1
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, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ----------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- ----------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(303) 691-0680
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(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ---------
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of May 12, 2005
- ------------------------------- -------------------------------------
Common Stock, without par value 1,121,161
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, 2004
and March 31, 2005 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2005 4
Unaudited Condensed Statement of Shareholders' Equity as of March 31, 2005 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2005 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 5. Other Information 20
Item 6. Exhibits 21
Signatures 22
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 2004 2005
------------ ------------
** (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 756,181 $ 1,060,934
Accounts receivable, net of allowance for doubtful accounts
of $232,543 and $227,347, respectively 2,976,186 3,699,019
Deferred tax asset 135,826 135,826
Income tax receivable 80,318 -
Prepaid expenses and other assets 800,671 708,097
----------- -----------
Total current assets 4,749,182 5,603,876
PROPERTY AND EQUIPMENT, net 3,164,124 3,109,072
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,787,093 13,599,483
Deferred charges and other assets 159,440 158,558
----------- -----------
Total assets $21,859,839 $22,470,989
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,637,927 $ 5,335,314
Income taxes payable - 386,113
Current maturities of long-term debt 167,217 170,537
----------- -----------
Total current liabilities 4,805,144 5,891,964
LONG-TERM LIABILITIES:
Deferred tax liability, net 670,893 670,893
Long-term debt, net of current maturities 1,078,711 709,745
Other long-term obligations 176,741 176,101
----------- -----------
Total liabilities 6,731,489 7,448,703
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding - -
Common Stock, no par value, 20,000,000 shares
authorized; 1,208,510 and 1,184,843 shares issued and
outstanding, respectively 12,125,811 11,557,072
Retained earnings 3,002,539 3,465,214
----------- -----------
Total shareholders' equity 15,128,350 15,022,286
----------- -----------
Total liabilities and shareholders' equity $21,859,839 $22,470,989
=========== ===========
** Derived from the Company's audited consolidated balance sheet at
December 31, 2004
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
-----------------------------
2004 2005
----------- -----------
NET REVENUE $ 8,210,196 $ 9,367,731
DIRECT EXPENSES:
Clinical salaries and benefits 3,029,606 3,486,150
Dental supplies 462,424 533,338
Laboratory fees 628,638 628,496
Occupancy 875,148 960,216
Advertising and marketing 146,088 259,442
Depreciation and amortization 467,741 424,372
General and administrative 939,541 980,113
----------- ------------
6,549,186 7,272,127
----------- ------------
Contribution from dental offices 1,661,010 2,095,604
CORPORATE EXPENSES:
General and administrative 818,089 900,488
Depreciation and amortization 56,597 36,674
----------- ------------
Operating income 786,324 1,158,442
Interest expense (income), net 26,102 (7,632)
----------- ------------
Income from continuing operations
before income taxes 760,222 1,166,074
Income tax expense 304,089 466,431
----------- ------------
Income from continuing operations 456,133 699,643
DISCONTINUED OPERATIONS (NOTE 6):
Operating (loss) attributable to assets disposed of (45,195) -
Income tax benefit 18,078 -
----------- ------------
Loss on discontinued operations (27,117) -
----------- ------------
Net income $ 429,016 $ 699,643
=========== ============
Net income per share of Common Stock - Basic:
Continuing operations $ .38 $ .59
Discontinued operations (.02) -
----------- ------------
Net income per share of Common Stock - Basic $ .36 $ 59
=========== ============
Net income per share of Common Stock - Diluted:
Continuing operations $ .35 $ .53
Discontinued operations (.02) -
------------ ------------
Net income per share of Common Stock - Diluted $ .33 $ .53
=========== ============
Weighted average number of shares of Common Stock and dilutive securities:
Basic 1,188,651 1,190,098
=========== ============
Diluted 1,296,610 1,310,523
=========== ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Total
--------------------------- Retained Shareholders'
Shares Amount Earnings Equity
--------- ------------ ----------- -----------
BALANCES, December 31, 2004 1,208,510 $ 12,125,811 $ 3,002,539 $15,128,350
Common Stock options exercised 11,333 100,271 - 100,271
Purchase and retirement of Common Stock (35,000) (669,010) - (669,010)
Dividends declared on Common Stock - - (236,968) (236,968)
Net income - - 699,643 699,643
--------- ------------ ----------- -----------
BALANCES, March 31, 2005 1,184,843 $ 11,557,072 $ 3,465,214 $15,022,286
========= ============ =========== ===========
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,
-------------------------------
2004 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 429,016 $ 699,643
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 528,941 461,046
Loss on disposition of property - 424
Provision for losses on accounts receivable 116,916 96,791
Amortization of debt issuance costs 848 882
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (495,624) (819,624)
Prepaid expenses and other assets 84,969 92,574
Accounts payable and accrued expenses 623,004 551,057
Income taxes payable 94,411 466,431
Other long-term obligations (618) (640)
------------ ------------
Net cash provided by operating activities 1,381,863 1,548,584
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of new dental centers - (60,060)
Capital expenditures (116,838) (158,748)
------------ ------------
Net cash used in investing activities (116,838) (218,808)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances - line of credit 4,200,000 4,350,000
Repayments - line of credit (5,100,000) (4,675,000)
Repayment of long-term debt (85,451) (40,646)
Proceeds from exercise of Common Stock options 87,843 100,271
Purchase and retirement of Common Stock (545,430) (669,010)
Common Stock cash dividends - (90,638)
----------- -----------
Net cash used in financing activities (1,443,038) (1,025,023)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (178,013) 304,753
CASH AND CASH EQUIVALENTS, beginning of period 1,110,786 756,181
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 932,773 $ 1,060,934
=========== ===========
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,
---------------------------------
2004 2005
------------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 43,660 $ 25,677
============= ===========
Cash paid during the period for income taxes $ 191,600 $ -
============= ===========
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, 2005
(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, 2004.
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, 2005 and the results of
operations and cash flows for the periods presented. All such adjustments are of
a normal recurring nature. The results of operations for the three months ended
March 31, 2005 are not necessarily indicative of the results that may be
achieved for a full fiscal year and should not be used to indicate financial
performance for the entire year.
(2) SIGNIFICANT ACCOUNTING POLICIES
Stock Options
The Company accounts for stock options using the intrinsic value method wherein
compensation expense is recognized on stock options granted only for the excess
of the market price of our Common Stock over the option exercise price on the
date of grant. All options of the Company are granted at amounts equal to or
higher than the fair value of our Common Stock, so no compensation expense is
recorded.
Some companies also recognize compensation expense for the fair value of the
option right itself. The Company has elected not to adopt this accounting method
because it requires the use of subjective valuation models, which the Company
believes are not representative of the real value of the option to either the
Company or the optionees. However, we are required to disclose the pro forma
effect of accounting for stock options using such a valuation for all options
granted. The fair value of the options was estimated at the date of grant using
a Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Ended
March 31,
------------------------
2004 2005
--------- ---------
Risk-free interest rate 2.06% 3.54%
Expected dividend yield 1.9% 3.4%
Expected lives 3.4 years 3.4 years
Expected volatility 27% 46%
To estimate lives of options for this valuation, it was assumed that options
would be exercised one year after becoming fully vested. All options are
initially assumed to vest. Cumulative compensation cost recognized in pro forma
net income with respect to options that are forfeited prior to vesting is
adjusted as a reduction of pro forma compensation expense in the period of
forfeiture. Fair value computations are highly sensitive to the volatility
factor assumed; the greater the volatility, the higher the computed fair value
of options granted.
The total fair value of options and warrants granted was computed to be
approximately $14,000 and $297,000 for the three months ended March 31, 2004 and
2005, respectively. These amounts are amortized ratably over the vesting periods
of the options or recognized at the date of grant if no vesting period is
required. Pro forma stock-based compensation, net of the effect of forfeitures,
was ($12,000) and $113,000 for the three months ended March 31, 2004 and 2005,
respectively.
8
If the Company had accounted for its stock-based compensation plans in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
the Company's net income and net income per common share would have been
reported as follows:
Three Months Ended
March 31,
----------------------------
2004 2005
----------- ---------
Net income, as reported $ 429,016 $ 699,643
Stock based compensation included in net income - -
Fair value of stock based compensation, net of income taxes 7,540 (68,729)
----------- ---------
Pro forma net income $ 436,556 $ 630,914
=========== =========
Net income per share, basic:
As reported $ .36 $ .59
Stock based compensation included in net income - -
Fair value of stock based compensation, net of income taxes .01 (.06)
------ -----
Pro forma $ .37 $ .53
====== =====
Net income per share, diluted:
As reported $ .33 $ .53
Stock based compensation included in net income - -
Fair value of stock based compensation, net of income taxes .01 (.05)
------ -----
Pro forma $ .34 $ .48
====== =====
Weighted average shares used to calculate pro forma net income per share were
determined as described in Note 3, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123(R) is effective for public companies for interim or annual periods at the
beginning of the next fiscal year that begins after June 15, 2005, supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The new standard will be effective for
the Company beginning in the first quarter of 2006. The Company has not yet
completed its evaluation but expects the adoption to have an effect on the
financial statements similar to the pro forma effects reported above.
(3) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings Per Share".
Three Months Ended March 31,
--------------------------------------------------------------------------
2004 2005
----------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- ------ ---------- --------- -------
Basic EPS:
Net income available to
shares of Common Stock $ 429,016 1,188,651 $ .36 $ 699,643 1,190,098 $ .59
Effect of dilutive shares of
Common Stock from stock
options and warrants - 107,959 (.03) - 120,425 (.06)
--------- --------- ------ ---------- --------- -------
Diluted EPS:
Net income available to
shares of Common Stock $ 429,016 1,296,610 $ .33 $ 699,643 1,310,523 $ .53
========= ========= ====== ========== ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the three months ended March 31, 2004
and 2005 relates to the effect of 107,959 and 120,425, respectively, of dilutive
shares of Common Stock from stock options and warrants which are included in
total shares for the diluted calculation.
9
(4) LINE OF CREDIT
On April 29, 2005, the Company amended its Credit Facility. The amended Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $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 will also be assessed. The Company may prepay any Base Rate
loan at any time and any LIBOR Rate loan upon not less than three business days
prior written notice given to the lender, but the Company will be responsible
for any loss or cost incurred by the lender in liquidating or employing deposits
required to fund or maintain the LIBOR Rate loan. The amended Credit Facility
expires on May 31, 2007. At March 31, 2005, the Company had $575,000 outstanding
and $3.425 million available for borrowing under the Credit Facility. This
consisted of $575,000 outstanding under the Base Rate option and no borrowings
outstanding under the LIBOR Rate option. The Credit Facility requires the
Company to maintain certain financial ratios on an ongoing basis. At March 31,
2005, the Company was in full compliance with all of its covenants under the
Credit Facility.
(5) CAPITAL COMMITMENTS
The Company has budgeted capital commitments for the next 12 months of
approximately $1.3 million, which includes the development of three de novo
Offices and the remodel of one existing 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, 2005 were approximately $3.5 million and the
Company had a working capital deficit on that date of approximately $288,000.
During the quarter ended March 31, 2005, the Company had capital expenditures of
$219,000 and purchased approximately $669,000 of Common Stock while reducing
total bank debt by $325,000.
(6) DISCONTINUED OPERATIONS
During the third quarter of 2004, the Company closed an office in the Phoenix,
Arizona market. Discontinued operations are defined in Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", as a component that has either been disposed of or is
classified as held for sale if both the operations and cash flows of the
component have been or will be eliminated from ongoing operations of the Company
as a result of the disposal transaction and the Company will not have any
significant continuing involvement in the operations of the component after the
disposal transaction. SFAS No. 144 further provides that the assets and
liabilities of the component, if any, that has been classified as discontinued
operations be presented separately in the Company's balance sheet. The results
of operations of the component of the Company that has been classified as
discontinued operations are also reported as discontinued operations for all
periods presented.
10
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.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
the general economy of the United States and the specific markets in which the
Company's Offices are located or are proposed to be located, trends in the
health care, dental care and managed care industries, as well as the risk
factors set forth in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" section of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2004, 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, 2004 and 2005. 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 current1y manages 56 Offices in
Colorado, New Mexico and Arizona staffed by 83 general dentists and 21
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 Form 10-K for
the year ended December 31, 2004. There have been no changes to these policies
since the filing of that report.
11
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
P.C. revenue received from indemnity dental plans, preferred provider plans and
direct payments by patients not covered by any third-party payment arrangement.
Managed dental care revenue consists of 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.
Net revenue represents Revenue less amounts retained by the Offices. The amounts
retained by the Offices represent amounts paid as salary to employed dentists
and hygienists. The Company's net revenue is dependent on the Revenue of the
Offices. Direct expenses consist of the expenses incurred by the Company in
connection with managing the Offices, including salaries and benefits for
personnel other than dentists and hygienists, dental supplies, dental laboratory
fees, occupancy costs, advertising and marketing, depreciation and amortization
and general and administrative (including office supplies, equipment leases,
management information systems and other expenses related to dental practice
operations). The Company also incurs personnel and administrative expenses in
connection with maintaining a corporate function that provides management,
administrative, marketing, development and professional services to the Offices.
Under each of the Management Agreements, the Company manages the business and
marketing aspects of the Offices, including (i) providing capital, (ii)
designing and implementing marketing programs, (iii) negotiating for the
purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of non-dental
personnel, (vii) billing and collecting certain fees for dental services
provided by the Offices, (viii) arranging for certain legal and accounting
services, and (ix) negotiating with managed care organizations. 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, other than 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.
12
The Company's Revenue is derived principally from fee-for-service revenue and
managed dental care revenue. Fee-for-service revenue consists of P.C. revenue
received from indemnity dental plans, preferred provider plans and direct
payments by patients not covered by any third-party payment arrangement. Managed
dental care revenue consists of P.C. revenue received from capitated managed
dental care plans, including capitation payments and patient co-payments.
Capitated managed dental care contracts are between dental benefits
organizations and the P.C.s. Under the Management Agreements, the Company
negotiates and administers these contracts on behalf of the P.C.s. Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental group practice obligated to provide them. This arrangement
shifts the risk of utilization of these services to the dental group practice
providing the dental services. Because the Company assumes responsibility under
the Management Agreements for all aspects of the operation of the dental
practices (other than the practice of dentistry) and thus bears all costs of the
P.C.s associated with the provision of dental services at the Offices (other
than compensation and benefits of dentists and hygienists), the risk of
over-utilization of dental services at the Offices under capitated managed
dental care plans is effectively shifted to the Company. In addition, dental
group practices participating in a capitated managed dental care plan often
receive supplemental payments for more complicated or elective procedures. In
contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided. 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 new Offices. The Company seeks to supplement this
fee-for-service business with revenue from contracts with capitated managed
dental care plans. Although the Company's fee-for-service business generally is
more profitable than its capitated managed dental care business, capitated
managed dental care business serves to increase facility utilization and dentist
productivity. The relative percentage of the Company's Revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable 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. Historically, the Company has experienced a decrease in capitation
premiums received from insurance companies' managed care plans for which the
Company's affiliated Offices are providers. The Company believes this decrease
in capitation premiums has been caused by insurance companies decreasing the
scope of or in some cases, discontinuing altogether, their managed care
products, a trend the Company believes will continue. The Company has
experienced and expects to continue to experience an increase in patient visits
with Preferred Provider Organization ("PPO") insurance and believes a
significant portion of this increase has been the result of patients moving from
insurance companies' managed care products to their PPO products.
Results of Operations
For the three months ended March 31, 2005, Revenue increased $1.5 million, or
13.0%, to $13.4 million compared to $11.8 million for the three months ended
March 31, 2004. For the three months ended March 31, 2005, net revenue increased
to $9.4 million compared to $8.2 million for the three months ended March 31,
2004, an increase of $1.2 million or 14.1%.
For the three months ended March 31, 2005, net income increased 63.1%, to
$700,000, compared to net income of $429,000 for the three months ended March
31, 2004. Net income for the three months of 2004 included a loss on
discontinued operations of $(27,000).
The Company has signed leases for three additional Offices in the Phoenix,
Arizona market, one of which is projected to open in the third quarter of 2005
and two in the first quarter of 2006. The Company also opened two de novo
Offices in the Denver, Colorado market, one in November 2004 and the other in
January 2005.
The Company continues to generate strong cash flow from operations. Capital
expenditures during the first quarter of 2005 were approximately $219,000,
comprised of regular ongoing maintenance capital expenditures and capital
expenditures related to the new de novo Offices. During the first quarter of
2005, the Company reduced total debt outstanding by approximately $366,000 to
$880,000.
13
Revenue is total dental group practice revenue generated at the Company's
offices from professional services provided to its patients. Amounts retained by
group practices 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 or liquidity that is calculated in accordance with generally
accepted accounting principles. The following table reconciles Revenue to net
revenue (excluding discontinued operations).
Three Months Ended March 31,
-----------------------------------
2004 2005
------------ ------------
Total dental group practice revenue $ 11,809,840 $ 13,350,407
Amounts retained by group practices (3,599,644) (3,982,676)
------------ ------------
Net revenue $ 8,210,196 $ 9,367,731
============ ============
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's Condensed Consolidated Statements of
Operations. The information contained in the table represents the historical
results of the Company. The information that follows should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto contained elsewhere in this report.
Three Months Ended March 31,
----------------------------
2004 2005
------- -------
Net revenue 100.0 % 100.0 %
..
Direct expenses:
Clinical salaries and benefits 36.9 % 37.2 %
..
Dental supplies 5.6 % 5.7 %
..
Laboratory fees 7.7 % 6.7 %
..
Occupancy 10.7 % 10.2 %
..
Advertising and marketing 1.8% 2.8 %
..
Depreciation and amortization 5.7 % 4.5 %
..
General and administrative 11.4 % 10.5 %
----- -----
..
79.8 % 77.6 %
----- -----
Contribution from dental offices 20.2 % 22.4 %
Corporate expenses:
General and administrative 10.0 % 9.6 %
Depreciation and amortization 0.7 % 0.4 %
----- -----
..
Operating income 9.5 % 12.4 %
..
Interest expense, net 0.3 % (0.1)%
----- -----
..
Income before income taxes 9.2 % 12.5 %
..
Income tax expense 3.7 % 5.0 %
----- -----
Income from continuing operations 5.5 % 7.5 %
..
Loss attributable to discontinued operations,
net of income taxes 0.3 % - %
----- ------
Net income 5.2 % 7.5 %
===== ======
14
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004:
Net revenue. For the three months ended March 31, 2005, net revenue, increased
$1.2 million, or 14.1% to $9.4 million compared to $8.2 million for the three
months ended March 31, 2004. This increase is attributable to higher revenues
due to an increased emphasis on specialty dentistry as well as the addition of
three new Offices since March 31, 2004.
Clinical salaries and benefits. For the three months ended March 31, 2005,
clinical salaries and benefits increased $457,000, or 15.1% to $3.5 million
compared to $3.0 million for the three months ended March 31, 2004. This
increase was due to higher wages resulting from a higher number of contract
dentists working in the specialty dentistry area, a larger support staff for the
additional dentists as well as annual wage increases that became effective
February 1, 2005. As a percentage of net revenue, clinical salaries and benefits
increased to 37.2% for the three months ended March 31, 2005 compared to 36.9%
for the three months ended March 31, 2004.
Dental supplies. For the three months ended March 31, 2005, dental supplies
increased to $533,000 compared to $462,000 for the three months ended March 31,
2004, an increase of $71,000 or 15.3%. This increase is attributable to
increased production, the opening dental supply inventory at two of the de novo
Offices and increased emphasis on specialty dentistry. As a percentage of net
revenue, dental supplies increased to 5.7% for the three months ended March 31,
2005 compared to 5.6% for the three months ended March 31, 2004.
Laboratory fees. For the three months ended March 31, 2005, laboratory fees
remained constant at $629,000 compared to the three months ended March 31, 2004.
Laboratory fees associated with specialty dentistry are not as significant,
relative to general dentistry, and therefore this expense did not increase as a
result of increased production. As a percentage of net revenue, laboratory fees
decreased to 6.7% for the three months ended March 31, 2005 compared to 7.7% for
the three months ended March 31, 2004.
Occupancy. For the three months ended March 31, 2005, occupancy expense
increased to $960,000 compared to $875,000 for the three months ended March 31,
2004, an increase of $85,000 or 9.7%. This increase was primarily due to the
opening of three new Offices since March 31, 2004 and increased rental payments
resulting from the renewal of Office leases at current market rates for Offices
whose leases expired subsequent to the 2004 period. As a percentage of net
revenue, occupancy expense decreased to 10.2% for the three months ended March
31, 2005 compared to 10.7% for the three months ended March 31, 2004.
Advertising and marketing. For the three months ended March 31, 2005,
advertising and marketing expense increased to $259,000 compared to $146,000 for
the three months ended March 31, 2004, an increase of $113,000 or 77.6%. This
was attributable to a new television and print advertising campaign in the
Denver, Colorado market which began in January 2005. As a percentage of net
revenue, advertising and marketing expense increased to 2.8% for the three
months ended March 31, 2005 compared to 1.8% for the three months ended March
31, 2004.
Depreciation and amortization. For the three months ended March 31, 2005,
depreciation and amortization expense, which consists of depreciation and
amortization expense incurred at the Offices, decreased to $424,000 compared to
$468,000 for the three months ended March 31, 2004, a decrease of $43,000 or
9.3%. The decrease in the Company's depreciable asset base is a result of assets
at existing Offices becoming fully depreciated partially offset by depreciation
expense at the three de novo Offices. As a percentage of net revenue,
depreciation and amortization decreased to 4.5% for the three months ended March
31, 2005 compared to 5.7% for the three months ended March 31, 2004.
General and administrative. For the three months ended March 31, 2005, general
and administrative expenses, which are attributable to the Offices, increased to
$980,000 compared to $940,000 for the three months ended March 31, 2004, an
increase of $41,000 or 4.3%. This was attributable to higher dentist recruitment
costs, higher office supplies expense and higher credit card fees. As a
percentage of net revenue, general and administrative expenses decreased to
10.5% for the three months ended March 31, 2005 compared to 11.4% during the
three months ended March 31, 2004.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased $435,000, or 26.2%, to $2.1 million for the three
months ended March 31, 2005, compared to $1.7 million for the three months ended
March 31, 2004. As a percentage of net revenue, contribution from dental offices
increased to 22.4% for the three months ended March 31, 2005 compared to 20.2%
for the three months ended March 31, 2004.
15
Corporate expenses - general and administrative. For the three months ended
March 31, 2005, corporate expenses - general and administrative increased to
$900,000 compared to $818,000 for the three months ended March 31, 2004, an
increase of $82,000 or 10.1%. This increase was primarily do to higher accrued
bonuses, regional director wages and recruiting and professional fees. As a
percentage of net revenue, corporate expense - general and administrative
decreased to 9.6% for the three months ended March 31, 2005 compared to 10.0%
during the three months ended March 31, 2004
Corporate expenses - depreciation and amortization. For the three months ended
March 31, 2005, corporate expenses - depreciation and amortization decreased to
$37,000 compared to $57,000 for the three months ended March 31, 2004, a
decrease of $20,000 or 35.2%. This decrease is related to the decrease in the
Company's depreciable asset base. As a percentage of net revenue, corporate
expenses - depreciation and amortization decreased to 0.4% for the three months
ended March 31, 2005 compared to 0.7% for the three months ended March 31, 2004.
Operating income. As a result of the matters discussed above, the Company
generated operating income of $1.2 million for the three months ended March 31,
2005 compared to operating income of $786,000 for the three months ended March
31, 2004, an increase of $372,000 or 47.3%. As a percentage of net revenue,
operating income increased to 12.4% for the three months ended March 31, 2005
compared to 9.5% for the three months ended March 31, 2004.
Interest expense/(income), net. For the three months ended March 31, 2005,
interest expense/(income), net was ($8,000) compared to $26,000 for the three
months ended March 31, 2004, a decrease of $34,000. This increase in interest
income is attributable to lower interest expense on the Company's seller notes
due to lower balances as the result of prepayments made in November 2004 and
higher charges for late payments on customer accounts receivable. As a
percentage of net revenue, interest expense/(income) decreased to (0.1%) for the
three months ended March 31, 2005 compared to 0.3% for the three months ended
March 31, 2004.
Discontinued operations. In September 2004, the Company closed an Office in the
Phoenix market. This closure had no effect on the income statement for the three
months ended March 31, 2005. Operating results for this Office, which have been
classified as discontinued operations for all prior periods, were comprised of
an operating loss of $45,000, partially offset by an income tax benefit of
$18,000 for the three months ended March 31, 2004.
Net income. As a result of the above, the Company reported net income of
$700,000 for the three months ended March 31, 2005 compared to net income of
$429,000 for the three months ended March 31, 2004, an increase of $271,000 or
63.1%. Net income for the quarter ended March 31, 2005 was net of income tax
expense of $466,000 while net income for the quarter ended March 31, 2004 was
net of income tax expense of $286,000. As a percentage of net revenue, net
income increased to 7.5% for the three months ended March 31, 2005 compared to
5.2% for the three months ended March 31, 2004.
Liquidity and Capital Resources
The Company finances its operations and growth through a combination of cash
provided by operating activities, a bank line of credit (the "Credit Facility")
and, from time to time, seller notes related to acquisitions of dental
practices. As of March 31, 2005, the Company had a working capital deficit of
approximately $288,000. This is primarily comprised of balances in accounts
payable and accrued expenses, income taxes payable and current maturities of
long-term debt in excess of balances in cash, accounts receivable and prepaid
expenses as of March 31, 2005.
Net cash provided by operating activities was approximately $1.5 million and
$1.4 million for the three months ended March 31, 2005 and 2004, respectively.
During 2005, 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
(primarily due to higher dentist and staff compensation, bonuses and higher
vendor balances payable as the result of higher production), 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 production). During the 2004 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 $623,000, an increase in income taxes payable of approximately
$94,000 and a decrease in prepaid expenses and other assets of approximately
$85,000 partially offset by an increase in accounts receivable of approximately
$496,000.
Net cash used in investing activities was approximately $219,000 and $117,000
for the three months ended March 31, 2005 and 2004, respectively. For the three
months ended March 31, 2005, the Company invested approximately $159,000 in the
purchase of additional property and equipment and approximately $60,000 in the
development of new Offices. For the three months ended March 31, 2004,
approximately $117,000 was invested in the purchase of additional property and
equipment.
16
Net cash used in financing activities was approximately $1.0 million and $1.4
million for the three months ended March 31, 2005 and 2004, respectively. During
the three months ended March 31, 2005, net cash used in financing activities was
comprised of approximately $4.7 million used to pay down on 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
$4.4 million in additional funds drawn on the Company's Credit Facility and
approximately $100,000 in proceeds from the exercise of Common Stock options.
During the three months ended March 31, 2004, net cash used in financing
activities was comprised of approximately $5.1 million used to pay down on the
Company's bank line of credit, approximately $545,000 used in the purchase and
retirement of Common Stock and approximately $85,000 for the repayment of seller
notes. This was partially offset by $4.2 million drawn from the Company's Credit
Facility and approximately $88,000 of proceeds from the exercise of Common Stock
options.
On April 29, 2005, the Company amended its Credit Facility. The amended Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $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 will also be assessed. The Company may prepay any Base Rate
loan at any time and any LIBOR Rate loan upon not less than three business days
prior written notice given to the lender, but the Company will be responsible
for any loss or cost incurred by the lender in liquidating or employing deposits
required to fund or maintain the LIBOR Rate loan. The amended Credit Facility
expires on May 31, 2007. At March 31, 2005, the Company had $575,000 outstanding
and $3.425 million available for borrowing under the Credit Facility. This
consisted of $575,000 outstanding under the Base Rate option and no borrowings
outstanding under the LIBOR Rate option. The Credit Facility requires the
Company to maintain certain financial ratios on an ongoing basis. At March 31,
2005, the Company was in full compliance with all of its covenants under the
Credit Facility.
At March 31, 2005, the Company had outstanding indebtedness in addition to the
Credit Facility of approximately $305,000 represented by seller notes issued in
connection with various dental practice acquisitions, all of which bear interest
at 8.0%. At March 31, 2005, the Company had capital commitments of approximately
$1.3 million related to the development of three de novo offices and the
remodeling of one existing Office. The Company's retained earnings as of March
31, 2005 were approximately $3.5 million.
The Company's earnings before interest, taxes, depreciation, amortization and
discontinued operations ("Adjusted EBITDA") increased to $1.6 million for the
three months ended March 31, 2005 compared to $1.3 million for the corresponding
three month period in 2004. Although Adjusted EBITDA is not a generally accepted
accounting principles 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 this measure 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 generally accepted accounting principles. In addition,
because Adjusted EBITDA is not calculated in accordance with generally accepted
accounting principles, it may not necessarily be comparable to similarly titled
measures employed by other companies. A reconciliation of Adjusted EBITDA can be
made by adding discontinued operations, depreciation and amortization expense -
offices, depreciation and amortization expense - corporate, interest expense,
net and income tax expense to net income as in the table below.
Three Months Ended March 31,
----------------------------------------
2004 2005
------------ -------------
RECONCILIATION OF Adjusted EBITDA:
Net income $ 429,016 $ 699,643
Discontinued operations -
(before income tax benefit) 45,195 -
Depreciation and amortization 467,741 424,372
Depreciation and amortization - Corporate 56,597 36,674
Interest expense, net 26,102 (7,632)
Income tax expense 286,011 466,431
------------ -------------
Adjusted EBITDA $ 1,310,662 $ 1,619,488
============ =============
17
As of March 31, 2005, the Company had the following known contractual
obligations:
Payments due by Period
------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------- --------- --------- --------- ---------
Long-Term Debt Obligations 880,282 170,537 709,745 - -
Operating Lease Obligations 8,027,806 2,534,517 3,818,838 1,651,251 23,200
Other Long-Term Liabilities Reflected on
the Balance Sheet Under GAAP 176,101 2,656 114,390 58,761 294
--------- --------- --------- --------- ------
Total 9,084,189 2,707,710 4,642,973 1,710,012 23,494
========= ========= ========= ========= ======
The Company from time to time may purchase its Common Stock on the open market
for treasury stock. During 2003, the Company, in 84 separate transactions,
purchased 296,195 shares of its Common Stock for total consideration of
approximately $3.9 million at prices ranging from $9.54 to $14.20 per share.
During 2004, the Company, in seven separate transactions, purchased 54,000
shares of its Common Stock for total consideration of approximately $778,000 at
prices ranging from $12.65 to $18.50 per share. During the three month period
ended March 31, 2005, the Company, in two separate transactions, purchased
35,000 shares of its Common Stock for total consideration of approximately
$669,000 at prices ranging from $18.00 to $20.60 per share. On August 10, 2004,
the Board of Directors authorized the Company to make up to $500,000 in
open-market purchases of its Common Stock. On November 9, 2004, the Board of
Directors authorized the Company to increase the amount available to make
open-market purchases of its Common Stock by $300,000. On March 17, 2005, the
Board of Directors authorized the Company to increase the amount available to
make open-market purchases of its Common Stock by $500,000. As of March 31,
2005, there was approximately $758,000 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. On April 7, 2005, the Company purchased, in a single private
transaction approved by the Board of Directors and outside of previously
publicly announced plans, 63,682 shares of its Common Stock for $24 per share.
This purchase, of approximately $1.5 million, was financed with borrowings under
the Company's Credit Facility.
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.
18
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, 2005, the Company has not used derivative instruments or engaged in
hedging activities.
Interest Rate Risk. The interest payable on the Company's 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, 2005, the Company had
$575,000 outstanding with an interest rate of 5.75% (under the Base 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 $2,300 for the three months ended March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
The effectiveness of our 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 our
disclosure controls and procedures will detect all errors or fraud. By their
nature, our 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 our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the design
and operation of our 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, 2005. On the basis of this review, our management,
including our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures are designed, and are effective, to
give reasonable assurance that the information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC
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 our 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 2005 that materially affected, or were
reasonably likely to materially affect, its internal control over financial
reporting.
19
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following chart provides information regarding Common Stock repurchases by
the Company during the period January 1, 2005 through March 31, 2005.
Issuer Purchases of Equity Securities
Approximate
Total Number Dollar Value
Of Shares Of Shares That
Purchased as May Yet Be
Average Part of Publicly Purchased
Total Number Price Announced Under the
Of Shares Paid per Plans or Plans or
Period Purchased Share Programs Programs
------ ------------ --------- ---------------- --------------
January 1, 2005 through January 31, 2005 20,000 $ 18.00 - 567,468
February 1, 2005 through February 29, 2005 15,000 $ 20.60 15,000 258,458
March 1, 2005 through March 31, 2005 - $ - - 758,458
------ ------
Total 35,000 $ 19.11 15,000 -
Purchases made prior to January 2005 were made pursuant to publicly announced
plans. The purchase of 20,000 shares in January 2005 was made through a private
transaction which was approved by the Board of Directors. All purchases, other
than the 20,000 shares described above, were made pursuant to publicly announced
plans. On March 17, 2005, the Board of Directors authorized the Company to
increase the amount available to make open market purchases of its Common Stock
by $500,000. As of March 31, 2005, there was approximately $758,000 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. On April 7, 2005, the Company purchased, in a
single private transaction approved by the Board of Directors and outside of
previously publicly announced plans, 63,682 shares of its Common Stock for $24
per share. This purchase, of approximately $1.5 million, was financed with
borrowings under the Company's Credit Facility.
ITEM 5. OTHER INFORMATION
On March 17, 2005, the Board of Directors approved a 2005 Executive Bonus Plan
and the performance metrics that will be used to determine the amount of bonus
awards under the plan. The total potential bonus pool, which is payable
quarterly, will equal a portion of the company's pre-tax profits it both revenue
and net income goals are met, and a smaller portion of pre-tax profits if one of
the two goals is met. The goals will be measured quarterly based on cumulative
results for the year through the quarter end. Bonuses will be payable to all of
the Company's executive officers quarterly. Base salaries for the Company's
executive officers remain unchanged from 2004.
On April 29, 2005, the Company amended its Credit Facility Agreement. The
amended Credit Facility: 1) increases the amount the Company may borrow, on a
revolving basis, from $4.0 million to $5.0 million; 2) reduces the LIBOR rate
Margin from 1.75% to 1.50%; 3) extends the expiration date of the Agreement from
May 31, 2006 to May 31, 2007 and 4) deletes the "minimum net income" requirement
from the covenants.
20
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
10.44 Second Amendment to Second Amended and Restated Credit Agreement
dated April 29, 2005 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.
21
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 12, 2005 By: /s/ Frederic W.J. Birner
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Name: Frederic W.J. Birner
Title: Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2005 By: /s/ Dennis N. Genty
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Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary, and Treasurer
(Principal Financial and Accounting Officer)
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