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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
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(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 691-0680
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K. [ ___ ]
The aggregate market value of the Registrant's voting stock held as of March 13,
2002 by non-affiliates of the Registrant was $5,020,675. This calculation
assumes that certain parties may be affiliates of the Registrant and that,
therefore, 788,175 shares of voting stock are held by non-affiliates. As of
March 13, 2002, the Registrant had 1,506,705 shares of its common stock, without
par value ("Common Stock") outstanding.
On February 22, 2001 a special shareholder's meeting was held to consider a
proposal to effect a reverse split of the issued and outstanding shares of the
Registrant's Common Stock, whereby the Registrant would issue one new share of
its Common Stock for between three and five shares of its presently outstanding
stock. The proposal was approved by a majority of the shareholders. The Board of
Directors in a meeting that same day determined that the ratio of the reverse
stock split would be one-for-four and that the effective date for the reverse
split would be February 26, 2001. Therefore, all shares, options, share prices,
option prices and earnings per share calculations for all periods in this
document have been restated to reflect the effect of the reverse stock split.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K ("Annual Report") of
Birner Dental Management Services, Inc. (the "Company"), which are not
historical in nature, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include statements in Items 1. and 2., "Business and Properties,"
Item 5., "Market for the Registrant's Common Equity and Related Stockholder
Matters" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations," regarding intent, belief or current
expectations of the Company or its officers with respect to the development or
acquisition of additional dental practices and the successful integration of
such practices into the Company's network, recruitment of additional dentists,
funding of the Company's expansion, capital expenditures, payment or nonpayment
of dividends and cash outlays for income taxes.
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,
failure to consummate or successfully integrate proposed developments or
acquisitions of dental practices, the ability of the Company to manage
effectively an increasing number of dental practices, the general economy of the
United States and the specific markets in which the Company's dental practices
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 Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors," 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.
2
Birner Dental Management Services, Inc.
Form 10-K
Table of Contents
Part Item(s) Page
I. 1. and 2. Business and Properties 4
General 4
Dental Services Industry 4
Operations 5
Existing Offices 6
Patient Services 7
Dental Practice Management Model 7
Payor Mix 9
The Company Dentist Philosophy 9
Expansion Program 10
Affiliation Model 11
Competition 12
Government Regulation 13
Insurance 16
Trademark 16
Facilities and Employees 16
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
II. 5. Market for Registrant's Common Equity and Related Stockholder Matters
17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19
7A. Quantitative and Qualitative Disclosures About Market Risk 33
8. Financial Statements and Supplementary Data 34
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 58
III. 10. Directors and Executive Officers of the Registrant 59
11. Executive Compensation 60
12. Security Ownership of Certain Beneficial Owners and Management 64
13. Certain Relationships and Related Transactions 65
IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 66
3
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.
General
The Company acquires, develops, and manages geographically dense dental practice
networks in select markets, currently including Colorado, New Mexico and
Arizona. With its 40 dental practices ("Offices") in Colorado and eight Offices
in New Mexico, the Company believes, based on industry knowledge and contacts,
that it is the largest provider of dental management services in Colorado and
New Mexico. The Company provides a solution to the needs of dentists, patients,
and third-party payors by allowing the Company's affiliated dentists to provide
high-quality, efficient dental care in patient-friendly, family practice
settings. Dentists practicing at the various locations provide comprehensive
general dentistry services, and the Company increasingly offers specialty dental
services through affiliated specialists. The Company currently manages 54
Offices, of which 37 were acquired and 17 were developed internally ("de novo
Offices").
Dental Services Industry
According to the U.S. Health Care Financing Administration ("HCFA"), dental
expenditures in the U.S. increased from $31.5 billion in 1990 to $60.0 billion
in 2000. HCFA also projects that dental expenditures will reach approximately
$104.6 billion by 2011, representing an increase of approximately 74.3% over
2000 dental expenditures. The Company believes this growth is driven by (i) an
increase in the number of people covered by third-party payment arrangements and
the resulting increase in their utilization of dental services, (ii) an
increasing awareness of the benefits of dental treatments, (iii) the retention
of teeth into later stages of life, (iv) the general aging of the population, as
older patients require more extensive dental services, and (v) a growing
awareness of and demand for preventative and cosmetic services.
Traditionally, most dental patients have paid for dental services themselves
rather than through third-party payment arrangements such as indemnity
insurance, preferred provider plans or managed dental plans. More recently,
factors such as increased consumer demand for dental services and the desire of
employers to provide enhanced benefits for their employees have resulted in an
increase in third-party payment arrangements for dental services. These
third-party payment arrangements include indemnity insurance, preferred provider
plans and capitated managed dental care plans. Current market trends, including
the rise of third-party payment arrangements, have contributed to the increased
consolidation of practices in the dental services industry and to the formation
of dental practice management companies. The Company believes that the
percentage of people covered by third-party payment arrangements will continue
to increase due in part to the popularity of such arrangements.
4
Operations
Location of Offices
[MAP INSERTED HERE]
5
Existing Offices
As of the date of this Annual Report, the Company managed a total of 54 Offices
in Colorado, New Mexico, and Arizona. The following table identifies each
Office, the location of each Office, the date each Office was acquired or de
novo developed, and any specialty dental services offered at that Office in
addition to comprehensive general dental services:
Date Acquired/ Specialty
Office Name Office Address Developed* Services
Colorado
Boulder
Perfect Teeth/Boulder 4155 Darley, #F September 1997
Perfect Teeth/Folsom 1840 Folsom, Suite 302 April 1998
Castle Rock
Perfect Teeth/Castle Rock 390 South Wilcox, Unit D October 1995
Colorado Springs
Perfect Teeth/Cheyenne Meadows 827 Cheyenne Meadows Road June 1998*
Perfect Teeth/Garden of the Gods 4329 Centennial Boulevard July 1996*
Perfect Teeth/South 8th Street 1050 South Eighth Street August 1998 1,2
Perfect Teeth/Uintah Gardens 1768 West Uintah Street May 1996* 1
Perfect Teeth/Union & Academy 5140 North Union September 1997
Perfect Teeth/Woodman Valley 6914 North Academy Boulevard, Unit 1B April 1998*
Perfect Teeth/Powers 5929 Constitution Avenue March 1999* 1,2
Denver
Perfect Teeth/64th and Ward 12650 West 64th Avenue, Unit J January 1996*
Perfect Teeth/88th and Wadsworth 8749 Wadsworth Boulevard September 1997 2,3,4
Perfect Teeth/Arapahoe 7600 East Arapahoe Road, #311 October 1995 1
Perfect Teeth/Bowmar 5151 South Federal Boulevard, #G-2 October 1995 1
Perfect Teeth/Buckley and Quincy 4321 South Buckley Road September 1997 1
Perfect Teeth/Central Denver 1633 Fillmore Street, Suite 200 May 1996
Perfect Teeth/East 104th Avenue 2200 East 104th Avenue, #112 May 1996 1
Perfect Teeth/East Cornell 12200 East Cornell Avenue, # E August 1996
Perfect Teeth/East Iliff 16723 East Iliff Avenue May 1997
Glendale Dental Group 4521 East Virginia Avenue February 1999
Perfect Teeth/Golden 17211 South Golden Road, #100 June 1999*
Perfect Teeth/Green Mountain 13035 West Alameda Parkway December 1998*
Perfect Teeth/Highlands Ranch 9227 Lincoln Avenue, Suite 100 July 1999* 1
Perfect Teeth/Ken Caryl 7660 South Pierce September 1997
Perfect Teeth/Leetsdale 7150 Leetsdale Drive, #110A March 1996*
Mississippi Dental Group 11175 East Mississippi Avenue, #110 September 1998
Perfect Teeth/Monaco and Evans 2121 South Oneida, Suite 321 November 1995 1,2,3,4
Perfect Teeth/North Sheridan 11550 North Sheridan, #101 May 1996 1
Perfect Teeth/Parker 11005 South Parker Road December 1998* 1
Perfect Teeth/Sheridan and 64th Avenue5169 West 64th Avenue May 1996
Perfect Teeth/South Holly Street 8211 South Holly Street September 1997 2
Perfect Teeth/Speer 700 East Speer Boulevard February 1997
Perfect Teeth/West 38th Avenue 7760 West 38th Avenue, #200 May 1996 1
Perfect Teeth/West 120th Avenue 6650 West 120th Avenue, A-6 September 1997
Perfect Teeth/West Jewell 8064 West Jewell April 1998
Perfect Teeth/Yale 7515 West Yale Avenue, Suite A April 1997 1,3
Fort Collins
Perfect Teeth/South Fort Collins 1355 Riverside Avenue, Unit D May 1996
Greeley
Perfect Teeth/Greeley 902 14th Street September 1997
Longmont
Perfect Teeth/Longmont 641 Ken Pratt Boulevard September 1997
Loveland
Perfect Teeth/ Loveland 3400 West Eisenhower Boulevard September 1996
6
Date Acquired/ Specialty
Office Name Office Address Developed* Services
New Mexico
Albuquerque
Perfect Teeth/Alice 5909 Alice NE February 1998
Perfect Teeth/Candelaria 6101 Candelaria NE April 1997
Perfect Teeth/Cubero Drive 5900 Cubero Drive NE, Suite E September 1998
Perfect Teeth/Four Hills 13140-E Central Avenue, SE August 1997* 3
Perfect Teeth/Fourth Street 5721 Fourth Street NW August 1997
Perfect Teeth/Wyoming and Candelaria 8501 Candelaria NE, Suite D3 August 1997
Rio Rancho
Perfect Teeth/Rio Rancho 4500 Arrowhead Ridge Drive July 1999* 3
Santa Fe
Perfect Teeth/Plaza Del Sol 720 St. Michael Drive, Suite O May 1998* 3
Arizona
Goodyear
Perfect Teeth/Palm Valley 14175 West Indian School Bypass Road, #B6March 2000*
Mesa
Perfect Teeth/Power & McDowell 2733 North Power Road, Suite 101 October 2000*
Phoenix
Perfect Teeth/Thomas and 15th Avenue 3614 North 15th Avenue, Suite B September 1998
Scottsdale
Perfect Teeth/Bell Road & 64th 6345 East Bell Road, Suite 1 July 1998 1,2,3
Street
Perfect Teeth/Shea & 90th Street 9393 North 90th Street, Suite 207 September 1998
Tempe
Perfect Teeth/Elliot and McClintock 7650 S. McClintock Dr., #110 June 1999*
(1) Orthodontics
(2) Periodontics
(3) Oral Surgery
(4) Pedodontics
The Offices typically are located either in shopping centers, professional
office buildings or stand-alone buildings. The majority of the de novo Offices
are located in supermarket-anchored shopping centers. The Offices have from four
to 16 treatment rooms and range in size from 1,200 square feet to 7,400 square
feet.
Patient Services
The Company seeks to develop long-term relationships with patients. A
comprehensive exam and evaluation is conducted during a patient's first visit.
Through patient education, the patients develop an awareness of the benefits of
a comprehensive, long-term dental care plan. The Company believes that it will
retain these patients longer and that these patients will have a higher
utilization of the Company's dental services including specialty, elective, and
cosmetic services.
Dentists practicing at the Offices provide comprehensive general dentistry
services, including crowns and bridges, fillings (including state-of-the-art
gold, porcelain and composite inlays/onlays), and aesthetic procedures such as
porcelain veneers and bleaching. In addition, hygienists provide cleanings and
periodontal services including root planing and scaling. If appropriate, the
patient is offered specialty dental services, such as orthodontics, oral surgery
and periodontics, which are available at certain of the Company's Offices, as
indicated on the table above. These services are provided by affiliated
specialists who rotate through several offices in certain of the Company's
existing markets. The addition of specialty services is a key component of the
Company's strategy, as it enables the Company to capture revenue from typically
higher margin services that would otherwise be referred to non-affiliated
providers. In addition, by offering a broad range of dental services within a
single practice, the Company is able to distinguish itself from its competitors
and realize operating efficiencies and economies of scale through higher
utilization of professionals and facilities.
Dental Practice Management Model
The Company has developed a dental practice management model designed to achieve
its goal of providing personalized, high-quality dental care in a patient
friendly setting similar to that found in a traditional private practice. The
Company's dental practice management model consists of the following components:
7
Recruiting of Dentists. The Company seeks dentists with excellent skills and
experience, who are sensitive to patient needs, interested in establishing
long-term patient relationships and are motivated by financial incentives to
enhance Office operating performance. The Company believes that practicing in
its network of Offices offers both recently graduated dentists and more
experienced dentists advantages over a solo or smaller group practice, including
relief from the burden of administrative responsibilities and the resulting
ability to focus almost exclusively on practicing dentistry. Advantages to
dentists affiliated with the Company also include a compensation structure that
rewards productivity, employee benefits such as health insurance, a 401(k) plan,
continuing education, payment of professional membership fees and malpractice
insurance. The Company's effort to recruit managing dentists is primarily
focused on dentists with three or more years of practice experience. The Company
typically recruits associate dentists graduating from residency programs. It has
been the Company's experience, that many dentists in the early stages of their
careers have incurred substantial student loans. As a result, they face
significant financial constraints in starting their own practices or buying into
existing practices, especially in view of the capital-intensive nature of modern
dentistry.
The Company advertises for the dentists it seeks in national and regional dental
journals, local market newspapers, professional conferences and directly at
dental schools with strong residency programs. In addition, the Company has
found that its existing affiliated dentists provide a good referral source for
recruiting future dentists.
Training of Non-Dental Employees. The Company has developed a formalized
training program for non-dental employees, which is conducted by the Company's
staff. This program includes training in patient interaction, scheduling, use of
the computer system, office procedures and protocol, and third-party payment
arrangements. Additionally, the Company encourages its employees to attend
continuing education seminars as a supplement to the Company's formalized
training program. In addition, Company regional directors meet weekly with the
Company's senior management and administrative staff to review pertinent and
timely topics and generate ideas that can be shared with all Offices. Management
believes that its training program and the on-going meetings with employees have
contributed to an improvement in the operations at its Offices.
Staffing Model. The Company's staffing model attempts to maximize Office
profitability by adjusting personnel according to an Office's revenue level.
Staffing at mature Offices can vary based on the number of treatment rooms, but
generally includes one to three dentists, two to three dental assistants, one to
three hygienists, one to two hygiene assistants and two to four front office
personnel. Staffing at de novo Offices typically consists initially of one
dentist, one dental assistant and one front office person. As the patient base
builds at an Office, additional staff is added to accommodate the growth as
provided in the staffing model developed by the Company. The Company currently
has a staff of six regional directors in Colorado and one regional director for
New Mexico and Arizona. These regional directors, who are each responsible from
four to 14 Offices or the specialty practice, oversee operations, development of
non-dental employees, recruiting and work to implement the Company's dental
practice management model to maximize revenues and profitability.
Management Information Systems. All of the Offices have the same management
information system, which allows the Company to receive uniform data that can be
analyzed easily in order to measure and improve Office operating performance. As
part of its acquisition integration process, the Company converts acquired
Offices to its management information system as soon as practicable. The
Company's current system enables it to maintain on-line contact with each of its
Offices and allows the Company to monitor the Offices by obtaining real-time
data relating to patient and insurance information, treatment plans, scheduling,
revenues and collections. The Company provides each Office with monthly
operating and financial data, which is analyzed and used to improve Office
performance.
Advertising and Marketing. The Company seeks to increase patient volume at its
Offices from time to time through television, radio, print advertising and other
marketing techniques. The Company's advertising efforts are primarily aimed at
increasing its fee-for-service business and emphasizes the high-quality care
provided, as well as the timely, individualized attention received from the
Company's affiliated dentists.
Quality Assurance. The Company has designed and implemented a quality assurance
program for dental personnel, including a background check. Each affiliated
dentist is a graduate of an accredited dental program, and most state licensing
authorities require dentists to undergo annual training. The dentists and
hygienists practicing at the Offices obtain a portion of their required
continuing education through the Company's internal training programs.
8
Purchasing / Vendor Relationships. The Company has negotiated arrangements with
a number of its more significant vendors, including dental laboratory and supply
providers, to reduce per unit costs. By aggregating supply purchasing and
laboratory usage, the Company believes that it has received favorable pricing
compared to solo or smaller group practices. This system of centralized buying
and distribution on an as-needed basis limits storage of unused inventory and
supplies at the Offices.
Payor Mix
The Company's payors include indemnity insurers, preferred provider plans,
managed dental care plans, and uninsured patients. The Company seeks to optimize
the revenue mix at each Office between fee-for-service business and capitated
managed care plans, taking into account the local dental market. While
fee-for-service business generally provides a greater margin than capitated
managed dental care business, capitated managed dental care business serves to
increase facility utilization and dentist productivity. Consequently, the
Company seeks to supplement its fee-for-service business with revenue derived
from contracts with capitated managed dental care plans. The Company negotiates
the managed care contracts on behalf of the professional corporations that
operate the Offices (the "P.C.s"), although the P.C.s enter into the contracts
with the various managed care plans. Managed care relationships also provide
increased co-payment revenue, referrals of additional fee-for-service patients
and opportunities for dentists practicing at the Offices to educate patients
about the benefits of elective dental procedures that may not be covered by the
patients' capitated managed dental care plans.
During the years ended December 31, 1999, 2000, and 2001 the following companies
were responsible for the corresponding percentages of the Company's total dental
group practice revenue (includes capitation premiums and co-payments): Aetna
Healthcare was responsible for 8.9%, 9.1% and 7.4%, respectively, CIGNA Dental
Health was responsible for 7.8%, 5.9% and 6.0%, respectively and Delta Care was
responsible for 5.0%, 8.6% and 8.0%, respectively.
The Company has successfully reduced the percentage of its business that comes
from managed dental care plans, from 51.4% of gross revenues in 1998 to 31.2% of
gross revenues in 2001, and replaced that revenue stream with higher margin
fee-for-service revenues. This higher margin fee for service revenue has
predominantly been business derived from preferred provider plans.
The Company Dentist Philosophy
The Company seeks to develop long-term relationships with its dentists by
building the practice at each of its Offices around a managing dentist. The
Company's dental practice management model provides managing dentists the
autonomy and independence of a private family practice setting without the
capital commitment and the administrative burdens such as billing/collections,
payroll, accounting, and marketing. This gives the managing dentists the ability
to focus primarily on providing high-quality dental care to their patients. The
managing dentist retains the responsibilities of team building and developing
long-term relationships with patients and staff by building trust and providing
a friendly, relaxed atmosphere in his or her Office. The managing dentist
exercises his or her own clinical judgment in matters of patient care. In
addition, managing dentists are given an economic incentive to improve the
operating performance of their Offices, in the form of a bonus based upon the
operating performance of the Office. In addition, managing dentist's may be
granted stock options in the Company that ordinarily vest over a three-to-five
year period.
When the revenues of an Office justify expansion, associate dentists can be
added to the team. Associate dentists are typically recent graduates from
residency programs, and usually spend up to two years working with a managing
dentist. Depending on performance and abilities, an associate dentist may be
given the opportunity to become a managing dentist.
9
Expansion Program
Overview
Since its formation in May 1995, the Company has acquired 42 practices,
including five practices that have been consolidated into existing Offices. Of
those acquired practices (including the five practices consolidated with
existing Offices), 34 were located in Colorado, five were located in New Mexico,
and three were located in Arizona. Although the Company has acquired and
integrated several group practices, many of the Company's acquisitions have been
solo dental practices. The Company has developed 17 de novo Offices (including
one practice that was consolidated with an existing Office). 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 change in the number of Offices managed by
the Company from January 1, 1997 through December 31, 2001.
1997 1998 1999 2000 2001
---- ---- ----- ---- ----
Offices at beginning of the period 18 34 49 54 56
De novo Offices 1 5 5 2 0
Acquired Offices 15 10 1 0 0
Consolidation of Offices 0 0 (1) 0 (2)
---- ---- ----- ---- ----
Offices at end of the period 34 49 54 56 54
===== ===== ===== ===== =====
Capacity Utilization
The Company expects to expand in existing markets primarily by enhancing the
operating performance of its existing Offices. Enhancing operating performance
will principally be accomplished through the addition of incremental dentists
and hygienists to further utilize existing physical capacity in the Offices.
De Novo Office Developments
One method by which the Company enters new markets and expands its operations in
existing markets is through the development of de novo Offices. Five of the
Company's seven Colorado Springs Offices, six of the Company's 29 Denver metro
area Offices, none of the Company's four Northern Colorado Offices, three of the
Company's eight New Mexico Offices and three of the Company's six Arizona
Offices were de novo developments. The Company generally locates de novo Offices
in prime retail locations in areas where there is significant population growth.
These locations provide high visibility for the Company's signage and easy
walk-in access for its customers. Historically, the Company has used consistent
office designs, colors, logo and signage for each of its de novo Offices.
The average investment by the Company in each of its 17 de novo Offices has been
approximately $210,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the initial operations. The 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.
Acquisition Strategy
Prior to entering a new market, the Company considers the population,
demographics, market potential, competitive and regulatory environment, supply
of available dentists, needs of managed care plans or other large payors and
general economic conditions within the market. Once the Company has established
a presence in a new market, the Company seeks to increase its density in that
market by making further acquisitions and by developing de novo Offices. The
Company identifies potential acquisition candidates through a variety of means,
including selected inquiries of dentists by the Company, direct inquiries by
dentists, referrals from other dentists, participation in professional
conferences and referrals from practice brokers. The Company seeks to identify
and acquire dental practices for which the Company believes application of its
dental practice management model will improve revenue and operating performance.
10
Recent Acquisitions
Colorado: During 2000, the Company acquired the remaining 50% interest in two
existing Offices in Colorado. During 1999, the Company acquired one practice in
the Denver market. In addition to this acquisition, the Company opened three de
novo Offices in 1999, one in Colorado Springs and two in the Denver metropolitan
area, which included Highlands Ranch and Golden.
New Mexico: During 2001 the Company acquired the remaining 50% interest in one
existing Office in New Mexico. During 1999 the Company opened one de novo Office
in Rio Rancho, a suburb of Albuquerque.
Arizona: In March 2000, the Company opened one de novo Office in Goodyear. In
October 2000, the Company opened one de novo Office in Mesa. Both Goodyear and
Mesa are suburbs of Phoenix. During 1999 the Company opened one de novo Office
in Tempe, a suburb of Phoenix.
Affiliation Model
Relationship with Professional Corporations (P.C.s)
Each Office is operated by a P.C., which are owned by one of eight different
licensed dentists practicing within the Company's network. The Company has
entered into agreements with owners of 51 of the P.C.s which provide that upon
the death, disability, incompetence or insolvency of the owner, a loss of the
owner's license to practice dentistry, a termination of the owner's employment
by the P.C. or the Company, a conviction of the owner for a criminal offense, or
a breach by the P.C. of the Management Agreement with the Company, the Company
may require the owner to sell his or her shares in the P.C. for a nominal amount
to a third-party designated by the Company. These agreements also prohibit the
owner from transferring or pledging the shares in the P.C.s except to parties
approved by the Company who agree to be bound by the terms of the agreements.
Upon a transfer of the shares to another party, the owner agrees to resign all
positions held as an officer or the director of the P.C.
One licensed dentist who owns a P.C. operating an Office in Colorado has entered
into stock purchase, pledge and security agreements with the Company. Under this
agreement, if certain events occur including the failure to perform the
obligations under the employment agreement with the P.C., cessation of
employment with the P.C. for any reason, death or insolvency or directly or
indirectly causing the P.C. to breach its obligations under the Management
Agreement, then the Company may cause the P.C. to redeem the dentist's ownership
interest in the P.C. for an agreed price which is not considered to be material
by the Company. Two of the three directors of this P.C. are nominees of the
Company and the dentist has given the Company's Chief Executive Officer, Fred
Birner an irrevocable proxy to vote his shares in the P.C.
In the remaining two Colorado P.C.s the Company has the right of first refusal
to purchase 100% of the P.C.s shares and the right to elect one-half of the
directors and vote one-half of the shares in such P.C.s.
Management Agreements with Affiliated Offices
The Company derives all of its revenue from its management agreements with the
P.C.s (the "Management Agreements"). 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) ensuring
compliance with all laws, rules and regulations relating to dentists and dental
hygienists, and (iii) maintaining proper patient records. The Company has made,
and intends to make in the future, loans to P.C.s in Colorado, New Mexico and
Arizona to fund their acquisition of dental assets from third parties in order
to comply with the laws of such states. Because the Company's financial
statements are consolidated with the financial statements of the P.C.s, these
loans are eliminated in consolidation.
11
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 the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of Company 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 Office 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 plans to continue to use the current form of its Management
Agreement to the extent possible. However, the terms of the Management Agreement
are subject to change to comply with existing or new regulatory requirements or
to enable the Company to compete more effectively.
Employment Agreements
Most dentists practicing at the Offices have entered into employment agreements
or independent contractor agreements with a P.C. The majority of such agreements
can be terminated by either party without cause with 90 days notice. The
employment agreement for one of the managing dentists who is also a shareholder
of a P.C. has a term of 20 years and can only be terminated by the employer P.C.
upon the occurrence of certain events. If the employment of the managing dentist
is terminated for any reason, the employer P.C. has the right to redeem the
shares of the P.C. operating the Office held by the managing dentist. Such
agreements typically contain non-competition provisions for a period of up to
three to five years following their termination within a specified geographic
area, usually a specified number of miles from the associated Office, and
restrict solicitation of patients and employees. Managing dentists receive
compensation based upon a specified amount per hour worked or a percentage of
revenue or collections attributable to their work, or a bonus based upon the
operating performance of the Office, whichever is greater. Associate dentists
are compensated based upon a specified amount per hour worked or a percentage of
revenue or collections attributable to their work, whichever is greater.
Specialists are compensated based upon a percentage of revenue or collections
attributable to their work. The P.C. with whom the dentist has entered into an
employment agreement pays the dentists' compensation and benefits.
Competition
The dental services industry is highly fragmented, consisting primarily of solo
and smaller group practices. The dental practice management segment of this
industry is highly competitive and is expected to become more competitive. In
this regard, the Company expects that the provision of multi-specialty dental
services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are
operating in its markets, including Monarch Dental Corporation, American Dental
Partners, Inc., and Dental Health Centers of America. Companies with dental
practice management businesses similar to that of the Company which currently
operate in other parts of the country, may begin targeting the Company's
existing markets for expansion. Such competitors may have greater financial
resources or otherwise enjoy competitive advantages, which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company.
12
The business of providing general and specialty dental services is highly
competitive in the markets in which the Company operates. The Company believes
it competes with other providers of dental and specialty services on the basis
of factors such as brand name recognition, convenience, cost and the quality and
range of services provided. Competition may include practitioners who have more
established practices and reputations. The Company also competes against
established practices in the retention and recruitment of general dentists,
specialists, hygienists and other personnel. If the availability of such
individuals begins to decline in the Company's markets, it may become more
difficult to attract and retain qualified personnel to sufficiently staff the
existing Offices or to meet the staffing needs of the Company's planned
expansion.
Government Regulation
The practice of dentistry is regulated at both the state and federal levels, and
the regulation of health care-related companies is increasing. There can be no
assurance that the regulatory environment in which the Company or the P.C.s
operate will not change significantly in the future. The laws and regulations of
all states in which the Company operates impact the Company's operations but do
not currently materially restrict the Company's operations in those states. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The laws regulating health care are
broad and subject to varying interpretations, and there is currently a lack of
case law construing such statutes and regulations. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
State Regulation
The laws of many states, including Colorado and New Mexico, permit a dentist to
conduct a dental practice only as an individual, a member of a partnership or an
employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services. Under the Management Agreements,
the P.C.s control all clinical aspects of the practice of dentistry and the
provision of dental services at the Offices, including the exercise of
independent professional judgment regarding the diagnosis or treatment of any
dental disease, disorder or physical condition. Persons to whom dental services
are provided at the Offices are patients of the P.C.s and not of the Company.
The Company does not employ the dentists who provide dental services at the
Offices nor does the Company have or exercise any control or direction over the
manner or methods in which dental services are performed or interfere in any way
with the exercise of professional judgment by the dentists.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist, to own or control dental equipment or offices used in a dental
practice. Some states allow leasing of equipment and office space to a dental
practice, under a bona fide lease, if the equipment and office remain under the
control of the dentist. Some states, including Arizona and New Mexico, require
all advertisements to be in the name of the dentist. A number of states,
including Arizona, Colorado and New Mexico, also regulate the content of
advertisements of dental services. In addition, Colorado, New Mexico and
Arizona, and many other states impose limits on the tasks that may be delegated
by dentists to hygienists and dental assistants. Some states require entities
designated as "clinics" to be licensed, and may define clinics to include dental
practices that are owned or controlled in whole or in part by non-dentists.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
Many states have fraud and abuse laws which are similar to the federal fraud and
abuse law described below, and which in many cases apply to referrals for items
or services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
Many states, including Colorado and New Mexico, also prohibit "fee-splitting" by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice's revenues.
13
In addition, many states have laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to include referrals for
health care items or services, including dental items and services.
In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. As the P.C.s contract with third-party payors, on a capitation or
other basis under which the relevant P.C. assumes financial risk, the P.C.s may
become subject to state insurance laws. Specifically, in some states, regulators
may determine that the Company or the P.C.s are engaged in the business of
insurance, particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. In Arizona, Colorado and New Mexico, the P.C.s currently
only contract on a financial-risk basis with entities that are licensed to
engage in the business of insurance and thus are not subject to the insurance
laws of those states. To the extent that the Company or the P.C.s are determined
to be engaged in the business of insurance, the Company may be required to
change the method of payment from third-party payors and the Company's revenue
may be materially and adversely affected.
Federal Regulation
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
under Medicare or Medicaid, the impact of these laws on the Company to date has
been negligible. There can be no assurance, however, that the P.C.s will not
have patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
The federal fraud and abuse statute prohibits, subject to certain safe harbors,
the payment, offer, solicitation or receipt of any form of remuneration in
return for, or in order to induce: (i) the referral of a person for service,
(ii) the furnishing or arranging to furnish items or services, or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable under
Medicare or Medicaid. The statute reflects the federal government's policy of
increased scrutiny of joint ventures and other transactions among healthcare
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Because dental services are covered under various government
programs, including Medicare and Medicaid, this federal law applies to dentists
and the provision of dental services.
Significant prohibitions against dentist self-referrals for services covered by
Medicare and Medicaid programs were enacted, subject to certain exceptions, by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as Stark II, amended prior physician and dentist self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by dramatically enlarging the list of services and investment
interest to which the self-referral prohibitions apply. Effective January 1,
1995, Stark II prohibits a physician or dentist, or a member of his or her
immediate family, from making referrals for certain "designated health services"
to entities in which the physician or dentist has an ownership or investment
interest, or with which the physician or dentist has a compensation arrangement.
"Designated health services" include, among other things, clinical laboratory
services, radiology and other diagnostic services, radiation therapy services,
durable medical equipment, prosthetics, outpatient prescription drugs, home
health services and inpatient and outpatient hospital services. Stark II
prohibitions include referrals within the physician's or dentist's own group
practice (unless such practice satisfies the "group practice" exception) and
referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with or
violation of Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Nevertheless, there can be no assurance that Stark II will not be interpreted or
hereafter amended in a manner that has a material adverse effect on the
Company's operations as presently conducted.
14
Proposed federal regulations also govern physician incentive plans associated
with certain managed care organizations that offer risk-based Medicare or
Medicaid contracts. These regulations define physician incentive plans to
include any compensation arrangement (such as capitation arrangements, bonuses
and withholds) that may directly or indirectly have the effect of reducing or
limiting services furnished to patients covered by the Medicare or Medicaid
programs. Direct monetary compensation which is paid by a managed care plan,
dental group or intermediary to a dentist for services rendered to individuals
covered by the Medicare or Medicaid programs is subject to these regulations, if
the compensation arrangement places the dentist at substantial financial risk.
When applicable, the regulations generally require disclosure to the federal
government or, upon request, to a Medicare beneficiary or Medicaid recipient
regarding such financial incentives, and require the dentist to obtain stop-loss
insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans, which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing agents. These
rules prohibit a billing agent from receiving a fee based on a percentage of
Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.
Federal regulations also allow state licensing boards to revoke or restrict a
dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including governmental
insurers, are subject to significant regulation. Some payors limit the extent to
which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain
conditions are met, such as acceptance by dentists of assignment of the payor
receivable from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided "incident to" a dentist's
services. Under these "incident to" rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Offices' staff unless certain conditions are met, such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Office staff
must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its revenue under such programs.
The operations of the Offices are also subject to compliance with regulations
promulgated by the Occupational Safety and Health Administration ("OSHA"),
relating to such matters as heat sterilization of dental instruments and the use
of barrier techniques such as masks, goggles and gloves. The Company incurs
expenses on an ongoing basis relating to OSHA monitoring and compliance.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs will
not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
15
Commencing in March 2003, health care providers, including the Company, will
have to comply with the electronic data security and privacy requirements of the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA
delegates enforcement authority to the Centers for Medicare Services Office for
Civil Rights. Noncompliance with HIPAA regulations can result in severe
penalties up to $250,000 in fines and up to ten years in prison. While the
Company intends to comply with all requirements, the Company cannot presently
predict the ultimate impact of the HIPAA regulations on the Company and its
business.
Insurance
The Company believes that its existing insurance coverage is adequate to protect
it from the risks associated with the ongoing operation of its business. This
coverage includes property and casualty, general liability, workers
compensation, director's and officer's corporate liability, employment practices
liability, corporate errors and omissions liability, excess liability and
professional liability insurance for dentists, hygienists and dental assistants
at the Offices.
Trademark
The Company is the registered owner of the PERFECT TEETH(R) trademark in the
United States.
Facilities and Employees
The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 508, Denver, Colorado, in approximately 9,500 square feet occupied under a
lease, which expires in January 2003. The Company believes that this space is
adequate for its current needs. The Company also leases real estate at the
location of each Office under leases ranging in term from one to 10 years. The
Company believes the facilities at each of its Offices are adequate for their
current level of business. The Company generally anticipates leasing and
developing new Offices in its current markets rather than significantly
expanding the size of its existing Offices.
As of December 31, 2001, the Company had 73 general dentists, 13 specialists and
65 affiliated hygienists that were employed by the P.C.s, and 323 non-dental
employees.
ITEM 3. 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.
None
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company received notice from the Nasdaq Stock Market that the Company did
not comply with the requirements for continued listing on the Nasdaq National
Market System. In order to satisfy Nasdaq's listing requirements for the Nasdaq
SmallCap Market, effective February 26, 2001, the Company's Board of Directors
approved a one-for-four reverse stock split. The SmallCap Market's maintenance
standards, among other things, require the Company to have 1) at least 500,000
shares of Common Stock held by non-affiliates; 2) an aggregate market public
float of at least $1,000,000; 3) at least 300 shareholders who own 100 shares of
Common Stock or more; and 4) a minimum bid price of at least $1.00 per share.
All shares, share prices and earnings per share calculations for all periods
have been restated to reflect this reverse stock split.
The Common Stock has been quoted on the Nasdaq SmallCap Market under the symbol
"BDMS" since February 26, 2001. The following table sets forth, for the period
indicated, the range of high and low sales prices per share of Common Stock, as
reported on The Nasdaq National Market up to February 26, 2001 and The Nasdaq
SmallCap Market thereafter:
HIGH LOW
2000
First Quarter $ 7.50 $ 4.50
Second Quarter 7.50 4.00
Third Quarter 7.50 3.50
Fourth Quarter 4.50 1.50
2001
First Quarter $ 3.25 $ 1.88
Second Quarter 2.20 1.94
Third Quarter 3.02 1.95
Fourth Quarter 4.91 2.60
2002
First Quarter (January 1, 2002 through March 13, 2002) $ 6.37 $ 4.33
At March 13, 2002 the last reported sale price of the Company's Common Stock was
$6.37 per share. As of the same date, there were 1,506,705 shares of Common
Stock outstanding held by 79 holders of record and approximately 590 beneficial
owners.
The Company has not declared or paid dividends on its Common Stock since its
formation, and the Company does not anticipate paying dividends in the
foreseeable future. The Company's existing credit facility prohibits the payment
of cash dividends on the Common Stock without the lender's consent. Any future
credit facility, which the Company may obtain, is also likely to prohibit the
payment of dividends. Declaration or payment of dividends, if any, in the
future, will be at the discretion of the Board of Directors and will depend on
the Company's then current financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors.
17
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial and operating
data for the Company. The data for the years ended December 31, 1999, 2000, and
2001 should be read in conjunction with the Company's consolidated financial
statements included elsewhere in this document. The selected consolidated
financial data for the 1997 and 1998 periods are derived from the Company's
historical consolidated financial statements.
A one-for four split of the Company's stock became effective as of February 26,
2001. As a result, all earnings per share data presented in the following table
has been restated to reflect this reverse stock split.
The data in the following table is in $000's except per share data, number of
offices and number of dentists:
Years Ended December 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Statements of Operations Data: (1)
Net revenue $ 12,742 $ 21,741 $ 28,553 $ 29,419 $ 29,249
Direct expenses 10,151 17,287 24,425 25,475 25,158
Contribution from dental offices 2,591 4,454 4,128 3,944 4,092
Corporate expenses 1,714 3,182 4,038 3,747 3,270
Operating income 877 1,272 90 197 822
Income (loss) before income taxes 34 843 (389) (434) 371
Income tax (expense) benefit - (128) 111 113 (121)
Income (loss) before change in accounting 34 715 (278) (321) 250
principle
Cumulative effect of change in accounting - (39) - - -
principle
Net income (loss) 34 675 (278) (321) 250
Basic earnings per share of Common Stock:
Income (loss) before cumulative effect of change .04 .46 (.18) (.21) .17
in accounting principle
Cumulative effect of change in accounting - (.03) - - -
principle
Net income (loss)(2) .04 .43 (.18) (.21) .17
Diluted earnings per share of Common Stock:
Income (loss) before cumulative effect of change .04 .44 (.18) (.21) .16
in accounting principle
Cumulative effect of change in accounting - (.02) - - -
principle
Net income (loss)(2) .04 .42 (.18) (.21) .16
Balance Sheet Data (3):
Cash and cash equivalents $ 977 $ 2,170 $ 807 $ 691 $ 949
Working capital (deficit) (458) 2,309 1,467 2,043 301
Total assets 15,564 25,543 27,949 26,333 24,762
Long-term debt, less current maturities 10,198 3,240 6,771 6,682 3,296
Total shareholders' equity 1,388 18,746 16,905 16,471 16,721
Dividends declared per share of Common Stock - - - - -
Operating Data:
Number of offices (3) 34 49 54 56 54
Number of dentists (3)(4) 53 73 90 91 86
Total net revenue per office $ 375 $ 444 $ 529 $ 525 $ 542
- -------------------
(1) Acquisitions of Offices and development of de novo Offices affect the
comparability of the data. During 1997 15 additional Office
acquisitions and one de novo Office increased the Company's operations.
In 1998, the Company acquired an additional 10 Offices and opened five
de novo Offices. In 1999, the Company acquired one Office, opened five
de novo Offices and consolidated two existing Offices into one. In
2000, the Company opened two de novo Offices. During 2001, the Company
consolidated four existing Offices into two.
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements of the Company.
(3) Data is as of the end of the respective periods presented.
(4) This represents the actual number of dentists employed by the P.C.s and
specialists who contract with the P.C.s to provide specialty dental
services.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
The following discussion and analysis relates to factors, which have affected
the consolidated results of operations and financial condition of the Company
for the three years ended December 31, 2001. Reference should also be made to
the Company's consolidated financial statements and related notes thereto and
the Selected Financial Data included elsewhere in this document. This document
contains forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under Items 1 and 2.
"Business and Properties," Item 5., "Market for the Registrant's Common Equity
and Related Stockholder Matters" as well as in this document generally.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation the risk factors set forth in this Item 7 under the heading "Risk
Factors."
Overview
The Company was formed in May 1995, and currently manages 54 Offices in
Colorado, New Mexico, and Arizona staffed by 73 dentists and 13 specialists. The
Company has acquired 42 practices (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 practices, only three (the first three
practices, which were acquired from the Company's President, Mark Birner,
D.D.S.) were acquired from affiliates of the Company. The Company derives all of
its Revenue (as defined below) from its Management Agreements with the P.C.s. 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 the 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. See
Items 1 and 2. "Business and Properties - Operations - Dental Practice
Management Model."
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's success in the Colorado
market led to its expansion into New Mexico and Arizona. The Company commenced
operations in Colorado in October 1995 with the acquisition of three practices,
and acquired a fourth practice in November 1995. During 1996, the Company
developed five de novo Offices and acquired 12 practices (including three
practices which were consolidated with existing Offices). In 1997, the Company
developed one de novo Office and acquired 15 practices. In 1998, the Company
developed five de novo Offices and acquired 10 practices. In 1999, the Company
developed five de novo Offices, acquired one practice and consolidated two
practices into one. In 2000, the Company developed two de novo Offices and
purchased the remaining 50% interest in two existing Offices. In 2001, the
Company consolidated four existing Offices in to two Offices and acquired the
remaining 50% interest in one existing Office.
The combined purchase amounts for the four practices acquired in 1995, the 12
practices acquired in 1996, the 15 practices acquired in 1997, the 10 practices
acquired in 1998, and the practice acquired in 1999 were approximately $412,000,
$4.4 million, $5.3 million, $5.8 million and $760,000, respectively. The 17
remaining 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. See Items 1 and 2. "Business and Properties -
Expansion Program."
The Company has grown primarily through the ongoing development of a dense
dental practice network and the implementation of its dental practice management
model. During the three years ended December 31, 2001, net revenue increased
from $28.6 million in 1999 to $29.4 million for 2000, and decreased to $29.2
million for 2001. During the three years ended December 31, 2001, contribution
from dental offices decreased from $4.1 million in 1999 to $3.9 million for
2000, and increased to $4.1 million for 2001. During the three years ended
December 31, 2001, operating income increased from $89,000 for 1999 to $197,000
in 2000 and $822,000 in 2001.
19
At December 31, 2001, the Company's total assets of $24.8 million included $13.9
million of identifiable intangible assets related to Management Agreements. At
that date, the Company's total shareholders' equity was $16.7 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
December 31, 2001 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 the 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 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 Office are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists 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.
20
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
Office (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Office 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. See Items 1 and 2. "Business and Properties -
Payor Mix."
The Company seeks to increase its fee-for-service business by increasing the
patient volume of 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
provides a greater margin 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 Company believes that the period-to-period comparisons
set forth below may not be representative of future operating results.
For the year ended December 31, 2001, Revenue increased to $41.4 million
compared to $41.2 million for the year ended December 31, 2000, an increase of
$200,000 or 0.4%. An increase in Revenue of $454,000 was attributable to the two
de novo Offices that were opened during 2000, which was partially offset by a
decrease in Revenue of $300,000 at the 52 Offices in existence during both full
periods.
For the year ended December 31, 2000, Revenue increased to $41.2 million from
$39.1 million for the year ended December 31, 1999, an increase of $2.1 million
or 5.4%. The Company opened two de novo Offices during 2000 which, in the
aggregate, contributed $483,000 and $1.6 million was attributable to the 54
Offices that existed at the beginning of 2000.
The Company has successfully reduced the percentage of its business which comes
from capitated managed dental care plans from 51.4% of Revenue in 1998 to 31.2%
of Revenue in 2001, and replaced that capitated revenue stream with higher
margin fee-for-service business. This higher margin fee-for-service revenue has
predominately been business derived from preferred provider plans.
21
The following table sets forth the percentages of Net Revenue represented by
certain items reflected in the Company's 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 consolidated financial statements and related notes thereto.
Years Ended December 31,
-------------------------------------------------------------------
1999 2000 2001
---- ---- ----
Net revenue 100.0 % 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 39.2 40.9 40.4
Dental supplies 6.2 6.4 6.0
Laboratory fees 10.0 8.9 8.4
Occupancy 10.8 11.0 11.2
Advertising and marketing 1.7 1.1 1.1
Depreciation and amortization 6.7 8.2 8.4
General and administrative 10.9 10.1 10.5
----- ------- ----
85.5 86.6 86.0
----- ------- ----
Contribution from dental offices 14.5 13.4 14.0
Corporate expenses:
General and administrative 13.3 11.6 10.1
Depreciation and amortization 0.9 1.1 1.1
----- ------- ----
Operating income 0.3 0.7 2.8
Interest expense, net
(1.7) (2.2) (1.5)
----- ------- ----
Income (loss) before income taxes (1.4) (1.5) 1.3
Income tax (expense) benefit 0.4 0.4 (0.4)
Net income (loss) (1.0)% (1.1)% 0.9 %
====== ======= =====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net revenue. Net revenue decreased from $29.4 million for the year ended
December 31, 2000 to $29.2 million for the year ended December 31, 2001, a
decrease of $169,000 or 0.6%. A decrease in net revenue of $451,000 was
attributable to the 52 practices in existence during both full periods, of which
$282,000 was offset by an increase in net revenue attributable to two de novo
offices that were opened during the 2000 fiscal year.
Clinical salaries and benefits. Clinical salaries and benefits decreased from
$12.0 million for the year ended December 31, 2000 to $11.8 million for the year
ended December 31, 2001, a decrease of $217,000 or 1.8%. This decrease was due
primarily to attrition of support staff at the Offices who were not replaced and
also because of a wage freeze that was implemented during 2001. As a percentage
of net revenue, clinical salaries and benefits decreased from 40.9% in 2000 to
40.4% in 2001.
Dental supplies. Dental supplies decreased from $1.9 million for the year ended
December 31, 2000 to $1.8 million for the year ended December 31, 2001, a
decrease of $115,000 or 6.2%. This decrease was primarily due to fewer de novo
office starts that require additional expenses to establish a start-up
inventory. As a percentage of net revenue, dental supplies decreased from 6.4%
in 2000 to 6.0% in 2001.
Laboratory fees. Laboratory fees decreased from $2.6 million for the year ended
December 31, 2000 to $2.5 million for the year ended December 31, 2001, a
decrease of $164,000 or 6.2%. This decrease was primarily due to the Company's
efforts to consolidate the use of dental laboratories so that improved pricing
could be obtained based upon the Company's laboratory case volume. As a
percentage of net revenue, laboratory fees decreased from 8.9% in 2000 to 8.4%
in 2001.
22
Occupancy. Occupancy increased from $3.2 million for the year ended December 31,
2000 to $3.3 million for the year ended December 31, 2001, an increase of
$39,000 or 1.2%. This increase was due to certain Offices which were only open
for part of the year ended December 31, 2000 and a full year in 2001 as well as
increased rental payments resulting from the renewal of Office leases at current
market rates for Offices whose leases expired subsequent to the 2000 period.
This was partially offset by lower costs associated with the consolidation of
four offices into two during 2001. As a percentage of net revenue, occupancy
expense increased from 11.0% in 2000 to 11.2% in 2001.
Advertising and marketing. Advertising and marketing decreased from $328,000 for
the year ended December 31, 2000 to $315,000 for the year ended December 31,
2001, a decrease of $13,000 or 4.0%. This decrease was primarily due to the fact
that no new Offices were opened in 2001 as compared to the opening of two new
Offices in 2000 and the corresponding savings of the initial expense of
promoting new Offices. As a percentage of net revenue, advertising and marketing
remained constant at 1.1% for both 2000 and 2001.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$2.4 million for the year ended December 31, 2000 to $2.5 million for the year
ended December 31, 2001, an increase of $53,000 or 2.2%. This increase is
related to the increase in the Company's depreciable and amortizable asset base.
As a percentage of net revenue, depreciation and amortization increased from
8.2% in 2000 to 8.4% in 2001.
General and administrative. General and administrative costs which are
attributable to the Offices, increased from $3.0 million for the year ended
December 31, 2000 to $3.1 million for the year ended December 31, 2001, an
increase of $99,000 or 3.4%. This increase was primarily due to certain Offices
which were only open for part of the year ended December 31, 2000 and a full
year in 2001. As a percentage of net revenue, general and administrative
expenses increased from 10.1% in 2000 to 10.5% in 2001.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased from $3.9 million for the year ended December 31, 2000
to $4.1 million for the year ended December 31, 2001, an increase of $148,000 or
3.8%. As a percentage of net revenue, contribution from dental offices increased
from 13.4% in 2000 to 14.0% in 2001.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative decreased from $3.4 million for the year ended December 31,
2000 to $2.9 million for the year ended December 31, 2001, a decrease of
$467,000 or 13.7%. This decrease is attributable to a management initiative in
the second quarter of 2001 to lower corporate expenses through a reduction in
personnel and other cost cutting measures. As a percentage of net revenue,
corporate expense - general and administrative decreased from 11.6% in 2000 to
10.1% in 2001.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization decreased from $332,000 for the year ended
December 31, 2000 to $322,000 for the year ended December 31, 2001, a decrease
of $10,000 or 3.0%. This decrease was a result of the Company's efforts to
control capital expenditures and the fact that some corporate assets have become
fully depreciated. As a percentage of net revenue, corporate expenses -
depreciation and amortization remained constant at 1.1% from 2000 to 2001.
Operating income. As a result of the above, operating income increased from
$197,000 for the year ended December 31, 2000 to $822,000 for the year ended
December 31, 2001, an increase of $625,000 or 317.8%. As a percentage of net
revenue, operating income increased from 0.7% in 2000 to 2.8% in 2001.
Interest expense, net. Interest expense, net decreased from $630,000 for the
year ended December 31, 2000 to $451,000 for the year ended December 31, 2001, a
decrease of $180,000 or 28.5%. This decrease was primarily the result of a lower
average interest rate and a lower average outstanding debt balance during 2001.
As a percentage of net revenue, interest expense, net decreased from 2.2% in
2000 to 1.5% in 2001.
Net income (loss). As a result of the above, the Company reported net income of
$250,000 for the year ended December 31, 2001 compared to a net loss of
$(321,000) for the year ended December 31, 2000. Net income for the year ended
December 31, 2001 was net of income tax expense of $121,000 while the net loss
for the year ended December 31, 2000 included an income tax benefit of $113,000.
23
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net revenue. Net revenue increased from $28.6 million for the year ended
December 31, 1999 to $29.4 million for the year ended December 31, 2000. The
Company opened two de novo Offices during 2000, which contributed approximately
$444,000 to the increase. The remainder of the increase in net revenue of
approximately $356,000 was attributable to the 54 practices the Company had at
the beginning of the 2000 year.
Clinical salaries and benefits. Clinical salaries and benefits increased from
$11.2 million for the year ended December 31, 1999 to $12.0 million for the year
ended December 31, 2000, an increase of $815,000 or 7.3%. This increase was due
primarily to the increased number of Offices and the corresponding addition of
non-dental personnel and because of annual wage increases. As a percentage of
net revenue, clinical salaries and benefits increased from 39.2% in 1999 to
40.9% in 2000.
Dental supplies. Dental supplies increased from $1.8 million for the year ended
December 31, 1999 to $1.9 million for the year ended December 31, 2000, an
increase of $97,000 or 5.5%. This increase was due primarily to the increased
number of Offices and to normal price increases from suppliers. As a percentage
of net revenue, dental supplies increased from 6.2% in 1999 to 6.4% in 2000.
Laboratory fees. Laboratory fees decreased from $2.8 million for the year ended
December 31, 1999 to $2.6 million for the year ended December 31, 2000, a
decrease of $211,000 or 7.4%. The decrease was primarily due to the Company
contracting with a single laboratory and receiving the benefits of lower costs
due to volume discounts. Laboratory fees as a percentage of net revenues
decreased from 10.0% in 1999 to 8.9% in 2000.
Occupancy. Occupancy increased from $3.1 million for the year ended December 31,
1999 to $3.3 million for the year ended December 31, 2000, an increase of
$155,000 or 5.3%. This increase was due to the two new Offices opened in 2000,
as well as certain Offices which were only open for part of the year ended
December 31, 1999 and a full year in 2000. As a percentage of net revenue,
occupancy expense increased from 10.8% in 1999 to 11.0% in 2000.
Advertising and marketing. Advertising and marketing decreased from $484,000 for
the twelve months ended December 31, 1999 to $328,000 for the twelve months
ended December 31, 2000, a decrease of $156,000 or 32.1%. This decrease was
primarily due to the opening of two Offices in 2000 as compared to six Offices
in 1999 and the corresponding savings of the initial expense of promoting new
Offices. Advertising and marketing expense, as a percentage of net revenue,
decreased from 1.7% in 1999 to 1.1% in 2000.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$1.9 million for the twelve months ended December 31, 1999 to $2.4 million for
the twelve months ended December 31, 2000, an increase of $484,000 or 25.2%.
This increase was primarily due to the number of Offices which were open for
part of the year ended December 31, 1999, and because of the two new Offices
opened in 2000. Depreciation and amortization as a percentage of net revenue
increased from 6.7% in 1999 to 8.2% in 2000.
General and administrative. General and administrative costs, attributable to
the Offices, decreased from $3.1 million for the twelve months ended December
31, 1999 to $3.0 million for the twelve months ended December 31, 2000, a
decrease of $143,000 or 4.6%. The reduction is primarily the result of a Company
initiative in 2000 to manage controllable costs. As a percentage of net revenue,
general and administrative expenses decreased from 10.9% in 1999 to 10.1% in
2000.
Contribution from dental offices. As a result of the above changes, contribution
from dental offices decreased from $4.1 million for the twelve months ended
December 31, 1999 to $3.9 million for the twelve months ended December 31, 2000,
a decrease of $184,000 or 4.5%. As a percentage of net revenue, contribution
from dental offices decreased from 14.5% in 1999 to 13.4% in 2000.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative decreased from $3.8 million for the twelve months ended
December 31, 1999 to $3.4 million for the twelve months ended December 31, 2000,
a decrease of $382,000 or 10.1%. The reduction is primarily the result of a
Company initiative in 2000 to manage controllable costs. As a percentage of net
revenue, corporate expenses - general and administrative decreased from 13.3% in
1999 to 11.6% in 2000.
24
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from $242,000 for the twelve months
ended December 31, 1999 to $332,000 for the twelve months ended December 31,
2000, an increase of $90,000 or 37.4%. This increase was primarily due to the
acquisition of new payroll software in 2000 to manage new and future growth.
Corporate expenses - depreciation and amortization as a percentage of net
revenue increased from 0.9% in 1999 to 1.1% in 2000.
Operating income. As a result of the change described above, operating income
increased from $90,000 for the twelve months ended December 31, 1999 to $197,000
for the twelve months ended December 31, 2000, an increase of 107,000 or 119.9%.
As a percentage of net revenue, operating income increased from 0.3% in 1999 to
0.7% in 2000.
Interest expense, net. Interest expense - net increased from $478,000 for the
twelve months ended December 31, 1999 to $630,000 for the twelve months ended
December 31, 2000, an increase of $152,000 or 31.8%. This increase was primarily
the result of higher rates of interest charged the Company on its line of credit
and a higher average balance outstanding on this line of credit that was used
for capital expenditures and the open-market purchases of Common Stock of the
Company. As a percentage of net revenue, interest expense - net increased from
1.7% in 1999 to 2.2% in 2000.
Net loss. As a result of the changes described above, the Company reported a net
loss of $(321,000) for the twelve months ended December 31, 2000 as compared to
a net loss of $(278,000) for the twelve months ended December 31, 1999, net of
tax benefits of $113,000 and $111,000 for 2000 and 1999, respectively.
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 the initial public offering of Common Stock.
Net cash provided by operating activities was $1.3 million, $1.7 million, and
$4.0 million for the years ended December 31, 1999, 2000 and 2001, respectively.
During the year ended December 31, 2001, excluding net income and after adding
back non-cash items, the Company's cash provided by operating activities
consisted primarily of a decrease in accounts receivable of approximately
$784,000, an increase in accounts payable of approximately $342,000 offset, in
part, by an increase in prepaid expenses of approximately $267,000. During the
year ended December 31, 2000 after adding back depreciation and amortization and
other non-cash expenses, the Company's cash used in operating activities
consisted primarily of a reduction in accounts payable of approximately $705,000
offset, in part, by a decrease in prepaid expenses of approximately $146,000.
During the year ended December 31, 1999 after adding back depreciation and
amortization and other non-cash expenses, the Company's cash used in operating
activities consisted primarily of an increase in accounts receivable of
approximately $1.1 million offset, in part, by an increase in accounts payable
of approximately $500,000.
Net cash used in investing activities was $4.4 million, $1.5 million, and $1.1
million for the years ended December 31, 1999, 2000 and 2001, respectively.
During the year ended December 31, 2001, $547,000 was invested in the purchase
of additional property and equipment and $435,000 for acquiring the remaining
50% interest in one existing Office. During the year ended December 31, 2000,
$1.1 million was invested in the purchase of additional property and equipment,
including $428,000 for two de novo Offices and $197,000 for acquiring the
remaining 50% interest in two existing Offices. During the year ended December
31, 1999, $3.7 million was invested in the purchase of additional property and
equipment, including $1.1 million for the de novo Offices and $697,000 for an
acquisition.
For the year ended December 31, 1999 net cash provided by financing activities
was $1.8 million. For the years ended December 31, 2000 and 2001 net cash used
in financing activities was $401,000, and $2.7 million, respectively. For the
year ended December 31, 2001, net cash used in financing activities was
comprised of $2.4 million for the pay-down on the Company's line of credit,
$203,000 for the repayment of long-term debt and $67,000 for the payment of
financing costs. For the year ended December 31, 2000, net cash used in
financing activities was comprised of $195,000 for the repayment of long-term
debt, $113,000 for the purchase and retirement of Common Stock and $93,000 for
the pay-down on the Company's line of credit. For the year ended December 31,
1999, net cash provided by financing activities was comprised of net borrowings
under the Company's line of credit of approximately $3.7 million which was
partially offset by the purchase and retirement of Common Stock of approximately
$1.6 million and approximately $310,000 for the repayment of long-term debt.
25
Under the Company's Credit Facility (as amended on December 17, 2001), the
Company may borrow on a revolving basis up to the lesser of an applicable
Borrowing Base (calculated in accordance with the most recent Borrowing Base
Certificate delivered to the Lender) or $2.0 million and on a non-revolving
basis, an aggregate principal amount not in excess of $4.0 million for working
capital, restructuring of the Original Loan and for other general corporate
purposes. Balances bear interest at the lender's base rate (prime plus a rate
margin of 2.0%). The Company is also obligated to pay an annual facility fee of
.50% on the average unused amount of the revolving line of credit during the
previous full calendar quarter. Borrowings are limited to an availability
formula based on the Company's eligible accounts receivable. As amended, the
revolving loan matures on April 30, 2002 and the non-revolving note matures on
April 30, 2003. At December 31, 2001, the Company had $168,000 outstanding and
approximately $1.8 million available for borrowing under the revolving line of
credit and $3.875 million outstanding under the term 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 December 31, 2001 the Company was in full compliance with
all of its covenants under this agreement.
As of December 31, 2001, the Company had approximately $585,000 in notes payable
issued in connection with various Office acquisitions, which bear interest at
rates varying from 8.0% to 9.0%. At December 31, 2001, the Company's material
commitments for capital expenditures totaled approximately $1.2 million that
includes the acquisition of controlling interest in two existing Offices. The
Company anticipates that these capital expenditures will be funded by cash on
hand, cash generated by operations, or borrowings under the Company's Credit
Facility. The Company's accumulated deficit as of December 31, 2001 was
approximately $(134,000) and the Company had working capital on that date of
approximately $301,000.
The Company believes that cash generated from operations will be sufficient to
fund its anticipated working capital needs and capital expenditures for at least
the next 12 months, even in the event the Company is not able to successfully
negotiate a new Line of Credit at the end of its term. The Company believes,
however, that it will be able to renew the Line of Credit with its current
lender or a different lender with the same or better terms than currently exist.
In addition, in order to meet its long-term liquidity needs the Company may need
to 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. See "Risk Factors - Need for Additional Capital;
Uncertainty of Additional Financing" in this Item 7.
On September 5, 2000, the Company's Board of Directors unanimously approved the
purchase of shares of the Company's Common Stock on the open market, total value
not to exceed $150,000. During 2000 the Company, in 18 separate transactions,
purchased approximately 26,300 shares of Common Stock for total consideration of
approximately $113,000 at prices ranging from $3.80 to $6.68 per share. The
Company's current Credit Facility (as amended on December 17, 2001) prohibits
the Company from purchasing its Common Stock on the open market even though
approximately $37,000 remains available under the Board of Directors approved
plan.
In July 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, "Business Combinations," and
SFAS 142, "Goodwill and Other Intangible Assets," which replace Accounting
Principle Board Opinion Nos. 16 ("APB 16"), "Business Combinations," and APB 17,
"Intangible Assets," respectively. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and that the use of the pooling-of-interests method be prohibited. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only-method. Amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of SFAS 142, which the
Company will be required to adopt on January 1, 2002. After December 31, 2001,
goodwill can only be written down upon impairment discovered during annual tests
for fair value, or discovered during tests taken when certain triggering events
occur. Prior to the adoption of SFAS 142, impairment of intangibles was
recognized according to the undiscounted cash flow test per SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The Company does not expect the adoption of SFAS 141 and SFAS
142 to have a material impact on the Company's financial condition or results of
operations.
26
In June 2001, the FASB approved for issuance SFAS 143, Asset Retirement
Obligations. SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The statement is effective for the financial statements issued
for fiscal years beginning after June 15, 2002. The Company does not believe
that the adoption of the statement will have a material effect on its financial
position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The provisions of
this statement are generally to be applied prospectively. Management believes
the adoption of SFAS 144 will not have a material impact on the Company's
financial statements.
Risk Factors
This Annual Report contains forward-looking statements. Discussions containing
such forward-looking statements may be found in the material set forth in this
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations," Items 1 and 2. "Business and Properties" and Item 5. "Market for
the Registrant's Common Equity and Related Stockholder Matters," as well as in
this Annual Report generally. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various
factors, including, without limitation, the risk factors set forth below and the
matters set forth in this Annual Report generally.
Demands on Management from Growth; Limited Operating History. The Company has
been providing dental practice management services since October 1995. Prior to
April 1997, the Company provided dental practice management services exclusively
in Colorado. The Company's growth has placed, and will continue to place,
strains on the Company's management, operations and systems. The growth has
required the hiring and training of additional employees to oversee the
operations and training of non-dental employees in the new Offices, the use of
management resources to integrate the operations of the new Offices with the
operations of the Company, and the incurring of incremental costs to convert to
or install the Company's management information system. The Company's ability to
compete effectively will depend upon its ability to hire, train and assimilate
additional management and other employees, and its ability to expand, improve
and effectively utilize its operating, management, marketing and financial
systems to accommodate its expanded operations. Any failure by the Company's
management to effectively anticipate, implement and manage the changes required
to sustain the Company's growth may have a material adverse effect on the
Company's business, financial condition and operating results. See Items 1 and
2. "Business and Properties - Expansion Program."
Dependence Upon Availability of Dentists and Other Personnel. The Company
believes that individual Office profitability, individual Office operations and
its expansion strategy are dependent on the availability and successful
recruitment and retention of dentists, dental assistants, hygienists,
specialists and other personnel. The Company may not be able to recruit or
retain dentists and other personnel for its existing and newly established
Offices, which may have a material adverse effect on the Company's expansion
strategy and its business, financial condition and operating results. See Items
1 and 2. "Business and Properties - Operations - Dental Practice Model."
Need for Additional Capital; Uncertainty of Additional Financing. Implementation
of the Company's growth strategy has required significant capital resources.
Such resources will be needed to establish additional Offices, maintain or
upgrade the Company's management information systems, and for the effective
integration, operation and expansion of the Offices. The Company historically
has used principally cash and promissory notes as consideration in acquisitions
of dental practices and intends to continue to do so. If the Company's capital
requirements over the next several years exceed cash flow generated from
operations and borrowings available under the Company's existing Credit Facility
or any successor credit facility, the Company may need to issue additional
equity securities and incur additional debt. If additional funds are raised
through the issuance of equity securities, dilution to the Company's existing
shareholders may result. Additional debt or non-Common Stock equity financings
could be required to the extent that the Common Stock fails to maintain a market
value sufficient to warrant its use for future financing needs. If additional
funds are raised through the incurrence of debt, such debt instruments will
likely contain restrictive financial, maintenance and security covenants. The
Company's existing credit facility limits the amount the Company may spend in
any calendar year to acquire dental practices. The Company may not be able to
obtain additional required capital on satisfactory terms, if at all. The failure
to raise the funds necessary to finance the expansion of the Company's
operations or the Company's other capital requirements could have a material and
adverse effect on the Company's ability to pursue its strategy and on its
business, financial condition and operating results. See "Liquidity and Capital
Resources" in this Item 7.
27
Risks Associated with De Novo Office Development. The Company utilizes internal
and external resources to identify locations in suitable markets for the
development of de novo Offices. Identifying locations in suitable geographic
markets and negotiating leases can be a lengthy and costly process. Furthermore,
the Company will need to provide each new Office with the appropriate equipment,
furnishings, materials and supplies. To date, the Company's average cost to open
a de novo Office has been approximately $210,000. Future de novo development may
require a greater investment by the Company. Additionally, new Offices must be
staffed with one or more dentists. Because a new Office may be staffed with a
dentist with no previous patient base, significant advertising and marketing
expenditures may be required to attract patients. There can be no assurance that
a de novo Office will become profitable for the Company. See Items 1 and 2.
"Business and Properties - Expansion Program - De Novo Office Developments."
Dependence on Management Agreements, the P.C.s and Affiliated Dentists. The
Company receives management fees for services provided to the P.C.s under
Management Agreements. The Company owns most of the non-dental operating assets
of the Offices but does not employ or contract with dentists, employ hygienists
or control the provision of dental care. The Company's revenue is dependent on
the revenue generated by the P.C.s. Therefore, effective and continued
performance of dentists providing services for the P.C.s is essential to the
Company's long-term success. Under each Management Agreement, the Company pays
substantially all of the operating and non-operating expenses associated with
the provision of dental services except for the salaries and benefits of the
dentists and hygienists and principal and interest payments of loans made to the
P.C. by the Company. Any material loss of revenue by the P.C.s would have a
material adverse effect on the Company's business, financial condition and
operating results, and any termination of a Management Agreement (which is
permitted in the event of a material default or bankruptcy by either party)
could have such an effect. In the event of a breach of a Management Agreement by
a P.C., there can be no assurance that the legal remedies available to the
Company will be adequate to compensate the Company for its damages resulting
from such breach. See Items 1 and 2. "Business and Properties - Affiliation
Model."
Government Regulation. The practice of dentistry is regulated at both the state
and federal levels. There can be no assurance that the regulatory environment in
which the Company or P.C.s operate will not change significantly in the future.
In addition, state and federal laws regulate health maintenance organizations
and other managed care organizations for which dentists may be providers. In
general, regulation of health care companies is increasing. In connection with
its operations in existing markets and expansion into new markets, the Company
may become subject to additional laws, regulations and interpretations or
enforcement actions. The laws regulating health care are broad and subject to
varying interpretations, and there is currently a lack of case law construing
such statutes and regulations. The ability of the Company to operate profitably
will depend in part upon the ability of the Company to operate in compliance
with applicable health care regulations.
The laws of many states, including Colorado and New Mexico, permit a dentist to
conduct a dental practice only as an individual, a member of a partnership or an
employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist to own or control dental equipment or offices used in a dental
practice. In addition, Arizona, Colorado, New Mexico, and many other states
impose limits on the tasks that may be delegated by dentists to hygienists and
dental auxiliaries. Some states, including Arizona, Colorado and New Mexico,
regulate the content of advertisements of dental services. Some states require
entities designated as "clinics" to be licensed, and may define clinics to
include dental practices that are owned or controlled in whole or in part by
non-dentists. These laws and their interpretations vary from state to state and
are enforced by the courts and by regulatory authorities with broad discretion.
Many states, including Colorado and New Mexico, also prohibit "fee-splitting" by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice's revenues.
28
Many states have fraud and abuse laws, which apply to referrals for items or
services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. Specifically, in some states, regulators may determine that the P.C.s
are engaged in the business of insurance, particularly if they contract on a
financial-risk basis directly with self-insured employers or other entities that
are not licensed to engage in the business of insurance. If the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's business, financial condition and operating results may be materially
and adversely affected.
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. The federal fraud and abuse statute prohibits,
among other things, the payment, offer, solicitation or receipt of any form of
remuneration, directly or indirectly, in cash or in kind to induce or in
exchange for (i) the referral of a person for services reimbursable by Medicare
or Medicaid, or (ii) the purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any item, good, facility or service
which is reimbursable under Medicare or Medicaid. Because the P.C.s receive no
revenue under Medicare and Medicaid, the impact of these laws on the Company to
date has been negligible. There can be no assurance, however, that the P.C.s
will not have patients in the future covered by these laws, or that the scope of
these laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
Commencing in March 2003, health care providers, including the Company, will
have to comply with the electronic data security and privacy requirements of the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA
delegates enforcement authority to the Centers for Medicare Services Office for
Civil Rights. Noncompliance with HIPAA regulations can result in severe
penalties up to $250,000 in fines and up to ten years in prison. While the
Company intends to comply with all requirements, the Company cannot presently
predict the ultimate impact of the HIPAA regulations on the Company and its
business.
Although the Company believes that its operations as currently conducted are in
material compliance with applicable laws, there can be no assurance that the
Company's contractual arrangements will not be successfully challenged as
violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations or change the way it conducts business. See Items 1 and 2.
"Business and Properties - Government Regulation."
Risks Associated with Acquisition Strategy. The Company has grown substantially
in a relatively short period of time, in large part through acquisitions of
existing Offices and through the development of de novo Offices. Since its
organization in May 1995, the Company has completed 42 dental practice
acquisitions, five of which have been consolidated into existing Offices. The
success of the Company's acquisition strategy will depend on factors, which
include the following:
* Ability to Identify Suitable Dental Practices. Identifying
appropriate acquisition candidates and negotiating and consummating
acquisitions can be a lengthy and costly process. Furthermore, the
Company may compete for acquisition opportunities with companies that
have greater resources than the Company. There can be no assurance that
suitable acquisition candidates will be identified or that acquisitions
will be consummated on terms favorable to the Company, on a timely
basis or at all. If a planned acquisition fails to occur or is delayed,
the Company's quarterly financial results may be materially lower than
analysts' expectations, which likely would cause a decline, perhaps
substantial, in the market price of the Common Stock. In addition,
increasing consolidation in the dental management services industry may
result in an increase in purchase prices required to be paid by the
Company to acquire dental practices.
29
* Integration of Dental Practices. The integration of acquired dental
practices into the Company's networks is a difficult, costly and time
consuming process which, among other things, requires the Company to
attract and retain competent and experienced management and
administrative personnel and to implement and integrate reporting and
tracking systems, management information systems and other operating
systems. In addition, such integration may require the expansion of
accounting controls and procedures and the evaluation of certain
personnel functions. There can be no assurance that substantial
unanticipated problems, costs or delays associated with such
integration efforts or with such acquired practices will not occur. As
the Company pursues its acquisition strategy, there can be no assurance
that the Company will be able to successfully integrate acquired
practices in a timely manner or at all, or that any acquired practices
will have a positive impact on the Company's results of operations and
financial condition.
* Management of Acquisitions. The success of the Company's acquisition
strategy will depend in part on the Company's ability to manage
effectively an increasing number of Offices. The addition of Offices
may impair the Company's ability to provide management services
efficiently and successfully to existing Offices and to manage and
supervise adequately the Company's employees. The Company's results of
operations and financial condition could be materially adversely
affected if it is unable to do so effectively.
* Availability of Funds for Acquisitions. The Company's acquisition
strategy will require that substantial capital investment and adequate
financing is available to the Company. Funds are needed for (i) the
purchase of assets of dental practices, (ii) the integration of
operations of acquired dental practices, and (iii) the purchase of
additional equipment and technology for acquired practices. In
addition, increasing consolidation in the dental services industry may
result in an increase in purchase prices required to be paid by the
Company to acquire dental practices. Any inability of the Company to
obtain suitable financing could cause the Company to limit or otherwise
modify its acquisition strategy, which could have a material adverse
effect on the Company's results of operations and financial condition.
See "Risk Factors - Need for Additional Capital; Uncertainty of
Additional Financing" in this Item 7.
* Ability to Increase Revenues and Operating Income of Acquired
Practices. A key element of the Company's growth strategy is to
increase revenues and operating income at its acquired Offices. There
can be no assurance that the Company's revenues and operating income
from its acquired Offices will improve or that revenues or operating
income from existing Offices will continue to improve. Any failure by
the Company in improving revenues or operating income at its Offices
could have a material adverse effect on the Company's results of
operations and financial condition.
Reliance on Certain Personnel. The success of the Company, depends on the
continued services of a relatively limited number of members of the Company's
senior management, including its President, Mark Birner, D.D.S., its Chief
Executive Officer, Fred Birner, and its Chief Financial Officer, Treasurer and
Secretary, Dennis Genty. Some key employees have only recently joined the
Company. The Company believes its future success will depend in part upon its
ability to attract and retain qualified management personnel. Competition for
such personnel is intense and the Company competes for qualified personnel with
numerous other employers, some of which have greater financial and other
resources than the Company. The loss of the services of one or more members of
the Company's senior management or the failure to add or retain qualified
management personnel could have a material adverse effect on the Company's
business, financial condition and operating results.
Risks Associated with Cost-Containment Initiatives. The health care industry,
including the dental services market, is experiencing a trend toward cost
containment, as payors seek to impose lower reimbursement rates upon providers.
The Company believes that this trend will continue and will increasingly affect
the provision of dental services. This may result in a reduction in per-patient
and per-procedure revenue from historic levels. Significant reductions in
payments to dentists or other changes in reimbursement by payors for dental
services may have a material adverse effect on the Company's business, financial
condition and operating results.
Risks Associated with Capitated Payment Arrangements. Part of the Company's
growth strategy involves selectively obtaining capitated managed dental care
contracts. Under a capitated managed dental care contract, the dental practice
provides dental services to the members of the plan 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 practice which is obligated to provide them, and may receive a co-pay for
each service provided. This arrangement shifts the risk of utilization of such
services to the dental group practice that provides the dental services. Because
the Company assumes responsibility under its 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 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 contrast,
under traditional indemnity insurance arrangements, the insurance company
reimburses reasonable charges that are billed for the dental services provided.
30
In 2001, the Company derived approximately 15.4% of its revenues from capitated
managed dental care contracts, and 15.8% of its revenues from associated
co-payments. Risks associated with capitated managed dental care contracts
include principally (i) the risk that the capitation payments and any associated
co-payments do not adequately cover the costs of providing the dental services,
(ii) the risk that one or more of the P.C.s may be terminated as an approved
provider by managed dental care plans with which they contract, (iii) the risk
that the Company will be unable to negotiate future capitation arrangements on
satisfactory terms with managed care dental plans, and (iv) the risk that large
subscriber groups will terminate their relationship with such managed dental
care plans which would reduce patient volume and capitation and co-payment
revenue. There can be no assurance that the Company will be able to negotiate
future capitation arrangements on behalf of P.C.s on satisfactory terms or at
all, or that the fees offered in current capitation arrangements will not be
reduced to levels unsatisfactory to the Company. Moreover, to the extent that
costs incurred by the Company's affiliated dental practices in providing
services to patients covered by capitated managed dental care contracts exceed
the revenue under such contracts, the Company's business, financial condition
and operating results may be materially and adversely affected. See Items 1 and
2. "Business and Properties - Operations - Payor Mix."
Risks of Becoming Subject to Licensure. Federal and state laws regulate
insurance companies and certain other managed care organizations. Many states,
including Colorado, also regulate the establishment and operation of networks of
health care providers. In most states, these laws do not apply to
discounted-fee-for-service arrangements. These laws also do not generally apply
to networks that are paid on a capitated basis, unless the entity with which the
network provider is contracting is not a licensed health insurer or other
managed care organization. There are exceptions to these rules in some states.
For example, certain states require a license for a capitated arrangement with
any party unless the risk-bearing entity is a professional corporation that
employs the professionals. The Company believes its current activities do not
constitute the provision of insurance in Colorado or New Mexico, and thus, it is
in compliance with the insurance laws of these states with respect to the
operation of its Offices. There can be no assurance that these laws will not be
changed or that interpretations of these laws by the regulatory authorities in
those states, or in the states in which the Company expands, will not require
licensure or a restructuring of some or all of the Company's operations. In the
event that the Company is required to become licensed under these laws, the
licensure process can be lengthy and time consuming and, unless the regulatory
authority permits the Company to continue to operate while the licensure process
is progressing, the Company could experience a material adverse change in its
business while the licensure process is pending. In addition, many of the
licensing requirements mandate strict financial and other requirements, which
the Company may not immediately be able to meet. Further, once licensed, the
Company would be subject to continuing oversight by and reporting to the
respective regulatory agency. The regulatory framework of certain jurisdictions
may limit the Company's expansion into, or ability to continue operations
within, such jurisdictions if the Company is unable to modify its operational
structure to conform to such regulatory framework. Any limitation on the
Company's ability to expand could have a material adverse effect on the
Company's business, financial condition and operating results.
Risks Arising From Health Care Reform. Federal and state governments currently
are considering various types of health care initiatives and comprehensive
revisions to the health care and health insurance systems. Some of the proposals
under consideration, or others that may be introduced, could, if adopted, have a
material adverse effect on the Company's business, financial condition and
operating results. It is uncertain what legislative programs, if any will be
adopted in the future, or what action Congress or state legislatures may take
regarding health care reform proposals or legislation. In addition, changes in
the health care industry, such as the growth of managed care organizations and
provider networks, may result in lower payments for the services of the
Company's managed practices.
Risks Associated with Intangible Assets. At December 31, 2001, intangible assets
on the Company's consolidated balance sheet were $13.9 million, representing
56.2% of the Company's total assets at that date. The Company expects the amount
allocable to intangible assets on its balance sheet to increase in the future in
connection with additional acquisitions, which will increase the Company's
amortization expense. In the event of any sale or liquidation of the Company or
a portion of its assets, there can be no assurance that the value of the
Company's intangible assets will be realized. In addition, the Company
continually evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of the amount allocable to the
Company's intangible assets may not be recoverable. When factors indicate that
the amount allocable to the Company's intangible assets should be evaluated for
possible impairment, the Company may be required to reduce the carrying value of
such assets. Any future determination requiring the write off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's business, financial condition and operating results.
31
Possible Exposure to Professional Liability. In recent years, dentists have
become subject to an increasing number of lawsuits alleging malpractice. Some of
these lawsuits involve large claims and significant defense costs. Any suits
involving the Company or dentists at the Offices, if successful, could result in
substantial damage awards that may exceed the limits of the Company's insurance
coverage. The Company provides practice management services; it does not engage
in the practice of dentistry or control the practice of dentistry by the
dentists or their compliance with regulatory requirements directly applicable to
providers. There can be no assurance, however, that the Company will not become
subject to litigation in the future as a result of the dental services provided
at the Offices. The Company maintains professional liability insurance for
itself and provides for professional liability insurance covering dentists,
hygienists and dental assistants at the Offices. While the Company believes it
has adequate liability insurance coverage, there can be no assurance that the
coverage will be adequate to cover losses or that coverage will continue to be
available upon terms satisfactory to the Company. In addition, certain types of
risks and liabilities, including penalties and fines imposed by governmental
agencies, are not covered by insurance. Malpractice insurance, moreover, can be
expensive and varies from state to state. Successful malpractice claims could
have a material adverse effect on the Company's business, financial condition
and operating results. See Items 1 and 2. "Business and Properties - Insurance."
Risks Associated with Non-Competition Covenants and Other Arrangements with
Managing Dentists. The Management Agreements require the P.C.s to enter into
employment agreements with dentists which include non-competition provisions
typically for three to five years after termination of employment within a
specified geographic area, usually a specified number of miles from the relevant
Office, and restrict solicitation of employees and patients. In Colorado,
covenants not to compete are prohibited by statute with certain exceptions. One
exception permits enforcement of covenants not to compete against executive and
management personnel and officers and employees who constitute professional
staff to executive and management personnel. Permitted covenants not to compete
are enforceable in Colorado only to the extent their terms are reasonable in
both duration and geographic scope. Arizona and New Mexico courts have enforced
covenants not to compete if their terms are found to be reasonable. It is thus
uncertain whether a court will enforce a covenant not to compete in those states
in a given situation. In addition, there is little judicial authority regarding
whether a practice management agreement will be viewed as the type of
protectable business interest that would permit it to enforce such a covenant or
to require a P.C. to enforce such covenants against dentists formerly employed
by the P.C. Since the intangible value of a Management Agreement depends
primarily on the ability of the P.C. to preserve its business, which could be
harmed if employed dentists went into competition with the P.C., a determination
that the covenants not to compete contained in the employment agreements between
the P.C. and its employed dentists are unenforceable could have a material
adverse impact on the Company. See Items 1 and 2. "Business and Properties -
Affiliation Model- Employment Agreements." In addition, the Company is a party
to various agreements with managing dentists who own the P.C.s, which restrict
the dentists' ability to transfer the shares in the P.C.s. See Items 1 and 2.
"Business and Properties - Affiliation Model - Relationship with P.C.s." There
can be no assurance that these agreements will be enforceable in a given
situation. A determination that these agreements are not enforceable could have
a material adverse impact on the Company.
Seasonality. The Company's past financial results have fluctuated somewhat due
to seasonal variations in the dental service industry, with Revenue typically
declining in the fourth calendar quarter. The Company expects this seasonality
to continue in the future.
Competition. The dental practice management segment of the dental services
industry is highly competitive and is expected to become increasingly more
competitive. There are several dental practice management companies that are
operating in the Company's markets. There are also a number of companies with
dental practice management businesses similar to that of the Company currently
operating in other parts of the country which may enter the Company's existing
markets in the future. As the Company seeks to expand its operations into new
markets, it is likely to face competition from dental practice management
companies, which already have established a strong business presence in such
locations. The Company's competitors may have greater financial or other
resources or otherwise enjoy competitive advantages, which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company. See Items 1 and 2. "Business and Properties -
Competition."
The business of providing general dental and specialty dental services is highly
competitive in the markets in which the Company operates. Competition for
providing dental services may include practitioners who have more established
practices and reputations. The Company competes against established practices in
the retention and recruitment of general dentists, specialists, hygienists and
other personnel. If the availability of such dentists, specialists, hygienists
and other personnel begins to decline in the Company's markets, it may become
more difficult to attract qualified dentists, specialists, hygienists and other
personnel. There can be no assurance that the Company will be able to compete
effectively against other existing practices or against new single or
multi-specialty dental practices that enter its markets, or to compete against
such practices in the recruitment and retention of qualified dentists,
specialists, hygienists and other personnel. See Items 1 and 2. "Business and
Properties - Competition."
32
Volatility of Stock Price. The market price of the Common Stock could be subject
to wide fluctuations in response to quarter-by-quarter variations in operating
results of the Company or its competitors, changes in earnings estimates by
analysts, developments in the industry or changes in general economic
conditions.
Restrictions on Payment of Dividends. The Company has not declared or paid cash
dividends on its Common Stock since its formation, and the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of dividends is prohibited under the terms of the Company's existing
credit facility and may be prohibited under any future credit facility, which
the Company may obtain. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters" and "Liquidity and Capital Resources" in this Item
7.
ITEM 7A. 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 December 31, 2001, the Company has not used derivative instruments or
engaged in hedging activities.
Interest Rate Risk. The interest payable on the Company's line-of-credit and
term-loan is variable based upon the prime rate and, therefore, affected by
changes in market interest rates. At December 31, 2001, approximately $4.0
million was outstanding with an interest rate of 6.75% (prime plus 2.0%). The
Company may repay the balance in full at any time without penalty. As a result,
the Company does not believe that any reasonably possible near-term changes in
interest rates would 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 interest rate on the Company's Credit Facility would have
resulted in additional interest expense of approximately $58,000 for the twelve
months ended December 31, 2001.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Birner Dental Management Services, Inc. and subsidiaries' consolidated financial
statements as of December 31, 2000 and 2001 and for the three years ended
December 31, 2001:
Page
Report of Independent Public Accountants 35
Consolidated Balance Sheets 37
Consolidated Statements of Operations 38
Consolidated Statements of Shareholders' Equity 39
Consolidated Statements of Cash Flows 40
Notes to Consolidated Financial Statements 42
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Birner Dental Management Services, Inc.:
We have audited the accompanying consolidated balance sheet of Birner Dental
Management Services, Inc. (a Colorado corporation) and subsidiaries as of
December 31, 2001 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Birner Dental Management
Services, Inc. and subsidiaries as of December 31, 2001 and the results of their
operations and their cash flows for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
Hein + Associates LLP
Denver, Colorado,
March 2, 2002
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Birner Dental Management Services, Inc.:
We have audited the accompanying consolidated balance sheet of Birner Dental
Management Services, Inc. (a Colorado corporation) and subsidiaries as of
December 31, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Birner Dental Management
Services, Inc. and subsidiaries as of December 31, 2000, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 2001.
36
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2000 2001
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 691,417 $ 949,236
Accounts receivable, net of allowance for doubtful
accounts of $201,047 and $201,795, respectively 3,871,818 3,086,648
Deferred tax asset 104,429 112,214
Prepaid expenses and other assets 426,938 724,429
------------ ------------
Total current assets 5,094,602 4,872,527
PROPERTY AND EQUIPMENT, net 6,967,914 5,369,198
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,693,092 13,915,362
Deferred charges and other assets 179,156 216,285
Notes receivable - related parties 214,112 284,479
Deferred tax asset, net 184,192 104,074
------------ ------------
Total assets $ 26,333,068 $ 24,761,925
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,897,043 $ 3,239,202
Current maturities of long-term debt 154,666 1,332,158
------------ ------------
Total current liabilities 3,051,709 4,571,360
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 6,681,623 3,296,304
Other long-term obligations 128,820 173,089
------------ ------------
Total liabilities 9,862,152 8,040,753
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding - -
Common Stock, no par value, 20,000,000 shares
authorized; 1,506,705 shares issued and
outstanding at December 31, 2000 and 2001 16,855,661 16,855,661
Accumulated deficit (384,745) (134,489)
------------ ------------
Total shareholders' equity 16,470,916 16,721,172
Total liabilities and shareholders' equity $ 26,333,068 $ 24,761,925
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
37
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1999 2000 2001
----- ------ ----
NET REVENUE: $28,553,114 $29,418,772 $29,249,333
DIRECT EXPENSES:
Clinical salaries and benefits 11,204,988 12,020,083 11,803,291
Dental supplies 1,773,229 1,870,396 1,754,923
Laboratory fees 2,845,896 2,634,975 2,471,087
Occupancy 3,088,530 3,250,974 3,289,937
Advertising and marketing 483,615 328,149 315,083
Depreciation and amortization 1,924,790 2,409,223 2,462,604
General and administrative 3,104,388 2,961,451 3,060,699
------------ ----------- -----------
24,425,436 25,475,251 25,157,624
------------ ----------- -----------
Contribution from dental offices 4,127,678 3,943,521 4,091,709
CORPORATE EXPENSES:
General and administrative 3,796,696 3,415,031 2,948,082
Depreciation and amortization 241,496 331,738 321,690
------------ ----------- -----------
Operating income 89,486 196,752 821,937
Interest expense, net (478,285) (630,410) (450,869)
------------ ----------- -----------
Income (loss) before income taxes (388,799) (433,658) 371,068
Income tax (expense) benefit 111,187 112,756 (120,812)
------------ ----------- -----------
Net income (loss) $ (277,612) $ (320,902) $ 250,256
============ =========== ===========
Net income (loss) per share of Common Stock:
Basic $ (.18) $ (.21) $ .17
============ =========== ===========
Diluted $ (.18) $ (.21) $ .16
============ =========== ===========
Weighted average number of shares of Common Stock and dilutive securities:
Basic 1,558,553 1,523,594 1,506,705
============ =========== ===========
Diluted 1,558,553 1,523,594 1,529,549
============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
38
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Earnings Total
Common Stock (Accumulated Shareholders'
Shares Amount Deficit) Equity
------ ------ ---------- ------------
BALANCES, December 31, 1998 $ 1,659,278 $18,531,738 $ 213,769 $18,745,507
Purchase and retirement of Common Stock (133,775) (1,638,416) - (1,638,416)
Exercise of stock options 1,376 12,132 - 12,132
Issuance of Common Stock for dental
office acquisition 3,158 35,000 - 35,000
Issuance of Common Stock to Profit
Sharing Plan 2,950 28,000 - 28,000
Net loss, FYE 1999 - (277,612) (277,612)
----------- ----------- --------- ----------
BALANCES, December 31, 1999 1,532,987 16,968,454 (63,843) 16,904,611
Purchase and retirement of Common Stock (26,282) (112,793) - (112,793)
Net loss, FYE 2000 - (320,902) (320,902)
----------- ----------- --------- ----------
BALANCES, December 31, 2000 1,506,705 16,855,661 (384,745) 16,470,916
Net Income, FYE 2001 250,256 250,256
----------- ----------- --------- ----------
BALANCES, December 31, 2001 $ 1,506,705 $16,855,661 $(134,489) $16,721,172
=========== =========== ========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
39
Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------
1999 2000 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (277,612) $ (320,902) $ 250,256
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,166,286 2,740,961 2,784,294
Stock issued for profit sharing plan 28,000 - -
Provision for doubtful accounts 42,261 2,963 748
Provision for (benefit from) deferred income taxes (219,805) (112,756) 72,333
Loss on disposition of property - - 7,956
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (1,106,624) (49,852) 784,422
Prepaid expense, income tax receivable
and other assets 90,832 146,084 (267,363)
Accounts payable and accrued expenses 500,109 (705,196) 342,159
Other long-term obligations 91,257 37,563 44,269
------------ ------------ ----------
Net cash provided by operating activities 1,314,704 1,738,865 4,019,074
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties, net (45,324) (140,042) (70,367)
Capital expenditures (2,634,600) (688,930) (546,798)
Development of new dental offices (1,071,191) (427,731) -
Acquisition of dental offices (697,321) (197,163) (435,006)
------------ ------------ ----------
Net cash used in investing activities (4,448,436) (1,453,866) (1,052,171)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of Common Stock options 12,132 - -
Net borrowings from line of credit and long-term debt 3,707,144 (93,000) (2,439,000)
Repayment of long-term debt (309,861) (194,743) (202,827)
Payment of debenture issuance and other
financing costs - - (67,257)
Purchase and retirement of Common Stock (1,638,416) (112,793) -
------------ ------------ ----------
Net cash provided by (used in) financing activities 1,770,999 (400,536) (2,709,084)
------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,362,733) (115,537) 257,819
CASH AND CASH EQUIVALENTS, beginning of year 2,169,687 806,954 691,417
------------ ------------ ----------
CASH AND CASH EQUIVALENTS, end of year $ 806,954 $ 691,417 $ 949,236
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
40
Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 2000 2001
----- ----- -----
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 445,784 $ 630,570 $ 503,979
=============== ============= ============
Cash paid during the year for income taxes $ 87,000 $ -
=============== ============= ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Acquisition of dental offices $ 35,000 $ - $ -
=============== ============= ============
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities $ 59,596 $ - $ -
=============== ============= ============
Accounts receivable acquired through
acquisitions $ 40,000 $ - $ -
=============== ============= ============
Other assets acquired through acquisitions $ 30,000 $ - $ -
=============== ============= ============
Notes payable incurred from:
Acquisition of dental offices $ - $ 189,000 $ 434,000
=============== ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
41
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND ORGANIZATION
Birner Dental Management Services, Inc., a Colorado corporation (the "Company"),
was incorporated on May 17, 1995 and manages dental group practices. As of
December 31, 1999, 2000 and 2001 the Company managed 54, 56, and 54 dental
practices (collectively referred to as the "Offices"), respectively. The Company
provides management services, which are designed to improve the efficiency and
profitability of the dental practices. These Offices are organized as
professional corporations and the Company provides its management activities
with the Offices under long-term management agreements (the "Management
Agreements").
The Company has grown primarily through acquisitions and de novo developments.
The following table highlights the Company's growth through December 31, 2001 as
follows:
De novo Office
Acquisitions Developments Consolidations
1997 and Prior * 31 6 (3)
1998 10 5 -
1999 1 5 (1)
2000 - 2 -
2001 - - (2)
------------- --------------- ---------------
Total 42 18 (6)
============= =============== ================
* Includes three dental Offices acquired from one of the Company's founders.
The Company's operations and expansion strategy are dependent, in part, on the
availability of dentists, hygienists and other professional personnel and the
ability to hire and assimilate additional management and other employees to
accommodate expanded operations.
(2) SIGNIFICANT ACCOUNTING POLICIES
--------------------------------
Basis of Presentation/Basis of Consolidation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. These financial statements present the financial
position and results of operations of the Company and the Offices, which are
under the control of the Company. All intercompany accounts and transactions
have been eliminated in the consolidation. Certain prior year amounts have been
reclassified to conform to the presentation used in 2001.
The Company treats Offices as consolidated subsidiaries where it has a long-term
and unilateral controlling financial interest over the assets and operations of
the Offices. The Company has obtained control of substantially all of the
Offices via long-term contractual management arrangements. Certain key features
of these arrangements either enable the Company at any time and in its sole
discretion to cause a change in the shareholder of the P.C. (i.e., "nominee
shareholder") or allow the Company to vote the shares of stock held by the owner
of the P.C. and to elect a majority of the board of directors of the P.C. The
accompanying statements of operations reflect net revenue, which is the amount
billed to patients, less dentists' and hygienists' compensation. Direct expenses
consist of all the expenses incurred in operating the Offices and paid by the
Company. Under the Management Agreements the Company assumes responsibility for
the management of most aspects of the Offices' business (other than the
provision of dental services) including personnel recruitment and training,
comprehensive administrative business and marketing support and advice, and
facilities, equipment, and support personnel as required to operate the
practice. The accompanying consolidated financial statements are presented
without regard to where the costs are incurred since under the management and
other agreements the Company believes it has long-term and unilateral control
over the assets and operations of substantially all of the Offices.
42
The Emerging Issues Task Force ("EITF") Issue 97-2 of the Financial Accounting
Standards Board ("FASB") covers financial reporting matters relating to the
physician practice management industry, including the consolidation of
professional corporation revenue and expenses, the accounting for business
combinations and the treatment of stock options for dentists as employee
options. The Company's accounting policies in these areas are consistent with
the provisions of EITF Issue 97-2.
A summary of the components of net revenue for the years ended December 31,
1999, 2000, and 2001 follows:
Years Ended December 31,
1999 2000 2001
---- ----- ----
Total dental group practice revenue, net $ 39,109,357 $ 41,232,288 $ 41,388,573
Less - revenue from managed offices, net 6,927,865 4,979,535 3,941,061
---------- ---------- ----------
Dental office revenue, net 32,181,492 36,252,753 37,447,512
Less - amounts retained by dental offices 8,444,706 10,261,702 10,904,069
---------- ---------- ----------
Net revenue from consolidated dental offices 23,736,786 25,991,051 26,543,443
Management service fee revenue 4,816,328 3,427,721 2,705,890
---------- ---------- ----------
Net revenue $ 28,553,114 $ 29,418,772 $ 29,249,333
============== ============== ===============
Total Dental Group Practice Revenue, Net
"Total dental group practice revenue, net" represents the revenue of the
consolidated and managed Offices reported at the estimated realizable amounts
from insurance companies, preferred provider and health maintenance
organizations (i.e., third-party payors) and patients for services rendered, net
of contractual and other adjustments. Dental services are billed and collected
by the Company in the name of the Offices.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. There are no material claims, disputes or other
unsettled matters that exist to management's knowledge concerning third-party
reimbursements.
During 1999, 2000, and 2001, 20.7%, 18.5%, and 15.4%, respectively, of the
Company's gross revenue was derived from capitated managed dental care
contracts. Under these contracts the Offices receive a fixed monthly payment for
each covered plan member for a specific schedule of services regardless of the
quantity or cost of services provided by the Offices. Additionally, the Offices
may receive a co-pay from the patient for certain services provided. Revenue
from the Company's capitated managed dental care contracts is recognized as
earned on a monthly basis.
During the years ended December 31, 1999, 2000 and 2001, the following companies
were responsible for the corresponding percentages of the Company's total dental
group practice revenue (includes capitation premiums and co-payments): Aetna
Healthcare was responsible for 8.9%, 9.1% and 7.4%, respectively, CIGNA Dental
Health was responsible for 7.8%, 5.9% and 6.0%, respectively and Delta Care was
responsible for 5.0%, 8.6% and 8.0%, respectively.
Net Revenue from Consolidated Dental Offices
"Net revenue from consolidated dental offices" represents the "Total dental
group practice revenue, net" less amounts retained by the Offices primarily for
compensation paid by the professional corporations to dentists and hygienists.
Dentists receive compensation based upon a specified amount per hour worked or a
percentage of revenue or collections attributable to their work, and a bonus
based upon the operating performance of the Office.
43
Management Service Fee Revenue
For two of the Offices for which the Company has Management Agreements, but does
not have control, the Company receives management service fee revenue included
with net revenue in the accompanying statements of operations. "Management
service fee revenue" is equal to gross revenue less compensation for dentists
and hygienists for the Offices. Direct expenses associated with the operations
of these Offices are also included in the accompanying statements of operations.
Contribution From Dental Offices
The "Contribution from dental offices" represents the excess of net revenue from
the operations of the Offices over direct expenses associated with operating the
Offices. The revenue and direct expense amounts relate exclusively to business
activities associated with the Offices. The contribution from dental offices
provides an indication of the level of earnings generated from the operation of
the Offices to cover corporate expenses, interest expense charges and income
taxes.
Advertising and Marketing
The costs of advertising, promotion and marketing are expensed as incurred.
Cash and Cash Equivalents
For purposes of the consolidated balance sheets and statements of cash flows,
cash and cash equivalents include money market accounts and all highly liquid
investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable represents receivables from patients and other third-party
payors for dental services provided. Such amounts are recorded net of
contractual allowances and other adjustments at time of billing. In addition,
the Company has estimated allowances for uncollectible accounts. In those
instances when payment is not received at the time of service, the Offices
record receivables from their patients, most of who are local residents and are
insured under third-party payor agreements. Management continually monitors and
periodically adjusts the allowances associated with these receivables.
Property and Equipment
Property and equipment are stated at cost or fair market value at the date of
acquisition, net of accumulated depreciation. Property and equipment are
depreciated using the straight-line method over their useful lives of five years
and leasehold improvements are amortized over the remaining life of the leases.
Depreciation was $1,550,363, $2,114,446, and $2,125,756 for the years ended
December 31, 1999, 2000 and 2001, respectively.
Intangible Assets
The Company's dental practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
Offices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed, based on estimated fair market values. Costs of acquisition
in excess of the net estimated fair value of tangible and identifiable
intangible assets acquired and liabilities assumed are allocated to the
Management Agreement. The Management Agreement represents the Company's right to
manage the Offices during the 40-year term of the agreement. The assigned value
of the Management Agreement is amortized using the straight-line method over a
period of 25 years. Amortization was $615,923, $626,515, and $658,538 for the
years ended December 31, 1999, 2000, and 2001, respectively.
The Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default by the Company.
44
Impairment of Long-Lived and Intangible Assets
In the event that facts and circumstances indicate that the cost of long-lived
and intangible assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
value would be required.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk are primarily cash and cash equivalents and accounts receivable. The
Company maintains its cash balances in the form of bank demand deposits and
money market accounts with financial institutions that management believes are
creditworthy. The Company may be exposed to credit risk generally associated
with healthcare and retail companies. The Company established an allowance for
uncollectible accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information. The Company has no
significant financial instruments with off-balance sheet risk of accounting
loss, such as foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes (Note 11) pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the asset and liability method of computing deferred
income taxes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
book basis and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or settled.
Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per Share".
Years Ended December 31,
-----------------------
1999 2000 2001
---- ---- ----
Weighted Per Weighted Per Weighted Per
Average Share Average Share Average Share
Loss Shares Amount Loss Shares Amount Income Shares Amount
----- ------- ------ ----- -------- ------- ------ --------- ------
Basic EPS:
Net income (loss) $ (277,612) 1,558,553 $ (.18) $(320,902) 1,523,594 $ (.21) $ 250,256 1,506,705 $.17
=========== ========= ======= ========== ========= ======= ========= ========= ====
Diluted EPS:
Net income (loss) $ (277,612) 1,558,553 $ (.18) $(320,902) 1,523,594 $ (.21) $ 250,256 1,529,549 $.16
=========== ========= ======= ========== ========= ======= ========= ========= ====
All options and warrants to purchase shares of Common Stock were excluded from
the computation of diluted earnings for the years ended December 31, 1999 and
2000 since they were anti-dilutive as a result of the Company's net loss for the
year. The number of options and warrants excluded from the earnings per share
calculation because they are anti-dilutive, using the treasury stock method were
2,447 and 511 for the years ended December 31, 1999 and 2000, respectively. The
difference between basic earnings per share and diluted earnings per share for
2001 relates to the effect of 22,844 of dilutive shares of Common Stock from
stock options and warrants which are included in total shares for the diluted
calculation. All shares, share prices and earnings per share calculations have
been restated to reflect a one-for-four reverse stock split which was effective
February 26, 2001.
45
Comprehensive Income
The FASB issued SFAS 130 "Reporting Comprehensive Income" in June 1997 which
established standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. In addition to
net income (loss), comprehensive income includes all changes in equity during a
period, except those resulting from investments by and distributions to owners.
The Company adopted SFAS 130, which is effective for fiscal years beginning
after December 15, 1997, in the first quarter of 1998. For 1999, 2000 and 2001
net income and comprehensive income were the same.
Costs of Start-up Activities
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-Up Activities" in April 1998. This SOP provides
guidance on the reporting of start-up costs and organization costs and requires
the Company to expense these costs (as defined by the SOP) as they are incurred.
The Company adopted SOP 98-5 in the first quarter of 1998.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" that establishes standards for reporting
information about operating segments in annual and interim financial statements.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for fiscal
years beginning after December 15, 1997 and was adopted by the Company in 1998.
The Company operates in one business segment, which is to manage dental
practices. The Company currently manages Offices in the states of Arizona,
Colorado and New Mexico. All aspects of the Company's business are structured on
a practice-by-practice basis. Financial analysis and operational decisions are
made at the individual Office level. The Company does not evaluate performance
criteria based upon geographic location, type of service offered or source of
revenue.
Stock-Based Compensation Plans
As permitted under the SFAS 123, Accounting for Stock-Based Compensation, the
Company accounts for its stock-based compensation in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. As such, compensation expense is recorded on the date
of grant if the current market price of the underlying stock exceeds the
exercise price. Certain pro forma net income and earnings per share disclosures
for employee stock option grants are also included in the notes to the financial
statements as if the fair value method as defined in SFAS No. 123 had been
applied.
Recent Accounting Pronouncements
In July 2001 the FASB issued SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets," which replace APB 16, "Business
Combinations," and APB 17, "Intangible Assets," respectively. SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and that the use of the pooling-of-interests
method be prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only-method. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of SFAS 142, which the Company will be required to adopt on January 1,
2002. After December 31, 2001, goodwill can only be written down upon impairment
discovered during annual tests for fair value, or discovered during tests taken
when certain triggering events occur. Prior to the adoption of SFAS 142,
impairment of intangibles was recognized according to the undiscounted cash flow
test per SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Company does not expect the adoption
of SFAS 141 and SFAS 142 to have a material impact on the Company's financial
position or results of operations.
46
In June 2001, the FASB approved for issuance SFAS 143, Asset Retirement
Obligations. SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-loved assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The statement is effective for the financial statements issued
for fiscal years beginning after June 15, 2002. The Company does not believe
that the adoption of the statement will have a material effect on its financial
position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The provisions of
this statement are generally to be applied prospectively. The Company does not
believe the adoption of SFAS 144 will have a material impact on its financial
position, results of operations or cash flows..
(3) ACQUISITIONS
During 1999, 2000 and 2001, the Company acquired various dental practices. In
connection with each Office acquisition, the Company entered into contractual
arrangements, including Management Agreements, which have a term of 40 years.
Pursuant to these contractual arrangements the Company manages all aspects of
the Offices, other than the provision of dental services, and believes it has
long-term and unilateral control over the assets and business operations of the
Offices. Accordingly, these acquisitions are considered business combinations
and treated under the purchase method of accounting.
1999 Acquisitions
On February 11, 1999, the Company acquired all of the assets of a Colorado sole
proprietorship (Glendale Dental Group) and obtained certain rights to manage the
practice for a total purchase price of approximately $760,000. The consideration
consisted of $665,000 payable in cash, $35,000 payable in Common Stock of the
Company and the assumption of certain obligations of approximately $60,000.
2000 Acquisitions
During 2000, the Company did not acquire any additional dental practices but
did, however, acquire the remaining 50% interest in two existing dental
practices in Colorado. On March 13, 2000, the Company acquired the remaining 50%
interest in Perfect Teeth/East Cornell for a total purchase price of $108,728.
The consideration consisted of $68,228 in cash and a $40,500 note payable with a
term of 60 months and an interest rate of 8.0%. On June 30, 2000, the Company
acquired the remaining 50% interest in Perfect Teeth/Yale for a total purchase
price of $276,670. The consideration consisted of $141,670 in cash and a
$135,000 note payable with a term of 60 months and an interest rate of 8.0%. The
Company recorded an increase to intangible assets for the total purchase price
of the remaining 50% interest in both Offices. Operating results for Perfect
Teeth/East Cornell and Perfect Teeth/Yale are included in the accompanying
statements of operations beginning with the acquisition dates identified above.
2001 Acquisitions
On April 30, 2001 the Company acquired the remaining 50% interest in Perfect
Teeth/Alice P.C. for a total purchase price of approximately $869,000. The
consideration consisted of $435,000 in cash and $434,000 in notes payable with a
term of 60 months and an interest rate of 8.0%. The Company recorded an increase
to intangible assets for the total purchase price of the remaining 50% interest
in this Office.
In connection with the agreements with the dentists associated with Mississippi
Dental Group and Glendale Dental Group, whereby the Company acquired an interest
in the practices and obtained the rights to manage the practices, the Company
recorded intangible assets of $1,701,014 related to the Management Agreements
obtained in these transactions. In each case, the dentist has an option to put
the remaining interest in the Office to the Company at an exercise price, which
is calculated based upon the performance of the Office (the "put option price").
The option is exercisable contingent upon certain conditions as outlined in the
agreement. The option exercise periods generally begin three years
47
after the date of acquisition and run for seven years. The option exercise
period began on September 30, 2001 for Mississippi Dental Group and begins on
February 28, 2002 for Glendale Dental Group. The Company expects these options
to be exercised at, or shortly after, the start of the exercise period. The
excess of the put option price over the fair value of the remaining interest (if
any) will be charged to earnings or, if the put option is exercised, the amount
paid will be recorded as an additional cost of acquisition.
(4) NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties consist of the following:
December 31,
------------
2000 2001
---- ----
Note receivable from Chief Executive Officer, Director and shareholder, $ 100,115 $ 112,134
unsecured, principal and interest due December 31, 2002,
interest rate of 7% per annum.
Note receivable from President, Director and shareholder, unsecured,
principal and interest due December 31, 2002, 50,000 94,065
interest rate of 7% per annum.
Note receivable from Chief Financial Officer, Director and shareholder,
unsecured, principal and interest due December 31, 2002, 51,123 78,280
interest rate of 7% per annum.
Note receivable from employee, unsecured, annual principal and interest
payments, due March 15, 2001,
interest rate of 6% per annum. 3,000 -
Note receivable from affiliated dentist, unsecured,
monthly principal and interest payments of $1,028,
interest rate of 9% per annum, due July 25, 2001. 9,874 -
--------- ---------
Notes receivable - related parties $ 214,112 $ 284,479
========= =========
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
-----------
2000 2001
----- ------
Dental equipment $ 4,273,903 $ 4,334,655
Furniture and fixtures 999,812 939,301
Leasehold improvements 3,923,770 4,126,082
Computer equipment, software and related items 2,264,253 2,433,578
Instruments 665,646 681,714
---------- -----------
12,127,384 12,515,330
Less - accumulated depreciation (5,159,470) (7,146,132)
---------- -----------
Property and equipment, net $ 6,967,914 $ 5,369,198
=========== ===========
48
(6) DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
December 31,
-----------
2000 2001
----- -----
Deferred financing costs, net $ 21,824 $ 67,256
Deposits 157,332 149,029
$ 179,156 $ 216,285
========= ==========
Deferred financing costs are related to the acquisition and amendment of the
revolving credit agreement and term loan and will be amortized over the life of
the credit agreement of between four and sixteen months (Note 8).
(7) INTANGIBLE ASSETS
Intangible assets consist of Management Agreements:
Amortization December 31,
-----------
Period 2000 2001
------------ ---- -----
Management agreements 25 years $15,773,223 $16,668,966
Less - accumulated amortization (2,080,131) (2,753,604)
----------- -----------
Intangible assets, net $13,693,092 $13,915,362
=========== ===========
49
(8) DEBT
Debt consists of the following:
December 31,
2000 2001
---- ----
Term-loan with a bank for $4.0 million, interest payable monthly $ - $ 3,875,000
at lender's base rate (4.75% at December 31, 2001) plus 2.00%,
principal payments of $250,000 due quarterly, collateralized by the
Company's account receivables and Management Agreements, due in April 2003.
Revolving credit agreement with a bank not to exceed $2.0 million,
interest payable monthly at the lender's base rate (4.75% at December
31, 2001) plus 2.00%, collateralized by the Company's account
receivables and Management Agreements, due April 2002. - 168,000
Revolving credit agreement with a bank not to exceed $10.0 million,
interest payable quarterly at the lender's
base rate (10.5% at December 31, 2000) or
applicable LIBOR rate (6.6254%) plus 2.25%,
due in April 2002. 6,482,000 -
Acquisition notes payable:
Due in September 2001; interest at 8%; no collateral; monthly principal
and interest payments of $6,267. 53,690 -
Due in May 2002; interest at 8%; no collateral; monthly principal
and interest payments of $2,247. 35,901 11,014
Due in September 2002; interest at 9%; no collateral; monthly principal and
interest payments of $2,325. 45,017 20,161
Due in October 2003; interest at 8%; no collateral; monthly principal
and interest payments of $2,028. 61,549 41,412
Due in February 2005; interest at 8%; no collateral; monthly principal
and interest payments of $809. 34,328 27,097
Due in June 2005; interest at 8%; no collateral; monthly principal and
interest payments of $2,737. 123,804 99,994
Due in April, 2006; interest at 8.00%; no collateral; monthly principal and
interest payments of $4,400. - 192,892
Due in April, 2006; interest at 8.00%; no collateral; monthly principal and
interest payments of $4,400. - 192,892
------------ -----------
$ 6,836,289 $ 4,628,462
Less - current maturities (154,666) (1,332,158)
------------ -----------
Long-term debt, net of current maturities $ 6,681,623 $ 3,296,304
============ ===========
50
Credit Facility
Under the Company's Credit Facility (as amended on December 17, 2001), the
Company may borrow on a revolving basis up to the lesser of an applicable
Borrowing Base (calculated in accordance with the most recent Borrowing Base
Certificate delivered to the Lender) or $2.0 million and on a non-revolving
basis, an aggregate principal amount not in excess of $4.0 million for working
capital, for restructuring of the Original Loan and for other general corporate
purposes. Balances bear interest at the lender's base rate (prime plus a rate
margin of 2.0%). The Company is also obligated to pay an annual facility fee of
.50% on the average unused amount of the revolving line of credit during the
previous full calendar quarter. Borrowings on the revolving loan are limited to
an availability formula based on the Company's eligible accounts receivable. As
amended, the revolving loan matures on April 30, 2002 and the non-revolving note
matures on April 30, 2003. At December 31, 2001, the Company had $168,000
outstanding and approximately $1.8 million available for borrowing under the
revolving loan and $3.875 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 December 31, 2001 the Company
was in full compliance with all of its covenants under this agreement.
The scheduled maturities of debt are as follows:
Years ending December 31,
2002 $ 1,332,158
2003 3,015,006
2004 130,332
2005 116,167
Thereafter 34,799
--------------
$ 4,628,462
==============
(9) SHAREHOLDERS' EQUITY
The Company received notice from the Nasdaq Stock Market that the Company did
not comply with the requirements for continued listing on the Nasdaq National
Market System. In order to satisfy Nasdaq's listing requirements for the Nasdaq
SmallCap Market, effective February 26, 2001, the Company's Board of Directors
approved a one-for-four reverse stock split. The SmallCap Market's maintenance
standards, among other things, require the Company to have 1) at least 500,000
shares of Common Stock held by non-affiliates; 2) an aggregate market public
float of at least $1,000,000; 3) at least 300 shareholders who own 100 shares of
Common Stock or more; and 4) a minimum bid price of at least $1.00 per share.
All shares, share prices and earnings per share calculations for all periods
have been restated to reflect this reverse stock split. The Common Stock has
been quoted on the Nasdaq SmallCap Market under the symbol "BDMS" since February
26, 2001.
Treasury Stock
On February 9, 1999, the Company's Board of Directors unanimously approved an
increase of 75,000 shares, to 150,000 shares, of the Company's Common Stock that
could be purchased on the open market on such terms, as the Board of Directors
deems acceptable. On September 5, 2000, the Company's Board of Directors
unanimously approved the purchase of shares of the Company's Common Stock on the
open market, total value not to exceed $150,000. During 1999, the Company, in 58
separate transactions, purchased approximately 133,800 shares of Common Stock
for total consideration of approximately $1.6 million at prices ranging from
$7.12 to $15.00 per share. During 2000, the Company, in 18 separate
transactions, purchased approximately 26,300 shares of its Common Stock for
total consideration of approximately $113,000 at prices ranging from $3.80 to
$6.68 per share. The Company's current Credit Facility (as amended on December
17, 2001) prohibits the Company from purchasing its Common Stock on the open
market even though approximately $37,000 remains available under the Board of
Directors approved plan.
51
Stock Option Plans
The Employee Stock Option Plan (the "Employee Plan ") was adopted by the Board
of Directors effective as of October 30, 1995, and as amended on September 4,
1997, has 229,250 shares of Common Stock reserved for issuance. The Employee
Plan provides for the grant of incentive stock options to employees (including
officers and employee-directors) and non-statutory stock options to employees,
directors and consultants.
The Dental Center Stock Option Plan ("Dental Center Plan") was adopted by the
Board of Directors effective as of October 30, 1995, and as amended on September
4, 1997, has 160,475 shares of Common Stock reserved for issuance. The Dental
Center Plan provides for the grant of non-statutory stock options to P.C.s that
are parties to Management Agreements with the Company, and to dentists or dental
hygienists who are either employed by or an owner of the P.C.s. The Employee
Plan and Dental Center Plan are administered by a committee ("the Committee")
appointed by the Board of Directors, which determines recipients and types of
options to be granted, including the exercise price, the number of shares, the
grant dates, and the exercisability thereof. The term of any stock option
granted may not exceed ten years. The exercise price of options granted under
the Employee Plan and the Dental Center Plan is determined by the Committee,
provided that the exercise price of a stock option cannot be less than 100% of
the fair market value of the shares subject to the option on the date of grant,
or 110% of the fair market value for awards to more than 10% shareholders.
Options granted under the plans vest at the rate specified in the option
agreements, which generally provide that options vest in three equal annual
installments.
A summary of stock option activity under both the Employee Plan and the Dental
Center Plan as of December 31, 1999, 2000 and 2001 and changes during the years
then ended is presented below:
1999 2000 2001
------------------------ -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------ ------- -------- ------- ------
Outstanding at beginning of year 146,178 $ 23.94 146,134 $ 19.84 147,552 $ 16.23
Granted 44,250 $ 9.55 31,500 $ 4.66 180,750 $ 2.01
Canceled (42,918) $ 23.53 (30,082) $ 21.69 (45,403) $ 12.06
Exercised (1,376) $ 8.82 - $ - - $ -
------- ------- ------- ------- -------
Outstanding at end of year 146,134 $ 19.84 147,552 $ 16.23 282,899 $ 7.81
======= ======= ======= ======= ======= =========
Exercisable at end of year 80,391 $ 22.76 92,197 $ 20.23 92,003 $ 19.41
======= ======= ======= ======= ======= =========
Weighted average fair value
of options granted during the year $ 5.96 $ 3.26 $ 1.45
======= ======= =======
52
The following table summarizes information about the options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
------------------- -------------------
Number of Weighted Number of
Options Average Weighted Options Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of Exercise Prices 2001 Life Price 2001 Price
------------------------ ----------- ----------- -------- -------------- --------
$0.00-- 7.80 195,625 4.50 $ 2.23 7,062 $ 5.08
$7.81-- 15.84 38,562 1.60 $10.41 36,562 $10.48
$15.85-- 23.76 17,291 1.80 $18.86 16,958 $18.92
$23.77-- 31.68 11,168 3.10 $26.82 11,168 $26.82
$31.69-- 39.60 20,253 1.40 $36.85 20,253 $36.85
-------------- ----------- ----------- -------- -------------- --------
$0.00-- 39.60 282,899 3.70 $ 7.81 92,003 $19.41
============== =========== =========== ======== ============== ========
Warrants
At December 31, 1999, 2000 and 2001, there were outstanding warrants or
contractual obligations to issue warrants to purchase approximately 95,266,
72,723 and 7,338, respectively, of shares of the Company's Common Stock.
Warrants were issued in connection with the private placement of the Company's
Common Stock, the issuance of convertible subordinated debentures and for
personal guarantees provided for certain Company bank debt.
A summary of warrants as of December 31, 1999, 2000 and 2001, and changes during
the years then ended is presented below:
1999 2000 2001
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------ ------ -------- ------ -------
Outstanding at beginning of year 95,266 $15.24 95,266 $15.24 72,723 $17.53
Cancelled - - (22,543) - (65,385) $16.79
Outstanding at end of year 95,266 72,723 7,338
====== ======= ======
Warrants exercisable at end of year 95,266 72,723 7,338
====== ======= ======
Weighted average exercise
price of warrants outstanding $15.24 $17.53 $24.14
====== ====== ======
Weighted average remaining
contractual life at end of year 1.49 .70 0.50
====== ====== ======
53
The Company uses the intrinsic value method to account for options granted to
employees and directors. For purposes of the pro forma disclosures under SFAS
No. 123 presented below, the Company has computed the fair values of all
non-compensatory options and warrants granted to employees, directors and
dentists using the Black-Scholes pricing model and the following weighted
average assumptions:
1999 2000 2001
---- ---- ----
Risk-free interest rate 5.62% 6.27% 3.79%
Expected dividend yield 0% 0% 0%
Expected lives 3.7 years 3.6 years 3.5 years
Expected volatility 88% 106% 77%
To estimate lives of options for this valuation, it was assumed options will 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 $264,000, $103,000, and $203,000 for the years ended December 31,
1999, 2000, and 2001, 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 $344,006, $264,058 and $177,772 for the years ended December
31, 1999, 2000 and 2001, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income (loss) and net income
(loss) per common share would have been reported as follows:
1999 2000 2001
----- ----- ------
Net income (loss):
As reported $ (277,612) $ (320,902) $ 250,256
=========== ============ ==========
Pro forma $ (523,232) $ (516,305) $ 130,438
=========== ============ ==========
Net income (loss) per share, basic:
As reported $ (.18) $ (.21) $ .17
=========== ============ ==========
Pro forma $ (.34) $ (.34) $ .09
=========== ============ ==========
Weighted average shares used to calculate pro forma net income (loss) per share
were determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
54
(10) COMMITMENTS AND CONTINGENCIES
Operating Lease Obligations
The Company leases office space under leases accounted for as operating leases.
The original lease terms are generally one to five years with options to renew
the leases for specific periods subsequent to their original terms. Rent expense
for these leases totaled $2,293,927, $2,516,275 and $2,596,248 for the years
ended December 31, 1999, 2000, and 2001 respectively. Rent expense for leases
with related parties (affiliated dentists) for the years ended December 31,
1999, 2000, and 2001 totaled $172,100, $46,442, and $27,600, respectively.
Future minimum lease commitments for operating leases with remaining terms of
one or more years are as follows:
Years ending December 31,
2002 $ 2,018,465
2003 1,358,240
2004 881,953
2005 576,444
2006 330,191
Thereafter 277,518
-----------
$ 5,442,811
===========
Certain of the Company's office space leases are structured to include scheduled
and specified rent increases over the lease term. The Company has recognized the
effects of these rent escalations on a straight-line basis over the lease terms.
Litigation
From time to time the Company is subject to litigation incidental to its
business, which could include litigation as a result of the dental services
provided at the Offices, although the Company does not engage in the practice of
dentistry or control the practice of dentistry. The Company maintains general
liability insurance for itself and provides for professional liability insurance
to the dentists, dental hygienists and dental assistants at the Offices.
Management believes the Company is not presently a party to any material
litigation.
(11) INCOME TAXES
The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax consequences of events, which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. At December 31, 2001, the Company has
available tax net operating loss carryforwards of approximately $753,000, which
expire beginning in 2012.
Income tax expense (benefit) for the years ended December 31, consists of the
following:
1999 2000 2001
----- ----- -----
Current:
Federal $ - $ - $ 48,479
State - - -
--------------- ------------- -------------
- - 48,479
--------------- ------------- -------------
Deferred:
Federal (98,357) (98,445) 67,863
State (12,830) (14,311) 4,470
--------------- ------------- -------------
(111,187) (112,756) 72,333
--------------- ------------- -------------
Total income expense (benefit) $ (111,187) $ (112,756) $ 120,812
=============== ============= ==============
55
The Company's effective tax rate differs from the statutory rate due to the
impact of the following (expressed as a percentage of income (loss) before
income taxes):
1999 2000 2001
----- ----- -----
Statutory federal income tax expense (benefit) (34.0)% (34.0)% 34.0%
State income tax expense (benefit) (3.3) (3.3) 3.3
Effect of permanent differences -
travel and entertainment expenses 8.7 13.3 (4.7)
Other - (2.0) -
------- ------- -----
(28.6)% (26.0)% 32.6%
======= ======= =====
Temporary differences comprise the deferred tax assets and liabilities in the
consolidated balance sheet as follows:
December 31,
------------
2000 2001
---- ----
Deferred tax assets current:
Accruals not currently deductible $ 29,437 $ 36,944
Allowance for doubtful accounts 74,992 75,270
--------- ---------
104,429 112,214
Deferred tax assets long-term:
Tax loss carryforwards 467,808 280,924
Benefit of AMT tax credit 117,289 165,768
Depreciation for tax under books 150,433 374,840
--------- ---------
735,530 821,532
Deferred tax liabilities long-term:
Intangible asset amortization for tax
over books (551,338) (717,458)
Depreciation for tax over books - -
--------- ---------
(551,338) (717,458)
-------- ---------
Net deferred tax asset $ 288,621 $ 216,288
========= =========
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. It believes that sufficient
book and taxable income will be generated to realize the benefit of these tax
assets.
(12) BENEFIT PLANS
Profit Sharing 401(k)/Stock Bonus Plan
The Company has a 401(k)/stock bonus plan. Eligible employees may make voluntary
contributions to the plan, which may be matched by the Company, at its
discretion, up to 2% of each employee's compensation. In addition, the Company
may make profit sharing contributions during certain years, which may be made,
at the Company's discretion, in cash or in Common Stock of the Company. The plan
was established effective April 1, 1997. For the years ended December 31, 2000
and 2001 the Company did not make any contributions to the plan.
56
Other Company Benefits
The Company provides a health and welfare benefit plan to all regular full-time
employees. The plan includes health and life insurance, and a cafeteria plan. In
addition, regular full-time and regular part-time employees are entitled to
certain dental benefits.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments included in current assets and current liabilities
approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's note payable are based on similar
rates currently available to the Company. The carrying values and estimated fair
values were estimated to be substantially the same at December 31, 2000 and
2001.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-------------------------------------------
The following summarizes certain quarterly results of operations:
Net Income
Contribution (Loss) Per
From Net Share of
Net Dental Income Common
Revenue Offices (Loss) Stock (Diluted)
------- ------- ------ ---------------
1999 quarter ended:
March 31, 1999 $ 7,022,728 $ 1,597,851 $ 298,639 $ .19
June 30, 1999 7,166,534 1,050,817 (61,222) (.04)
September 30, 1999 7,406,488 1,123,541 (24,944) (.01)
December 31, 1999 6,957,364 355,469 (490,085) (.32)
------------- ----------- ---------- -----------
$ 28,553,114 $ 4,127,678 $ (277,612) $ (.18)
============= =========== ========== ===========
2000 quarter ended:
March 31, 2000 $ 7,802,571 $ 1,232,713 $ 62,155 $ .04
June 30, 2000 7,810,220 1,329,177 128,898 .09
September 30, 2000 6,998,659 756,847 (168,935) (.11)
December 31, 2000 6,807,322 624,784 (343,020) (.23)
------------- ----------- ---------- -----------
$ 29,418,772 $ 3,943,521 $ (320,902) $ (.21)
============= =========== ========== ===========
2001 quarter ended:
March 31, 2001 $ 7,714,671 $ 1,038,462 $ (175,243) $ (.12)
June 30, 2001 7,518,664 1,040,640 118,338 .08
September 30, 2001 7,049,075 924,001 125,725 .08
December 31, 2001 6,966,923 1,088,606 181,436 .12
------------ ----------- ---------- -----------
$ 29,249,333 $ 4,091,709 $ 250,256 $ .16
============= =========== ========== ===========
(15) SUBSEQUENT EVENTS
On January 31, 2002 the Company acquired 2/3 of the remaining 50% interest in
Mississippi Dental Group for a total purchase price of $798,654. The
consideration consisted of $398,654 in cash and $400,000 in notes payable with a
term of 60 months and an interest rate of 8.0%. The Company recorded an increase
to intangible assets for the total purchase price of the 33% interest in this
Office.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 14, 2001, the Company dismissed Arthur Andersen LLP as the Company's
principal accountant. The decision to change accountants was recommended by the
Audit Committee of the Board of Directors and approved by the Board of
Directors.
The Report of Arthur Andersen LLP on the financial statements of the Company for
either of the past two fiscal years ended December 31, 1999 and 2000 did not
contain an adverse opinion or disclaimer of opinion nor was it qualified or
modified as to uncertainty, audit scope or accounting principles. The Company
does not believe that there were any disagreements with Arthur Andersen LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, during the past two fiscal years
ended December 31, 1999 and 2000 and during the subsequent interim period
through November 14, 2001, which, if not resolved to Arthur Andersen LLP's
satisfaction, would have caused Arthur Andersen LLP to make reference to the
subject matter of the disagreement(s) in connection with its Reports.
The Company engaged Hein + Associates LLP as its new principal independent
accountant as of November 14, 2001.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information concerning each of the directors and
executive officers of the Company. All directors shall serve until their
successors are duly elected and qualified, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. Officers are
appointed by and serve at the discretion of the Board of Directors.
Name Age Position
Frederic W.J. Birner 44 Chairman of the Board, Chief Executive Officer and Director
Mark A. Birner, D.D.S. 42 President and Director
Dennis N. Genty 44 Chief Financial Officer, Secretary, Treasurer and Director
James M. Ciccarelli 49 Director
Steven M. Bathgate 47 Director
Paul E. Valuck, D.D.S. 45 Director
Business Biographies
Frederic W.J. Birner is a founder of the Company and has served as Chairman of
the Board and Chief Executive Officer since the Company's inception in May 1995.
From May 1992 to September 1995, he was employed as a Senior Vice President in
the Corporate Finance Department at Cohig & Associates, Inc., an investment
banking firm. From 1983 to February 1992, Mr. Birner held various positions with
Hanifen, Imhoff, Inc., an investment banking firm, most recently as Senior Vice
President in the Corporate Finance Department. Mr. Birner received his M.S.
degree from Columbia University and his B.A. degree from The Colorado College.
Mr. Birner is the brother of Mark A. Birner, D.D.S.
Mark A. Birner, D.D.S. is a founder of the Company and has served as President,
and as a director, since the Company's inception in May 1995. From February 1994
to October 1995, Dr. Birner was the owner and operator of three individual
dental practices. From 1986 to February 1994, he was an associate dentist with
the Family Dental Group. Dr. Birner received his D.D.S. and B.A. degrees from
the University of Colorado and completed his general practice residency at the
University of Minnesota in Minneapolis. Dr. Birner is the brother of Frederic
W.J. Birner.
Dennis N. Genty is a founder of the Company and has served as Secretary since
May 1995, and as Chief Financial Officer, Treasurer, and as a director, since
September 1995. From October 1992 to September 1995, he was employed as a Vice
President in the Corporate Finance Department at Cohig & Associates, Inc., an
investment banking firm. From May 1990 to October 1992, he was a Vice President
in the Corporate Finance Department at Hanifen, Imhoff, Inc., an investment
banking firm. Mr. Genty received his M.B.A. degree from Columbia University and
his B.S. degree from the Colorado School of Mines.
James M. Ciccarelli joined the Company as a consultant in August 1996 and has
served as a director since November 1996. Mr. Ciccarelli has been Chairman of
the Board of TeleConnex Solutions, LLC (formerly ActiveLink Communications and
CommWorld International) since October 1998. Mr. Ciccarelli served as Chairman
of the Board of Wireless Telecom, Inc., a wireless data and network service
provider from March 1993 to January 2000. In addition Mr. Ciccarelli served as
their Chief Executive Officer from March 1993 to October 1998. From September
1990 to March 1993, Mr. Ciccarelli was a Vice President of Intelligent
Electronics, a high technology distribution and services company, and the
President and CEO of its Reseller Network Division. From November 1988 to
September 1990, Mr. Ciccarelli was the President of Connecting Point of America,
a franchisor of retail computer stores.
Steven M. Bathgate became a director of the Company effective upon consummation
of the Company's initial public offering in February 1998. Mr. Bathgate has
served as a principal of Bathgate McColley Capital Corp. LLC, an investment
banking firm, since its formation in January 1996. Mr. Bathgate held a number of
positions from 1985 to 1996 at Cohig & Associates, Inc., an investment banking
firm, including Chairman and Chief Executive Officer.
Paul E. Valuck, D.D.S. was in private dental practice in Denver from September
1985 until November 1995. From November 1995 until December 1997, Dr. Valuck
practiced as an affiliated dentist with the Company. Since January 1998 Dr.
Valuck has been in private dental practice in Denver. Dr. Valuck received his
D.D.S. and his B.S. Pharmacy degree from the University of Colorado.
59
Section 16 reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, executive officers and beneficial owners of more than 10% of the
outstanding shares of the Company to file with the Securities and Exchange
Commission reports regarding changes in their beneficial ownership of shares in
the Company. To the Company's knowledge and based solely on a review of the
Section 16(a) reports furnished to the Company, Mr. Ciccarelli, Mr. Bathgate and
Mr. Valuck were late in filing their Statements of Changes in Beneficial
Ownership on Form 4 for the month of June 2001. All other Section 16(a) reports
were filed on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION.
Director Compensation
Directors currently do not receive any cash compensation from the Company for
their services as directors and are not presently reimbursed for expenses in
connection with attendance at Board of Directors and committee meetings.
Executive Compensation
Summary Compensation
The following table sets forth the compensation paid by the Company to the Chief
Executive Officer and each of the executive officers of the Company who were
paid total salary and bonus exceeding $100,000 during the fiscal year ended
December 31, 2001 (the "Named Executive Officers").
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying All Other
Name and Principal Position Fiscal Year Salary Bonus Options/Warrants Compensation
- --------------------------- ----------- ------- ----- ---------------- ------------
Frederic W.J. Birner 1999 $210,691 $ - $ - $2,528 (1)
Chairman of the Board and 2000 $223,413 $ - $ - $2,006 (1)
Chief Executive Officer 2001 $225,000 $10,000 $ - $1,125 (1)
Mark A. Birner, D.D.S. 1999 $140,897 $ - $ - $2,536 (1)
President and Director 2000 $148,942 $ - $ - $1,893 (1)
2001 $150,000 $10,000 $ - $1,125 (1)
Dennis N. Genty 1999 $141,382 $ - $ - $2,121 (1)
Chief Financial Officer 2000 $148,942 $ - $ - $2,681 (1)
Treasurer, Secretary and 2001 $150,000 $10,000 $ - $1,125 (1)
Director
(1) 401(k) contributions paid for by the Company on behalf of each named
executive officer.
60
Option Grants
No stock options were granted during the fiscal year ended December 31, 2001 to
any Named Executive Officer.
Option Exercises and Holdings
The following table sets forth for the Named Executive Officers the number and
value of securities underlying unexercised in-the-money options held as of
December 31, 2001. None of the Named Executive Officers exercised any options
during the fiscal year ended December 31, 2001.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised,
Options Held at In-the-Money Options at
December 31, 2001 December 31, 2001 (1)
---------------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------- ----------- -------------
Frederic W.J. Birner 14,880 - $ - $ -
Mark A. Birner, D.D.S. 14,527 - $ - $ -
Dennis N. Genty 12,235 - $ - $ -
(1) Value is based on the difference between the stock option exercise
price and the closing price of the Common Stock on the Nasdaq SmallCap
Market on December 31, 2001 of $4.45 per share. The stock price on
December 31, 2001 was less than the exercise price of all outstanding
options.
Compensation Committee Interlocks and Insider Participation
No executive officer of the Company currently serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Board of Directors or as an executive
officer of the Company. See "Director and Executive Compensation" and "Certain
Transactions" for a description of transactions between the Company and members
of the Board of Directors.
Compensation Committee Report on Executive Compensation
Currently, the entire Board of Directors makes all determinations with respect
to executive officer compensation. The following report is submitted by the
Board of Directors of the Company, in its capacity as Compensation Committee,
pursuant to rules established by the Securities and Exchange Commission, and
provides certain information regarding compensation of the Company's executive
officers.
The Compensation Committee is responsible for establishing and administering a
general compensation policy and program for the Company. The Compensation
Committee also possesses all of the powers of administration under the Company's
employee benefit plans, including all stock option plans and other employee
benefit plans. Subject to the provisions of those plans, the Compensation
Committee must determine the individuals eligible to participate in the plans,
the extent of such participation and the terms and conditions under which
benefits may be vested, received or exercised.
61
Compensation Policies. The Company's executive compensation policies are
designed to complement the Company's business objectives by motivating and
retaining quality members of senior management, by aligning management's
interests with those of the Company's shareholders and by linking total
compensation to the performance of the Company. The Company's executive
compensation policies generally consist of equity-based long-term incentives,
short-term incentives and competitive base salaries. The Compensation Committee
will continue to monitor the performance of the Company and its executive
officers in reassessing executive compensation.
Base Salary. The Compensation Committee reviews the base salaries of the
Company's executive officers on an annual basis. Base salaries are determined
based upon a subjective assessment of the nature and responsibilities of the
position involved, the performance of the particular officer and of the Company,
the officer's experience and tenure with the Company and base salaries paid to
persons in similar positions with companies comparable to the Company.
Annual Bonus. Annual bonuses may be paid to the Company's executive officers at
the discretion of the Compensation Committee. The Compensation Committee granted
bonuses of $10,000 each to three executive officers during 2001.
Long-Term Incentives. The Company's long-term compensation strategy is focused
on the grant of stock options under the stock option plans and warrants, which
the Compensation Committee believes rewards executive officers for their efforts
in improving long-term performance of the Common Stock and creating value for
the Company's shareholders, and which the Compensation Committee believes aligns
the financial interests of management with those of the Company's shareholders.
During 2001, the Compensation Committee did not grant stock options to the
executive officers.
Chief Executive Officer Compensation for Fiscal Year 2001. The compensation for
Frederic W.J. Birner during 2001 consisted of his base salary, the rate of which
was established in 1999, and a cash bonus of $10,000. Mr. Birner's base salary
was not increased in 2001.
COMPENSATION COMMITTEE
Frederic W.J. Birner
Mark A. Birner, D.D.S.
Dennis N. Genty
James M. Ciccarelli
Steven M. Bathgate
Paul E. Valuck D.D.S.
62
PERFORMANCE GRAPH
The following line graph compares the percentage change from date of public
offering (February 11, 1998) through December 31, 2001 for (i) the Common Stock,
(ii) a peer group (the "Peer Group") of companies selected by the Company that
are predominantly dental management companies located in the United States,
(iii) Nasdaq Composite Index and (iv) S&P 500 Composite Index. The companies in
the Peer Group are American Dental Partners, Inc., Castle Dental Centers, Inc.,
Coast Dental Services, Inc., Interdent, Inc. and Monarch Dental Corporation.
[THE FOLLOWING TABLE WAS REPRESENTED BY
A LINE GRAPH IN THE PRINTED MATERIAL]
Comparison of Total Returns*
2/11/98 12/31/98 12/31/99 12/31/00 12/31/01
------- -------- -------- -------- --------
Description
Birner Dental Management
Services, Inc. $100.00 $ 50.00 $ 19.64 $ 6.70 $ 15.89
Peer Group 100.00 57.57 32.58 11.16 6.69
Nasdaq Composite Index 100.00 136.69 254.02 152.85 120.79
S&P 500 Composite Index 100.00 127.17 153.93 139.92 123.29
*Total return based on $100 initial investment and reinvestment of dividends
63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 13, 2002, by (i)
all persons known by the Company to be the beneficial owners of 5% or more of
the Common Stock, (ii) each director, (iii) each director nominee, (iv) each of
the executive officers, and (v) all executive officers, directors and director
nominee as a group. Unless otherwise indicated, the address of each of the
persons named below is in care of the Company, 3801 East Florida Avenue, Suite
508, Denver, Colorado 80210.
Number of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class (1)(2)
------------------------ ------------------ -----------------------
Frederic W.J. Birner (3).................... 200,786 13.2%
Mark A. Birner, D.D.S. (4).................. 197,492 13.0%
Dennis N. Genty (5)......................... 134,946 8.9%
Lee Schlessman (6)......................... 131,785 8.7%
Steven M. Bathgate (7)...................... 103,019 6.8%
Paul E. Valuck, D.D.S.......................... 5,273 *
James M. Ciccarelli (8)..................... 4,209 *
All executive officers and directors
(six persons) (9)........................ 645,725 41.2%
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options, warrants and convertible debentures currently
exercisable or convertible, or exercisable or convertible within 60
days of March 13, 2002, are deemed outstanding for computing the
percentage of the person or entity holding such securities but are not
outstanding for computing the percentage of any other person or entity.
Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting
and investment power with respect to all shares of Common Stock shown
as beneficially owned by them.
(2) Percentage of ownership is based on 1,506,705 shares of Common Stock
outstanding at March 13, 2002.
(3) Includes 14,880 shares of Common Stock that are issuable upon the
exercise of options that are currently exercisable and 2,293 shares of
Common Stock that are issuable upon the exercise of warrants that are
currently exercisable. Includes 2,125 shares of Common Stock owned by
his wife. Mr. Birner disclaims beneficial ownership of all shares held
by his wife.
(4) Includes 14,527 shares of Common Stock that are issuable upon the
exercise of options that are currently exercisable and 2,293 shares of
Common Stock that are issuable upon the exercise of warrants that are
currently exercisable.
(5) Includes 12,235 shares of Common Stock that are issuable upon the
exercise of options that are currently exercisable and 2,293 shares of
Common Stock that are issuable upon the exercise of warrants that are
currently exercisable. Includes 118,443 shares of Common Stock owned by
his wife. Mr. Genty disclaims beneficial ownership of all shares held
by his wife.
(6) Includes 61,753 shares of Common Stock over which Mr. Schlessman has
sole voting power pursuant to certain powers of attorney, but for which
he disclaims beneficial ownership. The address for Mr. Schlessman is
1301 Pennsylvania Street, Suite 800, Denver, CO 80203.
(7) Includes 6,250 shares of Common Stock that are issuable upon the
exercise of options that are currently exercisable. Includes 37,625
shares of Common Stock owned by his wife. Mr. Bathgate disclaims
beneficial ownership of all shares held by his wife. Includes 23,500
shares of Common Stock owned by Bathgate Family Partnership Ltd.. Mr.
Bathgate disclaims beneficial ownership of these securities except to
the extent of his pecuniary interest therein.
(8) Includes 3,750 shares of Common Stock that are issuable upon the
exercise of options that are currently exercisable and 459 shares of
Common Stock that are issuable upon the exercise of warrants that are
currently exercisable.
(9) Includes 58,980 shares of Common Stock issuable upon the exercise of
options and warrants held by all executive officers and directors as a
group that are currently exercisable or are exercisable within 60 days.
There has been no change in control of the Company since the beginning of its
last fiscal year, and there are no arrangements known to the Company, including
any pledge of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
The Company's Chief Executive Officer, Frederic W.J. Birner, is indebted to the
Company on an unsecured basis in the amount of $112,134. Principal and interest
(at 7% per annum) are due December 31, 2002. The Company's President, Mark A.
Birner, is indebted to the Company on an unsecured basis in the amount of
$94,065. Principal and interest (at 7% per annum) are due December 31, 2002. The
Company's Chief Financial Officer, Dennis N. Genty, is indebted to the Company
on an unsecured basis in the amount of $78,280. Principal and interest (at 7%
per annum) are due December 31, 2002.
65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets -
December 31, 2000 and 2001
Consolidated Statements of Operations -
Years ended December 31, 1999, 2000 and 2001
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 2000 and 2001
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Report of Independent Public Accountants on Schedule
II - Valuation and Qualifying Accounts -
Three Years Ended December 31, 2001
Inasmuch as Registrant is primarily a holding company and all subsidiaries are
wholly owned, only consolidated statements are being filed. Schedules other than
those listed above are omitted because of the absence of the conditions under
which they are required or because the information is included in the financial
statements or notes to the financial statements.
(b) Reports on Form 8-K:
On November 17, 2001 the Company filed a report of Form 8-K related to
a change in Auditors. On November 27, 2001 the Company filed a report
on Form 8-K (a) related to a change in Auditors.
66
(c) Exhibits:
Exhibit
Number Description of Document
3.1 Amended and Restated Articles of Incorporation, incorporated
herein by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2 Specimen Stock Certificate, incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.1 Form of Indemnification Agreement entered into between the
Registrant and its Directors and Executive Officers, incorporated
herein by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
10.2 Warrant Agreement dated December 27, 1996, between the
Registrant and Cohig & Associates, Inc., incorporated herein by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.3 Warrant Agreement dated May 29, 1996, between the Registrant and
Cohig, incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.4 Warrant Agreement dated October 3, 1995, between the Registrant
and Cohig, incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.5 Warrant Certificate dated June 30, 1997, issued to Fred Birner,
incorporated herein by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.6 Warrant Certificate dated November 1, 1996, issued to Fred
Birner, incorporated herein by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.7 Warrant Certificate dated June 30, 1997, issued to Mark Birner,
incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.8 Warrant Certificate dated November 1, 1996, issued to Mark
Birner, incorporated herein by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.9 Warrant Certificate dated June 30, 1997, issued to Dennis
Genty, incorporated herein by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.10 Warrant Certificate dated November 1, 1996, issued to Dennis
Genty, incorporated herein by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.11 Warrant Certificate dated August 1, 1996, issued to James
Ciccarelli, incorporated herein by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.12 Warrant Certificate dated July 15, 1997 issued to James
Ciccarelli, incorporated herein by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.13 Credit Agreement, dated October 31, 1996, between the Registrant
and Key Bank of Colorado, as amended by First Amendment to Loan
Documents, dated as of September 3, 1997, incorporated herein by
reference to Exhibit 10.13 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.14 Form of Managed Care Contract with Prudential, incorporated
herein by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
10.15 Form of Managed Care Contract with PacifiCare, incorporated
herein by reference to Exhibit 10.15 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
67
10.16 Letter Agreement dated October 17, 1996, between the Registrant and
James Ciccarelli, as amended by letter agreement dated September 24,
1997 between the Registrant and James Ciccarelli, incorporated herein
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.17 Agreement, dated August 21, 1997, between the Registrant and James
Abramowitz, D.D.S., and Equity Resources Limited Partnership, a
Colorado limited partnership, incorporated herein by reference to
Exhibit 10.17 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.18 Form of Management Agreement, incorporated herein by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.19 Employment Agreement dated September 8, 1997 between the Registrant and
James Abramowitz, D.D.S., incorporated herein by reference to Exhibit
10.19 to the Company's Registration Statement on Form S-1 (SEC File No.
333-36391), as filed with the Securities and Exchange Commission on
September 25, 1997.
10.20 Form of Stock Transfer and Pledge Agreement, incorporated herein by
reference to Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.21 Indenture, dated as of December 27, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.22 Indenture, dated as of May 15, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.23 Birner Dental Management Services, Inc. 1995 Employee Stock Option
Plan, including forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement under the Employee Plan,
incorporated herein by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.24 Birner Dental Management Services, Inc. 1995 Stock Option Plan for
Managed Dental Centers, including form of Non-statutory Stock Option
Agreement under the Dental Center Plan, incorporated herein by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.25 Profit Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated
herein by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
10.26 Form of Stock Transfer and Pledge Agreement with Mark Birner, D.D.S.,
incorporated herein by reference to Exhibit 10.26 of Pre-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-1
(SEC File No. 333-36391), as filed with the Securities and Exchange
Commission on November 7, 1997.
10.27 Stock Purchase, Pledge and Security Agreement, dated October 27, 1997,
between the Company and William Bolton, D.D.S., incorporated herein by
reference to Exhibit 10.27 of Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on November 7,
1997.
10.28 Stock Purchase, Pledge and Security Agreement, dated October 27, 1997,
between the Company and Scott Kissinger, D.D.S., incorporated herein by
reference to Exhibit 10.28 of Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on November 7,
1997.
10.29 Second Amendment to Loan Documents dated November 19, 1997 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.29 of Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on November 25, 1997.
10.30 Form of Financial Consulting Agreement between the Company and Joseph
Charles & Associates, Inc., incorporated herein by reference to Exhibit
10.30 of Post-Effective Amendment No. 2 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on January 14, 1998.
10.31 Form of Purchase Option for the Purchase of Shares of Common Stock
granted to Joseph Charles & Associates, Inc., incorporated herein by
reference to Exhibit 10.31 of Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on January 14,
1998.
68
10.32 Third Amendment to Loan Documents date September 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.32 of the Company's Form 10-Q for the quarterly period
ended September 30, 1998 filed with the Securities and Exchange
Commission on November 16, 1998.
10.33 Fourth Amendment to Loan Document dated December 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.33 of the Company's Form 10-K for the annual period ended
December 31, 1998 filed with the Securities and Exchange Commission on
March 31, 1999.
10.34 Fifth Amendment to Loan Document dated May 28, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.34 of the Company's Form 10-Q for the quarterly period
ended June 30, 1999 filed with the Securities and Exchange Commission
on August 12, 1999.
10.35 Sixth Amendment to Loan Document dated September 20, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.35 of the Company's Form 10-Q for the quarterly period
ended September 30, 1999 filed with the Securities and Exchange
Commission on November 15, 1999.
10.36 Seventh Amendment to Loan Document dated March 24, 2000 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.36 of the Company's Form 10-K for the annual period ended
December 31, 1999 filed with the Securities and Exchange Commission on
March 30, 2000.
10.37 Eighth Amendment to Loan Document dated September 29, 2000 between
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.37 of the Company's Form 10-Q for the quarterly period
ended September 30, 2000 filed with the Securities and Exchange
Commission on November 13, 2000.
10.38 Amended and Restated Credit Agreement dated December 17, 2001 between
Registrant and Key Bank of Colorado, incorporated herein as Exhibit
10.38 of the Company's Form 10-K for the annual period ended December
31, 2001.
69
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
/s/ Frederic W.J. Birner Chairman of the Board, Chief Executive March 18, 2002
- -------------------------------------
Frederic W.J. Birner Officer and Director (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Frederic W.J. Birner Chairman of the Board, Chief Executive March 18, 2002
- -------------------------------------
Frederic W.J. Birner Officer and Director (Principal Executive
Officer)
/s/ Mark A. Birner President and Director March 18, 2002
- -------------------------------------
Mark A. Birner, D.D.S.
/s/ Dennis N. Genty Chief Financial Officer, Secretary, March 18, 2002
- -------------------------------------
Dennis N. Genty Treasurer and Director (Principal
Financial and Accounting Officer)
/s/ James M. Ciccarelli Director March 18, 2002
- -------------------------------------
James M. Ciccarelli
/s/ Steven M. Bathgate Director March 18, 2002
- -------------------------------------
Steven M. Bathgate
/s/ Paul E. Valuck Director March 18, 2002
- -------------------------------------
Paul E. Valuck D.D.S.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Birner Dental Management
Services, Inc. for the year ended December 31, 2001 included in this Form 10-K
and have issued our report thereon dated March 2, 2002. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. This Schedule II - Valuation and Qualifying Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The information included in this schedule for
the year ended December 31, 2001 has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Hein + Associates LLP
Denver, Colorado,
March 2, 2002.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Birner Dental Management
Services, Inc. for the years ended December 31 1999 and 2000 included in this
Form 10-K and have issued our report thereon dated March 2, 2001. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. This Schedule II - Valuation and Qualifying Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The information included in this schedule for
the years ended December 31, 1999 and 2000 has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 2001.
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Birner Dental Management Services, Inc. and Subsidiaries
Financial Statement Schedule
II - Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
Column B Column C - Additions
Balance at Charged to Charged to Column E
Column A beginning of costs and other Column D Balance at end
Description period expenses accounts * Deductions** of period
----------- ------ -------- ---------- ------------ ---------
2001 $ 201,047 $ 748 $ - $ - $ 201,795
2000 $ 306,469 $ 2,963 $ - $ (108,385) $ 201,047
1999 $ 296,911 $ 42,261 $158,114 $ (190,817) $ 306,469
* Allowance recorded, as the result of accounts receivable acquired. **Charges
to the account are for the purpose for which the reserves were created.
73