<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, 1999
---------------------------------------------
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)
<TABLE>
<CAPTION>
COLORADO 84-1307044
- --------------------------------------------- ----------------------------
<S> <C>
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- --------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(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.
<TABLE>
<CAPTION>
Class Shares Outstanding as of November 9, 1999
- -------------------------------- -----------------------------------------
<S> <C>
Common Stock, without par value 6,131,814
</TABLE>
<PAGE> 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 (unaudited) 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Nine Months Ended September 30, 1998 and 1999 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1999 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</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>
December 31, September 30,
ASSETS 1998 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,169,687 $ 2,340,321
Accounts receivable, net of allowance for doubtful accounts
of $296,911 and $304,429 at December 31, 1998 and
September 30, 1999, respectively 2,668,024 3,774,988
Current portion of notes receivable - related parties 28,746 69,368
Deferred income taxes 173,629 282,247
Income tax receivable 262,469 --
Prepaid expenses and other assets 345,858 992,189
----------- -----------
Total current assets 5,648,413 7,459,113
PROPERTY AND EQUIPMENT, net 5,613,021 7,449,719
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,877,449 14,220,688
Deferred charges and other assets 404,476 263,336
Notes receivable - related party - long term -- 3,000
----------- -----------
Total assets $25,543,359 $29,395,856
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,042,534 $ 4,393,880
Income taxes payable -- 39,427
Current maturities of long-term debt 276,331 173,836
Current maturities of capital lease obligations 20,996 1,959
----------- -----------
Total current liabilities 3,339,861 4,609,102
LONG TERM LIABILITIES:
Long-term debt, net of current maturities 3,234,101 7,173,908
Deferred income taxes 217,569 217,569
Capital lease obligations, net of current maturities 6,321 581
----------- -----------
Total liabilities 6,797,852 12,001,160
----------- -----------
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;
6,636,980 and 6,131,814, shares issued and outstanding
at December 31, 1998 and September 30, 1999, respectively 18,531,738 16,968,454
Retained earnings 213,769 426,242
----------- -----------
Total shareholders' equity 18,745,507 17,394,696
----------- -----------
Total liabilities and shareholders' equity $25,543,359 $29,395,856
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
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 1999 1998 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUE $ 5,855,388 $ 7,406,488 $ 16,115,742 $ 21,595,750
DIRECT EXPENSES:
Clinical salaries and benefits 2,190,598 2,864,842 5,983,054 8,296,258
Dental supplies 271,418 493,912 833,446 1,296,712
Laboratory fees 501,229 697,036 1,431,481 2,093,271
Occupancy 525,463 823,869 1,366,148 2,253,177
Advertising and marketing 87,272 114,812 291,799 343,048
Depreciation and amortization 308,922 496,233 784,383 1,348,959
General and administrative 586,832 792,243 1,462,004 2,192,116
------------ ------------ ------------ ------------
4,471,734 6,282,947 12,152,315 17,823,541
------------ ------------ ------------ ------------
Contribution from dental offices 1,383,654 1,123,541 3,963,427 3,772,209
CORPORATE EXPENSES:
General and administrative 831,992 959,018 2,067,130 2,915,756
Depreciation and amortization 43,560 66,543 112,051 190,448
------------ ------------ ------------ ------------
Operating income 508,102 97,980 1,784,246 666,005
Interest income (expense), net 14,125 (137,736) (57,297) (327,105)
Conversion inducement expense -- -- (305,100) --
------------ ------------ ------------ ------------
Income (loss) before income taxes 522,227 (39,756) 1,421,849 338,900
Income tax benefit (expense) (138,677) 14,812 (426,555) (126,427)
------------ ------------ ------------ ------------
Income (loss) before change in accounting principle 383,550 (24,944) 995,294 212,473
Cumulative effect of change in accounting principle -- -- (39,162) --
------------ ------------ ------------ ------------
Net income (loss) $ 383,550 $ (24,944) $ 956,132 $ 212,473
============ ============ ============ ============
Basic earnings per share of Common Stock:
Income before cumulative effect of
change in accounting principle $ .06 $ .00 $ .16 $ .03
Cumulative effect of change in accounting
principle -- -- (.01) --
------------ ------------ ------------ ------------
Net income $ .06 $ .00 $ .15 $ .03
============ ============ ============ ============
Diluted earnings per share of Common Stock:
Income before cumulative effect of
change in accounting principle $ .06 $ .00 $ .16 $ .03
Cumulative effect of change in accounting
principle -- -- (.01) --
------------ ------------ ------------ ------------
Net income $ .06 $ .00 $ .15 $ .03
============ ============ ============ ============
Weighted average number of shares of
Common stock and dilutive securities:
Basic 6,685,759 6,139,591 6,106,389 6,260,453
============ ============ ============ ============
Diluted 6,838,167 6,139,591 6,317,054 6,318,773
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------------------- Retained Total Shareholders'
Shares Amount Earnings Equity
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 6,636,980 $ 18,531,738 $ 213,769 $ 18,745,507
Issuance of Common Stock for dental office
acquisition 12,632 35,000 -- 35,000
Options exercised 5,502 12,132 -- 12,132
Purchase and retirement of Common Stock (535,100) (1,638,416) -- (1,638,416)
Issuance of Common Stock to Profit
Sharing Plan 11,800 28,000 -- 28,000
Net Income -- -- 212,473 212,473
------------------ ------------------ ------------------ -------------------
BALANCE, September 30, 1999 (Unaudited) 6,131,814 $ 16,968,454 $ 426,242 $ 17,394,696
================== ================== ================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 956,132 $ 212,473
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 896,434 1,539,407
Provision for doubtful accounts 141,139 52,104
Amortization of debenture issuance costs 22,742 --
Conversion inducement 305,100 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (1,229,610) (1,170,471)
Prepaid expense, income tax receivable and other assets (379,589) (393,960)
Accounts payable and accrued expenses 636,570 1,358,731
------------ ------------
Net cash provided by operating activities 1,348,918 1,598,284
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties 13,119 (43,622)
Capital expenditures (1,377,617) (1,673,530)
Development of new dental offices (692,506) (1,178,393)
Acquisition of dental offices (5,847,987) (718,356)
------------ ------------
Net cash used in investing activities (7,904,991) (3,613,901)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of underwriting discounts 11,476,042 --
Payment of public offering costs (1,123,756) --
Proceeds from issuance of Common Stock from options exercised 47,425 12,132
Net borrowings - line of credit 368,056 4,010,000
Proceeds from notes payable 300,000 --
Repayment of long-term debt (3,462,721) (197,465)
Payment of debenture issuance and other financing cost (27,927) --
Purchase and retirement of Common Stock -- (1,638,416)
Payment to induce conversion of debentures (305,100) --
------------ ------------
Net cash provided by financing activities 7,272,019 2,186,251
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 715,946 170,634
CASH AND CASH EQUIVALENTS, beginning of period 977,454 2,169,687
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,693,400 $ 2,340,321
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1999
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 492,587 $ 334,038
========== ==========
Cash paid during the period for income taxes $ 200,000 $ 87,000
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Conversion of debentures $6,780,000 $ --
Acquisition of dental offices $ 76,500 $ 35,000
Profit Sharing Plan $ -- $ 28,000
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities $ 149,777 $ 59,596
Notes payable $ 395,200 $ --
Accounts receivable net, acquired through acquisitions $ 255,000 $ 40,000
Other assets acquired through acquisitions $ -- $ 30,000
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
<PAGE> 8
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(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 Exchange
Commission in the Company's Form 10-K for the year ended December 31, 1998.
In the opinion of 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, 1999 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, 1999 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.
Certain prior years' amounts in the unaudited condensed consolidated financial
statements and related notes have been reclassified to conform to the
presentation used in 1999.
(2) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share".
<TABLE>
<CAPTION>
Quarter Ended September 30,
-----------------------------------------------------------------------------------------------
1998 1999
------------------------------------------- --------------------------------------------
Per Share Per Share
Income Shares Amount (Loss) Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $ 383,550 6,685,759 $ .06 $ (24,944) 6,139,591 $ .00
========= ========= ========= ========= ========= =========
Diluted EPS:
Net income (loss) $ 383,550 6,838,167 $ .06 $ (24,944) 6,139,591 $ .00
========= ========= ========= ========= ========= =========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------------------
1998 1999
-------------------------------------- -------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income before cumulative effect of
change in accounting principle $ 995,294 6,106,389 $ .16 $ 212,473 6,260,453 $ .03
Cumulative effect of change
in accounting principle (39,162) -- (.01) -- -- --
--------- --------- --------- --------- --------- ---------
Net income $ 956,132 6,106,389 $ .15 $ 212,473 6,260,453 $ .03
========= ========= ========= ========= ========= =========
Diluted EPS:
Income before cumulative effect of
change in accounting principle $ 995,294 6,317,054 $ .16 $ 212,473 6,318,773 $ .03
Cumulative effect of change
in accounting principle (39,162) -- (.01) -- -- --
--------- --------- --------- --------- --------- ---------
Net income $ 956,132 6,317,054 $ .15 $ 212,473 6,318,773 $ .03
========= ========= ========= ========= ========= =========
</TABLE>
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the nine months ended September 30,
1998 and 1999 and the quarter ended September 30, 1998 relates to the effect of
210,665, 58,320 and 152,408, respectively, of dilutive shares of Common Stock
from stock options and warrants which are included in total shares for the
diluted calculation. All options and warrants to purchase shares of common stock
were excluded from the computation of diluted earnings for the quarter ended
September 30, 1999 since they were anti-dilutive as a result of the Company's
net loss for the quarter.
(3) LINE OF CREDIT
Under the Company's Credit Facility (as amended on September 20, 1999), during
its three-year term, the Company may borrow up to $20.0 million. 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,
1999, the Company had $470,000 available and $6.9 million 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.
(4) ACQUISITIONS AND DE-NOVOS
On February 11, 1999, the Company acquired all of the assets of a Colorado sole
proprietorship (Glendale Dental Group) and obtained certain rights to manage the
practice for a total purchase price of approximately $760,000. The consideration
consisted of $665,000 payable in cash, $35,000 payable in Common Stock of the
Company and the assumption of certain obligations of approximately $60,000.
On March 27, 1999, the Company opened a de novo office in Colorado Springs,
Colorado.
On June 7, 1999, the Company opened one de novo office in Tempe, Arizona. The
Company also consolidated two of its Denver, Colorado practices into one office.
On June 28, 1999, the Company opened one de novo office in Golden, Colorado.
On July 5, 1999, the Company opened two de novo offices, one in Littleton,
Colorado and one in Rio Rancho, New Mexico.
9
<PAGE> 10
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In July 1999, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" that establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. As the Company holds no derivative instruments and does not
engage in hedging activities the adoption of SFAS No. 133 will have no impact to
the Company.
(6) COSTS OF START-UP ACTIVITIES
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 requires
the Company to expense these costs (as defined by the SOP) as they are incurred.
The Company adopted SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, in the first quarter of 1998. Initial application of
this SOP was reported as a cumulative effect of a change in accounting principle
in 1998, resulting in a $39,162 decrease in net income for 1998.
(7) REPORTABLE BUSINESS SEGMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" that establishes standards for reporting
information about operating segments in annual and interim financial statements.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for fiscal
years beginning after December 15, 1997 and was adopted by the Company in 1998.
The Company operates in one business segment, which is to manage dental group
practices. The Company currently manages Offices in the states of Arizona,
Colorado and New Mexico. All aspects of the Company's business are structured on
a practice-by-practice basis. Financial analysis and operational decisions are
determined on a practice-by-practice basis, the Company does not evaluate
performance criteria based upon geographic location, type of service offered or
sources of revenue.
10
<PAGE> 11
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 Offices, the ability of the Company to manage effectively an
increasing number of Offices, the general economy of the United States and the
specific markets in which the Company's 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, 1998 (as filed with the Securities Exchange Commission on March 31,
1998), the "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" of this Quarterly Report, 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 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 fourth
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
received responses from 27 of the 38 vendors contacted. All vendors who have
responded indicate that their systems are Year 2000 compliant. During the fourth
quarter of 1999, efforts will continue to be made to contact those vendors that
have not yet responded to the Company's Year 2000 survey. Potential issues
related to those vendors who do not respond to the Company's survey will be
addressed in the Company's contingency plan. 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
11
<PAGE> 12
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. Any changes that this assessment indicates are required,
will be made by the Company prior to this date. 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.
Although the Company believes that its internal systems are 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 complete its
contingency plan during the fourth quarter of 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, 1999 and 1998. 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 currently manages 54 Offices in
Colorado, New Mexico and Arizona staffed by 76.6 full-time equivalent general
dentists and 5.5 full-time equivalent specialists. The Company has acquired 42
Offices (four of which were consolidated into existing Offices) and opened 16 de
novo Offices. Of the 42 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 a
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 1997 1998 1999(2)
------------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Offices at beginning of period 0 4 18 34 49
De novo Offices 0 5 1 5 5
Acquired Offices 4 12 15 10 1
Consolidation of Offices 0 (3) 0 0 (1)
------------- ----------- ------------ ------------ ----------
Offices at end of period 4 18 34 49 54
============= =========== ============ ============ ==========
</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) From January 1, 1999 through September 30, 1999.
The combined purchase amounts for the four Offices acquired in 1995, the 12
practices acquired in 1996, the 15 practices acquired in 1997, the 10 practices
acquired in 1998, and the practice acquired in 1999 were $412,000, $4.3 million,
$5.4 million, $6.0 million, and $760,000 respectively. The average investment by
the Company in each of its
12
<PAGE> 13
16 de novo Offices has been approximately $186,000, which includes the cost of
equipment, leasehold improvements and working capital associated with the
Offices. The nine de novo Offices opened between January 1996 and June 1998
began generating positive contribution from dental offices, on average, within
four months of opening. Six of the seven remaining de novo Offices, which have
been open an average of five and one half months, have not generated positive
contribution from dental offices as of the date of this Quarterly Report. The
remaining de novo Office generated positive contribution from dental offices
within three months of opening.
At September 30, 1999, the Company's total assets of $29.4 million included
$14.2 million of identifiable intangible assets related to Management
Agreements. At that date, the Company had total shareholders' equity of $17.4
million and a tangible net worth of $3.2 million. 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 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
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,
and (iii) maintaining proper patient records. The Company has made, and intends
to 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 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 the Management Agreement, including (i) salaries, benefits and
other direct costs of employees who work at the Office, (ii) direct costs of all
Company employees or consultants 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
13
<PAGE> 14
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) general and 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 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, each Management
Agreement generally may be terminated by the P.C. only for cause, which includes
a material default by or bankruptcy of the Company. Upon expiration or
termination of a Management Agreement by either party, the P.C. must satisfy all
obligations it has to the Company.
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 P.C. revenue 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 P.C. revenue
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
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Offices 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 supplemental 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
contractual terms. 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 Company's existing 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 current results.
RESULTS OF OPERATIONS
As a result of the ongoing 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.
14
<PAGE> 15
The Company has experienced significant period-to-period growth in Revenue. For
the quarter ended September 30, 1999, Revenue increased to $10.1 million from
$7.7 million for the three months ended September 30, 1998, an increase of $2.4
million or 30.9%. The Company opened 2 de novo Offices during the period from
July 1, 1999 to September 30, 1999 which, in the aggregate, accounted for
$167,000 of the $2.4 million increase. Revenue at the 39 Offices in existence
during both full periods increased to $7.9 million in 1999 from $7.4 million in
1998, an increase of $500,000 or 6.7%. The remainder of the increase in Revenue
of $1.7 million was attributable to the 13 Offices that were acquired or opened
during the period from July 1, 1998 to June 30, 1999.
For the nine months ended September 30, 1999, Revenue increased to $29.1 million
from $21.3 million for the nine months ended September 30, 1998, an increase of
$7.8 million or 36.3%. The Company acquired one practice and opened 5 de novo
Offices during the period from January 1, 1999 to September 30, 1999 which, in
the aggregate, accounted for $1.3 million of the $7.8 million increase. Revenue
at the 33 Offices in existence during both full periods increased to $20.1
million in 1999 from $19.2 million in 1998, an increase of $900,000, or 4.3%.
The remainder of the increase in Revenue of $5.6 million was attributable to the
15 Offices that were acquired or opened during the period from January 1, 1998
to December 31, 1998.
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's condensed 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 Quarterly Report.
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Direct expenses:
Clinical salaries and benefits 37.4% 38.7% 37.1% 38.4%
Dental supplies 4.6% 6.6% 5.2% 6.0%
Laboratory fees 8.5% 9.4% 8.9% 9.7%
Occupancy 9.0% 11.1% 8.5% 10.4%
Advertising and marketing 1.5% 1.5% 1.8% 1.6%
Depreciation and amortization 5.3% 6.7% 4.8% 6.2%
General and administrative 10.0% 10.7% 9.1% 10.2%
---------- ---------- ---------- ----------
76.3% 84.7% 75.4% 82.5%
---------- ---------- ---------- ----------
Contribution from dental offices 23.7% 15.3% 24.6% 17.5%
Corporate expenses:
General and administrative 14.2% 13.0% 12.8% 13.5%
Depreciation and amortization 0.7% 0.9% 0.7% 0.9%
---------- ---------- ---------- ----------
Operating income 8.8% 1.4% 11.1% 3.1%
Interest income (expense), net 0.2% (1.9)% (0.4)% (1.5)%
Conversion inducement expense -- -- (1.9)% --
---------- ---------- ---------- ----------
Income (loss) before income taxes 9.0% (0.5)% 8.8% 1.6%
Income tax benefit (expense) (2.4)% 0.2% (2.7)% (0.6)%
---------- ---------- ---------- ----------
Income (loss) before change in accounting principle 6.6% (0.3)% 6.1% 1.0%
Cumulative effect of change in accounting principle -- -- (0.2)% --
---------- ---------- ---------- ----------
Net income (loss) 6.6% (0.3)% 5.9% 1.0%
========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998:
Net revenue. Net revenue increased to $7.4 million for the three months ended
September 30, 1999 from $5.8 million for the three months ended September 30,
1998, an increase of approximately $1.6 million, or 26.5%. The Company opened 2
de novo Offices during the period from July 1, 1999 to September 30, 1999, which
contributed $112,000 to the increase. Net revenue at the 39 Offices which the
Company managed and which were in existence for both full third quarters of 1999
and 1998 increased 5.3% or $295,000 to $5.9 million in the third quarter of 1999
from $5.6 million in the third quarter of 1998. The remainder of the increase in
net revenue of $1.2 million was attributable to 7 practice acquisitions and 6 de
novo Office openings which occurred between July 1, 1998 and June 30, 1999.
15
<PAGE> 16
Clinical salaries and benefits. Clinical salaries and benefits increased to
$2.9 million for the three months ended September 30, 1999 from $2.2 million for
the three months ended September 30, 1998, an increase of $674,000 or 30.8%.
This increase was primarily due 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 to 38.7% for the three months ended
September 30, 1999 from 37.4% for the three months ended September 30, 1998.
This increase was due primarily to the increased number of non-dental personnel
added in connection with the hiring of additional dentists and the opening of
de novo offices.
Dental supplies. Dental supplies increased to $494,000 for the three months
ended September 30, 1999 from $271,000 for the three months ended September 30,
1998, an increase of $223,000 or 82.0%. This increase was primarily due to the
increase in the number of dental practices to 54 at September 30, 1999 compared
to 47 at September 30, 1998, the increased number of patient visits, the initial
expense of stocking de novo offices, the increase in amount of specialty
services provided and price increases from suppliers. As a percentage of net
revenue, dental supplies increased to 6.6% during the three months ended
September 30, 1999 from 4.6% during the three months ended September 30, 1998.
The increase in dental supplies as a percentage of net revenue is attributable
to the increased number of recently hired dentists, including specialists, and
the de novo offices that were opened.
Laboratory fees. Laboratory fees increased to $697,000 during the three months
ended September 30, 1999 from $501,000 during the three months ended September
30, 1998, an increase of $196,000 or 39.1%. This increase was primarily due to
the increase in the number of dental practices to 54 at September 30, 1999
compared to 47 at September 30, 1998, the increased number of patients seen, the
use of non-contract laboratories and cost increases in certain laboratory
agreements. As a percentage of net revenue, laboratory fees increased to 9.4%
during the three months ended September 30, 1999 from 8.5% during the three
months September 30, 1998.
Occupancy. Occupancy increased to $824,000 during the three months ended
September 30, 1999 from $526,000 during the three months ended September 30,
1998, an increase of $298,000 or 56.8%. This increase was primarily due to the
incremental expenditures required to operate 54 dental practices at September
30, 1999 compared to 47 dental practices at September 30, 1998 and increased
costs relating to utilities and property taxes. As a percentage of net revenue,
occupancy expense increased to 11.1% during the three months ended September 30,
1999 from 9.0% during the three months ended September 30, 1998. The increase in
occupancy as a percentage of net revenue is attributable to rent expense at the
Company's recently opened de novo Offices and rent increases at the Company's
recently expanded Offices.
Advertising and marketing. Advertising and marketing increased to $115,000 for
the three months ended September 30, 1999 from $87,000 for the three months
ended September 30, 1998, an increase of $28,000 or 31.6%. As a percentage of
net revenue, advertising and marketing stayed even at 1.5% during the three
months ended September 30, 1999 and 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 to
$496,000 for the three months ended September 30, 1999 from $309,000 for the
three months ended September 30, 1998, an increase of $187,000 or 60.6%. This
increase is related to the increase in the Company's depreciable and amortizable
asset base. The increase in the asset base is directly related to the Company's
expansion from 47 dental practices at the end of the 1998 period to 54 dental
practices at the end of the 1999 period. As a percentage of net revenue,
depreciation and amortization increased to 6.7% for the three months ended
September 30, 1999 from 5.3% for the three months ended September 30, 1998. The
increase in depreciation and amortization as a percentage of net revenue is
related to the higher depreciable asset base associated with the Company's de
novo Offices and recent Office expansions.
General and administrative. General and administrative expense, which is
attributable to the Offices, increased to $792,000 during the three months ended
September 30, 1999 from $587,000 during the three months ended September 30,
1998, an increase of approximately $205,000 or 35.0%. This increase was
primarily due to the incremental expenditures required to operate 54 dental
practices at September 30, 1999 compared to 47 dental practices at September 30,
1998 and increases in overhead costs. As a percentage of net revenue, general
and administrative expenses increased to 10.7% during the three months ended
September 30, 1999 from 10.0% during the three months ended September 30, 1998.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased to $1.1 million for the three months ended September
30, 1999 from $1.4 million for the three months ended September 30, 1998, a
decrease of $260,000 or 18.8%. As a percentage of net revenue, contribution from
dental offices decreased to 15.3%
16
<PAGE> 17
during the three months ended September 30, 1999 from 23.7% during the three
months ended September 30, 1999. This decrease as a percentage of net revenue is
a result of the factors discussed above.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative increased to $959,000 during the three months ended September
30, 1999 from $832,000 during the three months ended September 30, 1998, an
increase of $127,000 or 15.3%. This increase was due to expansion of the
Company's infrastructure to manage anticipated growth, primarily through the
addition of personnel. As a percentage of net revenue, corporate expense -
general and administrative decreased to 13.0% during the three months ended
September 30, 1999 from 14.2% during the three months ended September 30, 1998.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased to $67,000 for the three months ended
September 30, 1999 from $44,000 for the three months ended September 30, 1998,
an increase of $23,000 or 52.8%. 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 increased to 0.9% during the three months
ended September 30, 1999 from 0.7% during the three months ended September 30,
1998.
Operating income. As a result of the above, operating income decreased to
$98,000 during the three months ended September 30, 1999 from operating income
of $508,000 during the three months ended September 30, 1998, a decrease of
$410,000 or 80.7%. As a percentage of net revenue, operating income decreased to
1.4% during the three months ended September 30, 1999 from 8.8% during the three
months ended September 30, 1998. The decrease as a percentage of net revenue is
a result of the factors discussed above.
Interest expense, net. Net interest expense increased to $138,000 for the three
months ended September 30, 1999 from net interest income of $14,000 for the
three months ended September 30, 1998, an increase of $152,000. This
increase in net interest expense is attributable to an increase in the average
debt outstanding during the 1999 period. The funds from the additional debt
incurred have been used for the development of de novo offices, purchase of
practices, and the purchase of treasury stock.
Net income (loss). As a result of the above, net income decreased to a net loss
of $(25,000) for the three months ended September 30, 1999 from net income of
$384,000 for the three months ended September 30, 1998, a decrease of $409,000.
Net loss for the three months ended September 30, 1999 was net of an income tax
benefit of $15,000. Net income for the three months ended September 30, 1998 was
net of income taxes of $139,000. As a percentage of net revenue, net income
decreased to (0.3)% for the three months ended September 30, 1999 from 6.6% for
the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998:
Net revenue. Net revenue increased to $21.6 million for the nine months ended
September 30, 1999 from $16.1 million for the nine months ended September 30,
1998, an increase of approximately $5.5 million, or 33.3%. The Company acquired
one practice and opened five de novo Offices during the period from January 1,
1999 to September 30, 1999, which contributed $887,000 of the increase. Net
revenue at the 33 Offices which the Company managed and which were in existence
for the full nine month periods ended September 30, 1999 and 1998 increased 4.7%
or $683,000 to $15.3 million in 1999 from $14.7 million in 1998. The remainder
of the increase in net revenue of $3.9 million was attributable to 10 practice
acquisitions and 5 de novo Office openings which occurred between January 1,
1998 and December 31, 1998.
Clinical salaries and benefits. Clinical salaries and benefits increased to $8.3
million for the nine months ended September 30, 1999 from $6.0 million for the
nine months ended September 30, 1998, an increase of $2.3 million or 38.7%. 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 to 38.4% for the nine months ended
September 30, 1999 from 37.1% for the nine months ended September 30, 1998.
Dental supplies. Dental supplies increased to $1.3 million for the nine months
ended September 30, 1999 from $833,000 for the nine months ended September 30,
1998, an increase of $463,000 or 55.6%. This increase was primarily due to the
increase in the number of dental practices to 54 at September 30, 1999 compared
to 47 at September 30, 1998, the increased number of patient visits, the
initial expense of stocking de novo offices, the increase in amount of
17
<PAGE> 18
specialty services provided and price increases from suppliers. As a percentage
of net revenue, dental supplies increased to 6.0% during the nine months ended
September 30, 1999 from 5.2% during the nine months ended September 30, 1998.
The increase in dental supplies as a percentage of net revenue is attributable
to the increased number of recently hired dentists, including specialists, and
the de novo offices that were opened.
Laboratory fees. Laboratory fees increased to $2.1 million during the nine
months ended September 30, 1999 from $1.4 million during the nine months ended
September 30, 1998, an increase of $662,000 or 46.2%. This increase was
primarily due to the increase in the number of dental practices to 54 at
September 30, 1999 compared to 47 at September 30, 1998, the increased number of
patients seen and the use of non-contract laboratories. As a percentage of net
revenue, laboratory fees increased to 9.7% during the nine months ended
September 30, 1999 from 8.9% during the nine months September 30, 1998. The
increase in laboratory fees as a percentage of net revenue is attributable to
cost increases in certain laboratory agreements and the use of non-contract
laboratories.
Occupancy. Occupancy increased to $2.3 million during the nine months ended
September 30, 1999 from $1.4 million during the nine months ended September 30,
1998, an increase of $887,000 or 64.9%. This increase was primarily due to the
incremental expenditures required to operate 54 dental practices at September
30, 1999 compared to 47 dental practices at September 30, 1998 and increased
costs relating to utilities and property taxes. As a percentage of net revenue,
occupancy expense increased to 10.4% during the nine months ended September 30,
1999 from 8.5% during the nine months ended September 30, 1998. The increase in
occupancy as a percentage of net revenue is attributable to rent expense at the
Company's recently opened de novo Offices and rent increases at the Company's
recently expanded Offices.
Advertising and marketing. Advertising and marketing increased to $343,000 for
the nine months ended September 30, 1999 from $292,000 for the nine months ended
September 30, 1998, an increase of $51,000 or 17.6%. As a percentage of net
revenue, advertising and marketing decreased to 1.6% during the nine months
ended September 30, 1999 from 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 to $1.3
million for the nine months ended September 30, 1999 from $784,000 for the nine
months ended September 30, 1998, an increase of $565,000 or 72.0%. This increase
is related to the increase in the Company's depreciable and amortizable asset
base. The increase in the asset base is directly related to the Company's
expansion from 47 dental practices at the end of the 1998 period to 54 dental
practices at the end of the 1999 period. As a percentage of net revenue,
depreciation and amortization increased to 6.2% for the nine months ended
September 30, 1999 from 4.8% for the nine months ended September 30, 1998. The
increase in depreciation and amortization as a percentage of net revenue is
related to the higher depreciable asset base associated with the Company's de
novo Offices and recent Office expansions.
General and administrative. General and administrative expense, which is
attributable to the Offices, increased to $2.2 million during the nine months
ended September 30, 1999 from $1.5 million during the nine months ended
September 30, 1998, an increase of approximately $730,000 or 49.9%. This
increase was primarily due to the incremental expenditures required to operate
54 dental practices at September 30, 1999 compared to 47 dental practices at
September 30, 1998 and increases in overhead costs. As a percentage of net
revenue, general and administrative expenses increased to 10.2% during the nine
months ended September 30, 1999 from 9.1% during the nine months ended September
30, 1998.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased $191,000 or 4.8% to $3.8 million for the nine months
ended September 30, 1999 when compared to the corresponding period in 1998. As a
percentage of net revenue, contribution from dental offices decreased to 17.5%
during the nine months ended September 30, 1999 from 24.6% during the nine
months ended September 30, 1998. This decrease as a percentage of net revenue is
a result of the factors discussed above.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative expense increased to $2.9 million during the nine months
ended September 30, 1999 from $2.1 million during the nine months ended
September 30, 1998, an increase of $849,000 or 41.1%. This increase was due to
expansion of the Company's infrastructure to manage anticipated growth,
primarily through the addition of personnel and increases in overhead costs. As
a percentage of net revenue, corporate expense - general and administrative
increased to 13.5% during the nine months ended September 30, 1999 from 12.8%
during the nine months ended September 30, 1998.
18
<PAGE> 19
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased to $190,000 for the nine months ended
September 30, 1999 from $112,000 for the nine months ended September 30, 1998,
an increase of $78,000 or 70.0%. 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 increased to 0.9% during the nine months
ended September 30, 1999 from 0.7% during the nine months ended September 30,
1998.
Operating income. As a result of the above, operating income decreased to
$666,000 during the nine months ended September 30, 1999 from $1.8 million
during the nine months ended September 30, 1998, a decrease of $1.1 million or
62.7%. As a percentage of net revenue, operating income decreased to 3.1% during
the nine months ended September 30, 1999 from 11.1% during the nine months ended
September 30, 1998. The decrease as a percentage of net revenue is a result of
the factors discussed above.
Interest expense, net. Net interest expense increased to $327,000 for the nine
months ended September 30, 1999 from $57,000 for the nine months ended September
30, 1998, an increase of $270,000 or 470.9% This increase in net interest
expense is attributable to an increase in the average debt outstanding during
the 1999 period. The funds from the additional debt incurred have been used for
the development of de novo offices, purchase of practices, and the purchase of
treasury stock.
Conversion inducement expense. During the nine months ended September 30, 1998,
the Company incurred a one-time charge of $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 (loss). As a result of the above, net income decreased to $212,000
for the nine months ended September 30, 1999 from net income of $956,000 for the
nine months ended September 30, 1998, a decrease of $744,000. Net income for the
nine months ended September 30, 1999 was net of income taxes of $126,000. Net
income for the nine months ended September 30, 1998 was net of $305,000 related
to a one-time charge to induce the conversion of the debentures, income taxes of
$427,000, and the cumulative effect of a change in an accounting principle
related to SOP 98-5 of $39,000. As a percentage of net revenue, net income
decreased to 1.0% for the nine months ended September 30, 1999 from 5.9% for the
nine months ended September 30, 1998.
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 its initial public offering of Common Stock.
Net cash provided by operating activities was approximately $1.6 million and
$1.3 million for the nine months ended September 30, 1999 and 1998,
respectively. Net cash provided by operating activities during the 1999 period,
after adding back non-cash items, consisted primarily of an increase in accounts
payable and accrued expenses of approximately $1.4 million partially offset by
an increase in accounts receivable of approximately $1.2 million, and an
increase in prepaid expenses and other assets of approximately $394,000. Net
cash provided by operating activities during the 1998 period, after adding back
non-cash items, consisted primarily of an increase in accounts payable and
accrued expenses of approximately $637,000 partially offset by an increase in
accounts receivable of approximately $1.2 million and an increase in prepaid
expenses and other assets of approximately $380,000. During the nine months
ended September 30, 1999, net income contributed approximately $212,000 to net
cash provided by operating activities for the period compared to approximately
$956,000 for the corresponding period in 1998.
Net cash used in investing activities was approximately $3.6 million and $7.9
million for the nine months ended September 30, 1999 and 1998, respectively.
During the nine month period ended September 30, 1999, approximately $718,000
was utilized for acquisitions and approximately $2.9 million was invested in the
purchase of additional property and equipment, including approximately $1.2 for
the development of de novo Offices For the nine months 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 development of de novo offices.
19
<PAGE> 20
Net cash provided by financing activities was approximately $2.2 million and
$7.3 million for the nine months ended September 30, 1999 and 1998,
respectively. During the nine months ended September 30, 1999, net cash provided
by financing activities was comprised of net borrowings under the Company's line
of credit of approximately $4.0 million which was partially offset by the
purchase and retirement of Common Stock of approximately $1.6 million and
approximately $197,000 for the repayment of long-term debt. During the nine
months ended September 30, 1998, net cash provided by financing activities was
comprised of $11.5 million of 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. This was partially offset by $3.5 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, $1.1 million for costs associated with the public offering,
$305,000 for the conversion of subordinated debentures to Common Stock and
$28,000 used for the payment of debenture issuance and other financing costs.
Under the Company's Credit Facility, during its three-year term, the Company may
borrow up to $20.0 million. 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, 1999, the Company had $470,000
available and $6.9 million 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, 1999, the Company had outstanding indebtedness of approximately
$410,000 represented by notes issued in connection with various practice
acquisitions and capital lease obligations, all of which bear interest at rates
varying from 7.0% to 14.0%. Also included in long-term debt is approximately
$63,000 of deferred lease liability. The Company's material commitments for
capital expenditures total approximately $773,000 for the expansion of one
Office and planned de novo Office developments and approximately 290,000 for
computer software and hardware. 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, 1999 were approximately $426,000, and the Company
had working capital on that date of approximately $2.9 million.
On February 11, 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 had fully expended the proceeds from the initial
public offering which included the repayment of $3.7 million of outstanding
indebtedness.
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. On February 9,
1999, the Company's Board of Directors increased the approved number of shares
to be purchased on the open market to 600,000 shares. During 1998 the Company,
in 11 separate transactions, purchased approximately 60,000 shares of its Common
Stock for total consideration of approximately $242,000 at prices ranging from
$3.63 to $4.81 per share. During the first nine months of 1999, the Company, in
58 separate transactions, purchased approximately 535,000 shares of Common Stock
for total consideration of $1.6 million at prices ranging from $1.78 to $3.75
per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in United States interest rates. Historically
and as of September 30, 1999, the Company has not used derivative instruments or
engaged in hedging activities.
20
<PAGE> 21
Interest Rate Risk. The interest payable on the Company's line-of-credit is
variable based upon the prime rate or LIBOR (at the Company's option), and,
therefore, affected by changes in market interest rates. At September 30, 1999,
approximately $6.9 million was outstanding with an average interest rate of
7.44%. The line-of-credit matures on February 11, 2001. The Company may repay
the balance in full at any time without penalty. As a result, the Company does
not believe that reasonably possible near-term changes in interest rates will
result in a material effect on future earnings, fair values or cash flows of the
Company.
21
<PAGE> 22
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
10.35 Sixth Amendment to Loan Document dated September 20, 1999
between the Company and Key Bank National Association.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
None.
22
<PAGE> 23
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 12, 1999 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 12, 1999 By: /s/ Dennis N. Genty
----------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director (Principal
Financial and Accounting Officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.35 Sixth Amendment to Loan Document dated September 20, 1999
between the Company and Key Bank National Association.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.35
SIXTH AMENDMENT TO LOAN DOCUMENTS
THIS SIXTH AMENDMENT TO LOAN DOCUMENTS (this "Sixth Amendment"), made as of the
20th day of September 1999 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:
A. 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 original principal amount of
$800,000.00 executed by Borrower and payable to the order of Lender, (2) 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 (3) by a Credit Agreement (the "Credit Agreement") dated as of
October 31, 1996 between Borrower and Lender, and (4) 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 (i) 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, (ii) by a Third Amendment to Loan Documents
dated September 30, 1998 (the "Third Amendment"), (iii) by a Fourth
Amendment to Loan Documents dated December 31, 1998 (the "Fourth
Amendment") to increase the amount of the Revolving Loan to $20,000,000,
and (iv) by a Fifth Amendment to Loan Documents dated May 28, 1999 (the
"Fifth Amendment").
B. Borrower and Lender desire to further amend the Credit Agreement, Security
Agreement, and other Loan Documents under the terms and conditions set
forth herein.
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:
a. The following definition set forth in Article I of the Credit Agreement
shall be revised as follows:
"Borrowing Base" means, through December 31, 1999, three and one-half (3.5)
times the Consolidated EBITDA of the Borrower for the previous twelve (12) month
period. Commencing January 1, 2000 and thereafter for the remaining term of the
Revolving Loan, the Borrowing Base shall mean three (3) times the consolidated
EBITDA of the Borrower for the previous twelve (12) month period.
b. Section 6.12 of the Credit Agreement shall be amended in its entirety to
read as follows:
6.12 Senior Debt to EBITDA. The ratio of Consolidated Senior Debt to
Consolidated EBITDA shall not be greater than 3.5 to 1.0 through December 31,
1999. Commencing January 1, 2000 and thereafter for the remaining term of the
Revolving Loan, the ratio of Consolidated Senior Debt to Consolidated EBITDA
shall not be greater than 3.0 to 1.0.
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.
<PAGE> 2
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 and
(ii) 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 Sixth 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 Sixth Amendment may be
detached from any counterpart of this Sixth Amendment without impairing the
legal effect of any signatures thereon and may be attached to another
counterpart of this Sixth Amendment identical in form hereto but having
attached to it one or more additional signature pages.
IN WITNESS WHEREOF, the parties hereto have executed this Sixth Amendment as of
the day and year first above written.
LENDER:
KEYBANK NATIONAL ASSOCIATION
By: /s/ Michelle Bushey
-------------------------------
Title: Vice President
BORROWER:
BIRNER DENTAL MANAGEMENT SERVICES, INC.,
a Colorado corporation
By: /s/ Dennis N. Genty
--------------------------------
Title: Chief Financial Officer
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,340,321
<SECURITIES> 0
<RECEIVABLES> 4,079,417
<ALLOWANCES> 304,429
<INVENTORY> 0
<CURRENT-ASSETS> 7,459,113
<PP&E> 8,532,083
<DEPRECIATION> 1,082,364
<TOTAL-ASSETS> 29,395,856
<CURRENT-LIABILITIES> 4,609,102
<BONDS> 0
0
0
<COMMON> 16,968,454
<OTHER-SE> 426,242
<TOTAL-LIABILITY-AND-EQUITY> 29,395,586
<SALES> 29,088,696
<TOTAL-REVENUES> 29,088,696
<CGS> 7,492,946
<TOTAL-COSTS> 7,492,946
<OTHER-EXPENSES> 20,929,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327,105
<INCOME-PRETAX> 338,900
<INCOME-TAX> 126,427
<INCOME-CONTINUING> 212,473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212,473
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
