UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 2002
-------------------------------
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.
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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
- ------------------------------------------------------ -------------------------
(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 3, 2002
--------------------------------- --------------------------------------------
Common Stock, without par value 1,506,705
1
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, 2001
And March 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
Ended March 31, 2001 and 2002 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2002 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 2001 2002
------------ -----------
** (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 949,236 $ 977,980
Accounts receivable, net of allowance for doubtful accounts
of $201,795 and $196,955, respectively 3,086,648 3,440,727
Deferred tax asset 112,214 112,214
Prepaid expenses and other assets 724,429 673,694
----------- -----------
Total current assets 4,872,527 5,204,615
PROPERTY AND EQUIPMENT, net 5,369,198 4,975,910
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,915,362 14,540,242
Deferred charges and other assets 216,285 189,695
Notes receivable - related parties 284,479 284,479
Deferred tax asset, net 104,074 104,074
----------- -----------
Total assets $24,761,925 $25,299,015
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,190,723 $ 3,473,644
Income taxes payable 48,479 144,071
Current maturities of long-term debt 1,332,158 1,222,333
----------- -----------
Total current liabilities 4,571,360 4,840,048
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 3,296,304 3,331,512
Other long-term obligations 173,089 168,737
----------- -----------
Total liabilities 8,040,753 8,340,297
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
Retained earnings (accumulated deficit) (134,489) 103,057
----------- -----------
Total shareholders' equity 16,721,172 16,958,718
----------- -----------
Total liabilities and shareholders' equity $24,761,925 $25,299,015
=========== ===========
** Derived from the Company's audited consolidated balance sheet at December 31, 2001
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,
2001 2002
---- ----
NET REVENUE $ 7,714,671 $ 7,767,614
DIRECT EXPENSES:
Clinical salaries and benefits 3,293,363 2,972,198
Dental supplies 472,390 444,261
Laboratory fees 623,399 594,971
Occupancy 814,026 834,270
Advertising and marketing 82,504 79,066
Depreciation and amortization 612,941 594,390
General and administrative 777,586 773,687
----------- -----------
6,676,209 6,292,843
----------- -----------
Contribution from dental offices 1,038,462 1,474,771
CORPORATE EXPENSES:
General and administrative 973,269 905,932
Depreciation and amortization 82,486 79,219
----------- -----------
Operating income (loss) (17,293) 489,620
Interest expense, net (157,950) (106,481)
----------- -----------
Income (loss) before income taxes (175,243) 383,139
Income tax expense - (145,593)
----------- -----------
Net income (loss) $ (175,243) $ 237,546
=========== ===========
Net income (loss) per share of Common Stock:
Basic $ (.12) $ .16
----------- -----------
Diluted $ (.12) $ .15
=========== ===========
Weighted average number of shares of Common Stock and dilutive securities:
Basic 1,506,705 1,506,705
=========== ===========
Diluted 1,506,705 1,609,461
=========== ===========
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)
Retained
Earnings Total
Common Stock (Accumulated Shareholders'
Shares Amount Deficit) Equity
------ ------ ----------- ------------
BALANCES, December 31, 2001 1,506,705 $ 16,855,661 $ (134,489) $ 16,721,172
Net Income - - 237,546 237,546
BALANCES, March 31, 2002 1,506,705 $ 16,855,661 $ 103,057 $ 16,958,718
========= ============ ============= ============
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,
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (175,243) $ 237,546
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 695,427 673,609
Loss on disposition of property 1,254 -
Provision for doubtful accounts 10,122 (4,840)
Amortization of debt issuance costs 7,787 27,367
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (301,081) (349,239)
Prepaid expense, income tax receivable and other assets (343,452) 56,661
Accounts payable and accrued expenses 865,700 282,921
Income taxes payable - 95,592
Other long-term obligations 8,057 (4,352)
------------ ----------
Net cash provided by operating activities 768,571 1,015,265
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties 12,873 -
Capital expenditures (260,793) (106,547)
Acquisition of dental offices - (398,654)
------------ ----------
Net cash used in investing activities (247,920) (505,201)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) - line of credit (260,000) (168,000)
Repayment of bank term-loan - (250,000)
Repayment of long-term debt (42,395) (56,617)
Payment of debt issuance and financing costs - (6,703)
------------ ----------
Net cash used in financing activities (302,395) (481,320)
NET INCREASE IN CASH AND CASH EQUIVALENTS 218,256 28,744
CASH AND CASH EQUIVALENTS, beginning of period 691,417 949,236
------------ ----------
CASH AND CASH EQUIVALENTS, end of period $ 909,673 $ 977,980
============ ==========
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,
2001 2002
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 160,145 $ 106,664
=============== ============
Cash paid during the period for income taxes $ - $ 50,000
=============== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable incurred from:
Acquisition of dental offices $ - $ 400,000
=============== ============
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, 2002
(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 szzzuch 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, 2001.
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, 2002 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, 2002 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 March 31,
2001 2002
---- ----
Per Share Per Share
(Loss) Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic EPS:
Net income (loss) available to
shares of Common Stock $ (175,243) 1,506,705 $ (.12) $ 237,546 1,506,705 $ .16
Effect of dilutive shares of
Stock from stock
and warrants - - - - 102,756 (.01)
Diluted EPS:
---------- --------- ------ ---------- --------- -----
Net income (loss) available to
shares of Common Stock $ (175,243) 1,506,705 $ (.12) $ 237,546 1,609,461 $ .15
=========== ========= ====== ========== ========= =====
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. The difference in weighted average
shares outstanding between basic earnings per share and diluted earnings per
share for the quarter ended March 31, 2002 relates to the effect of 102,756
dilutive shares of Common Stock from stock options and warrants which are
included in total shares for the diluted calculation.
8
(3) LINE OF CREDIT
--------------
Under the Company's Credit Facility (as amended on December 17, 2001), the
Company may borrow on a revolving basis up to the lesser of an applicable
Borrowing Base (calculated in accordance with the most recent Borrowing Base
Certificate delivered to the Lender) or $2.0 million and on a non-revolving
basis, an aggregate principal amount not in excess of $4.0 million for working
capital, for restructuring of the Original Loan and for other general corporate
purposes. Balances bear interest at the lender's base rate (prime plus a rate
margin of 2.0%). The Company is also obligated to pay an annual facility fee of
...50% on the average unused amount of the revolving line of credit during the
previous full calendar month. Borrowings on the revolving loan are limited to an
availability formula based on the Company's eligible accounts receivable. As
amended, the revolving loan matures on April 30, 2002 (see Footnote 7,
Subsequent Events) and the non-revolving note matures on April 30, 2003. At
March 31, 2002, the Company had no borrowings outstanding and $2.0 million
available for borrowing under the revolving loan and $3.625 million outstanding
under the non-revolving loan. 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,
2002 the Company was in full compliance with all of its covenants under this
agreement.
(4) RECENT ACCOUNTING PROUNCEMENTS
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets,"
which replace Accounting Principles Board ("APB") 16, "Business Combinations,"
and APB 17, "Intangible Assets," respectively. SFAS 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 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, ceased upon adoption of SFAS
142, which the Company was 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 142, impairment of
intangibles was recognized according to the undiscounted cash flow test per SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption of SFAS 141 and SFAS 142 on January 1,
2002 did not have a material impact on the Company's financial position or
results of operations.
In June 2001, the FASB approved for issuance SFAS 143, Asset Retirement
Obligations. SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The statement is effective for the financial statements issued
for fiscal years beginning after June 15, 2002. The Company does not believe
that the adoption of the statement will have a material effect on its financial
position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS 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 144 is
effective for fiscal years beginning after December 15, 2001. The provisions of
this statement are generally to be applied prospectively. The adoption of SFAS
144 on January 1, 2002 did not have a material impact on the Company's financial
position, results of operations or cash flows.
9
(5) 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, 2001, the Company has
available tax net operating loss carryforwards of approximately $753,000, 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.
(6) ACQUISITIONS
On January 31, 2002 the Company acquired two-thirds of the remaining 50%
interest in Mississippi Dental Group for a total purchase price of $798,654. The
consideration consisted of $398,654 in cash and $400,000 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 33% interest in this
Office.
(7) SUBSEQUENT EVENTS
------------------
On April 1, 2002 the Company acquired the remaining 50% interest in Glendale
Dental Group for a total purchase price of $1,119,496. The consideration
consisted of $560,496 in cash and $559,000 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.
On April 30, 2002, the Company's current Credit Facility was amended. This
amendment extends the maturity date for the revolving loan to April 30, 2003.
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, 2001 (as filed
with the Securities Exchange Commission on March 28, 2002), the "Management's
Discussion and Analysis of Financial Condition and Results of Operations -Year
2002" 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, 2001 and 2002. 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 current1y manages 54 Offices in
Colorado, New Mexico and Arizona staffed by 74 general dentists and 14
specialists. The Company has acquired 42 Offices (five of which were
consolidated into existing Offices) and opened 18 de novo Offices (one of which
was consolidated into an existing Office). 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 (as defined below) 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 expects to
expand in existing markets primarily by enhancing the operating performance of
its existing Offices and by developing de novo Offices. The Company has
historically expanded in existing markets by acquiring solo and group dental
practices and may do so in the future if an economically feasible opportunity
presents itself. Generally, the Company seeks to acquire dental practices for
which the Company believes application of its Dental Practice Management Model
will improve operating performance.
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's growth and success in the
Colorado market led to its expansion into the New Mexico and Arizona markets as
well as to its evaluation of additional markets. 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 1998 through March 31, 2002, including the number of de novo
Offices and acquired Offices in each such period.
1998 1999 2000 2001 2002 (1)
---- ---- ---- ---- --------
Offices at beginning of the period 34 49 54 56 54
De novo Offices 5 5 2 0 0
Acquired Offices 10 1 0 0 0
Consolidation of Offices 0 (1) 0 (2) 0
Offices at end of the period 49 54 56 54 54
==============================================
(1) From January 1, 2002 through March 31, 2002.
The combined purchase amounts for the 31 practices acquired through 1998, and
the one practice acquired in 1999 were $15.9 million, and $760,000 respectively.
The average initial investment by the Company in each of its 17 de novo Offices
has been approximately $210,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the Offices. These de novo
Offices, which were opened between January 1996 and October 2000, began
generating positive contribution from dental offices, on average, within eight
months of opening.
11
At March 31, 2002, the Company's total assets of approximately $25.3 million
included approximately $14.5 million of identifiable intangible assets related
to Management Agreements. At that date, the Company had total shareholders'
equity of approximately $17.0 million. The Company reviews the recorded amount
of intangible assets and other fixed assets for impairment for each Office
whenever events or changes in circumstances indicate the carrying amount of the
assets may not be recoverable. If this review indicates that the carrying amount
of the assets may not be recoverable as determined based on the undiscounted
cash flows of each Office, whether acquired or developed, the carrying value of
the asset is reduced to fair value. Among the factors that the Company will
continually evaluate are unfavorable changes in each Office, relative market
share and local market competitive environment, current period and forecasted
operating results, cash flow levels of Offices and the impact on the net revenue
earned by the Company, and the legal and regulatory factors governing the
practice of dentistry.
Components of Revenue and Expenses
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Offices. Net revenue
represents Revenue less amounts retained by the Offices. The amounts retained by
the Offices represent amounts paid as salary, benefits and other payments to
employed dentists and hygienists. The Company's net revenue is dependent on the
Revenue of the Offices. Management service fee revenue represents the net
revenue earned by the Company for the Offices for which the Company has
management agreements, but does not have control. Direct expenses consist of the
expenses incurred by the Company in connection with managing the Offices,
including salaries and benefits (for personnel other than dentists and
hygienists), dental supplies, dental laboratory fees, occupancy costs,
advertising and marketing, depreciation and amortization and general and
administrative (including office supplies, equipment leases, management
information systems and other expenses related to dental practice operations).
The Company also incurs personnel and administrative expenses in connection with
maintaining a corporate function that provides management, administrative,
marketing, development and professional services to the Offices.
Under each of the Management Agreements, the Company manages the business and
marketing aspects of the Offices, including (i) providing capital, (ii)
designing and implementing marketing programs, (iii) negotiating for the
purchase of supplies, (iv) 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) supervision
of 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.
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 of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at each Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office, (ii) direct
costs of all Company employees or consultants who provide services to or in
connection with the Office, (iii) utilities, janitorial, laboratory, supplies,
advertising and other expenses incurred by the Company in carrying out its
obligations under the Management Agreement, (iv) depreciation expense associated
with the P.C.'s assets and the assets of the Company used at the Office, and the
amortization of intangible asset value 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
12
the Offices of the P.C.'s. This enables the Company to manage the profitability
of the Offices. Each Management Agreement is for a term of 40 years. Further,
each Management Agreement generally may be terminated by the P.C. only for
cause, which includes a material default by or bankruptcy of the Company. Upon
expiration or termination of a Management Agreement by either party, the P.C.
must satisfy all obligations it has to the Company.
The Company's Revenue is derived principally from fee-for-service revenue and
revenue from capitated managed dental care plans. Fee-for-service revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care 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 at existing Offices through effective marketing and advertising
programs and by opening new Offices. 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, 2002, Revenue remained constant at $11.0
million as compared to the three months ended March 31, 2001.
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,
2001 2002
Net revenue 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 42.7 % 38.3 %
Dental supplies 6.1 % 5.7 %
Laboratory fees 8.1 % 7.7 %
Occupancy 10.5 % 10.7 %
Advertising and marketing 1.1 % 1.0 %
Depreciation and amortization 7.9 % 7.6 %
General and administrative 10.1 % 10.0 %
----- -----
86.5 % 81.0 %
----- -----
Contribution from dental offices 13.5 % 19.0 %
Corporate expenses:
General and administrative 12.6 % 11.7 %
Depreciation and amortization 1.1 % 1.0 %
----- -----
Operating income (loss) (0.2) % 6.3 %
Interest expense, net (2.1)% (1.4)%
----- ------
Income (loss) before income taxes (2.3) % 4.9 %
Income tax expense - % (1.9)%
----- -----
Net income (loss) (2.3) % 3.0 %
===== =====
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001:
Net revenue. For the three months ended March 31, 2002 net revenue increased
slightly to $7.8 million compared to $7.7 million for the three months ended
March 31, 2001, an increase of approximately $53,000, or 0.7%.
Clinical salaries and benefits. For the three months ended March 31, 2002
clinical salaries and benefits decreased to $3.0 million compared to $3.3
million for the three months ended March 31, 2001, a decrease of $321,000 or
9.8%. 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 38.3% for the three months ended March 31,
2002 compared to 42.7% for the three months ended March 31, 2001.
Dental supplies. For the three months ended March 31, 2002 dental supplies
decreased to $444,000 compared to $472,000 for the three months ended March 31,
2001, a decrease of $28,000 or 6.0%. This decrease was primarily due to fewer de
novo office starts that require additional expenses to establish a start-up
inventory. As a percentage of net revenue, dental supplies decreased to 5.7% for
the three months ended March 31, 2002 compared to 6.1% for the three months
ended March 31, 2001.
Laboratory fees. For the three months ended March 31, 2002 laboratory fees
decreased to $595,000 compared to $623,000 for the three months ended March 31,
2001, a decrease of $28,000 or 4.6%. 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 7.7% for the three
months ended March 31, 2002 compared to 8.1% for the three months March 31,
2001.
14
Occupancy. For the three months ended March 31, 2002 occupancy expense increased
to $834,000 compared to $814,000 for the three months ended March 31, 2001, an
increase of $20,000 or 2.5%. 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 2001 period. As a percentage of
net revenue, occupancy expense increased to 10.7% for the three months ended
March 31, 2002 compared to 10.5% for the three months ended March 31, 2001.
Advertising and marketing. For the three months ended March 31, 2002 advertising
and marketing decreased to $79,000 compared to $83,000 for the three months
ended March 31, 2001, a decrease of $3,000 or 4.2%. As a percentage of net
revenue, advertising and marketing decreased to 1.0% for the three months ended
March 31, 2002 compared to 1.1% for the three months ended March 31, 2001.
Depreciation and amortization. For the three months ended March 31, 2002
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, decreased to $594,000 compared to $613,000 for
the three months ended March 31, 2001, a decrease of $19,000 or 3.0%. 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 7.6% for the three months ended March 31, 2002
compared to 7.9% for the three months ended March 31, 2001.
General and administrative. For the three months ended March 31, 2002 general
and administrative, which is attributable to the Offices, decreased to $774,000
compared to $778,000 for the three months ended March 31, 2001, a decrease of
approximately $4,000 or 0.5%. As a percentage of net revenue, general and
administrative expenses decreased to 10.0% for the three months ended March 31,
2002 compared to 10.1% during the three months ended March 31, 2001.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $1.5 million for the three months ended March 31,
2002 compared to $1.0 million for the three months ended March 31, 2001, an
increase of $436,000 or 42.0%. As a percentage of net revenue, contribution from
dental offices increased to 19.0% for the three months ended March 31, 2002
compared to 13.5% for the three months ended March 31, 2001
Corporate expenses - general and administrative. For the three months ended
March 31, 2002 corporate expenses - general and administrative decreased to
$906,000 compared to $973,000 for the three months ended March 31, 2001, a
decrease of $67,000 or 6.9%. 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 11.7% for
the three months ended March 31, 2002 compared to 12.6% during the three months
ended March 31, 2001.
Corporate expenses - depreciation and amortization. For the three months ended
March 31, 2002 corporate expenses - depreciation and amortization decreased to
$79,000 compared to $82,000 for the three months ended March 31, 2001, a
decrease of $3,000 or 4.0%. As a percentage of net revenue, corporate expenses -
depreciation and amortization decreased to 1.0% for the three months ended March
31, 2002 compared to 1.1% for the three months ended March 31, 2001.
Operating income (loss). As a result of the above, the Company generated
operating income of $490,000 for the three months ended March 31, 2002 compared
to a operating loss of $(17,000) for the three months ended March 31, 2001, an
increase of $507,000.
Interest expense, net. For the three months ended March 31, 2002 interest
expense decreased to $106,000 compared to $158,000 for the three months ended
March 31, 2001, a decrease of $52,000 or 32.6%. This decrease in interest
expense is attributable to lower average outstanding debt balances. As a
percentage of net revenue, interest expense decreased to 1.4% for the three
months ended March 31, 2002 compared to 2.1% for the three months ended March
31, 2001.
Net income (loss). As a result of the above, the Company reported net income of
$238,000 for the three months ended March 31, 2002 compared to a net loss of
$(175,000) for the three months ended March 31, 2001, an increase of $413,000.
Net income for the quarter ended March 31, 2002 was net of income tax expense of
$146,000 while the net loss for the quarter ended March 31, 2001 did not include
a provision for income taxes.
15
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 $769,000 and $1.0
million for the three months ended March 31, 2001 and 2002, respectively. During
the 2002 period, excluding net income 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 $283,000, an
increase in income taxes payable of approximately $96,000 and a decrease in
prepaid expense, income tax receivable and other asets of approximately $57,000,
partially offset by an increase in accounts receivable of approximately
$349,000. Net cash provided by operating activities during the 2001 period,
excluding the net loss and after adding back non-cash items, 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 asssets of approximately $343,000.
Net cash used in investing activities was approximately $248,000 and $505,000
for the three months ended March 31, 2001 and 2002, respectively. For the three
months ended March 31, 2002, approximately $399,000 was utilized for acquisition
of dental offices and approximately $107,000 was invested in the purchase of
additional property and equipment. During the three month period ended March 31,
2001, approximately $261,000 was invested in the purchase of additional property
and equipment.
Net cash used in financing activities was approximately $302,000 and $481,000
for the three months ended March 31, 2001 and 2002, respectively. During the
three months ended March 31, 2002, net cash used in financing activities was
comprised of approximately $250,000 used to reduce the amount outstanding on the
Company's term-loan with its bank, $168,000 used to reduce the amount
outstanding on the Company's bank line of credit and approximately $57,000 for
the repayment of long-term debt. 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.
Under the Company's Credit Facility (as amended on December 17, 2001), the
Company may borrow on a revolving basis up to the lesser of an applicable
Borrowing Base (calculated in accordance with the most recent Borrowing Base
Certificate delivered to the Lender) or $2.0 million and on a non-revolving
basis, an aggregate principal amount not in excess of $4.0 million for working
capital, for restructuring of the Original Loan and for other general corporate
purposes. Balances bear interest at the lender's base rate (prime plus a rate
margin of 2.0%). The Company is also obligated to pay an annual facility fee of
...50% on the average unused amount of the revolving line of credit during the
previous full calendar month. Borrowings on the revolving loan are limited to an
availability formula based on the Company's eligible accounts receivable. As
amended, the revolving loan matures on April 30, 2002 and the non-revolving note
matures on April 30, 2003. At March 31, 2002, the Company had no borrowings
outstanding and $2.0 million available for borrowing under the revolving loan
and $3.625 million outstanding under the non-revolving loan. 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, 2002 the Company was in full compliance with all
of its covenants under this agreement.
On April 30, 2002, the Company's current Credit Facility was amended. This
amendment extends the maturity date for the revolving loan to April 30, 2003.
At March 31, 2002, the Company had outstanding indebtedness of approximately
$929,000 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
$850,000 which includes the acquisition of controlling interest in one existing
Office which occurred on April 1, 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
retained earnings as of March 31, 2002 was approximately $103,000 and the
Company had working capital on that date of approximately $365,000.
16
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 April 30, 2002, the Company's current Credit Facility was amended. This
amendment extends the maturity date for the revolving loan to April 30, 2003.
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, 2002 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, 2002, 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 and
term-loan is variable based upon the prime rate and, therefore, affected by
changes in market interest rates. At March 31, 2002, $3.625 million was
outstanding with an interest rate of 6.75% (Prime plus 2.0%). 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 1.0% increase
in the Company's interest rate would result in additional interest expense of
approximately $9,800 for the three months ended March 31, 2002.
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
Exhibit
Number Description of Document
10.39 First Amendment to Amended and Restated Credit Agreement dated April
30, 2002 between the Registrant and Key Bank of Colorado.
(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 3, 2002 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 3, 2002 By: /s/ Dennis N. Genty
--------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and Accounting Officer)
19