UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ---------------- Commission file number 0-23367 BIRNER DENTAL MANAGEMENT SERVICES, INC. - -------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --------- ------- 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 5, 2003 - ------------------------------- -------------------------------------- Common Stock, without par value 1,334,936 BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Unaudited Condensed Consolidated Balance Sheets as of December 31, 2002 And March 31, 2003 3 Unaudited Condensed Consolidated Statements of Operations for the Quarters Ended March 31, 2002 and 2003 4 Unaudited Condensed Statement of Shareholders' Equity 5 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2003 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 17 Item 4. Controls and Procedures 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Certification of 10-Q Report 20 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 2002 2003 ------------- ------------- ** (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,072,757 $ 1,040,195 Accounts receivable, net of allowance for doubtful accounts of $212,803 and $207,761, respectively 2,708,231 2,956,866 Deferred tax asset 120,622 120,622 Prepaid expenses and other assets 738,119 613,458 ----------- ------------ Total current assets 4,639,729 4,731,141 PROPERTY AND EQUIPMENT, net 3,926,422 3,552,455 OTHER NONCURRENT ASSETS: Intangible assets, net 15,496,271 15,304,647 Deferred charges and other assets 167,098 154,827 ----------- ------------ Total assets $24,229,520 $23,743,070 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 3,981,247 $ 3,987,960 Income taxes payable 30,219 149,805 Current maturities of long-term debt 2,169,713 2,500,203 ----------- ------------ Total current liabilities 6,181,179 6,637,968 LONG-TERM LIABILITIES: Deferred tax liability, net 24,258 24,258 Long-term debt, net of current maturities 1,087,422 1,001,972 Other long-term obligations 177,635 184,027 ----------- ------------ Total liabilities 7,470,494 7,848,225 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; 1,434,817 and 1,354,137 shares issued and outstanding, respectively 15,959,829 14,818,951 Retained earnings 799,197 1,075,894 ----------- ------------ Total shareholders' equity 16,759,026 15,894,845 ----------- ------------ Total liabilities and shareholders' equity $24,229,520 $23,743,070 =========== =========== ** Derived from the Company's audited consolidated balance sheet at December 31, 2002 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, ----------------------------- 2002 2003 ----------- ----------- NET REVENUE $ 7,767,614 $ 7,728,758 DIRECT EXPENSES: Clinical salaries and benefits 2,972,198 3,010,839 Dental supplies 444,261 444,597 Laboratory fees 594,971 599,502 Occupancy 834,270 863,708 Advertising and marketing 79,066 97,939 Depreciation and amortization 594,390 582,027 General and administrative 773,687 751,240 ----------- ----------- 6,292,843 6,349,852 ----------- ----------- Contribution from dental offices 1,474,771 1,378,906 CORPORATE EXPENSES: General and administrative 905,932 799,838 Depreciation and amortization 79,219 79,982 ----------- ----------- Operating income 489,620 499,086 Interest expense, net 106,481 52,803 ----------- ----------- Income before income taxes 383,139 446,283 Income tax expense 145,593 169,586 ----------- ----------- Net income $ 237,546 $ 276,697 =========== =========== Net income per share of Common Stock: Basic $ .16 $ .20 =========== =========== Diluted $ .15 $ .18 =========== =========== Weighted average number of shares of Common Stock and dilutive securities: Basic 1,506,705 1,407,292 =========== =========== Diluted 1,609,461 1,534,001 =========== =========== 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) Common Stock Total --------------------------- Retained Shareholders' Shares Amount Earnings Equity --------- ------------ ----------- ------------ BALANCES, December 31, 2002 1,434,817 $ 15,959,829 $ 799,197 $16,759,026 Common Stock options exercised 17,212 99,797 - 99,797 Purchase and retirement of Common Stock (97,892) (1,240,675) - (1,240,675) Net Income - - 276,697 276,697 --------- ------------ ----------- ----------- BALANCES, March 31, 2003 1,354,137 $ 14,818,951 $ 1,075,894 $15,894,845 ========= ============ =========== =========== 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) Quarters Ended March 31, -------------------------------- 2002 2003 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 237,546 $ 276,697 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 673,609 662,009 Gain on disposition of property - (199) Provision for doubtful accounts (4,840) (5,042) Amortization of debt issuance costs 27,367 12,707 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable (349,239) (243,593) Prepaid expense and other assets 56,661 124,225 Accounts payable and accrued expenses 282,921 6,713 Income taxes payable 95,592 119,586 Other long-term obligations (4,352) 6,392 ----------- ----------- Net cash provided by operating activities 1,015,265 959,495 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (106,547) (96,219) Acquisition of dental offices (398,654) - ----------- ----------- Net cash used in investing activities (505,201) (96,219) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) - line of credit (168,000) 650,000 Repayment of bank term-loan (250,000) (320,000) Repayment of long-term debt (56,617) (84,960) Payment of debt issuance and financing costs (6,703) - Proceeds from exercise of Common Stock options - 99,797 Purchase and retirement of Common Stock - (1,240,675) ----------- ---------- Net cash used in financing activities (481,320) (895,838) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,744 (32,562) CASH AND CASH EQUIVALENTS, beginning of period 949,236 1,072,757 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 977,980 $ 1,040,195 =========== =========== 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) Quarters Ended March 31, ----------------------------------- 2002 2003 ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 86,994 $ 52,953 ============= ============= Cash paid during the period for income taxes $ 50,000 $ 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, 2003 (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 Annual Report on Form 10-K for the year ended December 31, 2002. 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, 2003 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, 2003 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) SIGNIFICANT ACCOUNTING POLICIES Stock Options The Company accounts for stock options using the intrinsic value method wherein compensation expense is recognized on stock options granted only for the excess of the market price of our common stock over the option exercise price on the date of grant. All options of the Company are granted at amounts equal to or higher than the fair-value of our stock so no compensation expense is recorded. Some companies also recognize compensation expense for the fair value of the option right itself. The Company has elected not to adopt this accounting method because it requires the use of subjective valuation models which the Company believes are not representative of the real value of the option to either the Company or the optionees. However, we are required to disclose the pro forma effect of accounting for stock options using such a valuation for all options granted. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: 2002 2003 --------- --------- Risk-free interest rate 3.49% 2.39% Expected dividend yield 0% 0% Expected lives 3.4 years 3.4 years Expected volatility 63% 57% To estimate lives of options for this valuation, it was assumed options would be exercised one year after becoming fully vested. All options are initially assumed to vest. Cumulative compensation cost recognized in pro forma net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of pro forma compensation expense in the period of forfeiture. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of options granted. The total fair value of options and warrants granted was computed to be approximately $72,000 and $469,000 for the quarters ended March 31, 2002, and 2003, respectively. These amounts are amortized ratably over the vesting periods of the options or recognized at the date of grant if no vesting period is required. Pro forma stock-based compensation, net of the effect of forfeitures, was $48,000 and $404,000 for the quarters ended March 31, 2002 and 2003, respectively. 8 If the Company had accounted for its stock-based compensation plans in accordance with SFAS No. 123, the Company's net income and net income per common share would have been reported as follows: Three Months Ended March 31, ---------------------- 2002 2003 -------- -------- Net income, as reported $237,546 $276,697 Pro forma stock compensation expense, net of tax benefit 29,743 274,592 -------- -------- Pro forma net income $207,803 $ 2,105 ======== ======== Net income per share, basic: As reported $ .16 $ .20 Pro forma stock compensation expense .02 .20 -------- -------- Pro forma $ .14 $ .00 ======== ======== Net income per share, diluted: As reported $ .15 $ .18 Pro forma stock option compensation expense .02 .18 -------- -------- Pro forma $ .13 $ .00 ======== ======== (3) 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, ------------------------------------------------------------------------- 2002 2003 --------------------------------- ---------------------------------- Per Share Per Share Income Shares Amount Income Shares Amount --------- ---------- --------- ----------- ---------- --------- Basic EPS: Net income available to shares of Common Stock $ 237,546 1,506,705 $ .16 $ 276,697 1,407,292 $ .20 Effect of dilutive shares of Common Stock from stock and warrants - 102,756 (.01) - 126,709 (.02) --------- ---------- ----- ----------- ---------- ----- Diluted EPS: Net income available to shares of Common Stock $ 237,546 1,609,461 $ .15 $ 276,697 1,534,001 $ .18 ========= ========= ===== ========== ========= ===== 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. The difference in weighted average shares outstanding between basic earnings per share and diluted earnings per share for the quarter ended March 31, 2003 relates to the effect of 126,709 dilutive shares of Common Stock from stock options and warrants which are included in total shares for the diluted calculation. 9 (4) LINE OF CREDIT Under the Company's Credit Facility (as amended on December 6, 2002), 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. 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, both the revolving loan and the non-revolving note mature on April 30, 2003 (see Footnote 7, Subsequent Events). At March 31, 2003, the Company had $650,000 outstanding and $1.35 million available for borrowing under the revolving loan and $1.505 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, 2003 the Company was in full compliance with all of its covenants under this agreement. (5) RECENT ACCOUNTING PROUNCEMENTS In December 2002, the FASB issued Statements of Financial Accounting Standards No.148, "Accounting for Stock-Based compensation - Transition and Disclosure - an amendment of FASB Statement 123" (SFAS 123). For entities that change their accounting for stock-based compensation from the intrinsic method to the fair value method under SFAS 123, the fair value method is to be applied prospectively to those awards granted after the beginning of the period of adoption (the prospective method). The amendment permits two additional transition methods for adoption of the fair value method. In addition to the prospective method, the entity can choose to either (i) restate all periods presented (retroactive restatement method) or (ii) recognize compensation cost from the beginning of the fiscal year of adoption as if the fair value method had been used to account for awards (modified prospective method). For fiscal years beginning after December 15, 2002, the prospective method will no longer be allowed. The Company currently accounts for its stock-based compensation using the intrinsic value method as proscribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and plans on continuing using this method to account for stock options, therefore, it does not intend to adopt the transition requirements as specified in SFAS 148. The Company adopted the SFAS 148 disclosure requirements in the first quarter of fiscal 2003. (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. 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. (7) SUBSEQUENT EVENTS On April 24, 2003, the Company's current Credit Facility was amended. This fourth amendment to the amended and restated credit agreement, among other provisions, extends the maturity date for the Credit Facility to October 31, 2003, and allows for the payment of dividends to shareholders up to $1.00 per share during any fiscal year. 10 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, 2002 (as filed with the Securities Exchange Commission on March 27, 2003), the "Management's Discussion and Analysis of Financial Condition and Results of Operations -Year 2003" 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 three months ended March 31, 2002 and 2003. 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 78 general dentists and 13 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. 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 1999 through March 31, 2003, including the number of de novo Offices and acquired Offices in each such period. 1999 2000 2001 2002 2003 (1) ---- ---- ---- ---- -------- Offices at beginning of the period 49 54 56 54 54 De novo Offices 5 2 0 0 0 Acquired Offices 1 0 0 0 0 Consolidation of Offices (1) 0 (2) 0 0 -- -- -- -- -- Offices at end of the period 54 56 54 54 54 == == == == == - ---------- (1) From January 1, 2003 through March 31, 2003. The purchase amount for the one practice acquired in 1999 was $760,000. The average initial investment by the Company in each of its 17 de novo Offices has been approximately $194,000, 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. At March 31, 2003, the Company's total assets of approximately $23.7 million included approximately $15.3 million of identifiable intangible assets related to Management Agreements. At that date, the Company had total shareholders' equity of approximately $15.9 million. The Company reviews the recorded amount of intangible assets and other long-lived 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. As of March 31, 2003 a review by the Company determined that there was no permanent impairment of any long-lived or intangible asset at any Office. 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. 12 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 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. 13 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, 2003, Revenue decreased $70,000 to $10.9 million compared to $11.0 million for the three months ended March 31, 2002. This was the direct result of a severe snow storm in Colorado which effected office performance for most of the week of March 17, including the closing of a significant number of offices for three days. The Company estimates the lost Revenue at the Offices from this snow storm was approximately $300,000. 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, ------------------------ 2002 2003 ---- ---- Net revenue 100.0 % 100.0 % Direct expenses: Clinical salaries and benefits 38.3 % 39.0 % Dental supplies 5.7 % 5.7 % Laboratory fees 7.7 % 7.8 % Occupancy 10.7 % 11.2 % Advertising and marketing 1.0 % 1.3 % Depreciation and amortization 7.6 % 7.5 % General and administrative 10.0 % 9.7 % ----- ----- 81.0 % 82.2 % ----- ----- Contribution from dental offices 19.0 % 17.8 % Corporate expenses: General and administrative 11.7 % 10.3 % Depreciation and amortization 1.0 % 1.0 % ----- ----- Operating income 6.3 % 6.5 % Interest expense, net (1.4)% (0.7)% ----- ----- Income before income taxes 4.9 % 5.8 % Income tax expense (1.9)% (2.2)% ------ ----- Net income 3.0 % 3.6 % ===== ===== Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002: Net revenue. For the three months ended March 31, 2003 net revenue decreased slightly to $7.7 million compared to $7.8 million for the three months ended March 31, 2002, a decrease of approximately $39,000, or 0.5%. This was the direct result of a severe snow storm in Colorado which effected office performance for most of the week of March 17, including the closing of a significant number of offices for three days. The Company estimates the lost net revenues to the Company from this snow storm was approximately $212,000. Clinical salaries and benefits. For the three months ended March 31, 2003 clinical salaries and benefits remained constant at $3.0 million as compared to the three months ended March 31, 2002. As a percentage of net revenue, clinical salaries and benefits increased to 39.0% for the three months ended March 31, 2003 compared to 38.3% for the three months ended March 31, 2002. Dental supplies. For the three months ended March 31, 2003 dental supplies remained constant at $445,000 compared to the three months ended March 31, 2002. As a percentage of net revenue, dental supplies remained constant at 5.7% for the three months ended March 31, 2003 compared to the three months ended March 31, 2002. 14 Laboratory fees. For the three months ended March 31, 2003 laboratory fees increased to $600,000 compared to $595,000 for the three months ended March 31, 2002, an increase of $5,000 or 0.8%. As a percentage of net revenue, laboratory fees increased to 7.8% for the three months ended March 31, 2003 compared to 7.7% for the three months March 31, 2002. Occupancy. For the three months ended March 31, 2003 occupancy expense increased to $864,000 compared to $834,000 for the three months ended March 31, 2002, an increase of $29,000 or 3.5%. 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 2002 period. As a percentage of net revenue, occupancy expense increased to 11.2% for the three months ended March 31, 2003 compared to 10.7% for the three months ended March 31, 2002. Advertising and marketing. For the three months ended March 31, 2003 advertising and marketing increased to $98,000 compared to $79,000 for the three months ended March 31, 2002, an increase of $19,000 or 23.9%. This increase is primarily due to enhanced yellow page advertising during the first quarter of 2003. As a percentage of net revenue, advertising and marketing increased to 1.3% for the three months ended March 31, 2003 compared to 1.0% for the three months ended March 31, 2002. Depreciation and amortization. For the three months ended March 31, 2003 depreciation and amortization, which consists of depreciation and amortization expense incurred at the Offices, decreased to $582,000 compared to $594,000 for the three months ended March 31, 2002, a decrease of $12,000 or 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 7.5% for the three months ended March 31, 2003 compared to 7.6% for the three months ended March 31, 2002. General and administrative. For the three months ended March 31, 2003 general and administrative, which is attributable to the Offices, decreased to $751,000 compared to $774,000 for the three months ended March 31, 2002, a decrease of approximately $22,000 or 2.9%. As a percentage of net revenue, general and administrative expenses decreased to 9.7% for the three months ended March 31, 2003 compared to 10.0% during the three months ended March 31, 2002. Contribution from dental offices. As a result of the above, contribution from dental offices decreased to $1.4 million for the three months ended March 31, 2003 compared to $1.5 million for the three months ended March 31, 2002, a decrease of $96,000 or 6.5%. As a percentage of net revenue, contribution from dental offices decreased to 17.8% for the three months ended March 31, 2003 compared to 19.0% for the three months ended March 31, 2002. Corporate expenses - general and administrative. For the three months ended March 31, 2003 corporate expenses - general and administrative decreased to $800,000 compared to $906,000 for the three months ended March 31, 2002, a decrease of $106,000 or 11.7%. This decrease is attributable to lower legal fees in 2003 as a result of the disposition of certain outstanding litigation during 2002. As a percentage of net revenue, corporate expense - general and administrative decreased to 10.3% for the three months ended March 31, 2003 compared to 11.7% during the three months ended March 31, 2002. Corporate expenses - depreciation and amortization. For the three months ended March 31, 2003 corporate expenses - depreciation and amortization remained constant at $80,000 compared to the three months ended March 31, 2002. As a percentage of net revenue, corporate expenses - depreciation and amortization remained constant at 1.0% for the three months ended March 31, 2003 compared to the three months ended March 31, 2002. Operating income. As a result of the above, the Company generated operating income of $499,000 for the three months ended March 31, 2003 compared to operating income of $490,000 for the three months ended March 31, 2002, an increase of $9,000 or 1.9%. Interest expense, net. For the three months ended March 31, 2003 interest expense decreased to $53,000 compared to $106,000 for the three months ended March 31, 2002, a decrease of $54,000 or 50.4%. This decrease in interest expense is attributable to lower average outstanding debt balances and lower interest rates as well as lower amortization of debt acquisition costs during the first quarter of 2003. As a percentage of net revenue, interest expense decreased to 0.7% for the three months ended March 31, 2003 compared to 1.4% for the three months ended March 31, 2002. 15 Net income. As a result of the above, the Company reported net income of $277,000 for the three months ended March 31, 2003 compared to net income of $238,000 for the three months ended March 31, 2002, an increase of $39,000 or 16.5%. Net income for the quarter ended March 31, 2003 was net of income tax expense of $170,000 while net income for the quarter ended March 31, 2002 was net of income tax expense of $146,000. 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 remained constant at approximately $1.0 million for the three months ended March 31, 2002 and 2003, respectively. During 2003, excluding net income and after adding back non-cash items, the Company's cash provided by operating activities consisted primarily of a decrease in prepaid expenses and other assets of approximately $124,000, an increase in income taxes payable of approximately $120,000 and an increase in accounts payable and accrued expenses of approximately $7,000, partially offset by an increase in accounts receivable of approximately $244,000. 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 and other assets of approximately $57,000, partially offset by an increase in accounts receivable of approximately $349,000. Net cash used in investing activities was approximately $505,000 and $96,000 for the three months ended March 31, 2002 and 2003, respectively. For the three months ended March 31, 2003, approximately $96,000 was invested in the purchase of additional property and equipment. 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. Net cash used in financing activities was approximately $481,000 and $896,000 for the three months ended March 31, 2002 and 2003, respectively. During the three months ended March 31, 2003, net cash used in financing activities was comprised of approximately $1.2 million used in the purchase and retirement of Common Stock, approximately $320,000 used to reduce the amount outstanding on the Company's term-loan with its bank and approximately $85,000 for the repayment of long-term debt. This was partially offset by $650,000 drawn from the Company's bank line of credit and approximately $100,000 of proceeds from the exercise of Common Stock options. 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. Under the Company's Credit Facility (as amended on April 24, 2003), 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. 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 subsequent to March 31, 2003, both the revolving loan and the non-revolving note mature on October 31, 2003. At March 31, 2003, the Company had $650,000 outstanding and $1.35 million available for borrowing under the revolving loan and $1.505 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 in excess of $1.00 per share per fiscal year, 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, 2003 the Company was in full compliance with all of its covenants under this agreement. 16 At March 31, 2003, the Company had outstanding indebtedness of approximately $1.3 million represented by notes issued in connection with various practice acquisitions, all of which bear interest at 8.0%. At March 31, 2003, the Company had no material commitments for capital expenditures. The Company's retained earnings as of March 31, 2003 was approximately $1.1 million and the Company had a working capital deficit on that date of approximately $1.9 million which was the result of the classification of the entire amount outstanding under the Credit Facility as a short-term liability. When excluding the effect of this classification, the Company's working capital deficit would be $1.4 million. The Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") remained constant at $1.2 million for the three months ended March 31, 2003 compared to the corresponding three-month period in 2002. 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 May 8, 2002 the Company's Board of Directors unanimously approved the purchase of shares of the Company's Common Stock on the open market up to $1.0 million. On October 24, 2002 the Company's Board of Directors unanimously approved an incremental increase of $500,000 in the amount that could be used to purchase shares of the Company's Common Stock on the open market to $1.5 million. On February 19, 2003 the Company's Board of Directors unanimously approved an increase, to $2.4 million from $1.5 million, in the amount that could be used to purchase shares of the Company's Common Stock on the open market. During 2002, the Company, in 93 separate transactions, purchased 117,236 shares of its Common Stock for total consideration of approximately $1.2 million at prices ranging from $7.35 to $11.25 per share, of which approximately $60,000 was recorded as compensation expense in accordance with Financial Accounting Standards Board Interpretation Number 44. During the three month period ended March 31, 2003, the Company, in 45 separate transactions, purchased 97,892 shares of its Common Stock for total consideration of approximately $1.2 million at prices ranging from $9.54 to $14.20 per share. 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, 2003, 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, 2003, $2.155 million was outstanding with an interest rate of 4.25% (Prime). 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 $5,000 for the three months ended March 31, 2003. ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. The Company, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 25, 2003 (the "Evaluation Date"). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that the Company's disclosure controls and procedures were effective for purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports that the Company files under the Exchange Act. 17 Changes in internal controls. There were no significant changes in our internal controls and no other factors that could significantly affect these controls subsequent to the Evaluation Date. The Company did not need to implement any corrective actions with regard to any significant deficiency or material weakness in its internal controls. 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 10.41 Fourth Amendment to Amended and Restated Credit Agreement dated April 24, 2003 between the Registrant and Key Bank of Colorado. 99.1 Certification of 10-Q report pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. (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 8, 2003 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 8, 2003 By: /s/ Dennis N. Genty ------------------------------------------------- Name: Dennis N. Genty Title: Chief Financial Officer, Secretary, Treasurer and Director (Principal Financial and Accounting Officer) 19 CERTIFICATION I, Frederic W.J. Birner, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Birner Dental Management Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 8, 2003 By: /s/ Frederic W.J. Birner --------------------------------------- Name: Frederic W.J. Birner Title: Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) 20 CERTIFICATION I, Dennis N. Genty, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Birner Dental Management Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 8, 2003 By: /s/ Dennis N. Genty -------------------------------- Name: Dennis N. Genty Title: Chief Financial Officer, Secretary, Treasurer and Director (Principal Financial Officer) 21