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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ----------------------------------------------- --------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 691-0680
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of November 6, 2002
- ------------------------------- ---------------------------------------------
Common Stock, without par value 1,438,717
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets as of December 31, 2001
and September 30, 2002 (unaudited) 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Nine Months Ended September 30, 2001 and 2002 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2002 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certification of Chief Executive Officer 24
Certification of Chief Financial Officer 25
Certification of 10-Q Report 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
ASSETS 2001 2002
--------------- ---------------
** (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 949,236 $ 962,569
Accounts receivable, net of allowance for doubtful accounts
of $201,795 and $215,340, respectively 3,086,648 2,940,498
Notes receivable - related parties - 284,479
Deferred tax asset 112,214 112,214
Prepaid expenses and other assets 724,429 353,576
Total current assets 4,872,527 4,653,336
------------- -------------
PROPERTY AND EQUIPMENT, net 5,369,198 4,279,228
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,915,362 15,288,569
Deferred charges and other assets 216,285 179,231
Notes receivable - related parties 284,479 -
Deferred tax asset, net 104,074 104,074
------------- -------------
Total assets $ 24,761,925 $ 24,504,438
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,190,723 $ 3,567,695
Income taxes payable 48,479 233,321
Current maturities of long-term debt 1,332,158 2,807,907
------------- -------------
Total current liabilities 4,571,360 6,608,923
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 3,296,304 1,006,940
Other long-term obligations 173,089 171,964
------------- -------------
Total liabilities 8,040,753 7,787,827
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding - -
Common Stock, no par value, 20,000,000 shares
authorized; 1,506,705 and 1,454,727 shares issued and
outstanding, respectively 16,855,661 16,107,555
Retained earnings (accumulated deficit) (134,489) 609,056
------------- -------------
Total shareholders' equity 16,721,172 16,716,611
------------- -------------
Total liabilities and shareholders' equity $ 24,761,925 $ 24,504,438
============= =============
** Derived from the Company's audited consolidated balance sheet at
December 31, 2001
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------
2001 2002 2001 2002
----------- ----------- ------------ -----------
NET REVENUE $7,049,075 $ 7,558,588 $22,282,410 $22,959,798
DIRECT EXPENSES:
Clinical salaries and benefits 2,807,972 2,895,670 9,157,089 8,833,681
Dental supplies 423,742 455,705 1,337,710 1,354,664
Laboratory fees 612,912 580,334 1,885,495 1,801,312
Occupancy 852,095 859,540 2,494,956 2,554,425
Advertising and marketing 82,785 95,826 263,925 256,481
Depreciation and amortization 596,678 600,974 1,822,440 1,794,200
General and administrative 748,890 790,908 2,317,692 2,365,842
---------- ----------- ----------- -----------
6,125,074 6,278,957 19,279,307 18,960,605
---------- ----------- ----------- -----------
Contribution from dental offices 924,001 1,279,631 3,003,103 3,999,193
CORPORATE EXPENSES:
General and administrative 620,926 689,802 2,314,320 2,277,607
Depreciation and amortization 78,681 84,436 243,933 247,615
---------- ----------- ----------- -----------
Operating income 224,394 505,393 444,850 1,473,971
Interest expense, net 98,669 79,673 376,030 274,704
Income before income taxes 125,725 425,720 68,820 1,199,267
Income tax expense - 161,774 - 455,722
Net income $ 125,725 $ 263,946 $ 68,820 $ 743,545
=========== =========== ============ ===========
Net income per share of Common Stock:
Basic $ .08 $ .18 $ .05 $ .50
=========== =========== ============ ===========
Diluted $ .08 $ .16 $ .05 $ .46
=========== =========== ============ ===========
Weighted average number of shares of Common
Stock and dilutive securities:
Basic 1,506,705 1,471,646 1,506,705 1,493,840
=========== =========== ============ ===========
Diluted 1,533,999 1,617,310 1,514,802 1,629,786
=========== =========== ============ ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Retained
Earnings Total
Common Stock (Accumulated Shareholders'
Shares Amount Deficit) Equity
--------- ------------ ----------- ------------
BALANCES, December 31, 2001 1,506,705 $ 16,855,661 $ (134,489) $ 16,721,172
Common Stock options exercised 40,544 93,013 - 93,013
Purchase and retirement of Common Stock (92,522) (901,173) - (901,173)
Exercise of Common Stock options
recorded as compensation expense - 60,054 60,054
Net income - - 743,545 743,545
--------- ----------- ---------- -----------
BALANCES, September 30, 2002 1,454,727 $ 16,107,555 $ 609,056 $16,716,611
========= ============ ========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES: ------------ ------------
Net income $ 68,820 $ 743,545
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,066,373 2,041,815
Loss (gain) on disposition of property 3,660 (10,838)
Provision for doubtful accounts 9,671 13,545
Amortization of debt issuance costs 17,449 54,091
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 427,240 132,605
Prepaid expenses, income tax receivable and other assets 14,085 369,773
Accounts payable and accrued expenses 374,426 376,972
Income taxes payable - 184,842
Other long-term obligations 35,044 (1,125)
------------ ------------
Net cash provided by operating activities 3,016,768 3,905,225
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties (58,349) -
Capital expenditures (430,889) (396,064)
Acquisition of dental offices (435,006) (959,150)
------------ ------------
Net cash used in investing activities (924,244) (1,355,214)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments - line of credit (1,688,000) (168,000)
Repayment of bank term-loan - (1,375,000)
Repayment of long-term debt (158,435) (229,615)
Payment of financing costs - (15,957)
Proceeds from exercise of Common Stock options - 93,013
Purchase and retirement of Common Stock - (841,119)
------------ ------------
Net cash used in financing activities (1,846,435) (2,536,678)
NET INCREASE IN CASH AND CASH EQUIVALENTS 246,089 13,333
CASH AND CASH EQUIVALENTS, beginning of period 691,417 949,236
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 937,506 $ 962,569
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2001 2002
--------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 399,800 $ 275,047
=============== ============
Cash paid during the period for income taxes $ - $ 270,880
=============== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable incurred from:
Acquisition of dental offices $ 434,000 $ 959,000
============== ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2002
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
The financial statements included herein have been prepared by Birner Dental
Management Services, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures included herein are adequate to make the
information presented not misleading. A description of the Company's accounting
policies and other financial information is included in the audited consolidated
financial statements as filed with the Securities and Exchange Commission in the
Company's Form 10-K for the year ended December 31, 2001.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of September 30, 2002 and the results of
operations and cash flows for the periods presented. All such adjustments are of
a normal recurring nature. The results of operations for the quarter and nine
months ended September 30, 2002 are not necessarily indicative of the results
that may be achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
(2) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share".
Quarters Ended September 30,
2001 2002
----- ----
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- ----- ----------- --------- -----
Basic EPS:
Net income available to
shares of Common Stock $ 125,725 1,506,705 $ .08 $ 263,946 1,471,646 $ .18
Effect of dilutive shares of
Common Stock from stock
options and warrants - 27,294 - - 145,664 (.02)
--------- --------- ----- ---------- ---------- -----
Diluted EPS:
Net income available to
shares of Common Stock $ 125,725 1,533,999 $ .08 $ 263,946 1,617,310 $ .16
========= ========= ===== ========== ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended September 30, 2001
and 2002 relates to the effect of 27,294 and 145,664, respectively, of dilutive
shares of Common Stock from stock options and warrants which are included in
total shares for the diluted calculation.
8
Quarters Ended September 30,
2001 2002
----- ----
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- ----- ----------- --------- -----
Basic EPS:
Net income available to
shares of Common Stock $ 68,820 1,506,705 $ .05 $ 743,545 1,493,840 $ .50
Effect of dilutive shares of
Common Stock from stock
options and warrants - 8,097 - - 135,946 (.04)
-------- --------- ----- ---------- ---------- ----
Diluted EPS:
Net income available to
shares of Common Stock $ 68,820 1,514,802 $ .05 $ 743,545 1,629,786 $ .46
======== ========= ===== ========== ========== =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the nine months ended September 30,
2001 and 2002 relates to the effect of 8,097 and 135,946, respectively, of
dilutive shares of Common Stock from stock options and warrants which are
included in total shares for the diluted calculation.
(3) LINE OF CREDIT
--------------
Under the Company's Credit Facility (as amended on September 9, 2002), the
Company may borrow on a revolving basis up to the lesser of an applicable
Borrowing Base (calculated in accordance with the most recent Borrowing Base
Certificate delivered to the Lender) or $2.0 million and on a non-revolving
basis, an aggregate principal amount not in excess of $4.0 million for working
capital, for restructuring of the Original Loan and for other general corporate
purposes. Balances bear interest at the lender's prime rate. The Company is also
obligated to pay an annual facility fee of .50% on the average unused amount of
the revolving line of credit during the previous full calendar month. Borrowings
on the revolving loan are limited to an availability formula based on the
Company's eligible accounts receivable. As amended, both the revolving loan and
the non-revolving note mature on April 30, 2003. At September 30, 2002, the
Company had no borrowings outstanding and $2.0 million available for borrowing
under the revolving loan and $2.5 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 September 30, 2002 the
Company was in full compliance with all of its covenants under this agreement.
9
(4) RECENT ACCOUNTING PROUNCEMENTS
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets,"
which replace Accounting Principles Board ("APB") 16, "Business Combinations,"
and APB 17, "Intangible Assets," respectively. SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, and that the use of the pooling-of-interests method be
prohibited. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only-method. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
SFAS 142, which the Company was required to adopt on January 1, 2002. After
December 31, 2001, goodwill can only be written down upon impairment discovered
during annual tests for fair value, or discovered during tests taken when
certain triggering events occur. Prior to the adoption of SFAS 142, impairment
of intangibles was recognized according to the undiscounted cash flow test per
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption of SFAS 141 and SFAS 142 on January 1,
2002 did not have a material impact on the Company's financial position or
results of operations.
In June 2001, the FASB approved for issuance SFAS 143, Asset Retirement
Obligations. SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The statement is effective for the financial statements issued
for fiscal years beginning after June 15, 2002. The Company does not believe
that the adoption of this statement will have a material effect on its financial
position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The provisions of
this statement are generally to be applied prospectively. The adoption of SFAS
144 on January 1, 2002 did not have a material impact on the Company's financial
position, results of operations or cash flows.
In April 2002, the FASB approved for issuance Statements of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
SFAS 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds previous
accounting guidance, which required all gains and losses from extinguishment of
debt be classified as an extraordinary item. Under SFAS 145 classification of
debt extinguishment depends on the facts and circumstances of the transaction.
SFAS 145 is effective for fiscal years beginning after May 15, 2002 and adoption
is not expected to have a material effect on the Company's financial position or
results of its operations.
In July 2002, the FASB issued Statements of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by SFAS 146
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS 146
is not expected to have a material effect on the Company's financial position or
results of its operations
10
(5) INCOME TAXES
-------------
The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax consequences of events, which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. At December 31, 2001, the Company has
available tax net operating loss carryforwards of approximately $780,000, which
expire beginning in 2012.
The Company is aware of the risk that the recorded deferred tax assets may not
be realizable. However, management believes that it will obtain the full benefit
of the deferred tax assets on the basis of its evaluation of the Company's
anticipated profitability over the period of years that the temporary
differences are expected to become tax deductions. The Company believes that
sufficient book and taxable income will be generated to realize the benefit of
these tax assets.
(6) ACQUISITIONS
------------
On January 31, 2002 the Company acquired two-thirds of the remaining 50%
interest in Mississippi Dental Group for a total purchase price of $798,654. The
consideration consisted of $398,654 in cash and $400,000 in notes payable with a
term of 60 months and an interest rate of 8.0%. The Company recorded an increase
to intangible assets for the total purchase price of the 33% interest in this
Office.
On April 1, 2002 the Company acquired the remaining 50% interest in Glendale
Dental Group for a total purchase price of $1,119,496. The consideration
consisted of $560,496 in cash and $559,000 in notes payable with a term of 60
months and an interest rate of 8.0%. The Company recorded an increase to
intangible assets for the total purchase price of the remaining 50% interest in
this Office.
(7) SUBSEQUENT EVENTS
-----------------
On October 1, 2002 the company acquired the remaining interest in Mississippi
Dental Group for a total purchase price of $399,327. The consideration consisted
of $199,327 in cash and $200,000 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 17% interest in this office.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The statements contained in this Form 10-Q ("Quarterly Report") of the Company
which are not historical in nature are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements in this Item 2., "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
in Part II, Item 1., "Legal Proceedings", regarding intent, belief or current
expectations of the Company or its officers with respect to the development or
acquisition of additional dental practices ("Offices") and the successful
integration of such Offices into the Company's network, recruitment of
additional dentists, funding of the Company's expansion, capital expenditures,
payment or nonpayment of dividends, cash outlays for income taxes and outcome of
pending legal proceedings.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
the general economy of the United States and the specific markets in which the
Company's Offices are located or are proposed to be located, trends in the
health care, dental care and managed care industries, as well as the risk
factors set forth in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" section of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (as filed
with the Securities Exchange Commission on March 28, 2002), the "Management's
Discussion and Analysis of Financial Condition and Results of Operations -Year
2002" of this Quarterly Report, and other factors as may be identified from time
to time in the Company's filings with the Securities and Exchange Commission or
in the Company's press releases.
General
The following discussion relates to factors, which have affected the results of
operations and financial condition of the Company for the quarters and nine
months ended September 30, 2001 and 2002. This information should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto included elsewhere in this Quarterly Report.
Overview
The Company was formed in May 1995 and as of September 30, 2002 managed 54
Offices in Colorado, New Mexico and Arizona staffed by 77 general dentists and
14 specialists. The Company has acquired 42 Offices (five of which were
consolidated into existing Offices) and opened 18 de novo Offices (one of which
was consolidated into an existing Office). Of the 42 acquired practices, only
three (the first three practices, which were acquired from the Company's
President, Mark Birner, DDS) were acquired from affiliates of the Company. The
Company derives all of its revenue (as defined below) from its Management
Agreements with professional corporations ("P.C.s") which conduct the practice
at each Office. In addition, the Company assumes a number of responsibilities
when it acquires a new practice or develops a de novo Office, which are set
forth in a Management Agreement, as described below. The Company expects to
expand in existing markets primarily by enhancing the operating performance of
its existing Offices and by developing de novo Offices. The Company has
historically expanded in existing markets by acquiring solo and group dental
practices and may do so in the future if an economically feasible opportunity
presents itself. Generally, the Company seeks to acquire dental practices for
which the Company believes application of its Dental Practice Management Model
will improve operating performance.
12
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's growth and success in the
Colorado market led to its expansion into the New Mexico and Arizona markets as
well as to its evaluation of additional markets. During 2000, the Company's
growth strategy shifted from an acquisition and development approach to an
approach which is focused on greater utilization of exsisting physical capacity
through recruiting more dentists and support staff. The following table sets
forth the change in the number of Offices affiliated with and managed by the
Company from 1998 through September 30, 2002, including the number of de novo
Offices and acquired Offices in each such period.
1998 1999 2000 2001 2002 (1)
---- ---- ---- ---- ----
Offices at beginning of the period 34 49 54 56 54
De novo Offices 5 5 2 0 0
Acquired Offices 10 1 0 0 0
Consolidation of Offices 0 (1) 0 (2) 0
---- ---- ---- ---- ----
Offices at end of the period 49 54 56 54 54
==== ==== ==== ==== ====
(1) From January 1, 2002 through September 30, 2002.
The combined purchase amounts for the 31 practices acquired through 1998 and the
one practice acquired in 1999 were $15.9 million and $760,000 respectively. The
average initial investment by the Company in each of its 17 de novo Offices has
been approximately $210,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the Offices. These de novo
Offices, which were opened between January 1996 and October 2000, began
generating positive contribution from dental offices, on average, within eight
months of opening.
At September 30, 2002, the Company's total assets of approximately $24.5 million
included approximately $15.3 million of identifiable intangible assets related
to Management Agreements. At that date, the Company had total shareholders'
equity of approximately $16.7 million. The Company reviews the recorded amount
of intangible assets and other fixed assets for impairment for each Office
whenever events or changes in circumstances indicate the carrying amount of the
assets may not be recoverable. If this review indicates that the carrying amount
of the assets may not be recoverable as determined based on the undiscounted
cash flows of each Office, whether acquired or developed, the carrying value of
the asset is reduced to fair value. Among the factors that the Company will
continually evaluate are unfavorable changes in each Office, relative market
share and local market competitive environment, current period and forecasted
operating results, cash flow levels of Offices and the impact on the net revenue
earned by the Company, and the legal and regulatory factors governing the
practice of dentistry.
Components of Revenue and Expenses
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Offices. Net revenue
represents Revenue less amounts retained by the Offices. The amounts retained by
the Offices represent amounts paid as salary, benefits and other payments to
employed dentists and hygienists. The Company's net revenue is dependent on the
Revenue of the Offices. Management service fee revenue represents the net
revenue earned by the Company for the Offices for which the Company has
management agreements, but does not have control. Direct expenses consist of the
expenses incurred by the Company in connection with managing the Offices,
including salaries and benefits (for personnel other than dentists and
hygienists), dental supplies, dental laboratory fees, occupancy costs,
advertising and marketing, depreciation and amortization and general and
administrative (including office supplies, equipment leases, management
information systems and other expenses related to dental practice operations).
The Company also incurs personnel and administrative expenses in connection with
maintaining a corporate function that provides management, administrative,
marketing, development and professional services to the Offices.
13
Under each of the Management Agreements, the Company manages the business and
marketing aspects of the Offices, including (i) providing capital, (ii)
designing and implementing marketing programs, (iii) negotiating for the
purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of non-dental
personnel, (vii) billing and collecting patient fees, (viii) arranging for
certain legal and accounting services, and (ix) negotiating with managed care
organizations. The P.C. is responsible for, among other things (i) supervision
of all dentists and dental hygienists, (ii) complying with all laws, rules and
regulations relating to dentists and dental hygienists, and (iii) maintaining
proper patient records. The Company has made, and intends to make in the future,
loans to P.C.s in Colorado, New Mexico and Arizona to fund their acquisition of
dental assets from third parties in order to comply with the laws of such
states.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at each Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office, (ii) direct
costs of all Company employees or consultants who provide services to or in
connection with the Office, (iii) utilities, janitorial, laboratory, supplies,
advertising and other expenses incurred by the Company in carrying out its
obligations under the Management Agreement, (iv) depreciation expense associated
with the P.C.'s assets and the assets of the Company used at the Office, and the
amortization of intangible asset value relating to the Office, (v) interest
expense on indebtedness incurred by the Company to finance any of its
obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company's or the P.C.'s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company's personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of the Company
including the P.C.'s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Offices are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists who work at the Offices of the P.C.'s.. This enables the Company to
manage the profitability of the Offices. Each Management Agreement is for a term
of 40 years. Further, each Management Agreement generally may be terminated by
the P.C. only for cause, which includes a material default by or bankruptcy of
the Company. Upon expiration or termination of a Management Agreement by either
party, the P.C. must satisfy all obligations it has to the Company.
The Company's Revenue is derived principally from fee-for-service revenue and
revenue from capitated managed dental care plans. Fee-for-service revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive supplemental payments for more complicated or elective procedures.
In contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided.
14
The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs. The Company seeks to supplement this fee-for-service business with
Revenue from contracts with capitated managed dental care plans. Although the
Company's fee-for-service business generally is more profitable than its
capitated managed dental care business, capitated managed dental care business
serves to increase facility utilization and dentist productivity. The relative
percentage of the Company's revenue derived from fee-for-service business and
capitated managed dental care contracts varies from market to market depending
on the availability of capitated managed dental care contracts in any particular
market and the Company's ability to negotiate favorable contractual terms. In
addition, the profitability of managed dental care Revenue varies from market to
market depending on the level of capitation payments and co-payments in
proportion to the level of benefits required to be provided.
Results of Operations
As a result of the shift in focus from expansion of the Company's business
through acquisitions and the development of de novo Offices to the greater
utilization of existing physical capacity through the recruitment of additional
dentists and staff, the period-to-period comparisons set forth below may not be
representative of future operating results.
For the three months ended September 30, 2002, Revenue increased $706,000 to
$10.7 million compared to $9.9 million for the three months ended September 30,
2001. For the nine months ended September 30, 2002, Revenue increased $786,000
to $32.4 million compared to $31.6 million for the nine months ended September
30, 2001.
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's Condensed Consolidated Statements of
Operations. The information contained in the table represents the historical
results of the Company. The information that follows should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto contained elsewhere in this Quarterly Report.
Quarters Ended Nine Months Ended
September 30, September 30,
-------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 39.8 % 38.3 % 41.1 % 38.5 %
Dental supplies 6.0 % 6.0 % 6.0 % 5.9 %
Laboratory fees 8.7 % 7.7 % 8.4 % 7.9 %
Occupancy 12.1 % 11.4 % 11.2 % 11.1 %
Advertising and marketing 1.2 % 1.3 % 1.2 % 1.1 %
Depreciation and amortization 8.5 % 7.9 % 8.2 % 7.8 %
General and administrative 10.6 % 10.5 % 10.4 % 10.3 %
------- ------- ------- -------
86.9 % 83.1 % 86.5 % 82.6 %
------- ------- ------- -------
Contribution from dental offices 13.1 % 16.9 % 13.5 % 17.4 %
Corporate Expenses:
General and administrative 8.8 % 9.1 % 10.4 % 9.9 %
Depreciation and amortization 1.1 % 1.1 % 1.1 % 1.1 %
------- -------- ------- -------
Operating income 3.2 % 6.7 % 2.0 % 6.4 %
Interest expense, net 1.4% 1.1 % 1.7 % 1.2 %
------- ------- ------- -------
Income before income taxes 1.8% 5.6 % 0.3 % 5.2 %
Income tax expense - % 2.1 % - % 2.0 %
------- ------- ------- -------
Net income 1.8% 3.5 % 0.3 % 3.2 %
======= ======= ======= =======
15
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001:
Net revenue. For the three months ended September 30, 2002 net revenue increased
to $7.6 million compared to $7.0 million for the three months ended September
30, 2001, an increase of $510,000 or 7.2%.
Clinical salaries and benefits. For the three months ended September 30, 2002
clinical salaries and benefits increased to $2.9 million compared to $2.8
million for the three months ended September 30, 2001, an increase of $88,000 or
3.1%. This increase was primarily due to the hiring of additional support
personnel corresponding to the increased number of dentists at the Offices. As a
percentage of net revenue, clinical salaries and benefits decreased to 38.3% for
the three months ended September 30, 2002 compared to 39.8% for the three months
ended September 30, 2001.
Dental supplies. For the three months ended September 30, 2002 dental supplies
increased to $456,000 compared to $424,000 for the three months ended September
30, 2001, an increase of $32,000 or 7.5%. This increase was primarily due to
higher production during this period due to the increase in the number of
dentists working. As a percentage of net revenue, dental supplies remained
constant at 6.0% for the three months ended September 30, 2002 compared to the
three months ended September 30, 2001.
Laboratory fees. For the three months ended September 30, 2002 laboratory fees
decreased to $580,000 compared to $613,000 for the three months ended September
30, 2001, a decrease of $32,000 or 5.3%. This decrease was primarily due to the
Company's efforts to consolidate the use of dental laboratories so that improved
pricing could be obtained based upon the Company's laboratory case volume. As a
percentage of net revenue, laboratory fees decreased to 7.7% for the three
months ended September 30, 2002 compared to 8.7% for the three months September
30, 2001.
Occupancy. For the three months ended September 30, 2002 occupancy expense
increased to $860,000 compared to $852,000 for the three months ended September
30, 2001, an increase of $7,000 or 0.9%. This increase was primarily due to
increased rental payments resulting from the renewal of Office leases at current
market rates for Offices whose leases expired subsequent to the 2001 period. As
a percentage of net revenue, occupancy expense decreased to 11.4% for the three
months ended September 30, 2002 compared to 12.1% for the three months ended
September 30, 2001.
Advertising and marketing. For the three months ended September 30, 2002
advertising and marketing increased to $96,000 compared to $83,000 for the three
months ended September 30, 2001, an increase of $13,000 or 15.8%. This increase
was primarily due to additional yellow page advertising in local directories. As
a percentage of net revenue, advertising and marketing increased to 1.3% for the
three months ended September 30, 2002 compared to 1.2% for the three months
ended September 30, 2001.
Depreciation and amortization. For the three months ended September 30, 2002
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, increased to $601,000 compared to $597,000 for
the three months ended September 30, 2001, an increase of $4,000 or 0.7%. This
increase is related to the increase in the Company's amortizable asset base
relating to the purchase of a portion of the remaining interest in Mississippi
Dental Group and all of the remaining interest in Glendale Dental Group during
the first and second quarters of 2002, respectively. As a percentage of net
revenue, depreciation and amortization decreased to 7.9% for the three months
ended September 30, 2002 compared to 8.5% for the three months ended September
30, 2001.
General and administrative. For the three months ended September 30, 2002
general and administrative, which is attributable to the Offices, increased to
$791,000 compared to $749,000 for the three months ended September 30, 2001, an
increase of $42,000 or 5.6%. This increase is primarily due to increased
recruiting expenses relating to the hiring of new dentists. As a percentage of
net revenue, general and administrative expenses decreased to 10.5% for the
three months ended September 30, 2002 compared to 10.6% for the three months
ended September 30, 2001.
16
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $1.3 million for the three months ended September
30, 2002 compared to $924,000 for the three months ended September 30, 2001, an
increase of $356,000 or 38.5%. As a percentage of net revenue, contribution from
dental offices increased to 16.9% for the three months ended September 30, 2002
compared to 13.1% for the three months ended September 30, 2001.
Corporate expenses - general and administrative. For the three months ended
September 30, 2002 corporate expenses - general and administrative increased to
$690,000 compared to $621,000 for the three months ended September 30, 2001, an
increase of $69,000 or 11.1%. This increase is primarily attributable to
incentive bonuses paid based on the increased profitability of the Company and
performance of the Company's Common Stock. As a percentage of net revenue,
corporate expense - general and administrative increased to 9.1% for the three
months ended September 30, 2002 compared to 8.8% during the three months ended
September 30, 2001.
Corporate expenses - depreciation and amortization. For the three months ended
September 30, 2002 corporate expenses - depreciation and amortization increased
to $84,000 as compared to $79,000 for the three months ended September 30, 2001,
an increase of $6,000 or 7.3%. This increase is primarily due to a higher
depreciable asset base due to the purchase of enhanced computer software. As a
percentage of net revenue, corporate expenses - depreciation and amortization
remained constant at 1.1% for the three months ended September 30, 2002 compared
to the three months ended September 30, 2001.
Operating income. As a result of the above, the Company generated operating
income of $505,000 for the three months ended September 30, 2002 compared to
operating income of $224,000 for the three months ended September 30, 2001, an
increase of $281,000 or 125.2%. As a percentage of net revenue, operating income
increased to 6.7% for the three months ended September 30, 2002 compared to 3.2%
for the three months ended September 30, 2001.
Interest expense, net. For the three months ended September 30, 2002 interest
expense decreased to $80,000 compared to $99,000 for the three months ended
September 30, 2001, a decrease of $19,000 or 19.3%. This decrease in interest
expense is attributable to a lower average outstanding debt balance and a
lowering of the interest rate on the Company's credit facility. As a percentage
of net revenue, interest expense decreased to 1.1% for the three months ended
September 30, 2002 compared to 1.4% for the three months ended September 30,
2001.
Net income. As a result of the above, the Company's net income was $264,000 for
the three months ended September 30, 2002 compared to net income of $126,000 for
the three months ended September 30, 2001, an increase of $138,000 or 109.9%.
Net income for the quarter ended September 30, 2002 was net of income tax
expense of $162,000 while the net income for the quarter ended September 30,
2001 did not include a provision for income taxes.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001:
Net revenue. For the nine months ended September 30, 2002 net revenue increased
to $23.0 million compared to $22.3 million for the nine months ended September
30, 2001, an increase of $677,000 or 3.0%.
Clinical salaries and benefits. For the nine months ended September 30, 2002
clinical salaries and benefits decreased to $8.8 million compared to $9.2
million for the nine months ended September 30, 2001, a decrease of $323,000 or
3.5%. This decrease was primarily due to attrition of support staff at the
Offices which were not replaced, partially offset by the recent hiring of
additional support personnel corresponding to the increased number of dentists
at the Offices. As a percentage of net revenue, clinical salaries and benefits
decreased to 38.5% for the nine months ended September 30, 2002 compared to
41.1% for the nine months ended September 30, 2001.
Dental supplies. For the nine months ended September 30, 2002 dental supplies
increased to $1.4 million compared to $1.3 million for the nine months ended
September 30, 2001, an increase of $17,000 or 1.3%. As a percentage of net
revenue, dental supplies decreased to 5.9% for the nine months ended September
30, 2002 compared to 6.0% for the nine months ended September 30, 2001.
17
Laboratory fees. For the nine months ended September 30, 2002 laboratory fees
decreased to $1.8 million compared to $1.9 million for the nine months ended
September 30, 2001, a decrease of $84,000 or 4.5%. This decrease was primarily
due to the Company's efforts to consolidate the use of dental laboratories so
that improved pricing could be obtained based upon the Company's laboratory case
volume. As a percentage of net revenue, laboratory fees decreased to 7.9% for
the nine months ended September 30, 2002 compared to 8.4% for the nine months
September 30, 2001.
Occupancy. For the nine months ended September 30, 2002 occupancy expense
increased to $2.6 million compared to $2.5 million for the nine months ended
September 30, 2001, an increase of $59,000 or 2.4%. This increase was primarily
due to increased rental payments resulting from the renewal of Office leases at
current market rates for Offices whose leases expired subsequent to the 2001
period. As a percentage of net revenue, occupancy expense decreased to 11.1% for
the nine months ended September 30, 2002 compared to 11.2% for the nine months
ended September 30, 2001.
Advertising and marketing. For the nine months ended September 30, 2002
advertising and marketing decreased to $256,000 compared to $264,000 for the
nine months ended September 30, 2001, a decrease of $7,000 or 2.8%. As a
percentage of net revenue, advertising and marketing decreased to 1.1% for the
nine months ended September 30, 2002 compared to 1.2% for the nine months ended
September 30, 2001.
Depreciation and amortization. For the nine months ended September 30, 2002
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, remained constant at $1.8 million compared to
the nine months ended September 30, 2001. As a percentage of net revenue,
depreciation and amortization decreased to 7.8% for the nine months ended
September 30, 2002 compared to 8.2% for the nine months ended September 30,
2001.
General and administrative. For the nine months ended September 30, 2002 general
and administrative, which is attributable to the Offices, increased to $2.4
million compared to $2.3 million for the nine months ended September 30, 2001,
an increase of $48,000 or 2.1%. As a percentage of net revenue, general and
administrative expenses decreased to 10.3% for the nine months ended September
30, 2002 compared to 10.4% during the nine months ended September 30, 2001.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $4.0 million for the nine months ended September 30,
2002 compared to $3.0 million for the nine months ended September 30, 2001, an
increase of $996,000 or 33.2%. As a percentage of net revenue, contribution from
dental offices increased to 17.4% for the nine months ended September 30, 2002
compared to 13.5% for the nine months ended September 30, 2001.
Corporate expenses - general and administrative. For the nine months ended
September 30, 2002 corporate expenses - general and administrative remained
constant at $2.3 million compared to the nine months ended September 30, 2001.
As a percentage of net revenue, corporate expense - general and administrative
decreased to 9.9% for the nine months ended September 30, 2002 compared to 10.4%
during the nine months ended September 30, 2001.
Corporate expenses - depreciation and amortization. For the nine months ended
September 30, 2002 corporate expenses - depreciation and amortization increased
to $248,000 compared to $244,000 for the nine months ended September 30, 2001,
an increase of $4,000 or 1.5%. As a percentage of net revenue, corporate
expenses - depreciation and amortization remained constant at 1.1% for the nine
months ended September 30, 2002 compared to the nine months ended September 30,
2001.
Operating income. As a result of the above, the Company generated operating
income of $1.5 million for the nine months ended September 30, 2002 compared to
operating income of $445,000 for the nine months ended September 30, 2001, an
increase of $1.0 million or 231.3%. As a percentage of net revenue, operating
income increased to 6.4% for the nine months ended September 30, 2002 compared
to 2.0% for the nine months ended September 30, 2001.
18
Interest expense, net. For the nine months ended September 30, 2002 interest
expense decreased to $275,000 compared to $376,000 for the nine months ended
September 30, 2001, a decrease of $101,000 or 26.9%. This decrease in interest
expense is attributable to a lower average outstanding debt balance and lower
interest rates during the current period. As a percentage of net revenue,
interest expense decreased to 1.2% for the nine months ended September 30, 2002
compared to 1.7% for the nine months ended September 30, 2001.
Net income. As a result of the above, the Company generated net income of
$744,000 for the nine months ended September 30, 2002 compared to net income of
$69,000 for the nine months ended September 30, 2001. Net income for the nine
months ended September 30, 2002 was net of income tax expense of $456,000 while
net income for the nine months ended September 30, 2001 did not include a
provision for income taxes.
Liquidity and Capital Resources
Since its inception, the Company has financed its growth through a combination
of private sales of convertible subordinated debentures and Common Stock, cash
provided by operating activities, a bank line of credit (the "Credit Facility"),
seller notes and its initial public offering of Common Stock.
Net cash provided by operating activities was approximately $3.0 million and
$3.9 million for the nine months ended September 30, 2001 and 2002,
respectively. During the 2002 period, excluding net income and after adding back
non-cash items, the Company's cash provided by operating activities consisted
primarily of an increase in accounts payable and accrued expenses of
approximately $377,000, a decrease in prepaid expense, income tax receivable and
other assets of approximately $370,000, an increase in income taxes payable of
approximately $185,000 and a decrease in accounts receivable of approximately
$133,000. Net cash provided by operating activities during the 2001 period,
excluding net income and after adding back non-cash items, consisted primarily
of a decrease in accounts receivable of approximately $427,000 and an increase
in accounts payable and accrued expenses of approximately $374,000.
Net cash used in investing activities was approximately $924,000 and $1.4
million for the nine months ended September 30, 2001 and 2002, respectively.
During the nine month period ended September 30, 2002, approximately $959,000
was utilized for the acquisition of a portion of the remaining interest in one
dental office, all of the remaining interest in another dental office and
approximately $396,000 was invested in the purchase of additional property and
equipment. For the nine months ended September 30, 2001, approximately $435,000
was invested in the purchase of the remaining 50% interest in an existing Office
and additional property and equipment purchases totaling approximately $431,000.
Net cash used in financing activities was approximately $1.8 million and $2.5
million for the nine months ended September 30, 2001 and 2002, respectively.
During the nine months ended September 30, 2002, net cash used in financing
activities was comprised of $1.4 million used to reduce the amount outstanding
on the Company's term-loan with its bank, $168,000 used to reduce the amount
outstanding on the Company's bank line of credit, $841,000 for the purchase and
retirement of Common Stock and approximately $230,000 for the repayment of
long-term debt. During the nine months ended September 30, 2001, net cash used
in financing activities was comprised of $1.7 million used to reduce the amount
outstanding on the Company's bank line of credit and $158,000 for the repayment
of long-term debt.
Under the Company's Credit Facility (as amended on September 9, 2002), the
Company may borrow on a revolving basis up to the lesser of an applicable
Borrowing Base (calculated in accordance with the most recent Borrowing Base
Certificate delivered to the Lender) or $2.0 million and on a non-revolving
basis, an aggregate principal amount not in excess of $4.0 million for working
capital, for restructuring of the Original Loan and for other general corporate
purposes. Balances bear interest at the lender's prime rate. The Company is also
obligated to pay an annual facility fee of .50% on the average unused amount of
the revolving line of credit during the previous full calendar month. Borrowings
on the revolving loan are limited to an availability formula based on the
Company's eligible accounts receivable. As amended, both the revolving loan and
the non-revolving note mature on April 30, 2003. At September 30, 2002, the
Company had no borrowings outstanding and $2.0 million available for borrowing
under the revolving loan and $2.5 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 September 30, 2002 the
Company was in full compliance with all of its covenants under this agreement.
19
At September 30, 2002, the Company had outstanding indebtedness of approximately
$1.3 million represented by notes issued in connection with various practice
acquisitions, all of which bear interest at 8.0%. The Company's material
commitments for capital expenditures total approximately $250,000. The Company
anticipates that these capital expenditures will be provided from cash on hand,
cash generated by operations, or borrowings under the Company's Credit Facility.
The Company's retained earnings as of September 30, 2002 was approximately
$609,000 and the Company had a working capital deficit on that date of
approximately $2.0 million which was the result of the classification of the
entire amount outstanding under the Credit Facility as a short-term liability.
The Company believes the Credit Facility will be extended beyond its current
maturity date. When excluding the effect of this classification, the Company's
working capital deficit would be $456,000. The Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") increased 40% to $3.5
million for the nine months ended September 30, 2002 compared to $2.5 million
for the same nine-month period in 2001. During the first nine months of 2002 the
Company reduced total bank debt outstanding by $1.5 million to $2.5 million as
of September 30, 2002.
The Company believes that cash generated from operations and borrowings under
its Credit Facility, will be sufficient to fund its anticipated working capital
needs, capital expenditures and future acquisitions for at least the next 12
months. In the event the Company is not able to successfully negotiate a new
Credit Facility at the end of its term, the Company's current sources of
liquidity may not be adequate. In addition, in order to meet its long-term
liquidity needs the Company may issue additional equity and debt securities,
subject to market and other conditions. There can be no assurance that such
additional financing will be available on terms acceptable to the Company. The
failure to raise the funds necessary to finance its future cash requirements
could adversely affect the Company's ability to pursue its strategy and could
negatively affect its operations in future periods.
On May 8, 2002 the Company's Board of Directors unanimously approved the
purchase of shares of the Company's Common Stock on the open market up to $1.0
million. On October 24, 2002 the Company's Board of Directors unanimously
approved an incremental increase of $500,000 in the amount that can be used to
purchase shares of the Company's Common Stock on the open market to $1.5
million. Through September 30, 2002 the Company, in 56 separate transactions,
purchased 92,522 shares of Common Stock at prices ranging from $7.35 to $11.20
per share, for total consideration of approximately $901,000, of which
approximately $60,000 was recorded as compensation expense in accordance with
Financial Accounting Standards Board Interpretation Number 44.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in United States interest rates. Historically
and as of June 30, 2002, the Company has not used derivative instruments or
engaged in hedging activities.
Interest Rate Risk. The interest payable on the Company's line-of-credit and
term-loan is variable based upon the prime rate, and, therefore, affected by
changes in market interest rates. At September 30, 2002, approximately $2.5
million was outstanding with an interest rate of 4.75% (Prime). The Company may
repay the balance in full at any time without penalty. As a result, the Company
does not believe that reasonably possible near-term changes in interest rates
will result in a material effect on future earnings, fair values or cash flows
of the Company. Based on calculations performed by the Company, a 1.0% increase
in the Company's interest rate would result in additional interest expense of
approximately $26,300 for the nine months ended September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
The Company, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of November 1, 2002 (the
"Evaluation Date"). Based upon this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded as of the Evaluation Date that the Company's
disclosure controls and procedures were effective for purposes of recording,
processing, summarizing and timely reporting material information required to be
disclosed in reports that the Company files under the Exchange Act.
Changes in internal controls.
There were no significant changes in our internal controls and no other factors
that could significantly affect these controls subsequent to the Evaluation
Date. The Company did not need to implement any corrective actions with regard
to any significant deficiency or material weakness in its internal controls.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Document
10.40 Second Amendment to Amended and Restated Credit Agreement dated
September 9, 2002 between the Registrant and Key Bank of Colorado.
(b) Reports on Form 8-K None
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
a Colorado corporation
Date: November 6, 2002 By: /s/ Frederic W.J. Birner
--------------------------------------------
Name: Frederic W.J. Birner
Title:Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: November 6, 2002 By: /s/ Dennis N. Genty
--------------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and
Accounting Officer)
23
CERTIFICATION
I, Frederic W.J. Birner, Chief Executive Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Birner
Dental Management Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
Registrant is made known to us by others within the
Company, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and
the audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the Registrant's ability to record, process,
summarize and report financial data and have
identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal controls;
6. The Registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 6, 2002 By: /s/ Frederic W.J. Birner
----------------------------------------
Name: Frederic W.J. Birner
Title Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
24
CERTIFICATION
I, Dennis N. Genty, Chief Financial Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Birner Dental Management Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
Registrant is made known to us by others within the
Company, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and
the audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the Registrant's ability to record, process,
summarize and report financial data and have
identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal controls;
6. The Registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 6, 2002 By: /s/ Dennis N. Genty
-------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer,
Secretary, Treasurer and Director
(Principal Financial Officer)
25
CERTIFICATION OF 10-Q REPORT
OF
BIRNER DENTAL MANAGEMENT SERVICES, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
1. The undersigned are the Chief Executive Officer and the Chief Financial
Officer of Birner Dental Management Services, Inc. This Certification
is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This
Certification accompanies the 10-Q Report of Birner Dental Management
Services, Inc. for the quarter ended September 30, 2002.
2. We certify that such 10-Q Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
that the information contained in such 10-Q Report fairly presents, in
all material respects, the financial condition and results of
operations of Birner Dental Management Services, Inc.
This Certification is executed as of November 6, 2002.
By: /s/ Frederic W.J. Birner
-----------------------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
By: /s/ Dennis N. Genty
----------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and Accounting Officer)
26