UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
------------- to -----------------
Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ----------------------------------------------- -------------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
(303) 691-0680
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(Registrant's telephone number, including area code)
N/A
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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 May 9, 2001
----------------------------------- ------------------------
Common Stock, without par value 1,506,705
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 December 31, 2000
And March 2001 (unaudited) 3
Unaudited Condensed Consolidated Statements of Operations
for the Quarters Ended March 31, 2000 and 2001 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and 2001 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March, 31,
ASSETS 2000 2001
(Unaudited)
CURRENT ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 691,417 $ 909,673
Accounts receivable, net of allowance for doubtful accounts
of $201,047 and $190,925 at December 31, 2000 and
March 31, 2001, respectively 3,871,818 4,162,777
Current portion of notes receivable - related parties 214,112 201,239
Deferred income taxes 104,429 104,429
Income tax receivable 87,000 87,000
Prepaid expenses and other assets 339,938 685,185
------------ -----------
Total current assets 5,308,714 6,150,303
PROPERTY AND EQUIPMENT, net 6,967,914 6,686,553
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,693,092 13,538,565
Deferred charges and other assets 179,156 169,574
Deferred tax asset, net 184,192 184,192
------------ ------------
Total assets $26,333,068 $26,729,187
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,897,043 $ 3,762,743
Current maturities of long-term debt 154,666 138,938
------------ ------------
Total current liabilities 3,051,709 3,901,681
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 6,681,623 6,394,956
Other long-term obligations 128,820 136,877
------------ ------------
Total liabilities 9,862,152 10,433,514
------------ ------------
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; 1,506,705 shares issued and
outstanding 16,855,661 16,855,661
Accumulated deficit (384,745) (559,988)
------------ ------------
Total shareholders' equity 16,470,916 16,295,673
------------ ------------
Total liabilities and shareholders' equity $26,333,068 $26,729,187
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended
March 31,
2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
NET REVENUE $ 7,802,571 $ 7,714,671
DIRECT EXPENSES:
Clinical salaries and benefits 3,099,470 3,293,363
Dental supplies 498,359 472,390
Laboratory fees 743,595 623,399
Occupancy 791,791 814,026
Advertising and marketing 88,948 82,504
Depreciation and amortization 577,791 612,941
General and administrative 769,904 777,586
---------- ----------
6,569,858 6,676,209
---------- ----------
Contribution from dental offices 1,232,713 1,038,462
Corporate expenses:
General and administrative 892,988 973,269
Depreciation and amortization 81,832 82,486
---------- ----------
Operating income (loss) 257,893 (17,293)
Interest expense, net (158,763) (157,950)
---------- ----------
Income (loss) before income taxes 99,130 (175,243)
Income tax expense (36,975) -
---------- ----------
Net income (loss) $ 62,155 $ (175,243)
========== ==========
Net income (loss) per share of Common Stock:
Basic $ .04 $ (.12)
========== ==========
Diluted $ .04 $ (.12)
========== ==========
Weighted average number of shares of Common Stock and dilutive securities:
Basic 1,532,954 1,506,705
============ ==========
Diluted 1,534,544 1,506,705
============ ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
-------------------------------
Total
Common Stock Accumulated Shareholders'
Shares Amount Deficit Equity
BALANCES, December 31, 2000 1,506,705 $ 16,855,661 $ (384,745) $ 16,470,916
Net Loss - - (175,243) (175,243)
BALANCES, March 31, 2001 1,506,705 $ 16,855,661 $ (559,988) $16,295,673
========= ============ =============== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Quarters Ended
March 31,
2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 62,155 $ (175,243)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 659,623 695,427
Loss on sale of property - 1,254
Provision for doubtful accounts 1,554 10,122
Provision for deferred income taxes 36,975 -
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (245,150) (301,081)
Prepaid expense, income tax receivable and other assets (215,620) (335,665)
Accounts payable and accrued expenses 274,767 865,700
Other long-term obligations 10,049 8,057
----------- -----------
Net cash provided by operating activities 584,353 768,571
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties (172,793) 12,873
Capital expenditures (210,306) (260,793)
Acquisition of dental offices (54,728) -
----------- -----------
Net cash used in investing activities (437,827) (247,920)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) - line of credit 300,000 (260,000)
Repayment of long-term debt (48,658) (42,395)
----------- -----------
Net cash provided by (used in) financing activities 251,342 (302,395)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 397,868 218,256
CASH AND CASH EQUIVALENTS, beginning of period 806,954 691,417
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,204,822 $ 909,673
============== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Quarters Ended
March 31,
2000 2001
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 144,207 $ 160,145
=============== ============
Cash paid during the period for income taxes $ - $ -
============== =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Liabilities assumed or incurred through acquisitions:
Notes payable $ 54,000 $ -
=============== ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. A description of
the Company's accounting policies and other financial information is included in
the audited consolidated financial statements as filed with the Securities and
Exchange Commission in the Company's Form 10-K for the year ended December 31,
2000.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of March 31, 2001 and the results of
operations and cash flows for the periods presented. All such adjustments are of
a normal recurring nature. The results of operations for the quarter ended March
31, 2001 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 March 31,
----------------------
2000 2001
---- -----
Per Share Per Share
Income Shares Amount (Loss) Shares Amount
Basic EPS:
Net income (loss) available to
shares of Common Stock $ 62,155 1,532,954 $ .04 $ (175,243) 1,506,705 $ (.12)
Effect of dilutive shares of
Common Stock from stock options
and warrants - 1,590 - - - -
Diluted EPS:
--------- ---------- ----- ----------- ---------- -------
Net income (loss) available to
shares of Common Stock $ 62,155 1,534,544 $ .04 $ (175,243) 1,506,705 $ (.12)
========= ========= ===== =========== ========= =======
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for 2000 relates to the effect of 1,590 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 per share for the quarter ended March 31, 2001 since they were
anti-dilutive as a result of the Company's net loss for the period. The number
of options and warrants excluded from the earnings per share calculation because
they are anti-dilutive, using the treasury stock method were 212 for the quarter
ended March 31, 2001.
8
(3) LINE OF CREDIT
--------------
Under the Company's Credit Facility (as amended on September 29, 2000), the
Company may borrow up to $10.0 million for working capital needs, acquisitions
and capital expenditures including capital expenditures for de novo Offices.
Advances 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 Earnings Before Income Taxes, Depreciation and Amortization
("EBITDA") or at an adjusted London Interbank Offered Rate ("LIBOR") (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 April 30, 2002. At March 31,
2001, the Company had approximately $8.1 million available and approximately
$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; making investments or making
acquisitions, and requires the Company to maintain certain financial ratios on
an ongoing basis. At March 31, 2001 the Company was in compliance with all
covenants required by the Credit Facility.
(4) SHAREHOLDERS' EQUITY
-------------------
The Company received notice from NASDAQ that the Company did not comply with the
requirements for continued listing on the NASDAQ National Market System. In
order to satisfy NASDAQ's listing requirements for the NASDAQ SmallCap Market,
effective February 26, 2001, the Company's Shareholders approved a reverse stock
split of between one-for-three and one-for-five and the Company's Board of
Directors set the ratio at one-for four. The SmallCap Market's maintenance
standards, among other things, require the Company to have 1) at least 500,000
shares of Common Stock held by non-affiliates; 2) an aggregate market public
float of at least $1,000,000; 3) at least 300 shareholders who own 100 shares of
common Stock or more; and 4) a minimum bid price of at least $1.00 per share.
All shares, share prices and earnings per share calculations for prior periods
have been restated to reflect this reverse stock split.
(5) RECENT ACCOUNTING PROUNCEMENTS
------------------------------
In September 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" that establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. In September 1999, the FASB
issued 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. In June 2000, SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133" was issued. SFAS 138
addresses a limited number of issues causing difficulties in the implementation
of SFAS 133 and is required to be adopted concurrent with SFAS 133. As the
Company holds no derivative instruments and does not engage in hedging
activities the adoption of SFAS 133 and SFAS 138 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 fourth quarter of 2000. The adoption of SAB 101 did not have a
material effect on the Company's financial results.
9
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 No. 25 and clarifies the application of APB No. 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. FIN 44
did not have a material effect on the Company's financial results.
(6) 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 basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. At December 31, 2000, the Company has
available tax net operating loss carryforwards of approximately $1.3 million,
which expire beginning in 2012.
The Company is aware of the risk that the recorded deferred tax assets may not
be realizable. However, management believes that it will obtain the full benefit
of the deferred tax assets on the basis of its evaluation of the Company's
anticipated profitability over the period of years that the temporary
differences are expected to become tax deductions. The Company believes that
sufficient book and taxable income will be generated to realize the benefit of
these tax assets. For the quarter ended March 31, 2001, the Company did not
record an income tax benefit due to the operational fluctuations that occur in
its business on a monthly basis and because it believes that the deferred tax
assets currently recorded are materially correct.
(7) SUBSEQUENT EVENTS
------------------
On April 30, 2001 the Company consolidated two of its Denver, Colorado practices
into one office.
On April 30, 2001 the Company acquired the remaining 50% interest in Perfect
Teeth/Alice P.C. for a total purchase price of $869,006. The consideration
consisted of $435,006 in cash and $434,000 in notes payable with a term of 60
months and an interest rate of 8.0%. The Company recorded an increase to
intangible assets for the total purchase price of the remaining 50% interest in
this Office.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The statements contained in this Form 10-Q ("Quarterly Report") of Birner Dental
Management Services, Inc. (the "Company") which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements in this Item 2., "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and in Part II, Item 1., "Legal
Proceedings", regarding intent, belief or current expectations of the Company or
its officers with respect to the development or acquisition of additional dental
practices ("Offices") and the successful integration of such Offices into the
Company's network, recruitment of additional dentists, funding of the Company's
expansion, capital expenditures, payment or nonpayment of dividends, cash
outlays for income taxes and outcome of pending legal proceedings.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
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, 2000 (as filed
with the Securities Exchange Commission on March 29, 2001), the "Management's
Discussion and Analysis of Financial Condition and Results of Operations -Year
2001" 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.
10
General
The following discussion relates to factors, which have affected the results of
operations and financial condition of the Company for the three months ended
March 31, 2000 and 2001. This information should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related Notes thereto
included elsewhere in this Quarterly Report.
Overview
The Company was formed in May 1995, and as of March 31, 2001 managed 56 Offices
in Colorado, New Mexico and Arizona staffed by 79 general dentists and 12
specialists. The Company has acquired 42 Offices (four of which were
consolidated into existing Offices) and opened 18 de novo Offices. Of the 42
acquired Offices, only three (the first three practices, which were acquired
from the Company's President, Mark Birner, DDS) were acquired from affiliates of
the Company. The Company derives all of its revenue from its Management
Agreements with professional corporations ("P.C.s") which conduct the practice
at each Office. In addition, the Company assumes a number of responsibilities
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 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. During 2000, the Company's
growth strategy shifted from an acquisition and development approach to an
approach which is focused on greater utilization of exsisting physical capacity
through recruiting more dentists and support staff. The following table sets
forth the increase in the number of Offices affiliated with and managed by the
Company from 1997 through March 31, 2001, including the number of de novo
Offices and acquired Offices in each such period.
1997 1998 1999 2000 2001 (1)
---- ---- ---- ---- ----
Offices at beginning of the period 18 34 49 54 56
De novo Offices 1 5 5 2 0
Acquired Offices 15 10 1 0 0
Consolidation of Offices 0 0 (1) 0 0
---- ---- ---- ---- ----
Offices at end of the period 34 49 54 56 56
(1) From January 1, 2001 through March 31, 2001.
The combined purchase amounts for the 31 practices acquired through 1997, the 10
practices acquired in 1998, and the practice acquired in 1999 were $10.1
million, $6.0 million, and $760,000 respectively. The average initial investment
by the Company in each of its 18 de novo Offices has been approximately
$206,000, which includes the cost of equipment, leasehold improvements and
working capital associated with the Offices. The five de novo offices opened
prior to January 1997 and the 11 de novo Offices opened between January 1997 and
December 1999 began generating positive contribution from dental offices, on
average, within six months of opening. Of the two de novo Offices opened in
2000, one began generating positive contribution from dental offices within four
months of opening. The Company's remaining de novo Office, which has been open
for six months, has not generated positive contribution from dental offices as
of the date of this Quarterly Report.
At March 31, 2001, the Company's total assets of approximately $26.7 million
included approximately $13.5 million of identifiable intangible assets related
to Management Agreements. At that date, the Company had total shareholders'
equity of approximately $16.3 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.
11
Components of Revenue and Expenses
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Offices. Net revenue
represents Revenue less amounts retained by the Offices. The amounts retained by
the Offices represent amounts paid as salary, benefits and other payments to
employed dentists and hygienists. The Company's net revenue is dependent on the
Revenue of the Offices. Direct expenses consist of the expenses incurred by the
Company in connection with managing the Offices, including salaries and benefits
(for personnel other than dentists and hygienists), dental supplies, dental
laboratory fees, occupancy costs, advertising and marketing, depreciation and
amortization and general and administrative (including office supplies,
equipment leases, management information systems and other expenses related to
dental practice operations). The Company also incurs personnel and
administrative expenses in connection with maintaining a corporate function that
provides management, administrative, marketing, development and professional
services to the Offices.
Under the Management Agreements, the Company manages the business and marketing
aspects of the Offices, including (i) providing capital, (ii) designing and
implementing marketing programs, (iii) negotiating for the purchase of supplies,
(iv) staffing, (v) recruiting, (vi) training of non-dental personnel, (vii)
billing and collecting patient fees, (viii) arranging for certain legal and
accounting services, and (ix) negotiating with managed care organizations. The
P.C. is responsible for, among other things (i) hiring 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. 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 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.
12
The Company's Revenue is derived principally from fee-for-service revenue and
revenue from capitated managed dental care plans. Fee-for-service revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive supplemental payments for more complicated or elective procedures.
In contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided.
The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs. 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.
Results of Operations
As a result of the shift in focus from expansion of the Company's business
through acquisitions and the development of de novo Offices to the greater
utilization of existing physical capacity through the recruitment of additional
dentists and staff, the period-to-period comparisons set forth below may not be
representative of future operating results.
For the three months ended March 31, 2001, Revenue increased to $11.0 million
from $10.9 million for the three months ended March 31, 2000, an increase of
$67,000 or 0.6%. Revenue at the 54 Offices in existence during both full periods
decreased to $10.8 million in 2001 from $10.9 million in 2000, a decrease of
$87,000 or 0.8%. This decrease was offset by an increase in Revenue of $154,000
attributable to the two Offices which were opened in March and October of 2000.
13
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.
Quarters Ended March 31,
2000 2001
---- ----
Net revenue 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 39.7 % 42.7 %
Dental supplies 6.4 % 6.1 %
Laboratory fees 9.5 % 8.1 %
Occupancy 10.2 % 10.5 %
Advertising and marketing 1.1 % 1.1 %
Depreciation and amortization 7.4 % 7.9 %
General and administrative 9.9 % 10.1 %
----- -----
84.2 % 86.5 %
---- ----
Contribution from dental offices 15.8 % 13.5 %
Corporate expenses:
General and administrative 11.4 % 12.6 %
Depreciation and amortization 1.1 % 1.1 %
----- -----
Operating income (loss) 3.3 % (0.2) %
Interest expense, net (2.0)% (2.1)%
----- -----
Income (loss) before income taxes 1.3 % (2.3) %
Income tax expense (0.5)% (0.0)%
----- -----
Net income (loss) 0.8 % (2.3) %
===== ======
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000:
Net revenue. For the three months ended March 31, 2001 net revenue decreased to
$7.7 million compared to $7.8 million for the three months ended March 31, 2000,
a decrease of approximately $88,000, or 1.1%. Net revenue at the 54 Offices
managed by the Company which were in existence for both first quarter periods
decreased to $7.6 million for the first quarter of 2001 compared to $7.8 million
for the first quarter of 2000, a decrease of approximately $177,000, or 2.3%.
This decrease was primarily due to 1) the higher amounts retained by dental
offices for compensation paid by the professional corporations to dentists and
hygienists resulting from the shift in the Company's revenue mix from managed
care to fee-for-service and the corresponding higher labor costs associated with
this fee-for-service business, and 2) the higher cost of doing business in a
tight labor market. This amount increased due to the shift in revenues from
managed dental care plans to fee-for-service business. This decrease was
partially offset by an increase in net revenue of $89,000 attributable to the
two Offices that were opened during the period from January 1, 2000 through
March 31, 2001.
Clinical salaries and benefits. For the three months ended March 31, 2001
clinical salaries and benefits increased to $3.3 million compared to $3.1
million for the three months ended March 31, 2000, an increase of $194,000 or
6.3%. This increase was primarily due to the increased number of Offices open
during the 2000 period and the corresponding addition of non-dental personnel as
well as the Company's annual compensation increase, which took effect on July 1,
2000. As a percentage of net revenue, clinical salaries and benefits increased
to 42.7% for the three months ended March 31, 2001 compared to 39.7% for the
three months ended March 31, 2000.
Dental supplies. For the three months ended March 31, 2001 dental supplies
decreased to $472,000 compared to $498,000 for the three months ended March 31,
2000, a decrease of $26,000 or 5.2%. As a percentage of net revenue, dental
supplies decreased to 6.1% for the three months ended March 31, 2001 compared to
6.4% for the three months ended March 31, 2000.
14
Laboratory fees. For the three months ended March 31, 2001 laboratory fees
decreased to $623,000 compared to $744,000 for the three months ended March 31,
2000, a decrease of $120,000 or 16.2%. 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 8.1% for the three
months ended March 31, 2001 compared to 9.5% for the three months March 31,
2000.
Occupancy. For the three months ended March 31, 2001 occupancy expense increased
to $814,000 compared to $792,000 for the three months ended March 31, 2000, an
increase of $22,000 or 2.8%. This increase was primarily due to incremental
occupancy expenditures related to the increased number of Offices open during
the 2001 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 2000 period. As a percentage of net revenue, occupancy
expense increased to 10.6% for the three months ended March 31, 2001 compared to
10.2% for the three months ended March 31, 2000.
Advertising and marketing. For the three months ended March 31, 2001 advertising
and marketing decreased to $83,000 compared to $89,000 for the three months
ended March 31, 2000, a decrease of $6,000 or 7.2%. As a percentage of net
revenue, advertising and marketing remained constant at 1.1% for the three
months ended March 31, 2001 compared to the three months ended March 31, 2000.
Depreciation and amortization. For the three months ended March 31, 2001
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, increased to $613,000 compared to $578,000 for
the three months ended March 31, 2000, an increase of $35,000 or 6.1%. 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, upgrades to existing Offices and addition
of equipment to older Offices. As a percentage of net revenue, depreciation and
amortization increased to 7.9% for the three months ended March 31, 2001
compared to 7.4% for the three months ended March 31, 2000. The increase in
depreciation and amortization as a percentage of net revenue is related to the
higher depreciable asset base associated with the Company's de novo Offices and
the addition of equipment to older Offices.
General and administrative. For the three months ended March 31, 2001 general
and administrative, which is attributable to the Offices, increased to $778,000
compared to $770,000 for the three months ended March 31, 2000, an increase of
approximately $8,000 or 1.0%. As a percentage of net revenue, general and
administrative expenses increased to 10.1% for the three months ended March 31,
2001 compared to 9.9% during the three months ended March 31, 2000.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased to $1.0 million for the three months ended March 31,
2001 compared to $1.2 million for the three months ended March 31, 2000, a
decrease of $194,000 or 15.8%. As a percentage of net revenue, contribution from
dental offices decreased to 13.5% for the three months ended March 31, 2001
compared to 15.8% for the three months ended March 31, 2001
Corporate expenses - general and administrative. For the three months ended
March 31, 2001 corporate expenses - general and administrative increased to
$973,000 compared to $893,000 for the three months ended March 31, 2000, an
increase of $80,000 or 9.0%. This increase is attributable to higher legal fees
and computer operations and maintenance expenses offset, in part, by lower
employee salaries and contract labor. As a percentage of net revenue, corporate
expense - general and administrative increased to 12.6% for the three months
ended March 31, 2001 compared to 11.4% during the three months ended March 31,
2000.
Corporate expenses - depreciation and amortization. For the three months ended
March 31, 2001 corporate expenses - depreciation and amortization remained
constant at $82,000 as compared to the three months ended March 31, 2000. As a
percentage of net revenue, corporate expenses - depreciation and amortization
remained constant at 1.1% for the three months ended March 31, 2001 compared to
the three months ended March 31, 2000.
Operating income (loss). As a result of the above, the Company incurred an
operating loss of $(17,000) for the three months ended March 31, 2001 compared
to operating income of $258,000 for the three months ended March 31, 2000, a
decrease of $275,000.
15
Interest expense, net. For the three months ended March 31, 2001 interest
expense decreased to $158,000 compared to $159,000 for the three months ended
March 31, 2000, a decrease of $1,000 or 0.5%. This decrease in interest expense
is attributable to a lower average interest rate as well as a lower average
outstanding debt balance. As a percentage of net revenue, interest expense
increased to 2.1% for the three months ended March 31, 2001 compared to 2.0% for
the three months ended March 31, 2000.
Net income (loss). As a result of the above, the Company's incurred a net loss
of $(175,000) for the three months ended March 31, 2001 compared to net income
of $62,000 for the three months ended March 31, 2000.
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 $584,000 and
$769,000 for the three months ended March 31, 2000 and 2001, respectively.
During the 2001 period, excluding the net loss and after adding back non-cash
items, the Company's cash provided by operating activities consisted primarily
of an increase in accounts payable and accrued expenses of approximately
$866,000 partially offset by an increase in accounts receivable of approximately
$301,000 and an increase in prepaid expense, income tax receivable and other
assets of approximately $336,000. Net cash provided by operating activities
during the 2000 period, excluding net income and after adding back non-cash
items, consisted primarily of an increase in accounts payable and accrued
expenses of approximately $275,000 offset by an increase in accounts receivable
of approximately $245,000 and an increase in prepaid expense, income tax
receivable and other assets of approximately $216,000.
Net cash used in investing activities was approximately $438,000 and $248,000
for the three months ended March 31, 2000 and 2001, respectively. For the three
months ended March 31, 2001, approximately $261,000 was invested in the purchase
of additional property and equipment which was partially offset by approximately
$13,000 relating to the repayment of notes receivable from related parties.
During the three month period ended March 31, 2000, approximately $55,000 was
utilized for acquisitions, approximately $210,000 was invested in the purchase
of additional property and equipment and approximately $173,000 was related to
the issuance of notes receivable from related parties.
Net cash provided by financing activities was approximately $251,000 for the
three months ended March 31, 2000 and net cash used in financing activities was
approximately $302,000 for the three months ended March 31, 2001. During the
three months ended March 31, 2001, net cash used in financing activities was
comprised of approximately $260,000 used to reduce the amount outstanding on the
Company's bank line of credit and approximately $42,000 for the repayment of
long-term debt. During the three months ended March 31, 2000, net cash provided
by financing activities was comprised of approximately $300,000 of net
borrowings under the Company's line of credit offset, in part, by approximately
$49,000 for the repayment of long-term debt.
Under the Company's Credit Facility (as amended on September 29, 2000), the
Company may borrow up to $10.0 million for working capital needs, acquisitions
and capital expenditures including capital expenditures for de novo Offices.
Advances will bear interest at the lender's base rate (prime plus a rate margin
ranging from .25% to 1.50% based on the ratio of consolidated senior debt to
consolidated EBITDA) or at an adjusted LIBOR rate (LIBOR plus a rate margin
ranging from 1.5% to 2.75% based on the ratio of consolidated senior debt to
consolidated EBITDA), at the Company's option. The Company is also obligated to
pay an annual facility fee ranging from .25% to .50% (based on the ratio of
consolidated senior debt to consolidated EBITDA) on the average unused amount of
the line of credit during the previous full calendar quarter. Borrowings are
limited to an availability formula based on the Company's adjusted EBITDA. As
amended, the loan matures on April 30, 2002. At March 31, 2001, the Company had
approximately $1.9 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; making investments or making acquisitions, and requires the Company to
maintain certain financial ratios on an ongoing basis. At March 31, 2001 the
Company was in full compliance with all of its covenants under this agreement.
16
At March 31, 2001, the Company had outstanding indebtedness of approximately
$311,894 represented by notes issued in connection with various practice
acquisitions, all of which bear interest at rates varying from 8.0% to 9.0%. The
Company's material commitments for capital expenditures total approximately $1.1
million which includes the acquisition of controlling interest in two existing
Offices scheduled to occur during the second and fourth quarters of 2001. The
Company anticipates that these capital expenditures will be provided from cash
on hand, cash generated by operations, or borrowings under the Company's Credit
Facility. The Company's accumulated deficit as of March 31, 2001 was
approximately $560,000 and the Company had working capital on that date of
approximately $2.2 million.
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.
On September 5, 2000, the Company's Board of Directors unanimously approved the
purchase of shares of the Company's Common Stock on the open market, total value
not to exceed $150,000. During 2000, the Company, in 18 separate transactions,
purchased approximately 26,300 shares of Common Stock for total consideration of
approximately $113,000 at prices ranging from $3.80 to $6.68 per share. At March
31, 2001 approximately $37,000 remains available under this Board of Directors
approved program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in United States interest rates. Historically
and as of March 31, 2001, the Company has not used derivative instruments or
engaged in hedging activities.
Interest Rate Risk. The interest payable on the Company's line-of-credit is
variable based upon the prime rate or LIBOR (at the Company's option), and,
therefore, affected by changes in market interest rates. At March 31, 2001, $6.2
million was outstanding under the LIBOR option with an interest rate of 7.375%
(LIBOR plus 2.25%) and $22,000 was outstanding with an interest rate of 9.0%
(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 $8,400 for the three
months ended March 31, 2001.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
a Colorado corporation
Date: May 14, 2001 By: /s/ Frederic W.J. Birner
-----------------------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: May 14, 2001 By: /s/ Dennis N. Genty
-----------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer,
Secretary, Treasurer and Director
(Principal Financial and
Accounting Officer)