<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 March 31, 2000
---------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23367
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BIRNER DENTAL MANAGEMENT SERVICES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ----------------------------------------------- -------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
(303) 691-0680
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(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 May 10, 2000
- -------------------------------------- ---------------------------------------
Common Stock, without par value 6,131,814
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
Ended March 31, 2000 and 1999 4
Unaudited Condensed Statement of Shareholders' Equity for the Quarter Ended
March 31, 2000 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 806,954 $ 1,204,822
Accounts receivable, net of allowance for doubtful accounts
of $306,469 and $308,023 at December 31, 1999 and
March 31, 2000, respectively 3,700,685 3,944,281
Current portion of notes receivable - related parties 71,070 71,070
Deferred income taxes 117,764 117,764
Income tax receivable 87,000 87,000
Prepaid expenses and other assets 449,385 675,875
------------- -------------
Total current assets 5,232,858 6,100,812
PROPERTY AND EQUIPMENT, net 7,965,699 7,845,833
OTHER NONCURRENT ASSETS:
Intangible assets, net 14,057,688 14,011,303
Deferred charges and other assets 215,793 203,378
Notes receivable - related parties, net of current portion 3,000 --
Deferred tax asset 473,969 473,969
------------- -------------
Total assets $ 27,949,007 $ 28,635,295
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,602,239 $ 3,877,006
Deferred income taxes -- 36,975
Current maturities of long-term debt 161,936 158,032
Current maturities of capital lease obligations 1,600 1,081
------------- -------------
Total current liabilities 3,765,775 4,073,094
LONG TERM LIABILITIES:
Deferred income taxes 415,868 415,868
Long-term debt, net of current maturities 6,771,157 7,081,174
Capital lease obligations, net of current maturities 339 87
Other long-term obligations 91,257 98,306
------------- -------------
Total liabilities 11,044,396 11,668,529
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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 6,131,814, shares issued and outstanding
at December 31,1999 and March 31, 2000, respectively 16,968,454 16,968,454
Accumulated deficit (63,843) (1,688)
------------- -------------
Total shareholders' equity 16,904,611 16,966,766
------------- -------------
Total liabilities and shareholders' equity $ 27,949,007 $ 28,635,295
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
NET REVENUE $ 7,022,728 $ 7,802,571
DIRECT EXPENSES:
Clinical salaries and benefits 2,597,108 3,099,470
Dental supplies 388,631 498,359
Laboratory fees 668,304 743,595
Occupancy 649,223 791,791
Advertising and marketing 81,837 88,948
Depreciation and amortization 404,256 577,791
General and administrative 635,518 769,904
----------- -----------
5,424,877 6,569,858
----------- -----------
Contribution from dental offices 1,597,851 1,232,713
Corporate expenses:
General and administrative 965,288 892,988
Depreciation and amortization 60,367 81,832
----------- -----------
Operating income 572,196 257,893
Interest expense, net (95,898) (158,763)
----------- -----------
Income before income taxes 476,298 99,130
Income tax expense (177,659) (36,975)
----------- -----------
Net income $ 298,639 $ 62,155
=========== ===========
Net income per share of Common Stock:
Basic $ .05 $ .01
=========== ===========
Diluted $ .05 $ .01
=========== ===========
Weighted average number of shares of
Common Stock and dilutive securities:
Basic 6,451,009 6,131,814
=========== ===========
Diluted 6,523,742 6,138,176
=========== ===========
</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 STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
----------------------- Accumulated Total 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
Net Income -- -- 62,155 62,155
--------- ----------- -------------- ------------------
BALANCES, March 31, 2000 6,131,814 $16,968,454 $ (1,688) $ 16,966,766
========= =========== ============== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 298,639 $ 62,155
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 464,623 659,623
Provision for doubtful accounts (9,532) 1,554
Provision for deferred income taxes -- 36,975
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (753,285) (245,150)
Prepaid expense, income tax receivable and other assets (529,705) (215,620)
Accounts payable and accrued expenses 1,378,287 274,767
Other long-term obligations -- 10,049
----------- -----------
Net cash provided by operating activities 849,027 584,353
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (385,169) (172,793)
Development of new dental offices (439,364) (210,306)
Acquisition of dental offices (680,035) (54,728)
----------- -----------
Net cash used in investing activities (1,504,568) (437,827)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from line of credit 2,180,000 300,000
Repayment of long-term debt (144,079) (48,658)
Purchase and retirement of Common Stock (1,243,680) --
----------- -----------
Net cash provided by financing activities 792,241 251,342
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 136,700 397,868
CASH AND CASH EQUIVALENTS, beginning of period 2,169,687 806,954
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,306,387 $ 1,204,822
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 2000
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 62,800 $ 144,207
============ ============
Cash paid during the period for income taxes $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Acquisition of dental offices $ 35,000 $ --
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities $ 59,596 $ --
Notes payable $ -- $ 54,000
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.
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 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 Annual Report on 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 March 31, 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 ended March
31, 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 March 31,
--------------------------------------------------------------
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 $ 298,639 6,451,009 $.05 $ 62,155 6,131,814 $.01
Effect of dilutive shares of
Common Stock from stock
options and warrants -- 72,733 -- -- 6,362 --
--------- --------- ---- --------- --------- ----
Diluted earning per share
of Common Stock:
Net income available to
shares of Common Stock $ 298,639 6,523,742 $.05 $ 62,155 6,138,176 $.01
========= ========= ==== ========= ========= ====
</TABLE>
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for 1999 and 2000 relates to the effect of
72,733 and 6,362, respectively, of dilutive shares of Common Stock from stock
options and warrants which are included in total shares for the diluted
calculation.
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(3) LINE OF CREDIT
Under the Company's Credit Facility (as amended on March 24, 2000), the Company
may borrow up to $10.0 million for working capital needs. 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
July 1, 2001. At March 31, 2000, the Company had approximately $1.4 million
available and $6.9 million outstanding under the Credit Facility. The Credit
Facility is secured by a lien on the Company's accounts receivable and its
Management Agreements. The Credit Facility prohibits the payment of dividends
and other distributions to shareholders, restricts or prohibits the Company from
incurring indebtedness, incurring liens, disposing of assets, making investments
or making acquisitions, and requires the Company to maintain certain financial
ratios on an ongoing basis. The Company is in compliance with these financial
ratios as of March 31, 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 controlling interest in an existing
Office during March, 2000. The consideration consisted of $54,728 payable in
cash and a $54,000 note payable with a term of 60 months and an interest rate of
8.0%.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In June 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
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137
("SFAS 137") "Accounting for Derivative Instruments and 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 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.
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. SAB 101 must be applied to the financial statements
no later than the second quarter of 2000. The Company does not believe that the
adoption of SAB 101 will have a material affect on the Company's financial
results; however, the provisions of SAB 101 are still being evaluated.
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.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q ("Quarterly Report") of Birner Dental
Management Services, Inc. (the "Company") which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements in this Item 2., "Management's Discussion and Analysis of Financial
Condition and Results of Operations," regarding intent, belief or current
expectations of the Company or its officers with respect to the development or
acquisition of additional dental practices ("Offices") and the successful
integration of such Offices into the Company's network, recruitment of
additional dentists, funding of the Company's expansion, capital expenditures,
payment or nonpayment of dividends and cash outlays for income taxes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
failure to consummate or successfully integrate proposed developments or
acquisitions of 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.
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 have resulted in a major system failure or miscalculations.
During 1999, the Company completed a comprehensive program to assess, remediate
and mitigate the potential impact of problems associated with the Year 2000. To
date in 2000, the Company has not suffered any adverse effects associated with
Year 2000 issues. The Company does not currently expect any significant Year
2000 issues to develop and will continue to monitor its systems to ensure that
they continue to be Year 2000 compliant.
GENERAL
The following discussion relates to factors which have affected the results of
operations and financial condition of the Company for the quarters ended March
31, 2000 and 1999. 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 March 31, 2000 managed 55 Offices
in Colorado, New Mexico and Arizona staffed by 79 general dentists and 13
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 employ or contract
with the dentists and dental hygienists that practice at that Office. In
addition, the
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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 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 and
its evaluation of additional markets. The following table sets forth the
increase in the number of Offices owned and managed by the Company from 1995
through March 31, 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 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 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. Three 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 five months of opening. The Company's
three remaining de novo Offices, which have been open an average of six months,
have not generated positive contribution from dental offices as of the date of
this Quarterly Report.
At March 31, 2000, the Company's total assets of $28.6 million included $14.0
million of identifiable intangible assets related to Management Agreements. At
that date, the Company had total shareholders' equity of $17.0 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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<PAGE> 12
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 with the Company. 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 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
12
<PAGE> 13
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 year-to-year growth in Revenue. For the
three months ended March 31, 2000, Revenue increased to $10.9 million from $9.3
million for the three months ended March 31, 1999, an increase of 17.5%. The
Company opened one de novo Office during the period from January 1, 2000 to
March 31, 2000 which, in the aggregate, accounted for $14,000 of the $1.6
million increase. The remainder of the increase in Revenue of $1.6 million was
attributable to the 54 Offices that existed at the beginning of 2000. Revenue at
48 of these Offices which were in existence during both full periods increased
to $10.0 million in 2000 from $9.0 million in 1999, an increase of $931,000, or
10.3%. Revenue at the remaining six Offices, which were acquired or opened
between January 1, 1999 and December 31, 1999, was approximately $679,000.
13
<PAGE> 14
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.
It should be noted that the percentages presented below are based upon the
Company's net revenues. Comparability to certain published industry percentages
and statistics may not be accurate or appropriate due to the fact that certain
of these industry percentages and statistics may be based on gross revenue
rather than net revenue.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 2000
--------- ---------
<S> <C> <C>
Net revenue 100.0% 100.0%
Direct expenses:
Clinical salaries and benefits 37.0% 39.7%
Dental supplies 5.5% 6.4%
Laboratory fees 9.5% 9.5%
Occupancy 9.2% 10.2%
Advertising and marketing 1.2% 1.1%
Depreciation and amortization 5.8% 7.4%
General and administrative 9.0% 9.9%
--------- ---------
77.2% 84.2%
--------- ---------
Contribution from dental offices 22.8% 15.8%
Corporate expenses:
General and administrative 13.7% 11.4%
Depreciation and amortization 0.9% 1.1%
--------- ---------
Operating income 8.2% 3.3%
Interest expense, net (1.4)% (2.0)%
--------- ---------
Income before income taxes 6.8% 1.3%
Income tax expense (2.5)% (0.5)%
--------- ---------
Net income 4.3% 0.8%
========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999:
Net revenue. Net revenue increased to $7.8 million for the three months ended
March 31, 2000 from $7.0 million for the three months ended March 31, 1999, an
increase of approximately $780,000, or 11.1%. The Company opened one de novo
Office during the period from January 1, 2000 to March 31, 2000, which
contributed $10,000 of the increase. Net revenue at the 48 Offices which the
Company managed and which were in existence for both full first quarters of 2000
and 1999 increased 5.0% or $343,000 to $7.2 million in the first quarter of 2000
from $6.9 million in the first quarter of 1999. The remainder of the increase in
net revenue of $426,000 was attributable to one practice acquisition and five de
novo Office openings which occurred between January 1, 1999 and December 31,
1999.
Clinical salaries and benefits. Clinical salaries and benefits increased to $3.1
million for the three months ended March 31, 2000 from $2.6 million for the
three months ended March 31, 1999, an increase of $502,000 or 19.3%. 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 39.7% for the three months ended
March 31, 2000 from 37.0% for the three months ended March 31, 1999. This
increase was due primarily to the addition of dental practices in 1999 and 2000
Dental supplies. Dental supplies increased to $498,000 for the three months
ended March 31, 2000 from $389,000 for the three months ended March 31, 1999, an
increase of $110,000 or 28.2%. This increase was primarily due to the
incremental expenditures required to operate 55 dental practices at March 31,
2000 compared to 51 dental practices at
14
<PAGE> 15
March 31, 1999. As a percentage of net revenue, dental supplies increased to
6.4% during the three months ended March 31, 2000 from 5.5% during the three
months ended March 31, 1999.
Laboratory fees. Laboratory fees increased to $744,000 during the three months
ended March 31, 2000 from $668,000 during the three months ended March 31, 1999,
an increase of $75,000 or 11.3%. This increase was primarily due to the
incremental expenditures to operate 55 dental practices at March 31, 2000
compared to 51 dental practices at March 31, 1999. As a percentage of net
revenue, laboratory fees stayed constant at 9.5% during the three months ended
March 31, 2000 and March 31, 1999.
Occupancy. Occupancy increased to $792,000 during the three months ended March
31, 2000 from $649,000 during the three months ended March 31, 1999, an increase
of $143,000 or 22.0%. This increase was primarily due to the incremental
expenditures required to operate 55 dental practices at March 31, 2000 compared
to 51 dental practices at March 31, 1999. As a percentage of net revenue,
occupancy expense increased to 10.2% during the three months ended March 31,
2000 from 9.2% during the three months ended March 31, 1999. 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 $89,000 for
the three months ended March 31, 2000 from $82,000 for the three months ended
March 31, 1999, an increase of $7,000 or 8.7%. As a percentage of net revenue,
advertising and marketing decreased to 1.1% during the three months ended March
31, 2000 from 1.2% during the three months ended March 31, 1999.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased to
$578,000 for the three months ended March 31, 2000 from $404,000 for the three
months ended March 31, 1999, an increase of $174,000 or 42.9%. This increase is
related to the increase in the Company's depreciable and amortizable asset base.
As a percentage of net revenue, depreciation and amortization increased to 7.4%
for the three months ended March 31, 2000 from 5.8% for the three months ended
March 31, 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 recent Office expansions.
General and administrative. General and administrative, which is attributable to
the Offices, increased to $770,000 during the three months ended March 31, 2000
from $636,000 during the three months ended March 31, 1999, an increase of
approximately $134,000 or 21.1%. This increase was primarily due to the
incremental expenditures required to operate 55 dental practices at March 31,
2000 compared to 51 dental practices at March 31, 1999. As a percentage of net
revenue, general and administrative expenses increased to 9.9% during the three
months ended March 31, 2000 from 9.0% during the three months ended March 31,
1999.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased to $1.2 million for the three months ended March 31,
2000 from $1.6 million for the three months ended March 31, 1999, a decrease of
$365,000 or 22.9%. As a percentage of net revenue, contribution from dental
offices decreased to 15.8% during the three months ended March 31, 2000 from
22.8% during the three months ended March 31, 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 decreased to $893,000 during the three months ended March 31,
2000 from $965,000 during the three months ended March 31, 1999, a decrease of
$72,000 or 7.5%. This decrease was due to reductions in certain costs at the
corporate facility. As a percentage of net revenue, corporate expense - general
and administrative decreased to 11.4% during the three months ended March 31,
2000 from 13.7% during the three months ended March 31, 1999.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased to $82,000 for the three months ended
March 31, 2000 from $60,000 for the three months ended March 31, 1999, an
increase of $22,000 or 35.6%. 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 1.1% during the three
months ended March 31, 2000 from 0.9% during the three months ended March 31,
1999.
15
<PAGE> 16
Operating income. As a result of the above, operating income decreased to
$258,000 during the three months ended March 31, 2000 from $572,000 during the
three months ended March 31, 1999, a decrease of $314,000 or 54.9%. As a
percentage of net revenue, operating income decreased to 3.3% during the three
months ended March 31, 2000 from 8.2% during the three months ended March 31,
1999. The decrease as a percentage of net revenue is a result of the factors
discussed above.
Interest expense, net. The Company had net interest expense of $159,000 for the
three months ended March 31, 2000 compared to $96,000 for the three months ended
March 31, 1999. This increase is attributable to an increase in the average debt
outstanding during the 2000 period.
Net income. As a result of the above, net income decreased to $62,000 for the
three months ended March 31, 2000 from net income of $299,000 for the three
months ended March 31, 1999, a decrease of $236,000. Net income for the three
months ended March 31, 2000 was net of income taxes of $37,000. Net income for
the three months ended March 31, 1999 was net of income taxes of $178,000. As a
percentage of net revenue, net income decreased to 0.8% for the three months
ended March 31, 2000 from 4.3% for the three months ended March 31, 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 the initial public offering of its Common Stock.
Net cash provided by operating activities was approximately $584,000 and
$849,000 for the three months ended March 31, 2000 and 1999, respectively.
During the 2000 period, after adding back non-cash items, the Company's cash
used in operating activities consisted primarily of an increase in accounts
receivable of approximately $245,000 and an increase in prepaid expenses and
other assets of approximately $216,000 partially offset by an increase in
accounts payable and accrued expenses of approximately $275,000. Net cash
provided by operating activities during the 1999 period, after adding back
non-cash items, consisted primarily of an increase in accounts payable and
accrued expenses of approximately $1.4 million partially offset by an increase
in accounts receivable of approximately $753,000 and an increase in prepaid
expenses and other assets of approximately $530,000. During the three months
ended March 31, 2000, net income and non-cash items contributed approximately
$760,000 to net cash provided by operating activities for the period compared to
approximately $754,000 for the same three months in 1999.
Net cash used in investing activities was approximately $438,000 and $1.5
million for the three months ended March 31, 2000 and 1999, respectively. For
the three months ended March 31, 2000, approximately $55,000 was utilized for
acquisitions and approximately $383,000 was invested in the purchase of
additional property and equipment including approximately $210,000 for the de
novo offices. During the three month period ended March 31, 1999, approximately
$680,000 was utilized for acquisitions and approximately $825,000 was invested
in the purchase of additional property and equipment, including approximately
$440,000 for the de novo Offices.
Net cash provided by financing activities was approximately $251,000 and
$792,000 for the three months ended March 31, 2000 and 1999, respectively.
During the three months ended March 31, 2000, net cash provided by financing
activities was comprised of net borrowings under the Company's line of credit of
$300,000 which was partially offset by approximately $49,000 used for the
repayment of long-term debt. During the three months ended March 31, 1999, net
cash provided by financing activities was comprised of net borrowings under the
Company's line of credit of approximately $2.2 million which was partially
offset by the purchase and retirement of Common Stock of approximately $1.2
million and approximately $144,000 for the repayment of long-term debt.
Under the Company's Credit Facility (as amended on March 24, 2000), the Company
may borrow up to $10.0 million for working capital needs. 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
July 1, 2001. At March 31, 2000, the Company had approximately $1.4 million
available and $6.9 million outstanding under the Credit Facility. The Credit
Facility is
16
<PAGE> 17
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, making investments or making
acquisitions, and requires the Company to maintain certain financial ratios on
an ongoing basis.
At March 31, 2000, the Company had outstanding indebtedness of approximately
$364,000 represented by notes issued in connection with various practice
acquisitions, all of which bear interest at rates varying from 7.0% to 14.0%.
The Company's material commitments for capital expenditures total approximately
$137,000 for one de novo Office development. 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 deficit as of March 31, 2000 was approximately $(1,700), and the
Company had working capital on that date of approximately $2.0 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 $1.78 to $3.75 per share. At March 31,
2000, approximately 5,000 shares remain available to be purchased under this
Board of Directors approved program.
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 March 31, 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 March 31, 2000,
approximately $6.5 million was outstanding under the LIBOR option with an
interest rate of 8.25% (LIBOR plus 2.75%) and approximately $375,000 was
outstanding with an interest rate of 8.5% (prime plus 1.50%). 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 $8,600.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
18
<PAGE> 19
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: May 12, 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: May 12, 2000 By: /s/ Dennis N. Genty
----------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and Accounting
Officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BIRNER
DENTAL MANAGEMENT SERVICES, INC. FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,204,822
<SECURITIES> 0
<RECEIVABLES> 4,252,304
<ALLOWANCES> 308,023
<INVENTORY> 0
<CURRENT-ASSETS> 6,100,812
<PP&E> 11,412,714
<DEPRECIATION> 3,566,881
<TOTAL-ASSETS> 28,635,295
<CURRENT-LIABILITIES> 4,073,095
<BONDS> 0
0
0
<COMMON> 16,968,454
<OTHER-SE> (1,688)
<TOTAL-LIABILITY-AND-EQUITY> 28,635,295
<SALES> 10,886,020
<TOTAL-REVENUES> 10,886,020
<CGS> 3,083,449
<TOTAL-COSTS> 3,083,449
<OTHER-EXPENSES> 7,544,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,763
<INCOME-PRETAX> 99,130
<INCOME-TAX> 36,975
<INCOME-CONTINUING> 62,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,155
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
