UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ----------------------------------------------- --------------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- ------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(303) 691-0680
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(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(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 August 4, 2003
- -------------------------------- ----------------------------------------
Common Stock, without par value 1,268,111
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 June 30, 2003 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Six Months Ended June 30, 2002 and 2003 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 2002 2003
------------- ------------
** (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,072,757 $ 915,060
Accounts receivable, net of allowance for doubtful accounts
of $212,803 and $215,449, respectively 2,708,231 2,838,150
Deferred tax asset 120,622 120,622
Prepaid expenses and other assets 738,119 476,098
----------- -----------
Total current assets 4,639,729 4,349,930
PROPERTY AND EQUIPMENT, net 3,926,422 3,180,590
OTHER NONCURRENT ASSETS:
Intangible assets, net 15,496,271 15,113,023
Deferred charges and other assets 167,098 151,711
----------- -----------
Total assets $24,229,520 $22,795,254
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,981,247 $ 3,914,935
Income taxes payable 30,219 138,897
Current maturities of long-term debt 2,169,713 346,013
----------- -----------
Total current liabilities 6,181,179 4,399,845
LONG-TERM LIABILITIES:
Deferred tax liability, net 24,258 24,258
Long-term debt, net of current maturities 1,087,422 2,169,808
Other long-term obligations 177,635 182,314
----------- -----------
Total liabilities 7,470,494 6,776,225
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 1,355,886 shares issued and
outstanding, respectively 15,959,829 14,634,618
Retained earnings 799,197 1,384,411
----------- -----------
Total shareholders' equity 16,759,026 16,019,029
----------- -----------
Total liabilities and shareholders' equity $24,229,520 $22,795,254
=========== ===========
** 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 Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
2002 2003 2002 2003
----------- ----------- ----------- -----------
NET REVENUE $ 7,633,596 $ 7,880,470 $15,401,210 $15,609,228
DIRECT EXPENSES:
Clinical salaries and benefits 2,965,813 3,002,902 5,938,011 6,013,741
Dental supplies 454,698 478,576 898,959 923,173
Laboratory fees 626,007 669,624 1,220,978 1,269,126
Occupancy 860,615 870,260 1,694,885 1,733,968
Advertising and marketing 81,589 95,719 160,655 193,658
Depreciation and amortization 598,836 565,459 1,193,226 1,147,486
General and administrative 801,247 777,848 1,574,934 1,529,088
----------- ----------- ----------- -----------
6,388,805 6,460,388 12,681,648 12,810,240
----------- ----------- ----------- -----------
Contribution from dental offices 1,244,791 1,420,082 2,719,562 2,798,988
CORPORATE EXPENSES:
General and administrative 681,873 811,860 1,587,805 1,611,698
Depreciation and amortization 83,960 74,767 163,179 154,749
----------- ----------- ----------- -----------
Operating income 478,958 533,455 968,578 1,032,541
Interest expense, net 88,550 35,845 195,031 88,648
----------- ----------- ----------- -----------
Income before income taxes 390,408 497,610 773,547 943,893
Income tax expense 148,355 189,093 293,948 358,679
----------- ----------- ----------- -----------
Net income $ 242,053 $ 308,517 $ 479,599 $ 585,214
=========== =========== =========== ===========
Net income per share of Common Stock:
Basic $ .16 $ .23 $ .32 $ .43
=========== =========== =========== ===========
Diluted $ .15 $ .21 $ .29 $ .39
=========== =========== =========== ===========
Weighted average number of shares of Common Stock and dilutive securities:
Basic 1,503,553 1,341,461 1,505,121 1,374,195
========= ========= ========= =========
Diluted 1,650,896 1,476,919 1,634,356 1,505,183
========= ========= ========= =========
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 38,506 151,011 - 151,011
Purchase and retirement of Common Stock (117,437) (1,485,882) - (1,485,882)
Other - 9,660 - 9,660
Net Income - - 585,214 585,214
--------- ------------ ---------- ------------
BALANCES, June 30, 2003 1,355,886 $ 14,634,618 $1,384,411 $ 16,019,029
========= ============ ========== ============
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)
Six Months Ended
June 30,
-------------------------------
2002 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 479,599 $ 585,214
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,356,405 1,302,235
Loss on disposition of property (5,495) 5,942
Provision for doubtful accounts 9,533 2,646
Amortization of debt issuance costs 43,165 17,573
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 222,300 (132,565)
Prepaid expenses and other assets 199,694 258,585
Accounts payable and accrued expenses 236,236 (66,312)
Income taxes payable 123,067 108,678
Other long-term obligations 1,540 4,679
----------- -----------
Net cash provided by operating activities 2,666,044 2,086,675
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (256,415) (176,097)
Acquisition of dental offices (959,150) -
----------- -----------
Net cash used in investing activities (1,215,565) (176,097)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments - line of credit (168,000) -
Repayment of bank term-loan (900,000) (570,000)
Repayment of long-term debt (149,756) (171,314)
Payment of debt issuance and financing costs (10,957) (1,750)
Proceeds from exercise of Common Stock options 22,668 151,011
Purchase and retirement of Common Stock (102,841) (1,485,882)
Other - 9,660
----------- -----------
Net cash used in financing activities (1,308,886) (2,068,275)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 141,593 (157,697)
CASH AND CASH EQUIVALENTS, beginning of period 949,236 1,072,757
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,090,829 $ 915,060
=========== ===========
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)
Six Months Ended
June 30,
-------------------------------
2002 2003
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 181,290 $ 105,423
============= ============
Cash paid during the period for income taxes $ 170,880 $ 250,000
============= ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable incurred from:
Acquisition of dental offices $ 959,000 $ -
============== ============
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)
JUNE 30, 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 June 30, 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 and six
months ended June 30, 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:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2002 2003 2002 2003
---- ---- --------- ---------
Risk-free interest rate * * 3.49% 2.39%
Expected dividend yield 0% 0% 0% 0%
Expected lives * * 3.4 years 3.4 years
Expected volatility 87% 57% 63% 57%
* There were no options granted during the second quarter of either 2002 or
2003.
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.
There were no options granted during the quarters ended June 30, 2002 and 2003,
respectively. The total fair value of options and warrants granted was computed
to be approximately $72,000 and $469,000 for the six months ended June 30, 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 $29,000 and ($66,000) for the quarters ended June 30, 2002 and
2003, respectively and $78,000 and $377,000 for the six months ended June 30,
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 Six Months Ended
June 30, June 30,
---------------------- ---------------------
2002 2003 2002 2003
-------- ------- --------- ---------
Net income, as reported 242,053 308,517 $ 479,599 $ 585,214
Pro forma stock compensation expense (income),
net of income tax benefit (expense) 18,506 (40,619) 48,249 233,973
-------- ------- --------- ---------
Pro forma net income 223,547 349,136 $ 431,350 $ 351,241
======== ======= ========= =========
Net income per share, basic:
As reported $ .16 $ .23 $ .32 $ .43
Pro forma stock compensation expense (income) .01 (.03) .03 .17
----- ----- ------ -----
Pro forma $ .15 $ .26 $ .29 $ .26
===== ===== ====== =====
Net income per share, diluted:
As reported $ .15 $ .21 $ .29 $ .39
Pro forma stock compensation expense (income) .01 (.03) .03 .16
----- ----- ------ -----
Pro forma $ .14 $ .24 $ .26 $ .23
===== ===== ====== =====
(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 June 30,
-------------------------------------------------------------------------
2002 2003
--------------------------------- ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- ---------- --------- --------
Basic EPS:
Net income available to
shares of Common Stock $ 242,053 1,503,553 $ .16 $ 308,517 1,341,461 $ .23
Effect of dilutive shares of Common
Stock from stock options
and warrants - 147,343 (.01) - 135,458 (.02)
--------- --------- ----- ---------- --------- -----
Diluted EPS:
Net income available to
shares of Common Stock $ 242,053 1,650,896 $ .15 $ 308,517 1,476,919 $ .21
========= ========= ===== ========== ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended June 30, 2002 and
2003 relates to the effect of 147,343 and 135,458, respectively, of dilutive
shares of Common Stock from stock options and warrants which are included in
total shares for the diluted calculation.
9
Six Months Ended June 30,
-------------------------------------------------------------------------
2002 2003
--------------------------------- ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- ---------- --------- --------
Basic EPS:
Net income available to
shares of Common Stock $ 479,599 1,505,121 $ .32 $ 585,214 1,374,195 $ .43
Effect of dilutive shares of Common
Stock from stock options
and warrants - 129,235 (.03) - 130,988 (.04)
--------- --------- ------ ---------- --------- -----
Diluted EPS:
Net income available to
shares of Common Stock $ 479,599 1,634,356 $ .29 $ 585,214 1,505,183 $ .39
========= ========= ====== ========== ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the six months ended June 30, 2002 and
2003 relates to the effect of 129,235 and 130,988, respectively, of dilutive
shares of Common Stock from stock options and warrants which are included in
total shares for the diluted calculation.
(4) LINE OF CREDIT
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, both the revolving loan and the
non-revolving note mature on October 31, 2003. At June 30, 2003, the Company had
no borrowings outstanding and $2.0 million available for borrowing under the
revolving loan and $1.255 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 June 30, 2003 the Company was
in full compliance with all of its covenants under this agreement.
(5) RECENT ACCOUNTING PROUNCEMENTS
In January 2003, FASB Interpretation 46 ("FIN 46"), "Consolidation of Variable
Interest Entities", was issued. FIN 46 requires a company to consolidate
variable interest entities ("VIE") if the enterprise is a primary beneficiary
(holds a majority of the variable interest) of the VIE and the VIE possess
specific characteristics. It also requires additional disclosure for parties
involved with VIEs. The provisions of FIN 46 are effective in 2003. As the
Company does not have a VIE, adoption of this interpretation will not have an
effect on our financial statements.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. The new guidance amends SFAS 133 for decisions made: (a) as part
of the Derivatives Implementation Group process that effectively required
amendments to SFAS 133, (b) in connection with other Board projects dealing with
financial instruments, and (c) regarding implementation issues raised in
relation to the application of the definition of a derivative, particularly
regarding the meaning of an "underlying" and the characteristics of a derivative
that contains financing components. The amendments set forth in SFAS 149 improve
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. SFAS 149 is generally effective for contracts
entered into or modified after June 30, 2003 (with a few exceptions) and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively. We do not expect the provisions of SFAS 149 to have a
material impact on our financial position or results of operations.
10
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS 150
requires that three classes of freestanding financial statements that embody
obligations for entities be classified as liabilities. Generally, SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not believe the adoption of SFAS
150 will have a material impact on its financial position or results of
operations.
(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 July 16, 2003, the Company's Board of Directors approved the purchase of
83,975 shares of the Company's Common Stock from a private shareholder of the
Company, at an aggregate cost of $1,154,656.
On August 7, 2003 the Company's current Credit Facility Agreement was amended.
The new Credit Facility allows the Company to borrow, on a revolving basis, an
aggregate principal amount not to exceed $4.0 million at either the Lender's
Base Rate plus a Base Rate Margin or at a LIBOR Rate plus a LIBOR Rate Margin,
at the Company's option. A commitment fee of 0.25% on the average daily unused
amount of the Revolving Loan Commitment during the preceding quarter will also
be assessed by the Lender. The amended Credit Facility expires on May 31, 2005.
11
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 quarters and six
months ended June 30, 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 76 general dentists and 14
specialists. 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, by acquiring dental practices 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.
The Company was formed with the intention of becoming the leading provider of
business services to dental practices in Colorado. The Company's growth and
success in the Colorado market led to its expansion into the New Mexico and
Arizona markets. During 2000, the Company's growth strategy shifted from an
approach that was primarily focused on acquisitions and development to an
approach that 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 June 30, 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 June 30, 2003.
12
At June 30, 2003, the Company's total assets of approximately $22.8 million
included approximately $15.1 million of identifiable intangible assets related
to Management Agreements. At that date, the Company had total shareholders'
equity of approximately $16.0 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 June 30, 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.
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.
13
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 June 30, 2003, Revenue increased $386,000, or 3.6%,
to $11.1 million compared to $10.7 million for the three months ended June 30,
2002. For the six months ended June 30, 2003, Revenue increased $316,000, or
1.5% to $22.0 million compared to $21.7 million for the six months ended June
30, 2002. Six-month revenues were hampered by a severe snowstorm 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.
14
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 June 30, Six Months Ended June 30,
------------------------ -------------------------
2002 2003 2002 2003
---- ---- ---- ----
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 38.8 % 38.1 % 38.6 % 38.5 %
Dental supplies 6.0 % 6.1 % 5.8 % 5.9 %
Laboratory fees 8.2 % 8.5 % 7.9 % 8.1 %
Occupancy 11.3 % 11.0 % 11.0 % 11.1 %
Advertising and marketing 1.1 % 1.2 % 1.0 % 1.3 %
Depreciation and amortization 7.8 % 7.2 % 7.8 % 7.4 %
General and administrative 10.5 % 9.9 % 10.2 % 9.8 %
-------- -------- -------- --------
83.7 % 82.0 % 82.3 % 82.1 %
------- -------- -------- --------
Contribution from dental offices 16.3 % 18.0 % 17.7 %. 17.9 %
Corporate Expenses:
General and administrative 8.9 % 10.3 % 10.3 % 10.3 %
Depreciation and amortization 1.1 % 0.9 % 1.1 % 1.0 %
------- -------- -------- --------
Operating income 6.3 % 6.8 % 6.3 % 6.6 %
Interest expense, net 1.2 % 0.5 % 1.3 % 0.6 %
------- ------- ------- --------
Income before income taxes 5.1 % 6.3 % 5.0 % 6.0 %
Income tax expense 1.9 % 2.4 % 1.9 % 2.3 %
------- ------- ------- --------
Net income 3.2 % 3.9 % 3.1 % 3.7 %
======= ======= ======= ========
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002:
Net revenue. For the three months ended June 30, 2003 net revenue, or total
dental group practice revenue less amounts retained by group practices for
payments of salaries, benefits and other payments to employed dentists and
hygienists, increased to $7.9 million compared to $7.6 million for the three
months ended June 30, 2002, an increase of $247,000, or 3.2%.
Clinical salaries and benefits. For the three months ended June 30, 2003
clinical salaries and benefits remained constant at $3.0 million as compared to
the three months ended June 30, 2002. As a percentage of net revenue, clinical
salaries and benefits decreased to 38.1% for the three months ended June 30,
2003 compared to 38.8% for the three months ended June 30, 2002.
Dental supplies. For the three months ended June 30, 2003 dental supplies
increased to $479,000 compared to $455,000 for the three months ended June 30,
2002, an increase of $24,000 or 5.3%. This increase was primarily due to an
incremental increase in the number of dentists working, including specialty
dentists. As a percentage of net revenue, dental supplies increased to 6.1% for
the three months ended June 30, 2003 compared to 6.0% for the three months ended
June 30, 2002.
Laboratory fees. For the three months ended June 30, 2003 laboratory fees
increased to $670,000 compared to $626,000 for the three months ended June 30,
2002, an increase of $44,000 or 7.0%. This increase is primarily due to an
incremental increase in the number of dentists working which increases patient
procedures requiring laboratory work. As a percentage of net revenue, laboratory
fees increased to 8.5% for the three months ended June 30, 2003 compared to 8.2%
for the three months June 30, 2002.
15
Occupancy. For the three months ended June 30, 2003 occupancy expense increased
to $870,000 compared to $861,000 for the three months ended June 30, 2002, an
increase of $9,000 or 1.1%. 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 decreased to 11.0% for the three months ended
June 30, 2003 compared to 11.3% for the three months ended June 30, 2002.
Advertising and marketing. For the three months ended June 30, 2003 advertising
and marketing increased to $96,000 compared to $82,000 for the three months
ended June 30, 2002, an increase of $14,000 or 17.3%. This increase is primarily
due to enhanced yellow page advertising during the second quarter of 2003. As a
percentage of net revenue, advertising and marketing increased to 1.2% for the
three months ended June 30, 2003 compared to 1.1% for the three months ended
June 30, 2002.
Depreciation and amortization. For the three months ended June 30, 2003
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, decreased to $565,000 compared to $599,000 for
the three months ended June 30, 2002, a decrease of $33,000 or 5.6%. The
decrease in the Company's depreciable asset base is directly related to the
Company's efforts to more fully utilize its existing facilities. During 2000,
the Company's growth strategy shifted from an approach that was primarily
focused on acquisitions and de novo developments to an approach that is focused
on greater utilization of existing physical capacity through recruiting more
dentists and their associated support staff. As a result of this shift in
strategy in 2000, the acquisition of new assets for acquired Offices and de novo
developments has decreased as existing assets have become fully depreciated. As
a percentage of net revenue, depreciation and amortization decreased to 7.2% for
the three months ended June 30, 2003 compared to 7.8% for the three months ended
June 30, 2002.
General and administrative. For the three months ended June 30, 2003 general and
administrative, which is attributable to the Offices, decreased to $778,000
compared to $801,000 for the three months ended June 30, 2002, a decrease of
$23,000 or 2.9%. The decrease is directly related to the Company's continued
efforts to control costs. As a percentage of net revenue, general and
administrative expenses decreased to 9.9% for the three months ended June 30,
2003 compared to 10.5% during the three months ended June 30, 2002.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $1.4 million for the three months ended June 30,
2003 compared to $1.2 million for the three months ended June 30, 2002, an
increase of $175,000 or 14.1%. As a percentage of net revenue, contribution from
dental offices increased to 18.0% for the three months ended June 30, 2003
compared to 16.3% for the three months ended June 30, 2002.
Corporate expenses - general and administrative. For the three months ended June
30, 2003 corporate expenses - general and administrative increased to $812,000
compared to $682,000 for the three months ended June 30, 2002, an increase of
$130,000 or 19.1%. This increase is attributable primarily to higher
professional fees of $62,000, higher general insurance costs of $15,000 and the
fact that the second quarter of 2002 reflected a $36,000 favorable reversal of
an accrual made in the first quarter of 2002. As a percentage of net revenue,
corporate expense - general and administrative increased to 10.3% for the three
months ended June 30, 2003 compared to 8.9% during the three months ended June
30, 2002.
Corporate expenses - depreciation and amortization. For the three months ended
June 30, 2003 corporate expenses - depreciation and amortization decreased to
$75,000 for the three months ended June 30, 2003 compared to $84,000 for the
three months ended June 30, 2002, a decrease of $9,000 or 10.9%. This decrease
is related to the decrease in the Company's depreciable asset base. As a
percentage of net revenue, corporate expenses - depreciation and amortization
decreased to 0.9% for the three months ended June 30, 2003 compared to 1.1% for
the three months ended June 30, 2002.
Operating income. As a result of the matters discussed above, the Company
generated operating income of $533,000 for the three months ended June 30, 2003
compared to operating income of $479,000 for the three months ended June 30,
2002, an increase of $54,000 or 11.4%. As a percentage of net revenue, operating
income increased to 6.8% for the three months ended June 30, 2003 compared to
6.3% for the three months ended June 30, 2002.
Interest expense, net. For the three months ended June 30, 2003 interest
expense, net decreased to $36,000 compared to $89,000 for the three months ended
June 30, 2002, a decrease of $53,000 or 59.5%. This decrease in interest expense
is attributable to lower average outstanding debt balances, lower interest
rates, lower amortization of debt acquisition costs and the implementation of
patient late charges during 2003, which offset interest expense by $22,000
during the second quarter of 2003. As a percentage of net revenue, interest
expense decreased to 0.5% for the three months ended June 30, 2003 compared to
1.2% for the three months ended June 30, 2002.
16
Net income. As a result of the above, the Company reported net income of
$309,000 for the three months ended June 30, 2003 compared to net income of
$242,000 for the three months ended June 30, 2002, an increase of $66,000 or
27.5%. Net income for the quarter ended June 30, 2003 was net of income tax
expense of $189,000 while net income for the quarter ended June 30, 2002 was net
of income tax expense of $148,000. As a percentage of net revenue, net income
increased to 3.9% for the three months ended June 30, 2003 compared to 3.2% for
the three months ended June 30, 2002.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002:
Net revenue. For the six months ended June 30, 2003 net revenue, or total dental
group practice revenue less amounts retained by group practices for payments of
salaries, benefits and other payments to employed dentists and hygienists,
increased to $15.6 million compared to $15.4 million for the six months ended
June 30, 2002, an increase of $208,000 or 1.4%.
Clinical salaries and benefits. For the six months ended June 30, 2003 clinical
salaries and benefits increased to $6.0 million compared to $5.9 million for the
six months ended June 30, 2002, an increase of $76,000 or 1.3%. This increase
was primarily due to wage increases granted during the first quarter of 2003. As
a percentage of net revenue, clinical salaries and benefits decreased to 38.5%
for the six months ended June 30, 2003 compared to 38.6% for the six months
ended June 30, 2002.
Dental supplies. For the six months ended June 30, 2003 dental supplies
increased to $923,000 compared to $899,000 for the six months ended June 30,
2002, an increase of $24,000 or 2.7%. This increase was primarily due to an
incremental increase in the number of dentists working, including specialty
dentists. As a percentage of net revenue, dental supplies increased to 5.9% for
the six months ended June 30, 2003 compared to 5.8% for the six months ended
June 30, 2002.
Laboratory fees. For the six months ended June 30, 2002 laboratory fees
increased to $1.3 million compared to $1.2 million for the six months ended June
30, 2002, an increase of $48,000 or 3.9%. This increase is primarily due to an
incremental increase in the number of dentists working which increases patient
procedures requiring laboratory work. As a percentage of net revenue, laboratory
fees increased to 8.1% for the six months ended June 30, 2003 compared to 7.9%
for the six months June 30, 2002.
Occupancy. For the six months ended June 30, 2003 occupancy expense remained
constant at $1.7 million compared to the six months ended June 30, 2002. As a
percentage of net revenue, occupancy expense increased to 11.1% for the six
months ended June 30, 2003 compared to 11.0% for the six months ended June 30,
2002.
Advertising and marketing. For the six months ended June 30, 2002 advertising
and marketing increased to $194,000 compared to $161,000 for the six months
ended June 30, 2002, an increase of $33,000 or 20.5%. This increase is primarily
due to enhanced yellow page advertising during 2003. As a percentage of net
revenue, advertising and marketing increased to 1.3% for the six months ended
June 30, 2002 compared to 1.0% for the six months ended June 30, 2002.
Depreciation and amortization. For the six months ended June 30, 2003
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, decreased to $1.1 million compared to $1.2
million for six months ended June 30, 2002, a decrease of $46,000 or 3.8%. The
decrease in the Company's depreciable asset base is directly related to the
Company's efforts to more fully utilize its existing facilities. During 2000,
the Company's growth strategy shifted from an approach that was primarily
focused on acquisitions and de novo developments to an approach that is focused
on greater utilization of existing physical capacity through recruiting more
dentists and their associated support staff. As a result of this shift in
strategy in 2000, the acquisition of new assets for acquired Offices and de novo
developments has decreased as existing assets have become fully depreciated. As
a percentage of net revenue, depreciation and amortization decreased to 7.4% for
the six months ended June 30, 2003 compared to 7.8% for the six months ended
June 30, 2002.
General and administrative. For the six months ended June 30, 2003 general and
administrative, which is attributable to the Offices, decreased to $1.5 million
compared to $1.6 million for the six months ended June 30, 2002, a decrease of
$46,000 or 2.9%. The decrease is directly related to the Company's continued
efforts to control costs. As a percentage of net revenue, general and
administrative expenses decreased to 9.8% for the six months ended June 30, 2003
compared to 10.2% during the six months ended June 30, 2002.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $2.8 million for the six months ended June 30, 2003
compared to $2.7 million for the six months ended June 30, 2002, an increase of
$79,000 or 2.9%. As a percentage of net revenue, contribution from dental
offices increased to 17.9% for the six months ended June 30, 2003 compared to
17.7% for the six months ended June 30, 2002.
17
Corporate expenses - general and administrative. For the six months ended June
30, 2003 corporate expenses - general and administrative remained constant at
$1.6 million compared to the six months ended June 30, 2002. As a percentage of
net revenue, corporate expense - general and administrative remained constant at
10.3% for the six months ended June 30, 2003 compared to the six months ended
June 30, 2002.
Corporate expenses - depreciation and amortization. For the six months ended
June 30, 2003 corporate expenses - depreciation and amortization decreased to
$155,000 compared to $163,000 for the six months ended June 30, 2002, a decrease
of $8,000 or 5.2%. This decrease is related to the decrease in the Company's
depreciable asset base. As a percentage of net revenue, corporate expenses -
depreciation and amortization decreased to 1.0% for the six months ended June
30, 2003 compared to 1.1% for the six months ended June 30, 2002.
Operating income. As a result of the above, the Company generated operating
income of $1.0 million for the six months ended June 30, 2003 compared to
operating income of $969,000 for the six months ended June 30, 2002, an increase
of $64,000 or 6.6%. As a percentage of net revenue, operating income increased
to 6.6% for the six months ended June 30, 2003 compared to 6.3% for the six
months ended June 30, 2002.
Interest expense, net. For the six months ended June 30, 2003 interest expense,
net decreased to $89,000 compared to $195,000 for the six months ended June 30,
2002, a decrease of $106,000 or 54.5%. This decrease in interest expense is
attributable to a lower average outstanding debt balances, lower interest rates,
lower amortization of debt acquisition costs and the implementation of patient
late charges in 2003 that offset interest expense by $34,000 during the first
six months of 2003. As a percentage of net revenue, interest expense decreased
to 0.6% for the six months ended June 30, 2003 compared to 1.3% for the six
months ended June 30, 2002.
Net income. As a result of the above, the Company's generated net income of
$585,000 for the six months ended June 30, 2003 compared to net income of
$480,000 for the six months ended June 30, 2002, an increase of $105,000 or
22.0%. Net income for the six months ended June 30, 2003 was net of income tax
expense of $359,000 while the net income for the six months ended June 30, 2002
was net of income tax expense of $294,000. As a percentage of net revenue, net
income increased to 3.7% for the six months ended June 30, 2003 compared to 3.1%
for the six months ended June 30, 2002.
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 $2.7 million and
$2.1 million for the six months ended June 30, 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 $259,000 and an
increase in income taxes payable of approximately $109,000, partially offset by
an increase in accounts receivable of approximately $133,000 and a decrease in
accounts payable of approximately $66,000. 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 $236,000, a decrease in accounts receivable of
approximately $222,000, a decrease in prepaid expense and other assets of
approximately $200,000 and an increase in income taxes payable of approximately
$123,000.
Net cash used in investing activities was approximately $1.2 million and
$176,000 for the six months ended June 30, 2002 and 2003, respectively. For the
six months ended June 30, 2003, approximately $176,000 was invested in the
purchase of additional property and equipment. For the six months ended June 30,
2002, approximately $959,000 was utilized for acquisition of dental offices and
approximately $256,000 was invested in the purchase of additional property and
equipment.
Net cash used in financing activities was approximately $1.3 million and $2.1
million for the six months ended June 30, 2002 and 2003, respectively. During
the six months ended June 30, 2003, net cash used in financing activities was
comprised of approximately $1.5 million used in the purchase and retirement of
Common Stock, approximately $570,000 used to reduce the amount outstanding on
the Company's term-loan with its bank and approximately $171,000 for the
repayment of long-term debt, partially offset by approximately $151,000 in
proceeds from the exercise of Common Stock options. During the six months ended
June 30, 2002, net cash used in financing activities was comprised of
approximately $900,000 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, approximately $150,000 for the repayment of
long-term debt and approximately $103,000 used in the purchase and retirement of
Common Stock.
18
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, both the revolving loan and the
non-revolving note mature on October 31, 2003. At June 30, 2003, the Company had
no borrowings outstanding and $2.0 million available for borrowing under the
revolving loan and $1.255 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 June 30, 2003 the Company was
in full compliance with all of its covenants under this agreement. On August 7,
2003 the Company's current Credit Facility Agreement was amended. The new Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $4.0 million at either the Lender's Base Rate
plus a Base Rate Margin or at a LIBOR Rate plus a LIBOR Rate Margin, at the
Company's option. A commitment fee of 0.25% on the average daily unused amount
of the Revolving Loan Commitment during the preceding quarter will also be
assessed by the Lender. The amended Credit Facility expires on May 31, 2005.
At June 30, 2003, the Company had outstanding indebtedness of approximately $1.3
million represented by notes issued in connection with various dental practice
acquisitions, all of which bear interest at 8.0%. At June 30, 2003, the Company
had $60,000 in capital commitments related to the purchase of a new server for
its patient accounting software. The Company's retained earnings as of June 30,
2003 was approximately $1.4 million and the Company had a working capital
deficit on that date of approximately $50,000. The Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") remained constant at
$2.3 million for the six months ended June 30, 2003 compared to the
corresponding six-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. On May 6, 2003 the Company's Board of Directors unanimously approved an
incremental increase of $1.0 million in the amount that could be used to
purchase shares of the Company's Common Stock on the open market at prices up to
$14.00 per share. 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
six month period ended June 30, 2003, the Company, in 50 separate transactions,
purchased 117,437 shares of its Common Stock for total consideration of
approximately $1.5 million at prices ranging from $9.54 to $14.20 per share. On
July 16, 2003, the Company's Board of Directors approved the purchase of 83,975
shares of the Company's Common Stock from a private shareholder of the Company,
at an aggregate cost of $1,154,656. As a condition of this purchase, the Company
and the private shareholder have entered into a stock repurchase agreement
whereby the private shareholder and his affiliated companies, among other items,
agree that for a period of two years from July 16, 2003 will not: 1) acquire,
directly or indirectly, any voting securities of the Company; 2) solicit proxies
with respect to the Company's voting securities under any circumstances; and 3)
take any action or assist in any manner, directly or indirectly, to influence or
affect control of the Company.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in United States interest rates. Historically
and as of June 30, 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 June 30, 2003, $1.255 million was
outstanding with an interest rate of 4.00% (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 $9,700 for the six months ended June 30, 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 June 30, 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.
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.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders was held on June 3, 2003.
(b) The following directors were elected at the meeting to serve a three-year
term as Class III directors:
For Withheld Authority Abstain
Frederic W.J. Birner 1,202,132 7,872 0
Mark A. Birner, D.D.S. 1,202,132 7,872 0
Continuing Directors
The following directors are continuing to serve their three-year term as Class I
directors, which will expire at the Company's annual meeting in 2004:
James M. Ciccarelli
Paul E. Valuck, D.D.S.
The following directors are continuing to serve their three-year terms as Class
II directors, which will expire at the Company's annual meeting in 2005:
Dennis N. Genty
Brooks G. O'Neil
(c) other matters voted upon at the meeting and results of those votes are as
follows:
Approval of the grant of 30,000 warrants to executive officers of the
Company on February 11, 2002 at an exercise price of 110% of the then fair
market value of the Company's Common Stock:
For Against Abstain Not Voted
--- ------- ------- ---------
749,919 21,335 400 438,350
The matters mentioned above are described in detail in the Company's
definitive proxy statement dated April 25, 2003 for the Annual Meeting of
Shareholders held on June 3, 2003.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
31.00 Certification of 10-Q report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.00 Certification of 10-Q report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
10.41 Fourth Amendment to Amended and Restated Credit Agreement
dated April 24, 2003 between the Registrant and Key Bank of
Colorado.
(b) Reports on Form 8-K
On May 7, 2003 the Company filed a report on Form 8-K related to
reporting of financial results for the first quarter of 2003.
On May 8, 2003 the Company filed a report on Form 8-K related to
the approval by the Company's Board of Directors to spend up to an
additional $1.0 million to continue buying its Common Stock.
On July 18, 2003 the Company filed a report on Form 8-K related to
the approval by the Company's Board of Directors to purchase 83,975
shares of the Company's Common Stock from a private shareholder for
an aggregate cost of $1,154,656.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
a Colorado corporation
Date: August 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: August 8, 2003 By: /s/ Dennis N. Genty
----------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and Accounting Officer)