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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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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.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
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(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 691-0680
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value of the Registrant's voting stock held as of March 22,
2000 by non-affiliates of the Registrant was $5,359,817. This calculation
assumes that certain parties may be affiliates of the Registrant and that,
therefore, 3,573,211 shares of voting stock are held by non-affiliates. As of
March 22, 2000, the Registrant had 6,131,814 shares of its Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report (Items 10, 11, 12 and 13) is
incorporated by reference from the Registrant's Proxy Statement to be filed
pursuant to Regulation 14A with respect to the annual meeting of shareholders
scheduled to be held on or about June 8, 2000.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K ("Annual 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 Items 1. and 2., "Business and Properties," Item 5.,
"Market for the Registrant's Common Equity and Related Stockholder Matters" and
Item 7., "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 and the successful integration of such practices
into the Company's network, recruitment of additional dentists, funding of the
Company's expansion, capital expenditures, payment or nonpayment of dividends
and cash outlays for income taxes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
failure to consummate or successfully integrate proposed developments or
acquisitions of dental practices, the ability of the Company to manage
effectively an increasing number of dental practices, the general economy of the
United States and the specific markets in which the Company's dental practices
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 Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors," 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.
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Birner Dental Management Services, Inc.
Form 10-K
Table of Contents
Part Item(s) Page
I. 1 and 2. Business and Properties 4
General 4
Dental Services Industry 4
The Company Strategy 5
Operations 6
The Company Dentist Philosophy 10
Expansion Program 11
Affiliation Model 12
Competition 13
Government Regulation 14
Insurance 16
Trademark 16
Facilities and Employees 16
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
II. 5. Market for Registrant's Common Equity and Related Stockholder Matters 18
6. Selected Financial Data 20
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 21
7A. Quantitative and Qualitative Disclosures About Market Risk 35
8. Financial Statements and Supplementary Data 36
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 59
III. 10. Directors and Executive Officers of the Registrant 59
11. Executive Compensation 59
12. Security Ownership of Certain Beneficial Owners and Management 59
13. Certain Relationships and Related Transactions 59
IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 60
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PART I
ITEMS 1 AND 2.BUSINESS AND PROPERTIES.
GENERAL
Birner Dental Management Services, Inc. (the "Company") acquires, develops, and
manages geographically dense dental practice networks in select markets,
currently including Colorado, New Mexico and Arizona. With its 42 dental
practices ("Offices") in Colorado and eight Offices in New Mexico, the Company
believes, based on industry knowledge and contacts, that it is the largest
provider of dental management services in Colorado and New Mexico. The Company
and its dental practice management model, which was developed by the Company's
President, Mark Birner, D.D.S., provide a solution to the needs of dentists,
patients, and third-party payors by allowing the Company's affiliated dentists
to provide high-quality, efficient dental care in patient-friendly, family
practice settings. Dentists practicing at the various locations provide
comprehensive general dentistry services, and the Company increasingly offers
specialty dental services through affiliated specialists. The Company currently
manages 55 Offices, of which 38 were acquired and 17 were developed internally
("de novo Offices").
DENTAL SERVICES INDUSTRY
According to the U.S. Health Care Financing Administration ("HCFA"), dental
expenditures in the U.S. increased from $31.6 billion in 1990 to $53.8 billion
in 1998. HCFA also projects that dental expenditures will reach approximately
$93.1 billion by 2008, representing an increase of approximately 73.1% over 1998
dental expenditures. The Company believes this growth is driven by (i) an
increase in the number of people covered by third-party payment arrangements and
the resulting increase in their utilization of dental services, (ii) an
increasing awareness of the benefits of dental treatments, (iii) the retention
of teeth into later stages of life, (iv) the general aging of the population, as
older patients require more extensive dental services, and (v) a growing
awareness of and demand for preventative and cosmetic services.
The dental services industry is undergoing rapid change throughout the United
States. Although total expenditures for dental care services in the United
States have grown, the industry is highly fragmented. According to the American
Dental Association, in 1996 there were more than 152,000 active dentists in the
United States, of which approximately 92% practiced either alone or with one
other dentist. Dental services typically are offered by local providers,
primarily solo practitioners or small groups of general dentists or specialists,
practicing at a single location.
Traditionally, most dental patients have paid for dental services themselves
rather than through third-party payment arrangements such as indemnity
insurance, preferred provider plans or managed dental plans. More recently,
factors such as increased consumer demand for dental services and the desire of
employers to provide enhanced benefits for their employees have resulted in an
increase in third-party payment arrangements for dental services. These
third-party payment arrangements include indemnity insurance, preferred provider
plans and capitated managed dental care plans. Current market trends, including
the rise of third-party payment arrangements, have contributed to the increased
consolidation of practices in the dental services industry and to the formation
of dental practice management companies. According to the National Association
of Dental Plans, in 1995 approximately 147 million persons, or approximately 55%
of all persons in the U.S., were covered by some form of third-party dental care
plan. The remaining 120 million, or 45% of all persons in the U.S., were not
covered by any third-party plan. The Company believes that the percentage of
people covered by third-party payment arrangements will continue to increase due
in part to the popularity of such arrangements.
The Company believes that the fragmented dental services industry will
increasingly consolidate due to (i) the shift to third-party reimbursement and
the advantages enjoyed by larger group practices in negotiating with third-party
payors, (ii) the economies of scale for cost-effective management of patient
care, (iii) the desire to capture revenues from higher-margin specialty
procedures, which would otherwise be referred to non-affiliated specialists,
(iv) the need for access to the capital resources necessary to acquire and
maintain state-of-the-art dental equipment, clinical facilities and management
information systems, and (v) the growing importance of sophisticated marketing
programs directed toward patients and third-party payors.
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THE COMPANY STRATEGY
The Company's objective is to be the leading dental practice management company
in the markets it serves. The key elements of the Company's strategy include:
Develop and Operate Geographically Dense Dental Practice Networks. Management
believes that clustering its Offices allows the Company to implement other key
elements of its strategy, which maximize revenue and operating performance. With
42 Offices in the Colorado market, eight Offices in the New Mexico market and
five Offices in the Arizona market, the Company has built and is building
geographically dense dental practice networks. The Company only intends to enter
markets which will support such networks.
Enhance Operating Performance. The Company enhances the operating performance of
its Offices through the implementation and application of its dental practice
management model. Key components of this model include providing a designated
managing dentist with economic incentives to improve Office operating
performance, a proprietary patient scheduling system, a training program for
non-dental employees, and a system for optimizing revenue through managing payor
mix. The Company believes its model provides an ideal setting for dentists to
develop long-term relationships with patients.
Capture Specialty Service Revenue. By operating geographically dense networks,
the Company can effectively utilize affiliated specialists. As the Company
achieves density in a market, it offers a complete range of specialty services
to its patients. This enables the Company to capture revenue from specialty
services that would otherwise be lost to non-affiliated providers. Specialty
services typically are provided on a fee-for-service basis and generally yield a
higher margin than general dentistry services.
Develop Brand Identity. The Company's marketing programs have been designed to
reinforce the association of the PERFECT TEETH(R) name and logo with
high-quality, convenient dental care. The Company's marketing efforts are
intended to increase patient flow and generally are targeted at fee-for-service
patients. Where appropriate, the Company operates its offices under the PERFECT
TEETH(R) name with the PERFECT TEETH(R) logo prominently displayed. The
Company's geographically dense networks allow it to spread the cost of its
marketing programs, particularly television and radio advertising, across a
larger base of patient revenue.
Capitalize on Flexible Growth Strategy. Once the Company has identified an
attractive market, it can enter that market and subsequently increase the
density of its dental practice network through multiple methods. The Company has
demonstrated its ability to acquire large group practices, to acquire solo and
small group practices, and to develop de novo Offices. The Company believes its
experience in acquiring solo and small group practices will become increasingly
important, as the majority of all dentists practice either alone or with one
other dentist. The Company believes its experience with multiple expansion
methods, including the development of de novo Offices, allows it to capitalize
on the opportunities presented by the current marketplace and represents a
significant competitive advantage.
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OPERATIONS
LOCATION OF OFFICES
[MAP INSERTED HERE]
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EXISTING OFFICES
As of the date of this annual report, the Company currently manages a total of
55 Offices in Colorado, New Mexico, and Arizona. The following table identifies
each Office, the location of each Office, the date each Office was acquired or
de novo developed, and any specialty dental services offered at that Office in
addition to comprehensive general dental services:
DATE ACQUIRED/ SPECIALTY
OFFICE NAME OFFICE ADDRESS DEVELOPED* SERVICES
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COLORADO
BOULDER
Perfect Teeth/Boulder 4155 Darley, #F September 1997
Perfect Teeth/Folsom 1840 Folsom, Suite 302 April 1998 1,2
CASTLE ROCK
Perfect Teeth/Castle Rock 390 South Wilcox, Unit D October 1995 1
COLORADO SPRINGS
Perfect Teeth/Austin Bluffs 4114 Austin Bluffs Parkway, #1604 January 1996*
Perfect Teeth/Cheyenne Meadows 827 Cheyenne Meadows Road June 1998*
Perfect Teeth/Garden of the Gods 4329 Centennial Boulevard July 1996*
Perfect Teeth/South 8th Street 1050 South Eighth Street August 1998 1,2,3
Perfect Teeth/Uintah Gardens 1768 West Uintah Street May 1996* 1
Perfect Teeth/Union & Academy 5140 North Union September 1997
Perfect Teeth/Woodman Valley 6914 North Academy Boulevard, Unit 1B April 1998*
Perfect Teeth/Powers 5929 Constitution Avenue March 1999*
DENVER
Perfect Teeth/64th and Ward 12650 West 64th Avenue, Unit J January 1996*
Perfect Teeth/88th and Wadsworth 8749 Wadsworth Boulevard September 1997 1,2,3,4
Perfect Teeth/Arapahoe 7600 East Arapahoe Road, #311 October 1995 1
Perfect Teeth/Bowmar 5151 South Federal Boulevard, #G-2 October 1995 1
Perfect Teeth/Buckley and Mississippi 4321 South Buckley Road September 1997 1
Perfect Teeth/Central Denver 1633 Fillmore Street, Suite 200 May 1996 1
Perfect Teeth/East 104th Avenue 2200 East 104th Avenue, #112 May 1996 1
Perfect Teeth/East Cornell 12200 East Cornell Avenue, # E August 1996
Perfect Teeth/East Iliff 16723 East Iliff Avenue May 1997
Perfect Teeth/Glendale Dental 4521 East Virginia Avenue February 1999
Perfect Teeth/Golden 17211 South Golden Road, #100 June 28, 1999* 1
Perfect Teeth/Green Mountain 13035 West Alameda Parkway December 1998*
Perfect Teeth/Highlands Ranch 9227 Lincoln Avenue, Suite 100 July 5, 1999* 1
Perfect Teeth/Ken Caryl 7660 South Pierce September 1997 1
Perfect Teeth/Leetsdale 7150 Leetsdale Drive, #110A March 1996*
Perfect Teeth/Mississippi 11175 East Mississippi Avenue, #110 September 1998
Perfect Teeth/Monaco and Evans 2121 South Oneida, Suite 321 November 1995 1,2,3,4
Perfect Teeth/North Sheridan 11550 North Sheridan, #101 May 1996 1
Perfect Teeth/Parker 11005 South Parker Road December 1998* 1
Perfect Teeth/Sheridan and 64th Avenue 5169 West 64th Avenue May 1996
Perfect Teeth/South Broadway 6767 South Broadway, Unit 10 April 1998
Perfect Teeth/South Holly Street 8211 South Holly Street September 1997
Perfect Teeth/Speer 700 East Speer Boulevard February 1997
Perfect Teeth/West 38th Avenue 7760 West 38th Avenue, #200 May 1996 1
Perfect Teeth/West 120th Avenue 6650 West 120th Avenue, A-6 September 1997
Perfect Teeth/West Jewell 8064 West Jewell April 1998
Perfect Teeth/Yale 7515 West Yale Avenue, Suite A April 1997 1,2,3
FORT COLLINS
Perfect Teeth/South Fort Collins 1355 Riverside Avenue, Unit D May 1996 3
GREELEY
Perfect Teeth/Greeley 902 14th Street September 1997
LONGMONT
Perfect Teeth/Longmont 641 Ken Pratt Boulevard September 1997
LOVELAND
Perfect Teeth/ Loveland 3400 West Eisenhower Boulevard September 1996
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DATE ACQUIRED/ SPECIALTY
OFFICE NAME OFFICE ADDRESS DEVELOPED* SERVICES
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NEW MEXICO
ALBUQUERQUE
Perfect Teeth/Alice 5909 Alice NE February 1998
Perfect Teeth/Candelaria 6101 Candelaria NE April 1997
Perfect Teeth/Cubero Drive 5900 Cubero Drive NE, Suite E September 1998
Perfect Teeth/Four Hills 13140-E Central Avenue, SE August 1997* 3
Perfect Teeth/Fourth Street 5721 Fourth Street NW August 1997
Perfect Teeth/Wyoming and Candelaria 8501 Candelaria NE, Suite D3 August 1997
SANTA FE
Perfect Teeth/Plaza Del Sol 720 St. Michael Drive, Suite O May 1998* 3
RIO RANCHO
Perfect Teeth/Rio Rancho 4500 Arrowhead Ridge Drive July 5, 1999* 3
ARIZONA (5)
SCOTTSDALE
Perfect Teeth/Bell Road and 64th Street 6345 East Bell Road, Suite 1 July 1998 1,3
Perfect Teeth/Shea and 90th Street 9393 North 90th Street, Suite 207 September 1998
PHOENIX
Perfect Teeth/Thomas and 15th Avenue 3614 North 15th Avenue, Suite B September 1998 1,3
TEMPE
Perfect Teeth/Elliot and McClintock 7650 S. McClintock Dr., #110 June 7, 1999*
GOODYEAR
Perfect Teeth/Palm Valley 14175 West Indian School Bypass Road, #B6 March 20, 2000*
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(1) Orthodontics
(2) Periodontics
(3) Oral Surgery
(4) Pedodontics
(5) All of the Arizona offices are located in Phoenix or the surrounding
suburbs.
The Offices typically are located either in shopping centers, professional
office buildings or stand-alone buildings. The majority of the de novo Offices
are located in supermarket-anchored shopping centers. The Offices have from four
to 16 treatment rooms and range in size from 1,200 square feet to 7,400 square
feet.
PATIENT SERVICES
The Company seeks to develop long-term relationships with patients. A
comprehensive exam and evaluation is conducted during a patient's first visit.
Through patient education, the patients develop an awareness of the benefits of
a comprehensive, long-term dental care plan. The Company believes that it will
retain these patients longer and that these patients will have a higher
utilization of the Company's dental services including specialty, elective, and
cosmetic services.
Dentists practicing at the Offices provide comprehensive general dentistry
services, including crowns and bridges, fillings (including state-of-the-art
gold, porcelain and composite inlays/onlays), and aesthetic procedures such as
porcelain veneers and bleaching. In addition, hygienists provide cleanings and
periodontal services including root planing and scaling. If appropriate, the
patient is offered specialty dental services, such as orthodontics, oral surgery
and periodontics, which are available at certain of the Company's Offices, as
indicated on the table above. These services are provided by affiliated
specialists who rotate through several offices in certain of the Company's
existing markets. The addition of specialty services is a key component of the
Company's strategy, as it enables the Company to capture revenue from typically
higher margin services that would otherwise be referred to non-affiliated
providers. In addition, by offering a broad range of dental services within a
single practice, the Company is able to distinguish itself from its competitors
and realize operating efficiencies and economies of scale through higher
utilization of professionals and facilities.
DENTAL PRACTICE MANAGEMENT MODEL
The Company has developed a dental practice management model designed to achieve
its goal of providing personalized, high-quality dental care in a patient
friendly setting similar to that found in a traditional private practice. The
Company believes that its model differentiates it from other dental practice
management companies and provides it with significant competitive advantages in
attracting and retaining dental care professionals, negotiating with third party
payors, and attracting and retaining patients. The Company's dental practice
management model consists of the following components:
Recruiting of Dentists. The Company seeks dentists with excellent skills and
experience, who are sensitive to patient needs, interested in establishing
long-term patient relationships and are motivated by financial incentives to
enhance
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Office operating performance. The Company believes that practicing in its
network of Offices offers both recently graduated dentists and more experienced
dentists advantages over a solo or smaller group practice, including relief from
the burden of administrative responsibilities and the resulting ability to focus
almost exclusively on practicing dentistry. Advantages to dentists affiliated
with the Company also include a compensation structure that rewards
productivity, employee benefits such as health insurance, a 401(k) plan,
continuing education, payment of professional membership fees and malpractice
insurance, and, for affiliated specialists, the Company believes this
affiliation offers a steadier stream of referrals. The Company's effort to
recruit managing dentists is primarily focused on dentists with three or more
years of practice experience. The Company typically recruits associate dentists
graduating from residency programs. It has been the Company's experience, that
many dentists in the early stages of their careers have incurred substantial
student loans. As a result, they face significant financial constraints in
starting their own practices or buying into existing practices, especially in
view of the capital-intensive nature of modern dentistry.
The Company advertises for the dentists it seeks in national and regional dental
journals, local market newspapers, and directly at dental schools with strong
residency programs. In addition, the Company has found that its existing
affiliated dentists provide a good referral source for recruiting future
dentists.
Training of Non-Dental Employees. The Company has developed a formalized
training program for non-dental employees, which is conducted by the Company's
professional training staff. This program includes training in patient
interaction, scheduling, use of the computer system, office procedures and
protocol, and third-party payment arrangements. Employment with the Company
begins with five days of formal training and, on an ongoing basis, the Company
encourages these employees to attend continuing education seminars as a
supplement to the Company's formalized training program. In addition, Company
field representatives meet weekly with the Company's administrative staff to
review pertinent and timely topics and generate ideas that can be shared with
all Offices. Management believes that its training program and the on-going
meetings with employees have contributed to an improvement in the operations at
its Offices.
Proprietary Patient Scheduling. The Company has developed a proprietary patient
scheduling system, which was designed by its President, Mark Birner, D.D.S., to
maximize Office and personnel utilization and profitability while providing
timely, high-quality care to the patients. The Company's scheduling system is
designed to control the revenue mix by balancing fee-for-service and capitated
managed dental care patients.
Staffing Model. The Company's staffing model attempts to maximize Office
profitability by adjusting personnel according to an Office's revenue level.
Staffing at mature Offices can vary based on the number of treatment rooms, but
generally includes one to four dentists, two to six dental assistants, one to
three hygienists, one to two hygiene assistants and two to four front office
personnel. Staffing at de novo Offices typically consists initially of one
dentist, one dental assistant and one front office person. As the patient base
builds at an Office, additional staff is added to accommodate the growth as
provided in the staffing model developed by the Company. The Company currently
has a staff of four field representatives in Colorado, one field representative
in New Mexico and one field representative in Arizona. These field
representatives, who are each responsible for up to 11 Offices, oversee
operations, development of non-dental employees and work to implement the
Company's dental practice management model to maximize revenues and
profitability.
Management Information Systems. All of the Offices have the same management
information system, which allows the Company to receive uniform data that can be
analyzed easily in order to measure and improve Office operating performance. As
part of its acquisition integration process, the Company converts the acquired
Offices to its management information system as soon as practicable. The
Company's current system enables it to maintain on-line contact with each of its
Offices and allows the Company to monitor the Offices by obtaining real-time
data relating to patient and insurance information, treatment plans, scheduling,
revenues and collections. The Company provides each Office with monthly
operating and financial data, which is analyzed and used to improve Office
performance.
Advertising and Marketing. The Company seeks to increase patient volume at its
Offices through television, radio, print advertising and other marketing
techniques. The Company's advertising efforts are primarily aimed at increasing
its fee-for-service business and emphasize the high-quality care provided as
well as the timely individualized attention received from the Company's
affiliated dentists.
Quality Assurance. The Company has designed and implemented a quality assurance
program for dental personnel, including a background check. Quarterly site
visits to the Offices and monthly dentist meetings help reinforce elements of
the Company's quality assurance program. Each affiliated dentist is a graduate
of an accredited dental program, and state licensing authorities require
dentists to undergo annual training. The dentists and hygienists practicing at
the Offices obtain a portion of their required continuing education through the
Company's internal training programs.
Purchasing/Vendor Relationships. The Company has negotiated arrangements with a
number of its more significant vendors, including dental laboratory and supply
providers to reduce per unit costs. By aggregating supply purchasing
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and laboratory usage, the Company believes that it has received favorable
pricing compared to solo or smaller group practices. This system of centralized
buying and distribution on an as-needed basis limits storage of unused inventory
and supplies at the Offices.
PAYOR MIX
The Company's payors include indemnity insurers, preferred provider plans,
managed dental care plans, and uninsured patients. The Company seeks to optimize
the revenue mix at each Office between fee-for-service business and capitated
managed care plans, taking into account the local dental market. While
fee-for-service business generally is more profitable than capitated managed
dental care business, capitated managed dental care business serves to increase
facility utilization and dentist productivity. Consequently, the Company seeks
to supplement its fee-for-service business with revenue derived from contracts
with capitated managed dental care plans. The Company negotiates the managed
care contracts on behalf of the professional corporations that operate the
Offices (the "P.C.s"), although the P.C.s enter into the contracts with the
various managed care plans. Managed care relationships also provide increased
co-payment revenue, referrals of additional fee-for-service patients and
opportunities for dentists practicing at the Offices to educate patients about
the benefits of elective dental procedures that may not be covered by the
patients' capitated managed dental care plans.
Although only approximately 9% of individuals in the United States were enrolled
in managed dental care plans in 1995, the Company believes that capitated
managed dental care will play an increasingly important role in the provision of
dental services. In 1997, managed dental care plans, including HMO's and PPO's,
represented 38.3% of the dental benefits market. The Company believes that its
experience with capitated managed dental care contracts positions the Company
well for an environment with increased managed care penetration.
Capitated managed dental care plans typically pay participating dental group
practices a fixed monthly amount for each plan member covered for a specified
schedule of services regardless of the quantity or cost of such services. This
arrangement shifts the risk and reward of utilization and efficiency to the
dental group practice that provides the dental services. Because the Company
assumes responsibility under its Management Agreements with the P.C.s for all
aspects of the operation of the dental practices (other than the provision of
dental care) and thus bears all costs of the P.C.s associated with operating 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,
members of capitated managed dental care plans may pay the P.C.s additional
amounts as supplemental payments for more complex procedures. The relative size
of capitation payments and co-payments varies in accordance with the level of
benefits provided and plan design.
During the years ended December 31, 1999, 1998, and 1997 the following companies
were responsible for the corresponding percentages of the Company's total dental
group practice revenue: Prudential Dental Maintenance Organization, Inc. was
responsible for 8.9%, 9.3% and 11.5%, respectively, PacifiCare of Colorado, Inc.
was responsible for 6.7%, 10.6% and 13.4%, respectively, and CIGNA Dental Health
was responsible for 7.8%, 9.3% and 11.5%, respectively.
THE COMPANY DENTIST PHILOSOPHY
The Company seeks to develop long-term relationships with its dentists by
building the practice at each of its Offices around a managing dentist. The
Company's dental practice management model provides managing dentists the
autonomy and independence of a private family practice setting without the
capital commitment and the administrative burdens such as billing/collections,
payroll, accounting, and marketing. This gives the managing dentists the ability
to focus primarily on providing high-quality dental care to their patients. The
managing dentist retains the responsibilities of team building and developing
long-term relationships with patients and staff by building trust and providing
a friendly, relaxed atmosphere in his or her Office. The managing dentist
exercises his or her own clinical judgment in matters of patient care. In
addition, managing dentists are given an economic incentive to improve the
operating performance of their Offices, in the form of a bonus based upon the
operating performance of the Office. In addition, managing dentist's may be
granted stock options in the Company that ordinarily vest over a three-to-five
year period.
When the revenues of an Office justify expansion, associate dentists can be
added to the team. Associate dentists are typically recent graduates from
residency programs, and usually spend up to two years working with a managing
dentist. Depending on performance and abilities, an associate dentist may be
given the opportunity to become a managing dentist.
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EXPANSION PROGRAM
OVERVIEW
Since its formation in May 1995, the Company has acquired 42 practices,
including four practices that have been consolidated into existing Offices. Of
those acquired practices (including the four practices consolidated with
existing Offices), 34 were located in Colorado, five were located in New Mexico,
and three were located in Arizona. Although the Company has acquired and
integrated several group practices, many of the Company's acquisitions have been
of solo dental practices. The Company also has developed 17 de novo Offices (as
of March 29, 2000). As a result of the application of multiple expansion
methods, the Company is not dependent on any particular expansion strategy and
can capitalize on the opportunities presented by the current marketplace.
The following table sets forth the increase in the number of Offices managed by
the Company from 1995 through March 29, 2000, including the number of de novo
Offices and acquired Offices in each such year:
1995(1) 1996 1997 1998 1999 2000(2)
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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
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Offices at end of the period 4 18 34 49 54 55
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(1) From October 1, 1995 through December 31, 1995.
(2) From January 1, 2000 through March 29, 2000.
ACQUISITION STRATEGY
Prior to entering a new market, the Company considers the population,
demographics, market potential, competitive and regulatory environment, supply
of available dentists, needs of managed care plans or other large payors and
general economic conditions within the market. Once the Company has established
a presence in a new market, the Company seeks to increase its density in that
market by making further acquisitions and by developing de novo Offices. The
Company identifies potential acquisition candidates through a variety of means,
including selected inquiries of dentists by the Company, direct inquiries by
dentists, referrals from other dentists, participation in professional
conferences and referrals from practice brokers. The Company seeks to identify
and acquire dental practices for which the Company believes application of its
dental practice management model will improve revenue and operating performance.
RECENT ACQUISITIONS
COLORADO ACQUISITIONS. During 1999, the Company acquired one practice in the
Denver market. In addition to this acquisition, the Company opened three de novo
Offices in 1999, one in Colorado Springs and two in the Denver metropolitan area
which included Highlands Ranch and Golden. The Company acquired controlling
interest in an existing Office during March, 2000. The Company's intentions are
to open one de novo office in the Colorado market during 2000.
NEW MEXICO ACQUISITIONS. During 1999 the Company opened one de novo Office in
Rio Rancho, a suburb of Albuquerque.
ARIZONA ACQUISITIONS. During 1999 the Company opened one de novo Office in
Tempe, a suburb of Phoenix. In March, 2000, the Company opened one de novo
Office in Goodyear, also a suburb of Phoenix. The Company's intentions are to
open two additional de novo Offices in the Arizona market during 2000.
DE NOVO OFFICE DEVELOPMENTS
One method by which the Company enters new markets and expands its operations in
existing markets is through the development of de novo Offices. Six of the
Company's eight Colorado Springs Offices, six of the Company's 34 Denver metro
area, two of the Company's seven Albuquerque Offices, the Office in Santa Fe,
the Office in Tempe and the Office in Goodyear were de novo developments. The
Company generally locates de novo Offices in areas where there is significant
population growth and in supermarket-anchored shopping centers. The Company
seeks prime retail locations for its de novo Offices, generally located in
high-growth suburban areas. These locations provide high
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visibility for the Company's signage and easy walk-in access for its customers.
Historically, the Company has used consistent office designs, colors, logo and
signage for each of its de novo Offices.
The average investment by the Company in each of its 17 de novo Offices has been
approximately $198,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the initial operations. The
eleven de novo Offices opened between January 1996 and December 1998, began
generating positive contribution from dental offices, on average, within six
months of opening. Two of the six de novo Offices opened in 1999 and early 2000
began generating positive contribution from dental offices within three months
of opening. The Company's four remaining de novo Offices, which have been open
an average of four months, have not generated positive contribution from dental
offices as of the date of this Annual Report. The Company expects these Offices
to become profitable by December 31, 2000.
AFFILIATION MODEL
RELATIONSHIP WITH P.C.S
Each Office is operated by a P.C., which employs or contracts with the dentists
and dental hygienists who practice at that Office. Thirty-eight of the 42 P.C.s
operating Offices located in Colorado and the five P.C.'s operating Offices
located in Arizona are solely owned by the Company's President, Mark Birner,
D.D.S. Five of the eight New Mexico Offices are owned by a non-managing dentist
and the remaining three P.C.s operating Offices located in New Mexico and the
remaining four P.C.s operating Offices in Colorado are owned by the managing
dentists of those Offices. The Company has entered into agreements with seven of
the owners of the P.C.s operating Offices in New Mexico and with the Company's
President Dr. Birner, as the owner of 38 P.C.s operating Offices in Colorado and
five P.C.s operating Offices in Arizona, which provide that upon the death,
disability, incompetence or insolvency of the owner, a loss of the owner's
license to practice dentistry, a termination of the owner's employment by the
P.C. or the Company, a conviction of the owner for a criminal offense, or a
breach by the P.C. of the Management Agreement with the Company, the Company may
require the owner to sell his or her shares in the P.C. for a nominal amount to
a third-party designated by the Company. Each agreement with Dr. Birner also
permits the Company, in its sole discretion, to require Dr. Birner to transfer
his shares in the P.C. (s) to another party designated by the Company. These
agreements also prohibit the owner from transferring or pledging the shares in
the P.C.s except to parties approved by the Company who agree to be bound by the
terms of the agreements. Upon a transfer of the shares to another party, the
owner agrees to resign all positions held as an officer or the director of the
P.C.
One of the six managing dentists (three of which are owners of one P.C.) who
owns a P.C. operating an Office in Colorado has entered into stock purchase,
pledge and security agreements with the Company. Under this agreement, if
certain events occur including the failure to perform the obligations under the
employment agreement with the P.C., cessation of employment with the P.C. for
any reason, death or insolvency or directly or indirectly causing the P.C. to
breach its obligations under the Management Agreement, then the Company may
cause the P.C. to redeem the dentist's ownership interest in the P.C. for an
agreed price which is not considered to be material by the Company. Two of the
three directors of each of these two P.C.s are nominees of the Company and the
dentists have given the Company's Chief Executive Officer, Fred Birner
irrevocable proxies to vote their shares in the P.C.s.
In the remaining three Colorado P.C.s and one of the New Mexico P.C.s owned by a
managing dentist, the Company has the right of first refusal to purchase 100% of
the P.C.s shares and the right to elect one-half of the directors and vote
one-half of the shares in such P.C.s.
MANAGEMENT AGREEMENTS WITH AFFILIATED OFFICES
The Company derives all of its revenue from its management agreements with the
P.C.s (the "Management Agreements"). Under each of 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 the economic benefits or detriments associated
with assets acquired by the P.C.s using such loans with the Company. Because the
Company's financial statements are consolidated with the financial statements of
the P.C.s, these loans are eliminated in consolidation.
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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 the
Office under the Management Agreement, including (i) salaries, benefits and
other direct costs of Company 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 Office 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 plans to continue to use the current form of its Management
Agreement to the extent possible. However, the terms of the Management Agreement
are subject to change to comply with existing or new regulatory requirements or
to enable the Company to compete more effectively.
EMPLOYMENT AGREEMENTS
Most dentists practicing at the Offices have entered into employment agreements
or independent contractor agreements with the P.C.s. The majority of such
agreements can be terminated by either party without cause with two to seven
days' notice. The employment agreement for one of the managing dentists who is
also a shareholder of a P.C. has a term of 20 years and can only be terminated
by the P.C. upon the occurrence of certain events. If the employment of the
managing dentist is terminated for any reason, the P.C. has the right to redeem
the shares of the P.C. held by the managing dentist. Such agreements typically
contain non-competition provisions for a period of up to three to five years
following their termination within a specified geographic area, usually a
specified number of miles from the relevant Office, and restrict solicitation of
patients and employees. Managing dentists receive compensation based upon a
specified amount per hour worked or a percentage of revenue or collections
attributable to their work, and a bonus based upon the operating performance of
the Office. Associate dentists are compensated based upon a specified amount per
hour worked or a percentage of revenue or collections attributable to their
work. Specialists are compensated based upon a percentage of revenue or
collections attributable to their work. The P.C. with whom the dentist has
entered into an employment agreement pays the dentists' compensation and
benefits.
COMPETITION
The dental services industry is highly fragmented, consisting primarily of solo
and smaller group practices. The dental practice management segment of this
industry is highly competitive and is expected to become more competitive. In
this regard, the Company expects that the provision of multi-specialty dental
services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are
operating in its markets, including Monarch Dental Corporation and Dental Health
Centers of America. Companies with dental practice management businesses similar
to that of the Company which currently operate in other parts of the country,
may begin targeting the Company's existing markets for expansion. Such
competitors may have greater financial resources or otherwise enjoy competitive
advantages, which may make it difficult for the Company to compete against them
or to acquire additional Offices on terms acceptable to the Company. As the
Company seeks to expand its operations into new markets, it is likely to face
competition from dental practice management companies, which already have
established a strong business presence in such locations.
The business of providing general and specialty dental services is highly
competitive in the markets in which the Company operates. The Company believes
it competes with other providers of dental and specialty services on the basis
of factors such as brand name recognition, convenience, cost and the quality and
range of services provided. Competition may include practitioners who have more
established practices and reputations. The Company also
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competes against established practices in the retention and recruitment of
general dentists, specialists, hygienists and other personnel. If the
availability of such individuals begins to decline in the Company's markets, it
may become more difficult to attract and retain qualified personnel to
sufficiently staff the existing Offices or to meet the staffing needs of the
Company's planned expansion.
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal levels, and
the regulation of health care-related companies is increasing. There can be no
assurance that the regulatory environment in which the Company or the P.C.s
operate will not change significantly in the future. The laws and regulations of
all states in which the Company operates impact the Company's operations but do
not currently materially restrict the Company's operations in those states. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The laws regulating health care are
broad and subject to varying interpretations, and there is currently a lack of
case law construing such statutes and regulations. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
STATE REGULATION
The laws of many states, including Colorado and New Mexico, permit a dentist to
conduct a dental practice only as an individual, a member of a partnership or an
employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services. Under the Management Agreements,
the P.C.s control all clinical aspects of the practice of dentistry and the
provision of dental services at the Offices, including the exercise of
independent professional judgment regarding the diagnosis or treatment of any
dental disease, disorder or physical condition. Persons to whom dental services
are provided at the Offices are patients of the P.C.s and not of the Company and
the Company does not have or exercise any control or direction over the manner
or methods in which dental services are performed, nor does the Company
interfere in any way with the exercise of professional judgment by the dentists
who are employees or independent contractors of the P.C.s.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist, to own or control dental equipment or offices used in a dental
practice. Some states allow leasing of equipment and office space to a dental
practice, under a bona fide lease, if the equipment and office remain under the
control of the dentist. Some states, including Arizona and New Mexico, require
all advertisements to be in the name of the dentist. A number of states,
including Arizona, Colorado and New Mexico, also regulate the content of
advertisements of dental services. In addition, Colorado, New Mexico and
Arizona, and many other states impose limits on the tasks that may be delegated
by dentists to hygienists and dental assistants. Some states require entities
designated as "clinics" to be licensed, and may define clinics to include dental
practices that are owned or controlled in whole or in part by non-dentists.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
Many states have fraud and abuse laws which are similar to the federal fraud and
abuse law described below, and which in many cases apply to referrals for items
or services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
Many states, including Colorado and New Mexico, also prohibit "fee-splitting" by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice's revenues.
In addition, many states have laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to include referrals for
health care items or services, including dental items and services.
In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. As the P.C.s contract with third-party payors, on a capitation or
other basis under which the relevant P.C. assumes financial risk, the P.C.s may
become subject to state insurance laws. Specifically, in some states, regulators
may determine that the Company or the P.C.s are engaged in the business of
insurance, particularly if they contract on a financial-risk basis directly with
self-insured
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employers or other entities that are not licensed to engage in the business of
insurance. In Arizona, Colorado and New Mexico, the P.C.s currently only
contract on a financial-risk basis with entities that are licensed to engage in
the business of insurance and thus are not subject to the insurance laws of
those states. To the extent that the Company or the P.C.s are determined to be
engaged in the business of insurance, the Company may be required to change the
method of payment from third-party payors and the Company's revenue may be
materially and adversely affected.
FEDERAL REGULATION
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
under Medicare or Medicaid, the impact of these laws on the Company to date has
been negligible. There can be no assurance, however, that the P.C.s will not
have patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
The federal fraud and abuse statute prohibits, subject to certain safe harbors,
the payment, offer, solicitation or receipt of any form of remuneration in
return for, or in order to induce: (i) the referral of a person for service,
(ii) the furnishing or arranging to furnish items or services, or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable under
Medicare or Medicaid. The statute reflects the federal government's policy of
increased scrutiny of joint ventures and other transactions among healthcare
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Because dental services are covered under various government
programs, including Medicare and Medicaid, this federal law applies to dentists
and the provision of dental services.
Significant prohibitions against dentist self-referrals for services covered by
Medicare and Medicaid programs were enacted, subject to certain exceptions, by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as Stark II, amended prior physician and dentist self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by dramatically enlarging the list of services and investment
interest to which the self-referral prohibitions apply. Effective January 1,
1995, Stark II prohibits a physician or dentist, or a member of his or her
immediate family, from making referrals for certain "designated health services"
to entities in which the physician or dentist has an ownership or investment
interest, or with which the physician or dentist has a compensation arrangement.
"Designated health services" include, among other things, clinical laboratory
services, radiology and other diagnostic services, radiation therapy services,
durable medical equipment, prosthetics, outpatient prescription drugs, home
health services and inpatient and outpatient hospital services. Stark II
prohibitions include referrals within the physician's or dentist's own group
practice (unless such practice satisfies the "group practice" exception) and
referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with, or
violation of Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Nevertheless, there can be no assurance that Stark II will not be interpreted or
hereafter amended in a manner that has a material adverse effect on the
Company's operations as presently conducted.
Proposed federal regulations also govern physician incentive plans associated
with certain managed care organizations that offer risk-based Medicare or
Medicaid contracts. These regulations define physician incentive plans to
include any compensation arrangement (such as capitation arrangements, bonuses
and withholds) that may directly or indirectly have the effect of reducing or
limiting services furnished to patients covered by the Medicare or Medicaid
programs. Direct monetary compensation which is paid by a managed care plan,
dental group or intermediary to a dentist for services rendered to individuals
covered by the Medicare or Medicaid programs is subject to these regulations, if
the compensation arrangement places the dentist at substantial financial risk.
When applicable, the regulations generally require disclosure to the federal
government or, upon request, to a Medicare beneficiary or Medicaid recipient
regarding such financial incentives, and require the dentist to obtain stop-loss
insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans, which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing agents. These
rules prohibit a billing agent from receiving a fee based on a percentage of
Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.
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Federal regulations also allow state licensing boards to revoke or restrict a
dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including governmental
insurers, are subject to significant regulation. Some payors limit the extent to
which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain
conditions are met, such as acceptance by dentists of assignment of the payor
receivable from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided "incident to" a dentist's
services. Under these "incident to" rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Offices' staff unless certain conditions are met, such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Office staff
must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its revenue under such programs.
The operations of the Offices are also subject to compliance with regulations
promulgated by the Occupational Safety and Health Administration ("OSHA"),
relating to such matters as heat sterilization of dental instruments and the use
of barrier techniques such as masks, goggles and gloves. The Company incurs
expenses on an ongoing basis relating to OSHA monitoring and compliance.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs will
not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
INSURANCE
The Company believes that its existing insurance coverage is adequate to protect
it from the risks associated with the ongoing operation of its business. This
coverage includes property and casualty, general liability, workers
compensation, director's and officer's corporate liability, employment practices
liability, corporate errors and omissions liability, excess liability and
professional liability insurance for dentists, hygienists and dental assistants
at the Offices.
TRADEMARK
The Company is the registered owner of the PERFECT TEETH(R) trademark in the
United States.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 508, Denver, Colorado, in approximately 9,500 square feet occupied under a
lease, which expires in January 2003. The Company believes that this space is
adequate for its current needs. The Company also leases real estate at the
location of each Office under leases ranging in term from one to 10 years. The
Company believes the facilities at each of its Offices are adequate for their
current level of business. The Company generally anticipates leasing and
developing new Offices in its current markets as well as in certain other
geographic markets rather than significantly expanding the size of its existing
Offices.
As of December 31, 1999, the Company had 81 general dentists and 64 affiliated
hygienists who were employed by the P.C.s, nine specialists who contract with
the P.C.s to provide specialty dental services, and 359 non-dental employees.
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ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock ("Common Stock") is quoted on the Nasdaq Stock Market
National Market under the symbol "BDMS." The following table sets forth, for the
period indicated, the range of high and low sales prices per share of Common
Stock, as reported on the Nasdaq Stock Market National Market:
HIGH LOW
--------- --------
1998
----
First Quarter (February 12, 1998 through March 31, 1998) $7-1/2 $5-5/16
Second Quarter 8-3/8 5-3/4
Third Quarter 6-1/2 3-5/8
Fourth Quarter 5-5/16 2-13/16
1999
First Quarter $4 $2-3/16
Second Quarter 3-1/2 2-3/8
Third Quarter 2-9/16 1-5/8
Fourth Quarter 2-7/16 1-1/8
2000
First Quarter (January 1, 2000 through March 22, 2000) $1-5/8 $1-1/8
At March 22, 2000 the last reported sale price of the Common Stock was $1.50 per
share. As of the same date, there were 6,131,814 shares of Common Stock
outstanding held by 80 holders of record and approximately 650 beneficial
owners.
The Company has not declared or paid dividends on its Common Stock since its
formation, and the Company does not anticipate paying dividends in the
foreseeable future. The Company's existing credit facility prohibits the payment
of cash dividends on the Common Stock without the lender's consent. Any future
credit facility, which the Company may obtain, is also likely to prohibit the
payment of dividends. Declaration or payment of dividends, if any, in the
future, will be at the discretion of the Board of Directors and will depend on
the Company's then current financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors.
On February 17, 1998, the Company's 9.0% convertible debentures ($6.8 million)
issued in May 1996 and December 1996 were converted into Common Stock in
accordance with the terms of those securities and in conjunction with the
closing of the Company's initial public offering.
During 1997, 1998, and 1999 the Company has issued and/or sold unregistered
securities as set forth below:
1. In May 1997, the Company repurchased 137,550 shares of Common Stock
from Paul Valuck, D.D.S. issued in connection with the terms of an
asset purchase agreement, for the purchase price of $350,000.
2. In June 1997, the Company awarded to Fred Birner, Mark Birner and
Dennis Genty, the founders of the Company, warrants to purchase an
aggregate of 27,510 share of Common Stock of the Company, at an
exercise price of $6.00 per share.
3. A warrant to purchase up to 1,834 shares of Common Stock of the
Company was awarded to James Ciccarelli, a director of the Company in
July 1997, at an exercise price of $6.54 per share.
4. In August 1997, 34,387 shares of Common Stock was issued to W.
Frederic Birner, M.D. pursuant to an exercise of a warrant, for the
total exercise price of $20,000.
5. From January 1, 1997 to December 31, 1997, the Company issued options
to purchase 149,199 shares of Common Stock under the Employee Plan,
with a weighted average of $8.49 per share, and 49, 625 shares of
Common Stock under the Dental Center Plan, with a weighted average of
$7.84 per share.
6. In November 1997, an individual exercised options to purchase 208
shares of Common Stock granted pursuant to the Employee Plan at a
weighted average exercise price of $2.09 per share.
7. In February 1998, the Company issued 5,250 shares of Common Stock,
valued at $5.71 per share, in connection with the acquisition of a New
Mexico dental practice.
8. In March 1998, an individual exercised options to purchase 2,751
shares of Common Stock granted pursuant to the Dental Center Plan at
an exercise price of $1.96 per share.
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9. In April 1998, an individual exercised options to purchase 1,446
shares of Common Stock granted pursuant to the Employee Plan at an
average exercise price of $2.73 per share. The individual elected to
use a cashless option exercise and received 559 shares of Common Stock
in exchange for all vested options outstanding.
10. In April 1998, an individual exercised options to purchase 9,170
shares of Common Stock granted pursuant to the Employee Plan at an
exercise price of $3.54 per share.
11. In April 1998, an individual exercised options to purchase 92 shares
of Common Stock granted pursuant to the Employee Plan at an exercise
price of $4.63 per share.
12. In April 1998, an individual exercised options to purchase 917 shares
of Common Stock granted pursuant to the Employee Plan at an exercise
price of $1.96 per share.
13. In April 1998, an individual exercised options to purchase 1,834
shares of Common Stock granted pursuant to the Dental Center Plan at
an average exercise price of $3.82 per share.
14. In April 1998, an individual exercised options to purchase 92 shares
of Common Stock granted pursuant to the Dental Center Plan at an
exercise price of $3.82 per share.
15. In September 1998, the Company issued 10,590 shares of Common Stock,
valued at $4.25 per share, in connection with the acquisition of a
Colorado dental practice.
16. In February 1999, the Company issued 12,632 shares of Common Stock,
valued at $2.77 per share, in connection with the acquisition of a
Colorado dental practice.
The sales of securities described above were issued in reliance upon the
exemption from registration under the Securities Act provided by Section 4(2)
thereof or Regulation D thereunder. The purchasers were either accredited
investors as defined in Regulation D, sophisticated investors or employees of
the Company or the P.C.s, and all had adequate access, through their
relationships with the Company and its officers, to information about the
Company. The purchasers represented their intention to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were placed on the share
certificates or contained in the instruments representing the securities.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial and operating
data for the Company. The data for the years ended December 31, 1999, 1998, and
1997 should be read in conjunction with the Company's consolidated financial
statements included elsewhere in this document. The selected consolidated
financial data for the 1996 and 1995 periods is derived from the Company's (or
its predecessor's) historical consolidated financial statements. All amounts are
stated in thousands except per share amounts, number of offices and number of
dentists.
Predecessor The Company (1)
---------------- ---------------------------------------------------------
January 1, 1995 Inception to
To September 30, December 31, Year Ended December 31,
1995 1995 (2) 1996 1997 1998 1999
---------------- ------------- --------- --------- ---------- -------
STATEMENTS OF OPERATIONS DATA:
Net revenue $ 757 $ 300 $ 5,373 $ 12,742 $ $21,741 $28,553
Direct Expenses 709 306 4,602 10,151 17,287 24,425
Contribution from dental offices 48 (6) 771 2,591 4,454 4,128
Corporate expenses -- 153 780 1,714 3,182 4,038
Operating income (loss) 48 (159) (9) 877 1,272 90
Income (loss) before income taxes 19 (160) (335) 34 843 (389)
(Provision) benefit for income taxes -- -- -- -- (128) 111
Income (loss) before change in
accounting principle 19 (160) (335) 34 715 (278)
Cumulative effect of change in
accounting principle -- -- -- -- (39) --
Net income (loss) 19 (160) (335) 34 675 (278)
Basic earnings per share of Common Stock:
Income before cumulative effect of
change in accounting principle N/A (.06) (.10) .01 .12 (.04)
Cumulative effect of change in
accounting principle N/A -- -- -- (.01) --
Net income (loss)(3) N/A (.06) (.10) .01 .11 (.04)
Diluted earnings per share of Common Stock:
Income before cumulative effect of
change in accounting principle N/A (.06) (.10) .01 .11 (.04)
Cumulative effect of change in
accounting principle N/A -- -- -- (.01) --
Net income (loss)(3) N/A (.06) (.10) .01 .10 (.04)
BALANCE SHEET DATA (4):
Cash and cash equivalents N/A $ 1,465 $ 1,798 $ 977 $ 2,170 $ 807
Working capital N/A 698 1,817 (458) 2,309 1,467
Total assets N/A 2,908 9,553 15,564 25,543 27,949
Long-term debt, less current maturities N/A 23 6,829 10,198 3,240 6,771
Total shareholders' equity N/A 2,004 1,684 1,388 18,746 16,904
Dividends declared per share of
Common Stock -- -- -- -- -- --
OPERATING DATA:
Number of offices (4) 3 4 18 34 49 54
Number of dentists (4)(5) 3 6 24 53 73 90
Total net revenue per office $ 252 $ 75 $ 299 $ 375 $ 444 $ 529
- -----------------
(1) Acquisitions of Offices and development of de novo Offices affect the
comparability of the data. The Company was operating four Offices as
of December 1995. During 1996 the Company acquired nine Offices and
opened five de novo Offices. Fifteen additional Office acquisitions
and one de novo Office increased the Company's operations for the year
ended December 31, 1997. In 1998, the Company acquired an additional
10 Offices and opened five de novo Offices. In 1999, the Company
acquired one Office, opened five de novo Offices and consolidated two
existing Offices into one.
(2) The Company was formed on May 17, 1995, and had no substantial
operations until October 1, 1995.
(3) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements of the Company.
(4) Data is as of the end of the respective periods presented.
(5) This represents the actual number of dentists employed by the P.C.s
and specialists who contract with the P.C.s to provide specialty
dental services.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
GENERAL
The following discussion and analysis relates to factors, which have affected
the consolidated results of operations and financial condition of the Company
for the three years ended December 31, 1999. Reference should also be made to
the Company's Consolidated Financial Statements and related Notes thereto and
the Selected Financial Data included elsewhere in this document. This document
contains forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under Items 1 and 2.
"Business and Properties," Item 5., "Market for the Registrant's Common Equity
and Related Stockholder Matters" as well as in this document generally.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation the risk factors set forth in this Item 7 under the heading "Risk
Factors."
OVERVIEW
The Company was formed in May 1995, and currently manages 55 Offices in
Colorado, New Mexico, and Arizona staffed by 90 dentists. The Company has
acquired 42 practices (four of which were consolidated into existing Offices)
and opened 17 de novo Offices. Of the 42 acquired practices, only three (the
first three practices, which were acquired from the Company's President, Mark
Birner, D.D.S.) were acquired from affiliates of the Company. The Company
derives all of its Revenue (as defined below) from its Management Agreements
with the P.C.s. In addition, the Company assumes a number of responsibilities
when it acquires a new practice or develops a de novo Office, which are set
forth in the Management Agreement, as described below. The Company expects to
expand in existing 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. See Items 1 and 2. "Business and Properties
- - Operations - Dental Practice Management Model."
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's success in the Colorado
market led to its expansion into New Mexico and Arizona and its evaluation of
additional markets. The Company commenced operations in Colorado in October 1995
with the acquisition of three practices, and acquired a fourth practice in
November 1995. During 1996, the Company developed five de novo Offices and
acquired 12 practices (including three practices which were consolidated with
existing Offices). In 1997, the Company developed one de novo Office and
acquired 15 practices. In 1998, the company developed five de novo Offices and
acquired 10 practices. In 1999, the Company developed five de novo Offices,
acquired one practice and consolidated two practices into one. In March 2000,
the Company developed one de novo Office.
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 approximately $412,000,
$4.4 million, $5.3 million, $5.8 million and $760,000, respectively. The eleven
de novo Offices opened between January 1996 and December 1998, began generating
positive contribution from dental offices, on average, within six months of
opening. Two of the five de novo Offices opened in 1999 began generating
positive contribution from dental offices within three months of opening. The
Company's four remaining de novo Offices which have been open an average of four
months, have not generated positive contribution from dental offices as of the
date of this Annual Report. The Company expects these Offices to become
profitable by December 31, 2000. See Items 1 and 2. "Business and Properties -
Expansion Program."
The Company has experienced significant growth in net revenue (as defined
below). The Company has achieved these results primarily through the ongoing
development of a dense dental practice network and the implementation of its
dental practice management model. During the three years ended December 31,
1999, net revenue increased from $12.7 million in 1997 to $21.7 million for
1998, and increased to $28.5 million for 1999. During the three years ended
December 31, 1999, contribution from dental offices increased from $2.6 million
in 1997 to $4.5 million for 1998, and decreased to $4.1 million for 1999.
Several factors contributed to the decrease in contribution from dental offices
for 1999. The Company increased employee costs as a result of adding support
staff in its dental centers in anticipation of hiring additional dentists. The
Company expanded four of its dental centers in 1999 and has opened seven de novo
Offices since December 1998. The Company has taken steps to improve its
profitability by adding incremental dentists and specialists to the current
network, renegotiating managed care contracts, and slowing the growth in the
number of incremental offices. During the three years ended December 31, 1999,
operating income increased from $877,000 for 1997 to $1.3 million for 1998, and
decreased to $90,000 for 1999.
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At December 31, 1999, the Company's total assets of $27.9 million included $14.1
million of identifiable intangible assets related to Management Agreements. At
that date, the Company's total shareholders' equity was $16.9 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.
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.
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. Management service fee revenue represents the net
revenue earned by the Company for the Offices for which the Company has
management agreements, but does not have control. Direct expenses consist of the
expenses incurred by the Company in connection with managing the Offices,
including salaries and benefits (for personnel other than dentists and
hygienists), dental supplies, dental laboratory fees, occupancy costs,
advertising and marketing, depreciation and amortization and general and
administrative (including office supplies, equipment leases, management
information systems and other expenses related to dental practice operations).
The Company also incurs personnel and administrative expenses in connection with
maintaining a corporate function that provides management, administrative,
marketing, development and professional services to the Offices.
Under each of 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 the economic benefits or detriments associated with assets
acquired by the P.C.s using such loans with the Company. Because the Company's
financial statements are consolidated with the financial statements of the
P.C.s, 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 the
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
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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 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 Office 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
Office (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Office under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive 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. See Items 1 and 2. "Business and Properties -
Payor Mix."
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 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
year ended December 31, 1999, Revenue increased to $39.1 million from $29.2
million for the year ended December 31, 1998, an increase of 33.9%. The Company
acquired one practice and opened five de novo Offices during 1999, which, in the
aggregate, contributed $2.1 million of the $9.9 million increase. The remainder
of the increase in Revenue of $7.8 million was attributable to the 48 Offices
that existed at the beginning of 1999. Revenue at the 34 Offices in existence
during both full periods increased from $24.8 million in 1998 to $26.3 million
in 1999, an increase of $1.8 million, or 7.4%. For the year ended
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December 31, 1998, Revenue increased to $29.2 million from $17.2 million for the
year ended December 31, 1997, an increase of 69.9%. The Company acquired 10
practices and opened five de novo Offices during 1998, which, in the aggregate,
contributed $4.4 million of the $12.0 million increase. The remainder of the
increase in Revenue of $7.6 million was attributable to the 34 Offices that
existed at the beginning of 1998. Revenue at the 18 Offices in existence during
both full periods increased to $13.7 million in 1998 from $12.8 million in 1997,
an increase of $0.9 million or 7.0%.
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's Consolidated Statements of Operations.
The information contained in the table represents the historical results of the
Company. The information that follows should be read in conjunction with the
Company's consolidated financial statements and related notes thereto.
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------ ------ ------
Net revenue 100.0% 100.0% 100.0%
Direct expenses:
Clinical salaries and benefits 37.4 38.9 39.2
Dental supplies 8.5 5.6 6.2
Laboratory fees 9.2 9.3 10.0
Occupancy 8.6 9.0 10.8
Advertising and marketing 3.2 1.8 1.7
Depreciation and amortization 4.3 5.3 6.7
General and administrative 8.4 9.6 10.9
------ ------ ------
79.6 79.5 85.5
------ ------ ------
Contribution from dental offices 20.4 20.5 14.5
Corporate expenses -
General and administrative 10.7 13.9 13.3
Depreciation and amortization 0.8 0.7 0.9
Unsuccessful acquisition costs 2.0 -- --
------ ------ ------
Operating income 6.9 5.9 0.3
Interest expense, net (6.6) (0.6) (1.7)
Conversion inducement expense -- (1.4) --
------ ------ ------
Income (loss) before income taxes 0.3 3.9 (1.4)
Income tax (expense) benefit -- (0.6) 0.4
------ ------ ------
Income (loss) before change in
accounting principle 0.3 3.3 (1.0)
Cumulative effect of change in
accounting principle -- (0.2) --
------ ------ ------
Net income (loss) 0.3% 3.1% (1.0)%
====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net revenue. Net revenue increased from $21.7 million for the year ended
December 31, 1998 to $28.5 million for the year ended December 31, 1999, an
increase of $6.8 million or 31.3%. The Company acquired one practice and opened
five de novo Offices during 1999, which contributed $1.4 million of the
increase. The remainder of the increase in net revenue of $5.4 million was
attributable to the 49 practices the Company had at the beginning of the 1999
year.
Clinical salaries and benefits. Clinical salaries and benefits increased from
$8.5 million for the year ended December 31, 1998 to $11.2 million for the year
ended December 31, 1999, an increase of $2.7 million or 32.5%. This increase was
due primarily to the increased number of Offices and the corresponding addition
of non-dental personnel. As a percentage of net revenue, clinical salaries and
benefits increased from 38.9% in 1998 to 39.2% in 1999.
Dental supplies. Dental supplies increased from $1.2 million for the year ended
December 31, 1998 to $1.8 million for the year ended December 31, 1999, an
increase of $564,000 or 46.7%. This increase was due to the increased Revenue
generated at the Offices and the increased number of Offices. As a percentage of
net revenue, dental supplies increased from 5.6% in 1998 to 6.2% in 1999. The
increase in dental supplies as a percentage of net revenue is primarily
attributable to the de novo Offices which opened in 1999 and late 1998.
Laboratory fees. Laboratory fees increased from $2.0 million for the year ended
December 31, 1998 to $2.8 million for the year ended December 31, 1999, an
increase of $814,000 or 40.1%. This increase was due to the increased number of
Offices. As a percentage of net revenue, laboratory fees increased from 9.3% in
1998 to 10.0% in 1999. The increase in laboratory fees as a percentage of net
revenue is primarily attributable to the Arizona Offices and the de novo Offices
which opened in 1999 and late 1998 not fully utilizing the laboratories having
Company negotiated pricing arrangements.
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Occupancy. Occupancy increased from $2.0 million for the year ended December 31,
1998 to $3.1 million for the year ended December 31, 1999, an increase of $1.1
million or 57.2%. This increase was due to the Offices added in 1999 as well as
certain Offices which were only open for part of the year ended December 31,
1998 and a full year in 1999. As a percentage of net revenue, occupancy expense
increased from 9.0% in 1998 to 10.8% in 1999. This is attributable to the
opening of de novo Offices which have a higher rate per square foot and lower
revenue than the Offices in existence at the beginning of 1998.
Advertising and marketing. Advertising and marketing increased from $380,000 for
the year ended December 31, 1998 to $484,000 for the year ended December 31,
1999, an increase of $104,000 or 27.2%. As a percentage of net revenue,
advertising and marketing decreased from 1.8% in 1998 to 1.7% in 1999.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$1.2 million for the year ended December 31, 1998 to $1.9 million for the year
ended December 31, 1999, an increase of $773,000 or 67.1%. This increase was due
to the increased number of Offices which were only open for part of the year
ended December 31, 1998. As a percentage of net revenue, depreciation and
amortization increased from 5.3% in 1998 to 6.7% in 1999. The increase in
depreciation and amortization as a percentage of net revenue is due to the
number of de novo Offices opened during 1999 which have a lower revenue base
than the Offices that have been in operation longer.
General and administrative. General and administrative costs which are
attributable to the Offices, increased from $2.1 million for the year ended
December 31, 1998 to $3.1 million for the year ended December 31, 1999, an
increase of $1.0 million or 48.4%. This increase was due to the increased number
of Offices as well as certain Offices which were only open for part of the year
ended December 31, 1998. Additionally, the Company expanded its corporate
infrastructure to manage the growth and some of these costs were passed on to
the Offices. As a percentage of net revenue, general and administrative expenses
increased from 9.6% in 1998 to 10.9% in 1999.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased from $4.5 million for the year ended December 31, 1998
to $4.1 million for the year ended December 31, 1999, a decrease of $326,000 or
7.3%. As a percentage of net revenue, contribution from dental offices decreased
from 20.5% in 1998 to 14.5% in 1999.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative increased from $3.0 million for the year ended December 31,
1998 to $3.8 million for the year ended December 31, 1999, an increase of
$765,000 or 25.2%. This increase was due to the expansion of the Company's
infrastructure to more effectively manage past and present growth. As a
percentage of net revenue, corporate expense - general and administrative
decreased from 13.9% in 1998 to 13.3% in 1999.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from $150,000 for the year ended
December 31, 1998 to $242,000 for the year ended December 31, 1999, an increase
of $92,000 or 61.3%. This increase was a result of the Company's expansion of
its corporate infrastructure, primarily investments in computer equipment and
software to manage current and future growth. As a percentage of net revenue,
corporate expenses - depreciation and amortization increased from 0.7% in 1998
to 0.9% in 1999.
Operating income. As a result of the above, operating income decreased from $1.3
million for the year ended December 31, 1998 to $90,000 for the year ended
December 31, 1999, a decrease of $1.2 million or 93.0%. As a percentage of net
revenue, operating income decreased from 5.9% in 1998 to 0.3% in 1999.
Interest expense, net. Interest expense, net increased from $124,000 for the
year ended December 31, 1998 to $478,000 for the year ended December 31, 1999,
an increase of $354,000 or 286.0%. This increase was primarily the result of an
increase in borrowings on the line of credit which were used for capital
expenditures and the purchase and retirement of Common Stock of the Company. As
a percentage of net revenue, interest expense, net increased from 0.6% in 1998
to 1.7% in 1999.
Conversion inducement expense. During the year ended December 31, 1998, the
Company incurred a one-time charge of approximately $305,000 related to inducing
the convertible debenture holders to convert to Common Stock at the closing of
the Company's initial public offering in February 1998.
Change in Accounting Principle. Effective January 1, 1998, the Company adopted
SOP 98-5 "Reporting on the Costs of Start-up Activities". This SOP provides
guidance on the reporting of start-up costs and organization costs and requires
the Company to expense these costs (as defined by the SOP) as they are incurred.
Initial application of this SOP has been reported as a cumulative effect of a
change in accounting principle and resulted in a charge of approximately $39,000
in the year ended December 31, 1998.
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Net income (loss). As a result of the above, the Company reported a net loss of
$(278,000) for the year ended December 31, 1999 compared to net income of
$675,000 for the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenue. Net revenue increased from $12.7 million for the year ended
December 31, 1997 to $21.7 million for the year ended December 31, 1998, an
increase of $9.0 million or 70.6%. The Company acquired ten practices and opened
five de novo Offices during 1998, which contributed $3.1 million of the
increase. The remainder of the increase in net revenue of $5.9 million was
attributable to the 34 practices the Company had at the beginning of the 1998
year.
Clinical salaries and benefits. Clinical salaries and benefits increased from
$4.8 million to $8.5 million for the year ended December 31, 1997 and 1998,
respectively, an increase of $3.7 million or 77.4%. This increase was due
primarily to the increased number of Offices and the corresponding addition of
non-dental personnel. As a percentage of net revenue, clinical salaries and
benefits increased from 37.4% in 1997 to 38.9% in 1998.
Dental supplies. Dental supplies increased from $1.1 million for the year ended
December 31, 1997 to $1.2 million for the year ended December 31, 1998, an
increase of $128,000 or 11.8%. This increase was due to the increased Revenue
generated at the Offices. As a percentage of net revenue, dental supplies
decreased from 8.5% in 1997 to 5.6% in 1998. The decrease in dental supplies as
a percentage of net revenue is attributable to the Company's efforts in
consolidating vendors and negotiating favorable pricing by aggregating Office
purchases.
Laboratory fees. Laboratory fees increased from $1.2 million for the year ended
December 31, 1997 to $2.0 million for the year ended December 31, 1998, an
increase of $860,000 or 73.4%. This increase was due to the increased Revenue
generated at the Offices. As a percentage of net revenue, laboratory fees
increased marginally from 9.2% in 1997 to 9.3% in 1998.
Occupancy. Occupancy increased from $1.1 million for the year ended December 31,
1997 to $2.0 million for the year ended December 31, 1998, an increase of
$865,000 or 78.6%. This increase was due to the increased number of Offices as
well as certain Offices which were only open for part of the year ended December
31, 1997. As a percentage of net revenue, occupancy expense increased from 8.6%
in 1997 to 9.0% in 1998.
Advertising and marketing. Advertising and marketing decreased from $409,000 for
the year ended December 31, 1997 to $380,000 for the year ended December 31,
1998, a decrease of $29,000 or 7.0%. As a percentage of net revenue, advertising
and marketing decreased from 3.2% in 1997 to 1.8% in 1998.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$549,000 for the year ended December 31, 1997 to $1.2 million for the year ended
December 31, 1998, an increase of $603,000 or 109.7%. This increase was due to
the increased number of Offices as well as certain Offices which were only open
for part of the year ended December 31, 1997. As a percentage of net revenue,
depreciation and amortization increased from 4.3% in 1997 to 5.3% in 1998.
General and administrative. General and administrative, which is attributable to
the Offices, increased from $1.1 million for the year ended December 31, 1997 to
$2.1 million for the year ended December 31, 1998, an increase of $1.0 million
or 95.2%. This increase was due to the increased number of Offices as well as
certain Offices which were only open for part of the year ended December 31,
1997. Additionally, the Company expanded its corporate infrastructure to manage
the growth and some of these costs were passed on to the Offices. As a
percentage of net revenue, general and administrative expenses increased from
8.4% in 1997 to 9.6% in 1998.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased from $2.6 million for the year ended December 31, 1997
to $4.5 million for the year ended December 31, 1998, an increase of $1.9
million or 71.9%. As a percentage of net revenue, contribution from dental
offices increased from 20.4% in 1997 to 20.5% in 1998.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative increased from $1.4 million for the year ended December 31,
1997 to $3.0 million for the year ended December 31, 1998, an increase of $1.7
million or 122.9%. This increase was due to expansion of the Company's
infrastructure to manage growth, primarily through the addition of personnel. As
a percentage of net revenue, corporate expense - general and administrative
increased from 10.7% in 1997 to 13.9% in 1998.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from $102,000 for the year ended
December 31, 1997 to $150,000 for the year ended December 31, 1998, an increase
of $48,000 or 47.2%. This increase was a result of the Company's expansion of
its corporate infrastructure, primarily
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investments in computer equipment to manage future growth. As a percentage of
net revenue, corporate expenses - depreciation and amortization decreased from
0.8% in 1997 to 0.7% in 1998.
Corporate expenses - unsuccessful acquisition costs. During the year ended
December 31, 1997, the Company incurred a one-time charge of approximately
$252,000 related to due diligence costs and audit fees in connection with a
potential acquisition of a group of dental practices. As a result of its due
diligence, the Company did not proceed with the acquisition.
Operating income. As a result of the above, operating income increased from
$877,000 for the year ended December 31, 1997 to $1.3 million for the year ended
December 31, 1998, an increase of $395,000 or 45.0%. As a percentage of net
revenue, operating income decreased from 6.9% in 1997 to 5.9% in 1998.
Interest expense, net. Interest expense, net decreased from $843,000 for the
year ended December 31, 1997 to $124,000 for the year ended December 31, 1998, a
decrease of $720,000 or 85.3%. This decrease was primarily the result of
converting the Company's 9.0% convertible debentures ($6.8 million) issued in
May 1996 and December 1996 to Common Stock. As a percentage of net revenue,
interest expense, net decreased from 6.6% in 1997 to 0.6% in 1998.
Conversion inducement expense. During the year ended December 31, 1998, the
Company incurred a one-time charge of approximately $305,000 related to inducing
the convertible debenture holders to convert to Common Stock at the closing of
the Company's initial public offering in February 1998.
Change in Accounting Principle. Effective January 1, 1998, the Company adopted
SOP 98-5 "Reporting on the Costs of Start-up Activities". This SOP provides
guidance on the reporting of start-up costs and organization costs and requires
the Company to expense these costs (as defined by the SOP) as they are incurred.
Initial application of this SOP has been reported as a cumulative effect of a
change in accounting principle and resulted in a charge of approximately $39,000
in the year ended December 31, 1998.
Net income. As a result of the above, net income increased from $34,000 for the
year ended December 31, 1997 to $675,000 for the year ended December 31, 1998,
an increase of $642,000. As a percentage of net revenue, net income increased
from 0.3% in 1997 to 3.1% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its growth through a combination
of private sales of convertible subordinated debentures and Common Stock, cash
provided by operating activities, a bank line of credit (the "Credit Facility"),
seller notes and the initial public offering of Common Stock.
Net cash provided by operating activities was $1.3 million, $1.4 million, and
$1.4 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Net cash provided by operations during these periods, after adding back
depreciation and amortization and other non cash expenses, consisted primarily
of increases in accounts payable and accrued expenses somewhat offset by
increases in accounts receivable.
Net cash used in investing activities was $4.4 million, $8.9 million, and $4.2
million for the years ended December 31, 1999, 1998 and 1997, respectively.
During the year ended December 31, 1999, $3.7 million was invested in the
purchase of additional property and equipment, including $1.1 for the de novo
Offices and $697,000 was utilized for an acquisition. During the year ended
December 31, 1998, $5.5 million was utilized for acquisitions and $3.4 million
was invested in the purchase of additional property and equipment, including
$1.1 million for the de novo Offices. During the year ended December 31, 1997,
$3.4 million was utilized for acquisitions and $1.1 million was invested in the
purchase of additional property and equipment, including $165,000 for the de
novo Office. These capital expenditures were partially offset by $200,000 of
cash obtained from the acquisition of existing dental offices.
For the years ended December 31, 1999, 1998, and 1997, net cash provided by
financing activities was $1.8 million, $8.7 million, and $2.0 million,
respectively. For the year ended December 31, 1999, net cash provided by
financing activities was comprised of net borrowings under the Company's line of
credit of approximately $3.7 million which was partially offset by the purchase
and retirement of Common Stock of approximately $1.6 million and approximately
$310,000 for the repayment of long-term debt. For the year ended December 31,
1998, the cash provided was comprised of $11.5 million from the initial public
offering, $50,000 from stock options exercised and $2.5 million in net
borrowings from the Credit Facility. This was offset by $1.2 million for costs
associated with the public offering, $3.5 million used for the repayment of long
term debt, $305,000 related to the conversion of subordinated debentures to
Common Stock, $242,000 for the purchase and retirement of Common Stock, and
$54,000 loan issuance costs. In the year ended December 31, 1997, the cash
provided was comprised of $225,000 from the private sale of convertible
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subordinated debentures and $250,000 in net borrowings from the Credit Facility
and proceeds of $2.0 million from a term loan used to finance the Gentle Dental
Acquisition. This was partially offset by $271,000 used for the repayment of
long term debt and $219,000 used to repurchase Common Stock.
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 1.50% 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 December 31, 1999, the Company had
approximately $700,000 available and $6.6 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.
As of December 31, 1999, the Company had outstanding indebtedness of
approximately $358,000 represented by notes issued in connection with various
practice acquisitions which bear interest at rates varying from 7.0% to 14.0%.
At December 31, 1999, the Company's material commitments for capital
expenditures totaled approximately $590,000, which includes the de novo Office
developments. The Company anticipates that these capital expenditures will be
funded by cash on hand, cash generated by operations, or borrowings under the
Company's Credit Facility. The Company's retained deficit as of December 31,
1999 was approximately $(64,000) and the Company had working capital on that
date of approximately $1.5 million.
On February 11, 1998 the Company completed a public offering of 2,100,000 shares
of Common Stock at an initial public offering price of $7.00 per share resulting
in net proceeds to the Company of approximately $10.3 million. At December 31,
1998, the Company had fully expended the proceeds from the initial public
offering. Approximately $2.6 million of the net proceeds was used to repay
outstanding indebtedness under the Credit Facility and to repay the $1.3 million
note issued in connection with the Gentle Dental Acquisition. The Company
believes that cash generated from operations and borrowings under its Credit
Facility, will be sufficient to fund its anticipated working capital needs,
capital expenditures and future acquisitions for at least the next 12 months. In
the event the Company is not able to successfully negotiate a new Credit
Facility at the end of its term, the Company's current sources of liquidity may
not be adequate. In addition, in order to meet its long-term liquidity needs the
Company may issue additional equity and debt securities, subject to market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to the Company. The failure to raise the funds
necessary to finance its future cash requirements could adversely affect the
Company's ability to pursue its strategy and could negatively affect its
operations in future periods. See "Risk Factors - Need for Additional Capital;
Uncertainty of Additional Financing" in this Item 7.
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. As of December 31, 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 December 31, 1999, 4,700 shares remain unpurchased based on the Board of
Directors approved number of shares to be repurchased.
RISK FACTORS
This Annual Report contains forward-looking statements. Discussions containing
such forward-looking statements may be found in the material set forth in this
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations, " Items 1 and 2. "Business and Properties" and Item 5. "Market
for the Registrant's Common Equity and Related Stockholder Matters, " as well as
in this Annual Report generally. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various
factors, including, without limitation, the risk factors set forth below and the
matters set forth in this Annual Report generally.
Demands on Management from Growth; Limited Operating History. The Company has
been providing dental practice management services since October 1995. Prior to
April 1997, the Company provided dental practice management services exclusively
in Colorado. The Company's growth has placed, and will continue to place,
strains on the Company's management, operations and systems. The growth has
required the hiring and training of additional
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employees to oversee the operations and training of non-dental employees in the
new Offices, the use of management resources to integrate the operations of the
new Offices with the operations of the Company, and the incurring of incremental
costs to convert to or install the Company's management information system. The
Company's ability to compete effectively will depend upon its ability to hire,
train and assimilate additional management and other employees, and its ability
to expand, improve and effectively utilize its operating, management, marketing
and financial systems to accommodate its expanded operations. Any failure by the
Company's management to effectively anticipate, implement and manage the changes
required to sustain the Company's growth may have a material adverse effect on
the Company's business, financial condition and operating results. See Items 1
and 2. "Business and Properties - Expansion Program."
Dependence Upon Availability of Dentists and Other Personnel. The Company's
operations and expansion strategy are dependent on the availability and
successful recruitment and retention of dentists, dental assistants, hygienists,
specialists and other personnel. The Company may not be able to recruit or
retain dentists and other personnel for its existing and newly established
Offices, which may have a material adverse effect on the Company's expansion
strategy and its business, financial condition and operating results. See Items
1 and 2. "Business and Properties - Operations - Dental Practice Model."
Need for Additional Capital; Uncertainty of Additional Financing. Implementation
of the Company's growth strategy has required significant capital resources.
Such resources will be needed to establish additional Offices, maintain or
upgrade the Company's management information systems, and for the effective
integration, operation and expansion of the Offices. The Company historically
has used principally cash and promissory notes as consideration in acquisitions
of dental practices and intends to continue to do so. If the Company's capital
requirements over the next several years exceed cash flow generated from
operations and borrowings available under the Company's existing credit facility
or any successor credit facility, the Company may need to issue additional
equity securities and incur additional debt. If additional funds are raised
through the issuance of equity securities, dilution to the Company's existing
shareholders may result. Additional debt or non-Common Stock equity financings
could be required to the extent that the Common Stock fails to maintain a market
value sufficient to warrant its use for future financing needs. If additional
funds are raised through the incurrence of debt, such debt instruments will
likely contain restrictive financial, maintenance and security covenants. The
Company's existing credit facility limits the amount the Company may spend in
any calendar year to acquire dental practices. The Company may not be able to
obtain additional required capital on satisfactory terms, if at all. The failure
to raise the funds necessary to finance the expansion of the Company's
operations or the Company's other capital requirements could have a material and
adverse effect on the Company's ability to pursue its strategy and on its
business, financial condition and operating results. See "Liquidity and Capital
Resources" in this Item 7.
Risks Associated with De Novo Office Development. The Company utilizes internal
and external resources to identify locations in suitable markets for the
development of de novo Offices. Identifying locations in suitable geographic
markets and negotiating leases can be a lengthy and costly process. Furthermore,
the Company will need to provide each new Office with the appropriate equipment,
furnishings, materials and supplies. To date, the Company's average cost to open
a de novo Office has been approximately $198,000. Future de novo development may
require a greater investment by the Company. Additionally, new Offices must be
staffed with one or more dentists. Because a new Office may be staffed with a
dentist with no previous patient base, significant advertising and marketing
expenditures may be required to attract patients. There can be no assurance that
a de novo Office will become profitable for the Company. See Items 1 and 2.
"Business and Properties - Expansion Program - De Novo Office Developments."
Dependence on Management Agreements, the P.C.s and Affiliated Dentists. The
Company receives management fees for services provided to the P.C.s under
Management Agreements. The Company owns most of the non-dental operating assets
of the Offices but does not employ or contract with dentists, employ hygienists
or control the provision of dental care. The Company's revenue is dependent on
the revenue generated by the P.C.s. Therefore, effective and continued
performance of dentists providing services for the P.C.s is essential to the
Company's long-term success. Under each Management Agreement, the Company pays
substantially all of the operating and non-operating expenses associated with
the provision of dental services except for the salaries and benefits of the
dentists and hygienists and principal and interest payments of loans made to the
P.C. by the Company. Any material loss of revenue by the P.C.s would have a
material adverse effect on the Company's business, financial condition and
operating results, and any termination of a Management Agreement (which is
permitted in the event of a material default or bankruptcy by either party)
could have such an effect. In the event of a breach of a Management Agreement by
a P.C., there can be no assurance that the legal remedies available to the
Company will be adequate to compensate the Company for its damages resulting
from such breach. See Items 1 and 2. "Business and Properties - Affiliation
Model."
Government Regulation. The practice of dentistry is regulated at both the state
and federal levels. There can be no assurance that the regulatory environment in
which the Company or P.C.s operate will not change significantly in the future.
In addition, state and federal laws regulate health maintenance organizations
and other managed care organizations for which dentists may be providers. In
general, regulation of health care companies is increasing. In connection with
its operations in existing markets and expansion into new markets, the Company
may become subject to
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additional laws, regulations and interpretations or enforcement actions. The
laws regulating health care are broad and subject to varying interpretations,
and there is currently a lack of case law construing such statutes and
regulations. The ability of the Company to operate profitably will depend in
part upon the ability of the Company to operate in compliance with applicable
health care regulations.
The laws of many states, including Colorado and New Mexico, permit a dentist to
conduct a dental practice only as an individual, a member of a partnership or an
employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist to own or control dental equipment or offices used in a dental
practice. In addition, Arizona, Colorado, New Mexico, and many other states
impose limits on the tasks that may be delegated by dentists to hygienists and
dental auxiliaries. Some states, including Arizona, Colorado and New Mexico,
regulate the content of advertisements of dental services. Some states require
entities designated as "clinics" to be licensed, and may define clinics to
include dental practices that are owned or controlled in whole or in part by
non-dentists. These laws and their interpretations vary from state to state and
are enforced by the courts and by regulatory authorities with broad discretion.
Many states, including Colorado and New Mexico, also prohibit "fee-splitting" by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice's revenues.
Many states have fraud and abuse laws, which apply to referrals for items or
services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. Specifically, in some states, regulators may determine that the P.C.s
are engaged in the business of insurance, particularly if they contract on a
financial-risk basis directly with self-insured employers or other entities that
are not licensed to engage in the business of insurance. If the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's business, financial condition and operating results may be materially
and adversely affected.
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. The federal fraud and abuse statute prohibits,
among other things, the payment, offer, solicitation or receipt of any form of
remuneration, directly or indirectly, in cash or in kind to induce or in
exchange for (i) the referral of a person for services reimbursable by Medicare
or Medicaid, or (ii) the purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any item, good, facility or service
which is reimbursable under Medicare or Medicaid. Because the P.C.s receive no
revenue under Medicare and Medicaid, the impact of these laws on the Company to
date has been negligible. There can be no assurance, however, that the P.C.s
will not have patients in the future covered by these laws, or that the scope of
these laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
Although the Company believes that its operations as currently conducted are in
material compliance with applicable laws, there can be no assurance that the
Company's contractual arrangements will not be successfully challenged as
violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations or change the way it conducts business. See Items 1 and 2.
"Business and Properties - Government Regulation."
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Risks Associated with Acquisition Strategy. The Company has grown substantially
in a relatively short period of time, in large part through acquisitions of
existing Offices and through the development of de novo Offices. Since its
organization in May 1995, the Company has completed 42 dental practice
acquisitions, four of which have been consolidated into existing Offices. The
success of the Company's acquisition strategy will depend on factors, which
include the following:
* Ability to Identify Suitable Dental Practices. The Company devotes
substantial time and resources to acquisition-related activities.
Identifying appropriate acquisition candidates and negotiating and
consummating acquisitions can be a lengthy and costly process. Furthermore,
the Company may compete for acquisition opportunities with companies that
have greater resources than the Company. There can be no assurance that
suitable acquisition candidates will be identified or that acquisitions
will be consummated on terms favorable to the Company, on a timely basis or
at all. If a planned acquisition fails to occur or is delayed, the
Company's quarterly financial results may be materially lower than
analysts' expectations, which likely would cause a decline, perhaps
substantial, in the market price of the Common Stock. In addition,
increasing consolidation in the dental management services industry may
result in an increase in purchase prices required to be paid by the Company
to acquire dental practices.
* Integration of Dental Practices. The integration of acquired dental
practices into the Company's networks is a difficult, costly and time
consuming process which, among other things, requires the Company to
attract and retain competent and experienced management and administrative
personnel and to implement and integrate reporting and tracking systems,
management information systems and other operating systems. In addition,
such integration may require the expansion of accounting controls and
procedures and the evaluation of certain personnel functions. There can be
no assurance that substantial unanticipated problems, costs or delays
associated with such integration efforts or with such acquired practices
will not occur. As the Company pursues its acquisition strategy, there can
be no assurance that the Company will be able successfully to integrate
acquired practices in a timely manner or at all, or that any acquired
practices will have a positive impact on the Company's results of
operations and financial condition.
* Management of Acquisitions. The success of the Company's acquisition
strategy will depend in part on the Company's ability to manage effectively
an increasing number of Offices, some of which are expected to be located
in markets geographically distant from markets in which the Company
presently operates. The addition of Offices may impair the Company's
ability to provide management services efficiently and successfully to
existing Offices and to manage and supervise adequately the Company's
employees. The Company's results of operations and financial condition
could be materially adversely affected if it is unable to do so
effectively.
* Availability of Funds for Acquisitions. The Company's acquisition
strategy will require that substantial capital investment and adequate
financing be available to the Company. Funds are needed for (i) the
purchase of assets of dental practices, (ii) the integration of operations
of acquired dental practices, and (iii) the purchase of additional
equipment and technology for acquired practices. In addition, increasing
consolidation in the dental services industry may result in an increase in
purchase prices required to be paid by the Company to acquire dental
practices. Any inability of the Company to obtain suitable financing could
cause the Company to limit or otherwise modify its acquisition strategy,
which could have a material adverse effect on the Company's results of
operations and financial condition. See "Risk Factors - Need for Additional
Capital; Uncertainty of Additional Financing" in this Item 7.
* Ability to Increase Revenues and Operating Income of Acquired Practices.
A key element of the Company's growth strategy is to increase revenues and
operating income at its acquired Offices. There can be no assurance that
the Company's revenues and operating income from its acquired Offices will
improve at rates comparable to the historical improvement rates experienced
by the Company's existing Offices or at all, or that revenues or operating
income from existing Offices will continue to improve at such historical
rates or at all. Any failure by the Company in improving revenues or
operating income at its Offices could have a material adverse effect on the
Company's results of operations and financial condition.
Reliance on Certain Personnel. The success of the Company, depends on the
continued services of a relatively limited number of members of the Company's
senior management, including its President, Mark Birner, D.D.S., its Chief
Executive Officer, Fred Birner, and its Chief Financial Officer, Treasurer and
Secretary, Dennis Genty. Some key employees have only recently joined the
Company. The Company believes its future success will depend in part upon its
ability to attract and retain qualified management personnel. Competition for
such personnel is intense and the Company competes for qualified personnel with
numerous other employers, some of which have greater financial and other
resources than the Company. The loss of the services of one or more members of
the Company's senior management or
31
32
the failure to add or retain qualified management personnel could have a
material adverse effect on the Company's business, financial condition and
operating results.
Risks Associated with Cost-Containment Initiatives. The health care industry,
including the dental services market, is experiencing a trend toward cost
containment, as payors seek to impose lower reimbursement rates upon providers.
The Company believes that this trend will continue and will increasingly affect
the provision of dental services. This may result in a reduction in per-patient
and per-procedure revenue from historic levels. Significant reductions in
payments to dentists or other changes in reimbursement by payors for dental
services may have a material adverse effect on the Company's business, financial
condition and operating results.
Risks Associated with Capitated Payment Arrangements. Part of the Company's
growth strategy involves selectively obtaining capitated managed dental care
contracts. Under a capitated managed dental care contract, the dental practice
provides dental services to the members of the plan 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 practice which is obligated to provide them, and may receive a co-pay for
each service provided. This arrangement shifts the risk of utilization of such
services to the dental group practice that provides the dental services. Because
the Company assumes responsibility under its 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 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 contrast,
under traditional indemnity insurance arrangements, the insurance company
reimburses reasonable charges that are billed for the dental services provided.
In 1999, the Company derived approximately 18.7% of its revenues from capitated
managed dental care contracts, and 21.3% of its revenues from associated
co-payments. Risks associated with capitated managed dental care contracts
include principally (i) the risk that the capitation payments and any associated
co-payments do not adequately cover the costs of providing the dental services,
(ii) the risk that one or more of the P.C.s may be terminated as an approved
provider by managed dental care plans with which they contract, (iii) the risk
that the Company will be unable to negotiate future capitation arrangements on
satisfactory terms with managed care dental plans, and (iv) the risk that large
subscriber groups will terminate their relationship with such managed dental
care plans which would reduce patient volume and capitation and co-payment
revenue. There can be no assurance that the Company will be able to negotiate
future capitation arrangements on behalf of P.C.s on satisfactory terms or at
all, or that the fees offered in current capitation arrangements will not be
reduced to levels unsatisfactory to the Company. Moreover, to the extent that
costs incurred by the Company's affiliated dental practices in providing
services to patients covered by capitated managed dental care contracts exceed
the revenue under such contracts, the Company's business, financial condition
and operating results may be materially and adversely affected. See Items 1 and
2. "Business and Properties - Operations - Payor Mix."
Risks of Becoming Subject to Licensure. Federal and state laws regulate
insurance companies and certain other managed care organizations. Many states,
including Colorado, also regulate the establishment and operation of networks of
health care providers. In most states, these laws do not apply to
discounted-fee-for-service arrangements. These laws also do not generally apply
to networks that are paid on a capitated basis, unless the entity with which the
network provider is contracting is not a licensed health insurer or other
managed care organization. There are exceptions to these rules in some states.
For example, certain states require a license for a capitated arrangement with
any party unless the risk-bearing entity is a professional corporation that
employs the professionals. The Company believes its current activities do not
constitute the provision of insurance in Colorado or New Mexico, and thus, it is
in compliance with the insurance laws of these states with respect to the
operation of its Offices. There can be no assurance that these laws will not be
changed or that interpretations of these laws by the regulatory authorities in
those states, or in the states in which the Company expands, will not require
licensure or a restructuring of some or all of the Company's operations. In the
event that the Company is required to become licensed under these laws, the
licensure process can be lengthy and time consuming and, unless the regulatory
authority permits the Company to continue to operate while the licensure process
is progressing, the Company could experience a material adverse change in its
business while the licensure process is pending. In addition, many of the
licensing requirements mandate strict financial and other requirements, which
the Company may not immediately be able to meet. Further, once licensed, the
Company would be subject to continuing oversight by and reporting to the
respective regulatory agency. The regulatory framework of certain jurisdictions
may limit the Company's expansion into, or ability to continue operations
within, such jurisdictions if the Company is unable to modify its operational
structure to conform to such regulatory framework. Any limitation on the
Company's ability to expand could have a material adverse effect on the
Company's business, financial condition and operating results.
Risks Arising From Health Care Reform. Federal and state governments currently
are considering various types of health care initiatives and comprehensive
revisions to the health care and health insurance systems. Some of the proposals
under consideration, or others that may be introduced, could, if adopted, have a
material adverse effect on the
32
33
Company's business, financial condition and operating results. It is uncertain
what legislative programs, if any will be adopted in the future, or what action
Congress or state legislatures may take regarding health care reform proposals
or legislation. In addition, changes in the health care industry, such as the
growth of managed care organizations and provider networks, may result in lower
payments for the services of the Company's managed practices.
Risks Associated with Intangible Assets. At December 31, 1999, intangible assets
on the Company's consolidated balance sheet were $14.1 million, representing
50.3% of the Company's total assets at that date. The Company expects the amount
allocable to intangible assets on its balance sheet to increase in the future in
connection with additional acquisitions, which will increase the Company's
amortization expense. In the event of any sale or liquidation of the Company or
a portion of its assets, there can be no assurance that the value of the
Company's intangible assets will be realized. In addition, the Company
continually evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of the amount allocable to the
Company's intangible assets may not be recoverable. When factors indicate that
the amount allocable to the Company's intangible assets should be evaluated for
possible impairment, the Company may be required to reduce the carrying value of
such assets. Any future determination requiring the write off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's business, financial condition and operating results.
Possible Exposure to Professional Liability. In recent years, dentists have
become subject to an increasing number of lawsuits alleging malpractice and
related legal theories. Some of these lawsuits involve large claims and
significant defense costs. Any suits involving the Company or dentists at the
Offices, if successful, could result in substantial damage awards that may
exceed the limits of the Company's insurance coverage. The Company provides
practice management services; it does not engage in the practice of dentistry or
control the practice of dentistry by the dentists or their compliance with
regulatory requirements directly applicable to providers. There can be no
assurance, however, that the Company will not become subject to litigation in
the future as a result of the dental services provided at the Offices. The
Company maintains professional liability insurance for itself and provides for
professional liability insurance covering dentists, hygienists and dental
assistants at the Offices. While the Company believes it has adequate liability
insurance coverage, there can be no assurance that the coverage will be adequate
to cover losses or that coverage will continue to be available upon terms
satisfactory to the Company. In addition, certain types of risks and
liabilities, including penalties and fines imposed by governmental agencies, are
not covered by insurance. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims could have a material
adverse effect on the Company's business, financial condition and operating
results. See Items 1 and 2. "Business and Properties - Insurance."
Risks Associated with Non-Competition Covenants and Other Arrangements with
Managing Dentists. The Management Agreements require the P.C.s to enter into
employment agreements with dentists which include non-competition provisions
typically for three to five years after termination of employment within a
specified geographic area, usually a specified number of miles from the relevant
Office, and restrict solicitation of employees and patients. In Colorado,
covenants not to compete are prohibited by statute with certain exceptions. One
exception permits enforcement of covenants not to compete against executive and
management personnel and officers and employees who constitute professional
staff to executive and management personnel. Permitted covenants not to compete
are enforceable in Colorado only to the extent their terms are reasonable in
both duration and geographic scope. Arizona and New Mexico courts have enforced
covenants not to compete if their terms are found to be reasonable. It is thus
uncertain whether a court will enforce a covenant not to compete in those states
in a given situation. In addition, there is little judicial authority regarding
whether a practice management agreement will be viewed as the type of
protectable business interest that would permit it to enforce such a covenant or
to require a P.C. to enforce such covenants against dentists formerly employed
by the P.C. Since the intangible value of a Management Agreement depends
primarily on the ability of the P.C. to preserve its business, which could be
harmed if employed dentists went into competition with the P.C., a determination
that the covenants not to compete contained in the employment agreements between
the P.C. and its employed dentists are unenforceable could have a material
adverse impact on the Company. See Items 1 and 2. "Business and Properties -
Affiliation Model- Employment Agreements." In addition, the Company is a party
to various agreements with managing dentists who own the P.C.s, which restrict
the dentists' ability to transfer the shares in the P.C.s. See Items 1 and 2.
"Business and Properties - Affiliation Model - Relationship with P.C.s." There
can be no assurance that these agreements will be enforceable in a given
situation. A determination that these agreements are not enforceable could have
a material adverse impact on the Company.
Seasonality. The Company's past financial results have fluctuated somewhat due
to seasonal variations in the dental service industry, with Revenue typically
declining in the fourth calendar quarter. The Company expects this seasonality
to continue in the future.
Year 2000 Issues. 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.
33
34
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.
Competition. The dental practice management segment of the dental services
industry is highly competitive and is expected to become increasingly more
competitive. There are several dental practice management companies that are
operating in the Company's markets. There are also a number of companies with
dental practice management businesses similar to that of the Company currently
operating in other parts of the country which may enter the Company's existing
markets in the future. As the Company seeks to expand its operations into new
markets, it is likely to face competition from dental practice management
companies, which already have established a strong business presence in such
locations. The Company's competitors may have greater financial or other
resources or otherwise enjoy competitive advantages, which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company. See Items 1 and 2. "Business and Properties -
Competition."
The business of providing general dental and specialty dental services is highly
competitive in the markets in which the Company operates. Competition for
providing dental services may include practitioners who have more established
practices and reputations. The Company competes against established practices in
the retention and recruitment of general dentists, specialists, hygienists and
other personnel. If the availability of such dentists, specialists, hygienists
and other personnel begins to decline in the Company's markets, it may become
more difficult to attract qualified dentists, specialists, hygienists and other
personnel. There can be no assurance that the Company will be able to compete
effectively against other existing practices or against new single or
multi-specialty dental practices that enter its markets, or to compete against
such practices in the recruitment and retention of qualified dentists,
specialists, hygienists and other personnel. See Items 1 and 2.
"Business and Properties - Competition."
Volatility of Stock Price. The market price of the Common Stock could be subject
to wide fluctuations in response to quarter-by-quarter variations in operating
results of the Company or its competitors, changes in earnings estimates by
analysts, developments in the industry or changes in general economic
conditions.
Restrictions on Payment of Dividends. The Company has not declared or paid cash
dividends on its Common Stock since its formation, and the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of dividends is prohibited under the terms of the Company's existing
credit facility and may be prohibited under any future credit facility, which
the Company may obtain. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters" and "Liquidity and Capital Resources" in this Item
7.
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ITEM 7A. 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 December 31, 1999, the Company has not used derivative instruments or
engaged in hedging activities.
Interest Rate Risk. The interest payable on the Company's line-of-credit is
variable based upon the prime rate or LIBOR (at the Company's option), and,
therefore, affected by changes in market interest rates. At December 31, 1999,
approximately $5.5 million was outstanding under the LIBOR option with an
interest rate of 8.4% (LIBOR plus 2.25%) and approximately $1.1 million was
outstanding with an interest rate of 8.5% (prime plus 0.5%). 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.
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36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Birner Dental Management Services, Inc.'s and subsidiaries consolidated
financial statements as of December 31, 1999 and 1998 and for the three years
ended December 31, 1999:
Page
----
Report of Independent Public Accountants 37
Consolidated Balance Sheets 38
Consolidated Statements of Operations 39
Consolidated Statements of Shareholders' Equity 40
Consolidated Statements of Cash Flows 41
Notes to Consolidated Financial Statements 43
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37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Birner Dental Management Services, Inc.:
We have audited the accompanying consolidated balance sheets of Birner Dental
Management Services, Inc. (a Colorado corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Birner Dental Management
Services, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 10, 2000.
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38
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
ASSETS 1998 1999
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 2,169,687 $ 806,954
Accounts receivable, net of allowance for doubtful
accounts of $296,911 and $306,469, respectively 2,668,024 3,700,685
Current portion of notes receivable - related parties 28,746 71,070
Deferred income taxes 173,629 117,764
Income tax receivable 262,469 87,000
Prepaid expenses and other assets 345,858 449,385
----------- -----------
Total current assets 5,648,413 5,232,858
PROPERTY AND EQUIPMENT, net 5,613,021 7,965,699
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,877,449 14,057,688
Deferred charges and other assets 404,476 215,793
Notes receivable - related parties, net of current portion -- 3,000
Deferred tax asset -- 473,969
----------- -----------
Total assets $25,543,359 $27,949,007
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,042,534 $ 3,602,239
Current maturities of long-term debt 276,331 161,936
Current maturities of capital lease obligations 20,996 1,600
----------- -----------
Total current liabilities 3,339,861 3,765,775
LONG-TERM LIABILITIES:
Deferred income taxes 217,569 415,868
Long-term debt, net of current maturities 3,234,101 6,771,157
Capital lease obligations, net of current maturities 6,321 339
Other long-term obligations -- 91,257
----------- -----------
Total liabilities 6,797,852 11,044,396
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding -- --
Common Stock, no par value, 20,000,000 shares
authorized; 6,636,980 and 6,131,814, shares issued and
outstanding at December 31, 1998 and 1999, respectively 18,531,738 16,968,454
Retained earnings (accumulated deficit) 213,769 (63,843)
----------- -----------
Total shareholders' equity 18,745,507 16,904,611
----------- -----------
Total liabilities and shareholders' equity $25,543,359 $27,949,007
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
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39
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
NET REVENUE $ 12,742,293 $ 21,740,665 $ 28,553,114
DIRECT EXPENSES:
Clinical salaries and benefits 4,767,444 8,456,126 11,204,988
Dental supplies 1,081,080 1,209,068 1,773,229
Laboratory fees 1,171,429 2,031,392 2,845,896
Occupancy 1,100,447 1,965,278 3,088,530
Advertising and marketing 408,612 380,068 483,615
Depreciation and amortization 549,332 1,152,200 1,924,790
General and administrative 1,072,224 2,092,523 3,104,388
-------------- -------------- --------------
10,150,568 17,286,655 24,425,436
-------------- -------------- --------------
Contribution from dental offices 2,591,725 4,454,010 4,127,678
Corporate expenses-
General and administrative 1,360,537 3,032,142 3,796,696
Depreciation and amortization 101,709 149,748 241,496
Unsuccessful acquisition costs 252,234 -- --
-------------- -------------- --------------
Operating income 877,245 1,272,120 89,486
Interest expense, net (843,430) (123,900) (478,285)
Conversion inducement expense -- (305,100) --
-------------- -------------- --------------
Income (loss) before income taxes 33,815 843,120 (388,799)
Income tax (expense) benefit -- (128,471) 111,187
-------------- -------------- --------------
Income (loss) before change in accounting
principle 33,815 714,649 (277,612)
Cumulative effect of change in accounting
principle -- (39,162) --
-------------- -------------- --------------
Net income (loss) $ 33,815 $ 675,487 $ (277,612)
============== ============== ==============
Basic earnings (loss) per share of Common Stock:
Income (loss) before cumulative effect
of change in accounting principle $ .01 $ .12 $ (.04)
Cumulative effect of change in
accounting principle -- (.01) --
-------------- -------------- --------------
Net income (loss) $ .01 $ .11 $ (.04)
============== ============== ==============
Diluted earnings (loss) per share of Common Stock:
Income (loss) before cumulative effect
of change in accounting principle $ .01 $ .11 $ (.04)
Cumulative effect of change in
accounting principle -- (.01) --
-------------- -------------- --------------
Net income (loss) $ .01 $ .10 $ (.04)
============== ============== ==============
Weighted average number of shares of Common
Stock and dilutive securities:
Basic 3,218,392 6,239,671 6,234,209
============== ============== ==============
Diluted 3,456,973 6,444,982 6,234,209
============== ============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
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40
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Common Stock Earnings Total
----------------------------- (Accumulated Shareholders'
Shares Amount Deficit) Equity
------------ ------------ ------------ -------------
BALANCES, December 31, 1996 3,299,205 $ 2,179,659 $ (495,533) $ 1,684,126
Purchase and retirement of Common Stock (137,550) (330,000) -- (330,000)
Exercise of warrants 34,380 -- -- --
Exercise of stock options 208 435 -- 435
Net income -- -- 33,815 33,815
------------ ------------ ------------ ------------
BALANCES, December 31, 1997 3,196,243 1,850,094 (461,718) 1,388,376
Proceeds from initial public offering,
net of $2,541,912 of offering costs
and underwriters discount 1,833,816 10,294,800 -- 10,294,800
Debenture conversion, net of $278,393
of deferred financing costs 1,633,142 6,501,607 -- 6,501,607
Issuance of Common Stock for dental
office acquisition 15,840 76,500 -- 76,500
Purchase and retirement of Common Stock (57,978) (241,563) -- (241,563)
Exercise of stock options 15,917 50,300 -- 50,300
Net income -- -- 675,487 675,487
------------ ------------ ------------ ------------
BALANCES, December 31, 1998 6,636,980 18,531,738 213,769 18,745,507
Purchase and retirement of Common Stock (535,100) (1,638,416) -- (1,638,416)
Exercise of stock options 5,502 12,132 -- 12,132
Issuance of Common Stock for dental
office acquisition 12,632 35,000 -- 35,000
Issuance of Common Stock to Profit
Sharing Plan 11,800 28,000 -- 28,000
Net (loss) -- -- (277,612) (277,612)
------------ ------------ ------------ ------------
BALANCES, December 31, 1999 6,131,814 $ 16,968,454 $ (63,843) $ 16,904,611
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 33,815 $ 675,487 $ (277,612)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 651,041 1,301,948 2,166,286
Stock issued for profit sharing plan -- -- 28,000
Provision for doubtful accounts 71,516 58,069 42,261
Provision for deferred income taxes -- 43,940 (219,805)
Amortization of debenture issuance costs 87,838 27,169 --
Conversion inducement -- 305,100 --
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (417,049) (1,096,789) (1,106,624)
Prepaid expense, income tax receivable
and other assets (79,647) (404,009) 90,832
Accounts payable and accrued expenses 1,051,943 486,526 500,109
Other long-term obligations -- -- 91,257
-------------- -------------- --------------
Net cash provided by operating activities 1,399,457 1,397,441 1,314,704
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties 94,992 14,813 (45,324)
Capital expenditures (912,976) (2,302,440) (2,634,600)
Development of new dental offices (165,103) (1,139,882) (1,071,191)
Cash acquired from existing dental offices 200,058 -- --
Acquisition of dental offices (3,402,536) (5,522,296) (697,321)
-------------- -------------- --------------
Net cash used in investing activities (4,185,565) (8,949,805) (4,448,436)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of
underwriting discounts -- 11,466,041 --
Payment of public offering costs -- (1,171,241) --
Proceeds from convertible subordinated debentures 225,000 -- --
Proceeds from exercise of Common Stock options 435 50,300 12,132
Net borrowings from line of credit 250,000 2,517,856 3,707,144
Proceeds from notes payable 2,000,000 -- --
Repayment of long-term debt (270,618) (3,517,967) (309,861)
Payment of debenture issuance and other
financing costs (19,629) (53,729) --
Payment to induce conversion of debentures -- (305,100) --
Purchase and retirement of Common Stock (219,178) (241,563) (1,638,416)
-------------- -------------- --------------
Net cash provided by financing activities 1,966,010 8,744,597 1,770,999
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (820,098) 1,192,233 (1,362,733)
CASH AND CASH EQUIVALENTS, beginning of year 1,797,552 977,454 2,169,687
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 977,454 $ 2,169,687 $ 806,954
============== ============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
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Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------------
1997 1998 1999
-------------- -------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 652,362 $ 260,171 $ 445,784
============== ============== ==============
Cash paid during the year for income taxes $ -- $ 347,000 $ 87,000
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Conversion of debentures -- 6,780,000 --
Acquisition of dental offices -- 76,500 35,000
Liabilities assumed or incurred through
acquisitions:
Accounts payable and accrued liabilities 451,055 149,777 59,596
Notes payable -- 95,200 --
Accounts receivable acquired through
acquisitions 197,920 225,000 40,000
Other assets acquired through acquisitions 25,491 -- 30,000
Notes payable incurred from:
Acquisition of dental offices 1,642,000 300,000 --
Purchase and retirement of Common Stock 110,822 -- --
1,061 shares of Common Stock issued for
cashless exercise of 8,585 warrants in 1998 -- -- --
34,380 shares of Common Stock issued for
cashless exercise of 36,680 warrants in 1997 -- -- --
The accompanying notes are an integral part of these consolidated
financial statements.
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43
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND ORGANIZATION
Birner Dental Management Services, Inc., a Colorado corporation (the "Company"),
was incorporated on May 17, 1995 ("Inception") and manages dental group
practices. As of December 31, 1999, 1998 and 1997 the Company managed 54, 49,
and 34 dental practices (collectively referred to as the "Offices"),
respectively. The Company provides management services, which are designed to
improve the efficiency and profitability of the dental practices. These Offices
are organized as professional corporations and the Company provides its
management activities with the Offices under long-term management agreements
(the "Management Agreements").
The Company has grown primarily through acquisitions. The following table
highlights the Company's growth through December 31, 1999 as follows:
De novo Office
Acquisitions Developments Consolidations
------------ ------------ --------------
1995* 4 -- --
1996 12 5 (3)
1997 15 1 --
1998 10 5 --
1999 1 5 (1)
-------- -------- ------
Total 42 16 (4)
======== ======== ======
* Includes three dental Offices acquired from one of the Company's founders.
The Company's operations and expansion strategy are dependent, in part, on the
availability of dentists, hygienists and other professional personnel and the
ability to hire and assimilate additional management and other employees to
accommodate expanded operations.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation/Basis of Consolidation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. These financial statements present the financial
position and results of operations of the Company and the Offices, which are
under the control of the Company. All intercompany accounts and transactions
have been eliminated in the consolidation.
The Company treats Offices as consolidated subsidiaries where it has a perpetual
and unilateral controlling financial interest over the assets and operations of
the Offices. The Company has obtained control of substantially all of the
Offices via long-term contractual management arrangements. Certain key features
of these arrangements either enable the Company at any time and in its sole
discretion to cause a change in the shareholder of the P.C. (i.e., "nominee
shareholder") or allow the Company to vote the shares of stock held by the owner
of the P.C. and to elect a majority of the board of directors of the P.C. The
accompanying statements of operations reflect net revenue, which is the amount
billed to patients, less dentists' and hygienists' compensation. Direct expenses
consist of all the expenses incurred in operating the Offices and paid by the
Company. Under the Management Agreements the Company assumes responsibility for
the management of most aspects of the Offices' business (other than the
provision of dental services) including personnel recruitment and training,
comprehensive administrative business and marketing support and advice, and
facilities, equipment, and support personnel as required to operate the
practice. The accompanying consolidated financial statements are presented
without regard to where the costs are incurred since under the management and
other agreements the Company believes it has perpetual and unilateral control
over the assets and operations of substantially all of the Offices.
The Emerging Issues Task Force ("EITF") Issue 97-2 of the Financial Accounting
Standards Board ("FASB") covers financial reporting matters relating to the
physician practice management industry, including the consolidation of
professional corporation revenue and expenses, the accounting for business
combinations and the treatment of stock options for dentists as employee
options. The Company's accounting policies in these areas are consistent with
the provisions of EITF Issue 97-2.
43
44
A summary of the components of net revenue for the years ended December 31,
1999, 1998, and 1997 follows:
Years Ended December 31,
--------------------------------------------------
1997 1998 1999
-------------- -------------- ------------
Total dental group practice revenue, net $ 17,176,583 $ 29,189,754 $ 39,109,357
Less - revenue from managed offices, net 1,345,231 3,576,870 6,927,865
-------------- -------------- --------------
Dental office revenue, net 15,831,352 25,612,884 32,181,492
Less - amounts retained by dental offices 4,134,542 6,607,253 8,444,706
-------------- -------------- --------------
Net revenue from consolidated dental offices 11,696,810 19,005,631 23,736,786
Management service fee revenue 1,045,483 2,735,034 4,816,328
-------------- -------------- --------------
Net revenue $ 12,742,293 $ 21,740,665 $ 28,553,114
============== ============== ==============
Total Dental Group Practice Revenue, Net
"Total dental group practice revenue, net" represents the revenue of the
consolidated and managed Offices reported at the estimated realizable amounts
from insurance companies, preferred provider and health maintenance
organizations (i.e., third-party payors) and patients for services rendered, net
of contractual and other adjustments. Dental services are billed and collected
by the Company in the name of the Offices.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. There are no material claims, disputes or other
unsettled matters that exist to management's knowledge concerning third-party
reimbursements.
During 1999, 1998, and 1997, 18.7%, 22.6%, and 23.7%, respectively, of the
Company's gross revenue was derived from capitated managed dental care
contracts. Under these contracts the Offices receive a fixed monthly payment for
each covered plan member for a specific schedule of services regardless of the
quantity or cost of services provided by the Offices. The Offices may receive a
co-pay from the patient for each service provided.
During the three years ended December 31, 1999, the following three companies
were responsible for the corresponding percentages of the Company's total dental
group practice revenue, net: Prudential Dental Maintenance Organization, Inc.
was responsible for 8.9%, 9.3% and 11.5%, respectively, PacifiCare of Colorado,
Inc. was responsible for 6.7%, 10.6% and 13.4%, respectively, and CIGNA Dental
Health was responsible for 7.8%, 9.3% and 11.5%, respectively.
Net Revenue from Consolidated Dental Offices
Net revenue from consolidated dental offices represents the "Total dental group
practice revenue, net" less amounts retained by the Offices primarily for
compensation paid by the professional corporations to dentists and hygienists.
Dentists receive compensation based upon a specified amount per hour worked or a
percentage of revenue or collections attributable to their work, and a bonus
based upon the operating performance of the Office. The Company's net revenue is
dependent upon the revenue of the Offices. The Company's historical net revenue
and operating income levels would be the same as those reported even if the
Company employed all of the dentists and hygienists.
Management Service Fee Revenue
For five of the Offices for which the Company has management agreements, but
does not have control, the Company receives management services fee revenue
included with net revenue in the accompanying statements of operations.
Management service fee revenue is equal to gross revenue less compensation for
dentists and hygienists for the Offices. Direct expenses associated with the
operations of these Offices are also included in the accompanying statements of
operations.
44
45
Contribution From Dental Offices
The "Contribution from dental offices" represents the excess of net revenue from
the operations of the offices over direct expenses associated with operating the
Offices. The revenue and direct expense amounts relate exclusively to business
activities associated with the Offices. The contribution from dental offices
provides an indication of the level of earnings generated from the operation of
the Offices to cover corporate expenses, interest expense charges and income
taxes.
Advertising and Marketing
The costs of advertising, promotion and marketing are expensed as incurred.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include money market accounts and all highly liquid investments with
original maturities of three months or less.
Accounts Receivable
Accounts receivable represents receivables from patients and other third-party
payors for dental services provided. Such amounts are recorded net of
contractual allowances and other adjustments at time of billing. In addition,
the Company has estimated allowances for uncollectible accounts.
In those instances when payment is not received at the time of service, the
Offices record receivables without collateral from their patients, most of who
are local residents and are insured under third-party payor agreements.
Management continually monitors and periodically adjusts the allowances
associated with these receivables.
Property and Equipment
Property and equipment are stated at cost or fair market value at the date of
acquisition, net of accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over their useful lives
of five years and leasehold improvements are amortized over the remaining life
of the lease. Equipment held under capital lease obligations is amortized on a
straight-line basis over the shorter of the lease term or estimated life of the
asset. Depreciation was $1,550,363, $829,988, and $390,891 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Intangible Assets
The Company's dental practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
Offices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed, based on estimated fair market values. Costs of acquisition
in excess of the net estimated fair value of tangible and identifiable
intangible assets acquired and liabilities assumed are allocated to the
Management Agreement. The Management Agreement represents the Company's right to
manage the Offices during the 40-year term of the agreement. The assigned value
of the Management Agreement is amortized using the straight-line method over a
period of 25 years. Amortization was $615,923, $471,960, and $249,914 for the
years ended December 31, 1999, 1998, and 1997, respectively.
The Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default by the Company.
The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. If this review indicates that the carrying amount
of the asset may not be recoverable, as determined based on the undiscounted
cash flows of the Offices acquired over the remaining amortization periods, 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 dental
Office's relative market share and local market competitive environment, current
period and forecasted operating results, cash flow levels of the dental Offices
and the impact on the net revenue earned by the Company, and legal and
regulatory factors governing the practice of dentistry.
45
46
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk are primarily cash and cash equivalents and accounts receivable. The
Company maintains its cash balances in the form of bank demand deposits and
money market accounts with financial institutions that management believes are
creditworthy. Accordingly, the Company may be exposed to credit risk generally
associated with healthcare and retail companies. The Company established an
allowance for uncollectible accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information. The Company
has no significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option contracts or other
foreign currency hedging arrangements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes (Note 11) pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the asset and liability method of computing deferred
income taxes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
book basis and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or settled.
Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per Share".
Years Ended December 31,
----------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ----------------------------- ---------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Loss Shares Amount
------ --------- -------- -------- --------- -------- --------- ----------- ---------
Basic EPS
Income (loss) before cumulative
effect of change in
accounting
principle $33,815 3,218,392 $.01 $ 714,649 6,239,671 $.12 $(277,612) 6,234,209 $(.04)
Cumulative effect of
change in accounting
principle -- -- -- (39,162) -- (.01) -- -- --
------- --------- ---- --------- --------- ---- --------- ---------- -----
Net income (loss) $33,815 3,218,392 $.01 $ 675,487 6,239,671 $.11 $(277,612) 6,234,209 $(.04)
======= ========= ==== ========= ========= ==== ========= ========== =====
Diluted EPS
Income (loss) before cumulative
effect of change in
accounting
principle $33,815 3,456,973 $.01 $ 714,649 6,444,982 $.11 $(277,612) 6,234,209 $(.04)
Cumulative effect of
change in accounting
principle -- -- -- (39,162) -- (.01) -- -- --
------- --------- ---- --------- --------- ---- --------- --------- -----
Net income (loss) $33,815 3,456,973 $.01 $ 675,487 6,444,982 $.10 $(277,612) 6,234,209 $(.04)
======= ========= ==== ========= ========= ==== ========= ========= =====
The difference between basic earnings per share and diluted earnings per share
for 1998 and 1997 relates to the effect of 205,311 and 238,581, 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 year ended December 31, 1999 since they were anti-dilutive as a
result of the Company's net loss for the year.
The conversion of the May and December Debentures were excluded from diluted
earnings per share for 1997 as the effect of the exclusion of the related
interest expense for 1997 would have an anti-dilutive effect on diluted earnings
per share.
46
47
Comprehensive Income
The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in June 1997 which
established standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. In addition to
net income (loss), comprehensive income includes all changes in equity during a
period, except those resulting from investments by and distributions to owners.
The Company adopted SFAS 130, which is effective for fiscal years beginning
after December 15, 1997, in the first quarter of 1998. For 1999, 1998 and 1997
net income and comprehensive income were the same.
Costs of Start-up Activities
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-Up Activities" in April 1998. This SOP provides
guidance on the reporting of start-up costs and organization costs and requires
the Company to expense these costs (as defined by the SOP) as they are incurred.
The Company adopted SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, in the first quarter of 1998. Initial application of
this SOP was reported as a cumulative effect of a change in accounting principle
in 1998, resulting in a $39,162 decrease in net income for the year ended
December 31, 1998.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" that establishes standards for reporting
information about operating segments in annual and interim financial statements.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for fiscal
years beginning after December 15, 1997 and was adopted by the Company in 1998.
The Company operates in one business segment, which is to manage dental group
practices. The Company currently manages Offices in the states of Arizona,
Colorado and New Mexico. All aspects of the Company's business are structured on
a practice-by-practice basis. Financial analysis and operational decisions are
made at the Office level, the Company does not evaluate performance criteria
based upon geographic location, type of service offered or sources of revenue.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees". The Company follows the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". SFAS 123 defines a fair value based method of accounting for
stock options and similar equity instruments. (See Note 9).
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.
(3) ACQUISITIONS
During 1999, 1998 and 1997, the Company acquired various dental practices. In
connection with each Office acquisition, the Company entered into contractual
arrangements, including Management Agreements, which have a term of 40 years.
Pursuant to these contractual arrangements the Company manages all aspects of
the Offices, other than the provision of dental services, and believes it has
perpetual and unilateral control over the assets and business operations of the
Offices. Accordingly, these acquisitions are considered business combinations.
47
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1999 Acquisitions
On February 11, 1999, the Company acquired all of the assets of a Colorado sole
proprietorship (Perfect Teeth/Glendale Dental) and obtained certain rights to
manage the practice for a total purchase price of approximately $760,000. The
consideration consisted of $665,000 payable in cash, $35,000 payable in Common
Stock of the Company and the assumption of certain obligations of approximately
$60,000.
1998 Acquisitions
On February 27, 1998, the Company acquired all of the assets of a New Mexico
partnership (Perfect Teeth/Alice) and obtained certain rights to manage the
practice for a total purchase price of $630,000. The consideration consisted of
$598,500 payable in cash with the remaining $31,500 being payable in Common
Stock of the Company. On April 27, 1998, the Company acquired all of the assets
of three Colorado dental practices, two in the Denver metro area (Perfect
Teeth/West Jewell and Perfect Teeth/South Broadway) and one in Boulder (Perfect
Teeth/Folsom) for a total purchase price of $1,800,000, all payable in cash. On
July 15, 1998, the Company acquired all of the assets of a dental practice in
Phoenix, Arizona (Perfect Teeth/Bell Road and 64th Street) for a total purchase
price of $791,000, all payable in cash. On August 14, 1998, the Company acquired
all of the assets of a dental practice in Colorado Springs, Colorado (Perfect
Teeth/South 8th Street) for a total purchase price of $351,000, all payable in
cash. On September 18, 1998, the Company acquired all of the assets of a dental
practice in Albuquerque, New Mexico (Perfect Teeth/Cubero) for a total purchase
price of $320,000. The consideration consisted of $120,000 payable in cash and a
$200,000 note payable with a term of 36 months and an interest rate of 8%. On
September 28, 1998, the Company acquired all the assets of a Colorado
partnership (Perfect Teeth/Mississippi) and obtained certain rights to manage
the practice for a total purchase price of $1,128,000. The consideration
consisted of $855,000 payable in cash, $45,000 payable in Common Stock of the
Company and the assumption of certain obligations in the amount of $228,000. On
September 29, 1998, the Company acquired all of the assets of a dental practice
in Scottsdale, Arizona (Perfect Teeth/Shea and 90th Street) for a total purchase
price of $704,000. The consideration consisted of $604,000 payable in cash and a
$100,000 note payable with a term of 60 months and an interest rate of 8%. On
September 30, 1998, the Company acquired all of the assets of a dental practice
in Phoenix, Arizona (Perfect Teeth/Thomas and 15th Avenue) for a total purchase
price of $295,000, all payable in cash.
1997 Acquisitions
The Company acquired all the assets of three dental practices for a total
purchase price of $645,000, at various dates from February 1997 through May
1997. All the assets in another Colorado practice (Perfect Teeth/Yale) and
certain rights to manage the practice were acquired in April 1997. The Company
acquired two unrelated New Mexico dental practices for approximately $457,500 in
August 1997. On September 8, 1997, the Company acquired nine dental practices,
operated under the name of Gentle Dental, located in Colorado for $3.5 million.
The acquisitions described above have been accounted for using the purchase
method of accounting. Accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed based on the
estimated fair values at the dates of acquisition. The Company does not expect
the final allocations to differ significantly from the amounts estimated at date
of acquisition. The estimated fair value of assets acquired and liabilities
assumed for these acquisitions are summarized as follows:
1997 1998
Acquisitions(1) Acquisitions(2)
--------------- ---------------
Accounts receivable, net $ 179,920 $ 175,000
Property and equipment, net 221,478 376,000
Other assets 225,549 -
Liabilities assumed (470,270) (17,061)
Intangible assets 4,443,323 3,727,461
Less: Fair value of Common
Stock issued - -
Deferred purchase price
(payable in cash) (1,642,000) (300,000)
------------ ------------
Cash purchase price $ 2,958,000 $ 3,961,400
============ ============
(1) Excluding acquired interest in Yale
(2) Excluding acquired interest in Alice and Mississippi
48
49
Alice, Mississippi, East Cornell, Yale and Glendale Dental are not treated as
business combinations because the contractual arrangements do not provide
complete and unilateral control of the operations of the Offices. No information
is shown for 1999 as the Glendale Dental acquisition done in 1999 is not treated
as a business combination.
Operating results of the acquired practices are included in the accompanying
statements of operations from the date of acquisition.
In connection with the agreements with the dentists associated with East
Cornell, Yale, Alice, Mississippi and Glendale Dental, whereby the Company
acquired an interest in the practices and obtained the rights to manage the
practices, the Company recorded intangible assets of $2,779,800 related to the
Management Agreements obtained in these transactions. In each case, the dentist
has an option to put the remaining interest in the Office to the Company at an
exercise price, which is calculated based upon the performance of the Office
(the "put option price"). The option is exercisable contingent upon certain
conditions as outlined in the agreement. The option exercise periods generally
begin three years after the date of acquisition and run for seven years. The
excess of the put option price over the fair value of the remaining interest (if
any) will be charged to earnings or, if the put option is exercised, the amount
paid will be recorded as an additional cost of acquisition.
(4) NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties consist of the following:
December 31,
---------------------------------
1998 1999
-------------- --------------
Note receivable from CEO and shareholder, unsecured,
principal and interest due December 31, 2000,
interest rate of 6% per annum $ 25,000 $ 30,070
Note receivable from CEO and shareholder, unsecured,
principal and interest due September 16, 2000, -- 38,000
interest rate of 7% per annum
Note receivable from employee, unsecured, annual principal and
interest payments, due March 15, 2001,
interest rate of 6% per annum -- 6,000
Note receivable from affiliated dentist, unsecured,
monthly principal and interest payments, interest
rate of 8% per annum, due July 20, 1999 3,746 --
-------------- --------------
28,746 74,070
Less - current maturities (28,746) (71,070)
-------------- --------------
Notes receivable - related parties, long-term $ -- $ 3,000
============== ==============
49
50
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
----------------------------------
1998 1999
-------------- ---------------
Dental equipment $ 2,440,330 $ 3,504,480
Furniture and fixtures 494,594 728,888
Leasehold improvements 2,567,577 4,026,305
Computer equipment, software and related items 1,363,323 2,101,532
Instruments 245,047 652,707
-------------- --------------
7,110,871 11,013,912
Less - accumulated depreciation (1,497,850) (3,048,213)
-------------- --------------
Property and equipment, net $ 5,613,021 $ 7,965,699
============== ==============
Property and equipment held under capital leases included in the above balances
and the related accumulated amortization is as follows:
December 31,
---------------------------------
1998 1999
-------------- --------------
Leased property and equipment $ 103,277 $ 103,277
Less - accumulated amortization (73,250) (101,338)
-------------- --------------
Leased property and equipment, net $ 30,027 $ 1,939
============== ==============
(6) DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
December 31,
--------------------------------
1998 1999
-------------- --------------
Deferred financing costs, net $ 64,164 $ 34,564
Office development costs 193,298 22,199
Deposits 147,014 159,030
-------------- --------------
$ 404,476 $ 215,793
============== ==============
Deferred financing costs are related to the acquisition and amendment of the
revolving credit agreement and are amortized over the life of the revolver of
three years (Note 8). Office development costs represent capital costs to third
parties incurred in connection with pending acquisitions or new Offices, which
are in the process of being opened. These costs will be capitalized when the
acquisitions are finalized or when the new Offices are opened, and will be
expensed if the acquisition is not completed.
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(7) INTANGIBLE ASSETS
Intangible assets consist of Management Agreements:
December 31,
Amortization ---------------------------------
Period 1998 1999
------------- -------------- --------------
Management agreements 25 years $ 14,715,142 $ 15,511,304
Less - accumulated amortization (837,693) (1,453,616)
-------------- --------------
Intangible assets, net $ 13,877,449 $ 14,057,688
============== ==============
(8) DEBT
Debt consists of the following:
December 31,
---------------------------------
1998 1999
-------------- --------------
Revolving credit agreement with a bank not to exceed
$20.0 million, interest payable quarterly at the
lender's base rate (8.5% at December 31, 1999) or
applicable LIBOR rate (6.19% plus 2.25%),
due in February 2001 $ 2,867,856 $ 6,575,000
Acquisition notes payable:
Due in January 2000, interest at 7%, monthly principal
and interest payments of $2,239 27,948 2,226
Due in May 2000, interest at 9%, monthly principal and
interest payments of $2,544 38,222 9,988
Due in September 2002, interest at 9%, monthly principal and
interest payments of $2,325 88,458 67,742
Due in May 2002; interest at 8%; monthly principal
and interest payments of $2,247 80,277 58,973
Due in September 2001; interest at 8%; monthly principal
and interest payments of $6,267 184,333 121,603
Due in October 2003; interest at 8%; monthly principal
and interest payments of $2,028 97,295 80,125
Notes payable assumed for an affiliated dentist; with monthly aggregate
principal and interest payments of $2,678; average interest rate of 14%;
maturing August 2000
to December 2000 33,682 17,436
Note payable; interest at 9.25% at December 31, 1998;
monthly principal and interest payments of $694 92,361 --
-------------- --------------
3,510,432 6,933,093
Less - current maturities (276,331) (161,936)
-------------- --------------
Long-term debt $ 3,234,101 $ 6,771,157
============== ==============
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Line of Credit
Under the Company's Credit Facility (as amended on September 29, 1999), during
its term, the Company may borrow up to $20.0 million for working capital needs.
Advances will bear interest at the lender's base rate or at the applicable LIBOR
rate plus 2.25%, at the Company's option, and the Company will be obligated to
pay an annual facility fee of .25% of the average unused amount of the line of
credit during the previous full calendar quarter. Borrowings are limited to an
availability formula based on the Company's adjusted EBITDA. At December 31,
1999, the Company had approximately $700,000 available and $6.6 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. At December 31, 1999, the Company was in compliance with all the
covenants required by the debt agreement.
The scheduled maturities of debt are as follows:
Years ending December 31,
2000 161,936
2001 6,698,671
2002 52,882
2003 19,604
Thereafter --
--------------
$ 6,933,093
==============
Conversion of the Debentures
In August 1997, the Company requested the holders of the December Debentures and
May Debentures to convert their debentures at the conversion rate of $5.45 and
$3.82 per share, respectively, concurrent with the initial public offering. In
return for this early conversion, the Company agreed to pay six months of
additional interest and allow some of the shares obtained from the conversion to
be included in the public offering. The additional interest cost of $305,100 was
expensed upon completing the conversion and payment of the interest. All holders
of debentures agreed to this early conversion. Therefore, on February 11, 1998,
all outstanding debentures were converted into 1,633,142 shares of Common Stock
of the Company. Upon conversion of the debentures, the carrying amount of
$6,780,000 was credited to shareholders' equity, net of remaining deferred
debenture issuance costs of $278,393.
(9) SHAREHOLDERS' EQUITY
Initial Public Offering
The Company's registration statement on Form S-1 (SEC File No. 333-36391)
covering the Company's initial public offering of 2,100,000 shares (including
266,184 shares sold by selling shareholders) of Common Stock at $7.00 per share,
was declared effective on February 11, 1998. The gross proceeds to the Company
in the offering were $12,836,712 and the expenses incurred were as follows: (i)
$1,370,671 for the underwriters discount and non-accountable expense allowance;
and (ii) $1,171,241 for other expenses, including legal, accounting and printing
fees. The Company used the net proceeds of the offering to repay outstanding
obligations and to fund the acquisition and development of dental practices in
Colorado, New Mexico, and Arizona.
Treasury Stock
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. As of December 31, 1998
the Company, in 11 separate transactions, purchased approximately 60,000 shares
of its Common Stock for total consideration of $ 241,563 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
considerations of $1.6 million at prices ranging from $1.78 to $3.75 per share.
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53
Stock Option Plans
The Employee Stock Option Plan (the "Employee Plan ") was adopted by the Board
of Directors effective as of October 30, 1995, and as amended on September 4,
1997, has 917,000 shares of Common Stock reserved for issuance. The Employee
Plan provides for the grant of incentive stock options, to employees (including
officers and employee-directors) and non-statutory stock options to employees,
directors and consultants.
The Dental Center Plan (the "Dental Center Plan") was adopted by the Board of
Directors effective as of October 30, 1995, and as amended on September 4, 1997,
has 641,900 shares of Common Stock reserved for issuance. The Dental Center Plan
provides for the grant of non-statutory stock options to P.C.s that are parties
to Management Agreements with the Company, and to dentists or dental hygienists
who are either employed by or an owner of the P.C.s. The Employee Plan and
Dental Center Plan are administered by a committee appointed by the Board of
Directors, which determines recipients and types of options to be granted,
including the exercise price, the number of shares, the grant dates, and the
exercisability thereof. The term of any stock option granted may not exceed 10
years. The exercise price of options granted under the Employee Plan and the
Dental Center Plan is determined by the committee, provided that the exercise
price of a stock option cannot be less than 100% of the fair market value of the
shares subject to the option on the date of grant, or 110% of the fair market
value for awards to more than 10% stockholders. Options granted under the plans
vest at the rate specified in the option agreements, which generally provide
that options vest in three to five equal annual installments.
A summary of stock options under both the Employee and the Dental Center Plans
as of December 31, 1999, 1998 and 1997 and changes during the years then ended
is presented below:
1997 1998 1999
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ----------
Outstanding at beginning of
year 361,273 $ 3.12 441,221 $ 5.48 584,640 $ 5.98
Granted 198,824 $ 8.28 279,700 $ 6.49 177,000 $ 2.34
Canceled (118,668) $ 3.04 (120,364) $ 5.68 (171,718) $ 5.88
Exercised (208) $ 2.09 (15,917) $ 3.16 (5,502) $ 2.21
---------- ---------- ----------
Outstanding at end of
year 441,221 584,640 584,420
========== ========== ==========
Exercisable at end of
year 149,575 242,967 321,493
========== ========== ==========
Weighted average fair value
of options granted $ 2.48 $ 3.19 $ 1.49
========== ========== ==========
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The following table summarizes information about the options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------------------------------- -------------------------------------
Number of Weighted Number of
Options Average Weighted Options Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of Exercise Prices 1999 Life Price 1999 Price
- ------------------------ --------------- -------------- -------------- --------------- --------------
$0.00-- 1.95 55,000 4.90 $ 1.65 -- --
$1.96-- 3.96 205,893 4.60 $ 2.65 109,424 $ 2.73
$3.97-- 5.94 85,432 3.80 $ 4.72 62,667 $ 4.90
$5.95-- 7.92 151,928 4.10 $ 6.96 67,568 $ 6.94
$7.93-- 9.90 86,167 3.40 $ 9.22 81,834 $ 9.23
-------------- -------------- -------------- -------------- --------------
$1.96-- 9.90 584,420 4.20 $ 4.95 321,493 $ 5.69
============== ============== ============== ============== ==============
Warrants
At December 31, 1999, 1998 and 1997, there were outstanding warrants or
contractual obligations to issue warrants to purchase approximately 381,041
shares of the Company's Common Stock. Total warrants of 90,169 were issued in
connection with the private placement of the Company's Common Stock, 137,733 for
the issuance of convertible subordinated debentures and 119,210 for personal
guarantees provided for certain Company bank debt. The warrants granted for the
personal guarantees of Company bank debt included 27,510 to each of the three
founders and 36,680 to the father of two of the founders. In August 1997, this
individual was issued 34,380 shares of Common Stock in a cashless exercise of
the warrants.
A summary of warrants as of December 31, 1999, 1998 and 1997, and changes during
the years then ended is presented below:
1997 1998 1999
-------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------ ---------- ------------ ---------- ------------
Outstanding at beginning of
year 388,377 $ 3.34 381,041 $ 3.81 381,041 $ 3.81
Granted 29,344 $ 6.04 -- -- -- --
Exercised (36,680) $ .54 -- -- -- --
------- ------- -------
Outstanding at end of
year 381,041 381,041 381,041
Warrants exercisable at ======= ======= =======
end of year 360,409 381,041 381,041
Weighted average exercise ======= ======= =======
price of warrants
outstanding $ 3.81 $ 3.81 $ 3.81
============ ============ ============
Weighted average remaining
contractual life at end of
year 3.77 2.49 1.49
============ ============ ============
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The Company uses the intrinsic value method to account for options granted to
employees and directors. For purposes of the pro forma disclosures under SFAS
No. 123 presented below, the Company has computed the fair values of all
non-compensatory options and warrants granted to employees, directors and
dentists using the Black-Scholes pricing model and the following weighted
average assumptions:
1997 1998 1999
---- ---- ----
Risk-free interest rate 5.63% 5.31% 5.62%
Expected dividend yield 0% 0% 0%
Expected lives 3.8 years 3.4 years 3.7 years
Expected volatility 61% 68% 88%
To estimate lives of options for this valuation, it was assumed options will be
exercised one year after becoming fully vested. All options are initially
assumed to vest. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture. As
the Company's Common Stock was not yet publicly traded in 1997, the expected
market volatility was based on the volatility of comparable publicly traded
companies. Actual volatility of the Company's Common Stock was used for 1999 and
1998. Fair value computations are highly sensitive to the volatility factor
assumed; the greater the volatility, the higher the computed fair value of
options granted.
The total fair value of options and warrants granted was computed to be
approximately $144,394, $595,510, and $550,113 for the years ended December 31,
1999, 1998, and 1997, respectively. These amounts are amortized ratably over the
vesting periods of the options or recognized at the date of grant if no vesting
period is required. Pro forma stock-based compensation, net of the effect of
forfeitures, was $137,101, $259,429 and $196,670 for the years ended December
31, 1999, 1998 and 1997, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income (loss) and pro forma net
income (loss) per common share would have been reported as follows:
1997 1998 1999
============== ============= =============
Net income (loss):
As reported $ 33,815 $ 675,487 $ (277,612)
============== ============= =============
Pro forma $ (162,855) $ 544,529 $ (375,493)
============== ============= =============
Net income (loss) per share, basic:
As reported $ .01 $ .11 $ (.04)
============== ============= =============
Pro forma $ (.05) $ .09 $ (.06)
============== ============= =============
Weighted average shares used to calculate pro forma net income (loss) per share
were determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
(10) COMMITMENTS AND CONTINGENCIES
Operating and Capital Lease Obligations
The Company leases certain office equipment and office space under leases
accounted for as operating leases. The original lease terms are generally one to
five years with options to renew the leases for specific periods subsequent to
their original terms. Rent expense for these leases totaled $2,293,927,
$1,480,939 and $659,902 for the years ended December 31, 1999, 1998, and 1997
respectively. Rent expense for leases with related parties for the years ended
December 31, 1999, 1998, and 1997 totaled $172,100, $232,484, and $126,609,
respectively.
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56
Future minimum lease commitments for operating leases with remaining terms of
one or more years are as follows:
Years ending December 31,
2000 1,968,521
2001 1,797,508
2002 1,539,552
2003 1,019,761
2004 607,312
Thereafter 810,029
-----------
$ 7,742,683
===========
Certain of the Company's office space leases are structured to include scheduled
and specified rent increases over the lease term. The Company has recognized the
effects of these rent escalations on a straight-line basis over the lease terms.
From time to time the Company is subject to litigation incidental to its
business, which could include litigation as a result of the dental services
provided at the Offices, although the Company does not engage in the practice of
dentistry or control the practice of dentistry. The Company maintains general
liability insurance for itself and provides for professional liability insurance
to the dentists, dental hygienists and dental assistants at the Offices. The
Company is not presently a party to any material litigation.
(11) INCOME TAXES
The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax consequences of events, which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. At December 31, 1999, the Company has
available tax net operating loss carryforwards of approximately $979,000, which
expire beginning in 2018.
Income tax expense for the years ended December 31, consists of the following:
1997 1998 1999
============ ============ ===========
Current:
Federal $ 13,926 $ 301,588 $ --
State 1,352 29,271 --
Utilization of net operating loss (15,278) (246,328) --
------------ ------------ ------------
-- 84,531 --
------------ ------------ ------------
Deferred:
Federal (31,648) 235,060 (132,192)
State (3,072) 22,680 (12,830)
Effect of permanent differences -- -- 33,835
Valuation allowance increase (decrease) 34,720 (213,800) --
------------ ------------ ------------
-- 43,940 (111,187)
------------ ------------ ------------
Total income taxes $ -- $ 128,471 $ (111,187)
============ ============ ============
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57
The Company's effective tax rate differs from the statutory rate due to the
impact of the following (expressed as a percentage of net income (loss) before
taxes):
1997 1998 1999
-------------- ----------- -------------
Statutory federal income tax
expense (benefit) 34.0% 34.0% (34.0)%
State income tax effect, net 3.3 3.3 (3.3)
Effect of permanent differences -- .6 8.7
Valuation allowance, net change (37.3) (30.9) --
Other -- 9.0 --
-------------- ----------- -------------
0.0% 16.0% (28.6)%
============== =========== =============
Temporary differences comprise the deferred tax assets and liabilities in the
consolidated balance sheet as follows:
December 31,
------------------------------
1998 1999
------------- -------------
Deferred tax assets current:
Tax loss carryforwards $ 39,265 $ --
Accruals not currently deductible 65,180 43,879
Allowance for doubtful accounts 69,184 73,885
------------ ------------
173,629 117,764
Deferred tax assets long-term:
Tax loss carryforwards -- 365,179
Benefit of AMT tax credit -- 108,790
------------ ------------
-- 473,969
Deferred tax liabilities long-term:
Intangible asset amortization for tax
over books (229,674) (397,575)
Depreciation for tax (over) under books 12,105 (18,293)
------------ ------------
Net deferred tax (liability) asset (217,569) (415,868)
------------ ------------
$ (43,940) $ 175,865
============ =============
(12) BENEFIT PLANS
Profit Sharing 401(k)/Stock Bonus Plan
The Company has a 401(k)/stock bonus plan. Eligible employees may make voluntary
contributions to the plan, which may be matched by the Company, at its
discretion, up to 2% of each employee's compensation. In addition, the Company
may make profit sharing contributions during certain years, which may be made,
at the Company's discretion, in cash or in Common Stock of the Company. The plan
was established effective April 1, 1997. For the year ended December 31, 1998
the Company accrued $25,000 which will be contributed to the plan during 1999
and contributed $15,000 related to the 1997 fiscal year. The Company did not
make any contributions to the plan during the year ended December 31, 1997.
Other Company Benefits
The Company provides a health and welfare benefit plan to all regular full-time
employees. The plan includes health and life insurance, and a cafeteria plan. In
addition, regular full-time and regular part-time employees are entitled to
certain dental benefits.
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58
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments included in current assets and current liabilities
approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's note payable and capital lease
obligations are based on similar rates currently available to the Company. The
carrying values and estimated fair values were estimated to be substantially the
same at December 31, 1999 and 1998.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes certain quarterly results of operations:
Net Income
Contribution (Loss) Per
From Net Share of
Net Dental Income Common
Revenue Offices (Loss) Stock (Diluted)
------------- ------------ ---------- ---------------
1999 quarter ended:
March 31, 1999 $ 7,022,728 $ 1,597,851 $ 298,639 $ .05
June 30, 1999 7,166,534 1,050,817 (61,222) (.01)
September 30, 1999 7,406,488 1,123,541 (24,944) .00
December 31, 1999 6,957,364 355,469 (490,085) (.08)
------------- ----------- ---------- ---------------
$ 28,553,114 $ 4,127,678 $ (277,612) $ (.04)
============= =========== ========== ===============
1998 quarter ended:
March 31, 1998 $ 4,651,337 $ 1,137,388 $ 62,806 $ .01
June 30, 1998 5,609,017 1,442,385 509,776 .07
September 30, 1998 5,855,388 1,383,654 383,550 .06
December 31, 1998 5,624,923 490,583 (280,645) (.04)
------------- ----------- ---------- ---------------
$ 21,740,665 $ 4,454,010 $ 675,487 $ .10
============= =========== ========== ===============
As a result of the implementation of SOP 98-5 effective January 1, 1998, net
income and net income per share of common stock (diluted) for the first quarter
of 1998 as reported above varies from the amounts originally reported on prior
Form 10-Q.
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59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to instruction G (3) to Form 10-K, Items 10, 11, 12 and 13 are omitted
because the Company will file a definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A under the Securities Exchange Act of 1934
not later than 120 days after the close of the fiscal year. The information
required by such items will be included in the Proxy Statement to be so filed
for the Company's annual meeting of stockholders to be held on or about June 8,
2000 and is hereby incorporated by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets -
December 31, 1999 and 1998
Consolidated Statements of Operations -
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Report of Independent Accountants on Schedule
II - Valuation and Qualifying Accounts -
Three Years Ended December 31, 1999
Inasmuch as Registrant is primarily a holding company and all subsidiaries are
wholly owned, only consolidated statements are being filed. Schedules other than
those listed above are omitted because of the absence of the conditions under
which they are required or because the information is included in the financial
statements or notes to the financial statements.
(b) Reports on Form 8-K:
None
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(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Articles of Incorporation, incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2 Specimen Stock Certificate, incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.1 Form of Indemnification Agreement entered into between the Registrant
and its Directors and Executive Officers, incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.2 Warrant Agreement dated December 27, 1996, between the Registrant and
Cohig & Associates, Inc., incorporated herein by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (SEC File No.
333-36391), as filed with the Securities and Exchange Commission on
September 25, 1997.
10.3 Warrant Agreement dated May 29, 1996, between the Registrant and
Cohig, incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.4 Warrant Agreement dated October 3, 1995, between the Registrant and
Cohig, incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.5 Warrant Certificate dated June 30, 1997, issued to Fred Birner,
incorporated herein by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.6 Warrant Certificate dated November 1, 1996, issued to Fred Birner,
incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.7 Warrant Certificate dated June 30, 1997, issued to Mark Birner,
incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.8 Warrant Certificate dated November 1, 1996, issued to Mark Birner,
incorporated herein by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.9 Warrant Certificate dated June 30, 1997, issued to Dennis Genty,
incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.10 Warrant Certificate dated November 1, 1996, issued to Dennis Genty,
incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.11 Warrant Certificate dated August 1, 1996, issued to James Ciccarelli,
incorporated herein by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.12 Warrant Certificate dated July 15, 1997 issued to James Ciccarelli,
incorporated herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.13 Credit Agreement, dated October 31, 1996, between the Registrant and
Key Bank of Colorado, as amended by First Amendment to Loan Documents,
dated as of September 3, 1997, incorporated herein by reference to
Exhibit 10.13 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.14 Form of Managed Care Contract with Prudential, incorporated herein by
reference to Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.15 Form of Managed Care Contract with PacifiCare, incorporated herein by
reference to Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
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62
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.16 Letter Agreement dated October 17, 1996, between the Registrant and
James Ciccarelli, as amended by letter agreement dated September 24,
1997 between the Registrant and James Ciccarelli, incorporated herein
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.17 Agreement, dated August 21, 1997, between the Registrant and James
Abramowitz, D.D.S., and Equity Resources Limited Partnership, a
Colorado limited partnership, incorporated herein by reference to
Exhibit 10.17 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.18 Form of Management Agreement, incorporated herein by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.19 Employment Agreement dated September 8, 1997 between the Registrant
and James Abramowitz, D.D.S., incorporated herein by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.20 Form of Stock Transfer and Pledge Agreement, incorporated herein by
reference to Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.21 Indenture, dated as of December 27, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.22 Indenture, dated as of May 15, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.23 Birner Dental Management Services, Inc. 1995 Employee Stock Option
Plan, including forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement under the Employee Plan,
incorporated herein by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.24 Birner Dental Management Services, Inc. 1995 Stock Option Plan for
Managed Dental Centers, including form of Non-statutory Stock Option
Agreement under the Dental Center Plan, incorporated herein by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.25 Profit Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated
herein by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
10.26 Form of Stock Transfer and Pledge Agreement with Mark Birner,
D.D.S., incorporated herein by reference to Exhibit 10.26 of
Pre-Effective Amendment No. 1 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on November 7, 1997.
10.27 Stock Purchase, Pledge and Security Agreement, dated October 27,
1997, between the Company and William Bolton, D.D.S., incorporated
herein by reference to Exhibit 10.27 of Pre-Effective Amendment No. 1
to the Company's Registration Statement on Form S-1 (SEC File No.
333-36391), as filed with the Securities and Exchange Commission on
November 7, 1997.
10.28 Stock Purchase, Pledge and Security Agreement, dated October
27, 1997, between the Company and Scott Kissinger, D.D.S.,
incorporated herein by reference to Exhibit 10.28 of Pre-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-1
(SEC File No. 333-36391), as filed with the Securities and Exchange
Commission on November 7, 1997.
10.29 Second Amendment to Loan Documents dated November 19, 1997 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.29 of Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on November 25, 1997.
10.30 Form of Financial Consulting Agreement between the Company and
Joseph Charles & Associates, Inc., incorporated herein by reference to
Exhibit 10.30 of Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on January 14, 1998.
10.31 Form of Purchase Option for the Purchase of Shares of Common Stock
granted to Joseph Charles & Associates, Inc., incorporated herein by
reference to Exhibit 10.31 of Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on January 14,
1998.
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63
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.32 Third Amendment to Loan Documents date September 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.32 of the Company's Form 10-Q for the quarterly period
ended September 30, 1998 filed with the Securities and Exchange
Commission on November 16, 1998.
10.33 Fourth Amendment to Loan Document dated December 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.33 of the Company's Form 10-K for the annual period
ended December 31, 1998 filed with the Securities and Exchange
Commission on March 31, 1999.
10.34 Fifth Amendment to Loan Document dated May 28, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.34 of the Company's Form 10-Q for the quarterly period
ended June 30, 1999 filed with the Securities and Exchange Commission
on August 12, 1999.
10.35 Sixth Amendment to Loan Document dated September 20, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.35 of the Company's Form 10-Q for the quarterly period
ended September 30, 1999 filed with the Securities and Exchange
Commission on November 15, 1999.
10.36 Seventh Amendment to Loan Document dated March 24, 2000 between the
Registrant and Key Bank of Colorado.
27.1 Financial Data Schedule.
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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
/s/ Frederic W.J. Birner Chairman of the Board, Chief Executive March 29, 2000
- ----------------------------- Officer and Director (Principal Executive
Frederic W.J. Birner Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Frederic W.J. Birner Chairman of the Board, Chief Executive March 29, 2000
- ----------------------------- Officer and Director (Principal Executive
Frederic W.J. Birner Officer)
/s/ Mark A. Birner President and Director March 29, 2000
- -----------------------------
Mark A. Birner, D.D.S.
/s/ Dennis N. Genty Chief Financial Officer, Secretary March 29, 2000
- ----------------------------- Treasurer and Director (Principal
Dennis N. Genty Financial and Accounting Officer)
Director
- -----------------------------
James M. Ciccarelli
Director
- -----------------------------
Steven M. Bathgate
64
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
We have audited in accordance with generally accepted accounting standards, the
consolidated financial statements of Birner Dental Management Services, Inc.
included in this Form 10-K and have issued our report thereon dated March 10,
2000. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. This schedule II - Valuation and
Qualifying Accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 10, 2000.
65
66
Birner Dental Management Services, Inc. and Subsidiaries
Financial Statement Schedule
II - Valuation and Qualifying Accounts
Column C - Additions
--------------------
Column B
Balance at Charged to Charged to Column E
Column A beginning of costs and other Column D Balance at end
Description period expenses accounts * Deductions** of period
----------- ------------ ---------- ---------- ---------- --------------
1999 $ 296,911 $ 42,261 $158,114 $ (190,817) $ 306,469
1998 $ 97,746 $ 58,069 $141,096 $ -- $ 296,911
1997 $ 26,200 $ 71,546 $ -- $ -- $ 97,746
* Allowance recorded, as the result of accounts receivable acquired.
** Charges to the account are for the purpose for which the reserves were
created.
66
67
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Amended and Restated Articles of Incorporation, incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2 Specimen Stock Certificate, incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.1 Form of Indemnification Agreement entered into between the Registrant
and its Directors and Executive Officers, incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.2 Warrant Agreement dated December 27, 1996, between the Registrant and
Cohig & Associates, Inc., incorporated herein by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (SEC File No.
333-36391), as filed with the Securities and Exchange Commission on
September 25, 1997.
10.3 Warrant Agreement dated May 29, 1996, between the Registrant and
Cohig, incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.4 Warrant Agreement dated October 3, 1995, between the Registrant and
Cohig, incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.5 Warrant Certificate dated June 30, 1997, issued to Fred Birner,
incorporated herein by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.6 Warrant Certificate dated November 1, 1996, issued to Fred Birner,
incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.7 Warrant Certificate dated June 30, 1997, issued to Mark Birner,
incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.8 Warrant Certificate dated November 1, 1996, issued to Mark Birner,
incorporated herein by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.9 Warrant Certificate dated June 30, 1997, issued to Dennis Genty,
incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.10 Warrant Certificate dated November 1, 1996, issued to Dennis Genty,
incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.11 Warrant Certificate dated August 1, 1996, issued to James Ciccarelli,
incorporated herein by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.12 Warrant Certificate dated July 15, 1997 issued to James Ciccarelli,
incorporated herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.13 Credit Agreement, dated October 31, 1996, between the Registrant and
Key Bank of Colorado, as amended by First Amendment to Loan Documents,
dated as of September 3, 1997, incorporated herein by reference to
Exhibit 10.13 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.14 Form of Managed Care Contract with Prudential, incorporated herein by
reference to Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.15 Form of Managed Care Contract with PacifiCare, incorporated herein by
reference to Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
68
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.16 Letter Agreement dated October 17, 1996, between the Registrant and
James Ciccarelli, as amended by letter agreement dated September 24,
1997 between the Registrant and James Ciccarelli, incorporated herein
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.17 Agreement, dated August 21, 1997, between the Registrant and James
Abramowitz, D.D.S., and Equity Resources Limited Partnership, a
Colorado limited partnership, incorporated herein by reference to
Exhibit 10.17 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.18 Form of Management Agreement, incorporated herein by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.19 Employment Agreement dated September 8, 1997 between the Registrant
and James Abramowitz, D.D.S., incorporated herein by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.20 Form of Stock Transfer and Pledge Agreement, incorporated herein by
reference to Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.21 Indenture, dated as of December 27, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.22 Indenture, dated as of May 15, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.23 Birner Dental Management Services, Inc. 1995 Employee Stock Option
Plan, including forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement under the Employee Plan,
incorporated herein by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.24 Birner Dental Management Services, Inc. 1995 Stock Option Plan for
Managed Dental Centers, including form of Non-statutory Stock Option
Agreement under the Dental Center Plan, incorporated herein by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.25 Profit Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated
herein by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
10.26 Form of Stock Transfer and Pledge Agreement with Mark Birner,
D.D.S., incorporated herein by reference to Exhibit 10.26 of
Pre-Effective Amendment No. 1 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on November 7, 1997.
10.27 Stock Purchase, Pledge and Security Agreement, dated October 27,
1997, between the Company and William Bolton, D.D.S., incorporated
herein by reference to Exhibit 10.27 of Pre-Effective Amendment No. 1
to the Company's Registration Statement on Form S-1 (SEC File No.
333-36391), as filed with the Securities and Exchange Commission on
November 7, 1997.
10.28 Stock Purchase, Pledge and Security Agreement, dated October
27, 1997, between the Company and Scott Kissinger, D.D.S.,
incorporated herein by reference to Exhibit 10.28 of Pre-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-1
(SEC File No. 333-36391), as filed with the Securities and Exchange
Commission on November 7, 1997.
10.29 Second Amendment to Loan Documents dated November 19, 1997 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.29 of Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on November 25, 1997.
10.30 Form of Financial Consulting Agreement between the Company and
Joseph Charles & Associates, Inc., incorporated herein by reference to
Exhibit 10.30 of Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on January 14, 1998.
10.31 Form of Purchase Option for the Purchase of Shares of Common Stock
granted to Joseph Charles & Associates, Inc., incorporated herein by
reference to Exhibit 10.31 of Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on January 14,
1998.
69
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.32 Third Amendment to Loan Documents date September 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.32 of the Company's Form 10-Q for the quarterly period
ended September 30, 1998 filed with the Securities and Exchange
Commission on November 16, 1998.
10.33 Fourth Amendment to Loan Document dated December 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.33 of the Company's Form 10-K for the annual period
ended December 31, 1998 filed with the Securities and Exchange
Commission on March 31, 1999.
10.34 Fifth Amendment to Loan Document dated May 28, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.34 of the Company's Form 10-Q for the quarterly period
ended June 30, 1999 filed with the Securities and Exchange Commission
on August 12, 1999.
10.35 Sixth Amendment to Loan Document dated September 20, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.35 of the Company's Form 10-Q for the quarterly period
ended September 30, 1999 filed with the Securities and Exchange
Commission on November 15, 1999.
10.36 Seventh Amendment to Loan Document dated March 24, 2000 between the
Registrant and Key Bank of Colorado.
27.1 Financial Data Schedule.