| Discussions containing such forward-looking statements may be found in the material set forth in this Item 7 |
| "e Market for the Registrantapstas Common Equity and Related Stockholder Matters, "e as well as in this Annual Report generally |
| Investors and 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 below and the matters set forth in this Annual Report generally and other factors as may be identified from time to time in the Companyapstas filings with the Securities and Exchange Commission or in the Companyapstas press releases |
| The Companyapstas ability to compete effectively will depend upon its ability to hire, train, and assimilate additional management and other employees, and its ability to expand, improve, and effectively utilize its operating, management, marketing and financial systems to accommodate its expanded operations |
| Any failure by the Companyapstas management to effectively anticipate, implement, and manage the changes required to sustain the Companyapstas growth may have a material adverse effect on the Companyapstas business, financial condition, and operating results |
| The Company believes that the profitability and operations of its Offices and its expansion strategy are dependent on the availability and successful recruitment and retention of dentists, dental assistants, hygienists, specialists, and other personnel |
| The Company may not be able to recruit or retain dentists and other personnel for its existing and newly established Offices, which may have a material adverse effect on the Companyapstas expansion strategy and its business, financial condition and operating results |
| Dependence on Management Agreements, the PCs and Affiliated Dentists |
| The Company receives management fees for services provided to the PCs under Management Agreements |
| The Company owns most of the non-dental operating assets of the Offices but does not employ or contract with dentists, employ hygienists, or control the provision of dental care |
| The Companyapstas revenue is dependent on the revenue generated by the PCs |
| Therefore, effective and continued performance of dentists providing services for the PCs is essential to the Companyapstas long-term success |
| Under each Management Agreement, the Company pays substantially all of the operating and non-operating expenses associated with the provision of dental services except for the salaries and benefits of the dentists and hygienists and principal and interest payments of loans made to the PC by the Company |
| Any material loss of revenue by the PCs would have a material adverse effect on the Companyapstas business, financial condition, and operating results, and any termination of a Management Agreement (which is permitted in the event of a material default or bankruptcy by either party) could have such an effect |
| In the event of a breach of a Management Agreement by a PC, there can be no assurance that the legal remedies available to the Company will be adequate to compensate the Company for its damages resulting from such breach |
| 11 Risks Associated with De Novo Office Development |
| The Company utilizes internal and external resources to identify locations in suitable markets for the development of de novo Offices |
| Identifying locations in suitable geographic markets and negotiating leases can be a lengthy and costly process |
| Furthermore, the Company will need to provide each new Office with the appropriate equipment, furnishings, materials and supplies |
| Additionally, new Offices must be staffed with one or more dentists |
| Because a new Office may be staffed with a dentist with no previous patient base, significant advertising and marketing expenditures may be required to attract patients |
| There can be no assurance that a de novo Office will become profitable for the Company |
| Implementation of the Companyapstas growth strategy has required significant capital resources |
| Such resources will be needed to establish additional Offices, maintain or upgrade the Companyapstas management information systems, and for the effective integration, operation and expansion of the Offices |
| The Company historically has used principally cash and promissory notes as consideration in acquisitions of dental practices and intends to continue to do so |
| If the Companyapstas capital requirements over the next several years exceed cash flow generated from operations and borrowings available under the Companyapstas existing Credit Facility or any successor credit facility, the Company may need to issue additional equity securities and incur additional debt |
| If additional funds are raised through the issuance of equity securities, dilution to the Companyapstas existing shareholders may result |
| Additional debt or non-Common Stock equity financings could be required to the extent that the Common Stock fails to maintain a market value sufficient to warrant its use for future financing needs |
| If additional funds are raised through the incurrence of debt, such debt instruments will likely contain restrictive financial, maintenance and security covenants |
| The Company may not be able to obtain additional required capital on satisfactory terms, if at all |
| The failure to raise the funds necessary to finance the expansion of the Companyapstas operations or the Companyapstas other capital requirements could have a material and adverse effect on the Companyapstas ability to pursue its strategy and on its business, financial condition and operating results |
| See "e Liquidity and Capital Resources "e in this Item 7 |
| Payment of Dividends |
| Various factors may hinder our declaration and payment of cash dividends |
| The Company commenced paying a quarterly cash dividend in 2004, and increased the quarterly cash dividend in February 2005 and January 2006 |
| However, the payment of dividends in the future is subject to the discretion of our Board of Directors, and various factors may prevent us from paying dividends |
| Such factors include our financial position, capital requirements and liquidity, the existence of a stock repurchase program, any loan agreement restrictions, state corporate law restrictions, results of operations and such other factors our Board of Directors may consider relevant |
| Conduct of Practice |
| The practice of dentistry is regulated at both the state and federal levels |
| There can be no assurance that the regulatory environment in which the Company or the PCs operate will not change significantly in the future |
| In addition, state and federal laws regulate health maintenance organizations and other managed care organizations for which dentists may be providers |
| In general, regulation of health care companies is increasing |
| In connection with its operations in existing markets and expansion into new markets, the Company may become subject to additional laws, regulations and interpretations or enforcement actions |
| The laws regulating health care are broad and subject to varying interpretations, and there is currently a lack of case law construing such statutes and regulations |
| The ability of the Company to operate profitably will depend in part upon the ability of the Company to operate in compliance with applicable health care regulations |
| The laws of many states, including Colorado and New Mexico, permit a dentist to conduct a dental practice only as an individual, a member of a partnership or an employee of a professional corporation, limited liability company or limited liability partnership |
| These laws typically prohibit, either by specific provision or as a matter of general policy, non-dental entities, such as the Company, from practicing dentistry, from employing dentists and, in certain circumstances, hygienists or dental assistants, or from otherwise exercising control over the provision of dental services |
| 12 Many states, including Colorado, limit the ability of a person other than a licensed dentist to own or control dental equipment or offices used in a dental practice |
| In addition, Arizona, Colorado, New Mexico, and many other states impose limits on the tasks that may be delegated by dentists to hygienists and dental assistants |
| Some states, including Arizona, Colorado and New Mexico, regulate the content of advertisements of dental services |
| Some states require entities designated as "e clinics "e to be licensed, and may define clinics to include dental practices that are owned or controlled in whole or in part by non-dentists |
| These laws and their interpretations vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion |
| Many states, including Colorado and New Mexico, also prohibit "e fee-splitting "e 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 practiceapstas revenues |
| Managed Care Contracts |
| Many states have fraud and abuse laws, which apply to referrals for items or services reimbursable by any third-party payor, not just by Medicare and Medicaid |
| A number of states, including Arizona, Colorado and New Mexico, prohibit the submitting of false claims for dental services |
| In addition, there are certain regulatory risks associated with the Companyapstas role in negotiating and administering managed care contracts |
| The application of state insurance laws to third party payor arrangements, other than fee-for-service arrangements, is an unsettled area of law with little guidance available |
| Specifically, in some states, regulators may determine that the PCs are engaged in the business of insurance, particularly if they contract on a financial-risk basis directly with self-insured employers or other entities that are not licensed to engage in the business of insurance |
| If the PCs 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 Companyapstas business, financial condition and operating results may be materially and adversely affected |
| Federal laws generally regulate reimbursement and billing practices under Medicare and Medicaid programs |
| The federal fraud and abuse statute prohibits, among other things, the payment, offer, solicitation or receipt of any form of remuneration, directly or indirectly, in cash or in kind to induce or in exchange for (i) the referral of a person for services reimbursable by Medicare or Medicaid, or (ii) the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any item, good, facility or service which is reimbursable under Medicare or Medicaid |
| Because the PCs receive no revenue under Medicare and Medicaid, the impact of these laws on the Company to date has been negligible |
| There can be no assurance, however, that the PCs 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 there under could have a material adverse effect on the Companyapstas business, financial condition and operating results |
| On April 14, 2003, health care providers, including the Company, were required to comply with the electronic data security and privacy requirements of HIPPA 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 dlra250cmam000 in fines and up to ten years in prison |
| As of December 31, 2005, the Company believes that it was in full compliance with all requirements of HIPPA and there has been no material impact on the Company due to the implementation of these new regulations |
| Although the Company believes that its operations as currently conducted are in material compliance with applicable laws, there can be no assurance that the Companyapstas 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 PCs 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 Companyapstas 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 Companyapstas organization and arrangements may be required, which could have a material adverse effect on the Company, or the Company may be required to cease operations or change the way it conducts business |
| 13 Risks Associated with Acquisitions |
| The Company has grown substantially in a relatively short period of time, in large part through acquisitions of existing Offices and through the development of de novo Offices |
| Since its organization in May 1995, the Company has completed 42 dental practice acquisitions, five of which have been consolidated into existing Offices and one of which was closed during 2004 |
| The success of future acquisitions will depend on several factors, including the following: o Ability to Identify Suitable Dental Practices |
| Identifying appropriate acquisition candidates and negotiating and consummating acquisitions can be a lengthy and costly process |
| Furthermore, the Company may compete for acquisition opportunities with companies that have greater resources than the Company |
| There can be no assurance that suitable acquisition candidates will be identified or that acquisitions will be consummated on terms favorable to the Company, on a timely basis or at all |
| If a planned acquisition fails to occur or is delayed, the Companyapstas quarterly financial results may be materially lower than expectations, resulting in a decline, perhaps substantial, in the market price of its Common Stock |
| In addition, increasing consolidation in the dental management services industry may result in an increase in purchase prices required to be paid by the Company to acquire dental practices |
| o Integration of Dental Practices |
| The integration of acquired dental practices into the Companyapstas networks is a difficult, costly and time consuming process which, among other things, requires the Company to attract and retain competent and experienced management and administrative personnel and to implement and integrate reporting and tracking systems, management information systems and other operating systems |
| In addition, such integration may require the expansion of accounting controls and procedures and the evaluation of certain personnel functions |
| There can be no assurance that substantial unanticipated problems, costs or delays associated with such integration efforts or with such acquired practices will not occur |
| There also can be no assurance that the Company will be able to successfully integrate acquired practices in a timely manner or at all, or that any acquired practices will have a positive impact on the Companyapstas results of operations and financial condition |
| Reliance on Certain Personnel |
| The success of the Company depends on the continued services of three members of the Companyapstas senior management, its Chief Executive Officer, Fred Birner, its President, Mark Birner, DDS, and its Chief Financial Officer, Treasurer and Secretary, Dennis Genty |
| The Company believes its future success will depend in part upon its ability to attract and retain qualified management personnel |
| Competition for such personnel is intense and the Company competes for qualified personnel with numerous other employers, some of which have greater financial and other resources than the Company |
| The loss of the services of one or more members of the Companyapstas senior management or the failure to add or retain qualified management personnel could have a material adverse effect on the Companyapstas business, financial condition and operating results |
| Risks Associated with Cost-Containment Initiatives |
| The health care industry, including the dental services market, is experiencing a trend toward cost containment, as payors seek to impose lower reimbursement rates upon providers |
| The Company believes that this trend will continue and will increasingly affect the provision of dental services |
| Significant reductions in payments to dentists or other changes in reimbursement by payors for dental services may have a material adverse effect on the Companyapstas business, financial condition and operating results |
| Risks Associated with Capitated Payment Arrangements |
| Under a capitated managed dental care contract, the dental practice provides dental services to the members of the plan and receives a fixed monthly capitation payment for each plan member covered for a specific schedule of services regardless of the quantity or cost of services to the participating dental practice which is obligated to provide them, and may receive a co-pay for each service provided |
| This arrangement shifts the risk of utilization of such services to the dental group practice that provides the dental services |
| Because the Company assumes responsibility under its Management Agreements for all aspects of the operation of the dental practices (other than the practice of dentistry) and thus bears all costs of the provision of dental services at the Offices (other than compensation and benefits of dentists and hygienists), the risk of over-utilization of dental services at the Offices under capitated managed dental care plans is effectively shifted to the Company |
| In contrast, under traditional indemnity insurance arrangements, the insurance company reimburses reasonable charges that are billed for the dental services provided |
| 14 In 2005, the Company derived approximately 11dtta6prca of its Revenue from capitated managed dental care contracts, and 17dtta4prca of its Revenue from associated co-payments |
| Risks associated with capitated managed dental care contracts include principally (i) the risk that the capitation payments and any associated co-payments do not adequately cover the costs of providing the dental services, (ii) the risk that one or more of the PCs may be terminated as an approved provider by managed dental care plans with which they contract, (iii) the risk that the Company will be unable to negotiate future capitation arrangements on satisfactory terms with managed care dental plans, and (iv) the risk that large subscriber groups will terminate their relationship with such managed dental care plans which would reduce patient volume and capitation and co-payment revenue |
| There can be no assurance that the Company will be able to negotiate future capitation arrangements on behalf of PCs on satisfactory terms or at all, or that the fees offered in current capitation arrangements will not be reduced to levels unsatisfactory to the Company |
| Moreover, to the extent that costs incurred by the Companyapstas affiliated dental practices in providing services to patients covered by capitated managed dental care contracts exceed the revenue under such contracts, the Companyapstas business, financial condition and operating results may be materially and adversely affected |
| Risks of Becoming Subject to Licensure |
| Federal and state laws regulate insurance companies and certain other managed care organizations |
| Many states, including Colorado, also regulate the establishment and operation of networks of health care providers |
| These laws also do not generally apply to networks that are paid on a capitated basis, unless the entity with which the network provider is contracting is not a licensed health insurer or other managed care organization |
| There are exceptions to these rules in some states |
| For example, certain states require a license for a capitated arrangement with any party unless the risk-bearing entity is a professional corporation that employs the professionals |
| The Company believes its current activities do not constitute the provision of insurance in Colorado or New Mexico, and thus, it is in compliance with the insurance laws of these states with respect to the operation of its Offices |
| There can be no assurance that these laws will not be changed or that interpretations of these laws by the regulatory authorities in those states, or in the states in which the Company expands, will not require licensure or a restructuring of some or all of the Companyapstas operations |
| In the event that the Company is required to become licensed under these laws, the licensure process can be lengthy and time consuming and, unless the regulatory authority permits the Company to continue to operate while the licensure process is progressing, the Company could experience a material adverse change in its business while the licensure process is pending |
| In addition, many of the licensing requirements mandate strict financial and other requirements, which the Company may not immediately be able to meet |
| Further, once licensed, the Company would be subject to continuing oversight by and reporting to the respective regulatory agency |
| The regulatory framework of certain jurisdictions may limit the Companyapstas expansion into, or ability to continue operations within, such jurisdictions if the Company is unable to modify its operational structure to conform to such regulatory framework |
| Any limitation on the Companyapstas ability to expand could have a material adverse effect on the Companyapstas business, financial condition and operating results |
| Risks Arising From Health Care Reform |
| Federal and state governments currently are considering various types of health care initiatives and comprehensive revisions to the health care and health insurance systems |
| Some of the proposals under consideration, or others that may be introduced, could, if adopted, have a material adverse effect on the Companyapstas business, financial condition and operating results |
| It is uncertain what legislative programs, if any will be adopted in the future, or what action Congress or state legislatures may take regarding health care reform proposals or legislation |
| In addition, changes in the health care industry, such as the growth of managed care organizations and provider networks, may result in lower payments for the services of the Companyapstas managed practices |
| Risks Associated with Intangible Assets |
| At December 31, 2005, intangible assets on the Companyapstas consolidated balance sheet were dlra13dtta0 million, representing 59dtta2prca of the Companyapstas total assets at that date |
| The Company expects the amount allocable to intangible assets on its balance sheet to increase in the future in connection with additional acquisitions, which will increase the Companyapstas amortization expense |
| In the event of any sale or liquidation of the Company or a portion of its assets, there can be no assurance that the value of the Companyapstas intangible assets will be realized |
| In addition, the Company continually evaluates whether events and circumstances have occurred indicating that any portion of the remaining balance of the amount allocable to the Companyapstas intangible assets may not be recoverable |
| When factors indicate that the amount allocable to the Companyapstas intangible assets should be evaluated for possible impairment, the Company may be required to reduce the carrying value of such assets |
| Any future determination requiring the write off of a significant portion of unamortized intangible assets could have a material adverse effect on the Companyapstas business, financial condition and operating results |
| In recent years, dentists have become subject to an increasing number of lawsuits alleging malpractice |
| Some of these lawsuits involve large claims and significant defense costs |
| Any suits involving the Company or dentists at the Offices, if successful, could result in substantial damage awards that may exceed the limits of the Companyapstas insurance coverage |
| The Company provides practice management services; it does not engage in the practice of dentistry or control the practice of dentistry by the dentists or their compliance with regulatory requirements directly applicable to providers |
| There can be no assurance, however, that the Company will not become subject to litigation in the future as a result of the dental services provided at the Offices |
| The Company maintains professional liability insurance for itself and provides for professional liability insurance covering dentists, hygienists and dental assistants at the Offices |
| While the Company believes it has adequate liability insurance coverage, there can be no assurance that the coverage will be adequate to cover losses or that coverage will continue to be available upon terms satisfactory to the Company |
| In addition, certain types of risks and liabilities, including penalties and fines imposed by governmental agencies, are not covered by insurance |
| Malpractice insurance, moreover, can be expensive and varies from state to state |
| Successful malpractice claims could have a material adverse effect on the Companyapstas business, financial condition and operating results |
| Risks Associated with Non-Competition Covenants and Other Arrangements with Managing Dentists |
| The Management Agreements require the PCs to enter into employment agreements with dentists which include non-competition provisions typically for three to five years after termination of employment within a specified geographic area, usually a specified number of miles from the relevant Office, and restrict solicitation of employees and patients |
| In Colorado, covenants not to compete are prohibited by statute with certain exceptions |
| Permitted covenants not to compete are enforceable in Colorado only to the extent their terms are reasonable in both duration and geographic scope |
| Arizona and New Mexico courts have enforced covenants not to compete if their terms are found to be reasonable |
| It is thus uncertain whether a court will enforce a covenant not to compete in those states in a given situation |
| In addition, there is little judicial authority regarding whether a practice management agreement will be viewed as the type of protectable business interest that would permit it to enforce such a covenant or to require a PC to enforce such covenants against dentists formerly employed by the PC Since the intangible value of a Management Agreement depends primarily on the ability of the PC to preserve its business, which could be harmed if employed dentists went into competition with the PC, a determination that the covenants not to compete contained in the employment agreements between the PC and its employed dentists are unenforceable could have a material adverse impact on the Company |
| In addition, the Company is a party to various agreements with managing dentists who own the PCs, which restrict the dentists &apos ability to transfer the shares in the PCs |
| There can be no assurance that these agreements will be enforceable in a given situation |
| A determination that these agreements are not enforceable could have a material adverse impact on the Company |
| Seasonality |
| The Companyapstas past financial results have fluctuated somewhat due to seasonal variations in the dental service industry, with Revenue typically declining in the fourth calendar quarter |
| The Company expects this seasonal fluctuation to continue in the future |
| The dental practice management segment of the dental services industry is highly competitive and is expected to become increasingly more competitive |
| There are several dental practice management companies that are operating in the Companyapstas markets |
| There are also a number of companies with dental practice management businesses similar to that of the Company currently operating in other parts of the country which may enter the Companyapstas existing markets in the future |
| As the Company seeks to expand its operations into new markets, it is likely to face competition from dental practice management companies, which already have established a strong business presence in such locations |
| The Companyapstas competitors may have greater financial or other resources or otherwise enjoy competitive advantages, which may make it difficult for the Company to compete against them or to acquire additional Offices on terms acceptable to the Company |
| The business of providing general dental and specialty dental services is highly competitive in the markets in which the Company operates |
| Competition for providing dental services may include practitioners who have more established practices and reputations |
| The Company competes against established practices in the retention and recruitment of general dentists, specialists, hygienists and other personnel |
| If the availability of such dentists, specialists, hygienists and other personnel begins to decline in the Companyapstas markets, it may become more difficult to attract qualified dentists, specialists, hygienists and other personnel |
| There can be no assurance that the Company will be able to compete effectively against other existing practices or against new single or multi-specialty dental practices that enter its markets, or to compete against such practices in the recruitment and retention of qualified dentists, specialists, hygienists and other personnel |
| The market price of the Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results of the Company or its competitors, changes in earnings estimates by analysts, developments in the industry or changes in general economic conditions |