<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------------------
Commission file number 0-23367
--------
BIRNER DENTAL MANAGEMENT SERVICES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 691-0680
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding as of November 12, 1998
- --------------------------------------------------------- ---------------------
Common Stock, without par value 6,696,119
<PAGE> 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Nine Months Ended September 30, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 5
Unaudited Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------ --------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,693,400 $ 977,454
Accounts receivable, net of allowance for doubtful accounts
of $238,839 and $ 97,700 at September 30, 1998 and
December 31, 1997, respectively 2,717,775 1,374,304
Current portion of notes receivable - related parties 30,440 35,507
Prepaid expenses and other assets 541,393 284,865
Deferred offering costs -- 846,528
--------------- ---------------
Total current assets 4,983,008 3,518,658
PROPERTY AND EQUIPMENT, net 4,589,146 2,630,945
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,953,870 8,947,952
Deferred charges and other assets 336,878 458,191
Notes receivable - related parties, net of current portion -- 8,052
--------------- ---------------
Total assets $ 23,862,902 $ 15,563,798
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 2,979,182 $ 3,252,761
Current maturities of long-term debt 273,069 682,907
Current maturities of capital lease obligations 27,159 41,391
Income taxes payable 226,562 --
--------------- ---------------
Total current liabilities 3,505,972 3,977,059
LONG TERM LIABILITIES:
Long-term debt, net of current maturities 1,039,914 3,392,114
Convertible subordinated debentures -- 6,780,000
Capital lease obligations, net of current maturities 7,854 26,249
--------------- ---------------
Total liabilities 4,553,740 14,175,422
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding -- --
Common Stock, no par value, 20,000,000 shares
authorized; 6,696,119 and 3,196,243, shares issued and
outstanding at September 30, 1998 and December 31,
1997, respectively 18,775,586 1,850,094
Retained earnings (accumulated deficit) 533,576 (461,718)
--------------- ---------------
Total shareholders' equity 19,309,162 1,388,376
--------------- ---------------
Total liabilities and shareholders' equity $ 23,862,902 $ 15,563,798
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUE $ 5,855,388 $ 3,356,190 $ 16,115,742 $ 8,583,459
DIRECT EXPENSES:
Clinical salaries and benefits 2,190,598 1,337,319 5,983,054 3,033,401
Dental supplies 271,418 239,393 833,446 751,759
Laboratory fees 501,229 305,437 1,431,481 793,640
Occupancy 525,463 287,051 1,366,148 718,660
Advertising and marketing 87,272 68,817 291,799 285,947
Depreciation and amortization 308,922 106,482 784,383 391,891
General and administrative 586,832 263,714 1,462,004 616,389
------------ ------------ ------------ ------------
4,471,734 2,608,213 12,152,315 6,591,687
------------ ------------ ------------ ------------
Contribution from dental offices 1,383,654 747,977 3,963,427 1,991,772
Corporate expenses:
General and administrative 831,992 286,753 2,067,130 874,824
Depreciation and amortization 43,560 24,116 112,051 70,532
Acquisition costs -- 252,234 -- 252,234
------------ ------------ ------------ ------------
Operating income 508,102 184,874 1,784,246 794,182
Interest income (expense), net 14,125 (215,815) (57,297) (553,572)
Conversion inducement income (expense) -- -- (305,100) --
------------ ------------ ------------ ------------
Income (loss) before income taxes 522,227 (30,941) 1,421,849 240,610
Income tax benefit (expense) (138,677) -- (426,555) (5,200)
------------ ------------ ------------ ------------
Net income (loss) $ 383,550 $ (30,941) $ 995,294 $ 235,410
============ ============ ============ ============
Net income (loss) per share of common stock:
Basic $ .06 $ (.01) $ .16 $ .07
============ ============ ============ ============
Diluted $ .06 $ (.01) $ .16 $ .07
============ ============ ============ ============
Weighted average number of shares of
Common stock and dilutive securities:
Basic 6,685,759 3,178,848 6,106,389 3,228,519
============ ============ ============ ============
Diluted 6,838,167 3,509,955 6,317,054 3,559,626
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 995,294 $ 235,410
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 896,434 462,422
Allowance for doubtful accounts 141,139 7,136
Amortization of debenture issuance costs 22,742 64,287
Conversion inducement 305,100 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (1,229,610) (230,629)
Prepaid expenses and other assets (379,589) (120,323)
Accounts payable and accrued expenses 370,846 1,245,410
Income taxes payable 226,562 5,200
------------ ------------
Net cash provided by (used in) operating activities 1,348,918 1,668,913
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties 13,119 98,465
Capital expenditures (1,377,617) (550,908)
Development of new dental offices (692,506) (70,794)
Cash acquired from existing dental offices -- 200,058
Acquisition of dental offices (5,847,987) (3,413,787)
------------ ------------
Net cash provided by (used in) investing activities (7,904,991) (3,736,966)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering 11,476,042 --
Proceeds from convertible subordinated debentures 225,000
Proceeds from exercise of common stock options 47,425 --
Net borrowings from line of credit 368,056 250,000
Proceeds from notes payable 300,000 2,000,000
Repayment of long-term debt (3,462,721) (179,130)
Payment of debenture issuance and other financing cost (27,927) (16,875)
Payment to induce conversion of debentures (305,100) --
Payment of public offering costs (1,123,756) (466,442)
Purchase and retirement of Common Stock -- (219,178)
------------ ------------
Net cash provided by (used in) financing activities 7,272,019 1,593,375
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 715,946 (474,678)
CASH AND CASH EQUIVALENTS, beginning of period 977,454 1,797,552
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,693,400 $ 1,322,874
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 492,587 $ 341,845
========== ==========
Cash paid during the period for income taxes $ 200,000 $ --
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Conversion of debentures $6,780,000 $ --
Acquisition of dental offices 76,500 --
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities $ 149,777 $ 365,263
Notes payable 95,200 --
Accounts receivable acquired through acquisitions $ 255,000 $ 179,920
Other assets acquired through acquisitions $ -- $ 25,491
Notes payable incurred from:
Acquisition of dental offices $ 300,000 $1,642,000
Purchase and retirement of common stock -- 110,822
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. A description of
the Company's accounting policies and other financial information is included
in the audited consolidated financial statements as filed with the Securities
and Exchanges Commission in the Company's Form 10-K for the year ended December
31, 1997.
In the opinion of the management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company as of September 30, 1998 and the
results of operations and cash flows for the periods presented. All such
adjustments are of a normal recurring nature. The results of operations for the
quarter and nine months ended September 30, 1998 are not necessarily indicative
of the results that may be achieved for a full fiscal year and cannot be used
to indicate financial performance for the entire year.
(2) EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 is effective for periods ended after December
15, 1997. The statement replaces the "primary earnings per share" calculation
with a "basic earnings per share" and replaces the "fully diluted earnings per
share" calculation with "diluted earnings per share." The following tables
present a reconciliation of basic and diluted income per share calculations.
The Company's share base and related earnings per share for the nine months
ended September 30, 1997 as presented in the following table, differs from that
previously reported in the Company's Prospectus dated February 11, 1998 for
this same period due to the adoption of SFAS No. 128 which required retroactive
restatement of prior period's earnings per share.
<TABLE>
<CAPTION>
Quarter Ended September 30,
--------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount (Loss) Shares Amount
---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) available
to shares of common stock $ 383,550 6,685,759 $ .06 $ (30,941) 3,178,848 $ (.01)
Effect of dilutive shares of
common stock from stock
options and warrants - 152,408 - - 331,107 -
---------- --------- ---------- --------- --------- --------
Diluted earnings (loss) per share
of common stock:
Net income (loss) available
to shares of common stock $ 383,550 6,838,167 $ .06 $ (30,941) 3,509,955 $ (.01)
========== ========= ========== ========== ========= ========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
shares of common stock $995,294 6,106,389 $.16 $235,410 3,228,519 $.07
Effect of dilutive shares of
common stock from stock
options and warrants -- 210,665 -- -- 331,107 --
-------- --------- ---- -------- --------- ----
Diluted earnings per share of
common stock:
Net income available to
Shares of common stock $995,294 6,317,054 $.16 $235,410 3,559,626 $.07
======== ========= ==== ======== ========= ====
</TABLE>
(3) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in the first
quarter of 1998. Under SFAS No. 130, the Company reports comprehensive income,
which in addition to net income, includes all changes in equity during a period
except those resulting from investments by and distributions to owners. In the
first three quarters of 1998 and 1997, there were no differences between net
income and comprehensive income.
(4) INITIAL PUBLIC OFFERING
On February 11, 1998, the Company completed an initial offering of its common
stock to the public. The Company sold 1,833,816 shares with an additional
266,184 being sold by existing shareholders for a total of 2,100,000 shares
registered on the Nasdaq National Market under the trading symbol "BDMS". The
Company received net proceeds, after paying all offering costs, of
approximately $10.4 million. Approximately $2 million and $0.6 million of the
net proceeds were used to repay a bank term loan and revolving line of credit,
respectively. An additional $1.3 million was used to repay a note issued in
connection with the Gentle Dental Acquisition.
Conversion of Debentures
In connection with the offering, 1,633,142 shares of common stock were issued
to all debenture holders for the early conversion of the convertible
subordinated debentures maturing in December 2001 and May 2001. In order to
induce the conversion of these debentures, the Company paid six months of
additional interest of $305,100 along with accrued interest of $171,238. Upon
conversion of the debentures, the carrying amount of $6,780,000 was credited to
shareholders' equity, net of remaining deferred debenture issuance costs of
$288,286.
Line of Credit
On February 11, 1998, concurrent with the completion of the public offering,
the Company amended its revolving credit agreement with a bank, which increased
the borrowing limit from $800,000 to $10,000,000 with interest being payable at
LIBOR plus 2.25% maturing on February 11, 2001.
8
<PAGE> 9
(5) ACQUISITIONS AND DE-NOVOS
On February 27, 1998, the Company acquired all of the assets of a New Mexico
partnership and obtained certain rights to manage the practice for a total
purchase price of $630,000. The consideration consisted of $598,500 payable in
cash with the remaining $31,500 being payable in common stock of the Company.
On April 27, 1998, the Company acquired all of the assets of three Colorado
dental practices, two in the Denver metro area and one in Boulder for a total
purchase price of $1,800,000. The Company also opened a de-novo practice in
Colorado Springs, Colorado in April 1998 and a de-novo practice in Santa Fe,
New Mexico in May 1998.
On July 15, 1998, the Company acquired all of the assets of a dental practice
in Phoenix, Arizona for a total purchase price of $791,000. The consideration
consisted of $791,000 payable in cash. The Company also opened a de-novo
practice in Colorado Springs, Colorado in July 1998.
On August 14, 1998, the Company acquired all of the assets of a dental practice
in Colorado Springs, Colorado for a total purchase price of $351,000. The
consideration consisted of $351,000 payable in cash.
On September 18, 1998, the Company acquired all of the assets of a dental
practice in Albuquerque, New Mexico for a total purchase price of $320,000. The
consideration consisted of $120,000 payable in cash and a $200,000 note payable
with a term of 36 months and an interest rate of 8%.
On September 28, 1998, the Company acquired all of the assets of a Colorado
partnership and obtained certain rights to manage the practice for a total
purchase price of $1,128,000. The consideration consisted of $855,000 payable
in cash, $45,000 payable in common stock of the Company and the assumption of
certain obligations in the amount of $228,000.
On September 29, 1998, the Company acquired all of the assets of a dental
practice in Scottsdale, Arizona for a total purchase price of $704,400. The
consideration consisted of $604,400 payable in cash and a $100,000 note payable
with a term of 60 months and an interest rate of 8%.
On September 30, 1998, the Company acquired all of the assets of a dental
practice in Phoenix, Arizona for a total purchase price of $295,000. The
consideration consisted of $295,000 payable in cash.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-Up Activities" in April 1998. This SOP
provides guidance on the reporting of start-up costs and organization costs and
will require the Company to expense these costs (as defined by the SOP) as they
are incurred. Initial application of this SOP will be reported as a cumulative
effect of a change in accounting principal. When adopting this SOP, the Company
will not be required to report the pro forma effects of retroactive
application. The Company will adopt SOP 98-5, which is effective for fiscal
years beginning after December 15, 1998, in the first quarter of 1999.
(7) SUBSEQUENT EVENTS
On October 8, 1998, the Company's Board of Directors unanimously approved the
purchase of up to 300,000 shares of the Company's common stock on the open
market on such terms, as the Board of Directors deems acceptable. As of
November 12, 1998 the Company, in five separate transactions, has purchased
34,700 shares of its common stock for total consideration of $ 128,875 at
prices ranging from $ 3.63 to $3.75 per share.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q ("Quarterly Report") of Birner
Dental Management Services, Inc. (the "Company") which are not historical in
nature are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include statements in this Item 2., "Management's Discussion and Analysis of
Financial Condition and Results of Operations," regarding intent, belief or
current expectations of the Company or its officers with respect to the
development or acquisition of additional dental practices ("Offices") and the
successful integration of such Offices into the Company's network, recruitment
of additional dentists, funding of the Company's expansion, capital
expenditures, payment or nonpayment of dividends and cash outlays for income
taxes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
failure to consummate or successfully integrate proposed developments or
acquisitions of dental Offices, the ability of the Company to manage
effectively an increasing number of dental Offices, the general economy of the
United States and the specific markets in which the Company's dental Offices
are located or are proposed to be located, trends in the health care, dental
care and managed care industries, as well as the risk factors set forth in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" section of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (as filed with the Securities
Exchange Commission on March 31, 1998), the Year 2000 Risk Factor set forth
below, and other factors as may be identified from time to time in the
Company's filings with the Securities and Exchange Commission or in the
Company's press releases.
YEAR 2000
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any programs that
have date-sensitive software or equipment that has time-sensitive embedded
components may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or miscalculations.
The Company is currently engaged in a comprehensive project to upgrade its
computer software to programs that will consistently and properly recognize the
Year 2000. The Company utilizes off-the-shelf or third party production
software and has recently purchased new hardware, software and software
upgrades from vendors who have represented that these systems are Year 2000
compliant. The Company's expenditures and anticipated future expenditures for
this remediation are expected to be less than $100,000. In addition, the
Company is in the process of identifying non-information systems operation
critical applications that have date-sensitive software or equipment that has
time-sensitive embedded components. The Company expects to complete this
assessment during the first quarter of 1999.
The Company may also be vulnerable to other companies' Year 2000 issues. The
Company's current estimates of the impact of the Year 2000 problem on its
operations and financial results do not include costs and time that may be
incurred as a result of any vendors' or customers' failure to become Year 2000
compliant on a timely basis. The Company initiated formal communications with
all of its significant insurance payors and vendors during the third quarter of
1998 with respect to the status of their Year 2000 compliance programs and has
only begun to receive responses. However, there can be no assurance that these
companies will achieve Year 2000 compliance or that their conversions to become
Year 2000 compliant will be compatible with the Company's systems. The
inability of the Company's significant vendors or insurance payors to become
Year 2000 compliant in a timely manner could have a material adverse effect on
the Company's financial condition or results of operations.
The Company presently anticipates that it will complete its Year 2000
assessment by December 31, 1999. However there can be no assurance that the
Company will be successful in implementing its Year 2000 plan according to the
anticipated schedule. In addition, the Company may be adversely affected by the
inability of other companies whose systems interact with the Company's to
become Year 2000 compliant.
10
<PAGE> 11
Although the Company expects its internal systems will be Year 2000 compliant
as described above, the Company intends to prepare a contingency plan that will
specify what it plans to do if it or important external companies are not Year
2000 compliant in a timely manner. The Company expects to prepare its
contingency plan during fiscal 1999.
GENERAL
The following discussion relates to factors, which have affected the results of
operations and financial condition of the Company for the quarters and nine
months ended September 30, 1998 and 1997. This information should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto included elsewhere in this Quarterly Report.
OVERVIEW
The Company was formed in May 1995, and as of September 30, 1998, managed 47
Offices in Colorado, New Mexico and Arizona staffed by 60 full-time equivalent
general dentists and 3 full-time equivalent specialists. The Company has
acquired 41 Offices (three of which were consolidated into existing Offices)
and opened nine de novo Offices. Of the 41 acquired Offices, only three (the
first three practices, which were acquired from the Company's President, Mark
Birner, DDS) were acquired from affiliates of the Company. The Company derives
all of its revenue from its Management Agreements with professional
corporations ("P.C.s") which employ or contract with the dentists and dental
hygienists that practice at that Office. In addition, the Company assumes a
number of responsibilities when it acquires a new practice or develops a de
novo Office, which are set forth in the Management Agreement, as described
below. The Company expects to expand in existing and new markets by acquiring
solo and group dental practices, by developing de novo Offices and by enhancing
the operating performance of its existing Offices. Generally, the Company seeks
to acquire dental practices for which the Company believes application of its
dental practice management model will improve operating performance.
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's growth and success in
the Colorado market led to its expansion into the New Mexico and Arizona
markets as well as to its evaluation of expansion into additional markets. The
following table sets forth the increase in the number of Offices owned and
managed by the Company during each of the periods indicated, including the
number of de novo Offices and acquired Offices in each such period.
<TABLE>
<CAPTION>
1995(1) 1996(2) 1997 1998(3)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Offices at beginning of period 0 4 18 34
De novo Offices 0 5 1 3
Acquired Offices 4 9 15 10
------- ------- ------- -------
Offices at end of period 4 18 34 47
======= ======= ======= =======
</TABLE>
- ---------------
(1) From October 1, 1995 through December 31, 1995. The Company was formed on
May 17, 1995, and had no substantial operations until October 1, 1995.
(2) For 1996, does not include three practices that were acquired and
consolidated with existing Offices.
(3) From January 1, 1998 through September 30, 1998.
The combined purchase amounts for the four Offices acquired in 1995, the 12
practices acquired in 1996, the 15 practices acquired in 1997, and the 10
practices acquired in the first nine months of 1998, were $412,000, $4.4
million, $5.3 million, and $5.8 million, respectively. The average investment
by the Company in each of its nine de novo Offices has been approximately
$180,000, which includes the cost of equipment, leasehold improvements and
working capital associated with the Offices. The eight de novo Offices opened
between January 1996 and June 1998 began generating positive contribution from
dental offices, on average, within three months of opening.
At September 30, 1998, the Company's total assets of $23.9 million included
$14.0 million of identifiable intangible assets related to Management
Agreements. At that date, the Company's total shareholders' equity was $19.3
million.
11
<PAGE> 12
The Company reviews the recorded amount of intangible assets and other fixed
assets for impairment for each Office whenever events or changes in
circumstances indicate the carrying amount of the assets may not be
recoverable. If this review indicates that the carrying amount of the assets
may not be recoverable as determined based on the undiscounted cash flows of
each Office, whether acquired or developed, the carrying value of the asset is
reduced to fair value. Among the factors that the Company will continually
evaluate are unfavorable changes in each Office, relative market share and
local market competitive environment, current period and forecasted operating
results, cash flow levels of Offices and the impact on the net revenue earned
by the Company, and the legal and regulatory factors governing the practice of
dentistry.
COMPONENTS OF REVENUE AND EXPENSES
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Offices. Net revenue
represents Revenue less amounts retained by the Offices. The amounts retained
by the Offices represent amounts paid as salary, benefits and other payments to
employed dentists and hygienists. The Company's net revenue is dependent on the
Revenue of the Offices. Direct expenses consist of the expenses incurred by the
Company in connection with managing the Offices, including salaries and
benefits (for personnel other than dentists and hygienists), dental supplies,
dental laboratory fees, occupancy costs, advertising and marketing,
depreciation and amortization and general and administrative (including office
supplies, equipment leases, management information systems and other expenses
related to dental practice operations). The Company also incurs personnel and
administrative expenses in connection with maintaining a corporate function
that provides management, administrative, marketing, development and
professional services to the Offices.
Under the Management Agreements, the Company manages the business and marketing
aspects of the Offices, including (i) providing capital, (ii) designing and
implementing marketing programs, (iii) negotiating on behalf of the P.C.s for
the purchase of supplies, (iv) providing a patient scheduling system, (v)
staffing, (vi) recruiting, (vii) training of non-dental personnel, (viii)
billing and collecting patient fees, (ix) arranging for certain legal and
accounting services, and (x) negotiating on behalf of the P.C.s with managed
care organizations. The P.C. is responsible for, among other things (i)
employing and supervising all dentists and dental hygienists, (ii) complying
with all laws, rules and regulations relating to dentists and dental
hygienists, (iii) maintaining proper patient records, and (iv) cooperating in
the obtaining of professional liability insurance. The Company has made, and
may make in the future, loans to P.C.s in Colorado, New Mexico and Arizona to
fund their acquisition of dental assets from third parties in order to comply
with the laws of such states. Bonuses payable to dentists based on the
operating performance of the P.C.s take into account principal and interest
payments made on the loans, resulting in the dentists sharing with the Company
the economic benefits or detriments associated with assets acquired by the
P.C.s using such loans. Because the Company consolidates the financial
statements of the P.C.s with its financial statements, these loans are
eliminated in consolidation.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less (i) all compensation paid to the dentists and dental hygienists employed
by the P.C. Adjusted Gross Center Revenue is comprised of all fees and charges
booked each month by or on behalf of the P.C. as a result of dental services
provided to patients at the Office, less any adjustments for uncollectible
accounts, professional courtesies and other activities that do not generate a
collectible fee. The Company's costs include all direct and indirect costs,
overhead and expenses relating to the Company's provision of management
services at each Office under a Management Agreement, including (i) salaries,
benefits and other direct costs of employees of the Company that work at the
Office, including dental assistants, (ii) direct costs of all employees or
consultants of the Company who provide services to or in connection with the
Office, (iii) utilities, janitorial, laboratory, supplies, advertising and
other expenses incurred by the Company in carrying out its obligations under
the Management Agreement, (iv) depreciation expense associated with the P.C.'s
assets and the assets of the Company used at the Office, and the amortization
of intangible asset value as a result of any acquisition or merger of another
dental practice relating to the Office, (v) interest expense on indebtedness
incurred by the Company to finance any of its obligations under the Management
Agreement, (vi) malpractice insurance expenses, lease expenses and dentist
recruitment expenses, (vii) personal property and other taxes assessed against
the Company's or the P.C.'s assets used in connection with the operation of the
Office, (viii) out-of-pocket expenses of the Company's personnel related to
mergers or acquisitions involving the P.C., (ix) corporate overhead charges or
any other expenses of the Company including the P.C.'s pro rata share of the
expenses of the accounting and computer services provided by the Company, and
(x) a collection reserve in the amount of 5.0% of Adjusted Gross Center
Revenue. As a result, substantially all costs associated with the provision
12
<PAGE> 13
of dental services at the Offices are borne by the Company, other than the
compensation and benefits of the dentists and hygienists who are employed by
the P.C.s. This enables the Company to manage the profitability of the Offices.
Each Management Agreement is for a term of 40 years. Further, the P.C. only for
cause, which includes a material default by or bankruptcy of the Company,
generally may terminate each Management Agreement.
The Company's Revenue is derived principally from fee-for-service Revenue and
Revenue from capitated managed dental care plans. Fee-for-service Revenue
consists of Revenue of the P.C.s received from indemnity dental plans,
preferred provider plans and direct payments by patients not covered by any
third-party payment arrangement. Managed dental care Revenue consists of
Revenue of the P.C.s received from capitated managed dental care plans,
including capitation payments and patient co-payments. Capitated managed dental
care contracts are between dental benefits organizations and the P.C.s. Under
the Management Agreements, the Company negotiates and administers these
contracts on behalf of the P.C.s. Under a capitated managed dental care
contract, the dental group practice provides dental services to the members of
the dental benefits organization and receives a fixed monthly capitation
payment for each plan member covered for a specific schedule of services
regardless of the quantity or cost of services to the participating dental
group practice obligated to provide them. This arrangement shifts the risk of
utilization of these services to the dental group practice providing the dental
services. Because the Company assumes responsibility under the Management
Agreements for all aspects of the operation of the dental practices (other than
the practice of dentistry) and thus bears all costs of the P.C.s associated
with the provision of dental services at the Office (other than compensation
and benefits of dentists and hygienists), the risk of over-utilization of
dental services at the Office under capitated managed dental care plans is
effectively shifted to the Company. In addition, dental group practices
participating in a capitated managed dental care plan often receive co-payments
for more complicated or elective procedures. In contrast, under traditional
indemnity insurance arrangements, the insurance company pays whatever
reasonable charges are billed by the dental group practice for the dental
services provided.
The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs, opening new Offices and acquiring solo and group practices. The
Company seeks to supplement this fee-for-service business with Revenue from
contracts with capitated managed dental care plans. Although the Company's
fee-for-service business generally is more profitable than its capitated
managed dental care business, capitated managed dental care business serves to
increase facility utilization and dentist productivity.
The relative percentage of the Company's revenue derived from fee-for-service
business and capitated managed dental care contracts varies from market to
market depending on the availability of capitated managed dental care contracts
in any particular market and the Company's ability to negotiate favorable terms
in such contracts. In addition, the profitability of managed dental care
revenue varies from market to market depending on the level of capitation
payments and co-payments in proportion to the level of benefits required to be
provided. Variations in the relative penetration and popularity of capitated
managed dental care from market to market across the country, however, make it
difficult to determine whether the Company's experience in new markets will be
consistent with its experience in the Colorado, New Mexico and Arizona markets.
The Company expects that the level of profitability of its operations in new
markets entered through acquisition will vary depending in part on these
factors and may not replicate or be comparable to the Company's results in the
Colorado, New Mexico and Arizona markets.
RESULTS OF OPERATIONS
As a result of the continuing expansion of its business through acquisitions
and the development of de novo Offices, and the Company's limited period of
affiliation with these Offices, the Company believes that the period-to-period
comparisons set forth below may not be representative of future operating
results.
The Company has experienced significant growth in total dental group practice
revenue, which increased from $4.5 million for the three months ended September
30, 1997 to $7.7 million for the three months ended September 30, 1998, an
increase of 70.6%. The Company acquired six practices and opened one de novo
Office during the period from July 1, 1998 to September 30, 1998 which, in the
aggregate, contributed approximately $300,000 of the $3.2 million increase.
Total dental group practice revenue for the 22 Offices which were in existence
during both full quarters increased 9.6% from $4.1 million in the 1997 quarter
to $4.5 million in the 1998 quarter and, therefore, contributed approximately
$388,000 of the $3.2 million increase. The remainder of the increase in total
dental group practice revenue of $2.5 million was attributable to the 15
practice acquisitions (including the Gentle Dental Acquisition) and the opening
of three de novo Offices which took place between July 1, 1997 and June 30,
1998.
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<PAGE> 14
Total dental group practice revenue increased $10.0 million or 87.6% to $21.3
million for the nine-month period ended September 30, 1998 compared to $11.3
million for the nine-month period ended September 30, 1997. The Company
acquired 10 practices and opened three de novo Offices during the period from
January 1, 1998 to September 30, 1998, which, in the aggregate, contributed
$2.1 million of the $10.0 million, increase. Total dental group practice
revenue for the 18 Offices which were in existence during both full nine-month
periods increased 13.5% from $9.6 million in the 1997 period to $10.8 million
in the 1998 period and, therefore, contributed $1.2 million of the $10.0
million increase. The remainder of the increase of $6.7 million in total dental
group practice revenues was generated from the 15 practice acquisitions
(including the Gentle Dental Acquisition) and the opening of one de novo Office
which took place between January 1, 1997 and December 31, 1997.
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's consolidated statements of operations.
The information contained in the table represents the historical results of the
Company. The information that follows should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related Notes thereto
contained elsewhere in this document.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Direct expenses:
Clinical salaries and benefits 37.4% 39.8% 37.1% 35.3%
Dental supplies 4.6% 7.1% 5.2% 8.8%
Laboratory fees 8.6% 9.1% 8.9% 9.2%
Occupancy 9.0% 8.6% 8.5% 8.4%
Advertising and marketing 1.5% 2.1% 1.8% 3.3%
Depreciation and amortization 5.3% 3.2% 4.9% 4.6%
General and administrative 10.0% 7.9% 9.1% 7.2%
Contribution from dental offices 23.6% 22.3% 24.6% 23.2%
Corporate expenses:
General and administrative 14.2% 8.5% 12.8% 10.2%
Depreciation and amortization 0.7% 0.7% 0.7% .8%
Acquisition costs -- 7.5% -- 2.9%
Operating income 8.7% 5.5% 11.1% 9.3%
Interest income (expense), net 0.2% (6.4)% (0.4)% (6.4)%
Conversion inducement income (expense) -- -- (1.9)% --
Income (loss) before income taxes 8.9% (0.9)% 8.8% 2.8%
Income tax benefit (expense) 2.4% 0.0% 2.6% 0.1%
Net income (loss) 6.6% (0.9)% 6.2% 2.8%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997:
Net revenue. Net revenue increased from approximately $3.4 million for the
three months ended September 30, 1997 to approximately $5.9 million for the
three months ended September 30, 1998, an increase of approximately $2.5
million, or 74.5%. The Company acquired six practices and opened one de novo
Office during the period from July 1, 1998 to September 30, 1998, which
contributed to approximately $231,000 of the increase. Net revenue at the 22
Offices which the Company managed and which were in existence for both full
third quarters of 1997 and 1998 increased 9.6% or approximately $245,000 from
$3.2 million in the third quarter of 1997 to $3.4 million in the third quarter
of 1998. The remainder of the increase in net revenue of $2.0 million was
attributable to 15 practice acquisitions and three de novo Office opening which
occurred between July 1, 1997 and June 30, 1998.
Clinical salaries and benefits. Clinical salaries and benefits increased from
approximately $1.3 million for the three months ended September 30, 1997 to
approximately $2.2 million for the three months ended September 30, 1998, an
increase of approximately $900,000 or 63.8%. This increase was due primarily to
the increased number of Offices and the corresponding addition of non-dental
personnel. As a percentage of net revenue, clinical salaries and benefits
decreased from 39.8% for the three months ended September 30, 1997 to 37.4% for
the three months ended September 30, 1998.
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<PAGE> 15
Dental supplies. Dental supplies increased from approximately $239,000 for the
three months ended September 30, 1997 to approximately $271,000 for the three
months ended September 30, 1998, an increase of approximately $32,000 or 13.4%.
This increase was due to the increased total dental group practice revenue
generated at the Offices. As a percentage of net revenue, dental supplies
decreased from 7.1% during the three months ended September 30, 1997 to 4.6%
during the three months ended September 30, 1998.
Laboratory fees. Laboratory fees increased from approximately $305,000 during
the three months ended September 30, 1997 to approximately $501,000 during the
three months ended September 30, 1998, an increase of approximately $196,000 or
64.1%. This increase was due to the increased total dental group practice
revenue generated at the Offices. As a percentage of net revenue, laboratory
fees decreased from 9.1% during the three months ended September 30, 1997 to
8.6% during the three months ended September 30, 1998.
Occupancy. Occupancy increased from approximately $287,000 during the three
months ended September 30, 1997 to approximately $525,000 during the three
months ended September 30, 1998, an increase of approximately $238,000 or
83.1%. This increase was due to the increased number of Offices. As a
percentage of net revenue, occupancy expense increased from 8.6% during the
three months ended September 30, 1997 to 9.0% during the three months ended
September 30, 1998.
Advertising and marketing. Advertising and marketing increased from
approximately $69,000 for the three months ended September 30, 1997 to
approximately $87,000 for the three months ended September 30, 1998, an
increase of approximately $18,000 or 26.8%. As a percentage of net revenue,
advertising and marketing decreased from 2.1% during the three months ended
September 30, 1997 to 1.5% during the three months ended September 30, 1998.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
approximately $106,000 for the three months ended September 30, 1997 to
approximately $309,000 for the three months ended September 30, 1998, an
increase of approximately $203,000 or 190.1%. This increase was due to the
increased number of Offices. As a percentage of net revenue, depreciation and
amortization increased from 3.2% for the three months ended September 30, 1997
to 5.3% for the three months ended September 30, 1998.
General and administrative. General and administrative, which is attributable
to the Offices, increased from approximately $264,000 during the three months
ended September 30, 1997 to approximately $587,000 during the three months
ended September 30, 1998, an increase of approximately $323,000 or 122.5%. This
increase was due to the increased number of Offices. As a percentage of net
revenue, general and administrative expenses increased from 7.9% during the
three months ended September 30, 1997 to 10.0% during the three months ended
September 30, 1998.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased from approximately $748,000 for the three months ended
September 30, 1997 to approximately $1.4 million for the three months ended
September 30, 1998, an increase of approximately $634,000 or 85.0%. As a
percentage of net revenue, contribution from dental offices increased from
22.3% during the three months ended September 30, 1997 to 23.6% during the
three months ended September 30, 1998.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative increased from approximately $287,000 during the three
months ended September 30, 1997 to approximately $832,000 during the three
months ended September 30, 1998, an increase of approximately $545,000 or
190.1%. This increase was due to expansion of the Company's infrastructure to
manage growth, primarily through the addition of personnel. As a percentage of
net revenue, corporate expense - general and administrative increased from 8.5%
during the three months ended September 30, 1997 to 14.2% during the three
months ended September 30, 1998.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from approximately $24,000 for the
three months ended September 30, 1997 to approximately $44,000 for the three
months ended September 30, 1998, an increase of approximately $20,000 or 80.6%.
This increase was a result of the Company's expansion of its corporate
infrastructure, primarily investments in computer equipment to manage future
growth. During the three months ended September 30, 1997 and 1998, corporate
expenses - depreciation and amortization remained constant at 0.7% of net
revenue.
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<PAGE> 16
Corporate expenses - acquisition costs. Corporate expenses - acquisition costs
incurred during the three months ended September 30, 1997 are related to a
one-time charge of approximately $252,000, which consisted of due diligence
costs and audit fees in connection with a potential acquisition of a group of
dental practices. As a result of this due diligence, the Company decided not to
proceed with the acquisition. No such charge occurred during the three months
ended September 30, 1998.
Operating income. As a result of the above, operating income increased from
approximately $185,000 during the three months ended September 30, 1997 to
approximately $508,000 during the three months ended September 30, 1998, an
increase of approximately $323,000 or 174.8%. As a percentage of net revenue,
operating income increased from 5.5% during the three months ended September
30, 1997 to 8.7% during the three months ended September 30, 1998.
Interest income (expense), net. The Company had net interest expense of
approximately $216,000 for the three months ended September 30, 1997 and
generated net interest income of approximately $14,000 for the three months
ended September 30, 1998. This decrease in interest income (expense), net was
primarily the result of the February 1998 conversion into common stock of the
Company's $6.8 million principal amount 9.0% convertible debentures in
conjunction with the initial public offering of the Company's Common Stock and
the repayment of approximately $3.9 million of bank debt and seller notes with
the proceeds from the Company's initial public offering.
Net income (loss). As a result of the above, net income increased from a net
loss of approximately $31,000 for the three months ended September 30, 1997 to
net income of approximately $384,000 for the three months ended September 30,
1998, an increase of approximately $415,000. Net income for the three months
ended September 30, 1998 was net of income taxes of approximately $139,000, and
the net loss for the comparable period in 1997 had no income tax expense. As a
percentage of net revenue, net income increased from -0.9% for the three months
ended September 30, 1997 to 6.6% for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997:
Net revenue. Net revenue increased from approximately $8.6 million for the nine
months ended September 30, 1997 to approximately $16.1 million for the nine
months ended September 30, 1998, an increase of approximately $7.5 million, or
87.8%. The Company acquired 10 practices and opened three de novo Offices
during the period from January 1, 1998 to September 30, 1998, which contributed
approximately $1.4 million of the increase. Net revenue at the 18 Offices which
the Company managed and which were in existence during both full nine-month
periods of 1997 and 1998 increased 15.9% or approximately $1.1 million from
approximately $7.3 million for the nine months ended September 30, 1997 to
approximately $8.4 million for the nine months ended September 30, 1998. The
remainder of the increase in net revenue of approximately $5.0 million was
attributable to 15 practice acquisitions and one de novo Office opening which
occurred between January 1, 1997 and December 31, 1997.
Clinical salaries and benefits. Clinical salaries and benefits increased from
approximately $3.0 million for the nine months ended September 30, 1997 to
approximately $6.0 million for the nine months ended September 30, 1998, an
increase of approximately $3.0 million or 97.2%. This increase was due
primarily to the increased number of Offices and the corresponding addition of
non-dental personnel. As a percentage of net revenue, clinical salaries and
benefits increased from 35.3% in the nine months ended September 30, 1997 to
37.1% in the nine months ended September 30, 1998.
Dental supplies. Dental supplies increased from approximately $752,000 for the
nine months ended September 30, 1997 to approximately $833,000 for the nine
months ended September 30, 1998, an increase of approximately $81,000 or 10.9%.
This increase was due to the increased total dental group practice revenue
generated at the Offices. As a percentage of net revenue, dental supplies
decreased from 8.8% during the nine months ended September 30, 1997 to 5.2%
during the nine months ended September 30, 1998.
Laboratory fees. Laboratory fees increased from approximately $794,000 during
the nine months ended September 30, 1997 to approximately $1.4 million during
the nine months ended September 30, 1998, an increase of approximately $606,000
or 80.4%. This increase was due to the increased total dental group practice
revenue generated at the Offices. As a percentage of net revenue, laboratory
fees decreased from 9.2% during the nine months ended September 30, 1997 to
8.9% during the nine months ended September 30, 1998.
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<PAGE> 17
Occupancy. Occupancy increased from approximately $719,000 during the nine
months ended September 30, 1997 to approximately $1.4 million during the nine
months ended September 30, 1998, an increase of approximately $681,000 or
90.1%. This increase was due to the increased number of Offices. As a
percentage of net revenue, occupancy expense increased from 8.4% during the
nine months ended September 30, 1997 to 8.5% during the nine months ended
September 30, 1998.
Advertising and marketing. Advertising and marketing increased from
approximately $286,000 for the nine months ended September 30, 1997 to
approximately $292,000 for the nine months ended September 30, 1998, an
increase of approximately $6,000 or 2.0%. As a percentage of net revenue,
advertising and marketing decreased from 3.3% during the nine months ended
September 30, 1997 to 1.8% during the nine months ended September 30, 1998.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
approximately $392,000 for the nine months ended September 30, 1997 to
approximately $784,000 for the nine months ended September 30, 1998, an
increase of approximately $392,000 or 100.2%. This increase was due to the
increased number of Offices. As a percentage of net revenue, depreciation and
amortization increased from 4.6% for the nine months ended September 30, 1997
to 4.9% for the nine months ended September 30, 1998.
General and administrative. General and administrative, which is attributable
to the Offices, increased from approximately $616,000 during the nine months
ended September 30, 1997 to approximately $1.5 million during the nine months
ended September 30, 1998, an increase of approximately $884,000 or 137.2%. This
increase was due to the increased number of Offices. As a percentage of net
revenue, general and administrative expenses increased from 7.2% during the
nine months ended September 30, 1997 to 9.1% during the nine months ended
September 30, 1998.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased from approximately $2.0 million for the nine months
ended September 30, 1997 to approximately $4.0 million for the nine months
ended September 30, 1998, an increase of approximately $2.0 million or 99.0%.
As a percentage of net revenue, contribution from dental offices increased from
23.2% during the nine months ended September 30, 1997 to 24.6% during the nine
months ended September 30, 1998.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative increased from approximately $875,000 during the nine months
ended September 30, 1997 to approximately $2.1 million during the nine months
ended September 30, 1998, an increase of approximately $1.2 million or 136.3%.
This increase was due to expansion of the Company's infrastructure to manage
growth, primarily through the addition of personnel. As a percentage of net
revenue, corporate expense - general and administrative increased from 10.2%
during the nine months ended September 30, 1997 to 12.8% during the nine months
ended September 30, 1998.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from approximately $71,000 in the nine
months ended September 30, 1997 to approximately $112,000 in the nine months
ended September 30, 1998, an increase of approximately $41,000 or 58.9%. This
increase was a result of the Company's expansion of its corporate
infrastructure, primarily investments in computer equipment to manage future
growth. As a percentage of net revenue, corporate expenses - depreciation and
amortization decreased from 0.8% during the nine months ended September 30,
1997 to 0.7% during the nine months ended September 30, 1998.
Corporate expenses - acquisition costs. Corporate expenses - acquisition costs
incurred during the nine months ended September 30, 1997 are related to a
one-time charge of approximately $252,000, which consisted of due diligence
costs and audit fees in connection with a potential acquisition of a group of
dental practices. As a result of this due diligence, the Company decided not to
proceed with the acquisition. No such charge occurred during the nine months
ended September 30, 1998.
Operating income. As a result of the above, operating income increased from
approximately $800,000 during the nine months ended September 30, 1997 to
approximately $1.8 million during the nine months ended September 30, 1998, an
increase of approximately $1.0 million or 124.7%. As a percentage of net
revenue, operating income increased from 9.3% during the nine months ended
September 30, 1997 to 11.1% during the nine months ended September 30, 1998.
Interest income (expense), net. Interest expense, net decreased from
approximately $554,000 for the nine months ended September 30, 1997 to
approximately $57,000 for the nine months ended September 30, 1998, a decrease
of
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<PAGE> 18
approximately $497,000 or 89.6%. This decrease was primarily the result of the
February 1998 conversion into Common Stock of the Company's $6.8 million
principal amount 9.0% convertible debentures in conjunction with the initial
public offering of the Company's Common Stock and the repayment of
approximately $3.9 million of bank debt and seller notes with proceeds from the
Company's initial public offering. As a percentage of net revenue, interest
expense, net decreased from 6.4% for the nine months ended September 30, 1997
to 0.4% for the nine months ended September 30, 1998.
Conversion inducement income (expense). During the nine months ended September
30, 1998, the Company incurred a one-time charge of approximately $305,000
related to inducing the convertible debenture holders to convert to Common
Stock at the closing of the Company's initial public offering in February 1998.
Net income. As a result of the above, net income increased from approximately
$235,000 for the nine months ended September 30, 1997 to approximately $995,000
for the nine months ended September 30, 1998, an increase of approximately
$760,000 or 322.8%. Net income in 1998 was net of income taxes of approximately
$427,000, and net income in the comparable period in 1997 was net of income
taxes of approximately $5,000. As a percentage of net revenue, net income
increased from 2.8% for the nine months ended September 30, 1997 to 6.2% for
the nine months ended September 30, 1998. Without the one-time conversion
inducement expense of approximately $305,000, net income would have been
approximately $1.2 million or 7.5% of net revenue.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its growth through a combination
of private sales of convertible subordinated debentures and Common Stock, cash
provided by operating activities, a bank line of credit (the "Credit
Facility"), seller notes, and the initial public offering of Common Stock.
Net cash provided by operating activities was approximately $1.7 million and
$1.3 million for the nine month periods ended September 30, 1997 and 1998,
respectively. Net cash provided by operating activities during the 1998 period,
after adding back non-cash items, consisted primarily of an increase in
accounts receivable of approximately $1.2 million, an increase in prepaid
expenses and other assets of approximately $380,000, an increase in accounts
payable and accrued expenses of approximately $371,000 and an increase in
income taxes payable of approximately $227,000. During the nine months ended
September 30, 1998, net income contributed approximately $995,000 to net cash
provided by operating activities for the period.
Net cash used in investing activities was approximately $3.7 million and $7.9
million for the nine month periods ended September 30, 1997 and 1998,
respectively. During the nine month period ended September 30, 1998,
approximately $5.8 million was utilized for acquisitions and approximately $2.1
million was invested in the purchase of additional property and equipment,
including approximately $693,000 for the de novo Offices. For the nine months
ended September 30, 1997, approximately $3.4 million was utilized for
acquisitions and approximately $622,000 was invested in the purchase of
additional property and equipment.
Net cash provided by financing activities was approximately $1.6 million and
$7.3 million for the nine month periods ended September 30, 1997 and 1998,
respectively. During the nine month period ended September 30, 1998, net cash
provided by financing activities was comprised of approximately $11.5 million
of net proceeds from the initial public offering of the Company's Common Stock,
net borrowings under the Company's line of credit of approximately $368,000,
net proceeds from the issuance of notes payable of approximately $300,000 and
the exercise of common stock options in the amount of approximately $47,000.
These amounts were partially offset by approximately $3.8 million used for the
repayment of a bank line of credit and a note issued in connection with the
September 1997 acquisition of nine dental practices operated under the name
Gentle Dental (the "Gentle Dental Acquisition"), approximately $1.1 million for
costs associated with the public offering and approximately $28,000 used for
the payment of debenture issuance and other financing costs. Net cash provided
by financing activities for the nine months ended September 30, 1997 was
approximately $1.6 million. This was comprised of approximately $2.0 million
from the issuance of notes payable, approximately $225,000 from the private
sale of convertible subordinated debentures and approximately $250,000 of
proceeds from a bank line of credit. These amounts were partially offset by
approximately $466,000 for costs associated with the public offering,
approximately $179,000 for the repayment of long-term debt, approximately
$219,000 for the purchase and retirement of Common Stock and approximately
$17,000 used for the payment of debenture issuance and other financing costs.
18
<PAGE> 19
Under the Company's Credit Facility, during its three-year term, the Company
may borrow up to $10.0 million for working capital needs. Advances will bear
interest at the lender's base rate or at the applicable LIBOR rate plus 2.25%,
at the Company's option, and the Company will be obligated to pay an annual
facility fee of .25% of the average unused amount of the line of credit during
the previous full calendar quarter. Borrowings are limited to an availability
formula based on the Company's adjusted EBITDA. At September 30, 1998, the
Company had approximately $623,000 outstanding under the Credit Facility. The
Credit Facility is secured by a lien on the Company's accounts receivable and
its Management Agreements. The Credit Facility prohibits the payment of
dividends and other distributions to shareholders, restricts or prohibits the
Company from incurring indebtedness, incurring liens, disposing of assets, and
requires the Company to maintain certain financial ratios on an ongoing basis.
At September 30, 1998, the Company had outstanding indebtedness of
approximately $725,000 represented by bank debt assumed and notes issued in
connection with various practice acquisitions, all of which bear interest at
rates varying from 7.0% to 14.0% and capital lease obligations. The Company's
material commitments for capital expenditures total approximately $2.2 million,
consisting of approximately $550,000 for the expansion of four Offices,
approximately $200,000 for each of eight de novo Office developments, and
approximately $44,000 for a technology upgrade for the Company's information
system. The Company anticipates that these capital expenditures will be funded
by cash on hand, cash generated by operations, or borrowings under the
Company's Credit Facility. The Company's accumulated earnings as of September
30, 1998 were approximately $535,000, and the Company had working capital on
that date of approximately $1.5 million.
On February 17, 1998, the Company completed a public offering of 2,100,000
shares of Common Stock at an initial public offering price of $7.00 per share,
resulting in net proceeds to the Company of approximately $10.4 million. At
September 30, 1998, the Company has fully expended the proceeds from the
initial public offering. Approximately $2.6 million of the net proceeds was
used to repay outstanding indebtedness under the Credit Facility and to repay
the $1.3 million note issued in connection with the Gentle Dental Acquisition.
The Company expended approximately $5.8 million during the nine-month period
ended September 30, 1998 to acquire 10 dental practices. In February 1998, the
Company acquired a dental practice in Albuquerque, New Mexico; in April 1998,
the Company acquired two dental practices in Denver, Colorado and one dental
practice in Boulder, Colorado; in July 1998, the Company acquired a dental
practice in Phoenix, Arizona; in August 1998, the Company acquired a dental
practice in Colorado Springs, Colorado; and in September 1998, the Company
acquired one dental practice in Albuquerque, New Mexico, one dental practice in
Denver, Colorado, one dental practice in Phoenix, Arizona and one dental
practice in Scottsdale , Arizona. In addition, the Company opened three de novo
practices during this same period. In April 1998, the Company opened a practice
in Colorado Springs, Colorado; in May 1998, the Company opened a practice in
Santa Fe, New Mexico; and in July 1998, the Company opened another practice in
Colorado Springs, Colorado. The remaining proceeds from the initial public
offering along with internally generated cash flow was used by the Company to
acquire approximately $1.4 million of leasehold improvements, dental equipment,
furniture and fixtures and computer equipment. The Company believes cash
generated from operations and borrowings under its Credit Facility, will be
sufficient to fund its anticipated working capital needs, capital expenditures
and future acquisitions for at least the next 12 months. In the event the
Company is not able to successfully negotiate a new Credit Facility at the end
of its term or identifies and completes future acquisitions more quickly than
it currently anticipates, the Company's current sources of liquidity may not be
adequate. In addition, in order to meet its long-term liquidity needs the
Company may issue additional equity and debt securities, subject to market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to the Company. The failure to raise the funds
necessary to finance its future cash requirements could adversely affect the
Company's ability to pursue its strategy and could negatively affect its
operations in future periods.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the nine month period ended September 30, 1998, participants in the
Birner Dental Management Services, Inc. 1995 Employee Stock Option Plan
exercised options to purchase an aggregate of 10,179 shares of Common
Stock at a weighted average exercise price of $3.41 per share and
participants in the Birner Dental Management Services, Inc. 1995 Stock
Option Plan for Managed Dental Centers exercised options to purchase an
aggregate of 4,677 shares of Common Stock at a weighted average exercise
price of $2.72 per share. In addition, during the nine month period ended
September 30, 1998, the Company issued an aggregate of 15,840 shares of
Common Stock at a weighted average exercise price of $4.83 per share as
part of the purchase price for two acquisitions. Each of these issuances
of Common Stock was exempt from registration pursuant to section 4(2) of
the Securities Act of 1933 because they did not involve any public
offering.
(d) The Company's registration statement on Form S-1 (SEC File No. 333-36391)
covering the Company's initial public offering of 2,100,000 shares
(including 266,184 shares sold by selling shareholders) of Common Stock at
$7.00 per share, was declared effective on February 11, 1998. As of
September 30, 1998, the Company has fully expended the proceeds from its
initial public offering. During the nine months ended September 30, 1998,
approximately $2.6 million of the net proceeds was used to repay
outstanding indebtedness under the Credit Facility and to repay the $1.3
million note issued in connection with the Gentle Dental Acquisition. In
addition, the Company expended approximately $5.8 million during the same
period to acquire 10 dental practices located in Colorado, New Mexico and
Arizona. The Company also opened three de novo practices during the same
period in Colorado and New Mexico. The remaining proceeds from the initial
public offering along with internally generated cash flow was used by the
Company to acquire approximately $1.4 million of leasehold improvements,
dental equipment, furniture and fixtures and computer equipment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.32 Third Amendment to Loan Documents dated September 30, 1998 between
the Registrant and Key Bank of Colorado.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
---------------------------------------
a Colorado corporation
Date: November 13, 1998 By: /s/ Frederic W.J. Birner
----------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: November 13, 1998 By: /s/ Dennis N. Genty
------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and Accounting
Officer)
21
<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.32 Third Amendment to Loan Documents dated September 30, 1998 between
the Registrant and Key Bank of Colorado.
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.32
THIRD AMENDMENT TO LOAN DOCUMENTS
THIS THIRD AMENDMENT TO LOAN DOCUMENTS (this "Amendment"), made as of
the 30th day of September 1998, is between BIRNER DENTAL MANAGEMENT SERVICES,
INC., a Colorado corporation ("Borrower") and KEYBANK NATIONAL ASSOCIATION, a
national banking association ("Lender").
R E C I T A L S:
1. Lender has made a loan (the "Revolving Loan") to Borrower, which
Revolving Loan is evidenced and/or secured by (1) a Promissory Note (the
"Note") dated as of October 31, 1996 in the stated principal amount of
$800,000.00 executed by Borrower and payable to the order of Lender, and (2) a
Guaranty (the "Guaranty") dated as of October 31, 1996, executed by Fred
Birner, Mark Birner and Dennis Genty (collectively, the "Guarantors") securing
payment of the Note, and (3) by a Security Agreement (the "Security Agreement")
dated as of October 31, 1996 from Borrower for the benefit of Lender also
securing payment of the Note, and (4) by a Credit Agreement (the "Credit
Agreement") dated as of October 31, 1996 between Borrower and Lender, and (5)
by certain other documents or instruments (the Note, the Security Agreement,
the Credit Agreement and such other documents and instruments, as same may from
time to time be amended or replaced, are sometimes collectively referred to
herein as the "Loan Documents"). The Revolving Loan was modified by a Second
Amendment to Loan Documents dated November 18, 1997 (the "Second Amendment")
amending the terms and conditions of the Credit Agreement, Security Agreement
and other Loan Documents to increase the amount of the Revolving Loan to
$10,000,000.
2. Lender also made a loan to Borrower in the principal amount of Two
Million and No/100 Dollars ($2,000,000.00) (the "Term Loan"), as evidenced by
that certain Promissory Note dated September 3, 1997 (the "Term Note") executed
and delivered to Lender by Borrower, together with that certain First Amendment
to Loan Documents dated September 3, 1997 (the "First Amendment") amending the
terms and conditions of the Loan Documents to incorporate the Term Loan. The
Term Loan has been paid in full and the Term Note canceled pursuant to the
Second Amendment.
3. Borrower and Lender desire to further amend the terms and
conditions contained in the Credit Agreement, Security Agreement, and other
Loan Documents to modify the Borrowing Base from which the outstanding balance
of the Revolving Loan is calculated.
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt, adequacy and sufficiency of which
are hereby acknowledged, the parties hereto hereby covenant and agree as
follows:
1. CREDIT AGREEMENT AMENDMENTS. The Credit Agreement is amended as
follows:
1. The following definition set forth in Article I of the
Credit Agreement shall be revised as follows:
"BORROWING BASE" means, at any applicable date of determination, three
(3) times Consolidated EBITDA of the Borrower for the previous twelve (12)
month period.
b. Section 5.4(d) of the Credit Agreement shall be deleted in
its entirety and replaced with the following:
"(d) Within forty (40) days after the end of each month, the
Borrower shall deliver to Lender (x) a borrowing base certificate in the form
of Exhibit D hereto (the "Borrowing Base Certificate") detailing the Borrower's
Consolidated EBITDA as of the last day of such month, and (y) an Acquired
Practice Obligation report, detailing any Acquired Practice Obligations
incurred in the previous month, each of which shall be certified as complete
and correct on behalf of the Borrower by the chief executive officer, chief
financial officer, controller or other Authorized Officer of the Borrower,
respectively. If the Borrower fails to deliver any such Borrowing Base
Certificate within forty-five (45) days after the end of such month, then the
Borrowing Base shall be deemed to be $0 until such time as the Borrower
delivers such required Borrowing Base Certificate."
1
<PAGE> 2
c. The Borrowing Base Certificate referred to in Section
5.4(d) of the Credit Agreement and attached thereto as Exhibit D shall be
replaced in its entirety with the Borrowing Base Certificate attached hereto as
Exhibit D.
d. Section 6.14 of the Credit Agreement with respect to
Consolidated Acquisition Expenditures shall be deleted in its entirety.
2. OTHER LOAN DOCUMENT AMENDMENTS. Each of the other Loan Documents
are amended to reflect and to incorporate the amendment to the Credit Agreement
as set forth above.
3. DOCUMENT RATIFICATION. Except as set forth in Paragraphs 1 and 2
above, all of the terms and conditions contained in the Credit Agreement, the
Security Agreement and other Loan Documents shall remain the same and in full
force and effect, and are ratified, reaffirmed and republished as of the
Closing Date.
4. REPRESENTATION OF BORROWER. Borrower hereby confirms that, as of
the date hereof, (i) Borrower is in compliance with each of the
representations, warranties and covenants of Borrower set forth in the Loan
Documents, (ii) no Event of Default exists under the Loan Documents and (iii)
no fact or condition exists, which with the passage of time and/or giving of
notice, would constitute an Event of Default under the Loan Documents.
5. ACKNOWLEDGMENT OF PARTIES. Borrower and Lender acknowledge and
agree that as of the date hereof, there are no known claims or defaults by
either party against the other, nor are there any existing covenant violations
arising from or under the Credit Agreement.
6. CONTROLLING LAW. The terms and provisions of this Amendment shall
be construed in accordance with and governed by the laws of the State of
Colorado.
7. BINDING EFFECT. This Amendment shall be binding upon and inure to
the benefit of the parties hereto, their successors and assigns.
8. CAPTIONS. The paragraph captions utilized herein are in no way
intended to interpret or limit the terms and conditions hereof, rather, they
are intended for purposes of convenience only.
9. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be effective only upon delivery and
thereafter shall be deemed an original, and all of which shall be taken to be
one and the same instrument, for the same effect as if all parties hereto had
signed the same signature page. Any signature page of this Amendment may be
detached from any counterpart of this Amendment without impairing the legal
effect of any signatures thereon and may be attached to another counterpart of
this Amendment identical in form hereto but having attached to it one or more
additional signature pages.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
LENDER:
KEYBANK NATIONAL ASSOCIATION
By: Michelle Bushey
-----------------------------------------
Title: Vice President
----------------------------------
BORROWER:
BIRNER DENTAL MANAGEMENT SERVICES, INC.,
a Colorado corporation
By: /s/ Dennis N. Genty
----------------------------------------
Title: Chief Financial Officer
---------------------------------
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BIRNER
DENTAL MANAGEMENT SERVICES, INC. FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,693,400
<SECURITIES> 0
<RECEIVABLES> 2,987,054
<ALLOWANCES> 238,839
<INVENTORY> 0
<CURRENT-ASSETS> 4,983,008
<PP&E> 5,852,411
<DEPRECIATION> 1,263,265
<TOTAL-ASSETS> 23,862,902
<CURRENT-LIABILITIES> 3,505,972
<BONDS> 0
0
0
<COMMON> 18,775,586
<OTHER-SE> 533,579
<TOTAL-LIABILITY-AND-EQUITY> 23,862,902
<SALES> 21,335,108
<TOTAL-REVENUES> 21,335,108
<CGS> 17,371,681
<TOTAL-COSTS> 17,371,681
<OTHER-EXPENSES> 2,179,181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 362,397
<INCOME-PRETAX> 1,421,849
<INCOME-TAX> 426,555
<INCOME-CONTINUING> 995,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 995,294
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
