional borrowings are permitted under the
amendment.
As of December 31, 2000, the Company was in technical violation of certain
financial ratio covenants due to the restructure. This technical violation
occurred in spite of the preliminary attempt by management and the bank to
project the effect of the restructure on the ratios and to set the ratios at a
level to avoid the technical violation. The bank is currently working on a
waiver of the violation, which is expected.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Based upon its current strategy to enhance cash collections and
reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the balance of the
credit agreement obligation due July 31, 2001. Management believes it will be
able to replace the credit facility with other financing alternatives or
refinance its current line of credit. There is no assurance that other financing
or refinancing of its current line of credit will be available in sufficient
amounts, if at all, and there can be no assurance that the related terms and
conditions will be acceptable to the Company. Failure of the Company to obtain
such alternative financing or refinancing of its current line of credit would
have a material and adverse effect on the Company's financial position and
viability.
In order to increase its liquidity, the Company has developed the following
strategies; (i) suspension of its new practice affiliation program, (ii)
implement its revised eBusiness based strategic alternative described above,
(iii) implementation of more rigid credit policies with its affiliated
practices, (iv) consider terminating the services agreements of selected under
performing affiliated practices, (v) reducing costs in the Company's corporate
office, and (vi) raising additional capital. However, there can be no assurance
that the Company's strategy will be achieved.
6
2. SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding during each
period. Diluted earnings per share are not separately presented because such
amounts would be the same as amounts computed for basic earnings per share.
Outstanding options to purchase approximately 1,616,167 and 1,196,073
shares of Common Stock at exercise prices above the market value of Common Stock
were excluded from the calculation of earnings per share for the three and six
months ended December 31, 2000 and 1999, respectively, because their effect
would have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
3. LEGAL PROCEEDINGS
The Company has litigation pending on one practice and believes it will
prevail.
4. ASSET PURCHASE
On October 13, 2000, the Company entered into an Asset Purchase Agreement
with Dexpo.com, Inc. The consideration for the purchase of assets is 750,000
shares of e-dentist.com common stock with an additional 500,000 shares to be
held in escrow and paid contingent upon certain performance criteria of the
Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF THE
COMPANY AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS
OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND
RISKS DETAILED IN THE COMPANY'S SEC FILINGS.
OVERVIEW
e-dentist.com, Inc. (the "Company") provides eBusiness, eLearning and
practice enhancement products and services to the dental industry including its
affiliated practices.
The Company provided practice management services to fee-for-service dental
practices in the United States. On March 30, 1998, the Company acquired
simultaneously with the closing of its initial public offering ("IPO"),
substantially all of the tangible and intangible assets, and assumed the
liabilities, of the 51 founding affiliated practices. The Company also began to
provide practice management services to professional corporations or
associations owned by the dentist-owners of those affiliated practices (one of
which split into two separate dental practices immediately after the IPO)
pursuant to long-term Management Service Agreements entered into at the time of
the Affiliations.
The expenses incurred by the Company in fulfilling its obligations under
the Management Service Agreements were generally of the same nature as the
operating costs and expenses that would have otherwise been incurred by the
affiliated practices, including salaries, wages and benefits of practice
7
personnel (excluding dentists and certain other licensed dental care
professionals), dental supplies and office supplies used in administering their
practices and the office (general and administrative) expenses of their
practices. In addition to the operating costs and expenses discussed above, the
Company incurs personnel and administrative expenses in connection with
maintaining a corporate office, which provides management, practice
enhancements, administrative and business development services.
RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS
Management is continuing the development of a Business-to-Business Web site
focusing on the following on-line services:
1. E-LEARNING--Live and on-line interactive learning
2. DENTAL CAREERS--Employment opportunities for both employers and
employees
3. PRACTICE SERVICES--Payroll, human resources, practice enhancement,
patient financing, etc.
4. COMMUNITY--Dental and professional idea communication in chat rooms
and message boards
5. PURCHASING--Dental supplies and equipment purchasing from major
suppliers to all dentists
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services.
In early May 2000, the Company launched the first generation Web site and
launched its second generation Web site in November 2000. The current focus of
functionality is concentrated toward revenue generation for the Company.
During the three months ended December 31, 2000, the Company modified 3 and
terminated 2 of its Management Service Agreements. As of December 31, 2000, the
Company has modified 79 and terminated 16 of its Management Service Agreements
to a shorter term (from 25-40 year terms) of five years, and decreased and fixed
the future monthly management fees. The new service agreements modify the type
of services the Company provides each affiliated practice. The modification of
the terms include the following:
1. The payroll and payables process will cease for the affiliated
practices. All practice expenses will be paid by the dentist and not
reimbursed. All practice employees will become employees of the
dentists and payroll will be processed at the practice level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed for
three years, drawn weekly at the agreed upon fixed amount.
3. Assets and other equipment will be transferred back to the doctors at
the end of the amended management service agreement term, at a nominal
value.
The Company prepared an impairment analysis to determine the recoverability
of the management service agreement intangible assets and fixed assets grouped
at the practice level. The Company prepared the analysis by calculating the
expected discounted future cash flows under modified contracts less the carrying
amount of the intangible asset and fixed assets to determine the impairment
charge. Based on the modified and terminated Management Service Agreements as of
December 31, 2000, the Company has recorded a charge due to impairment of
approximately $23 million for the nine months ended December 31, 2000.
During fiscal 2000, the Company incurred a net loss of $5.4 million and had
an accumulated deficit of $6.4 million at March 31, 2000. In addition, the
Company used cash flow from operations of $628,000 during the period ending
March 31, 2000. During the three and nine months ended December 31, 2000, the
Company had net income of $266,000 and incurred a net loss of $25.2 million
respectively and has an accumulated deficit of $31.6 million at December 31,
2000. In addition, the Company generated cash flow from operations of $1.1
million during the nine months ended December 31, 2000.
8
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for any amount it collects from its notes receivable during each quarter.
The Company paid $226,000 to the bank relating to the collection of notes
receivable as of December 31, 2000. At the end of each quarter, the bank may
receive an additional principal payment up to $50,000 if the Company's cash
balance exceeds $750,000 and if the bank has not received at least $350,000 in
principal payments from note receivable collections. In January 2001, the
Company paid an additional $50,000 to the bank. No additional borrowings are
permitted under the amendment.
As of December 31, 2000, the Company was in technical violation of certain
financial ratio covenants due to the restructure. This technical violation
occurred in spite of the preliminary attempt by management and the bank to
project the effect of the restructure on the ratios and to set the ratios at a
level to avoid the technical violation. The bank is currently working on a
waiver of the violation, which is expected.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Based upon its current strategy to enhance cash collections and
reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the credit agreement
obligations due July 31, 2001. Management believes it will be able to replace
the credit facility with other financing alternatives or refinance its current
line of credit. There is no assurance that other financing or refinancing of its
current line of credit will be available in sufficient cash, if at all, and
there can be no assurance that the related terms and conditions will be
acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company's financial position and viability.
In order to increase its liquidity, the Company has developed the following
strategies; (i) suspension of its new practice affiliation program, (ii)
implement its revised eBusiness based strategic alternative described above,
(iii) implement more rigid credit policies with its affiliated practices, (iv)
consider terminating the services agreements of selected under performing
affiliated practices, (v) reducing costs in the Company's corporate office, and
(vi) raising additional capital. However, there can be no assurance that the
Company's strategy will be achieved.
RESULTS OF OPERATIONS (UNAUDITED)
Following completion of the IPO on March 30, 1998, the Company began
operations effective April 1, 1998. Management service fee recognition and
related expenses began April 1, 1998, and the Company began managing 51 dental
practices in 18 states.
COMPONENTS OF REVENUES AND EXPENSES
The Company has embarked upon a strategy focusing on eBusiness primarily in
the dental industry. Prior to the transition toward eBusiness, the Company
processed all payments to vendors and employed the staff of affiliated
practices. The modified Management Service Agreements caused the staff to cease
working as employees for e-dentist.com, Inc., and they have become employees of
the individual affiliated practices. In addition, processing of payments to
practice vendors is now performed at the practice level, by practice employees.
The Company no longer pays or is reimbursed for expenses paid on the practices'
behalf. As a result, the components of net revenues and expenses have changed
and decreased significantly with the modified Management Service Agreements.
Under the terms of the original management services agreement with an
affiliated practice, the Company served as the exclusive manager and
administrator of all non-dental services relating to the operation of an
affiliated practice. The obligations of the Company included assuming
responsibility for the operating expenses incurred in connection with managing
the dental centers. These expenses included salaries, wages and related costs of
non-dental personnel, dental supplies and laboratory fees, rental and lease
expenses, promotion and marketing costs, management information systems and
9
other operating expenses incurred at the affiliated practices. In addition, the
Company incurred general and administrative expenses related to the financial
and administrative management of dental operations, insurance, training and
development and other typical corporate expenditures. As compensation for its
services under the original services agreement and subject to applicable law,
the Company was paid a management fee comprised of two components: (1) the costs
incurred by it on behalf of the affiliated practice, and (2) a management fee
either fixed in amount, an amount usually approximating 35% of the affiliated
practice's operating profit, before dentist compensation or 15% of the
affiliated practice's collected gross revenue ("Service Fee"). Therefore, net
revenues represented amounts earned by the Company under the terms of its
Management Service Agreements with the affiliated practices, which generally
equated to the sum of the Service Fees and the operating expenses that the
affiliated practices paid to the Company under the service agreements.
NET REVENUE
Net revenue was $2.0 and $15.0 million for the three months ended December
31, 2000 and 1999, respectively. Net revenue was $10.5 and $43.0 million for the
nine months ended December 31, 2000 and 1999, respectively. Net revenue
generated for the three months ended December 31, 2000 and 1999 related to
service fees was approximately $1.9 and $2.6 million, respectively. Net revenue
generated for the nine months ended December 31, 2000 and 1999 related to
service fees was approximately $6.4 and $7.8 million. The decreases in each
period are due to the modification of the Management Service Agreements and the
resulting elimination of pass thru revenue and expense reporting.
Net revenue generated by paying the operating expenses of the affiliated
practices was approximately $0 and $4.1 million for the three and nine months
ended December 31, 2000 and approximately $12.4 and $35.3 million for the three
and nine months ended December 31, 2000, 1999. The decreases in each period are
due to the modification of the Management Service Agreements and the resulting
elimination of pass thru revenue and expense reporting.
OPERATING EXPENSES
The Company incurred operating expenses of approximately $1.5 and $14.8
million for the three months ended December 31, 2000 and 1999, respectively. The
Company incurred operating expenses of approximately $35.0 and $41.2 million for
the nine months ended December 31, 2000 and 1999, respectively. Operating
expenses consisted primarily of salaries, wages and benefits, dental supplies
and laboratory fees, rent, advertising and marketing, depreciation and
amortization, and general and administrative expenses. The changes in each
period are due to the impairment charges, offset by the modification of the
Management Service Agreements and the resulting elimination of pass thru revenue
and expense reporting.
General and administrative expenses consist of the corporate expenses of
the Company. These corporate expenses include salaries, wages and benefits,
rent, bad debt expenses, consulting fees, travel, office costs and other general
corporate expenses. For the three months ended December 31, 2000 and 1999,
general and administrative expenses were approximately $1.0 and $1.7 million, a
decrease of $700,000. The decrease is primarily due to decrease in salaries of
$184,000, bad debt expense of $172,000 and professional fees of $88,000.
For the nine months ended December 31, 2000 and 1999, general and
administrative expenses were approximately $6.1 and $4.1 million, an increase of
$2.0 million. The increase is primarily due to increases in bad debt expense of
$1.6 million and professional fees of $169,000.
INCOME TAX EXPENSE
The Company recorded no tax expense during the three months ended December
31, 2000, due to the losses incurred earlier in the year. The Company recorded
no tax benefit during the nine months ended December 31, 2000, because it
concluded it is not likely it would be able to recognize the tax asset created
due to the lack of operating history of its e-Business plan. Income tax expense
for the three months ended December 31, 1999 totaled $49,000, an amount greater
than income before taxes of $8,000. This occurred because certain amortization
expenses were deducted to arrive at net income but were not deductible for
income tax purposes. Income tax expense for the nine months ended December 31,
1999 totaled $579,000.
For the nine months ended December 31, 2000, the Company recorded a
valuation allowance for its entire deferred tax asset of $7.6 million because it
concluded it is not likely it would be able to recognize the tax asset due to
the lack of operating history of its implementation of the e-Business plan,
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modification of its Management Service Agreements and maturity of its line of
credit on July 31, 2001. At December 31, 2000, the Company has a net deferred
tax asset of $10.8 million with a corresponding valuation allowance.
Additionally, the Company also has $6.1 million of available deductions related
to the increase in tax basis of the assets acquired in the Affiliations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had a working capital deficit of
approximately $11.3 million. Current assets included approximately $1.1 million
in cash and $585,000 in net receivables, due from affiliated practices. Current
liabilities consisted of approximately $2.8 million in accounts payable and
accrued liabilities. Included in the current liabilities are approximately $9.6
million of anticipated payments on the line of credit.
On June 1, 1998, the Company closed a revolving bank credit facility with
Bank One, Texas, N.A., which provided the Company with a revolving line of
credit of up to $15.0 million, to be used for general corporate purposes
including financing of acquisitions, capital expenditures and working capital.
The credit facility is collateralized by liens on certain of the Company's
assets, including its rights under the Management Service Agreements and
accounts receivable. The credit facility contains restrictions on the incurrence
of additional indebtedness and payment of dividends on the Common Stock.
Additionally, compliance with certain financial covenants is required and the
lender has approval rights with respect with acquisitions exceeding certain
limits. As of December 31, 2000, the Company was in technical violation of
certain financial ratio covenants due to the restructure. This technical
violation occurred in spite of the preliminary attempt by management and the
bank to project the effect of the restructure on the ratios and to set the
ratios at a level to avoid the technical violation. The bank is currently
working on a waiver of the violation, which is expected. At December 31, 2000,
$9.6 million was outstanding under the revolving line of credit.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for amounts it collects from its notes receivable during each quarter. The
Company paid $226,000 to the bank relating to the collection of notes receivable
as of December 31, 2000. At the end of each quarter, the bank may receive an
additional principal payment up to $50,000 if the Company's cash balance exceeds
$750,000 and if the bank has not received at least $350,000 in principal
payments from note receivable collections. In January 2001, the Company paid an
additional $50,000 to the bank. No additional borrowings are permitted under the
amendment.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Based upon its current strategy to enhance cash collections and
reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the balance of the
credit agreement obligation due July 31, 2001. Management believes it will be
able to replace the credit facility with other financing alternatives or
refinance its current line of credit. There is no assurance that other financing
or refinancing of its current line of credit will be available in sufficient
amounts, if at all, and there can be no assurance that the related terms and
conditions will be acceptable to the Company. Failure of the Company to obtain
such alternative financing or refinancing of its current line of credit would
have a material and adverse effect on the Company's financial position and
viability.
Cash provided by investing activities for the nine months ended December
31, 2000 and 1999 involved collections on notes receivable of $264,000 and
$121,000, respectively. In addition $89,000 was provided by the disposition of
property and equipment during the nine months ended December 31, 2000. Cash used
in investing activities for the nine months ended December 31, 2000 and 1999
included $108,000 and $245,000, respectively, for purchases of capital equipment
and $31,000 and $1.2 million respectively, for the purchase of intangibles
associated with acquisitions.
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Cash used in financing activities for the nine-month periods ended December
31, 2000 and 1999 included payments on the Company's long-term debt and capital
leases of $830,000 and $231,000, respectively. Cash generated from financing
activities for the nine-month period ended December 31, 1999 was draws on the
revolving line of credit of $1.5 million.
ASSET PURCHASE
On October 13, 2000, the Company entered into an Asset Purchase Agreement
with Dexpo.com, Inc. The consideration for the purchase of assets is 750,000
shares of e-dentist.com common stock with an additional 500,000 shares to be
held in escrow and paid contingent upon certain performance criteria of the
Company's common stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has litigation pending on one practice and believes it will
prevail.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
As of September 30, 2000, the Company was in technical violation of certain
financial ratio covenants due to the restructure. This technical violation
occurred in spite of the preliminary attempt by management and the bank to
project the effect of the restructure on the ratios and to set the ratios at a
level to avoid the technical violation. The bank is currently working on a
waiver of the violation, which is expected to be delivered to the Company.
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, e-dentist.com, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
E-DENTIST.COM, INC.
Dated: February 13, 2001
By: /s/ Charles Sanders
------------------------------------
Charles Sanders
Sr. Vice President-Chief Financial
Officer
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