22
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23367
-------
BIRNER DENTAL MANAGEMENT SERVICES, INC.
(Exact name of registrant as specified in its charter)
------------------------------------------------------
COLORADO 84-1307044
(IRS Employer
(State or other jurisdiction of incorporation or organization)
--------------------------------------------------------------
Identification No.)
-------------------
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
(Address of principal executive offices) (Zip Code)
---------------------------------------- ----------
(303) 691-0680
(Registrant's telephone number, including area code)
----------------------------------------------------
N/A
(Former name, former address and former fiscal year, if changed since last
--------------------------------------------------------------------------
report)
-------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer Accelerated filer Non-accelerated filer X
-
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of May 10, 2006
Common Stock, without par value 2,328,681*
------------------------------- ----------
* On July 13, 2005, the Company announced that its Board of Directors had
declared a 2-for-1 stock split of its Common Stock. The 2-for-1 stock split,
which was effected as a stock dividend, was distributed on August 8, 2005 to
shareholders of record at the close of business on August 1, 2005. The stock
split increased the number of shares outstanding on August 8, 2005 from
1,210,295 to 2,420,590. All share and earnings per share calculations for all
periods in this document have been restated to reflect the effect of the stock
split.
1
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
----------------------------------
Item 1. Financial Statements Page
----
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2005
and March 31, 2006 3
Unaudited Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2005 and 2006 4
Unaudited Condensed Consolidated Statements of Shareholders' Equity as of
March 31, 2006 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2006 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
-------------------------------
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 5. Other Information 21
Item 6. Exhibits 22
Signatures 23
2
------
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
ASSETS 2005 2006
------------- ------------
** (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 921,742 $ 820,311
Accounts receivable, net of allowance for doubtful
accounts of $261,031 and $251,423, respectively 3,215,369 3,685,600
Deferred tax asset 160,411 189,413
Prepaid expenses and other assets 605,599 701,926
----------- -----------
Total current assets 4,903,121 5,397,250
PROPERTY AND EQUIPMENT, net 3,939,452 4,802,901
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,036,652 12,856,904
Deferred charges and other assets 154,245 181,810
----------- -----------
Total assets $22,033,470 $23,238,865
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,065,076 $ 1,886,552
Accrued expenses $ 1,110,526 $ 1,299,938
Accrued payroll and related expenses $ 1,502,877 $ 2,447,105
Income taxes payable 175,259 448,056
Current maturities of long-term debt 145,150 134,745
----------- -----------
Total current liabilities 4,998,888 6,216,396
LONG-TERM LIABILITIES:
Deferred tax liability, net 750,346 779,445
Long-term debt, net of current maturities 2,887,166 2,200,000
Other long-term obligations 195,723 195,527
----------- -----------
Total liabilities 8,832,123 9,391,368
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding - -
Common Stock, no par value, 20,000,000 shares
authorized; 2,343,675 and 2,380,261 shares issued and
outstanding, respectively 9,628,457 9,800,416
Deferred equity compensation (648,240) (567,210)
Retained earnings 4,221,130 4,614,291
----------- -----------
Total shareholders' equity 13,201,347 13,847,497
----------- -----------
Total liabilities and shareholders' equity $22,033,470 $23,238,865
=========== ===========
** Derived from the Company's audited consolidated balance sheet at December 31, 2005.
The accompanying notes are an integral part of these condensed consolidated balance sheets.
3
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
------------------------
2005 2006
---- ----
NET REVENUE: $9,367,731 $10,140,029
DIRECT EXPENSES:
Clinical salaries and benefits 3,486,150 3,688,987
Dental supplies 533,338 575,637
Laboratory fees 628,496 641,896
Occupancy 960,216 1,056,733
Advertising and marketing 259,442 208,954
Depreciation and amortization 424,372 479,775
General and administrative 980,113 1,190,869
7,272,127 7,842,851
---------- -----------
Contribution from dental offices 2,095,604 2,297,178
---------- -----------
CORPORATE EXPENSES:
General and administrative
(includes $81,030 of deferred equity
compensation expense and $87,745
related to stock-based
compensation expense in the three
months ended March 31, 2006) 900,488 1,081,063
Depreciation and amortization 36,674 34,196
---------- -----------
Operating income 1,158,442 1,181,919
Interest expense (income), net (7,632) 39,620
---------- -----------
Income before income taxes 1,166,074 1,142,299
Income tax expense 466,431 439,974
---------- -----------
Net income $ 699,643 $ 702,325
========== ===========
Net income per share of Common Stock - Basic $ 0.29 $ 0.30
========== ===========
Net income per share of Common Stock - Diluted $ 0.26 $ 0.27
========== ===========
Cash dividends per share of Common Stock $ 0.10 $ 0.13
========== ===========
Weighted average number of shares of
Common Stock and dilutive securities:
Basic 2,380,196 2,372,506
========== ===========
Diluted 2,621,046 2,584,713
========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Deferred
---------------------- Equity Retained Shareholders'
Shares Amount Compensation Earnings Equity
--------- ---------- ------------ ---------- -----------
BALANCES, December 31, 2005 2,343,675 $9,628,457 ($648,240) $4,221,130 $13,201,347
Common Stock options
exercised 37,733 87,411 - - 87,411
Purchase and retirement
of Common Stock (1,147) (20,278) - - (20,278)
Tax benefit of Common Stock
options exercised - 17,081 - - 17,081
Dividends declared on
Common Stock - - - (309,164) (309,164)
Stock-based compensation
expense - 87,745 - - 87,745
Amortization of deferred
equity compensation - - 81,030 - 81,030
Net income - - - 702,325 702,325
--------- ---------- ---------- ---------- -----------
BALANCES, March 31, 2006 2,380,261 $9,800,416 ($567,210) $4,614,291 $13,847,497
========= ========== ========== ========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Page 1 of 2
===========
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
2005 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 699,643 $ 702,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 461,046 513,971
Stock compensation expense - 87,745
Loss on disposition of property 424 -
Provision for doubtful accounts 96,791 224,667
Provision for deferred income taxes - 97
Amortization of debt issuance costs 882 -
Amortization of deferred equity compensation - 81,030
Changes in assets and liabilities net of effects
from acquisitions:
Accounts receivable (819,624) (694,898)
Prepaid expenses and other assets 92,574 (96,327)
Deferred charges and other assets - (27,565)
Accounts payable 321,105 (178,524)
Accrued expenses (381,926) 115,372
Accrued payroll and related expenses 611,878 944,228
Income taxes payable 466,431 272,797
Other long-term obligations (640) (196)
------------ ------------
Net cash provided by operating activities 1,548,584 1,944,722
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (158,748) (682,917)
Development of new dental centers (60,060) (514,755)
------------ ------------
Net cash used in investing activities (218,808) (1,197,672)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances - line of credit 4,350,000 4,023,409
Repayments - line of credit (4,675,000) (4,677,014)
Repayment of long-term debt (40,646) (43,966)
Proceeds from exercise of Common Stock options 100,271 87,411
Purchase and retirement of Common Stock (669,010) (20,278)
Tax benefit of Common Stock options exercised - 17,081
Common Stock cash dividends (90,638) (235,124)
------------ ------------
Net cash used in financing activities (1,025,023) (848,481)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 304,753 (101,431)
CASH AND CASH EQUIVALENTS, beginning of period 756,181 921,742
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,060,934 $ 820,311
=========== ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
2005 2006
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $25,677 $77,139
Cash paid during the year for income taxes $ - $ -
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2006
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by Birner Dental
Management Services, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures included herein are adequate to make the
information presented not misleading. A description of the Company's accounting
policies and other financial information is included in the audited consolidated
financial statements as filed with the Securities and Exchange Commission in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of March 31, 2006 and the results of
operations and cash flows for the periods presented. All such adjustments are
of a normal recurring nature. The results of operations for three months ended
March 31, 2006 are not necessarily indicative of the results that may be
achieved for a full fiscal year and cannot be used to indicate financial
performance for the entire year.
On July 13, 2005, the Company announced that its Board of Directors had declared
a 2-for-1 stock split of its common stock. The 2-for-1 stock split, which was
effected as a dividend, was distributed on August 8, 2005 to shareholders of
record at the close of business on August 1, 2005. The stock split increased
the number of shares outstanding on August 8, 2005 from 1,210,295 to 2,420,590.
All shares and earnings per share calculations for all periods in this document
have been restated to reflect the effect of the stock split.
(2) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Intangible Assets
The Company's dental practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
Offices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed, based on estimated fair market values. Costs of acquisition
in excess of the net estimated fair value of tangible assets acquired and
liabilities assumed are allocated to the Management Agreement. The Management
Agreement represents the Company's right to manage the Offices during the
40-year term of the agreement. The assigned value of the Management Agreement is
amortized using the straight-line method over a period of 25 years.
Amortization was $194,749 and $187,610 for the three months ended March 31, 2006
and 2005, respectively.
The Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default by the Company.
In the event that facts and circumstances indicate that the carrying value of
long-lived and intangible assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation were required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or undiscounted cash flow value would be required.
Stock Options
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Share-Based Payments." This standard revises
SFAS 123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees."
Under SFAS 123(R), the Company is required to measure the cost of employee
services received in exchange for stock options and similar awards based on the
grant date fair value of the award and recognize this cost in the income
statement over the period during which an employee is required to provide
service in exchange for the award.
8
The Company adopted SFAS 123(R) using the modified prospective method. Under
this transition method, stock-based compensation expense for the three months
ended March 31, 2006 includes: (i) compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provision of SFAS 123; and (ii) compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provision of SFAS 123(R). The
Company recognizes compensation expense on a straight line basis over the
requisite service period of the award. Total stock-based compensation expense
included in the Company's statement of income for the three months ended March
31, 2006 was approximately $88,000 and was recorded as a component of corporate
general and administrative expense. In accordance with the modified prospective
method, financial results for prior periods have not been restated.
The Black-Scholes option-pricing model was used to estimate the option fair
values. The option-pricing model requires a number of assumptions, of which the
most significant are, expected stock price volatility, the expected pre-vesting
forfeiture rate, expected dividend rate and the expected option term (the amount
of time from the grant date until the options are exercised or expire). Expected
volatility was calculated based upon actual historical stock price movements
over the most recent periods ending March 31, 2006 equal to the expected option
term. Expected pre-vesting forfeitures were estimated based on actual historical
pre-vesting forfeitures over the most recent periods ending March 31, 2006 for
the expected option term. The expected option term was calculated using the
"simplified" method permitted by SAB 107.
Prior to January 1, 2006, the Company accounted for stock options using the
intrinsic value method wherein compensation expense is recognized on stock
options granted only for the excess of the market price of the Company's Common
Stock over the option exercise price on the date of grant. All options of the
Company are granted at amounts equal to or higher than the fair value of the
Common Stock, so no compensation expense is recorded.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income and net income per share
of Common Stock for the three months ended March 31, 2005 would have been
reported as follows:
Three Months Ended
March 31, 2005
--------------------
Net income, as reported $ 699,643
Stock-based compensation included in net income -
Fair value of stock-based compensation, net of income taxes (68,729)
--------------------
Pro forma net income $ 630,914
====================
Net income per share of Common Stock - Basic:
As reported $ 0.29
Stock-based compensation included in net income -
Fair value of stock-based compensation, net of income taxes (0.03)
--------------------
Pro forma $ 0.26
====================
Net income per share of Common Stock - Diluted:
As reported $ 0.26
Stock-based compensation included in net income -
Fair value of stock-based compensation, net of income taxes (0.03)
--------------------
Pro forma $ 0.23
====================
Pro-forma compensation expense under SFAS 123, among other computational
differences, does not consider potential pre-vesting forfeitures. Because of
these differences, the pro-forma stock compensation expense presented above for
the prior quarterly period ended March 31, 2005 under SFAS 123 and the stock
compensation expense recognized during the current quarterly period ended March
31, 2006 under SFAS 123(R) are not directly comparable. In accordance with the
modified prospective transition method of SFAS 123(R), the prior comparative
quarterly results have not been restated.
9
(3) EARNINGS PER SHARE
------------------
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share."
Three Months Ended March 31,
--------------------------------------------------------------------------------
2005 2006
--------------------------------------- ---------------------------------------
Income Shares Per Share Amount Income Shares Per Share Amount
-------- --------- ------------------ -------- --------- ------------------
Basic EPS:
Net income available to
shares of Common
Stock $699,643 2,380,196 $ 0.29 $702,325 2,372,506 $ 0.30
Effect of dilutive shares of
Common Stock from stock options
And warrants - 240,850 ($0.03) - 212,207 ($0.03)
-------- --------- ------------------ -------- --------- ------------------
Diluted EPS:
Net income available to
shares of Common
Stock $699,643 2,621,046 $ 0.26 $702,325 2,584,713 $ 0.27
======== ========= ================= ======== ========= ==================
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the three months ended March 31, 2005
and 2006 relates to the effect of 240,850 and 212,207, respectively, of dilutive
shares of Common Stock from stock options, which are included in total shares
for the diluted calculation. For the three months ended March 31 , 2006, stock
options to purchase 60,000 shares of the Company's Common Stock were not
included in the computation of dilutive income per share because their effect
was anti-dilutive.
(4) STOCK-BASED COMPENSATION PLANS
--------------------------------
At the Company's June 2005 annual meeting of shareholders, the shareholders
approved the 2005 Equity Incentive Plan ("2005 Plan"), which reserved 300,000
shares of Common Stock for issuance. The 2005 Plan provides for the grant of
incentive stock options, restricted stock, restricted stock units and stock
grants to employees (including officers and employee-directors) and
non-statutory stock options to employees, directors and consultants. The
objectives of this plan include attracting and retaining the best personnel,
providing for additional performance incentives by providing employees with the
opportunity to acquire Common Stock. As of March 31, 2006, there were 67,800
shares available for issuance under the 2005 Plan. The option price of the stock
options issued under the 2005 Plan is equal to the market price, or market price
plus 10% for shareholders with 10% or more control of the Company, at the date
of grant. These stock options expire seven years, or five years for shareholders
with 10% or more control of the Company, from the date of the grant and vest
annually over a service period ranging from three to five years. The 2005 Plan
is administered by a committee of two or more outside directors from the
Company's Board of Directors (the "Committee"). The Committee determines the
eligible individuals to whom awards under the 2005 Plan may be granted, as well
as the time or times at which awards will be granted, the number of shares
subject to awards to be granted to any eligible individual, the life of any
award, and any other terms and conditions of the grant in addition to those
contained in the 2005 Plan.
The Employee Stock Option Plan (the ''Employee Plan'') was adopted by the Board
of Directors effective as of October 30, 1995, and as amended on September 4,
1997, February 28, 2002, and June 8, 2004, reserved 479,250 shares of Common
Stock for issuance. The Employee Plan provided for the grant of incentive stock
options to employees (including officers and employee-directors) and
non-statutory stock options to employees, directors and consultants. The
Employee Plan expired by its terms on October 30, 2005. As of March 31, 2006
there were 317,983 vested options outstanding and 115,666 unvested options
outstanding under the Employee Plan.
The Dental Center Stock Option Plan ("Dental Center Plan") was adopted by the
Board of Directors effective as of October 30, 1995, and as amended on September
4, 1997, reserved 160,475 shares of Common Stock for issuance. The Dental Center
Plan provided for the grant of non-statutory stock options to professional
corporations that operate the Offices ("P.C.s") that are parties to Management
Agreements with the Company, and to dentists or dental hygienists who are either
employed by or an owner of the P.C.s. The Dental Center Plan expired by its
terms on October 30, 2005. As of March 31, 2006 there were 14,000 vested options
outstanding and no unvested options outstanding under the Dental Center Plan.
10
The Company uses the Black-Scholes pricing model to estimate the fair value of
each option granted with the following weighted average assumptions:
Three Months Ended
March 31,
---------------------
Valuation Assumptions (1) 2005 2006
------------------------- --------- ---------
Expected life (2) 3.4 years 5.0 years
Risk-free interest rate (3) 3.54% 4.72%
Expected volatility (4) 46% 50%
Expected dividend yield 3.4% 2.9%
_____________________________
(1) Beginning on the date of adoption of SFAS 123(R), on January 1, 2006,
forfeitures are estimated based on historical experience. Prior to the of
adoption of SFAS 123(R), forfeitures were recorded as they occurred.
(2) The expected life of stock options is estimated using the simplified-method
calculation.
(3) The risk-free interest rate is based on U.S. Treasury bills whose term is
consistent with the expected life of the stock options.
(4) The expected volatility is estimated based on historical and current stock
data for the Company.
A summary of option activity as of March 31, 2006, and changes during the three
months then ended, is presented below:
Weighted- Weighted-Average Aggregate
Number of Average Range of Remaining Contractual Intrinsic Value
Options Exercise Price Exercise Prices Term (years) (thousands)
Outstanding at December 31, 2005 655,382 $10.42 $ 1.00 - $19.37
Granted 3,200 $17.75 $17.75 - $17.75
Exercised (37,733) $ 2.31 $ 1.00 - $ 9.66
Forfeited (1,000) $17.61 $17.61 - $17.61
Outstanding at March 31, 2006 619,849 $10.94 $ 4.80 - $19.37 4.1 $ 4,238
======= ====== =============== === ========
Exercisable at March 31, 2006 331,983 $ 6.87 $ 4.80 - $ 9.75 2.6 $ 3,562
======= ====== =============== === ========
The weighted average grant date fair value of options granted was $6.87 per
option and $2.86 per option during the three months ended March 31, 2006 and
2005, respectively. Net cash proceeds from the exercise of stock options during
the three months ended March 31, 2006 and 2005 were $87,411 and $100,271,
respectively. The associated income tax benefit from stock options exercised
during the three months ended March 31 2006 and 2005 was $17,081 and $55,198,
respectively. As of the date of exercise, the total intrinsic value of options
exercised during the three months ended March 31, 2006 and 2005 was $634,761 and
$144,497, respectively. As of March 31, 2006, there was $1.3 million of total
unrecognized compensation expense related to non-vested stock options, which is
expected to be recognized over a weighted average period of 1.71 years.
(5) RESTRICTED STOCK GRANT
----------------------
On July 1, 2005, the Company granted 60,000 shares of restricted Common Stock to
the Company's Chairman and Chief Executive Officer (the "Employee"). In
connection with the grant of restricted stock, the Company agreed to reimburse
the Employee an amount equal to the tax liability associated with the grant.
Such reimbursement was made by the Company and totaled approximately $586,000
which was recognized as an expense during the third quarter of 2005. As of March
31, 2006, there was approximately $567,000 of unrecognized compensation expense
related to the restricted stock grant. The expense is expected to be recognized
over a period of 1.75 years.
A summary of the vesting status of the shares of restricted stock as of March
31, 2006, and the changes during the three months then ended, is presented
below:
11
Number of Weighted-Average
Restricted Shares Grant-Date Fair Value
================== =====================
Non-vested at December 31, 2005 60,000 $ 13.51
Granted - -
Vested (20,000) 13.51
Forfeited - -
------ -------
Non-vested at March 31, 2006 40,000 $ 13.51
====== =======
(6) DIVIDENDS
---------
On March 9, 2004, the Company announced a quarterly cash dividend of $.0375 per
share. On February 10, 2005, the Company announced an increase in the amount of
the quarterly dividend to $.10 per share. On January 10, 2006, the Company
announced an increase in the amount of the quarterly dividend to $.13 per share.
The payment of dividends in the future is subject to the discretion of the
Company's Board of Directors, and various factors may prevent the Company from
paying dividends. Such factors include the Board of Directors' assessment of
financial position, capital requirements and liquidity, the existence of a stock
repurchase program, loan agreement restrictions, results of operations and such
other factors the Company's Board of Directors may consider relevant.
(7) LINE OF CREDIT
--------------
On April 25, 2006, the Company amended its bank line of credit ("Credit
Facility"). The amended Credit Facility allows the Company to borrow, on a
revolving basis, an aggregate principal amount not to exceed $7.0 million (an
increase from $5.0 million) at either, or a combination of, the lender's Base
Rate or at LIBOR plus a LIBOR rate margin, at the Company's option. The lender's
Base Rate computes interest at the higher of the lender's "prime rate" or the
Federal Funds Rate plus one-half percent (0.5%). The LIBOR option computes
interest at the LIBOR rate as of the date such LIBOR Rate loan was made plus a
LIBOR rate margin of 1.50%. A commitment fee of 0.25% on the average daily
unused amount of the revolving loan commitment during the preceding quarter is
also assessed. The Company may prepay any Base Rate loan at any time and any
LIBOR rate loan upon not less than three business days prior written notice
given to the lender, but the Company is responsible for any loss or cost
incurred by the lender in liquidating or employing deposits required to fund or
maintain the LIBOR rate loan. The amended Credit Facility expires on May 31,
2008. At March 31, 2006, the Company had $2.2 million outstanding and $2.8
million available for borrowing under the Credit Facility. The entire $2.2
million outstanding was borrowed under the LIBOR rate option. The Credit
Facility requires the Company to maintain certain financial ratios on an ongoing
basis. At March 31, 2006, the Company was in full compliance with all of its
covenants under the Credit Facility.
(8) CAPITAL COMMITMENTS
--------------------
At March 31, 2006, the Company had budgeted capital commitments for the next 12
months of approximately $1.3 million, which includes the development of three
dental practices developed internally ("de novo Offices"), and the remodel and
expansion of one existing dental practice ("Office"). 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
retained earnings as of March 31, 2006 were approximately $4.6 million and the
Company had a working capital deficit on that date of approximately $819,000.
During the quarter ended March 31, 2006, the Company had capital expenditures of
$1.2 million and purchased approximately $20,000 of Common Stock while
decreasing total bank debt by $654,000.
12
------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
--------------
Forward-Looking Statements
The statements contained in this report that are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements, other than statements of
historical facts, included in this report that address activities, events or
developments that we expect, believe, intend or anticipate will or may occur in
the future, are forward-looking statements. When used in this document, the
words "estimate," "believe," anticipate," "project" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. These
forward-looking statements include statements in this Item 2, "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
("Offices") and the successful integration of such Offices into the Company's
network, recruitment of additional dentists, funding of the Company's expansion,
capital expenditures, payment or nonpayment of dividends and cash outlays for
income taxes and other purposes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
the general economy of the United States and the specific markets in which the
Company's Offices are located or are proposed to be located, trends in the
health care, dental care and managed care industries, as well as the risk
factors set forth in Item 1A. "Risk Factors" in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, this report, and other
factors as may be identified from time to time in the Company's filings with the
Securities and Exchange Commission or in the Company's press releases.
General
The following discussion relates to factors that have affected the results of
operations and financial condition of the Company for the three months ended
March 31, 2005 and 2006. This information should be read in conjunction with the
Company's condensed consolidated financial statements and related notes thereto
included elsewhere in this report.
Overview
The Company was formed in May 1995 and currently manages 58 Offices in Colorado,
New Mexico and Arizona staffed by 81 general dentists and 26 specialists. The
Company derives all of its Revenue (as defined below) from its Management
Agreements with professional corporations ("P.C.s"), which conduct the practice
at each Office. In addition, the Company assumes a number of responsibilities
when it acquires a new practice or develops a de novo Office, which are set
forth in a Management Agreement, as described below.
The Company was formed with the intention of becoming the leading provider of
business services to dental practices in Colorado. The Company's growth and
success in the Colorado market led to its expansion into the New Mexico and
Arizona markets. The Company's growth strategy is to focus on greater
utilization of existing physical capacity through recruiting more dentists and
support staff and through development of de novo Offices and selective
acquisitions.
Critical Accounting Policies
The Company's critical accounting policies are set forth in its Annual Report on
Form 10-K for the year ended December 31, 2005. There have been no changes to
these policies since the filing of that report.
Components of Revenue and Expenses
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from dental plans,
other third-party payors and patients for dental services rendered at the
Offices. The Company's Revenue is derived principally from fee-for-service
revenue and managed dental care revenue. Fee-for-service revenue consists of
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 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.
13
Net revenue represents Revenue less amounts retained by the Offices. The amounts
retained by the Offices represent amounts paid as compensation to employed
dentists and hygienists. The Company's net revenue is dependent on the Revenue
of the Offices. 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, advertising, 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 and advertising programs, (iii) negotiating
for the purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of
non-dental personnel, (vii) billing and collecting certain fees for dental
services provided by the Offices, (viii) arranging for certain legal and
accounting services, and (ix) negotiating with third party payors. Under the
Management Agreements, the P.C. is responsible for, among other things (i)
supervision of all dentists and dental hygienists, (ii) complying with all laws,
rules and regulations relating to dentists and dental hygienists, and (iii)
maintaining proper patient records. The Company has made, and intends to make
in the future, loans to P.C.s in Colorado, New Mexico and Arizona to fund their
acquisition of dental assets from third parties in order to comply with the laws
of such states.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at each Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office (other than
dentist and hygienist salaries), (ii) direct costs of all Company employees or
consultants who provide services to or in connection with the Office, (iii)
utilities, janitorial, laboratory, supplies, advertising and other expenses
incurred by the Company in carrying out its obligations under the Management
Agreement, (iv) depreciation expense associated with the P.C.'s assets and the
assets of the Company used at the Office, and the amortization of intangible
asset value relating to the Office, (v) interest expense on indebtedness
incurred by the Company to finance any of its obligations under the Management
Agreement, (vi) general and malpractice insurance expenses, lease expenses and
dentist recruitment expenses, (vii) personal property and other taxes assessed
against the Company's or the P.C.'s assets used in connection with the operation
of the Office, (viii) out-of-pocket expenses of the Company's personnel related
to mergers or acquisitions involving the P.C., (ix) corporate overhead charges
or any other expenses of the Company, including the P.C.'s pro rata share of the
expenses of the accounting and computer services provided by the Company, and
(x) a collection reserve in the amount of 5.0% of Adjusted Gross Center Revenue.
As a result, substantially all costs associated with the provision of dental
services at the Offices are borne by the Company, except for the compensation 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.
Under the Management Agreements, the Company negotiates and administers these
contracts on behalf of the P.C.s. Under a capitated managed dental care
contract, the dental group practice provides dental services to the members of
the dental benefits organization and receives a fixed monthly capitation payment
for each plan member covered for a specific schedule of services regardless of
the quantity or cost of services to the participating dental group practice
obligated to provide them. This arrangement shifts the risk of utilization of
these services to the dental group practice providing the dental services.
Because the Company assumes responsibility under the Management Agreements for
all aspects of the operation of the dental practices (other than the practice of
dentistry) and thus bears all costs of the P.C.s associated with the provision
of dental services at the Offices (other than compensation and benefits of
dentists and hygienists), the risk of over-utilization of dental services at the
Offices under capitated managed dental care plans is effectively shifted to the
Company. In addition, dental group practices participating in a capitated
managed dental care plan often receive supplemental payments for more
complicated or elective procedures. In contrast, under traditional indemnity
insurance arrangements, the insurance company pays whatever reasonable charges
are billed by the dental group practice for the dental services provided. Under
a preferred provider plan, the dental group practice is paid for dental services
provided based on a fee schedule that is a discount to the usual and customary
fees paid under an indemnity insurance agreement.
The Company seeks to increase its fee-for-service business by increasing the
patient volume at existing Offices through effective marketing and advertising
programs and by opening de novo Offices. The Company seeks to supplement this
fee-for-service business with revenue from contracts with capitated managed
dental care plans. Although the Company's fee-for-service business generally is
more profitable than its capitated managed dental care business, capitated
managed dental care business serves to increase facility utilization and dentist
productivity. The relative percentage of the Company's Revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable contract 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.
14
Results Of Operations
For the three months ended March 31, 2006, Revenue increased $1.2 million, or
9.2%, to $14.6 million compared to $13.4 million for the three months ended
March 31, 2005. For the three months ended March 31, 2006, net revenue
increased $772,000, or 8.2%, to $10.1 million compared to $9.4 million for the
three months ended March 31, 2005.
Net income increased 0.4% to $$702,000, or $.27 per share (net of $104,000 of
after-tax stock-based compensation expense versus no such expense in the first
quarter of 2005) compared to $700,000, or $.26 per share for the same period of
2005.
The Company has signed leases for three additional de novo Offices, one in the
Phoenix, Arizona market, one in the Albuquerque, New Mexico market and one in
the Denver, Colorado market. These Offices are projected to open in the second
and third quarters of 2006. The Company opened one de novo Office in the
Phoenix, Arizona market in March 2006.
The Company continues to generate strong cash flow from operations. During the
first three months of 2006, the Company purchased $20,000 of its outstanding
Common Stock, incurred $1.2 million in capital expenditures, paid $235,000 in
dividends, and repaid $44,000 of long term debt while decreasing borrowings
under its bank line of credit ("Credit Facility") by $654,000.
Revenue is total dental group practice revenue generated at the Company's
Offices from professional services provided to its patients. Amounts retained by
dental Offices represents compensation expense to the dentists and hygienists
and is subtracted from total dental group practice revenue to arrive at net
revenue. The Company reports net revenue in its financial statements to comply
with Emerging Issues Task Force Issue No. 97-2, Application of SFAS No. 94
(Consolidation of All Majority Owned Subsidiaries) and APB Opinion No. 16
(Business Combinations) to Physician Practice Management Entities and Certain
Other Entities With Contractual Management Arrangements. Revenue is not a
generally accepted accounting principles measure. The Company discloses Revenue
because it is a critical component for management's evaluation of Office
performance. However, investors should not consider this measure in isolation or
as a substitute for net revenue, operating income, cash flows from operating
activities or any other measure for determining the Company's operating
performance that is calculated in accordance with generally accepted accounting
principles. The following table reconciles Revenue to net revenue.
Three Months Ended
March 31,
--------------------------
2005 2006
----------- ------------
Total dental group practice revenue $13,350,407 $14,579,914
Less - amounts retained by dental Offices (3,982,676) (4,439,885)
----------- -----------
Net revenue $ 9,367,731 $10,140,029
=========== ===========
15
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's condensed consolidated statements of
income. The information contained in the table represents the historical results
of the Company. The information that follows should be read in conjunction with
the Company's condensed consolidated financial statements and related notes
thereto contained elsewhere in this report.
Three Months Ended
March 31,
-------------------
2005 2006
------ ------
NET REVENUE: 100.0% 100.0%
DIRECT EXPENSES:
Clinical salaries and benefits 37.2% 36.4%
Dental supplies 5.7% 5.7%
Laboratory fees 6.7% 6.3%
Occupancy 10.2% 10.4%
Advertising and marketing 2.8% 2.1%
Depreciation and amortization 4.5% 4.7%
General and administrative 10.5% 11.7%
------ ------
77.6% 77.3%
------ ------
Contribution from dental Offices 22.4% 22.7%
CORPORATE EXPENSES:
General and administrative (includes $81,030 of deferred equity
compensation expense and $87,745 related to stock-based
compensation expense in the three months ended March 31, 2006) 9.6% 10.7%
Depreciation and amortization 0.4% 0.3%
------ ------
Operating income 12.4% 11.7%
Interest expense (income), net (0.1)% 0.4%
------ ------
Income before income taxes 12.5% 11.3%
Income tax expense 5.0% 4.3%
------ ------
Net income 7.5% 7.0%
====== ======
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31,
2005:
Net revenue. For the three months March 31, 2006, net revenue increased
$772,000, or 8.2%, to $10.1 million compared to $9.4 million for the three
months ended March 31, 2005. This increase is attributable to an increase in
specialty dentistry revenues of $579,000 and $142,000 from the addition of two
de novo Offices opened since March 31, 2005 and one de novo Office that opened
during the three months ended March 31, 2005.
Clinical salaries and benefits. For the three months ended March 31, 2006,
clinical salaries and benefits increased $203,000, or 5.8%, to $3.7 million
compared to $3.5 million for the three months ended March 31, 2005. This
increase was primarily due to additional employees at the recently opened de
novo Offices and remodeled and expanded Offices as well as annual wage increases
that became effective February 1, 2006. As a percentage of net revenue, clinical
salaries and benefits decreased to 36.4% for the three months ended March 31,
2006 compared to 37.2% for the three months ended March 31, 2005.
Dental supplies. For the three months ended March 31, 2006, dental supplies
increased to $576,000 compared to $533,000 for the three months ended March 31,
2005, an increase of $43,000 or 7.9%. This increase is attributable to increased
production and increased emphasis on specialty dentistry which tends to have
higher dental supply costs. As a percentage of net revenue, dental supplies
remained constant at 5.7% for the three months ended March 31, 2006 and March
31, 2005.
16
Laboratory fees. For the three months ended March 31 2006, laboratory fees
increased to $642,000 compared to $628,000 for the three months ended March 31
2005, an increase of $14,000 or 2.1%. Laboratory fees associated with specialty
dentistry are not as significant, relative to general dentistry, and therefore
this expense increase was minimal relative to the increased production. As a
percentage of net revenue, laboratory fees decreased to 6.3% for the three
months ended March 31, 2006 compared to 6.7% for the three months ended March
31, 2005.
Occupancy. For the three months ended March 31 2006, occupancy expense increased
to $1.1 million compared to $960,000 for the three months ended March 31, 2005,
an increase of $97,000 or 10.1%. This increase was primarily due to the opening
of two de novo Offices since March 2005 and increased rental payments resulting
from the renewal of Office leases at current market rates for Offices whose
leases expired subsequent to the 2005 period. As a percentage of net revenue,
occupancy expense increased to 10.4% for the three months ended March 31 2006
compared to 10.2% for the three months ended March 31, 2005.
Advertising and marketing. For the three months ended March 31 2006, advertising
and marketing decreased to $209,000 compared to $259,000 for the three months
ended March 31, 2005, a decrease of $50,000 or 19.5%. This decrease is
attributable to a shift in the television and print advertising from the
relatively expensive Denver, Colorado market in 2005 to the Albuquerque, New
Mexico and Colorado Springs, Colorado markets in 2006. As a percentage of net
revenue, advertising and marketing decreased to 2.1% for the three months ended
March 31, 2006 compared to 2.8% for the three months ended March 31, 2005.
Depreciation and amortization-Offices. For the three months ended March 31,
2006, depreciation and amortization expenses attributable to the Offices
increased to $480,000 compared to $424,000 for the three months ended March 31,
2005, an increase of $56,000 or 13.1%. The increase in the Company's depreciable
asset base is a result of purchasing tenant improvements and new equipment for
two new de novo Offices, the expansion of two existing Offices and increased
capital purchases for specialty services. As a percentage of net revenue,
depreciation and amortization increased to 4.7% for the three months ended March
31, 2006 compared to 4.5% for the three months ended March 31, 2005.
General and administrative-Offices. For the three months ended March 31, 2006,
general and administrative expenses attributable to the Offices increased to
$1.2 million compared to $980,000 for the three months ended March 31, 2005, an
increase of $211,000 or 21.5%. This increase in general and administrative
expenses is primarily attributable to higher write offs of uncollectible
accounts receivable, increased office supplies and increase in use and gross
receipts tax. As a percentage of net revenue, general and administrative
expenses increased to 11.7% for the three months ended March 31 2006 compared to
10.5% for the three months ended March 31, 2005.
Contribution from dental Offices. As a result of the above, contribution from
dental Offices increased $202,000, or 9.6%, to $2.3 million for the three months
ended March 31, 2006 compared to $2.1 million for the three months ended March
31, 2005. As a percentage of net revenue, contribution from dental offices
increased to 22.7% for the three months ended March 31, 2006 compared to 22.4%
for the three months ended March 31, 2005.
Corporate expenses - general and administrative. For the three months ended
March 31, 2006, corporate expenses - general and administrative increased to
$1.1 million compared to $900,000 for the three months ended March 31, 2005, an
increase of $181,000 or 20.1%. This increase is primarily related to $81,000 of
amortization as a result of 60,000 shares of restricted stock granted on July 1,
2005 to an Employee. The Company recognized approximately $81,000 of deferred
equity compensation expense, before taxes, in each subsequent quarter since the
grant date and will continue to recognize approximately $81,000 per quarter
through the quarter ending December 31, 2007. Also the adoption of SFAS 123(R),
"Share-Based Payments" on January 1, 2006 increased corporate expenses - general
and administrative by approximately $88,000. As a percentage of net revenue,
corporate expenses - general and administrative increased to 10.7% for the three
months ended March 31, 2006 compared to 9.6% for the three months ended March
31, 2005.
Corporate expenses - depreciation and amortization. For the three months ended
March 31, 2006, corporate expenses - depreciation and amortization decreased to
$34,000 compared to $37,000 for the three months ended March 31, 2005, a
decrease of $3,000 or 6.8%. The decrease is related to the decrease in the
Company's depreciable asset base. As a percentage of net revenue, corporate
expenses - depreciation and amortization decreased to 0.3% for the three months
ended March 31, 2006 compared to 0.4% for the three months ended March 31, 2005.
Operating income. As a result of the matters discussed above, the Company's
operating income remained constant at $1.2 million for the three months ended
March 31, 2006 and 2005. As a percentage of net revenue, operating income
decreased to 11.7% for the three months ended March 31, 2006 compared to 12.4%
for the three months ended March 31, 2005.
17
Interest expense/(income), net. For the three months ended March 31, 2006,
interest expense increased to $40,000 compared to ($8,000) for the three months
ended March 31, 2005, an increase of $48,000. This increase in interest expense
is attributable to higher interest expense on the Company's Credit Facility and
lower charges for late payments on customer accounts receivable. As a percentage
of net revenue, interest expense/(income), net, increased to 0.4% for the three
months ended March 31, 2006 compared to (0.1)% for the three months ended March
31, 2005.
Net income. As a result of the above, the Company reported net income of
$702,000 for the three months ended March 31, 2006 compared to net income of
$700,000 for the three months ended March 31, 2005, an increase of $2,000 or
0.4%. Net income for the three months ended March 31, 2006 was net of income
tax expense of $440,000 while net income for the three months ended March 31,
2005 was net of income tax expense of $466,000. Income tax expense for the three
months ended March 31, 2006 was less than income tax expense for the
corresponding quarter of 2005 because the Company currently anticipates a lower
tax rate for its fiscal year ended December 31, 2006 compared to the Company's
tax estimate in the first quarter of 2005. As a percentage of net revenue, net
income decreased to 7.0% for the three months ended March 31, 2006 compared to
7.5% for the three months ended March 31, 2005.
Liquidity and Capital Resources
The Company finances its operations and growth through a combination of cash
provided by operating activities, the Credit Facility and, from time to time,
seller notes issued in dental practice acquisitions. As of March 31, 2006, the
Company had a working capital deficit of approximately $819,000.
Net cash provided by operating activities was approximately $1.9 million and
$1.5 million for the three months ended March 31, 2006 and 2005, respectively.
During the 2006 period, excluding net income and after adding back non-cash
items, the Company's cash provided by operating activities consisted primarily
of an increase in accounts payable and accrued expenses of approximately
$881,000 and an increase in income taxes payable of approximately $273,000,
offset by an increase in prepaid expenses and other assets of approximately
$96,000, an increase in accounts receivable of approximately $695,000 (primarily
due to higher Revenue) and an increase in deferred charges and other assets of
approximately $28,000. During the 2005 period, excluding net income and after
adding back non-cash items, the Company's cash provided by operating activities
consisted primarily of an increase in accounts payable and accrued expenses of
approximately $551,000, an increase in income taxes payable of approximately
$466,000 and a decrease in prepaid expenses and other assets of approximately
$93,000, partially offset by an increase in accounts receivable of approximately
$820,000 (primarily due to higher Revenue).
Net cash used in investing activities was approximately $1.2 million and
$219,000 for the three months ended March 31, 2006 and 2005, respectively. For
the three months ended March 31, 2006, the Company invested approximately
$683,000 in the purchase of additional property and equipment and approximately
$515,000 in the development of de novo Offices. For the three months ended
March 31, 2005, approximately $159,000 was invested in the purchase of
additional property and equipment and $60,000 in the development of de novo
Offices.
Net cash used in financing activities was approximately $848,000 for the three
months ended March 31, 2006 and $1.0 million for the three months ended March
31, 2005. During the three months ended March 31, 2006, net cash used in
financing activities was comprised of approximately $654,000 used to pay down
the Company's Credit Facility, approximately $20,000 used in the purchase and
retirement of Common Stock, approximately $44,000 for the repayment of long-term
debt and approximately $235,000 for the payment of dividends, partially offset
by approximately $87,000 in proceeds from the exercise of Common Stock options
and $17,000 in tax benefit of Common Stock options exercised. During the three
months ended March 31, 2005, net cash used in financing activities was comprised
of approximately $325,00 used to pay down the Company's Credit Facility,
approximately $669,000 used in the purchase and retirement of Common Stock,
approximately $91,000 for the payment of dividends and approximately $41,000 for
the repayment of seller notes, partially offset by approximately $100,000 in
proceeds from the exercise of Common Stock options.
On April 25, 2006, the Company amended the Credit Facility. The amended Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $7.0 million (an increase from $5.0 million) at
either, or a combination of, the lender's Base Rate or at LIBOR plus a LIBOR
rate margin, at the Company's option. The lender's Base Rate computes interest
at the higher of the lender's "prime rate" or the Federal Funds Rate plus
one-half percent (0.5%). The LIBOR option computes interest at the LIBOR rate
as of the date such LIBOR rate loan was made plus a LIBOR rate margin of 1.50%.
A commitment fee of 0.25% on the average daily unused amount of the Revolving
Loan commitment during the preceding quarter is also assessed. The Company may
prepay any Base Rate loan at any time and any LIBOR rate loan upon not less than
three business days prior written notice given to the lender, but the Company
will be responsible for any loss or cost incurred by the lender in liquidating
or employing deposits required to fund or maintain the LIBOR rate loan. The
amended Credit Facility expires on May 31, 2008. At March 31, 2006, the Company
had $2.2 million outstanding and $2.8 million available for borrowing under the
Credit Facility. The entire $2.2 million outstanding was borrowed under the
LIBOR rate option. The Credit Facility requires the Company to maintain certain
financial ratios on an ongoing basis. At March 31, 2006, the Company was in
full compliance with all of its covenants under the Credit Facility.
18
At March 31, 2006, the Company had budgeted capital commitments for the next 12
months of approximately $1.3 million, which includes the development of three de
novo Offices, and the remodeling of one existing Office. The Company's retained
earnings as of March 31, 2006 were approximately $4.6 million. The Company
expects increased costs over the next 12 to 18 months as it prepares to comply
with Sarbanes-Oxley Act Section 404.
The Company's earnings before interest, taxes, depreciation, amortization and
non cash expense associated with stock-based compensation ("EBITDA") increased
$245,000, or 15.1% to $1.9 million for the three months ended March 31, 2006
compared to $1.6 million for the corresponding three month period in 2005.
Although EBITDA is not a generally accepted accounting principles ("GAAP")
measure of performance or liquidity, the Company believes that it may be useful
to an investor in evaluating its performance. However, investors should not
consider these measures in isolation or as a substitute for operating income,
cash flows from operating activities or any other measure for determining the
Company's operating performance or liquidity that is calculated in accordance
with GAAP. In addition, because EBITDA is not calculated in accordance with
GAAP, it may not necessarily be comparable to similarly titled measures employed
by other companies. A reconciliation of EBITDA can be made by adding
depreciation and amortization expense - offices, depreciation and amortization
expense - corporate, amortization of equity compensation, stock-based
compensation related to SFAS 123(R), interest expense/(income), net and income
tax expense to net income as in the table belowBeginning with this report and in
future reports, the Company intends to include stock-based compensation expense
and amortization of deferred equity compensation expense as part of the
reconciliation of EBITDA.
Three Months Ended March 31,
----------------------------
2005 2006
----------- ----------
RECONCILIATION OF EBITDA:
Net income $ 699,643 $ 702,325
Depreciation and amortization - Offices 424,372 479,775
Depreciation and amortization - Corporate 36,674 34,196
Amortization of deferred equity compensation expense - 81,030
Stock-based compensation expense related to
SFAS 123 (R) - 87,745
Interest expense/(income), net (7,632) 39,620
Income tax expense 466,431 439,974
----------- ----------
EBITDA $ 1,619,488 $1,864,665
=========== ==========
As of March 31, 2006, the Company had the following known contractual
obligations:
Payments due by Period
----------------------------------------------------------------
Total Less than 1 year 1-3 years 3-5 years More than 5 years
---------- ---------------- --------- --------- -----------------
Long-Term Debt Obligations 2,334,745 134,745 2,200,000 - -
Operating Lease Obligations 8,432,168 2,847,371 3,739,402 1,669,877 175,518
Other Long-Term Liabilities
Reflected on the
Balance Sheet Under GAAP 238,826 43,300 108,486 84,344 2,696
---------- --------- --------- --------- -------
Total 11,005,739 3,025,415 6,047,888 1,754,221 178,214
========== ========= ========= ========= =======
19
The Company from time to time may purchase its Common Stock on the open market.
The shares purchased and the purchase price per share for transactions prior to
August 1, 2005 have been adjusted to reflect the 2-for-1 stock split. During
2003, the Company, in 84 separate transactions, purchased 592,390 shares of its
Common Stock for total consideration of approximately $3.9 million at prices
ranging from $4.77 to $7.10 per share. During 2004, the Company, in seven
separate transactions, purchased 108,000 shares of its Common Stock for total
consideration of approximately $778,000 at prices ranging from $6.33 to $9.25
per share. During 2005, the Company, in 40 separate transactions, purchased
311,961 shares of its Common Stock for total consideration of approximately $4.3
million at prices ranging from $9.00 to $19.31 per share. In January 2005, the
Company purchased 40,000 shares of its Common Stock through a private
transaction that was approved by the Board of Directors. On March 17, 2005, the
Board of Directors authorized the Company to increase by $500,000 the amount
available to make open market purchases of its Common Stock. In April 2005, the
Company purchased 127,364 of Common Stock in a private transaction that was
previously approved by the Board of Directors. On September 12, 2005, the Board
of Directors authorized the Company to increase by $1.0 million the amount
available to make open market purchases of its Common Stock. On November 28,
2005, the Board of Directors authorized the Company to increase by an additional
$1.5 million the amount available to make open market purchases of its Common
Stock. During the three month period ended March 31, 2006, the Company, in five
separate transactions, purchased 1,147 shares of its Common Stock for total
consideration of approximately $20,000 at prices ranging from $17.20 to $18.10
per share. As of March 31, 2006, approximately $1.1 million of the previously
authorized amount was available for open-market purchases. There is no
expiration date on these plans. Such purchases may be made from time to time as
the Company's management deems appropriate.
On April 13, 2006, the Company agreed to purchase in a private transaction,
54,250 shares of its Common Stock from three of its executive officers for
$15.00 per share. This purchase, of approximately $814,000, was financed with
the Company's bank line of Credit. This transaction was negotiated on behalf of
the Company by its independent Board members. As a private transaction, the
purchase of the 54,250 shares was not counted against the amount available to
the Company for public purchases under its announced stock repurchase program.
The Company believes that cash generated from operations and borrowings under
its Credit Facility will be sufficient to fund its anticipated working capital
needs, capital expenditures and dividend payments for at least the next 12
months. In order to meet its long-term liquidity needs, the Company may issue
additional equity and debt securities, subject to market and other conditions.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company. The failure to obtain 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in interest rates. Historically, and as of
March 31, 2006, the Company has not used derivative instruments or engaged in
hedging activities.
Interest Rate Risk. The interest payable on the Credit Facility is variable
based upon the lender's Base Rate and the LIBOR rate and, therefore, is affected
by changes in market interest rates. At March 31, 2006, the Company had $0
outstanding with an interest rate of 7.75% under the Base Rate option and $2.2
million outstanding with an interest rate of 6.17% under the LIBOR rate option.
The Company does not believe that reasonably possible near-term changes in
interest rates will result in a material effect on future earnings, fair values
or cash flows of the Company. The Company estimates that a 1.0% increase in the
Company's interest rate would have resulted in additional interest expense of
approximately $6,400 for the three months ended March 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------------------
The effectiveness of the Company's or any system of disclosure controls and
procedures is subject to certain limitations, including the exercise of judgment
in designing, implementing and evaluating the controls and procedures, the
assumptions used in identifying the likelihood of future events, and the
inability to eliminate misconduct completely. As a result, there can be no
assurance that the Company's disclosure controls and procedures will detect all
errors or fraud. By their nature, the Company's or any system of disclosure
controls and procedures can provide only reasonable assurance regarding
management's control objectives.
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
evaluated the design and operation of its disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
or the "Exchange Act") as of March 31, 2006. On the basis of this review, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures are
designed, and are effective, to give reasonable assurance that the information
required to be disclosed by the Company in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and to ensure that information required to be disclosed in the
reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, in a manner that allows timely decisions regarding required
disclosure. There were no changes in the Company's internal controls over
financial reporting that occurred in the first quarter of 2006 that materially
affected, or were reasonably likely to materially affect, its internal control
over financial reporting.
20
PART II. OTHER INFORMATION
-----------------------------
ITEM 1. LEGAL PROCEEDINGS
--------------------------
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 1A. RISK FACTORS
----------------------
There have been no material changes in our risk factors from those disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
---------------------------------------------------------
The following chart provides information regarding Common Stock purchases by the
Company during the period January 1, 2006 through March 31, 2006.
ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------
Total Number Approximate
Of Shares Dollar Value
Purchased as Of Shares That
Part of May Yet Be
Publicly Purchased
Total Number Average Price Announced Under the
Of Shares Paid Plans or Plans or
Period Purchased per Share Programs Programs
------------------------------------------ ---------------- -------------------------- ------------- ---------------
January 1, 2006 through January 31, 2006 - $ - - $1,150,832
February 1, 2006 through February 28, 2006 - $ - - $1,150,832
March 1, 2006 through March 31, 2006 1,147 $ 17.68 1,147 $1,130,552
------ -----
Total 1,147 $ 17.68 1,147
The purchases of 1,147 shares of Common Stock in March 2006 were made through
open market transactions that were made pursuant to publicly announced plans
which were approved by the Board of Directors. As of March 31, 2006, there was
approximately $1.1 million available for the purchase of the Company's Common
Stock under publicly announced plans which have been approved by the Board of
Directors. There is no expiration date on these plans. Such purchases may be
made from time to time, as the Company's management deems appropriate.
ITEM 5. OTHER INFORMATION
----------------------------
On July 13, 2005, the Company announced that its Board of Directors had declared
a 2-for-1 stock split of its common stock. The 2-for-1 stock split, which was
effected as a stock dividend, was distributed on August 8, 2005 to shareholders
of record at the close of business on August 1, 2005. The stock split increased
the number of shares outstanding from 1,210,295 on August 8, 2005 to 2,420,590.
All shares and earnings per share calculations for all periods in this report
are restated to reflect the effect of the stock split.
On April 25, 2006, the Company amended its Credit Facility. The amended Credit
Facility increases the amount the Company may borrow, on a revolving basis, from
$5.0 million to $7.0 million and extends the expiration date of the credit
agreement from May 31, 2007 to May 31, 2008.
21
------
ITEM 6. EXHIBITS
-------------------
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
10.46 Third Amendment of Second Amended and Restated Credit Agreement dated
April 25, 2006 between the Registrant and Key Bank of Colorado.
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1 Section 1350 Certifications of the Chief Executive Officer and the
Chief Financial Officer.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
Date: May 15, 2006 By: /s/ Frederic W.J. Birner
------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
Date: May 15, 2006 By: /s/ Dennis N. Genty
-------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary, and
Treasurer
23