<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, 2000
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
------------------------------- -----------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
---------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(303) 691-0680
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of November 6, 2000
------------------------------- -----------------------------------------
Common Stock, without par value 6,026,688
<PAGE> 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999
And September 30, 2000 (unaudited) 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
And Nine Months Ended September 30, 1999 and 2000 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 2000 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 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
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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,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 806,954 $ 904,282
Accounts receivable, net of allowance for doubtful accounts
of $306,469 and $216,266 at December 31, 1999 and
September 30, 2000, respectively 3,700,685 3,668,735
Current portion of notes receivable - related parties 71,070 14,673
Deferred income taxes 117,764 117,764
Income tax receivable 87,000 69,972
Prepaid expenses and other assets 449,385 416,603
------------ ------------
Total current assets 5,232,858 5,192,029
PROPERTY AND EQUIPMENT, net 7,965,699 7,307,558
OTHER NONCURRENT ASSETS:
Intangible assets, net 14,057,688 13,851,348
Deferred charges and other assets 215,793 173,657
Notes receivable - related party, net of current portion 3,000 176,136
Deferred tax asset 473,969 473,969
------------ ------------
Total assets $ 27,949,007 $ 27,174,697
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,602,239 $ 3,107,121
Current maturities of long-term debt 161,936 170,105
Current maturities of capital lease obligations 1,600 --
------------ ------------
Total current liabilities 3,765,775 3,277,226
LONG TERM LIABILITIES:
Long-term debt, net of current maturities 6,771,157 6,543,640
Deferred income taxes 415,868 415,868
Capital lease obligations, net of current maturities 339 --
Other long-term obligations 91,257 124,027
------------ ------------
Total liabilities 11,044,396 10,360,761
------------ ------------
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; 6,131,814 and 6,026,688, shares issued and
outstanding at December 31, 1999 and September 30, 2000,
respectively 16,968,454 16,855,661
Accumulated deficit (63,843) (41,725)
------------ ------------
Total shareholders' equity 16,904,611 16,813,936
------------ ------------
Total liabilities and shareholders' equity $ 27,949,007 $ 27,174,697
============ ============
</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>
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUE $ 7,406,488 $ 6,998,659 $ 21,595,750 $ 22,611,450
DIRECT EXPENSES:
Clinical salaries and benefits 2,864,842 3,021,970 8,296,258 9,110,784
Dental supplies 493,912 420,932 1,296,712 1,432,342
Laboratory fees 697,036 597,524 2,093,271 2,055,588
Occupancy 823,869 824,224 2,253,177 2,439,037
Advertising and marketing 114,812 86,579 343,048 246,157
Depreciation and amortization 496,233 609,404 1,348,959 1,788,612
General and administrative 792,243 681,179 2,192,116 2,220,193
------------ ------------ ------------ ------------
6,282,947 6,241,812 17,823,541 19,292,713
------------ ------------ ------------ ------------
Contribution from dental offices 1,123,541 756,847 3,772,209 3,318,737
CORPORATE EXPENSES:
General and administrative 959,018 784,693 2,915,756 2,560,441
Depreciation and amortization 66,543 83,825 190,448 250,327
------------ ------------ ------------ ------------
Operating income (loss) 97,980 (111,671) 666,005 507,969
Interest expense, net (137,736) (153,954) (327,105) (468,823)
------------ ------------ ------------ ------------
Income (loss) before income taxes (39,756) (265,625) 338,900 39,146
Income tax benefit (expense) 14,812 96,690 (126,427) (17,028)
------------ ------------ ------------ ------------
Net income (loss) $ (24,944) $ (168,935) $ 212,473 $ 22,118
============ ============ ============ ============
Net income (loss) per share of Common Stock:
Basic $ (.00) $ (.03) $ .03 $ .00
============ ============ ============ ============
Diluted $ (.00) $ (.03) $ .03 $ .00
============ ============ ============ ============
Weighted average number of shares of Common stock
and dilutive securities:
Basic 6,139,591 6,089,542 6,260,453 6,117,099
============ ============ ============ ============
Diluted 6,139,591 6,089,542 6,318,773 6,123,379
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Total Deficit
----------------------------- Accumulated Shareholders'
Shares Amount Deficit Equity
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1999 6,131,814 $ 16,968,454 $ (63,843) $ 16,904,611
Purchase and retirement of Common Stock (105,126) (112,793) -- (112,793)
Net Income -- -- 22,118 22,118
------------ ------------ ------------ ------------
BALANCES, September 30, 2000 6,026,688 $ 16,855,661 $ (41,725) $ 16,813,936
============ ============ ============ ============
</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>
Nine Months Ended
September 30,
---------------------------
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 212,473 $ 22,118
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,539,407 2,038,939
Provision for doubtful accounts 52,104 18,182
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (1,170,471) 138,012
Prepaid expense, income tax receivable and other assets (393,960) 91,946
Accounts payable and accrued expenses 1,358,731 (495,118)
Other long-term obligations -- 32,770
----------- -----------
Net cash provided by operating activities 1,598,284 1,846,849
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties (43,622) (116,739)
Capital expenditures (1,673,530) (590,605)
Development of new dental offices (1,178,393) (321,934)
Acquisition of dental offices (718,356) (222,311)
----------- -----------
Net cash used in investing activities (3,613,901) (1,251,589)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock from options exercised 12,132 --
Net borrowings (repayments) - line of credit 4,010,000 (257,000)
Repayment of long-term debt (197,465) (128,139)
Purchase and retirement of Common Stock (1,638,416) (112,793)
----------- -----------
Net cash provided by (used in) financing activities 2,186,251 (497,932)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 170,634 97,328
CASH AND CASH EQUIVALENTS, beginning of period 2,169,687 806,954
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,340,321 $ 904,282
=========== ===========
</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>
Nine Months Ended
September 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $334,038 $478,674
======== ========
Cash paid during the period for income taxes $ 87,000 $ --
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Acquisition of dental offices $ 35,000 $ --
======== ========
Profit Sharing Plan $ 28,000 $ --
======== ========
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities $ 59,596 $ --
======== ========
Accounts receivable net, acquired through acquisitions $ 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, 2000
(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 accounting principles generally accepted
in the United States 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,
1999.
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, 2000 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, 2000 are not necessarily indicative of the results
that may be achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
(2) EARNINGS PER SHARE
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,
----------------------------------------------------------------------
1999 2000
--------------------------------- -----------------------------------
Per Share Per Share
(Loss) Shares Amount (Loss) Shares Amount
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net loss available to
shares of Common Stock $(24,944) 6,139,591 $ (.00) $(168,935) 6,089,542 $ (.03)
======== ========= ====== ========= ========= ======
Diluted EPS:
Net loss available to
shares of Common Stock $(24,944) 6,139,591 $ (.00) $(168,935) 6,089,542 $ (.03)
======== ========= ====== ========= ========= ======
</TABLE>
8
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<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------
1999 2000
--------------------------------- -----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
shares of Common Stock $212,473 6,260,453 $ .03 $ 22,118 6,117,099 $ .00
Effect of dilutive shares of
Common Stock from stock
options and warrants -- 58,320 -- -- 6,280 --
-------- --------- ----- -------- --------- -----
Diluted EPS:
Net income available to
shares of Common Stock $212,473 6,318,773 $ .03 $ 22,118 6,123,379 $ .00
======== ========= ===== ======== ========= =====
</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,
1999 and 2000 relates to the effect of 58,320, and 6,280, 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 quarters ended September 30, 1999 and 2000 since they were
anti-dilutive as a result of the Company's net loss for the affected periods.
(3) LINE OF CREDIT
Under the Company's Credit Facility (as amended on September 29, 2000), the
Company may borrow up to $10.0 million for working capital needs, acquisitions
and capital expenditures including capital expenditures for de novo Offices.
Advances will bear interest at the lender's base rate (prime plus a rate margin
ranging from .25% to 1.50% based on the ratio of consolidated senior debt to
consolidated EBITDA) or at an adjusted LIBOR rate (LIBOR plus a rate margin
ranging from 1.5% to 2.75% based on the ratio of consolidated senior debt to
consolidated EBITDA), at the Company's option. The Company is also obligated to
pay an annual facility fee ranging from .25% to .50% (based on the ratio of
consolidated senior debt to consolidated EBITDA) on 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. As
amended, the loan matures on April 30, 2002. At September 30, 2000, the Company
had approximately $1.5 million available and $6.3 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; limits the Company's annual capital expenditures beginning with calendar
year 2001 and requires the Company to maintain certain financial ratios on an
ongoing basis. The Company is in compliance with all covenants and financial
ratios as of September 30, 2000.
(4) ACQUISITIONS AND DE NOVOS
On March 20, 2000, the Company opened a de novo office in Goodyear, Arizona, a
suburb of Phoenix. The Company also acquired the remaining 50% interest in an
existing Office during March 2000. The consideration consisted of $53,270
payable in cash and a $54,000 note payable with a term of 60 months and an
interest rate of 8.0%. On July 1, 2000, the Company acquired the remaining 50%
interest in an existing Office. The consideration consisted of $141,670 payable
in cash and a $135,000 note payable with a term of 60 months and an interest
rate of 8.0%.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In September 1998, 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. In
September 1999, the FASB issued Statement of Financial Standards No. 137 ("SFAS
137") "Accounting for Derivative Instruments and
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Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
An Amendment of FASB Statement No 133". SFAS 137 delays the effective date of
SFAS 133 to financial quarters and financial years beginning after September 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.
In December 1999 the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. The Company adopted SAB 101 during the second
quarter of 2000. The adoption of SAB 101 did not have a material effect on the
Company's financial results.
In March 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation" ("FIN 44"). FIN 44 is an
interpretation of APB Opinion No. 25 "Accounting for Stock Issued to Employees"
("Opinion 25") and clarifies the application of Opinion 25 for certain issues.
This interpretation is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that FIN 44 covers events after these periods, but before the
effective date of July 1, 2000, the effects of applying this interpretation are
recognized on a prospective basis from July 1, 2000. Management does not expect
FIN 44 to have a material effect on the Company's financial results.
(6) LEGAL PROCEEDINGS
On August 15, 2000, the Company received a notice of claims against the
Company's President, Mark A. Birner, D.D.S., from the Colorado Board of Dental
Examiners (the "Board"). In the notice, the Board alleges violations of Colorado
dental law by Dr. Birner as a result of alleged practices by the Company. Among
other things, the Board claims that the Company uses hygiene assistants to
perform scaling, which is a task to be performed by a hygienist or dentist, and
that the Company engages in billing improprieties. The Board seeks relief as is
permitted by law, which can include actions ranging from revocation or
suspension of Dr. Birner's dental license, to reprimand or censure. A hearing
with an administrative law judge has been scheduled for mid-December 2000. The
Company believes that the bringing of these claims is unjustified and intends to
vigorously defend Dr. Birner and the Company's practices. Through September 30,
2000, the Company has incurred incremental defense related expenditures of
approximately $84,000, some of which may not be covered by applicable insurance
coverage. The Company believes that this proceeding will not have an on-going
material adverse impact on the Company's operations or financial position.
(7) SUBSEQUENT EVENTS
On October 16, 2000, the Company opened a de novo office in Mesa, Arizona, a
suburb of Phoenix.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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," and in Part II, Item 1., "Legal
Proceedings", 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, cash
outlays for income taxes and outcome of pending legal proceedings.
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, 1999 (as filed with the Securities Exchange Commission on March 30, 2000),
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.
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 2000. This information should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto included elsewhere in this Quarterly Report.
OVERVIEW
The Company was formed in May 1995, and as of September 30, 2000 managed 55
Offices in Colorado, New Mexico and Arizona staffed by 80 general dentists and
11 specialists. The Company has acquired 42 Offices (four of which were
consolidated into existing Offices) and opened 17 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 conduct the practice
at each Office. In addition, the Company assumes a number of responsibilities
11
<PAGE> 12
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 enhancing the operating performance of its
existing Offices, by developing de novo Offices and by acquiring solo and group
dental practices. 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 additional markets. The following table sets forth
the increase in the number of Offices affiliated with and managed by the Company
from 1995 through September 30, 2000, including the number of de novo Offices
and acquired Offices in each such period.
<TABLE>
<CAPTION>
1995(1) 1996 1997 1998 1999 2000
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Offices at beginning of the period 0 4 18 34 49 54
De novo Offices 0 5 1 5 5 1
Acquired Offices 4 12 15 10 1 0
Consolidation of Offices 0 (3) 0 0 (1) 0
------- ---- ---- ---- ---- ----
Offices at end of the period 4 18 34 49 54 55
======= ==== ==== ===== ==== ====
</TABLE>
----------------
(1) From October 1, 1995 through December 31, 1995.
The combined purchase amounts for the four practices 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 initial
investment by the Company in each of its 17 de novo Offices has been
approximately $180,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the Offices. The 11 de novo
Offices opened between January 1996 and December 1998 began generating positive
contribution from dental offices, on average, within six months of opening. Four
of the six de novo Offices opened in 1999 and the first quarter of 2000 began
generating positive contribution from dental offices, on average, within four
months of opening. The Company's two remaining de novo Offices, which have been
open an average of 14 months, have not generated positive contribution from
dental offices as of the date of this Quarterly Report.
At September 30, 2000, the Company's total assets of $27.2 million included
$13.8 million of identifiable intangible assets related to Management
Agreements. At that date, the Company had total shareholders' equity of $16.8
million and a tangible net worth of $3.0 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
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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) 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.
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 at the
Office. 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 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 work at the Office. 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.
13
<PAGE> 14
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
The expansion of the Company's business is a result of acquiring Offices and the
development of de novo Offices. Due to the Company's limited period of
affiliation with certain of these acquired and developed Offices, the
period-to-period comparisons set forth below may not be representative of future
operating results.
For the three months ended September 30, 2000, Revenue decreased to $9.9 million
from $10.1 million for the three months ended September 30, 1999, a decrease of
$185,000 or 1.8%. Revenue at the 52 Offices in existence during both full
periods decreased to $9.4 million in 2000 from $9.9 million in 1999, a decrease
of $548,000 or 5.5%. This decrease was somewhat offset by an increase in Revenue
of $363,000 attributable to the 3 Offices that were opened during the period
from July 1, 1999 to June 30, 2000.
For the nine months ended September 30, 2000, Revenue increased to $31.6 million
from $29.1 million for the nine months ended September 30, 1999, an increase of
$2.6 million or 8.8%. The Company opened one de novo Office during the period
from January 1, 2000 to September 30, 2000 which, in the aggregate, accounted
for $275,000 of the $2.6 million increase. Revenue at the 48 Offices in
existence during both full periods increased to $28.5 million in 2000 from $27.7
million in 1999, an increase of $769,000, or 2.8%. The remaining $1.5 million of
the increase in Revenue was attributable to the 6 Offices that were acquired or
opened during the period from January 1, 1999 to December 31, 1999.
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<PAGE> 15
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,
--------------------------- -------------------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET REVENUE 100.0 % 100.0 % 100.0 % 100.0 %
DIRECT EXPENSES:
Clinical salaries and benefits 38.7 % 43.2 % 38.4 % 40.3 %
Dental supplies 6.6 % 6.0 % 6.0 % 6.3 %
Laboratory fees 9.4 % 8.6 % 9.7 % 9.1 %
Occupancy 11.1 % 11.8 % 10.4 % 10.8 %
Advertising and marketing 1.5 % 1.2 % 1.6 % 1.1 %
Depreciation and amortization 6.7 % 8.7 % 6.2 % 7.9 %
General and administrative 10.7 % 9.7 % 10.2 % 9.8 %
------- ------- ------- -------
84.7 % 89.2 % 82.5 % 85.3 %
------- ------- ------- -------
Contribution from dental offices 15.3 % 10.8 % 17.5 % 14.7 %
CORPORATE EXPENSES:
General and administrative 13.0 % 11.2 % 13.5 % 11.3 %
Depreciation and amortization 0.9 % 1.2 % 0.9 % 1.1 %
------- ------- ------- -------
Operating income (loss) 1.4 % (1.6)% 3.1 % 2.3 %
Interest expense, net (1.9)% (2.2)% (1.5)% (2.1)%
------- ------- ------- -------
Income (loss) before income taxes (0.5)% (3.8)% 1.6 % 0.2 %
Income tax benefit (expense) 0.2 % 1.4 % (0.6)% (0.1)%
------- ------- ------- -------
Net income (loss) (0.3)% (2.4)% 1.0 % 0.1 %
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999:
Net revenue. For the three months ended September 30, 2000 net revenue decreased
to $7.0 million compared to $7.4 million for the three months ended September
30, 1999, a decrease of approximately $408,000, or 5.5%. Net revenue at the 52
Offices managed by the Company which were in existence for both third quarter
periods decreased to $6.6 million for the third quarter of 2000 compared to $7.3
million for the third quarter of 1999, a decrease of approximately $675,000, or
9.3%. This decrease was somewhat offset by an increase in net revenue of
$267,000 attributable to the 3 Offices that were opened during the period from
July 1, 1999 to June 30, 2000. The Company expected an increase in net revenue
for the quarter ended September 30, 2000 when compared to the corresponding
period in 1999. The revenue shortfall in the 2000 period was a direct result of
the fallout from the allegations against the Company's President, Mark Birner
D.D.S. by the Colorado Board of Dental Examiners, which was announced on August
15, 2000. The allegations resulted in lost revenue during the third quarter of
2000 in the following areas; 1) the temporary suspension of one of the Company's
managed care contracts; 2) the one half day closure of all Colorado offices to
explain the allegations to employees; 3) negative media publicity and; 4)
employee morale issues and a slow down in dentist and other personnel
recruitment. While quantifying the lost revenue from the events discussed above
is difficult, the Company believes that third quarter 2000 lost revenue was
approximately $650,000. The majority of the lost revenue, approximately
$450,000, came from the temporary suspension of one managed care contract. This
temporary suspension was based solely on the allegations against Mark Birner
D.D.S. The Company immediately appealed this suspension, and the appeal was
heard by the managed care company's national review committee. After hearing the
facts related to the allegations the national review committee overturned the
suspension and the Company was reinstated beginning October 2000.
Clinical salaries and benefits. For the three months ended September 30, 2000
clinical salaries and benefits increased to $3.0 million compared to $2.9
million for the three months ended September 30, 1999, an increase of $157,000
or 5.5%. This increase was primarily due to the increased number of Offices open
during the 2000 period and the corresponding addition of non-dental personnel as
well as the Company's annual compensation increase which, took effect on July 1,
2000. As a percentage of net revenue, clinical salaries and benefits increased
to 43.2% for the three months ended September 30, 2000 compared to 38.7% for the
three months ended September 30, 1999. This increase as a percentage of net
revenue was primarily due to the decrease in net revenue due to the allegations
and related issues discussed above under Net Revenue.
Dental supplies. For the three months ended September 30, 2000 dental supplies
decreased to $421,000 compared to $494,000 for the three months ended September
30, 1999, a decrease of $73,000 or 14.8%. This decrease was primarily
15
<PAGE> 16
due to lower patient traffic which was directly related to the allegations and
related issues discussed above under Net Revenue. As a percentage of net
revenue, dental supplies decreased to 6.0% for the three months ended September
30, 2000 compared to 6.6% for the three months ended September 30, 1999.
Laboratory fees. For the three months ended September 30, 2000 laboratory fees
decreased to $598,000 compared to $697,000 for the three months ended September
30, 1999, a decrease of $99,000 or 14.3%. This decrease was primarily due to the
Company's efforts to consolidate the use of dental laboratories so that improved
pricing could be obtained based upon the Company's laboratory case volume. In
addition, this decrease was also due to lower patient traffic which was directly
related to the allegations and related issues discussed above under Net Revenue.
As a percentage of net revenue, laboratory fees decreased to 8.6% for the three
months ended September 30, 2000 compared to 9.4% for the three months September
30, 1999.
Occupancy. For the three months ended September 30, 2000 occupancy expense
remained constant at approximately $824,000. Incremental occupancy expenditures
related to the increased number of Offices open during the 2000 period in
addition to increased rental payments resulting from the renewal of Office
leases at current market rates for Offices whose leases expired subsequent to
the 1999 period was offset by a reduction in the Company's other occupancy costs
. As a percentage of net revenue, occupancy expense increased to 11.8% for the
three months ended September 30, 2000 compared to 11.1% for the three months
ended September 30, 1999.
Advertising and marketing. For the three months ended September 30, 2000
advertising and marketing decreased to $87,000 compared to $115,000 for the
three months ended September 30, 1999, a decrease of $28,000 or 24.6%. As a
percentage of net revenue, advertising and marketing decreased to 1.2% for the
three months ended September 30, 2000 compared to 1.5% for the three months
ended September 30, 1999.
Depreciation and amortization. For the three months ended September 30, 2000
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, increased to $609,000 compared to $496,000 for
the three months ended September 30, 1999, an increase of $113,000 or 22.8%.
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 growth in terms of number of Offices, upgrades to existing Offices
and addition of equipment to older Offices. As a percentage of net revenue,
depreciation and amortization increased to 8.7% for the three months ended
September 30, 2000 compared to 6.7% for the three months ended September 30,
1999. 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 the addition of equipment to older Offices as well
as the decrease in net revenue due to the allegations and related issues
discussed above under Net Revenue.
General and administrative. For the three months ended September 30, 2000
general and administrative, which is attributable to the Offices, decreased to
$681,000 compared to $792,000 for the three months ended September 30, 1999, a
decrease of approximately $111,000 or 14.0%. As a percentage of net revenue,
general and administrative expenses decreased to 9.7% for the three months ended
September 30, 2000 compared to 10.7% during the three months ended September 30,
1999.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased to $757,000 for the three months ended September 30,
2000 compared to $1.1 million for the three months ended September 30, 1999, a
decrease of $367,000 or 32.6%. As a percentage of net revenue, contribution from
dental offices decreased to 10.8% for the three months ended September 30, 2000
compared to 15.3% for the three months ended September 30, 1999
Corporate expenses - general and administrative. For the three months ended
September 30, 2000 corporate expenses - general and administrative decreased to
$785,000 compared to $959,000 for the three months ended September 30, 1999, a
decrease of $174,000 or 18.2%. This decrease was primarily due to cost
containment efforts started by the Company in early 2000. As a percentage of net
16
<PAGE> 17
revenue, corporate expense - general and administrative decreased to 11.2% for
the three months ended September 30, 2000 compared to 13.0% during the three
months ended September 30, 1999.
Corporate expenses - depreciation and amortization. For the three months ended
September 30, 2000 corporate expenses - depreciation and amortization increased
to $84,000 compared to $67,000 for the three months ended September 30, 1999, an
increase of $17,000 or 26.0%. This increase was a result of the Company's
expansion of its corporate infrastructure, primarily investments in computer
equipment to manage the needs of each Office. As a percentage of net revenue,
corporate expenses - depreciation and amortization increased to 1.2% for the
three months ended September 30, 2000 compared to 0.9% during the three months
ended September 30, 1999.
Operating income (loss). As a result of the above, the Company incurred an
operating loss of $(112,000) for the three months ended September 30, 2000
compared to operating income of $98,000 for the three months ended September 30,
1999, a decrease of $210,000.
Interest expense, net. For the three months ended September 30, 2000 interest
expense increased to $154,000 compared to $138,000 for the three months ended
September 30, 1999, an increase of $16,000 or 11.8%. This increase in interest
expense is attributable to a higher average interest rate. As a percentage of
net revenue, interest expense increased to 2.2% for the three months ended
September 30, 2000 compared to 1.9% for the three months ended September 30,
1999.
Net income (loss). As a result of the above, the Company's net loss increased to
$(169,000) for the three months ended September 30, 2000 compared to a net loss
of $(25,000) for the three months ended September 30, 1999. Net loss for the
three months ended September 30, 2000 was enhanced by an income tax benefit of
$97,000. Net loss for the three months ended September 30, 1999 was enhanced by
an income tax benefit of $15,000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999:
Net revenue. For the nine months ended September 30, 2000 net revenue increased
to $22.6 million compared to $21.6 million for the nine months ended September
30, 1999, an increase of approximately $1.0 million, or 4.7%. For the nine
months ended September 30, 2000, net revenue at the six de novo Offices and one
acquired Office which opened between January 1, 1999 and September 30, 2000
increased to $2.2 million compared to $887,000 for the nine months ended
September 30, 1999, an increase of $1.3 million or 144.8%. This increase was
partially offset by a decrease in net revenue at the 48 Offices managed by the
Company, which were in existence for both first nine month periods. Net revenue
at these Offices decreased to $20.4 million for the first nine months of 2000
compared to $20.7 million for the first nine months of 1999, a decrease of
$268,000, or 1.3%. For the nine months ended September 30, 2000, the Company
expected a larger increase in total net revenue as well as an increase in net
revenue at the 48 Offices which were in existence for both first nine month
periods. The revenue shortfall in the 2000 period was a direct result of the
fallout from the allegations against the Company's President, Mark Birner D.D.S.
by the Colorado Board of Dental Examiners, which was announced on August 15,
2000. The allegations resulted in lost revenue during the nine month period
ended September 30, 2000 in the following areas; 1) the temporary suspension of
one of the Company's managed care contracts; 2) the one half day closure of all
Colorado offices to explain the allegations to employees; 3) negative media
publicity and; 4) employee morale issues and a slow down in dentist and other
personnel recruitment. While quantifying the lost revenue from the events
discussed above is difficult, the Company believes that lost revenue for the
nine month period ended September 30, 2000 was approximately $650,000. The
majority of the lost revenue, approximately $450,000, came from the temporary
suspension of one managed care contract. This temporary suspension was based
solely on the allegations against Mark Birner D.D.S. The Company immediately
appealed this suspension, and the appeal was heard by the managed care company's
national review committee. After hearing the facts related to the allegations
the national review committee overturned the suspension and the Company was
reinstated beginning October 2000.
Clinical salaries and benefits. For the nine months ended September 30, 2000
clinical salaries and benefits increased to $9.1 million compared to $8.3
million for the nine months ended September 30, 1999, an increase of $815,000 or
9.8%. This increase was due primarily to the increased number of Offices during
the 2000 period and the corresponding addition of non-dental personnel. As a
percentage of net revenue, clinical salaries and benefits increased to 40.3% for
the nine months ended September 30, 2000 compared to 38.4% for the nine months
ended September 30, 1999.
Dental supplies. For the nine months ended September 30, 2000 dental supplies
increased to $1.4 million compared to $1.3 million for the nine months ended
September 30, 1999, an increase of $136,000 or 10.5%. This increase was
primarily due to the incremental dental supply expenditures related to the
increased number of Offices open during the 2000 period. As a percentage of net
revenue, dental supplies increased to 6.3% for the nine months ended September
30, 2000 compared to 6.0% for the nine months ended September 30, 1999.
Laboratory fees. For the nine months ended September 30, 2000 laboratory fees
remained relatively constant at $2.1 million when compared to the corresponding
period in 1999. An increase in the incremental expenditures related to the
additional Offices open during the 2000 period was offset by the Company's
efforts to consolidate the use of dental laboratories so that improved pricing
could be obtained based upon the Company's laboratory case volume. As a
17
<PAGE> 18
percentage of net revenue, laboratory fees decreased to 9.1% for the nine months
ended September 30, 2000 compared to 9.7% for the nine months September 30, 1999
Occupancy. For the nine months ended September 30, 2000 occupancy expense
increased to $2.4 million compared to $2.2 million for the nine months ended
September 30, 1999, an increase of $186,000 or 8.2%. This increase was primarily
due to the incremental occupancy expenditures related to the increased number of
Offices open during the 2000 period in addition to increased rental payments
resulting from the renewal of Office leases at current market rates for Offices
whose leases expired subsequent to the 1999 period. As a percentage of net
revenue, occupancy expense increased to 10.8% for the nine months ended
September 30, 2000 compared to 10.4% for the nine months ended September 30,
1999.
Advertising and marketing. For the nine months ended September 30, 2000
advertising and marketing decreased to $246,000 compared to $343,000 for the
nine months ended September 30, 1999, a decrease of $97,000 or 28.2%. As a
percentage of net revenue, advertising and marketing decreased to 1.1% for the
nine months ended September 30, 2000 compared to 1.6% for the nine months ended
September 30, 1999.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased to $1.8
million for the nine months ended September 30, 2000 compared to $1.4 million
for the nine months ended September 30, 1999, an increase of $440,000 or 32.6%.
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 growth in terms of number of Offices, upgrades to existing Offices
and addition of equipment to older Offices. As a percentage of net revenue,
depreciation and amortization increased to 7.9% for the nine months ended
September 30, 2000 compared to 6.2% for the nine months ended September 30,
1999. 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 the addition of equipment to older Offices as well
as the decrease in net revenue due to the allegations and related issues
discussed above under Net Revenue.
General and administrative. For the nine months ended September 30, 2000 general
and administrative, which is attributable to the Offices, remained relatively
constant at $2.2 million when compared to the corresponding period in 1999. As a
percentage of net revenue, general and administrative expenses decreased to 9.8%
for the nine months ended September 30, 2000 compared to 10.2% for the nine
months ended September 30, 1999.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased to $3.3 million for the nine months ended September 30,
2000 compared to $3.8 million for the nine months ended September 30, 1999, a
decrease of $453,000 or 12.0%. As a percentage of net revenue, contribution from
dental offices decreased to 14.7% for the nine months ended September 30, 2000
compared to 17.5% for the nine months ended September 30, 1999.
Corporate expenses - general and administrative. For the nine months ended
September 30, 2000 corporate expenses - general and administrative decreased to
$2.6 million compared to $2.9 million for the nine months ended September 30,
1999, a decrease of $355,000 or 12.2%. This decrease was primarily due to cost
containment efforts started by the Company in early 2000. As a percentage of net
revenue, corporate expense - general and administrative decreased to 11.3% for
the nine months ended September 30, 2000 compared to 13.5% for the nine months
ended September 30, 1999.
Corporate expenses - depreciation and amortization. For the nine months ended
September 30, 2000 corporate expenses - depreciation and amortization increased
to $250,000 compared to $190,000 for the nine months ended September 30, 1999,
an increase of $60,000 or 31.4%. This increase was a result of the Company's
expansion of its corporate infrastructure, primarily investments in computer
equipment to manage the needs of each Office. As a percentage of net revenue,
corporate expenses - depreciation and amortization increased to 1.1% for the
nine months ended September 30, 2000 compared to 0.9% for the nine months ended
September 30, 1999.
Operating income. As a result of the above, operating income decreased to
$508,000 for the nine months ended September 30, 2000 compared to $666,000 for
the nine months ended September 30, 1999, a decrease of $158,000 or 23.7%. As a
percentage of net revenue, operating income decreased to 2.3% for the nine
months ended September 30, 2000 compared to 3.1% for the nine months ended
September 30, 1999.
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<PAGE> 19
Interest expense, net. For the nine months ended September 30, 2000 interest
expense increased to $469,000 compared to $327,000 for the nine months ended
September 30, 1999, an increase of $142,000 or 43.3%. This increase in interest
expense is attributable to an increase in the average debt outstanding during
the 2000 period as well as a higher average interest rate. As a percentage of
net revenue, interest expense increased to 2.1% for the nine months ended
September 30, 2000 compared to 1.5% for the nine months ended September 30,
1999.
Net income (loss). As a result of the above, net income decreased to $22,000 for
the nine months ended September 30, 2000 compared to net income of $212,000 for
the nine months ended September 30, 1999, a decrease of $190,000. Net income for
the nine months ended September 30, 2000 was net of income taxes of $17,000
while net income for the nine months ended September 30, 1999 was net of income
taxes of $126,000. As a percentage of net revenue, net income decreased to 0.1%
for the nine months ended September 30, 2000 compared to 1.0% for the nine
months ended September 30, 1999.
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
$1.8 million for the nine months ended September 30, 1999 and 2000,
respectively. During the 2000 period, excluding net income and after adding back
non-cash items, the Company's cash used in operating activities consisted
primarily of a decrease in accounts payable and accrued expenses of
approximately $495,000 partially offset by a decrease in accounts receivable of
approximately $138,000; a decrease in prepaid expense, income tax receivable and
other assets of approximately $92,000 and a decrease in other long-term
obligations of approximately $33,000. Net cash used in operating activities
during the 1999 period, excluding net income and after adding back non-cash
items, consisted primarily of an increase in accounts receivable of
approximately $1.2 million and an increase in prepaid expenses and other assets
of approximately $394,000 partially offset by an increase in accounts payable
and accrued expenses of approximately $1.4 million. During the nine months ended
September 30, 2000, net income contributed approximately $22,000 to net cash
provided by operating activities for the period compared to approximately
$212,000 for the corresponding period in 1999.
Net cash used in investing activities was approximately $3.6 million and $1.3
million for the nine months ended September 30, 1999 and 2000, respectively. For
the nine months ended September 30, 2000, approximately $222,000 was utilized
for acquisitions and approximately $913,000 was invested in the purchase of
additional property and equipment including approximately $322,000 for the
development of de novo offices and approximately $117,000 was related to the
issuance of notes receivable to related parties. 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 million for the development
of de novo Offices and approximately $44,000 was related to the issuance of
notes receivable to related parties.
Net cash provided by financing activities was approximately $2.2 million for the
nine months ended September 30, 1999 and net cash used in financing activities
was approximately $498,000 for the nine months ended September 30, 2000. During
the nine months ended September 30, 2000, net cash used in financing activities
was comprised of approximately $257,000 used to reduce the amount outstanding on
the Company's bank line of credit, approximately $128,000 for the repayment of
long-term debt and approximately $113,000 for the purchase and retirement of
Common Stock. During the nine months ended September 30, 1999, net cash provided
by financing activities was comprised of approximately $12,000 for the issuance
of Common Stock from the exercise of options and net borrowings under the
Company's line of credit of approximately $4.0 million both of which were
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.
Under the Company's Credit Facility (as amended on September 29, 2000), the
Company may borrow up to $10.0 million for working capital needs, acquisitions
and capital expenditures including capital expenditures for de novo Offices.
Advances will bear interest at the lender's base rate (prime plus a rate margin
ranging from .25% to 1.50% based on the ratio of consolidated senior debt to
consolidated EBITDA) or at an adjusted LIBOR rate (LIBOR plus a rate margin
ranging from 1.5% to 2.75% based on the ratio of consolidated senior debt to
consolidated EBITDA), at the Company's option. The Company is also obligated to
pay an annual facility fee ranging from .25% to .50% (based on the ratio of
consolidated senior debt to consolidated EBITDA) on the average unused amount of
the line of credit during the previous full calendar quarter. Borrowings are
limited to an availability formula
19
<PAGE> 20
based on the Company's adjusted EBITDA. As amended, the loan matures on April
30, 2002. At September 30, 2000, the Company had approximately $1.5 million
available and $6.3 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; limits the
Company's annual capital expenditures beginning with calendar year 2001 and
requires the Company to maintain certain financial ratios on an ongoing basis.
At September 30, 2000, the Company had outstanding indebtedness of approximately
$395,750 represented by notes issued in connection with various practice
acquisitions, all of which bear interest at rates varying from 8.0% to 14.0%.
The Company's material commitments for capital expenditures total approximately
$50,000 for one de novo Office development. The Company anticipates that the
required capital for this de novo development will be provided from cash on
hand, cash generated by operations, or borrowings under the Company's Credit
Facility. The Company's accumulated deficit as of September 30, 2000 was
approximately $42,000, and the Company had working capital on that date of
approximately $1.9 million.
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 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 $2.81 to $3.75 per share. On September 5,
2000, the Company's Board of Directors unanimously approved the purchase of
shares of the Company's Common Stock on the open market, total value not to
exceed $150,000. During the first nine months of 2000, the Company, in 18
separate transactions, purchased approximately 105,000 shares of Common Stock
for total consideration of approximately $112,800 at prices ranging from $0.95
to $1.67 per share. At September 30, 2000, approximately $42,300 remains
available under this Board of Directors approved program.
20
<PAGE> 21
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, 2000, 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 September 30, 2000,
approximately $5.8 million was outstanding under the LIBOR option with an
interest rate of 8.94% (LIBOR plus 2.25%) and approximately $818,000 was
outstanding with an interest rate of 10.5% (prime plus 1.0%). 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. Based on calculations performed by the Company, a 0.5% increase
in the Company's interest rate would result in additional interest expense of
approximately $26,000 for the nine months ended September 30, 2000.
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<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.
On August 15, 2000, the Company received a notice of claims against the
Company's President, Mark A. Birner, D.D.S., from the Colorado Board of Dental
Examiners (the "Board"). In the notice, the Board alleges violations of Colorado
dental law by Dr. Birner as a result of alleged practices by the Company. Among
other things, the Board claims that the Company uses hygiene assistants to
perform scaling, which is a task to be performed by a hygienist or dentist, and
that the Company engages in billing improprieties. The Board seeks relief as is
permitted by law, which can include actions ranging from revocation or
suspension of Dr. Birner's dental license, to reprimand or censure. A hearing
with an administrative law judge has been scheduled for mid-December 2000. The
Company believes that the bringing of these claims is unjustified and intends to
vigorously defend Dr. Birner and the Company's practices. Through September 30,
2000, the Company has incurred incremental defense related expenditures of
approximately $84,000, some of which may not be covered by applicable insurance
coverage. The Company believes that this proceeding will not have an on-going
material adverse impact on the Company's operations or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.37 Eighth Amendment to Loan Document dated September 29, 2000 between the Registrant and Key Bank of
Colorado.
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 13, 2000 By: /s/ Frederic W.J. Birner
-------------------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: November 13, 2000 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
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.37 Eighth Amendment to Loan Document dated September 29, 2000 between the Registrant and Key Bank of
Colorado.
27.1 Financial Data Schedule.
</TABLE>
