UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-------------------------------------
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 incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- -------------------------------------------------------------------------------
(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 November 7, 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
September 30, 2001 (unaudited) 3
Unaudited Condensed Consolidated Statements of Operations for the
Quarters And Nine Months Ended September 30, 2000 and 2001 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
ASSETS 2000 2001
(Unaudited)
CURRENT ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 691,417 $ 937,506
Accounts receivable, net of allowance for doubtful accounts
of $201,047 and $210,718 at December 31, 2000 and
September 30, 2001, respectively 3,871,818 3,434,907
Current portion of notes receivable-related parties 214,112 100,115
Deferred tax asset 104,429 104,429
Prepaid expenses and other current assets 426,938 418,206
------------ -----------
Total current assets 5,308,714 4,995,163
PROPERTY AND EQUIPMENT, net 6,967,914 5,807,056
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,693,092 14,083,812
Deferred charges and other assets 179,156 156,354
Notes receivable-related parties - 172,346
Deferred tax asset, net 184,192 184,192
------------ ------------
Total assets $26,333,068 $25,398,923
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,897,043 $ 3,271,469
Current maturities of long-term debt 154,666 4,968,377
------------ ------------
Total current liabilities 3,051,709 8,239,846
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 6,681,623 455,477
Other long-term obligations 128,820 163,864
------------ ------------
Total liabilities 9,862,152 8,859,187
------------- -------------
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) (315,925)
------------ ------------
Total shareholders' equity 16,470,916 16,539,736
------------ ------------
Total liabilities and shareholders' equity $26,333,068 $25,398,923
=========== ===========
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 Nine Months Ended
September 30, September 30,
------------- ------------
2000 2001 2000 2001
---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
NET REVENUE $ 6,998,659 $ 7,049,075 $22,611,450 $22,282,410
DIRECT EXPENSES:
Clinical salaries and benefits 3,021,970 2,807,972 9,110,784 9,157,089
Dental supplies 420,932 423,742 1,432,342 1,337,710
Laboratory fees 597,524 612,912 2,055,588 1,885,495
Occupancy 824,224 852,095 2,439,037 2,494,956
Advertising and marketing 86,579 82,785 246,157 263,925
Depreciation and amortization 609,404 596,678 1,788,612 1,822,440
General and administrative 681,179 748,890 2,220,193 2,317,692
----------- ----------- ----------- -----------
6,241,812 6,125,074 19,292,713 19,279,307
--------- --------- --------- ---------
Contribution from dental offices 756,847 924,001 3,318,737 3,003,103
Corporate Expenses:
General and administrative 784,693 620,926 2,560,441 2,314,320
Depreciation and amortization 83,825 78,681 250,327 243,933
----------- ----------- ----------- -----------
Operating income (loss) (111,671) 224,394 507,969 444,850
Interest expense, net (153,954) (98,669) (468,823) (376,030)
----------- ----------- ----------- -----------
Income (loss) before income taxes (265,625) 125,725 39,146 68,820
Income tax benefit (expense) 96,690 - (17,028) -
----------- ----------- ----------- -----------
Net income (loss) $ (168,935) $ 125,725 $ 22,118 $ 68,820
============= =========== ============= =============
Net income (loss) per share of Common Stock:
Basic $ (.11) $ .08 $ .01 $ .05
============= =========== ============ =============
Diluted $ (.11) $ .08 $ .01 $ .05
============= =========== ============ =============
Weighted average number of shares of Common Stock and dilutive securities:
Basic 1,522,386 1,506,705 1,529,275 1,506,705
========= ========= ========= =========
Diluted 1,522,386 1,533,999 1,530,379 1,514,802
========= ========= ========= =========
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 Income - - 68,820 68,820
BALANCES, September 30, 2001 1,506,705 $ 16,855,661 $ (315,925) $ 16,539,736
========= ============ =============== =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,118 $ 68,820
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,038,939 2,066,373
Loss on sale of property - 3,660
Provision for doubtful accounts 18,182 9,671
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 138,012 427,240
Prepaid expenses and other current assets 91,946 31,534
Accounts payable and accrued expenses (495,118) 374,426
Other long-term obligations 32,770 35,044
----------- -----------
Net cash provided by operating activities 1,846,849 3,016,768
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties (116,739) (58,349)
Capital expenditures (590,605) (430,889)
Development of new dental offices (321,934) -
Acquisition of dental offices (222,311) (435,006)
----------- ------------
Net cash used in investing activities (1,251,589) (924,244)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments - line of credit (257,000) (1,688,000)
Repayment of long-term debt (128,139) (158,435)
Purchase and retirement of Common Stock (112,793) -
----------- -----------
Net cash used in financing activities (497,932) (1,846,435)
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 97,328 246,089
CASH AND CASH EQUIVALENTS, beginning of period 806,954 691,417
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 904,282 $ 937,506
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2000 2001
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 478,674 $ 399,800
=============== ============
Cash paid during the period for income taxes $ - $ -
=============== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable incurred from:
Acquisition of dental offices $ - $ 434,000
============== ============
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)
SEPTEMBER 30, 2001
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
The financial statements included herein have been prepared by Birner Dental
Management Services, Inc. (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 September 30, 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 and nine
months ended September 30, 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".
Quarters Ended September 30,
2000 2001
Per Share Per Share
(Loss) Shares Amount Income Shares Amount
Basic EPS:
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to
shares of Common Stock $ (168,935) 1,522,386 $ (.11) $ 125,725 1,506,705 $ .08
Effect of dilutive shares of Common
Stock from stock options
and warrants - - - - 27,294 -
Diluted EPS:
--------- ---------- ----- ----------- ---------- -----
Net income (loss) available to
shares of Common Stock $ (168,935) 1,522,386 $ (.11) $ 125,725 1,533,999 $ .08
============ ========= ======= ========== ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the three month period ended September
30, 2001 relates to the effect of 27,294 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 three month
period ended September 30, 2000 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 1,370 for the three month period ended September
30, 2000.
8
Nine Months Ended September 30,
2000 2001
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS:
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to
shares of Common Stock $ 22,118 1,529,275 $ .01 $ 68,820 1,506,705 $ .05
Effect of dilutive shares of Common
Stock from stock options
and warrants - 1,104 - - 8,097 -
Diluted EPS:
--------- ---------- ----- ----------- ---------- -----
Net income available to
shares of Common Stock $ 22,118 1,530,379 $ .01 $ 68,820 1,514,802 $ .05
========= ========= ===== ========= ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the nine month periods ended September
30, 2000 and 2001 relates to the effect of 1,104 and 8,097, respectively, of
dilutive shares of Common Stock from stock options and warrants which are
included in total shares for the diluted calculation.
(3) LINE OF CREDIT
--------------
Under the Company's bank line of credit (the "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 September 30, 2001, the Company could borrow up to $8.0
million (based on the availability formula), of which $4.8 million was
outstanding under the Credit Facility. The Credit Facility is secured by a lien
on the Company's accounts receivable and its Management Agreements. The Credit
Facility prohibits the payment of dividends and other distributions to
shareholders; restricts or prohibits the Company from incurring indebtedness,
incurring liens, disposing of assets; making investments or making acquisitions,
and requires the Company to maintain certain financial ratios on an ongoing
basis. As a result of the Company's Credit Facility maturing on April 30, 2002,
the entire amount outstanding under the Company's Credit Facility has been
classified as a short-term liability. As a result of this classification, the
Company was not in compliance with the Credit Facility's current ratio covenant
of at least 1.25 to 1.0 at September 30, 2001. The sole reason for
non-compliance was due to the classification of the entire amount outstanding
under the Credit Facility as a short-term liability. The Company's lender waived
this covenant for the quarter ended September 30, 2001. The Company has signed a
commitment letter for a new Credit Facility with its current lender. Management
believes the new Credit Facility will consist of a term loan and a revolving
line of credit and is expected to close in the fourth quarter of 2001.
9
(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 PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board ("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 did not have a material impact to the Company.
In July 2001 the FASB issued SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets," which replace Accounting Principle
Board Opinion Nos. 16, "Business Combinations," and 17, "Intangible Assets,"
respectively. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001, and that the
use of the pooling-of-interests method be prohibited. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an
impairment-only-method. Amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of SFAS No. 142, which the
Company will be required to adopt on January 1, 2002. After December 31, 2001,
goodwill can only be written down upon impairment discovered during annual tests
for fair value, or discovered during tests taken when certain triggering events
occur. Prior to the adoption of SFAS No. 142, impairment was recognized
according to the undiscounted cash flow test per SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Company does not expect the adoption of SFAS No. 141 and No. 142 to
have a material impact on the Company's financial condition or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The provisions of
this statement are generally to be applied prospectively. Management believes
the adoption of SFAS No. 144 will not have a material impact on the Company's
financial statements.
(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 had
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. The Company believes that sufficient book and taxable
income will be generated to realize the benefit of these tax assets. For the
quarter and nine month periods ended September 30, 2001, the Company did not
record an income tax provision or benefit.
10
(7) ACQUISITIONS
On April 30, 2001 the Company acquired the remaining 50% interest in Perfect
Teeth/Alice P.C. for a total purchase price of approximately $869,000. The
consideration consisted of $435,000 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 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.
General
The following discussion relates to factors, which have affected the results of
operations and financial condition of the Company for the quarters and nine
months ended September 30, 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 September 30, 2001 managed 54
Offices in Colorado, New Mexico and Arizona staffed by 72 general dentists and
11 specialists. The Company has acquired 42 Offices (six of which were
consolidated into existing Offices) and opened 18 internally developed Offices
("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.
11
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 existing 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 September 30, 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 (2)
Offices at end of the period 34 49 54 56 54
====================================================
(1) From January 1, 2001 through September 30, 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 twelve months, has not generated positive contribution from dental offices
as of the date of this Quarterly Report.
At September 30, 2001, the Company's total assets of approximately $25.4 million
included approximately $14.1 million of identifiable intangible assets related
to Management Agreements. At that date, the Company had total shareholders'
equity of approximately $16.5 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 maintaining a corporate function that
provides management, administrative, marketing, development and professional
services to the Offices.
12
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.
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
13
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
The improvement from a loss in the third quarter of 2000 to profitability in the
third quarter of 2001 is the direct result of cost reductions implemented during
2001. During 2001, the Company has consolidated two offices with other nearby
facilities and will continue to evaluate the viability of consolidating certain
offices as leases expire. These consolidations allow for more efficient
utilization of the facilities and reduce overall costs and personnel
requirements. 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 September 30, 2001, Revenue increased $25,000 to
$9,948,000 as compared to $9,923,000 for the three months ended September 30,
2000. Revenue at the 53 Offices in existence during both full periods decreased
to $9,894,000 in 2001 from $9,923,000 in 2000, a decrease of 0.2%. This decrease
was offset by an increase in revenues of $54,000 attributable to the Office
opened in the fourth quarter of 2000.
For the nine months ended September 30, 2001, Revenue decreased $62,000 to
$31,586,000 as compared to $31,648,000 for the nine months ended September 30,
2000. Revenue at the 52 Offices in existence during both full periods decreased
to $31,000,000 in 2001 from $31,373,000 in 2000, a decrease of 1.2%. The
decrease in Revenue at the Offices in existence for both full periods is the
direct result of having fewer dentists in the Company's network during the 2001
period compared to the 2000 period. The decline in the number of dentists is due
to slow recruitment and normal attrition. This decrease was partially offset by
an increase in revenues of $311,000 attributable to two offices opened during
the first and fourth quarters of 2000.
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 September 30, Nine Months Ended September 30,
----------------------------- -------------------------------
2000 2001 2000 2001
---- ---- ---- ----
1996
NET REVENUE 100.0 % 100.0 % 100.0 % 100.0 %
DIRECT EXPENSES:
Clinical salaries and benefits 43.2 % 39.8 % 40.3 % 41.1 %
Dental supplies 6.0 % 6.0 % 6.3 % 6.0 %
Laboratory fees 8.6 % 8.7 % 9.1 % 8.4 %
Occupancy 11.8 % 12.1 % 10.8 % 11.2 %
Advertising and marketing 1.2 % 1.2 % 1.1 % 1.2 %
Depreciation and amortization 8.7 % 8.5 % 7.9 % 8.2 %
General and administrative 9.7 % 10.6 % 9.8 % 10.4 %
------- -------- ------- --------
89.2 % 86.9 % 85.3 % 86.5 %
------ -------- ------ -------
Contribution from dental offices 10.8 % 13.1 % 14.7 % 13.5 %
Corporate Expenses:
General and administrative 11.2 % 8.8 % 11.3 % 10.4 %
Depreciation and amortization 1.2 % 1.1 % 1.1 % 1.1 %
------- -------- ------- --------
Operating income (loss) (1.6)% 3.2% 2.3 % 2.0 %
Interest expense, net (2.2)% (1.4)% (2.1)% (1.7)%
------ ------- ------ ------
Income (loss) before income taxes (3.8)% 1.8% 0.2 % 0.3%
Income tax benefit (expense) 1.4 % (0.0)% (0.1)% (0.0)%
------- ------- ------- -------
Net income (loss) (2.4)% 1.8% 0.1 % 0.3%
======== ======= ======= =====
14
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000:
Net revenue. For the three months ended September 30, 2001 net revenue increased
$50,000 to $7,049,000 compared to $6,999,000 for the three months ended
September 30, 2000. Net revenue at the 53 Offices managed by the Company which
were in existence for both third quarter periods increased to $7,016,000 for the
third quarter of 2001 compared to $6,999,000 for the third quarter of 2000.
Additionally, an increase in net revenue of $33,000 was attributable to the
Office that was opened during October of 2000.
Clinical salaries and benefits. For the three months ended September 30, 2001
clinical salaries and benefits decreased to $2,808,000 compared to $3,022,000
for the three months ended September 30, 2000, a decrease of 7.1%. This decrease
was primarily due to attrition of support staff at the Offices which were not
replaced. As a percentage of net revenue, clinical salaries and benefits
decreased to 39.8% for the three months ended September 30, 2001 compared to
43.2% for the three months ended September 30, 2000.
Dental supplies. For the three months ended September 30, 2001 dental supplies
increased to $424,000 compared to $421,000 for the three months ended September
30, 2000, an increase of 0.7%. As a percentage of net revenue, dental supplies
remained constant at 6.0% for the three months ended September 30, 2001 as
compared the three months ended September 30, 2000.
Laboratory fees. For the three months ended September 30, 2001 laboratory fees
increased to $613,000 compared to $598,000 for the three months ended September
30, 2000, an increase of 2.6%. As a percentage of net revenue, laboratory fees
increased to 8.7% for the three months ended September 30, 2001 compared to 8.6%
for the three months September 30, 2000.
Occupancy. For the three months ended September 30, 2001 occupancy expense
increased to $852,000 compared to $824,000 for the three months ended September
30, 2000, an increase of 3.4%. This increase was primarily due 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 12.1% for the three
months ended September 30, 2001 compared to 11.8% for the three months ended
September 30, 2000.
Advertising and marketing. For the three months ended September 30, 2001
advertising and marketing decreased to $83,000 compared to $87,000 for the three
months ended September 30, 2000, a decrease of 4.4%. As a percentage of net
revenue, advertising and marketing remained constant at 1.2% for the three
months ended September 30, 2001 compared to the three months ended September 30,
2000.
Depreciation and amortization. For the three months ended September 30, 2001
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, decreased to $597,000 compared to $609,000 for
the three months ended September 30, 2000, a decrease of 2.1%. This decrease is
related to the decrease in the Company's depreciable and amortizable asset base.
The decrease in the asset base is directly related to the Company's efforts to
control costs, including capital expenditures and existing assets becoming fully
depreciated. As a percentage of net revenue, depreciation and amortization
decreased to 8.5% for the three months ended September 30, 2001 compared to 8.7%
for the three months ended September 30, 2000.
General and administrative. For the three months ended September 30, 2001
general and administrative, which is attributable to the Offices, increased to
$749,000 compared to $681,000 for the three months ended September 30, 2000, an
increase of approximately 9.9%. This increase was primarily due to non-recurring
credits taken against certain general and administrative expenses during the
three months ended September 30, 2000. As a percentage of net revenue, general
and administrative expenses increased to 10.6% for the three months ended
September 30, 2001 compared to 9.7% during the three months ended September 30,
2000.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $924,000 for the three months ended September 30,
2001 compared to $757,000 for the three months ended September 30, 2000, an
increase of 22.1%. As a percentage of net revenue, contribution from dental
offices increased to 13.1% for the three months ended September 30, 2001
compared to 10.8% for the three months ended September 30, 2000.
15
Corporate expenses - general and administrative. For the three months ended
September 30, 2001 corporate expenses - general and administrative decreased to
$621,000 compared to $785,000 for the three months ended September 30, 2000, a
decrease of 20.9%. This decrease is attributable to a management initiative in
the second quarter of 2001 to lower corporate expenses through a reduction in
personnel and other cost cutting measures. As a percentage of net revenue,
corporate expense - general and administrative decreased to 8.8% for the three
months ended September 30, 2001 compared to 11.2% during the three months ended
September 30, 2000.
Corporate expenses - depreciation and amortization. For the three months ended
September 30, 2001 corporate expenses - depreciation and amortization decreased
to $79,000 as compared to $84,000 for the three months ended September 30, 2000.
As a percentage of net revenue, corporate expenses - depreciation and
amortization decreased to 1.1% for the three months ended September 30, 2001
compared to 1.2% for three months ended September 30, 2000.
Operating income (loss). As a result of the above, the Company produced
operating income of $224,000 for the three months ended September 30, 2001
compared to an operating loss of $(112,000) for the three months ended September
30, 2000, an increase of $336,000.
Interest expense, net. For the three months ended September 30, 2001 interest
expense decreased to $99,000 compared to $154,000 for the three months ended
September 30, 2000, a decrease of 35.9%. 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
decreased to 1.4% for the three months ended September 30, 2001 compared to 2.2%
for the three months ended September 30, 2000.
Net income (loss). As a result of the above, the Company's net income was
$126,000 for the three months ended September 30, 2001 compared to net loss of
$(169,000) for the three months ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000:
Net revenue. For the nine months ended September 30, 2001 net revenue decreased
$329,000 to $22,282,000 compared to $22,611,000 for the nine months ended
September 30, 2000. Net revenue at the 52 Offices managed by the Company which
were in existence for both nine month periods decreased to $21,925,000 for the
first nine months of 2001 compared to $22,421,000 for the first nine months of
2000. This decrease was partially offset by an increase in net revenue of
$167,000 attributable to the two offices that were opened during 2000.
Clinical salaries and benefits. For the nine months ended September 30, 2001
clinical salaries and benefits increased to $9,157,000 compared to $9,111,000
for the nine months ended September 30, 2000, an increase of 0.5%. As a
percentage of net revenue, clinical salaries and benefits increased to 41.1% for
the nine months ended September 30, 2001 compared to 40.3% for the nine months
ended September 30, 2000.
Dental supplies. For the nine months ended September 30, 2001 dental supplies
decreased to $1.3 million compared to $1.4 million for the nine months ended
September 30, 2000, a decrease of 6.6%. This decrease was primarily due to lower
production during this period and fewer de novo office starts which require
additional expenses to establish a start-up inventory. As a percentage of net
revenue, dental supplies decreased to 6.0% for the nine months ended September
30, 2001 compared to 6.3% for the nine months ended September 30, 2000.
Laboratory fees. For the nine months ended September 30, 2001 laboratory fees
decreased to $1.9 million compared to $2.1 million for the nine months ended
September 30, 2000, a decrease of 8.3%. This decrease was primarily due to the
Company's efforts to consolidate the use of dental laboratories so that improved
pricing could be obtained based upon the Company's laboratory case volume. As a
percentage of net revenue, laboratory fees decreased to 8.4% for the nine months
ended September 30, 2001 compared to 9.1% for the nine months September 30,
2000.
Occupancy. For the nine months ended September 30, 2001 occupancy expense
increased to $2.5 million compared to $2.4 million for the nine months ended
September 30, 2000. This increase was primarily due 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 11.2% for the nine months ended
September 30, 2001 compared to 10.8% for the nine months ended September 30,
2000.
16
Advertising and marketing. For the nine months ended September 30, 2001
advertising and marketing increased to $264,000 compared to $246,000 for the
nine months ended September 30, 2000, an increase of 7.2%. As a percentage of
net revenue, advertising and marketing increased to 1.2% for the nine months
ended September 30, 2001 compared to 1.1% for the nine months ended September
30, 2000.
Depreciation and amortization. For the nine months ended September 30, 2001
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, remained constant at $1.8 million compared to
the nine months ended September 30, 2000. As a percentage of net revenue,
depreciation and amortization increased to 8.2% for the nine months ended
September 30, 2001 compared to 7.9% for the nine months ended September 30,
2000.
General and administrative. For the nine months ended September 30, 2001 general
and administrative, which is attributable to the Offices, increased to $2.3
million compared to $2.2 million for the nine months ended September 30, 2000,
an increase of 4.4%. As a percentage of net revenue, general and administrative
expenses increased to 10.4% for the nine months ended September 30, 2001
compared to 9.8% during the nine months ended September 30, 2000.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased to $3.0 million for the nine months ended September 30,
2001 compared to $3.3 million for the nine months ended September 30, 2000, a
decrease of 9.5%. As a percentage of net revenue, contribution from dental
offices decreased to 13.5% for the nine months ended September 30, 2001 compared
to 14.7% for the nine months ended September 30, 2000.
Corporate expenses - general and administrative. For the nine months ended
September 30, 2001 corporate expenses - general and administrative decreased to
$2.3 million compared to $2.6 million for the nine months ended September 30,
2000, a decrease of 9.6%. This decrease is attributable to a management
initiative in the second quarter of 2001 to lower corporate expenses through a
reduction in personnel and other cost cutting measures. As a percentage of net
revenue, corporate expense - general and administrative decreased to 10.4% for
the nine months ended September 30, 2001 compared to 11.3% during the nine
months ended September 30, 2000.
Corporate expenses - depreciation and amortization. For the nine months ended
September 30, 2001 corporate expenses - depreciation and amortization decreased
to 244,000 compared to $250,000 for the nine months ended September 30, 2000. As
a percentage of net revenue, corporate expenses - depreciation and amortization
remained constant at 1.1% for the nine months ended September 30, 2001 compared
to the nine months ended September 30, 2000.
Operating income. As a result of the above, the Company produced operating
income of $445,000 for the nine months ended September 30, 2001 compared to
operating income of $508,000 for the nine months ended September 30, 2000, a
decrease of 12.4%.
Interest expense, net. For the nine months ended September 30, 2001 interest
expense decreased to $376,000 compared to $469,000 for the nine months ended
September 30, 2000, a decrease of 19.8%. 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
decreased to 1.7% for the nine months ended September 30, 2001 compared to 2.1%
for the nine months ended September 30, 2000.
Net income. As a result of the above, the Company's net income was $69,000 for
the nine months ended September 30, 2001 compared to net income of $22,000 for
the nine months ended September 30, 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, its Credit Facility, seller notes and its
initial public offering of Common Stock.
17
Net cash provided by operating activities was approximately $1.8 million and
$3.0 million for the nine months ended September 30, 2000 and 2001,
respectively. During the 2001 period, excluding net income and after adding back
non-cash items, the Company's cash provided by operating activities consisted
primarily of a decrease in accounts receivable of approximately $427,000, and an
increase in accounts payable and accrued expenses of approximately $374,000. Net
cash provided by operating activities during the 2000 period, excluding net
income and after adding back non-cash items, consisted primarily of a decrease
in accounts receivable of approximately $138,000 offset by a decrease in
accounts payable and accrued expenses of approximately $495,000.
Net cash used in investing activities was approximately $1.3 million and
$924,000 for the nine months ended September 30, 2000 and 2001, respectively.
For the nine months ended September 30, 2001, approximately $435,000 was
invested in the purchase of the remaining 50% interest in an existing Office and
additional property and equipment purchases totaling approximately $431,000.
During the nine month period ended September 30, 2000, approximately $222,000
was utilized for acquisitions and approximately $913,000 was invested in the
purchase of additional property and equipment including approximately $322,000
for the development of de novo Offices.
Net cash used in financing activities was approximately $498,000 and $1.8
million for the nine months ended September 30, 2000 and 2001, respectively.
During the nine months ended September 30, 2001, net cash used in financing
activities was comprised of approximately $1.7 million used to reduce the amount
outstanding on the Company's bank line of credit and approximately $158,000 for
the repayment of long-term debt. During the nine months ended September 30,
2000, net cash used in financing activities was comprised of approximately
$257,000 used to reduce the amount outstanding on the Company's bank line of
credit, approximately $128,000 for the repayment of long-term debt and
approximately $113,000 to acquire and retire common stock of the Company.
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 September
30, 2001, the Company could borrow up to $8.0 million (based on the availability
formula), of which $4.8 million was outstanding under the Credit Facility. The
Credit Facility is secured by a lien on the Company's accounts receivable and
its Management Agreements. The Credit Facility prohibits the payment of
dividends and other distributions to shareholders; restricts or prohibits the
Company from incurring indebtedness, incurring liens, disposing of assets;
making investments or making acquisitions, and requires the Company to maintain
certain financial ratios on an ongoing basis. As a result of the Company's
Credit Facility maturing on April 30, 2002, the entire amount outstanding under
the Company's Credit Facility has been classified a short-term liability. As a
result of this classification, the Company was not in compliance with the Credit
Facility's current ratio covenant of at least 1.25 to 1.0 at September 30, 2001.
The sole reason for non-compliance was due to the classification of the entire
amount outstanding under the Credit Facility as a short-term liability. The
Company's lender waived this covenant for the quarter ended September 30, 2001.
The Company has signed a commitment letter for a new Credit Facility with its
current lender. Management believes the new Credit Facility will consist of a
term loan and a revolving line of credit and is expected to close in the fourth
quarter of 2001.
At September 30, 2001, the Company had outstanding indebtedness of approximately
$627,000 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 the remaining 50% interest in two
existing Offices expected to occur during the first and second quarters of 2002.
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 September 30, 2001 was
approximately $316,000 and the Company had a working capital deficit on that
date of approximately $3.2 million which was the result of the classification of
the amount outstanding under the Credit Facility as a short-term liability. When
excluding the effect of this classification, the Company's working capital was
approximately $1.5 million.
18
The Company believes that cash generated from operations and borrowings under
its current Credit Facility or under a new or renewed credit facility, will be
sufficient to fund its anticipated working capital needs, capital expenditures
and future acquisitions for at least the next 12 months. The Company has signed
a commitment letter for a new Credit Facility with its current lender and
expects to close on this agreement in the fourth quarter of 2001. 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. However,
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 or to renew its Credit Facility 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
September 30, 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 September 30, 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 September 30, 2001,
$4.7 million was outstanding under the LIBOR option with an interest rate of
5.8125% (LIBOR plus 2.25%) and $94,000 was outstanding under the prime rate
option with an interest rate of 7.0%. 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 1.0% increase in the Company's
interest rate would result in additional interest expense of approximately
$47,000 for the nine months ended September 30, 2001.
19
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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
a Colorado corporation
Date: November 9, 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: November 9, 2001 By: /s/ Dennis N. Genty
-------------------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and Accounting Officer)