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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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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
BIRNER DENTAL MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- -------------------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
(303) 691-0680
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of August 7, 2000
- ----------------------------------- ------------------------------------------
Common Stock, without par value 6,108,414
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Six Months Ended June 30, 2000 and 1999 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 1999 2000
------------ -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 806,954 $ 953,379
Accounts receivable, net of allowance for doubtful accounts
of $306,469 and $214,820 at December 31, 1999 and
June 30, 2000, respectively 3,700,685 3,925,859
Current portion of notes receivable - related parties 71,070 3,000
Deferred income taxes 117,764 117,764
Income tax receivable 87,000 --
Prepaid expenses and other assets 449,385 580,893
------------ -----------
Total current assets 5,232,858 5,580,895
PROPERTY AND EQUIPMENT, net 7,965,699 7,575,719
OTHER NONCURRENT ASSETS:
Intangible assets, net 14,057,688 13,731,874
Deferred charges and other assets 215,793 171,217
Notes receivable - related party, net of current portion 3,000 150,115
Deferred tax asset 473,969 473,969
------------ -----------
Total assets $ 27,949,007 $27,683,789
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,602,239 $ 3,548,065
Income taxes payable -- 26,718
Current maturities of long-term debt 161,936 141,269
Current maturities of capital lease obligations 1,600 --
------------ -----------
Total current liabilities 3,765,775 3,716,052
LONG TERM LIABILITIES:
Long-term debt, net of current maturities 6,771,157 6,357,298
Deferred income taxes 415,868 415,868
Capital lease obligations, net of current maturities 339 --
Other long-term obligations 91,257 108,732
------------ -----------
Total liabilities 11,044,396 10,597,950
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding -- --
Common Stock, no par value, 20,000,000 shares
authorized; 6,131,814 and 6,122,814, shares issued and
outstanding at December 31, 1999 and June 30, 2000,
respectively 16,968,454 16,958,629
Retained earnings (accumulated deficit) (63,843) 127,210
------------ -----------
Total shareholders' equity 16,904,611 17,085,839
------------ -----------
Total liabilities and shareholders' equity $ 27,949,007 $27,683,789
============ ===========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
NET REVENUE $ 7,166,534 $ 7,810,220 $ 14,189,262 $ 15,612,791
DIRECT EXPENSES:
Clinical salaries and benefits 2,834,308 2,989,344 5,431,416 6,088,814
Dental supplies 414,169 513,051 802,800 1,011,410
Laboratory fees 727,931 714,469 1,396,235 1,458,064
Occupancy 780,085 823,022 1,429,308 1,614,813
Advertising and marketing 146,399 70,630 228,236 159,578
Depreciation and amortization 448,470 601,417 852,726 1,179,208
General and administrative 764,355 769,110 1,399,873 1,539,014
------------ ------------ ------------ ------------
6,115,717 6,481,043 11,540,594 13,050,901
------------ ------------ ------------ ------------
Contribution from dental offices 1,050,817 1,329,177 2,648,668 2,561,890
CORPORATE EXPENSES:
General and administrative 991,450 882,760 1,956,738 1,775,748
Depreciation and amortization 63,538 84,670 123,905 166,502
------------ ------------ ------------ ------------
Operating income (loss) (4,171) 361,747 568,025 619,640
Interest expense, net (93,471) (156,106) (189,369) (314,869)
------------ ------------ ------------ ------------
Income (loss) before income taxes (97,642) 205,641 378,656 304,771
Income tax benefit (expense) 36,420 (76,743) (141,239) (113,718)
------------ ------------ ------------ ------------
Net income (loss) $ (61,222) $ 128,898 $ 237,417 $ 191,053
============ ============ ============ ============
Net income (loss) per share of Common Stock:
Basic $ (.01) $ .02 $ .04 $ .03
============ ============ ============ ============
Diluted $ (.01) $ .02 $ .04 $ .03
============ ============ ============ ============
Weighted average number of shares of
Common stock and dilutive securities:
Basic 6,177,727 6,130,245 6,314,966 6,131,029
============ ============ ============ ============
Diluted 6,177,727 6,138,032 6,378,559 6,136,365
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Retained
Common Stock Earnings Total
---------------------------- (Accumulated Shareholders'
Shares Amount Deficit) Equity
------------ ------------ ------------ -------------
BALANCES, December 31, 1999 6,131,814 $ 16,968,454 $ (63,843) $ 16,904,611
Purchase and retirement of Common Stock (9,000) (9,825) -- (9,825)
Net Income -- -- 191,053 191,053
------------ ------------ ------------ -------------
BALANCES, June 30, 2000 6,122,814 $ 16,958,629 $ 127,210 $ 17,085,839
============ ============ ============ =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
1999 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 237,417 $ 191,053
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 976,631 1,345,710
Provision for doubtful accounts 25,589 16,736
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (737,243) (117,666)
Prepaid expense, income tax receivable and other assets (622,338) 68
Accounts payable and accrued expenses 631,675 (27,456)
Other long-term obligations -- 20,475
----------- -----------
Net cash provided by operating activities 511,731 1,428,920
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties -- (82,045)
Capital expenditures (964,428) (422,394)
Development of new dental offices (1,050,750) (222,273)
Acquisition of dental offices (691,476) (68,993)
----------- -----------
Net cash used in investing activities (2,706,654) (795,705)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock from options exercised 12,132 --
Net borrowings (repayments) - line of credit 3,140,000 (386,000)
Repayment of long-term debt (170,525) (90,965)
Purchase and retirement of Common Stock (1,581,343) (9,825)
----------- -----------
Net cash provided by (used in) financing activities 1,400,264 (486,790)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (794,659) 146,425
CASH AND CASH EQUIVALENTS, beginning of period 2,169,687 806,954
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,375,028 $ 953,379
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------
1999 2000
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 181,936 $ 317,295
========= =========
Cash paid during the period for income taxes $ 87,000 $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Acquisition of dental offices $ 35,000 $ --
========= =========
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities $ 59,596 $ --
========= =========
Accounts receivable net, acquired through acquisitions $ 40,000 $ --
========= =========
Other assets acquired through acquisitions $ 30,000 $ --
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures included herein are adequate to make
the information presented not misleading. A description of the Company's
accounting policies and other financial information is included in the audited
consolidated financial statements as filed with the Securities and Exchange
Commission in the Company's Form 10-K for the year ended December 31, 1999.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of June 30, 2000 and the results of
operations and cash flows for the periods presented. All such adjustments are of
a normal recurring nature. The results of operations for the quarter and six
months ended June 30, 2000 are not necessarily indicative of the results that
may be achieved for a full fiscal year and cannot be used to indicate financial
performance for the entire year.
(2) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share".
Quarter Ended June 30,
---------------------------------------------------------------------------
1999 2000
------------------------------------ ----------------------------------
Per Share Per Share
(Loss) Shares Amount Income Shares Amount
---------- ----------- --------- --------- ---------- ---------
Basic EPS:
Net income (loss) available to
shares of Common Stock $ (61,222) 6,177,727 $ (.01) $ 128,898 6,130,245 $ .02
Effect of dilutive shares of
Common Stock from stock
options and warrants -- -- -- -- 7,787 --
---------- ----------- --------- --------- ---------- ---------
Diluted EPS:
Net income (loss) available to
shares of Common Stock $ (61,222) 6,177,727 $ (.01) $ 128,898 6,138,032 $ .02
========== =========== ========= ========= ========== =========
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Six Months Ended June 30,
---------------------------------------------------------------------------
1999 2000
------------------------------------ ----------------------------------
Per Share Per Share
(Loss) Shares Amount Income Shares Amount
---------- ----------- --------- --------- ---------- ---------
Basic EPS:
Net income available to
shares of Common Stock $ 237,417 6,314,966 $ .04 $ 191,053 6,131,029 $ .03
Effect of dilutive shares of
Common Stock from stock
Options and warrants -- 63,593 -- -- 5,336 --
---------- ----------- --------- --------- ---------- ---------
Diluted EPS:
Net income available to
shares of Common Stock $ 237,417 6,378,559 $ .04 $ 191,053 6,136,365 $ .03
========== =========== ========= ========= ========== =========
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarter ended June 30, 2000 and the
six months ended June 30, 1999 and 2000 relates to the effect of 7,787, 63,593,
and 5,336, respectively, of dilutive shares of Common Stock from stock options
and warrants which are included in total shares for the diluted calculation. All
options and warrants to purchase shares of Common Stock were excluded from the
computation of diluted earnings for the quarter ended June 30, 1999 since they
were anti-dilutive as a result of the Company's net loss for the quarter.
(3) LINE OF CREDIT
Under the Company's Credit Facility (as amended on March 24, 2000), the Company
may borrow up to $10.0 million for working capital needs. Advances will bear
interest at the lender's base rate (prime plus a rate margin ranging from .25%
to 1.50% based on the ratio of consolidated senior debt to consolidated EBITDA)
or at an adjusted LIBOR rate (LIBOR plus a rate margin ranging from 1.5% to
2.75% based on the ratio of consolidated senior debt to consolidated EBITDA), at
the Company's option. The Company is also obligated to pay an annual facility
fee ranging from .25% to .50% (based on the ratio of consolidated senior debt to
consolidated EBITDA) on the average unused amount of the line of credit during
the previous full calendar quarter. Borrowings are limited to an availability
formula based on the Company's adjusted EBITDA. As amended, the loan matures on
July 1, 2001. At June 30, 2000, the Company had approximately $2.6 million
available and $6.2 million outstanding under the Credit Facility. The Credit
Facility is secured by a lien on the Company's accounts receivable and its
Management Agreements. The Credit Facility prohibits the payment of dividends
and other distributions to shareholders, restricts or prohibits the Company from
incurring indebtedness, incurring liens, disposing of assets, and requires the
Company to maintain certain financial ratios on an ongoing basis. The Company is
in compliance with these financial ratios as of June 30, 2000.
(4) ACQUISITIONS AND DE-NOVOS
On March 20, 2000, the Company opened a de novo office in Goodyear, Arizona, a
suburb of Phoenix. The Company also acquired the remaining 50% interest in an
existing Office during March 2000. The consideration consisted of $68,993
payable in cash and a $38,277 note payable with a term of 60 months and an
interest rate of 8.0%.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No.133 "Accounting for Derivative Instruments
and Hedging Activities" that establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the FASB
issued Statement of Financial 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.
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As the Company holds no derivative instruments and does not engage in hedging
activities the adoption of SFAS No. 133 will have no impact to the Company.
In December 1999 the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. The Company adopted SAB 101 during the second
quarter of 2000. The adoption of SAB 101 did not have a material effect on the
Company's financial results.
In March 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation" ("FIN 44"). FIN 44 is an
interpretation of APB Opinion No. 25 "Accounting for Stock Issued to Employees"
(Opinion 25") and clarifies the application of Opinion 25 for certain issues.
This interpretation is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that FIN 44 covers events after these periods, but before the
effective date of July 1, 2000, the effects of applying this interpretation are
recognized on a prospective basis from July 1, 2000. Management does not expect
FIN 44 to have a material effect on the Company's financial results.
(6) SUBSEQUENT EVENTS
On July 1, 2000, the Company acquired the remaining 50% interest in an existing
Office. The consideration consisted of $141,670 payable in cash and a $135,000
note payable with a term of 60 months and an interest rate of 8.0%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q ("Quarterly Report") of Birner Dental
Management Services, Inc. (the "Company") which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements in this Item 2., "Management's Discussion and Analysis of Financial
Condition and Results of Operations," regarding intent, belief or current
expectations of the Company or its officers with respect to the development or
acquisition of additional dental practices ("Offices") and the successful
integration of such Offices into the Company's network, recruitment of
additional dentists, funding of the Company's expansion, capital expenditures,
payment or nonpayment of dividends and cash outlays for income taxes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
failure to consummate or successfully integrate proposed developments or
acquisitions of Offices, the ability of the Company to manage effectively an
increasing number of Offices, the general economy of the United States and the
specific markets in which the Company's Offices are located or are proposed to
be located, trends in the health care, dental care and managed care industries,
as well as the risk factors set forth in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors"
section of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (as filed with the Securities Exchange Commission on March 30,
2000), the "Management's Discussion and Analysis of Financial Condition and
Results of Operations -Year 2000" of this Quarterly Report, and other factors as
may be identified from time to time in the Company's filings with the Securities
and Exchange Commission or in the Company's press releases.
YEAR 2000
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any programs that have
date-sensitive software or equipment that has time-sensitive embedded components
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could have resulted in a major system failure or miscalculations.
During 1999, the Company completed a comprehensive program to assess, remediate
and mitigate the potential impact of problems associated with the Year 2000. To
date in 2000, the Company has not suffered any adverse effects associated with
Year 2000 issues. The Company does not currently expect any significant Year
2000 issues to develop and will continue to monitor its systems to ensure that
they continue to be Year 2000 compliant.
GENERAL
The following discussion relates to factors which have affected the results of
operations and financial condition of the Company for the quarters and six
months ended June 30, 1999 and 2000. This information should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto included elsewhere in this Quarterly Report.
OVERVIEW
The Company was formed in May 1995, and as of June 30, 2000 managed 55 Offices
in Colorado, New Mexico and Arizona staffed by 81 general dentists and 12
specialists. The Company has acquired 42 Offices (four of which were
consolidated into existing Offices) and opened 17 de novo Offices. Of the 42
acquired Offices, only three (the first three practices, which were acquired
from the Company's President, Mark Birner, DDS) were acquired from affiliates of
the Company. The Company derives all of its revenue from its Management
Agreements with professional corporations
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("P.C.s") which conduct the practice at each Office. In addition, the Company
assumes a number of responsibilities when it acquires a new practice or develops
a de novo Office, which are set forth in a Management Agreement, as described
below. The Company expects to expand in existing and new markets by enhancing
the operating performance of its existing Offices, by developing de novo Offices
and by acquiring solo and group dental practices. Generally, the Company seeks
to acquire dental practices for which the Company believes application of its
dental practice management model will improve operating performance.
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's growth and success in the
Colorado market led to its expansion into the New Mexico and Arizona markets as
well as to its evaluation of additional markets. The following table sets forth
the increase in the number of Offices owned and managed by the Company from 1995
through June 30, 2000, including the number of de novo Offices and acquired
Offices in each such period.
1995(1) 1996 1997 1998 1999 2000
------- ---- ---- ---- ---- ----
Offices at beginning of the period 0 4 18 34 49 54
De novo Offices 0 5 1 5 5 1
Acquired Offices 4 12 15 10 1 0
Consolidation of Offices 0 (3) 0 0 (1) 0
Offices at end of the period 4 18 34 49 54 55
- ----------
(1) From October 1, 1995 through December 31, 1995.
The combined purchase amounts for the four practices acquired in 1995, the 12
practices acquired in 1996, the 15 practices acquired in 1997, the 10 practices
acquired in 1998, and the practice acquired in 1999 were $412,000, $4.3 million,
$5.4 million, $6.0 million, and $760,000 respectively. The average investment by
the Company in each of its 17 de novo Offices has been approximately $180,000,
which includes the cost of equipment, leasehold improvements and working capital
associated with the Offices. The 11 de novo Offices opened between January 1996
and December 1998 began generating positive contribution from dental offices, on
average, within six months of opening. Three of the six de novo Offices opened
in 1999 and the first quarter of 2000, began generating positive contribution
from dental offices, on average, within five months of opening. The Company's
three remaining de novo Offices, which have been open an average of eight and
one half months, have not generated positive contribution from dental offices as
of the date of this Quarterly Report.
At June 30, 2000, the Company's total assets of $27.7 million included $13.7
million of identifiable intangible assets related to Management Agreements. At
that date, the Company had total shareholders' equity of $17.1 million and a
tangible net worth of $3.4 million. The Company reviews the recorded amount of
intangible assets and other fixed assets for impairment for each Office whenever
events or changes in circumstances indicate the carrying amount of the assets
may not be recoverable. If this review indicates that the carrying amount of the
assets may not be recoverable as determined based on the undiscounted cash flows
of each Office, whether acquired or developed, the carrying value of the asset
is reduced to fair value. Among the factors that the Company will continually
evaluate are unfavorable changes in each Office, relative market share and local
market competitive environment, current period and forecasted operating results,
cash flow levels of Offices and the impact on the net revenue earned by the
Company, and the legal and regulatory factors governing the practice of
dentistry.
COMPONENTS OF REVENUE AND EXPENSES
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Offices. Net revenue
represents Revenue less amounts retained by the Offices. The amounts retained by
the Offices represent amounts paid as salary, benefits and other payments to
employed dentists and hygienists. The Company's net revenue is dependent on the
Revenue of the Offices. Direct expenses consist of the expenses incurred by the
Company in connection with managing the Offices, including salaries and benefits
(for personnel other than dentists and hygienists), dental supplies, dental
laboratory fees, occupancy costs, advertising and marketing, depreciation and
amortization and general and administrative (including office supplies,
equipment leases, management information systems and other expenses related to
dental practice operations). The Company also incurs personnel and
administrative expenses in connection with
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maintaining a corporate function that provides management, administrative,
marketing, development and professional services to the Offices.
Under the Management Agreements, the Company manages the business and marketing
aspects of the Offices, including (i) providing capital, (ii) designing and
implementing marketing programs, (iii) negotiating for the purchase of supplies,
(iv) providing a patient scheduling system, (v) staffing, (vi) recruiting, (vii)
training of non-dental personnel, (viii) billing and collecting patient fees,
(ix) arranging for certain legal and accounting services, and (x) negotiating
with managed care organizations. The P.C. is responsible for, among other things
(i) supervising all dentists and dental hygienists, (ii) complying with all
laws, rules and regulations relating to dentists and dental hygienists, and
(iii) maintaining proper patient records. The Company has made, and intends to
make in the future, loans to P.C.s in Colorado, New Mexico and Arizona to fund
their acquisition of dental assets from third parties in order to comply with
the laws of such states. Bonuses payable to dentists based on the operating
performance of the P.C.s take into account principal and interest payments made
on the loans, resulting in the dentists sharing with the Company the economic
benefits or detriments associated with assets acquired by the P.C.s using such
loans. Because the Company consolidates the financial statements of the P.C.s
with its financial statements, these loans are eliminated in consolidation.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office. Adjusted Gross Center Revenue is comprised of all fees and charges
booked each month by or on behalf of the P.C. as a result of dental services
provided to patients at the Office, less any adjustments for uncollectible
accounts, professional courtesies and other activities that do not generate a
collectible fee. The Company's costs include all direct and indirect costs,
overhead and expenses relating to the Company's provision of management services
at each Office under the Management Agreement, including (i) salaries, benefits
and other direct costs of employees who work at the Office, (ii) direct costs of
all Company employees or consultants who provide services to or in connection
with the Office, (iii) utilities, janitorial, laboratory, supplies, advertising
and other expenses incurred by the Company in carrying out its obligations under
the Management Agreement, (iv) depreciation expense associated with the P.C.'s
assets and the assets of the Company used at the Office, and the amortization of
intangible asset value as a result of any acquisition or merger of another
dental practice relating to the Office, (v) interest expense on indebtedness
incurred by the Company to finance any of its obligations under the Management
Agreement, (vi) general and malpractice insurance expenses, lease expenses and
dentist recruitment expenses, (vii) personal property and other taxes assessed
against the Company's or the P.C.'s assets used in connection with the operation
of the Office, (viii) out-of-pocket expenses of the Company's personnel related
to mergers or acquisitions involving the P.C., (ix) corporate overhead charges
or any other expenses of the Company including the P.C.'s pro rata share of the
expenses of the accounting and computer services provided by the Company, and
(x) a collection reserve in the amount of 5.0% of Adjusted Gross Center Revenue.
As a result, substantially all costs associated with the provision of dental
services at the Offices are borne by the Company, other than the compensation
and benefits of the dentists and hygienists who work at the Office. This enables
the Company to manage the profitability of the Offices. Each Management
Agreement is for a term of 40 years. Further, each Management Agreement
generally may be terminated by the P.C. only for cause, which includes a
material default by or bankruptcy of the Company. Upon expiration or termination
of a Management Agreement by either party, the P.C. must satisfy all obligations
it has to the Company.
The Company's Revenue is derived principally from fee-for-service revenue and
revenue from capitated managed dental care plans. Fee-for-service revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive supplemental payments for more complicated or elective procedures.
In contrast, under traditional
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indemnity insurance arrangements, the insurance company pays whatever reasonable
charges are billed by the dental group practice for the dental services
provided.
The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs, opening new Offices and acquiring solo and group practices. The
Company seeks to supplement this fee-for-service business with revenue from
contracts with capitated managed dental care plans. Although the Company's
fee-for-service business generally is more profitable than its capitated managed
dental care business, capitated managed dental care business serves to increase
facility utilization and dentist productivity.
The relative percentage of the Company's revenue derived from fee-for-service
business and capitated managed dental care contracts varies from market to
market depending on the availability of capitated managed dental care contracts
in any particular market and the Company's ability to negotiate favorable
contractual terms. In addition, the profitability of managed dental care revenue
varies from market to market depending on the level of capitation payments and
co-payments in proportion to the level of benefits required to be provided.
Variations in the relative penetration and popularity of capitated managed
dental care from market to market across the country, however, make it difficult
to determine whether the Company's experience in new markets will be consistent
with its experience in the Company's existing markets. The Company expects that
the level of profitability of its operations in new markets entered through
acquisition will vary depending in part on these factors and may not replicate
or be comparable to the Company's current results.
RESULTS OF OPERATIONS
As a result of the ongoing expansion of its business through acquisitions and
the development of de novo Offices, and the Company's limited period of
affiliation with these Offices, the Company believes that the period-to-period
comparisons set forth below may not be representative of future operating
results.
The Company has experienced significant period-to-period growth in Revenue. For
the three months ended June 30, 2000, Revenue increased to $10.8 million from
$9.7 million for the three months ended June 30, 1999, an increase of $1.1
million or 11.5%. Revenue at the 50 Offices in existence during both full
periods increased to $10.3 million in 2000 from $9.7 million in 1999, an
increase of $546,000 or 5.6%. The remainder of the increase in Revenue of
$572,000 was attributable to the 5 Offices that were acquired or opened during
the period from April 1, 1999 to March 31, 2000.
For the six months ended June 30, 2000, Revenue increased to $21.7 million from
$19.0 million for the six months ended June 30, 1999, an increase of $2.7
million or 14.5%. The Company opened one de novo Office during the period from
January 1, 2000 to June 30, 2000 which, in the aggregate, accounted for $117,000
of the $2.7 million increase. Revenue at the 48 Offices in existence during both
full periods increased to $19.8 million in 2000 from $18.3 million in 1999, an
increase of $1.5 million, or 8.1%. The remaining $1.1 million of the increase in
Revenue was attributable to the 6 Offices that were acquired or opened during
the period from January 1, 1999 to December 31, 1999.
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The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's condensed consolidated statements of
operations. The information contained in the table represents the historical
results of the Company. The information that follows should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto contained elsewhere in this Quarterly Report.
Quarter Ended June 30, Six Months Ended June 30,
---------------------- --------------------------
1999 2000 1999 2000
------ ------ ------ ------
NET REVENUE 100.0% 100.0% 100.0% 100.0%
DIRECT EXPENSES:
Clinical salaries and benefits 39.5% 38.3% 38.3% 39.0%
Dental supplies 5.8% 6.6% 5.6% 6.5%
Laboratory fees 10.1% 9.1% 9.8% 9.3%
Occupancy 10.9% 10.5% 10.1% 10.3%
Advertising and marketing 2.0% 0.9% 1.6% 1.0%
Depreciation and amortization 6.3% 7.7% 6.0% 7.6%
General and administrative 10.7% 9.8% 9.9% 9.9%
------ ------ ------ ------
85.3% 82.9% 81.3% 83.6%
------ ------ ------ ------
Contribution from dental offices 14.7% 17.1% 18.7% 16.4%
CORPORATE EXPENSES:
General and administrative 13.9% 11.3% 13.8% 11.4%
Depreciation and amortization 0.9% 1.1% 0.9% 1.1%
------ ------ ------ ------
Operating income (loss) (0.1)% 4.7% 4.0% 3.9%
Interest expense , net (1.3)% (2.0)% (1.3)% (2.0)%
------ ------ ------ ------
Income (loss) before income taxes (1.4)% 2.7% 2.7% 1.9%
Income tax benefit (expense) 0.5% (1.0)% (1.0)% (0.7)%
------ ------ ------ ------
Net income (loss) (0.9)% 1.7% 1.7% 1.2%
====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999:
Net revenue. For the three months ended June 30, 2000 net revenue increased to
$7.8 million compared to $7.2 million for the three months ended June 30, 1999,
an increase of approximately $644,000, or 9.0%. Net revenue at the 50 Offices
managed by the Company which were in existence for both second quarter periods
increased to $7.4 million for the second quarter of 2000 compared to $7.2
million for the second quarter of 1999, an increase of approximately $257,000,
or 3.6%. The remainder of the net revenue increase of approximately $386,000 is
attributable to 5 de novo Offices which opened between April 1, 1999 and March
31, 2000.
Clinical salaries and benefits. For the three months ended June 30, 2000
clinical salaries and benefits increased to $3.0 million compared to $2.8
million for the three months ended June 30, 1999, an increase of $155,000 or
5.4%. This increase was primarily due to the increased number of Offices open
during the 2000 period and the corresponding addition of non-dental personnel.
As a percentage of net revenue, clinical salaries and benefits decreased to
38.3% for the three months ended June 30, 2000 compared to 39.5% for the three
months ended June 30, 1999.
Dental supplies. For the three months ended June 30, 2000 dental supplies
increased to $513,000 compared to $414,000 for the three months ended June 30,
1999, an increase of $99,000 or 23.9%. This increase was primarily due to the
incremental dental supply expenditures related to the increased number of
Offices open during the 2000 period as well as the increase in the use of dental
supplies related to increased patient traffic at the Offices which were in
existence for the entire second quarters of 1999 and 2000. As a percentage of
net revenue, dental supplies increased to 6.6% for the three months ended June
30, 2000 compared to 5.8% for the three months ended June 30, 1999.
Laboratory fees. For the three months ended June 30, 2000 laboratory fees
decreased to $714,000 compared to $728,000 for the three months ended June 30,
1999, a decrease of $13,000 or 1.8%. This decrease was primarily due to the
Company's efforts to consolidate the use of dental laboratories so that improved
pricing could be obtained based upon the Company's laboratory case volume. As a
percentage of net revenue, laboratory fees decreased to 9.1% for the three
months ended June 30, 2000 compared to 10.1% for the three months June 30, 1999.
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Occupancy. For the three months ended June 30, 2000 occupancy expense increased
to $823,000 compared to $780,000 for the three months ended June 30, 1999, an
increase of $43,000 or 5.5%. This increase was primarily due to the incremental
occupancy expenditures related to the increased number of Offices open during
the 2000 period in addition to increased rental payments resulting from the
renewal of Office leases at current market rates for Offices whose leases
expired subsequent to the 1999 period. As a percentage of net revenue, occupancy
expense decreased to 10.5% for the three months ended June 30, 2000 compared to
10.9% for the three months ended June 30, 1999.
Advertising and marketing. For the three months ended June 30, 2000 advertising
and marketing decreased to $71,000 compared to $146,000 for the three months
ended June 30, 1999, a decrease of $75,000 or 51.8%. This decrease is primarily
attributable to a decrease in the amount of radio and television airtime
purchased by the Company during the 2000 period. As a percentage of net revenue,
advertising and marketing decreased to 0.9% for the three months ended June 30,
2000 compared to 2.0% for the three months ended June 30, 1999.
Depreciation and amortization. For the three months ended June 30, 2000
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, increased to $601,000 compared to $448,000 for
the three months ended June 30, 1999, an increase of $153,000 or 34.1%. This
increase is related to the increase in the Company's depreciable and amortizable
asset base. The increase in the asset base is directly related to the Company's
growth in terms of number of Offices, expansion of Offices and addition of
equipment to older Offices. As a percentage of net revenue, depreciation and
amortization increased to 7.7% for the three months ended June 30, 2000 compared
to 6.3% for the three months ended June 30, 1999. The increase in depreciation
and amortization as a percentage of net revenue is related to the higher
depreciable asset base associated with the Company's de novo Offices and recent
Office expansions.
General and administrative. For the three months ended June 30, 2000 general and
administrative, which is attributable to the Offices, increased to $769,000
compared to $764,000 for the three months ended June 30, 1999, an increase of
approximately $5,000 or 0.6%. As a percentage of net revenue, general and
administrative expenses decreased to 9.8% for the three months ended June 30,
2000 compared to 10.7% during the three months ended June 30, 1999.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $1.3 million for the three months ended June 30,
2000 compared to $1.1 million for the three months ended June 30, 1999, an
increase of $278,000 or 26.5%. As a percentage of net revenue, contribution from
dental offices increased to 17.1% for the three months ended June 30, 2000
compared to 14.7% for the three months ended June 30, 1999
Corporate expenses - general and administrative. For the three months ended June
30, 2000 corporate expenses - general and administrative decreased to $883,000
compared to $991,000 for the three months ended June 30, 1999, a decrease of
$108,000 or 11.0%. This decrease was primarily due to cost containment efforts
started by the Company in early 2000. As a percentage of net revenue, corporate
expense - general and administrative decreased to 11.3% for the three months
ended June 30, 2000 compared to 13.9% during the three months ended June 30,
1999.
Corporate expenses - depreciation and amortization. For the three months ended
June 30, 2000 corporate expenses - depreciation and amortization increased to
$85,000 compared to $64,000 for the three months ended June 30, 1999, an
increase of $21,000 or 33.3%. This increase was a result of the Company's
expansion of its corporate infrastructure, primarily investments in computer
equipment to manage the needs of each Office. As a percentage of net revenue,
corporate expenses - depreciation and amortization increased to 1.1% for the
three months ended June 30, 2000 compared to 0.9% during the three months ended
June 30, 1999.
Operating income. As a result of the above, operating income increased to
$362,000 for the three months ended June 30, 2000 from an operating loss of
$(4,200) for the three months ended June 30, 1999, an increase of $366,000. As a
percentage of net revenue, operating income increased to 4.7% for the three
months ended June 30, 2000 compared to (0.1)% for the three months ended June
30, 1999.
Interest expense, net. For the three months ended June 30, 2000 interest expense
increased to $156,000 compared to $93,000 for the three months ended June 30,
1999, an increase of $63,000 or 67.0%. This increase in interest expense is
attributable to an increase in the average debt outstanding during the 2000
period as well as a higher average interest rate. As a percentage of net
revenue, interest expense increased to 2.0% for the three months ended June 30,
2000 compared to 1.3% for the three months ended June 30, 1999.
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Net income (loss). As a result of the above, net income increased to $129,000
for the three months ended June 30, 2000 compared to a net loss of $(61,000) for
the three months ended June 30, 1999, an increase of $190,000. Net income for
the three months ended June 30, 2000 was net of income taxes of $77,000. Net
loss for the three months ended June 30, 1999 was enhanced by an income tax
benefit of $36,000. As a percentage of net revenue, net income increased to 1.7%
for the three months ended June 30, 2000 compared to (0.9)% for the three months
ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999:
Net revenue. For the six months ended June 30, 2000 net revenue increased to
$15.6 million compared to $14.2 million for the six months ended June 30, 1999,
an increase of approximately $1.4 million, or 10.0%. The Company opened one de
novo Office during the period from January 1, 2000 to June 30, 2000, which
contributed $79,000 of the increase. Net revenue at the 48 Offices managed by
the Company which were in existence for both first six month periods increased
to $14.3 million for the first six months of 2000 compared to $13.7 million for
the first six months of 1999, an increase of $557,000, or 4.1%. The remainder of
the increase in net revenue of $787,000 was attributable to 6 de novo Offices
which opened between January 1, 1999 and December 31, 1999.
Clinical salaries and benefits. For the six months ended June 30, 2000 clinical
salaries and benefits increased to $6.1 million compared to $5.4 million for the
six months ended June 30, 1999, an increase of $657,000 or 12.1%. This increase
was due primarily to the increased number of Offices during the 2000 period and
the corresponding addition of non-dental personnel. As a percentage of net
revenue, clinical salaries and benefits increased to 39.0% for the six months
ended June 30, 2000 compared to 38.3% for the six months ended June 30, 1999.
Dental supplies. For the six months ended June 30, 2000 dental supplies
increased to $1.0 million compared to $803,000 for the six months ended June 30,
1999, an increase of $209,000 or 26.0%. This increase was primarily due to the
incremental dental supply expenditures related to the increased number of
Offices open during the 2000 period as well as the increase in the use of dental
supplies related to increased patient traffic at the Offices which were in
existence for the entire six month periods of 1999 and 2000. As a percentage of
net revenue, dental supplies increased to 6.5% for the six months ended June 30,
2000 compared to 5.6% for the six months ended June 30, 1999.
Laboratory fees. For the six months ended June 30, 2000 laboratory fees
increased to $1.5 million compared to $1.4 million for the six months ended June
30, 1999, an increase of $62,000 or 4.4%. This increase was primarily due to the
incremental expenditures related to the additional Offices open during the 2000
period and increased patient traffic at the Offices which were in existence for
the entire six month periods of 1999 and 2000. This increase was somewhat offset
by the Company's efforts to consolidate the use of dental laboratories so that
improved pricing could be obtained based upon the Company's laboratory case
volume. As a percentage of net revenue, laboratory fees decreased to 9.3% for
the six months ended June 30, 2000 compared to 9.8% for the six months June 30,
1999
Occupancy. For the six months ended June 30, 2000 occupancy expense increased to
$1.6 million compared to $1.4 million for the six months ended June 30, 1999, an
increase of $186,000 or 13.0%. This increase was primarily due to the
incremental occupancy expenditures related to the increased number of Offices
open during the 2000 period in addition to increased rental payments resulting
from the renewal of Office leases at current market rates for Offices whose
leases expired subsequent to the 1999 period. As a percentage of net revenue,
occupancy expense increased to 10.3% for the six months ended June 30, 2000
compared to 10.1% for the six months ended June 30, 1999.
Advertising and marketing. For the six months ended June 30, 2000 advertising
and marketing decreased to $160,000 compared to $228,000 for the six months
ended June 30, 1999, a decrease of $68,000 or 30.1%. This decrease is primarily
attributable to a decrease in the amount of radio and television airtime
purchased by the Company during the 2000 period. As a percentage of net revenue,
advertising and marketing decreased to 1.0% for the six months ended June 30,
2000 compared to 1.6% for the six months ended June 30, 1999.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased to $1.2
million for the six months ended June 30, 2000 compared to $853,000 for the six
months ended June 30, 1999, an increase of $326,000 or 38.3%. This increase is
related to the increase in the Company's depreciable and amortizable asset base.
The increase in the asset base is directly related to the Company's growth in
terms of number of Offices, expansion of Offices and addition of equipment to
older Offices. As a percentage of net revenue, depreciation and amortization
increased to 7.6% for the six months ended June 30, 2000 compared to 6.0% for
the six months ended June 30, 1999.
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General and administrative. For the six months ended June 30, 2000 general and
administrative, which is attributable to the Offices, increased to $1.5 million
compared to $1.4 million for the six months ended June 30, 1999, an increase of
approximately $139,000 or 9.9%. This increase was primarily due to the
incremental expenditures required to operate 55 dental practices at June 30,
2000 compared to 52 dental practices at June 30, 1999. As a percentage of net
revenue, general and administrative expenses stayed constant at 9.9% for the six
months ended June 30, 1999 and 2000, respectively.
Contribution from dental offices. As a result of the above, contribution from
dental offices was relatively constant at approximately $2.6 million for the six
months ended June 30, 1999 and 2000, respectively. As a percentage of net
revenue, contribution from dental offices decreased to 16.4% for the six months
ended June 30, 2000 compared to 18.7% during the six months ended June 30, 1999.
Corporate expenses - general and administrative. For the six months ended June
30, 2000 corporate expenses - general and administrative decreased to $1.8
million compared to $2.0 million for the six months ended June 30, 1999, a
decrease of $181,000 or 9.2%. This decrease was primarily due to cost
containment efforts started by the Company in early 2000. As a percentage of net
revenue, corporate expense - general and administrative decreased to 11.4% for
the six months ended June 30, 2000 compared to 13.8% for the six months ended
June 30, 1999.
Corporate expenses - depreciation and amortization. For the six months ended
June 30, 2000 corporate expenses - depreciation and amortization increased to
$167,000 compared to $124,000 for the six months ended June 30, 1999, an
increase of $43,000 or 34.4%. This increase was a result of the Company's
expansion of its corporate infrastructure, primarily investments in computer
equipment to manage the needs of each Office. As a percentage of net revenue,
corporate expenses - depreciation and amortization increased to 1.1% for the six
months ended June 30, 2000 compared to 0.9% for the six months ended June 30,
1999.
Operating income. As a result of the above, operating income increased to
$620,000 for the six months ended June 30, 2000 compared to $568,000 for the six
months ended June 30, 1999, an increase of $52,000 or 9.1%. As a percentage of
net revenue, operating income decreased to 3.9% for the six months ended June
30, 2000 compared to 4.0% for the six months ended June 30, 1999.
Interest expense, net. For the six months ended June 30, 2000 interest expense
increased to $315,000 compared to $189,000 for the six months ended June 30,
1999, an increase of $126,000 or 66.3%. This increase in interest expense is
attributable to an increase in the average debt outstanding during the 2000
period as well as a higher average interest rate. As a percentage of net
revenue, interest expense increased to 2.0% for the six months ended June 30,
2000 compared to 1.3% for the six months ended June 30, 1999.
Net income (loss). As a result of the above, net income decreased to $191,000
for the six months ended June 30, 2000 compared to net income of $237,000 for
the six months ended June 30, 1999, a decrease of $46,000. Net income for the
six months ended June 30, 2000 was net of income taxes of $114,000 while net
income for the six months ended June 30, 1999 was net of income taxes of
$141,000. As a percentage of net revenue, net income decreased to 1.2% for the
six months ended June 30, 2000 compared to 1.7% for the six months ended June
30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its growth through a combination
of private sales of convertible subordinated debentures and Common Stock, cash
provided by operating activities, a bank line of credit (the "Credit Facility"),
seller notes and its initial public offering of Common Stock.
Net cash provided by operating activities was approximately $512,000 and $1.4
million for the six months ended June 30, 1999 and 2000, respectively. During
the 2000 period, excluding net income and after adding back non-cash items, the
Company's cash used in operating activities consisted primarily of an increase
in accounts receivable of approximately $118,000 and a decrease in accounts
payable and accrued expenses of approximately $27,000 partially offset by an
increase in other long-term liabilities of approximately $20,000. Net cash used
in operating activities during the 1999 period, excluding net income and after
adding back non-cash items, consisted primarily of an increase in accounts
receivable of approximately $737,000 and an increase in prepaid expenses and
other assets of approximately $622,000 partially offset by an increase in
accounts payable and accrued expenses of approximately $632,000. During
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the six months ended June 30, 2000, net income contributed approximately
$191,000 to net cash provided by operating activities for the period compared to
approximately $238,000 for the corresponding period in 1999.
Net cash used in investing activities was approximately $2.7 million and
$796,000 for the six months ended June 30, 1999 and 2000, respectively. For the
six months ended June 30, 2000, approximately $69,000 was utilized for
acquisitions and approximately $645,000 was invested in the purchase of
additional property and equipment including approximately $222,000 for the
development of de novo offices and approximately $82,000 was related to the
issuance of notes receivable to related parties. During the six month period
ended June 30, 1999, approximately $691,000 was utilized for acquisitions and
approximately $2.0 million was invested in the purchase of additional property
and equipment, including approximately $1.1 million for the development of de
novo Offices.
Net cash provided by financing activities was approximately $1.4 million for the
six months ended June 30, 1999 and net cash used in financing activities was
approximately $487,000 for the six months ended June 30, 2000. During the six
months ended June 30, 2000, net cash used in financing activities was comprised
of approximately $386,000 used to reduce the amount outstanding on the Company's
bank line of credit, approximately $91,000 for the repayment of long-term debt
and approximately $9,800 for the purchase and retirement of Common Stock. During
the six months ended June 30, 1999, net cash provided by financing activities
was comprised of approximately $12,000 for the issuance of Common Stock from the
exercise of options and net borrowings under the Company's line of credit of
approximately $3.1 million both of which were partially offset by the purchase
and retirement of Common Stock of approximately $1.6 million and approximately
$171,000 for the repayment of long-term debt.
Under the Company's Credit Facility (as amended on March 24, 2000), the Company
may borrow up to $10.0 million for working capital needs. Advances will bear
interest at the lender's base rate (prime plus a rate margin ranging from .25%
to 1.50% based on the ratio of consolidated senior debt to consolidated EBITDA)
or at an adjusted LIBOR rate (LIBOR plus a rate margin ranging from 1.5% to
2.75% based on the ratio of consolidated senior debt to consolidated EBITDA), at
the Company's option. The Company is also obligated to pay an annual facility
fee ranging from .25% to .50% (based on the ratio of consolidated senior debt to
consolidated EBITDA) on the average unused amount of the line of credit during
the previous full calendar quarter. Borrowings are limited to an availability
formula based on the Company's adjusted EBITDA. As amended, the loan matures on
July 1, 2001. At June 30, 2000, the Company had approximately $2.6 million
available and $6.2 million outstanding under the Credit Facility. The Credit
Facility is secured by a lien on the Company's accounts receivable and its
Management Agreements. The Credit Facility prohibits the payment of dividends
and other distributions to shareholders, restricts or prohibits the Company from
incurring indebtedness, incurring liens, disposing of assets, and requires the
Company to maintain certain financial ratios on an ongoing basis.
At June 30, 2000, the Company had outstanding indebtedness of approximately
$310,000 represented by notes issued in connection with various practice
acquisitions, all of which bear interest at rates varying from 8.0% to 14.0%.
The Company's material commitments for capital expenditures total approximately
$137,000 for one de novo Office development. The Company anticipates that the
required capital for this de novo development will be provided from cash on
hand, cash generated by operations, or borrowings under the Company's Credit
Facility. The Company's retained earnings as of June 30, 2000 were approximately
$127,000, and the Company had working capital on that date of approximately $1.9
million.
On October 8, 1998, the Company's Board of Directors unanimously approved the
purchase of up to 300,000 shares of the Company's Common Stock on the open
market on such terms, as the Board of Directors deems acceptable. On February 9,
1999, the Company's Board of Directors increased the approved number of shares
to be purchased on the open market to 600,000 shares. During 1998 the Company,
in 11 separate transactions, purchased approximately 60,000 shares of its Common
Stock for total consideration of approximately $242,000 at prices ranging from
$3.63 to $4.81 per share. During 1999, the Company, in 58 separate transactions,
purchased approximately 535,000 shares of Common Stock for total consideration
of $1.6 million at prices ranging from $2.81 to $3.75 per share. On June 5,
2000, the Company's Board of Directors unanimously approved the purchase of
shares of the Company's Common Stock on the open market, total value not to
exceed $150,000. During the first six months of 2000, the Company, in three
separate transactions, purchased approximately 9,000 shares of Common Stock for
total consideration of approximately $9,800 at prices ranging from $1.08 to
$1.10 per share. At June 30, 2000, approximately $141,000 remains available
under this Board of Directors approved program.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in United States interest rates. Historically
and as of June 30, 2000, the Company has not used derivative instruments or
engaged in hedging activities.
Interest Rate Risk. The interest payable on the Company's line-of-credit is
variable based upon the prime rate or LIBOR (at the Company's option), and,
therefore, affected by changes in market interest rates. At June 30, 2000,
approximately $6.0 million was outstanding under the LIBOR option with an
interest rate of 9.06% (LIBOR plus 2.25%) and approximately $189,000 was
outstanding with an interest rate of 11.0% (prime plus 1.0%). The Company may
repay the balance in full at any time without penalty. As a result, the Company
does not believe that reasonably possible near-term changes in interest rates
will result in a material effect on future earnings, fair values or cash flows
of the Company. Based on calculations performed by the Company, a 0.5% increase
in the Company's interest rate would result in additional interest expense of
approximately $16,000 for the six months ended June 30, 2000.
20
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders was held on June 8, 2000.
(b) The following directors were elected at the meeting to serve a three-year
term as Class III directors:
For Withheld Authority Abstain
--- ------------------ -------
Frederic W.J. Birner 4,685,033 27,677 0
Mark A. Birner, D.D.S. 4,685,033 27,677 0
The following director is continuing to serve his three-year term as a Class I
director, which will expire at the Company's annual meeting in 2001:
James M.Ciccarelli
The following directors are continuing to serve their three-year terms as Class
II directors which will expire at the Company's annual meeting in 2002:
Dennis N. Genty
Steven M. Bathgate
(c) The only other matter voted upon at the meeting and results of that vote
are as follows:
Ratification of appointment of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year 2000.
For Against Abstain
--- ------- -------
4,712,260 450 0
The matter described above is described in detail in the Company's definitive
proxy statement dated May 8, 2000 for the Annual Meeting of Shareholders held on
June 8, 2000.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
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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
Date: August 11, 2000 By: /s/ Frederic W.J. Birner
----------------------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: August 11, 2000 By: /s/ Dennis N. Genty
------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule.