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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, 2003
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -------------------
Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ----------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 691-0680
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ---------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of November 4, 2003
- ------------------------------- -----------------------------------------
Common Stock, without par value 1,201,211
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2002
and September 30, 2003 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Nine Months Ended September 30, 2002 and 2003 4
Unaudited Condensed Statement of Shareholders' Equity 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2003 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
ASSETS 2002 2003
** (Unaudited)
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,072,757 $ 846,846
Accounts receivable, net of allowance for doubtful accounts
of $212,803 and $222,582, respectively 2,708,231 2,817,379
Deferred tax asset 120,622 120,622
Prepaid expenses and other assets 738,119 327,758
----------- -----------
Total current assets 4,639,729 4,112,605
PROPERTY AND EQUIPMENT, net 3,926,422 2,898,620
OTHER NONCURRENT ASSETS:
Intangible assets, net 15,496,271 14,922,429
Deferred charges and other assets 167,098 152,597
----------- -----------
Total assets $24,229,520 $22,086,251
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,981,247 $ 3,945,002
Income taxes payable 30,219 305,798
Current maturities of long-term debt 2,169,713 346,912
----------- -----------
Total current liabilities 6,181,179 4,597,712
LONG-TERM LIABILITIES:
Deferred tax liability, net 24,258 24,258
Long-term debt, net of current maturities 1,087,422 3,126,096
Other long-term obligations 177,635 186,886
----------- -----------
Total liabilities 7,470,494 7,934,952
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding - -
Common Stock, no par value, 20,000,000 shares
authorized; 1,434,817 and 1,201,211 shares issued and
outstanding, respectively 15,959,829 12,468,453
Retained earnings 799,197 1,682,846
----------- -----------
Total shareholders' equity 16,759,026 14,151,299
----------- -----------
Total liabilities and shareholders' equity $24,229,520 $22,086,251
=========== ===========
** Derived from the Company's audited consolidated
balance sheet at December 31, 2002
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2002 2003 2002 2003
----------- ----------- ----------- -----------
NET REVENUE $ 7,558,588 $ 7,537,951 $22,959,798 $23,147,179
DIRECT EXPENSES:
Clinical salaries and benefits 2,895,670 2,915,517 8,833,681 8,929,258
Dental supplies 455,705 449,927 1,354,664 1,373,100
Laboratory fees 580,334 573,194 1,801,312 1,842,320
Occupancy 859,540 888,577 2,554,425 2,622,545
Advertising and marketing 95,826 82,100 256,481 275,758
Depreciation and amortization 600,974 528,144 1,794,200 1,675,630
General and administrative 790,908 776,146 2,365,842 2,305,234
----------- ----------- ----------- -----------
6,278,957 6,213,605 18,960,605 19,023,845
----------- ----------- ----------- -----------
Contribution from dental offices 1,279,631 1,324,346 3,999,193 4,123,334
CORPORATE EXPENSES:
General and administrative 689,802 736,430 2,277,607 2,348,128
Depreciation and amortization 84,436 71,998 247,615 226,747
----------- ----------- ----------- -----------
Operating income 505,393 515,918 1,473,971 1,548,459
Interest expense, net 79,673 34,572 274,704 123,220
----------- ----------- ----------- -----------
Income before income taxes 425,720 481,346 1,199,267 1,425,239
Income tax expense 161,774 182,911 455,722 541,590
----------- ----------- ----------- -----------
Net income $ 263,946 $ 298,435 $ 743,545 $ 883,649
=========== =========== =========== ===========
Net income per share of Common Stock:
Basic $ .18 $ .24 $ .50 $ .66
=========== =========== =========== ===========
Diluted $ .16 $ .21 $ .46 $ .60
=========== =========== ========== ===========
Weighted average number of shares of
Common Stock and dilutive securities:
Basic 1,471,646 1,260,181 1,493,840 1,335,773
========= ========= ========= =========
Diluted 1,617,310 1,388,321 1,629,786 1,465,854
========= ========= ========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Total
--------------------------- Retained Shareholders'
Shares Amount Earnings Equity
--------- ------------ ------------ -----------
BALANCES, December 31, 2002 1,434,817 $ 15,959,829 $ 799,197 $16,759,026
Common Stock options exercised 40,556 161,673 - 161,673
Purchase and retirement of Common Stock (274,162) (3,662,709) - (3,662,709)
Other - 9,660 - 9,660
Net Income - - 883,649 883,649
--------- ------------ ------------ -----------
BALANCES, September 30, 2003 1,201,211 $ 12,468,453 $ 1,682,846 $14,151,299
========= ============ ============ ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------
2002 2003
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 743,545 $ 883,649
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,041,815 1,902,377
(Gain) Loss on disposition of property (10,838) 11,055
Provision for doubtful accounts 13,545 9,779
Amortization of debt issuance costs 54,091 18,937
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 132,605 (118,927)
Prepaid expenses and other assets 369,773 403,925
Accounts payable and accrued expenses 376,972 (36,245)
Income taxes payable 184,842 275,579
Other long-term obligations (1,125) 9,251
------------ -----------
Net cash provided by operating activities 3,905,225 3,359,380
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (396,064) (305,788)
Acquisition of dental offices (959,150) -
----------- -----------
Net cash used in investing activities (1,355,214) (305,788)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances (repayments) - line of credit (168,000) 2,300,000
Repayment of bank term-loan (1,375,000) (1,825,000)
Repayment of long-term debt (229,615) (259,127)
Payment of debt issuance and financing costs (15,957) (4,000)
Proceeds from exercise of Common Stock options 93,013 161,673
Purchase and retirement of Common Stock (841,119) (3,662,709)
Other - 9,660
----------- -----------
Net cash used in financing activities (2,536,678) (3,279,503)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,333 (225,911)
CASH AND CASH EQUIVALENTS, beginning of period 949,236 1,072,757
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 962,569 $ 846,846
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------
2002 2003
------------ ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 275,047 $ 159,807
============= ============
Cash paid during the period for income taxes $ 270,880 $ 266,010
============= ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable incurred from:
Acquisition of dental offices $ 959,000 $ -
============= ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by Birner Dental
Management Services, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures included herein are adequate to make the
information presented not misleading. A description of the Company's accounting
policies and other financial information is included in the audited consolidated
financial statements as filed with the Securities and Exchange Commission in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of September 30, 2003 and the results of
operations and cash flows for the periods presented. All such adjustments are of
a normal recurring nature. The results of operations for the quarter and nine
months ended September 30, 2003 are not necessarily indicative of the results
that may be achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
(2) SIGNIFICANT ACCOUNTING POLICIES
Stock Options
The Company accounts for stock options using the intrinsic value method wherein
compensation expense is recognized on stock options granted only for the excess
of the market price of our common stock over the option exercise price on the
date of grant. All options of the Company are granted at amounts equal to or
higher than the fair-value of our stock so no compensation expense is recorded.
Some companies also recognize compensation expense for the fair value of the
option right itself. The Company has elected not to adopt this accounting method
because it requires the use of subjective valuation models which the Company
believes are not representative of the real value of the option to either the
Company or the optionees. However, we are required to disclose the pro forma
effect of accounting for stock options using such a valuation for all options
granted. The fair value of the options was estimated at the date of grant using
a Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2003 2002 2003
------ ------ ------ ------
Risk-free interest rate * * 3.49% 2.39%
Expected dividend yield 0% 0% 0% 0%
Expected lives * * 5.0 years 5.0 years
Expected volatility 54% 45% 67% 48%
* There were no options granted during the third quarter of either 2002 or 2003.
To estimate lives of options for this valuation, it was assumed options would be
exercised one year after becoming fully vested. All options are initially
assumed to vest. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
Fair value computations are highly sensitive to the volatility factor assumed;
the greater the volatility, the higher the computed fair value of options
granted.
There were no options granted during the quarters ended September 30, 2002 and
2003, respectively. The total fair value of options and warrants granted was
computed to be approximately $72,000 and $469,000 for the nine months ended
September 30, 2002 and 2003, respectively. These amounts are amortized ratably
over the vesting periods of the options or recognized at the date of grant if no
vesting period is required. Pro forma stock-based compensation, net of the
effect of forfeitures, was $38,000 and ($4,000) for the quarters ended September
30, 2002 and 2003, respectively and $116,000 and $373,000 for the nine months
ended September 30, 2002 and 2003, respectively.
8
If the Company had accounted for its stock-based compensation plans by
recognizing compensation expense based upon the fair value of stock options on
the grant date under the methodology prescribed by SFAS No. 123, the Company's
net income and net income per common share would have been reported as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2003 2002 2003
-------- -------- -------- --------
Net income, as reported 263,946 298,435 $743,545 $883,649
Pro forma stock compensation(expense)income,
net of income tax benefit (expense) (23,393) 2,768 (71,642) (231,205)
-------- -------- -------- --------
Pro forma net income 240,553 301,203 $671,903 $652,444
======== ======== ======== ========
Net income per share, basic:
As reported $ .18 $ .24 $ .50 $ .66
Pro forma stock compensation
(expense)income (.02) - (.05) (.17)
-------- -------- -------- --------
Pro forma $ .16 $ .24 $ .45 $ .49
Net income per share, diluted:
As reported $ .16 $ .21 $ .46 $ .60
Pro forma stock compensation
(expense)income (.01) .01 (.04) (.15)
-------- -------- -------- --------
Pro forma $ .15 $ .22 $ .42 $ .45
(3) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share".
Quarters Ended September 30,
------------------------------------------------------------------------------
2002 2003
------------------------------------- -------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- --------- --------- ---------
Basic EPS:
Net income available to
shares of Common Stock $ 263,946 1,471,646 $ .18 $ 298,435 1,260,181 $ .24
Effect of dilutive shares of Common
Stock from stock options
and warrants - 145,664 (.02) - 128,140 (.03)
Diluted EPS:
--------- --------- --------- --------- --------- ---------
Net income available to
shares of Common Stock $ 263,946 1,617,310 $ .16 $ 298,435 1,388,321 $ .21
========= ========= ========= ========= ========= =========
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended September 30, 2002
and 2003 relates to the effect of 145,664 and 128,140, respectively, of dilutive
shares of Common Stock from stock options and warrants which are included in
total shares for the diluted calculation.
9
Quarters Ended September 30,
------------------------------------------------------------------------------
2002 2003
------------------------------------- -------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- --------- --------- ---------
Basic EPS:
Net income available to
shares of Common Stock $ 743,545 1,493,840 $ .50 $ 883,649 1,335,773 $ .66
Effect of dilutive shares of Common
Stock from stock options
and warrants - 135,946 (.04) - 130,081 (.06)
Diluted EPS:
Net income available to
shares of Common Stock $ 743,545 1,629,786 $ .46 $ 883,649 1,465,854 $ .60
========= ========= ========= ========= ========= =========
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the nine months ended September 30,
2002 and 2003 relates to the effect of 135,946 and 130,081, respectively, of
dilutive shares of Common Stock from stock options and warrants which are
included in total shares for the diluted calculation.
(4) LINE OF CREDIT
On August 7, 2003 the Company's current Credit Facility Agreement was amended.
The new Credit Facility allows the Company to borrow, on a revolving basis, an
aggregate principal amount not to exceed $4.0 million at either, or a
combination of, the Lender's Base Rate plus a Base Rate Margin or at a LIBOR
rate plus a LIBOR Rate Margin, at the Company's option. The Lender's Base Rate
computes interest at the higher of the Lender's "prime rate" plus a Base Rate
Margin of one-half percent (0.5%) or the Federal Funds Rate plus one-half
percent (0.5%), plus a Base Rate Margin of one-half percent (0.5%). The LIBOR
option computes interest at the LIBOR Rate as of the date such LIBOR rate Loan
was made plus a LIBOR Rate Margin of 2.0%. A commitment fee of 0.25% on the
average daily unused amount of the Revolving Loan commitment during the
preceding quarter will also be assessed. The Company may prepay any Base Rate
Loan at any time and any LIBOR Rate Loan upon not less than three business days
prior written notice given to the Lender, but the Company will be responsible
for any loss or cost incurred by the Lender in liquidating or employing deposits
required to fund or maintain the LIBOR rate Loan. The amended Credit Facility
expires on May 31, 2005. At September 30, 2003, the Company had $2.3 million
outstanding and $1.7 million available for borrowing under the revolving loan.
This consisted of $500,000 outstanding under the Base Rate Option and $1.8
million outstanding under the LIBOR Rate option. The Credit Facility requires
the Company to maintain certain financial ratios on an ongoing basis. At
September 30, 2003 the Company was in full compliance with all of its covenants
under this agreement.
(5) RECENT ACCOUNTING PROUNCEMENTS
In January 2003, FASB Interpretation 46 ("FIN 46"), "Consolidation of Variable
Interest Entities", was issued. FIN 46 requires a company to consolidate
variable interest entities ("VIE") if the enterprise is a primary beneficiary
(holds a majority of the variable interest) of the VIE and the VIE possess
specific characteristics. It also requires additional disclosure for parties
involved with VIEs. The provisions of FIN 46 are effective in 2003. As the
Company does not have a VIE, adoption of this interpretation will not have an
effect on our financial statements.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. The new guidance amends SFAS 133 for decisions made: (a) as part
of the Derivatives Implementation Group process that effectively required
amendments to SFAS 133, (b) in connection with other Board projects dealing with
financial instruments, and (c) regarding implementation issues raised in
relation to the application of the definition of a derivative, particularly
10
regarding the meaning of an "underlying" and the characteristics of a derivative
that contains financing components. The amendments set forth in SFAS 149 improve
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. SFAS 149 is generally effective for contracts
entered into or modified after June 30, 2003 (with a few exceptions) and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively. We do not expect the provisions of SFAS 149 to have a
material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS 150
requires that three classes of freestanding financial statements that embody
obligations for entities be classified as liabilities. Generally, SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not believe the adoption of SFAS
150 will have a material impact on its financial position or results of
operations.
(6) INCOME TAXES
The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax consequences of events, which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company is aware of the risk that the
recorded deferred tax assets may not be realizable. However, management believes
that it will obtain the full benefit of the deferred tax assets on the basis of
its evaluation of the Company's anticipated profitability over the period of
years that the temporary differences are expected to become tax deductions. The
Company believes that sufficient book and taxable income will be generated to
realize the benefit of these tax assets.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The statements contained in this Form 10-Q ("Quarterly Report") of the Company,
which are not historical in nature, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements in this Item 2., "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
in Part II, Item 1., "Legal Proceedings", regarding intent, belief or current
expectations of the Company or its officers with respect to the development or
acquisition of additional dental practices ("Offices") and the successful
integration of such Offices into the Company's network, recruitment of
additional dentists, funding of the Company's expansion, capital expenditures,
payment or nonpayment of dividends, cash outlays for income taxes and outcome of
pending legal proceedings.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
the general economy of the United States and the specific markets in which the
Company's Offices are located or are proposed to be located, trends in the
health care, dental care and managed care industries, as well as the risk
factors set forth in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" section of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (as filed
with the Securities Exchange Commission on March 27, 2003), the "Management's
Discussion and Analysis of Financial Condition and Results of Operations -Year
2003" of this Quarterly Report, and other factors as may be identified from time
to time in the Company's filings with the Securities and Exchange Commission or
in the Company's press releases.
General
The following discussion relates to factors, which have affected the results of
operations and financial condition of the Company for the quarters and nine
months ended September 30, 2002 and 2003. This information should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto included elsewhere in this Quarterly Report.
Overview
The Company was formed in May 1995, and current1y manages 54 Offices in
Colorado, New Mexico and Arizona staffed by 80 general dentists and 14
specialists. The Company derives all of its revenue (as defined below) from its
Management Agreements with professional corporations ("P.C.s") which conduct the
practice at each Office. In addition, the Company assumes a number of
responsibilities when it acquires a new practice or develops a de novo Office,
which are set forth in a Management Agreement, as described below. The Company
expects to expand in existing markets primarily by enhancing the operating
performance of its existing Offices, by acquiring dental practices and by
developing de novo Offices. The Company has historically expanded in existing
markets by acquiring solo and group dental practices and may do so in the future
if an economically feasible opportunity presents itself.
The Company was formed with the intention of becoming the leading provider of
business services to dental practices in Colorado. The Company's growth and
success in the Colorado market led to its expansion into the New Mexico and
Arizona markets. The Company's growth strategy is to focus on greater
utilization of existing physical capacity through recruiting more dentists and
support staff and through selective acquisitions and development of de novo
Offices. The following table sets forth the increase in the number of Offices
affiliated with and managed by the Company from 1999 through September 30, 2003,
including the number of de novo Offices and acquired Offices in each such
period.
1999 2000 2001 2002 2003 (1)
---- ---- ---- ---- ----
Offices at beginning of the period 49 54 56 54 54
De novo Offices 5 2 0 0 0
Acquired Offices 1 0 0 0 0
Consolidation of Offices (1) 0 (2) 0 0
---- ---- ---- ---- ----
Offices at end of the period 54 56 54 54 54
==== ==== ==== ==== ====
(1) From January 1, 2003 through September 30, 2003.
12
At September 30, 2003, the Company's total assets of approximately $22.1 million
included approximately $14.9 million of identifiable intangible assets related
to Management Agreements. At that date, the Company had total shareholders'
equity of approximately $14.1 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 September 30, 2003 a review by the Company
determined that there was no permanent impairment of any long-lived or
intangible asset at any Office.
Components of Revenue and Expenses
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Offices. Net revenue
represents Revenue less amounts retained by the Offices. The amounts retained by
the Offices represent amounts paid as salary 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 certain fees for dental services
provided by the Offices, (viii) arranging for certain legal and accounting
services, and (ix) negotiating with managed care organizations. The P.C. is
responsible for, among other things (i) supervision of all dentists and dental
hygienists, (ii) complying with all laws, rules and regulations relating to
dentists and dental hygienists, and (iii) maintaining proper patient records.
The Company has made, and intends to make in the future, loans to P.C.s in
Colorado, New Mexico and Arizona to fund their acquisition of dental assets from
third parties in order to comply with the laws of such states.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at each Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office, (ii) direct
costs of all Company employees or consultants who provide services to or in
connection with the Office, (iii) utilities, janitorial, laboratory, supplies,
advertising and other expenses incurred by the Company in carrying out its
obligations under the Management Agreement, (iv) depreciation expense associated
with the P.C.'s assets and the assets of the Company used at the Office, and the
amortization of intangible asset value relating to the Office, (v) interest
expense on indebtedness incurred by the Company to finance any of its
obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company's or the P.C.'s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company's personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of the Company
including the P.C.'s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Offices are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists who work at the Offices of the P.C.'s. This enables the Company to
manage the profitability of the Offices. Each Management Agreement is for a term
of 40 years. Further, each Management Agreement generally may be terminated by
the P.C. only for cause, which includes a material default by or bankruptcy of
the Company. Upon expiration or termination of a Management Agreement by either
party, the P.C. must satisfy all obligations it has to the Company.
13
The Company's Revenue is derived principally from fee-for-service revenue and
revenue from capitated managed dental care plans. Fee-for-service revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive supplemental payments for more complicated or elective procedures.
In contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided.
The Company seeks to increase its fee-for-service business by increasing the
patient volume at existing Offices through effective marketing and advertising
programs and by opening new Offices. The Company seeks to supplement this
fee-for-service business with revenue from contracts with capitated managed
dental care plans. Although the Company's fee-for-service business generally is
more profitable than its capitated managed dental care business, capitated
managed dental care business serves to increase facility utilization and dentist
productivity. The relative percentage of the Company's revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable contractual terms. In addition, the profitability of managed dental
care Revenue varies from market to market depending on the level of capitation
payments and co-payments in proportion to the level of benefits required to be
provided. Historically, the Company has experienced a decrease in capitation
premiums received from insurance companies' managed care plans for which the
Company's affiliated Offices are providers. The Company believes this decrease
in capitation premiums has been caused by insurance companies decreasing the
scope of, or in some cases, discontinuing altogether their managed care
products; a trend the Company believes will continue. The Company has
experienced and expects to continue to experience an increase in patient visits
with PPO insurance and believes a significant portion of this increase has been
the result of patients moving from insurance companies' managed care products to
their PPO products.
Results of Operations
For the three months ended September 30, 2003, Revenue increased $151,000, or
1.4%, to $10.8 million compared to $10.7 million for the three months ended
September 30, 2002. The Company had anticipated third quarter total dental group
practice revenue growth in the 3% to 4% range versus the actual growth of 1.4%.
The Company believes that the difference between the actual and expected revenue
growth is the impact of jobs being lost in its markets over the past few years.
To combat any further economic softness, the Company is actively exploring ways
to increase revenue growth, including; increased marketing, acquisitions of
group or individual practices, and de novo practice development. For the nine
months ended September 30, 2003, Revenue increased $467,000, or 1.4% to $32.8
million compared to $32.4 million for the nine months ended September 30, 2002.
Nine-month revenues in 2003 were hampered by a severe snowstorm in Colorado,
which affected office performance for most of the week of March 17, including
the closing of a significant number of offices for three days.
14
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's Condensed Consolidated Statements of
Operations. The information contained in the table represents the historical
results of the Company. The information that follows should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto contained elsewhere in this Quarterly Report.
Quarters Ended September 30, Nine Months Ended September 30,
----------------------------- -------------------------------
2002 2003 2002 2003
------- ------- ------- -------
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 38.3 % 38.6 % 38.5 % 38.6 %
Dental supplies 6.0 % 6.0 % 5.9 % 5.9 %
Laboratory fees 7.7 % 7.6 % 7.9 % 8.0 %
Occupancy 11.4 % 11.8 % 11.1 % 11.3 %
Advertising and marketing 1.3 % 1.1 % 1.1 % 1.2 %
Depreciation and amortization 7.9 % 7.0 % 7.8 % 7.2 %
General and administrative 10.5 % 10.3 % 10.3 % 10.0 %
------- ------- ------- --------
83.1 % 82.4 % 82.6 % 82.2 %
------- ------- ------- --------
Contribution from dental offices 16.9 % 17.6 % 17.4 %. 17.8 %
Corporate Expenses:
General and administrative 9.1 % 9.8 % 9.9 % 10.1 %
Depreciation and amortization 1.1 % 1.0 % 1.1 % 1.0 %
------- ------- ------- --------
Operating income 6.7 % 6.8 % 6.4 % 6.7 %
Interest expense, net 1.1 % 0.4 % 1.2 % 0.5 %
------- ------- ------- --------
Income before income taxes 5.6 % 6.4 % 5.2 % 6.2 %
Income tax expense 2.1 % 2.4 % 2.0 % 2.4 %
------- ------- ------- -------
Net income 3.5 % 4.0 % 3.2 % 3.8 %
======= ======= ======= ========
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002:
Net revenue. For the three months ended September 30, 2003 net revenue, or total
dental group practice revenue less amounts retained by group practices for
compensation to employed dentists and hygienists, decreased $21,000, or 0.3% to
$7.5 million.
Clinical salaries and benefits. For the three months ended September 30, 2003
clinical salaries and benefits remained constant at $2.9 million as compared to
the three months ended September 30, 2002. As a percentage of net revenue,
clinical salaries and benefits increased to 38.6% for the three months ended
September 30, 2003 compared to 38.3% for the three months ended September 30,
2002.
Dental supplies. For the three months ended September 30, 2003 dental supplies
decreased to $450,000 compared to $456,000 for the three months ended September
30, 2002, a decrease of $6,000 or 1.3%. As a percentage of net revenue, dental
supplies remained constant at 6.0% for the three months ended September 30, 2003
compared to the three months ended September 30, 2002.
Laboratory fees. For the three months ended September 30, 2003 laboratory fees
decreased to $573,000 compared to $580,000 for the three months ended September
30, 2002, a decrease of $7,000 or 1.2%. As a percentage of net revenue,
laboratory fees decreased to 7.6% for the three months ended September 30, 2003
compared to 7.7% for the three months September 30, 2002.
15
Occupancy. For the three months ended September 30, 2003 occupancy expense
increased to $889,000 compared to $860,000 for the three months ended September
30, 2002, an increase of $29,000 or 3.4%. 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 2002 period. As
a percentage of net revenue, occupancy expense increased to 11.8% for the three
months ended September 30, 2003 compared to 11.4% for the three months ended
September 30, 2002.
Advertising and marketing. For the three months ended September 30, 2003
advertising and marketing decreased to $82,000 compared to $96,000 for the three
months ended September 30, 2002, a decrease of $14,000 or 14.3%. This decrease
is primarily due to the cancellation during the second quarter of 2003 of the
enhanced yellow page advertising that was effective during the third quarter of
2002. As a percentage of net revenue, advertising and marketing decreased to
1.1% for the three months ended September 30, 2003 compared to 1.3% for the
three months ended September 30, 2002.
Depreciation and amortization. For the three months ended September 30, 2003
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, decreased to $528,000 compared to $601,000 for
the three months ended September 30, 2002, a decrease of $73,000 or 12.1%. The
decrease in the Company's depreciable asset base is a result of fewer Office
acquisitions and no de novo Offices developed over the past three years as well
as existing assets becoming fully depreciated. As a percentage of net revenue,
depreciation and amortization decreased to 7.0% for the three months ended
September 30, 2003 compared to 7.9% for the three months ended September 30,
2002.
General and administrative. For the three months ended September 30, 2003
general and administrative, which is attributable to the Offices, decreased to
$776,000 compared to $791,000 for the three months ended September 30, 2002, a
decrease of $15,000 or 1.9%. The decrease is directly related to the Company's
continued efforts to control costs. As a percentage of net revenue, general and
administrative expenses decreased to 10.3% for the three months ended September
30, 2003 compared to 10.5% during the three months ended September 30, 2002.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased $45,000, or 3.5% to $1.3 million for the three months
ended September 30, 2003 compared to the three months ended September 30, 2002.
As a percentage of net revenue, contribution from dental offices increased to
17.6% for the three months ended September 30, 2003 compared to 16.9% for the
three months ended September 30, 2002.
Corporate expenses - general and administrative. For the three months ended
September 30, 2003 corporate expenses - general and administrative increased to
$736,000 compared to $690,000 for the three months ended September 30, 2002, an
increase of $47,000 or 6.8%. This increase is attributable primarily to higher
performance bonuses and health insurance premiums paid in 2003. As a percentage
of net revenue, corporate expense - general and administrative increased to 9.8%
for the three months ended September 30, 2003 compared to 9.1% during the three
months ended September 30, 2002.
Corporate expenses - depreciation and amortization. For the three months ended
September 30, 2003 corporate expenses - depreciation and amortization decreased
to $72,000 compared to $84,000 for the three months ended September 30, 2002, a
decrease of $12,000 or 14.7%. This decrease is related to the decrease in the
Company's depreciable asset base. As a percentage of net revenue, corporate
expenses - depreciation and amortization decreased to 1.0% for the three months
ended September 30, 2003 compared to 1.1% for the three months ended September
30, 2002.
Operating income. As a result of the matters discussed above, the Company
generated operating income of $516,000 for the three months ended September 30,
2003 compared to operating income of $505,000 for the three months ended
September 30, 2002, an increase of $11,000 or 2.1%. As a percentage of net
revenue, operating income increased to 6.8% for the three months ended September
30, 2003 compared to 6.7% for the three months ended September 30, 2002.
Interest expense, net. For the three months ended September 30, 2003 interest
expense, net decreased to $35,000 compared to $80,000 for the three months ended
September 30, 2002, a decrease of $45,000 or 56.6%. This decrease in interest
expense is attributable to lower average outstanding debt balances, lower
interest rates, lower amortization of debt acquisition costs and the
implementation of patient late charges during 2003, which offset interest
expense by $20,000 during the third quarter of 2003. As a percentage of net
revenue, interest expense decreased to 0.4% for the three months ended September
30, 2003 compared to 1.1% for the three months ended September 30, 2002.
16
Net income. As a result of the above, the Company reported net income of
$298,000 for the three months ended September 30, 2003 compared to net income of
$264,000 for the three months ended September 30, 2002, an increase of $34,000
or 13.1%. Net income for the quarter ended September 30, 2003 was net of income
tax expense of $183,000 while net income for the quarter ended September 30,
2002 was net of income tax expense of $162,000. As a percentage of net revenue,
net income increased to 4.0% for the three months ended September 30, 2003
compared to 3.5% for the three months ended September 30, 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002:
Net revenue. For the nine months ended September 30, 2003 net revenue, or total
dental group practice revenue less amounts retained by group practices for
compensation to employed dentists and hygienists, increased to $23.1 million
compared to $23.0 million for the nine months ended September 30, 2002, an
increase of $187,000 or 0.8%.
Clinical salaries and benefits. For the nine months ended September 30, 2003
clinical salaries and benefits increased to $8.9 million compared to $8.8
million for the nine months ended September 30, 2002, an increase of $96,000 or
1.1%. This increase was primarily due to wage increases granted during the first
quarter of 2003. As a percentage of net revenue, clinical salaries and benefits
increased to 38.6% for the nine months ended September 30, 2003 compared to
38.5% for the nine months ended September 30, 2002.
Dental supplies. For the nine months ended September 30, 2003 dental supplies
remained constant at $1.4 million compared to the nine months ended September
30, 2002. As a percentage of net revenue, dental supplies remained constant at
5.9% for the nine months ended September 30, 2003 compared to the nine months
ended September 30, 2002.
Laboratory fees. For the nine months ended September 30, 2002 laboratory fees
remained constant at $1.8 million compared to the nine months ended September
30, 2002. As a percentage of net revenue, laboratory fees increased to 8.0% for
the nine months ended September 30, 2003 compared to 7.9% for the nine months
September 30, 2002.
Occupancy. For the nine months ended September 30, 2003 occupancy expense
increased $68,000, or 2.7% to $2.6 million compared to the nine months ended
September 30, 2002. As a percentage of net revenue, occupancy expense increased
to 11.3% for the nine months ended September 30, 2003 compared to 11.1% for the
nine months ended September 30, 2002.
Advertising and marketing. For the nine months ended September 30, 2003
advertising and marketing increased to $276,000 compared to $256,000 for the
nine months ended September 30, 2002, an increase of $19,000 or 7.5%. This
increase is primarily due to enhanced yellow page advertising that began in June
2002 and continued into June 2003. As a percentage of net revenue, advertising
and marketing increased to 1.2% for the nine months ended September 30, 2002
compared to 1.1% for the nine months ended September 30, 2002.
Depreciation and amortization. For the nine months ended September 30, 2003
depreciation and amortization, which consists of depreciation and amortization
expense incurred at the Offices, decreased to $1.7 million compared to $1.8
million for nine months ended September 30, 2002, a decrease of $119,000 or
6.6%. The decrease in the Company's depreciable asset base is a result of fewer
Office acquisitions and no de novo Offices developed over the past three years
as well as existing assets becoming fully depreciated. As a percentage of net
revenue, depreciation and amortization decreased to 7.2% for the nine months
ended September 30, 2003 compared to 7.8% for the nine months ended September
30, 2002.
General and administrative. For the nine months ended September 30, 2003 general
and administrative, which is attributable to the Offices, decreased to $2.3
million compared to $2.4 million for the nine months ended September 30, 2002, a
decrease of $61,000 or 2.6%. The decrease is directly related to the Company's
continued efforts to control costs. As a percentage of net revenue, general and
administrative expenses decreased to 10.0% for the nine months ended September
30, 2003 compared to 10.3% during the nine months ended September 30, 2002.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $4.1 million for the nine months ended September 30,
2003 compared to $4.0 million for the nine months ended September 30, 2002, an
increase of $124,000 or 3.1%. As a percentage of net revenue, contribution from
dental offices increased to 17.8% for the nine months ended September 30, 2003
compared to 17.4% for the nine months ended September 30, 2002.
Corporate expenses - general and administrative. For the nine months ended
September 30, 2003 corporate expenses - general and administrative increased
$71,000, or 3.1% to $2.3 million compared to the nine months ended September 30,
2002. As a percentage of net revenue, corporate expense - general and
administrative increased to 10.1% for the nine months ended September 30, 2003
compared to 9.9% for the nine months ended September 30, 2002.
17
Corporate expenses - depreciation and amortization. For the nine months ended
September 30, 2003 corporate expenses - depreciation and amortization decreased
to $227,000 compared to $248,000 for the nine months ended September 30, 2002, a
decrease of $21,000 or 8.4%. This decrease is related to the decrease in the
Company's depreciable asset base. As a percentage of net revenue, corporate
expenses - depreciation and amortization decreased to 1.0% for the nine months
ended September 30, 2003 compared to 1.1% for the nine months ended September
30, 2002.
Operating income. As a result of the above, the Company generated operating
income of $1,548,000 for the nine months ended September 30, 2003 compared to
operating income of $1,474,000 for the nine months ended September 30, 2002, an
increase of $74,000 or 5.1%. As a percentage of net revenue, operating income
increased to 6.7% for the nine months ended September 30, 2003 compared to 6.4%
for the nine months ended September 30, 2002.
Interest expense, net. For the nine months ended September 30, 2003 interest
expense, net decreased to $123,000 compared to $275,000 for the nine months
ended September 30, 2002, a decrease of $152,000 or 55.1%. This decrease in
interest expense is attributable to a lower average outstanding debt balances,
lower interest rates, lower amortization of debt acquisition costs and the
implementation of patient late charges in 2003 that offset interest expense by
$54,000 during the first nine months of 2003. As a percentage of net revenue,
interest expense decreased to 0.5% for the nine months ended September 30, 2003
compared to 1.2% for the nine months ended September 30, 2002.
Net income. As a result of the above, the Company's generated net income of
$884,000 for the nine months ended September 30, 2003 compared to net income of
$744,000 for the nine months ended September 30, 2002, an increase of $140,000
or 18.8%. Net income for the nine months ended September 30, 2003 was net of
income tax expense of $542,000 while the net income for the nine months ended
September 30, 2002 was net of income tax expense of $456,000. As a percentage of
net revenue, net income increased to 3.8% for the nine months ended September
30, 2003 compared to 3.2% for the nine months ended September 30, 2002.
Liquidity and Capital Resources
The Company finances its operations and growth through a combination of cash
provided by operating activities, a bank line of credit (the "Credit Facility")
and, from time to time, seller notes.
Net cash provided by operating activities was approximately $3.9 million and
$3.4 million for the nine months ended September 30, 2002 and 2003,
respectively. During 2003, excluding net income and after adding back non-cash
items, the Company's cash provided by operating activities consisted primarily
of a decrease in prepaid expenses and other assets of approximately $404,000 and
an increase in income taxes payable of approximately $275,000, partially offset
by an increase in accounts receivable of approximately $119,000 and a decrease
in accounts payable of approximately $36,000. During the 2002 period, excluding
net income and after adding back non-cash items, the Company's cash provided by
operating activities consisted primarily of an increase in accounts payable and
accrued expenses of approximately $377,000, a decrease in prepaid expense and
other assets of approximately $370,000, a decrease in accounts receivable of
approximately $133,000, and an increase in income taxes payable of approximately
$185,000.
Net cash used in investing activities was approximately $1.4 million and
$306,000 for the nine months ended September 30, 2002 and 2003, respectively.
For the nine months ended September 30, 2003, approximately $306,000 was
invested in the purchase of additional property and equipment. For the nine
months ended September 30, 2002, approximately $959,000 was utilized for
acquisition of dental offices and approximately $396,000 was invested in the
purchase of additional property and equipment.
Net cash used in financing activities was approximately $2.5 million and $3.3
million for the nine months ended September 30, 2002 and 2003, respectively.
During the nine months ended September 30, 2003, net cash used in financing
activities was comprised of approximately $3.7 million used in the purchase and
retirement of Common Stock and approximately $259,000 for the repayment of
long-term debt, partially offset by approximately $475,000 in additional funds
drawn on the Company's Credit Facility with its bank and approximately $162,000
in proceeds from the exercise of Common Stock options. During the nine months
ended September 30, 2002, net cash used in financing activities was comprised of
approximately $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, approximately $229,000 for the
repayment of long-term debt and approximately $841,000 used in the purchase and
retirement of Common Stock.
18
On August 7, 2003 the Company's current Credit Facility Agreement was amended.
The new Credit Facility allows the Company to borrow, on a revolving basis, an
aggregate principal amount not to exceed $4.0 million at either, or a
combination of, the Lender's Base Rate plus a Base Rate Margin or at a LIBOR
rate plus a LIBOR Rate Margin, at the Company's option. The Lender's Base Rate
computes interest at the higher of the Lender's "prime rate" plus a Base Rate
Margin of one-half percent (0.5%) or the Federal Funds Rate plus one-half
percent (0.5%), plus a Base Rate Margin of one-half percent (0.5%). The LIBOR
option computes interest at the LIBOR Rate as of the date such LIBOR rate Loan
was made plus a LIBOR Rate Margin of 2.0%. A commitment fee of 0.25% on the
average daily unused amount of the Revolving Loan commitment during the
preceding quarter will also be assessed. The Company may prepay any Base Rate
Loan at any time and any LIBOR Rate Loan upon not less than three business days
prior written notice given to the Lender, but the Company will be responsible
for any loss or cost incurred by the Lender in liquidating or employing deposits
required to fund or maintain the LIBOR rate Loan. The amended Credit Facility
expires on May 31, 2005. At September 30, 2003, the Company had $2.3 million
outstanding and $1.7 million available for borrowing under the revolving loan.
This consisted of $500,000 outstanding under the Base Rate Option and $1.8
million outstanding under the LIBOR Rate option. The Credit Facility requires
the Company to maintain certain financial ratios on an ongoing basis. At
September 30, 2003 the Company was in full compliance with all of its covenants
under this agreement.
At September 30, 2003, the Company had outstanding indebtedness of approximately
$1.2 million represented by notes issued in connection with various dental
practice acquisitions, all of which bear interest at 8.0%. At September 30,
2003, the Company had approximately $45,000 in capital commitments related to
the purchase of a new server for its patient accounting software. The Company's
retained earnings as of September 30, 2003 was approximately $1.7 million and
the Company had a working capital deficit on that date of approximately
$485,000. The Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") remained constant at $3.5 million for the nine months
ended September 30, 2003 compared to the corresponding nine-month period in
2002.
The Company believes that cash generated from operations and borrowings under
its Credit Facility, will be sufficient to fund its anticipated working capital
needs, capital expenditures and future acquisitions for at least the next 12
months. In the event the Company is not able to successfully negotiate a new
Credit Facility at the end of its term, the Company's current sources of
liquidity may not be adequate. In addition, in order to meet its long-term
liquidity needs the Company may issue additional equity and debt securities,
subject to market and other conditions. There can be no assurance that such
additional financing will be available on terms acceptable to the Company. The
failure to raise the funds necessary to finance its future cash requirements
could adversely affect the Company's ability to pursue its strategy and could
negatively affect its operations in future periods.
On May 8, 2002 the Company's Board of Directors unanimously approved the
purchase of shares of the Company's Common Stock on the open market up to $1.0
million. On October 24, 2002 the Company's Board of Directors unanimously
approved an incremental increase of $500,000 in the amount that could be used to
purchase shares of the Company's Common Stock on the open market to $1.5
million. On February 19, 2003 the Company's Board of Directors unanimously
approved an increase, to $2.4 million from $1.5 million, in the amount that
could be used to purchase shares of the Company's Common Stock on the open
market. On May 6, 2003 the Company's Board of Directors unanimously approved an
incremental increase of $1.0 million in the amount that could be used to
purchase shares of the Company's Common Stock on the open market at prices up to
$14.00 per share. During 2002, the Company, in 93 separate transactions,
purchased 117,236 shares of its Common Stock for total consideration of
approximately $1.2 million at prices ranging from $7.35 to $11.25 per share, of
which approximately $60,000 was recorded as compensation expense in accordance
with Financial Accounting Standards Board Interpretation Number 44. During the
nine month period ended September 30, 2003, the Company, in 80 separate
transactions, purchased 274,162 shares of its Common Stock for total
consideration of approximately $3.7 million at prices ranging from $9.54 to
$14.20 per share. On July 16, 2003, the Company's Board of Directors approved
the purchase of 83,975 shares of the Company's Common Stock from a private
shareholder of the Company, at an aggregate cost of $1,154,656. As a condition
of this purchase, the Company and the private shareholder have entered into a
stock repurchase agreement whereby the private shareholder and his affiliated
companies, among other items, agree that for a period of two years from July 16,
2003 will not: 1) acquire, directly or indirectly, any voting securities of the
Company; 2) solicit proxies with respect to the Company's voting securities
under any circumstances; and 3) take any action or assist in any manner,
directly or indirectly, to influence or affect control of the Company.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in United States interest rates. Historically
and as of September 30, 2003, the Company has not used derivative instruments or
engaged in hedging activities.
Interest Rate Risk. The interest payable on the Company's line-of-credit is
variable based upon the prime rate and the LIBOR rate and, therefore, is
affected by changes in market interest rates. At September 30, 2003, $500,000
was outstanding with an interest rate of 4.50% (Prime plus 0.5%) and $1.8
million was outstanding with an interest rate of 3.12% (LIBOR 30 day rate plus
2.0%). 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 $14,800 for the nine months ended
September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
31.01 Certification of 10-Q report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.01 Certification of 10-Q report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On August 6, 2003 the Company filed a report on Form 8-K related to
reporting of financial results for the second quarter of 2003.
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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 12, 2003 By: /s/ Frederic W.J. Birner
-------------------------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 12, 2003 By: /s/ Dennis N. Genty
-------------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and
Accounting Officer)
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