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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
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(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 691-0680
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K. [ ___ ]
The aggregate market value of the Registrant's voting stock held as of March 13,
2002 by non-affiliates of the Registrant was $5,020,675. This calculation
assumes that certain parties may be affiliates of the Registrant and that,
therefore, 788,175 shares of voting stock are held by non-affiliates. As of
March 13, 2002, the Registrant had 1,506,705 shares of its common stock, without
par value ("Common Stock") outstanding.
On February 22, 2001 a special shareholder's meeting was held to consider a
proposal to effect a reverse split of the issued and outstanding shares of the
Registrant's Common Stock, whereby the Registrant would issue one new share of
its Common Stock for between three and five shares of its presently outstanding
stock. The proposal was approved by a majority of the shareholders. The Board of
Directors in a meeting that same day determined that the ratio of the reverse
stock split would be one-for-four and that the effective date for the reverse
split would be February 26, 2001. Therefore, all shares, options, share prices,
option prices and earnings per share calculations for all periods in this
document have been restated to reflect the effect of the reverse stock split.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K ("Annual Report") of
Birner Dental Management Services, Inc. (the "Company"), which are not
historical in nature, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include statements in Items 1. and 2., "Business and Properties,"
Item 5., "Market for the Registrant's Common Equity and Related Stockholder
Matters" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations," regarding intent, belief or current
expectations of the Company or its officers with respect to the development or
acquisition of additional dental practices and the successful integration of
such practices into the Company's network, recruitment of additional dentists,
funding of the Company's expansion, capital expenditures, payment or nonpayment
of dividends and cash outlays for income taxes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
failure to consummate or successfully integrate proposed developments or
acquisitions of dental practices, the ability of the Company to manage
effectively an increasing number of dental practices, the general economy of the
United States and the specific markets in which the Company's dental practices
are located or are proposed to be located, trends in the health care, dental
care and managed care industries, as well as the risk factors set forth in Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors," and other factors as may be identified from time to
time in the Company's filings with the Securities and Exchange Commission or in
the Company's press releases.
2
Birner Dental Management Services, Inc.
Form 10-K
Table of Contents
Part Item(s) Page
I. 1. and 2. Business and Properties 4
General 4
Dental Services Industry 4
Operations 5
Existing Offices 6
Patient Services 7
Dental Practice Management Model 7
Payor Mix 9
The Company Dentist Philosophy 9
Expansion Program 10
Affiliation Model 11
Competition 12
Government Regulation 13
Insurance 16
Trademark 16
Facilities and Employees 16
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
II. 5. Market for Registrant's Common Equity and Related Stockholder Matters
17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19
7A. Quantitative and Qualitative Disclosures About Market Risk 33
8. Financial Statements and Supplementary Data 34
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 58
III. 10. Directors and Executive Officers of the Registrant 59
11. Executive Compensation 60
12. Security Ownership of Certain Beneficial Owners and Management 64
13. Certain Relationships and Related Transactions 65
IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 66
3
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.
General
The Company acquires, develops, and manages geographically dense dental practice
networks in select markets, currently including Colorado, New Mexico and
Arizona. With its 40 dental practices ("Offices") in Colorado and eight Offices
in New Mexico, the Company believes, based on industry knowledge and contacts,
that it is the largest provider of dental management services in Colorado and
New Mexico. The Company provides a solution to the needs of dentists, patients,
and third-party payors by allowing the Company's affiliated dentists to provide
high-quality, efficient dental care in patient-friendly, family practice
settings. Dentists practicing at the various locations provide comprehensive
general dentistry services, and the Company increasingly offers specialty dental
services through affiliated specialists. The Company currently manages 54
Offices, of which 37 were acquired and 17 were developed internally ("de novo
Offices").
Dental Services Industry
According to the U.S. Health Care Financing Administration ("HCFA"), dental
expenditures in the U.S. increased from $31.5 billion in 1990 to $60.0 billion
in 2000. HCFA also projects that dental expenditures will reach approximately
$104.6 billion by 2011, representing an increase of approximately 74.3% over
2000 dental expenditures. The Company believes this growth is driven by (i) an
increase in the number of people covered by third-party payment arrangements and
the resulting increase in their utilization of dental services, (ii) an
increasing awareness of the benefits of dental treatments, (iii) the retention
of teeth into later stages of life, (iv) the general aging of the population, as
older patients require more extensive dental services, and (v) a growing
awareness of and demand for preventative and cosmetic services.
Traditionally, most dental patients have paid for dental services themselves
rather than through third-party payment arrangements such as indemnity
insurance, preferred provider plans or managed dental plans. More recently,
factors such as increased consumer demand for dental services and the desire of
employers to provide enhanced benefits for their employees have resulted in an
increase in third-party payment arrangements for dental services. These
third-party payment arrangements include indemnity insurance, preferred provider
plans and capitated managed dental care plans. Current market trends, including
the rise of third-party payment arrangements, have contributed to the increased
consolidation of practices in the dental services industry and to the formation
of dental practice management companies. The Company believes that the
percentage of people covered by third-party payment arrangements will continue
to increase due in part to the popularity of such arrangements.
4
Operations
Location of Offices
[MAP INSERTED HERE]
5
Existing Offices
As of the date of this Annual Report, the Company managed a total of 54 Offices
in Colorado, New Mexico, and Arizona. The following table identifies each
Office, the location of each Office, the date each Office was acquired or de
novo developed, and any specialty dental services offered at that Office in
addition to comprehensive general dental services:
Date Acquired/ Specialty
Office Name Office Address Developed* Services
Colorado
Boulder
Perfect Teeth/Boulder 4155 Darley, #F September 1997
Perfect Teeth/Folsom 1840 Folsom, Suite 302 April 1998
Castle Rock
Perfect Teeth/Castle Rock 390 South Wilcox, Unit D October 1995
Colorado Springs
Perfect Teeth/Cheyenne Meadows 827 Cheyenne Meadows Road June 1998*
Perfect Teeth/Garden of the Gods 4329 Centennial Boulevard July 1996*
Perfect Teeth/South 8th Street 1050 South Eighth Street August 1998 1,2
Perfect Teeth/Uintah Gardens 1768 West Uintah Street May 1996* 1
Perfect Teeth/Union & Academy 5140 North Union September 1997
Perfect Teeth/Woodman Valley 6914 North Academy Boulevard, Unit 1B April 1998*
Perfect Teeth/Powers 5929 Constitution Avenue March 1999* 1,2
Denver
Perfect Teeth/64th and Ward 12650 West 64th Avenue, Unit J January 1996*
Perfect Teeth/88th and Wadsworth 8749 Wadsworth Boulevard September 1997 2,3,4
Perfect Teeth/Arapahoe 7600 East Arapahoe Road, #311 October 1995 1
Perfect Teeth/Bowmar 5151 South Federal Boulevard, #G-2 October 1995 1
Perfect Teeth/Buckley and Quincy 4321 South Buckley Road September 1997 1
Perfect Teeth/Central Denver 1633 Fillmore Street, Suite 200 May 1996
Perfect Teeth/East 104th Avenue 2200 East 104th Avenue, #112 May 1996 1
Perfect Teeth/East Cornell 12200 East Cornell Avenue, # E August 1996
Perfect Teeth/East Iliff 16723 East Iliff Avenue May 1997
Glendale Dental Group 4521 East Virginia Avenue February 1999
Perfect Teeth/Golden 17211 South Golden Road, #100 June 1999*
Perfect Teeth/Green Mountain 13035 West Alameda Parkway December 1998*
Perfect Teeth/Highlands Ranch 9227 Lincoln Avenue, Suite 100 July 1999* 1
Perfect Teeth/Ken Caryl 7660 South Pierce September 1997
Perfect Teeth/Leetsdale 7150 Leetsdale Drive, #110A March 1996*
Mississippi Dental Group 11175 East Mississippi Avenue, #110 September 1998
Perfect Teeth/Monaco and Evans 2121 South Oneida, Suite 321 November 1995 1,2,3,4
Perfect Teeth/North Sheridan 11550 North Sheridan, #101 May 1996 1
Perfect Teeth/Parker 11005 South Parker Road December 1998* 1
Perfect Teeth/Sheridan and 64th Avenue5169 West 64th Avenue May 1996
Perfect Teeth/South Holly Street 8211 South Holly Street September 1997 2
Perfect Teeth/Speer 700 East Speer Boulevard February 1997
Perfect Teeth/West 38th Avenue 7760 West 38th Avenue, #200 May 1996 1
Perfect Teeth/West 120th Avenue 6650 West 120th Avenue, A-6 September 1997
Perfect Teeth/West Jewell 8064 West Jewell April 1998
Perfect Teeth/Yale 7515 West Yale Avenue, Suite A April 1997 1,3
Fort Collins
Perfect Teeth/South Fort Collins 1355 Riverside Avenue, Unit D May 1996
Greeley
Perfect Teeth/Greeley 902 14th Street September 1997
Longmont
Perfect Teeth/Longmont 641 Ken Pratt Boulevard September 1997
Loveland
Perfect Teeth/ Loveland 3400 West Eisenhower Boulevard September 1996
6
Date Acquired/ Specialty
Office Name Office Address Developed* Services
New Mexico
Albuquerque
Perfect Teeth/Alice 5909 Alice NE February 1998
Perfect Teeth/Candelaria 6101 Candelaria NE April 1997
Perfect Teeth/Cubero Drive 5900 Cubero Drive NE, Suite E September 1998
Perfect Teeth/Four Hills 13140-E Central Avenue, SE August 1997* 3
Perfect Teeth/Fourth Street 5721 Fourth Street NW August 1997
Perfect Teeth/Wyoming and Candelaria 8501 Candelaria NE, Suite D3 August 1997
Rio Rancho
Perfect Teeth/Rio Rancho 4500 Arrowhead Ridge Drive July 1999* 3
Santa Fe
Perfect Teeth/Plaza Del Sol 720 St. Michael Drive, Suite O May 1998* 3
Arizona
Goodyear
Perfect Teeth/Palm Valley 14175 West Indian School Bypass Road, #B6March 2000*
Mesa
Perfect Teeth/Power & McDowell 2733 North Power Road, Suite 101 October 2000*
Phoenix
Perfect Teeth/Thomas and 15th Avenue 3614 North 15th Avenue, Suite B September 1998
Scottsdale
Perfect Teeth/Bell Road & 64th 6345 East Bell Road, Suite 1 July 1998 1,2,3
Street
Perfect Teeth/Shea & 90th Street 9393 North 90th Street, Suite 207 September 1998
Tempe
Perfect Teeth/Elliot and McClintock 7650 S. McClintock Dr., #110 June 1999*
(1) Orthodontics
(2) Periodontics
(3) Oral Surgery
(4) Pedodontics
The Offices typically are located either in shopping centers, professional
office buildings or stand-alone buildings. The majority of the de novo Offices
are located in supermarket-anchored shopping centers. The Offices have from four
to 16 treatment rooms and range in size from 1,200 square feet to 7,400 square
feet.
Patient Services
The Company seeks to develop long-term relationships with patients. A
comprehensive exam and evaluation is conducted during a patient's first visit.
Through patient education, the patients develop an awareness of the benefits of
a comprehensive, long-term dental care plan. The Company believes that it will
retain these patients longer and that these patients will have a higher
utilization of the Company's dental services including specialty, elective, and
cosmetic services.
Dentists practicing at the Offices provide comprehensive general dentistry
services, including crowns and bridges, fillings (including state-of-the-art
gold, porcelain and composite inlays/onlays), and aesthetic procedures such as
porcelain veneers and bleaching. In addition, hygienists provide cleanings and
periodontal services including root planing and scaling. If appropriate, the
patient is offered specialty dental services, such as orthodontics, oral surgery
and periodontics, which are available at certain of the Company's Offices, as
indicated on the table above. These services are provided by affiliated
specialists who rotate through several offices in certain of the Company's
existing markets. The addition of specialty services is a key component of the
Company's strategy, as it enables the Company to capture revenue from typically
higher margin services that would otherwise be referred to non-affiliated
providers. In addition, by offering a broad range of dental services within a
single practice, the Company is able to distinguish itself from its competitors
and realize operating efficiencies and economies of scale through higher
utilization of professionals and facilities.
Dental Practice Management Model
The Company has developed a dental practice management model designed to achieve
its goal of providing personalized, high-quality dental care in a patient
friendly setting similar to that found in a traditional private practice. The
Company's dental practice management model consists of the following components:
7
Recruiting of Dentists. The Company seeks dentists with excellent skills and
experience, who are sensitive to patient needs, interested in establishing
long-term patient relationships and are motivated by financial incentives to
enhance Office operating performance. The Company believes that practicing in
its network of Offices offers both recently graduated dentists and more
experienced dentists advantages over a solo or smaller group practice, including
relief from the burden of administrative responsibilities and the resulting
ability to focus almost exclusively on practicing dentistry. Advantages to
dentists affiliated with the Company also include a compensation structure that
rewards productivity, employee benefits such as health insurance, a 401(k) plan,
continuing education, payment of professional membership fees and malpractice
insurance. The Company's effort to recruit managing dentists is primarily
focused on dentists with three or more years of practice experience. The Company
typically recruits associate dentists graduating from residency programs. It has
been the Company's experience, that many dentists in the early stages of their
careers have incurred substantial student loans. As a result, they face
significant financial constraints in starting their own practices or buying into
existing practices, especially in view of the capital-intensive nature of modern
dentistry.
The Company advertises for the dentists it seeks in national and regional dental
journals, local market newspapers, professional conferences and directly at
dental schools with strong residency programs. In addition, the Company has
found that its existing affiliated dentists provide a good referral source for
recruiting future dentists.
Training of Non-Dental Employees. The Company has developed a formalized
training program for non-dental employees, which is conducted by the Company's
staff. This program includes training in patient interaction, scheduling, use of
the computer system, office procedures and protocol, and third-party payment
arrangements. Additionally, the Company encourages its employees to attend
continuing education seminars as a supplement to the Company's formalized
training program. In addition, Company regional directors meet weekly with the
Company's senior management and administrative staff to review pertinent and
timely topics and generate ideas that can be shared with all Offices. Management
believes that its training program and the on-going meetings with employees have
contributed to an improvement in the operations at its Offices.
Staffing Model. The Company's staffing model attempts to maximize Office
profitability by adjusting personnel according to an Office's revenue level.
Staffing at mature Offices can vary based on the number of treatment rooms, but
generally includes one to three dentists, two to three dental assistants, one to
three hygienists, one to two hygiene assistants and two to four front office
personnel. Staffing at de novo Offices typically consists initially of one
dentist, one dental assistant and one front office person. As the patient base
builds at an Office, additional staff is added to accommodate the growth as
provided in the staffing model developed by the Company. The Company currently
has a staff of six regional directors in Colorado and one regional director for
New Mexico and Arizona. These regional directors, who are each responsible from
four to 14 Offices or the specialty practice, oversee operations, development of
non-dental employees, recruiting and work to implement the Company's dental
practice management model to maximize revenues and profitability.
Management Information Systems. All of the Offices have the same management
information system, which allows the Company to receive uniform data that can be
analyzed easily in order to measure and improve Office operating performance. As
part of its acquisition integration process, the Company converts acquired
Offices to its management information system as soon as practicable. The
Company's current system enables it to maintain on-line contact with each of its
Offices and allows the Company to monitor the Offices by obtaining real-time
data relating to patient and insurance information, treatment plans, scheduling,
revenues and collections. The Company provides each Office with monthly
operating and financial data, which is analyzed and used to improve Office
performance.
Advertising and Marketing. The Company seeks to increase patient volume at its
Offices from time to time through television, radio, print advertising and other
marketing techniques. The Company's advertising efforts are primarily aimed at
increasing its fee-for-service business and emphasizes the high-quality care
provided, as well as the timely, individualized attention received from the
Company's affiliated dentists.
Quality Assurance. The Company has designed and implemented a quality assurance
program for dental personnel, including a background check. Each affiliated
dentist is a graduate of an accredited dental program, and most state licensing
authorities require dentists to undergo annual training. The dentists and
hygienists practicing at the Offices obtain a portion of their required
continuing education through the Company's internal training programs.
8
Purchasing / Vendor Relationships. The Company has negotiated arrangements with
a number of its more significant vendors, including dental laboratory and supply
providers, to reduce per unit costs. By aggregating supply purchasing and
laboratory usage, the Company believes that it has received favorable pricing
compared to solo or smaller group practices. This system of centralized buying
and distribution on an as-needed basis limits storage of unused inventory and
supplies at the Offices.
Payor Mix
The Company's payors include indemnity insurers, preferred provider plans,
managed dental care plans, and uninsured patients. The Company seeks to optimize
the revenue mix at each Office between fee-for-service business and capitated
managed care plans, taking into account the local dental market. While
fee-for-service business generally provides a greater margin than capitated
managed dental care business, capitated managed dental care business serves to
increase facility utilization and dentist productivity. Consequently, the
Company seeks to supplement its fee-for-service business with revenue derived
from contracts with capitated managed dental care plans. The Company negotiates
the managed care contracts on behalf of the professional corporations that
operate the Offices (the "P.C.s"), although the P.C.s enter into the contracts
with the various managed care plans. Managed care relationships also provide
increased co-payment revenue, referrals of additional fee-for-service patients
and opportunities for dentists practicing at the Offices to educate patients
about the benefits of elective dental procedures that may not be covered by the
patients' capitated managed dental care plans.
During the years ended December 31, 1999, 2000, and 2001 the following companies
were responsible for the corresponding percentages of the Company's total dental
group practice revenue (includes capitation premiums and co-payments): Aetna
Healthcare was responsible for 8.9%, 9.1% and 7.4%, respectively, CIGNA Dental
Health was responsible for 7.8%, 5.9% and 6.0%, respectively and Delta Care was
responsible for 5.0%, 8.6% and 8.0%, respectively.
The Company has successfully reduced the percentage of its business that comes
from managed dental care plans, from 51.4% of gross revenues in 1998 to 31.2% of
gross revenues in 2001, and replaced that revenue stream with higher margin
fee-for-service revenues. This higher margin fee for service revenue has
predominantly been business derived from preferred provider plans.
The Company Dentist Philosophy
The Company seeks to develop long-term relationships with its dentists by
building the practice at each of its Offices around a managing dentist. The
Company's dental practice management model provides managing dentists the
autonomy and independence of a private family practice setting without the
capital commitment and the administrative burdens such as billing/collections,
payroll, accounting, and marketing. This gives the managing dentists the ability
to focus primarily on providing high-quality dental care to their patients. The
managing dentist retains the responsibilities of team building and developing
long-term relationships with patients and staff by building trust and providing
a friendly, relaxed atmosphere in his or her Office. The managing dentist
exercises his or her own clinical judgment in matters of patient care. In
addition, managing dentists are given an economic incentive to improve the
operating performance of their Offices, in the form of a bonus based upon the
operating performance of the Office. In addition, managing dentist's may be
granted stock options in the Company that ordinarily vest over a three-to-five
year period.
When the revenues of an Office justify expansion, associate dentists can be
added to the team. Associate dentists are typically recent graduates from
residency programs, and usually spend up to two years working with a managing
dentist. Depending on performance and abilities, an associate dentist may be
given the opportunity to become a managing dentist.
9
Expansion Program
Overview
Since its formation in May 1995, the Company has acquired 42 practices,
including five practices that have been consolidated into existing Offices. Of
those acquired practices (including the five practices consolidated with
existing Offices), 34 were located in Colorado, five were located in New Mexico,
and three were located in Arizona. Although the Company has acquired and
integrated several group practices, many of the Company's acquisitions have been
solo dental practices. The Company has developed 17 de novo Offices (including
one practice that was consolidated with an existing Office). During 2000, the
Company's growth strategy shifted from an acquisition and development approach
to an approach which is focused on greater utilization of existing physical
capacity through recruiting more dentists and support staff.
The following table sets forth the change in the number of Offices managed by
the Company from January 1, 1997 through December 31, 2001.
1997 1998 1999 2000 2001
---- ---- ----- ---- ----
Offices at beginning of the period 18 34 49 54 56
De novo Offices 1 5 5 2 0
Acquired Offices 15 10 1 0 0
Consolidation of Offices 0 0 (1) 0 (2)
---- ---- ----- ---- ----
Offices at end of the period 34 49 54 56 54
===== ===== ===== ===== =====
Capacity Utilization
The Company expects to expand in existing markets primarily by enhancing the
operating performance of its existing Offices. Enhancing operating performance
will principally be accomplished through the addition of incremental dentists
and hygienists to further utilize existing physical capacity in the Offices.
De Novo Office Developments
One method by which the Company enters new markets and expands its operations in
existing markets is through the development of de novo Offices. Five of the
Company's seven Colorado Springs Offices, six of the Company's 29 Denver metro
area Offices, none of the Company's four Northern Colorado Offices, three of the
Company's eight New Mexico Offices and three of the Company's six Arizona
Offices were de novo developments. The Company generally locates de novo Offices
in prime retail locations in areas where there is significant population growth.
These locations provide high visibility for the Company's signage and easy
walk-in access for its customers. Historically, the Company has used consistent
office designs, colors, logo and signage for each of its de novo Offices.
The average investment by the Company in each of its 17 de novo Offices has been
approximately $210,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the initial operations. The de
novo Offices, which were opened between January 1996 and October 2000, began
generating positive contribution from dental offices, on average, within eight
months of opening.
Acquisition Strategy
Prior to entering a new market, the Company considers the population,
demographics, market potential, competitive and regulatory environment, supply
of available dentists, needs of managed care plans or other large payors and
general economic conditions within the market. Once the Company has established
a presence in a new market, the Company seeks to increase its density in that
market by making further acquisitions and by developing de novo Offices. The
Company identifies potential acquisition candidates through a variety of means,
including selected inquiries of dentists by the Company, direct inquiries by
dentists, referrals from other dentists, participation in professional
conferences and referrals from practice brokers. The Company seeks to identify
and acquire dental practices for which the Company believes application of its
dental practice management model will improve revenue and operating performance.
10
Recent Acquisitions
Colorado: During 2000, the Company acquired the remaining 50% interest in two
existing Offices in Colorado. During 1999, the Company acquired one practice in
the Denver market. In addition to this acquisition, the Company opened three de
novo Offices in 1999, one in Colorado Springs and two in the Denver metropolitan
area, which included Highlands Ranch and Golden.
New Mexico: During 2001 the Company acquired the remaining 50% interest in one
existing Office in New Mexico. During 1999 the Company opened one de novo Office
in Rio Rancho, a suburb of Albuquerque.
Arizona: In March 2000, the Company opened one de novo Office in Goodyear. In
October 2000, the Company opened one de novo Office in Mesa. Both Goodyear and
Mesa are suburbs of Phoenix. During 1999 the Company opened one de novo Office
in Tempe, a suburb of Phoenix.
Affiliation Model
Relationship with Professional Corporations (P.C.s)
Each Office is operated by a P.C., which are owned by one of eight different
licensed dentists practicing within the Company's network. The Company has
entered into agreements with owners of 51 of the P.C.s which provide that upon
the death, disability, incompetence or insolvency of the owner, a loss of the
owner's license to practice dentistry, a termination of the owner's employment
by the P.C. or the Company, a conviction of the owner for a criminal offense, or
a breach by the P.C. of the Management Agreement with the Company, the Company
may require the owner to sell his or her shares in the P.C. for a nominal amount
to a third-party designated by the Company. These agreements also prohibit the
owner from transferring or pledging the shares in the P.C.s except to parties
approved by the Company who agree to be bound by the terms of the agreements.
Upon a transfer of the shares to another party, the owner agrees to resign all
positions held as an officer or the director of the P.C.
One licensed dentist who owns a P.C. operating an Office in Colorado has entered
into stock purchase, pledge and security agreements with the Company. Under this
agreement, if certain events occur including the failure to perform the
obligations under the employment agreement with the P.C., cessation of
employment with the P.C. for any reason, death or insolvency or directly or
indirectly causing the P.C. to breach its obligations under the Management
Agreement, then the Company may cause the P.C. to redeem the dentist's ownership
interest in the P.C. for an agreed price which is not considered to be material
by the Company. Two of the three directors of this P.C. are nominees of the
Company and the dentist has given the Company's Chief Executive Officer, Fred
Birner an irrevocable proxy to vote his shares in the P.C.
In the remaining two Colorado P.C.s the Company has the right of first refusal
to purchase 100% of the P.C.s shares and the right to elect one-half of the
directors and vote one-half of the shares in such P.C.s.
Management Agreements with Affiliated Offices
The Company derives all of its revenue from its management agreements with the
P.C.s (the "Management Agreements"). Under each of the Management Agreements,
the Company manages the business and marketing aspects of the Offices, including
(i) providing capital, (ii) designing and implementing marketing programs, (iii)
negotiating for the purchase of supplies, (iv) staffing, (v) recruiting, (vi)
training of non-dental personnel, (vii) billing and collecting patient fees,
(viii) arranging for certain legal and accounting services, and (ix) negotiating
with managed care organizations. The P.C. is responsible for, among other
things, (i) supervision of all dentists and dental hygienists, (ii) ensuring
compliance with all laws, rules and regulations relating to dentists and dental
hygienists, and (iii) maintaining proper patient records. The Company has made,
and intends to make in the future, loans to P.C.s in Colorado, New Mexico and
Arizona to fund their acquisition of dental assets from third parties in order
to comply with the laws of such states. Because the Company's financial
statements are consolidated with the financial statements of the P.C.s, these
loans are eliminated in consolidation.
11
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of Company employees who work at the Office,
(ii) direct costs of all Company employees or consultants who provide services
to or in connection with the Office, (iii) utilities, janitorial, laboratory,
supplies, advertising and other expenses incurred by the Company in carrying out
its obligations under the Management Agreement, (iv) depreciation expense
associated with the P.C.'s assets and the assets of the Company used at the
Office, and the amortization of intangible asset value relating to the Office,
(v) interest expense on indebtedness incurred by the Company to finance any of
its obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company's or the P.C.'s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company's personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of the Company
including the P.C.'s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Office are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists who work at the Offices of the P.C.s. This enables the Company to
manage the profitability of the Offices. Each Management Agreement is for a term
of 40 years. Further, each Management Agreement generally may be terminated by
the P.C. only for cause, which includes a material default by or bankruptcy of
the Company. Upon expiration or termination of a Management Agreement by either
party, the P.C. must satisfy all obligations it has to the Company.
The Company plans to continue to use the current form of its Management
Agreement to the extent possible. However, the terms of the Management Agreement
are subject to change to comply with existing or new regulatory requirements or
to enable the Company to compete more effectively.
Employment Agreements
Most dentists practicing at the Offices have entered into employment agreements
or independent contractor agreements with a P.C. The majority of such agreements
can be terminated by either party without cause with 90 days notice. The
employment agreement for one of the managing dentists who is also a shareholder
of a P.C. has a term of 20 years and can only be terminated by the employer P.C.
upon the occurrence of certain events. If the employment of the managing dentist
is terminated for any reason, the employer P.C. has the right to redeem the
shares of the P.C. operating the Office held by the managing dentist. Such
agreements typically contain non-competition provisions for a period of up to
three to five years following their termination within a specified geographic
area, usually a specified number of miles from the associated Office, and
restrict solicitation of patients and employees. Managing dentists receive
compensation based upon a specified amount per hour worked or a percentage of
revenue or collections attributable to their work, or a bonus based upon the
operating performance of the Office, whichever is greater. Associate dentists
are compensated based upon a specified amount per hour worked or a percentage of
revenue or collections attributable to their work, whichever is greater.
Specialists are compensated based upon a percentage of revenue or collections
attributable to their work. The P.C. with whom the dentist has entered into an
employment agreement pays the dentists' compensation and benefits.
Competition
The dental services industry is highly fragmented, consisting primarily of solo
and smaller group practices. The dental practice management segment of this
industry is highly competitive and is expected to become more competitive. In
this regard, the Company expects that the provision of multi-specialty dental
services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are
operating in its markets, including Monarch Dental Corporation, American Dental
Partners, Inc., and Dental Health Centers of America. Companies with dental
practice management businesses similar to that of the Company which currently
operate in other parts of the country, may begin targeting the Company's
existing markets for expansion. Such competitors may have greater financial
resources or otherwise enjoy competitive advantages, which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company.
12
The business of providing general and specialty dental services is highly
competitive in the markets in which the Company operates. The Company believes
it competes with other providers of dental and specialty services on the basis
of factors such as brand name recognition, convenience, cost and the quality and
range of services provided. Competition may include practitioners who have more
established practices and reputations. The Company also competes against
established practices in the retention and recruitment of general dentists,
specialists, hygienists and other personnel. If the availability of such
individuals begins to decline in the Company's markets, it may become more
difficult to attract and retain qualified personnel to sufficiently staff the
existing Offices or to meet the staffing needs of the Company's planned
expansion.
Government Regulation
The practice of dentistry is regulated at both the state and federal levels, and
the regulation of health care-related companies is increasing. There can be no
assurance that the regulatory environment in which the Company or the P.C.s
operate will not change significantly in the future. The laws and regulations of
all states in which the Company operates impact the Company's operations but do
not currently materially restrict the Company's operations in those states. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The laws regulating health care are
broad and subject to varying interpretations, and there is currently a lack of
case law construing such statutes and regulations. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
State Regulation
The laws of many states, including Colorado and New Mexico, permit a dentist to
conduct a dental practice only as an individual, a member of a partnership or an
employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services. Under the Management Agreements,
the P.C.s control all clinical aspects of the practice of dentistry and the
provision of dental services at the Offices, including the exercise of
independent professional judgment regarding the diagnosis or treatment of any
dental disease, disorder or physical condition. Persons to whom dental services
are provided at the Offices are patients of the P.C.s and not of the Company.
The Company does not employ the dentists who provide dental services at the
Offices nor does the Company have or exercise any control or direction over the
manner or methods in which dental services are performed or interfere in any way
with the exercise of professional judgment by the dentists.
Many states, including Colorado, limit the ability of a person other than a
licensed dentist, to own or control dental equipment or offices used in a dental
practice. Some states allow leasing of equipment and office space to a dental
practice, under a bona fide lease, if the equipment and office remain under the
control of the dentist. Some states, including Arizona and New Mexico, require
all advertisements to be in the name of the dentist. A number of states,
including Arizona, Colorado and New Mexico, also regulate the content of
advertisements of dental services. In addition, Colorado, New Mexico and
Arizona, and many other states impose limits on the tasks that may be delegated
by dentists to hygienists and dental assistants. Some states require entities
designated as "clinics" to be licensed, and may define clinics to include dental
practices that are owned or controlled in whole or in part by non-dentists.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
Many states have fraud and abuse laws which are similar to the federal fraud and
abuse law described below, and which in many cases apply to referrals for items
or services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
Many states, including Colorado and New Mexico, also prohibit "fee-splitting" by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice's revenues.
13
In addition, many states have laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to include referrals for
health care items or services, including dental items and services.
In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. As the P.C.s contract with third-party payors, on a capitation or
other basis under which the relevant P.C. assumes financial risk, the P.C.s may
become subject to state insurance laws. Specifically, in some states, regulators
may determine that the Company or the P.C.s are engaged in the business of
insurance, particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. In Arizona, Colorado and New Mexico, the P.C.s currently
only contract on a financial-risk basis with entities that are licensed to
engage in the business of insurance and thus are not subject to the insurance
laws of those states. To the extent that the Company or the P.C.s are determined
to be engaged in the business of insurance, the Company may be required to
change the method of payment from third-party payors and the Company's revenue
may be materially and adversely affected.
Federal Regulation
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
under Medicare or Medicaid, the impact of these laws on the Company to date has
been negligible. There can be no assurance, however, that the P.C.s will not
have patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.
The federal fraud and abuse statute prohibits, subject to certain safe harbors,
the payment, offer, solicitation or receipt of any form of remuneration in
return for, or in order to induce: (i) the referral of a person for service,
(ii) the furnishing or arranging to furnish items or services, or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable under
Medicare or Medicaid. The statute reflects the federal government's policy of
increased scrutiny of joint ventures and other transactions among healthcare
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Because dental services are covered under various government
programs, including Medicare and Medicaid, this federal law applies to dentists
and the provision of dental services.
Significant prohibitions against dentist self-referrals for services covered by
Medicare and Medicaid programs were enacted, subject to certain exceptions, by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as Stark II, amended prior physician and dentist self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by dramatically enlarging the list of services and investment
interest to which the self-referral prohibitions apply. Effective January 1,
1995, Stark II prohibits a physician or dentist, or a member of his or her
immediate family, from making referrals for certain "designated health services"
to entities in which the physician or dentist has an ownership or investment
interest, or with which the physician or dentist has a compensation arrangement.
"Designated health services" include, among other things, clinical laboratory
services, radiology and other diagnostic services, radiation therapy services,
durable medical equipment, prosthetics, outpatient prescription drugs, home
health services and inpatient and outpatient hospital services. Stark II
prohibitions include referrals within the physician's or dentist's own group
practice (unless such practice satisfies the "group practice" exception) and
referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with or
violation of Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Nevertheless, there can be no assurance that Stark II will not be interpreted or
hereafter amended in a manner that has a material adverse effect on the
Company's operations as presently conducted.
14
Proposed federal regulations also govern physician incentive plans associated
with certain managed care organizations that offer risk-based Medicare or
Medicaid contracts. These regulations define physician incentive plans to
include any compensation arrangement (such as capitation arrangements, bonuses
and withholds) that may directly or indirectly have the effect of reducing or
limiting services furnished to patients covered by the Medicare or Medicaid
programs. Direct monetary compensation which is paid by a managed care plan,
dental group or intermediary to a dentist for services rendered to individuals
covered by the Medicare or Medicaid programs is subject to these regulations, if
the compensation arrangement places the dentist at substantial financial risk.
When applicable, the regulations generally require disclosure to the federal
government or, upon request, to a Medicare beneficiary or Medicaid recipient
regarding such financial incentives, and require the dentist to obtain stop-loss
insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans, which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing agents. These
rules prohibit a billing agent from receiving a fee based on a percentage of
Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.
Federal regulations also allow state licensing boards to revoke or restrict a
dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including governmental
insurers, are subject to significant regulation. Some payors limit the extent to
which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain
conditions are met, such as acceptance by dentists of assignment of the payor
receivable from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided "incident to" a dentist's
services. Under these "incident to" rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Offices' staff unless certain conditions are met, such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Office staff
must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its revenue under such programs.
The operations of the Offices are also subject to compliance with regulations
promulgated by the Occupational Safety and Health Administration ("OSHA"),
relating to such matters as heat sterilization of dental instruments and the use
of barrier techniques such as masks, goggles and gloves. The Company incurs
expenses on an ongoing basis relating to OSHA monitoring and compliance.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs will
not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
15
Commencing in March 2003, health care providers, including the Company, will
have to comply with the electronic data security and privacy requirements of the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA
delegates enforcement authority to the Centers for Medicare Services Office for
Civil Rights. Noncompliance with HIPAA regulations can result in severe
penalties up to $250,000 in fines and up to ten years in prison. While the
Company intends to comply with all requirements, the Company cannot presently
predict the ultimate impact of the HIPAA regulations on the Company and its
business.
Insurance
The Company believes that its existing insurance coverage is adequate to protect
it from the risks associated with the ongoing operation of its business. This
coverage includes property and casualty, general liability, workers
compensation, director's and officer's corporate liability, employment practices
liability, corporate errors and omissions liability, excess liability and
professional liability insurance for dentists, hygienists and dental assistants
at the Offices.
Trademark
The Company is the registered owner of the PERFECT TEETH(R) trademark in the
United States.
Facilities and Employees
The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 508, Denver, Colorado, in approximately 9,500 square feet occupied under a
lease, which expires in January 2003. The Company believes that this space is
adequate for its current needs. The Company also leases real estate at the
location of each Office under leases ranging in term from one to 10 years. The
Company believes the facilities at each of its Offices are adequate for their
current level of business. The Company generally anticipates leasing and
developing new Offices in its current markets rather than significantly
expanding the size of its existing Offices.
As of December 31, 2001, the Company had 73 general dentists, 13 specialists and
65 affiliated hygienists that were employed by the P.C.s, and 323 non-dental
employees.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company received notice from the Nasdaq Stock Market that the Company did
not comply with the requirements for continued listing on the Nasdaq National
Market System. In order to satisfy Nasdaq's listing requirements for the Nasdaq
SmallCap Market, effective February 26, 2001, the Company's Board of Directors
approved a one-for-four reverse stock split. The SmallCap Market's maintenance
standards, among other things, require the Company to have 1) at least 500,000
shares of Common Stock held by non-affiliates; 2) an aggregate market public
float of at least $1,000,000; 3) at least 300 shareholders who own 100 shares of
Common Stock or more; and 4) a minimum bid price of at least $1.00 per share.
All shares, share prices and earnings per share calculations for all periods
have been restated to reflect this reverse stock split.
The Common Stock has been quoted on the Nasdaq SmallCap Market under the symbol
"BDMS" since February 26, 2001. The following table sets forth, for the period
indicated, the range of high and low sales prices per share of Common Stock, as
reported on The Nasdaq National Market up to February 26, 2001 and The Nasdaq
SmallCap Market thereafter:
HIGH LOW
2000
First Quarter $ 7.50 $ 4.50
Second Quarter 7.50 4.00
Third Quarter 7.50 3.50
Fourth Quarter 4.50 1.50
2001
First Quarter $ 3.25 $ 1.88
Second Quarter 2.20 1.94
Third Quarter 3.02 1.95
Fourth Quarter 4.91 2.60
2002
First Quarter (January 1, 2002 through March 13, 2002) $ 6.37 $ 4.33
At March 13, 2002 the last reported sale price of the Company's Common Stock was
$6.37 per share. As of the same date, there were 1,506,705 shares of Common
Stock outstanding held by 79 holders of record and approximately 590 beneficial
owners.
The Company has not declared or paid dividends on its Common Stock since its
formation, and the Company does not anticipate paying dividends in the
foreseeable future. The Company's existing credit facility prohibits the payment
of cash dividends on the Common Stock without the lender's consent. Any future
credit facility, which the Company may obtain, is also likely to prohibit the
payment of dividends. Declaration or payment of dividends, if any, in the
future, will be at the discretion of the Board of Directors and will depend on
the Company's then current financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors.
17
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial and operating
data for the Company. The data for the years ended December 31, 1999, 2000, and
2001 should be read in conjunction with the Company's consolidated financial
statements included elsewhere in this document. The selected consolidated
financial data for the 1997 and 1998 periods are derived from the Company's
historical consolidated financial statements.
A one-for four split of the Company's stock became effective as of February 26,
2001. As a result, all earnings per share data presented in the following table
has been restated to reflect this reverse stock split.
The data in the following table is in $000's except per share data, number of
offices and number of dentists:
Years Ended December 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Statements of Operations Data: (1)
Net revenue $ 12,742 $ 21,741 $ 28,553 $ 29,419 $ 29,249
Direct expenses 10,151 17,287 24,425 25,475 25,158
Contribution from dental offices 2,591 4,454 4,128 3,944 4,092
Corporate expenses 1,714 3,182 4,038 3,747 3,270
Operating income 877 1,272 90 197 822
Income (loss) before income taxes 34 843 (389) (434) 371
Income tax (expense) benefit - (128) 111 113 (121)
Income (loss) before change in accounting 34 715 (278) (321) 250
principle
Cumulative effect of change in accounting - (39) - - -
principle
Net income (loss) 34 675 (278) (321) 250
Basic earnings per share of Common Stock:
Income (loss) before cumulative effect of change .04 .46 (.18) (.21) .17
in accounting principle
Cumulative effect of change in accounting - (.03) - - -
principle
Net income (loss)(2) .04 .43 (.18) (.21) .17
Diluted earnings per share of Common Stock:
Income (loss) before cumulative effect of change .04 .44 (.18) (.21) .16
in accounting principle
Cumulative effect of change in accounting - (.02) - - -
principle
Net income (loss)(2) .04 .42 (.18) (.21) .16
Balance Sheet Data (3):
Cash and cash equivalents $ 977 $ 2,170 $ 807 $ 691 $ 949
Working capital (deficit) (458) 2,309 1,467 2,043 301
Total assets 15,564 25,543 27,949 26,333 24,762
Long-term debt, less current maturities 10,198 3,240 6,771 6,682 3,296
Total shareholders' equity 1,388 18,746 16,905 16,471 16,721
Dividends declared per share of Common Stock - - - - -
Operating Data:
Number of offices (3) 34 49 54 56 54
Number of dentists (3)(4) 53 73 90 91 86
Total net revenue per office $ 375 $ 444 $ 529 $ 525 $ 542
- -------------------
(1) Acquisitions of Offices and development of de novo Offices affect the
comparability of the data. During 1997 15 additional Office
acquisitions and one de novo Office increased the Company's operations.
In 1998, the Company acquired an additional 10 Offices and opened five
de novo Offices. In 1999, the Company acquired one Office, opened five
de novo Offices and consolidated two existing Offices into one. In
2000, the Company opened two de novo Offices. During 2001, the Company
consolidated four existing Offices into two.
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements of the Company.
(3) Data is as of the end of the respective periods presented.
(4) This represents the actual number of dentists employed by the P.C.s and
specialists who contract with the P.C.s to provide specialty dental
services.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
The following discussion and analysis relates to factors, which have affected
the consolidated results of operations and financial condition of the Company
for the three years ended December 31, 2001. Reference should also be made to
the Company's consolidated financial statements and related notes thereto and
the Selected Financial Data included elsewhere in this document. This document
contains forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under Items 1 and 2.
"Business and Properties," Item 5., "Market for the Registrant's Common Equity
and Related Stockholder Matters" as well as in this document generally.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation the risk factors set forth in this Item 7 under the heading "Risk
Factors."
Overview
The Company was formed in May 1995, and currently manages 54 Offices in
Colorado, New Mexico, and Arizona staffed by 73 dentists and 13 specialists. The
Company has acquired 42 practices (five of which were consolidated into existing
Offices) and opened 18 de novo Offices (one of which was consolidated into an
existing Office). Of the 42 acquired practices, only three (the first three
practices, which were acquired from the Company's President, Mark Birner,
D.D.S.) were acquired from affiliates of the Company. The Company derives all of
its Revenue (as defined below) from its Management Agreements with the P.C.s. In
addition, the Company assumes a number of responsibilities when it acquires a
new practice or develops a de novo Office, which are set forth in the Management
Agreement, as described below. The Company expects to expand in existing markets
primarily by enhancing the operating performance of its existing Offices and by
developing de novo Offices. The Company has historically expanded in existing
markets by acquiring solo and group dental practices and may do so in the future
if an economically feasible opportunity presents itself. Generally, the Company
seeks to acquire dental practices for which the Company believes application of
its Dental Practice Management Model will improve operating performance. See
Items 1 and 2. "Business and Properties - Operations - Dental Practice
Management Model."
The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's success in the Colorado
market led to its expansion into New Mexico and Arizona. The Company commenced
operations in Colorado in October 1995 with the acquisition of three practices,
and acquired a fourth practice in November 1995. During 1996, the Company
developed five de novo Offices and acquired 12 practices (including three
practices which were consolidated with existing Offices). In 1997, the Company
developed one de novo Office and acquired 15 practices. In 1998, the Company
developed five de novo Offices and acquired 10 practices. In 1999, the Company
developed five de novo Offices, acquired one practice and consolidated two
practices into one. In 2000, the Company developed two de novo Offices and
purchased the remaining 50% interest in two existing Offices. In 2001, the
Company consolidated four existing Offices in to two Offices and acquired the
remaining 50% interest in one existing Office.
The combined purchase amounts for the four practices acquired in 1995, the 12
practices acquired in 1996, the 15 practices acquired in 1997, the 10 practices
acquired in 1998, and the practice acquired in 1999 were approximately $412,000,
$4.4 million, $5.3 million, $5.8 million and $760,000, respectively. The 17
remaining de novo Offices which were opened between January 1996 and October
2000 began generating positive contribution from dental offices, on average,
within eight months of opening. See Items 1 and 2. "Business and Properties -
Expansion Program."
The Company has grown primarily through the ongoing development of a dense
dental practice network and the implementation of its dental practice management
model. During the three years ended December 31, 2001, net revenue increased
from $28.6 million in 1999 to $29.4 million for 2000, and decreased to $29.2
million for 2001. During the three years ended December 31, 2001, contribution
from dental offices decreased from $4.1 million in 1999 to $3.9 million for
2000, and increased to $4.1 million for 2001. During the three years ended
December 31, 2001, operating income increased from $89,000 for 1999 to $197,000
in 2000 and $822,000 in 2001.
19
At December 31, 2001, the Company's total assets of $24.8 million included $13.9
million of identifiable intangible assets related to Management Agreements. At
that date, the Company's total shareholders' equity was $16.7 million. The
Company reviews the recorded amount of intangible assets and other long-lived
assets for impairment for each Office whenever events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable.
If this review indicates that the carrying amount of the assets may not be
recoverable as determined based on the undiscounted cash flows of each Office,
whether acquired or developed, the carrying value of the asset is reduced to
fair value. Among the factors that the Company will continually evaluate are
unfavorable changes in each Office, relative market share and local market
competitive environment, current period and forecasted operating results, cash
flow levels of Offices and the impact on the net revenue earned by the Company,
and the legal and regulatory factors governing the practice of dentistry. As of
December 31, 2001 a review by the Company determined that there was no permanent
impairment of any long-lived or intangible asset at any Office.
Components of Revenue and Expenses
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices, reported at estimated realizable amounts, received from third-party
payors and patients for dental services rendered at the Offices. Net revenue
represents Revenue less amounts retained by the Offices. The amounts retained by
the Offices represent amounts paid as salary, benefits and other payments to
employed dentists and hygienists. The Company's net revenue is dependent on the
Revenue of the Offices. Management service fee revenue represents the net
revenue earned by the Company for the Offices for which the Company has
management agreements, but does not have control. Direct expenses consist of the
expenses incurred by the Company in connection with managing the Offices,
including salaries and benefits (for personnel other than dentists and
hygienists), dental supplies, dental laboratory fees, occupancy costs,
advertising and marketing, depreciation and amortization and general and
administrative (including office supplies, equipment leases, management
information systems and other expenses related to dental practice operations).
The Company also incurs personnel and administrative expenses in connection with
maintaining a corporate function that provides management, administrative,
marketing, development and professional services to the Offices.
Under each of the Management Agreements, the Company manages the business and
marketing aspects of the Offices, including (i) providing capital, (ii)
designing and implementing marketing programs, (iii) negotiating for the
purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of non-dental
personnel, (vii) billing and collecting patient fees, (viii) arranging for
certain legal and accounting services, and (ix) negotiating with managed care
organizations. The P.C. is responsible for, among other things, (i) supervision
of all dentists and dental hygienists, (ii) complying with all laws, rules and
regulations relating to dentists and dental hygienists, and (iii) maintaining
proper patient records. The Company has made, and intends to make in the future,
loans to P.C.s in Colorado, New Mexico and Arizona to fund their acquisition of
dental assets from third parties in order to comply with the laws of such
states.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office, (ii) direct
costs of all Company employees or consultants who provide services to or in
connection with the Office, (iii) utilities, janitorial, laboratory, supplies,
advertising and other expenses incurred by the Company in carrying out its
obligations under the Management Agreement, (iv) depreciation expense associated
with the P.C.'s assets and the assets of the Company used at the Office, and the
amortization of intangible asset value relating to the Office, (v) interest
expense on indebtedness incurred by the Company to finance any of its
obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company's or the P.C.'s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company's personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of Company
including the P.C.'s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Office are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists work at the Offices of the P.C.s. This enables the Company to manage
the profitability of the Offices. Each Management Agreement is for a term of 40
years. Further, each Management Agreement generally may be terminated by the
P.C. only for cause, which includes a material default by or bankruptcy of the
Company. Upon expiration or termination of a Management Agreement by either
party, the P.C. must satisfy all obligations it has to the Company.
20
The Company's revenue is derived principally from fee-for-service revenue and
revenue from capitated managed dental care plans. Fee-for-service revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Office (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Office under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive supplemental payments for more complicated or elective procedures.
In contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided. See Items 1 and 2. "Business and Properties -
Payor Mix."
The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs and by opening new Offices. The Company seeks to supplement this
fee-for-service business with Revenue from contracts with capitated managed
dental care plans. Although the Company's fee-for-service business generally
provides a greater margin than its capitated managed dental care business,
capitated managed dental care business serves to increase facility utilization
and dentist productivity. The relative percentage of the Company's Revenue
derived from fee-for-service business and capitated managed dental care
contracts varies from market to market depending on the availability of
capitated managed dental care contracts in any particular market and the
Company's ability to negotiate favorable contractual terms. In addition, the
profitability of managed dental care Revenue varies from market to market
depending on the level of capitation payments and co-payments in proportion to
the level of benefits required to be provided.
Results of Operations
As a result of the shift in focus from expansion of the Company's business
through acquisitions and the development of de novo Offices to the greater
utilization of existing physical capacity through the recruitment of additional
dentists and staff, the Company believes that the period-to-period comparisons
set forth below may not be representative of future operating results.
For the year ended December 31, 2001, Revenue increased to $41.4 million
compared to $41.2 million for the year ended December 31, 2000, an increase of
$200,000 or 0.4%. An increase in Revenue of $454,000 was attributable to the two
de novo Offices that were opened during 2000, which was partially offset by a
decrease in Revenue of $300,000 at the 52 Offices in existence during both full
periods.
For the year ended December 31, 2000, Revenue increased to $41.2 million from
$39.1 million for the year ended December 31, 1999, an increase of $2.1 million
or 5.4%. The Company opened two de novo Offices during 2000 which, in the
aggregate, contributed $483,000 and $1.6 million was attributable to the 54
Offices that existed at the beginning of 2000.
The Company has successfully reduced the percentage of its business which comes
from capitated managed dental care plans from 51.4% of Revenue in 1998 to 31.2%
of Revenue in 2001, and replaced that capitated revenue stream with higher
margin fee-for-service business. This higher margin fee-for-service revenue has
predominately been business derived from preferred provider plans.
21
The following table sets forth the percentages of Net Revenue represented by
certain items reflected in the Company's Consolidated Statements of Operations.
The information contained in the table represents the historical results of the
Company. The information that follows should be read in conjunction with the
Company's consolidated financial statements and related notes thereto.
Years Ended December 31,
-------------------------------------------------------------------
1999 2000 2001
---- ---- ----
Net revenue 100.0 % 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 39.2 40.9 40.4
Dental supplies 6.2 6.4 6.0
Laboratory fees 10.0 8.9 8.4
Occupancy 10.8 11.0 11.2
Advertising and marketing 1.7 1.1 1.1
Depreciation and amortization 6.7 8.2 8.4
General and administrative 10.9 10.1 10.5
----- ------- ----
85.5 86.6 86.0
----- ------- ----
Contribution from dental offices 14.5 13.4 14.0
Corporate expenses:
General and administrative 13.3 11.6 10.1
Depreciation and amortization 0.9 1.1 1.1
----- ------- ----
Operating income 0.3 0.7 2.8
Interest expense, net
(1.7) (2.2) (1.5)
----- ------- ----
Income (loss) before income taxes (1.4) (1.5) 1.3
Income tax (expense) benefit 0.4 0.4 (0.4)
Net income (loss) (1.0)% (1.1)% 0.9 %
====== ======= =====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net revenue. Net revenue decreased from $29.4 million for the year ended
December 31, 2000 to $29.2 million for the year ended December 31, 2001, a
decrease of $169,000 or 0.6%. A decrease in net revenue of $451,000 was
attributable to the 52 practices in existence during both full periods, of which
$282,000 was offset by an increase in net revenue attributable to two de novo
offices that were opened during the 2000 fiscal year.
Clinical salaries and benefits. Clinical salaries and benefits decreased from
$12.0 million for the year ended December 31, 2000 to $11.8 million for the year
ended December 31, 2001, a decrease of $217,000 or 1.8%. This decrease was due
primarily to attrition of support staff at the Offices who were not replaced and
also because of a wage freeze that was implemented during 2001. As a percentage
of net revenue, clinical salaries and benefits decreased from 40.9% in 2000 to
40.4% in 2001.
Dental supplies. Dental supplies decreased from $1.9 million for the year ended
December 31, 2000 to $1.8 million for the year ended December 31, 2001, a
decrease of $115,000 or 6.2%. This decrease was primarily due to fewer de novo
office starts that require additional expenses to establish a start-up
inventory. As a percentage of net revenue, dental supplies decreased from 6.4%
in 2000 to 6.0% in 2001.
Laboratory fees. Laboratory fees decreased from $2.6 million for the year ended
December 31, 2000 to $2.5 million for the year ended December 31, 2001, a
decrease of $164,000 or 6.2%. This decrease was primarily due to the Company's
efforts to consolidate the use of dental laboratories so that improved pricing
could be obtained based upon the Company's laboratory case volume. As a
percentage of net revenue, laboratory fees decreased from 8.9% in 2000 to 8.4%
in 2001.
22
Occupancy. Occupancy increased from $3.2 million for the year ended December 31,
2000 to $3.3 million for the year ended December 31, 2001, an increase of
$39,000 or 1.2%. This increase was due to certain Offices which were only open
for part of the year ended December 31, 2000 and a full year in 2001 as well as
increased rental payments resulting from the renewal of Office leases at current
market rates for Offices whose leases expired subsequent to the 2000 period.
This was partially offset by lower costs associated with the consolidation of
four offices into two during 2001. As a percentage of net revenue, occupancy
expense increased from 11.0% in 2000 to 11.2% in 2001.
Advertising and marketing. Advertising and marketing decreased from $328,000 for
the year ended December 31, 2000 to $315,000 for the year ended December 31,
2001, a decrease of $13,000 or 4.0%. This decrease was primarily due to the fact
that no new Offices were opened in 2001 as compared to the opening of two new
Offices in 2000 and the corresponding savings of the initial expense of
promoting new Offices. As a percentage of net revenue, advertising and marketing
remained constant at 1.1% for both 2000 and 2001.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$2.4 million for the year ended December 31, 2000 to $2.5 million for the year
ended December 31, 2001, an increase of $53,000 or 2.2%. This increase is
related to the increase in the Company's depreciable and amortizable asset base.
As a percentage of net revenue, depreciation and amortization increased from
8.2% in 2000 to 8.4% in 2001.
General and administrative. General and administrative costs which are
attributable to the Offices, increased from $3.0 million for the year ended
December 31, 2000 to $3.1 million for the year ended December 31, 2001, an
increase of $99,000 or 3.4%. This increase was primarily due to certain Offices
which were only open for part of the year ended December 31, 2000 and a full
year in 2001. As a percentage of net revenue, general and administrative
expenses increased from 10.1% in 2000 to 10.5% in 2001.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased from $3.9 million for the year ended December 31, 2000
to $4.1 million for the year ended December 31, 2001, an increase of $148,000 or
3.8%. As a percentage of net revenue, contribution from dental offices increased
from 13.4% in 2000 to 14.0% in 2001.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative decreased from $3.4 million for the year ended December 31,
2000 to $2.9 million for the year ended December 31, 2001, a decrease of
$467,000 or 13.7%. This decrease is attributable to a management initiative in
the second quarter of 2001 to lower corporate expenses through a reduction in
personnel and other cost cutting measures. As a percentage of net revenue,
corporate expense - general and administrative decreased from 11.6% in 2000 to
10.1% in 2001.
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization decreased from $332,000 for the year ended
December 31, 2000 to $322,000 for the year ended December 31, 2001, a decrease
of $10,000 or 3.0%. This decrease was a result of the Company's efforts to
control capital expenditures and the fact that some corporate assets have become
fully depreciated. As a percentage of net revenue, corporate expenses -
depreciation and amortization remained constant at 1.1% from 2000 to 2001.
Operating income. As a result of the above, operating income increased from
$197,000 for the year ended December 31, 2000 to $822,000 for the year ended
December 31, 2001, an increase of $625,000 or 317.8%. As a percentage of net
revenue, operating income increased from 0.7% in 2000 to 2.8% in 2001.
Interest expense, net. Interest expense, net decreased from $630,000 for the
year ended December 31, 2000 to $451,000 for the year ended December 31, 2001, a
decrease of $180,000 or 28.5%. This decrease was primarily the result of a lower
average interest rate and a lower average outstanding debt balance during 2001.
As a percentage of net revenue, interest expense, net decreased from 2.2% in
2000 to 1.5% in 2001.
Net income (loss). As a result of the above, the Company reported net income of
$250,000 for the year ended December 31, 2001 compared to a net loss of
$(321,000) for the year ended December 31, 2000. Net income for the year ended
December 31, 2001 was net of income tax expense of $121,000 while the net loss
for the year ended December 31, 2000 included an income tax benefit of $113,000.
23
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net revenue. Net revenue increased from $28.6 million for the year ended
December 31, 1999 to $29.4 million for the year ended December 31, 2000. The
Company opened two de novo Offices during 2000, which contributed approximately
$444,000 to the increase. The remainder of the increase in net revenue of
approximately $356,000 was attributable to the 54 practices the Company had at
the beginning of the 2000 year.
Clinical salaries and benefits. Clinical salaries and benefits increased from
$11.2 million for the year ended December 31, 1999 to $12.0 million for the year
ended December 31, 2000, an increase of $815,000 or 7.3%. This increase was due
primarily to the increased number of Offices and the corresponding addition of
non-dental personnel and because of annual wage increases. As a percentage of
net revenue, clinical salaries and benefits increased from 39.2% in 1999 to
40.9% in 2000.
Dental supplies. Dental supplies increased from $1.8 million for the year ended
December 31, 1999 to $1.9 million for the year ended December 31, 2000, an
increase of $97,000 or 5.5%. This increase was due primarily to the increased
number of Offices and to normal price increases from suppliers. As a percentage
of net revenue, dental supplies increased from 6.2% in 1999 to 6.4% in 2000.
Laboratory fees. Laboratory fees decreased from $2.8 million for the year ended
December 31, 1999 to $2.6 million for the year ended December 31, 2000, a
decrease of $211,000 or 7.4%. The decrease was primarily due to the Company
contracting with a single laboratory and receiving the benefits of lower costs
due to volume discounts. Laboratory fees as a percentage of net revenues
decreased from 10.0% in 1999 to 8.9% in 2000.
Occupancy. Occupancy increased from $3.1 million for the year ended December 31,
1999 to $3.3 million for the year ended December 31, 2000, an increase of
$155,000 or 5.3%. This increase was due to the two new Offices opened in 2000,
as well as certain Offices which were only open for part of the year ended
December 31, 1999 and a full year in 2000. As a percentage of net revenue,
occupancy expense increased from 10.8% in 1999 to 11.0% in 2000.
Advertising and marketing. Advertising and marketing decreased from $484,000 for
the twelve months ended December 31, 1999 to $328,000 for the twelve months
ended December 31, 2000, a decrease of $156,000 or 32.1%. This decrease was
primarily due to the opening of two Offices in 2000 as compared to six Offices
in 1999 and the corresponding savings of the initial expense of promoting new
Offices. Advertising and marketing expense, as a percentage of net revenue,
decreased from 1.7% in 1999 to 1.1% in 2000.
Depreciation and amortization. Depreciation and amortization, which consists of
depreciation and amortization expense incurred at the Offices, increased from
$1.9 million for the twelve months ended December 31, 1999 to $2.4 million for
the twelve months ended December 31, 2000, an increase of $484,000 or 25.2%.
This increase was primarily due to the number of Offices which were open for
part of the year ended December 31, 1999, and because of the two new Offices
opened in 2000. Depreciation and amortization as a percentage of net revenue
increased from 6.7% in 1999 to 8.2% in 2000.
General and administrative. General and administrative costs, attributable to
the Offices, decreased from $3.1 million for the twelve months ended December
31, 1999 to $3.0 million for the twelve months ended December 31, 2000, a
decrease of $143,000 or 4.6%. The reduction is primarily the result of a Company
initiative in 2000 to manage controllable costs. As a percentage of net revenue,
general and administrative expenses decreased from 10.9% in 1999 to 10.1% in
2000.
Contribution from dental offices. As a result of the above changes, contribution
from dental offices decreased from $4.1 million for the twelve months ended
December 31, 1999 to $3.9 million for the twelve months ended December 31, 2000,
a decrease of $184,000 or 4.5%. As a percentage of net revenue, contribution
from dental offices decreased from 14.5% in 1999 to 13.4% in 2000.
Corporate expenses - general and administrative. Corporate expenses - general
and administrative decreased from $3.8 million for the twelve months ended
December 31, 1999 to $3.4 million for the twelve months ended December 31, 2000,
a decrease of $382,000 or 10.1%. The reduction is primarily the result of a
Company initiative in 2000 to manage controllable costs. As a percentage of net
revenue, corporate expenses - general and administrative decreased from 13.3% in
1999 to 11.6% in 2000.
24
Corporate expenses - depreciation and amortization. Corporate expenses -
depreciation and amortization increased from $242,000 for the twelve months
ended December 31, 1999 to $332,000 for the twelve months ended December 31,
2000, an increase of $90,000 or 37.4%. This increase was primarily due to the
acquisition of new payroll software in 2000 to manage new and future growth.
Corporate expenses - depreciation and amortization as a percentage of net
revenue increased from 0.9% in 1999 to 1.1% in 2000.
Operating income. As a result of the change described above, operating income
increased from $90,000 for the twelve months ended December 31, 1999 to $197,000
for the twelve months ended December 31, 2000, an increase of 107,000 or 119.9%.
As a percentage of net revenue, operating income increased from 0.3% in 1999 to
0.7% in 2000.
Interest expense, net. Interest expense - net increased from $478,000 for the
twelve months ended December 31, 1999 to $630,000 for the twelve months ended
December 31, 2000, an increase of $152,000 or 31.8%. This increase was primarily
the result of higher rates of interest charged the Company on its line of credit
and a higher average balance outstanding on this line of credit that was used
for capital expenditures and the open-market purchases of Common Stock of the
Company. As a percentage of net revenue, interest expense - net increased from
1.7% in 1999 to 2.2% in 2000.
Net loss. As a result of the changes described above, the Company reported a net
loss of $(321,000) for the twelve months ended December 31, 2000 as compared to
a net loss of $(278,000) for the twelve months ended December 31, 1999, net of
tax benefits of $113,000 and $111,000 for 2000 and 1999, respectively.
Liquidity and Capital Resources
Since its inception, the Company has financed its growth through a combination
of private sales of convertible subordinated debentures and Common Stock, cash
provided by operating activities, a bank line of credit (the "Credit Facility"),
seller notes and the initial public offering of Common Stock.
Net cash provided by operating activities was $1.3 million, $1.7 million, and
$4.0 million for the years ended December 31, 1999, 2000 and 2001, respectively.
During the year ended December 31, 2001, excluding net income and after adding
back non-cash items, the Company's cash provided by operating activities
consisted primarily of a decrease in accounts receivable of approximately
$784,000, an increase in accounts payable of approximately $342,000 offset, in
part, by an increase in prepaid expenses of approximately $267,000. During the
year ended December 31, 2000 after adding back depreciation and amortization and
other non-cash expenses, the Company's cash used in operating activities
consisted primarily of a reduction in accounts payable of approximately $705,000
offset, in part, by a decrease in prepaid expenses of approximately $146,000.
During the year ended December 31, 1999 after adding back depreciation and
amortization and other non-cash expenses, the Company's cash used in operating
activities consisted primarily of an increase in accounts receivable of
approximately $1.1 million offset, in part, by an increase in accounts payable
of approximately $500,000.
Net cash used in investing activities was $4.4 million, $1.5 million, and $1.1
million for the years ended December 31, 1999, 2000 and 2001, respectively.
During the year ended December 31, 2001, $547,000 was invested in the purchase
of additional property and equipment and $435,000 for acquiring the remaining
50% interest in one existing Office. During the year ended December 31, 2000,
$1.1 million was invested in the purchase of additional property and equipment,
including $428,000 for two de novo Offices and $197,000 for acquiring the
remaining 50% interest in two existing Offices. During the year ended December
31, 1999, $3.7 million was invested in the purchase of additional property and
equipment, including $1.1 million for the de novo Offices and $697,000 for an
acquisition.
For the year ended December 31, 1999 net cash provided by financing activities
was $1.8 million. For the years ended December 31, 2000 and 2001 net cash used
in financing activities was $401,000, and $2.7 million, respectively. For the
year ended December 31, 2001, net cash used in financing activities was
comprised of $2.4 million for the pay-down on the Company's line of credit,
$203,000 for the repayment of long-term debt and $67,000 for the payment of
financing costs. For the year ended December 31, 2000, net cash used in
financing activities was comprised of $195,000 for the repayment of long-term
debt, $113,000 for the purchase and retirement of Common Stock and $93,000 for
the pay-down on the Company's line of credit. For the year ended December 31,
1999, net cash provided by financing activities was comprised of net borrowings
under the Company's line of credit of approximately $3.7 million which was
partially offset by the purchase and retirement of Common Stock of approximately
$1.6 million and approximately $310,000 for the repayment of long-term debt.
25
Under the Company's Credit Facility (as amended on December 17, 2001), the
Company may borrow on a revolving basis up to the lesser of an applicable
Borrowing Base (calculated in accordance with the most recent Borrowing Base
Certificate delivered to the Lender) or $2.0 million and on a non-revolving
basis, an aggregate principal amount not in excess of $4.0 million for working
capital, restructuring of the Original Loan and for other general corporate
purposes. Balances bear interest at the lender's base rate (prime plus a rate
margin of 2.0%). The Company is also obligated to pay an annual facility fee of
.50% on the average unused amount of the revolving line of credit during the
previous full calendar quarter. Borrowings are limited to an availability
formula based on the Company's eligible accounts receivable. As amended, the
revolving loan matures on April 30, 2002 and the non-revolving note matures on
April 30, 2003. At December 31, 2001, the Company had $168,000 outstanding and
approximately $1.8 million available for borrowing under the revolving line of
credit and $3.875 million outstanding under the term loan. The Credit Facility
is secured by a lien on the Company's accounts receivable and its Management
Agreements. The Credit Facility prohibits the payment of dividends and other
distributions to shareholders, restricts or prohibits the Company from incurring
indebtedness, incurring liens, disposing of assets, making investments or making
acquisitions, and requires the Company to maintain certain financial ratios on
an ongoing basis. At December 31, 2001 the Company was in full compliance with
all of its covenants under this agreement.
As of December 31, 2001, the Company had approximately $585,000 in notes payable
issued in connection with various Office acquisitions, which bear interest at
rates varying from 8.0% to 9.0%. At December 31, 2001, the Company's material
commitments for capital expenditures totaled approximately $1.2 million that
includes the acquisition of controlling interest in two existing Offices. The
Company anticipates that these capital expenditures will be funded by cash on
hand, cash generated by operations, or borrowings under the Company's Credit
Facility. The Company's accumulated deficit as of December 31, 2001 was
approximately $(134,000) and the Company had working capital on that date of
approximately $301,000.
The Company believes that cash generated from operations will be sufficient to
fund its anticipated working capital needs and capital expenditures for at least
the next 12 months, even in the event the Company is not able to successfully
negotiate a new Line of Credit at the end of its term. The Company believes,
however, that it will be able to renew the Line of Credit with its current
lender or a different lender with the same or better terms than currently exist.
In addition, in order to meet its long-term liquidity needs the Company may need
to issue additional equity and debt securities, subject to market and other
conditions. There can be no assurance that such additional financing will be
available on terms acceptable to the Company. The failure to raise the funds
necessary to finance its future cash requirements could adversely affect the
Company's ability to pursue its strategy and could negatively affect its
operations in future periods. See "Risk Factors - Need for Additional Capital;
Uncertainty of Additional Financing" in this Item 7.
On September 5, 2000, the Company's Board of Directors unanimously approved the
purchase of shares of the Company's Common Stock on the open market, total value
not to exceed $150,000. During 2000 the Company, in 18 separate transactions,
purchased approximately 26,300 shares of Common Stock for total consideration of
approximately $113,000 at prices ranging from $3.80 to $6.68 per share. The
Company's current Credit Facility (as amended on December 17, 2001) prohibits
the Company from purchasing its Common Stock on the open market even though
approximately $37,000 remains available under the Board of Directors approved
plan.
In July 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, "Business Combinations," and
SFAS 142, "Goodwill and Other Intangible Assets," which replace Accounting
Principle Board Opinion Nos. 16 ("APB 16"), "Business Combinations," and APB 17,
"Intangible Assets," respectively. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and that the use of the pooling-of-interests method be prohibited. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only-method. Amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of SFAS 142, which the
Company will be required to adopt on January 1, 2002. After December 31, 2001,
goodwill can only be written down upon impairment discovered during annual tests
for fair value, or discovered during tests taken when certain triggering events
occur. Prior to the adoption of SFAS 142, impairment of intangibles was
recognized according to the undiscounted cash flow test per SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The Company does not expect the adoption of SFAS 141 and SFAS
142 to have a material impact on the Company's financial condition or results of
oper