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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23367
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BIRNER DENTAL MANAGEMENT SERVICES, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
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(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 691-0680
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value of the Registrant's voting stock held as of March 14,
2001 by non-affiliates of the Registrant was $1,854,156. This calculation
assumes that certain parties may be affiliates of the Registrant and that,
therefore, 988,883 shares of voting stock are held by non-affiliates. As of
March 14, 2001, the Registrant had 1,506,705 shares of its common stock, without
par value ("Common Stock") outstanding.
On February 22, 2001 a special shareholder's meeting was held to consider a
proposal to effect a reverse split of the issued and outstanding shares of the
Registrant's Common Stock, whereby the Registrant would issue one new share of
its Common Stock for between three and five shares of its presently outstanding
stock. The proposal was approved by a majority of the shareholders. The Board of
Directors in a meeting that same day determined that the ratio of the reverse
stock split would be one-for-four and that the effective date for the reverse
split would be February 26, 2001. Therefore, all shares, options, share prices,
option prices and earnings per share calculations for all periods in this
document have been restated to reflect the effect of the reverse stock split.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report (Items 10, 11, 12 and 13) is
incorporated by reference from the Registrant's Proxy Statement to be filed
pursuant to Regulation 14A with respect to the annual meeting of shareholders
scheduled to be held on or about June 7, 2001.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K ("Annual Report") of
Birner Dental Management Services, Inc. (the "Company") which are not historical
in nature are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include statements in Items 1. and 2., "Business and Properties," Item 5.,
"Market for the Registrant's Common Equity and Related Stockholder Matters" and
Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations," regarding intent, belief or current expectations of the
Company or its officers with respect to the development or acquisition of
additional dental practices and the successful integration of such practices
into the Company's network, recruitment of additional dentists, funding of the
Company's expansion, capital expenditures, payment or nonpayment of dividends
and cash outlays for income taxes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
failure to consummate or successfully integrate proposed developments or
acquisitions of dental practices, the ability of the Company to manage
effectively an increasing number of dental practices, the general economy of the
United States and the specific markets in which the Company's dental practices
are located or are proposed to be located, trends in the health care, dental
care and managed care industries, as well as the risk factors set forth in Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors," and other factors as may be identified from time to
time in the Company's filings with the Securities and Exchange Commission or in
the Company's press releases.
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Birner Dental Management Services, Inc.
Form 10-K
Table of Contents
Part Item(s) Page
I. 1. and 2. Business and Properties 4
General 4
Dental Services Industry 4
Operations 5
Existing Offices 6
Patient Services 7
Dental Practice Management Model 7
Payor Mix 9
The Company Dentist Philosophy 9
Expansion Program 10
Affiliation Model 11
Competition 12
Government Regulation 13
Insurance 16
Trademark 16
Facilities and Employees 16
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
II. 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19
7A. Quantitative and Qualitative Disclosures About Market Risk 33
8. Financial Statements and Supplementary Data 34
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 58
III. 10. Directors and Executive Officers of the Registrant 58
11. Executive Compensation 58
12. Security Ownership of Certain Beneficial Owners and Management 58
13. Certain Relationships and Related Transactions 58
IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 59
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.
GENERAL
The Company acquires, develops, and manages geographically dense dental practice
networks in select markets, currently including Colorado, New Mexico and
Arizona. With its 42 dental practices ("Offices") in Colorado and eight Offices
in New Mexico, the Company believes, based on industry knowledge and contacts,
that it is the largest provider of dental management services in Colorado and
New Mexico. The Company provides a solution to the needs of dentists, patients,
and third-party payors by allowing the Company's affiliated dentists to provide
high-quality, efficient dental care in patient-friendly, family practice
settings. Dentists practicing at the various locations provide comprehensive
general dentistry services, and the Company increasingly offers specialty dental
services through affiliated specialists. The Company currently manages 56
Offices, of which 38 were acquired and 18 were developed internally ("de novo
Offices").
DENTAL SERVICES INDUSTRY
According to the U.S. Health Care Financing Administration ("HCFA"), dental
expenditures in the U.S. increased from $31.6 billion in 1990 to $56.6 billion
in 1999. HCFA also projects that dental expenditures will reach approximately
$93.1 billion by 2008, representing an increase of approximately 64.5% over 1999
dental expenditures. The Company believes this growth is driven by (i) an
increase in the number of people covered by third-party payment arrangements and
the resulting increase in their utilization of dental services, (ii) an
increasing awareness of the benefits of dental treatments, (iii) the retention
of teeth into later stages of life, (iv) the general aging of the population, as
older patients require more extensive dental services, and (v) a growing
awareness of and demand for preventative and cosmetic services.
Traditionally, most dental patients have paid for dental services themselves
rather than through third-party payment arrangements such as indemnity
insurance, preferred provider plans or managed dental plans. More recently,
factors such as increased consumer demand for dental services and the desire of
employers to provide enhanced benefits for their employees have resulted in an
increase in third-party payment arrangements for dental services. These
third-party payment arrangements include indemnity insurance, preferred provider
plans and capitated managed dental care plans. Current market trends, including
the rise of third-party payment arrangements, have contributed to the increased
consolidation of practices in the dental services industry and to the formation
of dental practice management companies. The Company believes that the
percentage of people covered by third-party payment arrangements will continue
to increase due in part to the popularity of such arrangements.
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OPERATIONS
LOCATION OF OFFICES
[MAP INSERTED HERE]
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EXISTING OFFICES
As of the date of this Annual Report, the Company currently manages a total of
56 Offices in Colorado, New Mexico, and Arizona. The following table identifies
each Office, the location of each Office, the date each Office was acquired or
de novo developed, and any specialty dental services offered at that Office in
addition to comprehensive general dental services:
DATE ACQUIRED/ SPECIALTY
OFFICE NAME OFFICE ADDRESS DEVELOPED* SERVICES
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COLORADO
BOULDER
Perfect Teeth/Boulder 4155 Darley, #F September 1997
Perfect Teeth/Folsom 1840 Folsom, Suite 302 April 1998 1,2
CASTLE ROCK
Perfect Teeth/Castle Rock 390 South Wilcox, Unit D October 1995 1
COLORADO SPRINGS
Perfect Teeth/Austin Bluffs 4114 Austin Bluffs Parkway, #1604 January 1996*
Perfect Teeth/Cheyenne Meadows 827 Cheyenne Meadows Road June 1998*
Perfect Teeth/Garden of the Gods 4329 Centennial Boulevard July 1996*
Perfect Teeth/South 8th Street 1050 South Eighth Street August 1998 1,2,3
Perfect Teeth/Uintah Gardens 1768 West Uintah Street May 1996* 1
Perfect Teeth/Union & Academy 5140 North Union September 1997
Perfect Teeth/Woodman Valley 6914 North Academy Boulevard, Unit 1B April 1998*
Perfect Teeth/Powers 5929 Constitution Avenue March 1999*
DENVER
Perfect Teeth/64th and Ward 12650 West 64th Avenue, Unit J January 1996*
Perfect Teeth/88th and Wadsworth 8749 Wadsworth Boulevard September 1997 1,2,3,4
Perfect Teeth/Arapahoe 7600 East Arapahoe Road, #311 October 1995 1
Perfect Teeth/Bowmar 5151 South Federal Boulevard, #G-2 October 1995 1
Perfect Teeth/Buckley and Quincy 4321 South Buckley Road September 1997 1
Perfect Teeth/Central Denver 1633 Fillmore Street, Suite 200 May 1996 1
Perfect Teeth/East 104th Avenue 2200 East 104th Avenue, #112 May 1996 1
Perfect Teeth/East Cornell 12200 East Cornell Avenue, # E August 1996
Perfect Teeth/East Iliff 16723 East Iliff Avenue May 1997
Glendale Dental Group 4521 East Virginia Avenue February 1999
Perfect Teeth/Golden 17211 South Golden Road, #100 June 28, 1999* 1
Perfect Teeth/Green Mountain 13035 West Alameda Parkway December 1998*
Perfect Teeth/Highlands Ranch 9227 Lincoln Avenue, Suite 100 July 5, 1999* 1
Perfect Teeth/Ken Caryl 7660 South Pierce September 1997 1
Perfect Teeth/Leetsdale 7150 Leetsdale Drive, #110A March 1996*
Mississippi Dental Group 11175 East Mississippi Avenue, #110 September 1998
Perfect Teeth/Monaco and Evans 2121 South Oneida, Suite 321 November 1995 1,2,3,4
Perfect Teeth/North Sheridan 11550 North Sheridan, #101 May 1996 1
Perfect Teeth/Parker 11005 South Parker Road December 1998* 1
Perfect Teeth/Sheridan and 64th Avenue 5169 West 64th Avenue May 1996
Perfect Teeth/South Broadway 6767 South Broadway, Unit 10 April 1998
Perfect Teeth/South Holly Street 8211 South Holly Street September 1997
Perfect Teeth/Speer 700 East Speer Boulevard February 1997
Perfect Teeth/West 38th Avenue 7760 West 38th Avenue, #200 May 1996 1
Perfect Teeth/West 120th Avenue 6650 West 120th Avenue, A-6 September 1997
Perfect Teeth/West Jewell 8064 West Jewell April 1998
Perfect Teeth/Yale 7515 West Yale Avenue, Suite A April 1997 1,2,3
FORT COLLINS
Perfect Teeth/South Fort Collins 1355 Riverside Avenue, Unit D May 1996 3
GREELEY
Perfect Teeth/Greeley 902 14th Street September 1997
LONGMONT
Perfect Teeth/Longmont 641 Ken Pratt Boulevard September 1997
LOVELAND
Perfect Teeth/ Loveland 3400 West Eisenhower Boulevard September 1996
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DATE ACQUIRED/ SPECIALTY
OFFICE NAME OFFICE ADDRESS DEVELOPED* SERVICES
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NEW MEXICO
ALBUQUERQUE
Perfect Teeth/Alice 5909 Alice NE February 1998
Perfect Teeth/Candelaria 6101 Candelaria NE April 1997
Perfect Teeth/Cubero Drive 5900 Cubero Drive NE, Suite E September 1998
Perfect Teeth/Four Hills 13140-E Central Avenue, SE August 1997* 3
Perfect Teeth/Fourth Street 5721 Fourth Street NW August 1997
Perfect Teeth/Wyoming and Candelaria 8501 Candelaria NE, Suite D3 August 1997
SANTA FE
Perfect Teeth/Plaza Del Sol 720 St. Michael Drive, Suite O May 1998* 3
RIO RANCHO
Perfect Teeth/Rio Rancho 4500 Arrowhead Ridge Drive July 5, 1999* 3
ARIZONA
SCOTTSDALE
Perfect Teeth/Bell Road and 64th 6345 East Bell Road, Suite 1 July 1998 1,3,5
Street
Perfect Teeth/Shea and 90th Street 9393 North 90th Street, Suite 207 September 1998
PHOENIX
Perfect Teeth/Thomas and 15th Avenue 3614 North 15th Avenue, Suite B September 1998
TEMPE
Perfect Teeth/Elliot and McClintock 7650 S. McClintock Dr., #110 June 7, 1999*
GOODYEAR
Perfect Teeth/Palm Valley 14175 West Indian School Bypass Road, #B6 March 20, 2000*
MESA
Perfect Teeth/Power & McDowell 2733 North Power Road, Suite 101 October 16, 2000*
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(1) Orthodontics
(2) Periodontics
(3) Oral Surgery
(4) Pedodontics
(5) Endodontics
The Offices typically are located either in shopping centers, professional
office buildings or stand-alone buildings. The majority of the de novo Offices
are located in supermarket-anchored shopping centers. The Offices have from four
to 16 treatment rooms and range in size from 1,200 square feet to 7,400 square
feet.
PATIENT SERVICES
The Company seeks to develop long-term relationships with patients. A
comprehensive exam and evaluation is conducted during a patient's first visit.
Through patient education, the patients develop an awareness of the benefits of
a comprehensive, long-term dental care plan. The Company believes that it will
retain these patients longer and that these patients will have a higher
utilization of the Company's dental services including specialty, elective, and
cosmetic services.
Dentists practicing at the Offices provide comprehensive general dentistry
services, including crowns and bridges, fillings (including state-of-the-art
gold, porcelain and composite inlays/onlays), and aesthetic procedures such as
porcelain veneers and bleaching. In addition, hygienists provide cleanings and
periodontal services including root planing and scaling. If appropriate, the
patient is offered specialty dental services, such as orthodontics, oral surgery
and periodontics, which are available at certain of the Company's Offices, as
indicated on the table above. These services are provided by affiliated
specialists who rotate through several offices in certain of the Company's
existing markets. The addition of specialty services is a key component of the
Company's strategy, as it enables the Company to capture revenue from typically
higher margin services that would otherwise be referred to non-affiliated
providers. In addition, by offering a broad range of dental services within a
single practice, the Company is able to distinguish itself from its competitors
and realize operating efficiencies and economies of scale through higher
utilization of professionals and facilities.
DENTAL PRACTICE MANAGEMENT MODEL
The Company has developed a dental practice management model designed to achieve
its goal of providing personalized, high-quality dental care in a patient
friendly setting similar to that found in a traditional private practice. The
Company's dental practice management model consists of the following components:
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Recruiting of Dentists. The Company seeks dentists with excellent skills and
experience, who are sensitive to patient needs, interested in establishing
long-term patient relationships and are motivated by financial incentives to
enhance Office operating performance. The Company believes that practicing in
its network of Offices offers both recently graduated dentists and more
experienced dentists advantages over a solo or smaller group practice, including
relief from the burden of administrative responsibilities and the resulting
ability to focus almost exclusively on practicing dentistry. Advantages to
dentists affiliated with the Company also include a compensation structure that
rewards productivity, employee benefits such as health insurance, a 401(k) plan,
continuing education, payment of professional membership fees and malpractice
insurance. The Company's effort to recruit managing dentists is primarily
focused on dentists with three or more years of practice experience. The Company
typically recruits associate dentists graduating from residency programs. It has
been the Company's experience, that many dentists in the early stages of their
careers have incurred substantial student loans. As a result, they face
significant financial constraints in starting their own practices or buying into
existing practices, especially in view of the capital-intensive nature of modern
dentistry.
The Company advertises for the dentists it seeks in national and regional dental
journals, local market newspapers, professional conferences and directly at
dental schools with strong residency programs. In addition, the Company has
found that its existing affiliated dentists provide a good referral source for
recruiting future dentists.
Training of Non-Dental Employees. The Company has developed a formalized
training program for non-dental employees, which is conducted by the Company's
professional training staff. This program includes training in patient
interaction, scheduling, use of the computer system, office procedures and
protocol, and third-party payment arrangements. Employment with the Company
begins with five days of formal training and, on an ongoing basis, the Company
encourages these employees to attend continuing education seminars as a
supplement to the Company's formalized training program. In addition, Company
regional directors meet weekly with the Company's administrative staff to review
pertinent and timely topics and generate ideas that can be shared with all
Offices. Management believes that its training program and the on-going meetings
with employees have contributed to an improvement in the operations at its
Offices.
Staffing Model. The Company's staffing model attempts to maximize Office
profitability by adjusting personnel according to an Office's revenue level.
Staffing at mature Offices can vary based on the number of treatment rooms, but
generally includes one to four dentists, two to six dental assistants, one to
three hygienists, one to two hygiene assistants and two to four front office
personnel. Staffing at de novo Offices typically consists initially of one
dentist, one dental assistant and one front office person. As the patient base
builds at an Office, additional staff is added to accommodate the growth as
provided in the staffing model developed by the Company. The Company currently
has a staff of five regional directors in Colorado, one regional director in New
Mexico and one regional director in Arizona. These regional directors, who are
each responsible from four to 12 Offices, oversee operations, development of
non-dental employees, recruiting and work to implement the Company's dental
practice management model to maximize revenues and profitability.
Management Information Systems. All of the Offices have the same management
information system, which allows the Company to receive uniform data that can be
analyzed easily in order to measure and improve Office operating performance. As
part of its acquisition integration process, the Company converts acquired
Offices to its management information system as soon as practicable. The
Company's current system enables it to maintain on-line contact with each of its
Offices and allows the Company to monitor the Offices by obtaining real-time
data relating to patient and insurance information, treatment plans, scheduling,
revenues and collections. The Company provides each Office with monthly
operating and financial data, which is analyzed and used to improve Office
performance.
Advertising and Marketing. The Company seeks to increase patient volume at its
Offices from time to time through television, radio, print advertising and other
marketing techniques. The Company's advertising efforts are primarily aimed at
increasing its fee-for-service business and emphasizes the high-quality care
provided, as well as the timely, individualized attention received from the
Company's affiliated dentists.
Quality Assurance. The Company has designed and implemented a quality assurance
program for dental personnel, including a background check. Each affiliated
dentist is a graduate of an accredited dental program, and most state licensing
authorities require dentists to undergo annual training. The dentists and
hygienists practicing at the Offices obtain a portion of their required
continuing education through the Company's internal training programs.
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Purchasing/Vendor Relationships. The Company has negotiated arrangements with a
number of its more significant vendors, including dental laboratory and supply
providers, to reduce per unit costs. By aggregating supply purchasing and
laboratory usage, the Company believes that it has received favorable pricing
compared to solo or smaller group practices. This system of centralized buying
and distribution on an as-needed basis limits storage of unused inventory and
supplies at the Offices.
PAYOR MIX
The Company's payors include indemnity insurers, preferred provider plans,
managed dental care plans, and uninsured patients. The Company seeks to optimize
the revenue mix at each Office between fee-for-service business and capitated
managed care plans, taking into account the local dental market. While
fee-for-service business generally is more profitable than capitated managed
dental care business, capitated managed dental care business serves to increase
facility utilization and dentist productivity. Consequently, the Company seeks
to supplement its fee-for-service business with revenue derived from contracts
with capitated managed dental care plans. The Company negotiates the managed
care contracts on behalf of the professional corporations that operate the
Offices (the "P.C.s"), although the P.C.s enter into the contracts with the
various managed care plans. Managed care relationships also provide increased
co-payment revenue, referrals of additional fee-for-service patients and
opportunities for dentists practicing at the Offices to educate patients about
the benefits of elective dental procedures that may not be covered by the
patients' capitated managed dental care plans.
During the years ended December 31, 1998, 1999, and 2000 the following companies
were responsible for the corresponding percentages of the Company's total dental
group practice revenue (includes capitation premiums and co-payments): Aetna
Healthcare was responsible for 9.3%, 8.9% and 9.1%, respectively, CIGNA Dental
Health was responsible for 9.3%, 7.8% and 5.9%, respectively and Delta Care was
responsible for less than 1.0%, 5.0% and 8.6%, respectively.
The Company has successfully reduced the percentage of its business that came
from managed dental care plans, from 51.4% of gross revenues in 1998 to 37.8% of
gross revenues in 2000, and replaced that revenue stream with higher margin
fee-for-service revenues. This higher margin fee-for-service revenue has
predominately been business derived from preferred provider plans.
THE COMPANY DENTIST PHILOSOPHY
The Company seeks to develop long-term relationships with its dentists by
building the practice at each of its Offices around a managing dentist. The
Company's dental practice management model provides managing dentists the
autonomy and independence of a private family practice setting without the
capital commitment and the administrative burdens such as billing/collections,
payroll, accounting, and marketing. This gives the managing dentists the ability
to focus primarily on providing high-quality dental care to their patients. The
managing dentist retains the responsibilities of team building and developing
long-term relationships with patients and staff by building trust and providing
a friendly, relaxed atmosphere in his or her Office. The managing dentist
exercises his or her own clinical judgment in matters of patient care. In
addition, managing dentists are given an economic incentive to improve the
operating performance of their Offices, in the form of a bonus based upon the
operating performance of the Office. In addition, managing dentist's may be
granted stock options in the Company that ordinarily vest over a three-to-five
year period.
When the revenues of an Office justify expansion, associate dentists can be
added to the team. Associate dentists are typically recent graduates from
residency programs, and usually spend up to two years working with a managing
dentist. Depending on performance and abilities, an associate dentist may be
given the opportunity to become a managing dentist.
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EXPANSION PROGRAM
OVERVIEW
Since its formation in May 1995, the Company has acquired 42 practices,
including four practices that have been consolidated into existing Offices. Of
those acquired practices (including the four practices consolidated with
existing Offices), 34 were located in Colorado, five were located in New Mexico,
and three were located in Arizona. Although the Company has acquired and
integrated several group practices, many of the Company's acquisitions have been
solo dental practices. The Company has developed 18 de novo Offices (the latest,
Perfect Teeth/Power & McDowell opened in October 2000). During 2000, the
Company's growth strategy shifted from an acquisition and development approach
to an approach which is focused on greater utilization of existing physical
capacity through recruiting more dentists and support staff.
The following table sets forth the increase in the number of Offices managed by
the Company from 1995 through December 31, 2000, including the number of de novo
Offices and acquired Offices in each such year:
1995(1) 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
Offices at beginning of the period 0 4 18 34 49 54
De novo Offices 0 5 1 5 5 2
Acquired Offices 4 12 15 10 1 0
Consolidation of Offices 0 (3) 0 0 (1) 0
------ ------ ------ ------ ------ ------
Offices at end of the period 4 18 34 49 54 56
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(1) From October 1, 1995 through December 31, 1995.
ACQUISITION STRATEGY
Prior to entering a new market, the Company considers the population,
demographics, market potential, competitive and regulatory environment, supply
of available dentists, needs of managed care plans or other large payors and
general economic conditions within the market. Once the Company has established
a presence in a new market, the Company seeks to increase its density in that
market by making further acquisitions and by developing de novo Offices. The
Company identifies potential acquisition candidates through a variety of means,
including selected inquiries of dentists by the Company, direct inquiries by
dentists, referrals from other dentists, participation in professional
conferences and referrals from practice brokers. The Company seeks to identify
and acquire dental practices for which the Company believes application of its
dental practice management model will improve revenue and operating performance.
DE NOVO OFFICE DEVELOPMENTS
One method by which the Company enters new markets and expands its operations in
existing markets is through the development of de novo Offices. Six of the
Company's eight Colorado Springs Offices, six of the Company's 34 Denver metro
area Offices, two of the Company's seven Albuquerque Offices, the Office in
Santa Fe, the Office in Tempe, the Office in Goodyear and the Office in Mesa
were de novo developments. The Company generally locates de novo Offices in
prime retail locations in areas where there is significant population growth.
These locations provide high visibility for the Company's signage and easy
walk-in access for its customers. Historically, the Company has used consistent
office designs, colors, logo and signage for each of its de novo Offices.
The average investment by the Company in each of its 18 de novo Offices has been
approximately $206,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the initial operations. The
sixteen de novo Offices opened between January 1996 and December 1999 began
generating positive contribution from dental offices, on average, within six
months of opening. One of the two de novo Offices opened in 2000 began
generating positive contribution from dental offices within four months of
opening. The Company's other remaining de novo Office, which has been open for
three months, has not generated positive contribution from the dental offices as
of the date of this Annual Report. The Company expects this Office to become
profitable during 2001.
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RECENT ACQUISITIONS
COLORADO: During 2000, the Company acquired the remaining 50% interest in two
existing Offices in Colorado. During 1999, the Company acquired one practice in
the Denver market. In addition to this acquisition, the Company opened three de
novo Offices in 1999, one in Colorado Springs and two in the Denver metropolitan
area, which included Highlands Ranch and Golden.
NEW MEXICO: During 1999 the Company opened one de novo Office in Rio Rancho, a
suburb of Albuquerque.
ARIZONA: In March 2000, the Company opened one de novo Office in Goodyear. In
October 2000, the Company opened one de novo Office in Mesa. Both Goodyear and
Mesa are suburbs of Phoenix. During 1999 the Company opened one de novo Office
in Tempe, a suburb of Phoenix.
AFFILIATION MODEL
RELATIONSHIP WITH PROFESSIONAL CORPORATIONS (P.C.S)
Each Office is operated by a P.C., which are owned by one of nine different
licensed dentists practicing within the Company's network. The Company has
entered into agreements with owners of 52 of the P.C.s which provide that upon
the death, disability, incompetence or insolvency of the owner, a loss of the
owner's license to practice dentistry, a termination of the owner's employment
by the P.C. or the Company, a conviction of the owner for a criminal offense, or
a breach by the P.C. of the Management Agreement with the Company, the Company
may require the owner to sell his or her shares in the P.C. for a nominal amount
to a third-party designated by the Company. These agreements also prohibit the
owner from transferring or pledging the shares in the P.C.s except to parties
approved by the Company who agree to be bound by the terms of the agreements.
Upon a transfer of the shares to another party, the owner agrees to resign all
positions held as an officer or the director of the P.C.
One licensed dentist who owns a P.C. operating an Office in Colorado has entered
into stock purchase, pledge and security agreements with the Company. Under this
agreement, if certain events occur including the failure to perform the
obligations under the employment agreement with the P.C., cessation of
employment with the P.C. for any reason, death or insolvency or directly or
indirectly causing the P.C. to breach its obligations under the Management
Agreement, then the Company may cause the P.C. to redeem the dentist's ownership
interest in the P.C. for an agreed price which is not considered to be material
by the Company. Two of the three directors of this P.C. are nominees of the
Company and the dentist has given the Company's Chief Executive Officer, Fred
Birner an irrevocable proxy to vote his shares in the P.C.
In the remaining two Colorado P.C.s and one of the New Mexico P.C.s owned by
licensed dentists, the Company has the right of first refusal to purchase 100%
of the P.C.s shares and the right to elect one-half of the directors and vote
one-half of the shares in such P.C.s.
MANAGEMENT AGREEMENTS WITH AFFILIATED OFFICES
The Company derives all of its revenue from its management agreements with the
P.C.s (the "Management Agreements"). Under each of the Management Agreements,
the Company manages the business and marketing aspects of the Offices, including
(i) providing capital, (ii) designing and implementing marketing programs, (iii)
negotiating for the purchase of supplies, (iv) staffing, (v) recruiting, (vi)
training of non-dental personnel, (vii) billing and collecting patient fees,
(viii) arranging for certain legal and accounting services, and (ix) negotiating
with managed care organizations. The P.C. is responsible for, among other
things, (i) hiring of all dentists and dental hygienists, (ii) ensuring
compliance with all laws, rules and regulations relating to dentists and dental
hygienists, and (iii) maintaining proper patient records. The Company has made,
and intends to make in the future, loans to P.C.s in Colorado, New Mexico and
Arizona to fund their acquisition of dental assets from third parties in order
to comply with the laws of such states. Because the Company's financial
statements are consolidated with the financial statements of the P.C.s, these
loans are eliminated in consolidation.
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Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of Company employees who work at the Office,
(ii) direct costs of all Company employees or consultants who provide services
to or in connection with the Office, (iii) utilities, janitorial, laboratory,
supplies, advertising and other expenses incurred by the Company in carrying out
its obligations under the Management Agreement, (iv) depreciation expense
associated with the P.C.'s assets and the assets of the Company used at the
Office, and the amortization of intangible asset value relating to the Office,
(v) interest expense on indebtedness incurred by the Company to finance any of
its obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company's or the P.C.'s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company's personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of the Company
including the P.C.'s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Office are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists who work at the Offices of the P.C.s. This enables the Company to
manage the profitability of the Offices. Each Management Agreement is for a term
of 40 years. Further, each Management Agreement generally may be terminated by
the P.C. only for cause, which includes a material default by or bankruptcy of
the Company. Upon expiration or termination of a Management Agreement by either
party, the P.C. must satisfy all obligations it has to the Company.
The Company plans to continue to use the current form of its Management
Agreement to the extent possible. However, the terms of the Management Agreement
are subject to change to comply with existing or new regulatory requirements or
to enable the Company to compete more effectively.
EMPLOYMENT AGREEMENTS
Most dentists practicing at the Offices have entered into employment agreements
or independent contractor agreements with a P.C. The majority of such agreements
can be terminated by either party without cause with two to seven days notice.
The employment agreement for one of the managing dentists who is also a
shareholder of a P.C. has a term of 20 years and can only be terminated by the
employer P.C. upon the occurrence of certain events. If the employment of the
managing dentist is terminated for any reason, the employer P.C. has the right
to redeem the shares of the P.C. operating the Office held by the managing
dentist. Such agreements typically contain non-competition provisions for a
period of up to three to five years following their termination within a
specified geographic area, usually a specified number of miles from the relevant
Office, and restrict solicitation of patients and employees. Managing dentists
receive compensation based upon a specified amount per hour worked or a
percentage of revenue or collections attributable to their work, and a bonus
based upon the operating performance of the Office. Associate dentists are
compensated based upon a specified amount per hour worked or a percentage of
revenue or collections attributable to their work. Specialists are compensated
based upon a percentage of revenue or collections attributable to their work.
The P.C. with whom the dentist has entered into an employment agreement pays the
dentists' compensation and benefits.
COMPETITION
The dental services industry is highly fragmented, consisting primarily of solo
and smaller group practices. The dental practice management segment of this
industry is highly competitive and is expected to become more competitive. In
this regard, the Company expects that the provision of multi-specialty dental
services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are
operating in its markets, including Monarch Dental Corporation, American Dental
Partners, Inc., and Dental Health Centers of America. Companies with dental
practice management businesses similar to that of the Company which currently
operate in other parts of the country, may begin targeting the Company's
existing markets for expansion. Such competitors may have greater financial
resources or otherwise enjoy competitive advantages, which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company.
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The business of providing general and specialty dental services is highly
competitive in the markets in which the Company operates. The Company believes
it competes with other providers of dental and specialty services on the basis
of factors such as brand name recognition, convenience, cost and the quality and
range of services provided. Competition may include practitioners who have more
established practices and reputations. The Company also competes against
established practices in the retention and recruitment of general dentists,
specialists, hygienists and other personnel. If the availability of such
individuals begins to decline in the Company's markets, it may become more
difficult to attract and retain qualified personnel to sufficiently staff the
existing Offices or to meet the staffing needs of the Company's planned
expansion.
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal levels, and
the regulation of health care-related companies is increasing. There can be no
assurance that the regulatory environment in which the Company or the P.C.s
operate will not change significantly in the future. The laws and regulations of
all states in which the Company operates impact the Company's operations but do
not currently materially restrict the Company's operations in those states. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The laws regulating health care are
broad and subject to varying interpretations, and there is currently a lack of
case law construing such statutes and regulations. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
STATE REGULATION
The laws of many states, including Colorado and New Mexico, permit a dentist to
conduct a dental practice only as an individual, a member of a partnership or an
employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services. Under the Management Agreements,
the P.C.s control all clinical aspects of the practice of dentistry and the
provision of dental services at the Offices, including the exercise of
independent professional judgment regarding the diagnosis or treatment of any
dental disease, disorder or physical condition. Persons to whom dental services
are provided at the Offices are patients of the P.C.s and not of the Company.
The Company does not employ the dentists who provide dental services at the
Offices nor does the Company have or exercise any control or direction over the
manner or methods in which dental services are performed or interfere in any way
with the exercise of professional judgment by the dentists.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist, to own or control dental equipment or offices used in a dental
practice. Some states allow leasing of equipment and office space to a dental
practice, under a bona fide lease, if the equipment and office remain under the
control of the dentist. Some states, including Arizona and New Mexico, require
all advertisements to be in the name of the dentist. A number of states,
including Arizona, Colorado and New Mexico, also regulate the content of
advertisements of dental services. In addition, Colorado, New Mexico and
Arizona, and many other states impose limits on the tasks that may be delegated
by dentists to hygienists and dental assistants. Some states require entities
designated as "clinics" to be licensed, and may define clinics to include dental
practices that are owned or controlled in whole or in part by non-dentists.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
Many states have fraud and abuse laws which are similar to the federal fraud and
abuse law described below, and which in many cases apply to referrals for items
or services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
Many states, including Colorado and New Mexico, also prohibit "fee-splitting" by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice's revenues.
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In addition, many states have laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to include referrals for
health care items or services, including dental items and services.
In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. As the P.C.s contract with third-party payors, on a capitation or
other basis under which the relevant P.C. assumes financial risk, the P.C.s may
become subject to state insurance laws. Specifically, in some states, regulators
may determine that the Company or the P.C.s are engaged in the business of
insurance, particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. In Arizona, Colorado and New Mexico, the P.C.s currently
only contract on a financial-risk basis with entities that are licensed to
engage in the business of insurance and thus are not subject to the insurance
laws of those states. To the extent that the Company or the P.C.s are determined
to be engaged in the business of insurance, the Company may be required to
change the method of payment from third-party payors and the Company's revenue
may be materially and adversely affected.
FEDERAL REGULATION
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
under Medicare or Medicaid, the impact of these laws on the Company to date has
been negligible. There can be no assurance, however, that the P.C.s will not
have patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
The federal fraud and abuse statute prohibits, subject to certain safe harbors,
the payment, offer, solicitation or receipt of any form of remuneration in
return for, or in order to induce: (i) the referral of a person for service,
(ii) the furnishing or arranging to furnish items or services, or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable under
Medicare or Medicaid. The statute reflects the federal government's policy of
increased scrutiny of joint ventures and other transactions among healthcare
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Because dental services are covered under various government
programs, including Medicare and Medicaid, this federal law applies to dentists
and the provision of dental services.
Significant prohibitions against dentist self-referrals for services covered by
Medicare and Medicaid programs were enacted, subject to certain exceptions, by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as Stark II, amended prior physician and dentist self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by dramatically enlarging the list of services and investment
interest to which the self-referral prohibitions apply. Effective January 1,
1995, Stark II prohibits a physician or dentist, or a member of his or her
immediate family, from making referrals for certain "designated health services"
to entities in which the physician or dentist has an ownership or investment
interest, or with which the physician or dentist has a compensation arrangement.
"Designated health services" include, among other things, clinical laboratory
services, radiology and other diagnostic services, radiation therapy services,
durable medical equipment, prosthetics, outpatient prescription drugs, home
health services and inpatient and outpatient hospital services. Stark II
prohibitions include referrals within the physician's or dentist's own group
practice (unless such practice satisfies the "group practice" exception) and
referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with or
violation of Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Nevertheless, there can be no assurance that Stark II will not be interpreted or
hereafter amended in a manner that has a material adverse effect on the
Company's operations as presently conducted.
Proposed federal regulations also govern physician incentive plans associated
with certain managed care organizations that offer risk-based Medicare or
Medicaid contracts. These regulations define physician incentive plans to
include any compensation arrangement (such as capitation arrangements, bonuses
and withholds) that may directly or indirectly have the effect of reducing or
limiting services furnished to patients covered by the Medicare or Medicaid
programs. Direct monetary compensation which is paid by a managed care plan,
dental group or intermediary to a dentist for services rendered to individuals
covered by the Medicare or Medicaid programs is subject to these regulations, if
the compensation arrangement places the dentist at substantial financial risk.
When applicable, the regulations generally require disclosure to the federal
government or, upon request, to a Medicare beneficiary or Medicaid recipient
regarding such financial incentives, and require the dentist to obtain stop-loss
insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans, which involve
payments made to directly
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induce the limitation or reduction of medically necessary covered services. A
recently enacted federal law specifically exempts managed care arrangements from
the application of the federal anti-kickback statute (the principal federal
health care fraud and abuse law), but there is a risk this exemption may be
repealed. It is unclear how the Company will be affected in the future by the
interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing agents. These
rules prohibit a billing agent from receiving a fee based on a percentage of
Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.
Federal regulations also allow state licensing boards to revoke or restrict a
dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including governmental
insurers, are subject to significant regulation. Some payors limit the extent to
which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain
conditions are met, such as acceptance by dentists of assignment of the payor
receivable from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided "incident to" a dentist's
services. Under these "incident to" rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Offices' staff unless certain conditions are met, such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Office staff
must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its revenue under such programs.
The operations of the Offices are also subject to compliance with regulations
promulgated by the Occupational Safety and Health Administration ("OSHA"),
relating to such matters as heat sterilization of dental instruments and the use
of barrier techniques such as masks, goggles and gloves. The Company incurs
expenses on an ongoing basis relating to OSHA monitoring and compliance.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs will
not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
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INSURANCE
The Company believes that its existing insurance coverage is adequate to protect
it from the risks associated with the ongoing operation of its business. This
coverage includes property and casualty, general liability, workers
compensation, director's and officer's corporate liability, employment practices
liability, corporate errors and omissions liability, excess liability and
professional liability insurance for dentists, hygienists and dental assistants
at the Offices.
TRADEMARK
The Company is the registered owner of the PERFECT TEETH(R) trademark in the
United States.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 508, Denver, Colorado, in approximately 9,500 square feet occupied under a
lease, which expires in January 2003. The Company believes that this space is
adequate for its current needs. The Company also leases real estate at the
location of each Office under leases ranging in term from one to 10 years. The
Company believes the facilities at each of its Offices are adequate for their
current level of business. The Company generally anticipates leasing and
developing new Offices in its current markets rather than significantly
expanding the size of its existing Offices.
As of December 31, 2000, the Company had 78 general dentists, 13 specialists and
69 affiliated hygienists that were employed by the P.C.s, and 353 non-dental
employees.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
On August 15, 2000 the Company received a notice of claims against the Company's
President, Mark A. Birner, D.D.S., from the Colorado Board of Dental Examiners
(the "Board"). In the notice, The Board alleged violations of Colorado dental
law by Dr. Birner as a result of alleged practices by the Company. Among other
things, the Board claimed that the Company used hygiene assistants to perform
scaling, which is a task to be performed by a hygienist or dentist, and that the
Company engaged in billing improprieties. The Board sought relief as is
permitted by law, which could have included actions ranging from revocation or
suspension of Dr. Birner's dental license, to reprimand or censure. On December
7, 2000, the Company and the Board reached an agreement to settle the claim in
exchange for the Company agreeing to set up a written regulatory compliance plan
and to appoint a compliance officer within 60 days of the agreement. The Company
must also provide educational programs for its employees regarding state dental
rules and regulations. The compliance plan will be used, at least annually, as
the basis for a Company-wide performance audit of adherence to the plan. Through
December 31, 2000, the Company has incurred incremental defense related
expenditures of approximately $206,000, some of which may not be covered by
applicable insurance coverage. The Company believes that this proceeding will
not have an ongoing material adverse impact on the Company's operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company received notice from NASDAQ that the Company did not comply with the
requirements for continued listing on the NASDAQ National Market System. In
order to satisfy NASDAQ's listing requirements for the NASDAQ SmallCap Market,
effective February 26, 2001, the Company's Board of Directors approved a
one-for-four reverse stock split. The SmallCap Market's maintenance standards,
among other things, require the Company to have 1) at least 500,000 shares of
Common Stock held by non-affiliates; 2) an aggregate market public float of at
least $1,000,000; 3) at least 300 shareholders who own 100 shares of Common
Stock or more; and 4) a minimum bid price of at least $1.00 per share. All
shares, share prices and earnings per share calculations for all periods have
been restated to reflect this reverse stock split.
The Common Stock is now quoted on the Nasdaq Stock Market SmallCap Market under
the symbol "BDMS." The following table sets forth, for the period indicated, the
range of high and low sales prices per share of Common Stock, as reported on The
Nasdaq Stock National Market up to February 26, 2001 and The SmallCap Market
thereafter:
HIGH LOW
---- ---
1999
First Quarter $ 16.00 $ 8.75
Second Quarter 14.00 9.50
Third Quarter 10.25 6.50
Fourth Quarter 9.75 4.50
2000
First Quarter $ 7.50 $ 4.50
Second Quarter 7.50 4.00
Third Quarter 7.50 3.50
Fourth Quarter 4.50 1.50
2001
First Quarter (January 1, 2001 through March 14, 2001) $ 3.25 $ 1.88
At March 14, 2001 the last reported sale price of the Common Stock was $1.88 per
share. As of the same date, there were 1,506,705 shares of Common Stock
outstanding held by 81 holders of record and approximately 590 beneficial
owners.
The Company has not declared or paid dividends on its Common Stock since its
formation, and the Company does not anticipate paying dividends in the
foreseeable future. The Company's existing credit facility prohibits the payment
of cash dividends on the Common Stock without the lender's consent. Any future
credit facility, which the Company may obtain, is also likely to prohibit the
payment of dividends. Declaration or payment of dividends, if any, in the
future, will be at the discretion of the Board of Directors and will depend on
the Company's then current financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial and operating
data for the Company. The data for the years ended December 31, 1998, 1999, and
2000 should be read in conjunction with the Company's consolidated financial
statements included elsewhere in this document. The selected consolidated
financial data for the 1996 and 1997 periods is derived from the Company's
historical consolidated financial statements. All amounts are stated in
thousands except per share amounts, number of offices and number of dentists.
A one-for four split of the Company's stock became effective as of February 26,
2001. As a result, all earnings per share data presented in the following table
has been restated to reflect this reverse stock split.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS DATA(1):
Net revenue $ 5,373 $ 12,742 $ 21,741 $ 28,553 $ 29,419
Direct expenses 4,602 10,151 17,287 24,425 25,475
Contribution from dental offices 771 2,591 4,454 4,128 3,944
Corporate expenses 780 1,714 3,182 4,038 3,747
Operating income (loss) (9) 877 1,272 90 197
Income (loss) before income taxes (335) 34 843 (389) (434)
(Provision) benefit for income taxes -- -- (128) 111 113
Income (loss) before change in accounting (335) 34 715 (278) (321)
principle
Cumulative effect of change in accounting -- -- (39) -- --
principle
Net income (loss) (335) 34 675 (278) (321)
Basic earnings per share of Common Stock:
Income before cumulative effect of change in (.41) .04 .46 (.18) (.21)
accounting principle
Cumulative effect of change in accounting -- -- (.03) -- --
principle
Net income (loss)(2) (.41) .04 .43 (.18) (.21)
Diluted earnings per share of Common Stock:
Income before cumulative effect of change in (.41) .04 .44 (.18) (.21)
accounting principle
Cumulative effect of change in accounting -- -- (.02) -- --
principle
Net income (loss)(2) (.41) .04 .42 (.18) (.21)
BALANCE SHEET DATA(4):
Cash and cash equivalents $ 1,798 $ 977 $ 2,170 $ 807 $ 691
Working capital 1,817 (458) 2,309 1,467 2,257
Total assets 9,553 15,564 25,543 27,949 26,734
Long-term debt, less current maturities 6,829 10,198 3,240 6,771 6,682
Total shareholders' equity 1,684 1,388 18,746 16,905 16,471
Dividends declared per share of Common Stock -- -- -- -- --
OPERATING DATA:
Number of offices(3) 18 34 49 54 56
Number of dentists(3)(4) 24 53 73 90 91
Total net revenue per office $ 299 $ 375 $ 444 $ 529 $ 525
- ----------
(1) Acquisitions of Offices and development of de novo Offices affect the
comparability of the data. During 1996 the Company acquired nine
Offices and opened five de novo Offices. Fifteen additional Office
acquisitions and one de novo Office increased the Company's operations
for the year ended December 31, 1997. In 1998, the Company acquired an
additional 10 Offices and opened five de novo Offices. In 1999, the
Company acquired one Office, opened five de novo Offices and
consolidated two existing Offices into one. In 2000, the Company opened
two de novo Offices.
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements of the Company.
(3) Data is as of the end of the respective periods presented.
(4) This represents the actual number of dentists employed by the P.C.s and
specialists who contract with the P.C.s to provide specialty dental
services.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion and analysis relates to factors, which have affected
the consolidated results of operations and financial condition of the Company
for the three years ended December 31, 2000. Reference should also be made to
the Company's consolidated financial statements and related notes thereto and
the Selected Financial Data included elsewhere in this document. This document
contains forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under Items 1 and 2.
"Business and Properties," Item 5., "Market for the Registrant's Common Equity
and Related Stockholder Matters" as well as in this document generally.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation the risk factors set forth in this Item 7 under the heading "Risk
Factors."
OVERVIEW
The Company was formed in May 1995, and currently manages 56 Offices in
Colorado, New Mexico, and Arizona staffed by 78 dentists and 13 specialists. The
Company has acquired 42 practices (four of which were consolidated into existing
Offices) and opened 18 de novo Offices. Of the 42 acquired practices, only three
(the first three practices, which were acquired from the Company's President,
Mark Birner, D.D.S.) were acquired from affiliates of the Company. The Company
derives all of its Revenue (as defined below) from its Management Agreements
with the P.C.s. In addition, the Company assumes a number of responsibilities
when it acquires a new practice or develops a de novo Office, which are set
forth in the Management Agreement, as described below. The Company expects to
expand in existing markets by enhancing the operating performance of its
existing Offices, by developing de novo Offices, and by acquiring solo and group
dental practices. Generally, the Company seeks to acquire dental practices for
which the Company believes application of its Dental Practice Management Model
will improve operating performance. See Items 1 and 2. "Business and Properties
- - Operations - Dental Practice Management Model."
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's success in the Colorado
market led to its expansion into New Mexico and Arizona. The Company commenced
operations in Colorado in October 1995 with the acquisition of three practices,
and acquired a fourth practice in November 1995. During 1996, the Company
developed five de novo Offices and acquired 12 practices (including three
practices which were consolidated with existing Offices). In 1997, the Company
developed one de novo Office and acquired 15 practices. In 1998, the Company
developed five de novo Offices and acquired 10 practices. In 1999, the Company
developed five de novo Offices, acquired one practice and consolidated two
practices into one. In 2000, the Company developed two de novo Offices and
purchased the remaining 50% interest in two existing Offices.
The combined purchase amounts for the four practices acquired in 1995, the 12
practices acquired in 1996, the 15 practices acquired in 1997, the 10 practices
acquired in 1998, and the practice acquired in 1999 were approximately $412,000,
$4.4 million, $5.3 million, $5.8 million and $760,000, respectively. The 16 de
novo Offices opened between January 1996 and December 1999 began generating
positive contribution from dental offices, on average, within six months of
opening. One of the two de novo Offices opened in 2000 began generating a
positive contribution from dental offices within four months of opening. The
Company's other remaining de novo Office, which has been open for three months,
has not generated a positive contribution from dental offices as of the date of
this Annual Report. The Company expects this Office to become profitable during
2001. See Items 1 and 2. "Business and Properties - Expansion Program."
The Company has achieved growth in net revenue (as defined below) primarily
through the ongoing development of a dense dental practice network and the
implementation of its dental practice management model. During the three years
ended December 31, 2000, net revenue increased from $21.7 million in 1998 to
$28.6 million for 1999, and increased to $29.4 million for 2000. During the
three years ended December 31, 2000, contribution from dental offices decreased
from $4.5 million in 1998 to $4.1 million for 1999, and decreased to $3.9
million for 2000. The major factor contributing to the decrease in contribution
from dental offices for 2000 was the fallout from the allegations against the
Company's President, Mark Birner D.D.S. by the Colorado Board of Dental
Examiners, which was announced on August 15, 2000. Management believes the
allegations resulted in lost revenue during the third and fourth quarters of
2000 due to: 1) the temporary suspension of one of the Company's managed care
contracts; 2) the one half day closure of all Colorado offices to explain the
allegations to employees; 3) negative media publicity and; 4) employee morale
issues and a slow down in dentist and other personnel recruitment. The Company
has taken steps to improve its profitability by increasing its efforts to add
incremental dentists and specialists to the current network, renegotiating
managed care
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contracts, and slowing the growth in the number of incremental offices. During
the three years ended December 31, 2000, operating income decreased from $1.3
million for 1998 to $90,000 for 1999, and increased to $197,000 for 2000.
At December 31, 2000, the Company's total assets of $26.3 million included $13.7
million of identifiable intangible assets related to Management Agreements. At
that date, the Company's total shareholders' equity was $16.5 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.
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) hiring all
dentists and dental hygienists, (ii) complying with all laws, rules and
regulations relating to dentists and dental hygienists, and (iii) maintaining
proper patient records. The Company has made, and intends to make in the future,
loans to P.C.s in Colorado, New Mexico and Arizona to fund their acquisition of
dental assets from third parties in order to comply with the laws of such
states.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office, (ii) direct
costs of all Company employees or consultants who provide services to or in
connection with the Office, (iii) utilities, janitorial, laboratory, supplies,
advertising and other expenses incurred by the Company in carrying out its
obligations under the Management Agreement, (iv) depreciation expense associated
with the P.C.'s assets and the assets of the Company used at the Office, and the
amortization of intangible asset value relating to the Office, (v) interest
expense on indebtedness incurred by the Company to finance any of its
obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company's or the P.C.'s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company's personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of Company
including the P.C.'s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Office are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists work at the Offices of the P.C.s. This enables the Company to manage
the profitability of the Offices. Each Management Agreement is for a term of 40
years. Further, each Management Agreement generally may be terminated by the
P.C. only for cause, which includes a material default by or bankruptcy of the
Company. Upon expiration or termination of a Management Agreement by either
party, the P.C. must satisfy all obligations it has to the Company.
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The Company's revenue is derived principally from fee-for-service revenue and
revenue from capitated managed dental care plans. Fee-for-service revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Office (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Office under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive supplemental payments for more complicated or elective procedures.
In contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided. See Items 1 and 2. "Business and Properties -
Payor Mix."
The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs, opening new Offices and acquiring solo and group practices. 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 Company believes that the period-to-period comparisons
set forth below may not be representative of future operating results.
For the year ended December 31, 2000, Revenue increased to $41.2 million from
$39.1 million for the year ended December 31, 1999, an increase of 5.4%. The
Company opened two de novo Offices during 2000 which, in the aggregate,
contributed $483,000 of the $2.1 million increase. The remainder of the increase
in Revenue of $1.6 million was attributable to the 54 Offices that existed at
the beginning of 2000. Revenue at the 48 Offices in existence during both full
periods decreased slightly from $37.0 million in 1999 to $36.9 million in 2000.
The Company has successfully reduced the percentage of its business which comes
from managed dental care plans from 51.4% of total revenues in 1998 to 37.8% of
total revenues in 2000, and replaced that revenue stream with higher margin
fee-for-service business. This higher margin fee-for-service revenue has
predominately been business derived from preferred provider plans.
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For the year ended December 31, 1999, Revenue increased to $39.1 million from
$29.2 million for the year ended December 31, 1998, an increase of 33.9%. The
Company acquired one practice and opened five de novo Offices during 1999 which,
in the aggregate, contributed $2.1 million of the $9.9 million increase. Revenue
at the 34 Offices in existence during both full periods increased from $24.8
million in 1998 to $26.3 million in 1999, an increase of $1.5 million, or 6.0%.
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's Consolidated Statements of Operations.
The information contained in the table represents the historical results of the
Company. The information that follows should be read in conjunction with the
Company's consolidated financial statements and related notes thereto.
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
--------- --------- ---------
Net revenue 100.0% 100.0% 100.0%
Direct expenses:
Clinical salaries and benefits 38.9 39.2 40.9
Dental supplies 5.6 6.2 6.4
Laboratory fees 9.3 10.0 8.9
Occupancy 9.0 10.8 11.0
Advertising and marketing 1.8 1.7 1.1
Depreciation and amortization 5.3 6.7 8.2
General and administrative 9.6 10.9 10.1
--------- --------- ---------
79.5 85.5 86.6
--------- --------- ---------
Contribution from dental offices 20.5 14.5 13.4
Corporate expenses -
General and administrative 13.9 13.3 11.6
Depreciation and amortization 0.7 0.9 1.1
--------- --------- ---------
Operating income 5.9 0.3 0.7
Interest expense, net (0.6) (1.7) (2.2)
Conversion inducement expense (1.4) -- --
--------- --------- ---------
Income (loss) before income taxes 3.9 (1.4) (1.5)
Income tax (expense) benefit (0.6) 0.4 0.4
--------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle 3.3 (1.0) (1.1)
Cumulative effect of change in
accounting principle (0.2) -- --
--------- --------- ---------
Net income (loss) 3.1% (1.0)% (1.1)%
========= ========= =========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net revenue. Net revenue increased from $28.6 million for the year ended
December 31, 1999 to $29.4 million for the year ended December 31, 2000. The
Company opened two de novo Offices during 2000, which contributed approximately
$444,000 to the increase. The remainder of the increase in net revenue of
approximately $356,000 was attributable to the 54 practices the Company had at
the beginning of the 2000 year.
Clinical salaries and benefits. Clinical salaries and benefits increased from
$11.2 million for the year ended December 31, 1999 to $12.0 million for the year
ended December 31, 2000, an increase of $815,000 or 7.3%. This increase was due
primarily to the increased number of Offices and the corresponding addition of
non-dental personnel and because of annual wage increases. As a percentage of
net revenue, clinical salaries and benefits increased from 39.2% in 1999 to
40.9% in 2000.
Dental supplies. Dental supplies increased from $1.8 million for the year ended
December 31, 1999 to $1.9 million for the year ended December 31, 2000, an
increase of $97,000 or 5.5%. This increase was due primarily to the increased
number of Offices and to normal price increases from suppliers. As a percentage
of net revenue, dental supplies increased from 6.2% in 1999 to 6.4% in 2000.
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Laboratory fees. Laboratory fees decreased from $2.8 million for the year ended
December 31, 1999 to $2.6 million for the year ended December 31, 2000, a
decrease of $211,000 or 7.4%. The decrease was primarily due to the Company
contracting with a single laboratory and receiving the benefits of lower costs
due to volume discounts. Laboratory fees as a percentage of net revenues
decreased from 10.0% in 1999 to 8.9% in 2000.
Occupancy. Occupancy increased from $3.1 million for the year ended December 31,
1999 to $3.3 million for the year ended December 31, 2000, an increase of
$155,000 or 5.3%. This increase was due to the two new Offices opened in 2000,
as well as certain Offices which were only open for part of the year ended
December 31, 1999 and a full year in 2000. As a percentage of net revenue,
occupancy expense increased from 10.8% in 1999 to 11.0% in 2000.
Advertising and marketing. Advertising and marketing decreased from $484,000 for
the twelve months ended December 31, 1999 to $328,000 for the twelve months
ended December 31, 2000, a decrease of $156,000 or 32.1%. This decrease was
primarily due to the opening of only two Offices in 2000 as compared to six
Offices in 1999 and the corresponding savings of the initial expense of
promoting new Offices. Advertising and marketing expense, as a percentage of net
revenue, decreased from 1.7% in 1999 to 1.1% in 2000.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$1.9 million for the twelve months ended December 31, 1999 to $2.4 million for
the twelve months ended December 31, 2000, an increase of $484,000 or 25.2%.
This increase was primarily due the number of Offices which were open only for
part of the year ended December 31, 1999, and because of the two new Offices
opened in 2000 which, because they were developed from scratch, have a higher
depreciable basis than those of an existing office being purchased. Depreciation
and amortization as a percentage of net revenue increased from 6.7% in 1999 to
8.2% in 2000.
General and administrative. General and administrative costs, attributable to
the Offices, decreased from $3.1 million for the twelve months ended December
31, 1999 to $3.0 million for the twelve months ended December 31, 2000, a
decrease of $143,000 or 4.6%. The reduction is primarily the result of a Company
initiative in 2000 to manage controllable costs. As a percentage of net revenue,
general and administrative expenses decreased from 10.9% in 1999 to 10.1% in
2000.
Contribution from dental offices. As a result of the above changes, contribution
from dental offices decreased from $4.1 million for the twelve months ended
December 31, 1999 to $3.9 million for the twelve months ended December 31, 2000,
a decrease of $184,000 or 4.5%. As a percentage of net revenue, contribution
from dental offices decreased from 14.5% in 1999 to 13.4% in 2000.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative decreased from $3.8 million for the twelve months ended
December 31, 1999 to $3.4 million for the twelve months ended December 31, 2000,
a decrease of $382,000 or 10.1%. The reduction is primarily the result of a
Company initiative in 2000 to manage controllable costs. As a percentage of net
revenue, corporate expenses - general and administrative decreased from 13.3% in
1999 to 11.6% in 2000.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from $242,000 for the twelve months
ended December 31, 1999 to $332,000 for the twelve months ended December 31,
2000, an increase of $90,000 or 37.4%. This increase was primarily due to the
acquisition of new payroll software in 2000 to manage new and future growth.
Corporate expenses - depreciation and amortization as a percentage of net
revenue increased from 0.9% in 1999 to 1.1% in 2000.
Operating income. As a result of the change described above, operating income
increased from $90,000 for the twelve months ended December 31, 1999 to $197,000
for the twelve months ended December 31, 2000, an increase of 107,000 or 119.9%.
As a percentage of net revenue, operating income increased from 0.3% in 1999 to
0.7% in 2000.
Interest expense, net. Interest expense - net increased from $478,000 for the
twelve months ended December 31, 1999 to $630,000 for the twelve months ended
December 31, 2000, an increase of $152,000 or 31.8%. This increase was primarily
the result of higher rates of interest charged the Company on its line of credit
and a higher average balance outstanding on this line of credit which was used
for capital expenditures and the retirement of Common Stock of the Company. As a
percentage of net revenue, interest expense - net increased from 1.7% in 1999 to
2.2% in 2000.
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Net loss. As a result of the changes described above, the Company reported a net
loss of $(321,000) for the twelve months ended December 31, 2000 as compared to
a net loss of $(278,000) for the twelve months ended December 31, 1999, net of
tax benefits of $113,000 and $111,000 for 2000 and 1999, respectively.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net revenue. Net revenue increased from $21.7 million for the year ended
December 31, 1998 to $28.6 million for the year ended December 31, 1999, an
increase of $6.9 million or 31.3%. The Company acquired one practice and opened
five de novo Offices during 1999, which contributed $1.4 million of the
increase. The remainder of the increase in net revenue of $5.5 million was
attributable to the 49 practices the Company had at the beginning of the 1999
year.
Clinical salaries and benefits. Clinical salaries and benefits increased from
$8.5 million for the year ended December 31, 1998 to $11.2 million for the year
ended December 31, 1999, an increase of $2.7 million or 32.5%. This increase was
due primarily to the increased number of Offices and the corresponding addition
of non-dental personnel. As a percentage of net revenue, clinical salaries and
benefits increased from 38.9% in 1998 to 39.2% in 1999.
Dental supplies. Dental supplies increased from $1.2 million for the year ended
December 31, 1998 to $1.8 million for the year ended December 31, 1999, an
increase of $564,000 or 46.7%. This increase was due to the increased Revenue
generated at the Offices and the increased number of Offices. As a percentage of
net revenue, dental supplies increased from 5.6% in 1998 to 6.2% in 1999. The
increase in dental supplies as a percentage of net revenue is primarily
attributable to the de novo Offices which opened in 1999 and late 1998.
Laboratory fees. Laboratory fees increased from $2.0 million for the year ended
December 31, 1998 to $2.8 million for the year ended December 31, 1999, an
increase of $814,000 or 40.1%. This increase was due to the increased number of
Offices. As a percentage of net revenue, laboratory fees increased from 9.3% in
1998 to 10.0% in 1999. The increase in laboratory fees as a percentage of net
revenue is primarily attributable to the Arizona Offices and the de novo Offices
which opened in 1999 and late 1998 not fully utilizing the laboratories having
Company negotiated pricing arrangements.
Occupancy. Occupancy increased from $2.0 million for the year ended December 31,
1998 to $3.1 million for the year ended December 31, 1999, an increase of $1.1
million or 57.2%. This increase was due to the Offices added in 1999 as well as
certain Offices which were only open for part of the year ended December 31,
1998 and a full year in 1999. As a percentage of net revenue, occupancy expense
increased from 9.0% in 1998 to 10.8% in 1999. This is attributable to the
opening of de novo Offices which have a higher rental rate per square foot and
lower revenue than the Offices in existence at the beginning of 1998.
Advertising and marketing. Advertising and marketing increased from $380,000 for
the year ended December 31, 1998 to $484,000 for the year ended December 31,
1999, an increase of $104,000 or 27.2%. As a percentage of net revenue,
advertising and marketing decreased from 1.8% in 1998 to 1.7% in 1999.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$1.2 million for the year ended December 31, 1998 to $1.9 million for the year
ended December 31, 1999, an increase of $773,000 or 67.1%. This increase was due
to the increased number of Offices which were only open for part of the year
ended December 31, 1998. As a percentage of net revenue, depreciation and
amortization increased from 5.3% in 1998 to 6.7% in 1999. The increase in
depreciation and amortization as a percentage of net revenue is due to the
number of de novo Offices opened during 1999 which have a lower revenue base
than the Offices that have been in operation longer.
General and administrative. General and administrative costs which are
attributable to the Offices, increased from $2.1 million for the year ended
December 31, 1998 to $3.1 million for the year ended December 31, 1999, an
increase of $1.0 million or 48.4%. This increase was due to the increased number
of Offices as well as certain Offices which were only open for part of the year
ended December 31, 1998. Additionally, the Company expanded its corporate
infrastructure to manage the growth and some of these costs were passed on to
the Offices. As a percentage of net revenue, general and administrative expenses
increased from 9.6% in 1998 to 10.9% in 1999.
Contribution from dental offices. As a result of the above, contribution from
dental offices decreased from $4.5 million for the year ended December 31, 1998
to $4.1 million for the year ended December 31, 1999, a decrease of $326,000 or
7.3%. As a percentage of net revenue, contribution from dental offices decreased
from 20.5% in 1998 to 14.5% in 1999.
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25
Corporate expenses - general and administrative. Corporate expenses - general
and administrative increased from $3.0 million for the year ended December 31,
1998 to $3.8 million for the year ended December 31, 1999, an increase of
$765,000 or 25.2%. This increase was due to the expansion of the Company's
infrastructure to more effectively manage growth. As a percentage of net
revenue, corporate expense - general and administrative decreased from 13.9% in
1998 to 13.3% in 1999.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from $150,000 for the year ended
December 31, 1998 to $242,000 for the year ended December 31, 1999, an increase
of $92,000 or 61.3%. This increase was a result of the Company's expansion of
its corporate infrastructure, primarily investments in computer equipment and
software to manage current and future growth. As a percentage of net revenue,
corporate expenses - depreciation and amortization increased from 0.7% in 1998
to 0.9% in 1999.
Operating income. As a result of the above, operating income decreased from $1.3
million for the year ended December 31, 1998 to $90,000 for the year ended
December 31, 1999, a decrease of $1.2 million or 93.0%. As a percentage of net
revenue, operating income decreased from 5.9% in 1998 to 0.3% in 1999.
Interest expense, net. Interest expense, net increased from $124,000 for the
year ended December 31, 1998 to $478,000 for the year ended December 31, 1999,
an increase of $354,000 or 286.0%. This increase was primarily the result of an
increase in borrowings on the line of credit which were used for capital
expenditures and the purchase and retirement of Common Stock of the Company. As
a percentage of net revenue, interest expense, net increased from 0.6% in 1998
to 1.7% in 1999.
Conversion inducement expense. During the year ended December 31, 1998, the
Company incurred a one-time charge of approximately $305,000 related to inducing
the convertible debenture holders to convert to Common Stock at the closing of
the Company's initial public offering in February 1998.
Change in Accounting Principle. Effective January 1, 1998, the Company adopted
SOP 98-5 "Reporting on the Costs of Start-up Activities". This SOP provides
guidance on the reporting of start-up costs and organization costs and requires
the Company to expense these costs (as defined by the SOP) as they are incurred.
Initial application of this SOP has been reported as a cumulative effect of a
change in accounting principle and resulted in a charge of approximately $39,000
in the year ended December 31, 1998.
Net income (loss). As a result of the above, the Company reported a net loss of
$(278,000) for the year ended December 31, 1999 compared to net income of
$675,000 for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its growth through a combination
of private sales of convertible subordinated debentures and Common Stock, cash
provided by operating activities, a bank line of credit (the "Credit Facility"),
seller notes and the initial public offering of Common Stock.
Net cash provided by operating activities was $1.4 million, $1.3 million, and
$1.7 million for the years ended December 31, 1998, 1999 and 2000, respectively.
During the year ended December 31, 2000 after adding back depreciation and
amortization and other non-cash expenses, the Company used cash in operating
activities. This use of cash consisted primarily of a decrease in accounts
payable which was somewhat offset by a decrease in prepaid expenses. During the
year ended December 31, 1999 after adding back depreciation and amortization and
other non-cash expenses, the Company used cash in operating activities. This use
of cash consisted primarily of an increase in accounts receivable which was
somewhat offset by an increase in accounts payable, an increase in other
long-term obligations and a decrease in prepaid expenses. During the year ended
December 31, 1998 after adding back depreciation and amortization and other
non-cash expenses, the Company used cash in operating activities. This use of
cash consisted primarily of an increase in accounts receivable and prepaid
expenses which was somewhat offset by an increase in accounts payable.
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26
Net cash used in investing activities was $8.9 million, $4.4 million, and $1.5
million for the years ended December 31, 1998, 1999 and 2000, respectively.
During the year ended December 31, 2000, $1.3 million was invested in the
purchase of additional property and equipment, including $428,000 for two de
novo Offices and $197,000 for acquiring the remaining 50% interest in two
existing Offices. During the year ended December 31, 1999, $4.4 million was
invested in the purchase of additional property and equipment, including $1.1
million for the de novo Offices and $697,000 was utilized for an acquisition.
During the year ended December 31, 1998, $5.5 million was utilized for
acquisitions and $3.4 million was invested in the purchase of additional
property and equipment, including $1.1 million for the de novo Offices.
For the year ended December 31, 2000 net cash used in financing activities was
$401,000. For the years ended December 31, 1998 and 1999 net cash provided by
financing activities was $8.7 million, and $1.8 million, respectively. For the
year ended December 31, 2000, net cash used in financing activities was
comprised of $195,000 for the repayment of long-term debt, $113,000 for the
purchase and retirement of Common Stock and $93,000 for the pay-down on the
Company's line of credit. For the year ended December 31, 1999, net cash
provided by financing activities was comprised of net borrowings under the
Company's line of credit of approximately $3.7 million which was partially
offset by the purchase and retirement of Common Stock of approximately $1.6
million and approximately $310,000 for the repayment of long-term debt. For the
year ended December 31, 1998, the cash provided was comprised of $11.5 million
from the initial public offering, $2.5 million in net borrowings from the
Company's Credit Facility and $50,000 from stock options exercised. This was
offset by $1.2 million for costs associated with the public offering, $3.5
million used for the repayment of long-term debt, $305,000 related to the
conversion of subordinated debentures to Common Stock, $242,000 for the purchase
and retirement of Common Stock, and $54,000 loan issuance costs.
Under the Company's Credit Facility (as amended on September 29, 2000), the
Company may borrow up to $10.0 million for working capital needs. Advances bear
interest at the lender's base rate (prime plus a rate margin ranging from .25%
to 1.50% based on the ratio of consolidated senior debt to consolidated EBITDA),
or at an adjusted LIBOR rate (LIBOR plus a rate margin ranging from 1.50% to
2.75% based on the ratio of consolidated senior debt to consolidated EBITDA), at
the Company's option. The Company is also obligated to pay an annual facility
fee ranging from .25% to .50% (based on the ratio of consolidated senior debt to
consolidated EBITDA) on the average unused amount of the line of credit during
the previous full calendar quarter. Borrowings are limited to an availability
formula based on the Company's adjusted EBITDA. As amended, the loan matures on
April 30, 2002. At December 31, 2000, the Company had approximately $2.3 million
available and $6.5 million outstanding under the Credit Facility. The Credit
Facility is secured by a lien on the Company's accounts receivable and its
Management Agreements. The Credit Facility prohibits the payment of dividends
and other distributions to shareholders, restricts or prohibits the Company from
incurring indebtedness, incurring liens, disposing of assets, making investments
or making acquisitions, and requires the Company to maintain certain financial
ratios on an ongoing basis. At December 31, 2000 the Company was in full
compliance with all of its covenants under this agreement.
As of December 31, 2000, the Company had approximately $354,000 in notes payable
issued in connection with various Office acquisitions which bear interest at
rates varying from 8.0% to 9.0%. At December 31, 2000, the Company's material
commitments for capital expenditures totaled approximately $1.2 million which
includes the acquisition of controlling interest in two existing Offices. The
Company anticipates that these capital expenditures will be funded by cash on
hand, cash generated by operations, or borrowings under the Company's Credit
Facility. The Company's accumulated deficit as of December 31, 2000 was
approximately $(385,000) and the Company had working capital on that date of
approximately $2.3 million.
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. See "Risk Factors - Need for
Additional Capital; Uncertainty of Additional Financing" in this Item 7.
On October 8, 1998, the Company's Board of Directors unanimously approved the
purchase of up to 75,000 shares of the Company's Common Stock on the open market
on such terms, as the Board of Directors deems acceptable. On February 9, 1999,
the Company's Board of Directors increased the approved number of shares to be
purchased on the open market to 150,000 shares. On September 5, 2000, the
Company's Board of Directors unanimously approved the purchase of shares of the
Company's Common Stock on the open market, total value not to exceed $150,000.
As of December 31, 1998 the Company, in 11 separate transactions, purchased
approximately 14,500 shares of its Common Stock for total
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consideration of approximately $242,000 at prices ranging from $14.52 to $19.24
per share. During 1999, the Company, in 58 separate transactions, purchased
approximately 133,800 shares of Common Stock for total consideration of
approximately $1.6 million at prices ranging from $7.12 to $15.00 per share.
During 2000 the Company, in 18 separate transactions, purchased approximately
26,300 shares of Common Stock for total consideration of approximately $113,000
at prices ranging from $3.80 to $6.68 per share.
RISK FACTORS
This Annual Report contains forward-looking statements. Discussions containing
such forward-looking statements may be found in the material set forth in this
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations," Items 1 and 2. "Business and Properties" and Item 5. "Market for
the Registrant's Common Equity and Related Stockholder Matters," as well as in
this Annual Report generally. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various
factors, including, without limitation, the risk factors set forth below and the
matters set forth in this Annual Report generally.
Demands on Management from Growth; Limited Operating History. The Company has
been providing dental practice management services since October 1995. Prior to
April 1997, the Company provided dental practice management services exclusively
in Colorado. The Company's growth has placed, and will continue to place,
strains on the Company's management, operations and systems. The growth has
required the hiring and training of additional employees to oversee the
operations and training of non-dental employees in the new Offices, the use of
management resources to integrate the operations of the new Offices with the
operations of the Company, and the incurring of incremental costs to convert to
or install the Company's management information system. The Company's ability to
compete effectively will depend upon its ability to hire, train and assimilate
additional management and other employees, and its ability to expand, improve
and effectively utilize its operating, management, marketing and financial
systems to accommodate its expanded operations. Any failure by the Company's
management to effectively anticipate, implement and manage the changes required
to sustain the Company's growth may have a material adverse effect on the
Company's business, financial condition and operating results. See Items 1 and
2. "Business and Properties - Expansion Program."
Dependence Upon Availability of Dentists and Other Personnel. The Company
believes that individual Office profitability, individual Office operations and
its expansion strategy are dependent on the availability and successful
recruitment and retention of dentists, dental assistants, hygienists,
specialists and other personnel. The Company may not be able to recruit or
retain dentists and other personnel for its existing and newly established
Offices, which may have a material adverse effect on the Company's expansion
strategy and its business, financial condition and operating results. See Items
1 and 2. "Business and Properties - Operations - Dental Practice Model."
Need for Additional Capital; Uncertainty of Additional Financing. Implementation
of the Company's growth strategy has required significant capital resources.
Such resources will be needed to establish additional Offices, maintain or
upgrade the Company's management information systems, and for the effective
integration, operation and expansion of the Offices. The Company historically
has used principally cash and promissory notes as consideration in acquisitions
of dental practices and intends to continue to do so. If the Company's capital
requirements over the next several years exceed cash flow generated from
operations and borrowings available under the Company's existing Credit Facility
or any successor credit facility, the Company may need to issue additional
equity securities and incur additional debt. If additional funds are raised
through the issuance of equity securities, dilution to the Company's existing
shareholders may result. Additional debt or non-Common Stock equity financings
could be required to the extent that the Common Stock fails to maintain a market
value sufficient to warrant its use for future financing needs. If additional
funds are raised through the incurrence of debt, such debt instruments will
likely contain restrictive financial, maintenance and security covenants. The
Company's existing credit facility limits the amount the Company may spend in
any calendar year to acquire dental practices. The Company may not be able to
obtain additional required capital on satisfactory terms, if at all. The failure
to raise the funds necessary to finance the expansion of the Company's
operations or the Company's other capital requirements could have a material and
adverse effect on the Company's ability to pursue its strategy and on its
business, financial condition and operating results. See "Liquidity and Capital
Resources" in this Item 7.
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Risks Associated with De Novo Office Development. The Company utilizes internal
and external resources to identify locations in suitable markets for the
development of de novo Offices. Identifying locations in suitable geographic
markets and negotiating leases can be a lengthy and costly process. Furthermore,
the Company will need to provide each new Office with the appropriate equipment,
furnishings, materials and supplies. To date, the Company's average cost to open
a de novo Office has been approximately $206,000. Future de novo development may
require a greater investment by the Company. Additionally, new Offices must be
staffed with one or more dentists. Because a new Office may be staffed with a
dentist with no previous patient base, significant advertising and marketing
expenditures may be required to attract patients. There can be no assurance that
a de novo Office will become profitable for the Company. See Items 1 and 2.
"Business and Properties - Expansion Program - De Novo Office Developments."
Dependence on Management Agreements, the P.C.s and Affiliated Dentists. The
Company receives management fees for services provided to the P.C.s under
Management Agreements. The Company owns most of the non-dental operating assets
of the Offices but does not employ or contract with dentists, employ hygienists
or control the provision of dental care. The Company's revenue is dependent on
the revenue generated by the P.C.s. Therefore, effective and continued
performance of dentists providing services for the P.C.s is essential to the
Company's long-term success. Under each Management Agreement, the Company pays
substantially all of the operating and non-operating expenses associated with
the provision of dental services except for the salaries and benefits of the
dentists and hygienists and principal and interest payments of loans made to the
P.C. by the Company. Any material loss of revenue by the P.C.s would have a
material adverse effect on the Company's business, financial condition and
operating results, and any termination of a Management Agreement (which is
permitted in the event of a material default or bankruptcy by either party)
could have such an effect. In the event of a breach of a Management Agreement by
a P.C., there can be no assurance that the legal remedies available to the
Company will be adequate to compensate the Company for its damages resulting
from such breach. See Items 1 and 2. "Business and Properties - Affiliation
Model."
Government Regulation. The practice of dentistry is regulated at both the state
and federal levels. There can be no assurance that the regulatory environment in
which the Company or P.C.s operate will not change significantly in the future.
In addition, state and federal laws regulate health maintenance organizations
and other managed care organizations for which dentists may be providers. In
general, regulation of health care companies is increasing. In connection with
its operations in existing markets and expansion into new markets, the Company
may become subject to additional laws, regulations and interpretations or
enforcement actions. The laws regulating health care are broad and subject to
varying interpretations, and there is currently a lack of case law construing
such statutes and regulations. The ability of the Company to operate profitably
will depend in part upon the ability of the Company to operate in compliance
with applicable health care regulations.
The laws of many states, including Colorado and New Mexico, permit a dentist to
conduct a dental practice only as an individual, a member of a partnership or an
employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist to own or control dental equipment or offices used in a dental
practice. In addition, Arizona, Colorado, New Mexico, and many other states
impose limits on the tasks that may be delegated by dentists to hygienists and
dental auxiliaries. Some states, including Arizona, Colorado and New Mexico,
regulate the content of advertisements of dental services. Some states require
entities designated as "clinics" to be licensed, and may define clinics to
include dental practices that are owned or controlled in whole or in part by
non-dentists. These laws and their interpretations vary from state to state and
are enforced by the courts and by regulatory authorities with broad discretion.
Many states, including Colorado and New Mexico, also prohibit "fee-splitting" by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice's revenues.
Many states have fraud and abuse laws, which apply to referrals for items or
services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
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In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. Specifically, in some states, regulators may determine that the P.C.s
are engaged in the business of insurance, particularly if they contract on a
financial-risk basis directly with self-insured employers or other entities that
are not licensed to engage in the business of insurance. If the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's business, financial condition and operating results may be materially
and adversely affected.
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. The federal fraud and abuse statute prohibits,
among other things, the payment, offer, solicitation or receipt of any form of
remuneration, directly or indirectly, in cash or in kind to induce or in
exchange for (i) the referral of a person for services reimbursable by Medicare
or Medicaid, or (ii) the purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any item, good, facility or service
which is reimbursable under Medicare or Medicaid. Because the P.C.s receive no
revenue under Medicare and Medicaid, the impact of these laws on the Company to
date has been negligible. There can be no assurance, however, that the P.C.s
will not have patients in the future covered by these laws, or that the scope of
these laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
Although the Company believes that its operations as currently conducted are in
material compliance with applicable laws, there can be no assurance that the
Company's contractual arrangements will not be successfully challenged as
violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations or change the way it conducts business. See Items 1 and 2.
"Business and Properties - Government Regulation."
Risks Associated with Acquisition Strategy. The Company has grown substantially
in a relatively short period of time, in large part through acquisitions of
existing Offices and through the development of de novo Offices. Since its
organization in May 1995, the Company has completed 42 dental practice
acquisitions, four of which have been consolidated into existing Offices. The
success of the Company's acquisition strategy will depend on factors, which
include the following:
* Ability to Identify Suitable Dental Practices. Identifying appropriate
acquisition candidates and negotiating and consummating acquisitions can be
a lengthy and costly process. Furthermore, the Company may compete for
acquisition opportunities with companies that have greater resources than
the Company. There can be no assurance that suitable acquisition candidates
will be identified or that acquisitions will be consummated on terms
favorable to the Company, on a timely basis or at all. If a planned
acquisition fails to occur or is delayed, the Company's quarterly financial
results may be materially lower than analysts' expectations, which likely
would cause a decline, perhaps substantial, in the market price of the
Common Stock. In addition, increasing consolidation in the dental
management services industry may result in an increase in purchase prices
required to be paid by the Company to acquire dental practices.
* Integration of Dental Practices. The integration of acquired dental
practices into the Company's networks is a difficult, costly and time
consuming process which, among other things, requires the Company to
attract and retain competent and experienced management and administrative
personnel and to implement and integrate reporting and tracking systems,
management information systems and other operating systems. In addition,
such integration may require the expansion of accounting controls and
procedures and the evaluation of certain personnel functions. There can be
no assurance that substantial unanticipated problems, costs or delays
associated with such integration efforts or with such acquired practices
will not occur. As the Company pursues its acquisition strategy, there can
be no assurance that the Company will be able successfully to integrate
acquired practices in a timely manner or at all, or that any acquired
practices will have a positive impact on the Company's results of
operations and financial condition.
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* Management of Acquisitions. The success of the Company's acquisition
strategy will depend in part on the Company's ability to manage effectively
an increasing number of Offices. The addition of Offices may impair the
Company's ability to provide management services efficiently and
successfully to existing Offices and to manage and supervise adequately the
Company's employees. The Company's results of operations and financial
condition could be materially adversely affected if it is unable to do so
effectively.
* Availability of Funds for Acquisitions. The Company's acquisition
strategy will require that substantial capital investment and adequate
financing is available to the Company. Funds are needed for (i) the
purchase of assets of dental practices, (ii) the integration of operations
of acquired dental practices, and (iii) the purchase of additional
equipment and technology for acquired practices. In addition, increasing
consolidation in the dental services industry may result in an increase in
purchase prices required to be paid by the Company to acquire dental
practices. Any inability of the Company to obtain suitable financing could
cause the Company to limit or otherwise modify its acquisition strategy,
which could have a material adverse effect on the Company's results of
operations and financial condition. See "Risk Factors - Need for Additional
Capital; Uncertainty of Additional Financing" in this Item 7.
* Ability to Increase Revenues and Operating Income of Acquired Practices.
A key element of the Company's growth strategy is to increase revenues and
operating income at its acquired Offices. There can be no assurance that
the Company's revenues and operating income from its acquired Offices will
improve or that revenues or operating income from existing Offices will
continue to improve. Any failure by the Company in improving revenues or
operating income at its Offices could have a material adverse effect on the
Company's results of operations and financial condition.
Reliance on Certain Personnel. The success of the Company, depends on the
continued services of a relatively limited number of members of the Company's
senior management, including its President, Mark Birner, D.D.S., its Chief
Executive Officer, Fred Birner, and its Chief Financial Officer, Treasurer and
Secretary, Dennis Genty. Some key employees have only recently joined the
Company. The Company believes its future success will depend in part upon its
ability to attract and retain qualified management personnel. Competition for
such personnel is intense and the Company competes for qualified personnel with
numerous other employers, some of which have greater financial and other
resources than the Company. The loss of the services of one or more members of
the Company's senior management or the failure to add or retain qualified
management personnel could have a material adverse effect on the Company's
business, financial condition and operating results.
Risks Associated with Cost-Containment Initiatives. The health care industry,
including the dental services market, is experiencing a trend toward cost
containment, as payors seek to impose lower reimbursement rates upon providers.
The Company believes that this trend will continue and will increasingly affect
the provision of dental services. This may result in a reduction in per-patient
and per-procedure revenue from historic levels. Significant reductions in
payments to dentists or other changes in reimbursement by payors for dental
services may have a material adverse effect on the Company's business, financial
condition and operating results.
Risks Associated with Capitated Payment Arrangements. Part of the Company's
growth strategy involves selectively obtaining capitated managed dental care
contracts. Under a capitated managed dental care contract, the dental practice
provides dental services to the members of the plan and receives a fixed monthly
capitation payment for each plan member covered for a specific schedule of
services regardless of the quantity or cost of services to the participating
dental practice which is obligated to provide them, and may receive a co-pay for
each service provided. This arrangement shifts the risk of utilization of such
services to the dental group practice that provides the dental services. Because
the Company assumes responsibility under its Management Agreements for all
aspects of the operation of the dental practices (other than the practice of
dentistry) and thus bears all costs of the provision of dental services at the
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In contrast,
under traditional indemnity insurance arrangements, the insurance company
reimburses reasonable charges that are billed for the dental services provided.
In 2000, the Company derived approximately 18.5% of its revenues from capitated
managed dental care contracts, and 19.3% of its revenues from associated
co-payments. Risks associated with capitated managed dental care contracts
include principally (i) the risk that the capitation payments and any associated
co-payments do not adequately cover the costs of providing the dental services,
(ii) the risk that one or more of the P.C.s may be terminated as an approved
provider by managed dental care plans with which they contract, (iii) the risk
that the Company will be unable to negotiate future capitation arrangements on
satisfactory terms with managed care dental plans, and (iv) the risk that large
subscriber groups will terminate their relationship with such managed dental
care plans which would reduce patient volume and capitation and co-payment
revenue. There can be no assurance that the Company will be able to negotiate
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future capitation arrangements on behalf of P.C.s on satisfactory terms or at
all, or that the fees offered in current capitation arrangements will not be
reduced to levels unsatisfactory to the Company. Moreover, to the extent that
costs incurred by the Company's affiliated dental practices in providing
services to patients covered by capitated managed dental care contracts exceed
the revenue under such contracts, the Company's business, financial condition
and operating results may be materially and adversely affected. See Items 1 and
2. "Business and Properties - Operations - Payor Mix."
Risks of Becoming Subject to Licensure. Federal and state laws regulate
insurance companies and certain other managed care organizations. Many states,
including Colorado, also regulate the establishment and operation of networks of
health care providers. In most states, these laws do not apply to
discounted-fee-for-service arrangements. These laws also do not generally apply
to networks that are paid on a capitated basis, unless the entity with which the
network provider is contracting is not a licensed health insurer or other
managed care organization. There are exceptions to these rules in some states.
For example, certain states require a license for a capitated arrangement with
any party unless the risk-bearing entity is a professional corporation that
employs the professionals. The Company believes its current activities do not
constitute the provision of insurance in Colorado or New Mexico, and thus, it is
in compliance with the insurance laws of these states with respect to the
operation of its Offices. There can be no assurance that these laws will not be
changed or that interpretations of these laws by the regulatory authorities in
those states, or in the states in which the Company expands, will not require
licensure or a restructuring of some or all of the Company's operations. In the
event that the Company is required to become licensed under these laws, the
licensure process can be lengthy and time consuming and, unless the regulatory
authority permits the Company to continue to operate while the licensure process
is progressing, the Company could experience a material adverse change in its
business while the licensure process is pending. In addition, many of the
licensing requirements mandate strict financial and other requirements, which
the Company may not immediately be able to meet. Further, once licensed, the
Company would be subject to continuing oversight by and reporting to the
respective regulatory agency. The regulatory framework of certain jurisdictions
may limit the Company's expansion into, or ability to continue operations
within, such jurisdictions if the Company is unable to modify its operational
structure to conform to such regulatory framework. Any limitation on the
Company's ability to expand could have a material adverse effect on the
Company's business, financial condition and operating results.
Risks Arising From Health Care Reform. Federal and state governments currently
are considering various types of health care initiatives and comprehensive
revisions to the health care and health insurance systems. Some of the proposals
under consideration, or others that may be introduced, could, if adopted, have a
material adverse effect on the Company's business, financial condition and
operating results. It is uncertain what legislative programs, if any will be
adopted in the future, or what action Congress or state legislatures may take
regarding health care reform proposals or legislation. In addition, changes in
the health care industry, such as the growth of managed care organizations and
provider networks, may result in lower payments for the services of the
Company's managed practices.
Risks Associated with Intangible Assets. At December 31, 2000, intangible assets
on the Company's consolidated balance sheet were $13.7 million, representing
51.2% of the Company's total assets at that date. The Company expects the amount
allocable to intangible assets on its balance sheet to increase in the future in
connection with additional acquisitions, which will increase the Company's
amortization expense. In the event of any sale or liquidation of the Company or
a portion of its assets, there can be no assurance that the value of the
Company's intangible assets will be realized. In addition, the Company
continually evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of the amount allocable to the
Company's intangible assets may not be recoverable. When factors indicate that
the amount allocable to the Company's intangible assets should be evaluated for
possible impairment, the Company may be required to reduce the carrying value of
such assets. Any future determination requiring the write off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's business, financial condition and operating results.
Possible Exposure to Professional Liability. In recent years, dentists have
become subject to an increasing number of lawsuits alleging malpractice and
related legal theories. Some of these lawsuits involve large claims and
significant defense costs. Any suits involving the Company or dentists at the
Offices, if successful, could result in substantial damage awards that may
exceed the limits of the Company's insurance coverage. The Company provides
practice management services; it does not engage in the practice of dentistry or
control the practice of dentistry by the dentists or their compliance with
regulatory requirements directly applicable to providers. There can be no
assurance, however, that the Company will not become subject to litigation in
the future as a result of the dental services provided at the Offices. The
Company maintains professional liability insurance for itself and provides for
professional liability insurance covering dentists, hygienists and dental
assistants at the Offices. While the Company believes it has adequate liability
insurance coverage, there can be no assurance that the coverage will be adequate
to cover losses or that coverage will continue to be available upon terms
satisfactory to the Company. In addition, certain types of risks and
liabilities, including penalties and fines imposed by governmental agencies, are
not covered by insurance. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims could have a material
adverse effect on the Company's business, financial condition and operating
results. See Items 1 and 2. "Business and Properties - Insurance."
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Risks Associated with Non-Competition Covenants and Other Arrangements with
Managing Dentists. The Management Agreements require the P.C.s to enter into
employment agreements with dentists which include non-competition provisions
typically for three to five years after termination of employment within a
specified geographic area, usually a specified number of miles from the relevant
Office, and restrict solicitation of employees and patients. In Colorado,
covenants not to compete are prohibited by statute with certain exceptions. One
exception permits enforcement of covenants not to compete against executive and
management personnel and officers and employees who constitute professional
staff to executive and management personnel. Permitted covenants not to compete
are enforceable in Colorado only to the extent their terms are reasonable in
both duration and geographic scope. Arizona and New Mexico courts have enforced
covenants not to compete if their terms are found to be reasonable. It is thus
uncertain whether a court will enforce a covenant not to compete in those states
in a given situation. In addition, there is little judicial authority regarding
whether a practice management agreement will be viewed as the type of
protectable business interest that would permit it to enforce such a covenant or
to require a P.C. to enforce such covenants against dentists formerly employed
by the P.C. Since the intangible value of a Management Agreement depends
primarily on the ability of the P.C. to preserve its business, which could be
harmed if employed dentists went into competition with the P.C., a determination
that the covenants not to compete contained in the employment agreements between
the P.C. and its employed dentists are unenforceable could have a material
adverse impact on the Company. See Items 1 and 2. "Business and Properties -
Affiliation Model- Employment Agreements." In addition, the Company is a party
to various agreements with managing dentists who own the P.C.s, which restrict
the dentists' ability to transfer the shares in the P.C.s. See Items 1 and 2.
"Business and Properties - Affiliation Model - Relationship with P.C.s." There
can be no assurance that these agreements will be enforceable in a given
situation. A determination that these agreements are not enforceable could have
a material adverse impact on the Company.
Seasonality. The Company's past financial results have fluctuated somewhat due
to seasonal variations in the dental service industry, with Revenue typically
declining in the fourth calendar quarter. The Company expects this seasonality
to continue in the future.
Competition. The dental practice management segment of the dental services
industry is highly competitive and is expected to become increasingly more
competitive. There are several dental practice management companies that are
operating in the Company's markets. There are also a number of companies with
dental practice management businesses similar to that of the Company currently
operating in other parts of the country which may enter the Company's existing
markets in the future. As the Company seeks to expand its operations into new
markets, it is likely to face competition from dental practice management
companies, which already have established a strong business presence in such
locations. The Company's competitors may have greater financial or other
resources or otherwise enjoy competitive advantages, which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company. See Items 1 and 2. "Business and Properties -
Competition."
The business of providing general dental and specialty dental services is highly
competitive in the markets in which the Company operates. Competition for
providing dental services may include practitioners who have more established
practices and reputations. The Company competes against established practices in
the retention and recruitment of general dentists, specialists, hygienists and
other personnel. If the availability of such dentists, specialists, hygienists
and other personnel begins to decline in the Company's markets, it may become
more difficult to attract qualified dentists, specialists, hygienists and other
personnel. There can be no assurance that the Company will be able to compete
effectively against other existing practices or against new single or
multi-specialty dental practices that enter its markets, or to compete against
such practices in the recruitment and retention of qualified dentists,
specialists, hygienists and other personnel. See Items 1 and 2.
"Business and Properties - Competition."
32
33
Volatility of Stock Price. The market price of the Common Stock could be subject
to wide fluctuations in response to quarter-by-quarter variations in operating
results of the Company or its competitors, changes in earnings estimates by
analysts, developments in the industry or changes in general economic
conditions.
Restrictions on Payment of Dividends. The Company has not declared or paid cash
dividends on its Common Stock since its formation, and the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of dividends is prohibited under the terms of the Company's existing
credit facility and may be prohibited under any future credit facility, which
the Company may obtain. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters" and "Liquidity and Capital Resources" in this Item
7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in United States interest rates. Historically
and as of December 31, 2000, 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 or LIBOR (at the Company's option) and,
therefore, affected by changes in market interest rates. At December 31, 2000,
approximately $5.5 million was outstanding under the LIBOR option with an
interest rate of 8.875% (LIBOR plus 2.25%) and approximately $1.0 million was
outstanding with an interest rate of 10.5% (prime plus 0.5%). 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.
33
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Birner Dental Management Services, Inc. and subsidiaries' consolidated financial
statements as of December 31, 1999 and 2000 and for the three years ended
December 31, 2000:
Page
----
Report of Independent Public Accountants 35
Consolidated Balance Sheets 36
Consolidated Statements of Operations 37
Consolidated Statements of Shareholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 41
34
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Birner Dental Management Services, Inc.:
We have audited the accompanying consolidated balance sheets of Birner Dental
Management Services, Inc. (a Colorado corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Birner Dental Management
Services, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 2001.
35
36
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
ASSETS 1999 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 806,954 $ 691,417
Accounts receivable, net of allowance for doubtful
accounts of $306,469 and $201,047, respectively 3,700,685 3,871,818
Current portion of notes receivable - related parties 71,070 214,112
Deferred income taxes 117,764 104,429
Income tax receivable 87,000 87,000
Prepaid expenses and other assets 449,385 339,938
------------ ------------
Total current assets 5,232,858 5,308,714
PROPERTY AND EQUIPMENT, net 7,965,699 6,967,914
OTHER NONCURRENT ASSETS:
Intangible assets, net 14,057,688 13,693,092
Deferred charges and other assets 215,793 179,156
Notes receivable - related parties, net of current portion 3,000 --
Deferred tax asset, net 58,101 184,192
------------ ------------
Total assets $ 27,533,139 $ 26,333,068
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,602,239 $ 2,897,043
Current maturities of long-term debt 161,936 154,666
Current maturities of capital lease obligations 1,600 --
------------ ------------
Total current liabilities 3,765,775 3,051,709
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 6,771,157 6,681,623
Capital lease obligations, net of current maturities 339 --
Other long-term obligations 91,257 128,820
------------ ------------
Total liabilities 10,628,528 9,862,152
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding -- --
Common Stock, no par value, 20,000,000 shares
authorized; 1,532,987 and 1,506,705, shares issued and
outstanding at December 31, 1999 and 2000, respectively 16,968,454 16,855,661
Accumulated deficit (63,843) (384,745)
------------ ------------
Total shareholders' equity 16,904,611 16,470,916
------------ ------------
Total liabilities and shareholders' equity $ 27,533,139 $ 26,333,068
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
36
37
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------------
1998 1999 2000
------------ ------------ ------------
NET REVENUE: $ 21,740,665 $ 28,553,114 $ 29,418,772
DIRECT EXPENSES:
Clinical salaries and benefits 8,456,126 11,204,988 12,020,083
Dental supplies 1,209,068 1,773,229 1,870,396
Laboratory fees 2,031,392 2,845,896 2,634,975
Occupancy 1,965,278 3,088,530 3,250,974
Advertising and marketing 380,068 483,615 328,149
Depreciation and amortization 1,152,200 1,924,790 2,409,223
General and administrative 2,092,523 3,104,388 2,961,451
------------ ------------ ------------
17,286,655 24,425,436 25,475,251
------------ ------------ ------------
Contribution from dental offices 4,454,010 4,127,678 3,943,521
CORPORATE EXPENSES:
General and administrative 3,032,142 3,796,696 3,415,031
Depreciation and amortization 149,748 241,496 331,738
------------ ------------ ------------
Operating income 1,272,120 89,486 196,752
Interest expense, net (123,900) (478,285) (630,410)
Conversion inducement expense (305,100) -- --
------------ ------------ ------------
Income (loss) before income taxes 843,120 (388,799) (433,658)
Income tax (expense) benefit (128,471) 111,187 112,756
------------ ------------ ------------
Income (loss) before cumulative effect
of change in accounting principle 714,649 (277,612) (320,902)
Cumulative effect of change in accounting
principle (39,162) -- --
------------ ------------ ------------
Net income (loss) $ 675,487 $ (277,612) $ (320,902)
============ ============ ============
Basic earnings (loss) per share of Common Stock:
Income (loss) before cumulative effect
of change in accounting principle $ .46 $ (.18) $ (.21)
Cumulative effect of change in
accounting principle (.03) -- --
------------ ------------ ------------
Net income (loss) $ .43 $ (.18) $ (.21)
============ ============ ============
Diluted earnings (loss) per share of Common Stock:
Income (loss) before cumulative effect
of change in accounting principle $ .44 $ (.18) $ (.21)
Cumulative effect of change in
accounting principle (.02) -- --
------------ ------------ ------------
Net income (loss) $ .42 $ (.18) $ (.21)
============ ============ ============
Weighted average number of shares of
Common Stock and dilutive securities:
Basic 1,559,918 1,558,553 1,523,594
============ ============ ============
Diluted 1,611,246 1,558,553 1,523,594
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
37
38
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Common Stock Earnings Total
----------------------------- (Accumulated Shareholders'
Shares Amount Deficit) Equity
------------ ------------ ------------ ------------
BALANCES, December 31, 1997 799,094 $ 1,850,094 $ (461,718) $ 1,388,376
Proceeds from initial public offering,
net of $2,541,912 of offering costs
and underwriters discount 458,454 10,294,800 -- 10,294,800
Debenture conversion, net of $278,393
of deferred financing costs 408,286 6,501,607 -- 6,501,607
Issuance of Common Stock for dental
office acquisition 3,960 76,500 -- 76,500
Purchase and retirement of Common Stock (14,495) (241,563) -- (241,563)
Exercise of stock options 3,979 50,300 -- 50,300
Net income -- -- 675,487 675,487
------------ ------------ ------------ ------------
BALANCES, December 31, 1998 1,659,278 18,531,738 213,769 18,745,507
Purchase and retirement of Common Stock (133,775) (1,638,416) -- (1,638,416)
Exercise of stock options 1,376 12,132 -- 12,132
Issuance of Common Stock for dental
office acquisition 3,158 35,000 -- 35,000
Issuance of Common Stock to Profit
Sharing Plan 2,950 28,000 -- 28,000
Net loss -- -- (277,612) (277,612)
------------ ------------ ------------ ------------
BALANCES, December 31, 1999 1,532,987 16,968,454 (63,843) 16,904,611
Purchase and retirement of Common Stock (26,282) (112,793) -- (112,793)
Net loss -- -- (320,902) (320,902)
------------ ------------ ------------ ------------
BALANCES, December 31, 2000 1,506,705 $ 16,855,661 $ (384,745) $ 16,470,916
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
38
39
Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 675,487 $ (277,612) $ (320,902)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,301,948 2,166,286 2,740,961
Stock issued for profit sharing plan -- 28,000 --
Provision for doubtful accounts 58,069 42,261 2,963
Provision for (benefit from) deferred income taxes 43,940 (219,805) (112,756)
Amortization of debenture issuance costs 27,169 -- --
Conversion inducement 305,100 -- --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (1,096,789) (1,106,624) (49,852)
Prepaid expense, income tax receivable
and other assets (404,009) 90,832 146,084
Accounts payable and accrued expenses 486,526 500,109 (705,196)
Other long-term obligations -- 91,257 37,563
-------------- -------------- --------------
Net cash provided by operating activities 1,397,441 1,314,704 1,738,865
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related parties, net 14,813 (45,324) (140,042)
Capital expenditures (2,302,440) (2,634,600) (688,930)
Development of new dental offices (1,139,882) (1,071,191) (427,731)
Acquisition of dental offices (5,522,296) (697,321) (197,163)
-------------- -------------- --------------
Net cash used in investing activities (8,949,805) (4,448,436) (1,453,866)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of
underwriting discounts 11,466,041 -- --
Payment of public offering costs (1,171,241) -- --
Proceeds from exercise of Common Stock options 50,300 12,132 --
Net borrowings from line of credit 2,517,856 3,707,144 (93,000)
Repayment of long-term debt (3,517,967) (309,861) (194,743)
Payment of debenture issuance and other
financing costs (53,729) -- --
Payment to induce conversion of debentures (305,100) -- --
Purchase and retirement of Common Stock (241,563) (1,638,416) (112,793)
-------------- -------------- --------------
Net cash provided by (used in) financing activities 8,744,597 1,770,999 (400,536)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,192,233 (1,362,733) (115,537)
CASH AND CASH EQUIVALENTS, beginning of year 977,454 2,169,687 806,954
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 2,169,687 $ 806,954 $ 691,417
============== ============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
39
40
Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------------
1998 1999 2000
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 260,171 $ 445,784 $ 630,570
============= ============= =============
Cash paid during the year for income taxes $ 347,000 $ 87,000 $ --
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common Stock issued for:
Conversion of debentures 6,780,000 -- --
Acquisition of dental offices 76,500 35,000 --
Liabilities assumed or incurred through acquisitions:
Accounts payable and accrued liabilities 149,777 59,596 --
Notes payable 95,200 -- --
Accounts receivable acquired through
acquisitions 225,000 40,000 --
Other assets acquired through acquisitions -- 30,000 --
Notes payable incurred from:
Acquisition of dental offices 300,000 -- 189,000
266 shares of Common Stock issued for
cashless exercise of 2,147 warrants in 1998 -- -- --
The accompanying notes are an integral part of these consolidated
financial statements.
40
41
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND ORGANIZATION
Birner Dental Management Services, Inc., a Colorado corporation (the "Company"),
was incorporated on May 17, 1995 and manages dental group practices. As of
December 31, 2000, 1999 and 1998 the Company managed 56, 54, and 49 dental
practices (collectively referred to as the "Offices"), respectively. The Company
provides management services, which are designed to improve the efficiency and
profitability of the dental practices. These Offices are organized as
professional corporations and the Company provides its management activities
with the Offices under long-term management agreements (the "Management
Agreements").
The Company has grown primarily through acquisitions. The following table
highlights the Company's growth through December 31, 2000 as follows:
De novo Office
Acquisitions Developments Consolidations
------------ ------------ --------------
1995* 4 -- --
1996 12 5 (3)
1997 15 1 --
1998 10 5 --
1999 1 5 (1)
2000 -- 2 --
-------- -------- --------
Total 42 18 (4)
======== ======== ========
* Includes three dental Offices acquired from one of the Company's founders.
The Company's operations and expansion strategy are dependent, in part, on the
availability of dentists, hygienists and other professional personnel and the
ability to hire and assimilate additional management and other employees to
accommodate expanded operations.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation/Basis of Consolidation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. These financial statements present the financial
position and results of operations of the Company and the Offices, which are
under the control of the Company. All intercompany accounts and transactions
have been eliminated in the consolidation.
The Company treats Offices as consolidated subsidiaries where it has a perpetual
and unilateral controlling financial interest over the assets and operations of
the Offices. The Company has obtained control of substantially all of the
Offices via long-term contractual management arrangements. Certain key features
of these arrangements either enable the Company at any time and in its sole
discretion to cause a change in the shareholder of the P.C. (i.e., "nominee
shareholder") or allow the Company to vote the shares of stock held by the owner
of the P.C. and to elect a majority of the board of directors of the P.C. The
accompanying statements of operations reflect net revenue, which is the amount
billed to patients, less dentists' and hygienists' compensation. Direct expenses
consist of all the expenses incurred in operating the Offices and paid by the
Company. Under the Management Agreements the Company assumes responsibility for
the management of most aspects of the Offices' business (other than the
provision of dental services) including personnel recruitment and training,
comprehensive administrative business and marketing support and advice, and
facilities, equipment, and support personnel as required to operate the
practice. The accompanying consolidated financial statements are presented
without regard to where the costs are incurred since under the management and
other agreements the Company believes it has perpetual and unilateral control
over the assets and operations of substantially all of the Offices.
The Emerging Issues Task Force ("EITF") Issue 97-2 of the Financial Accounting
Standards Board ("FASB") covers financial reporting matters relating to the
physician practice management industry, including the consolidation of
professional corporation revenue and expenses, the accounting for business
combinations and the treatment of stock options for dentists as employee
options. The Company's accounting policies in these areas are consistent with
the provisions of EITF Issue 97-2.
41
42
A summary of the components of net revenue for the years ended December 31,
2000, 1999, and 1998 follows:
Years Ended December 31,
----------------------------------------------
1998 1999 2000
------------ ------------ ------------
Total dental group practice revenue, net $ 29,189,754 $ 39,109,357 $ 41,232,288
Less - revenue from managed offices, net 3,576,870 6,927,865 4,979,535
------------ ------------ ------------
Dental office revenue, net 25,612,884 32,181,492 36,252,753
Less - amounts retained by dental offices 6,607,253 8,444,706 10,261,702
------------ ------------ ------------
Net revenue from consolidated dental offices 19,005,631 23,736,786 25,991,051
Management service fee revenue 2,735,034 4,816,328 3,427,721
------------ ------------ ------------
Net revenue $ 21,740,665 $ 28,553,114 $ 29,418,772
============ ============ ============
Total Dental Group Practice Revenue, Net
"Total dental group practice revenue, net" represents the revenue of the
consolidated and managed Offices reported at the estimated realizable amounts
from insurance companies, preferred provider and health maintenance
organizations (i.e., third-party payors) and patients for services rendered, net
of contractual and other adjustments. Dental services are billed and collected
by the Company in the name of the Offices.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. There are no material claims, disputes or other
unsettled matters that exist to management's knowledge concerning third-party
reimbursements.
During 1998, 1999, and 2000, 24.4%, 20.7%, and 18.5%, respectively, of the
Company's gross revenue was derived from capitated managed dental care
contracts. Under these contracts the Offices receive a fixed monthly payment for
each covered plan member for a specific schedule of services regardless of the
quantity or cost of services provided by the Offices. Additionally, the Offices
may receive a co-pay from the patient for certain services provided. Revenue
from the Company's capitated managed dental care contracts is recognized as
earned on a monthly basis.
During the years ended December 31, 1998, 1999 and 2000, the following three
companies were responsible for the corresponding percentages of the Company's
total dental group practice revenue, net (includes capitation premiums and
co-payments): Aetna Healthcare was responsible for 9.3%, 8.9% and 9.1%,
respectively, Delta Care was responsible for less than 1.0%, 5.0% and 8.6%
respectively, and CIGNA Dental Health was responsible for 9.3%, 7.8% and 5.9%,
respectively.
Net Revenue from Consolidated Dental Offices
"Net revenue from consolidated dental offices" represents the "Total dental
group practice revenue, net" less amounts retained by the Offices primarily for
compensation paid by the professional corporations to dentists and hygienists.
Dentists receive compensation based upon a specified amount per hour worked or a
percentage of revenue or collections attributable to their work, and a bonus
based upon the operating performance of the Office. The Company's net revenue is
dependent upon the revenue of the Offices. The Company's historical net revenue
and operating income levels would be the same as those reported even if the
Company employed all of the dentists and hygienists.
Management Service Fee Revenue
For three of the Offices for which the Company has Management Agreements, but
does not have control, the Company receives management service fee revenue
included with net revenue in the accompanying statements of operations.
"Management service fee revenue" is equal to gross revenue less compensation for
dentists and hygienists for the Offices. Direct expenses associated with the
operations of these Offices are also included in the accompanying statements of
operations.
42
43
Contribution From Dental Offices
The "Contribution from dental offices" represents the excess of net revenue from
the operations of the Offices over direct expenses associated with operating the
Offices. The revenue and direct expense amounts relate exclusively to business
activities associated with the Offices. The contribution from dental offices
provides an indication of the level of earnings generated from the operation of
the Offices to cover corporate expenses, interest expense charges and income
taxes.
Advertising and Marketing
The costs of advertising, promotion and marketing are expensed as incurred.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include money market accounts and all highly liquid investments with
original maturities of three months or less.
Accounts Receivable
Accounts receivable represents receivables from patients and other third-party
payors for dental services provided. Such amounts are recorded net of
contractual allowances and other adjustments at time of billing. In addition,
the Company has estimated allowances for uncollectible accounts. In those
instances when payment is not received at the time of service, the Offices
record receivables from their patients, most of who are local residents and are
insured under third-party payor agreements. Management continually monitors and
periodically adjusts the allowances associated with these receivables.
Property and Equipment
Property and equipment are stated at cost or fair market value at the date of
acquisition, net of accumulated depreciation. Property and equipment are
depreciated using the straight-line method over their useful lives of five years
and leasehold improvements are amortized over the remaining life of the leases.
Equipment held under capital lease obligations is amortized on a straight-line
basis over the shorter of the lease term or estimated life of the asset.
Depreciation was $828,988, $1,550,363, and $2,114,446 for the years ended
December 31, 1998, 1999 and 2000, respectively.
Intangible Assets
The Company's dental practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
Offices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed, based on estimated fair market values. Costs of acquisition
in excess of the net estimated fair value of tangible and identifiable
intangible assets acquired and liabilities assumed are allocated to the
Management Agreement. The Management Agreement represents the Company's right to
manage the Offices during the 40-year term of the agreement. The assigned value
of the Management Agreement is amortized using the straight-line method over a
period of 25 years. Amortization was $471,960, $615,923, and $626,515 for the
years ended December 31, 1998, 1999, and 2000, respectively.
The Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default by the Company.
The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. If this review indicates that the carrying amount
of the asset may not be recoverable, as determined based on the undiscounted
cash flows of the Offices acquired over the remaining amortization periods, the
carrying value of the asset is reduced to fair value. Among the factors that the
Company will continually evaluate are the availability and successful
recruitment and retention of dentists, dental assistants, hygienists,
specialists and other personnel; unfavorable changes in each dental Office's
relative market share and the local market competitive environment; current
period and forecasted operating results; cash flow levels of the dental Offices
and the impact on the net revenue earned by the Company; and legal and
regulatory factors governing the practice of dentistry.
43
44
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk are primarily cash and cash equivalents and accounts receivable. The
Company maintains its cash balances in the form of bank demand deposits and
money market accounts with financial institutions that management believes are
creditworthy. The Company may be exposed to credit risk generally associated
with healthcare and retail companies. The Company established an allowance for
uncollectible accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information. The Company has no
significant financial instruments with off-balance sheet risk of accounting
loss, such as foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes (Note 11) pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the asset and liability method of computing deferred
income taxes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
book basis and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or settled.
Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per Share".
Years Ended December 31,
-------------------------------------------------------------------------
1998 1999
---------------------------------- ----------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Loss Shares Amount
--------- --------- --------- --------- --------- ---------
Basic EPS
Income (loss) before cumulative
effect of change in
accounting
principle $ 714,649 1,559,918 $ .46 $(277,612) 1,558,553 $ (.18)
Cumulative effect of
change in accounting
principle (39,162) -- (.03) -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 675,487 1,559,918 $ .43 $(277,612) 1,558,553 $ (.18)
========= ========= ========= ========= ========= =========
Diluted EPS
Income (loss) before cumulative
effect of change in
accounting
principle $ 714,649 1,611,246 $ .44 $(277,612) 1,558,553 $ (.18)
Cumulative effect of
change in accounting
principle (39,162) -- (.02) -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 675,487 1,611,246 $ .42 $(277,612) 1,558,553 $ (.18)
========= ========= ========= ========= ========= =========
Years Ended December 31,
----------------------------------
2000
----------------------------------
Weighted Per
Average Share
Loss Shares Amount
--------- --------- ---------
Basic EPS
Income (loss) before cumulative
effect of change in
accounting
principle $(320,902) 1,523,594 $ (.21)
Cumulative effect of
change in accounting
principle -- -- --
--------- --------- ---------
Net income (loss) $(320,902) 1,523,594 $ (.21)
========= ========= =========
Diluted EPS
Income (loss) before cumulative
effect of change in
accounting
principle $(320,902) 1,523,594 $ (.21)
Cumulative effect of
change in accounting
principle -- -- --
--------- --------- ---------
Net income (loss) $(320,902) 1,523,594 $ (.21)
========= ========= =========
The difference between basic earnings per share and diluted earnings per share
for 1998 relates to the effect of 51,328 of dilutive shares of Common Stock
from stock options and warrants which are included in total shares for the
diluted calculation. All options and warrants to purchase shares of Common
Stock were excluded from the computation of diluted earnings for the years
ended December 31, 1999 and 2000 since they were anti-dilutive as a result of
the Company's net loss for the year. The number of options and warrants
excluded from the earnings per share calculation because they are
anti-dilutive, using the treasury stock method were 2,447 and 511 for the
years ended December 31, 1999 and 2000, respectively. All shares, share prices
and earnings per share calculations have been restated to reflect a
one-for-four reverse stock split which was effective February 26, 2001.
44
45
Comprehensive Income
The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in June 1997 which
established standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. In addition to
net income (loss), comprehensive income includes all changes in equity during a
period, except those resulting from investments by and distributions to owners.
The Company adopted SFAS 130, which is effective for fiscal years beginning
after December 15, 1997, in the first quarter of 1998. For 1998, 1999 and 2000
net income and comprehensive income were the same.
Costs of Start-up Activities
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-Up Activities" in April 1998. This SOP provides
guidance on the reporting of start-up costs and organization costs and requires
the Company to expense these costs (as defined by the SOP) as they are incurred.
The Company adopted SOP 98-5 in the first quarter of 1998. Initial application
of this SOP was reported as a cumulative effect of a change in accounting
principle in 1998, resulting in a $39,162 decrease in net income for the year
ended December 31, 1998.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" that establishes standards for reporting
information about operating segments in annual and interim financial statements.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for fiscal
years beginning after December 15, 1997 and was adopted by the Company in 1998.
The Company operates in one business segment, which is to manage dental group
practices. The Company currently manages Offices in the states of Arizona,
Colorado and New Mexico. All aspects of the Company's business are structured on
a practice-by-practice basis. Financial analysis and operational decisions are
made at the Office level, the Company does not evaluate performance criteria
based upon geographic location, type of service offered or sources of revenue.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees". The Company follows the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation". SFAS 123 defines a fair value based
method of accounting for stock options and similar equity instruments. (Note 9).
Recent Accounting Pronouncements
In September 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" that establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. In September 1999, the FASB
issued SFAS 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - An Amendment of FASB
Statement No 133". SFAS 137 delays the effective date of SFAS 133 to financial
quarters and financial years beginning after June 15, 2000. In June 2000, SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133" was issued. SFAS 138
addresses a limited number of issues causing difficulties in the implementation
of SFAS 133 and is required to be adopted concurrent with SFAS 133. As the
Company holds no derivative instruments and does not engage in hedging
activities the adoption of SFAS 133 and SFAS 138 will have no impact to the
Company.
In December 1999 the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the fourth quarter of 2000. The adoption of SAB 101 did not have a
material effect on the Company's financial results.
In March 2000 the FASB issued FASB Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44"). FIN 44 is an
interpretation of APB No. 25 and clarifies the application of APB No. 25 for
certain issues. This interpretation is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. To the extent that FIN 44 covers events after these periods,
but before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. FIN 44
did not have a material effect on the Company's financial results.
45
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(3) ACQUISITIONS
During 1998, 1999 and 2000, the Company acquired various dental practices. In
connection with each Office acquisition, the Company entered into contractual
arrangements, including Management Agreements, which have a term of 40 years.
Pursuant to these contractual arrangements the Company manages all aspects of
the Offices, other than the provision of dental services, and believes it has
perpetual and unilateral control over the assets and business operations of the
Offices. Accordingly, these acquisitions are considered business combinations.
1998 Acquisitions
On February 27, 1998, the Company acquired all of the assets of a New Mexico
partnership (Perfect Teeth/Alice) and obtained certain rights to manage the
practice for a total purchase price of $630,000. The consideration consisted of
$598,500 payable in cash with the remaining $31,500 being payable in Common
Stock of the Company. On April 27, 1998, the Company acquired all of the assets
of three Colorado dental practices, two in the Denver metro area (Perfect
Teeth/West Jewell and Perfect Teeth/South Broadway) and one in Boulder (Perfect
Teeth/Folsom) for a total purchase price of $1,800,000, all payable in cash. On
July 15, 1998, the Company acquired all of the assets of a dental practice in
Phoenix, Arizona (Perfect Teeth/Bell Road and 64th Street) for a total purchase
price of $791,000, all payable in cash. On August 14, 1998, the Company acquired
all of the assets of a dental practice in Colorado Springs, Colorado (Perfect
Teeth/South 8th Street) for a total purchase price of $351,000, all payable in
cash. On September 18, 1998, the Company acquired all of the assets of a dental
practice in Albuquerque, New Mexico (Perfect Teeth/Cubero Drive) for a total
purchase price of $320,000. The consideration consisted of $120,000 payable in
cash and a $200,000 note payable with a term of 36 months and an interest rate
of 8%. On September 28, 1998, the Company acquired all the assets of a Colorado
partnership (Mississippi Dental Group) and obtained certain rights to manage the
practice for a total purchase price of $1,128,000. The consideration consisted
of $855,000 payable in cash, $45,000 payable in Common Stock of the Company and
the assumption of certain obligations in the amount of $228,000. On September
29, 1998, the Company acquired all of the assets of a dental practice in
Scottsdale, Arizona (Perfect Teeth/Shea and 90th Street) for a total purchase
price of $704,000. The consideration consisted of $604,000 payable in cash and a
$100,000 note payable with a term of 60 months and an interest rate of 8%. On
September 30, 1998, the Company acquired all of the assets of a dental practice
in Phoenix, Arizona (Perfect Teeth/Thomas and 15th Avenue) for a total purchase
price of $295,000, all payable in cash.
1999 Acquisitions
On February 11, 1999, the Company acquired all of the assets of a Colorado sole
proprietorship (Glendale Dental Group) and obtained certain rights to manage the
practice for a total purchase price of approximately $760,000. The consideration
consisted of $665,000 payable in cash, $35,000 payable in Common Stock of the
Company and the assumption of certain obligations of approximately $60,000.
2000 Acquisitions
During 2000, the Company did not acquire any additional dental practices but
did, however, acquire the remaining 50% interest in two existing dental
practices in Colorado. On March 13, 2000, the Company acquired the remaining 50%
interest in Perfect Teeth/East Cornell for a total purchase price of $108,728.
The consideration consisted of $54,728 in cash and a $54,000 note payable with a
term of 60 months and an interest rate of 8.0%. On June 30, 2000, the Company
acquired the remaining 50% interest in Perfect Teeth/Yale for a total purchase
price of $276,670. The consideration consisted of $141,670 in cash and a
$135,000 note payable with a term of 60 months and an interest rate of 8.0%. The
Company recorded an increase to intangible assets for the total purchase price
of the remaining 50% interest in both Offices. Operating results for Perfect
Teeth/East Cornell and Perfect Teeth/Yale are included in the accompanying
statements of operations beginning with the acquisition dates identified above.
46
47
The 1998 acquisitions described above have been accounted for using the purchase
method of accounting. Accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed based on the
estimated fair values at the dates of acquisition. The final allocations did not
differ significantly from the amounts estimated at the date of acquisition. The
estimated fair value of assets acquired and liabilities assumed for these
acquisitions are summarized as follows:
1998
Acquisitions (1)
----------------
Accounts receivable, net $ 175,000
Property and equipment, net 376,000
Liabilities assumed (17,061)
Intangible assets 3,727,461
Deferred purchase price
(payable in cash) (300,000)
-----------
Cash purchase price $ 3,961,400
===========
(1) Excluding acquired interest in Perfect Teeth/Alice and Mississippi Dental
Group
Perfect Teeth/Alice, Mississippi Dental Group and Glendale Dental Group are not
treated as business combinations because the contractual arrangements do not
provide complete and unilateral control of the operations of the Offices. No
information is shown for 1999 as the Glendale Dental Group acquisition done in
1999 is not treated as a business combination. Information related to the
acquisition of the remaining 50% interest in Perfect Teeth/East Cornell and
Perfect Teeth/Yale during 2000 are not presented in a table above because the
acquisition of the initial 50% interest in both Offices was not treated as a
business combination.
Operating results of the acquired practices are included in the accompanying
statements of operations from the date of acquisition.
In connection with the agreements with the dentists associated with Perfect
Teeth/Alice, Mississippi Dental Group and Glendale Dental Group, whereby the
Company acquired an interest in the practices and obtained the rights to manage
the practices, the Company recorded intangible assets of $2,245,466 related to
the Management Agreements obtained in these transactions. In each case, the
dentist has an option to put the remaining interest in the Office to the Company
at an exercise price, which is calculated based upon the performance of the
Office (the "put option price"). The option is exercisable contingent upon
certain conditions as outlined in the agreement. The option exercise periods
generally begin three years after the date of acquisition and run for seven
years. The option exercise period begins February 28, 2001 for Perfect
Teeth/Alice, September 30, 2001 for Mississippi Dental Group and February 28,
2002 for Glendale Dental Group. The Company expects these options to be
exercised at, or shortly after, the start of the exercise period. The excess of
the put option price over the fair value of the remaining interest (if any) will
be charged to earnings or, if the put option is exercised, the amount paid will
be recorded as an additional cost of acquisition.
47
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(4) NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties consist of the following:
December 31,
1999 2000
------------ ------------
Note receivable from Chief Executive Officer and shareholder,
unsecured, principal and interest due December 31, 2000,
interest rate of 6% per annum $ 30,070 $ --
Note receivable from Chief Executive Officer and shareholder,
unsecured, principal and interest due September 16, 2000, 38,000 --
interest rate of 7% per annum
Note receivable from Chief Executive Officer and shareholder,
unsecured, principal and interest due December 31, 2001, -- 100,115
interest rate of 7% per annum
Note receivable from President and shareholder, unsecured,
principal and interest due December 31, 2001, -- 50,000
interest rate of 7% per annum
Note receivable from Chief Financial Officer and shareholder,
unsecured, principal and interest due December 31, 2001, -- 51,123
interest rate of 7% per annum
Note receivable from employee, unsecured, annual principal and
interest payments, due March 15, 2001,
interest rate of 6% per annum 6,000 3,000
Note receivable from affiliated dentist, unsecured,
monthly principal and interest payments of $1,028,
interest rate of 9% per annum, due July 25, 2001 -- 9,874
------------ ------------
74,070 214,112
Less - current maturities (71,070) (214,112)
------------ ------------
Notes receivable - related parties, long-term $ 3,000 $ --
============ ============
48
49
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
--------------------------------
1999 2000
------------ ------------
Dental equipment $ 3,504,480 $ 4,273,903
Furniture and fixtures 728,888 999,812
Leasehold improvements 4,026,305 3,923,770
Computer equipment, software and related items 2,101,532 2,264,253
Instruments 652,707 665,646
------------ ------------
11,013,912 12,127,384
Less - accumulated depreciation (3,048,213) (5,159,470)
------------ ------------
Property and equipment, net $ 7,965,699 $ 6,967,914
============ ============
Property and equipment held under capital leases included in the above balances
and the related accumulated amortization is as follows:
December 31,
--------------------------
1999 2000
--------- ---------
Leased property and equipment $ 103,277 $ 103,277
Less - accumulated amortization (101,338) (103,277)
--------- ---------
Leased property and equipment, net $ 1,939 $ --
========= =========
(6) DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
December 31,
-------------------------------
1999 2000
------------ ------------
Deferred financing costs, net $ 34,564 $ 21,824
Office development costs 22,199 --
Deposits 159,030 157,332
------------ ------------
$ 215,793 $ 179,156
============ ============
Deferred financing costs are related to the acquisition and amendment of the
revolving credit agreement and are amortized over the life of the revolver of
three years (Note 8). Office development costs represent capital costs to third
parties incurred in connection with pending acquisitions or new Offices, which
are in the process of being opened. These costs are capitalized when the
acquisitions are finalized or when the new Offices are opened, and are expensed
if the acquisition is not completed.
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(7) INTANGIBLE ASSETS
Intangible assets consist of Management Agreements:
December 31,
Amortization -------------------------------
Period 1999 2000
------------ ------------ -----------
Management agreements 25 years $15,511,304 $15,773,223
Less - accumulated amortization (1,453,616) (2,080,131)
----------- -----------
Intangible assets, net $14,057,688 $13,693,092
=========== ===========
(8) DEBT
Debt consists of the following:
December 31,
--------------------------------
1999 2000
------------ ------------
Revolving credit agreement with a bank not to exceed
$10.0 million, interest payable quarterly at the lender's base rate
(10.5% at December 31, 2000) or applicable LIBOR rate (6.6254%)
plus 2.25%, due in April 2002 $ 6,575,000 $ 6,482,000
Acquisition notes payable:
Due in January 2000; interest at 7%; monthly principal
and interest payments of $2,239 2,226 --
Due in May 2000; interest at 9%; monthly principal and
interest payments of $2,544 9,988 --
Due in September 2001; interest at 8%; monthly principal
and interest payments of $6,267 121,603 53,690
Due in May 2002; interest at 8%; monthly principal
and interest payments of $2,247 58,973 35,901
Due in September 2002; interest at 9%; monthly principal and
interest payments of $2,325 67,742 45,017
Due in October 2003; interest at 8%; monthly principal
and interest payments of $2,028 80,125 61,549
Due in February 2005; interest at 8%; monthly principal
and interest payments of $809 -- 34,328
Due in June 2005; interest at 8%; monthly principal and
interest payments of $2,737 -- 123,804
Notes payable assumed for an affiliated dentist; with monthly aggregate
principal and interest payments of $2,678; average interest rate of 14%;
maturing August 2000
to December 2000 17,436 --
------------ ------------
6,933,093 6,836,289
Less - current maturities (161,936) (154,666)
------------ ------------
Long-term debt, net of current maturities $ 6,771,157 $ 6,681,623
============ ============
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Line of Credit
Under the Company's Credit Facility (as amended on September 29, 2000), the
Company may borrow up to $10.0 million for working capital needs, acquisitions
and capital expenditures including capital expenditures for de novo Offices.
Advances will bear interest at the lender's base rate (prime plus a rate margin
ranging from .25% to 1.5% based on the ratio of consolidated senior debt to
consolidated Earnings Before Income Taxes, Depreciation and Amortization
("EBITDA"), or at an adjusted London Interbank Offered Rate "LIBOR" (LIBOR plus
a rate margin from 1.5% to 2.75% based on the ratio of consolidated senior debt
to consolidated EBITDA), at the Company's option. The Company will be obligated
to pay an annual facility fee ranging from .25% to .50% (based on the ratio of
consolidated senior debt to consolidated EBITDA) of the average unused amount of
the line of credit during the previous full calendar quarter. Borrowings are
limited to an availability formula based on the Company's adjusted EBITDA. As
amended, the loan matures on April 30, 2002. At December 31, 2000, the Company
had approximately $2.3 million available and $6.5 million outstanding under the
Credit Facility. The Credit Facility is secured by a lien on the Company's
accounts receivable and its Management Agreements. The Credit Facility prohibits
the payment of dividends and other distributions to shareholders, restricts or
prohibits the Company from incurring indebtedness, incurring liens, disposing of
assets, making investments or making acquisitions, and requires the Company to
maintain certain financial ratios on an ongoing basis. At December 31, 2000, the
Company was in compliance with all the covenants required by the Credit
Facility.
The scheduled maturities of debt are as follows:
Years ending December 31,
2001 154,666
2002 6,568,543
2003 56,011
2004 39,416
Thereafter 17,653
--------------
$ 6,836,289
==============
Conversion of the Debentures
In August 1997, the Company requested the holders of the convertible
subordinated debentures maturing December 27, 2001 and the convertible
subordinated debentures maturing May 15, 2001 to convert their debentures at the
conversion rate of $21.80 and $15.28 per share, respectively, concurrent with
the initial public offering. In return for this early conversion, the Company
agreed to pay six months of additional interest and allow some of the shares
obtained from the conversion to be included in the public offering. The
additional interest cost of $305,100 was expensed upon completing the conversion
and payment of the interest. All holders of debentures agreed to this early
conversion. Therefore, on February 11, 1998, all outstanding debentures were
converted into 408,286 shares of Common Stock of the Company. Upon conversion of
the debentures, the carrying amount of $6,780,000 was credited to shareholders'
equity, net of remaining deferred debenture issuance costs of $278,393.
(9) SHAREHOLDERS' EQUITY
The Company received notice from NASDAQ that the Company did not comply with the
requirements for continued listing on the NASDAQ National Market System. In
order to satisfy NASDAQ's listing requirements for the NASDAQ SmallCap Market,
effective February 26, 2001, the Company's Board of Directors approved a
one-for-four reverse stock split. The SmallCap Market's maintenance standards,
among other things, require the Company to have 1) at least 500,000 shares of
Common Stock held by non-affiliates; 2) an aggregate market public float of at
least $1,000,000; 3) at least 300 shareholders who own 100 shares of Common
Stock or more; and 4) a minimum bid price of at least $1.00 per share. All
shares, share prices and earnings per share calculations for all periods have
been restated to reflect this reverse stock split.
Initial Public Offering
The Company's registration statement on Form S-1 (SEC File No. 333-36391)
covering the Company's initial public offering of 525,000 shares (including
66,546 shares sold by selling shareholders) of Common Stock at $28.00 per share,
was declared effective on February 11, 1998. The gross proceeds to the Company
in the offering were $12,836,712 and the expenses incurred were as follows: (i)
$1,370,671 for the underwriters discount and non-accountable expense allowance;
and (ii) $1,171,241 for other expenses, including legal, accounting and printing
fees. The Company used the net proceeds of the offering to repay outstanding
obligations and to fund the acquisition and development of dental practices in
Colorado, New Mexico, and Arizona.
51
52
Treasury Stock
On October 8, 1998, the Company's Board of Directors unanimously approved the
purchase of up to 75,000 shares of the Company's Common Stock on the open market
on such terms, as the Board of Directors deems acceptable. On February 9, 1999,
the Company's Board of Directors increased the approved number of shares to be
purchased on the open market to 150,000 shares. On September 5, 2000, the
Company's Board of Directors unanimously approved the purchase of shares of the
Company's Common Stock on the open market, total value not to exceed $150,000.
As of December 31, 1998 the Company, in 11 separate transactions, purchased
approximately 14,500 shares of its Common Stock for total consideration of
approximately $242,000 at prices ranging from $14.52 to $19.24 per share. During
1999, the Company, in 58 separate transactions, purchased approximately 133,800
shares of Common Stock for total consideration of approximately $1.6 million at
prices ranging from $7.12 to $15.00 per share. During 2000, the Company, in 18
separate transactions, purchased approximately 26,300 shares of its Common Stock
for total consideration of approximately $113,000 at prices ranging from $3.80
to $6.68 per share.
Stock Option Plans
The Employee Stock Option Plan (the "Employee Plan ") was adopted by the Board
of Directors effective as of October 30, 1995, and as amended on September 4,
1997, has 229,250 shares of Common Stock reserved for issuance. The Employee
Plan provides for the grant of incentive stock options to employees (including
officers and employee-directors) and non-statutory stock options to employees,
directors and consultants.
The Dental Center Plan was adopted by the Board of Directors effective as of
October 30, 1995, and as amended on September 4, 1997, has 160,475 shares of
Common Stock reserved for issuance. The Dental Center Plan provides for the
grant of non-statutory stock options to P.C.s that are parties to Management
Agreements with the Company, and to dentists or dental hygienists who are either
employed by or an owner of the P.C.s. The Employee Plan and Dental Center Plan
are administered by a committee appointed by the Board of Directors, which
determines recipients and types of options to be granted, including the exercise
price, the number of shares, the grant dates, and the exercisability thereof.
The term of any stock option granted may not exceed ten years. The exercise
price of options granted under the Employee Plan and the Dental Center Plan is
determined by the committee, provided that the exercise price of a stock option
cannot be less than 100% of the fair market value of the shares subject to the
option on the date of grant, or 110% of the fair market value for awards to more
than 10% shareholders. Options granted under the plans vest at the rate
specified in the option agreements, which generally provide that options vest in
three to five equal annual installments.
A summary of stock options under both the Employee Plan and the Dental Center
Plan as of December 31, 1998, 1999 and 2000 and changes during the years then
ended is presented below:
1998 1999 2000
------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 111,035 $ 21.93 146,178 $ 23.94 146,134 $ 19.84
Granted 69,974 $ 25.94 44,250 $ 9.55 31,500 $ 4.66
Canceled (30,852) $ 22.71 (42,918) $ 23.53 (30,082) $ 21.69
Exercised (3,979) $ 12.65 (1,376) $ 8.82 -- $ --
Outstanding at end of year 146,178 $ 23.94 146,134 $ 19.84 147,552 $ 16.23
========== ========== ========== ========== ========== ==========
Exercisable at end of year 60,758 $ 20.41 80,391 $ 22.76 92,197 $ 20.23
========== ========== ========== ========== ========== ==========
Weighted average fair value
of options granted during the year $ 12.76 $ 5.96 $ 3.26
========== ========== ==========
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53
The following table summarizes information about the options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Number of Weighted Number of
Options Average Weighted Options Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of Exercise Prices 2000 Life Price 2000 Price
- ---------------------------- -------------- ----------- ----------- -------------- -----------
$0.00-- 7.80 40,000 4.10 $ 5.40 4,334 $ 7.00
$7.81-- 15.84 47,815 2.60 $ 10.72 38,055 $ 10.77
$15.85-- 23.76 19,607 2.60 $ 18.90 17,218 $ 19.25
$23.77-- 31.68 19,418 3.60 $ 27.32 11,878 $ 27.65
$31.69-- 39.60 20,712 2.40 $ 36.91 20,712 $ 36.91
----------- ----------- ----------- ----------- -----------
$0.00-- 39.60 147,552 3.10 $ 16.23 92,197 $ 20.23
=========== =========== =========== =========== ===========
Warrants
At December 31, 1998, 1999 and 2000, there were outstanding warrants or
contractual obligations to issue warrants to purchase approximately 95,266,
95,266 and 72,723, respectively, of shares of the Company's Common Stock.
Warrants were issued in connection with the private placement of the Company's
Common Stock, the issuance of convertible subordinated debentures and for
personal guarantees provided for certain Company bank debt.
A summary of warrants as of December 31, 1998, 1999 and 2000, and changes during
the years then ended is presented below:
1998 1999 2000
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 95,266 $ 15.24 95,266 $ 15.24 95,266 $ 15.24
Cancelled -- -- -- -- (22,543) $ 7.84
---------- ---------- ----------
Outstanding at end of year 95,266 95,266 72,723
========== ========== ==========
Warrants exercisable at end of year 95,266 95,266 72,723
========== ========== ==========
Weighted average exercise
price of warrants outstanding $ 15.24 $ 15.24 $ 17.53
========== ========== ==========
Weighted average remaining
contractual life at end of year 2.49 1.49 0.70
========== ========== ==========
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The Company uses the intrinsic value method to account for options granted to
employees and directors. For purposes of the pro forma disclosures under SFAS
No. 123 presented below, the Company has computed the fair values of all
non-compensatory options and warrants granted to employees, directors and
dentists using the Black-Scholes pricing model and the following weighted
average assumptions:
1998 1999 2000
---------- ---------- ----------
Risk-free interest rate 5.31% 5.62% 6.27%
Expected dividend yield 0% 0% 0%
Expected lives 3.4 years 3.7 years 3.6 years
Expected volatility 68% 88% 106%
To estimate lives of options for this valuation, it was assumed options will be
exercised one year after becoming fully vested. All options are initially
assumed to vest. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
Fair value computations are highly sensitive to the volatility factor assumed;
the greater the volatility, the higher the computed fair value of options
granted.
The total fair value of options and warrants granted was computed to be
approximately $892,000, $264,000, and $103,000 for the years ended December 31,
1998, 1999, and 2000, 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 $259,429, $344,006 and $264,058 for the years ended December
31, 1998, 1999 and 2000, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income (loss) and net income
(loss) per common share would have been reported as follows:
1998 1999 2000
---------- ---------- ----------
Net income (loss):
As reported $ 675,487 $ (277,612) $ (320,902)
========== ========== ==========
Pro forma $ 544,529 $ (523,232) $ (516,305)
========== ========== ==========
Net income (loss) per share, basic:
As reported $ .43 $ (.18) $ (.21)
========== ========== ==========
Pro forma $ .35 $ (.34) $ (.34)
========== ========== ==========
Weighted average shares used to calculate pro forma net income (loss) per share
were determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
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(10) COMMITMENTS AND CONTINGENCIES
Operating Lease Obligations
The Company leases office space under leases accounted for as operating leases.
The original lease terms are generally one to five years with options to renew
the leases for specific periods subsequent to their original terms. Rent expense
for these leases totaled $1,480,939, $2,293,927 and $2,516,275 for the years
ended December 31, 1998, 1999, and 2000 respectively. Rent expense for leases
with related parties for the years ended December 31, 1998, 1999, and 2000
totaled $232,484, $172,100, and $46,442, respectively.
Future minimum lease commitments for operating leases with remaining terms of
one or more years are as follows:
Years ending December 31,
2001 $ 2,098,735
2002 1,790,783
2003 1,211,886
2004 789,327
2005 463,928
Thereafter 584,070
-----------
$ 6,938,729
===========
Certain of the Company's office space leases are structured to include scheduled
and specified rent increases over the lease term. The Company has recognized the
effects of these rent escalations on a straight-line basis over the lease terms.
Litigation
From time to time the Company is subject to litigation incidental to its
business, which could include litigation as a result of the dental services
provided at the Offices, although the Company does not engage in the practice of
dentistry or control the practice of dentistry. The Company maintains general
liability insurance for itself and provides for professional liability insurance
to the dentists, dental hygienists and dental assistants at the Offices. The
Company is not presently a party to any material litigation.
(11) INCOME TAXES
The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax consequences of events, which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. At December 31, 2000, the Company has
available tax net operating loss carryforwards of approximately $1.3 million
which expire beginning in 2012.
Income tax expense (benefit) for the years ended December 31, consists of the
following:
1998 1999 2000
--------- --------- ---------
Current:
Federal $ 301,588 $ -- $ --
State 29,271 -- --
Utilization of net operating loss (246,328) -- --
--------- --------- ---------
84,531 -- --
--------- --------- ---------
Deferred:
Federal 235,060 (98,357) (98,445)
State 22,680 (12,830) (14,311)
Valuation allowance decrease (213,800) -- --
--------- --------- ---------
43,940 (111,187) (112,756)
--------- --------- ---------
Total income taxes $ 128,471 $(111,187) $(112,756)
========= ========= =========
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56
The Company's effective tax rate differs from the statutory rate due to the
impact of the following (expressed as a percentage of net income (loss) before
taxes):
1998 1999 2000
--------- --------- ---------
Statutory federal income tax
expense (benefit) 34.0% (34.0)% (34.0)%
State income tax effect, net 3.3 (3.3) (3.3)
Effect of permanent differences -
travel and entertainment expenses .6 8.7 13.3
Valuation allowance, net change (30.9) -- --
Other 9.0 -- (2.0)
--------- --------- ---------
16.0% (28.6)% (26.0)%
========= ========= =========
Temporary differences comprise the deferred tax assets and liabilities in the
consolidated balance sheet as follows:
December 31,
-------------------------------
1999 2000
------------ ------------
Deferred tax assets current:
Accruals not currently deductible $ 43,879 $ 29,437
Allowance for doubtful accounts 73,885 74,992
------------ ------------
117,764 104,429
Deferred tax assets long-term:
Tax loss carryforwards 365,179 467,808
Benefit of AMT tax credit 108,790 117,289
Depreciation for tax under books -- 150,433
------------ ------------
473,969 735,530
Deferred tax liabilities long-term:
Intangible asset amortization for tax
over books (397,575) (551,338)
Depreciation for tax over books (18,293) --
------------ ------------
(415,868) (551,338)
------------ ------------
Net deferred tax asset $ 175,865 $ 288,621
============ ============
The Company is aware of the risk that the recorded deferred tax assets may not
be realizable. However, management believes that it will obtain the full benefit
of the deferred tax assets on the basis of its evaluation of the Company's
anticipated profitability over the period of years that the temporary
differences are expected to become tax deductions. It believes that sufficient
book and taxable income will be generated to realize the benefit of these tax
assets.
(12) BENEFIT PLANS
Profit Sharing 401(k)/Stock Bonus Plan
The Company has a 401(k)/stock bonus plan. Eligible employees may make voluntary
contributions to the plan, which may be matched by the Company, at its
discretion, up to 2% of each employee's compensation. In addition, the Company
may make profit sharing contributions during certain years, which may be made,
at the Company's discretion, in cash or in Common Stock of the Company. The plan
was established effective April 1, 1997. For the years ended December 31, 1999
and 2000 the Company did not make any contributions to the plan. For the year
ended December 31, 1998 the Company accrued $25,000 which was contributed to the
plan during 1999 along with $15,000 related to the 1997 fiscal year.
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57
Other Company Benefits
The Company provides a health and welfare benefit plan to all regular full-time
employees. The plan includes health and life insurance, and a cafeteria plan. In
addition, regular full-time and regular part-time employees are entitled to
certain dental benefits.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments included in current assets and current liabilities
approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's note payable and capital lease
obligations are based on similar rates currently available to the Company. The
carrying values and estimated fair values were estimated to be substantially the
same at December 31, 1999 and 2000.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes certain quarterly results of operations:
Net Income
Contribution (Loss) Per
From Net Share of
Net Dental Income Common
Revenue Offices (Loss) Stock (Diluted)
----------- ----------- ----------- ----------------
1998 quarter ended:
March 31, 1998 $ 4,651,337 $ 1,137,388 $ 62,806 $ .05
June 30, 1998 5,609,017 1,442,385 509,776 .29
September 30, 1998 5,855,388 1,383,654 383,550 .22
December 31, 1998 5,624,923 490,583 (280,645) (.14)
----------- ----------- ----------- -----------
$21,740,665 $ 4,454,010 $ 675,487 $ .42
=========== =========== =========== ===========
1999 quarter ended:
March 31, 1999 $ 7,022,728 $ 1,597,851 $ 298,639 $ .19
June 30, 1999 7,166,534 1,050,817 (61,222) (.04)
September 30, 1999 7,406,488 1,123,541 (24,944) (.01)
December 31, 1999 6,957,364 355,469 (490,085) (.32)
----------- ----------- ----------- -----------
$28,553,114 $ 4,127,678 $ (277,612) $ (.18)
=========== =========== =========== ===========
2000 quarter ended:
March 31, 2000 $ 7,802,571 $ 1,232,713 $ 62,155 $ .04
June 30, 2000 7,810,220 1,329,177 128,898 .09
September 30, 2000 6,998,659 756,847 (168,935) (.11)
December 31, 2000 6,807,322 624,784 (343,020) (.23)
----------- ----------- ----------- -----------
$29,418,772 $ 3,943,521 $ (320,902) $ (.21)
=========== =========== =========== ===========
As a result of the implementation of SOP 98-5 effective January 1, 1998, net
income and net income per share of common stock (diluted) for the first quarter
of 1998 as reported above varies from the amounts originally reported on prior
Form 10-Q.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to instruction G (3) to Form 10-K, Items 10, 11, 12 and 13 are omitted
because the Company will file a definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A under the Securities Exchange Act of 1934
not later than 120 days after the close of the fiscal year. The information
required by such items will be included in the Proxy Statement to be so filed
for the Company's annual meeting of shareholders to be held on or about June 7,
2001 and is hereby incorporated by reference.
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59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets -
December 31, 1999 and 2000
Consolidated Statements of Operations -
Years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Report of Independent Public Accountants on Schedule
II - Valuation and Qualifying Accounts -
Three Years Ended December 31, 2000
Inasmuch as Registrant is primarily a holding company and all subsidiaries are
wholly owned, only consolidated statements are being filed. Schedules other than
those listed above are omitted because of the absence of the conditions under
which they are required or because the information is included in the financial
statements or notes to the financial statements.
(b) Reports on Form 8-K:
None
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(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Articles of Incorporation, incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2 Specimen Stock Certificate, incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.1 Form of Indemnification Agreement entered into between the Registrant
and its Directors and Executive Officers, incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.2 Warrant Agreement dated December 27, 1996, between the Registrant and
Cohig & Associates, Inc., incorporated herein by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (SEC File No.
333-36391), as filed with the Securities and Exchange Commission on
September 25, 1997.
10.3 Warrant Agreement dated May 29, 1996, between the Registrant and
Cohig, incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.4 Warrant Agreement dated October 3, 1995, between the Registrant and
Cohig, incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
10.5 Warrant Certificate dated June 30, 1997, issued to Fred Birner,
incorporated herein by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.6 Warrant Certificate dated November 1, 1996, issued to Fred Birner,
incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.7 Warrant Certificate dated June 30, 1997, issued to Mark Birner,
incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.8 Warrant Certificate dated November 1, 1996, issued to Mark Birner,
incorporated herein by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.9 Warrant Certificate dated June 30, 1997, issued to Dennis Genty,
incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.10 Warrant Certificate dated November 1, 1996, issued to Dennis Genty,
incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.11 Warrant Certificate dated August 1, 1996, issued to James Ciccarelli,
incorporated herein by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.12 Warrant Certificate dated July 15, 1997 issued to James Ciccarelli,
incorporated herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.13 Credit Agreement, dated October 31, 1996, between the Registrant and
Key Bank of Colorado, as amended by First Amendment to Loan Documents,
dated as of September 3, 1997, incorporated herein by reference to
Exhibit 10.13 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.14 Form of Managed Care Contract with Prudential, incorporated herein by
reference to Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
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61
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.15 Form of Managed Care Contract with PacifiCare, incorporated herein by
reference to Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.16 Letter Agreement dated October 17, 1996, between the Registrant and
James Ciccarelli, as amended by letter agreement dated September 24,
1997 between the Registrant and James Ciccarelli, incorporated herein
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.17 Agreement, dated August 21, 1997, between the Registrant and James
Abramowitz, D.D.S., and Equity Resources Limited Partnership, a
Colorado limited partnership, incorporated herein by reference to
Exhibit 10.17 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.18 Form of Management Agreement, incorporated herein by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.19 Employment Agreement dated September 8, 1997 between the Registrant
and James Abramowitz, D.D.S., incorporated herein by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
10.20 Form of Stock Transfer and Pledge Agreement, incorporated herein by
reference to Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.21 Indenture, dated as of December 27, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.22 Indenture, dated as of May 15, 1996, between the Registrant and
Colorado National Bank, a national banking association, as Trustee,
incorporated herein by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.23 Birner Dental Management Services, Inc. 1995 Employee Stock Option
Plan, including forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement under the Employee Plan,
incorporated herein by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on September 25, 1997.
10.24 Birner Dental Management Services, Inc. 1995 Stock Option Plan for
Managed Dental Centers, including form of Non-statutory Stock Option
Agreement under the Dental Center Plan, incorporated herein by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-36391), as filed with the Securities and
Exchange Commission on September 25, 1997.
10.25 Profit Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated
herein by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-36391), as filed with the
Securities and Exchange Commission on September 25, 1997.
10.26 Form of Stock Transfer and Pledge Agreement with Mark Birner, D.D.S.,
incorporated herein by reference to Exhibit 10.26 of Pre-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-1
(SEC File No. 333-36391), as filed with the Securities and Exchange
Commission on November 7, 1997.
10.27 Stock Purchase, Pledge and Security Agreement, dated October 27, 1997,
between the Company and William Bolton, D.D.S., incorporated herein by
reference to Exhibit 10.27 of Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on November 7,
1997.
10.28 Stock Purchase, Pledge and Security Agreement, dated October 27, 1997,
between the Company and Scott Kissinger, D.D.S., incorporated herein
by reference to Exhibit 10.28 of Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on November 7,
1997.
10.29 Second Amendment to Loan Documents dated November 19, 1997 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.29 of Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on November 25, 1997.
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EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.30 Form of Financial Consulting Agreement between the Company and Joseph
Charles & Associates, Inc., incorporated herein by reference to
Exhibit 10.30 of Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed
with the Securities and Exchange Commission on January 14, 1998.
10.31 Form of Purchase Option for the Purchase of Shares of Common Stock
granted to Joseph Charles & Associates, Inc., incorporated herein by
reference to Exhibit 10.31 of Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on January 14,
1998.
10.32 Third Amendment to Loan Documents date September 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.32 of the Company's Form 10-Q for the quarterly period
ended September 30, 1998 filed with the Securities and Exchange
Commission on November 16, 1998.
10.33 Fourth Amendment to Loan Document dated December 31, 1998 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.33 of the Company's Form 10-K for the annual period
ended December 31, 1998 filed with the Securities and Exchange
Commission on March 31, 1999.
10.34 Fifth Amendment to Loan Document dated May 28, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.34 of the Company's Form 10-Q for the quarterly period
ended June 30, 1999 filed with the Securities and Exchange Commission
on August 12, 1999.
10.35 Sixth Amendment to Loan Document dated September 20, 1999 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.35 of the Company's Form 10-Q for the quarterly period
ended September 30, 1999 filed with the Securities and Exchange
Commission on November 15, 1999.
10.36 Seventh Amendment to Loan Document dated March 24, 2000 between the
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.36 of the Company's Form 10-K for the annual period
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 30, 2000.
10.37 Eighth Amendment to Loan Document dated September 29, 2000 between
Registrant and Key Bank of Colorado, incorporated herein by reference
to Exhibit 10.37 of the Company's Form 10-Q for the quarterly period
ended September 30, 2000 filed with the Securities and Exchange
Commission on November 13, 2000.
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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
/s/ Frederic W.J. Birner Chairman of the Board, Chief Executive March 22, 2001
- ------------------------------------- Officer and Director (Principal Executive
Frederic W.J. Birner Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Frederic W.J. Birner Chairman of the Board, Chief Executive March 22, 2001
- ------------------------------------- Officer and Director (Principal Executive
Frederic W.J. Birner Officer)
/s/ Mark A. Birner President and Director March 22, 2001
- -------------------------------------
Mark A. Birner, D.D.S.
/s/ Dennis N. Genty Chief Financial Officer, Secretary, March 22, 2001
- ------------------------------------- Treasurer and Director (Principal
Dennis N. Genty Financial and Accounting Officer)
Director
- -------------------------------------
James M. Ciccarelli
Director
- -------------------------------------
Steven M. Bathgate
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Birner Dental Management
Services, Inc. included in this Form 10-K and have issued our report thereon
dated March 2, 2001. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. This Schedule II - Valuation
and Qualifying Accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 2001.
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65
Birner Dental Management Services, Inc. and Subsidiaries
Financial Statement Schedule
II - Valuation and Qualifying Accounts
Column C - Additions
--------------------
Column B
Balance at Charged to Charged to Column E
Column A beginning of costs and other Column D Balance at end
Description period expenses accounts * Deductions** of period
- ------------ ------------ ------------ ------------ ------------ --------------
2000 $ 306,469 $ 2,963 $ -- $ (108,385) $ 201,047
1999 $ 296,911 $ 42,261 $ 158,114 $ (190,817) $ 306,469
1998 $ 97,746 $ 58,069 $ 141,096 $ -- $ 296,911
* Allowance recorded, as the result of accounts receivable acquired.
** Charges to the account are for the purpose for which the reserves were
created.
65