<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 June 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)
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 August 9, 1999
- ------------------------------- ---------------------------------------
Common Stock, without par value 6,142,714
<PAGE> 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Six Months Ended June 30, 1999 and 1998 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 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 21
Item 4. Submission of Matters to a Vote of Security Holders 21
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>
June 30, December 31,
ASSETS 1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,375,028 $ 2,169,687
Accounts receivable, net of allowance for doubtful accounts
of $361,498 and $ 296,911 at June 30, 1999 and
December 31, 1998, respectively 3,323,689 2,668,024
Current portion of notes receivable - related parties 32,542 28,746
Deferred income taxes 282,247 173,629
Income tax receivable 86,078 262,469
Prepaid expenses and other assets 1,116,278 345,858
------------ ------------
Total current assets 6,215,862 5,648,413
PROPERTY AND EQUIPMENT, net 6,607,432 5,613,021
OTHER NONCURRENT ASSETS:
Intangible assets, net 14,385,154 13,877,449
Deferred charges and other assets 693,670 404,476
Notes receivable - related party - long term 3,000 --
------------ ------------
Total assets $ 27,905,118 $ 25,543,359
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $3,731,612 $ 3,042,534
Current maturities of long-term debt 185,939 276,331
Current maturities of capital lease obligations 5,781 20,996
------------ ------------
Total current liabilities 3,923,332 3,339,861
LONG TERM LIABILITIES:
Long-term debt, net of current maturities 6,314,688 3,234,101
Deferred income taxes 217,569 217,569
Capital lease obligations, net of current maturities 816 6,321
------------ ------------
Total liabilities 10,456,405 6,797,852
============ ============
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; 6,146,714 and 6,636,980, shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively 16,997,527 18,531,738
Retained earnings 451,186 213,769
------------ ------------
Total shareholders' equity 17,448,713 18,745,507
------------ ------------
Total liabilities and shareholders' equity $ 27,905,118 $ 25,543,359
============ ============
</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 Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUE $ 7,166,534 $ 5,609,017 $ 14,189,262 $ 10,260,354
DIRECT EXPENSES:
Clinical salaries and benefits 2,834,308 2,028,685 5,431,416 3,792,456
Dental supplies 414,169 297,994 802,800 562,028
Laboratory fees 727,931 536,351 1,396,235 930,252
Occupancy 780,085 452,984 1,429,308 840,685
Advertising and marketing 146,399 126,815 228,236 204,527
Depreciation and amortization 448,470 258,718 852,726 475,461
General and administrative 764,355 465,085 1,399,873 875,172
----------- ----------- ------------ ------------
6,115,717 4,166,632 11,540,594 7,680,581
----------- ----------- ------------ ------------
Contribution from dental offices 1,050,817 1,442,385 2,648,668 2,579,773
Corporate expenses:
General and administrative 991,450 685,375 1,956,738 1,235,139
Depreciation and amortization 63,538 38,303 123,905 68,490
----------- ----------- ------------ ------------
Operating income (loss) (4,171) 718,707 568,025 1,276,144
Interest income (expense), net (93,471) 30,963 (189,369) (71,422)
Conversion inducement expense -- -- -- (305,100)
----------- ----------- ------------ ------------
Income (loss) before income taxes (97,642) 749,670 378,656 899,622
Income tax benefit (expense) 36,420 (239,894) (141,239) (287,878)
----------- ----------- ------------ ------------
Income (loss) before change in accounting principle (61,222) 509,776 237,417 611,744
Cumulative effect of change in accounting principle -- -- -- (39,162)
----------- ----------- ------------ ------------
Net income (loss) $ (61,222) $ 509,776 $ 237,417 $ 572,582
=========== =========== ============ ============
Basic earnings per share of Common Stock:
Income (loss) before cumulative effect of
change in accounting principle $ (.01) $ .08 $ .04 $ .11
Cumulative effect of change in accounting
principle -- -- -- (.01)
----------- ----------- ------------ ------------
Net income (loss) $ (.01) $ .08 $ .04 $ .10
=========== =========== ============ ============
Diluted earnings per share of Common Stock:
Income (loss) before cumulative effect of
change in accounting principle $ (.01) $ .07 $ .04 $ .10
Cumulative effect of change in accounting
principle -- -- -- (.01)
----------- ----------- ------------ ------------
Net income (loss) $ (.01) $ .07 $ .04 $ .09
=========== =========== ============ ============
Weighted average number of shares of
Common stock and dilutive securities:
Basic 6,177,727 6,675,879 6,314,966 5,807,049
=========== =========== ============ ============
Diluted 6,177,727 6,934,112 6,378,559 6,057,707
=========== =========== ============ ============
</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 (508,400) (1,581,343) -- (1,581,343)
Net Income -- -- 237,417 237,417
--------- ------------ --------- -------------------
BALANCE, June 30, 1999 6,146,714 $ 16,997,527 $ 451,186 $ 17,448,713
========= ============ ========= ===================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 237,417 $ 572,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 976,631 543,952
Provision for doubtful accounts 25,589 --
Amortization of debenture issuance costs -- 18,098
Conversion inducement -- 305,100
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (737,243) (734,727)
Prepaid expense, income tax receivable and other assets (622,338) 183,259
Accounts payable and accrued expenses 631,675 (204,023)
------------ -----------
Net cash provided by operating activities 511,731 684,241
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties -- 12,620
Capital expenditures (964,428) (987,117)
Development of new dental offices (1,050,750) (550,965)
Acquisition of dental offices (691,476) (2,432,528)
------------ -----------
Net cash used in investing activities (2,706,654) (3,957,990)
------------ -----------
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 12,132 47,425
Net borrowings (repayments) - line of credit 3,140,000 (350,000)
Repayment of long-term debt (170,525) (3,425,766)
Payment of debenture issuance and other financing cost -- (27,927)
Purchase and retirement of Common Stock (1,581,343) --
Payment to induce conversion of debentures -- (305,100)
------------ -----------
Net cash provided by financing activities 1,400,264 6,290,918
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (794,659) 3,017,169
CASH AND CASH EQUIVALENTS, beginning of period 2,169,687 977,454
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,375,028 $ 3,994,623
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1999 1998
------------ -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 181,936 $ 455,316
============ ===========
Cash paid during the period for income taxes $ 87,000 $ --
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Conversion of debentures $ -- $ 6,780,000
Acquisition of dental offices $ 35,000 $ 31,500
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities $ 59,596 $ 8,915
Accounts receivable net, acquired through acquisitions $ 40,000 $ 140,000
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)
JUNE 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 June 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 six
months ended June 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 June 30,
------------------------------------------------------------------------------
1999 1998
---------------------------------- ------------------------------------
Per Share Per Share
(Loss) Shares Amount Income Shares Amount
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $ (61,222) 6,177,727 $ (.01) $ 509,776 6,675,879 $ .08
========= ========= ========= ========== ========= =========
Diluted EPS:
Net income (loss) $ (61,222) 6,177,727 $ (.01) $ 509,776 6,934,112 $ .07
========= ========= ========= ========== ========= =========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
---------------------------------- ------------------------------------
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 $ 237,417 6,314,966 $ .04 $ 611,744 5,807,049 $ .11
Cumulative effect of change
in accounting principle -- -- -- (39,162) -- (.01)
--------- --------- --------- ---------- --------- ---------
Net income $ 237,417 6,314,966 $ .04 $ 572,582 5,807,049 $ .10
========= ========= ========= ========== ========= =========
Diluted EPS:
Income before cumulative effect of
change in accounting principle $ 237,417 6,378,559 $ .04 $ 611,744 6,057,707 $ .10
Cumulative effect of change
in accounting principle -- -- -- (39,162) -- (.01)
--------- --------- ---------- ---------- --------- ---------
Net income $ 237,417 6,378,559 $ .04 $ 572,582 6,057,707 $ .09
========= ========= ========= ========== ========= =========
</TABLE>
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the six months ended June 30, 1999 and
1998 and the quarter ended June 30, 1998 relates to the effect of 63,593,
250,658 and 258,233, 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 June 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 May 28, 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. 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 officee in Golden, Colorado.
(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
9
<PAGE> 10
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) COMPREHENSIVE INCOME
The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in June 1997 which
established standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. In addition to
net income (loss), comprehensive income includes all changes in equity during a
period, except those resulting from investments by and distributions to owners.
The Company adopted SFAS 130, which is effective for fiscal years beginning
after December 15, 1997, in the first quarter of 1998. For the six months ended
June 30, 1999 and 1998 net income and comprehensive income were the same.
(8) 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.
(9) SUBSEQUENT EVENTS
On July 5, 1999 the Company opened two de novo offices, one in Littleton,
Colorado and one in Rio Rancho, New Mexico.
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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 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 third
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 20 of the 38 vendors contacted. All vendors who have
responded indicate that their systems are Year 2000 compliant. Third and final
requests were sent on August 1, 1999 to those vendors who have not yet
responded. 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.
11
<PAGE> 12
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.
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 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 six
months ended June 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 as of June 30, 1999 managed 52 Offices
in Colorado, New Mexico and Arizona staffed by 67 full-time equivalent general
dentists and four and one half full-time equivalent specialists. The Company has
acquired 42 Offices (four of which were consolidated into existing Offices) and
opened 14 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 3
Acquired Offices 4 12 15 10 1
Consolidation of Offices 0 (3) 0 0 (1)
------- ------- ------- ------- -------
Offices at end of period 4 18 34 49 52
======= ======= ======= ======= =======
</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 June 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 14 de novo Offices has been approximately $180,000,
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
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<PAGE> 13
began generating positive contribution from dental offices, on average, within
four months of opening. The Company's five remaining de novo Offices, which have
been open an average of three and one half months, have not generated positive
contribution from dental offices as of the date of this Quarterly Report.
At June 30, 1999, the Company's total assets of $27.9 million included $14.4
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 $3.1 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 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
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<PAGE> 14
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.
The Company has experienced significant period-to-period growth in Revenue. For
the quarter ended June 30, 1999, Revenue increased to $9.7 million from $7.4
million for the three months ended June 30, 1998, an increase of $2.3
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<PAGE> 15
million or 31.3%. The Company opened two de novo Offices during the period from
April 1, 1999 to June 30, 1999 which, in the aggregate, accounted for $3,700 of
the $2.3 million increase. Revenue at the 34 Offices in existence during both
full periods increased to $7.1 million in 1999 from $7.0 million in 1998, an
increase of $108,000 or 1.6%. The remainder of the increase in Revenue of $2.2
million was attributable to the 16 Offices that were acquired or opened during
the period from April 1, 1998 to March 31, 1999.
For the six months ended June 30, 1999, Revenue increased to $19.0 million from
$13.6 million for the six months ended June 30, 1998, an increase of $5.4
million or 39.4%. The Company acquired one practice and opened three de novo
Offices during the period from January 1, 1999 to June 30, 1999 which, in the
aggregate, accounted for $673,000 of the $5.4 million increase. Revenue at the
33 Offices in existence during both full periods increased to $13.4 million in
1999 from $12.7 million in 1998, an increase of $610,000, or 4.8%. The remainder
of the increase in Revenue of $4.1 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 June 30, Six Months Ended June 30,
--------------------- -------------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Direct expenses:
Clinical salaries and benefits 39.5% 36.2% 38.3% 37.0%
Dental supplies 5.8% 5.3% 5.6% 5.5%
Laboratory fees 10.1% 9.5% 9.8% 9.1%
Occupancy 10.9% 8.1% 10.1% 8.2%
Advertising and marketing 2.0% 2.3% 1.6% 2.0%
Depreciation and amortization 6.3% 4.6% 6.0% 4.6%
General and administrative 10.7% 8.3% 9.9% 8.5%
----- ----- ----- -----
85.3% 74.3% 81.3% 74.9%
----- ----- ----- -----
Contribution from dental offices 14.7% 25.7% 18.7% 25.1%
Corporate expenses:
General and administrative 13.9% 12.2% 13.8% 12.0%
Depreciation and amortization 0.9% 0.7% 0.9% 0.7%
----- ----- ----- -----
Operating income (loss) (0.1)% 12.8% 4.0% 12.4%
Interest income (expense), net (1.3)% 0.6% (1.3)% (0.7)%
Conversion inducement expense -- -- -- (2.9)%
----- ----- ----- -----
Income (loss) before income taxes (1.4)% 13.4% 2.7% 8.8%
Income tax benefit (expense) 0.5% (4.3)% (1.0)% (2.8)%
----- ----- ----- -----
Income (loss) before change in accounting principle (0.9)% 9.1% 1.7% 6.0%
Cumulative effect of change in accounting principle -- -- -- (0.4)%
----- ----- ----- -----
Net income (loss) (0.9)% 9.1% 1.7% 5.6%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998:
Net revenue. Net revenue increased to $7.2 million for the three months ended
June 30, 1999 from $5.6 million for the three months ended June 30, 1998, an
increase of approximately $1.6 million, or 27.8%. The Company opened two de novo
Offices during the period from April 1, 1999 to June 30, 1999, which did not
contribute to the increase. Net revenue at the 34 Offices which the Company
managed and which were in existence for both full second quarters of 1999 and
1998 increased 0.9% or $46,000 to $5.4 million in the second quarter of 1999
from $5.3 million in the second quarter of 1998. The remainder of the increase
in net revenue of $1.5 million was attributable to 10 practice acquisitions and
6 de novo Office openings which occurred between April 1, 1998 and March 31,
1999.
Clinical salaries and benefits. Clinical salaries and benefits increased to $2.8
million for the three months ended June 30, 1999 from $2.0 million for the three
months ended June 30, 1998, an increase of $806,000 or 39.7%. 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 39.5% for the three months ended June 30, 1999
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<PAGE> 16
from 36.2% for the three months ended June 30, 1998. This increase was due
primarily to the increased number support staff added in anticipation of hiring
additional dentists, the opening of de novo offices, and the expansion of
existing offices.
Dental supplies. Dental supplies increased to $414,000 for the three months
ended June 30, 1999 from $298,000 for the three months ended June 30, 1998, an
increase of $116,000 or 39.0%. This increase was primarily due to the
incremental expenditures required to operate 52 dental practices at June 30,
1999 compared to 40 dental practices at June 30, 1998. As a percentage of net
revenue, dental supplies increased to 5.8% during the three months ended June
30, 1999 from 5.3% during the three months ended June 30, 1998.
Laboratory fees. Laboratory fees increased to $728,000 during the three months
ended June 30, 1999 from $536,000 during the three months ended June 30, 1998,
an increase of $192,000 or 35.7%. This increase was primarily due to the
incremental expenditures required to operate 52 dental practices at June 30,
1999 compared to 40 dental practices at June 30, 1998. As a percentage of net
revenue, laboratory fees increased to 10.1% during the three months ended June
30, 1999 from 9.6% during the three months June 30, 1998.
Occupancy. Occupancy increased to $780,000 during the three months ended June
30, 1999 from $453,000 during the three months ended June 30, 1998, an increase
of $327,000 or 72.2%. This increase was primarily due to the incremental
expenditures required to operate 52 dental practices at June 30, 1999 compared
to 40 dental practices at June 30, 1998. As a percentage of net revenue,
occupancy expense increased to 10.9% during the three months ended June 30, 1999
from 8.1% during the three months ended June 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 $146,000 for
the three months ended June 30, 1999 from $127,000 for the three months ended
June 30, 1998, an increase of $20,000 or 15.4%. As a percentage of net revenue,
advertising and marketing decreased to 2.0% during the three months ended June
30, 1999 from 2.3% during the three months ended June 30, 1998.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased to
$448,000 for the three months ended June 30, 1999 from $259,000 for the three
months ended June 30, 1998, an increase of $190,000 or 73.3%. 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 40 dental practices at the end of the 1998 period to 52 dental practices at
the end of the 1999 period. As a percentage of net revenue, depreciation and
amortization increased to 6.3% for the three months ended June 30, 1999 from
4.6% for the three months ended June 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, which is attributable to
the Offices, increased to $764,000 during the three months ended June 30, 1999
from $465,000 during the three months ended June 30, 1998, an increase of
approximately $299,000 or 64.3%. This increase was primarily due to the
incremental expenditures required to operate 52 dental practices at June 30,
1999 compared to 40 dental practices at June 30, 1998. As a percentage of net
revenue, general and administrative expenses increased to 10.7% during the three
months ended June 30, 1999 from 8.3% during the three months ended June 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 June 30,
1999 from $1.4 million for the three months ended June 30, 1998, a decrease of
$392,000 or 27.1%. As a percentage of net revenue, contribution from dental
offices decreased to 14.7% during the three months ended June 30, 1999 from
25.7% during the three months ended June 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 $991,000 during the three months ended June 30,
1999 from $685,000 during the three months ended June 30, 1998, an increase of
$306,000 or 44.7%. 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 -
16
<PAGE> 17
general and administrative increased to 13.9% during the three months ended June
30, 1999 from 12.2% during the three months ended June 30, 1998.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased to $64,000 for the three months ended
June 30, 1999 from $38,000 for the three months ended June 30, 1998, an increase
of $25,000 or 65.9%. 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 increased to 0.9% during the three months ended
June 30, 1999 from 0.7% during the three months ended June 30, 1998.
Operating income. As a result of the above, operating income decreased to an
operating loss of $(4,200) during the three months ended June 30, 1999 from
operating income of $719,000 during the three months ended June 30, 1998, a
decrease of $723,000 or 100.6%. As a percentage of net revenue, operating income
decreased to (0.1)% during the three months ended June 30, 1999 from 12.8%
during the three months ended June 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 $93,000 for the three
months ended June 30, 1999 from net interest income of $31,000 for the three
months ended June 30, 1998, an increase of $124,000 or 401.9%. This increase in
net interest expense is attributable to an increase in the average debt
outstanding during the 1999 period.
Net income (loss). As a result of the above, net income decreased to a net loss
of $(61,000) for the three months ended June 30, 1999 from net income of
$510,000 for the three months ended June 30, 1998, a decrease of $571,000. Net
loss for the three months ended June 30, 1999 was net of an income tax benefit
of $36,000. Net income for the three months ended June 30, 1998 was net of
income taxes of $240,000. As a percentage of net revenue, net income decreased
to (0.9)% for the three months ended June 30, 1999 from 9.1% for the three
months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998:
Net revenue. Net revenue increased to $14.2 million for the six months June 30,
1999 from $10.3 million for the six months ended June 30, 1998, an increase of
approximately $3.9 million, or 38.3%. The Company acquired one practice and
opened three de novo Offices during the period from January 1, 1999 to June 30,
1999, which contributed $432,000 of the increase. Net revenue at the 33 Offices
which the Company managed and which were in existence for both full first six
months of 1999 and 1998 increased 6.1% or $595,000 to $10.3 million in the first
quarter of 1999 from $9.7 million in the first quarter of 1998. The remainder of
the increase in net revenue of $2.9 million was attributable to 10 practice
acquisitions and 5 de novo Office openings which occurred between January 1,
1998 and December 31, 1999.
Clinical salaries and benefits. Clinical salaries and benefits increased to $5.4
million for the six months ended June 30, 1999 from $3.8 million for the six
months ended June 30, 1998, an increase of $1.6 million or 43.2%. 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 to 38.3% for the six months ended June 30, 1999
from 37.0% for the six months ended June 30, 1998.
Dental supplies. Dental supplies increased to $803,000 for the six months ended
June 30, 1999 from $562,000 for the six months ended June 30, 1998, an increase
of $241,000 or 42.8%. This increase was primarily due to the incremental
expenditures required to operate 52 dental practices at June 30, 1999 compared
to 40 dental practices at June 30, 1998. As a percentage of net revenue, dental
supplies increased to 5.6% during the six months ended June 30, 1999 from 5.5%
during the six months ended June 30, 1998.
Laboratory fees. Laboratory fees increased to $1.4 million during the six months
ended June 30, 1999 from $930,000 during the six months ended June 30, 1998, an
increase of $466,000 or 50.1%. This increase was primarily due to the
incremental expenditures required to operate 52 dental practices at June 30,
1999 compared to 40 dental practices at June 30, 1998. As a percentage of net
revenue, laboratory fees increased to 9.8% during the six months ended June 30,
1999 from 9.1% during the six months June 30, 1998. The increase in laboratory
fees as a percentage of net revenue is attributable to cost increases in certain
laboratory agreements and to recently acquired dental practices which have not
fully converted to laboratories with which the Company has pricing agreements.
17
<PAGE> 18
Occupancy. Occupancy increased to $1.4 million during the six months ended June
30, 1999 from $841,000 during the six months ended June 30, 1998, an increase of
$589,000 or 70.0%. This increase was primarily due to the incremental
expenditures required to operate 52 dental practices at June 30, 1999 compared
to 40 dental practices at June 30, 1998. As a percentage of net revenue,
occupancy expense increased to 10.1% during the six months ended June 30, 1999
from 8.2% during the six months ended June 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 $228,000 for
the six months ended June 30, 1999 from $205,000 for the six months ended June
30, 1998, an increase of $24,000 or 11.6%. As a percentage of net revenue,
advertising and marketing decreased to 1.6% during the six months ended June 30,
1999 from 2.0% during the six months ended June 30, 1998.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased to
$853,000 for the six months ended June 30, 1999 from $475,000 for the six months
ended June 30, 1998, an increase of $377,000 or 79.3%. 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
40 dental practices at the end of the 1998 period to 52 dental practices at the
end of the 1999 period. As a percentage of net revenue, depreciation and
amortization increased to 6.0% for the six months ended June 30, 1999 from 4.6%
for the six months ended June 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, which is attributable to
the Offices, increased to $1.4 million during the six months ended June 30, 1999
from $875,000 during the six months ended June 30, 1998, an increase of
approximately $525,000 or 60.0%. This increase was primarily due to the
incremental expenditures required to operate 52 dental practices at June 30,
1999 compared to 40 dental practices at June 30, 1998. As a percentage of net
revenue, general and administrative expenses increased to 9.9% during the six
months ended June 30, 1999 from 8.5% during the six months ended June 30, 1998.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased $69,000 or 2.7% to $2.6 million for the six months
ended June 30, 1999 when compared to the corresponding period in 1998. As a
percentage of net revenue, contribution from dental offices decreased to 18.7%
during the six months ended June 30, 1999 from 25.1% during the six months ended
June 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 increased to $2.0 million during the six months ended June
30, 1999 from $1.2 million during the six months ended June 30, 1998, an
increase of $722,000 or 58.4%. 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 increased to 13.8% during the six months ended June
30, 1999 from 12.0% during the six months ended June 30, 1998.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased to $124,000 for the six months ended
June 30, 1999 from $68,000 for the six months ended June 30, 1998, an increase
of $55,000 or 80.9%. 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 increased to 0.9% during the six months ended June
30, 1999 from 0.7% during the six months ended June 30, 1998.
Operating income. As a result of the above, operating income decreased to
$568,000 during the six months ended June 30, 1999 from $1.3 million during the
six months ended June 30, 1998, a decrease of $708,000 or 55.5%. As a percentage
of net revenue, operating income decreased to 4.0% during the six months ended
June 30, 1999 from 12.4% during the six months ended June 30, 1998. The decrease
as a percentage of net revenue is a result of the factors discussed above.
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<PAGE> 19
Interest expense, net. Net interest expense increased to $189,000 for the six
months ended June 30, 1999 from $71,000 for the six months ended June 30, 1998,
an increase of $118,000 or 166.2% This increase in net interest expense is
attributable to an increase in the average debt outstanding during the 1999
period.
Conversion inducement expense. During the six months ended June 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 $237,000
for the six months ended June 30, 1999 from net income of $573,000 for the six
months ended June 30, 1998, a decrease of $335,000. Net income for the six
months ended June 30, 1999 was net of income taxes of $141,000. Net income for
the six months ended June 30, 1998 was net of $305,000 related to a one-time
charge to induce the conversion of the debentures, income taxes of $288,000, 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 1.7% for the
six months ended June 30, 1999 from 5.6% for the six months ended June 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 $512,000 and
$684,000 for the six months ended June 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 $632,000 partially offset by an increase in
accounts receivable of approximately $737,000 and an increase in prepaid
expenses and other assets of approximately $622,000. 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
$735,000, a decrease in prepaid expenses and other assets of approximately
$183,000 and a decrease in accounts payable and accrued expenses of
approximately $204,000. During the six months ended June 30, 1999, net income
contributed approximately $238,000 to net cash provided by operating activities
for the period compared to approximately $573,000 for the corresponding period
in 1998.
Net cash used in investing activities was approximately $2.7 million and $4.0
million for the six months ended June 30, 1999 and 1998, respectively. During
the six month period ended June 30, 1999, approximately $691,000 was utilized
for acquisitions and approximately $2.0 million was invested in the purchase of
additional property and equipment, including approximately $1.1 for the
development of de novo Offices. For the six months ended June 30, 1998,
approximately $2.4 million was utilized for acquisitions and approximately $1.5
million was invested in the purchase of additional property and equipment
including approximately $551,000 for the development of de novo offices.
Net cash provided by financing activities was approximately $1.4 million and
$6.3 million for the six months ended June 30, 1999 and 1998, respectively.
During the six months ended June 30, 1999, net cash provided by financing
activities was comprised of net borrowings under the Company's line of credit of
approximately $3.1 million which was partially offset by the purchase and
retirement of Common Stock of approximately $1.6 million and approximately
$171,000 for the repayment of long-term debt. During the six months ended June
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. This was partially offset by $3.7 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, 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 June 30, 1999, the Company had $890,000 available
and $6.0 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
19
<PAGE> 20
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 June 30, 1999, the Company had outstanding indebtedness of approximately
$507,000 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%. The Company's material commitments for capital
expenditures total approximately $680,000 for the expansion of certain Offices
and planned de novo Office developments. 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 June 30, 1999 were approximately $451,000, and the
Company had working capital on that date of approximately $2.3 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 six months of 1999, the Company, in
50 separate transactions, purchased approximately 508,000 shares of Common Stock
for total consideration of $1.6 million at prices ranging from $2.81 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 June 30, 1999, the Company has not used derivative instruments or
engaged in hedging activities.
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 June 30, 1999,
approximately $6.0 million was outstanding with an average interest rate of
7.78%. 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.
20
<PAGE> 21
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders was held on June 10, 1999.
(b) The following directors were elected at the meeting to serve a three-year
term as Class II directors:
<TABLE>
<CAPTION>
For Withheld Authority Abstain
--------- ------------------ -------
<S> <C> <C> <C>
Dennis N. Genty 5,257,158 5,100 0
Steven M. Bathgate 5,257,158 5,100 0
</TABLE>
The following directors are continuing to serve their three-year terms as Class
III directors which will expire at the Company's annual meeting in 2000:
Frederic W.J. Birner
Mark A. Birner, D.D.S.
The following directors are continuing to serve their three-year terms as Class
I directors which will expire at the Company's annual meeting in 2001:
James M. Ciccarelli
(c) The only other matter voted upon at the meeting and results of that vote
are as follows:
Ratification of appointment of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year 1999.
<TABLE>
<CAPTION>
For Against Abstained
--------- ------- ---------
<S> <C> <C>
5,259,002 3,000 256
</TABLE>
The matter described above is described in detail in the Company's definitive
proxy statement dated May 12, 1999 for the Annual Meeting of Shareholders held
on June 10, 1999.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.34 Fifth Amendment to Loan Document dated May 28, 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: August 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: August 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 OF DOCUMENT
- ------- -----------------------
<S> <C>
10.34 Fifth Amendment to Loan Document dated May 28, 1999 between the
Company and Key Bank National Association.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 10.34
FIFTH AMENDMENT TO LOAN DOCUMENTS
THIS FIFTH AMENDMENT TO LOAN DOCUMENTS (this "Amendment"), made as of the 28th
day of May 1999 is between BIRNER DENTAL MANAGEMENT SERVICES, INC., a Colorado
Corporation ("Borrower") and KEYBANK NATIONAL ASSOCIATION, a national banking
association ("Lender").
RECITALS:
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"), and (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.
A. 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:
"BASE RATE" shall mean, for any day, a rate per annum (rounded upwards if
necessary, to the next 1/16 of 1%) equal to the Prime Rate in effect on such
day. For purposes hereof, "Prime Rate" shall mean the rate of interest per annum
announced from time to time by the Lender as its prime rate in effect at its
principal office in Cleveland, Ohio; each change in the Prime Rate shall be
effective on the date such change is announced. The Prime Rate may not be
publicly announced or published and does not necessarily represent the lowest or
best rate at which Lender will extend credit.
1. 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.
1. 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.
1. 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.
<PAGE> 2
1. 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.
1. 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.
1. BINDING EFFECT. This Amendment shall be binding upon and inure to the
benefit of the parties hereto, their successors and assigns.
1. 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.
1. 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.
IN WITNESS WHEREOF, the parties hereto have executed this 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 SIX MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE SIX
MONTHS ENDED JUNE 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,375,028
<SECURITIES> 0
<RECEIVABLES> 3,685,187
<ALLOWANCES> 361,498
<INVENTORY> 0
<CURRENT-ASSETS> 6,215,862
<PP&E> 7,277,548
<DEPRECIATION> 670,116
<TOTAL-ASSETS> 27,905,118
<CURRENT-LIABILITIES> 3,923,332
<BONDS> 0
0
0
<COMMON> 16,997,527
<OTHER-SE> 451,186
<TOTAL-LIABILITY-AND-EQUITY> 27,905,118
<SALES> 18,980,220
<TOTAL-REVENUES> 18,980,220
<CGS> 4,790,958
<TOTAL-COSTS> 4,790,958
<OTHER-EXPENSES> 13,621,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,369
<INCOME-PRETAX> 378,656
<INCOME-TAX> 141,239
<INCOME-CONTINUING> 237,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237,417
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
